MERCURY AIR GROUP INC
424A, 1996-01-12
AIRPORTS, FLYING FIELDS & AIRPORT TERMINAL SERVICES
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<PAGE>
INFORMATION   CONTAINED  HEREIN  IS  SUBJECT   TO  COMPLETION  OR  AMENDMENT.  A
REGISTRATION STATEMENT  RELATING TO  THESE SECURITIES  HAS BEEN  FILED WITH  THE
SECURITIES  AND EXCHANGE  COMMISSION. THESE SECURITIES  MAY NOT BE  SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR  TO THE TIME THE REGISTRATION STATEMENT  BECOMES
EFFECTIVE.  THIS  PROSPECTUS  SHALL  NOT  CONSTITUTE AN  OFFER  TO  SELL  OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE  SECURITIES
IN  ANY STATE IN WHICH SUCH OFFER,  SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
   
      SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED JANUARY 11, 1996
    

                                  $25,000,000

                            MERCURY AIR GROUP, INC.

   
                  % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
    

                   Interest Payable August   and February

   
    The    % Convertible Subordinated Debentures due 2006 (the "Debentures") are
convertible into  shares of  the common  stock, par  value $.01  per share  (the
"Common  Stock"), of Mercury Air Group, Inc. ("Mercury" or the "Company") at any
time prior  to  maturity,  unless  previously  redeemed  or  repurchased,  at  a
conversion  rate  of        shares  per  $1,000 principal  amount  of Debentures
(equivalent to a conversion price of approximately  $    per share), subject  to
adjustment in certain circumstances. See "Description of Debentures." The Common
Stock  is traded on  the American Stock  Exchange (the "AMEX")  under the symbol
MAX. On January 10, 1996, the last  reported sale price for the Common Stock  on
the  AMEX was  $8.00 per share.  See "Price  Range of Common  Stock and Dividend
Policy."
    

    Interest on the Debentures is payable semi-annually on August   and February
  of each year, commencing August   , 1996.  On or after February   , 1999,  the
Debentures  will be redeemable, in whole or in  part, at any time, at the option
of Mercury, at the declining redemption prices set forth herein plus accrued and
unpaid interest  to  the  date  of  redemption.  Mercury  may  also  redeem  the
Debentures between February   , 1998 and February   , 1999, in whole or in part,
at  the redemption prices set  forth herein plus accrued  and unpaid interest to
the date of redemption,  if the closing  price of the Common  Stock has been  at
least  140% of the conversion price for at least 20 trading days within a period
of 30 consecutive trading days ending not  more than five trading days prior  to
the  notice of redemption. Subject to  certain limitations, Mercury will redeem,
in whole or in part, at any time,  at 100% of the principal amount thereof  plus
accrued  and  unpaid interest  to the  date  of redemption,  Debentures properly
tendered in respect of a deceased holder. In addition, upon a Change of  Control
and  a  Rating Downgrade  (as such  terms  are defined  herein), each  holder of
Debentures has the  right, subject  to certain restrictions  and conditions,  to
require  Mercury to repurchase all or a part of such holder's Debentures at 100%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. See "Description of Debentures."

    The Debentures are unsecured obligations  and are subordinated in the  right
of payment to all existing and future Senior Indebtedness (as defined herein) of
Mercury. See "Description of Debentures."

    The  Debentures will be initially issued only in fully registered book-entry
form. The Debentures will not  initially be issuable in definitive  certificated
form  to  any  person other  than  the  Depositary (as  defined  herein)  or its
nominees. See  "Description of  Debentures --  Book-Entry System."  The  minimum
principal amount of Debentures which may be purchased is $1,000. Application has
been  made to  list the  Debentures on  the AMEX  under the  symbol "MAX.A." The
Company has been advised by the Underwriters  that they intend to make a  market
in  the Debentures;  however, no  assurance can be  made that  an active trading
market for the Debentures will develop.

                         ------------------------------

    SEE "RISK FACTORS" BEGINNING ON PAGE  7 FOR A DISCUSSION OF CERTAIN  FACTORS
THAT  SHOULD BE CONSIDERED  BY PROSPECTIVE PURCHASERS  OF THE DEBENTURES OFFERED
HEREBY.
                             ---------------------

    THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
    AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
       SECURITIES  AND  EXCHANGE  COMMISSION  OR  ANY  STATE   SECURITIES
       COMMISSION   PASSED  UPON  THE  ACCURACY   OR  ADEQUACY  OF  THIS
        PROSPECTUS. ANY          REPRESENTATION TO THE  CONTRARY IS  A
                               CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
                                                                     UNDERWRITING
                                                 PRICE TO              DISCOUNT            PROCEEDS TO
                                                  PUBLIC         AND COMMISSIONS (1)       COMPANY (2)
<S>                                        <C>                   <C>                   <C>
Per Debenture............................           %                     %                     %
Total (3)................................           $                     $                     $
</TABLE>

(1)  The  Company  has  agreed to  indemnify  the  Underwriters  against certain
    liabilities, including  liabilities under  the Securities  Act of  1933,  as
    amended. See "Underwriting."

(2)  Before  deducting  expenses  payable  by  Mercury  which  are  estimated at
    $300,000.

(3) Mercury has granted the Underwriters an option, exercisable for 30 days from
    the date  of  this  Prospectus,  to purchase  up  to  $3,750,000  additional
    aggregate  principal amount of  the Debentures at the  Price to Public, less
    the Underwriting Discount and Commissions, solely to cover  over-allotments,
    if any. If the Underwriters exercise such option in full, the total Price to
    Public,  Underwriting Discount and Commissions  and Proceeds to Company will
    be $    , $    and $    , respectively. See "Underwriting."

    The Debentures are offered by the Underwriters named herein when, as and  if
delivered and accepted by the Underwriters and subject to prior sale, withdrawal
or  cancellation of  the offer without  notice and  subject to the  right of the
Underwriters to reject any order  in whole or in part.  It is expected that  the
Debentures will be available for delivery on or about          , 1996.

EVEREN SECURITIES, INC.                                    CROWELL, WEEDON & CO.

                                         , 1996
<PAGE>
                             AVAILABLE INFORMATION

    Mercury  is  subject  to  the  information  requirements  of  the Securities
Exchange Act  of  1934, as  amended  (the  "Exchange Act"),  and  in  accordance
therewith  files  reports,  proxy  materials  and  other  information  with  the
Securities and  Exchange  Commission  (the "Commission").  Such  reports,  proxy
materials   and  other  information  concerning  Mercury  and  the  Registration
Statement (as defined below) can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024 Judiciary Plaza, 450  Fifth
Street,  N.W., Washington,  D.C. 20549, and  at the  public reference facilities
maintained by the Commission at its regional offices located at The Northwestern
Atrium  Center,  500  West  Madison   Street,  Suite  1400,  Chicago,   Illinois
60661-2511,  and at  Seven World  Trade Center, Suite  1300, New  York, New York
10048. Copies can be  obtained by mail from  the Commission at prescribed  rates
from  the Public Reference Section of the  Commission at its principal office at
Judiciary Plaza,  450  Fifth Street,  N.W.,  Washington, D.C.  20549.  Mercury's
Common  Stock is listed on the American Stock Exchange and copies of reports and
other material  concerning  Mercury  can  be inspected  at  the  American  Stock
Exchange, 86 Trinity Place, New York, New York 10006.

    Mercury  has filed with the Commission  a registration statement on Form S-1
(herein,  together  with  all  amendments  and  exhibits,  referred  to  as  the
"Registration  Statement") under  the Securities  Act of  1933, as  amended (the
"Securities Act"), of which this Prospectus is a part. This Prospectus does  not
contain  all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance  with the rules and regulations of  the
Commission.   For  further  information,   reference  is  hereby   made  to  the
Registration  Statement,  including  the  exhibits  filed  as  a  part  thereof.
Statements  made in this Prospectus as to the contents of any documents referred
to are not necessarily complete, and in each instance reference is made to  such
exhibits for a more complete description and each such statement is qualified in
its  entirety by such reference.  Copies of such materials  may be obtained from
the Public Reference Section of the Commission at the address set forth above at
prescribed rates.

                            ------------------------

    IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR  EFFECT
TRANSACTIONS  WHICH STABILIZE OR MAINTAIN THE  MARKET PRICE OF THE DEBENTURES OR
THE COMMON STOCK, OR BOTH, AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN  MARKET.  SUCH TRANSACTIONS  MAY  BE  EFFECTED ON  THE  AMERICAN  STOCK
EXCHANGE,  IN THE  OVER-THE-COUNTER MARKET,  OR OTHERWISE.  SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

                                       2
<PAGE>
                               PROSPECTUS SUMMARY

    THE  FOLLOWING SUMMARY IS NOT INTENDED TO  BE COMPLETE AND SHOULD BE READ IN
CONJUNCTION WITH,  AND  IS QUALIFIED  IN  ITS  ENTIRETY BY,  THE  MORE  DETAILED
INFORMATION  AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS  PROSPECTUS. EACH PROSPECTIVE  INVESTOR IS URGED  TO
READ   THIS  PROSPECTUS  IN  ITS   ENTIRETY.  UNLESS  OTHERWISE  INDICATED,  ALL
INFORMATION HEREIN ASSUMES THAT THE  UNDERWRITERS' OVER-ALLOTMENT OPTION IS  NOT
EXERCISED.  ALL PER SHARE AND OTHER SHAREHOLDER INFORMATION HAS BEEN ADJUSTED TO
REFLECT THE EFFECT OF A JUNE 16, 1995 TEN PERCENT STOCK DIVIDEND.

    EXCEPT AS OTHERWISE NOTED, REFERENCES IN THIS PROSPECTUS TO "MERCURY" OR THE
"COMPANY" REFER TO MERCURY AIR GROUP, INC. AND ITS SUBSIDIARIES. THE  DEBENTURES
OFFERED  HEREBY ARE OBLIGATIONS  OF MERCURY AIR GROUP,  INC., THE PARENT HOLDING
COMPANY, AND NOT ITS SUBSIDIARIES, AND REFERENCES TO "MERCURY" OR THE  "COMPANY"
RELATING TO THE DEBENTURES REFER ONLY TO THE PARENT HOLDING COMPANY.

                                  THE COMPANY

    Mercury  provides a broad range of  services to the aviation industry. These
services include  fuel  sales  and  fuel delivery  to  commercial,  private  and
military  aircraft (collectively,  "fuel sales  and services");  cargo handling,
space brokerage and  general cargo  sales agent  services (collectively,  "cargo
operations");  fixed base operations for commercial, private and other aircraft,
including fuel  sales, fuel  delivery services  ("into-plane services"),  ground
support  services  and  tie-down  facilities  (collectively,  "FBOs");  and  the
operation of government-owned fuel  depots and the  performance of aircraft  and
other  services  at  U.S.  military  bases  (collectively,  "government contract
services"). Mercury's  customers in  one  or more  of these  categories  include
domestic  and  international  airlines;  regional  and  commuter  air  carriers;
operators of cargo, corporate and private aircraft; and the U.S. government.

    FUEL SALES  AND  SERVICES.    Mercury's  fuel  sales  and  services  consist
primarily  of aviation fuel sales; comprehensive fuel management services, which
allow customers to reduce administrative expenses; into-plane services; and  the
brokering  of non-aviation  fuel. Through  its extensive  network of third-party
delivery and supply relationships, Mercury  conducts its fuel sales business  at
over  100 airports  primarily in  the United States,  as well  as throughout the
world. At most  of these  locations, Mercury  contracts with  third parties  for
into-plane   services,   thereby  minimizing   its   fixed  costs   and  capital
requirements. Mercury believes  that its status  as a volume  purchaser and  its
creditworthiness enable it to purchase fuel on more favorable pricing and credit
terms  than most  of its  customers could  obtain independently.  Mercury's fuel
sales and services strategy  is to expand its  business with existing  customers
and  attract new  customers by  further enhancing  its customer  services and by
continuing to offer favorable credit terms and competitive fuel prices.

    CARGO OPERATIONS.  Mercury's cargo operations are conducted primarily at Los
Angeles International Airport  ("LAX") where it  maintains approximately  90,000
square  feet of warehouse  facilities. Mercury also leases  a 45,000 square foot
warehouse facility near the  San Francisco International  Airport which it  uses
for cargo handling operations. In September 1995, Mercury acquired the operating
and  other assets  of certain  providers of  cargo handling  services at airport
facilities in Toronto and Montreal, Canada. See "Business -- Recent Developments
- -- Excel Cargo." Mercury's strategy is to continue to expand its cargo  handling
operations  by securing  additional warehouse  facilities on  favorable economic
terms and to  obtain additional  customers to fully  utilize existing  warehouse
facilities.  Space brokerage, a significant  part of Mercury's cargo operations,
consists of contracting with domestic and international airlines for cargo space
and reselling the  cargo space  to customers  with shipping  needs. This  allows
airlines  to increase  cargo capacity  utilization by  using Mercury's marketing
capabilities. Mercury's strategy is to expand its space brokerage operations  by
establishing  relationships with  additional shipping agents  and by contracting
for additional  cargo  space.  In  conducting  its  general  cargo  sales  agent
services,  another important  component of  Mercury's cargo  operations, Mercury
acts as an agent for airlines in the Far East, Mexico, Central and South America
and the United  States. In this  capacity, Mercury earns  a commission from  the
airlines for

                                       3
<PAGE>
selling  air  cargo space.  Mercury's  strategy is  to  expand its  revenues and
operating income from general cargo sales agent services by obtaining new  sales
territories  for  airlines with  which it  has an  existing relationship  and by
entering into arrangements with additional airlines.

    FBOS.  Mercury's FBO services are performed at leased facilities located  at
LAX   and  at  airports  in  Reno,  Nevada;  Bakersfield,  California;  Burbank,
California; and  Santa  Barbara,  California. At  each  FBO,  Mercury  maintains
administrative  offices, conducts fuel sales  and refueling operations, provides
catering and other ground support services  and provides tie-down space for  its
customers.  Mercury's  strategy  is  to  acquire  additional  FBOs  on favorable
economic terms and to expand its business at existing FBOs.

   
    GOVERNMENT CONTRACT  SERVICES.   Mercury  conducts its  government  contract
services at 14 military bases throughout the United States and at three military
bases outside the United States, one in Greece and two in Japan. The majority of
these contracts entail providing equipment and manpower to fuel aircraft, but do
not  include  the sale  of  fuel, the  procurement of  which  is handled  by the
military. The Company's government  contracts have terms of  one to four  years.
Mercury  has recently lost several government contracts due to base closures and
other reasons. Mercury's strategy in the government contract services area is to
retain existing contracts and cost effectively bid for new refueling  contracts.
Mercury also intends to expand the types of outsourcing services provided to the
U.S. government beyond the Company's core military refueling business. Potential
areas  of expansion  include engineering  services, base  operating services and
maintenance and operations services. Mercury  believes its expansion efforts  in
this  area will be facilitated by  its familiarity with military base operations
and government contract requirements.
    

    Mercury's principal executive offices are located at 5456 McConnell  Avenue,
Los  Angeles, California 90066, and its  telephone number is (310) 827-2737. The
Company was incorporated in New York in April 1956.

                                  THE OFFERING

   
<TABLE>
<S>                                  <C>
Securities Offered.................  $25,000,000  aggregate  principal  amount  of        %
                                     Convertible Subordinated Debentures due 2006.
Maturity Date......................  February   , 2006.
Interest Payment Dates.............  Interest   payable  semi-annually  on  August      and
                                     February   of each year,  commencing August   ,  1996.
                                     The  first  interest payment  will  represent interest
                                     from the date  of original issuance  to and  including
                                     August   , 1996.
Denominations......................  $1,000 and any integral multiple thereof.
Conversion Rights..................  The  Debentures are  convertible at the  option of the
                                     holder  at  any   time  prior   to  maturity,   unless
                                     previously  redeemed or  repurchased, at  a conversion
                                     rate of          shares  of  Common Stock  per  $1,000
                                     principal   amount  of  Debentures  (equivalent  to  a
                                     conversion price of  approximately $      per  share),
                                     subject  to  adjustment  in  certain  circumstances as
                                     described herein.  No accrued  interest will  be  paid
                                     upon  conversion,  except that  Debentures  called for
                                     redemption which are held on a record date  respecting
                                     any  interest  payment  date  shall  be  paid  accrued
                                     interest to the earlier of  the date of conversion  or
                                     through  the end  of the  related semi-annual interest
                                     payment period.  See  "Description  of  Debentures  --
                                     Conversion Rights."
</TABLE>
    

                                       4
<PAGE>

<TABLE>
<S>                                  <C>
Optional Redemption................  The Debentures are redeemable on or after February   ,
                                     1999,  in whole or in part, at any time, at the option
                                     of Mercury,  at the  declining redemption  prices  set
                                     forth  herein plus accrued and  unpaid interest to the
                                     date of redemption.  In addition,  Mercury may  redeem
                                     the  Debentures between February   , 1998 and February
                                       , 1999, if the closing price of the Common Stock has
                                     been at least 140% of the Conversion Price (as defined
                                     herein) for at least 20  trading days within a  period
                                     of  30 consecutive  trading days ending  not more than
                                     five trading days prior to the date of the  redemption
                                     notice.  See  "Description of  Debentures  -- Optional
                                     Redemption."
Sinking Fund.......................  None.
Redemption Option Upon
  Death of Holder..................  Debentures tendered by an authorized representative or
                                     the surviving joint tenant, tenant by the entirety  or
                                     tenant   in  common  of  a  deceased  holder  will  be
                                     redeemable, in whole  or in  part, within  60 days  of
                                     tender,  at 100% of the  principal amount plus accrued
                                     and unpaid  interest  to  and including  the  date  of
                                     redemption,  subject to a  maximum principal amount of
                                     $100,000 per deceased holder  and a maximum  aggregate
                                     principal  amount for all deceased holders of $500,000
                                     during  each  calendar   year.  See  "Description   of
                                     Debentures  -- Repurchase of  Debentures Upon Death of
                                     Holder."
Repurchase at Option of Holder
  After Certain Changes of
  Control..........................  After a Change of Control and a Rating Downgrade, each
                                     holder  will  have  the  right,  subject  to   certain
                                     conditions,  to require  Mercury to  repurchase all or
                                     part of  such  holder's  Debentures  at  100%  of  the
                                     principal  amount  thereof,  plus  accrued  and unpaid
                                     interest to the date of repurchase. See "Risk  Factors
                                     --   Limitations  on  Repurchase  of  Debentures"  and
                                     "Description of Debentures -- Repurchase of Debentures
                                     at the Option of the  Holder After Certain Changes  of
                                     Control."
Subordination......................  The  Debentures are  unsecured obligations  of Mercury
                                     and are subordinated  in the right  of payment to  all
                                     existing  and future  Senior Indebtedness  (as defined
                                     herein) of Mercury. As of September 30, 1995, assuming
                                     application of the  net proceeds of  this offering  in
                                     the manner described herein, Senior Indebtedness would
                                     have  been approximately  $8.8 million.  The Indenture
                                     does not restrict the incurrence of additional  Senior
                                     Indebtedness  or other indebtedness  by Mercury or any
                                     subsidiary. See  "Risk Factors  -- Subordination"  and
                                     "Description of Debentures -- Subordination."
Rating.............................  The  Debentures are  rated       by  Standard & Poor's
                                     Corporation. See "Rating of Debentures."
</TABLE>

                                       5
<PAGE>

<TABLE>
<S>                                  <C>
Listing............................  Application has been  made to list  the Debentures  on
                                     the  AMEX under the symbol  MAX.A. The Common Stock is
                                     listed on the AMEX and traded under the symbol  "MAX."
                                     See "Price Range of Common Stock and Dividend Policy."
Use of Proceeds....................  Mercury  intends  to  use  the  net  proceeds  of this
                                     offering to repay  the outstanding  balance under  the
                                     Revolver  (as defined  herein); to  fund expansion and
                                     growth, both internally and through acquisitions;  and
                                     for general corporate purposes. See "Use of Proceeds."
</TABLE>

                      SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                                       THREE MONTHS ENDED
                                                        FISCAL YEAR ENDED JUNE 30,                       SEPTEMBER 30,
                                        -----------------------------------------------------------  ----------------------
                                           1991        1992        1993         1994        1995        1994        1995
                                        ----------  ----------  -----------  ----------  ----------  ----------  ----------
                                                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>         <C>          <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Sales and revenues....................   $  73,498   $  71,746   $  84,543    $ 103,069   $ 183,000   $  35,554   $  51,880
Operating income......................       7,909       6,492       8,903       12,665      16,573       3,851       4,597
Income before income taxes............       1,634         616       3,363(1)      5,169      7,312       1,724       2,076
Net income............................         944         359       1,950        2,995       4,307       1,002       1,232

PER SHARE DATA: (2)
Net income per common share on a fully
  diluted basis.......................   $    0.38   $    0.01   $    0.39    $    0.59   $    0.76   $    0.18   $    0.22
Weighted average common shares
  outstanding.........................   2,377,821   2,394,151   2,431,549    3,719,884   5,420,158   5,354,000   5,415,000

SUPPLEMENTAL DATA:
EBITDA (3)............................  $    4,474  $    2,761  $    5,024   $    8,404  $   11,210  $    2,661  $    3,124
Ratio of earnings to fixed charges
  (4).................................        1.82x       1.36x       2.73 x       3.82x       4.16x       4.34x       4.11x
Dividends per share (5)...............          --          --          --           --  $     0.02          --  $     0.01
</TABLE>

<TABLE>
<CAPTION>
                                                                                              SEPTEMBER 30, 1995
                                                                                          --------------------------
                                                                                           ACTUAL    AS ADJUSTED (6)
                                                                                          ---------  ---------------
<S>                                                                                       <C>        <C>
BALANCE SHEET DATA:
Working capital.........................................................................  $  20,488     $  31,991
Total assets............................................................................     59,491        72,544
Long-term debt (net of current maturities)..............................................     20,011        33,064
Total liabilities.......................................................................     40,756        53,809
Shareholders' equity....................................................................     18,735        18,735
</TABLE>

- ---------------
(1)  Includes a pre-tax gain from a legal judgment in the amount of $1,060,000.

(2)  Shares  outstanding and earnings per share have been adjusted retroactively
     to reflect the payment of a ten percent stock dividend on June 16, 1995.

(3)  EBITDA as  used herein  means earnings  before interest  expense,  interest
     income,   taxes,  depreciation  and  amortization,  and  excludes  minority
     interest and the pre-tax gain from a legal judgment in fiscal 1993.

(4)  For purposes of calculating this  ratio, earnings consist of income  before
     income  taxes and fixed charges. Fixed  charges consist of interest expense
     and one-third  of rental  expense, representative  of that  portion of  the
     rental  expense attributable to interest. The  pro forma ratio, adjusted to
     reflect the issuance of the  Debentures offered hereby and the  application
     of  the  net proceeds  therefrom to  repay the  Revolver, with  the balance
     invested at short-term market rates, would be 2.70x and 2.96x for the  year
     ended  June  30,  1995  and  the three  months  ended  September  30, 1995,
     respectively.

(5)  In December 1994, Mercury's Board of Directors adopted a quarterly dividend
     plan of $.01 per share of common stock. Dividends in the aggregate  amounts
     of $50,000, $50,000, $55,000 and $54,000 were paid on February 1, 1995, May
     1, 1995, September 1, 1995 and November 1, 1995, respectively.

(6)  Adjusted  to reflect the issuance of  the Debentures offered hereby and the
     application of  a  portion of  the  net  proceeds therefrom  to  repay  the
     Revolver  in full. As of November 30,  1995, the amount of the Revolver was
     $12.0 million. See "Use of Proceeds."

                                       6
<PAGE>
                                  RISK FACTORS

    THE  DEBENTURES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISKS INHERENT IN AN INVESTMENT IN THE DEBENTURES.

SUBSTANTIAL LEVERAGE

    The  Company's  leverage  will  increase  following  the  issuance  of   the
Debentures. As of September 30, 1995, the Company's actual leverage, as measured
by  its long-term debt to capitalization ratio, was 51.6%; assuming the issuance
of the  Debentures  and the  application  of  the net  proceeds  therefrom,  the
Company's  leverage would have  been 63.8%. The  degree to which  the Company is
leveraged could  have  important  consequences to  holders  of  the  Debentures,
including  the  following:  (i)  the  Company's  ability  to  obtain  additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired; (ii) a substantial
portion of the  Company's cash  flow from operations  must be  dedicated to  the
payment  of  the  principal  of  and interest  on  the  Debentures  and existing
indebtedness; and (iii) the Company's substantial degree of leverage may make it
more  vulnerable  to  a  downturn  in  the  aviation  services  industry,  which
historically  has  been sensitive  to  changes in  general  economic conditions.
Although the Company presently anticipates that it will be able to pay its  debt
service  and other obligations, there can be  no assurance that the Company will
possess sufficient  income and  liquidity  to meet  all  of its  long-term  debt
service   requirements  and  other  obligations.   See  "Use  of  Proceeds"  and
"Capitalization."

CONSENT OF LENDER TO ADDITIONAL INDEBTEDNESS

    Under the  terms  of its  Credit  Facility (as  defined  herein),  Mercury's
principal  lender must consent to the incurrence of any additional indebtedness.
There can be  no assurance  that Mercury will  not require  additional funds  to
repay  the Debentures, that such additional funds could be obtained, or that the
lender would  consent to  Mercury incurring  additional indebtedness.  Moreover,
Mercury  may in the future enter into financing arrangements which could require
additional consents to repay  the Debentures and/or  contain terms limiting  its
ability  to incur additional  indebtedness. There can be  no assurance that such
additional consents could be obtained, or that the lender under such  additional
financing arrangements would allow Mercury to enter into further indebtedness.

CREDIT QUALITY OF RECEIVABLES

    Mercury  frequently sells aviation fuel on  an unsecured basis with extended
credit  terms.  In  addition,  a  substantial  portion  of  Mercury's   accounts
receivable   are  due  from  smaller  and  generally  less  well-established  or
well-capitalized airlines,  including certain  foreign, regional,  commuter  and
start-up  airlines, which may be less creditworthy than larger, well-established
and well-capitalized airlines. Mercury has incurred in the past and is likely to
continue to incur losses as  the result of the  business failure of a  customer.
The  failure of  a relatively  large customer or  a number  of smaller customers
could have  a  material adverse  effect  on the  Company's  business,  operating
results and financial condition. See "Business -- Fuel Sales and Services."

FOREIGN CUSTOMERS

    Approximately  39% of Mercury's  consolidated revenues for  fiscal 1995 were
generated from  foreign-based customers  headquartered  in Asia,  Europe,  Latin
America  and the Caribbean. Mercury frequently grants foreign customers extended
credit terms, which may result in proportionately larger receivable balances for
a given quantity of fuel sales. To the extent such customers are also large fuel
purchasers, Mercury's credit  exposure to  a single customer  may be  relatively
large.  Although  invoices  are  usually denominated  in  U.S.  dollars, foreign
customers may  have difficulty  in paying  such  invoices in  the event  of  the
devaluation of their national currency. In addition, if a foreign customer fails
to  abide by its contractual commitments, Mercury's legal remedies may not be as
effective as they would be in collecting from domestic customers.

                                       7
<PAGE>
DEPENDENCE ON SIGNIFICANT CUSTOMERS

    Although during fiscal  1995 no single  customer accounted for  over 10%  of
Mercury's  consolidated revenues, at times  certain key customers have accounted
for a significant  portion of Mercury's  consolidated revenues and/or  operating
income.  Furthermore,  at  times  certain key  customers  have  accounted  for a
significant portion of the  revenues and/or operating income  of one or more  of
Mercury's  operating units.  The loss  of one  or more  key customers  in any of
Mercury's operating units  could substantially impair  the operating results  of
such  operating  unit and  could  have a  material  adverse effect  on Mercury's
business, operating results and financial condition.

NATURE OF CONTRACTS

    A large portion of Mercury's business with its customers is based on  verbal
agreements,  invoice terms  or short-term  contracts terminable  by either party
upon limited notice. While Mercury has  operated pursuant to such contracts  for
some  time,  there  can  be  no assurance  that  such  contracts,  agreements or
arrangements will not be terminated. The termination of a large portion of those
arrangements could  have  a  material  adverse  effect  on  Mercury's  business,
operating results and financial condition.

COMPETITION

    Each  of the markets in which Mercury operates is highly competitive. In the
aviation fuel sales and services market,  Mercury is in direct competition  with
major oil companies, major airlines and other aircraft support companies. In the
cargo services market, Mercury competes with major airlines, specialized freight
transporters  and other cargo service firms. In the FBO market, Mercury competes
against other FBOs at each  of the airports at  which it currently operates.  In
the  military  services market,  Mercury  competes with  other  military service
contractors as well as government  provided services. Competition for  customers
between  Mercury and its  competitors is principally  on the basis  of price and
quality of service. Substantially all of  the Company's services are subject  to
competitive  bidding. Many of the  Company's competitors have greater financial,
technical and marketing resources than Mercury.  There can be no assurance  that
the  Company  will  be  able  to  compete  successfully  with  existing  or  new
competitors. See "Business -- Competition."

GENERAL ECONOMIC CONDITIONS

    The air  transportation industry  is highly  sensitive to  general  economic
conditions. Mercury's fuel sales and services business, air cargo operations and
FBOs could be adversely affected by a sustained economic recession either in the
United  States or globally. A substantial reduction in air traffic, particularly
at LAX, or financial problems  incurred by Mercury's commercial customers  could
have  a material  adverse effect  on Mercury's  business, operating  results and
financial condition. Furthermore, Mercury's business with foreign air  carriers,
its fuel sales and its cargo operations could be adversely affected by political
or  military  disputes  involving  the  United  States  and/or  certain  foreign
countries.

AVIATION FUEL AVAILABILITY

    Mercury's fuel sales business  could be materially  adversely affected by  a
significant  decrease in the availability, or increase in the price, of aviation
fuel. Fuel sales and services represented approximately 77.5% and 62.5% of total
revenues in fiscal 1995 and fiscal 1994, respectively. For the last five  years,
with  the exception of a short-term  market dislocation surrounding the Gulf War
in 1990-1991, aviation  fuel prices  have remained in  a relatively  predictable
range.  However, there can be  no assurance that such  prices will remain within
such range in  the future. Moreover,  although Mercury believes  that there  are
currently  adequate aviation fuel supplies and  that aviation fuel supplies will
generally remain available, events  outside Mercury's control  have in the  past
resulted  and could in the future result in spot shortages or rapid increases in
fuel costs. If aviation fuel prices were to materially increase for a  sustained
period,  or if aviation fuel supplies were  for any reason to become unavailable
to Mercury, Mercury's business, operating results and financial condition  could
be  materially adversely affected. See  "Management's Discussion and Analysis of
Financial  Condition  and  Results  of  Operations  --  Liquidity  and   Capital
Resources" and "Business -- Fuel Sales and Services."

                                       8
<PAGE>
IMPACT OF FUEL SALES ON WORKING CAPITAL

    The  Company uses substantial working capital to finance accounts receivable
generated from its fuel sales operations. The amount of working capital consumed
by these accounts receivable depends primarily on the quantity of fuel sold, the
price of the  fuel, the Company's  extension of credit  and customer  compliance
with  credit terms.  Any increase  in such  quantity or  price, any  increase in
credit extended, or  any substantial  customer noncompliance  with credit  terms
will  result in  a corresponding increase  in the  aggregate accounts receivable
balance, thereby requiring Mercury to  employ additional working capital.  While
the  quantity of fuel  sold by Mercury  has increased substantially  in the last
several years, Mercury has been able  to finance the related growth in  accounts
receivable  by increasing the  Credit Facility and  through internally generated
funds. However, at the  current level of  fuel sales, if  the price of  aviation
fuel  were to materially increase for a  sustained period, Mercury might have to
reallocate funds  from business  expansion to  meet working  capital demand,  or
alternatively,  Mercury  could be  forced to  curtail fuel  sales or  change the
credit terms granted to its customers, which could adversely affect earnings and
jeopardize established customer relationships. See  "Business -- Fuel Sales  and
Services."

EFFECT OF AVIATION FUEL AVAILABILITY ON CUSTOMERS

    A  material rise in  the price or  material decrease in  the availability of
aviation fuel would  adversely impact  Mercury's customers. To  the extent  that
Mercury's  airline customers were not able  to immediately adjust their business
operations to  reflect increased  operating costs,  they could  take  relatively
longer  to pay Mercury's accounts receivable.  Such payment delays would further
increase Mercury's working capital demands. In some cases, the impact of a  fuel
price  increase could  materially impair the  financial stability  of an airline
customer such that it would be unable  to pay amounts owed to Mercury and  could
result in such airline customer filing for bankruptcy protection. In that event,
Mercury  could incur significant  losses related to  the uncollectability of the
receivable. See "Business -- Fuel Sales and Services."

MANAGEMENT OF GROWTH

    Mercury has experienced rapid growth  of its business. Management's  ability
to  support and manage  this growth is  dependent upon, among  other things, the
ability to  hire, train,  motivate and  retain personnel,  and the  quality  and
flexibility  of  its  internal  controls  and  automated  systems.  If Mercury's
management is unable to manage growth effectively, Mercury's business, operating
results and financial condition could be adversely affected.

DEPENDENCE UPON KEY PERSONNEL

    Mercury's success depends in large part on its ability to retain and develop
its management team. To  date, Mercury has been  heavily dependent upon  Seymour
Kahn,  its  Chairman of  the Board  and Chief  Executive Officer,  who maintains
significant personal relationships with many  of Mercury's major customers.  Mr.
Kahn  is  68 years  old and  his  employment agreement  with Mercury  expires in
December 1998. Although Mercury has a key man life insurance policy on the  life
of  Mr.  Kahn, Mercury's  operations  could be  adversely  affected if,  for any
reason, Mr. Kahn  does not continue  to be active  in Mercury's management.  The
future  success of Mercury also depends on  its ability to identify, attract and
retain additional qualified management personnel. There can be no assurance that
employees will not leave Mercury  or compete against Mercury. Mercury's  failure
to  attract  additional qualified  employees or  to retain  the services  of key
personnel could materially  adversely affect the  Company's business,  operating
results and financial condition. See "Business -- Employees" and "Management."

EXPANSION BY ACQUISITION

    Mercury's  strategy is to  expand its operations  through internal growth as
well as  through  selected acquisitions  of  aviation businesses  which  may  be
integrated  into or  complement Mercury's existing  businesses. Although Mercury
regularly reviews possible  acquisition candidates,  there can  be no  assurance
that suitable acquisition candidates will be identified or that acquisitions can
be  consummated on acceptable  terms. Under the Credit  Facility, the consent of
Mercury's principal lender may

                                       9
<PAGE>
be required for an acquisition. Failure to accomplish future acquisitions  could
limit Mercury's revenue and earnings growth potential. In addition, acquisitions
involve  a  number  of risks  that  could adversely  affect  Mercury's business,
operating  results  and   financial  condition,  including   the  diversion   of
management's  attention, the assimilation of the operations and personnel of the
acquired companies,  the  amortization of  acquired  intangible assets  and  the
potential  loss of key employees. There can be no assurance that any acquisition
by Mercury will  not materially adversely  affect Mercury's business,  operating
results  and  financial  condition or  that  any such  acquisition  will enhance
Mercury's business, operating results or  financial condition. See "Business  --
Recent Developments."

GOVERNMENT CONTRACT SERVICES OUTLOOK

   
    Mercury's government contract services business has been negatively impacted
by  contract losses due  to base closures,  the loss of  competitive bids, small
business contract set asides  and internalization of  the refueling function  by
the  U.S. military. Since June 30, 1994, ten contracts held by Mercury have been
terminated for such reasons, five of which were terminated in fiscal 1995,  four
of  which have  been terminated or  are scheduled for  termination during fiscal
1996, and one of which is scheduled  for termination in fiscal 1997. Since  June
30,  1994,  Mercury renewed  two four-year  contracts  and added  two contracts.
Growth of the Company's  government contract services  business is dependent  on
obtaining  additional  contracts  and renewing  existing  contracts  through the
process of competitive bids, and on expanding the types of outsourcing  services
provided to the U.S. government. There can be no assurance that the Company will
be  able to  obtain additional  government contracts,  renew existing government
contracts, or expand  the types  of outsourcing  services provided  to the  U.S.
government. See "Management's Discussion and Analysis of Financial Condition and
Results  of Operations  -- Results  of Operations"  and "Business  -- Government
Contract Services."
    

CAPACITY CONSTRAINTS IN CARGO OPERATIONS

    Growth prospects for Mercury's cargo handling operations are limited by  the
availability of additional strategically located warehouse facilities. Mercury's
cargo  handling  operations currently  occur  principally at  LAX.  Mercury also
leases a warehouse facility which it  uses for cargo handling in San  Francisco,
California.  In addition, Mercury recently  acquired certain operating and other
assets used for  cargo handling services  at airport facilities  in Toronto  and
Montreal. At LAX, a portion of Mercury's cargo handling operations are conducted
in a facility subject to a month-to-month agreement. Continuous long-term growth
in  Mercury's cargo handling operations can  be realized only by maintaining and
expanding current  warehouse facilities  or  by obtaining  additional  warehouse
facilities  at existing  or new  locations. There can  be no  assurance that the
Company will be able to maintain or expand its existing warehouse facilities  or
continue  to  obtain additional  warehouse  facilities. See  "Business  -- Cargo
Operations" and "Business -- Recent Developments."

GROWTH POTENTIAL FOR FBOS

    Growth within Mercury's FBOs  is not likely to  be substantial, and may  not
occur  at all, without the acquisition of additional FBO locations. There can be
no assurance that Mercury  will be able to  obtain additional FBO facilities  to
support  continued, long-term growth  in this unit. Even  if such facilities are
available, the cost of the  acquisition or the capital expenditure  requirements
thereof   may  be  prohibitive  or  render  the  operation  of  such  facilities
unprofitable. See "Management's Discussion  and Analysis of Financial  Condition
and  Results of Operations -- Results of Operations" and "Business -- Fixed Base
Operations."

AVIATION FUEL INVENTORY

    Due to the  nature of Mercury's  business, the volume  of its aviation  fuel
inventories has increased and may continue to increase. Depending upon the price
and  price movement of aviation fuel, such  inventories may subject Mercury to a
risk of financial loss. Mercury's fuel inventories are partially hedged pursuant
to pricing terms with its customers and to transactions in heating oil  futures.
There  can be no assurance  that such hedges will  adequately protect Mercury in
the event of a substantial downward movement in the price of aviation fuel.  See
"Business -- Fuel Sales and Services."

                                       10
<PAGE>
ENVIRONMENTAL MATTERS

    Mercury  owns and  leases underground fuel  storage tanks  and operates fuel
tank trucks. Leaks or spills from  such fuel containers could expose Mercury  to
substantial  remediation costs or capital expenditures to repair or replace fuel
containers. Mercury's fuel tanks, fuel  trucks and other operations are  subject
to  numerous federal,  state and local  environmental laws  and regulations that
impose limitations on  the discharge of  pollutants into the  air and water  and
establish  standards for  the treatment,  storage and  transporting of  fuel and
related  materials.  Mercury  believes  that  it  has  installed  the  necessary
safeguards  and procedures required for full compliance with all such applicable
environmental laws and regulations regarding  its fuel facilities. There can  be
no  assurance that changes  to applicable laws  and regulations will  not in the
future occur  which  might  require  substantial  additional  expenditures.  See
"Business -- Environmental Matters."

EMPLOYEE RELATIONS

    Many  workers in  the aviation  services industry  are represented  by labor
unions. If  unionization  of  Mercury's  employees were  to  occur,  changes  to
effective  labor costs and  employee utilization could result  in an increase in
costs which could  adversely affect  Mercury's business,  operating results  and
financial condition. See "Business -- Employees."

CONTROL OF MERCURY

   
    As  of December 31, 1995, Mr. Kahn beneficially owned approximately 25.5% of
the Company's outstanding  voting securities.  As a  principal shareholder,  Mr.
Kahn  is able to exert  greater influence than other  shareholders of Mercury in
the election of  the members  of Mercury's Board  of Directors  and in  business
transactions  such as mergers or other business combinations, the acquisition or
disposition  of  assets,  the  incurrence  of  indebtedness,  the  issuance   of
additional Common Stock or other equity securities and the payment of dividends.
See "Principal Shareholders" and "Management -- Certain Transactions."
    

POSSIBLE NEGATIVE EFFECTS OF PREFERRED STOCK AND LOAN PROVISIONS

    Mercury's  Articles  of  Incorporation  authorize  the  issuance  of  up  to
3,000,000 shares of preferred stock with  such rights and preferences as may  be
determined  from time to time by the  Board of Directors. Accordingly, the Board
of Directors  may,  without shareholder  approval,  issue preferred  stock  with
dividend,  liquidation, conversion, voting or other rights which could adversely
affect the rights,  value and  liquidity of the  Common Stock.  The issuance  of
shares  of preferred stock may also have  the effect of rendering more difficult
an acquisition or a  change in control of  Mercury. Moreover, such issuance  may
constitute a Change of Control, which, in certain instances, may require Mercury
to  repurchase the Debentures. Mercury  has no present plans  to issue shares of
preferred stock. See "Description of  Debentures -- Repurchase of Debentures  at
the  Option of the Holder After Certain  Changes of Control" and "Description of
Capital Stock -- Preferred Stock."

LIMITATIONS ON REPURCHASE OF DEBENTURES

    After a Change of  Control and a Rating  Downgrade, a holder of  Debentures,
may have the right, at the holder's option, to require the Company to repurchase
all  or a portion of such holder's  Debentures. Repurchase rights may also apply
following the death of  a holder of  Debentures. If either  event was to  occur,
there  can  be no  assurance that  the  Company would  have sufficient  funds to
repurchase the Debentures. In addition,  the Company's repurchase of  Debentures
may  be limited by, or create an event  of default under, its Credit Facility or
under additional agreements relating to  borrowings which the Company may  enter
into  from  time  to  time.  See "Description  of  Debentures  --  Repurchase of
Debentures at the  Option of the  Holder After Certain  Changes of Control"  and
"Description of Debentures -- Repurchase of Debentures Upon Death of Holder."

ABSENCE OF SECURITY FOR PAYMENT; LIMITED COVENANTS IN THE INDENTURE

    The  Debentures are  unsecured obligations  of Mercury  and do  not have the
benefit of a sinking  fund or other similar  provision for payment at  maturity.
Furthermore,  the Indenture contains  only limited covenants,  none of which are
designed  to   protect  holders   of  the   Debentures  in   the  event   of   a

                                       11
<PAGE>
material  adverse change in  Mercury's business, operating  results or financial
condition.  Moreover,  the  Indenture  does  not  restrict  the  incurrence   of
additional  Senior  Indebtedness  or  other  Indebtedness  (as  defined  in  the
Indenture) by Mercury or any subsidiary. Consequently, Mercury could become more
highly leveraged, resulting in an increase in debt service that could  adversely
affect  Mercury's  ability to  service  the Debentures.  During  the continuance
beyond any applicable grace period of  any default in the payment of  principal,
premium,  interest  or any  other  payment due  on  any Senior  Indebtedness, no
payment of principal, premium, if any, or interest on the Debentures  (including
the  redemption of any Debentures) may be  made by the Company. See "Description
of Debentures."

SOURCES OF PAYMENTS ON THE DEBENTURES

    The Debentures are obligations exclusively of the Company and not of any  of
its  subsidiaries.  The Company's  cash flow  and its  ability to  service debt,
including the  Debentures, are  partially  dependent upon  the earnings  of  its
subsidiaries  and the  distribution of  those earnings  to the  Company, or upon
other payments of funds by the subsidiaries to the Company. During fiscal  1995,
42.2%  of the Company's operating income and  13.9% of its revenues were derived
from two  of  its subsidiaries,  Mercury  Air  Cargo, Inc.  ("MAC")  and  Maytag
Aircraft  Corporation ("Maytag").  The Company's  subsidiaries are  separate and
distinct legal entities and have no obligation, contingent or otherwise, to  pay
any  amounts  due pursuant  to the  Debentures  or to  make any  funds available
therefor, whether by dividends,  loans or other payments.  In addition, MAC  and
Maytag  are direct obligors under the  Credit Facility. The payment of dividends
and the making of loans and advances  to the Company by its subsidiaries may  be
subject  to  additional  contractual  restrictions  or  to  statutory  or  other
restrictions, are  dependent upon  the earnings  of those  subsidiaries and  are
subject  to various business  considerations. See "Description  of Debentures --
Subordination."

SUBORDINATION

    The Debentures are subordinated in the right of payment to all existing  and
future  Senior Indebtedness of  Mercury. As of September  30, 1995, after giving
effect to  this offering  and the  application of  the net  proceeds  therefrom,
Senior  Indebtedness would have  been approximately $8.8  million. The Company's
Credit  Facility  and   certain  other  Senior   Indebtedness  are  secured   by
substantially all of Mercury's assets. Therefore, in the event of a liquidation,
dissolution,  reorganization or similar proceeding involving Mercury, the assets
of Mercury will be available to pay obligations on the Debentures (and any other
obligations ranking  PARI  PASSU with  the  Debentures) only  after  all  Senior
Indebtedness  has been paid in  full, and there may  not be sufficient assets to
pay any or all amounts due on the Debentures. If Mercury becomes insolvent or is
liquidated, or if payment of the Senior Indebtedness is accelerated, the holders
of the Senior Indebtedness would be entitled to exercise the remedies  available
to  secured lenders under applicable law and pursuant to the terms of the Senior
Indebtedness. See "Description of Debentures -- Subordination."

LIMITED MARKET FOR DEBENTURES

    There is no existing market for the Debentures. Mercury will attempt to have
the Debentures  listed  on  the  AMEX.  The Company  has  been  advised  by  the
Underwriters that they intend to make a market in the Debentures; however, there
can  be  no assurance  that  an active  trading  market in  the  Debentures will
develop. If  a market  were to  develop, the  Debentures could  trade at  prices
higher  or  lower than  the  initial offering  price  thereof depending  on many
factors, including  but  not limited  to  prevailing interest  rates,  Mercury's
operating  results, the  market price  for the Common  Stock and  the market for
similar securities. If the Underwriters cease making a market in the Debentures,
the price of the Debentures may be adversely affected and holders may be  unable
to sell the Debentures.

RULE 144 SALES

   
    The  prevailing market  price of Common  Stock after this  offering could be
adversely affected by future sales of Common Stock by existing shareholders  and
option  holders.  Of the  5,380,087  shares of  Common  Stock outstanding  as of
December 31, 1995, 1,595,790 shares were held by affiliates of Mercury and  were
not  freely tradable except in compliance with Rule 144 ("Rule 144") promulgated
by the  Commission under  the Securities  Act. Subject  to the  satisfaction  of
certain conditions, Rule 144
    

                                       12
<PAGE>
   
permits aggregate sales by any affiliate in a three-month period of no more than
the  greater of 1% of  the outstanding shares (53,800  shares as of December 31,
1995) or the average of  the weekly trading volume for  the shares for the  four
weeks preceding the sale.
    

                                USE OF PROCEEDS

   
    The net proceeds of this offering, after deducting the underwriting discount
and  commissions and  estimated expenses  of the  offering, are  estimated to be
$23,450,000 ($27,012,500 if the Underwriters' over-allotment option is exercised
in full).  Mercury's  credit  facility  with  its  senior  lender  (the  "Credit
Facility")  consists of a revolving portion  (the "Revolver") and a term portion
(the "Term  Loan").  Mercury  intends to  use  the  net proceeds  to  repay  its
outstanding  balance  under  the  Revolver;  for  expansion  and  growth  of its
business, both internally  and through acquisitions;  and for general  corporate
purposes.  As of December 31, 1995, outstanding advances under the Revolver were
$13.1 million, accruing interest  at an effective rate  of approximately 8%  per
annum.
    

                                       13
<PAGE>
                                 CAPITALIZATION

    The   following  table  sets  forth  the  capitalization  of  Mercury  on  a
consolidated basis at September 30, 1995, and as adjusted to reflect the sale of
the Debentures offered hereby and the application of the net proceeds therefrom.
See "Use of Proceeds." This table  should be read in conjunction with  Mercury's
consolidated financial statements and the accompanying notes contained elsewhere
in this Prospectus.

   
<TABLE>
<CAPTION>
                                                                                           SEPTEMBER 30, 1995
                                                                                        -------------------------
                                                                                         ACTUAL    AS ADJUSTED(1)
                                                                                        ---------  --------------
                                                                                             (IN THOUSANDS)
<S>                                                                                     <C>        <C>
Long-term debt:
  Revolver (2)(4).....................................................................  $  11,947    $       --
  Other long-term debt (3)(4).........................................................      8,064         8,064
     % Convertible Subordinated Debentures due 2006...................................         --        25,000
                                                                                        ---------  --------------
    Total long-term debt..............................................................     20,011        33,064
Shareholders' equity:
  Preferred Stock, par value $.01 per share, 3,000,000 shares authorized; no shares
    outstanding.......................................................................         --            --
  Common Stock, par value $.01 per share, 9,000,000 shares authorized; 5,371,087
    shares outstanding (5)............................................................         54            54
  Additional paid-in capital..........................................................     14,611        14,611
  Retained earnings...................................................................      4,225         4,225
  Common Stock in treasury (35,200 shares)............................................       (155)         (155)
                                                                                        ---------  --------------
    Total shareholders' equity........................................................     18,735        18,735
                                                                                        ---------  --------------
Total capitalization..................................................................  $  38,746    $   51,799
                                                                                        ---------  --------------
                                                                                        ---------  --------------
</TABLE>
    

- ------------
(1) Adjusted  to reflect the sale of  the Debentures (assuming the Underwriters'
    over-allotment option is not exercised)  and the application of  $11,947,000
    of the net proceeds to repay the Revolver in full.

(2) Advances  to Mercury under  the Revolver bear interest  at a fluctuating per
    annum rate equal to either the lender's announced prime rate ("Prime  Rate")
    plus  1/2%, or the London  Interbank Offered Rate ("LIBOR")  plus 2%, at the
    Company's option.

(3) Includes the outstanding balance  on the Term Loan  of $4,378,000. The  Term
    Loan  bears interest at the Prime Rate  plus 3/4%, provided no change in the
    interest rate shall be made for any decrease in the Prime Rate below 5%,  or
    LIBOR  plus 2 1/4%.  Principal under the  Term Loan is  repayable in monthly
    installments of $125,000. Upon  an event of  default which remains  uncured,
    interest  will accrue and  compound monthly at  the applicable interest rate
    described above plus 2%.

(4) The Credit Facility requires Mercury to maintain certain levels of financial
    performance, including specified  minimum levels of  tangible net worth,  as
    defined,  working capital and ratios related  to working capital and debt to
    net  worth.  The  Credit  Facility  also  limits  Mercury's  annual  capital
    expenditures  and limits the payment of  dividends on shares of Common Stock
    to $250,000 annually. For the fiscal years ended June 30, 1994 and June  30,
    1995,  Mercury was, and Mercury currently is, in compliance with each of the
    financial covenants contained in the Credit Facility.

(5) Excludes               shares of  Common Stock  reserved for  issuance  upon
    conversion  of the Debentures offered hereby, 284,250 shares of Common Stock
    reserved for issuance upon the exercise of options granted or to be  granted
    under  the Company's  1990 Directors  Stock Option  Plan, 242,800  shares of
    Common Stock reserved for issuance upon  the exercise of options granted  or
    to  be  granted under  the Company's  1990  Long-Term Incentive  Stock Plan,
    110,000 shares of Common Stock reserved for issuance upon the exercise of  a
    Non-Qualified Stock Option dated

                                       14
<PAGE>
    January  31, 1993, 18,335 shares of  Common Stock reserved for issuance upon
    the exercise  of a  certain underwriter  warrant dated  June 18,  1991,  and
    167,970  shares of Common Stock reserved for issuance upon conversion of the
    debenture issued  in  connection  with the  Excel  Transaction  (as  defined
    herein).  See "Business -- Recent  Developments -- Excel Cargo," "Management
    -- Compensation of Directors" and Note 11 of Notes to Consolidated Financial
    Statements.

                PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

   
    Mercury's Common Stock  is listed and  traded on the  AMEX under the  symbol
"MAX." The table below sets forth, for the quarterly periods indicated, the high
and  low daily closing sale  prices on the AMEX  for the Company's Common Stock.
All per share stock price information has been adjusted to reflect the June  16,
1995 ten percent stock dividend.
    

   
<TABLE>
<CAPTION>
                                                                                                 HIGH        LOW
                                                                                               ---------  ---------
<S>                                                                                            <C>        <C>
FISCAL 1994:
Quarter ended September 30, 1993.............................................................  $    3.13  $    2.50
Quarter ended December 31, 1993..............................................................       3.64       2.84
Quarter ended March 31, 1994.................................................................       5.68       3.30
Quarter ended June 30, 1994..................................................................       5.45       4.09

FISCAL 1995:
Quarter ended September 30, 1994.............................................................  $    6.14  $    4.89
Quarter ended December 31, 1994..............................................................       7.05       5.11
Quarter ended March 31, 1995.................................................................       8.64       6.25
Quarter ended June 30, 1995..................................................................       9.00       7.27

FISCAL 1996:
Quarter ended September 30, 1995.............................................................  $    9.00  $    7.75
Quarter ended December 31, 1995..............................................................      10.75       8.13
Quarter ending March 31, 1996 (through January 10, 1996).....................................       8.63       8.00
</TABLE>
    

   
    On  January 10, 1996, the closing sale price of the Common Stock as reported
on the AMEX  was $8.00.  As of  January 9,  1996, there  were approximately  479
holders of record.
    

    In  December 1994, Mercury's Board of Directors adopted a quarterly dividend
plan of $.01 per common share. The  first such dividend was paid on February  1,
1995.  Based upon the current  number of shares of  Common Stock outstanding and
assuming the  quarterly amount  of  $.01 per  share  remains in  effect,  annual
dividend  requirements will amount to approximately $215,000. Mercury intends to
review its dividend policy from time to time in light of its earnings, financial
condition and other relevant factors, including applicable covenants in debt and
other  agreements.  In  this  regard,  as  discussed  in  Note  9  of  Notes  to
Consolidated  Financial Statements, certain of Mercury's loan agreements provide
for  the  maintenance  of  specified  levels  of  working  capital  as  well  as
limitations on cash dividends.

                                       15
<PAGE>
                      SELECTED CONSOLIDATED FINANCIAL DATA

    The  consolidated statement of  income data set forth  below with respect to
the years ended June 30, 1993, 1994 and 1995 and the consolidated balance  sheet
data  at June 30, 1994 and 1995 are derived from, and are qualified by reference
to, the audited  consolidated financial  statements included  elsewhere in  this
Prospectus.  The  consolidated statement  of income  data  set forth  below with
respect to the years ended June 30,  1991 and 1992 and the consolidated  balance
sheet  data at June 30, 1991, 1992,  and 1993 are derived from audited financial
statements of Mercury not included in this Prospectus. The selected consolidated
financial data presented below as of September 30, 1994 and September 30,  1995,
and for the three-month periods then ended, have been derived from the unaudited
consolidated  financial statements of  Mercury and reflect  all normal recurring
accruals and  adjustments which,  in the  opinion of  Mercury's management,  are
necessary  for a  fair presentation  of the  unaudited results.  The information
presented below should be  read in conjunction  with the consolidated  financial
statements  and  notes  thereto  presented  elsewhere  in  this  Prospectus  and
"Management's Discussion  and Analysis  of Financial  Condition and  Results  of
Operations."

<TABLE>
<CAPTION>
                                                                                                                THREE MONTHS
                                                           FISCAL YEAR ENDED JUNE 30,                       ENDED SEPTEMBER 30,
                                          -------------------------------------------------------------    ----------------------
                                            1991         1992         1993         1994         1995         1994         1995
                                          ---------    ---------    ---------    ---------    ---------    ---------    ---------
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>          <C>          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Sales and revenues......................  $  73,498    $  71,746    $ 84,543     $ 103,069    $ 183,000    $  35,554    $  51,880
Operating income........................      7,909        6,492       8,903        12,665       16,573        3,851        4,597
Income before income taxes..............      1,634          616       3,363 (1)     5,169        7,312        1,724        2,076
Net income..............................        944          359       1,950         2,995        4,307        1,002        1,232
PER SHARE DATA: (2)
Net income per common share on a fully
  diluted basis.........................  $    0.38    $    0.01    $   0.39     $    0.59    $    0.76    $    0.18    $    0.22
Weighted average common shares
  outstanding...........................  2,377,821    2,394,151    2,431,549    3,719,884    5,420,158    5,354,000    5,415,000
SUPPLEMENTAL DATA:
EBITDA (3)..............................  $   4,474    $   2,761    $  5,024     $   8,404    $  11,210    $   2,661    $   3,124
Ratio of earnings to fixed charges
  (4)...................................       1.82x        1.36x       2.73 x        3.82x        4.16x        4.34x        4.11x
Dividends per share (5).................         --           --          --            --    $    0.02           --    $    0.01
</TABLE>

<TABLE>
<CAPTION>
                                                          AT JUNE 30,                  AT SEPTEMBER 30,
                                          -------------------------------------------  ----------------
                                           1991     1992     1993     1994     1995     1994     1995
                                          -------  -------  -------  -------  -------  -------  -------
<S>                                       <C>      <C>      <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA:
Working capital.........................  $ 5,482  $ 6,182  $ 8,409  $ 9,353  $20,528  $12,339  $20,488
Total assets............................   22,370   26,090   31,800   35,442   54,210   40,822   59,491
Long-term debt (net of current
  maturities)...........................    4,941    7,299    9,821    8,650   17,104   10,711   20,011
Total liabilities.......................   14,966   18,001   22,264   21,806   35,839   26,713   40,756
Shareholders' equity....................    7,404    8,089    9,536   13,636   18,371   14,109   18,735
</TABLE>

- ---------------
(1)  Includes a pre-tax gain from a legal judgment in the amount of $1,060,000.

(2)  Shares  outstanding and earnings per share have been adjusted retroactively
     to reflect the payment of a ten percent stock dividend on June 16, 1995.

(3)  EBITDA as  used herein  means earnings  before interest  expense,  interest
     income,   taxes,  depreciation  and  amortization,  and  excludes  minority
     interest and the pretax gain from a legal judgment in 1993.

(4)  For purposes of calculating this  ratio, earnings consist of income  before
     income  taxes and fixed charges. Fixed  charges consist of interest expense
     and one-third  of rental  expense, representative  of that  portion of  the
     rental  expense attributable to interest. The  pro forma ratio, adjusted to
     reflect the issuance of the  Debentures offered hereby and the  application
     of  the  net proceeds  therefrom to  repay the  Revolver, with  the balance
     invested at  short-term market  rates, would  be 2.70x  and 2.96x  for  the
     fiscal  year ended June 30,  1995 and the three  months ended September 30,
     1995, respectively.

(5)  In December 1994, Mercury's Board of Directors adopted a quarterly dividend
     plan of $.01 per share of common stock. Dividends in the aggregate  amounts
     of $50,000, $50,000, $55,000 and $54,000 were paid on February 1, 1995, May
     1, 1995, September 1, 1995 and November 1, 1995, respectively.

                                       16
<PAGE>
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

    THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1994

    The  following table sets forth, for the periods indicated, the revenues and
operating income  of each  of the  Company's four  operating units,  as well  as
certain other financial data.

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED SEPTEMBER 30,
                                                              -----------------------------------------
                                                                     1994                  1995
                                                              -------------------   -------------------
                                                                       % OF TOTAL            % OF TOTAL
                                                              AMOUNT    REVENUES    AMOUNT    REVENUES
                                                              ------   ----------   ------   ----------
                                                                        (DOLLARS IN MILLIONS)
<S>                                                           <C>      <C>          <C>      <C>
Revenues:
Fuel sales and services.....................................  $25.1       70.6%     $41.1       79.3%
Cargo operations............................................    2.1        5.8        2.9        5.6
Government contract services................................    4.2       11.8        3.6        6.8
FBOs........................................................    4.2       11.8        4.3        8.3
                                                              ------     -----      ------     -----
  Total revenues............................................  $35.6      100.0%     $51.9      100.0%
                                                              ------     -----      ------     -----
                                                              ------     -----      ------     -----
</TABLE>

<TABLE>
<CAPTION>
                                                                       % OF UNIT            % OF UNIT
                                                              AMOUNT   REVENUES    AMOUNT   REVENUES
                                                              ------   ---------   ------   ---------
<S>                                                           <C>      <C>         <C>      <C>
Operating income:
Fuel sales and services.....................................   $1.4       5.5%      $2.0       4.7%
Cargo operations............................................    0.5      25.9        0.9      32.1
Government contract services................................    1.0      24.3        0.9      24.7
FBOs........................................................    0.9      21.6        0.8      19.5
                                                              ------      ---      ------      ---
  Total operating income....................................   $3.8      10.8%      $4.6       8.9%
                                                              ------      ---      ------      ---
                                                              ------      ---      ------      ---
</TABLE>

<TABLE>
<CAPTION>
                                                                       % OF TOTAL            % OF TOTAL
                                                              AMOUNT    REVENUES    AMOUNT    REVENUES
                                                              ------   ----------   ------   ----------
<S>                                                           <C>      <C>          <C>      <C>
Expenses:
Selling, general and administrative.........................  $ 1.2        3.3%     $ 1.5        2.8%
Depreciation and amortization...............................    0.6        1.7        0.6        1.2
Interest and other..........................................    0.3        1.0        0.4        0.9
                                                              ------     -----      ------     -----
Income before income taxes..................................    1.7        4.8        2.1        4.0
Provision for income taxes..................................    0.7        2.0        0.9        1.6
                                                              ------     -----      ------     -----
  Net income................................................  $ 1.0        2.8%     $ 1.2        2.4%
                                                              ------     -----      ------     -----
                                                              ------     -----      ------     -----
</TABLE>

    Revenues  in the  three months ended  September 30, 1995  increased 45.9% to
$51.9 million from $35.6 million in the same period of the prior year. Operating
income in the  three months  ended September 30,  1995 increased  19.4% to  $4.6
million from $3.8 million in the same period of the prior year.

    Revenues  from fuel sales  and services include  all revenues from Mercury's
contract fueling business, as well as revenues from a number of other commercial
activities which are headquartered  at LAX as part  of Mercury's fuel sales  and
services operations. These activities include refueling services at LAX and John
Wayne  International Airport  in Santa  Ana, California,  the brokering  of non-
aviation fuel to industrial and commercial customers, the provision of air frame
and power plant  mechanics to  commercial airlines  and the  provision of  cargo
warehouse  manpower to a commercial  airline. Revenues from the  sale of fuel by
Mercury's FBOs are included in the amounts  for FBOs, and not in fuel sales  and
services.

                                       17
<PAGE>
    Revenues from fuel sales and services represented 79.3% of total revenues in
the three months ended September 30, 1995 compared to 70.6% of total revenues in
the  same period of the prior year. Revenues from fuel sales and services in the
three months ended  September 30,  1995 increased  63.7% to  $41.1 million  from
$25.1  million in the  same period of  the prior year.  The increase in revenues
from fuel sales and services was primarily  due to an increase in the number  of
gallons sold as a result of the addition of a significant number of new accounts
subsequent  to September 30, 1994. Average fuel prices were marginally higher in
the three months ended  September 30, 1995  compared to the  same period of  the
prior  year. Operating income from  fuel sales and services  in the three months
ended September 30, 1995  increased 40.5% to $2.0  million from $1.4 million  in
the same period of the prior year. The increase was attributable primarily to an
increase  in fuel  sales, and to  a lesser  extent, a slight  improvement in per
gallon margins. Due  to sales to  the new accounts  subsequent to September  30,
1994  which were included in  the results of the  second fiscal quarter of 1995,
the comparative rate of growth in fuel sales and services revenues and operating
income in the second fiscal  quarter of 1996 is expected  to be lower than  that
experienced in the three months ended September 30, 1995.

    Revenues  from cargo operations in the three months ended September 30, 1995
increased 39.7% to  $2.9 million from  $2.1 million  in the same  period of  the
prior  year. This increase was primarily due to a general increase in the volume
of business from existing  accounts. Operating income  from cargo operations  in
the  three  months ended  September 30,  1995 increased  72.7% to  $931,000 from
$539,000 in the same period of the prior year.

   
    Revenues from  government  contract  services  in  the  three  months  ended
September 30, 1995 decreased 15.8% to $3.6 million from $4.2 million in the same
period  of  the prior  year. The  decrease  was primarily  due to  five contract
terminations during fiscal 1995, which  terminations were only partially  offset
by  a new contract  received in November 1994.  Operating income from government
contract services in the three months  ended September 30, 1995 decreased  14.5%
to  $873,000 from $1.0 million in the same period of the prior year due to lower
revenues. Subsequent to September 30, 1995, four government contracts have  been
terminated  or are scheduled for termination  in fiscal 1996, and one government
contract is scheduled for termination in fiscal 1997.
    

    Revenues from FBOs in  the three months ended  September 30, 1995  increased
2.9%  to $4.3 million from $4.2 million in  the same period of the prior year in
part due to an increase in fuel sales and to higher service revenues.  Operating
income  in the three months ended September  30, 1995 decreased 6.8% to $841,000
from $902,000 in the same period of  the prior year. The decrease was  primarily
attributable to lower per gallon margins and higher operating expenses.

    Selling,  general  and administrative  expenses  in the  three  months ended
September 30, 1995 increased 23.8% to $1.5 million from $1.2 million in the same
period of the prior year. The increase was primarily due to higher  compensation
expense and, to a lesser extent, higher professional fees and facility expenses.

    Depreciation  and amortization expense  in the three  months ended September
30, 1995 increased  2.8% to $623,000  from $606,000  in the same  period of  the
prior year.

    Interest  expense in  the three month  periods September  30, 1995 increased
44.7% to  $437,000 from  $302,000 in  the same  period of  the prior  year.  The
increase was due to significantly higher average borrowings under the Revolver.

    Charges  for minority  interest were  eliminated in  the three  months ended
September 30, 1995 as compared to $42,000 in the same period of the prior  year.
The  elimination was due to the acquisition of the remaining minority interest's
share of MAC in  November 1994. See  Note 4 of  Notes to Consolidated  Financial
Statements.

   
    Income tax expense in the three months ended September 30, 1995 approximated
40.7%  of  pre-tax  income and  41.9%  in the  same  period of  the  prior year,
reflecting the expected effective annual tax rate.
    

                                       18
<PAGE>
    FISCAL 1993, 1994, AND 1995

    The following table sets forth, for the periods indicated, the revenues  and
operating  income for  each of  the Company's four  operating units,  as well as
certain other financial data.

   
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED JUNE 30,
                                                              -------------------------------------------------------------
                                                                     1993                  1994                 1995
                                                              -------------------   ------------------   ------------------
                                                                       % OF TOTAL           % OF TOTAL           % OF TOTAL
                                                              AMOUNT    REVENUES    AMOUNT   REVENUES    AMOUNT   REVENUES
                                                              ------   ----------   ------  ----------   ------  ----------
                                                                                  (DOLLARS IN MILLIONS)
<S>                                                           <C>      <C>          <C>     <C>          <C>     <C>
Revenues:
Fuel sales and services.....................................  $52.9       62.5%     $ 64.4     62.5%     $141.8     77.5%
Cargo operations............................................    4.8        5.7         7.0      6.8         9.9      5.4
Government contract services................................   12.4       14.7        16.0     15.5        15.6      8.5
FBOs........................................................   14.4       17.1        15.7     15.2        15.7      8.6
                                                              ------     -----      ------    -----      ------    -----
  Total revenues............................................  $84.5      100.0%     $103.1    100.0%     $183.0    100.0%
                                                              ------     -----      ------    -----      ------    -----
                                                              ------     -----      ------    -----      ------    -----
</TABLE>
    

<TABLE>
<CAPTION>
                                                                       % OF UNIT            % OF UNIT            % OF UNIT
                                                              AMOUNT   REVENUES    AMOUNT   REVENUES    AMOUNT   REVENUES
                                                              ------   ---------   ------   ---------   ------   ---------
<S>                                                           <C>      <C>         <C>      <C>         <C>      <C>
Operating income:
Fuel sales and services.....................................   $2.2       4.3%     $ 3.0       4.7%     $ 6.9       4.9%
Cargo operations............................................    1.6      33.1        2.7      38.4        2.8      28.5
Government contract services................................    3.2      25.8        4.0      25.0        4.2      26.7
FBOs........................................................    1.9      12.8        3.0      18.9        2.7      17.1
                                                              ------      ---      ------      ---      ------      ---
  Total operating income....................................   $8.9      10.5%     $12.7      12.3%     $16.6       9.1%
                                                              ------      ---      ------      ---      ------      ---
                                                              ------      ---      ------      ---      ------      ---
</TABLE>

<TABLE>
<CAPTION>
                                                                       % OF TOTAL           % OF TOTAL           % OF TOTAL
                                                              AMOUNT    REVENUES    AMOUNT   REVENUES    AMOUNT   REVENUES
                                                              ------   ----------   ------  ----------   ------  ----------
<S>                                                           <C>      <C>          <C>     <C>          <C>     <C>
Expenses:
Selling, general and administrative.........................  $ 3.9        4.6%     $  4.3      4.1%     $  5.4      2.9%
Depreciation and amortization...............................    1.7        2.0         2.0      2.0         2.4      1.3
Interest and other..........................................     --         --         1.2      1.2         1.5      0.8
                                                              ------     -----      ------    -----      ------    -----
Income before income taxes..................................    3.4        4.0         5.2      5.0         7.3      4.0
Provision for income taxes..................................    1.4        1.7         2.2      2.1         3.0      1.6
                                                              ------     -----      ------    -----      ------    -----
  Net income................................................  $ 2.0        2.3%     $  3.0      2.9%     $  4.3      2.4%
                                                              ------     -----      ------    -----      ------    -----
                                                              ------     -----      ------    -----      ------    -----
</TABLE>

    FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994

    Revenues in  fiscal  1995 increased  77.6%  to $183.0  million  from  $103.1
million in fiscal 1994. Operating income in fiscal 1995 increased 30.9% to $16.6
million from $12.7 million in fiscal 1994.

   
    Revenues from fuel sales and services represented 77.5% of total revenues in
fiscal  1995 compared to 62.5%  of total revenues in  fiscal 1994. Revenues from
fuel sales and services in fiscal  1995 increased 120.1% to $141.8 million  from
$64.4  million in  fiscal 1994.  The increase  in revenues  from fuel  sales and
services was primarily due  to an increase  in the number of  gallons sold as  a
result  of the addition of a significant  number of new accounts in fiscal 1995.
These new accounts were attributable in part to the opening of sales offices  in
Houston  and Miami  in October  1994. Average  fuel prices  were also marginally
higher in fiscal 1995 compared to fiscal 1994. Operating income from fuel  sales
and  services in fiscal 1995 increased 127.9%  to $6.9 million from $3.0 million
in fiscal 1994. The increase was  attributable primarily to an increase in  fuel
sales and, to a lesser extent, a slight improvement in per gallon margins.
    

    Revenues  from  cargo  operations in  fiscal  1995 increased  41.8%  to $9.9
million from $7.0 million in fiscal 1994.  This increase was primarily due to  a
general  increase  in the  volume  of business  from  existing accounts  and the
addition of a new location in San Francisco. During fiscal 1995, Mercury  opened
a  cargo operation in Miami; however, in March 1995, the operation was closed as
a result of the

                                       19
<PAGE>
loss of a key  employee. Operating income from  cargo operations in fiscal  1995
increased 5.5% to $2.8 million from $2.7 million in fiscal 1994. The increase in
operating income was significantly lower than the corresponding revenue increase
due  to operating losses at the San Francisco and Miami locations in fiscal 1995
and higher labor and  other operating costs  at LAX in  fiscal 1995 compared  to
fiscal 1994.

    Revenues  from government contract services in fiscal 1995 decreased 2.6% to
$15.6 million  from  $16.0 million  in  fiscal 1994.  Revenues  from  government
contract  services in fiscal 1995 included $5.3 million from ten contracts, five
of which were terminated in  fiscal 1995 and the balance  of which have been  or
are  scheduled for termination during fiscal 1996. The decrease in revenues from
government contract  services  in  fiscal  1995  compared  to  fiscal  1994  was
primarily   due  to  the   contract  terminations  during   fiscal  1995,  which
terminations were only partially offset by  a new contract received in  November
1994.  Operating  income  from  government  contract  services  in  fiscal  1995
increased 4.1% to $4.2  million from $4.0  million in fiscal  1994 due to  lower
operating expenses. Operating income from government contract services in fiscal
1995  included $1.4 million from the ten contracts described above which have or
will  be  terminated.  Mercury  does  not  anticipate  significant   charge-offs
associated with the contract terminations described above.

    Revenues  from FBOs remained relatively constant  in fiscal 1994 and 1995 at
$15.7 million, but operating income decreased  9.0% from $3.0 million in  fiscal
1994  to $2.7 million in fiscal 1995. The decrease was primarily attributable to
a reduction in the volume of fuel sold, as well as lower per gallon margins.

    Selling, general and administrative expenses in fiscal 1995 increased  25.9%
to $5.4 million from $4.3 million in fiscal 1994. The increase was primarily due
to an increase in the provision for bad debts. Provision for bad debts in fiscal
1995  increased to $905,000  from $324,000 in  fiscal 1994 due  to a significant
increase in  sales and  accounts  receivable. Excluding  the provision  for  bad
debts,  selling, general  and administrative  expenses in  fiscal 1995 increased
13.2% to $4.5 million from $3.9 million in fiscal 1994, primarily due to  higher
compensation expenses related to the expansion of Mercury's business.

    Depreciation and amortization expense in fiscal 1995 increased 17.6% to $2.4
million from $2.0 million in fiscal 1994. The increase was primarily due to $2.0
million  of  capital expenditures  in fiscal  1995 and  $5.0 million  of capital
expenditures in fiscal 1994.

    Interest expense in fiscal  1995 increased 36.9% to  $1.5 million from  $1.1
million  in  fiscal 1994.  The increase  was  due to  higher interest  rates and
significantly higher average borrowings on the Revolver in fiscal 1995  compared
to  fiscal 1994. Interest income in fiscal  1995 decreased 40.0% to $84,000 from
$140,000 in fiscal 1994  due to the declining  principal balance of  outstanding
notes receivable.

    Charges for minority interest in fiscal 1995 decreased 61.4% to $95,000 from
$246,000  in  fiscal  1994. The  decrease  was  due to  the  acquisition  of the
remaining minority interest's share of MAC in November 1994. See Note 4 of Notes
to Consolidated Financial Statements.

    Income tax expense for fiscal 1995 approximated 41.1% of pre-tax income  and
42.1% for fiscal 1994, reflecting the expected effective annual tax rate.

    FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1993

    Revenues in fiscal 1994 increased 21.9% to $103.1 million from $84.5 million
in fiscal 1993. Operating income in fiscal 1994 increased 42.3% to $12.7 million
from $8.9 million in fiscal 1993.

    Revenues from fuel sales and services represented 62.5% of total revenues in
both  fiscal 1994  and fiscal  1993. Revenues  from fuel  sales and  services in
fiscal 1994 increased 21.8% to $64.4 million from $52.9 million in fiscal  1993.
The  increase in revenues from  fuel sales and services  was primarily due to an
increase  in  the  number  of  gallons  sold.  On  average,  fuel  prices   were
approximately 13% lower in

                                       20
<PAGE>
fiscal  1994  than during  fiscal  1993. Operating  income  from fuel  sales and
services in fiscal  1994 increased 34.4%  to $3.0 million  from $2.2 million  in
fiscal  1993. The increase  in operating income  was principally attributable to
the increase in fuel sales.

    Revenues from  cargo  operations in  fiscal  1994 increased  46.3%  to  $7.0
million  from $4.8 million in fiscal 1993.  This increase was primarily due to a
general increase  in the  volume  of business  from  existing accounts  and  the
addition  of one cargo handling account.  Operating income from cargo operations
in fiscal 1994 increased 69.4% to $2.7 million from $1.6 million in fiscal 1993.
The increase in operating income was attributable to higher revenues.

    Revenues from government contract services in fiscal 1994 increased 28.7% to
$16.0 million from $12.4 million in fiscal  1993 due in part to the addition  of
two contracts, one in October 1992 and one in September 1993, and in part due to
increased  add-ons  to  existing  contracts.  Operating  income  from government
contract services  in fiscal  1994 increased  24.4% to  $4.0 million  from  $3.2
million in fiscal 1993 primarily due to higher revenues.

    Revenues from FBOs in fiscal 1994 increased 8.3% to $15.7 million from $14.4
million  in fiscal 1993 due  to an increase in  fuel sales and service revenues.
Operating income from  FBOs increased by  59.6% to $3.0  million in fiscal  1994
from  $1.9 million  in fiscal 1993.  The increase was  primarily attributable to
higher margins from fuel sales and, to a lesser extent, a greater volume of fuel
sold.

    Selling, general and administrative expenses  in fiscal 1994 increased  9.8%
to  $4.3 million from $3.9  million in fiscal 1993.  Excluding the provision for
bad debts, selling, general and administrative expenses in fiscal 1994 increased
13.6% to $3.9 million from $3.5 million in fiscal 1993, primarily due to  higher
compensation  expense. Included in selling,  general and administrative expenses
in fiscal 1994 was  a $324,000 provision  for bad debts  compared to a  $414,000
provision in fiscal 1993.

   
    Depreciation and amortization expense in fiscal 1994 increased 22.0% to $2.0
million from $1.7 million in fiscal 1993. The increase was primarily due to $5.0
million  of  capital expenditures  in fiscal  1994 and  $4.0 million  of capital
expenditures in fiscal 1993.
    

    Interest expense remained relatively constant in fiscal 1994 and fiscal 1993
at $1.1 million. Interest income in fiscal 1994 decreased 18.1% to $140,000 from
$171,000 in fiscal 1993  due to the declining  principal balance of  outstanding
notes receivable.

    Charges  for minority  interest in fiscal  1994 increased  92.2% to $246,000
from $128,000  in fiscal  1993. The  increase was  due to  significantly  higher
income generated by MAC, 20% of which was owned by a minority shareholder.

    Income  tax expense for fiscal 1994 approximated 42.1% of pre-tax income and
42.0% for fiscal 1993, reflecting the expected effective annual tax rate.

LIQUIDITY AND CAPITAL RESOURCES

    Mercury has historically financed its operations through operating cash flow
and borrowings under the  Revolver. Mercury's cash balance  as of September  30,
1995 totaled $529,000.

    Net  cash  provided by  operating activities  totaled $1,336,000  during the
three months ended September 30, 1995.  During this period, the primary  sources
of  cash  from operations  were net  income  plus depreciation  and amortization
totaling $1,855,000,  an  increase in  accounts  payable of  $1,721,000  and  an
increase in income taxes payable of $732,000. The primary uses of such cash were
an  increase  in accounts  receivable of  $2,377,000 and  a decrease  in accrued
expenses and other current liabilities of $1,095,000.

    Net cash used in operating activities totaled $5,581,000 during fiscal 1995.
During this period, the primary sources of cash from operations were net  income
plus  depreciation  and  amortization  totaling $6,716,000  and  an  increase in
accounts payable of $6,078,000. The primary  uses of such cash were an  increase
in  accounts  receivable  of  $16,105,000  and  an  increase  in  inventories of
$2,332,000.

                                       21
<PAGE>
    Net cash used in  investing activities totaled  $1,272,000 during the  three
months  ended  September  30,  1995.  The primary  uses  of  cash  for investing
activities included  additions  to  other assets  of  $640,000,  which  includes
goodwill  from the  Excel Transaction  of $750,000,  and additions  to property,
equipment and leaseholds of $561,000.

    Net cash used in investing activities totaled $2,021,000 during fiscal 1995.
The primary  uses  of  cash  for  investing  activities  included  additions  to
property,  equipment and leaseholds of $1,574,000  and additions to other assets
of $632,000.

    Net cash  used in  financing activities  totaled $366,000  during the  three
months  ended September 30, 1995. The primary source of such cash was borrowings
under the  Revolver  of $1,829,000.  The  primary uses  of  such cash  were  the
reduction  in  long-term  debt of  $1,327,000  and repurchases  of  Common Stock
totaling approximately $820,000.

    Net cash provided by financing  activities totaled $6,663,000 during  fiscal
1995.  The primary  source of  such cash  was borrowings  under the  Revolver of
$10,118,000. The primary uses of such cash were the reduction in long-term  debt
of  $2,443,000  and  repurchases  of Common  Stock,  including  redemption  by a
subsidiary  of  a  portion  of  a  minority  shareholder's  interest,   totaling
$1,925,000.

    The Credit Facility is secured by substantially all of Mercury's assets. The
original  principal balance of the Term Loan was $7,500,000, of which $4,128,000
was outstanding as of November 30, 1995. The Term Loan is amortized and paid  on
a  monthly basis and matures in August 1998. Pursuant to the Revolver, funds may
be obtained in an amount equal to the  value of up to 85% of Mercury's  eligible
receivables, as determined by the lender, up to an aggregate of $16,000,000. The
Revolver  was established  in December  1989 and  has been  renewed and expanded
several times. The current agreement matures in October 1997, subject to renewal
by the parties. At November 30,  1995, Mercury had approximately $12,045,000  of
borrowings  under the  Revolver and  had approximately  $3,000,000 of additional
borrowing availability based on the 85% of eligible receivables test.

    On September 30, 1995, the Company issued convertible debentures with a face
amount of $2,016,000 in connection with the Excel Transaction. See "Business  --
Recent  Developments  --  Excel Cargo"  and  Note  16 of  Notes  to Consolidated
Financial Statements.

    During fiscal 1995, Mercury repurchased 236,300 shares of Common Stock at  a
total  cost of  approximately $1,474,000.  During fiscal  1995, Mercury received
approximately $379,000 from  the exercise  of certain  underwriter warrants  and
stock  options which resulted in the issuance of 128,532 shares of Common Stock.
During the three  months ended September  30, 1995, the  Company repurchased  an
additional  155,420 shares of Common Stock  at a cost of approximately $820,000.
Management is  currently  authorized by  the  Company's Board  of  Directors  to
repurchase up to approximately an additional $240,000 in Common Stock.

    Historically,  the  Company's  capital  expenditure  requirements  have been
related to  refueling and  ground  handling equipment  for both  commercial  and
government  contract  services operations.  In  fiscal 1994,  the  Company spent
approximately $2,400,000 for equipment requirements related to new and  existing
contracts   and  to  purchase  equipment  previously  held  under  noncancelable
operating leases. During fiscal 1994, the Company also acquired a 20,000  square
foot  building for  its headquarters at  a cost of  approximately $1,800,000. In
addition, the Company invested nearly  $800,000 to acquire a leasehold  interest
at  its Bakersfield  FBO. In  fiscal 1995, the  Company purchased  a building in
Colorado Springs  at a  cost of  $500,000 to  relocate its  government  contract
services  headquarters. The Company also invested nearly $700,000 to remodel and
furnish  its  Los  Angeles  headquarters  building  and  to  purchase   computer
equipment.  In addition,  the Company  spent approximately  $700,000 to purchase
refueling and ground equipment for  its commercial, FBO and government  contract
service operations.

    The  Company's accounts  receivable increased  from $17,164,000  at June 30,
1994 to  $33,269,000  at June  30,  1995, an  increase  of $16,105,000  with  an
increase  in  accounts payable  during  the same  period  of only  $6,078,000 to
$12,998,000 at  June  30,  1995  from $6,920,000  at  June  30,  1994.  Accounts

                                       22
<PAGE>
receivable  days outstanding for  the quarter ended  June 30, 1994  were 64 days
compared to 61 days for the quarter ended June 30, 1995 based upon  consolidated
revenue  for each period. Accounts receivable days outstanding are impacted by a
high volume of  fuel brokerage which  is reported  in revenues on  a net  margin
basis  and a high concentration of fuel sales to customers with extended payment
terms. Allowance for doubtful  accounts increased to $610,000  at June 30,  1995
from $508,000 at June 30, 1994.

    The  Company's accounts  receivable increased  from $33,269,000  at June 30,
1995 to $35,992,000 at  September 30, 1995, an  increase of $2,723,000, with  an
increase in accounts payable during the same period of $2,189,000 to $15,187,000
at  September 30,  1995 from $12,998,000  at June 30,  1995. Accounts receivable
days outstanding for each of the quarters ended September 30, 1995 and June  30,
1995  were  unchanged at  61  days based  upon  total revenue  for  each period.
Allowance for doubtful accounts increased to $810,000 at September 30, 1995 from
$610,000 at June 30, 1995.

    Absent a  major  prolonged  surge  in oil  prices  or  a  capital  intensive
acquisition,  the Company believes  that the proceeds  from this offering, along
with operating cash flow, the Revolver  and vendor credit, will provide it  with
sufficient  liquidity  during the  next twelve  months. In  the event  that fuel
prices increase  significantly for  an extended  period of  time, the  Company's
liquidity  could be  adversely affected unless  the Company is  able to increase
vendor credit or increase lending limits under its Credit Facility.

SEASONAL NATURE OF BUSINESS

    Mercury's commercial fuel  sales, FBOs and  aircraft support operations  are
seasonal  in nature.  Mercury's fuel  sales and  services business  and FBOs are
relatively stronger during the months of April through September than during the
months of  October through  March. Commercial  air traffic  and traffic  at  the
Company's  FBOs are  reduced during  the winter months,  due in  part to weather
conditions, and increased during  the summer months, due  in part to  additional
commercial  flights and  more recreational  flying. Mercury's  cargo business is
relatively stronger during the months of  October through March than during  the
months  of  April  through September.  The  cargo  business is  affected  by the
patterns for commercial and retail  inventory build-ups in international  trade.
Operations at military facilities are not seasonal.

CURRENCY FLUCTUATIONS AND INFLATION

    Mercury  is only minimally subject to  the risk of currency fluctuations, as
most of its invoices for payment are denominated in U.S. dollars. The effects of
inflation are experienced by Mercury through increases in the cost of labor  and
aviation  fuel, the  latter of  which can  usually be  offset and/or anticipated
through resale price increases.

                                       23
<PAGE>
                                    BUSINESS

GENERAL

    Mercury provides a broad range of services to the aviation industry  through
four  principal operating units: fuel sales and services, cargo operations, FBOs
and government contract services.  Fuel sales and services  include the sale  of
fuel  and  delivery of  fuel primarily  to commercial  airlines and  air freight
companies.  Cargo  operations  consist   of  cargo  handling,  space   brokerage
operations  and general  cargo sales  agent services.  FBOs include  fuel sales,
into-plane services, ground support services and aircraft hangar facilities  and
tie-down  facilities  for  commercial, private  and  other  aircraft. Government
contract services principally consist of operating government-owned fuel  depots
and refueling aircraft for the military.

CURRENT BUSINESS ENVIRONMENT

   
    According  to the Air  Transport Association of America  (the "ATA") and the
LAX 1994 annual report, the amount of passenger traffic and air cargo  shipments
in  the entire United  States and at  LAX has increased  significantly in recent
years. Domestic  passenger miles  on  U.S. carriers  have increased  from  243.7
billion  in 1984 to 378.8  billion in 1994, an  increase of 55.4%, equivalent to
4.5% compounded  annually, while  international passenger  miles have  increased
from  61.4 billion to 140.3  billion, an increase of  128.5%, equivalent to 8.6%
compounded annually, in the same period. At LAX, where Mercury's fuel sales  and
services  operations are headquartered, the  number of passengers increased from
33.3 million in 1984 to 48.9 million  in 1994, an increase of 46.9%,  equivalent
to  3.9%  compounded  annually,  while the  number  of  international passengers
increased from 5.1 million to 12.2 million, an increase of 139.2%, equivalent to
9.1% compounded annually, in the same period.
    

    The market for cargo operations has  also greatly expanded in recent  years.
Among  U.S. airlines, domestic cargo has increased from 3.6 billion ton miles in
1984 to 5.9 billion ton miles in 1994, an increase of 63.9%, equivalent to  5.1%
compounded  annually,  while  international  ton miles  has  increased  from 3.0
billion to 7.8 billion,  an increase of 160.0%,  equivalent to 10.0%  compounded
annually,  in  the same  period. At  LAX, where  Mercury's cargo  operations are
headquartered, total cargo has increased from 949,178 tons in 1984 to  1,570,417
tons  in 1994,  an increase  of 65.5%,  equivalent to  5.2% compounded annually,
while international cargo has  increased from 295,277 tons  to 619,237 tons,  an
increase of 109.7%, equivalent to 7.7% compounded annually, in the same period.

    Not  only  do  increases  in  the  amount  of  passenger  and  cargo traffic
positively impact  Mercury's  operations,  but  management  also  believes  that
Mercury is well-positioned to take advantage of the airlines' increased emphasis
on  cost-containment.  For example,  an airline  can  outsource with  Mercury to
perform services,  such as  refueling,  on an  "as  needed" basis,  rather  than
investing in capital-intensive refueling equipment. Moreover, in many instances,
Mercury  is able  to realize  economies of scale  and to  obtain better pricing.
Mercury's presence at  certain locations  may allow it  to present  itself as  a
cost-saving alternative for larger customers who do not have, and do not wish to
invest in, their own equipment or facilities at such locations.

    Mercury's  strategy is  to take advantage  of the increase  in passenger and
cargo traffic while positioning itself as a cost-saving alternative for airlines
increasingly focused on profitability concerns.

FUEL SALES AND SERVICES

    Mercury's fuel sales consist of contract fueling and related fuel management
services.  Sales  of  aviation   fuel  are  made   primarily  to  domestic   and
international airline customers.

    Contract  fuel sales  are generally  made pursuant  to verbal  or short-term
contracts whereby Mercury provides fuel supply  and, in most cases, delivery  to
meet  all or a portion  of a customer's fuel  supply requirements. To facilitate
its fuel  sales  business at  locations  where Mercury  does  not have  its  own
facilities,  Mercury has developed an extensive  network of third party delivery
and supply  relationships which  enable it  to provide  fuel to  customers on  a
scheduled  or ad hoc basis. Through  these third party relationships, Mercury is
currently conducting its fuel sales business  at over 100 airports primarily  in
the United States, as well as throughout the world.

                                       24
<PAGE>
    Mercury believes that it adds value for its customers and is able to attract
business  by providing  high quality  service and  by offering  a combination of
favorable pricing and  credit terms.  Mercury provides  24-hour, single  source,
coordinated  supply  and  delivery on  a  national and  international  basis and
provides related support services. Mercury believes its scale of operations  and
creditworthiness  allow the purchase of fuel  on more favorable price and credit
terms than would be available to most of its customers on an individual basis.

    In general, the aviation industry is capital intensive and highly leveraged.
Recognizing the financial  risks of  the airline industry,  major oil  companies
often  restrict  or  prohibit  the  extension  of  credit  to  smaller  or  less
well-capitalized airlines. Consequently, in  order to obtain  fuel from a  major
oil  company, many carriers  must either post  a letter of  credit for or prepay
fuel purchases. These supply requirements can absorb a substantial portion of an
airline's working capital.

    Mercury  believes  that  the  extension   of  credit  to  smaller  or   less
well-capitalized  airlines represents a risk, but  also is a contributing factor
in attracting and retaining  customers. Accordingly, Mercury frequently  extends
credit on an unsecured basis to customers which may be less creditworthy and who
may  otherwise  be  required  to  prepay or  post  letters  of  credit  for fuel
purchases. The  amount  of credit  extended  to  any particular  customer  is  a
subjective   decision.  Factors  considered  in  credit  decisions  include  the
customer's financial strength and payment history, competitive conditions in the
market, the expected profitability of the account and, with respect to  domestic
accounts,  the availability of credit  insurance. Mercury considers its existing
credit portfolio  to  be  of  acceptable  quality  and,  on  an  ongoing  basis,
establishes allowances that management believes are adequate to absorb potential
credit  problems inherent in the portfolio.  See "Risk Factors -- Credit Quality
of Receivables."

    Mercury purchases fuel at current market prices from a number of independent
and major oil  companies based on  the expected requirements  of its  customers.
Mercury's  terms of payment range  from ten to thirty days  for most of its fuel
purchases, except for bulk  pipeline purchases which  generally are payable  two
days  from invoice receipt. Mercury has  agreements with certain suppliers under
which Mercury purchases  a minimum  amount of fuel  each month  at prices  which
approximate  current market prices.  Mercury makes occasional  spot purchases of
fuel to take advantage of market differentials. In order to meet customer supply
requirements, Mercury carries limited inventories at numerous locations and  two
to  three weeks inventory requirements  at a few key  pipeline locations. Due to
the nature  of  Mercury's  business,  the  volume  of  Mercury's  aviation  fuel
inventories  will  occasionally fluctuate.  Depending upon  the price  and price
movement of aviation  fuel, such inventories  may subject Mercury  to a risk  of
financial loss.

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

    Mercury's fuel sales and services could be materially adversely affected  by
a  significant  decrease  in the  availability,  or  increase in  the  price, of
aviation fuel. Fuel  sales and  services of $141.8  million in  fiscal 1995  and
$64.4  million in fiscal 1994 represented approximately 77.5% and 62.5% of total
revenues in fiscal 1995 and fiscal 1994, respectively. Although Mercury believes
that there are currently adequate aviation fuel supplies and that aviation  fuel
supplies  will generally remain available, events outside Mercury's control have
resulted and could result  in spot shortages or  rapid increases in fuel  costs.
Although  Mercury is  generally able  to pass through  rising fuel  costs to its
customers,

                                       25
<PAGE>
extended periods of high fuel costs could adversely affect Mercury's ability  to
purchase  fuel  in  sufficient quantities  because  of credit  limits  placed on
Mercury by its fuel suppliers. See "Risk Factors -- Aviation Fuel Availability."

    In addition  to  contract  fueling,  Mercury considers  a  number  of  other
commercial  activities which are headquartered at LAX  as part of its fuel sales
and services operations. These activities include refueling services at LAX  and
John  Wayne International  Airport in  Santa Ana,  California, the  brokering of
non-aviation fuel to the industrial and commercial marketplace, the provision of
air frame and power plant mechanics to commercial airlines and the provision  of
cargo  warehouse manpower to a commercial airline. Refueling services at LAX and
John  Wayne  International  Airport   consist  of  the   delivery  of  fuel   by
Company-owned  trucks or  hydrant carts for  a fee. Mercury  also maintains fuel
tanks at LAX to support its fuel sales operations.

CARGO OPERATIONS

    The Company's cargo operations are conducted through MAC, which provides the
following services:  cargo handling,  space brokerage  and general  cargo  sales
agent services.

CARGO HANDLING.  MAC provides domestic and international air cargo handling, air
mail  handling  and  bonded warehousing.  MAC  is  one of  only  two non-airline
providers  of   contractual  cargo   containerization  and   palletization   for
international   carriers  and  cargo   shippers  at  LAX.   MAC  specializes  in
consolidating smaller parcels into air cargo pallets and breaking down  shipping
containers  for sea-to-air and  air-to-air transfers. In  addition, MAC receives
cargo and loads pallets for shipping.

    As an example  of its  cargo handling services,  a large  quantity of  goods
manufactured in the Far East might be shipped by sea to the port of Los Angeles.
The  shipment will be delivered by truck  to MAC's LAX warehouse where the goods
may be temporarily stored while waiting to be broken down and redistributed to a
number of cities throughout the United States. Later, MAC's warehouse  personnel
will  combine that portion of the Far  East shipment intended for any particular
destination, for example, Chicago, with other unrelated merchandise destined for
Chicago, onto pallets specifically  sized to fit  efficiently in airplane  cargo
holds. This process is called palletization. MAC personnel will then deliver the
configured  pallet to an air carrier who will transport it to Chicago. MAC's fee
for this service is typically based on the weight of the cargo handled.

    MAC's cargo handling  operations occur primarily  at LAX. In  May 1994,  MAC
expanded  its cargo handling  operations by opening  an off-airport warehouse in
San Francisco, California. In July 1994, MAC opened a cargo handling facility in
Miami, Florida  in conjunction  with the  hiring  of a  key employee.  Upon  the
departure  of the key employee  in March 1995, the  Miami facility was closed at
minimal expense.

    In September 1995, Mercury acquired, as  a result of the Excel  Transaction,
the  operating and other  assets of certain providers  of cargo handling service
facilities in Montreal and  Toronto. This acquisition  provides Mercury with  an
approximately  50,000 square  foot cargo  handling facility  in Montreal  and an
approximately 12,000 square foot cargo handling facility in Toronto.

    MAC is able to  compete in the cargo  handling business by offering  quality
service   from  its  strategically  located  LAX  and  San  Francisco  warehouse
facilities. At  LAX,  a  portion  of Mercury's  cargo  handling  operations  are
conducted  in  a  facility  subject to  a  month-to-month  agreement. Continuous
long-term growth in  MAC's cargo  handling operations  can only  be realized  by
maintaining   and  expanding  current  warehouse   facilities  or  by  obtaining
additional warehouse facilities at LAX or new locations.

SPACE BROKERAGE.  MAC  brokers cargo space on  international flights to  Europe,
the  Middle East, Mexico and Central and South America. Space brokerage involves
contracting for cargo space  on airlines and subsequently,  on MAC's own  airway
bill, selling that space to customers with shipping

                                       26
<PAGE>
needs.  MAC has established a network of shipping agents who assist in obtaining
cargo for shipment  on space  purchased from  airlines, and  who facilitate  the
delivery  and collection  of freight charges  for cargo shipped  on MAC's airway
bills.

    Unlike an air  cargo company which  operates its own  aircraft, MAC's  space
brokerage  business utilizes otherwise unfilled cargo space on scheduled airline
flights.  Accordingly,  MAC  is   able  to  profit  from   the  sale  of   cargo
transportation space worldwide without the fixed overhead expense of maintaining
aircraft.  MAC purchases cargo space  from a number of  airlines worldwide. As a
result of its large volume of cargo space purchases and its ability to negotiate
among airlines, MAC adds value for its customers and is able to attract business
by offering favorable  pricing. MAC's  revenues are the  difference between  the
cost of the space and the amount at which the space is resold.

    MAC  believes it  can expand  its space  brokerage business  by establishing
relationships with  additional shipping  agents, by  negotiating for  additional
space  on airlines with which it currently  ships goods, and by purchasing space
from airlines with which it does not currently ship goods. MAC believes that its
knowledge of worldwide shipping patterns can  help it to achieve growth in  this
area.

GENERAL  CARGO SALES  AGENT SERVICES.   MAC also  serves as  general cargo sales
agent for airlines in the Far East, Mexico, Central and South America and in the
United States. In this capacity, MAC sells the transportation of cargo on client
airlines' flights,  using  the client  airlines'  own airway  bills.  MAC  earns
commissions  from the airlines  for selling air  cargo space. As  with its space
brokerage operations, the growth potential  for MAC's general cargo sales  agent
business  is not limited  by requirements for  physical facilities or additional
capital investments. MAC believes that it can further develop its general  cargo
sales  agent business by adding sales  territories from existing airline general
cargo sales agent customers  and by entering  into arrangements with  additional
airline customers.

FIXED BASE OPERATIONS

    Mercury currently provides FBO services at LAX; Cannon International Airport
in   Reno,   Nevada;   Meadows  Field   Airport   in   Bakersfield,  California;
Burbank-Glendale-Pasadena Airport  in  Burbank, California;  and  Santa  Barbara
Municipal  Airport in  Santa Barbara, California.  See "--  Properties." At each
FBO, Mercury maintains  administrative offices; conducts  retail fuel sales  and
refueling  operations which  service principally corporate  and private aircraft
("general aviation")  and to  some extent  commercial airlines;  and acts  as  a
landlord  for office and aircraft tie-down space tenants and, except at LAX, for
hangar tenants. In addition, at  Cannon International Airport, Mercury  provides
ground handling services for commercial airlines.

    Each  FBO operates  refueling vehicles and  maintains fuel  storage tanks to
support its into-plane  and fuel sales  activities. The FBO  facilities and  the
property  on which their operations are  conducted are generally leased from the
respective airport authorities. See "-- Properties."

    Mercury competes with other FBOs  by offering favorable pricing and  quality
service  to its customers. Mercury's  long-term strategy for increasing revenues
and operating income  of its  FBOs is to  acquire additional  FBOs on  favorable
economic  terms and  to increase its  business at existing  FBOs. In considering
potential acquisitions, Mercury analyzes  factors such as capital  requirements,
the  terms and conditions of  the lease for the  FBO facility, the condition and
nature of the physical facilities and the size and competitive conditions of the
airport. Although  Mercury is  in the  process of  evaluating several  FBOs  for
possible  acquisition, Mercury has  not entered into  any binding commitments to
purchase any additional FBOs.

GOVERNMENT CONTRACT SERVICES

   
    Mercury conducts its government  contract services business through  Maytag.
Headquartered in Colorado Springs, Colorado, Maytag provides services at 17 U.S.
military  bases, primarily for the U.S. Navy, including 14 located in the United
States and three additional bases located  in Greece and Japan. Maytag  provides
services to the government pursuant to contracts for each base which run for one
to   four   years.   Under   these   contracts,   Maytag   principally  operates
government-owned fuel  depots  and  services  a  variety  of  aircraft  for  the
military.   Under   the   terms   of   its   contracts,   Maytag   supplies  all
    

                                       27
<PAGE>
necessary personnel and equipment to  provide 24-hour refueling capability.  All
fuel handled in these operations is government owned. Maytag owns and operates a
fleet  of refueling trucks and other  support vehicles to support its government
contract services business.

   
    The following table lists the bases at which Maytag provides services, as of
December 31,  1995, and  the expiration  date of  each contract  for each  base.
Generally, these contracts provide for fueling services, unless otherwise noted.
    

   
<TABLE>
<CAPTION>
                          EXPIRATION DATE OF
LOCATION                  CONTRACT
- ------------------------  -------------------------
<S>                       <C>
Cherry Point, NC          January 1996
Washington, DC            April 1996
Willow Grove, PA          August 1996
Memphis, TN               September 1996
Bangor, WA                September 1996 (1)
Fukuoka, Japan            September 1996 (2)
Lakehurst, NJ             September 1996
Souda Bay, Crete          September 1996
Yokota, Japan             September 1996 (3)
Brunswick, ME             October 1996
Pensacola, FL             August 1997
Whidbey Island, WA        August 1997
Fallon, NV                September 1997
Whiting Field, FL         September 1997
Yuma, AZ                  July 1998
Point Mugu, CA            April 1999
El Centro, CA             September 1999
</TABLE>
    

- ------------
(1) Contract to provide library services.

(2) Contract to provide air terminal services.

(3) Contract to provide housing maintenance services.

    Maytag's  government  contracts  are  subject  to  competitive  bidding, are
generally awarded on a firm fixed-price basis and are subject to termination  at
the  discretion of  the U.S. government  in whole  or in part.  Termination of a
contract may occur  if the U.S.  government determines  that it is  in its  best
interest  to discontinue the contract, in which  case closure costs will be paid
to Maytag.  Termination may  also occur  if Maytag  defaults under  a  contract.
Maytag has never experienced any such default termination.

   
    Maytag's  government contract services business has been negatively impacted
by contract losses  due to base  closures, the loss  of competitive bids,  small
business  contract set asides  and internalization of  the refueling function by
the U.S. military. Since June 30, 1994,  ten contracts held by Maytag have  been
terminated  or are scheduled to be terminated,  five of which were terminated in
fiscal 1995, four  of which  were terminated  or are  scheduled for  termination
during  fiscal 1996 and one of which  is scheduled for termination during fiscal
1997. Former base  contracts terminated in  fiscal 1996 were  North Island,  CA,
Peterson,  CO, and Bermuda. Maytag lost a bid to renew its refueling contract at
North Island which contract expired in December 1995. In addition, the refueling
contract at  Cherry Point,  which will  expire  in January  1996, has  not  been
renewed  due to the government's decision  to perform the services with military
personnel. The  contract at  Peterson  has been  set  aside for  small  business
effective  January 1996. The Bermuda base was  closed in September 1995, and the
Memphis base is scheduled  to close in September  1996, both under federal  base
closure  and  realignment  legislation.  The Washington  D.C.  base  contract is
expected to be renewed for an additional four-year term, effective May 1,  1996.
Based  upon  the  July  13,  1995  presidential  approval  of  the  Defense Base
    

                                       28
<PAGE>
Closure and Realignment Commission recommendation, no additional bases served by
Maytag were selected for closure under the last round of federally mandated base
closures. The Company  knows of no  additional plans by  the U.S. government  to
close bases.

    Operating  income from government contract  services in fiscal 1995 included
$1.4 million from the ten contracts which have been terminated or are  scheduled
for termination.

    Since  June  30, 1994,  Maytag successfully  renewed four-year  contracts at
Point Mugu and El Centro. Mercury also acquired new contracts at Fukuoka, Japan,
to provide  air terminal  services, and  at Yokota,  Japan, to  provide  housing
maintenance services, effective November 1994 and October 1995, respectively.

    Mercury's  strategy in the  government contract services  area is to capture
new refueling contracts,  to retain  existing refueling  contracts by  utilizing
cost  advantages based on the availability of excess capital equipment which has
been fully amortized, and to expand  the types of outsourcing services  provided
to  the  U.S.  government.  Potential  areas  of  expansion  include engineering
services, base  operating  services  and maintenance  and  operations  services.
Mercury  believes  expansion  beyond  its core  military  refueling  business is
feasible  due  to  Mercury's  familiarity  with  military  base  operations  and
government contract requirements in general.

RECENT DEVELOPMENTS

EXCEL CARGO

    On  September 30, 1995, Mercury closed  the acquisition of certain operating
and other assets of Excel Cargo Inc., Excel Handling Inc. and 3087-1966 (Quebec)
Inc. (the  "Excel Parties"),  providers of  cargo handling  services at  airport
facilities  in Toronto and Montreal (the "Excel Transaction"). The consideration
paid for the assets was $2,766,000 (U.S. dollars). In addition, Mercury  assumed
certain  liabilities in connection  with the transaction,  including notes which
totaled  approximately  $573,000,  along  with  accounts  payable  and   accrued
expenses.  Total liabilities  assumed totaled  approximately $1,041,000. Mercury
paid the notes at the closing of the Excel Transaction.

    Mercury  acquired  the  assets  through  the  issuance,  by  a  wholly-owned
subsidiary,  of a convertible debenture,  guaranteed by Mercury. The convertible
debenture bears interest at  the rate of  8.5%, is payable  over eight years  in
equal  monthly installments of  principal and interest,  and is convertible into
Common Stock at a  conversion price of $12.00  per share, subject to  adjustment
upon  certain events. In addition, the  face amount of the convertible debenture
is adjustable downward in  the event the pre-tax  earnings generated during  the
three years following the acquisition is less than a certain amount.

    The  transaction provides for the employment of the former President of each
of the Excel  Parties for  three years,  at $100,000  per year,  plus bonus.  In
addition, the Excel Parties and their affiliates have agreed not to compete with
Mercury  or any of its affiliates in the cargo handling business in Canada until
February 1,  2000. In  addition to  the purchase  price, Mercury  agreed to  pay
$60,000 to a third party as a finder's fee.

LAX CARGO FACILITY

    In  August  1995,  MAC expanded  its  cargo  handling operations  at  LAX by
leasing, on a month-to-month basis, an additional 30,000 square foot hangar. See
"-- Properties."

FLORACOOL INCORPORATED OF FLORIDA

   
    On November 20, 1995,  a letter of intent  was executed between Mercury  and
Floracool  Incorporated of Florida ("Floracool").  The letter of intent provides
for Mercury to  acquire all  of the outstanding  common stock  of Floracool  for
$250,000, subject to adjustment, and to employ the former President of Floracool
under  a  consulting  agreement for  five  years,  at $70,000  per  year.  It is
anticipated that this transaction will close during the third quarter of  fiscal
1996. Floracool is engaged in the air cargo business in Miami.
    

                                       29
<PAGE>
CARNIVAL AIR LINES, INC.

    On  October 18, 1995,  Mercury announced the  signing of a  letter of intent
under which Carnival Air Lines, Inc., a privately owned airline, would be merged
with and  into  the  Company.  On  November  29,  1995,  Mercury  announced  the
termination of the transaction due to the inability of the parties to agree upon
certain material terms and closing conditions.

MAJOR CUSTOMERS

    During  fiscal 1995, no customers accounted  for over 10% of Mercury's total
revenues. See "Risk Factors -- Dependence on Significant Customers."

POTENTIAL LIABILITY AND INSURANCE

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

COMPETITION

    Mercury competes with major oil companies which maintain their own source of
aviation fuel and with  other aircraft support companies  whose total sales  and
financial  resources far exceed those of  Mercury. In addition, certain airlines
provide cargo and fueling services comparable to those furnished by Mercury.  At
LAX,  Mercury competes with, in addition to the airlines, three independent fuel
delivery services  providers  and primarily  with  one non-airline  entity  with
respect  to air cargo handling. Each FBO has a minimum of one competitor at each
airport. Mercury  has  many principal  competitors  in the  government  contract
services  business,  including  certain  small  disadvantaged  businesses  which
receive a ten percent cost advantage with respect to certain bids and set asides
of certain contracts.  Substantially all  of Mercury's services  are subject  to
competitive  bidding.  Mercury competes  on the  basis of  price and  quality of
service. See "Risk Factors -- Competition."

ENVIRONMENTAL MATTERS

    Mercury must continuously comply with federal, state and local environmental
statutes and regulations associated, in part, with its numerous underground fuel
storage tanks. These  requirements include,  among other things,  tank and  pipe
testing  for tightness, soil sampling for evidence of leaking and remediation of
detected leaks  and spills.  Mercury  has installed  inventory systems  for  its
underground  storage tanks and has placed sensors underground to detect leaking.
Mercury's operations are  subject to  frequent inspection by  federal and  local
environmental  agencies and local fire  and airline quality control departments.
To date, there have been no material  capital expenditures nor has there been  a
material  negative  impact  on  Mercury's earnings  or  competitive  position in
performing such compliance and  related remediation work.  To date, Mercury  has
not  received any notice of violation or been subject to any cease and abatement
proceeding by  any government  agency as  a  result of  failure to  comply  with
applicable environmental laws and regulations. Based on tests performed to date,
Mercury  knows of no  basis for any  notice of violation  or cease and abatement
proceeding  by  any  government  agency.  See  "Risk  Factors  --  Environmental
Matters."

EMPLOYEES

   
    As  of December  31, 1995, Mercury  employed 1,047 persons  in the following
units: fuel sales and services, 198 persons; cargo handling, 298 persons;  FBOs,
178  persons; government contract services,  329 persons; and administration, 44
persons.  Mercury  is  in  the  process  of  negotiating  collective  bargaining
agreements  for its military refueling operations  at Brunswick, Maine and Point
Mugu, California. Management  believes that,  in general,  wages, hours,  fringe
benefits  and  other  conditions  of  employment  offered  throughout  Mercury's
operations are at least equivalent to those found elsewhere in its industry  and
that  its general  relationship with  its employees  is satisfactory.  See "Risk
Factors --  Dependence  Upon  Key  Personnel"  and  "Risk  Factors  --  Employee
Relations."
    

                                       30
<PAGE>
PROPERTIES

    Mercury  owns its executive  offices, which consist  of approximately 20,000
square feet, located at 5456 McConnell Avenue, Los Angeles, California.  Mercury
also  owns a hangar and administrative  facility located at Cannon International
Airport in Reno, Nevada, which consists of approximately 33,000 square feet,  an
aircraft  facility  located  at  Burbank-Glendale-Pasadena  Airport  in Burbank,
California, which consists of approximately 106,000 square feet, and an aircraft
facility located  at Meadows  Field Airport  in Bakersfield,  California,  which
consists  of approximately 118,000 square feet. Mercury leases the land on which
such buildings are situated. Mercury also leases various airport and off-airport
facilities at  locations throughout  the western  United States,  including  the
following:  (i)  an approximately  10,000 square  foot office  and approximately
90,000 square feet  of cargo  hangar facilities  at LAX,  (ii) an  approximately
43,000  square foot  aircraft facility  and an  approximately 5,200  square foot
hangar facility  at Burbank-Glendale  Pasadena Airport  in Burbank,  California,
(iii)  an  approximately  45,000  square  foot  cargo  hangar  facility  in  San
Francisco, California, (iv)  an approximately  50,000 square  foot cargo  hangar
facility in Montreal, and (v) an approximately 12,000 square foot cargo handling
facility in Toronto.

    At  commercial airports where  Mercury operates FBOs,  Mercury maintains its
own fuel  storage  capabilities which  are  principally located  underground  as
follows:

<TABLE>
<CAPTION>
                   APPROXIMATE
                     CAPACITY
LOCATION            (GALLONS)
- -----------------  ------------
<S>                <C>
LAX                    311,000
Bakersfield            105,000
Burbank                119,000
Santa Barbara           42,000
Reno                   100,000
</TABLE>

    Management  believes that Mercury's property  and equipment are adequate for
its present business needs.

LEGAL PROCEEDINGS

    Other than routine litigation incident to Mercury's business, Mercury  knows
of  no material litigation or administrative proceedings pending against Mercury
to which Mercury or any of its subsidiaries is a party or to which any of  their
property is subject.

                                       31
<PAGE>
                                   MANAGEMENT

    Set  forth in  the table  below is certain  information with  respect to the
executive officers and directors of Mercury and certain of its subsidiaries.

   
<TABLE>
<CAPTION>
              NAME                   AGE                     POSITIONS
- --------------------------------     ---     ------------------------------------------
<S>                               <C>        <C>
Seymour Kahn                         68      Chairman of the Board and Chief Executive
                                              Officer of Mercury
Joseph A. Czyzyk                     48      President, Chief Operating Officer and
                                              Director of Mercury and President of
                                              Mercury Air Cargo, Inc. ("MAC")
Randolph E. Ajer                     42      Executive Vice President, Chief Financial
                                              Officer, Secretary and Treasurer of
                                              Mercury
William L. Silva                     45      Executive Vice President of Mercury and
                                              Executive Vice President of Maytag
                                              Aircraft Corporation ("Maytag")
Kevin J. Walsh                       45      Executive Vice President and Senior Vice
                                              President of Maytag
Philip J. Fagan, Jr., M.D.(1)        51      Director
Frederick H. Kopko, Jr.(1)           40      Director
William G. Langton                   49      Director
Robert L. List(1)                    59      Director
</TABLE>
    

- ------------

(1) Member of Audit and Compensation Committees

    Except for Messrs. Kahn and Czyzyk,  the executive officers of Mercury,  who
are appointed by the Board of Directors, hold office for one-year terms or until
their  respective successors have been duly  elected and have qualified. See "--
Employment Agreements." The  executive officers of  Mercury's subsidiaries,  who
are  appointed by such  subsidiaries' Boards of Directors,  also hold office for
one-year terms or until their respective  successors have been duly elected  and
have qualified.

    SEYMOUR  KAHN served as  President of Mercury  from 1969 until  1989 and has
served as Chief  Executive Officer  and Chairman of  the Board  of Directors  of
Mercury since 1974.

    JOSEPH  A. CZYZYK has been President, Chief Operating Officer and a director
of Mercury  since November  1994 and  President of  MAC since  August 1988.  Mr.
Czyzyk  also served as President of Mercury Service, a division of Mercury which
sells aviation fuel  and provides  refueling services  for commercial  aircraft,
from  August 1985  until August  1988. Mr.  Czyzyk served  as an  Executive Vice
President of Mercury in November 1990. Pursuant to his employment agreement, the
Board of  Directors will  continue to  nominate Mr.  Czyzyk as  a candidate  for
election to the Board of Directors while Mr. Czyzyk remains employed by Mercury.
See "-- Employment Agreements."

    RANDOLPH  E. AJER has been Chief Financial Officer of Mercury since 1987 and
Secretary and Treasurer since May 1985. Mr. Ajer served as a director of Mercury
from September 1989  until December  1990. He  was appointed  an Executive  Vice
President of Mercury in November 1990.

    WILLIAM  L. SILVA  served as Director  of Operations of  Maytag from October
1982 to October  1987 and  was appointed Vice  President of  Maytag in  November
1987. Since June 1992, Mr. Silva has been an Executive Vice President of Maytag.
In August 1993, Mr. Silva became an Executive Vice President of Mercury.

                                       32
<PAGE>
    KEVIN  J. WALSH served  as Vice President  of Maytag from  1987 to June 1992
when he was appointed Senior Vice  President of Maytag. Since January 1992,  Mr.
Walsh has been managing the Mercury Service division. Mr. Walsh was appointed an
Executive  Vice  President  of Mercury  in  November  1990. Mr.  Walsh  has been
employed by Mercury in various capacities since 1972.

   
    PHILIP J. FAGAN, JR.,  M.D. has been a  director of Mercury since  September
1989.  Dr.  Fagan has  been the  Chief  Executive Officer  and President  of the
Emergency Department Physicians Medical Group, Inc. since its inception in 1978.
Dr. Fagan has also  been President of Fagan  Emergency Room Medical Group  since
its  inception  in  1989.  Both  companies  are  currently  located  in Burbank,
California.
    

    FREDERICK H. KOPKO, JR. has been  a director of Mercury since October  1992.
Mr.  Kopko has been a partner in the  law firm of McBreen, McBreen & Kopko since
January 1990. Previously, Mr. Kopko served  as managing partner of the law  firm
of  D'Ancona &  Pflaum, a  firm which  he was  associated with  from August 1983
through December 1989. Mr. Kopko presently  serves on the board of directors  of
Butler International, Inc.

   
    WILLIAM  G. LANGTON has  been a director  of Mercury since  August 1993. Mr.
Langton  has  been  President  and  Chief  Operating  Officer  of  Southern  Air
Transport,  a provider of  a wide range of  commercial and supplemental aviation
services, for over ten years.
    

   
    ROBERT L.  LIST has  been a  director of  Mercury since  1990. Mr.  List  is
presently  an  independent financial  consultant. From  December 1989  to August
1992, Mr.  List was  President of  Yellowstone Environmental  Services, Inc.  of
Phoenix,  Arizona, an environmental/engineering consulting  firm. Prior to that,
Mr. List owned and  operated Cimarron Research,  an investment consulting  firm,
based  in Durango, Colorado and Dallas, Texas since 1977. Mr. List serves on the
board of directors of Pancho's Mexican Buffet, Inc.
    

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

   
    Mercury's Compensation Committee consists of Messrs. List and Kopko and  Dr.
Fagan.  During fiscal 1995 and  the six months ended  December 31, 1995, Mercury
paid to the  law firm  of McBreen,  McBreen &  Kopko, of  which Mr.  Kopko is  a
partner, $5,534 and $10,351, respectively, for legal services.
    

                                       33
<PAGE>
EXECUTIVE COMPENSATION

    The  following table  sets forth  the cash  compensation paid  or accrued by
Mercury for the Chairman of the Board  and Chief Executive Officer and for  each
of  the four  other most highly  compensated officers  (collectively, the "Named
Executive Officers"):

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                LONG-TERM COMPENSATION
                                                               ------------------------
                                                                              AWARDS        PAYOUTS
                                       ANNUAL COMPENSATION                  -----------  -------------
                                     ------------------------               SECURITIES     LONG-TERM         ALL OTHER
                                       FISCAL                               UNDERLYING   COMPENSATION     COMPENSATION(1)
NAME AND PRINCIPAL POSITION             YEAR      SALARY ($)    BONUS ($)   OPTIONS (#)   PAYOUTS ($)           ($)
- -----------------------------------  -----------  -----------  -----------  -----------  -------------  -------------------
<S>                                  <C>          <C>          <C>          <C>          <C>            <C>
Seymour Kahn                               1995      300,000      408,000       -0-           -0-               14,362
 Chairman of the Board and                 1994      230,000      301,500       -0-           -0-                2,536
 Chief Executive Officer                   1993      230,000      196,433      100,000        -0-                2,436
Joseph A. Czyzyk                           1995      271,000      136,000       -0-           -0-               56,030
 President and                             1994      271,000       -0-          -0-           -0-               54,388
 Chief Operating Officer                   1993      271,000       -0-          25,000        -0-                  288
Randolph E. Ajer                           1995      130,000      258,000       -0-           -0-               55,382
 Executive Vice President and              1994      126,500      198,500       -0-           -0-               54,388
 Chief Financial Officer                   1993      126,500       71,092       -0-           -0-                  288
Kevin J. Walsh                             1995      156,000       40,000       -0-           -0-               55,463
 Executive Vice                            1994      144,375       75,000       -0-           -0-               54,188
 President                                 1993      137,500       10,000       -0-           -0-                  188
William L. Silva                           1995      102,917       37,000       -0-           -0-                  410
 Executive Vice                            1994      100,000       50,000       -0-           -0-                  200
 President                                 1993       80,000       33,738       -0-           -0-                  100
</TABLE>

- ------------

(1)  Amounts  reflected  include  Mercury's  contributions  to  a  401(k)   Plan
    maintained  for  the  benefit  of  all  employees,  premiums  paid  for life
    insurance policies to  the extent such  policies are for  the benefit of  an
    executive officer's designated beneficiary and loan forgiveness with respect
    to Mercury financed purchases of Common Stock. See "Certain Transactions."

EMPLOYMENT AGREEMENTS

    Mr.  Kahn has an employment agreement with  Mercury dated as of December 10,
1993 pursuant to  which Mercury will  employ him  as Chairman of  the Board  and
Chief  Executive  Officer  for  a  three-year  period  with  automatic  one-year
extensions at the end of each year unless either party terminates the  agreement
in  writing prior  to such renewal.  Under the employment  agreement, Mr. Kahn's
annual compensation was  $230,000 from  December 1,  1993 to  December 1,  1994.
Since  December 1,  1994, Mr.  Kahn has  been paid  compensation at  the rate of
$350,000 per year .

    If Mr.  Kahn  is  disabled for  more  than  six weeks  while  employed,  his
compensation  will be  reduced by  50%. If  Mr. Kahn  is disabled  for more than
twelve months, Mercury  may terminate  his employment with  a severance  payment
equal  to his salary  for the lesser  of one year  or the remaining  term of the
employment agreement.  If Mr.  Kahn's employment  is terminated  without  cause,
Mercury  will be obligated to pay him  all amounts which would otherwise be paid
to him  over  the remaining  term  of the  employment  agreement. Mr.  Kahn  may
voluntarily  terminate the  employment agreement  and receive  all amounts which
would otherwise  be  paid to  him  over the  remaining  term of  the  employment
agreement  if  any of  the following  events occurs  without Mr.  Kahn's written
consent, including:  (i) any  person gains  sufficient control  over the  voting
stock  of Mercury so as to control Mercury  or the election of a majority of the
Board of Directors, (ii) Mercury is  acquired by another entity, either  through
the  purchase of Mercury's  assets or stock  or a combination  thereof, or (iii)
Mercury is  merged or  consolidated with  another entity  or reorganized,  in  a
manner  in which Mercury's  present status, business or  methods are changed. If
Mr. Kahn dies during the term of  the employment agreement, Mercury will pay  to
Mr.  Kahn's estate the  compensation which would  otherwise be paid  to Mr. Kahn

                                       34
<PAGE>
through the end of the month in which he dies. In addition, Mercury will pay Mr.
Kahn's estate  or  other  designated  beneficiary  $2,250,000  upon  his  death.
Relating to this obligation, Mercury has obtained a life insurance policy on Mr.
Kahn's  life in  the amount  of $2,025,000 which  designates Mr.  Kahn's wife as
beneficiary.

    Mr. Kahn has agreed not to compete with Mercury within a radius of 300 miles
from Mercury's present place of business for five years after the termination of
the employment agreement. Mercury must  make the severance payments required  by
the employment agreement for this non-competition agreement to be effective.

    A  cash bonus plan  for Mr. Kahn was  approved by the  Board of Directors in
November 1990 (commencing fiscal 1991). The Compensation Committee continued the
bonus plan during  fiscal 1995 and  will continue the  bonus plan during  fiscal
1996.  The two-part bonus  plan is based  on earnings before  interest and taxes
(EBIT) of the Company for the year in which the bonus is calculated. Under  Part
I  of the  Bonus Plan, if  the bonus year's  EBIT meets or  exceeds the trailing
three-year EBIT average, Mr.  Kahn is entitled  to a bonus equal  to 25% of  his
salary.  For years where  EBIT falls below the  trailing three-year average, any
bonus paid  to  Mr.  Kahn  is  solely at  the  discretion  of  the  Compensation
Committee.  Under Part II of the Bonus Plan,  an additional bonus is paid to Mr.
Kahn in an amount equal to 6.67% of any increase in the bonus year's EBIT  level
over the trailing three-year average EBIT level.

    Mr.  Czyzyk has an  employment agreement with Mercury,  dated as of November
15, 1994, pursuant to which Mercury will  employ him as its President and  Chief
Operating  Officer and as the president of MAC for a term ending on November 15,
1997, subject  to automatic  one-year extensions  each successive  November  15,
unless either party gives 30 days' notice of non-renewal. The agreement provides
that Mr. Czyzyk's tenure as President and Chief Operating Officer shall serve as
a  period of training and evaluation  for appointment as Chief Executive Officer
of Mercury, when and as such position may be vacated by Mr. Kahn, subject to the
sole discretion and judgment  of the Board of  Directors. The agreement  further
provides for the continued nomination of Mr. Czyzyk to the Board of Directors of
Mercury,  so  long as  Mr.  Czyzyk continues  to  serve as  President  and Chief
Operating Officer.

    Mr. Czyzyk will receive an annual salary of $270,000 plus a bonus at the end
of each fiscal year based  on the following: (i) for  fiscal 1996, in the  event
that   Mercury's  consolidated   operating  income   less  sales,   general  and
administrative expenses  and  depreciation  (EBIT) for  that  year  exceeds  the
average  EBIT of fiscal  1994 and fiscal 1995,  then Mr. Czyzyk  shall be paid a
bonus of 25% of his base compensation under Part I of the Bonus Plan and 2  1/2%
of  the amount by which fiscal 1996 EBIT exceeds the average EBIT of fiscal 1994
and fiscal 1995  under Part  II of  the Bonus Plan;  and (ii)  for fiscal  years
subsequent to fiscal 1996, Part I and Part II of the Bonus Plan remain in effect
except  that the threshold EBIT  is based on a trailing  average of EBIT for the
prior three fiscal years.

    In the event  Mr. Czyzyk's employment  is terminated for  cause, Mr.  Czyzyk
will  not be entitled to receive  or be paid a bonus.  In the event Mr. Czyzyk's
employment is terminated  without cause, Mercury  will be obligated  to pay  Mr.
Czyzyk  the lesser of one year's base compensation or the base compensation that
would otherwise be paid to him over  the remaining term of the agreement, and  a
bonus  for the fiscal year of termination  in an amount which would otherwise be
paid to him prorated over the days Mr. Czyzyk was employed by Mercury during the
fiscal year of termination.  "Cause" is defined in  the employment agreement  as
misappropriation   of  corporate  funds,   negligence,  Mr.  Czyzyk's  voluntary
abandonment of his job (other than following a change in control, as defined  in
his  employment agreement) or a material  breach of the employment agreement. In
the event of  Mr. Czyzyk's  death, Mr. Czyzyk's  estate or  beneficiary will  be
entitled to receive the death benefits of a $1,000,000 insurance policy, but all
other  obligations under his  employment agreement will  terminate and Mercury's
only obligation will be  to pay Mr. Czyzyk's  estate all accrued salary  through
the  end of the month of his death.  In the event of Mr. Czyzyk's disability (as
determined by the Chief Executive Officer of Mercury), Mr. Czyzyk's base  salary
will  be  reduced by  50%  during the  period of  disability.  If Mr.  Czyzyk is
disabled for  a period  of  more than  12 months  (as  determined by  the  Chief
Executive

                                       35
<PAGE>
Officer of Mercury), Mercury will be obligated to pay Mr. Czyzyk the same amount
that would have been paid to Mr. Czyzyk if his employment was terminated without
cause, except that all amounts paid to Mr. Czyzyk under any long-term disability
insurance policy maintained by Mercury will be credited as if paid by Mercury to
Mr.  Czyzyk and after giving  effect to any federal  or state income tax savings
resulting from the  payment under  a disability  policy (as  opposed to  taxable
salary). The employment agreement further provides that Mr. Czyzyk may terminate
his  employment following such  a change in  control, in which  event Mr. Czyzyk
will be entitled to be  paid the lesser of one  year's base compensation or  the
entire  balance of his base compensation remaining to be paid to Mr. Czyzyk over
the remaining term of the agreement.

    Mr. Czyzyk also received a signing bonus in the amount of $100,000 upon  the
execution  of  the  employment  agreement. The  agreement  includes  a five-year
post-employment, non-competition covenant.

COMPENSATION OF DIRECTORS

   
    Commencing July 1994,  Mercury paid  each non-employee  director $1,000  per
meeting  with an annual minimum of $7,500 in  fees paid in advance on the annual
meeting date. Directors are also reimbursed for their travel, meals, lodging and
out-of-pocket expenses incurred in connection with attending Board meetings.
    

    Under the 1990 Directors Stock Option Plan (the "1990 Directors Plan"), each
individual who was a non-employee director  on March 9, 1990 received an  option
to purchase 11,000 shares of Common Stock. As of the date of each annual meeting
of  shareholders ("Annual  Meeting Date")  occurring after  March 9,  1990, each
individual who was a non-employee director at any time since the end of the next
preceding Annual Meeting Date was, and  will continue to be, awarded options  to
purchase 11,000 shares of Common Stock.

    The  purchase price of a  share of Common Stock under  an option is equal to
the greater of 100% of the  fair market value of a  share of Common Stock as  of
the  date the option is granted or the par value of a share of such Common Stock
on such date. The options vest one year after the date of grant except following
a "change in control", as defined, in which event the options vest  immediately.
Each option expires ten years after the date of grant.

    Under  the 1990 Directors  Plan, each of  the current directors  who are not
employees of Mercury were granted non-qualified stock options at exercise prices
equal to the fair  market value of the  Common Stock on the  date of grants,  as
follows:  Philip  Fagan,  Jr.,  M.D., options  to  purchase  66,000  shares, all
currently outstanding, exercisable at prices between $1.70 and $6.36 per  share;
Frederick  H.  Kopko,  Jr., options  to  purchase 33,000  shares,  all currently
outstanding, exercisable at prices between $1.93 and $6.36 per share; Robert  L.
List,  options  to purchase  66,000 shares,  55,000 exercised,  11,000 currently
outstanding, exercisable at  $6.36 per  share; and William  Langton, options  to
purchase 22,000 shares, all currently outstanding, exercisable at $3.35 to $6.36
per share. Mr. Langton was also granted a non-qualified stock option outside the
1990  Directors Plan on August 9, 1993, exercisable to purchase 10,000 shares at
$3.125 per share, the fair  market value on the date  of grant. This option  was
exercised in March 1994.

STOCK OPTIONS

    The following table sets forth information regarding option exercises during
fiscal 1995, as well as the number and total of in-the-money options at June 30,
1995, for each of the Named Executive Officers. No Named Executive Officers were
granted options during fiscal 1995.

                                       36
<PAGE>
            AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
                       FISCAL YEAR-END OPTION VALUES (1)

<TABLE>
<CAPTION>
                                                                                                    VALUE OF
                                                                              NUMBER OF           UNEXERCISED
                                                                         UNEXERCISED OPTIONS  IN-THE-MONEY OPTIONS
                                                                              AT FISCAL            AT FISCAL
                                                                            YEAR-END (#)        YEAR-END ($)(4)
                                           SHARES                        -------------------  --------------------
                                         ACQUIRED ON        VALUE           EXERCISABLE/          EXERCISABLE/
NAME                                    EXERCISE (#)   REALIZED ($)(2)(3)    UNEXERCISABLE       UNEXERCISABLE
- --------------------------------------  -------------  ----------------  -------------------  --------------------
<S>                                     <C>            <C>               <C>                  <C>
Seymour Kahn..........................          -0-              -0-           110,000/-0-          688,050/-0-
Joseph A. Czyzyk......................        4,200           31,500            22,800/-0-          146,946/-0-
Randolph E. Ajer......................        5,000           30,875            22,000/-0-          139,150/-0-
Kevin J. Walsh........................        5,000           32,500            22,000/-0-          139,150/-0-
William L. Silva......................          -0-              -0-            27,500/-0-          153,807/-0-
</TABLE>

- ------------
(1) As adjusted for the ten percent stock dividend, effective June 16, 1995.

(2) In accordance with the rules of the Commission, the amounts set forth in the
    "Value  Realized" column  of this  table are  calculated by  subtracting the
    exercise price from the fair market value of the underlying Common Stock  on
    the  exercise date.  The amounts reported  thus reflect the  increase in the
    price of Mercury's  common stock from  the option grant  date to the  option
    exercise  date, but do not necessarily reflect actual proceeds received upon
    option exercises.

(3) For purposes of this table, fair market value is deemed to be the average of
    the high and low Common Stock price reported by the American Stock  Exchange
    Composite Transactions on the date indicated.

(4) Based upon a fair market value of $8.375 per share at June 30, 1995.

                              CERTAIN TRANSACTIONS

    In  November 1994, Mercury acquired from Mr. Czyzyk the outstanding minority
interest in  Mercury's 80%  owned subsidiary,  MAC. The  transaction included  a
redemption  of 5% of the capital stock of MAC held by Mr. Czyzyk in exchange for
$450,000 in cash and acquisition  of the remaining 15%  of the capital stock  of
MAC  held by Mr. Czyzyk  through the issuance of  225,000 shares of Common Stock
valued at $1,406,000 ($6.25 per share, the closing price of the Common Stock  on
the  AMEX  on  the  date  the  Board  approved  the  transaction)  for  a  total
consideration of  $1,856,000.  In  addition, concurrent  with  the  acquisition,
Mercury entered into an employment agreement with Mr. Czyzyk. See "Management --
Employment Agreements."

    Pursuant   to  a  Stock  Purchase   Agreement  (the  "First  Stock  Purchase
Agreement") dated December  10, 1990  between Mercury, SK  Acquisition, Inc.,  a
Delaware  corporation wholly-owned by Mr. Kahn ("SKAI"), Randolph E. Ajer, Kevin
J. Walsh, Grant  G. Murray and  Joseph A. Czyzyk  (the "First Purchasers"),  all
full-time  employees and Executive Vice Presidents of Mercury, SKAI sold 110,000
shares of Common Stock to each of Messrs. Ajer, Walsh, Murray and Czyzyk, at the
price of  $2.73  per share,  with  each purchaser  paying  a purchase  price  of
$300,000, or an aggregate of $1,200,000. On December 10, 1990, the closing price
of  the  Common Stock  on the  AMEX was  $2.73  per share.  Pursuant to  a Stock
Purchase Agreement  (the "Second  Stock Purchase  Agreement", collectively,  the
First  and Second Stock  Purchase Agreements are hereinafter  referred to as the
"Stock Purchase  Agreement") dated  August  9, 1993  between Mercury,  SKAI  and
William  L. Silva, a full-time employee and Executive Vice President of Mercury,
SKAI sold 110,000 shares of  Common Stock to Mr. Silva  at a price of $2.73  per
share,  with Mr. Silva paying  a total purchase price  of $300,000. On August 9,
1993, the closing price  of the Common  Stock on the AMEX  was $2.84 per  share.
Each of the First Purchasers and Mr. Silva (collectively, the "Purchasers") paid
$30,000  cash at the closing  of his purchase, or  an aggregate of $150,000, and
agreed to pay  the remaining  $270,000, or an  aggregate of  $1,350,000, over  a
period  of five years from  the date of purchase,  together with interest at the
rate of

                                       37
<PAGE>
10% per annum on  the outstanding balance.  The purchase price  owed to SKAI  is
secured  by a first security interest in the Common Stock sold to each Purchaser
and each such loan is non-recourse. Each Purchaser has given SKAI an irrevocable
proxy to vote  the Common  Stock purchased  by him  for all  purposes until  the
purchase price for his Common Stock has been paid in full.

    As  part of  the Stock  Purchase Agreement, Mercury  has agreed  to loan the
principal balance of the unpaid purchase price to each of the Purchasers  during
the  five-year payment period as each payment is required to be made on March 1,
June 1, September 1 and December 1 of each year until the principal amount  owed
by  each Purchaser is  paid in full,  which will occur  by the end  of 1995 with
respect to the First Purchasers and the  end of 1998 with respect to Mr.  Silva.
Such loans are non-recourse and are secured by a second security interest in the
purchased  stock. The Purchasers have  each agreed to pay  their own interest on
the balance of the  purchase price outstanding  from personal funds.  Commencing
March  1, 1994, and  annually thereafter, for  each of the  First Purchasers who
remain employed by  Mercury, one-fifth of  his loan will  be forgiven. For  each
First  Purchaser who remains employed by Mercury through March 1, 1998, his loan
will be forgiven in full, his shares  of Common Stock will be owned without  any
further  lien in  favor of Mercury  or SKAI and  the proxy granted  to SKAI will
expire by its terms. Commencing January  1, 1997, and annually thereafter,  one-
fifth of Mr. Silva's loan will be forgiven if he remains employed by Mercury. If
Mr. Silva remains employed by Mercury through January 1, 2001, his loans will be
forgiven  in full, his shares of Common  Stock will be owned without any further
lien in favor of Mercury  or SKAI and the proxy  granted to SKAI will expire  by
its terms. See Note 6 of Notes to Consolidated Financial Statements.

    During  fiscal 1995,  Mercury loaned an  aggregate of $337,500  to the First
Purchasers and Mr. Silva which was used to make the June 1, 1994 through June 1,
1995 payments to SKAI. Amounts outstanding as of June 30, 1995 were as  follows:
Mr.  Ajer $162,000, Mr. Walsh $162,000, Mr. Murray $162,000, Mr. Czyzyk $162,000
and Mr. Silva $270,000.

    During March 1994 and March 1995, Mercury loaned Mr. Ajer $19,274, Mr. Walsh
$19,143 and  Mr.  Murray  $22,491,  which was  used  to  pay  withholding  taxes
associated  with the loan forgiveness under  the First Stock Purchase Agreement.
Such loans bore or bear no interest and were or are being repaid through ratable
payroll deductions over a one-year period.

    In September  1994, Mercury  loaned Mr.  Czyzyk $130,000,  which Mr.  Czyzyk
repaid in November 1994.

    On  August 1, 1995,  Grant G. Murray  and Mercury entered  into an agreement
("Agreement") in connection with the termination of Mr. Murray's employment. The
Agreement provides  for the  payment to  Mr. Murray  by Mercury  of the  sum  of
$275,000,  payable $75,000 upon execution of the Agreement followed by quarterly
payments of $50,000  on November  1, 1995,  February 1,  1996, May  1, 1996  and
August 1, 1996.

    In  consideration for  the payment  of $275,000,  Mr. Murray  transferred to
Mercury 110,000 shares  acquired by  him pursuant  to the  First Stock  Purchase
Agreement  and  returned  all stock  options  held  by him.  The  Agreement also
provides (i) for the  forgiveness of all debts  or loans, aggregating  $178,000,
owed  by Mr. Murray to Mercury; (ii) for  Mr. Murray to procure new business for
Mercury and to receive as compensation  a percentage of net margins realized  on
such  new business;  (iii) for  Mr. Murray  not to  compete with  Mercury or its
affiliates until August 1, 1996; (iv) for the continuation of medical  insurance
for  Mr. Murray through  December 1995; (v) for  a release by  Mr. Murray of all
claims against Mercury, including his claim with respect to an accrued bonus  of
$60,000;  and (vi) for a release by Mercury of all claims against Mr. Murray. In
consideration for  SKAI's  facilitating  the  stock  repurchase  transaction  by
waiving  its  right to  restrict the  transfer  of Mr.  Murray's shares,  and as
payment in full of all interest and remaining amounts due to SKAI in  connection
with the purchase transaction, Mercury agreed to pay SKAI the amount of $100,000
in  the form  of options  to purchase  30,000 shares  of the  Common Stock. Such
options are to be granted at $3.33  below the closing price of the Common  Stock
on the AMEX as of August 24, 1995 (the date the Board approved the transaction),
and  will,  subject to  continued employment,  vest  and become  exercisable six
months from the date of

                                       38
<PAGE>
grant. Such  options  will  be  granted  subject to:  (1)  an  increase  in  the
authorized shares of Mercury at the next annual meeting of shareholders; and (2)
acceptance of the shares underlying such options for listing on the AMEX. If the
conditions  for the issuance of the options are not met, Mercury will reconsider
the form of payment of the $100,000 to SKAI.

    During  fiscal  1995,  Mercury  sold  approximately  $211,000  in  fuel   to
Millionaire  of Long Beach, a company owned by  Mr. Murray. As part of the stock
repurchase arrangement, Mr. Murray had agreed to let Mercury off-set any amounts
owed to Mercury by Millionaire of Long Beach for such purchases against  amounts
due  under the  stock repurchase  arrangement. No  amounts were  owed as  of the
closing of the transaction.

    Mercury has Indemnity Agreements  with each of  its directors and  executive
officers  which require Mercury,  among other things,  to indemnify them against
certain liabilities  that may  arise by  reason of  their status  or service  as
directors,  officers,  employees  or  agents  of  Mercury,  and,  under  certain
circumstances, to advance  their expenses  incurred as a  result of  proceedings
brought  against them. In order to be entitled to indemnification, the executive
officer or director must have acted in a manner reasonably believed to be in, or
not opposed to, the best  interests of Mercury and,  with respect to a  criminal
matter, in a manner which he had no reason to believe was illegal.

                             PRINCIPAL SHAREHOLDERS

   
    The  following table sets forth certain information regarding the beneficial
ownership of Common Stock as of December  31, 1995 by (i) each person (or  group
of  affiliated persons) known to Mercury to be the beneficial owner of more than
five percent of Common  Stock, (ii) each director  of Mercury, (iii) each  Named
Executive  Officer and (iv) all executive officers and directors of Mercury as a
group. As of  December 31,  1995, there were  5,380,087 shares  of Common  Stock
outstanding.  Unless otherwise indicated below, to the knowledge of Mercury, all
persons listed below have sole voting and investment power with respect to their
shares of Common Stock,  except to the  extent such power  is shared by  spouses
under applicable law.
    

   
<TABLE>
<CAPTION>
                                                                                  SHARES
                                                                               BENEFICIALLY
NAME AND ADDRESS                                                                   OWNED          PERCENT
- ---------------------------------------------------------------------------  -----------------  -----------
<S>                                                                          <C>                <C>
Seymour Kahn (1)...........................................................     1,398,140(2)         25.5%
Joseph A. Czyzyk (1).......................................................       396,450(3)          7.3%
Randolph E. Ajer...........................................................       143,000(4)          2.6%
Kevin J. Walsh.............................................................       132,000(5)          2.4%
William L. Silva...........................................................       137,500(6)          2.5%
Philip J. Fagan, Jr., M.D..................................................        99,000(7)          1.8%
Frederick H. Kopko, Jr.....................................................        33,000(8)         *
William G. Langton.........................................................        22,000(9)         *
Robert L. List.............................................................        11,000(10)        *
Kennedy Capital Management, Inc.
  425 N. New Ballas Road, #181
  St. Louis, Missouri 63141-6821...........................................       395,000             7.3%
All directors and executive officers as a group (9 persons)................     1,932,090(11)        33.8%
</TABLE>
    

- ------------
*   Less than one percent.

 (1)The  address for each of  Messrs. Kahn and Czyzyk  is 5456 McConnell Avenue,
    Suite 100, Los Angeles, California 90066.

                                       39
<PAGE>
   
 (2)Includes 829,660 shares held of record by SKAI. Also includes 440,000 shares
    owned by four executive officers of Mercury which SKAI holds a proxy to vote
    and which are  subject to  a security interest  held by  SKAI. See  "Certain
    Transactions." Includes 110,000 shares issuable upon the exercise of options
    exercisable  within  60 days  from December  31,  1995. Also  includes 8,800
    shares held of record  by Mr. Kahn's  wife, as to  which Mr. Kahn  disclaims
    beneficial ownership.
    

   
 (3)Includes  22,800 shares issuable upon exercise of options exercisable within
    60 days from December 31,  1995. Includes 110,000 shares beneficially  owned
    by Mr. Czyzyk for which Mr. Czyzyk has granted a proxy to SKAI and which are
    subject  to pledges. See "Certain  Transactions." Includes 3,850 shares held
    by Mr. Czyzyk, as custodian for his  children, and 1,100 shares held by  Mr.
    Czyzyk's  spouse's IRA  account with respect  to which  Mr. Czyzyk disclaims
    beneficial ownership.
    

   
 (4)Includes 22,000 shares issuable upon exercise of options exercisable  within
    60  days from December 31, 1995.  Includes 110,000 shares beneficially owned
    by Mr. Ajer for  which Mr. Ajer has  granted a proxy to  SKAI and which  are
    subject to pledges. See "Certain Transactions."
    

   
 (5)Includes  22,000 shares issuable upon exercise of options exercisable within
    60 days from December 31,  1995. Includes 110,000 shares beneficially  owned
    by  Mr. Walsh for which Mr. Walsh has  granted a proxy to SKAI and which are
    subjected to pledges. See "Certain Transactions."
    

   
 (6)Includes 27,500 shares issuable upon exercise of options exercisable  within
    60  days from December 31, 1995.  Includes 110,000 shares beneficially owned
    by Mr. Silva  which Mr.  Silva has  granted a proxy  to SKAI  and which  are
    subject to pledges. See "Certain Transactions."
    

   
 (7) Includes 66,000 shares issuable upon exercise of options exercisable within
    60 days from December 31, 1995.
    

   
 (8)  Consists of  33,000 shares issuable  upon exercise  of options exercisable
    within 60 days from December 31, 1995.
    

   
 (9) Consists of  22,000 shares  issuable upon exercise  of options  exercisable
    within 60 days from December 31, 1995.
    

   
(10)  Consists of  11,000 shares issuable  upon exercise  of options exercisable
    within 60 days from December 31, 1995.
    

   
(11) Includes  336,300  shares issuable  upon  exercise of  options  exercisable
    within 60 days from December 31, 1995.
    

                                       40
<PAGE>
                           DESCRIPTION OF DEBENTURES

   
    THE  DEBENTURES ARE BEING ISSUED PURSUANT  TO AN INDENTURE (THE "INDENTURE")
TO BE DATED AS OF JANUARY   , 1996 BETWEEN MERCURY AND IBJ SCHRODER BANK & TRUST
COMPANY, AS TRUSTEE (THE "TRUSTEE"). THE FOLLOWING IS A SUMMARY OF THE  MATERIAL
TERMS  AND PROVISIONS  OF THE  DEBENTURES. THE  TERMS OF  THE DEBENTURES INCLUDE
THOSE SET  FORTH IN  THE  INDENTURE AND  THOSE MADE  PART  OF THE  INDENTURE  BY
REFERENCE  TO THE TRUST INDENTURE ACT OF  1939, AS AMENDED (THE "TRUST INDENTURE
ACT"). THE DEBENTURES ARE SUBJECT TO ALL SUCH TERMS, AND PROSPECTIVE  PURCHASERS
OF  THE DEBENTURES ARE REFERRED TO THE INDENTURE AND THE TRUST INDENTURE ACT FOR
A STATEMENT THEREOF.  THE FOLLOWING SUMMARY  DOES NOT PURPORT  TO BE A  COMPLETE
DESCRIPTION  OF THE DEBENTURES AND IS SUBJECT TO THE DETAILED PROVISIONS OF, AND
IS QUALIFIED IN ITS ENTIRETY BY  REFERENCE TO, THE FORM OF INDENTURE  (INCLUDING
THE  FORM OF DEBENTURE)  THAT HAS BEEN  FILED AS AN  EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS  A PART. ALL SECTION REFERENCES  APPEARING
IN  THIS  "DESCRIPTION OF  DEBENTURES"  ARE TO  SECTIONS  OF THE  INDENTURE, AND
CAPITALIZED TERMS USED BUT NOT DEFINED  HEREIN SHALL HAVE THE MEANINGS  ASSIGNED
TO  THEM IN THE INDENTURE. AS USED IN THIS "DESCRIPTION OF DEBENTURES," THE TERM
"COMPANY" MEANS MERCURY AIR GROUP, INC. AND DOES NOT INCLUDE ITS SUBSIDIARIES.
    

GENERAL

   
    The Debentures will be unsecured obligations of Mercury, will be limited  to
$25,000,000   in  aggregate   principal  amount   (up  to   $28,750,000  if  the
Underwriters' over-allotment option  is exercised  in full) and  will mature  on
February   , 2006. The Debentures will bear interest at the rate per annum shown
on  the cover  of this  Prospectus from  and including  the date  of the initial
issuance of the Debentures  under the Indenture or  from and including the  most
recent  Interest Payment Date to  which interest has been  paid or provided for,
payable   semi-annually   on    August             and    February
of  each year,  commencing August     ,  1996, to  the Person in  whose name the
Debenture (or any predecessor Debenture) is registered at the close of  business
on  the preceding July     or January     , as the case  may be. Interest on the
Debentures will be paid on the basis of a 360-day year of twelve 30-day  months.
Debentures  issued pursuant to  the over-allotment option,  if any, shall accrue
interest from  the  date  of  issuance  of  the  initial  $25,000,000  aggregate
principal amount of Debentures. (Sections 2.1, 2.2 and 4.1).
    

    Principal  of,  premium, if  any, and  interest on,  the Debentures  will be
payable at the office or  agency of Mercury or  the Trustee maintained for  that
purpose  in New York, New  York and at any other  office or agency maintained by
Mercury or  the Trustee  for such  purpose, all  as provided  in the  Indenture.
(Sections 2.1 and 4.2).

    The  Debentures will be initially issued only in fully registered book-entry
form with  The  Depository Trust  Company,  as the  book-entry  depositary  (the
"Depositary").  (Section 2.1). Except as described  in this Prospectus or in the
Indenture, the Debentures will not  be issuable in definitive certificated  form
to  any person  other than  the Depositary or  its nominees.  See "-- Book-Entry
System." No service  charge will be  made for  any transfer or  exchange of  the
Debentures,  but Mercury may  require payment of  a sum sufficient  to cover any
related tax or other governmental charge.

    All moneys  paid by  Mercury to  the Trustee  or any  Paying Agent  for  the
payment  of principal of,  and premium, if  any, and interest  on, any Debenture
which remain unclaimed for two years  after such principal, premium or  interest
becomes due and payable may be repaid to Mercury. Thereafter, the Holder of such
Debenture  shall, as  an unsecured  general creditor,  look only  to Mercury for
payment thereof. (Section 8.5).

    Application has been made to list  the Debentures on the AMEX. When  issued,
the  Debentures will be  a new issue  of securities with  no established trading
market. No assurance can be given as to the liquidity of the trading market  for
the  Debentures. Because the  Debentures are convertible  into Common Stock, the
prices at which the Debentures  trade in the market  will likely be affected  by
the price of Mercury's Common Stock.

                                       41
<PAGE>
    The  Indenture will  not restrict  Mercury's ability  to incur indebtedness,
create or grant liens, pay dividends or make other distributions on its  capital
stock  (other than to the extent the conversion price may thereafter be required
to be adjusted) or make investments,  acquisitions or dispositions and will  not
require Mercury to meet any financial tests.

    The  Indenture does not contain any provisions that would provide protection
to Holders of  the Debentures against  a sudden and  dramatic decline in  credit
quality  of  Mercury resulting  from any  takeover, recapitalization  or similar
restructuring, except as described under "-- Repurchase of Debentures by Mercury
at the Option of the Holder After Certain Changes of Control."

BOOK-ENTRY SYSTEM

    The Debentures will be  represented by a single  global security (a  "Global
Note").  The Global Note will be deposited with, or on behalf of, the Depositary
and registered in  the name  of the Depositary's  nominee. Except  as set  forth
below, the Global Note may be transferred, in whole and not in part, only to the
Depositary  or another nominee of the Depositary or to a successor depositary or
nominee of  such successor.  Except as  set forth  below, book-entry  beneficial
owners of the Debentures will not be entitled to have such book-entry beneficial
ownership  registered in their names on  the Security Register, will not receive
or be entitled to receive physical delivery of the Debentures beneficially owned
by book-entry registration, and will not be deemed to be the registered  Holders
of the Debentures under the Indenture.

    Settlement  of Debentures deposited with the  Depositary will be made in the
Depositary's Same-Day Funds Settlement System. The Debentures will trade in such
system until maturity  or until the  Debentures are repurchased  or redeemed  in
full,  and secondary market  trading activity for  the Debentures will therefore
settle in immediately available  funds. All payments  of principal and  interest
will be made in immediately available funds. No assurance can be given as to the
effect, if any, of settlement in immediately available funds on trading activity
in the Debentures.

    The Depositary has advised as follows: It is a limited-purpose trust company
organized  under the New  York Banking Law, a  "banking organization" within the
meaning of the New York Banking Law,  a member of the Federal Reserve System,  a
"clearing  corporation" within  the meaning of  the New  York Uniform Commercial
Code, and a "clearing agency" registered  pursuant to the provisions of  Section
17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Depositary  holds securities that its participants ("Participants") deposit with
the  Depositary.   The  Depositary   also  facilitates   the  settlement   among
Participants  of  securities transactions,  such  as transfers  and  pledges, in
deposited securities  through  electronic  computerized  book-entry  changes  in
Participants'  accounts, thereby eliminating  the need for  physical movement of
securities certificates. "Direct  Participants" include  securities brokers  and
dealers,  banks,  trust  companies,  clearing  corporations,  and  certain other
organizations. The Depositary is  owned by a number  of its Direct  Participants
and  by the New York Stock Exchange,  Inc., AMEX and the National Association of
Securities Dealers, Inc. Access to the Depositary's system is also available  to
others  such as securities  brokers and dealers, banks  and trust companies that
clear through or maintain  a custodial relationship  with a Direct  Participant,
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Securities and Exchange
Commission.

    Purchases of interests in the Global Note under the Depositary's system must
be  made by or through Direct Participants, which will receive a credit for such
interests on the  Depositary's records.  The ownership interest  of each  actual
purchaser  of interests in the Global Note ("Beneficial Owner") is in turn to be
recorded on the  Direct and  Indirect Participants'  records. Beneficial  Owners
will not receive written confirmation from the Depositary of their purchase, but
Beneficial  Owners  are  expected  to  receive  written  confirmations providing
details of the transaction,  as well as periodic  statements of their  holdings,
from  the  Direct or  Indirect Participant  through  which the  Beneficial Owner
entered into the  transaction. Transfers  of ownership interests  in the  Global
Note  are to be accomplished by entries made on the books of Participants acting
on behalf of Beneficial Owners.

                                       42
<PAGE>
    To  facilitate  subsequent   transfers,  all  Global   Notes  deposited   by
Participants  with the Depositary are registered in the name of the Depositary's
partnership nominee, Cede & Co. The deposit of Global Notes with the  Depositary
and  their registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depositary has  no knowledge of the  actual Beneficial Owners  of
the  interests in  the Global Notes;  the Depositary's records  reflect only the
identity of the Direct  Participants to whose accounts  interests in the  Global
Notes  are  credited,  which  may  or may  not  be  the  Beneficial  Owners. The
Participants will remain responsible  for keeping account  of their holdings  on
behalf of their customers.

    Conveyance  of notices and other communications  by the Depositary to Direct
Participants, by Direct  Participants to  Indirect Participants,  and by  Direct
Participants  and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements  as
may be in effect from time to time.

    Neither  the Depositary nor Cede & Co.  will consent or vote with respect to
the Global Note.  Under its usual  procedures, the Depositary  mails an  Omnibus
Proxy to the issuer as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose  accounts interests  in the  Global Note are  credited on  the record date
(identified in a listing attached to the Omnibus Proxy).

    Principal and  interest payments  on the  Global Note  will be  made to  the
Depositary. The Depositary's practice is to credit Direct Participants' accounts
on  the payment date in  accordance with their respective  holdings shown on the
Depositary's records unless the  Depositary has reason to  believe that it  will
not  receive payment on the payment date. Payments by Participants to Beneficial
Owners will be governed by standing instructions and customary practices, as  is
the  case with securities held  for the accounts of  customers in bearer form or
registered in "street name," and will be the responsibility of such  Participant
and not the Depositary, the Paying Agent or Mercury, subject to any statutory or
regulatory  requirements  as may  be in  effect  from time  to time.  Payment of
principal and interest to the Depositary is the responsibility of Mercury or the
Paying Agent, disbursement of such payments to Direct Participants shall be  the
responsibility  of  the  Depositary and  disbursement  of such  payments  to the
Beneficial  Owners  shall   be  the  responsibility   of  Direct  and   Indirect
Participants.  None of Mercury, the  Trustee, or any Paying  Agent will have any
responsibility or  liability  for any  aspect  of  the records  relating  to  or
payments  made on account of beneficial  ownership interests in any Global Note,
or for  maintaining,  supervising or  reviewing  any records  relating  to  such
beneficial ownership interests.

    The  Global  Note  representing  all  but  not  part  of  the  Debentures is
exchangeable for Debentures in  definitive form of like  tenor and terms if  (i)
the  Depositary is at  any time unwilling,  unable or ineligible  to continue as
Depositary for such Global Notes and a successor Depositary is not appointed  by
the  Company within 60 days  of the date the Company  is so informed in writing;
(ii) the Company executes  and delivers to  the Trustee a  Company Order to  the
effect  that such  Global Note shall  be so  exchangeable; or (iii)  an Event of
Default or an event which, with the giving of notice or lapse of time, or  both,
would  constitute  an  Event of  Default  with  respect to  the  Debentures, has
occurred and is continuing. A Global  Note that is exchangeable pursuant to  the
preceding   sentence   shall  be   exchangeable   for  Debentures   issuable  in
denominations of $1,000 and any integral multiple thereof and registered in such
names as the Depositary  holding such Global Note  shall direct. Subject to  the
foregoing,  a Global Note shall not be exchangeable, except for a Global Note of
like denomination  to  be registered  in  the name  of  such Depositary  or  its
nominee.

    The   information  in  this  section   concerning  the  Depositary  and  the
Depositary's book-entry  system  has been  obtained  from sources  that  Mercury
believes  to be reliable,  but Mercury takes no  responsibility for the accuracy
thereof.

                                       43
<PAGE>
CONVERSION RIGHTS

    The  Debentures will be convertible  into Common Stock at  any time prior to
redemption or Stated Maturity,  initially at the conversion  price set forth  on
the cover of this Prospectus. The conversion price will be subject to adjustment
upon the occurrence of any of the following events: (i) the payment, dividend or
other  distribution on any class of capital stock of Mercury in shares of Common
Stock or any class  of capital stock  of Mercury; (ii)  the issuance of  rights,
options  or  warrants  to  all  or substantially  all  holders  of  Common Stock
entitling them to subscribe for  or purchase shares of  Common Stock at a  price
per  share less than the then current market  price per share (as defined in the
Indenture);  (iii)   the  subdivision,   combination  or   reclassification   of
outstanding  shares  of  Common  Stock;  and (iv)  the  distribution  to  all or
substantially all holders of Common Stock of evidences of indebtedness or assets
of Mercury or rights  or warrants to acquire  such evidences of indebtedness  or
assets  (including  securities, but  excluding (a)  rights, options  or warrants
referred to in clause (ii) above, and (b) dividends or distributions referred to
in clause (i) above). No adjustment of the conversion price will be required  to
be  made until cumulative adjustments amount to at least $0.125. Any adjustments
which by reason of  the foregoing are  not required to be  made will be  carried
forward  and taken into account in any subsequent adjustment. In addition to the
foregoing adjustments, Mercury will be permitted to reduce the conversion  price
at its discretion. (Section 13.4).

   
    Subject  to the  rights of  Holders to  require Mercury  to repurchase their
Debentures upon the  occurrence of a  Change of Control  and a Rating  Downgrade
(see  "-- Repurchase  of Debentures  at the Option  of the  Holder After Certain
Changes of Control"), in the case of any consolidation or merger of Mercury with
any other corporation or trust, or in case of any merger of another  corporation
or  trust into Mercury (other than one in  which no change is made in the Common
Stock), or  in  case of  any  sale, transfer  or  other disposition  of  all  or
substantially  all of the assets of Mercury, the Holder of any Debentures shall,
after such sale, transfer or other  disposition, have the right to convert  such
Debenture  only into the kind and amount  of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a Holder of  the
number  of shares  of Common  Stock into  which such  Debenture might  have been
converted immediately prior to such consolidation, merger, sale or transfer; and
adjustments will be provided  for events subsequent thereto  that are as  nearly
equivalent  as practical  to the  conversion price  adjustments described above.
(Section 13.10).
    

    Fractional shares of Common Stock will  not be issued upon conversion,  but,
in  lieu thereof,  Mercury will  pay a  cash adjustment  based upon  the Current
Market Price on the day of conversion. (Section 13.8).

    Except as provided  below, no  adjustment will be  made on  conversion of  a
Debenture  for  interest  accrued thereon.  If  a Debenture  is  surrendered for
conversion after the close of business on any regular record date for payment of
interest and  before  the opening  of  business on  the  corresponding  interest
payment  date, then,  notwithstanding such  conversion, the  interest payable on
such interest payment date will be paid in cash to the person in whose name  the
Debenture  is registered at the close of business on such record date and (other
than a  Debenture  or a  portion  of a  Debenture  called for  redemption  on  a
redemption  date occurring after such  record date and on  or prior to the fifth
calendar day  following such  interest  payment date)  when so  surrendered  for
conversion,  the Debenture must be accompanied by  payment of an amount equal to
the interest payable on such interest payment date.

    With respect to Debentures called for redemption, the conversion right  will
expire  at the close  of business on  the fifth calendar  day preceding the date
fixed for redemption.  (Section 13.1). The  interest payment with  respect to  a
Debenture (or portion of a Debenture) called for redemption on a redemption date
occurring  on a date during the period from the close of business on any regular
record date next preceding any interest payment date to the close of business on
the fifth calendar day following such  interest payment date will be payable  on
such  interest payment  date to  the Holder  of such  Debenture at  the close of
business on  such regular  record date  notwithstanding the  conversion of  such

                                       44
<PAGE>
Debenture after such regular date and on or prior to such interest payment date,
and  the Holder converting such Debenture will  not be required to pay an amount
equal to the interest  payable on such interest  payment date upon surrender  of
such Debenture for conversion.

SUBORDINATION

    The  indebtedness evidenced by  the Debentures is  subordinate to all Senior
Indebtedness of  Mercury.  To the  extent  and in  the  manner provided  in  the
Indenture,  Senior Indebtedness must be  paid before any payment  may be made to
any Holders of Debentures.  No payment shall  be made by  Mercury on account  of
principal  of, premium, if any,  or interest on the  Debentures or on account of
the redemption, repurchase, acceleration or  other acquisition of Debentures  of
Mercury, if there shall have occurred and be continuing a default in the payment
of  all or any portion of the  obligations on any Senior Indebtedness until such
default shall have been cured or waived or shall have ceased to exist.  (Section
11.1).

    Upon any acceleration of the principal of the Debentures or any distribution
of  assets  of  Mercury  upon  any dissolution,  winding  up,  total  or partial
liquidation or reorganization of Mercury,  whether voluntary or involuntary,  in
bankruptcy,  insolvency, receivership  or similar proceeding  or upon assignment
for the benefit of creditors, all amounts  due or to become due upon all  Senior
Indebtedness  must be  paid in  full before  the Holders  of the  Debentures are
entitled to  receive or  retain any  assets  so distributed  in respect  of  the
Debentures.  (Section  11.3).  By reason  of  this  provision, in  the  event of
insolvency of Mercury, Holders of the Debentures may recover less, ratably, than
holders of Senior Indebtedness and the general creditors of Mercury.

    "Senior Indebtedness" is defined to mean the principal of, premium, if  any,
unpaid  interest  (including interest  accruing on  or after  the filing  of any
petition in bankruptcy or for reorganization relating to Mercury whether or  not
a  claim for post-filing interest is allowed in such proceeding), fees, charges,
expenses, reimbursement and indemnification  obligations, and all other  amounts
payable under or in respect of Indebtedness (as defined) of Mercury, whether any
such  Indebtedness  exists  as of  the  date  of the  Indenture  or  is created,
incurred, assumed or  guaranteed after  such date, other  than (i)  Indebtedness
that  by its terms or by operation of law is subordinated to or on a parity with
the Debentures and (ii) Indebtedness of Mercury owed to a subsidiary of Mercury.
(Section 1.1).

    "Indebtedness" with respect to any Person is defined to mean:

        (i) any debt (a) for money borrowed (other than the Debentures), or  (b)
    evidenced  by  a  bond,  note, debenture  or  similar  instrument (including
    purchase money obligations) given in connection with the acquisition of  any
    business,  property or assets, whether by purchase, merger, consolidation or
    otherwise, but shall  not include  any account payable  or other  obligation
    created  or  assumed by  a  Person in  the  ordinary course  of  business in
    connection with the obtaining  of materials or services,  or (c) which is  a
    direct  or  indirect  obligation  which  arises  as  a  result  of  banker's
    acceptances or bank letters of credit  issued to secure obligations of  such
    Person,  or to secure the payment of revenue bonds issued for the benefit of
    such Person, whether contingent or otherwise;

        (ii) any debt of others described in the preceding clause (i) which such
    Person has guaranteed or for which it is otherwise liable;

       (iii) the obligation of such Person as lessee under any lease of property
    which is reflected on  such Person's balance sheet  as a capitalized  lease;
    and

       (iv) any deferral, amendment, renewal, extension, supplement or refunding
    of  any liability of the kind described in any of the preceding clauses (i),
    (ii) and (iii). (Section 1.1).

    The  Indenture  does  not  limit  or  prohibit  the  incurrence  of   Senior
Indebtedness  by Mercury or  of other Indebtedness or  liabilities by Mercury or
any of its subsidiaries. Certain  of Mercury's operations are conducted  through
subsidiaries,  which  are  separate  and distinct  legal  entities  and  have no
obligation, contingent or  otherwise, to  pay any  amounts due  pursuant to  the
Debentures or to make any

                                       45
<PAGE>
funds  available therefore, whether  by dividends, loans  or other payments. The
Debentures will  be  structurally subordinated  to  all Indebtedness  and  other
liabilities  and commitments (including trade payables and lease obligations) of
Mercury's subsidiaries.  Any right  of Mercury  to receive  assets of  any  such
subsidiary  upon the liquidation  or reorganization of  any such subsidiary (and
the consequent right of  the Holders of the  Debentures to participate in  those
assets)  will be  structurally subordinated to  the claims  of that subsidiary's
creditors.

OPTIONAL REDEMPTION

   
    The Debentures will  be redeemable, at  Mercury's option, in  whole or  from
time  to time in part, at any time on or  after February   , 1999, upon not less
than 30  nor  more than  60  days' notice  at  the following  Redemption  Prices
(expressed as percentages of principal amounts) plus accrued and unpaid interest
to  the  Redemption Date  (subject  to the  right of  Holders  of record  on the
relevant Record Date to receive interest due on an Interest Payment Date that is
prior to the Redemption Date). (Sections 3.1 and 3.4).
    

    If redeemed during the  period indicated below,  the Redemption Price  shall
be:

   
<TABLE>
<CAPTION>
                                                                 REDEMPTION
PERIOD                                                              PRICE
- -------------------------------------------------------------  ---------------
<S>                                                            <C>
February   , 1999 - February   , 2000........................          104%
February   , 2000 - February   , 2001........................          103%
February   , 2001 - February   , 2002........................          102%
February   , 2002 - February   , 2003........................          101%
</TABLE>
    

and thereafter at 100% of the principal amount thereof.

   
    In  addition, the Debentures may be redeemed at the election of the Company,
in whole or  in part,  at any time  on or  after February    ,  1998 and  before
February    , 1999, at a Redemption Price of 105% of the principal amount of the
Debentures plus  accrued and  unpaid  interest to  the  Redemption Date  if  the
Closing Price of the Common Stock has been at least 140% of the conversion price
for  at least  20 trading days  within a  period of 30  consecutive trading days
ending not more  than five  trading days  prior to  the date  of the  redemption
notice.  The redemption amounts will  be paid with interest  accrued to the date
fixed for  redemption, subject  to the  right of  the registered  holder on  the
Record  Date for an interest payment to receive such interest. If Mercury elects
to redeem less than all the Debentures, the Trustee will select which Debentures
to redeem using  such method  as it deems  fair and  appropriate (including  the
selection  for redemption of a portion of the principal amount of any Debenture,
but not less than $1,000). On and after the redemption date, interest ceases  to
accrue  on the  Debentures or portion  of the Debentures  called for redemption.
(Section 3.1).
    

    Mercury may at any time  buy Debentures on the  open market at prices  which
may be greater or less than the Redemption Prices listed above.

    No sinking fund is provided for the Debentures.

CONSOLIDATION, MERGER AND SALE OF ASSETS

    The  Indenture provides that Mercury may, without the consent of the Holders
of the Debentures,  consolidate with  or merge  into any  other corporation,  or
convey, transfer or lease its properties and assets substantially as an entirety
to  any person,  provided that  in any such  case (a)  the successor corporation
shall be  a  domestic  corporation  and  such  corporation  shall  assume  by  a
supplemental  indenture  Mercury's  obligations  under  the  Indenture  and  (b)
immediately after  giving effect  to  such transaction,  no default  shall  have
occurred and be continuing. Upon compliance with these provisions by a successor
corporation,  Mercury would be  relieved of its  obligations under the Indenture
and the Debentures. (Section 5.1).

REPURCHASE OF DEBENTURES AT THE OPTION OF THE HOLDER AFTER CERTAIN CHANGES OF
CONTROL

    In the event  of any  Change of Control  and a  Rating Downgrade,  occurring
after the date of issuance of the Debentures and on or prior to Stated Maturity,
each Holder of Debentures will have

                                       46
<PAGE>
   
the  right, at the Holder's option, to require Mercury to repurchase all (or any
portion with a principal amount equal to $1,000 or an integral multiple thereof)
of the Holder's Debentures  on or promptly following  the date (the  "Repurchase
Date")  that is  45 calendar  days after  the date  Mercury gives  notice of the
Change of Control and the Rating Downgrade  as described below, at a price  (the
"Repurchase Price") equal to 100% of the principal amount thereof, together with
accrued and unpaid interest to the Repurchase Date. (Section 12.1).
    

    The  right to require  Mercury to repurchase  Debentures as a  result of the
occurrence of a Change of Control and  a Rating Downgrade could create an  event
of  default under Senior Indebtedness as a result of which any repurchase could,
absent a waiver, be blocked by  the subordination provisions of the  Debentures.
See "-- Subordination." However, failure by Mercury to repurchase the Debentures
when  required under the preceding paragraph will  result in an Event of Default
under the  Indenture  whether  or  not  such  repurchase  is  permitted  by  the
subordination provisions of the Indenture. (Section 6.1).

   
    Within  30 calendar days after  the occurrence of a  Change of Control and a
Rating Downgrade, Mercury is  obligated to mail to  all Holders of Debentures  a
notice  of the occurrence  of such Change  of Control and  Rating Downgrade, the
Repurchase Date,  the Repurchase  Price, the  procedures which  the Holder  must
follow  to exercise the  repurchase right and other  information with respect to
the repurchase of the Debentures. To  exercise the repurchase right, the  Holder
of  a Debenture must  deliver, on or before  the close of  business on the tenth
Business Day immediately preceding  the Repurchase Date,  written notice to  the
Trustee of the Holder's exercise of such right. (Section 12.3).
    

    As  used in the Indenture, (a) a "Change of Control" shall be deemed to have
occurred at such time as, whether or  not approved by the Board of Directors  of
Mercury,  any  person  (i)  is  or becomes  the  beneficial  owner,  directly or
indirectly, of securities  representing more  than 50%  of the  total number  of
votes  that may  be cast for  the election of  the directors of  Mercury or (ii)
acquires from Mercury more than  50% of the assets  or earning power of  Mercury
and  its subsidiaries, (b) "person" means a  person or group (within the meaning
of Sections 13(d) and 14(d) of  the Exchange Act), together with any  affiliates
or  associates thereof, but does  not include Seymour Kahn  or any subsidiary of
Mercury,  (c)  "beneficial  ownership"  shall  be  determined  pursuant  to  the
provisions  of Rule 13d-3 and 13d-5 under the Exchange Act, except that a person
shall have "beneficial  ownership" of all  shares that any  such person has  the
right  to acquire, whether  such right is exercisable  immediately or only after
the passage of time and (d) "Rating  Downgrade" means a decrease by one or  more
gradations  (including gradations  within rating  categories as  well as between
rating categories) of the  investment rating assigned to  the Debentures by  any
nationally  recognized  statistical  rating  organization,  provided  that  such
downgrade occurs on, or within  90 days after, the earlier  to occur of (i)  the
occurrence  of a Change of Control or (ii)  public notice of the occurrence of a
Change of Control  or the intention  by Mercury  to effect a  Change of  Control
(which period shall be extended so long as the rating of the Debentures is under
publicly  announced  consideration  for  possible  downgrade  by  any nationally
recognized statistical rating organization). (Section 1.1).

    If a Change of Control  and a Rating Downgrade  were to occur, no  assurance
can  be  given  that  Mercury  would have  sufficient  funds  to  repurchase all
Debentures tendered by the Holders thereof or to make any principal or  interest
payment otherwise required by the Debentures.

    The  foregoing  provisions  would  not  necessarily  afford  Holders  of the
Debentures protection in  the event  of highly leveraged  or other  transactions
involving  Mercury that may adversely affect Holders. In addition, the foregoing
provisions may  discourage  open market  purchases  of  the Common  Stock  or  a
non-negotiated  tender or  exchange offer for  such stock  and, accordingly, may
limit a shareholder's ability to realize a premium over the market price of  the
Common Stock in connection with any such transaction.

                                       47
<PAGE>
    In  the event  a Change  of Control  and a  Rating Downgrade  occurs and the
Holders exercise  their  rights to  require  Mercury to  repurchase  Debentures,
Mercury  intends to comply with applicable tender offer rules under the Exchange
Act, including Rules 13e-4  and 14e-1, as  then in effect,  with respect to  any
such purchase.

REPURCHASE OF DEBENTURES UPON DEATH OF HOLDER

    Mercury  will repurchase Debentures tendered  by the personal representative
or surviving co-owner of a deceased Debenture Holder within 60 days of tender at
a price equal to 100% of the  principal amount plus accrued and unpaid  interest
to  the  date  of payment,  subject  to the  limitations  hereinafter described.
(Section 12.2).  Under the  terms  of the  Indenture,  Mercury is  obligated  to
repurchase  up to an  annual maximum principal amount  of $100,000 per Debenture
Holder, subject to an annual maximum  principal amount of $500,000 with  respect
to  Debentures tendered on behalf of all deceased Debenture Holders. In the case
of Debentures registered in the name of banks, trust companies or broker-dealers
who are members of a national securities exchange or the National Association of
Securities Dealers,  Inc. ("Qualified  Institutions"), the  individual  $100,000
annual  limitation applies  to each beneficial  owner of Debentures  held by any
Qualified Institution. (Section 12.2).

    A Debenture held  in tenancy by  the entirety, joint  tenancy or tenancy  in
common  will be deemed to be held by a  single Holder, and the death of any such
co-owner will be deemed the death of  a Holder, regardless of the name in  which
the  Debenture is registered, provided that  the co-owner establishes his or her
beneficial interest in the  Debenture to the satisfaction  of the Trustee.  Such
beneficial ownership will normally be deemed to exist in typical cases of street
name  or nominee ownership, ownership by a  custodian for the benefit of a minor
under the  Uniform  Gifts to  Minors  Act,  community property  or  other  joint
ownership arrangements between a husband and wife and certain other arrangements
whereby  a person has substantially all of the beneficial ownership interests in
the Debentures during his or her lifetime.

    Except for  Qualified  Institutions,  no  particular  form  of  request  for
repurchase  or authority  to request  the repurchase  is necessary.  However, in
order for Debentures  to be validly  tendered for repurchase,  the Trustee  must
receive:   (i)  a  written  request  for   repurchase  signed  by  the  personal
representative or surviving co-owner, (ii) evidence satisfactory to Mercury  and
the  Trustee that the  deceased Holder held a  book-entry beneficial interest in
the Debentures or, if applicable,  the certificates representing the  Debentures
to  be repurchased, free and clear  of liens and encumbrances; (iii) appropriate
evidence of  death and,  if made  by a  representative of  a deceased  Debenture
Holder,  appropriate evidence of  authority to make such  request; and (iv) such
other additional documents as the  Trustee shall require, including  inheritance
or  estate tax waivers and evidence of authority of the personal representative.
Debentures not repurchased because of the annual individual Holder or  aggregate
limitations will be held for repurchase in order of receipt, subject to the same
per  Holder and aggregate limitations, within 60 days following the commencement
of the  next  Repurchase Period  until  paid,  unless sooner  withdrawn  by  the
personal  representative of the deceased  Debenture Holder or surviving co-owner
of the Debenture.

   
    In the  case of  Debentures  held by  Qualified  Institutions on  behalf  of
beneficial   owners,  the  $100,000  principal   amount  per  Repurchase  Period
limitation shall apply to each such beneficial owner. Such Qualified Institution
in its request for  prepayment on behalf of  such beneficial owner must  certify
that  it  holds  Debentures on  behalf  of  the beneficial  owner  and  that the
aggregate requests for repayment tendered by the Qualified Institution on behalf
of the beneficial owner  during the calendar year  does not exceed $100,000.  In
addition,  any request for repurchase made  by a Qualified Institution on behalf
of a  beneficial owner  must be  delivered to  the Trustee  by registered  mail,
return receipt requested.
    

    Although  Mercury is obligated to repurchase  in any Repurchase Period up to
$500,000 principal amount of  the Debentures issued under  the Indenture, it  is
not required to establish a sinking fund or

                                       48
<PAGE>
otherwise  set aside funds for that purpose. Mercury intends to repay Debentures
tendered out of its internally generated  funds or, if necessary, short-term  or
other  long-term  borrowings.  The  obligation  to  repurchase  the  Debentures,
however, is an unsecured obligation of Mercury.

    Nothing in the Indenture prohibits Mercury from repurchasing, in  acceptance
of tenders made pursuant to the Indenture, Debentures in excess of the principal
amount  that  Mercury  is obligated  to  repurchase,  nor does  anything  in the
Indenture prohibit Mercury from purchasing any Debentures on the open market.

EVENTS OF DEFAULT

    An "Event of Default" is defined in the Indenture as (i) failure by  Mercury
to pay interest on any of the Debentures when it becomes due and payable and the
continuance  of any such failure for 30 days; (ii) failure by Mercury to pay all
or any part of the principal of, or  premium, if any, on the Debentures when  it
becomes  due  and payable,  whether at  Stated  Maturity, upon  redemption, upon
acceleration or  otherwise, including  payment of  the Repurchase  Price;  (iii)
failure by Mercury to comply with the provisions described under "Consolidation,
Merger and Sale of Assets" above; (iv) failure of Mercury to provide notice of a
Change  of Control  and a  Rating Downgrade  as provided  in the  Indenture; (v)
failure by  Mercury to  comply with  any  other covenant  in the  Indenture  and
continuance  of such failure for  60 days after notice  of such failure has been
given to  Mercury by  the Trustee  or by  the Holders  of at  least 25%  of  the
aggregate  principal  amount  of  the  Debentures  then  outstanding;  (vi)  any
acceleration  of  the  maturity  of  Indebtedness  of  Mercury  or  any  of  its
subsidiaries  having an outstanding principal amount of at least $5,000,000 or a
failure to pay such Indebtedness at  its stated maturity after demand  therefor,
if  acceleration is not annulled  within ten days after  written notice; (vii) a
final judgment or  final judgments  that exceed  $5,000,000 for  the payment  of
money  have been entered by a court  or courts of competent jurisdiction against
Mercury and/or any subsidiary of Mercury and such judgment or judgments have not
been discharged with 30 days after all rights to appeal have been exhausted; and
(viii) certain  events of  bankruptcy,  insolvency or  reorganization  involving
Mercury or any subsidiary of Mercury. (Section 6.1).

    Subject  to certain restrictions  on the ability  to accelerate contained in
the subordination provisions as described above under "-- Subordination," if (i)
an Event of Default with respect to the Debentures shall occur and be continuing
(except for an Event of Default referred to in clause (viii) above), the Trustee
or the  Holders of  not  less than  25% in  aggregate  principal amount  of  the
Debentures  then outstanding may  declare the principal  of all such Debentures,
including interest thereon, to be  due and payable or  (ii) an Event of  Default
referred  to in  clause (viii)  occurs, all principal  of, premium,  if any, and
accrued and  unpaid interest  on the  Debentures shall  be immediately  due  and
payable  without  any  declaration by  the  Trustee or  Holders.  (Section 6.2).
Mercury is required to furnish to the  Trustee, within 45 days after the end  of
each  financial quarter,  a statement  as to the  performance by  Mercury of its
obligations under  the Indenture  and as  to any  default in  such  performance.
(Section  4.6) Under certain circumstances, any declaration of acceleration with
respect to the Debentures may  be rescinded and past  defaults may be waived  by
the  Holders of a majority  of the aggregate principal  amount of the Debentures
then outstanding. (Sections 6.2 and 6.12).

    Subject to the  provisions of the  Indenture relating to  the duties of  the
Trustee  in case an Event of Default  shall occur and be continuing, the Trustee
will be under no obligation  to exercise any of its  rights or powers under  the
Indenture  at the request, order or direction of any of the Holders, unless such
Holders shall have offered  to the Trustee  reasonable indemnity. (Section  7.2)
The  Holders of a majority in aggregate  principal amount of the Debentures then
outstanding will  have  the  right to  direct  the  time, method  and  place  of
conducting  any proceeding for any remedy available to the Trustee or exercising
any trust or  power conferred on  the Trustee (subject  to certain  exceptions).
(Section 6.11).

    No  Holder of any Debenture will have  the right to institute any proceeding
with respect to the  Indenture or for any  remedy thereunder unless such  Holder
shall  have previously given to the Trustee written notice of a continuing Event
of  Default   and  unless   the   Holders  of   at   least  25%   in   aggregate

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<PAGE>
principal amount of the Debentures then outstanding shall also have made written
request,  and offered  reasonable indemnity,  to the  Trustee to  institute such
proceeding as Trustee,  and the  Trustee shall not  have received  with 60  days
after  its receipt of  such notice from  the Holders of  a majority in aggregate
principal amount of  the Debentures  then outstanding  a direction  inconsistent
with such request and the Trustee shall have failed to institute such proceeding
with 60 days. (Section 6.7).

AMENDMENTS AND WAIVERS

    Modifications and amendments of the Indenture may be made by Mercury and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal  amount of the Debentures then outstanding; provided, however, that no
such modification or amendment  may, without the consent  of the Holder of  each
outstanding  Debenture affected thereby, (i)  reduce the percentage of principal
amount of Debentures whose Holders must  consent to an amendment, supplement  or
waiver of any provisions of the Indenture or Debentures; (ii) reduce the rate or
extend  the time  for payment  of interest  on any  Debenture; (iii)  reduce the
principal amount  of  any Debenture,  or  reduce  the Repurchase  Price  or  the
Redemption Price; (iv) change the Stated Maturity of any Debenture or change the
Repurchase  Date of any Debenture;  (v) alter in a  manner adverse to any Holder
(a) the redemption provisions in the Indenture, (b) the repurchase provisions in
the Indenture or (c) the conversion provisions in the Indenture; (vi) change the
provisions concerning waivers of Defaults or Events of Default by Holders of the
Debentures (except  to  increase any  required  percentage or  to  provide  that
certain other provisions hereof cannot be modified or waived without the consent
of  the Holders of each outstanding Debenture affected thereby) or the rights of
Holders to recover the principal of, premium, if any, interest on, or redemption
or repurchase  payment  with respect  to,  any  Debenture; and  (vii)  make  the
principal  of, premium, if any,  or the interest on,  any Debenture payable with
anything or in any manner other than as provided for in the Indenture. (Sections
9.1 and 9.2).

    The Holders of not less than a majority in aggregate principal amount of the
Debentures then outstanding may, on behalf  of all Holders of Debentures,  waive
any  past default under the  Indenture with respect to  the Debentures, except a
default in the  payment of principal  of, premium,  if any, or  interest, or  in
respect  of a provision which under the  Indenture cannot be modified or amended
without consent of the Holder  of each outstanding Debenture affected.  (Section
6.12).

                              RATING OF DEBENTURES

    The  Debentures are rated "    " by Standard & Poor's Corporation ("S & P").
S & P defines a "     " rating as meaning "                ". Ratings are not  a
recommendation  to purchase, hold or sell the Debentures and are not intended to
provide any guidance concerning the relative value of an investment. The  rating
is  based on current information furnished to S  & P by the Company and obtained
from other sources.  The rating may  be changed, suspended  or withdrawn at  any
time as a result of changes in, or unavailability of, such information.

                    CERTAIN FEDERAL INCOME TAX CONSEQUENCES

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS

    The  following discussion  is a summary  of the material  federal income tax
consequences of holding  and disposing  of the  Debentures by  U.S. Holders  (as
defined  below).  This  summary is  based  upon laws,  regulations,  rulings and
judicial decisions now in effect, all  of which are subject to change  (possibly
on  a retroactive  basis). This summary  assumes that the  Debentures and Common
Stock of  the Company  will be  held as  capital assets  within the  meaning  of
Section  1221 of  the Internal  Revenue Code of  1986, as  amended (the "Code").
Further, this summary does  not discuss all aspects  of federal income  taxation
that may be relevant to investors in light of their personal circumstances or to
certain  types  of purchasers  subject to  special  treatment under  the federal
income tax laws (for example, dealers in securities, holders of securities  held
as  part  of  a  "straddle,"  "hedge"  or  "conversion  transaction," tax-exempt
organizations, insurance companies, financial institutions and foreign persons),
and does not

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<PAGE>
discuss the consequences  to a holder  under state, local  or foreign tax  laws.
Prospective  investors are advised  to consult their  own tax advisors regarding
the federal, state, local and other tax considerations of holding and  disposing
of the Debentures.

    For  purposes hereof, a  "U.S. Holder" is  (i) a citizen  or resident of the
United States, (ii)  a corporation or  partnership created or  organized in  the
United  States or under the laws of the  United States or of any state, or (iii)
an estate or trust the income of which is includible in gross income for  United
States federal income tax purposes regardless of its source.

GENERAL

    A  U.S. Holder of a Debenture will  be required to report as ordinary income
for federal income  tax purposes interest  earned on a  Debenture in  accordance
with  the holder's method of tax  accounting. Generally, principal payments on a
Debenture will be treated  as a return  of capital to the  extent of a  holder's
basis therein.

    The Company anticipates that the Debentures will not be issued with original
issue  discount within the meaning of the  Code, and the Company does not intend
to take any original issue discount deductions with respect to the Debentures.

CONVERSION OF DEBENTURES

    A U.S. Holder of a  Debenture will not recognize any  gain or loss upon  the
conversion of a Debenture into Common Stock except with respect to cash (if any)
received  in lieu  of fractional shares.  A holder  receiving cash in  lieu of a
fractional share will recognize capital gain or loss (subject to the  discussion
of market discount set forth below) in an amount equal to the difference between
the  amount of cash and the amount of  the basis in the converted Debenture that
is allocable  to the  fractional share.  Such  gain or  loss will  be  long-term
capital gain or loss provided the Debenture has been held for more than one year
at  the time of conversion.  A holder's aggregate tax  basis in the Common Stock
received upon  conversion  will  be equal  to  the  holder's tax  basis  of  the
Debenture  converted,  reduced  by  any  amount  allocable  to  fractional share
interests. A  holder's  holding  period  for  the  Common  Stock  received  upon
conversion  of a  Debenture will  include the  holder's holding  period for such
Debenture.

CONVERSION PRICE ADJUSTMENT

    The conversion price of the Debentures will be adjusted if the Company makes
certain distributions to  holders of  Common Stock or  in the  event of  certain
subdivisions,  combinations  or  reclassifications  of  Common  Stock.  Such  an
adjustment under  certain  circumstances  could be  treated  as  a  constructive
distribution  that is  taxable to a  U.S. Holder of  a Debenture at  the time of
adjustment under Sections 301 and 305 of the Code.

DISPOSITION OF DEBENTURES OR COMMON STOCK

    In general, a U.S. Holder  of a Debenture or the  Common Stock into which  a
Debenture  was converted will recognize gain or  loss upon the sale, exchange or
retirement (including redemptions  but excluding conversion)  of a Debenture  or
Common Stock in an amount equal to the difference between the amount of cash and
the fair market value of any property received (other than in respect of accrued
and  unpaid interest) and such  holder's adjusted tax basis  in the Debenture or
Common Stock (including any market discount previously included in income by the
holder thereof). Such gain or  loss will be capital gain  or loss except to  the
extent of any accrued market discount (see "Market Discount" below), and will be
long-term  capital gain or loss  if the Debenture or  Common Stock has been held
for more than one year at the time of sale, exchange or retirement.

MARKET DISCOUNT

    "Market  discount"  is  defined  generally  as  the  excess  of  the  stated
redemption price at maturity of a debt instrument over the tax basis of the debt
instrument  in the  hands of  the holder  immediately after  its acquisition. In
general, a Debenture in the hands of  an original holder or a Debenture that  is
purchased  at its  stated principal  amount is  not a  market discount  bond. In
addition, under  a de  minimis exception,  there is  no market  discount if  the
excess of the stated redemption price at maturity

                                       51
<PAGE>
of  a Debenture over  the holder's tax basis  therein is less  than 0.25% of the
stated redemption price at maturity of the Debenture multiplied by the number of
complete years remaining to maturity (after the holder acquired the  Debenture).
Market discount generally will accrue ratably during the period from the date of
acquisition  to the maturity date  of the Debenture unless  the holder elects to
accrue such discount on the basis of a constant interest method.

    A U.S. Holder in whose hands a Debenture is a market discount bond generally
will be required to treat  as ordinary income any  gain recognized on the  sale,
exchange, redemption or other disposition of the Debenture (excluding conversion
thereof)  to the  extent of accrued  market discount not  previously included in
taxable income. It  is anticipated  that regulations  will be  issued that  will
provide  that any accrued market discount on  a Debenture that is converted into
Common Stock pursuant to the conversion  feature would be carried over into  the
Common  Stock  received  and  treated  as ordinary  income  of  the  holder upon
disposition of the Common Stock. A U.S. Holder of a Debenture acquired at market
discount also may be required to defer the deduction of all or a portion of  the
interest  on any  indebtedness incurred or  maintained to purchase  or carry the
Debenture until such market discount is included in taxable income.

    A U.S. Holder  of a Debenture  acquired at  a market discount  may elect  to
include  market discount in income  as it accrues. This  election would apply to
all market discount bonds acquired by the electing holder on or after the  first
day  of the first taxable  year to which the  election applies. The election may
not be revoked without the consent of the Internal Revenue Service (the "IRS").

BACKUP WITHHOLDING

    Under federal income tax law, certain  U.S. Holders of Debentures or  Common
Stock  are required to  provide the Company with  such holder's correct taxpayer
identification number ("TIN"). If the holder is an individual, the TIN is his or
her social security number. If the Company is not provided with the correct TIN,
the holder may  be subject to  a $50 penalty  imposed by the  IRS. In  addition,
payments  that are made to such holder (such  as interest on a Debenture) may be
subject to backup  withholding. Certain U.S.  Holders (including, among  others,
corporations)  are  not  subject  to  these  backup  withholding  and  reporting
requirements. The backup withholding  rules will apply only  if the U.S.  Holder
(i)  fails to furnish  its Taxpayer Identification Number  ("TIN") which, for an
individual, would  be his  or  her Social  Security  Number, (ii)  furnishes  an
incorrect  TIN, (iii)  fails to report  properly interest or  dividends, or (iv)
under certain circumstances, fails to certify, under penalty of perjury, that it
has both furnished the  correct TIN and  has not been  notified by the  Internal
Revenue  Service that it is subject to  backup withholding for failure to report
interest and dividend payments.  If backup withholding  applies, the Company  is
required  to withhold 31% of any payment  made to the holder. Backup withholding
is not  an  additional  federal  income tax.  Rather,  the  federal  income  tax
liability of persons subject to backup withholding will be reduced by the amount
of  tax withheld.  If backup  withholding results  in an  overpayment of federal
income taxes,  a refund  may be  obtained  from the  IRS provided  the  required
information  is furnished.  U.S. Holders of  Debentures and  Common Stock should
consult their tax advisors as to  their qualification for exemption from  backup
withholding and the procedure for obtaining such an exemption.

CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS

    The  following  is a  summary of  certain United  States federal  income and
estate tax  consequences  of the  ownership  and disposition  of  Debentures  by
holders who are Non-U.S. Holders (as defined below). This summary discusses only
Debentures  held as  "capital assets"  (as defined in  the Code)  by the holders
thereof. This summary  does not  discuss all  aspects of  United States  federal
income  and estate taxation that may be relevant to a particular Non-U.S. Holder
of  Debentures  in  light  of  its  individual  investment  circumstances.  This
discussion  does not address  the tax consequences  to shareholders, partners or
beneficiaries of  a Non-U.S.  Holder.  Further, it  does not  consider  Non-U.S.
Holders  subject  to special  tax treatment  under the  federal income  tax laws
(including dealers in securities,

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<PAGE>
holders of  securities  held as  part  of  a "straddle,"  hedge  or  "conversion
transaction,"  or  situations  in  which the  "functional  currency"  within the
meaning of Section  985(b) of  the Code  of a holder  is not  the United  States
dollar).

    The  following discussion  is based upon  the Code,  the applicable Treasury
regulations promulgated and proposed thereunder, judicial authority and  current
administrative rulings and practices. All of the foregoing are subject to change
(possibly  on  a  retroactive  basis)  and  any  such  change  could  affect the
continuing validity of this discussion.

    For purposes hereof, a "Non-U.S. Holder" means any person other than: (i)  a
citizen  or resident  of the  United States;  (ii) a  corporation or partnership
created or organized in the United States or under the laws of the United States
or of any  state; or (iii)  any estate or  trust whose income  is includible  in
gross  income for  United States federal  income tax purposes  regardless of its
source. For  purposes of  the withholding  tax on  interest discussed  below,  a
non-resident alien or other non-resident fiduciary of an estate or trust will be
considered a Non-U.S. Holder.

    For  purposes of the  following discussion, interest income  and gain or the
sale, exchange or  retirement of  a Debenture will  be "United  States trade  or
business  income" if  such income  or gain is  (i) effectively  connected with a
trade or business carried on by the Non-U.S. Holder within the United States and
(ii) if a tax treaty applies,  attributable to a permanent establishment (or  in
the  case of  an individual, a  fixed place  of business) in  the United States.
United States trade or business income  would be taxed at regular United  States
federal  income tax rates. See, generally, "Certain United States Federal Income
Tax Considerations for  U.S. Holders" above.  In the case  of a Non-U.S.  Holder
that  is a corporation, such United States  trade or business income may also be
subject to  the branch  profits tax  (which is  generally imposed  on a  foreign
corporation  on  the actual  or deemed  repatriation from  the United  States of
earnings and profits attributable to United States trade or business income)  at
a  30% rate. The  branch profits tax  may not apply  (or may apply  at a reduced
rate) if the recipient is a  qualified resident of certain countries with  which
the United States has an income tax treaty.

CONVERSION OF DEBENTURES

    A Non-U.S. Holder of a Debenture will be treated substantially the same as a
U.S.  Holder upon  the conversion  of the Debenture  into Common  Stock. See "--
Conversion of Debentures" and
"-- Disposition of Debentures or Common Stock" above.

CERTAIN FIRPTA CONSIDERATIONS

    The  foregoing  discussion  for  Non-U.S.  Holders  under  "Disposition   of
Debentures  or Common  Stock" and  "Conversion of  Debentures" assumes  that the
Company is  not considered  a United  States real  property holding  corporation
("USRPHC")  within the meaning of Section 897(c) of the Code. In general, if the
Company is  determined to  be a  USRPHC  then certain  Non-U.S. Holders  may  be
subject  to United States income tax on  the sale, exchange, retirement or other
disposition of  a Debenture  (possibly on  the conversion  of a  Debenture  into
Common Stock) or the converted Common Stock, and to withholding at a rate of 10%
on any such disposition. However, a Non-U.S. Holder will not be subject to these
special  rules even if  the Company is  determined to be  a USRPHC provided that
such  holder  did  not   during  a  specified   five-year  period  actually   or
constructively  own more than 5%  of the Common Stock  of the Company (including
any Common Stock that may be received in exchange for a Debenture).

    Although the Company believes that it  is not presently a USRPHC, there  can
be no assurance that it will not become a USRPHC in the future.

INTEREST

    Payments  of  interest to  a Non-U.S.  Holder  that do  not qualify  for the
portfolio interest exception  discussed below  and which are  not United  States
trade or business income will be subject to withholding of United States federal
income  tax at a rate of 30% unless a United States income tax treaty applies to
reduce the rate of withholding. To claim  a treaty reduced rate or an  exemption
from

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<PAGE>
withholding  because the interest is United States trade or business income, the
Non-U.S. Holder  must  provide a  properly  executed  Form 1001  or  Form  4224,
respectively,  as applicable. The  same rules apply to  dividends paid on Common
Stock received upon conversion of the Debentures.

    Generally, however,  interest  that  is  paid to  a  Non-U.S.  Holder  on  a
Debenture that is not United States trade or business income will not be subject
to  United  States  tax  if  the  interest  qualifies  as  "portfolio interest."
Generally, interest on the Debentures that  is paid by the Company will  qualify
as  portfolio interest  if (i)  the Non-U.S.  Holder does  not own,  actually or
constructively, 10% or more of the total combined voting power of all classes of
stock of  the  Company  entitled  to  vote  and  is  not  a  controlled  foreign
corporation  that is related  to the Company through  stock ownership for United
States federal income tax purposes; (ii) the Non-U.S. Holder is not a bank  that
is  receiving the interest on a loan made in the ordinary course of its trade or
business; and  (iii) the  Company,  or its  paying  agent, received  a  properly
executed  certification signed  under penalties  of perjury  that the beneficial
owner is not  a "U.S. person"  for U.S.  federal income tax  purposes and  which
provides the beneficial owner's name and address.

SALE, EXCHANGE OR RETIREMENT OF DEBENTURES

    Except  as described below,  any gain realized  by a Non-U.S.  Holder on the
sale, exchange or  retirement of Debentures,  generally will not  be subject  to
United  States federal  income tax  provided that  (i) such  gain is  not United
States trade or business income; (ii)  the Non-U.S. Holder is not an  individual
who  is present in the United States for 183 days or more in the taxable year of
the disposition, and meets  certain other requirements;  and (iii) the  Non-U.S.
Holder is not subject to tax pursuant to the provisions of United States tax law
applicable  to certain United  States expatriates. For  the treatment of amounts
received in respect of accrued and unpaid interest, see "-- Interest."

FEDERAL ESTATE TAX

    Debentures held (or  treated as  held) by an  individual who  is a  Non-U.S.
Holder  at the time of  his or her death  (or theretofore transferred subject to
certain retained rights or powers) will not be subject to United States  federal
estate  tax  provided that  any interest  thereon would  be exempt  as portfolio
interest if such interest were  received by the Non-U.S.  Holder at the time  of
his  or her death.  However, shares of  Common Stock into  which a Debenture was
converted, held  by an  individual at  the time  of his  or her  death, will  be
included  in such  holder's gross  estate for  United States  federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.

UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

    The Company generally must report annually  to the IRS and to each  Non-U.S.
Holder  the  amount of  interest paid  to, and  the tax  withheld, if  any, with
respect to, each Non-U.S. Holder. These reporting requirements apply whether  or
not  withholding is reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be  made available under the provisions of  a
specific  treaty or agreement to the tax authorities of the country in which the
Non-U.S. Holder resides. Payments of principal to a Non-U.S. Holder will not  be
subject to information reporting if the holder has provided certification of its
Non-U.S. Holder status.

    The  United States backup withholding tax (in  general, a tax imposed at the
rate of 31% on payments to persons that fail to furnish the information required
under the United States information  reporting requirements) will generally  not
apply  to payments of  interest that qualify as  portfolio interest as described
above (provided that the Company  has no actual knowledge  that the holder is  a
U.S. person).

    Payments  of the proceeds of the sale  of Debentures to or through a foreign
office of  a "broker"  (as defined  in the  pertinent regulations)  will not  be
subject  to information reporting if  the broker is a  U.S. person, a controlled
foreign corporation for United States federal income tax purposes, or a  foreign
person  50% or  more of  whose gross  income is  from a  United States  trade or
business for a specified three-year period, unless the broker has in its records
documentary evidence that the holder is not a U.S. person and certain conditions
are  met   (including   that  the   broker   has  no   actual   knowledge   that

                                       54
<PAGE>
the  holder is a U.S. person) or  the holder otherwise establishes an exemption.
The United States  Treasury Department  has indicated  that it  is studying  the
possible  application of  backup withholding in  the case of  foreign offices of
United States and United  States-related brokers. Payment of  the proceeds of  a
sale  to or through  the United States office  of a broker  is subject to backup
withholding and information reporting, unless the holder certifies that it is  a
Non-U.S.   Holder  under  penalties  of  perjury  or  otherwise  establishes  an
exemption.

    Any amount withheld under the backup  withholding rules from a payment to  a
Non-U.S. Holder will be allowed as a credit against, or refund of, such holder's
regular  federal  income tax  liability,  provided that  certain  information is
provided to the IRS.

                          DESCRIPTION OF CAPITAL STOCK

   
    The authorized  capital stock  of Mercury  consists of  9,000,000 shares  of
Common Stock, par value $.01 per share, and 3,000,000 shares of preferred stock,
par value $.01 per share ("Preferred Stock"), As of December 31, 1995 there were
5,380,087  outstanding shares of Common Stock.  There are no shares of Preferred
Stock of any designation issued or outstanding.
    

   
    As of December 31, 1995 Mercury had reserved 548,285 shares of Common  Stock
for  issuance  pursuant  to  outstanding  options,  warrants  and  a convertible
debenture.
    

COMMON STOCK

    All shares  of Common  Stock  have equal  voting, dividend  and  liquidation
rights.  Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a  vote of shareholders, and holders are  not
entitled  to cumulative voting  in the election of  directors. Holders of Common
Stock are  entitled  to such  dividends  as may  be  declared by  the  Board  of
Directors  out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of Mercury,  the holders of Common Stock are  entitled
to  receive all assets remaining after  payment of liabilities and after payment
of any preference  to holders of  preferred stock. Holders  of shares of  Common
Stock have no conversion, preemptive or other rights to subscribe for additional
shares  and the  shares are  not subject to  redemption. All  of the outstanding
shares  of  Common  Stock  are  legally  and  validly  issued,  fully  paid  and
nonassessable.

PREFERRED STOCK

    Mercury's  Articles  of  Incorporation  authorize  the  issuance  of  up  to
3,000,000 shares of preferred stock with  such rights and preferences as may  be
determined  from time to time by the  Board of Directors. Accordingly, the Board
of Directors  may,  without shareholder  approval,  issue preferred  stock  with
dividend,  liquidation, conversion, voting or other rights which could adversely
affect the rights,  value and liquidity  of the Common  Stock. In addition,  the
issuance  of shares  of preferred  stock may have  the effect  of rendering more
difficult an acquisition of Mercury or a change in control of Mercury. There are
no shares  of preferred  stock of  any designation  issued or  outstanding,  and
Mercury has no present plans to issue shares of preferred stock.

REGISTRATION RIGHTS

    Mercury  has  reserved  18,335  shares of  Common  Stock  for  issuance upon
exercise of outstanding  underwriter warrants  which have an  exercise price  of
$3.82 and an expiration date of June 1996. The holder of the underwriter warrant
has the right to require Mercury to register such shares.

TRANSFER AGENT AND REGISTRAR

    The  American  Stock Transfer  &  Trust Company  is  the transfer  agent and
registrar for the Common Stock.

                                       55
<PAGE>
                                  UNDERWRITING

    Subject to the terms and conditions set forth in the Underwriting  Agreement
between  Mercury and each of the  Underwriters named below (the "Underwriters"),
for whom  EVEREN  Securities, Inc.  and  Crowell, Weedon  &  Co. are  acting  as
representatives  (the "Representatives"), the Company has agreed to sell to each
such Underwriter, and each of such Underwriters has severally agreed to purchase
from the Company,  the aggregate principal  amount of the  Debentures set  forth
opposite each Underwriter's name below:

<TABLE>
<CAPTION>
                                                                              PRINCIPAL AMOUNT
UNDERWRITER                                                                    OF DEBENTURES
- ----------------------------------------------------------------------------  ----------------
<S>                                                                           <C>
EVEREN Securities, Inc......................................................
Crowell, Weedon & Co........................................................

                                                                              ----------------
    Total...................................................................   $   25,000,000
                                                                              ----------------
                                                                              ----------------
</TABLE>

    Under   the  terms  and  conditions   of  the  Underwriting  Agreement,  the
Underwriters are obligated severally to  purchase all of the Debentures  offered
hereby  (other than those covered by  the over-allotment option described below)
if any Debentures are purchased.

    The Underwriters  have  advised  Mercury  that they  propose  to  offer  the
Debentures  to the public at the price to  public set forth on the cover page of
this Prospectus and that the Underwriters may allow certain dealers a concession
not to exceed     % of the  principal amount  of the Debentures,  of which  such
dealers  may reallow a concession not  to exceed   %  of the principal amount of
the Debentures to certain other dealers.  After the Debentures are released  for
sale to the public, the public offering price and the other selling terms may be
changed by the Representatives.

    Mercury  has granted  the Underwriters  an option,  exercisable for  30 days
after the  date of  this  Prospectus, to  purchase  up to  $3,750,000  aggregate
principal  amount of Debentures  at the price  to public set  forth on the cover
page of this Prospectus less the underwriters discount and commissions solely to
cover over-allotments. Such option  may be exercised at  any time until 30  days
after  the date of this Prospectus. To the extent that the Underwriters exercise
such option, each  of the  Underwriters will  be committed,  subject to  certain
conditions,   to  purchase  a   number  of  Debentures   proportionate  to  such
Underwriter's initial commitment as indicated in the preceding table.

    Mercury  has   agreed  to   indemnify  the   Underwriters  against   certain
liabilities, including liabilities under the Securities Act of 1933.

    Prior to this offering, there has been no established trading market for the
Debentures.  The initial price to public  for the Debentures offered hereby will
be determined by negotiation  among the Company  and the Representatives.  There
can  be no assurance, however, that the prices at which the Debentures will sell
in the public market  after this offering  will not be lower  than the price  at
which  the Debentures  are sold  to the  public by  the Underwriters.  See "Risk
Factors --Limited Market for Debentures."

                                    EXPERTS

    The consolidated financial  statements of Mercury  as of June  30, 1995  and
1994,  and  for each  of the  three years  in  the period  ended June  30, 1995,
included in  this  Prospectus  and  the  related  financial  statement  schedule
included elsewhere in the Registration Statement have been audited by Deloitte &
Touche  LLP, independent auditors,  as stated in  their reports appearing herein
and elsewhere  in  the Registration  Statement  and  have been  so  included  in
reliance  upon the reports of such firm given upon their authority as experts in
accounting and auditing.

                                       56
<PAGE>
                                 LEGAL MATTERS

    The validity of the Debentures offered hereby and the Common Stock  issuable
upon  conversion  thereof and  certain  other matters  will  be passed  upon for
Mercury by McBreen, McBreen & Kopko, Chicago, Illinois. Frederick H. Kopko,  Jr.
is  a member of that firm, a director of Mercury and beneficially owns an option
to acquire 33,000  shares of Mercury's  Common Stock. Certain  legal matters  in
connection with the offering will be passed upon for the Underwriters by Orrick,
Herrington & Sutcliffe, San Francisco, California.

                                       57
<PAGE>
                            MERCURY AIR GROUP, INC.
                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                    <C>
Independent Auditors' Report.........................................................        F-2
Consolidated Balance Sheets at June 30, 1994 and 1995 and September 30, 1995.........        F-3
Consolidated Statements of Income for the Years Ended June 30, 1993, 1994 and 1995
 and the Three Months Ended September 30, 1994 and 1995..............................        F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and
 1995 and the Three Months Ended September 30, 1994 and 1995.........................        F-5
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1993,
 1994 and 1995 and the Three Months Ended September 30, 1995.........................        F-6
Notes to Consolidated Financial Statements...........................................        F-7
</TABLE>

                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

Mercury Air Group, Inc.
Los Angeles, California

    We  have audited the accompanying consolidated balance sheets of Mercury Air
Group, Inc. and  subsidiaries as  of June  30, 1995  and 1994,  and the  related
consolidated  statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1995. These financial statements
are the responsibility  of the  Company's management. Our  responsibility is  to
express an opinion on these financial statements.

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

    In  our opinion, such  consolidated financial statements  present fairly, in
all material respects,  the financial position  of Mercury Air  Group, Inc.  and
subsidiaries  as of June 30, 1995 and  1994, and the results of their operations
and their cash flows for  each of the three years  in the period ended June  30,
1995 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Los Angeles, California
September 15, 1995

                                      F-2
<PAGE>
                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                JUNE 30,
                                                                        ------------------------  SEPTEMBER 30,
                                                                           1994         1995          1995
                                                                        -----------  -----------  -------------
                                                                                                   (UNAUDITED)
<S>                                                                     <C>          <C>          <C>
CURRENT ASSETS:
  Cash and cash equivalents...........................................  $ 1,770,000  $   831,000  $   529,000
  Trade accounts receivable, net of allowance for doubtful accounts of
    $508,000 at 6/30/94, $610,000 at 6/30/95 and $810,000 at 9/30/95
    (Note 9)..........................................................   17,164,000   33,269,000   35,992,000
  Notes receivable -- current portion.................................      185,000       50,000       60,000
  Inventories (Notes 3 and 9).........................................      951,000    3,283,000    3,071,000
  Prepaid expenses and other current assets...........................    1,297,000    1,822,000    1,573,000
                                                                        -----------  -----------  -------------
    Total current assets..............................................   21,367,000   39,255,000   41,225,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated depreciation
  and amortization of $18,277,000 at 6/30/94, $20,391,000 at 6/30/95
  and $20,995,000 at 9/30/95 (Notes 5, 9 and 16)......................   12,570,000   12,219,000   14,883,000
NOTES RECEIVABLE, net of current portion..............................      186,000      136,000      197,000
OTHER ASSETS (Notes 6 and 16).........................................    1,319,000    2,600,000    3,186,000
                                                                        -----------  -----------  -------------
                                                                        $35,442,000  $54,210,000  $59,491,000
                                                                        -----------  -----------  -------------
                                                                        -----------  -----------  -------------

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable....................................................  $ 6,920,000  $12,998,000  $15,187,000
  Accrued expenses and other current liabilities (Note 7).............    2,078,000    3,008,000    1,913,000
  Income taxes payable (Note 8).......................................      699,000      114,000      846,000
  Current portion of long-term debt (Note 9)..........................    2,317,000    2,607,000    2,791,000
                                                                        -----------  -----------  -------------
    Total current liabilities.........................................   12,014,000   18,727,000   20,737,000
LONG-TERM DEBT (Note 9)...............................................    8,650,000   17,104,000   20,011,000
DEFERRED INCOME TAXES (Note 8)........................................      218,000        8,000        8,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY (Note 4).................      924,000
                                                                        -----------  -----------  -------------
    Total liabilities.................................................   21,806,000   35,839,000   40,756,000
                                                                        -----------  -----------  -------------
COMMITMENTS AND CONTINGENCIES (Note 12)...............................
STOCKHOLDERS' EQUITY (Notes 9, 10 and 11):
  Preferred Stock -- $.01 par value; authorized 3,000,000 shares; no
    shares outstanding
  Common Stock -- $ .01 par value; authorized 9,000,000 shares;
    outstanding 4,905,779 shares at 6/30/94, 5,524,257 shares at
    6/30/95; and 5,371,087 shares at 9/30/95..........................       49,000       55,000       54,000
  Additional Paid-in Capital..........................................    9,187,000   14,992,000   14,611,000
  Retained Earnings...................................................    4,555,000    3,479,000    4,225,000
  Treasury Stock -- 32,000 shares of common stock at 6/30/94; 35,200
    shares of common stock at 6/30/95 and 9/30/95.....................     (155,000)    (155,000)    (155,000)
                                                                        -----------  -----------  -------------
    Total stockholders' equity........................................   13,636,000   18,371,000   18,735,000
                                                                        -----------  -----------  -------------
                                                                        $35,442,000  $54,210,000  $59,491,000
                                                                        -----------  -----------  -------------
                                                                        -----------  -----------  -------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                                           THREE MONTHS ENDED
                                                                        YEAR ENDED JUNE 30,                  SEPTEMBER 30,
                                                              ---------------------------------------  --------------------------
                                                                 1993          1994          1995          1994          1995
                                                              -----------  ------------  ------------  ------------  ------------
                                                                                                              (UNAUDITED)
<S>                                                           <C>          <C>           <C>           <C>           <C>
Sales and Revenues (Note 13):
  Sales.....................................................  $57,186,000  $ 68,991,000  $145,166,000  $ 26,155,000  $ 42,214,000
  Service revenues..........................................   27,357,000    34,078,000    37,834,000     9,399,000     9,666,000
                                                              -----------  ------------  ------------  ------------  ------------
                                                               84,543,000   103,069,000   183,000,000    35,554,000    51,880,000
                                                              -----------  ------------  ------------  ------------  ------------
Costs and Expenses:
  Cost of sales.............................................   50,804,000    61,060,000   132,838,000    23,666,000    38,747,000
  Operating expenses........................................   24,836,000    29,344,000    33,589,000     8,037,000     8,536,000
                                                              -----------  ------------  ------------  ------------  ------------
                                                               75,640,000    90,404,000   166,427,000    31,703,000    47,283,000
                                                              -----------  ------------  ------------  ------------  ------------
    Operating Income........................................    8,903,000    12,665,000    16,573,000     3,851,000     4,597,000
                                                              -----------  ------------  ------------  ------------  ------------
Other Expenses (Income):
  Selling, general and administrative (Note 6)..............    3,879,000     4,261,000     5,363,000     1,190,000     1,473,000
  Depreciation and amortization.............................    1,680,000     2,049,000     2,409,000       606,000       623,000
  Interest expense..........................................    1,084,000     1,080,000     1,478,000       302,000       437,000
  Interest income...........................................     (171,000)     (140,000)      (84,000)      (13,000)      (12,000)
  Minority interest (Note 4)................................      128,000       246,000        95,000        42,000
  Gain-legal judgement (Note 2).............................   (1,060,000)
                                                              -----------  ------------  ------------  ------------  ------------
                                                                5,540,000     7,496,000     9,261,000     2,127,000     2,521,000
                                                              -----------  ------------  ------------  ------------  ------------
Income Before Income Taxes..................................    3,363,000     5,169,000     7,312,000     1,724,000     2,076,000
Provision for Income Taxes (Note 8).........................    1,413,000     2,174,000     3,005,000       722,000       844,000
                                                              -----------  ------------  ------------  ------------  ------------
Net Income..................................................  $ 1,950,000  $  2,995,000  $  4,307,000  $  1,002,000  $  1,232,000
                                                              -----------  ------------  ------------  ------------  ------------
                                                              -----------  ------------  ------------  ------------  ------------
Net Income applicable to Common Stock.......................  $ 1,496,000  $  2,920,000  $  4,307,000  $  1,002,000  $  1,232,000
                                                              -----------  ------------  ------------  ------------  ------------
                                                              -----------  ------------  ------------  ------------  ------------
Net Income Per Common Share and Common Equivalent Share
  (Primary) (Note 14).......................................  $      0.62  $       0.75  $       0.76  $       0.18  $       0.22
                                                              -----------  ------------  ------------  ------------  ------------
                                                              -----------  ------------  ------------  ------------  ------------
Net Income Per Common Share-Assuming Full Dilution (Note
  14).......................................................  $      0.39  $       0.59  $       0.76  $       0.18  $       0.22
                                                              -----------  ------------  ------------  ------------  ------------
                                                              -----------  ------------  ------------  ------------  ------------
Weighted Average Number of Shares of Common Stock (Note
  14).......................................................    2,431,549     3,719,884     5,420,158     5,354,000     5,415,000
                                                              -----------  ------------  ------------  ------------  ------------
                                                              -----------  ------------  ------------  ------------  ------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                THREE MONTHS ENDED
                                                              YEAR ENDED JUNE 30,                 SEPTEMBER 30,
                                                     --------------------------------------  ------------------------
                                                        1993         1994          1995         1994         1995
                                                     -----------  -----------  ------------  -----------  -----------
                                                                                                   (UNAUDITED)
<S>                                                  <C>          <C>          <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income.......................................  $ 1,950,000  $ 2,995,000  $  4,307,000  $ 1,002,000  $ 1,232,000
  Adjustments to derive cash flow from operating
    activities:
    Depreciation and amortization..................    1,680,000    2,049,000     2,409,000      606,000      623,000
    Minority interest..............................      128,000      246,000        95,000       42,000
    Amortization of officers' loans................      154,000      154,000       140,000       39,000       39,000
    Increase (decrease) in deferred income taxes...      229,000     (651,000)     (210,000)
  Changes in operating assets and liabilities:
    Trade and other accounts receivable............   (3,929,000)    (474,000)  (16,105,000)  (6,461,000)  (2,377,000)
    Inventories....................................       84,000     (103,000)   (2,332,000)    (606,000)     212,000
    Prepaid expenses and other current assets......      398,000     (304,000)     (525,000)     207,000      249,000
    Accounts payable...............................      459,000      150,000     6,078,000    3,470,000    1,721,000
    Income taxes payable...........................      351,000      348,000      (368,000)     181,000      732,000
    Accrued expenses and other current
      liabilities..................................      162,000      (43,000)      930,000     (917,000)  (1,095,000)
                                                     -----------  -----------  ------------  -----------  -----------
      Net cash provided by (used in) operating
        activities.................................    1,666,000    4,367,000    (5,581,000)  (2,437,000)   1,336,000
                                                     -----------  -----------  ------------  -----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of investment.................                   300,000
  Decrease in notes receivable.....................      261,000      677,000       185,000       15,000      (71,000)
  Addition to other assets.........................     (265,000)    (259,000)     (632,000)     (78,000)    (640,000)
  Additions to property, equipment and
    leaseholds.....................................   (2,538,000)  (1,933,000)   (1,574,000)    (167,000)    (561,000)
                                                     -----------  -----------  ------------  -----------  -----------
      Net cash used in investing activities........   (2,542,000)  (1,215,000)   (2,021,000)    (230,000)  (1,272,000)
                                                     -----------  -----------  ------------  -----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment of dividend on common stock..............                                (100,000)                  (55,000)
  Proceeds from long-term debt.....................    3,461,000    2,876,000    10,752,000    2,720,000    1,829,000
  Reduction of long-term debt......................   (1,952,000)  (5,902,000)   (2,443,000)    (589,000)  (1,327,000)
  Payment of dividend on preferred stock...........     (454,000)     (75,000)
  Issuance of common stock.........................                 3,097,000       379,000       13,000        7,000
  Repurchase and retire preferred and common stock
    and warrants...................................      (50,000)  (1,917,000)   (1,475,000)    (542,000)    (820,000)
  Redemption by subsidiary of common stock owned by
    minority shareholder...........................                                (450,000)
                                                     -----------  -----------  ------------  -----------  -----------
      Net cash provided by (used in) financing
        activities.................................    1,005,000   (1,921,000)    6,663,000    1,602,000     (366,000)
                                                     -----------  -----------  ------------  -----------  -----------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS......................................      129,000    1,231,000      (939,000)  (1,065,000)    (302,000)
CASH AND CASH EQUIVALENTS, beginning of period.....      410,000      539,000     1,770,000    1,770,000      831,000
                                                     -----------  -----------  ------------  -----------  -----------
CASH AND CASH EQUIVALENTS, end of period...........  $   539,000  $ 1,770,000  $    831,000  $   705,000  $   529,000
                                                     -----------  -----------  ------------  -----------  -----------
                                                     -----------  -----------  ------------  -----------  -----------
CASH PAID DURING THE PERIOD:
  Interest.........................................  $ 1,084,000  $ 1,080,000  $  1,478,000  $   302,000  $   437,000
  Income taxes.....................................  $   645,000  $ 2,477,000  $  3,607,000  $   542,000  $   112,000

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
  FINANCING ACTIVITIES:
  Direct financing for purchase of equipment and
    property.......................................  $ 1,425,000  $ 2,518,000  $    435,000
  Cancellation of a note receivable and other
    assets as consideration for the purchase of
    leasehold property.............................               $   540,000
  Issuance of 225,000 common shares in exchange for
    the remaining minority interest of Mercury Air
    Cargo, Inc.....................................                            $  1,406,000
  Issuance of notes payable for the acquisition of
    assets (Note 16)...............................                                                       $ 2,016,000
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                               SERIES A                                                          COMMON STOCK
                                            PREFERRED STOCK       COMMON STOCK                                    IN TREASURY
                                          -------------------  ------------------  ADDITIONAL                ---------------------
                                          NUMBER OF            NUMBER OF             PAID-IN     RETAINED    NUMBER OF
                                           SHARES     AMOUNT    SHARES    AMOUNT     CAPITAL     EARNINGS     SHARES      AMOUNT
                                          ---------   -------  ---------  -------  -----------  -----------  ---------   ---------
<S>                                       <C>         <C>      <C>        <C>      <C>          <C>          <C>         <C>
BALANCE, June 30, 1992..................   575,000    $6,000   2,206,191  $22,000  $ 7,049,000  $ 1,167,000   32,000     $(155,000)
  Net income............................                                                          1,950,000
  Series A Preferred Stock converted
    into Common Stock...................   (12,002)              48,008
  Cash Dividend on Series A Preferred
    Stock...............................                                                           (454,000)
  Repurchase and retire Preferred
    Stock...............................    (4,000)                                    (32,000)     (17,000)
                                          ---------   -------  ---------  -------  -----------  -----------  ---------   ---------
BALANCE, June 30, 1993..................   558,998     6,000   2,254,199   22,000    7,017,000    2,646,000   32,000      (155,000)
  Net income............................                                                          2,995,000
  Cash Dividend on Series A Preferred
    Stock...............................                                                            (75,000)
  Repurchase and retire Preferred
    Stock...............................   (80,256)   (1,000 )                        (640,000)    (475,000)
  Series A Preferred Stock converted
    into Common Stock...................  (478,742)   (5,000 ) 1,914,968   19,000      (14,000)
  Repurchase and retire Common Stock....                       (169,200 )  (1,000)    (264,000)    (536,000)
  Common Stock issued on exercise of
    warrants and options................                        905,812     9,000    3,088,000
                                          ---------   -------  ---------  -------  -----------  -----------  ---------   ---------
BALANCE, June 30, 1994..................         0         0   4,905,779   49,000    9,187,000    4,555,000   32,000      (155,000)
  Net income............................                                                          4,307,000
  Cash Dividend on Common Stock.........                                                           (100,000)
  Repurchase and retire Common Stock....                       (236,300 )  (2,000)    (450,000)  (1,022,000)
  Common Stock issued on exercise of
    warrants and options................                        128,532     1,000      378,000
  Tax benefit from exercise of stock
    options.............................                                               217,000
  Common stock issued in exchange for
    the remaining minority interest of
    Mercury Air Cargo, Inc..............                        225,000     2,000    1,404,000
  Issue 10% stock dividend..............                        501,246     5,000    4,256,000   (4,261,000)   3,200
                                          ---------   -------  ---------  -------  -----------  -----------  ---------   ---------
BALANCE, June 30, 1995..................         0         0   5,524,257   55,000   14,992,000    3,479,000   35,200      (155,000)
  Net income............................                                                          1,232,000
  Repurchase and retire Common Stock....                       (155,420 )  (2,000)    (387,000)    (431,000)
  Common Stock issued on exercise of
    options.............................                          2,250     1,000        6,000
  Cash dividend on Common Stock.........                                                            (55,000)
                                          ---------   -------  ---------  -------  -----------  -----------  ---------   ---------
BALANCE, September 30, 1995
  (unaudited)...........................         0    $    0   5,371,087  $54,000  $14,611,000  $ 4,225,000   35,200     $(155,000)
                                          ---------   -------  ---------  -------  -----------  -----------  ---------   ---------
                                          ---------   -------  ---------  -------  -----------  -----------  ---------   ---------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    BUSINESS

    Mercury  Air Group,  Inc. and  subsidiaries (the  "Company") are principally
engaged in the  conduct of cargo  handling, cargo general  sales agency and  air
cargo  space  brokerage,  and  the  sale  and  delivery  of  aviation  fuels  to
commercial, air courier and commuter airlines, and to general aviation aircraft.
The Company also provides ground support services to U.S. military aircraft.

    PRINCIPLES OF CONSOLIDATION

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

    CASH AND CASH EQUIVALENTS

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

    INVENTORIES

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

    PROPERTY, EQUIPMENT AND LEASEHOLDS

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

    COST IN EXCESS OF NET ASSETS ACQUIRED

    Cost  in excess of net  assets acquired arose in  the acquisitions of Maytag
Aircraft Corporation, a wholly-owned subsidiary, in 1984, the minority  interest
in  Mercury Air Cargo, Inc. in November  1994 and Excel Cargo, Inc. in September
1995. Such costs are being amortized  on the straight-line method over 40  years
with  respect to Maytag Aircraft Corporation and  Mercury Air Cargo, Inc. and 15
years with respect to Excel Cargo, Inc. The Company assesses recoverability on a
periodic basis. Factors included in evaluating recoverability include historical
earnings and projected future earnings of the operations.

    REVENUE RECOGNITION

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

    INCOME TAXES

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

    INCOME PER SHARE

    Per   share  data  is  based  on  the  weighted  average  number  of  shares
outstanding, after  giving  effect  to the  cumulative  dividend  on  cumulative
preferred  stock,  and common  stock equivalents,  excluding those  common stock
equivalents that would increase the income per share.

    FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                      F-7
<PAGE>
    INTERIM REPORTING

    The accompanying  unaudited  financial statements  reflect  all  adjustments
(consisting  of normal, recurring  accruals only) which  are necessary to fairly
present the results for the interim  periods. The results of operations for  the
three  months ended September 30, 1995 are not necessarily indicative of results
for the full year.

NOTE 2 -- GAIN-LEGAL JUDGMENT:

    The Company recorded a pretax gain of $1,060,000 in fiscal 1993 related to a
recovery obtained from a legal judgment which arose following the bankruptcy  of
a former significant customer.

NOTE 3 -- INVENTORIES:

    Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                        JUNE 30,
                                                               --------------------------  SEPTEMBER 30,
                                                                  1994          1995           1995
                                                               -----------  -------------  -------------
<S>                                                            <C>          <C>            <C>
Aviation fuel................................................  $   757,000  $   3,166,000   $ 2,955,000
Supplies and parts...........................................      194,000        117,000       116,000
                                                               -----------  -------------  -------------
                                                               $   951,000  $   3,283,000   $ 3,071,000
                                                               -----------  -------------  -------------
                                                               -----------  -------------  -------------
</TABLE>

NOTE 4 -- RELATED PARTY TRANSACTIONS:

    Twenty  percent  of Mercury  Air Cargo,  Inc. ("MAC"),  a subsidiary  of the
Company, was owned by a company which is wholly-owned by an executive officer of
Mercury Air Group, Inc.  The minority interest  share in the  net income of  MAC
resulting  from this ownership  amounted to $95,000  (1995), $246,000 (1994) and
$128,000 (1993). In November 1994,  the Company acquired the remaining  minority
interest from the executive officer. The transaction included a redemption of 5%
in  exchange for $450,000 in  cash and acquisition of  the remaining 15% through
the issuance  of 247,500  common  shares (after  adjustment  for the  10%  stock
dividend)  valued at $1,406,000  ($5.68 per share) for  a total consideration of
$1,856,000. The acquisition of the minority interest has been accounted for as a
purchase  and,  accordingly,  the  excess  of  the  cost  over  the  book  value
($1,019,000)  of  the  shares  acquired  is  included  in  other  assets  in the
accompanying consolidated balance sheet at June 30, 1995 (See note 6).

NOTE 5 -- PROPERTY, EQUIPMENT AND LEASEHOLDS:

    Property, equipment and leaseholds consist of the following:

<TABLE>
<CAPTION>
                                                                                   JUNE 30,
                                                                        -------------------------------
                                                                             1994            1995
                                                                        --------------  ---------------
<S>                                                                     <C>             <C>
Land, buildings and leasehold improvements............................  $   15,230,000  $    16,187,000
Equipment, furniture and fixtures.....................................      15,509,000       16,391,000
Construction in progress..............................................         108,000           32,000
                                                                        --------------  ---------------
                                                                            30,847,000       32,610,000
Less accumulated depreciation and amortization........................     (18,277,000)     (20,391,000)
                                                                        --------------  ---------------
                                                                        $   12,570,000  $    12,219,000
                                                                        --------------  ---------------
                                                                        --------------  ---------------
</TABLE>

                                      F-8
<PAGE>
NOTE 6 -- OTHER ASSETS:

    Other assets consist of the following:

<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                    ----------------------
                                                       1994        1995
                                                    ----------  ----------
<S>                                                 <C>         <C>
Cost in excess of net assets acquired.............  $  665,000  $1,466,000
Deferred lease cost...............................      38,000      26,000
Other assets......................................     404,000     698,000
Loans to officers.................................     212,000     410,000
                                                    ----------  ----------
                                                    $1,319,000  $2,600,000
                                                    ----------  ----------
                                                    ----------  ----------
</TABLE>

    Cost in excess of net assets acquired includes $823,000 which arose from the
Company's acquisition of the  outstanding minority interest  in MAC in  November
1994. (See note 4)

    In  1991, four  executive officers  of the  Company each  agreed to purchase
110,000 (after adjustment for  the 10% stock dividend)  shares of the  Company's
stock  from a company owned by the Chairman and Chief Executive Officer at $2.73
per share pursuant  to a  Stock Purchase Agreement  ("Agreement'). The  officers
each  paid $30,000 in  cash, or $120,000, with  the remaining aggregate purchase
price of $1,080,000 to be paid over a  five year period ending in 1996. As  part
of  the  Agreement  to  purchase  the stock,  the  Company  agreed  to  loan the
executives the  $1,080,000 in  quarterly installments.  Beginning in  1994,  one
fifth  of the amount ultimately  to be loaned will be  forgiven each year over a
five year period ending  in 1998 provided  each of the  officers remains in  the
employ of the Company.

    In  1994, a fifth executive officer  of the Company purchased 110,000 shares
(after adjustment for  the 10%  stock dividend) of  the Company's  stock from  a
company  owned by the  Chairman and Chief  Executive Officer at  $2.73 per share
pursuant to a  Stock Purchase  Agreement similar  to the  agreements above.  The
officer paid $30,000 in cash with the remaining purchase price of $270,000 to be
paid over a five year period ending in 1998.

    The  Company  agreed  to  loan  the  executive  the  $270,000  in  quarterly
installments. Beginning  in 1996,  one fifth  of  the amount  to be  loaned,  or
$54,000,  will be  forgiven each  year over  a five  year period  ending in 2000
provided the officer remains in the employ of the Company.

    For accounting purposes,  the amounts subject  to forgiveness of  $1,080,000
and  $270,000 are being  treated as additional compensation  over the seven year
period from the date of the Agreements through 1998 and 2000, respectively.  The
loans  to officers are increased  by actual amounts advanced  by the Company and
are decreased  annually,  by  one-seventh  of the  amount  to  be  forgiven,  or
approximately  $154,000 through fiscal 1994 and  $140,000 in 1995. In July 1995,
one of  the executive  officers resigned  resulting in  the elimination  of  any
future  forgiveness with  respect to  that officer's  loan. In  August 1995, the
Company  repurchased  this  officer's  stock  for  $453,000,  less  the  balance
outstanding on the loan.

NOTE 7 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

    Accrued expenses and other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                    ----------------------
                                                       1994        1995
                                                    ----------  ----------
<S>                                                 <C>         <C>
Salaries and wages................................  $1,393,000  $1,918,000
Other.............................................     685,000   1,090,000
                                                    ----------  ----------
                                                    $2,078,000  $3,008,000
                                                    ----------  ----------
                                                    ----------  ----------
</TABLE>

                                      F-9
<PAGE>
NOTE 8 -- INCOME TAXES:

    The provision for taxes on income from continuing operations consists of the
following:

<TABLE>
<CAPTION>
                                                 YEAR ENDED JUNE 30,
                                          ----------------------------------
                                             1993        1994        1995
                                          ----------  ----------  ----------
<S>                                       <C>         <C>         <C>
Federal, current........................  $  944,000  $2,262,000  $2,565,000
State, current..........................     240,000     563,000     650,000
                                          ----------  ----------  ----------
                                           1,184,000   2,825,000   3,215,000
Deferred, primarily federal.............     229,000    (651,000)   (210,000)
                                          ----------  ----------  ----------
  Net provision.........................  $1,413,000  $2,174,000  $3,005,000
                                          ----------  ----------  ----------
                                          ----------  ----------  ----------
</TABLE>

    Deferred  taxes arise from  the recognition of certain  items of revenue and
expense for  tax  purposes in  years  different from  those  in which  they  are
recognized in the financial statements.

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

<TABLE>
<CAPTION>
                                                JUNE 30,
                                          --------------------
                                            1994       1995
                                          ---------  ---------
<S>                                       <C>        <C>
Depreciation/amortization...............  $ 337,000  $ 150,000
Deferred and prepaid expenses...........    258,000    275,000
State income taxes......................   (191,000)  (209,000)
Allowance for doubtful accounts.........   (186,000)  (244,000)
Miscellaneous...........................                36,000
                                          ---------  ---------
                                          $ 218,000  $   8,000
                                          ---------  ---------
                                          ---------  ---------
</TABLE>

    The  components of the deferred tax provision  prior to the adoption of SFAS
109 consisted of:

<TABLE>
<CAPTION>
                                          YEAR ENDED
                                           JUNE 30,
                                             1993
                                          -----------
<S>                                       <C>
Excess of book over tax depreciation....  $   (57,000)
Allowance for bad debts.................       96,000
Deferred expenses.......................      (79,000)
Amortization of officers loans..........      (62,000)
Gain -- legal judgement.................      445,000
State income taxes and miscellaneous....     (114,000)
                                          -----------
                                          $   229,000
                                          -----------
                                          -----------
</TABLE>

    The reconciliation of the federal statutory rate to the Company's  effective
tax rate on income is summarized as follows:

<TABLE>
<CAPTION>
                                          YEAR ENDED JUNE 30,
                                          --------------------
                                          1993    1994    1995
                                          -----   -----   ----
<S>                                       <C>     <C>     <C>
Computed "expected" tax rate............   34%     34%    34%
State income taxes, net of federal
  income tax benefit....................    6       6      6
Other...................................    2       2      1
                                          -----   -----   ----
Effective rate..........................   42%     42%    41%
                                          -----   -----   ----
                                          -----   -----   ----
</TABLE>

                                      F-10
<PAGE>
NOTE 9 -- LONG-TERM DEBT:

    Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                      JUNE 30,           SEPTEMBER
                                                              ------------------------      30,
                                                                 1994         1995         1995
                                                              -----------  -----------  -----------
<S>                                                           <C>          <C>          <C>
Notes payable to banks......................................  $ 6,251,000  $14,870,000  $16,325,000
Installment notes, payable to financial institutions in
  monthly installments aggregating approximately $70,000 at
  June 30, 1995 including interest from 7.23% to 11.85%,
  collateralized by certain assets of the Company and
  maturing from 1995 through 1999...........................    2,288,000    2,075,000    1,911,000
Mortgage payable to financial institution in monthly
  principal installments of $9,750 plus interest at 7.5% per
  annum, collateralized by land and building, maturing in
  April 2004................................................    1,151,000    1,034,000    1,004,000
Mortgage payable to financial institution in monthly
  installments of $4,447 including interest at 9% per annum,
  collateralized by land and building, maturing in May
  2010......................................................                   434,000      431,000
Note payable to seller of assets and leasehold at
  Bakersfield, California due in December 2004, interest at
  prime (9.00% at June 30, 1995), collateralized by property
  acquired, which is principally a leasehold................    1,093,000    1,017,000    1,000,000
Note payable to seller of assets and leasehold at
  Bakersfield, California due in November 1997, interest at
  10%.......................................................      169,000      126,000      115,000
Debenture payable to Seller of Excel assets due in September
  2003, interest at 8.5% per annum, collateralized by
  property acquired.........................................                              2,016,000
Other.......................................................       15,000      155,000
                                                              -----------  -----------  -----------
                                                               10,967,000   19,711,000   22,802,000
Less current portion........................................    2,317,000    2,607,000    2,791,000
                                                              -----------  -----------  -----------
                                                              $ 8,650,000  $17,104,000  $20,011,000
                                                              -----------  -----------  -----------
                                                              -----------  -----------  -----------
</TABLE>

    Notes  payable to  banks at  June 30, 1995  consists of  a term  loan in the
amount of  $4,752,000, which  is payable  in monthly  payments of  approximately
$125,000  plus interest at prime plus 3/4% or LIBOR + 2 1/4% and is scheduled to
mature in August 1998. At June 30, 1995 the Company also has a revolving  credit
line  that matures in October 1997, bears interest at prime plus 1/2% or LIBOR +
2% and permits  borrowing of  up to  $16,000,000 subject  to available  eligible
collateral. At June 30, 1995, there was approximately $10,118,000 in outstanding
borrowings.  At September 30, 1995, amounts  outstanding under the term loan and
revolving credit line  were $4,378,000 and  $11,947,000, respectively. The  term
loan and line of credit are collateralized by substantially all of the Company's
assets.

    Certain  debt agreements contain provisions that require: the maintenance of
certain financial ratios, minimum  tangible net worth  (as defined) and  minimum
working  capital  levels and  limit  payments of  dividends  on common  stock to
$250,000 annually,  annual capital  expenditures  and payments  under  operating
leases.

                                      F-11
<PAGE>
    Long-term debt payable subsequent to June 30, 1995 is as follows:

<TABLE>
<S>                                                     <C>
1996..................................................  $ 2,607,000
1997..................................................    2,489,000
1998..................................................   12,277,000
1999..................................................      709,000
2000..................................................      249,000
Thereafter............................................    1,380,000
                                                        -----------
                                                        $19,711,000
                                                        -----------
                                                        -----------
</TABLE>

NOTE 10 -- SERIES A PREFERRED STOCK:

    During  fiscal  1994,  478,742  shares  of  Series  A  Preferred  Stock were
converted into  1,914,968 shares  of  Common Stock.  Also  in fiscal  1994,  the
Company repurchased and/or redeemed 80,256 shares of Series A Preferred Stock at
a  cost of $1,115,000. In addition, 660,320  Series A and Series B Warrants were
exercised resulting in proceeds of $2,400,000 and the remaining 18,680 Series  A
and  Series B Warrants were redeemed at a  cost of $.10 per Warrant. As a result
of these transactions,  there are no  remaining outstanding shares  of Series  A
Preferred Stock or Series A and Series B Warrants as of June 30, 1994.

NOTE 11 -- COMMON STOCK:

    The  Company has  9,000,000 authorized shares  of common stock  having a par
value of $0.01 per share.

    The Company has  reserved 639,300 shares  of common stock  of which  242,800
shares relate to the 1990 Long-Term Incentive Plan; 286,500 shares relate to the
1990  Directors Stock Option Plan and 110,000  shares relate to a special option
grant made outside the Company's option plans.

    A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
                                                             LONG-TERM                      DIRECTORS
                                                             INCENTIVE                     STOCK OPTION
                                          OPTION PRICES        PLAN        OPTION PRICES       PLAN
                                        -----------------  -------------  ---------------  ------------
<S>                                     <C>                <C>            <C>              <C>
Outstanding July 1, 1992..............  $     2.25 - 3.38       135,000   $  1.875 - 3.00       60,000
Granted...............................              2.125       135,000             2.125       30,000
Cancelled.............................        2.25 - 3.38       (95,000)
                                                           -------------                   ------------
Outstanding June 30, 1993.............  $    2.125 - 3.38       175,000   $  1.875 - 3.00       90,000
Granted...............................              3.688        25,000             3.688       40,000
Exercised.............................       2.125 - 2.25       (32,500)     1.875 - 2.25      (13,000)
                                                           -------------                   ------------
Outstanding June 30, 1994.............  $    2.13 - 3.688       167,500   $  1.875 - 3.69      117,000
Granted...............................                                               7.00       40,000
Exercised.............................       2.125 - 2.25       (54,700)     2.125 - 3.00      (30,500)
                                                           -------------                   ------------
                                        $   2.125 - 3.688       112,800   $  1.875 - 7.00      126,500
10% Stock Dividend....................                           11,280                         12,650
                                                           -------------                   ------------
Outstanding June 30, 1995.............  $     1.93 - 3.35       124,080   $   1.70 - 6.36      139,150
                                                           -------------                   ------------
                                                           -------------                   ------------
</TABLE>

                                      F-12
<PAGE>
    At  June 30, 1995, options to purchase  95,150 shares at prices ranging from
$1.70 to $3.35 are  exercisable under the Director's  Stock Option Plan. All  of
the options outstanding under the Long-Term Incentive Plan are exercisable.

    On  January 21, 1993, a special option grant for 110,000 shares at $2.12 was
made and is exercisable  at June 30,  1995. On August 9,  1993 a special  option
grant  for 11,000  shares at  $2.84 was  made and  such option  was exercised in
March, 1995.

   
    The Company has  also reserved 18,335  shares of common  stock for  issuance
upon  exercise of outstanding underwriter warrants  which have an exercise price
of $3.82 per  share and an  expiration date  of June 1996.  During fiscal  1995,
33,332 warrants were exercised.
    

    All  amounts have been  restated to include  the 10% stock  dividend paid on
June 16, 1995.

NOTE 12 -- COMMITMENTS AND CONTINGENCIES:

    LEASES

    The Company  is obligated  under  noncancellable operating  leases.  Certain
leases  include  renewal  clauses  and require  payment  of  real  estate taxes,
insurance and other operating costs. Total rental expense on all such leases for
the fiscal years 1995,  1994 and 1993  was approximately $2,502,000,  $2,265,000
and  $2,596,000, respectively, net of  sublease income of approximately $230,000
annually. The  minimum annual  rentals on  all noncancellable  operating  leases
having a term of more than one year at June 30, 1995 are as follows:

<TABLE>
<S>                                                      <C>
1996...................................................  $1,836,000
1997...................................................   1,836,000
1998...................................................   1,815,000
1999...................................................   1,686,000
2000...................................................     707,000
Thereafter.............................................   1,198,000
                                                         ----------
  Total minimum payments required......................  $9,078,000
                                                         ----------
                                                         ----------
</TABLE>

    LITIGATION

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

NOTE 13 -- MAJOR CUSTOMERS AND FOREIGN CUSTOMERS:

    Revenues from the United States government amounted to approximately 9%, 16%
and 15% for fiscal 1995, 1994 and 1993, respectively.

    The  Company does business with a number of foreign airlines, principally in
the sale of aviation fuels.  For the most part, such  sales are made within  the
United  States and utilize the  same assets and generally  the same personnel as
are utilized  in the  Company's  domestic business.  Revenues related  to  these
foreign  airlines amounted  to approximately  39%, 45%  and 40%  of consolidated
revenues for the years ended June 30, 1995, 1994 and 1993, respectively.

NOTE 14 -- EARNINGS PER SHARE:

    Primary earnings  per  Common  Share  is computed  by  dividing  net  income
available  to common stockholders, which gives effect to the cash portion of the
cumulative dividend on preferred stock, by the weighted average number of common
stock and  common  stock  equivalents outstanding  during  the  period.  Options
granted  to purchase  373,230 shares of  common stock under  the Company's Long-

                                      F-13
<PAGE>
Term Incentive Plan and Directors' Stock Option Plan at exercise prices  ranging
from $1.70 to $6.36 were included as common stock equivalents in fiscal 1995 for
purposes of computing earnings per share.

<TABLE>
<CAPTION>
                                                                       YEAR ENDED    THREE MONTHS ENDED
                                                                      JUNE 30, 1995  SEPTEMBER 30, 1995
                                                                      -------------  -------------------
<S>                                                                   <C>            <C>
Weighted average number of common shares outstanding during the
  period............................................................     5,420,000          5,415,000
Common stock equivalents resulting from the assumed exercise of
  stock options.....................................................       236,000            241,000
                                                                      -------------        ----------
Weighted average number of common and common equivalent shares
  outstanding during the period.....................................     5,656,000          5,656,000
                                                                      -------------        ----------
                                                                      -------------        ----------
</TABLE>

    Weighted  average  outstanding  shares  and  earnings  per  share  have been
retroactively restated to include the 10%  stock dividend paid on June 16,  1995
which amounted to the issuance of 501,246 shares.

NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                                             GROSS PROFIT                      EARNINGS PER SHARE
                                             SALES AND        (OPERATING                   --------------------------
                                              REVENUES         INCOME)       NET INCOME      PRIMARY    FULLY DILUTED
                                          ----------------  --------------  -------------  -----------  -------------

<S>                                       <C>               <C>             <C>            <C>          <C>
YEAR ENDED JUNE 30, 1995
  First Quarter.........................       $35,554,000      $3,851,000     $1,002,000       $0.18         $0.18
  Second Quarter........................        49,165,000       4,444,000      1,200,000        0.21          0.21
  Third Quarter.........................        50,002,000       4,038,000      1,003,000        0.18          0.18
  Fourth Quarter........................        48,279,000       4,240,000      1,102,000        0.19          0.19
                                          ----------------  --------------  -------------       -----         -----
YEAR ENDED JUNE 30, 1995................      $183,000,000     $16,573,000     $4,307,000       $0.76         $0.76
                                          ----------------  --------------  -------------       -----         -----
                                          ----------------  --------------  -------------       -----         -----
YEAR ENDED JUNE 30, 1994
  First Quarter.........................       $24,982,000      $2,715,000       $597,000       $0.19         $0.12
  Second Quarter........................        26,668,000       3,165,000        817,000        0.31          0.17
  Third Quarter.........................        26,613,000       3,349,000        819,000        0.14          0.15
  Fourth Quarter........................        24,806,000       3,436,000        762,000        0.11          0.15
                                          ----------------  --------------  -------------       -----         -----
YEAR ENDED JUNE 30, 1994................      $103,069,000     $12,665,000     $2,995,000       $0.75         $0.59
                                          ----------------  --------------  -------------       -----         -----
                                          ----------------  --------------  -------------       -----         -----
</TABLE>

NOTE 16 -- ACQUISITION OF EXCEL CARGO, INC. (UNAUDITED):

    On September 30, 1995, the Company acquired the assets of Excel Cargo, Inc.,
a  cargo  handling  company  located  in  Montreal,  Canada,  for  approximately
$2,766,000. The purchase price consisted of  an 8.5% debenture in the amount  of
$2,016,000, payable in equal monthly installments over eight years, and $750,000
cash. In addition, the Company paid off outstanding bank notes totaling $573,000
at  the closing. The purchase price has been allocated to assets and liabilities
as follows:

<TABLE>
<S>                                                              <C>
Accounts receivable............................................  $  346,000
Property, equipment and leaseholds.............................   2,711,000
Goodwill.......................................................     750,000
Notes payable..................................................    (573,000)
Accounts payable and other current liabilities.................    (468,000)
                                                                 ----------
Purchase price.................................................  $2,766,000
                                                                 ----------
                                                                 ----------
</TABLE>

                                      F-14
<PAGE>
- -------------------------------------------
                                     -------------------------------------------
- -------------------------------------------
                                     -------------------------------------------

NO  DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN  THIS  PROSPECTUS, AND,  IF  GIVEN  OR MADE,  SUCH  INFORMATION  OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR  THE SOLICITATION OF AN  OFFER TO BUY ANY  SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH  OFFER OR  SOLICITATION IS  UNLAWFUL. NEITHER  THE DELIVERY  OF  THIS
PROSPECTUS  NOR ANY SALE  MADE HEREUNDER SHALL,  UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO  CHANGE IN THE AFFAIRS OF THE COMPANY  OR
IN  THE FACTS  SET FORTH IN  THIS PROSPECTUS SINCE  THE DATE HEREOF  OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

                                 --------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                    PAGE
                                                    -----
<S>                                              <C>
Prospectus Summary.............................           3
Risk Factors...................................           7
Use Of Proceeds................................          13
Capitalization.................................          14
Price Range of Common Stock and Dividend
 Policy........................................          15
Selected Consolidated Financial Data...........          16
Management's Discussion and Analysis of
 Financial Condition and Results of
 Operations....................................          17
Business.......................................          24
Management.....................................          32
Certain Transactions...........................          37
Principal Shareholders.........................          39
Description of Debentures......................          41
Rating of Debentures...........................          50
Certain Federal Income Tax Consequences........          50
Description of Capital Stock...................          55
Underwriting...................................          56
Experts........................................          56
Legal Matters..................................          57
Index to Financial Statements..................         F-1
</TABLE>

                                  $25,000,000

                            MERCURY AIR GROUP, INC.

   
                            % CONVERTIBLE SUBORDINATED
                              DEBENTURES DUE 2006
    

                              -------------------
                              P R O S P E C T U S
                              -------------------

                            EVEREN SECURITIES, INC.
                             CROWELL, WEEDON & CO.

                                           , 1996

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