-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DMydp5rJhbGuImpf9rNVMrYIYHqP2WCuqxaS4zihAL2V8KPupMzuRlg7PpiWSl4n jFvGDuVYE1DbpMtPZf7lCw== /in/edgar/work/0000890566-00-500054/0000890566-00-500054.txt : 20001019 0000890566-00-500054.hdr.sgml : 20001019 ACCESSION NUMBER: 0000890566-00-500054 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001010 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20001018 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KITTY HAWK INC CENTRAL INDEX KEY: 0000932110 STANDARD INDUSTRIAL CLASSIFICATION: [4522 ] IRS NUMBER: 752564006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-25202 FILM NUMBER: 742245 BUSINESS ADDRESS: STREET 1: P O BOX 612787 STREET 2: 1515 W 20TH ST CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 BUSINESS PHONE: 2144562220 MAIL ADDRESS: STREET 1: P O BOX 612787 CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 8-K 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): October 10, 2000 KITTY HAWK, INC. (Exact name of registrant as specified in charter) DELAWARE 0-25202 75-2564006 (State or other (Commission File Number) (IRS Employer jurisdiction of Identification No.) incorporation) 1515 West 20th Street P.O. Box 612787 Dallas/Fort Worth International Airport, Texas (Address of principal 75261 executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 456-2200 Not Applicable (Former name or former address, if changed since last report) ITEM 5. OTHER EVENTS. On October 11, 2000, the Company and its subsidiaries filed the Debtors' Joint Plan of Reorganization Dated October 10, 2000 (the "PLAN"), and the accompanying Final Disclosure Statement Under 11 U.S.C. ss. 1125 in Support of the Debtors' Amended Joint Plan of Reorganization Dated October 10, 2000 (the "DISCLOSURE STATEMENT") in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division. The hearing on the approval of the adequacy of the Disclosure Statement was held on October 10, 2000. The Order Approving Final Disclosure Statement was signed on October 10, 2000 and entered on October 13, 2000. The hearing on the confirmation of the Plan will be held on December 5, 2000 at 10:00 a.m., Dallas, Texas time, before the Honorable Barbara J. Houser at 1100 Commerce Street, 14th Floor, Dallas, Texas. This Form 8-K, the Plan and the Disclosure Statement contain forward-looking statements relating to business expectations, asset sales and liquidation analysis. Business plans may change as circumstances warrant. Actual results may differ materially as a result of many factors, some of which the Company has no control over. Such factors include, but are not limited to: worldwide business and economic conditions; recruiting and new business solicitation efforts; product demand and the rate of growth in the air cargo industry; the impact of competitors and competitive aircraft and aircraft financing availability; the ability to attract and retain new and existing customers; jet fuel prices; normalized aircraft operating costs and reliability, aircraft maintenance delays and damage; regulatory actions, the demand for used aircraft and aviation assets, contest for control of the Company; and the Company's ability to negotiate favorable asset sales. These risk factors and additional information are included in the Company's reports on file with the Securities and Exchange Commissions. The disclosures are not intended to be a solicitation of votes for our plan of reorganization of the Company. Creditors whose votes are being solicited will receive shortly by mail a solicitation package, including the Disclosure Statement, the Plan, the order approving the Disclosure Statement, a general notice and ballot. ITEM 7. EXHIBITS. (c) Exhibits 99.1 Debtors' Joint Plan of Reorganization Dated October 10, 2000. 99.2 Final Disclosure Statement Under 11 U.S.C.ss.1125 in Support of the Debtors' Joint Plan of Reorganization Dated October 10, 2000. * * * * * SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KITTY HAWK, INC. Date: October 17, 2000 By: /s/ TILMON J. REEVES ------------------------------------- Name: Tilmon J. Reeves Title: Chairman of the Board and Chief Executive Officer EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 99.1 Debtors' Joint Plan of Reorganization Dated October 10, 2000. 99.2 Final Disclosure Statement Under 11 U.S.C.ss.1125 in Support of the Debtors' Joint Plan of Reorganization Dated October 10, 2000. EX-99.1 2 0002.txt EXHIBIT 99.1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION IN RE: ss. Chapter 11 ss. KITTY HAWK, INC., ss. CASE NO. 400-42141-BJH-11 KITTY HAWK AIRCARGO, INC., ss. CASE NO. 400-42142-BJH-11 KITTY HAWK CHARTERS, INC., ss. CASE NO. 400-42143-BJH-11 KITTY HAWK INTERNATIONAL, INC., ss. CASE NO. 400-42144-BJH-11 KITTY HAWK CARGO, INC., ss. CASE NO. 400-42145-BJH-11 OK TURBINES, INC., ss. CASE NO. 400-42146-BJH-11 LONGHORN SOLUTIONS, INC., ss. CASE NO. 400-42147-BJH-11 AIRCRAFT LEASING, INC., ss. CASE NO. 400-42148-BJH-11 AMERICAN INTERNATIONAL ss. CASE NO. 400-42149-BJH-11 TRAVEL, INC., AND ss. FLIGHT ONE LOGISTICS, INC. ss. CASE NO. 400-42069-BJH-11 ss. Debtors. ss. Jointly Administered under ss. Case No. 400-42141 --------------------------------------------- DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 --------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE 1 DEFINITIONS............................................................2 RULES OF INTERPRETATION................................................2 ARTICLE 2 DESIGNATION OF CLAIMS AND INTERESTS...................................12 2.1 Summary.........................................................12 ARTICLE 3 TREATMENT OF UNCLASSIFIED CLAIMS......................................13 3.1 Administrative Claims...........................................13 (a) General...................................................13 (b) Payment of Statutory Fees.................................13 (c) Bar Date for Administrative Claims........................13 (i) General Provisions..................................13 (ii) Professionals.......................................14 (iii) Ordinary Course Liabilities.........................14 (iv) Contractual Employee Claims.........................14 (v) Tax Claims..........................................14 3.2 Treatment of Pre-Petition Priority and Secured Tax Claims.......14 ARTICLE 4 CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND INTERESTS.......................................15 4.1 Class 1 - Bank Claims...........................................15 4.2 Class 2 - Noteholders' Secured Claims...........................16 4.3 Class 3 - Secured Claims Other Than Bank Claims and Claims of the Noteholders..............................................17 4.4 Class 4 - Priority Claims.......................................17 4.5 Class 5 - Convenience Claims....................................18 4.6 Class 6 - Unsecured Noteholder Claims ..........................18 4.7 Class 7 - Other Unsecured Claims................................18 4.8 Class 8 - Old Common Stock......................................22 4.9 Class 9 - Securities Claims.....................................22 ARTICLE 5 ACCEPTANCE OR REJECTION OF THE PLAN...................................23 5.1 Voting Classes..................................................23 5.2 Presumed Rejection of Plan......................................23 i ARTICLE 6 MANNER OF DISTRIBUTION OF PROPERTY UNDER THE PLAN.....................23 6.1 Distribution Procedures.........................................23 6.2 Distribution of New Common Stock................................23 6.3 Distributions by Indenture Trustee..............................24 6.4 Surrender and Cancellation of Old Securities....................24 6.5 Disputed Claims.................................................25 6.6 Manner of Payment Under the Plan................................25 6.7 Delivery of Distributions and Undeliverable or Unclaimed Distributions...................................................25 (a) Delivery of Distributions in General......................25 (b) Undeliverable Distributions...............................25 (i) Holding and Investment of Undeliverable Property....25 (ii) Distribution of Undeliverable Property After it Becomes Deliverable and Failure to Claim Undeliverable Property..............................25 6.8 De Minimis Distributions........................................26 6.9 Failure to Negotiate Checks.....................................26 6.10 Compliance with Tax Requirements................................26 6.11 Setoffs.........................................................26 6.12 Fractional Interests............................................26 ARTICLE 7 TREATMENT OF EXECUTORY CONTRACTS......................................27 7.1 Rejection of All Executory Contracts and Leases Not Assumed.....27 7.2 Cure Payments...................................................27 7.3 Bar Date for Filing of Rejection Claims.........................27 ARTICLE 8 MEANS FOR EXECUTION AND IMPLEMENTATION................................28 8.1 Exit Financing..................................................28 8.2 Private Placement...............................................28 8.3 Merger of Corporate Entities....................................28 8.4 Board of Directors of the Reorganized Debtor....................28 8.5 Cancellation of Old Securities..................................29 8.6 Authorization and Issuance of New Common Stock..................29 8.7 Registration Exemption for Debtor's New Common Stock Distributed to Creditors........................................29 8.8 Charter and By-Laws.............................................29 8.9 Corporate Action................................................29 8.10 Release of Fraudulent Conveyance Claims.........................29 8.11 Other Releases by Debtors.......................................30 8.12 Preservation of Rights of Action................................30 8.13 Objections to Claims............................................30 8.14 Retiree Benefits................................................31 8.15 Exemption from Stamp and Similar Taxes..........................31 ii ARTICLE 9 CONDITIONS TO EFFECTIVENESS OF THE PLAN...............................31 9.1 Conditions to Effectiveness.....................................31 9.2 Waiver of Conditions............................................31 9.3 No Requirement of Final Order...................................31 ARTICLE 10 EFFECTS OF PLAN CONFIRMATION..........................................32 10.1 Binding Effect..................................................32 10.2 Moratorium, Injunction and Limitation of Recourse For Payment...32 10.3 Exculpation and Limitation of Liability.........................32 10.4 Revesting.......................................................33 10.5 Other Documents and Actions.....................................33 10.6 Post-Consummation Effect of Evidences of Claims or Interests....33 10.7 Term of Injunctions or Stays....................................33 ARTICLE 11 CONFIRMABILITY OF PLAN AND CRAMDOWN...................................33 ARTICLE 12 RETENTION OF JURISDICTION.............................................33 ARTICLE 13 MISCELLANEOUS PROVISIONS..............................................35 13.1 Fractional Dollars..............................................35 13.2 Modification of Plan............................................35 13.3 Withdrawal of Plan..............................................35 13.4 Governing Law...................................................35 13.5 Time............................................................36 13.6 Payment Dates...................................................36 13.7 Headings........................................................36 13.8 Successors and Assigns..........................................36 13.9 Severability of Plan Provisions.................................36 13.10 No Admissions...................................................36 13.11 Creditors' Committee............................................36 iii IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION IN RE: ss. Chapter 11 ss. KITTY HAWK, INC., ss. CASE NO. 400-42141-BJH-11 KITTY HAWK AIRCARGO, INC., ss. CASE NO. 400-42142-BJH-11 KITTY HAWK CHARTERS, INC., ss. CASE NO. 400-42143-BJH-11 KITTY HAWK INTERNATIONAL, INC., ss. CASE NO. 400-42144-BJH-11 KITTY HAWK CARGO, INC., ss. CASE NO. 400-42145-BJH-11 OK TURBINES, INC., ss. CASE NO. 400-42146-BJH-11 LONGHORN SOLUTIONS, INC., ss. CASE NO. 400-42147-BJH-11 AIRCRAFT LEASING, INC., ss. CASE NO. 400-42148-BJH-11 AMERICAN INTERNATIONAL ss. CASE NO. 400-42149-BJH-11 TRAVEL, INC., AND ss. FLIGHT ONE LOGISTICS, INC. ss. CASE No. 400-42069-BJH-11 ss. Debtors. ss. Jointly Administered under ss. Case No. 400-42141 DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Kitty Hawk, Inc., Kitty Hawk Aircargo, Inc., Kitty Hawk Charters, Inc., Kitty Hawk International, Inc., Kitty Hawk Cargo, Inc., OK Turbines, Inc., Longhorn Solutions, Inc., Aircraft Leasing, Inc., American International Travel, Inc., and Flight One Logistics, Inc. (collectively the "Debtors") as debtors and debtors-in-possession, propose this Plan of Reorganization pursuant to section 1121(a) of Title 11 of the United States Code for the resolution of the Debtors' outstanding creditor claims and equity interests. Reference is made to the Debtors' Disclosure Statement (the "Disclosure Statement") for a discussion of the Debtors' history, business, properties and results of operations, and for a summary of this Plan and certain related matters. All holders of Claims and Interests are encouraged to read the Plan and the Disclosure Statement in their entirety before voting to accept or reject this Plan. No materials, other than the Disclosure Statement and any exhibits and schedules attached thereto or referenced therein, have been approved by the Debtors for use in soliciting acceptances or rejections of this Plan. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 1 ARTICLE 1 DEFINITIONS RULES OF INTERPRETATION. As used herein, the following terms have the respective meanings specified below, and such meanings shall be equally applicable to both the singular and plural, and masculine and feminine, forms of the terms defined. The words "herein," "hereof," "hereto," "hereunder" and others of similar import, refer to the Plan as a whole and not to any particular section, subsection or clause contained in the Plan. Captions and headings to articles, sections and exhibits are inserted for convenience of reference only and are not intended to be part of or to affect the interpretation of the Plan. The rules of construction set forth in section 102 of the Bankruptcy Code shall apply. In computing any period of time prescribed or allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply. Any capitalized term used herein that is not defined herein but is defined in the Bankruptcy Code shall have the meaning ascribed to such term in the Bankruptcy Code. In addition to such other terms as are defined in other sections of the Plan, the following terms (which appear in the Plan as capitalized terms) have the following meanings as used in the Plan. 1.1 "ADMINISTRATIVE CLAIM" means a Claim for costs and expenses of administration allowed under section 503(b) of the Bankruptcy Code and referred to in section 507(a)(1) of the Bankruptcy Code, including, without limitation: (a) the actual and necessary costs and expenses incurred after the Petition Date of preserving the Estates and operating the business of the Debtor (such as wages, salaries or payments for goods and services); (b) compensation for legal, financial advisory, accounting and other services and reimbursement of expenses awarded or allowed under sections 330(a) or 331 of the Bankruptcy Code; and (c) all fees and charges assessed against the Estates under 28 U.S.C. ss. 1930. Administrative Claim includes any Claim of an employee or officer of the Debtors arising out of a Court-approved contract. 1.2 "AFFILIATE" means (a) an entity that directly or indirectly owns, controls or holds with power to vote, twenty percent or more of the outstanding voting securities of a Debtor, other than an entity that holds such securities (i) in a fiduciary or agency capacity without sole discretionary power to vote such securities or (ii) solely to secure a debt, if such entity has not in fact exercised such power to vote, or (b) a corporation twenty percent or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote, by a Debtor, or by an entity that directly or indirectly owns, controls or holds with power to vote, twenty percent or more of the outstanding voting securities of a Debtor, other than an entity that holds such securities (i) in a fiduciary or agency capacity without sole discretionary power to vote such securities or (ii) solely to secure a debt, if such entity has not in fact exercised such power to vote. 1.3 "AIRCARGO" means Kitty Hawk Aircargo, Inc., one of the Debtors. 1.4 "AIRCRAFT LEASING" means Aircraft Leasing, Inc., one of the Debtors. 1.5 "ALLOWED" means, with respect to any Claim, proof of which has been timely, properly Filed or, if no proof of claim was so Filed, which was or hereafter is listed on the Schedules DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 1 as liquidated in amount and not disputed or contingent, and, in either case, a Claim which is not a Disputed Claim. 1.6 "ALLOWED CLAIM" means that portion of a Claim which is not a Disputed Claim. 1.7 "ALLOWANCE DATE" means the date that a Claim becomes an Allowed Claim. 1.8 "ALLOWED SECURED CLAIM" means an Allowed Claim, or that portion thereof, of any creditor of the Debtors who holds a lien or security interest, as those terms are defined in Section 101 of the Code, which Claim has been properly perfected as required by law and determined in accordance with Section 506 of the Code with respect to properties owned by the Debtors. Such Allowed Secured Claim is secured only to the extent of the value of the Debtors' property which the Court finds is subject to a valid security interest of the creditor enforceable against property of the Estate. 1.9 "ALLOWED UNSECURED CLAIM" means an Allowed Claim, or that portion thereof, which is not entitled to priority or to secured status under the Code, and includes, but is not limited to, any claim arising as a result of a Debtor's execution of a guaranty agreement, promissory note, negotiable instrument, or other similar written instrument, whether as maker, endorser, guarantor, or otherwise. 1.10 "AMENDED BY-LAWS" means the by-laws of Kitty Hawk, in effect as of the Petition Date, as amended, substantially in the form included in the Plan Supplement. 1.11 "AMENDED CERTIFICATE OF INCORPORATION" means the amended and restated certificate of incorporation of Kitty Hawk Aircargo, as surviving entity after the mergers contemplated by Section 8.4 of the Plan, effective as of the Effective Date, substantially in the form included in the Plan Supplement. 1.12 "AMERICAN INTERNATIONAL TRAVEL" means American International Travel, Inc., one of the Debtors. 1.13 "BALLOTS" means the written Ballots for acceptance or rejection of the Plan. 1.14 "BALLOT RECORD DATE" means September 19, 2000. 1.15 "BALLOT RETURN DATE" means 5:00 p.m. Dallas, Texas Time on November 14, 2000, unless and to the extent such date is extended by the Debtors in accordance with the Disclosure Statement. 1.16 "BANK CLAIMS" mean the Claims of the Bank Group arising out of the (1) Second Amended and Restated Credit Agreement (as may have been amended, modified, supplemented, extended, renewed or restated from time to time) dated as of November 19, 1997; (2) Revolving Credit Note from Kitty Hawk, Inc. and its subsidiaries payable to the order of Wells Fargo Bank, N.A. in the original principal amount of $100 million; (3) Term Loan Note from Kitty Hawk and its subsidiaries to Wells Fargo, in the original principal sum of $45.9 million; and (4) any security DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 3 agreement, deposit or other agreement evidencing a security interest, right of setoff or obligation owing to a member of the Bank Group and the Final Order Authorizing Use of Cash Collateral and Granting Adequate Protection and any subsequent financing orders; (the items in categories (1) through (4) are collectively, the "Financing Documents"). The Bank Claims are Allowed Claims. 1.17 "BANK GROUP" means Wells Fargo Bank (Texas), N.A., Bank One, Texas, N.A., Comerica Bank, Heller Financial, Inc. and Union Bank of California, N.A. or their assignees. 1.18 "BANKRUPTCY CODE" OR "CODE" means Title 11 of the United States Code as now in effect or hereafter amended. 1.19 "BANKRUPTCY COURT" means the United States Bankruptcy Court for the Northern District of Texas, which presides over this proceeding, or if necessary, the United States District Court for said District having original jurisdiction over this case. 1.20 "BANKRUPTCY RULES" means, collectively (a) the Federal Rules of Bankruptcy Procedure, and (b) the local rules of the Bankruptcy Court, as applicable from time to time in the Reorganization Case. 1.21 "BUSINESS DAY" means any day, other than a Saturday, Sunday or "legal holiday" (as defined in Bankruptcy Rule 9006(a)). 1.22 "CARGO" means Kitty Hawk Cargo, Inc., one of the Debtors. 1.23 "CASH" means cash, wire transfer, certified check, cash equivalents and other readily marketable securities or instruments, including, without limitation, readily marketable direct obligations of the United States of America, certificates of deposit issued by banks, and commercial paper of any Person, including interests accrued or earned thereon, or a check from Reorganized Kitty Hawk. 1.24 "CHARTERS" means Kitty Hawk Charters, Inc., one of the Debtors. 1.25 "CLAIM" means any right to payment from the Debtors arising before the Confirmation Date, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, contested, uncontested, legal, equitable, secured, or unsecured; or any right to an equitable remedy for breach of performance if such breach gives rise to a right of payment from the Debtors, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, contested, uncontested, secured or unsecured. 1.26 "CLASS" means one of the classes of Claims or Interests defined in Article III hereof. 1.27 "CLASS 6 STOCK DISTRIBUTION" means the 42,500,000 shares of New Common Stock that will be distributed to holders of Allowed Class 6 Claims. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 4 1.28 "CLASS 7 STOCK DISTRIBUTION" means the 7,500,000 shares of New Common Stock that will be distributed to holders of Allowed Class 7 Claims. 1.29 "CLASS 6 STOCK RESERVE ACCOUNT" means a reserve established to hold the New Common Stock held from distribution on account of Disputed or undetermined Class 6 Unsecured Claims equal to the Pro Rata share to which each holder of a Disputed or undetermined Class 6 Unsecured Claim would have been entitled on the Effective Date in respect of the Disputed or undetermined portion as if the Disputed or undetermined portion of such Claim had been Allowed on the Effective Date. 1.30 "CLASS 6 STOCK RESERVE SURPLUS ACCOUNT" means the New Common Stock deposited or held in the Class 6 Stock Reserve Account on account of Disputed or undetermined Unsecured Claims to the extent that the Claims are disallowed in whole or in part after the Effective Date. 1.31 "CLASS 7 STOCK RESERVE ACCOUNT" means a reserve established to hold the New Common Stock held from distribution on account of Disputed or undetermined Class 7 Unsecured Claims equal to the Pro Rata share to which each holder of a Disputed or undetermined Class 7 Unsecured Claim would have been entitled on the Effective Date in respect of the Disputed or undetermined portion as if the Disputed or undetermined portion of such Claim had been Allowed on the Effective Date. 1.32 "CLASS 7A STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7A based on the percentage that the Allowed Other Unsecured Claims in Class 7A bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.33 "CLASS 7B STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7B based on the percentage that the Allowed Other Unsecured Claims in Class 7B bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.34 "CLASS 7C STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7C based on the percentage that the Allowed Other Unsecured Claims in Class 7C bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.35 "CLASS 7D STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7D based on the percentage that the Allowed Other Unsecured Claims in Class 7D bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.36 "CLASS 7E STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7E based on the percentage that the Allowed Other Unsecured Claims in Class 7E bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 5 1.37 "CLASS 7F STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7F based on the percentage that the Allowed Other Unsecured Claims in Class 7F bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.38 "CLASS 7G STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7G based on the percentage that the Allowed Other Unsecured Claims in Class 7G bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.39 "CLASS 7H STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7H based on the percentage that the Allowed Other Unsecured Claims in Class 7H bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.40 "CLASS 7I STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7I based on the percentage that the Allowed Other Unsecured Claims in Class 7I bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.41 "CLASS 7J STOCK DISTRIBUTION" means the Pro Rata share of the Class 7 Stock Distribution allocable to holders of Allowed Other Unsecured Claims in Class 7J based on the percentage that the Allowed Other Unsecured Claims in Class 7J bear to all Allowed Other Unsecured Claims in all subclasses of Class 7. 1.42 "CLASS 7 STOCK RESERVE SURPLUS ACCOUNT" means the New Common Stock deposited or held in the Class 7 Stock Reserve Account on account of Disputed or undetermined Unsecured Claims to the extent that the Claims are disallowed in whole or in part after the Effective Date. 1.43 "COMPANY" means Kitty Hawk, Inc., a Delaware Corporation and its subsidiaries. 1.44 "CONFIRMATION" means the entry of a Confirmation Order confirming this Plan at or after a hearing pursuant to Section 1129 of the Bankruptcy Code. 1.45 "CONFIRMATION DATE" means the date the Confirmation Order is entered on the docket by the Clerk of the Bankruptcy Court. 1.46 "CONFIRMATION ORDER" means the order entered by the Bankruptcy Court determining that this Plan meets the requirements of Chapter 11 of the Bankruptcy Code and is entitled to Confirmation pursuant to Section 1129 of the Bankruptcy Code. 1.47 "CONVENIENCE CLAIM" means any Allowed Unsecured Claim in Class 5 other than an Intercompany Claim, in an amount (a) equal to or less than $500, or (b) greater than $500, but which is reduced to $500 by written election of the holder of such Claim made on a validly executed and DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 6 timely delivered Ballot. All Allowed Unsecured Claims (other than Intercompany Claims) of a single holder will be aggregated and treated as a single Allowed Unsecured Claim for purposes of determining such holder's entitlement to Convenience Claim treatment by each such Debtor. Holders are determined as of the Petition Date and the post-petition assignment of Allowed Unsecured Claims does not consolidate Claims owed to separate claimholders on the Petition Date. 1.48 "CREDITORS' COMMITTEE" means the Official Committee of Unsecured Creditors appointed in the Chapter 11 case by the United States Trustee pursuant to Section 1102 of the Bankruptcy Code, as constituted by the addition or removal of members from time to time. 1.49 "DEBTORS" means Kitty Hawk, Inc., Kitty Hawk Aircargo, Inc., Kitty Hawk Charters, Inc., Kitty Hawk International, Inc., Kitty Hawk Cargo, Inc., OK Turbines, Inc., Longhorn Solutions, Inc., Aircraft Leasing, Inc., American International Travel, Inc., and Flight One Logistics, Inc., when acting in their capacity as representatives of their respective bankruptcy estates. 1.50 "DISCLOSURE STATEMENT" means the Disclosure Statement Filed by the Debtors as approved by the Bankruptcy Court for submission to the Creditors, Interest holders, and parties-in-interest of the Debtors, as it may have been amended or supplemented from time to time. 1.51 "DISPUTED CLAIM" means a Claim as to which a proof of claim has been Filed or deemed Filed under applicable law, as to which an objection has been or may be timely Filed and which objection, if timely Filed, has not been withdrawn on or before any date fixed for Filing such objections by the Plan or Order of the Bankruptcy Court and has not been overruled or denied by a Final Order. Prior to the time that an objection has been or may be timely Filed, for the purposes of this Plan a Claim shall be considered a Disputed Claim to the extent that: (i) the amount of the Claim specified in the proof of claim exceeds the amount of any corresponding Claim Scheduled by the Debtor in its Schedules of Assets and Liabilities to the extent of such excess; or (ii) no corresponding Claim has been Scheduled by the Debtor in its Schedules of Assets and Liabilities. 1.52 "DISTRIBUTION DATE" means the date the Reorganized Debtors commence distributions under the Plan. 1.53 "DISTRIBUTIONS" means the properties or interests in property to be paid or distributed hereunder to the holders of Allowed Claims. 1.54 "DOCKET" means the docket in the Reorganization Case maintained by the Clerk. 1.55 "EFFECTIVE CONFIRMATION ORDER" means the Confirmation Order rendered by the Bankruptcy Court or other court of competent jurisdiction that has been entered on the docket and (unless otherwise ordered by such court) as to which (i) both (a) the time to seek reconsideration, rehearing, or new trial by the rendering court (hereinafter, a ("Post-Trial Motion"), and (b) the time (including time resulting from a timely filed motion under Rule 8002(c) under the Federal Rules of Bankruptcy Procedure) to appeal or to seek a petition for review or certiorari (hereinafter, an "Appellate Court Review"), has expired (without regard to whether time to seek relief of a judgment under Rule 60(b) of the Federal Rules of Civil Procedure or Rule 9024 of the Federal Rules of DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 7 Bankruptcy Procedure has expired); and (ii) either (a) no Post-Trial Motion or request for Appellate Court Review is pending, or (b) a Post-Trial Motion or a request for Appellate Court Review is pending but the subject order of judgment has not been stayed, amended, modified or reversed by a court of competent jurisdiction or, if stayed, such stay has been vacated or is no longer in effect. Without limiting the foregoing, the pendency of, or request for, a Post-Trial Motion or an Appellate Court Review shall not prevent an order from becoming final and being implemented, absent the entry of a stay by a court of competent jurisdiction and the continuation thereof. 1.56 "EFFECTIVE DATE" means the date on which all of the conditions required in Section 9.1 have occurred, except as expressly waived as provided in Section 9.2 of this Plan. 1.57 "EMPLOYEE CLAIM" means a Claim based on salaries, wages, sales commissions, expense reimbursements, accrued vacation pay, health-related benefits, incentive programs, employee compensation guarantees, severance or similar employee benefits. 1.58 "ENGINES" means the RB-211 and JT9D engines identified on Exhibit A. 1.59 "ESTATES" means the estates created in these reorganization cases under Section 541 of the Bankruptcy Code. 1.60 "EXECUTORY CONTRACT" means any unexpired lease and/or executory contract as set forth in Section 365 of the Code. 1.61 "FILE" or "FILED" means filed with the Bankruptcy Court in the Reorganization Case. 1.62 "FINAL ORDER" means an order or judgment of the Bankruptcy Court, or other court of competent jurisdiction, as entered on the Docket in the Reorganization Case, which has not been reversed, stayed, modified or amended, and as to which (i) the time to appeal or seek certiorari has expired and no appeal or petition for certiorari has been timely filed, or (ii) any appeal that has been or may be taken or any petition for certiorari that has been or may be filed has been resolved by the highest court to which the order or judgment was appealed or from which certiorari was sought. 1.63 "FLIGHT ONE LOGISTICS" means Flight One Logistics, Inc., one of the debtors. 1.64 "IMPAIRED" means that class of Claims or Interests that is impaired within the meaning of 11 U.S.C.ss.1124. 1.65 "INDENTURE TRUSTEE" means HSBC or its successor, as Indenture Trustee for the Senior Notes. 1.66 "INTEREST" means the rights of the owners and/or holders of outstanding share or shares of the Company's Common Stock with respect of such Interest as of the date immediately preceding the Petition Date. 1.67 "INTERNATIONAL" means Kitty Hawk International, Inc., one of the Debtors. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 8 1.68 "KITTY HAWK" means Kitty Hawk, Inc., one of the Debtors. 1.69 "LONGHORN SOLUTIONS" means Longhorn Solutions, Inc., one of the Debtors. 1.70 "NET PROCEEDS" means with respect to the sale of pledged property, the proceeds of such sale minus all costs of sale, including, but not limited to, the cost of securing, maintaining and insuring such property pending the sale, all costs incurred in preparing the property for sale, and all commissions and other fees paid in connection with such sale. 1.71 "NEW COMMON STOCK" means the issued and outstanding stock of Reorganized Kitty Hawk. 1.72 "NOTEHOLDERS" means the holders of Senior Notes. 1.73 "NOTEHOLDERS' FEES" means $1 million of the professional fees and expenses incurred by the Indenture Trustee and the Unofficial Noteholders' Committee in connection with the Reorganization Case. 1.74 "NOTEHOLDERS' 727 COLLATERAL" means the 727 airframes, engines and related equipment pledged to the Noteholders. 1.75 "NOTEHOLDERS' WIDE BODY COLLATERAL" means the wide body airframes, engines and related equipment pledged to the Noteholders. 1.76 "OK TURBINES" means OK Turbines, Inc., one of the Debtors. 1.77 "OLD COMMON STOCK" means the Common Stock of the Company and any right to receive Old Common Stock pursuant to any warrant, option or other agreement. 1.78 "OLD SECURITIES" means the Senior Notes and the Old Common Stock. 1.79 "ORDER" means an order or judgment of the Bankruptcy Court as entered on the Docket. 1.80 "OTHER UNSECURED CLAIMS" means Unsecured Claims that are not Class 5 Convenience Claims or Class 6 Claims (Noteholder Claims). 1.81 "PERSON" means any individual, corporation, general partnership, limited partnership, association, joint stock company, joint venture, estate, trust, indenture trustee, government or any political subdivision, governmental unit (as defined in the Bankruptcy Code), official committee appointed by the United States Trustee, unofficial committee of creditors or equity holders or other entity. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 9 1.82 "PETITION DATE" means May 1, 2000, the date on which each of the Debtors, other than Flight One Logistics, filed their voluntary Chapter 11 petitions. 1.83 "PLAN" means this Plan of Reorganization in its present form, or as it may be amended, modified, and/or supplemented from time to time in accordance with the Code, or by agreement of all affected parties, or by order of the Bankruptcy Court, as the case may be. 1.84 "PLAN SUPPLEMENT" means the documents including the forms of the Amended By-Laws, Amended Certificate of Incorporation, as well as a list of the executory contracts and unexpired leases to be assumed pursuant to the Plan, which shall be contained in a separate Plan Supplement which shall be filed with the Clerk of the Bankruptcy Court at least fifteen (15) days prior to the date on which the Confirmation Hearing shall first commence or such shorter period as ordered by the Court. The Plan Supplement may be inspected in the office of the Clerk of the Bankruptcy Court during hours established therefor. Holders of Claims against and Equity Interests in the Debtors may obtain a copy of the Plan Supplement upon written request to the Debtors. The Plan Supplement is incorporated into and is a part of the Plan as if fully set forth herein. 1.85 "PRE-PETITION PRIORITY TAX CLAIM" means an Unsecured Allowed Claim of a governmental entity as provided by Section 507(a)(8) of the Code. or 1.86 "PRE-PETITION SECURED TAX CLAIM" means an Allowed Secured Claim of a governmental entity whose claim would be a Priority Claim under Section 507(a)(8) if it was not a Secured Claim. 1.87 "PRIORITY CLAIM" means any Claim against any of the Debtors entitled to priority under 11 U.S.C. ss.ss. 507(a) of the Bankruptcy Code, other than an Administrative Claim or a Pre-Petition Priority Tax Claim. 1.88 "PRIVATE PLACEMENT" means the private placement of up to five (5) million shares of New Common Stock at a price of not less than $3.00 per share with a Person who is not a holder of Old Common Stock. 1.89 "PRIVATE PLACEMENT PROCEEDS" means the cash proceeds of the Private Placement net of any expenses incurred by the Debtors in connection with making the Private Placement. 1.90 "PRO RATA" means proportionately, based on the percentage of the distribution made on account of a particular Allowed Claim bears to the distributions made on account of all Allowed Claims of the Class in which the Allowed Claim is included. 1.91 "QUARTERLY SURPLUS DISTRIBUTION DATE" means the last day, of if the last day is not a Business Day, the first Business Day after the end, of the months of March, June, September and December. The first Quarterly Surplus Distribution Date shall be March 31, 2001. 1.92 "REJECTION CLAIM" means a Claim resulting from the rejection of a lease or executory contract by a Debtor. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 10 1.93 "RELEASED OFFICERS AND DIRECTORS" means: OFFICERS: Tilmon J. Reeves Chief Executive Officer Drew Keith Vice President and Acting Chief Financial Officer James R. Craig Vice President and General Counsel Ted J. Coonfield Vice President John Turnipseed Vice President - Human Resources Michael Clark Vice President - Security DIRECTORS: M. Tom Christopher Lewis S. White Tilmon J. Reeves Steve Wood Ted Coonfield Bruce Martin Philip J. Sauder Tom Kincaid Thomas J. Smith 1.94 "REORGANIZATION CASE" means, collectively, the Debtors' cases under Chapter 11 of the Bankruptcy Code. 1.95 "REORGANIZED KITTY HAWK" or "REORGANIZED DEBTOR" means Kitty Hawk, Inc., Aircargo, Charters, KHI, Cargo, OK Turbines, Longhorn Solutions, Aircraft Leasing, American International Travel, and Flight One Logistics after being merged into Aircargo on the Effective Date. 1.96 "SCHEDULES" means the Schedules of Assets and Liabilities, Statement of Financial Affairs and Statement of Executory Contracts which have been filed by the Debtors with the Bankruptcy Court as amended or supplemented on or before the Confirmation Date, listing the liabilities and assets of Debtor. 1.97 "SECURED CLAIM" means any Claim that is secured by a lien on property in which the Estate has an interest or that is subject to setoff under section 553 of the Bankruptcy Code, to the extent of the value of the claim holder's interest in the Estate's interest in such property or to the extent of the amount subject to setoff, as applicable, as determined pursuant to section 506(a) of the Bankruptcy Code. 1.98 "SECURITIES CLAIMS" means (i) any Claim arising from rescission of a purchase or sale of Old Common Stock or for damages arising from the purchase or sale of Old Common Stock, or (ii) any Claim for indemnity, reimbursement, or contribution on account of any such Claim. 1.99 "SECURITY AGREEMENT" means the documentation under which a lien against property is reflected. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 11 1.100 "SENIOR NOTES" means the 9.95% Senior Secured Notes due 2004 issued by Kitty Hawk, Inc. 1.101 "SENIOR NOTE GUARANTEES" means the guarantees of the Senior Notes by each of the Debtors. 1.102 "TAX CLAIM" means an Unsecured Allowed Claim of a governmental entity as provided by Section 507(a)(8) of the Code. 1.103 "UNSECURED CLAIM" means any Claim that is not an Administrative Claim, Tax Claim or Secured Claim. ARTICLE 2 DESIGNATION OF CLAIMS AND INTERESTS THIS PLAN CONSOLIDATES THE CLAIMS AGAINST THE DEBTORS FOR PURPOSES OF DISTRIBUTIONS AS PART OF A SETTLEMENT WITH THE NOTEHOLDERS DESCRIBED IN SECTION IV,D, 2 (B) OF THE DISCLOSURE STATEMENT. THE DEBTORS BELIEVE THAT THE SETTLEMENT PROVIDES GREATER DISTRIBUTIONS OF VALUE TO UNSECURED CREDITORS (OTHER THAN THE NOTEHOLDERS) THAN THEY WOULD RECEIVE IF DISTRIBUTIONS WERE MADE ON AN ENTITY BY ENTITY BASIS. 2.1 SUMMARY. The following is a designation of the classes of Claims and Interests under this Plan. In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims and Tax Claims described in Article 3 of this Plan have not been classified and are excluded from the following classes. A Claim or Interest is classified in a particular class only to the extent that the Claim or Interest qualifies within the description of that class, and is classified in another class or classes to the extent that any remainder of the Claim or Interest qualifies within the description of such other class or classes. A Claim or Interest is classified in a particular class only to the extent that the Claim or Interest is an Allowed Claim or Allowed Interest in that class and has not been paid, released or otherwise satisfied before the Effective Date; a Claim or Interest which is not an Allowed Claim or Interest is not in any Class. Notwithstanding anything to the contrary contained in this Plan, no distribution shall be made on account of any Claim or Interest which is not an Allowed Claim or Allowed Interest. The Plan consolidates distributions to creditors of each of the Debtors as part of a settlement. Classes are considered separately among the Debtors for voting purposes and jointly among the Debtors for distribution purposes. The treatment provided for each Class shall be the same for each of the Debtors as if Claims against each Debtor had been separately classified. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 12 CLASS STATUS ----- ------ A. SECURED CLAIMS Class 1: Bank Claims Impaired - entitled to vote Class 2: Noteholders' Secured Claims Impaired - entitled to vote Class 3: Secured Claims Other Than Bank Impaired - entitled to vote Claims and Claims of the Noteholders B. UNSECURED CLAIMS Class 4: Priority Claims Impaired - entitled to vote Class 5: Convenience Claims Impaired - entitled to vote Class 6: Unsecured Noteholder Claims Impaired - entitled to vote Class 7: Other Unsecured Claims Impaired - entitled to vote C. INTERESTS Class 8: Old Common Stock Impaired - deemed to have rejected Class 9: Securities Claims Impaired - deemed to have rejected ARTICLE 3 TREATMENT OF UNCLASSIFIED CLAIMS 3.1 ADMINISTRATIVE CLAIMS. (a) GENERAL. Subject to the bar date provisions herein, unless otherwise agreed to by the parties, each holder of an Allowed Administrative Claim shall receive Cash equal to the unpaid portion of such Allowed Administrative Claim on the later of (a) the Effective Date or as soon as practicable thereafter, (b) the Allowance Date, and (c) such other date as is mutually agreed upon by the Debtors and the holder of such Claim; PROVIDED, HOWEVER, that Administrative Claims that represent liabilities incurred by the Debtors in the ordinary course of their business during the Reorganization Cases shall be paid by Reorganized Kitty Hawk in the ordinary course of business and in accordance with any terms and conditions of any agreements relating thereto. Payments on Administrative Claims shall be made by the Reorganized Debtor. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 13 (b) PAYMENT OF STATUTORY FEES. All fees payable pursuant to 28 U.S.C.ss.1930 shall be paid in Cash equal to the amount of such Administrative Claim when due. (c) BAR DATE FOR ADMINISTRATIVE CLAIMS. (i) GENERAL PROVISIONS. Except as provided below in Sections 3.1(c)(iii), 3.1(c)(iv) and 3.1(c)(v), requests for payment of Administrative Claims must be Filed no later than forty-five (45) days after the Effective Date. Holders of Administrative Claims (including, without limitation, professionals requesting compensation or reimbursement of expenses and the holders of any Claims for federal, state or local taxes) that are required to File a request for payment of such Claims and that do not File such requests by the applicable bar date shall be forever barred from asserting such Claims against the Debtors, any of their affiliates or any of their respective property. (ii) PROFESSIONALS. All professionals or other entities requesting compensation or reimbursement of expenses pursuant to sections 327, 328, 330, 331, 503(b) and 1103 of the Bankruptcy Code for services rendered before the Effective Date (including, without limitation, any compensation requested by any professional or any other entity for making a substantial contribution in the Reorganization Case) shall File and serve on Reorganized Kitty Hawk and the Creditors' Committee an application for final allowance of compensation and reimbursement of expenses no later than forty-five (45) days after the Effective Date. Objections to applications of professionals for compensation or reimbursement of expenses must be Filed and served on Debtors and the professionals to whose application the objections are addressed no later than seventy (70) days after the Effective Date. Any professional fees and reimbursements or expenses incurred by the Reorganized Debtor subsequent to the Effective Date may be paid without application to the Bankruptcy Court. (iii) ORDINARY COURSE LIABILITIES. Holders of Administrative Claims based on liabilities incurred in the ordinary course of the Debtors' business (other than Claims of governmental units for taxes or Claims and/or penalties related to such taxes) shall not be required to File any request for payment of such Claims. Such liabilities shall be paid by the Reorganized Debtor as soon as practicable after the Effective Date. (iv) CONTRACTUAL EMPLOYEE CLAIMS. Holders of Claims under employment contracts approved by the Court shall not be required to File any request for payment of such Claims and such Claims shall be paid in full on the Effective Date. (v) TAX CLAIMS. All requests for payment of Administrative Claims and other Claims by a governmental unit for taxes (and for interest and/or penalties related to such taxes) for any tax year or period, all or any portion of which occurs or falls within the period from and including the Petition Date through and including the Effective Date ("Post-Petition Tax Claims") and for which no bar date has otherwise been previously established, must be Filed on or before the later of (i) 45 days following the Effective Date; and (ii) 90 days following the filing with the applicable governmental unit of the tax return for such taxes for such tax year or period. Any holder of any Post-Petition Tax Claim that is required to File a request for payment of such taxes and does not File such a Claim by the applicable bar date shall be forever barred from asserting any such Post- DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 14 Petition Tax Claim against any of the Debtors, Kitty Hawk, or their respective property, whether any such Post-Petition Tax Claim is deemed to arise prior to, on, or subsequent to the Effective Date. To the extent that the holder of a Post-Petition Tax Claim holds a lien to secure its Claim under applicable state law, the holder of such Claim shall retain its lien until its Allowed Claim has been paid in full. 3.2 TREATMENT OF PRE-PETITION PRIORITY AND SECURED TAX CLAIMS. Each holder of an Allowed Pre-Petition Tax Claim or Security Tax Claim shall be paid by the Reorganized Debtor, pursuant to the provisions of Section 1129(a)(4)(c) of the Bankruptcy Code, in equal quarterly installments commencing on the first day of the first full month following the Effective Date (or the Allowance Date, if later) with the final payment of the remaining unpaid balance to be made on the sixth anniversary of the assessment of the tax, together with interest thereon at 8% per annum from and after the Effective Date until the date of final payment. The Reorganized Debtor may prepay any Pre-Petition Priority Tax Claim or Secured Tax Claim without penalty or premium, or may pay any Allowed Pre-Petition Priority Tax Claim or Secured Tax Claim on such terms as the holder of the Allowed Claim and the Debtors may agree. To the extent that the holder of a Pre-Petition Priority Tax Claim orThe liens of each holder of a Pre-Petition Secured Tax Claim shall remain in full force and effect until the Pre-Petition Secured Tax Claim is paid in full. Failure by the Reorganized Debtor to timely make a payment on an Allowed Pre-Petition Priority Tax Claim or Secured Tax Claim shall be an event of default. If the Reorganized Debtor fails to cure a default within twenty (20) days after service of written notice of default from the holder of the Allowed Pre- Petition Secured Tax Claim, then the holder of such Allowed Pre-Petition Priority Claim or Secured Tax Claim may enforce the total amount of its Claim, plus interest as provided in this Plan, against the Reorganized Debtor in accordance with applicable state or federal laws. ARTICLE 4 CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND INTERESTS 4.1 CLASS 1 - BANK CLAIMS. (a) CLASSIFICATION: Class 1 consists of all Allowed Secured Bank Claims. Allowed Secured Bank Claims shall be subclassified so that the holders of the Allowed Secured Bank Claims shall have a Claim against each Debtor whose property secures the Allowed Secured Bank Claims. (b) TREATMENT: Class 1 is impaired and the holders of Allowed Claims in Class 1 are entitled to vote on the Plan. The holders of the Allowed Secured Bank Claims may vote their Claims in each Case of a Debtor whose property secures the Allowed Secured Bank Claims. The Allowed Secured Bank Claims shall be satisfied as set forth herein or in such other manner as is acceptable to the Debtors and the holders of the Allowed Secured Bank Claims. All payments of the Bank Claims made prior to the Effective Date shall be deemed to be paid indefeasibly. Any portion of the Bank Claims unpaid as of the Effective Date shall be paid in full in cash on the Effective Date. Notwithstanding anything else contained in the Plan or the Confirmation Order, or DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 15 any amendments thereto, and notwithstanding the confirmation of the Plan, Wells Fargo, as Agent ("Agent") for the Bank Group and as the holder of the Bank Claims, and the members of the Bank Group, shall be entitled to all of the liens, protections, benefits, and priorities granted to it or confirmed by the (1) Second Amended and Restated Credit Agreement (as may have been amended, modified, supplemented, extended, renewed or restated from time to time) dated November 19, 1997; (2) Revolving Credit Note from Kitty Hawk, Inc. and it subsidiaries payable to the order of Wells Fargo Bank, N.A. in the original principal amount of $100 million; (3) Term Loan Note from Kitty Hawk and its subsidiaries to Wells Fargo, in the original principal sum of $45.9 million; and (4) any security agreement, deposit or other agreement evidencing a security interest, right of setoff or obligation owing to a member of the Bank Group and the Final Order Authorizing Use of Cash Collateral and Granting Adequate Protection and any subsequent financing orders (the "Financing Documents"). All such liens, protections, benefits, and priorities granted to Wells Fargo or the Bank Group in such Financing Documents shall continue until the Bank Claims are indefeasibly paid in full and satisfied, which Claims (i) are payable in their entirety, (ii) include unpaid principal and accrued but unpaid interest and fees as specified in the contract to the date of indefeasible payment of the Bank Claims, and (iii) are secured by reason of the first, valid, prior, and perfected liens and security interest granted under or in connection with, the Financing Documents. Within five business days before the Effective Date, the Bank Group shall provide the Debtors with a statement of all amounts constituting Bank Claims as of the Effective Date (the "Pay-off Amount"). If the Debtors dispute the Pay-off Amount, both the Debtors and the Bank Group agree that the Bankruptcy Court may determine the Pay-off Amount on an expedited basis. Upon payment of the Pay-off Amount, the Bank Group shall release all of its liens or assign such liens as directed by the Debtors. Notwithstanding the foregoing, all rights of the Bank Group pursuant to Section 13.2 of the Second Amended Credit Agreement shall survive the indefeasible payment in full of the Bank Claims as unsecured obligations of Kitty Hawk. The Bank Claims are finally allowed and are not subject to subordination or reconsideration. With respect to any claims related to the Financing Documents, or the Agent's or Bank Group's actions related to the Debtors or the Financing Documents, the Agent or Bank Group, and each of their representatives, shall have no liability to the Debtors or any third party (including creditors of any Debtors) and shall not be deemed to have been in control of the operations of the Debtors or to be acting as a "responsible person" or "owner or operator" with respect to the operation or management of the Debtors. 4.2 CLASS 2 - NOTEHOLDERS' SECURED CLAIMS (a) CLASSIFICATION: Class 2 consists of all Allowed Secured Claims of the Noteholders. The Allowed Class 2 Claims shall be subclassified so that the holders of the Allowed Class 2 Claims shall have a Claim against each Debtor whose property serves as the Noteholders' Wide Body Collateral or the Noteholders' 727 Collateral. (b) TREATMENT: Class 2 is impaired, and the holders of Allowed Claims in Class 2 are entitled to vote on the Plan. The Noteholders may vote their Allowed Class 2 Claims in the case of each Debtor whose property serves as the Noteholders' Wide Body Collateral or the Noteholders' 727 Collateral. On the Effective Date, the Reorganized Debtor shall satisfy the DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 16 Noteholders' Secured Claim that is secured by the Noteholders' 727 Collateral (i) through the payment to the Noteholders of cash equal to the current value of the 727 Collateral, which the Debtors, Indenture Trustee, and an Unofficial Committee of Noteholders have agreed is $55 million, (ii) by the delivery to the Indenture Trustee of the Net Proceeds of the Engines, and (iii) by the payment of the Noteholders' Fees by no later than the sixth month anniversary of the Effective Date. To the extent that the Noteholders' Wide Body Collateral and the Engines have not been liquidated and the net proceeds paid to the Indenture Trustee prior to the Effective Date, at the option of the Noteholders, acting through the Indenture Trustee, (i) KHI shall convey the Wide Body Collateral and Engines to the Indenture Trustee or an entity designated by the Indenture Trustee, or (ii) Reorganized Kitty Hawk shall liquidate the remaining Wide Body Collateral and Engines in cooperation with the Indenture Trustee and its agents and deliver the Net Proceeds to the Indenture Trustee pursuant to the Bankruptcy Court's Orders. The Bankruptcy Court shall retain jurisdiction to enter Orders (i) approving the sale of Wide Body Collateral and Engines and (ii) confirming to purchasers that such sale is free and clear of liens, claims and any other interest in such property that arose before the Confirmation Date. 4.3 CLASS 3 - SECURED CLAIMS OTHER THAN BANK CLAIMS AND CLAIMS OF THE NOTEHOLDERS. (a) CLASSIFICATION: Class 3 consists of all Allowed Secured Claims other than the Bank Claims and the Claims of the Noteholders. Each secured creditor shall be treated as a separate sub-class of Class 3. (b) TREATMENT: Class 3 is impaired, and the holders of Allowed Claims in Class 3 are entitled to vote on the Plan. Holders of Allowed Class 3 Claims may vote their Claims in the Case of each Debtor whose property secures their Claims. At the Debtors' option, on the Effective Date (a) the Plan may leave unaltered the legal, equitable, and contractual rights of the holder of an Allowed Secured Claim, OR (b) notwithstanding any contractual provision or applicable law that entitles the holder of an Allowed Secured Claim to demand or receive accelerated payment from the Debtors after the occurrence of a default, the Debtors may cure any such default, other than a default of a kind specified in section 365(b)(2) of the Bankruptcy Code, reinstate the maturity of such Claim as such maturity existed before such default, compensate the holder of such Claim for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law, and otherwise leave unaltered the legal, equitable or contractual rights to which such Claim entitles the holder, all pursuant to section 1124 of the Bankruptcy Code, OR (c) the Debtors may either (i) pay an Allowed Secured Claim in full, in cash, OR (ii) the Debtors may deliver to the holder of an Allowed Secured Claim the property securing such Claim, OR (iii) at Kitty Hawk's election and direction, Reorganized Kitty Hawk may deliver to the holder of an Allowed Secured Claim deferred cash payments in accordance with the requirements of section 1129(b)(2)(A)(II) of the Bankruptcy Code, in all of such events, the value of such holder's interest in such property shall be determined (A) by agreement of the Reorganized Debtor and the holder of such Allowed Secured Claim or (B) if they do not agree, by the Bankruptcy Court, OR (d) the Debtors may assume and assign the contract or agreement governing an Allowed Secured Claim pursuant to section 365(b) of the Bankruptcy Code, OR (e) the Debtors may pay an Allowed Secured Claim in such manner as may be agreed to by the holder of such Claim. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 17 4.4 CLASS 4 - PRIORITY CLAIMS. (a) CLASSIFICATION: Class 4 consists of all non-tax Priority Claims. (b) TREATMENT: Class 4 is impaired and the holders of Allowed Claims in Class 4 are entitled to vote on the Plan. The treatment set forth below shall be the same for each holder of an Allowed Priority Claim against each of the Debtors and each holder of an Allowed Priority Claim may vote in the case of the Debtor liable on such Claim. Unless otherwise agreed to by the parties, each holder of an Allowed Claim in Class 4 will be paid the Allowed amount of such Claim in full in cash by the Reorganized Debtor on or before the later of (a) the first practicable date after the Effective Date, (b) the Allowance Date, and (c) such other date as is mutually agreed upon by the Reorganized Debtor and the holder of such Claim. 4.5 CLASS 5 - CONVENIENCE CLAIMS (a) CLASSIFICATION: Class 5 consists of Allowed Convenience Claims. Allowed Convenience Claims shall be subclassified based on the Debtor liable on such Claim. (b) TREATMENT: Class 5 is impaired and the holders of Allowed Claims in Class 5 are entitled to vote on the Plan. The holder of Allowed Class 5 Claims against more than one Debtor may vote their Allowed Class 5 Claims in the case of each Debtor that is liable on such Claims. However, if more than one Debtor is liable on the same Class 5 Claim, the holder of such claim shall be paid no more than $500 on account of such Claim and such payment shall be in full satisfaction of all Debtors' liability on such Claim. Each holder of an Allowed Unsecured Claim(s) that is $500 or less, or that is more than $500, but the holder of which elects on the Ballot to have its Allowed Unsecured Claim(s) reduced to $500 and treated as a single Allowed Class 5 Convenience Claim, shall receive, on the Effective Date or as soon thereafter as practicable, payment from the Debtors in cash in an amount equal to the lesser of $500 or the allowed amount of such Claim(s). Creditors electing to reduce their Claims to $500 waive the remainder of their Claims and shall not be entitled to any other distribution in this Plan or from the Debtors. 4.6 CLASS 6 - UNSECURED NOTEHOLDER CLAIMS (a) CLASSIFICATION: Class 6 consists of all Allowed Unsecured Claims of Noteholders. Allowed Class 6 Claims shall be subclassified based on the Debtor(s) liable on such Claim. (b) TREATMENT: Class 6 is impaired and the holders of Allowed Claims in Class 6 are entitled to vote on the Plan. The holders of Allowed Class 6 Claims shall be entitled to vote their Claims in the Case of each Debtor that is liable on such Claim. Nevertheless, holders of Allowed Unsecured Claims in Class 6 (including each subclass of Class 6) shall receive a Pro Rata distribution of the Class 6 Stock Distribution based on the proportion that their Allowed Class 6 Claim (counted once only) bears to all Allowed Class 6 Claims (with each Allowed Class 6 Claim DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 18 counted only once) and such distribution shall be in full satisfaction of all Debtors' liability on such Claim. 4.7 CLASS 7 - OTHER UNSECURED CLAIMS 4.7.1 CLASS 7A (a) CLASSIFICATION: Class 7A consists of all Allowed Other Unsecured Claims against Kitty Hawk, Inc. (b) TREATMENT: Class 7A is impaired and the holders of Allowed Claims in Class 7A are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7A shall receive a Pro Rata distribution of the Class 7A Stock Distribution. Holders of Class 7A Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share.To the extent that a Class 7B Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7A Claimant's shares of New Common Stock, the number of the Class 7A Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7A Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.2 CLASS 7B (a) CLASSIFICATION: Class 7B consists of all Allowed Other Unsecured Claims against Cargo. (b) TREATMENT: Class 7B is impaired and the holders of Allowed Claims in Class 7B are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7B shall receive a Pro Rata distribution of the Class 7B Stock Distribution. Holders of Class 7B Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7B Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7B Claimant's shares of New Common Stock, the number of the Class 7B Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7B Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.3 CLASS 7C (a) CLASSIFICATION: Class 7C consists of all Allowed Other Unsecured Claims against Aircargo. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 19 (b) TREATMENT: Class 7C is impaired and the holders of Allowed Claims in Class 7C are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7C shall receive a Pro Rata distribution of the Class 7C Stock Distribution. Holders of Class 7C Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7C Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7C Claimant's shares of New Common Stock, the number of the Class 7C Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7C Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.4 CLASS 7D (a) CLASSIFICATION: Class 7D consists of all Allowed Other Unsecured Claims against International. (b) TREATMENT: Class 7D is impaired and the holders of Allowed Claims in Class 7D are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7D shall receive a Pro Rata distribution of the Class 7D Stock Distribution. Holders of Class 7D Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7D Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7D Claimant's shares of New Common Stock, the number of the Class 7D Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7D Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.5 CLASS 7E (a) CLASSIFICATION: Class 7E consists of all Allowed Other Unsecured Claims against Charters. (b) TREATMENT: Class 7E is impaired and the holders of Allowed Claims in Class 7E are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7E shall receive a Pro Rata distribution of the Class 7E Stock Distribution. Holders of Class 7E Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7E Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7E Claimant's shares of New Common Stock, the number of the Class 7E Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7E Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 20 4.7.6 CLASS 7F (a) CLASSIFICATION: Class 7F consists of all Allowed Other Unsecured Claims against Longhorn Solutions. (b) TREATMENT: Class 7F is impaired and the holders of Allowed Claims in Class 7F are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7F shall receive a Pro Rata distribution of the Class 7F Stock Distribution. Holders of Class 7F Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7F Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7F Claimant's shares of New Common Stock, the number of the Class 7F Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7F Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.7 CLASS 7G (a) CLASSIFICATION: Class 7G consists of all Allowed Other Unsecured Claims against Aircraft Leasing. (b) TREATMENT: Class 7G is impaired and the holders of Allowed Claims in Class 7G are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7G shall receive a Pro Rata distribution of the Class 7G Stock Distribution. Holders of Class 7G Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7G Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7G Claimant's shares of New Common Stock, the number of the Class 7G Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7G Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.8 CLASS 7H (a) CLASSIFICATION: Class 7H consists of all Allowed Other Unsecured Claims against American International Travel. (b) TREATMENT: Class 7H is impaired and the holders of Allowed Claims in Class 7H are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7H shall receive a Pro Rata distribution of the Class 7H Stock Distribution. Holders of Class 7H Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7H Claimant elects to have its New Common Stock redeemed and the Private Placement DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 21 Proceeds are insufficient to redeem all of such Class 7H Claimant's shares of New Common Stock, the number of the Class 7H Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7H Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.9 CLASS 7I (a) CLASSIFICATION: Class 7I consists of all Allowed Other Unsecured Claims against Flight One Logistics. (b) TREATMENT: Class 7I is impaired and the holders of Allowed Claims in Class 7I are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7I shall receive a Pro Rata distribution of the Class 7I Stock Distribution. Holders of Class 7I Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7I Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7I Claimant's shares of New Common Stock, the number of the Class 7I Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7I Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.7.10 CLASS 7J (a) CLASSIFICATION: Class 7J consists of all Allowed Other Unsecured Claims against OK Turbines. (b) TREATMENT: Class 7J is impaired and the holders of Allowed Claims in Class 7J are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7J shall receive a Pro Rata distribution of the Class 7J Stock Distribution. Holders of Class 7J Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7J Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7J Claimant's shares of New Common Stock, the number of the Class 7J Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7J Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 4.8 CLASS 8 - OLD COMMON STOCK (a) CLASSIFICATION: Class 8 consists of all Interests in Old Common Stock. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 22 (b) TREATMENT: Holders of Interests in Class 8 will receive no distribution under the Plan. and are deemed to have rejected the Plan. The Old Common Stock will be canceled on the Effective Date. 4.9 CLASS 9 - SECURITIES CLAIMS (a) CLASSIFICATION: Class 9 consists of all Allowed Securities Claims. (b) TREATMENT: Holders of Class 9 Claims shall be treated with the same priority as the Old Common Stock pursuant to Section 510(b) of the Code and will receive no distribution under the Plan. ARTICLE 5 ACCEPTANCE OR REJECTION OF THE PLAN 5.1 VOTING CLASSES. The holders of Claims in Classes 1, 2, 3 ,4, 5, 6 and 7 are impaired and shall be entitled to vote to accept or reject the Plan. 5.2 PRESUMED REJECTION OF PLAN. The holders of Interests and Claims in Classes 8 and 9 are not being solicited to accept or reject the Plan and will be deemed to have rejected the Plan. ARTICLE 6 MANNER OF DISTRIBUTION OF PROPERTY UNDER THE PLAN 6.1 DISTRIBUTION PROCEDURES. Except as otherwise provided in the Plan, all distributions of Cash and other property shall be made by the Reorganized Debtor on the later of the Effective Date or the Allowance Date, or as soon thereafter as practicable. Distributions required to be made on a particular date shall be deemed to have been made on such date if actually made on such date or as soon thereafter as practicable. No payments or other distributions of property shall be made on account of any Claim or portion thereof unless and until such Claim or portion thereof is Allowed. 6.2 DISTRIBUTION OF NEW COMMON STOCK. The Reorganized Debtor shall distribute all of the New Common Stock to be distributed under the Plan. The initial distribution of New Common Stock on account of Allowed Claims shall be on the Effective Date or as soon thereafter as practicable. The Reorganized Debtor may employ or contract with other entities to assist in or perform the distribution of New Common Stock. On each Quarterly Surplus Distribution Date, the Reorganized Debtor shall distribute to holders of Allowed Class 6 and Class 7 Claims, in accordance with the terms of the Plan, all shares in the Class 6 Stock Reserve Surplus Account and the Class 7 Stock Reserve Surplus Account, PROVIDED HOWEVER, that if, in the Reorganized Debtor's judgment, the aggregate value of the shares remaining in the Class 6 Stock Reserve Surplus Account or the DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 23 Class 7 Stock Reserve Surplus Account is less than can be economically distributed, the Reorganized Debtor may elect to hold such shares and distribute them on the next Quarterly Surplus Distribution Date. All distributions on account of Class 6 Claims shall be made by the Reorganized Debtor to the Indenture Trustee. The Reorganized Debtor shall pay all reasonable fees and expenses of the Indenture Trustee and/or the Depository Trust Corporation or Cede & Co. in acting as distribution agent as and when such fees and expenses become due without further order of the Bankruptcy Court. To the extent that a Class 6 Claim is a Disputed or undetermined Claim on the Effective Date, the distribution of New Common Stock allocable to the Disputed or undetermined portion of such Claim shall be deposited in the Class 6 Stock Reserve Account. To the extent that a Class 7 Claim is a Disputed or undetermined Claim on the Effective Date, the distribution of New Common Stock allocable to the Disputed or undetermined portion of such Claim shall be deposited in the Class 7 Stock Reserve Account. To the extent that a Class 6 or Class 7 Claim is Allowed after the Effective Date, the holder thereof shall be entitled to receive the New Common Stock reserved with respect to the Allowed amount of such Claim (including Shares representing distributions of Debtor's shares from the Class 6 Stock Reserve Surplus Account or the Class 7 Stock Reserve Surplus Account). 6.3 DISTRIBUTIONS BY INDENTURE TRUSTEE. Subject to any liens it may assert under the Indenture for the recovery of expenses, and subject to Section 6.4 below, the Indenture Trustee shall distribute to the record Noteholders, as appearing on the books and records of the Indenture Trustee on the Distribution Date, all cash and New Common Stock received by the Indenture Trustee under the Plan. In the event a record Noteholder is a depository or custodian for legal or beneficial owners of the Notes (such party being a "Custodian") and is unwilling to receive distributions on behalf of such owners of the Notes then the Indenture Trustee shall obtain from such Custodian a list of the parties for whom, as of the Distribution Date, it serves as custodian and/ depository and (i) the Indenture Trustee shall directly distribute to such owners of Notes their Pro Rata share of Cash received by the Indenture Trustee on Account of Class 2 Claims (subject to the lien of the Indenture Trustee) and (ii) the Indenture Trustee shall furnish to the Debtors such information as the Indenture Trustee has or may reasonably obtain that will permit the Debtors to issue New Common Stock to the owners of the Notes as appearing in the records of the Custodian, certificates for which the Debtors will forward directly to the owners. As of the close of business on the Distribution Date, the transfer ledgers with respect to the Senior Notes shall be closed and the Debtors, the Reorganized Debtor, and the Indenture Trustee shall have no obligation to recognize any transfer of the Senior Notes occurring thereafter. 6.4 SURRENDER AND CANCELLATION OF OLD SECURITIES. As a condition to receiving the New Securities distributable under the Plan, the record holders of Senior Notes shall surrender their Senior Notes, if held in certificate form, to the Indenture Trustee. When a holder surrenders its Senior Notes to the Trustee, the Indenture Trustee shall hold the instrument in "book entry only" until such instruments are canceled. Any holder of Senior Notes DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 24 whose instrument has been lost, stolen, mutilated or destroyed shall, in lieu of surrendering such instrument, deliver to the Indenture Trustee: (a) evidence satisfactory to the Indenture Trustee of the loss, theft, mutilation or destruction of such instrument, and (b) such security or indemnity that may be reasonably required by the Indenture Trustee to hold the Indenture Trustee harmless with respect to any such representation of the holder. Upon compliance with the preceding sentence, such holder shall, for all purposes under the Plan, be deemed to have surrendered such instrument. Any holder of a Senior Note which has not surrendered or have been deemed to surrender its Senior Notes within two years after the Effective Date, shall have its Claim as a holder of Senior Notes disallowed, shall receive no distribution on account of its Claim as a holder of Senior Notes, and shall be forever barred from asserting any Claim on account of its Senior Notes. Any New Common Stock issued and held for distribution on account of such disallowed claims of holders of Senior Notes shall be returned to the Reorganized Debtor and shall be deposited in the Stock Reserve Surplus Account. As of the Effective Date, all Senior Notes shall represent only the right to participate in the distributions provided in the Plan on account of such Senior Notes. 6.5 DISPUTED CLAIMS. Notwithstanding any other provisions of the Plan, no payments or distributions shall be made on account of any Disputed Claim until such Claim becomes an Allowed Claim, and then only to the extent that it becomes an Allowed Claim. 6.6 MANNER OF PAYMENT UNDER THE PLAN. Cash payments made pursuant to the Plan shall be in U.S. dollars by checks drawn on a domestic bank selected by the Reorganized Debtor, or by wire transfer from a domestic bank, at Reorganized Debtor's option, except that payments made to foreign trade creditors holding Allowed Claims may be paid, at the option of Reorganized Debtor in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. All distributions of Cash on account of Class 2 Claims shall be made to the Indenture Trustee. Upon receipt of such Cash, the Indenture Trustee shall distribute the cash as provided in Section 6.3. 6.7 DELIVERY OF DISTRIBUTIONS AND UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS. (a) DELIVERY OF DISTRIBUTIONS IN GENERAL. Except as provided below in Section 6.7(b) for holders of undeliverable distributions, distributions to holders of Allowed Claims shall be distributed by mail as follows: (a) except in the case of the holder of a Senior Note, (1) at the addresses set forth on the respective proofs of claim filed by such holders; (2) at the addresses set forth in any written notices of address changes delivered to the Reorganized Debtor after the date of any related proof of claim; or (3) at the address reflected on the Schedule of Assets and Liabilities Filed by the Debtors if no proof of claim or proof of interest is Filed and the Reorganized Debtor have not received a written notice of a change of address; and (b) in the case of the holder of the Senior Notes, as provided in Sections 6.3 and 6.4 above. (b) UNDELIVERABLE DISTRIBUTIONS. (i) HOLDING AND INVESTMENT OF UNDELIVERABLE PROPERTY. If the distribution to the holder of any Claim other than the holder of Senior Notes is returned to the Reorganized Debtor as undeliverable, no further distribution shall be made to such holder unless and DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 25 until the Reorganized Debtor is notified in writing of such holder's then current address. Subject to Section 7.8(b)(ii), undeliverable distributions shall remain in the possession of the Reorganized Debtor pursuant to this Section until such times as a distribution becomes deliverable. Unclaimed Cash (including interest, dividends and other consideration, if any, distributed on or received for undeliverable New Common Stock) shall be held in trust in a segregated bank account in the name of the Reorganized Debtor, for the benefit of the potential claimants of such funds, and shall be accounted for separately. Undeliverable New Common Stock shall be held in trust for the benefit of the potential claimants of such securities by the Reorganized Debtor in a number of shares sufficient to provide for the unclaimed amounts of such securities, and shall be accounted for separately. (ii) DISTRIBUTION OF UNDELIVERABLE PROPERTY AFTER IT BECOMES DELIVERABLE AND FAILURE TO CLAIM UNDELIVERABLE PROPERTY. Any holder of an Allowed Claim other than a holder of a Senior Note who does not assert a claim for an undeliverable distribution held by the Reorganized Debtor within one (1) year after the Effective Date shall no longer have any claim to or interest in such undeliverable distribution, and shall be forever barred from receiving any distributions under this Plan. In such cases, any New Common Stock shall be deposited in the Stock Reserve Surplus Account. 6.8 DE MINIMIS DISTRIBUTIONS. No Cash payment of less than twenty-five dollars ($25.00) shall be made to any holder on account of an Allowed Claim unless a request therefor is made in writing to the Reorganized Debtor. 6.9 FAILURE TO NEGOTIATE CHECKS. Checks issued in respect of distributions under the Plan shall be null and void if not negotiated within 60 days after the date of issuance. Any amounts returned to the Reorganized Debtor in respect of such checks shall be held in reserve by the Reorganized Debtor. Requests for reissuance of any such check may be made directly to the Reorganized Debtor by the holder of the Allowed Claim with respect to which such check originally was issued. Any claim in respect of such voided check is required to be made before the second anniversary of the Effective Date. All Claims in respect of void checks and the underlying distributions shall be discharged and forever barred from assertion against the Reorganized Debtor and their property. 6.10 COMPLIANCE WITH TAX REQUIREMENTS. In connection with the Plan, to the extent applicable, the Reorganized Debtor shall comply with all withholding and reporting requirements imposed on it by any governmental unit, and all distributions pursuant to the Plan shall be subject to such withholding and reporting requirements. 6.11 SETOFFS. Unless otherwise provided in a Final Order or in this Plan, the Debtors may, but shall not be required to, set off against any Claim and the payments to be made pursuant to the Plan in respect of such Claim, any claims of any nature whatsoever the Debtors may have against the holder thereof or its predecessor, but neither the failure to do so nor the allowance of any Claim hereunder shall constitute a waiver or release by the Debtors of any such Claims the Debtors may have against such holder or its predecessor. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 26 6.12 FRACTIONAL INTERESTS. The calculation of the percentage distribution of New Common Stock to be made to holders of certain Allowed Claims as provided elsewhere in this Plan may mathematically entitle the holder of such an Allowed Claim to a fractional interest in such New Common Stock. The number of shares of New Common Stock to be received by a holder of an Allowed Claim shall be rounded to the next lower whole number of shares. The total number of shares of New Common Stock to be distributed to a class of Claims shall be adjusted as necessary to account for the rounding provided for in this Section. No consideration shall be provided in lieu of the fractional shares that are rounded down and not issued. For purposes of applying this Section, the holders of Allowed Claims under or evidenced by Senior Notes shall, in the case of Senior Notes held in street name, mean the beneficial holders thereof as of the Distribution Date. ARTICLE 7 TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES 7.1 REJECTION OF ALL EXECUTORY CONTRACTS AND LEASES NOT ASSUMED. The Plan constitutes and incorporates a motion by the Debtors to reject, as of the Confirmation Date, all pre- petition executory contracts and unexpired leases to which the Debtors are a party, except for any executory contract or unexpired lease that (i) has been assumed or rejected pursuant to a Final Order, (ii) is the subject of a pending motion for authority to assume the contract or lease Filed by the Debtors prior to the Confirmation Date, or (iii) is identified in the Plan Supplement as an executory contract or lease that Debtors intend to assume. Assumption by any of the Debtors shall constitute assumption by the Reorganized Debtor as the successor to each of the Debtors. The filing of the Plan Supplement shall constitute a motion by Debtors to assume, effective on the Effective Date, the executory contracts and leases identified therein. With respect to leases and executory contracts not previously assumed, the Plan Supplement shall set forth a cure amount in accordance with section 365(b)(1) of the Bankruptcy Code for each unexpired lease and executory contract to be assumed. Unless the non-debtor parties timely object to such amount, the confirmation of the Plan shall constitute consent to the approval of the assumption of such executory contracts and unexpired leases and a determination that such cure amount is sufficient under section 365(b)(1) of the Bankruptcy Code. 7.2 CURE PAYMENTS. Any monetary defaults under each executory contract and unexpired lease to be assumed under the Plan in the amount either set forth in the Plan Supplement, motion to assume, or Final Order shall be satisfied, pursuant to section 365(b)(1) of the Bankruptcy Code, either: (1) by payment by the Reorganized Debtor of the default amount in Cash on the Effective Date, or (2) on such other terms as agreed to by the Reorganized Debtor and the non-debtor parties to such executory contract or unexpired lease. In the event of a dispute regarding (i) the amount of any cure payments, (ii) the ability of the Reorganized Debtor to provide adequate assurance of future performance under the contract or lease to be assumed, or (iii) any other matter pertaining to assumption, the cure payments required by section 365(b)(1) of the Bankruptcy Code DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 27 shall be made by the Reorganized Debtor following the entry of a Final Order resolving the dispute and approving assumption. 7.3 BAR DATE FOR FILING OF REJECTION CLAIMS. Any Claim for damages arising from the rejection under this Plan of an executory contract or unexpired lease must be Filed within thirty (30) days after the mailing of notice of Confirmation or be forever barred and unenforceable against the Debtors, the Estates, any of their affiliates and their properties and barred from receiving any distribution under this Plan. ARTICLE 8 MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN 8.1 EXIT FINANCING. On the Effective Date, the Reorganized Debtor shall enter into a loan agreement providing available funds in a sufficient amount, when combined with the Debtors' available resources, to fund the Reorganized Debtor's obligations under the Plan and to meet its ongoing business needs (the "Exit Financing"). Simultaneously with the closing of the Exit Financing transaction, the Reorganized Debtor will satisfy the Allowed Secured Claims of the Bank Group from Cash on hand and a portion of the proceeds of the Exit Financing, and the Bank Group shall, at the option of the Reorganized Debtor, either release its liens on the property of the Reorganized Debtor or assign the liens as directed by the Reorganized Debtor. The exit lender shall be granted a lien on assets of the Reorganized Debtor. 8.2 PRIVATE PLACEMENT. The Debtors shall use commercially reasonable efforts to sell up to five (5) million shares of New Common Stock through the Private Placement. The sale(s) will close on the Effective Date or as soon thereafter as possible. 8.3 MERGER OF CORPORATE ENTITIES. Prior to the Effective Date, Aircargo will form a wholly-owned subsidiary in Delaware, named Kitty Hawk Aircargo, Inc. On the Effective Date, American International Travel, Aircraft Leasing, Cargo, Charters, Flight One Logistics, International, Longhorn Solutions and OK Turbines will merge with and into Kitty Hawk, with Kitty Hawk being the surviving corporation in each of the mergers. In addition, Kitty Hawk Aircargo, Inc. (the Texas corporation) will merge with and into Kitty Hawk Aircargo, Inc. (the Delaware corporation), with Kitty Hawk Aircargo, Inc. (the Delaware corporation) being the surviving corporation in the merger. Immediately after the foregoing mergers, Kitty Hawk will merge with and into Kitty Hawk Aircargo, Inc. (the Delaware corporation), with Kitty Hawk Aircargo, Inc. (the Delaware corporation) being the surviving corporation in the merger. As a result of the mergers, Kitty Hawk Aircargo, Inc. (the Delaware corporation) will succeed to all of the assets, liabilities and rights of the Debtors. 8.4 BOARD OF DIRECTORS OF THE REORGANIZED DEBTOR. On the Effective Date, the existing directors of Kitty Hawk, Inc. shall be deemed removed from office pursuant to the operation of the Confirmation Order. On the Effective Date, the Reorganized Debtor will amend its bylaws to provide that the board of directors of the Reorganized Debtor shall be comprised of seven (7) DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 28 members, five (5) of which shall be selected by the Noteholders and two (2) of which shall be selected by the Debtor. All such selections shall be by written designation filed as a Plan Document by the selecting Person. Any director not so selected on a timely basis shall be designated by the Debtor on the Confirmation Date, subject to approval of the Court. Such amended bylaws shall provide that all such directors shall serve for a one-year term and shall not be subject to removal other than for cause during the first year following the Effective Date. Such amended bylaws shall provide that thereafter directors shall be elected at annual meetings of the shareholders of the Reorganized Debtor in accordance with the bylaws of the Reorganized Debtor and applicable law. 8.5 CANCELLATION OF OLD SECURITIES. On the Effective Date, all Old Securities shall be terminated and canceled, and the indenture or statements of resolution governing such Old Securities shall be rendered void except that, with respect to the powers of the Indenture Trustee, the Indenture for the Senior Notes shall remain in force and effect until all of the Noteholders' Wide Body Collateral has been liquidated and all distributions to Noteholders as provided in this Plan have been made. Notwithstanding the foregoing, such termination will not impair the rights and duties under such indenture as between Indenture Trustee and the beneficiaries of the trust created thereby including, but not limited to, the right of the Indenture Trustee to receive payment of its fees and expenses, to the extent not paid by the Company, from amounts distributable to holders of Senior Notes. 8.6 AUTHORIZATION AND ISSUANCE OF NEW COMMON STOCK. The Confirmation Order shall provide for the authorization of 65 million shares of stock in the Reorganized Debtor, of which 55 million shall be the New Common Stock (the issued and outstanding shares of the Reorganized Debtor). The remaining 10 million authorized shares shall be reserved and shall not be distributed without action by the Board of Directors selected in the manner described in Section 8.4 of this Plan. 8.7 REGISTRATION EXEMPTION FOR DEBTOR'S NEW COMMON STOCK DISTRIBUTED TO CREDITORS. The Confirmation Order shall provide that the distribution of the New Common Stock to holders of Allowed Claims pursuant to the Plan and the Amended Certificate of Incorporation shall be exempt from any and all federal, state and local laws requiring the registration of such security, to the extent provided by section 1145 of the Bankruptcy Code. 8.8 CHARTER AND BY-LAWS. The certificate of incorporation of the Reorganized Debtor shall read substantially as set forth in the Amended Certificate of Incorporation. The by-laws of the Reorganized Debtor shall read substantially as set forth in the Amended By-Laws. 8.9 CORPORATE ACTION. Upon entry of the Confirmation Order, the following shall be and be deemed authorized and approved in all respects: (i) the filing by the Reorganized Debtor of the Amended Certificate of Incorporation, (ii) the Amended By-Laws, (iii) the mergers contemplated by Section 8.3 hereof, and (iv) the issuance of the New Common Stock. On the Effective Date, or as soon thereafter as is practicable, the Reorganized Kitty Hawk shall file with the Secretary of State of the State of Delaware, in accordance with applicable state law, the Amended Certificate of Incorporation which shall conform to the provisions of the Plan and prohibit the issuance of non- voting equity securities. On the Effective Date, the matters provided under the Plan involving the capital and corporate structures and governance of the Reorganized Kitty Hawk, including the DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 29 mergers effectuated pursuant to Section 8.3 hereof, shall be deemed to have occurred and shall be in effect from and after the Effective Date pursuant to applicable state laws without any requirement of further action by the stockholders or directors of the Debtors or the Reorganized Kitty Hawk. On the Effective Date, the Reorganized Debtor shall be authorized and directed to take all necessary and appropriate actions to effectuate the transactions contemplated by the Plan and the Disclosure Statement in the name of and on behalf of the Reorganized Kitty Hawk. 8.10 RELEASE OF FRAUDULENT CONVEYANCE CLAIMS. On the Effective Date, in consideration of the compromise with the holders of the Senior Notes incorporated into this Plan and more fully described in Section IV, 4, b (2) of the Disclosure Statement, which settlement results in a greater distribution to holders of Allowed Unsecured Claims that are not Noteholder Claims, Reorganized Kitty Hawk, on its own behalf and as representative of the Debtors' Estates, releases the Indenture Trustee and the Noteholders, their predecessors and successors in interest, from all claims, obligations, suits, judgments, damages, rights, causes of action and liabilities whatsoever, whether known or unknown, foreseen or unforeseen, in law or in equity, based in whole or in part on an allegation that any of the Debtors' obligations on the Senior Notes, including any guaranty liabilities, are avoidable or unenforceable. 8.11 OTHER RELEASES BY DEBTORS. (a) On the Effective Date, the Reorganized Debtor, on its own behalf and as representative of the Debtors' Estates, in consideration of services rendered in the Reorganization Case and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, releases unconditionally, and is hereby deemed to release unconditionally, each of the Released Officers and Directors from any and all claims, obligations, suits, judgments, damages, rights, causes of action and liabilities whatsoever (including, without limitation, those arising under the Code), whether known or unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity or otherwise, based in whole or in part on any act, omission, transaction, event or other occurrence taking place before, on or after the Petition Date up to the Effective Date, in any way relating to the Debtors (before, on or after the Petition Date), the Reorganization Case, or the Plan; PROVIDED, HOWEVER, that the foregoing release shall not apply to any action or omission that constitutes actual fraud or criminal behavior and shall not apply to any claims or causes of action against Conrad Kalitta, the Kalitta Companies or any entity owned or controlled by either; PROVIDED FURTHER, HOWEVER, nothing in the Plan or the Confirmation Order shall constitute a release of any obligations, whether based on contract, statute or other applicable law, of present or former officers and directors of the Debtors in respect of the Debtors' confidential or proprietary information or of their agreements, obligations or undertakings not to engage in activities that are competitive with the Debtors' businesses. 8.12 PRESERVATION OF RIGHTS OF ACTION. Except as otherwise provided in the Plan, or in any contract, instrument, release, or other agreement entered into in connection with the Plan, in accordance with section 1123(b) of the Bankruptcy Code, Reorganized Kitty Hawk shall retain and may enforce any claims, rights and causes of action that the Debtors or the Estates may hold against any entity, including, without limitation, any claims, rights or causes of action arising under sections 544 through 551 or other sections of the Bankruptcy Code or any similar provisions of state law, or any other statute or legal theory. The Reorganized Debtor shall retain and may enforce the rights of DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 30 each of the Debtors to object to Claims on any basis, including 11 U.S.C. ss. 502(d). The Reorganized Debtor may pursue those rights of action, as appropriate, in accordance with what is in the best interests of the Reorganized Debtor. 8.13 OBJECTIONS TO CLAIMS. Except as otherwise provided for with respect to applications of professionals for compensation and reimbursement of expenses under Section 3.1(c)(ii) hereof, or as otherwise ordered by the Bankruptcy Court after notice and a hearing, objections to Claims, including Administrative Claims, shall be Filed and served upon the holder of such Claim or Administrative Claim not later than the later of (a) one hundred twenty (120) days after the Effective Date, and (b) one hundred twenty (120) days after a proof of claim or request for payment of such Administrative Claim is Filed, unless this period is extended by the Court. Such extension may occur ex parte. After the Effective Date, the Reorganized Debtor shall have the exclusive right to object to Claims. 8.14 RETIREE BENEFITS. On or after the Effective Date, pursuant to section 1129(a)(13) of the Bankruptcy Code, the Company will continue to pay all retiree benefits, as that term is defined in section 1114 of the Bankruptcy Code, at the level established pursuant to subsection (e)(1)(B) or (g) of section 1114, at any time prior to confirmation of the Plan, for the duration of the period the Debtors have obligated themselves to provide such benefits. 8.15 EXEMPTION FROM STAMP AND SIMILAR TAXES. The issuance and transfer of Debtors' New Common Stock as provided in this Plan shall not be taxed under any law imposing a stamp tax or similar tax in accordance with 11 U.S.C.ss.1146(c). ARTICLE 9 CONDITIONS TO EFFECTIVENESS OF THE PLAN 9.1 CONDITIONS TO EFFECTIVENESS. Except as expressly waived by the Debtors, the following conditions must occur and be satisfied on or before the Effective Date: (a) the Confirmation Order shall have been signed by the Court and duly entered on the docket for the Reorganization Cases by the clerk of the Court in form and substance acceptable to the Debtors; (b) the Confirmation Order shall have become an Effective Confirmation Order and not have been stayed, modified, reversed or amended; and (c) the Debtors have secured exit financing in a sufficient amount, when combined with the Debtors' available resources, to fund the Reorganized Debtor's obligations under the Plan and to meet its ongoing business needs. 9.2 WAIVER OF CONDITIONS. The Debtors and any co-Plan proponent may waive the condition set forth in 9.1(b) and (c) at any time, without notice, without leave of or order of the DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 31 Court, and without any formal action other than proceeding to consummate the Plan; provided however, that the Debtors may not waive the condition set forth in 9.1(c) without the consent of the Bank Group. 9.3 NO REQUIREMENT OF FINAL ORDER. So long as no stay is in effect, the Debtors' Effective Date of the Plan will occur notwithstanding the pendency of an appeal of the Confirmation Order or any Order related thereto. In that event, the Debtors or Reorganized Debtor may seek dismissal of any such appeal as moot following the Effective Date of the Plan. ARTICLE 10 EFFECTS OF PLAN CONFIRMATION 10.1 BINDING EFFECT. The Plan shall be binding upon all present and former holders of Claims and Equity Interests, and their respective successors and assigns, including the Reorganized Debtors. 10.2 MORATORIUM, INJUNCTION AND LIMITATION OF RECOURSE FOR PAYMENT. Except as otherwise provided in the Plan or by subsequent order of the Bankruptcy Court, the Confirmation Order shall provide, among other things, that from and after the Confirmation Date, all Persons or entities who have held, hold, or may hold Claims against or Equity Interests in the Debtors are permanently enjoined from taking any of the following actions against the Estates, the Reorganized Debtors, the Creditors' Committee, the Indenture Trustee, and the Unofficial Noteholders' Committee or any of their property on account of any such Claims or Equity Interests: (i) commencing or continuing, in any manner or in any place, any action or other proceeding; (ii) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order; (iii) creating, perfecting or enforcing any lien or encumbrance; (iv) asserting a setoff, right of subrogation or recoupment of any kind against any debt, liability or obligation due to the Debtor other than through a proof of claim or adversary proceeding; and (v) commencing or continuing, in any manner or in any place, any action that does not comply with or is inconsistent with the provisions of the Plan; PROVIDED, HOWEVER, that nothing contained herein shall preclude such persons from exercising their rights pursuant to and consistent with the terms of this Plan. 10.3 EXCULPATION AND LIMITATION OF LIABILITY. None of the Indenture Trustee and any professional Persons retained by it; the Creditors' Committee and any professional Persons retained by it; the Unofficial Noteholders' Committee, its members and any professional Persons retained by it; the Debtors and the professional Persons employed by the Debtors; any of their affiliates nor any of their officers, directors, partners, associates, employees, members of agents (collectively, the "Exculpated Persons"), shall have or incur any liability to any person for any act taken or omission made in good faith in connection with or related to the Bankruptcy Cases or actions taken therein, including negotiating, formulating, implementing, confirming or consummating the Plan, the Disclosure Statement, or any contract, instrument, or other agreement or document created in connection with the Plan. The Exculpated Persons shall have no liability to any Creditors or Equity Security Holders for actions taken under the Plan, in connection therewith or with respect thereto in good faith, including, without limitation, failure to obtain Confirmation of the Plan or to satisfy DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 32 any condition or condition, or refusal to waive any condition or conditions, precedent to Confirmation or to the occurrence of the Effective Date. Further, the Exculpated Persons will not have or incur any liability to any holder of a Claim, holder of an Interest, or party-in-interest herein or any other Person for any act or omission in connection with or arising out of their administration of the Plan or the property to be distributed under the Plan, except for gross negligence or willful misconduct as finally determined by the Bankruptcy Court, and in all respect such person will be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan. 10.4 REVESTING. On the Effective Date, the Reorganized Debtor will be vested with all the property of the respective estates of the Debtors free and clear of all Claims and other interests of creditors and equity holders, except as provided herein; provided, however, that the Debtors shall continue as debtors in possession under the Bankruptcy Code until the Effective Date, and, thereafter, the Reorganized Debtor may conduct its business free of any restrictions imposed by the Bankruptcy Code or the Court. 10.5 OTHER DOCUMENTS AND ACTIONS. The Debtors, the Debtors-In-Possession, and Reorganized Kitty Hawk may execute such documents and take such other action as is necessary to effectuate the transactions provided for in the Plan. 10.6 POST-CONSUMMATION EFFECT OF EVIDENCES OF CLAIMS OR INTERESTS. Senior Notes, Old Common Stock certificates, and other evidences of Claims against or Interests in the Debtors shall, effective upon the Effective Date, represent only the right to participate in the distributions contemplated by the Plan. 10.7 TERM OF INJUNCTIONS OR STAYS. Unless otherwise provided, all injunctions or stays provided for in the Reorganization Cases pursuant to sections 105 or 362 of the Bankruptcy Code or otherwise and in effect on the Confirmation Date shall remain in full force and effect until the Effective Date. ARTICLE 11 CONFIRMABILITY OF PLAN AND CRAMDOWN The Debtors request Confirmation under section 1129(b) of the Bankruptcy Code if any impaired class does not accept the Plan pursuant to section 1126 of the Bankruptcy Code. In that event, the Debtor reserves the right to modify the Plan to the extent, if any, that Confirmation of the Plan under section 1129(b) of the Bankruptcy Code requires modification. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 33 ARTICLE 12 RETENTION OF JURISDICTION Notwithstanding the entry of the Confirmation Order or the occurrence of the Effective Date, the Bankruptcy Court shall retain such jurisdiction over the Reorganization Case after the Effective Date as is legally permissible, including, without limitation, jurisdiction to: 12.1 Allow, disallow, determine, liquidate, classify or establish the priority or secured or unsecured status of or estimate any Claim or Interest, including, without limitation, the resolution of any request for payment of any Administrative Claim or Indenture Trustee Expenses and the resolution of any and all objections to the allowance or priority of Claims or Interests; 12.2 Grant or deny any and all applications for allowance of compensation or reimbursement of expenses authorized pursuant to the Bankruptcy Code or the Plan, for periods ending on or before the Effective Date; 12.3 Resolve any motions pending on the Effective Date to assume, assume and assign or reject any executory contract or unexpired lease to which the Debtors are parties or with respect to which the Debtors may be liable and to hear, determine and, if necessary, liquidate, any and all Claims arising therefrom; 12.4 Ensure that distributions to holders of Allowed Claims and Allowed Interests are accomplished pursuant to the provisions of the Plan; 12.5 Decide or resolve any and all applications, motions, adversary proceedings, contested or litigated matters and any other matters or grant or deny any applications involving the Debtors that may be pending on the Effective Date or that may be brought by the Debtors after the Effective Date, including Claims arising under Chapter 5 of the Bankruptcy Code; 12.6 Enter such Orders as may be necessary or appropriate to implement or consummate the provisions of the Plan and all contracts, instruments, releases, and other agreements or documents created in connection with the Plan or the Disclosure Statement; 12.7 Resolve any and all controversies, suits or issues that may arise in connection with the consummation, interpretation or enforcement of the Plan or any entity's obligations incurred in connection with the Plan; 12.8 Modify the Plan before or after the Effective Date pursuant to section 1127 of the Bankruptcy Code, or to modify the Disclosure Statement or any contract, instrument, release, or other agreement or document created in connection with the Plan or the Disclosure Statement; or remedy any defect or omission or reconcile any inconsistency in any Bankruptcy Court Order, the Plan, the Disclosure Statement or any contract, instrument, release, or other agreement or document created in connection with the Plan or the Disclosure Statement, in such manner as may be necessary or appropriate to consummate the Plan, to the extent authorized by the Bankruptcy Code; DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 34 12.9 Issue injunctions, enter and implement other orders or take such other actions as may be necessary or appropriate to restrain interference by any entity with consummation or enforcement of the Plan; 12.10 Enter and implement such orders as are necessary or appropriate if the Confirmation Order is for any reason modified, stayed, reversed, revoked or vacated; 12.11 To hear and determine such other matters as may be provided for in the Confirmation Order confirming this Plan or as may be permitted under the Bankruptcy Code and to issue such orders in aid of execution of the Plan to the extent authorized by section 1142 of the Bankruptcy Code, including using Bankruptcy Rule of Procedure 7070; and 12.12 Determine any other matters that may arise in connection with or relate to the Plan, the Disclosure Statement, the Confirmation Order or any contract, instrument, release, or other agreement or document created in connection with the Plan or the Disclosure Statement; 12.13 To enter orders approving the sale of the Noteholders' Wide Body Collateral and the Engines and confirming that the purchaser receives title free and clear of all liens, claims and other encumbrances that existed prior to the entry of the Confirmation Order and the occurrence of the Effective Date including adjudicating the value of the Wide Body Collateral and Engines, provided that no adjudication of such values shall alter the treatment under this Plan of the Claims of Noteholders. 12.14 Enter an order concluding the Reorganization Case. If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise without jurisdiction over any matter arising out of the Reorganization Case, including, without limitation, the matters set forth in this Article, this Article shall have no effect upon and shall not control, prohibit, or limit the exercise of jurisdiction by any other court having competent jurisdiction with respect to such matter. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 FRACTIONAL DOLLARS. Any other provision of the Plan notwithstanding, no payments of fractions of dollars will be made to any holder of an Allowed Claim. Whenever any payment of a fraction of a dollar to any holder of an Allowed Claim would otherwise be called for, the actual payment made will reflect a rounding of such fraction to the nearest whole dollar (up or down). 13.2 MODIFICATION OF PLAN. The Debtors reserve the right, in accordance with the Bankruptcy Code, to amend or modify the Plan prior to the entry of the Confirmation Order. After the entry of the Confirmation Order, the Reorganized Debtor may, upon order of the Court, amend or modify the Plan in accordance with section 1127(b) of the Bankruptcy Code, or remedy any defect DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 35 or omission or reconcile any inconsistency in the Plan in such manner as may be necessary to carry out the purpose and intent of the Plan. 13.3 WITHDRAWAL OF PLAN. The Debtors reserve the right, at any time prior to entry of the Confirmation Order, to revoke or withdraw the Plan. If the Debtors revoke or withdraw the Plan under this Section 13.3 or if the Effective Date does not occur, then the Plan shall be deemed null and void. In that event, nothing contained in the Plan shall be deemed to constitute a waiver or release of any Claims by or against the Debtors or any other person, or to prejudice in any manner the rights of the Debtors or any other person in any further proceedings involving the Debtors. 13.4 GOVERNING LAW. Except to the extent the Bankruptcy Code, the Bankruptcy Rules or the Delaware General Corporation Law are applicable, the rights and obligations arising under the Plan shall be governed by, and construed and enforced in accordance with the laws of the State of Texas, without giving effect to the principles of conflicts of law thereof. 13.5 TIME. In computing any period of time prescribed or allowed by this Plan, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is not a Business Day or, when the act to be done is the filing of a paper in court, a day on which weather or other conditions have made the clerk's office inaccessible, in which event the period runs until the end of the next day which is not one of the aforementioned days. When the period of time prescribed or allowed is less than eight days, intermediate days that are not Business Days shall be excluded in the computation. 13.6 PAYMENT DATES. Whenever any payment to be made under the Plan is due on a day other than a Business Day, such payment will instead be made, without interest, on the next Business Day. 13.7 HEADINGS. The headings used in this Plan are inserted for convenience only and neither constitute a portion of the Plan nor in any manner affect the provisions of the Plan. 13.8 SUCCESSORS AND ASSIGNS. The rights, benefits and obligations of any entity named or referred to in the Plan shall be binding on, and shall inure to the benefit of, any heir, executor, administrator, successor or assign of such entity. 13.9 SEVERABILITY OF PLAN PROVISIONS. If prior to Confirmation any term or provision of the Plan which does not govern the treatment of Claims or Interests or the conditions of the Effective Date, is held by the Bankruptcy Court to be invalid, void, or unenforceable, the Bankruptcy Court shall have the power to alter and interpret such term or provision to make it valid or enforceable to the maximum extent practicable, consistent with the original purpose of the term or provision held to be invalid, void, or unenforceable, and such term or provision shall then be applicable as altered or interpreted. Notwithstanding any such holding, alteration or interpretation, the remainder of the terms and provisions of the Plan will remain in full force and effect and will in no way be affected, impaired, or invalidated by such holding, alteration, or interpretation. The Confirmation Order shall constitute a judicial determination and shall provide that each term and provision of the Plan, as it DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 36 may have been altered or interpreted in accordance with the foregoing, is valid and enforceable pursuant to its terms. 13.10 NO ADMISSIONS. Notwithstanding anything herein to the contrary, nothing contained in the Plan shall be deemed as an admission by the Debtors with respect to any matter set forth herein, including, without limitation, liability on any Claim or the propriety of any Claims classification. 13.11 CREDITORS' COMMITTEE. The Creditors' Committee shall be dissolved on the Effective Date and all obligations and responsibilities of the members and professionals for the Creditors' Committee shall terminate. The Reorganized Debtor shall be substituted in place of the Creditors' Committee in any litigation pending upon the Effective Date and, at the Reorganized Debtor's option, prosecute, dismiss, compromise or dispose of such litigation. DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 Page 37 Dated: October 10, 2000. KITTY HAWK, INC. OK TURBINES, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ----------------------------------- ----------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK AIRCARGO, INC. LONGHORN SOLUTIONS, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ----------------------------------- ----------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK CHARTERS, INC. AIRCRAFT LEASING, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ----------------------------------- ----------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK INTERNATIONAL, INC. AMERICAN INTERNATIONAL TRAVEL, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ----------------------------------- ----------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK CARGO, INC. FLIGHT ONE LOGISTICS, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ----------------------------------- ----------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000
Robert D. Albergotti John D. Penn Sarah B. Foster State Bar No. 00969800 State Bar No. 15752300 State Bar No. 07297500 Haynes and Boone, LLP Haynes and Boone, LLP Haynes and Boone, LLP 901 Main Street, Suite 3100 201 Main Street, Suite 2200 600 Congress Ave., Suite 1600 Dallas, Texas 75202 Fort Worth, Texas 76102 Austin, Texas 78701 Tel. No. (214) 651-5000 Direct Tel. No. (817) 347-6610 Tel. No. (512) 867-8400 Fax No. (214) 651-5940 Direct Fax No. (817) 348-2300 Fax No. (512) 867-8470
/S/ JOHN D. PENN - ------------------------------------ Robert D. Albergotti (No. 00969800) John D. Penn (No. 15752300) Sarah B. Foster (No. 07297500) COUNSEL TO THE DEBTORS AND THE DEBTORS-IN-POSSESSION DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 EXHIBIT A TO DEBTORS' JOINT PLAN OF REORGANIZATION "Engines" includes all engines described in the Indenture and the supplements thereto and the following engines: A. Pratt & Whitney JT9D-7 Engines 662223, 662384, 662450, 662514, 685610, 685872, 689459, 689470, 701654, 701651, 701701 B. Rolls Royce RB211-524 Engines 14501, 14510, 14520, 14541, 14544, 14572, 14575 DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 EX-99.2 3 0003.txt EXHIBIT 99.2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION IN RE: ss. Chapter 11 ss. KITTY HAWK, INC., ss. CASE NO. 400-42141-BJH-11 KITTY HAWK AIRCARGO, INC., ss. CASE NO. 400-42142-BJH-11 KITTY HAWK CHARTERS, INC., ss. CASE NO. 400-42143-BJH-11 KITTY HAWK INTERNATIONAL, INC., ss. CASE NO. 400-42144-BJH-11 KITTY HAWK CARGO, INC., ss. CASE NO. 400-42145-BJH-11 OK TURBINES, INC., ss. CASE NO. 400-42146-BJH-11 LONGHORN SOLUTIONS, INC., ss. CASE NO. 400-42147-BJH-11 AIRCRAFT LEASING, INC., ss. CASE NO. 400-42148-BJH-11 AMERICAN INTERNATIONAL ss. CASE NO. 400-42149-BJH-11 TRAVEL, INC., AND ss. FLIGHT ONE LOGISTICS, INC. ss. CASE NO. 400-42069-BJH-11 ss. Debtors. ss. Jointly Administered under ss. Case No. 400-42141 - -------------------------------------------------------------------------------- FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 - -------------------------------------------------------------------------------- THIS FINAL DISCLOSURE STATEMENT HAS BEEN PREPARED BY (COLLECTIVELY, THE "DEBTORS," OR "KITTY HAWK") AND DESCRIBES THE TERMS AND PROVISIONS OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 (THE "PLAN"). ANY TERM USED IN THIS DISCLOSURE STATEMENT THAT IS NOT DEFINED HEREIN HAS THE MEANING ASCRIBED TO THAT TERM IN THE PLAN. A COPY OF THE PLAN IS INCLUDED HEREIN BEHIND THE DISCLOSURE STATEMENT. Dated: October 10, 2000
Robert D. Albergotti John D. Penn Sarah B. Foster State Bar No. 00969800 State Bar No. 15752300 State Bar No. 07297500 Haynes and Boone, LLP Haynes and Boone, LLP Haynes and Boone, LLP 901 Main Street, Suite 3100 201 Main Street, Suite 2200 600 Congress Ave., Suite 1600 Dallas, Texas 75202 Fort Worth, Texas 76102 Austin, Texas 78701 Tel. No. (214) 651-5000 Direct Tel. No. (817) 347-6610 Tel. No. (512) 867-8400 Fax No. (214) 651-5940 Direct Fax No. (817) 348-2300 Fax No. (512) 867-8470
COUNSEL TO THE DEBTORS AND THE DEBTORS-IN-POSSESSION TABLE OF CONTENTS PAGE SUMMARY OF THE PLAN..........................................................1 I. INTRODUCTION...........................................................2 A. Filing of the Debtors' Chapter 11 Reorganization Cases...........2 B. Purpose of Disclosure Statement..................................2 C. Hearing on Confirmation of the Plan..............................4 D. Sources of Information...........................................4 II. EXPLANATION OF CHAPTER 11..............................................5 A. Overview of Chapter 11...........................................5 B. Plan of Reorganization...........................................6 III. VOTING PROCEDURES AND REQUIREMENTS FOR CONFIRMATION....................7 A. "Voting Claims" -- Parties Entitled to Vote......................7 B. Return of Ballots................................................8 1. Voting Record Date.........................................9 2. Special Procedures for Ballots of Holders of Senior Notes..9 3. Deadline for Submission of Ballots........................10 C. Confirmation of Plan............................................10 1. Solicitation of Acceptances...............................10 2. Requirements for Confirmation of the Plan.................11 3. Acceptances Necessary to Confirm the Plan.................12 4. Cramdown..................................................12 IV. BACKGROUND OF THE DEBTORS.............................................13 A. Nature of the Debtors' Business.................................13 B. Overview of the Debtors' Current Corporate Structure............14 C. Creditor Claims Against Multiple Debtors........................15 D. Existing and Potential Litigation...............................16 1. Claims Against the Debtors................................16 a. Securities Litigation Against the Debtors or Their Officers and Directors........................16 b. Other Claims Against the Debtors....................17 2. Claims Held by the Debtors................................17 a. Preference Claims...................................17 b. Potential Avoidance Claims Against the Noteholders..17 3. Creditors' Committee's Position Statement on the Debtors' Proposed Settlement with the Noteholders.........21 a. Litigation with International Brotherhood of Teamsters...........................................23 b. Litigation with Conrad Kalitta......................24 c. Miscellaneous Litigation............................24 V. EVENTS LEADING TO BANKRUPTCY..........................................24 i A. Events Leading to Chapter 11 Bankruptcy Filing..................24 VI. PROGRESS DURING BANKRUPTCY AND SIGNIFICANT EVENTS.....................26 A. Fort Wayne Hub Improvements.....................................26 B. Financial Performance...........................................26 C. Revenue Performance Improvement.................................26 D. Administrative Consolidation....................................27 E. Management Changes..............................................27 F. Asset Sales.....................................................27 G. Key Contracts...................................................28 H. Significant Orders Entered During the Case......................29 I. Appointment of Creditors' Committee.............................31 J. Professionals' Being Paid by the Estates and Fees to Date.......32 1. Professionals employed by the Debtors.....................32 2. Professionals employed by the Creditors' Committee........32 3. Changes in Professionals Retained.........................32 4. Fees to Date..............................................33 VII. DESCRIPTION OF THE PLAN...............................................33 A. Introduction....................................................33 B. Consolidation...................................................33 C. Position of Northwest Airlines, Mercury Air and Creditors' Committee Regarding Plan........................................33 D. Designation of Claims and Interests.............................34 1. Secured Claims............................................35 2. Unsecured Claims..........................................35 3. Interests.................................................35 E. Treatment of Claims and Interests...............................35 1. Administrative Claims.....................................35 a. General.............................................35 b. Payment of Statutory Fees...........................36 c. Bar Date for Administrative Claims..................36 (1) General Provisions............................36 (2) Professionals.................................36 (3) Ordinary Course Liabilities...................36 (4) Contractual Employee Claims...................36 (5) Tax Claims....................................36 2. Treatment of Pre-Petition Priority and Secured Tax Claims.36 F. Classification and Treatment of Classified Claims and Interests.37 1. Class 1 - Bank Claims.....................................37 2. Class 2 - Noteholders' Secured Claims.....................38 3. Class 3 - Secured Claims Other Than Bank Claims and Claims of the Noteholders.................................38 4. Class 4 - Priority Claims.................................39 5. Class 5 - Convenience Claims..............................39 6. Class 6 - Unsecured Noteholder Claims.....................40 ii 7. Class 7 - Other Unsecured Claims..........................40 8. Class 8 - Old Common Stock................................43 9. Class 9 - Securities Claims...............................44 G. Acceptance or Rejection of the Plan.............................44 1. Voting Classes............................................44 2. Presumed Rejection of Plan................................44 H. Manner of Distribution of Property Under the Plan...............44 1. Distribution Procedures...................................44 2. Distribution of New Common Stock..........................44 3. Distributions by Indenture Trustee........................45 4. Surrender and Cancellation of Old Securities..............45 5. Disputed Claims...........................................45 6. Manner of Payment Under the Plan..........................45 7. Delivery of Distributions and Undeliverable or Unclaimed Distributions...................................46 a. Delivery of Distributions in General................46 b. Undeliverable Distributions.........................46 (1) Holding and Investment of Undeliverable Property......................................46 (2) Distribution of Undeliverable Property After it Becomes Deliverable and Failure to Claim Undeliverable Property........................46 8. De Minimis Distributions..................................46 9. Failure to Negotiate Checks...............................46 10. Compliance with Tax Requirements..........................46 11. Setoffs...................................................47 12. Fractional Interests......................................47 I. Treatment of Executory Contracts and Unexpired Leases...........47 J. Means for Execution and Implementation of the Plan..............47 1. Exit Financing............................................47 2. Private Placement.........................................48 3. Merger of Corporate Entities..............................48 4. Board of Directors of the Reorganized Debtor..............48 5. Post-Confirmation Management..............................48 6. Cancellation of Old Securities............................49 7. Authorization and Issuance of New Common Stock............49 8. Registration Exemption for Debtor's New Common Stock Distributed to Creditors............................49 9. Charter and By-Laws.......................................50 10. Corporate Action..........................................50 11. Release of Fraudulent Conveyance Claims...................50 12. Other Releases by Debtors.................................50 13. Preservation of Rights of Action..........................51 14. Objections to Claims......................................51 15. Retiree Benefits..........................................51 16. Exemption from Stamp and Similar Taxes....................52 K. Conditions to Effectiveness of the Plan.........................52 iii 1. Conditions to Effectiveness...............................52 2. Waiver of Conditions......................................52 3. No Requirement of Final Order.............................52 L. Effects of Plan Confirmation....................................52 1. Binding Effect............................................52 2. Moratorium, Injunction and Limitation of Recourse For Payment...................................................52 3. Exculpation and Limitation of Liability...................53 4. Revesting.................................................53 5. Other Documents and Actions...............................53 6. Post-Consummation Effect of Evidences of Claims or Interests.................................................54 7. Term of Injunctions or Stays..............................54 M. Confirmability of Plan and Cramdown.............................54 N. Retention of Jurisdiction.......................................54 VIII. FEASIBILITY OF THE PLAN...............................................54 A. Feasibility.....................................................54 1. Business Strategy.........................................54 2. Factors Enhancing Kitty Hawk's Future Business Prospects..56 a. Diversified Revenue Base............................56 b. Large Market in an Under-served, Growing Industry Segment.............................................56 c. Efficient, Utilitarian Aircraft Fleet...............56 d. Low Cost Operator of B727-200F......................57 e. Significant Opportunity to Expand Fort Wayne Hub....57 f. Substantial Leverage to Attract Strategic Partner(s)..........................................57 B. Alternatives to Confirmation of the Plan........................57 1. Dismissal.................................................58 2. Chapter 7 Liquidation.....................................58 3. Confirmation of an Alternative Plan.......................59 4. Christopher Plan..........................................59 IX. VALUATION OF KITTY HAWK, INC. AND ITS SUBSIDIARIES ON A STAND-ALONE BASIS................................................60 A. Cautionary Note.................................................60 1. Kitty Hawk, Inc...........................................61 2. Flight One Logistics, Inc.................................61 3. American International Travel, Inc........................61 4. Longhorn Solutions, Inc...................................61 5. Aircraft Leasing, Inc.....................................61 6. Kitty Hawk International, Inc.............................62 7. OK Turbines, Inc..........................................62 8. Kitty Hawk Charters, Inc..................................62 9. Explanatory Note as to Kitty Hawk Aircargo and Kitty Hawk Cargo Valuations.....................................62 X. DESCRIPTION OF SECURITIES TO BE ISSUED UNDER THE PLAN.................64 A. New Common Stock................................................64 iv B. Private Placement...............................................65 C. Issuance of the New Common Stock under the Plan.................66 D. Post-Confirmation Transfers of the New Common Stock.............66 E. Trading in the Over-the-Counter Market..........................67 F. Certain Transactions by Stockbrokers............................67 XI. VALUATION OF NEW COMMON STOCK.........................................67 XII. RISK FACTORS..........................................................69 A. Risks Relating to Confirmation..................................69 1. Risks Related to Exit Financing...........................69 2. Risks Related to Annual Meeting...........................69 3. Risks Related to Private Placement........................69 4. Risks Related to Pegasus Aviation Leases..................70 B. Kitty Hawk Related Risks........................................70 1. Dependence on Significant Customers ......................70 2. Employee Relations........................................71 C. Aircraft Related Risks..........................................71 1. Future Operations Based on Continued Acceptance of Scheduled Airfreight......................................71 2. Dependence on Aircraft Availability.......................71 3. Capital Intensive Nature of Aircraft Ownership............72 4. Aging Aircraft Regulations; Potential Compliance Costs ...72 D. Industry Related Risks..........................................73 1. Cyclicality and Seasonality of Business...................73 2. Volatility of Air Freight Services Market.................73 3. Government Regulation.....................................73 a. General.............................................73 b. International Regulation............................73 c. Stock Ownership by Non-U.S. Citizens................74 d. Noise Abatement Regulations.........................74 e. Safety, Training and Maintenance Regulations........74 f. Hazardous Materials Regulations.....................74 XIII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES...............................75 A. General.........................................................75 B. Tax Consequences to the Debtors.................................75 1. In General................................................75 2. Carryover of Tax Attributes...............................75 a. Net Operating Loss Carryovers.......................75 b. Section 382.........................................75 c. Special Bankruptcy Exception to Section 382.........76 3. Reduction of Debtors' Indebtedness........................77 C. Tax Consequences To Creditors...................................77 1. Claims Constituting Securities............................77 a. Definition of Security..............................77 v b. Receipt of Stock or Securities......................78 c. Determination of Character of Gain..................78 d. Tax Basis and Holding Period........................78 e. Market Discount with Respect to Senior Notes........78 2. Claims Not Constituting Securities........................79 a. Gain/Loss on Exchange...............................79 b. Tax Basis and Holding Period........................79 3. Creditors Receiving Solely Cash...........................79 4. Consideration Allocable to Interest or Original Issue Discount..................................................79 5. Backup Withholding........................................80 XIV. CONCLUSION............................................................80 vi INDEX TO APPENDIX EXHIBIT A: Projections of Reorganized Debtor's Operations EXHIBIT B: Liquidation Analysis vii IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION IN RE: ss. CHAPTER 11 ss. KITTY HAWK, INC., ss. CASE NO. 400-42141-BJH-11 KITTY HAWK AIRCARGO, INC., ss. CASE NO. 400-42142-BJH-11 KITTY HAWK CHARTERS, INC., ss. CASE NO. 400-42143-BJH-11 KITTY HAWK INTERNATIONAL, INC., ss. CASE NO. 400-42144-BJH-11 KITTY HAWK CARGO, INC., ss. CASE NO. 400-42145-BJH-11 OK TURBINES, INC., ss. CASE NO. 400-42146-BJH-11 LONGHORN SOLUTIONS, INC., ss. CASE NO. 400-42147-BJH-11 AIRCRAFT LEASING, INC., ss. CASE NO. 400-42148-BJH-11 AMERICAN INTERNATIONAL ss. CASE NO. 400-42149-BJH-11 TRAVEL, INC., AND ss. FLIGHT ONE LOGISTICS, INC. ss. CASE NO. 400-42069-BJH-11 ss. DEBTORS. ss. JOINTLY ADMINISTERED UNDER ss. CASE NO. 400-42141 - -------------------------------------------------------------------------------- FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 SUMMARY OF THE PLAN The Plan provides for the post-confirmation merger of the Debtors into a single Delaware corporation ("Reorganized Kitty Hawk" or the "Reorganized Debtor") which will be called Kitty Hawk Aircargo and for the continuation of the Debtors' core business. The majority of the Debtors' existing secured debt, as well as Administrative and Priority Claims, will be paid from cash on hand, asset sales and the proceeds of a new financing agreement. As part of a settlement with the holders of the Senior Notes, the claims against the Debtors will be consolidated for distribution purposes. The Noteholders will receive 85% of the issued and outstanding shares of stock in Reorganized Kitty Hawk. The other unsecured creditors will be treated in one of the following three ways. First, if an Allowed Unsecured Claim is $500 or less, or if the holder of the Claim elects to reduce it to $500, the Claim will be paid in full in cash. Second, holders of Allowed Unsecured Claims that are not Noteholder Claims, may receive their pro rata share of 15% of the issued and outstanding stock of Reorganized Kitty Hawk. KITTY HAWK'S PROJECTIONS AND VALUE ESTIMATES INDICATE THAT 15% OF REORGANIZED KITTY HAWK SHOULD BE WORTH BETWEEN $20.9 MILLION AND $24 MILLION (OR BETWEEN APPROXIMATELY 29% AND 33% OF THE ESTIMATED GENERAL UNSECURED CLAIMS). See Article X for discussion of valuation and Article XII for discussion of risks. Third, holders of Allowed Unsecured Claims THAT ARE FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 1 NOT NOTEHOLDER CLAIMS may elect to receive a discounted amount of cash in lieu of stock conditioned upon the Reorganized Debtor's ability to raise cash through a Private Placement. I. INTRODUCTION A. FILING OF THE DEBTORS' CHAPTER 11 REORGANIZATION CASES The Debtors filed their petitions for relief under Chapter 11 of the Bankruptcy Code on May 1, 20001 (the "Petition Date"), in the United States Bankruptcy Court for the Northern District of Texas (the "Bankruptcy Court"). Pursuant to an Order entered by the Bankruptcy Court on the Petition Date, the Debtors' bankruptcy cases were procedurally consolidated and have been jointly administered under Case No. 00-42141-BJH-11. Since the Petition Date, the Debtors have continued to operate their businesses and manage their properties and assets as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. B. PURPOSE OF DISCLOSURE STATEMENT This Disclosure Statement is submitted in accordance with section 1125 of the Bankruptcy Code for the purpose of soliciting acceptances of the Plan from holders of certain Classes of Claims. The only Creditors whose acceptances of the Plan are sought are those whose Claims are "impaired" by the Plan, as that term is defined in section 1124 of the Bankruptcy Code and who are receiving distributions under the Plan. Holders of Claims that are not "impaired" are deemed to have accepted the Plan. The Debtors have prepared this Disclosure Statement pursuant to the provisions of section 1125 of the Bankruptcy Code, which requires that a copy of the Plan, or a summary thereof, be submitted to all holders of Claims against, and Interests in, the Debtors, along with a written Disclosure Statement containing adequate information about the Debtors of a kind, and in sufficient detail, as far as is reasonably practicable, that would enable a hypothetical, reasonable investor typical of Creditors and holders of Interests to make an informed judgment in exercising their right to vote on the Plan. Section 1125 of the Bankruptcy Code provides, in pertinent part: (b) An acceptance or rejection of a plan may not be solicited after the commencement of the case under this title from a holder of a claim or interest with respect to such claim or interest, unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information. The court may approve a disclosure statement without a valuation of the debtor or an appraisal of the debtor's assets. - ---------------- 1 With the exception of Flight One Logistics, which filed its voluntary Chapter 11 petition on April 27, 2000. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 2 * * * (d) Whether a disclosure statement required under subsection (b) of this section contains adequate information is not governed by any otherwise applicable nonbankruptcy law, rule, or regulation, but an agency or official whose duty is to administer or enforce such a law, rule, or regulation may be heard on the issue of whether a disclosure statement contains adequate information. Such an agency or official may not appeal from, or otherwise seek review of, an order approving a disclosure statement. (e) A person that solicits acceptance or rejection of a plan, in good faith and in compliance with the applicable provisions of this title, or that participates, in good faith and in compliance with the applicable provisions of this title, in the offer, issuance, sale, or purchase of a security, offered or sold under the plan, of the debtor, of an affiliate participating in a joint plan with the debtor, or of a newly organized successor to the debtor under the plan, is not liable, on account of such solicitation or participation, for violation of any applicable law, rule, or regulation governing solicitation of acceptance or rejection of a plan or the offer, issuance, sale, or purchase of securities. THIS DISCLOSURE STATEMENT WAS APPROVED BY THE BANKRUPTCY COURT ON OCTOBER 4, 2000. Such approval is required by the Bankruptcy Code and does not constitute a judgment by the Bankruptcy Court as to the desirability of the Plan, or as to the value or suitability of any consideration offered thereunder. Such approval does indicate, however, that the Bankruptcy Court has determined that the Disclosure Statement meets the requirements of section 1125 of the Bankruptcy Code and contains adequate information to permit the holders of Allowed Claims, whose acceptance of the Plan is solicited, to make an informed judgment regarding acceptance or rejection of the Plan. THE APPROVAL BY THE BANKRUPTCY COURT OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE AN ENDORSEMENT BY THE BANKRUPTCY COURT OF THE PLAN OR A GUARANTEE OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN. THE MATERIAL HEREIN CONTAINED IS INTENDED SOLELY FOR THE USE OF CREDITORS AND HOLDERS OF INTERESTS OF THE DEBTORS IN EVALUATING THE PLAN AND VOTING TO ACCEPT OR REJECT THE PLAN AND, ACCORDINGLY, MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN THE DETERMINATION OF HOW TO VOTE ON THE PLAN. THE DEBTORS' REORGANIZATION PURSUANT TO THE PLAN IS SUBJECT TO NUMEROUS CONDITIONS AND VARIABLES AND THERE CAN BE NO ABSOLUTE ASSURANCE THAT THE PLAN, AS CONTEMPLATED, WILL BE EFFECTUATED. THE DEBTORS BELIEVE THAT THE PLAN AND THE TREATMENT OF CLAIMS THEREUNDER IS IN THE BEST INTERESTS OF CREDITORS, AND URGE THAT YOU VOTE TO ACCEPT THE PLAN. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 3 THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THIS DISCLOSURE STATEMENT AND THE EXHIBITS TO IT CONTAIN FORWARD-LOOKING STATEMENTS RELATING TO BUSINESS EXPECTATIONS, ASSET SALES AND LIQUIDATION ANALYSIS. BUSINESS PLANS MAY CHANGE AS CIRCUMSTANCES WARRANT. ACTUAL RESULTS MAY DIFFER MATERIALLY AS A RESULT OF MANY FACTORS, SOME OF WHICH KITTY HAWK HAS NO CONTROL OVER. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO: WORLDWIDE BUSINESS AND ECONOMIC CONDITIONS; RECRUITING AND NEW BUSINESS SOLICITATION EFFORTS; PRODUCT DEMAND AND THE RATE OF GROWTH IN THE AIR CARGO INDUSTRY; THE IMPACT OF COMPETITORS AND COMPETITIVE AIRCRAFT AND AIRCRAFT FINANCING AVAILABILITY; THE ABILITY TO ATTRACT AND RETAIN NEW AND EXISTING CUSTOMERS; JET FUEL PRICES; NORMALIZED AIRCRAFT OPERATING COSTS AND RELIABILITY, AIRCRAFT MAINTENANCE DELAYS AND DAMAGE; REGULATORY ACTIONS, THE DEMAND FOR USED AIRCRAFT AND AVIATION ASSETS, CONTEST FOR CONTROL OF KITTY HAWK; AND KITTY HAWK'S ABILITY TO NEGOTIATE FAVORABLE ASSET SALES. THESE RISK FACTORS AND ADDITIONAL INFORMATION ARE INCLUDED IN KITTY HAWK'S REPORTS ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSIONS. C. HEARING ON CONFIRMATION OF THE PLAN The Bankruptcy Court set December 5, 2000, at 10:00 o'clock, a.m. Dallas, Texas Time, as the time and date for the hearing (the "Confirmation Hearing") to determine whether the Plan has been accepted by the requisite number of Creditors and holders of Interests and whether the other requirements for Confirmation of the Plan have been satisfied. Once commenced, the Confirmation Hearing may be adjourned or continued by announcement in open court with no further notice. Holders of Claims against or Interests in the Debtors may vote on the Plan by completing and delivering the enclosed ballot to Lain Faulkner & Co., 400 N. St. Paul Street, Suite 600, Dallas, Texas 75201, Telephone (214) 720-1929, Telecopy (214) 720-1450, Attention: Dennis Faulkner, on or before 5:00 p.m. Dallas, Texas time on November 14, 2000. If the Plan is rejected by one or more impaired Classes of creditors or holders of Interests, the Plan, or a modification thereof, may still be confirmed by the Bankruptcy Court under section 1129(b) of the Bankruptcy Code (commonly referred to as a "cramdown") if the Bankruptcy Court determines, among other things, that the Plan does not discriminate unfairly and is fair and equitable with respect to the rejecting Class or Classes of creditors or holders of Interests impaired by the Plan. The procedures and requirements for voting on the Plan are described in more detail below. D. SOURCES OF INFORMATION Except as otherwise expressly indicated, the portions of this Disclosure Statement describing the Debtors, their businesses, properties and management, and the Plan have been prepared from information furnished by the Debtors. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 4 THE INFORMATION CONTAINED HEREIN HAS NOT BEEN SUBJECTED TO A CERTIFIED AUDIT AND IS BASED, IN PART, UPON INFORMATION PREPARED BY PARTIES OTHER THAN THE DEBTORS. THEREFORE, ALTHOUGH THE DEBTORS HAVE MADE EVERY REASONABLE EFFORT TO BE ACCURATE IN ALL MATERIAL MATTERS, THE DEBTORS ARE UNABLE TO WARRANT OR REPRESENT THAT ALL THE INFORMATION CONTAINED HEREIN IS COMPLETELY ACCURATE. Certain of the materials contained in this Disclosure Statement are taken directly from other readily accessible documents or are digests of other documents. While the Debtors have made every effort to retain the meaning of such other documents or portions that have been summarized, the Debtors urge that any reliance on the contents of such other documents should depend on a thorough review of the documents themselves. In the event of a discrepancy between this Disclosure Statement and the actual terms of a document, the actual terms of such document shall apply. The authors of the Disclosure Statement have compiled information from the Debtors without professional comment, opinion or verification and do not suggest comprehensive treatment has been given to matters identified herein. Each creditor and holder of an Interest is urged to independently investigate any such matters prior to reliance. The statements contained in this Disclosure Statement are made as of the date hereof unless another time is specified, and neither the delivery of this Disclosure Statement nor any exchange of rights made in connection with it shall, under any circumstances, create an implication that there has been no change in the facts set forth herein since the date hereof. No statements concerning the Debtors, the value of their property, or the value of any benefit offered to the holder of a Claim or Interest in connection with the Plan should be relied upon other than as set forth in this Disclosure Statement. In arriving at your decision, you should not rely on any representation or inducement made to secure your acceptance or rejection that is contrary to information contained in this Disclosure Statement, and any such additional representations or inducements should be reported to counsel for the Debtors, Robert D. Albergotti, Esq., Haynes and Boone, LLP, 901 Main Street, Suite 3100, Dallas, Texas 75202, (214) 651-5000. II. EXPLANATION OF CHAPTER 11 A. OVERVIEW OF CHAPTER 11 Chapter 11 is the principal reorganization chapter of the Bankruptcy Code. Pursuant to Chapter 11, a debtor-in-possession attempts to reorganize its business and financial affairs for the benefit of the debtor, its creditors, and other parties-in-interest. The commencement of a Chapter 11 case creates an estate comprising all the legal and equitable interests of the debtor in property as of the date the petition is filed. Unless the Bankruptcy Court orders the appointment of a trustee, sections 1101, 1107 and 1108 of the Bankruptcy Code FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 5 provide that a Chapter 11 debtor may continue to operate its business and control the assets of its estate as a "debtor-in-possession," as have the Debtors since the Petition Date. The filing of a Chapter 11 petition also triggers the automatic stay, which is set forth in section 362 of the Bankruptcy Code. The automatic stay essentially halts all attempts to collect pre- petition claims from the debtor or to otherwise interfere with the debtor's business or its estate. Formulation of a plan of reorganization is the principal purpose of a Chapter 11 case. The plan sets forth the means for satisfying the claims of creditors against and interests of equity security holders in the debtor. Unless a trustee is appointed, only the debtor may file a plan during the first 120 days of a Chapter 11 case (the "Exclusive Period"). After the Exclusive Period has expired, a creditor or any other party-in-interest may file a plan, unless the debtor files a plan within the Exclusive Period. If a debtor does file a plan within the Exclusive Period, the debtor is given sixty (60) additional days (the "Solicitation Period") to solicit acceptances of its plan. Section 1121(d) of the Bankruptcy Code permits the Bankruptcy Court to extend or reduce the Exclusive Period and the Solicitation Period upon a showing of adequate "cause." The Debtors' Exclusive Period and Solicitation Period were extended by the Bankruptcy Court on September 28, 2000 and will now expire on October 21, 2000 and December 31, 2000 respectively, unless further extended by Court order. B. PLAN OF REORGANIZATION A plan of reorganization provides the manner in which a debtor will satisfy the claims of its creditors. After the plan of reorganization has been filed, the holders of claims against or interests in a debtor are permitted to vote on whether to accept or reject the plan. Chapter 11 does not require that each holder of a claim against or interest in a debtor vote in favor of a plan of reorganization in order for the plan to be confirmed. At a minimum, however, a plan of reorganization must be accepted by a majority in number and two-thirds in amount of those claims actually voting from at least one class of claims impaired under the plan. The Bankruptcy Code also defines acceptance of a plan of reorganization by a class of interests (equity securities) as acceptance by holders of two- thirds of the number of shares actually voted. Classes of claims or interests that are not "impaired" under a plan of reorganization are conclusively presumed to have accepted the plan and, thus, are not entitled to vote. Acceptances of the Plan in this case are being solicited only from those persons who hold Claims in an impaired Class (other than Classes of Claims which are not receiving any distribution under the Plan). Holders of Interests in the Debtors will receive no distribution under the Plan and, therefore, are deemed to have rejected the Plan. A Class is "impaired" if the legal, equitable, or contractual rights attaching to the Claims or Interests of that Class are modified. Modification does not include curing defaults and reinstating maturity or payment in full in cash. Even if all classes of claims and interests accept a plan of reorganization, the Bankruptcy Court may nonetheless still deny confirmation. Section 1129 of the Bankruptcy Code sets forth the requirements for confirmation and, among other things, the Bankruptcy Code requires that a plan of reorganization be in the "best interests" of creditors and shareholders and that the plan of FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 6 reorganization be feasible. The "best interests" test generally requires that the value of the consideration to be distributed to claimants and interest holders under a plan may not be less than those parties would receive if that debtor were liquidated under a hypothetical liquidation occurring under Chapter 7 of the Bankruptcy Code. A plan of reorganization must also be determined to be "feasible," which generally requires a finding that there is a reasonable probability that the debtor will be able to perform the obligations incurred under the plan of reorganization, and that the debtor will be able to continue operations without the need for further financial reorganization. The Bankruptcy Court may confirm a plan of reorganization even though fewer than all of the classes of impaired claims and interests accept it. In order for a plan of reorganization to be confirmed despite the rejection of a class of impaired claims or interests, the proponent of the plan must show, among other things, that the plan of reorganization does not discriminate unfairly and that the plan is fair and equitable with respect to each impaired class of claims or interests that has not accepted the plan of reorganization. Under section 1129(b) of the Bankruptcy Code, a plan is "fair and equitable" as to a class if, among other things, the plan provides: (a) that each holder of a claim included in the rejecting class will receive or retain on account of its claim property that has a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (b) that the holder of any claim or interest that is junior to the claims of such class will not receive or retain on account of such junior claim or interest any property at all. The Bankruptcy Court must further find that the economic terms of the plan of reorganization meet the specific requirements of section 1129(b) of the Bankruptcy Code with respect to the particular objecting class. The proponent of the plan of reorganization must also meet all applicable requirements of section 1129(a) of the Bankruptcy Code (except section 1129(a)(8) if the proponent proposes to seek confirmation of the plan under the provisions of section 1129(b)). These requirements include the requirement that the plan comply with applicable provisions of the Bankruptcy Code and other applicable law, that the plan be proposed in good faith, and that at least one impaired class of creditors has voted to accepted the plan. III. VOTING PROCEDURES AND REQUIREMENTS FOR CONFIRMATION If you are in one of the Classes of Claims whose rights are affected by the Plan (SEE "Summary of the Plan" below), it is important that you vote. If you fail to vote, your rights may be jeopardized. A. "VOTING CLAIMS" -- PARTIES ENTITLED TO VOTE Pursuant to the provisions of section 1126 of the Bankruptcy Code, holders of Claims or Interests that are (i) ALLOWED, (ii) IMPAIRED, and (iii) that are RECEIVING OR RETAINING PROPERTY ON ACCOUNT OF SUCH CLAIMS OR INTERESTS pursuant to the Plan, are entitled to vote either for or against the FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 7 Plan (hereinafter, "Voting Claims"). Accordingly, in this Reorganization Case, any holder of a Claim classified in Classes 1, 2, 3, 4, 5, 6, and 7 of this Plan may have a Voting Claim and should have received a ballot for voting (with return envelope) in these Disclosure Statement and Plan materials (hereinafter, "Solicitation Package") since these are the Classes consisting of IMPAIRED Claims that are RECEIVING PROPERTY. Note that holders of Claims against or Interests in the Debtors that are classified in Classes 8 and 9 of this Plan should NOT have received ballots in their Solicitation Packages since they are impaired and are NOT RECEIVING OR RETAINING ANY PROPERTY on account of their Claims or Interests pursuant to the Plan (I.E.,these Classes are deemed to reject the Plan, pursuant to section 1126(g) of the Bankruptcy Code, and their votes need not be solicited, pursuant to section 1126(g) and Bankruptcy Rule 3017(d)). As referenced in the preceding paragraph, a Claim must be ALLOWED to be a Voting Claim. The Debtors filed schedules in this Reorganization Case listing Claims against the Debtors. To the extent a creditor's Claim was listed in the Debtors' schedules, and was not listed as disputed, contingent, or unliquidated, it is deemed "allowed." Any creditor whose Claim was not scheduled, or was listed as disputed, contingent or unliquidated, must have timely filed a proof of Claim in order to have an "allowed" Claim. The last day for filing proofs of Claim for amounts owed pre-petition was August 30, 2000. Absent an objection to that proof of Claim, it is deemed "allowed." In the event that any proof of Claim is subject to an objection by the Debtors as of or during the Plan voting period ("Objected-to Claim"), then, by definition, it is not "allowed," for purposes of section 1126 of the Bankruptcy Code, and is not to be considered a Voting Claim entitled to cast a ballot. Nevertheless, pursuant to Bankruptcy Rule 3018(a), the holder of an Objected-to Claim may petition the Bankruptcy Court, after notice and hearing, to allow the Claim temporarily for voting purposes in an amount which the Bankruptcy Court deems proper. Allowance of a Claim for voting purposes, and disallowance for voting purposes, does not necessarily mean that all or a portion of the Claim will be allowed or disallowed for distribution purposes. BY ENCLOSING A BALLOT, THE DEBTORS ARE NOT REPRESENTING THAT YOU ARE ENTITLED TO VOTE ON THE PLAN. ADDITIONALLY, BY ENCLOSING A BALLOT FOR EACH DEBTOR, THE DEBTORS ARE NOT REPRESENTING THAT YOU ARE ENTITLED TO VOTE ON A SPECIFIC DEBTOR'S PLAN. If you believe you are a holder of a Claim in an impaired Class under the Plan and entitled to vote to accept or reject the Plan, but did not receive a ballot with these materials, please contact Dennis Faulkner, Lain Faulkner & Co., 400 N. St. Paul Street, Suite 600, Dallas, Texas 75201, Telephone (214) 720-1929, Telecopy (214) 720-1450 (the "Solicitation Agent"); or Linda Breedlove, Haynes and Boone, LLP, 901 Main Street, Suite 3100, Dallas, Texas 75202, Telephone (214) 651- 5000, Telecopy (214) 651-5940. B. RETURN OF BALLOTS If you are a holder of a Voting Claim, your vote on the Plan is important. EXCEPT WITH REGARD TO BENEFICIAL HOLDERS OF DEBT SECURITIES THAT MAY BE VOTING THROUGH A RECORD OR NOMINAL HOLDER (SEE DISCUSSION BELOW), completed ballots should either be returned in the enclosed envelope or sent to the Solicitation Agent: FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 8 Attn: Dennis Faulkner Lain Faulkner & Co. 400 N. St. Paul Street, Suite 600 Dallas, TX 75201 1. VOTING RECORD DATE Pursuant to Bankruptcy Rule 3017(d), September 19, 2000 is the "Voting Record Date" for determining which Noteholders and holders of Old Common Stock may be entitled to vote to accept or reject the Plan. Only holders of record of Claims against the Debtors on that date are entitled to cast ballots. 2. SPECIAL PROCEDURES FOR BALLOTS OF HOLDERS OF SENIOR NOTES WITH REGARD TO DEBT SECURITIES, any person who is a "record holder" of a debt security (a person shown as the registered holder of a security in the registry maintained by a trustee or registrar of a debt security) on the Voting Record Date -- including any bank, agent, broker or other nominee who holds a debt security of the Debtors in its name (the "Nominal Holder" or "Nominee") for a beneficial holder or holders -- should receive Solicitation Packages for distribution to the appropriate beneficial holders. A Nominee shall, upon receipt of the Solicitation Packages, forward the Solicitation Packages to the beneficial owners so that such beneficial security holders may vote on the Plan pursuant to Code section 1126. The Debtors shall provide for reimbursement, as an administrative expense, of all the reasonable expenses of Nominal Holders in distributing the Solicitation Packages to said beneficial security holders. Nominal Holders will have two options for obtaining the votes of beneficial owners of securities, consistent with usual customary practices for obtaining the votes of securities held in street name: (i) the Nominal Holder may prevalidate the individual ballot contained in the Solicitation Package (by indicating that the record holders of the securities voted, and the appropriate account numbers through which the beneficial owner's holdings are derived) and then forward the Solicitation Package to the beneficial owner of the securities, which beneficial owner will then indicate its acceptance or rejection of the Plan and otherwise indicate his choices to the extent requested to do so on the ballot, and then return the individual ballot directly to the SOLICITATION AGENT in the return envelope to be provided in the Solicitation Package, or (ii) the Nominal Holder may forward the Solicitation Package to the beneficial owner of the securities for voting along with a return envelope provided by and addressed to the NOMINAL HOLDER, with the beneficial owner then returning the individual ballot to the Nominal Holder, the Nominal Holder will subsequently summarize the votes, including, at a minimum, the number of beneficial holders voting to accept and to reject the Plan who submitted ballots to the Nominal Holder and the amount of such securities so voted and shall also disclose any other individual choices made in response to requests in the ballot, in an affidavit (the "Affidavit of Voting Results"), and then return the Affidavit of Voting Results to the Solicitation Agent. By submitting an Affidavit of Voting Results, each such Nominal Holder certifies that the Affidavit of Voting Results accurately reflects votes and choices reflected on the ballots received from beneficial owners holding such securities as of the Voting Record Date. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 9 Pursuant to 28 U.S.C. ss.ss. 157 and 1334, 11 U.S.C. ss. 105, and Bankruptcy Rule 1007(i) and (j), the Nominees shall maintain the individual ballots of its beneficial owners and evidence of authority to vote on behalf of such beneficial owners. No such ballots shall be destroyed or otherwise disposed of or made unavailable without such action first being approved by prior order of the Bankruptcy Court. 3. DEADLINE FOR SUBMISSION OF BALLOTS BALLOTS MUST BE SUBMITTED TO (A) THE SOLICITATION AGENT, OR (B) ALTERNATIVELY, IN THE CASE OF DEBT SECURITIES, TO THE NOMINAL HOLDERS, AND MUST ACTUALLY BE RECEIVED BY EITHER OF THOSE PERSONS, WHETHER BY MAIL, DELIVERY, OR FACSIMILE, BY NOVEMBER 14, 2000, AT 5:00 P.M. DALLAS, TEXAS TIME (THE "BALLOT RETURN DATE"). ANY BALLOTS RECEIVED AFTER THAT TIME WILL NOT BE COUNTED. ANY BALLOT WHICH IS NOT EXECUTED BY A PERSON AUTHORIZED TO SIGN SUCH BALLOT WILL NOT BE COUNTED. IN THE EVENT THAT BALLOTS ARE SUBMITTED TO THE NOMINEES, AFFIDAVITS OF VOTING RESULTS REQUIRED OF THE NOMINEES MUST BE RECEIVED BY THE SOLICITATION AGENT WITHIN ONE (1) BUSINESS DAY AFTER THE BALLOT RETURN DATE, BUT MAY BE SENT BY FACSIMILE TRANSMISSION, PROVIDED THAT AN ORIGINAL, SIGNED AFFIDAVIT OF VOTING RESULTS IS RECEIVED BY THE SOLICITATION AGENT WITHIN FIVE (5) BUSINESS DAYS OF THE BALLOT RETURN DATE. IF YOU HAVE ANY QUESTIONS REGARDING THE PROCEDURES FOR VOTING ON THE PLAN, CONTACT THE SOLICITATION AGENT OR LINDA BREEDLOVE, HAYNES AND BOONE, LLP, 901 MAIN STREET, SUITE 3100, DALLAS, TEXAS 75202, TELEPHONE (214) 651-5000, TELECOPY (214) 651-5940. THE DEBTORS URGE ALL HOLDERS OF VOTING CLAIMS AND INTERESTS TO VOTE IN FAVOR OF THE PLAN. C. CONFIRMATION OF PLAN 1. SOLICITATION OF ACCEPTANCES The Debtors are soliciting your vote. The cost of any solicitation by the Debtors will be borne by the Debtors. No other additional compensation shall be received by any party for any solicitation other than as disclosed to the Bankruptcy Court. NO REPRESENTATIONS OR ASSURANCES, IF ANY, CONCERNING THE DEBTORS (INCLUDING, WITHOUT LIMITATION, THEIR FUTURE BUSINESS OPERATIONS) OR THE PLAN ARE AUTHORIZED BY THE DEBTORS OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT. ANY REPRESENTATIONS OR INDUCEMENTS MADE BY ANY PERSON TO SECURE YOUR VOTE THAT ARE OTHER THAN HEREIN CONTAINED SHOULD NOT BE RELIED UPON BY YOU IN ARRIVING AT YOUR DECISION, AND SUCH ADDITIONAL REPRESENTATIONS OR INDUCEMENTS SHOULD BE REPORTED TO COUNSEL FOR THE DEBTORS FOR SUCH ACTION AS MAY BE DEEMED APPROPRIATE. THIS IS A SOLICITATION SOLELY BY THE DEBTORS AND IS NOT A SOLICITATION BY ANY SHAREHOLDER, ATTORNEY, OR ACCOUNTANT FOR THE DEBTORS. THE REPRESENTATIONS, FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 10 IF ANY, MADE HEREIN ARE THOSE OF THE DEBTORS AND NOT OF SUCH SHAREHOLDERS, ATTORNEYS, OR ACCOUNTANTS, EXCEPT AS MAY BE OTHERWISE SPECIFICALLY AND EXPRESSLY INDICATED. Under the Bankruptcy Code, a vote for acceptance or rejection of a plan may not be solicited unless the claimant has received a copy of a disclosure statement approved by the Bankruptcy Court prior to, or concurrently with, such solicitation. This solicitation of votes on the Plan is governed by section 1125(b) of the Bankruptcy Code. Violation of section 1125(b) of the Bankruptcy Code may result in sanctions by the Bankruptcy Court, including disallowance of any improperly solicited vote. 2. REQUIREMENTS FOR CONFIRMATION OF THE PLAN At the Confirmation Hearing, the Bankruptcy Court shall determine whether the requirements of section 1129 of the Bankruptcy Code have been satisfied, in which event the Bankruptcy Court shall enter an Order confirming the Plan. For the Plan to be confirmed, section 1129 requires that: (i) The Plan comply with the applicable provisions of the Bankruptcy Code; (ii) The Debtors have complied with the applicable provisions of the Bankruptcy Code; (iii) The Plan has been proposed in good faith and not by any means forbidden by law; (iv) Any payment or distribution made or promised by the Debtors or by a person issuing securities or acquiring property under the Plan for services or for costs and expense in connection with the Plan has been disclosed to the Bankruptcy Court, and any such payment made before the confirmation of the Plan is reasonable, or if such payment is to be fixed after confirmation of the Plan, such payment is subject to the approval of the Bankruptcy Court as reasonable; (v) The Debtors have disclosed the identity and affiliations of any individual proposed to serve, after confirmation of the Plan, as a director, officer or voting trustee of the Debtors, an affiliate of the Debtors participating in a joint plan with the Debtors, or a successor to the Debtors under the Plan; the appointment to, or continuance in, such office of such individual is consistent with the interests of Creditors and holders of Interests and with public policy; and the Debtors have disclosed the identity of any insider that will be employed or retained by the Reorganized Debtor and the nature of any compensation for such insider; (vi) Any government regulatory commission with jurisdiction, after confirmation of the Plan, over the rates of the Debtors have approved any rate change provided for in the Plan, or such rate change is expressly conditioned on such approval; (vii) With respect to each impaired Class of Claims or Interests, either each holder of a Claim or Interest of the Class has accepted the Plan or will receive or retain under the Plan on FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 11 account of that Claim or Interest property of a value, as of the Effective Date of the Plan, that is not less than the amount that such holder would so receive or retain if the Debtors were liquidated on such date under Chapter 7 of the Bankruptcy Code. If section 1111(b)(2) of the Bankruptcy Code applies to the Claims of a Class, each holder of a Claim of that Class will receive or retain under the Plan on account of that Claim property of a value, as of the Effective Date, that is not less than the value of that holder's interest in the Debtor's interest in the property that secures that Claim; (viii) Each Class of Claims or Interests has either accepted the Plan or is not impaired under the Plan; (ix) Except to the extent that the holder of a particular Administrative Claim or Priority Claim has agreed to a different treatment of its Claim, the Plan provides that Administrative Claims and Priority Claims shall be paid in full on the Effective Date or the date on which it is Allowed; (x) If a Class of Claims or Interests is impaired under the Plan, at least one Class of Claims or Interests that is impaired under the Plan has accepted the Plan, determined without including any acceptance of the Plan by any insider holding a Claim or Interest of that Class; and (xi) Confirmation of the Plan is not likely to be followed by the liquidation or the need for further financial reorganization of the Debtors or any successor to the Debtors under the Plan, unless such liquidation or reorganization is proposed in the Plan. The Debtors believe that the Plan satisfies all of the statutory requirements of the Bankruptcy Code and that the Plan was proposed in good faith. The Debtors believe they have complied or will have complied with all the requirements of the Bankruptcy Code. 3. ACCEPTANCES NECESSARY TO CONFIRM THE PLAN Voting on the Plan by each holder of a Claim or Interest is important. Chapter 11 of the Bankruptcy Code does not require that each holder of a Claim or Interest vote in favor of the Plan in order for the Court to confirm the Plan. Generally, to be confirmed under the acceptance provisions of Section 1126(a) of the Bankruptcy Code, the Plan must be accepted by each Class of Claims that is impaired under the Plan by Class members holding at least two-thirds (2/3) in dollar amount and more than one-half (1/2) in number of the Allowed Claims of such Class actually voting in connection with the Plan; in connection with a Class of Interests, more than two-thirds (2/3) of the shares actually voted must accept to bind that Class. A Class of Interests that is impaired under the Plan accepts the Plan if more than two-thirds (2/3) in amount actually voting vote to accept the Plan. Even if all Classes of Claims and Interests accept the Plan, the Bankruptcy Court may refuse to Confirm the Plan. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 12 4. CRAMDOWN In the event that any impaired Class of Claims or Interests, including any of Classes 7A through 7J, does not accept the Plan, the Bankruptcy Court may still confirm the Plan at the request of the Debtors if, as to each impaired Class that has not accepted the Plan, the Plan "does not discriminate unfairly" and is "fair and equitable." A plan of reorganization does not discriminate unfairly within the meaning of the Bankruptcy Code if no class receives more than it is legally entitled to receive for its claims or equity interests. "Fair and equitable" has different meanings for holders of secured and unsecured claims and equity interests. With respect to a secured claim, "fair and equitable" means either (i) the impaired secured creditor retains its liens to the extent of its allowed claim and receives deferred cash payments at least equal to the allowed amount of its claims with a present value as of the effective date of the plan at least equal to the value of such creditor's interest in the property securing its liens, (ii) property subject to the lien of the impaired secured creditor is sold free and clear of that lien, with that lien attaching to the proceeds of sale, and such lien proceeds must be treated in accordance with clauses (i) and (iii) hereof, or (iii) the impaired secured creditor realizes the "indubitable equivalent" of its claim under the plan. With respect to an unsecured claim, "fair and equitable" means either (i) each impaired creditor receives or retains property of a value equal to the amount of its allowed claim or (ii) the holders of claims and equity interests that are junior to the claims of the dissenting class will not receive any property under the plan. With respect to equity interests, "fair and equitable" means either (i) each impaired equity interest receives or retains, on account of that equity interest, property of a value equal to the greater of the allowed amount of any fixed liquidation preference to which the holder is entitled, any fixed redemption price to which the holder is entitled, or the value of the equity interest; or (ii) the holder of any equity interest that is junior to the equity interest of that class will not receive or retain under the plan, on account of that junior equity interest, any property. In the event one or more Classes of impaired Claims or Interests rejects or is deemed to have rejected the Plan, the Bankruptcy Court will determine at the Confirmation Hearing whether the Plan is fair and equitable and does not discriminate unfairly against any rejecting impaired Class of Claims or Interests. The Debtors believe that the Plan does not discriminate unfairly and is fair and equitable with respect to each Class of Claims and Interests that is impaired. IV. BACKGROUND OF THE DEBTORS A. NATURE OF THE DEBTORS' BUSINESS FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 13 The Debtors have three main businesses. First, they are a leading provider of scheduled air freight services in the U.S., transporting air freight on scheduled routes. Second, the Debtors provide dedicated air lift in the U.S. for its scheduled freight division and customers like the U.S. Postal Service through ACMI contractual arrangements.2 Third, the Debtors are a U.S. air logistics services provider, arranging expedited air freight pick-up and delivery using either their own aircraft and third-party ground delivery services. The Debtors' scheduled air freight service provides overnight delivery to and from a number of U.S. cities using its own aircraft and three "wet leased" aircraft. As of March 24, the Debtors owned 105 aircraft and held another 15 under operating leases. The aircraft range in size from the Boeing 747-200 to Mitsubishi MU2s. At March 1, 2000, the Debtors employed approximately 2,290 full-time personnel, of which approximately 426 were involved in sales and administrative functions and approximately 1,864 in maintenance and flight operations, including approximately 727 pilots. The Debtors stopped operating their wide body aircraft (747's and L-1011's) and their DC-8's before they commenced their cases. While the wide body aircraft had been used primarily for international operations, they also provided some airlift capacity for some domestic operations as well. Suspending these operations reduced both the number of aircraft operated by the Debtors as well as the number of employees. B. OVERVIEW OF THE DEBTORS' CURRENT CORPORATE STRUCTURE The following description identifies the primary business functions of each of the Debtors. The Liquidation Analysis attached as Exhibit "B" reflects the assets, liabilities and claims against each Debtor. Kitty Hawk, Inc. is the parent company of each of the other Debtors who are all wholly- owned subsidiaries. Kitty Hawk, Inc. provides executive management, accounting, administrative and financial management for the other Debtors. Kitty Hawk, Inc. is a public company. However, two shareholders control approximately 54% of its stock. M. Tom Christopher owns approximately 34% of the outstanding shares. Conrad A. Kalitta or entities controlled by him own approximately 24% of the shares. On August 9, 2000, Conrad A. Kalitta granted Tilmon J. Reeves an irrevocable proxy to vote Kalitta's 3,899,150 shares of common stock of Kitty Hawk, Inc. only for the election of directors at a stockholders meeting or a consent in lieu of a stockholders meeting. The proxy expires at the earlier of (a) August 8, 2001, (b) if Mr. Reeves ceases to be Kitty Hawk's Chief Executive Officer or (c) if M. Tom Christopher becomes the chairman of Kitty Hawk's board of directors. Mr. Reeves paid $100 for the proxy. Mr. Christopher believes that the sale of the proxy violated a stipulation he reached with the Kitty Hawk that Mr. Kalitta's proxy would not be granted without permission of the Bankruptcy Court. Kitty Hawk disputes that contention and believes that it did not violate its agreement because, among other thing, Kitty Hawk did not acquire the proxy and the proxy was granted after the proposed transactions between Mr. Kalitta Kitty Hawk had been approved by the Bankruptcy Court. - -------- 2 According to the unaudited records, the USPS accounted for 24.0% of the Debtors' revenue. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 14 Kitty Hawk Aircargo, Inc. is a Part 121 certificated air carrier operating a fleet of 41 Boeing 727s and five Douglas DC-9s. Many of the 727s are used in Kitty Hawk Cargo's scheduled freight operation, while the remainder are used to service dedicated aircraft contracts for the U.S. Postal Service and BAX Global. Kitty Hawk Cargo, Inc. operates scheduled overnight freight service through Kitty Hawk's hub in Ft. Wayne, Indiana. Kitty Hawk Cargo services approximately 50 U.S. cities through 22 airports and serves another 28 cities by truck. Kitty Hawk Charters, Inc. is a Part 135 certificated air carrier operating a fleet of 19 Lear jets, one Falcon 20C jet, 8 Beechcraft BE8Ts and two Mitsubishi MU2. Charters serves as Kitty Hawk's same-day, on-demand air logistics service provider. Kitty Hawk International, Inc. was a Part 121 certificated air carrier operating a fleet of seven Boeing 747s, six L-1011s and six DC-8s. Three 747s and one L-1011 are used in Kitty Hawk Cargo's scheduled freight operations.3 Its Part 121 Certificate was sold in September, 2000. Longhorn Solutions, Inc. programs and sells aircraft maintenance scheduling software and maintains the information systems of all of the operating subsidiaries American International Travel, Inc. manages all of the travel arrangements for the various operating subsidiaries. OK Turbines, Inc. buys and sells parts for engines used on small jet aircraft. Aircraft Leasing, Inc. is a non-operating entity that owns and leases ten (10) 727s and five (5) DC-9s to Kitty Hawk Aircargo. Flight One Logistics, Inc. is a dormant Michigan corporation. C. CREDITOR CLAIMS AGAINST MULTIPLE DEBTORS Two creditor groups, the Bank Group and the holders of the Senior Notes, have claims against each of the Debtors. The Bank Group's claim is secured by the inventory and receivables of each of the Debtors. Additionally, the Bank Group has liens on a number of other assets of the Debtors, including fourteen 727s. The Bank Group's claim is approximately $108 million. The Debtors believe that the collateral securing the Bank Group's claim is worth more than the claim and that the Bank Group is fully secured. The Senior Notes are a direct obligation of Kitty Hawk, Inc. and are guaranteed by each of the other Debtors. The Senior Note obligation exceeds $350 million. The Senior Notes are secured by the Noteholders' Wide Body Collateral and the Noteholders' 727 Collateral (as defined in the - -------- 3 On April 30, 2000, immediately prior to the Petition Date, Kitty Hawk suspended flight operations of Kitty Hawk International. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 15 Plan). However, the value of the Noteholders' collateral is insufficient to satisfy the Noteholders' claim. The Debtors and the Noteholders acknowledge that the Noteholders will have a significant unsecured claim ranging from $180 million to $225 million or more. Because the Noteholders have a claim against each Debtor for the full amount of their deficiency claim, the Noteholders are the largest unsecured creditors of each Debtor and, on an entity by entity basis, their Claims dwarf all other Unsecured Claims. The Debtors' opinion regarding the Noteholders' likely deficiency is based on recent appraisals of the Noteholders' collateral. M. Tom Christopher has filed a motion to pursuant to section 506 of the Bankruptcy Code to have the Bankruptcy Court determine the value of the Noteholder's collateral for plan purposes. Pursuant to the settlement with the Noteholders incorporated in the Plan and described in Section IV, D 2(b) of the Disclosure Statement, the Noteholders have agreed that 15% of the New Common Stock will be distributed to the holders of other unsecured claims regardless of the Noteholders' deficiency claim. Unless the Noteholders' deficiency is materially lower than $180 million, the settlement provides a greater return to unsecureds than they would receive absent the settlement. The distribution of 15% of the New Common Stock results in an estimated recovery to unsecured creditors other than the Noteholders of New Common Stock with a value equal to 30% of their Claims. See Article X infra. D. EXISTING AND POTENTIAL LITIGATION 1. CLAIMS AGAINST THE DEBTORS. A. SECURITIES LITIGATION AGAINST THE DEBTORS OR THEIR OFFICERS AND DIRECTORS. During April through July 2000, four purported class action lawsuits were filed against Kitty Hawk, Inc. and/or certain of its officers and directors in the United States District Court for the Northern District of Texas, Dallas Division: (i) TODD HOLLEY V. KITTY HAWK, INC., M. TOM CHRISTOPHER AND RICHARD WADSWORTH, No. 3:00-CV-0828-P; (ii) RUSSELL SCHWEGMAN V. M. TOM CHRISTOPHER, CONRAD A. KALITTA, RICHARD R.WADSWORTH, JR. AND KITTY HAWK, INC., No. 3:00-CV-0867-P; (iii) DALE CRANDALL V. M. TOM CHRISTOPHER, CONRAD A. KALITTA, AND RICHARD R. WADSWORTH, JR., No. 3:00-CV-1102- T; and (iv) CHARLES LANDAN AND TRANS AMERICAN AIRLINES, INC. V. M. TOM CHRISTOPHER AND RICHARD R. WADSWORTH, JR., No. 3:00-CV-1623-P. Each of the complaints alleges that the defendants violated the United States securities laws by publicly issuing materially false and misleading statements and omitting disclosure of material adverse information regarding Kitty Hawk's business during the period from April 22, 1999 through April 11, 2000. Among other things, the complaints allege that the defendants materially overstated Kitty Hawk's earnings and financial condition by refusing to disclose that Kitty Hawk had deferred required maintenance and repairs on its aircraft and engines, and by refusing to timely write down the value of Kitty Hawk's obsolete aircraft that were beyond repair. Each of the complaints alleges that as a result of such alleged improper actions, the market price of Kitty Hawk's securities was artificially inflated at the time that the stockholders in the classes acquired those securities. The complaints seek monetary damages for the losses allegedly incurred by the members of the classes on whose behalf these actions are brought and equitable or injunctive relief as permitted by law. In May 2000, the court entered orders in the actions that had named Kitty Hawk as a defendant staying all claims against Kitty Hawk due to its filing for protection under Chapter 11 of the United States Bankruptcy Code. The actions were not stayed as to the individual defendants. In July 2000, the actions were consolidated into a single action. The court has entered an agreed scheduling order that requires a consolidated amended complaint to be FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 16 filed after the court appoints a lead plaintiff. The individual defendants are not required to file a response until after the consolidated amended complaint is filed. The Claims against Kitty Hawk, Inc. asserted in these lawsuits are treated as Class 9 Claims. B. OTHER CLAIMS AGAINST THE DEBTORS. The Debtors and their subsidiaries are potential and/or named defendants in several other lawsuits, claims and administrative proceedings arising in the ordinary course of business, most of which have been automatically stayed pursuant to section 362(a) of the Bankruptcy Code. While the outcome of such claims, lawsuits or other proceedings against Kitty Hawk cannot be predicted with certainty, the Debtors expect that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the financial condition of Kitty Hawk or on distributions to be made under the Plan. 2. CLAIMS HELD BY THE DEBTORS. A. PREFERENCE CLAIMS. During the ninety (90) days prior to the Petition Date, the Debtors made numerous payments and other transfers to creditors on account of antecedent debts. In addition, during the one-year period prior to the filing date, the Debtors made certain transfers to, or for the benefit of, certain "insider" creditors. While most of those payments were made in the ordinary course of the Debtors' business; some of those payments may be subject to avoidance and recovery by the Debtors' estates as preferential and/or fraudulent transfers pursuant to sections 544, 547, 548 and 550 of the Bankruptcy Code. Specifically, the Debtors have identified payments to various creditors totaling millions of dollars that merit investigation to determine whether some or all of those payments are subject to avoidance and recovery by the Debtors. In determining whether to pursue legal remedies for the avoidance and recovery of any transfers, the likelihood of successful recovery must be weighed against the legal fees and other expenses that would likely be incurred by the Debtors. Inasmuch as the Debtors' investigation of such payments is in its initial phase, the Debtors are unable to provide any meaningful estimate of the total amount that could be recovered. ANY CREDITOR THAT RECEIVED A PRE-PETITION4 payment from the Debtors after January 30, 2000 or, in the case of insiders, May 1, 1999, is hereby notified that the Reorganized Debtor may sue it to recover those payments if they constitute preferences under section 547 of the Bankruptcy Code. B. POTENTIAL AVOIDANCE CLAIMS AGAINST THE NOTEHOLDERS (being settled by the Plan).The Plan proposes and incorporates a settlement of various claims owned by the Debtors regarding the amount and enforceability of the subsidiary guarantees of the Senior Notes (see Section IV, C, "Creditor Claims Against Multiple Debtors"). Under the proposed settlement, the Noteholders allow Other Unsecured Creditors to receive 15% of the New Common Stock, which the Debtors believe is a larger distribution than unsecured creditors would receive if the Noteholders shared pro rata with other unsecured creditors of each Debtor (see Liquidation Analysis, Exhibit "B"). The Noteholders receive 85% of the New Common Stock. The Noteholders will also receive - -------- 4 Payments after the May 1, 2000 Petition Date are not subject to recovery as preferences. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 17 a release of the Debtors' fraudulent transfer claims as part of the settlement (see "Release of Fraudulent Transfer Claims," p. 50). The Noteholders receive a greater recovery on their unsecured claims in these Cases than Other Unsecured Creditors receive because the Noteholders have a claim against each of the Debtors in the full amount of their deficiency claim.(see Section IV, C, "Creditor Claims Against Multiple Debtors"). As a result of having a claim against each Estate, the Noteholders's recovery accumulates and the Noteholders receive a recovery in New Common Stock with an estimated value equal to 64% of their Claims. THE PROPOSED SETTLEMENT WITH THE NOTEHOLDERS HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT. The Bankruptcy Court will consider approval of the settlement at the hearing on confirmation of the Plan. If the Court finds that the settlement is not in the best interests of the Debtors' creditors, the settlement will not be approved and the Plan (i) may not be confirmed, or (ii) will have to be modified to be confirmed. Generally, the Bankruptcy Court must find that the settlement is fair and equitable after considering the probability of the Debtors' success if it litigates the claims, the complexity, expense, and likely duration of any litigation of the claims, the possible difficulties in collecting on the claims and all other factors relevant to assessing the "wisdom of the proposed compromise." PROTECTIVE COMMITTEE FOR INDEPENDENT STOCKHOLDERS OF TMT TRAILER FERRY, INC. V. ANDERSON (IN RE TMT TRAILER FERRY, INC.), 88 S.Ct. 1157, 1163 (1968). Subsidiary guarantees of a parent corporation's debt, such as the Kitty Hawk subsidiaries' guarantees of the Senior Notes, may raise the issue of whether the guaranties are fraudulent transfers under the Bankruptcy Code or applicable non-bankruptcy law. To demonstrate that the guaranties are avoidable, the Debtors must show that (a) each of the subsidiaries received less than reasonably equivalent value in exchange for the guaranty obligation, and (b) the obligation rendered the subsidiaries insolvent or left them with unreasonably small capital. THIS ANALYSIS IS PERFORMED AS OF THE TIME THE OBLIGATION WAS INCURRED, HERE, NOVEMBER 1997. In this case, the guarantees also include language that limits the amount of debt guaranteed to an amount just less than the amount that would make the guarantee avoidable as a fraudulent transfer. The Indenture provides as follows: Each Guarantor and, by its acceptance of a Note, each Holder confirms that it is the intention of all such parties that the guarantee by each such Guarantor pursuant to its Note Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law or the provisions of its local law relating to fraudulent transfer or conveyance. To effectuate the foregoing intention, the Holders and each such Guarantor hereby irrevocably agree that the maximum liability of each Guarantor will be $1.00 less than the lesser of (a) the amount which would render the Note Guarantee voidable under either Section 548 or 544(b) of the Bankruptcy Code, (b) the amount permitting avoidance of the Note Guarantee as a fraudulent transfer under any applicable Fraudulent Transfer Act or similar law and (c) the amount permitting the Note Guarantee to be set aside as a fraudulent FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 18 conveyance under any applicable Fraudulent Conveyance Act or similar law. In addition, if the execution and delivery and/or incurrence evidenced by the Note Guarantee constitutes a "distribution" under the Michigan Business Corporation Act (the "MBCA"), the maximum liability under the Note Guarantee with respect to such Guarantor shall be limited to $1.00 less than the maximum liability which such Guarantor is permitted to incur under Section 345 of the MCBA. As is clear from this language, if the guarantees would be avoidable as fraudulent transfers, the guarantees are limited to $1.00 less than the amount that would render the guarantee avoidable under fraudulent transfer or fraudulent conveyance theories. The Creditors' Committee has argued that the guarantees may be limited even if the Debtors can not demonstrate that the guarantees rendered the Debtors' insolvent as of November 17, 1997. The Debtors believe that the Creditors' Committee's counsel misinterprets this provision of the Indenture. The guarantees also include provisions specifically recognizing the rights of contribution among guarantors. Both contractually and under well-established equitable principles, each Debtor had the right on November 17, 1997 and thereafter to collect from each of the other Debtors if it was called upon to pay on its guarantee of the Senior Notes. As a result of the rights of contribution, so long as the Debtors, on a consolidated basis, were not rendered insolvent or left with unreasonably small capital by the Senior Note obligations, no single Debtor should have been rendered insolvent by becoming obligated on the Senior Notes guaranty since each Debtor would have the right to recover from each of the other Debtors the amounts, or a portion of the amounts, it had paid on the Senior Notes in excess of its share. To assess the merits of the Debtors' potential claims to avoid the subsidiary guarantees of the Senior Notes or to limit the amount of debt guaranteed by each subsidiary, the Debtors reviewed the law on fraudulent transfers and the law related to the allocation of liability among co-sureties of a single debt and among co-obligors. The Debtors' counsel, Haynes and Boone, L.L.P., has significant experience in the analyzing and prosecuting fraudulent transfer claims. Sarah Foster is the author of "Let's Remake a Deal: Fraudulent Transfer Laws as a Tool for Restructuring Leveraged Buyouts" and with other members of the Firm, recently conducted a lengthy investigation of claims, including fraudulent transfer claims, against the creditors of three related debtors in the Chapter 11 case of McGinnis Partners' Focus Fund. Ms. Foster and Mr. Penn worked together on behalf of a Chapter 7 Trustee to analyze and pursue fraudulent transfer and other claims in the David Mann case. That estate's claims were settled very favorably. In this case, counsel investigated the factual background for the claims by interviewing a number of Kitty Hawk employees who participated in the transactions giving rise to the Senior Notes as well as employees with knowledge of the Debtors' business operations following the Kalitta transactions. Counsel reviewed documentary evidence regarding the transaction, including appraisals, opinions and financial data as of the effective date of the transaction in question, and Debtors' operations following the transactions. Based on their review of the evidence and the issues and their assessment of the merits of the claims, the Debtors proposed a settlement of those claims whereby general unsecured creditors would recover more for their claims than those creditors would FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 19 receive if the guarantees were enforced according to their terms. The settlement also, necessarily, provides less value to the Noteholders' deficiency claims than if the guarantees were fully enforced. THE FOLLOWING DESCRIPTION OF THE BENEFITS OF THE SETTLEMENT REPRESENTS THE DEBTORS' POSITION. THIS DISCUSSION DOES NOT REPRESENT THE VIEWS OF THE COURT OR THE CREDITORS' COMMITTEE. The Debtors believe that settling these disputes in the Plan is in the best interest of the Debtors and their creditors for a number of reasons. (1) The Debtors do not believe that they have a significant likelihood of success on the merits of any avoidance claims. To avoid the guarantees, the Debtors must prove that the guarantees rendered the Debtors insolvent or left them with unreasonably small capital as of November 17, 1997. The Debtors face considerable problems in proving that the Debtors were rendered insolvent or left with unreasonably small capital as a result of the Senior Note transaction. The Debtors used the majority of the Senior Note proceeds to retire debt of the Kalitta companies that the Debtors acquired concurrently with the Note offering. Arms length negotiations resulted in the Kalitta merger. At the time, Kitty Hawk firmly believed that the merger provided value substantially greater than the acquisition cost. Third party appraisals supported the value of the aircraft pledged to Noteholders. Many acquired assets were left unencumbered and thus available to satisfy other creditors' claims. Alex Brown, an investment banking firm, opined that the transaction was fair to Kitty Hawk. Audited financial statements for both Kitty Hawk and the Kalitta Companies for 1995 and 1996 indicate that the companies were solvent. The audited consolidated financial statements for the merged companies as of December 31, 1997, reflect shareholders' equity of $179 million based on assets of $834 million and liabilities of $655 million (including the Senior Note obligations). At the time of the merger, the Debtors raised $38 million in equity and entered into a new secured revolving credit facility providing for borrowings of up to $100 million. Therefore, substantial, contemporaneous, third party assessments of the Debtors' value at the time the Debtors incurred the Senior Note and guaranty obligations will have to be discredited to demonstrate that the consolidated Debtors were rendered insolvent or left with unreasonably small capital as a result of the Senior Note obligation. The risk that the Debtors will not succeed on the merits of any fraudulent transfer claim combined with the cost and likely duration of any such litigation supports settlement of the potential claims. (2) The Debtors believe the settlement in the plan provides general unsecured with a greater recovery sooner than they would receive from the likely outcome of such litigation. The Debtors' analysis of the scheduled assets and liabilities of the subsidiaries indicates that the settlement will provide each subsidiary's creditors with a significantly higher distribution percentage under the Plan than they would receive if the Debtors pursued the litigation and were unsuccessful. The settlement provides the anticipated benefit of litigation, greater recoveries for unsecured creditors, without the costs and delays of litigation. The settlement provides creditors with the right to receive distributions of New Common Stock with a value equal to approximately 30% of the creditor's claim. In contrast, without the settlement, the most that any creditor of a subsidiary would FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 20 receive would be approximately 12% of its claim and creditors of many of the subsidiaries would receive substantially less. (3) The settlement eliminates litigation delay and expense. A fraudulent transfer adversary proceeding would consume a significant amount of time and expense. It is unlikely that a trial would occur within six months. Any significant distribution to unsecured creditors would be delayed since a reserve would have to be created for the total alleged amount of the Noteholders' Claims. The value of the major assets of each subsidiary would be in issue, and the Estates would likely incur significant expenses for forensic appraisals and the depositions of the experts preparing those appraisals. If there were material misrepresentations in 1997 regarding the assets, the possible causes of action for those misrepresentations would be disputed and would require even more expenditures. (4) Delaying confirmation to allow the litigation to proceed would materially increase the bankruptcy burdens on the Debtors. The Debtors would still face all of the administrative and reporting burdens of debtors in possession. Expenditures for bankruptcy professionals would continue (at a rate of approximately $1 million per month). The "soft costs" of bankruptcy would also continue and increase as the "light at the end of the tunnel" moved further away: declining employee morale, increasing employee departures, increasingly lower employee productivity, increasing questions by customers regarding Kitty Hawk's ability to survive. (5) Settlement also allows Kitty Hawk's management and employees to focus their time, efforts and energies towards Kitty Hawk's future operations instead of being required to devote material amounts of time and energy to events that occurred years before. For all these reasons, among others, the Debtors believe the settlement is in the best interests of the Debtors, their estates and should be approved by the creditors. 3. CREDITORS' COMMITTEE'S POSITION STATEMENT ON THE DEBTORS' PROPOSED SETTLEMENT WITH THE NOTEHOLDERS. The Committee's position is that the Debtors did not adequately investigate the merits of the fraudulent transfer claims before negotiating the settlement with (and release of) the Noteholders. The Committee does not believe that the Debtors are receiving fair consideration for releasing the claims for the reasons described below.5 The Committee believes that creditors existing in November 1997 and after may avail themselves of potential fraudulent transfer actions that could avoid certain Subsidiary guarantees issued in favor of the Senior Noteholders. The Debtors question the potential fraudulent transfer claims because (a) the audited financials show that the Debtors were solvent, in the aggregate, on a balance sheet basis immediately after the transaction in question, (b) the value of the aircraft (as appraised) and other assets received in the transaction exceeded $450 million, (c) the transaction incurred $340 million in debt and raised $40 million in equity capital, and (d) the Company received - -------- 5 On September 6, 2000, the Committee's Motion for it to have authority to prosecute fraudulent transfer litigation was denied. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 21 a fairness opinion regarding the transaction. The Committee disputes the Debtors' balance sheet asset values as of November, 1997. Kitty Hawk incurred capital expenditures in 1998 and 1999 which exceeded the projections by at least $100 million. The book value of the Debtors' aircraft after the November 19, 1997 acquisition date was approximately $126 million greater than the net book value reported by the entities pre-acquisition. The increase resulted from purchase accounting adjustments requiring a write-up of fixed assets to account for the purchase price (which was significantly less than appraised value). The Committee believes that the write-ups and significant capital expenditures required to maintain the aircraft calls into serious question the accuracy of the appraisals. Even if the balance sheet insolvency test is not met, other tests for avoidance can be used (each of which would be an issue of fact for determination by the Bankruptcy Court). First, the Committee believes that some of the Subsidiaries were left with unreasonably small capital as a result of the transaction with the Noteholders. Second, a debtor who is generally not able to pay the its debts as they become due is presumed to be insolvent. Again, the Committee believes that the Company and certain Subsidiaries were unable to pay debts as they became due in late 1999. If the Subsidiaries guaranteed an amount equal to the entire net worth of Kitty Hawk and its subsidiaries when the November 1997 merger occurred, this might leave the guarantors insolvent. The Committee is unaware of any case law interpreting the limitation language either as proposed by the Debtors or the Committee, and believes this would be a case of first impression. The Committee believes that allocating the Bondholder deficiency in full to each Subsidiary is inappropriate. The Subsidiary guarantees contain language purporting to limit the guaranteed amount to a lesser amount if the guaranty might be a fraudulent transfer. The reduced amount is just less than that which would make the guarantees fraudulent transfers. If the Senior Noteholders' deficiency claim is limited to each Subsidiary's Net Worth as of December 31, 1997, the Committee believes that unsecured trade creditors' claims would be 25% of the aggregate Unsecured Claims and to the Senior Noteholders' Claims (assuming a $200,730,000 deficiency claim as alleged by the Debtors) would be 75% of the aggregate Unsecured Claims. The Committee believes that applying the entire $200,730,000 estimated deficiency claim of the Senior Noteholders to each Subsidiary distorts the allocation of the guaranties and the estimated "settlement" proposed by the Debtors' Plan gives no value to the avoidance actions because it is less than the Committee asserts would be available if the guaranties were allocated based on the Subsidiaries' 1997 Net Worth. Under this analysis, on an entity by entity basis, the Committee believes that the available proceeds would be allocated as follows: FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 22 Senior Noteholders' Deficiency Claim (Limited to each Subsidiary's Net Worth as of 12/31/97) (6) - -------- (6) Source: Information derived principally from Debtor's liquidation analysis and supporting schedules for the Disclosure Statement as well as Debtors' 12/31/97 Consolidating Balance Sheets. (1) Kitty Hawk Cargo was formed in March 1999 through a combination of AIC and AIF (a division of AIA). For purposes of the above analysis, the Committee assumed that the beginning equity of Kitty Hawk Cargo consisted of the contributed capital reflected per the August 31, 1999 Consolidated balance sheet of $8,318,554 and $6,849,273 for AIC and AIF respectively. Since Kitty Hawk Cargo was formed from assets that were part of AIA in 1997, AIA's Net Worth as of 12/31/97 has been reduced by the portion allocated to Kitty Hawk Cargo. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 23
PERCENTAGE ALLOCATION OF AVAILABLE PROCEEDS ----------------------------- NET AMOUNT AVAILABLE FOR GENERAL BONDHOLDER UNSECURED BONDHOLDER UNSECURED UNSECURED DEFICIENCY CREDITORS' DEFICIENCY CREDITORS' CREDITORS CLAIM CLAIMS CLAIM CLAIMS ------------ ------------ ------------ ------------ ------------ KH, Inc. .................................... $ 5,317 $ 200,730 $ 2,452 98.8% 1.2% Kitty Hawk Cargo ....................................... 8,247(1) 15,168 5,588 73.1% 26.9% Kitty Hawk Aircargo .................................... 27.878 53,966 26,561 67.0% 33.0% KH International ............................ 3,418(1) 48,197 27,476 63.7% 36.3% KH Charters ................................. 19,589 38,263 10,608 78.3% 21.7% Longhorn Solutions ................................... -- -- 68 -- -- Aircraft Leasing ............................ 8,749 5,451 1,300 80.7% 19.3% AIT ......................................... 28 (230) 2 -- 100% FOL ......................................... (37) 64 -- 100% 0.0% OKT ......................................... 672 1,486 25 98.3% 1.7% ------------ ------------ ------------ ------------ ------------ TOTAL: ...................................... $ 73,859 $ 363,094 $ 74,080 74.7% 25.3%
The Committee believes that the potential benefits of litigation far outweigh the costs. Based on the liquidation analysis attached to the Disclosure Statement, if the guarantees by all Subsidiaries other than Kitty Hawk International are completely avoided and intercompany claims are eliminated, the following could be available for the unsecured creditors (in the event of liquidation): Kitty Hawk Cargo 100% Kitty Hawk Aircargo 100% Kitty Hawk Charters 100% Aircraft Leasing 100% OK Turbines 100% American Int'l Travel 100% Kitty Hawk International 4.5% The law firm of Haynes and Boone (Debtor's counsel), also represented Kitty Hawk and the Subsidiaries in the November 1997 transaction and issued a legal opinion (with all appropriate qualifications and assumptions) opining on, among other things, that the performance of the Subsidiaries on the guarantees "will not contravene....any provision of applicable law...." The Committee believes it would be more appropriate for another law firm to determine if a fraudulent transfer action exists and if the proposed settlement is appropriate. A. LITIGATION WITH INTERNATIONAL BROTHERHOOD OF TEAMSTERS ("IBT"). The IBT filed an adversary proceeding against International alleging substantial claims based on International abruptly suspending its flight operations. The suit alleges that, although the suspension occurred before the Petition Date, claims under the Collective Bargaining Agreement ("CBA") and under the FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 24 WARN Act are effectively treated as super-priority administrative claims - claims ahead of all other claims in the case. The IBT alleges that International owes its flight crews and their union over $9 million under a number of theories. The primary theory is that the amounts owed under the CBA for unpaid salaries and benefits must be paid without regard to their priority if the CBA has not been rejected. If the IBT prevails, the recovery by the IBT would effectively eliminate all of the equity in the International's bankruptcy estate leaving little or no available cash to pay other claims. International vigorously disputes the IBT's position on the priority of its claims. B. LITIGATION WITH CONRAD KALITTA. In late May, 2000, Kitty Hawk commenced an arbitration proceeding against Conrad Kalitta based on the 1997 merger of the Kalitta Companies and Kitty Hawk entities. Most of the allegations in the arbitration focus on the condition of the wide body assets and whether the substantially larger maintenance costs and reduced reliability caused significant harm to Kitty Hawk. The arbitration demand alleges that either the operating expenses were too large because the status of the engines was misrepresented or there was an undisclosed material adverse event that harmed the engines. Trial of the arbitration proceeding has been postponed until Spring 2001. C. MISCELLANEOUS LITIGATION. The Debtors and their subsidiaries may be potential and/or named plaintiffs in several other lawsuits, claims and administrative proceedings arising in the ordinary course of business. While the outcome of such proceedings cannot be predicted with certainty, the Debtors expect that the potential recovery, as well as the costs of pursuing such claims, will not have a material effect on the financial condition of the Debtors or the distributions to be made under the Plan. V. EVENTS LEADING TO BANKRUPTCY A. EVENTS LEADING TO CHAPTER 11 BANKRUPTCY FILING In 1997, Kitty Hawk expanded its level of operations and geographic scope through the acquisition and merger of the Kalitta Companies, several entities engaged in air transportation and aviation-related activities. The acquisition was financed by Kitty Hawk through a public debt offering in the amount of $340 million dollars (the "Senior Notes"). After acquiring the Kalitta Companies, Kitty Hawk commenced integration of the various entities into three units, which at the time of it bankruptcy filing, included: o Kitty Hawk International ("International"); a FAR Part 121 certificated air carrier, which operated scheduled freight from the U.S. to various countries in the Pacific Rim using a fleet of wide body Boeing747 freighter aircraft ("B747F"), Lockheed L-1011 freighter aircraft ("L-1011F") and a fleet of long-range McDonnell Douglas DC-8 freighter aircraft ("DC- 8F"). Additionally, International operated certain wide body aircraft in support of Kitty Hawk's scheduled overnight airfreight operations located in Fort Wayne, Indiana. o Kitty Hawk Aircargo, Inc. ("Aircargo"); a FAR Part 121 certificated air carrier engaged primarily in the air transport of domestic freight using a fleet of narrow-body aircraft ("B727- 200F") and to a lesser extent McDonnell-Douglas DC-9 ("DC-9-15F") air freighters. Aircargo's operations were substantially in support of Kitty Hawk's scheduled overnight air freight hub located in Fort Wayne, Indiana. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 25 o Kitty Hawk Cargo, Inc. ("Cargo") which operates Kitty Hawk's scheduled overnight air freight hub in Fort Wayne, Indiana. o Kitty Hawk Charters, Inc. ("Charters"); a FAR Part 135 certificated air carrier engaged primarily in the on-demand charter aircraft freight and passenger market using a fleet of small jet and turbo-prop aircraft. o OK Turbines, Inc. ("OK Turbines"); a small turbine engine repair and parts-sales/support operation located in Hollister, California, which supports Charters and other similarly situated small airlines. After acquiring the Kalitta Companies, Kitty Hawk proceeded to integrate the operations of the Kalitta Companies with those of Kitty Hawk's. However, in late 1999 and continuing into the first quarter of 2000, Kitty Hawk's financial performance began to deteriorate due to: (i) the unscheduled grounding of several wide body aircraft as a result of maintenance scheduling problems, including premature engine failures, (ii) the unscheduled grounding of aircraft (primarily operated by International) for repair of damage caused by various minor unrelated accidents, (iii) higher than expected maintenance costs, on the wide body fleet during the first quarter of 2000, (iv) the higher than expected fuel expenses for Kitty Hawk's scheduled overnight airfreight operations, and (v) general softness in customer demand relative to expectations. Kitty Hawk, as a result, experienced a substantial decrease in projected revenues, an increase in expenses and correspondingly, a substantial decrease in cash. The bulk of Kitty Hawk's deteriorating operating and financial condition emanated from International. Before and after acquiring the Kalitta companies, International sustained significant losses due primarily to substantial capital expenditures required to operate and maintain an aging fleet (including engines) of B747Fs, L-1011Fs and DC-8Fs and poor overall revenue and operating performance. Covenants contained in the Senior Notes mandate compliance with certain maintenance provisions for the aircraft and engines collateralizing this debt. In April 2000, Kitty Hawk projected a cash requirement in excess of $30 million to comply with these maintenance provisions specifically bringing the number of serviceable wide-body engines to required levels. In an effort to improve its liquidity and comply with the terms of the Senior Notes, Kitty Hawk unsuccessfully pursued various asset sales, including sale-leaseback financing on its fleet of owned B727-200F aircraft. On April 11, 2000, Kitty Hawk publicly disclosed that as a consequence of the aforementioned events it did not have sufficient cash to pay the $16.9 million semi-annual interest installment on its Senior Secured Notes due May 15, 2000. As a result of this disclosure, general trade creditors, fuel suppliers, and other vendors eliminated payment terms, demanded immediate payment on all outstanding balances, and required pre-payment, deposits, or COD on all future purchases, causing further deterioration of Kitty Hawk's cash position. By late April 2000, Kitty Hawk had ceased payments on several of its aircraft leases causing a default on virtually all its lease and loan agreements. Kitty Hawk believed that various creditor actions were imminent, including the seizure of aircraft and other operating assets as well as an involuntary bankruptcy filing. On April 30, 2000, Kitty Hawk suspended all flight operations of International, resulting in the grounding of all of the B747F, L-1011F and DC-8F aircraft and the termination of substantially all of International's employees (including all of the flight personnel represented by the International Brotherhood of Teamsters Union). FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 26 VI. PROGRESS DURING BANKRUPTCY AND SIGNIFICANT EVENTS After filing for Chapter 11 protection, Kitty Hawk focused its operations around the core business lines and on the operation of a single aircraft type, the B727-200F. In addition, Kitty Hawk commenced an aggressive program to streamline maintenance, planning, administration and flight operations functions. A. FORT WAYNE HUB IMPROVEMENTS The operational results for the scheduled overnight freight operation have improved significantly since the shutdown of International. Even though the cessation of service by International reduced Fort Wayne's capacity by about 200,000 pounds per night, the resulting decrease in traffic is approximately 100,000 pounds per night, thereby improving load fact and decreasing cost per pound. B. FINANCIAL PERFORMANCE The financial results achieved by Kitty Hawk have been significantly improved from those pre-petition. In May 2000, on a fully accrued basis (including various fees and costs related to the Chapter 11 filing), Kitty Hawk earned over $1.0 million. In June 2000, the results were essentially breakeven on a fully accrued basis. Kitty Hawk believes these results are significant since they demonstrate a financial improvement as a result of the suspension of operations at International and the ability of Kitty Hawk to concentrate on its three primary business lines. Seasonally, July is a difficult month for Kitty Hawk. Kitty Hawk reported an operating loss before taxes in July of $2.2 million, which is representative of the impact of the 4th of July holiday on its Scheduled Freight business (three fewer revenue nights than normal) and the shut-down of the automotive industry's manufacturing for two weeks in July. The July automotive plant shutdown affects Kitty Hawk's Scheduled Freight business to some degree, and the Kitty Hawk Charters 135 business dramatically. However, adjusting for the costs of bankruptcy, the non-recurring shutdown costs still being incurred, andthe businesses and fleet types that will be sold, the core operations were break-even for the month. This indicates a clear signal that fixed costs are in line, and aside from the holiday, the Scheduled Freight business did very well. The three days of lost freight in the Scheduled Freight business would have produced at least $1.1 million of pre-tax profit under any circumstances. August is typically the beginning of the best season of the year for Kitty Hawk, and August 2000 was no exception. After adjusting for the non-recurring expenses and losses related to discontinued business, and adjusting out Kitty Hawk Charters and Longhorn Solutions, Inc.'s operations due to the pending sale of those subsidiaries, Kitty Hawk generated income before taxes of $856 thousand in August of 2000. All indications are that Kitty Hawk is moving forward very well and will be able to meet the financial performance projections attached as Exhibit "A" to this Disclosure Statement. C. REVENUE PERFORMANCE IMPROVEMENT During June 2000, Kitty Hawk implemented an across-the-board 6 percent price increase to the scheduled hub operation and further improved its yields by increasing the premium rate for its higher yielding "EXPRESS" product and by increasing the surcharge rate on oversized freight. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 27 During June 2000, Kitty Hawk implemented price increases for two of its single-route contracts with the USPS resulting in approximately 10 percent improvement in revenues for these contracts. The contracts were renewed through October 2000. The third single-route contract, which renews in October 2000, is expected to yield similar increased results for Kitty Hawk. During May and June 2000, Kitty Hawk restructured its contract with BAX Global (which was unprofitable prior to the restructure) improving its revenue performance by increasing rates under the ACMI contracts in excess of 10 percent. Restructuring the BAX Global contract also reduced the number of dedicated aircraft from 13 to 7. The contract was extended to December 31, 2001. D. ADMINISTRATIVE CONSOLIDATION In connection with the suspension of International's flight operations and the Chapter 11 filing, Kitty Hawk commenced a comprehensive review of its various administrative departments for efficiency improvements. Kitty Hawk consolidated all general and administrative personnel to its corporate headquarters in Dallas, Texas, thus eliminating duplicative functions in Ypsilanti, Michigan and Fort Wayne, Indiana. This process is ongoing with continued improvements expected going forward. E. MANAGEMENT CHANGES In late August, 2000, Susan Hawley decided to leave Kitty Hawk to pursue other interests. Ms. Hawley had played a key role in negotiating and working with the United States Postal Service on Kitty Hawk's account. Upon her departure, Donny Scott, the Vice President for Postal and Ground Operations, assumed Ms. Hawley's responsibilities. He has prior experience with the USPS and Kitty Hawk's Peak Season operations for the USPS. Mr. Scott transitioned successfully into his new Postal responsibilities. In August, 2000, John Turnipseed, Vice President-Human Resources, announced his resignation. He was replaced by Jane Perelman, Kitty Hawk's assistant general counsel, an attorney with extensive employment law background, including Board Certification in Labor and Employment Law by the Texas Board of Legal Specialization. Jane Perelman announced her resignation in September, 2000. F. ASSET SALES Kitty Hawk has embarked on a series of asset sales designed to streamline its operation, eliminate surplus and/or non-strategic assets, and provide the requisite funding to expeditiously exit the Chapter 11 process as follows: o Kitty Hawk has obtained court approval to sell its authority related to a supplemental type certificate issued by the FAA for certain cargo conversion modifications on B727-200F aircraft. The sale of the supplemental type certificate is for $3.0 million with Kitty Hawk having received a non-refundable deposit of $150,000. The remainder of the sale is expected to close in October 2000. o Kitty Hawk has reached a preliminary agreement to sell a hangar owned by International and substantially all of Charters and OK Turbines for $22.4 million. The buyer must meet certain conditions in advance of the expected closing in October 2000. o Kitty Hawk has reached a preliminary agreement to sell its leasehold interests (including the building improvements) in a long-term lease at Honolulu International Airport. The buyer FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 28 of the leasehold is Fed Ex with an agreed price is $4.45 million. The transaction is subject to various approvals including the State of Hawaii. o Kitty Hawk has obtained court approval to sell the Part 121 Operating Certificate of International for $200,000. In addition, the agreement provides that the buyer of the certificate will assume a restructured contract for pilots with the International Brotherhood of Teamsters Union. The transaction is subject to certain other conditions including a non- compete agreement by the buyer. This transaction closed in September 2000. o Kitty Hawk has reached an agreement to sell one of its surplus DC-9-15F aircraft for $2.95 million. The transaction was approved by the Bankruptcy Court on September 27, 2000 and is expected to close in October. o Kitty Hawk conducted a series of four auctions in August and September 2000 with an internationally prominent aviation auction firm for the liquidation of its surplus aircraft/engine spare parts, ground equipment and other inventory primarily related to the B747F, L-1011F and DC-8F fleet types. o Kitty Hawk is actively pursuing transactions to sell other surplus assets including: (i) twelve Stage II compliant DC-8F aircraft, (ii) two additional surplus DC-9-15F, and (iii) certain fee- simple real estate located near the airport in Ypsilanti, Michigan. G. KEY CONTRACTS A significant portion of the Debtors' revenues for its continuing businesses are derived from contracts with BAX Global and the United States Postal Service. Prior to the bankruptcy, in 1998, Aircargo entered into an Agreement to Furnish Fourteen (14) B727-200 Aircraft and Air Cargo Services with BAX. Under the Original Contract, Aircargo agreed to provide and operate for the benefit of BAX fourteen (14) B727-200 aircraft and to provide air cargo services on the routes designated by BAX. The Original Contract is what is known as an ACMI contract. Typically an ACMI contract is entered into between a certified aircraft operator and a lessee, whereby the operator is obligated to provide a properly insured and maintained aircraft together with qualified flight deck crew to the lessee for a specified period of time. The operational and maintenance responsibility for the aircraft remain with the operator. The operator is compensated at a pre-determined rate, which typically covers the operator's direct costs including, crew, maintenance, insurance and ownership plus a mark-up for overhead and profit. Unless otherwise specified, the operator is generally responsible for absorbing increased costs related to flight crews, maintenance, and insurance over the term of the agreement. The lessee is responsible for all other costs, such as fuel, landing and navigation fees, and ground handling. Following the bankruptcy, Aircargo and BAX agreed to amend the Original Contract as of July 1, 2000 and to reduce the number of aircraft covered by the Original Contract to seven (7) aircraft: three (3) advanced Boeing 727s and four (4) non-advanced 727s. The amendments increase the base rate cost of the aircraft to BAX by $40,000 per aircraft per month and change the bonus structure. Although Aircargo and BAX have been performing under the terms of the amended agreement since June, the parties only recently finalized the documentation of the agreement. Aircargo has filed a motion to assume the BAX contract, as amended, and anticipates approval of the agreement. The Debtors have a number of contracts with the USPS. Post-petition, the Debtors have rejected a small number of these contracts that it could not service with its existing fleet. However, the Debtors' relationship with USPS has remained strong. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 29 Aircargo received AMENDMENT TO TRANSPORTATION SERVICES CONTRACT, amending contract No. CNB 99-01, on September 19th, 2000. This contract provides for, among other things, the Debtors' continued prime contractor status for the C Net peak season line haul/hub/terminal handling/sort operations out of Blytheville, AR ("CNB", or "C Net - Blytheville"). The contract price is $29.3 million, not including pass through direct expenses (landing & parking, de-ice, and fuel). While this contract is $10.1 million less than the 1999 CNB contract, it is above average from a historical perspective, and the Debtors expect to maintain similar profit margins to years past. CNB HISTORICAL AMOUNT AIRCRAFT AIR-STOPS (CITIES) - -------------------------- ---------------- --------------- ----------------- 1997 Actual $ 25,700,000 24 22 1998 Actual $ 28,900,000 29 26 1999 Actual $ 39,400,000 39 33 2000 Contracted $ 29,300,000 29 24 CNB is smaller than last year, but is not actually as much smaller as shown due to three (3) wide-body line haul routes being bid separately (Oakland, Los Angeles, Phoenix). This was due to USPS efforts to reduce the total cost of CNB this year, and the Debtors' need to get the CNB contract finalized as early as possible for stability reasons. It is unknown at this time whether or not this will prove effective in reducing costs for the USPS. The peak season opportunities with the USPS are not limited to CNB. There are at least three other opportunities, namely CNW (a Western US peak season operation), other single routes, and W Net peak season flying (the Debtors control through the W Net contract flown year-round). These opportunities have not yet been awarded or finalized, and the Debtors' opportunities are as follows: o CNW - is a six (6) aircraft operation this year, down from ten (10) last year. The Debtors will be bidding to retain five (5) of these routes that were flown by the Debtors last year. o Single routes - there is at least one significant route upon which the Debtors is bidding, Los Angeles to Honolulu, that is currently pending. Other single routes may still come available, as well as the three wide-body routes mentioned above (Oakland, Los Angeles, and Phoenix) going to the Blytheville hub, which the Debtors perceive may not yet be finalized. o W Net - peak season flying through the Sacramento (Mather AFB) hub where the Debtors operate W Net. This is additional flying that is captive for the Debtors, which should amount to approximately 4 extra days of flying. In summary, the Debtors expect to have a very good peak season with the USPS, and will increase its total revenue above just CNB as the remainder of the contracts are finalized. Many of the Debtors' important freight customers do not have an ongoing contracts with the Debtors. Nevertheless, pounds of freight carried per night through the Fort Wayne hub havetended to increase during the case. H. SIGNIFICANT ORDERS ENTERED DURING THE CASE During these bankruptcy cases, a number of significant Orders were issued by the Court. The most significant Orders are discussed below: FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 30 o May 2, 2000 - ORDER GRANTING JOINT ADMINISTRATION. This Order consolidated the ten cases for administrative purposes but did not substantively consolidate the debtors into one case with only one bankruptcy estate. o May 3 and June 16, 2000 - CASH COLLATERAL ORDERS. These Orders allow the debtors to use the cash collateral of the Bank Group while reorganizing their affairs. The Orders provide, among other things, that asset sales proceeds from the Bank Group's pre-petition collateral are to be paid to the Bank Group. The Orders also preserve the adequate protection rights and remedies of the Noteholders. o May, 2000 - ORDER AUTHORIZING RETENTION OF SEABURY ADVISORS, LLC AND SEABURY SECURITIES, LLC. The Bankruptcy Court authorized the Debtors' retention of Seabury Advisors, LLC and Seabury Securities, LLC as financial advisors to the Debtors. Seabury's compensation agreement with Kitty Hawk provides an incentive for successfully reorganizing Kitty Hawk and for obtaining secured debt financing. For secured debt refinancing, the success fee is 1.5% of the loan amount. For reorganizing Kitty Hawk, the success fee is a sliding scale based on the reorganized enterprise value plus the value of certain asset sales. For reorganized enterprises valued between $100 million and $200 million, the success fee is $1.75 million plus 1.5% of the amount over $100 million. Seabury's $150,000 per month retainer is a credit against certain of the success fees. o May 4, 2000, May 5, 2000 and August 11, 2000 - ORDER AUTHORIZING DEBTORS TO PAY PRE- PETITION SALARIES AND EMPLOYEE BENEFITS. The first two Orders allow the debtors to pay the pre-petition employee claims for all employees that were employed post-petition. The last Order authorized Kitty Hawk International to pay the pre-petition wage and benefit claims for its employees -- provided that the amount paid to any employee did not exceed the $4,300 priority claim limit under the Bankruptcy Code. o June 16, 2000 - AGREED ORDER ON DEBTORS' MOTION TO ABANDON CERTAIN AIRCRAFT AND ENGINES OF KITTY HAWK INTERNATIONAL. This Order dealt with the "wide body" aircraft securing the Senior Notes. The Order effectively transferred the responsibility and liability for those aircraft to the Noteholders. o June 23, 2000 - ORDER APPROVING MOTION TO SELL SUPPLEMENTAL TYPE CERTIFICATES. This Order allowed the sale of two Supplemental Type Certificates and associated inventory for $3 million. o July 7, 2000 - ORDER GRANTING MOTION TO EMPLOY AUCTIONEER AND SELL SURPLUS ASSETS. This Order allowed the Debtors to assemble a substantial amount of surplus property to be auctioned by Starman Brothers. The assets became unnecessary surplus when the Debtors downsized their operations. o August 4, 2000 - ORDER GRANTING MOTION TO APPROVE SALE OF AIR CARRIER CERTIFICATES AND MISCELLANEOUS ASSETS - This Order allowed Conrad Kalitta to purchase the FAA and DOT certificates of Kitty Hawk International for $200,000. o August 11, 2000 - ORDER GRANTING MOTION TO MODIFY AND ASSIGN COLLECTIVE BARGAINING AGREEMENT. This Order provided for a modified Collective Bargaining Agreement to be assigned to Mr. Kalitta to govern the prospective labor relations between the startup airline he contemplates and the International Brotherhood of Teamsters. Financially, neither the Order nor the modifications affect the Kitty Hawk International Estate or claims against the Estate. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 31 o August 3, 2000 - ORDER GRANTING MOTION TO ASSUME LEASE WITH FORT WAYNE AIRPORT AUTHORITY. This Order allowed Kitty Hawk to assume the favorable leases on the hub of its scheduled overnight freight business. o August 3, 2000 - ORDER ON EMERGENCY MOTION TO REQUIRE THE CALLING OF AN ANNUAL SHAREHOLDERS' MEETING AND ORAL MOTION TO MODIFY EXCLUSIVITY. This Order set the annual meeting of the shareholders of Kitty Hawk for October 31, 2000, the date requested by the Debtors in response to the request by M. Tom Christopher that the meeting be held earlier. The later meeting date gives the Debtor time to obtain audited financial statements for 1999 and to solicit proxies in connection with the annual meeting. The Order also terminated the Debtors' exclusive period for filing a plan as to Tom Christopher so that he may file a plan of reorganization for Kitty Hawk at any time. On September 28, the Bankruptcy Court ruled (with Mr. Christopher's agreement) that the annual meeting would be set after the Confirmation Hearing. o August 28, 2000 - ORDER AUTHORIZING DEBTORS' PAYMENTS AND PERFORMANCE OF OBLIGATIONS UNDER AIRCRAFT EQUIPMENT CONTRACTS PURSUANT TO 11 U.S.C. SS. 1110. The Order authorized certain payments previously made by the Debtors to its aircraft lessors and creditors with purchase money security interests in aircraft and further authorized the Debtors continued performance of its obligations to these parties. If the Debtors had not obtained this relief, they would be subject to having certain aircraft repossessed. o August 28, 2000 - ORDER GRANTING DEBTORS' MOTION TO APPROVE KEY EMPLOYEE RETENTION PLAN. The Order authorized Kitty Hawk to a retention bonus equal to six (6) month's salary in six monthly installments beginning on the earlier of January 1, 2001or the effective date of a plan of reorganization provided that they remained employed during that time and executed a covenant not to compete with Kitty Hawk through December 2001. The Key Employees listed in the motion were nine (9) executive officers of Kitty Hawk. Two of the nine key employees left Kitty Hawk's employ after the Order was signed, including Susan Hawley. o September , 2000 - ORDER DENYING MOTION FOR AUTHORITY TO BRING CAUSES OF ACTION ON BEHALF OF THE DEBTORS ARISING FROM FRAUDULENT TRANSFERS. On September 6, 2000, after a contested hearing, the Bankruptcy Court denied the Creditors' Committee's motion requesting authority to file and prosecute a fraudulent transfer adversary proceeding to avoid (set aside) one or more of Kitty Hawk's subsidiaries' guarantee of the debt to the Senior Notes as fraudulent transfers under state law. The Bankruptcy Court denied the Motion without prejudice to reasserting it. I. APPOINTMENT OF CREDITORS' COMMITTEE The Official Committee of Unsecured Creditors was appointed by the United States Trustee on May 11, 2000. The Creditors' Committee is composed of the following creditors:
Mercury Air Group, Inc. Zantop International Airlines, Inc. 5456 McConnell Avenue 840 Willow Run Airport Los Angeles, CA 90066 Ypsilanti, MI 48198-0840 [Creditor of Charters] Heico Corporation BF Goodrich Aerospace Component & Repair 825 Brickell Bay Dr., Suite 1644 5250 NW 33rd Avenue Miami, FL 33131 Ft. Lauderdale, FL 33309 [Creditor of Aircargo and International] [Creditor of Aircargo and International]
FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 32 Cherry-Air 4584 Claire Chennault Addison, TX 75001 [Creditor of Charters] Chevron Corporation 2005 Diamond Blvd., Room 2182B Concord, CA 94520-5739 [Creditor of International] Avfuel Corporation P. O. Box 1387 Ann Arbor, MI 48106-1387 [Creditor of Aircargo] The Debtors' books and records are the source of the Debtors' identification of the entity against which each member of the Committee has a claim. The Committee members may assert claims against other Debtors. J. PROFESSIONALS' BEING PAID BY THE ESTATES AND FEES TO DATE 1. PROFESSIONALS EMPLOYED BY THE DEBTORS The Debtors have employed the following professionals: Haynes and Boone, LLP General Counsel Dickinson Wright, PLLC Special Litigation Counsel Silverberg, Goldman and Bokoff, LLP Special Regulatory Counsel Ford & Harrison, LLP Special Labor Relations Counsel Seabury Advisors, LLC Financial Advisors Grant Thorton Accountants (audit) Lain, Faulkner & Co. Accountants 2. PROFESSIONALS EMPLOYED BY THE CREDITORS' COMMITTEE Forshey & Prostok, L.L.P. General Counsel Schafer and Weiner, PC Co-Counsel Jay Alix and Associates Financial Advisors FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 33 3. CHANGES IN PROFESSIONALS RETAINED On September 15, 2000, Kitty Hawk was advised that the Creditors' Committee voted to terminate the representation of Forshey & Prostok, LLP and that it would seek to employ Verner, Liipfert, Bernhard, McPherson and Hand, Chartered as its attorneys. An application to employ the Verner Liipfert firm is currently pending. 4. FEES TO DATE Through July 31, 2000, the Debtors incurred $2,843,455.39 in fees and expenses to the professionals identified above. Of that amount, $1,926,112.16 has been paid. VII. DESCRIPTION OF THE PLAN A. INTRODUCTION A summary of the principal provisions of the Plan and the treatment of Allowed Claims and Interests is set out below. The summary is qualified in its entirety by the Plan. The Plan provides for the post-confirmation merger of the Debtors into a single Delaware corporation ("Reorganized Kitty Hawk" or the "Reorganized Debtor") which will be called Kitty Hawk Aircargo and for the continuation of the Debtors' core business. The majority of the Debtors' existing secured debt, as well as Administrative and Priority Claims, will be paid from cash on hand, asset sales and the proceeds of a new financing agreement. As part of a settlement with the holders of the Senior Notes, the claims against the Debtors will be consolidated for distribution purposes. The Noteholders will receive 85% of the issued and outstanding shares of stock in Reorganized Kitty Hawk. The other unsecured creditors will be treated in one of the following three ways. First, if an Allowed Unsecured Claim is $500 or less, or if the holder of the Claim elects to reduce it to $500, the Claim will be paid in full in cash. Second, holders of Allowed Unsecured Claims that are not Noteholder Claims, may receive their pro rata share of 15% of the issued and outstanding stock of Reorganized Kitty Hawk. KITTY HAWK'S PROJECTIONS AND VALUE ESTIMATES INDICATE THAT 15% OF REORGANIZED KITTY HAWK SHOULD BE WORTH BETWEEN $20.9 MILLION AND $24 MILLION (OR BETWEEN APPROXIMATELY 29% AND 33% OF THE GENERAL UNSECURED CLAIMS). See Article X for discussion of valuation and Article XII for discussion of risks. Third, holders of Allowed Unsecured Claims that are not Noteholder claims may elect to receive a discounted amount of cash in lieu of stock conditioned upon the Reorganized Debtor's ability to raise cash through a Private Placement. B. CONSOLIDATION The Plan does NOT substantively consolidate the Debtors. Although the Plan consolidates claims against the various Debtors for distribution purposes, the Plan does not consolidate them for voting or other purposes. A creditor's vote on the Plan will be considered only with the votes of other creditors of the same Debtor for purposes of determining whether a class of creditors has accepted or rejected the Plan. If, for example, the holders of Other Unsecured Claims against Cargo vote to reject the Plan, the Debtors will have to demonstrate that the Plan is fair and equitable as to those creditors and meet the other criteria for forcing a class of creditors to accept their treatment under the Plan despite their rejection of the Plan. The votes of the creditors of Cargo will not be combined with the votes of creditors of another Debtor for purposes of determining whether the creditors of Cargo have accepted the Plan. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 34 C. POSITION OF NORTHWEST AIRLINES, MERCURY AIR AND CREDITORS' COMMITTEE REGARDING PLAN Northwest Airlines, Inc. ("Northwest") and Mercury Air Group, Inc. ("Mercury"), creditors of certain of the Debtors, have objected to the Plan, intend to vote against it, and submit that the Plan should be rejected by the holders of the Other Unsecured Claims. At the hearing on approval of the Disclosure Statement, Northwest and Mercury argued that the Plan cannot be confirmed as a matter of law, among other reasons, because the Plan (i) provides for improper releases of third parties; (ii) unfairly discriminates against the holders of Other Unsecured Claims; and (iii) violates bankruptcy law and the absolute priority rule by providing existing equity with an exclusive right to purchase stock in the Reorganized Debtor, without having to pay fair market value for such interests. The Court overruled Northwest's and Mercury's objections to the Plan at the hearing on approval of the Disclosure Statement, but fully preserved all such objections for the hearing on confirmation of the Plan. The Debtors modified the Plan to eliminate the violation of the absolute priority rule. Northwest and Mercury intend to vigorously assert their objections at the Confirmation Hearing. Northwest and Mercury's two major objections to the Plan can be summarized as follows. First, Northwest and Mercury believe that the Plan does not treat holders of Other Unsecured Claims fairly in relation to the unsecured Claims of the Noteholders. Under the Plan, the Noteholders receive nearly six times more shares of the Reorganized Debtor than the holders of Other Unsecured Claims and majority control of the Reorganized Debtor, when the Noteholders' unsecured claims are projected to exceed the Allowed Other Unsecured Claims by only approximately three times.The Debtors explain the reason for this discrepancy on page 18 of this Disclosure Statement. Second, Northwest and Mercury believe that the Plan is not in the best interests of holders of Other Unsecured Claims in most of the Debtors because such creditors could receive a significantly higher return in cash (rather than stock) in a Chapter 7 liquidation than proposed under the Plan. Based upon the foregoing, Northwest and Mercury believe that holders of Other Unsecured Claims should vote against the Plan. Northwest and Mercury believe that the Debtors have not adequately disclosed the basis for the releases contained in the Plan, the claims which are being released, or the benefits that the Debtors estates will receive in exchange for these releases. Northwest and Mercury also believe that Debtors fail to adequately disclose the discharge, injunction, and exculpation of liability in sections 10.2 and 10.3 of the Plan, provided to certain insiders, the Creditors Committee and its counsel, the Unofficial Noteholders' Committee and its counsel and the Indenture Trustee and its counsel, not only as to the Debtors' claims against these parties, but also as to claims which may be asserted by all third parties, even if such third parties do not vote in favor of the Plan. Under these provisions, to the extent that you do not vote against the Plan and the Plan is ultimately confirmed by the Court, any claims that you may have against certain insiders and the Creditors Committee and its professionals, the Unofficial Noteholders' Committee and its counsel and the Indenture Trustee and its professionals, the Indenture Trustee will be discharged and forever released without your consent. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 35 D. DESIGNATION OF CLAIMS AND INTERESTS The following is a designation of the classes of Claims and Interests under this Plan. In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims and Tax Claims described in Article 3 of this Plan have not been classified and are excluded from the following classes. A Claim or Interest is classified in a particular class only to the extent that the Claim or Interest qualifies within the description of that class, and is classified in another class or classes to the extent that any remainder of the Claim or Interest qualifies within the description of such other class or classes. A Claim or Interest is classified in a particular class only to the extent that the Claim or Interest is an Allowed Claim or Allowed Interest in that class and has not been paid, released or otherwise satisfied before the Effective Date; a Claim or Interest which is not an Allowed Claim or Interest is not in any Class. Notwithstanding anything to the contrary contained in this Plan, no distribution shall be made on account of any Claim or Interest which is not an Allowed Claim or Allowed Interest. The Plan consolidates distributions to creditors of each of the Debtors as part of a settlement. Classes are considered separately among the Debtors for voting purposes and jointly among the Debtors for distribution purposes. The treatment provided for each Class shall be the same for each of the Debtors as if Claims against each Debtor had been separately classified. CLASS STATUS 1. SECURED CLAIMS Class 1: Bank Claims Impaired - entitled to vote Class 2: Noteholders' Secured Claims Impaired - entitled to vote Class 3: Secured Claims Other Than Bank Impaired - entitled to vote Claims and Claims of the Noteholders 2. UNSECURED CLAIMS Class 4: Priority Claims Impaired - entitled to vote Class 5: Convenience Claims Impaired - entitled to vote Class 6: Unsecured Noteholder Claims Impaired - entitled to vote Class 7: Other Unsecured Claims Impaired - entitled to vote 3. INTERESTS Class 8: Old Common Stock Impaired - deemed to have rejected, not entitled to vote Class 9: Securities Claims Impaired - deemed to have rejected, not entitled to vote FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 36 E. TREATMENT OF CLAIMS AND INTERESTS 1. ADMINISTRATIVE CLAIMS. A. GENERAL. Subject to the bar date provisions herein, unless otherwise agreed to by the parties, each holder of an Allowed Administrative Claim shall receive Cash equal to the unpaid portion of such Allowed Administrative Claim on the later of (a) the Effective Date or as soon as practicable thereafter, (b) the Allowance Date, and (c) such other date as is mutually agreed upon by the Debtors and the holder of such Claim; PROVIDED, HOWEVER, that Administrative Claims that represent liabilities incurred by the Debtors in the ordinary course of their business during the Reorganization Cases shall be paid by Reorganized Kitty Hawk in the ordinary course of business and in accordance with any terms and conditions of any agreements relating thereto. Payments on Administrative Claims shall be made by the Reorganized Debtor. B. PAYMENT OF STATUTORY FEES. All fees payable pursuant to 28 U.S.C.ss.1930 shall be paid in Cash equal to the amount of such Administrative Claim when due. C. BAR DATE FOR ADMINISTRATIVE CLAIMS. (1) GENERAL PROVISIONS. Except as provided below in Sections 3.1(c)(iii), 3.1(c)(iv) and 3.1(c)(v), requests for payment of Administrative Claims must be Filed no later than forty-five (45) days after the Effective Date. Holders of Administrative Claims (including, without limitation, professionals requesting compensation or reimbursement of expenses and the holders of any Claims for federal, state or local taxes) that are required to File a request for payment of such Claims and that do not File such requests by the applicable bar date shall be forever barred from asserting such Claims against the Debtors, any of their affiliates or any of their respective property. (2) PROFESSIONALS. All professionals or other entities requesting compensation or reimbursement of expenses pursuant to sections 327, 328, 330, 331, 503(b) and 1103 of the Bankruptcy Code for services rendered before the Effective Date (including, without limitation, any compensation requested by any professional or any other entity for making a substantial contribution in the Reorganization Case) shall File and serve on Reorganized Kitty Hawk and the Creditors' Committee an application for final allowance of compensation and reimbursement of expenses no later than forty-five (45) days after the Effective Date. Objections to applications of professionals for compensation or reimbursement of expenses must be Filed and served on Debtors and the professionals to whose application the objections are addressed no later than seventy (70) days after the Effective Date. Any professional fees and reimbursements or expenses incurred by the Reorganized Debtor subsequent to the Effective Date may be paid without application to the Bankruptcy Court. (3) ORDINARY COURSE LIABILITIES. Holders of Administrative Claims based on liabilities incurred in the ordinary course of the Debtors' business (other than Claims of governmental units for taxes or Claims and/or penalties related to such taxes) shall not be required to File any request for payment of such Claims. Such liabilities shall be paid by the Reorganized Debtor as soon as practicable after the Effective Date. (4) CONTRACTUAL EMPLOYEE CLAIMS. Holders of Claims under employment contracts approved by the Court shall not be required to File any request for payment of such Claims and such Claims shall be paid in full on the Effective Date. (5) TAX CLAIMS. All requests for payment of Administrative Claims and other Claims by a governmental unit for taxes (and for interest and/or penalties related to such taxes) for any tax year or period, all or any portion of which occurs or falls within the period from and FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 37 including the Petition Date through and including the Effective Date ("Post-Petition Tax Claims") and for which no bar date has otherwise been previously established, must be Filed on or before the later of (i) 45 days following the Effective Date; and (ii) 90 days following the filing with the applicable governmental unit of the tax return for such taxes for such tax year or period. Any holder of any Post-Petition Tax Claim that is required to File a request for payment of such taxes and does not File such a Claim by the applicable bar date shall be forever barred from asserting any such Post- Petition Tax Claim against any of the Debtors, Kitty Hawk, or their respective property, whether any such Post-Petition Tax Claim is deemed to arise prior to, on, or subsequent to the Effective Date. To the extent that the holder of a Post-Petition Tax Claim holds a lien to secure its Claim under applicable state law, the holder of such Claim shall retain its lien until its Allowed Claim has been paid in full. 2. TREATMENT OF PRE-PETITION PRIORITY AND SECURED TAX CLAIMS. Each holder of an Allowed Pre-Petition Tax Claim or Security Tax Claim shall be paid by the Reorganized Debtor, pursuant to the provisions of Section 1129(a)(4)(c) of the Bankruptcy Code, in equal quarterly installments commencing on the first day of the first full month following the Effective Date (or the Allowance Date, if later) with the final payment of the remaining unpaid balance to be made on the sixth anniversary of the assessment of the tax, together with interest thereon at 8% per annum from and after the Effective Date until the date of final payment. The Reorganized Debtor may prepay any Pre-Petition Priority Tax Claim or Secured Tax Claim without penalty or premium, or may pay any Allowed Pre-Petition Priority Tax Claim or Secured Tax Claim on such terms as the holder of the Allowed Claim and the Debtors may agree. To the extent that the holder of a Pre-Petition Priority Tax Claim or the liens of each holder of a Pre-Petition Secured Tax Claim shall remain in full force and effect until the Pre-Petition Secured Tax Claim is paid in full. Failure by the Reorganized Debtor to timely make a payment on an Allowed Pre-Petition Priority Tax Claim or Secured Tax Claim shall be an event of default. If the Reorganized Debtor fails to cure a default within twenty (20) days after service of written notice of default from the holder of the Allowed Pre- Petition Secured Tax Claim, then the holder of such Allowed Pre-Petition Priority Claim or Secured Tax Claim may enforce the total amount of its Claim, plus interest as provided in this Plan, against the Reorganized Debtor in accordance with applicable state or federal laws. F. CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND INTERESTS 1. CLASS 1 - BANK CLAIMS. a. CLASSIFICATION: Class 1 consists of all Allowed Secured Bank Claims. Allowed Secured Bank Claims shall be subclassified so that the holders of the Allowed Secured Bank Claims shall have a Claim against each Debtor whose property secures the Allowed Secured Bank Claims. b. TREATMENT: Class 1 is impaired and the members of Class 1are entitled to vote on the Plan. The holders of the Allowed Secured Bank Claims may vote their Claims in each Case of a Debtor whose property secures the Allowed Secured Bank Claims. The Allowed Secured Bank Claims shall be satisfied as set forth herein or in such other manner as is acceptable to the Debtors and the holders of the Allowed Secured Bank Claims. All payments of the Bank Claims made prior to the Effective Date shall be deemed to be paid indefeasibly. Any portion of the Bank Claims unpaid as of the Effective Date shall be paid in full in cash on the Effective Date. Notwithstanding anything else contained in the Plan or the Confirmation Order, or any amendments thereto, and notwithstanding the confirmation of the Plan, Wells Fargo, as Agent ("Agent") for the Bank Group and as the holder of the Bank Claims, and the members of the Bank Group, shall be entitled to all of the liens, protections, benefits, and priorities granted to it or confirmed by the (1) Second Amended and Restated Credit Agreement (as may have been amended, modified, supplemented, extended, renewed or restated from time to time) dated November 19, 1997; (2) FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 38 Revolving Credit Note from Kitty Hawk, Inc. and it subsidiaries payable to the order of Wells Fargo Bank, N.A. in the original principal amount of $100 million; (3) Term Loan Note from Kitty Hawk and its subsidiaries to Wells Fargo, in the original principal sum of $45.9 million; and (4) any security agreement, deposit or other agreement evidencing a security interest, right of setoff or obligation owing to a member of the Bank Group and the Final Order Authorizing Use of Cash Collateral and Granting Adequate Protection and any subsequent financing orders (the "Financing Documents"). All such liens, protections, benefits, and priorities granted to Wells Fargo or the Bank Group in such Financing Documents shall continue until the Bank Claims are indefeasibly paid in full and satisfied, which Claims (i) are payable in their entirety, (ii) include unpaid principal and accrued but unpaid interest and fees as specified in the contract to the date of indefeasible payment of the Bank Claims, and (iii) are secured by reason of the first, valid, prior, and perfected liens and security interest granted under or in connection with, the Financing Documents. Within five business days before the Effective Date, the Bank Group shall provide the Debtors with a statement of all amounts constituting Bank Claims as of the Effective Date (the "Pay-off Amount"). If the Debtors dispute the Pay-off Amount, both the Debtors and the Bank Group agree that the Bankruptcy Court may determine the Pay-off Amount on an expedited basis. Upon payment of the Pay-off Amount, the Bank Group shall release all of its liens or assign such liens as directed by the Debtors. Notwithstanding the foregoing, all rights of the Bank Group pursuant to Section 13.2 of the Second Amended Credit Agreement shall survive the indefeasible payment in full of the Bank Claims as unsecured obligations of Kitty Hawk. The Bank Claims are finally allowed and are not subject to subordination or reconsideration. With respect to any claims related to the Financing Documents, or the Agent's or Bank Group's actions related to the Debtors or the Financing Documents, the Agent or Bank Group, and each of their representatives, shall have no liability to the Debtors or any third party (including creditors of any Debtors) and shall not be deemed to have been in control of the operations of the Debtors or to be acting as a "responsible person" or "owner or operator" with respect to the operation or management of the Debtors. The Debtors have agreed to the release set forth above in exchange for the Bank Group's agreement to release its liens, despite certain continuing obligations of the Debtors to the Bank Group under the Financing Documents. The Debtors believe that the Bank Claims are valid and enforceable and that the Bank Group's liens are properly perfected, enforceable first priority liens. 2. CLASS 2 - NOTEHOLDERS' SECURED CLAIMS a. CLASSIFICATION: Class 2 consists of all Allowed Secured Claims of the Noteholders. The Allowed Class 2 Claims shall be subclassified so that the holders of the Allowed Class 2 Claims shall have a Claim against each Debtor whose property serves as the Noteholders' Wide Body Collateral or the Noteholders' 727 Collateral. b. TREATMENT: Class 2 is impaired, and the members of Class 2 are entitled to vote on the Plan. The Noteholders may vote their Allowed Class 2 Claims in the case of each Debtor whose property serves as the Noteholders' Wide Body Collateral or the Noteholders' 727 Collateral. On the Effective Date, the Reorganized Debtor shall satisfy the Noteholders' Secured Claim that is secured by the Noteholders' 727 Collateral (i) through the payment to the Noteholders of cash equal to the current value of the 727 Collateral, which the Debtors, Indenture Trustee, and an Unofficial Committee of Noteholders have agreed is $55 million, (ii) by the delivery to the Indenture Trustee of the Net Proceeds of the Engines, and (iii) by the payment of the Noteholders' Fees by no later than the sixth month anniversary of the Effective Date. To the extent that the Noteholders' Wide Body Collateral and the Engines have not been liquidated and the net proceeds paid to the Indenture Trustee prior to the Effective Date, at the option of the Noteholders, acting through the Indenture Trustee, (i) KHI shall convey the Wide Body Collateral and Engines to the Indenture Trustee, or (ii) Reorganized Kitty Hawk shall liquidate the remaining Wide Body Collateral and Engines in FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 39 cooperation with the Indenture Trustee and its agents and deliver the Net Proceeds to the Indenture Trustee pursuant to the Bankruptcy Court's Orders. The Bankruptcy Court shall retain jurisdiction to enter Orders (i) approving the sale of Wide Body Collateral and Engines and (ii) confirming to purchasers that such sale is free and clear of liens, claims and any other interest in such property that arose before the Confirmation Date. 3. CLASS 3 - SECURED CLAIMS OTHER THAN BANK CLAIMS AND CLAIMS OF THE NOTEHOLDERS. a. CLASSIFICATION: Class 3 consists of all Allowed Secured Claims other than the Bank Claims and the Claims of the Noteholders. Each secured creditor shall be treated as a separate sub-class of Class 3. b. TREATMENT: Class 3 is impaired, and the members of Class 3 are entitled to vote on the Plan. Holders of Allowed Class 3 Claims may vote their Claims in the Case of each Debtor whose property secures their Claims. At the Debtors' option, on the Effective Date (a) the Plan may leave unaltered the legal, equitable, and contractual rights of the holder of an Allowed Secured Claim, OR (b) notwithstanding any contractual provision or applicable law that entitles the holder of an Allowed Secured Claim to demand or receive accelerated payment from the Debtors after the occurrence of a default, the Debtors may cure any such default, other than a default of a kind specified in section 365(b)(2) of the Bankruptcy Code, reinstate the maturity of such Claim as such maturity existed before such default, compensate the holder of such Claim for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law, and otherwise leave unaltered the legal, equitable or contractual rights to which such Claim entitles the holder, all pursuant to section 1124 of the Bankruptcy Code, OR (c) the Debtors may either (i) pay an Allowed Secured Claim in full, in cash, OR (ii) the Debtors may deliver to the holder of an Allowed Secured Claim the property securing such Claim, OR (iii) at Kitty Hawk's election and direction, Reorganized Kitty Hawk may deliver to the holder of an Allowed Secured Claim deferred cash payments in accordance with the requirements of section 1129(b)(2)(A)(II) of the Bankruptcy Code, in all of such events, the value of such holder's interest in such property shall be determined (A) by agreement of the Reorganized Debtor and the holder of such Allowed Secured Claim or (B) if they do not agree, by the Bankruptcy Court, OR (d) the Debtors may assume and assign the contract or agreement governing an Allowed Secured Claim pursuant to section 365(b) of the Bankruptcy Code, OR (e) the Debtors may pay an Allowed Secured Claim in such manner as may be agreed to by the holder of such Claim. 4. CLASS 4 - PRIORITY CLAIMS. a. CLASSIFICATION: Class 4 consists of all non-tax Priority Claims. b. TREATMENT: Class 4 is impaired and, accordingly, the members of Class 4 are entitled to vote on the Plan. The treatment set forth below shall be the same for each holder of an Allowed Priority Claim against each of the Debtors and each holder of an Allowed Priority Claim may vote in the case of the Debtor liable on such Claim. Unless otherwise agreed to by the parties, each holder of an Allowed Claim in Class 4 will be paid the Allowed amount of such Claim in full in cash by the Reorganized Debtor on or before the later of (a) the first practicable date after the Effective Date, (b) the Allowance Date, and (c) such other date as is mutually agreed upon by the Reorganized Debtor and the holder of such Claim. 5. CLASS 5 - CONVENIENCE CLAIMS a. CLASSIFICATION: Class 5 consists of Allowed Convenience Claims. Allowed Convenience Claims shall be subclassified based on the Debtor liable on such Claim. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 40 b. TREATMENT: Class 5 is impaired and, accordingly, the members of Class 5 Claims are entitled to vote on the Plan. The holder of Allowed Class 5 Claims against more than one Debtor may vote their Allowed Class 5 Claims in the case of each Debtor that is liable on such Claims. However, if more than one Debtor is liable on the same Class 5 Claim, the holder of such claim shall be paid no more than $500 on account of such Claim and such payment shall be in full satisfaction of all Debtors' liability on such Claim. Each holder of an Allowed Unsecured Claim(s) that is $500 or less, or that is more than $500, but the holder of which elects on the Ballot to have its Allowed Unsecured Claim(s) reduced to $500 and treated as a single Allowed Class 5 Convenience Claim, shall receive, on the Effective Date or as soon thereafter as practicable, payment from the Debtors in cash in an amount equal to the lesser of $500 or the allowed amount of such Claim(s). Creditors electing to reduce their Claims to $500 waive the remainder of other Claims and shall not be entitled to any other distribution in this Plan or from the Debtors. 6. CLASS 6 - UNSECURED NOTEHOLDER CLAIMS a. CLASSIFICATION: Class 6 consists of all Allowed Unsecured Claims of Noteholders. Allowed Class 6 Claims shall be subclassified based on the Debtor(s) liable on such Claim. b. TREATMENT: Class 6 is impaired and, accordingly, the members of Class 6 are entitled to vote on the Plan. The holders of Allowed Class 6 Claims shall be entitled to vote their Claims in the Case of each Debtor that is liable on such Claim. Nevertheless, holders of Allowed Unsecured Claims in Class 6 (including each subclass of Class 6) shall receive a Pro Rata distribution of the Class 6 Stock Distribution based on the proportion that their Allowed Class 6 Claim (counted once only) bears to all Allowed Class 6 Claims (with each Allowed Class 6 Claim counted only once) and such distribution shall be in full satisfaction of all Debtors' liability on such Claim. 7. CLASS 7 - OTHER UNSECURED CLAIMS 7.1 CLASS 7A (a) CLASSIFICATION: Class 7A consists of all Allowed Other Unsecured Claims against Kitty Hawk, Inc. (b) TREATMENT: Class 7A is impaired and, accordingly, the members of Class 7A are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7A shall receive a Pro Rata distribution of the Class 7A Stock Distribution. Holders of Class 7A Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7A Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7A Claimant's shares of New Common Stock, the number of the Class 7A Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7A Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.2 CLASS 7B (a) CLASSIFICATION: Class 7B consists of all Allowed Other Unsecured Claims against Cargo. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 41 (b) TREATMENT: Class 7B is impaired and, accordingly, the members of Class 7B are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7B shall receive a Pro Rata distribution of the Class 7B Stock Distribution. Holders of Class 7B Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7B Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7B Claimant's shares of New Common Stock, the number of the Class 7B Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7B Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.3 CLASS 7C (a) CLASSIFICATION: Class 7C consists of all Allowed Other Unsecured Claims against Aircargo. (b) TREATMENT: Class 7C is impaired and, accordingly, the members of Class 7C are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7C shall receive a Pro Rata distribution of the Class 7C Stock Distribution. Holders of Class 7C Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7C Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7C Claimant's shares of New Common Stock, the number of the Class 7C Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7C Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.4 CLASS 7D (a) CLASSIFICATION: Class 7D consists of all Allowed Other Unsecured Claims against International. (b) TREATMENT: Class 7D is impaired and, accordingly, the members of Class 7D are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7D shall receive a Pro Rata distribution of the Class 7D Stock Distribution. Holders of Class 7D Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7D Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7D Claimant's shares of New Common Stock, the number of the Class 7D Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7D Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.5 CLASS 7E (a) CLASSIFICATION: Class 7E consists of all Allowed Other Unsecured Claims against Charters. (b) TREATMENT: Class 7E is impaired and, accordingly, the members of Class 7E are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7E shall FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 42 receive a Pro Rata distribution of the Class 7E Stock Distribution. Holders of Class 7E Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7E Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7E Claimant's shares of New Common Stock, the number of the Class 7E Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7E Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.6 CLASS 7F (a) CLASSIFICATION: Class 7F consists of all Allowed Other Unsecured Claims against Longhorn Solutions. (b) TREATMENT: Class 7F is impaired and, accordingly, the members of Class 7F are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7F shall receive a Pro Rata distribution of the Class 7F Stock Distribution. Holders of Class 7F Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7F Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7F Claimant's shares of New Common Stock, the number of the Class 7F Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7F Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.7 CLASS 7G (a) CLASSIFICATION: Class 7G consists of all Allowed Other Unsecured Claims against Aircraft Leasing. (b) TREATMENT: Class 7G is impaired and, accordingly, the members of Class 7G are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7G shall receive a Pro Rata distribution of the Class 7G Stock Distribution. Holders of Class 7G Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7G Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7G Claimant's shares of New Common Stock, the number of the Class 7G Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7G Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.8 CLASS 7H (a) CLASSIFICATION: Class 7H consists of all Allowed Other Unsecured Claims against American International Travel. (b) TREATMENT: Class 7H is impaired and, accordingly, the members of Class 7H are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7H shall receive a Pro Rata distribution of the Class 7H Stock Distribution. Holders of Class 7H Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 43 Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7H Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7H Claimant's shares of New Common Stock, the number of the Class 7H Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7H Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.9 CLASS 7I (a) CLASSIFICATION: Class 7I consists of all Allowed Other Unsecured Claims against Flight One Logistics. (b) TREATMENT: Class 7I is impaired and, accordingly, the members of Class 7I are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7I shall receive a Pro Rata distribution of the Class 7I Stock Distribution. Holders of Class 7I Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7I Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7I Claimant's shares of New Common Stock, the number of the Class 7I Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7I Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. 7.10 CLASS 7J (a) CLASSIFICATION: Class 7J consists of all Allowed Other Unsecured Claims against OK Turbines. (b) TREATMENT: Class 7J is impaired and, accordingly, the members of Class 7J are entitled to vote on the Plan. Holders of Allowed Other Unsecured Claims in Class 7J shall receive a Pro Rata distribution of the Class 7J Stock Distribution. Holders of Class 7J Claims may elect by so indicating on their Ballot to have their New Common Stock redeemed by Reorganized Kitty Hawk from the Private Placement Proceeds at a price of $1.50 per share. To the extent that a Class 7J Claimant elects to have its New Common Stock redeemed and the Private Placement Proceeds are insufficient to redeem all of such Class 7J Claimant's shares of New Common Stock, the number of the Class 7J Claimant's shares that will be redeemed shall equal the product of (a) the Private Placement Proceeds divided by 1.5 (i.e. the total number of shares that can be redeemed) TIMES (b) the number of shares that the Class 7J Claimant wishes to redeem divided by the total number of shares of New Common Stock that all Claimants in Class 7A through 7J elect to redeem. VALUE OF DISTRIBUTIONS TO OTHER UNSECURED CREDITORS. The Debtors and their Financial Advisors estimate that the enterprise value of the Reorganized Debtor is $150 million (SEE DISCUSSION IN SECTION XI OF THIS DISCLOSURE STATEMENT). Fifty (50) million shares are being distributed to Class 7 under the Plan. Each holder of an Allowed Class 7 Claim will receive its Pro Rata share of 15% of the New Common Stock. Fifteen percent of $150 million in value is $22 million in value. Thus, if, for example, the total amount of Allowed Class 7 Claims is $71 million, each creditor in Class 7 will recover approximately 30% of its Claim in New Common Stock. Holders of Allowed Class 7 Claims who elect to have the Reorganized Debtor redeem their shares will have the shares redeemed at $1.50 per share, which is a 50% discount from the estimated value of each share of New Common Stock. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 44 8. CLASS 8 - OLD COMMON STOCK a. CLASSIFICATION: Class 8 consists of all Interests in Old Common Stock. b. TREATMENT: Holders of Interests in Class 8 will receive no distribution under the Plan and are deemed to have rejected the The Old Common Stock will be canceled on the Effective Date. 9. CLASS 9 - SECURITIES CLAIMS a. CLASSIFICATION: Class 9 consists of all Allowed Securities Claims. b. TREATMENT: Holders of Class 9 Claims shall be treated with the same priority as the Old Common Stock pursuant to Section 510(b) of the Code and will receive no distribution under the Plan. G. ACCEPTANCE OR REJECTION OF THE PLAN 1. VOTING CLASSES. The holders of Claims in Classes 1, 2, 3, 4, 5, 6 and 7 are impaired and shall be entitled to vote to accept or reject the Plan. 2. PRESUMED REJECTION OF PLAN. The holders of Interests and Claims in Classes 8 and 9 are not being solicited to accept or reject the Plan and will be deemed to have rejected the Plan. H. MANNER OF DISTRIBUTION OF PROPERTY UNDER THE PLAN 1. DISTRIBUTION PROCEDURES. Except as otherwise provided in the Plan, all distributions of Cash and other property shall be made by the Reorganized Debtor on the later of the Effective Date or the Allowance Date, or as soon thereafter as practicable. Distributions required to be made on a particular date shall be deemed to have been made on such date if actually made on such date or as soon thereafter as practicable. No payments or other distributions of property shall be made on account of any Claim or portion thereof unless and until such Claim or portion thereof is Allowed. 2. DISTRIBUTION OF NEW COMMON STOCK. The Reorganized Debtor shall distribute all of the New Common Stock to be distributed under the Plan. The initial distribution of New Common Stock on account of Allowed Claims shall be on the Effective Date or as soon thereafter as practicable. The Reorganized Debtor may employ or contract with other entities to assist in or perform the distribution of New Common Stock. On each Quarterly Surplus Distribution Date, the Reorganized Debtor shall distribute to holders of Allowed Class 6 and Class 7 Claims, in accordance with the terms of the Plan, all shares in the Class 6 Stock Reserve Surplus Account and the Class 7 Stock Reserve Surplus Account, PROVIDED HOWEVER, that if, in the Reorganized Debtor's judgment, the aggregate value of the shares remaining in the Class 6 Stock Reserve Surplus Account or the Class 7 Stock Reserve Surplus Account is less than can be economically distributed, the Reorganized Debtor may elect to hold such shares and distribute them on the next Quarterly Surplus Distribution Date. All distributions on account of Class 6 Claims shall be made by the Reorganized Debtor to the Indenture Trustee. The Reorganized Debtor shall pay all reasonable fees and expenses of the Indenture Trustee and/or the Depository Trust Corporation or Cede & Co. in acting as distribution agent as and when such fees and expenses become due without further order of the Bankruptcy Court. To the extent that a Class 6 Claim is a Disputed or undetermined Claim on the Effective Date, the distribution of New Common Stock allocable to the Disputed or undetermined portion of FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 45 such Claim shall be deposited in the Class 6 Stock Reserve Account. To the extent that a Class 7 Claim is a Disputed or undetermined Claim on the Effective Date, the distribution of New Common Stock allocable to the Disputed or undetermined portion of such Claim shall be deposited in the Class 7 Stock Reserve Account. To the extent that a Class 6 or Class 7 Claim is Allowed after the Effective Date, the holder thereof shall be entitled to receive the New Common Stock reserved with respect to the Allowed amount of such Claim (including Shares representing distributions of Debtor's shares from the Class 6 Stock Reserve Surplus Account or the Class 7 Stock Reserve Surplus Account). 3. DISTRIBUTIONS BY INDENTURE TRUSTEE. Subject to any liens it may assert under the Indenture for the recovery of expenses, and subject to Section 6.4 of the Plan, the Indenture Trustee shall distribute to the record Noteholders, as appearing on the books and records of the Indenture Trustee on the Distribution Date, all cash and New Common Stock received by the Indenture Trustee under the Plan. In the event a record Noteholder is a depository or custodian for legal or beneficial owners of the Notes (such party being a "Custodian") and is unwilling to receive distributions on behalf of such owners of the Notes then the Indenture Trustee shall obtain from such Custodian a list of the parties for whom, as of the Distribution Date, it serves as custodian and/ depository and (i) the Indenture Trustee shall directly distribute to such owners of Notes their Pro Rata share of Cash received by the Indenture Trustee on Account of Class 2 Claims (subject to the lien of the Indenture Trustee) and (ii) the Indenture Trustee shall furnish to the Debtors such information as the Indenture Trustee has or may reasonably obtain that will permit the Debtors to issue New Common Stock to the owners of the Notes as appearing in the records of the Custodian, certificates for which the Debtors will forward directly to the owners. As of the close of business on the Distribution Date, the transfer ledgers with respect to the Senior Notes shall be closed and the Debtors, the Reorganized Debtor, and the Indenture Trustee shall have no obligation to recognize any transfer of the Senior Notes occurring thereafter. 4. SURRENDER AND CANCELLATION OF OLD SECURITIES. As a condition to receiving the New Securities distributable under the Plan, the record holders of Senior Notes shall surrender their Senior Notes, if held in certificate form, to the Indenture Trustee. When a holder surrenders its Senior Notes to the Trustee, the Indenture Trustee shall hold the instrument in "book entry only" until such instruments are canceled. Any holder of Senior Notes whose instrument has been lost, stolen, mutilated or destroyed shall, in lieu of surrendering such instrument, deliver to the Indenture Trustee: (a) evidence satisfactory to the Indenture Trustee of the loss, theft, mutilation or destruction of such instrument, and (b) such security or indemnity that may be reasonably required by the Indenture Trustee to hold the Indenture Trustee harmless with respect to any such representation of the holder. Upon compliance with the preceding sentence, such holder shall, for all purposes under the Plan, be deemed to have surrendered such instrument. Any holder of a Senior Note which has not surrendered or have been deemed to surrender its Senior Notes within two years after the Effective Date, shall have its Claim as a holder of Senior Notes disallowed, shall receive no distribution on account of its Claim as a holder of Senior Notes, and shall be forever barred from asserting any Claim on account of its Senior Notes. Any New Common Stock issued and held for distribution on account of such disallowed claims of holders of Senior Notes shall be returned to the Reorganized Debtor and shall be deposited in the Stock Reserve Surplus Account. As of the Effective Date, all Senior Notes shall represent only the right to participate in the distributions provided in the Plan on account of such Senior Notes. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 46 5. DISPUTED CLAIMS. Notwithstanding any other provisions of the Plan, no payments or distributions shall be made on account of any Disputed Claim until such Claim becomes an Allowed Claim, and then only to the extent that it becomes an Allowed Claim. 6. MANNER OF PAYMENT UNDER THE PLAN. Cash payments made pursuant to the Plan shall be in U.S. dollars by checks drawn on a domestic bank selected by the Reorganized Debtor, or by wire transfer from a domestic bank, at Reorganized Debtor's option, except that payments made to foreign trade creditors holding Allowed Claims may be paid, at the option of Reorganized Debtor in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. All distributions of Cash on account of Class 2 Claims shall be made to the Indenture Trustee. Upon receipt of such Cash, the Indenture Trustee shall distribute the cash as provided in Section 6.3 of the Plan. 7. DELIVERY OF DISTRIBUTIONS AND UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS. A. DELIVERY OF DISTRIBUTIONS IN GENERAL. Except as provided in Section 6.9(b) of the Plan for holders of undeliverable distributions, distributions to holders of Allowed Claims shall be distributed by mail as follows: (a) except in the case of the holder of a Senior Note, (1) at the addresses set forth on the respective proofs of claim filed by such holders; (2) at the addresses set forth in any written notices of address changes delivered to the Reorganized Debtor after the date of any related proof of claim; or (3) at the address reflected on the Schedule of Assets and Liabilities Filed by the Debtors if no proof of claim or proof of interest is Filed and the Reorganized Debtor have not received a written notice of a change of address; and (b) in the case of the holder of the Senior Notes, as provided in Sections 6.3 and 6.4 of the Plan. B. UNDELIVERABLE DISTRIBUTIONS. (1) HOLDING AND INVESTMENT OF UNDELIVERABLE PROPERTY. If the distribution to the holder of any Claim other than the holder of Senior Notes is returned to the Reorganized Debtor as undeliverable, no further distribution shall be made to such holder unless and until the Reorganized Debtor is notified in writing of such holder's then current address. Subject to Section 6.7(b)(ii) of the Plan, undeliverable distributions shall remain in the possession of the Reorganized Debtor pursuant to this Section until such times as a distribution becomes deliverable. Unclaimed Cash (including interest, dividends and other consideration, if any, distributed on or received for undeliverable New Common Stock) shall be held in trust in a segregated bank account in the name of the Reorganized Debtor, for the benefit of the potential claimants of such funds, and shall be accounted for separately. Undeliverable New Common Stock shall be held in trust for the benefit of the potential claimants of such securities by the Reorganized Debtor in a number of shares sufficient to provide for the unclaimed amounts of such securities, and shall be accounted for separately. (2) DISTRIBUTION OF UNDELIVERABLE PROPERTY AFTER IT BECOMES DELIVERABLE AND FAILURE TO CLAIM UNDELIVERABLE PROPERTY. Any holder of an Allowed Claim other than a holder of a Senior Note who does not assert a claim for an undeliverable distribution held by the Reorganized Debtor within one (1) year after the Effective Date shall no longer have any claim to or interest in such undeliverable distribution, and shall be forever barred from receiving any distributions under this Plan. In such cases, any New Common Stock shall be deposited in the Stock Reserve Surplus Account. 8. DE MINIMIS DISTRIBUTIONS. No Cash payment of less than twenty-five dollars ($25.00) shall be made to any holder on account of an Allowed Claim unless a request therefor is made in writing to the Reorganized Debtor. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 47 9. FAILURE TO NEGOTIATE CHECKS. Checks issued in respect of distributions under the Plan shall be null and void if not negotiated within 60 days after the date of issuance. Any amounts returned to the Reorganized Debtor in respect of such checks shall be held in reserve by the Reorganized Debtor. Requests for reissuance of any such check may be made directly to the Reorganized Debtor by the holder of the Allowed Claim with respect to which such check originally was issued. Any claim in respect of such voided check is required to be made before the second anniversary of the Effective Date. All Claims in respect of void checks and the underlying distributions shall be discharged and forever barred from assertion against the Reorganized Debtor and their property. 10. COMPLIANCE WITH TAX REQUIREMENTS. In connection with the Plan, to the extent applicable, the Reorganized Debtor shall comply with all withholding and reporting requirements imposed on it by any governmental unit, and all distributions pursuant to the Plan shall be subject to such withholding and reporting requirements. 11. SETOFFS. Unless otherwise provided in a Final Order or in the Plan, the Debtors may, but shall not be required to, set off against any Claim and the payments to be made pursuant to the Plan in respect of such Claim, any claims of any nature whatsoever the Debtors may have against the holder thereof or its predecessor, but neither the failure to do so nor the allowance of any Claim hereunder shall constitute a waiver or release by the Debtors of any such Claims the Debtors may have against such holder or its predecessor. 12. FRACTIONAL INTERESTS. The calculation of the percentage distribution of New Common Stock to be made to holders of certain Allowed Claims as provided elsewhere in this Plan may mathematically entitle the holder of such an Allowed Claim to a fractional interest in such New Common Stock. The number of shares of New Common Stock to be received by a holder of an Allowed Claim shall be rounded to the next lower whole number of shares. The total number of shares of New Common Stock to be distributed to a class of Claims shall be adjusted as necessary to account for the rounding provided for in this Section. No consideration shall be provided in lieu of the fractional shares that are rounded down and not issued. For purposes of applying this Section, the holders of Allowed Claims under or evidenced by Senior Notes shall, in the case of Senior Notes held in street name, mean the beneficial holders thereof as of the Distribution Date. I. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES The Plan constitutes and incorporates a motion by the Debtors to reject, as of the Confirmation Date, all pre-petition executory contracts and unexpired leases to which the Debtors are a party, except for any executory contract or unexpired lease that (i) has been assumed or rejected pursuant to a Final Order, (ii) is the subject of a pending motion for authority to assume the contract or lease Filed by the Debtors prior to the Confirmation Date, or (iii) is identified in the Plan Supplement as an executory contract or lease that Debtors intend to assume. Assumption by any of the Debtors shall constitute assumption by the Reorganized Debtor as the successor to each of the Debtors. The filing of the Plan Supplement shall constitute a motion by Debtors to assume, effective on the Effective Date, the executory contracts and leases identified therein. With respect to leases and executory contracts not previously assumed, the Plan Supplement shall set forth a cure amount in accordance with section 365(b)(1) of the Bankruptcy Code for each unexpired lease and executory contract to be assumed. Unless the non-debtor parties timely object to such amount, the confirmation of the Plan shall constitute consent to the approval of the assumption of such executory contracts and unexpired leases and a determination that such cure amount is sufficient under section 365(b)(1) of the Bankruptcy Code. To the extent that there is a dispute regarding the Reorganized FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 48 Debtor's ability to meet the requirements of section 365 of the Code for assumption, the Reorganized Debtor shall make the cure payments required by section 365(b)(c) following the entry of a Final Order resolving the dispute and approving assumption. The Plan also establishes a bar date for filing claims for rejection under the Plan of an executory contract or unexpired lease. J. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN 1. EXIT FINANCING. On the Effective Date, the Reorganized Debtor shall enter into a loan agreement providing available funds in a sufficient amount, when combined with the Debtors' available resources, to fund the Reorganized Debtor's obligations under the Plan and to meet its ongoing business needs (the "Exit Financing"). Simultaneously with the closing of the Exit Financing transaction, the Reorganized Debtor will satisfy the Allowed Secured Claims of the Bank Group from Cash on hand and a portion of the proceeds of the Exit Financing, and the Bank Group shall, at the option of the Reorganized Debtor, either release its liens on the property of the Reorganized Debtor or assign the liens as directed by the Reorganized Debtor. The exit lender shall be granted a lien on assets of the Reorganized Debtor. The Debtors are seeking approximately $110 million in exit debt financing, comprised of a $60 million term loan and a $50 million revolver. To date, the Debtors have received four proposals. The Debtors anticipate negotiating all terms and conditions of the lending proposals to provide the Debtors with the most advantageous credit facility. Upon selecting a lender, the Debtors will be subjected to due diligence by the lender. In some cases, a lender requires a fee before conducting due diligence. Each proposal provides for a term loan secured by the Debtors' B727 aircraft and a revolver to be secured by receivables, rotable parts and inventory. The Debtors contemplate negotiating a term of at least three (3) years for the term loan. Based on the proposals, the Debtors believe that the blended interest rate on the lending facilities will be in a range in excess of 9.5%. As would be expected, each proposal calls for commitment fees, closing fees, annual fees, and unused revolver availability fees. The Debtors believe that the interest rates and fees they are able to negotiate will be similar to those incurred by other corporations emerging from bankruptcy. 2. PRIVATE PLACEMENT. The Debtors shall use commercially reasonable efforts to sell up to five (5) million shares of New Common Stock through the Private Placement. The price per share placed will be $3 or more. The sale(s) will close on the Effective Date or as soon thereafter as possible. 3. MERGER OF CORPORATE ENTITIES. Prior to the Effective Date, Aircargo will form a wholly-owned subsidiary in Delaware, named Kitty Hawk Aircargo, Inc. On the Effective Date, American International Travel, Aircraft Leasing, Cargo, Charters, Flight One Logistics, International, Longhorn Solutions and OK Turbines will merge with and into Kitty Hawk, with Kitty Hawk being the surviving corporation in each of the mergers. In addition, Kitty Hawk Aircargo, Inc. (the Texas corporation) will merge with and into Kitty Hawk Aircargo, Inc. (the Delaware corporation), with Kitty Hawk Aircargo, Inc. (the Delaware corporation) being the surviving corporation in the merger. Immediately after the foregoing mergers, Kitty Hawk will merge with and into Kitty Hawk Aircargo, Inc. (the Delaware corporation), with Kitty Hawk Aircargo, Inc. (the Delaware corporation) being the surviving corporation in the merger. As a result of the mergers, Kitty Hawk Aircargo, Inc. (the Delaware corporation) will succeed to all of the assets, liabilities and rights of the Debtors. 4. BOARD OF DIRECTORS OF THE REORGANIZED DEBTOR. On the Effective Date, the existing directors of Kitty Hawk, Inc. shall be deemed removed from office pursuant to the operation of the FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 49 Confirmation Order. On the Effective Date, the Reorganized Debtor will amend its bylaws to provide that the board of directors of the Reorganized Debtor shall be comprised of seven (7) members, five (5) of which shall be selected by the Noteholders and two (2) of which shall be selected by the Debtor. All such selections shall be by written designation filed as a Plan Document by the selecting Person. Any director not so selected on a timely basis shall be designated by the Debtor on the Confirmation Date, subject to approval of the Court. Such amended bylaws shall provide that all such directors shall serve for a one-year term and shall not be subject to removal other than for cause during the first year following the Effective Date. Such amended bylaws shall provide that thereafter directors shall be elected at annual meetings of the shareholders of the Reorganized Debtor in accordance with the bylaws of the Reorganized Debtor and applicable law. 5. POST-CONFIRMATION MANAGEMENT. Kitty Hawk's current officers, who, except as noted, are anticipated to continue in the same jobs post-confirmation: o Tilmon J. Reeves - Chairman of the Board and Chief Executive Officer. Mr. Reeves has extensive experience in the airline and airfreight industries with a number of companies, including Emery and American Airlines. o James R. Craig - Vice President and General Counsel. Mr. Craig was Kitty Hawk's outside counsel for many years and has been its Vice President and General Counsel since 1998. o Jack A. ("Drew") Keith - Chief Financial Officer. Mr. Keith, formerly Kitty Hawk's lender while Wells Fargo employed him, joined Kitty Hawk in September, 1999 and became the Chief Financial Officer in April 2000. o Toby Skaar - Vice President of Scheduled Freight for Kitty Hawk Cargo. Mr. Skaar manages Kitty Hawk's scheduled overnight freight system. o Clark Stevens - President of Kitty Hawk Aircargo. Mr. Stevens is responsible for all of the ongoing aircraft operations (which excludes the operations of Kitty Hawk Charters and Kitty Hawk International). o Donny Scott - Vice President-Ground Operations. Mr. Scott manages all ground handling operations for the U.S. Postal Service and will be assuming responsibility for ground handling operations at Kitty Hawk's Fort Wayne, Indiana hub operation. o Davis Green - Vice President-Sales for Kitty Hawk Aircargo. Mr. Green is responsible for all of Kitty Hawk's sales efforts (excluding the U.S. Postal Service and Kitty Hawk Charters). o Jessica Wilson - Chief Accounting Officer. Ms. Wilson is the longest serving employee in Kitty Hawk's accounting department and is responsible for maintaining the accuracy of Kitty Hawk's accounting records. 6. CANCELLATION OF OLD SECURITIES. On the Effective Date, all Old Securities shall be terminated and canceled, and the indenture or statements of resolution governing such Old Securities shall be rendered void. Notwithstanding the foregoing, such termination will not impair the rights and duties under such indenture as between Indenture Trustee and the beneficiaries of the trust created thereby including, but not limited to, the right of the Indenture Trustee to receive payment of its fees and expenses, to the extent not paid by Kitty Hawk, from amounts distributable to holders of Senior Notes. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 50 7. AUTHORIZATION AND ISSUANCE OF NEW COMMON STOCK. The Confirmation Order shall provide for the authorization of 65 million shares of stock in the Reorganized Debtor, of which 55 million shall be the New Common Stock (the issued and outstanding shares of the Reorganized Debtor). The remaining 10 million authorized shares shall be reserved and shall not be distributed without action by the Board of Directors selected in the manner described in Section 8.4 of the Plan. 8. REGISTRATION EXEMPTION FOR DEBTOR'S NEW COMMON STOCK DISTRIBUTED TO CREDITORS. The Confirmation Order shall provide that the distribution of the New Common Stock to holders of Allowed Claims pursuant to the Plan and the Amended Certificate of Incorporation shall be exempt from any and all federal, state and local laws requiring the registration of such security, to the extent provided by section 1145 of the Bankruptcy Code. 9. CHARTER AND BY-LAWS. The certificate of incorporation of the Reorganized Debtor shall read substantially as set forth in the Amended Certificate of Incorporation. The by-laws of the Reorganized Debtor shall read substantially as set forth in the Amended By-Laws. 10. CORPORATE ACTION. Upon entry of the Confirmation Order, the following shall be and be deemed authorized and approved in all respects: (i) the filing by the Reorganized Debtor of the Amended Certificate of Incorporation, (ii) the Amended By-Laws, (iii) the mergers contemplated by Section 8.3 of the Plan, and (iv) the issuance of the New Common Stock. On the Effective Date, or as soon thereafter as is practicable, the Reorganized Kitty Hawk shall file with the Secretary of State of the State of Delaware, in accordance with applicable state law, the Amended Certificate of Incorporation which shall conform to the provisions of the Plan and prohibit the issuance of non- voting equity securities. On the Effective Date, the matters provided under the Plan involving the capital and corporate structures and governance of the Reorganized Kitty Hawk, including the mergers effectuated pursuant to Section 8.3 of the Plan, shall be deemed to have occurred and shall be in effect from and after the Effective Date pursuant to applicable state laws without any requirement of further action by the stockholders or directors of the Debtors or the Reorganized Kitty Hawk. On the Effective Date, the Reorganized Debtor shall be authorized and directed to take all necessary and appropriate actions to effectuate the transactions contemplated by the Plan and the Disclosure Statement in the name of and on behalf of the Reorganized Kitty Hawk. 11. RELEASE OF FRAUDULENT CONVEYANCE CLAIMS. On the Effective Date, in consideration of the compromise with the holders of the Senior Notes incorporated into this Plan and more fully described in Section IV, D, 2, b of the Disclosure Statement, which settlement results in a greater distribution to holders of Allowed Unsecured Claims that are not Noteholder Claims than they would receive if the Senior Note guarantees were enforced, Reorganized Kitty Hawk, on its own behalf and as representative of the Debtors' Estates, releases the Indenture Trustee and the Noteholders, their predecessors and successors in interest, from all claims, obligations, suits, judgments, damages, rights, causes of action and liabilities whatsoever, whether known or unknown, foreseen or unforeseen, in law or in equity, based in whole or in part on an allegation that any of the Debtors' obligations on the Senior Notes, including any guaranty liabilities, are avoidable or unenforceable. 12. OTHER RELEASES BY DEBTORS. (a) On the Effective Date, the Reorganized Debtor, on its own behalf and as representative of the Debtors' Estates, in consideration of services rendered in the Reorganization Case and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, releases unconditionally, and is hereby deemed to release unconditionally, each of the Debtors' officers and directors identified below (the "Released Officers and Directors"), from any and all claims, obligations, suits, judgments, damages, rights, causes of action and liabilities whatsoever (including, without limitation, those arising under the Code), whether known or unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity or otherwise, based in whole or in part on any act, omission, transaction, event or other occurrence taking place before, on or after the Petition Date up to the Effective Date, in any way relating to the FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 51 Debtors (before, on or after the Petition Date), the Reorganization Case, or the Plan; PROVIDED, HOWEVER, that the foregoing release shall not apply to any action or omission that constitutes actual fraud or criminal behavior and shall not apply to any claims or causes of action against Conrad Kalitta, the Kalitta Companies or any entity owned or controlled by either; PROVIDED FURTHER, HOWEVER, nothing in the Plan or the Confirmation Order shall constitute a release of any obligations, whether based on contract, statute or other applicable law, of present or former officers and directors of the Debtors in respect of the Debtors' confidential or proprietary information or of their agreements, obligations or undertakings not to engage in activities that are competitive with the Debtors' businesses. . The Released Officers and Directors include the following people: OFFICERS: Tilmon J. Reeves Chief Executive Officer Drew Keith Vice President and Acting Chief Financial Officer James R. Craig Vice President and General Counsel Ted J. Coonfield Vice President John Turnipseed Vice President - Human Resources Michael Clark Vice President - Security DIRECTORS: M. Tom Christopher Lewis S. White Tilmon J. Reeves Steve Wood Ted Coonfield Bruce Martin Philip J. Sauder Tom Kincaid Thomas J. Smith The Debtors are not aware of any causes of action that the Debtors could assert against the Released Officers and Directors. Moreover, the Debtors are not aware of any facts that suggest that the Debtors may have claims against the Released Officers and Directors that should be investigated. The consideration for the releases provided for herein is, INTER ALIA, the valuable services the Released Officers and Directors provided to the Debtors and the cooperation they continue to provide to the Debtors. This is a release of claims held by the Debtors. It does not release third party claims such as the recission claims asserted by certain class action plaintiffs. 13. PRESERVATION OF RIGHTS OF ACTION. Except as otherwise provided in the Plan, or in any contract, instrument, release, or other agreement entered into in connection with the Plan, in accordance with section 1123(b) of the Bankruptcy Code, Reorganized Kitty Hawk shall retain and may enforce any claims, rights and causes of action that the Debtors or the Estates may hold against any entity, including, without limitation, any claims, rights or causes of action arising under sections 544 through 551 or other sections of the Bankruptcy Code or any similar provisions of state law, or any other statute or legal theory. The Reorganized Debtor shall retain and may enforce the rights of each of the Debtors to object to Claims on any basis, including 11 U.S.C. ss. 502(d). The Reorganized Debtor may pursue those rights of action, as appropriate, in accordance with what is in the best interests of the Reorganized Debtor. 14. OBJECTIONS TO CLAIMS. Except as otherwise provided for with respect to applications of professionals for compensation and reimbursement of expenses under Section 3.1(c)(ii) of the Plan, or as otherwise ordered by the Bankruptcy Court after notice and a hearing, objections to Claims, including Administrative Claims, shall be Filed and served upon the holder of such Claim or Administrative Claim not later than the later of (a) one hundred twenty (120) days after the FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 52 Effective Date, and (b) one hundred twenty (120) days after a proof of claim or request for payment of such Administrative Claim is Filed, unless this period is extended by the Court. Such extension may occur ex parte. After the Effective Date, the Reorganized Debtor shall have the exclusive right to object to Claims. 15. RETIREE BENEFITS. On or after the Effective Date, pursuant to section 1129(a)(13) of the Bankruptcy Code, Kitty Hawk will continue to pay all retiree benefits, as that term is defined in section 1114 of the Bankruptcy Code, at the level established pursuant to subsection (e)(1)(B) or (g) of section 1114, at any time prior to confirmation of the Plan, for the duration of the period the Debtors have obligated themselves to provide such benefits. 16. EXEMPTION FROM STAMP AND SIMILAR TAXES. The issuance and transfer of Debtors' New Common Stock as provided in this Plan shall not be taxed under any law imposing a stamp tax or similar tax in accordance with 11 U.S.C.ss. 1146(c). K. CONDITIONS TO EFFECTIVENESS OF THE PLAN 1. CONDITIONS TO EFFECTIVENESS. Except as expressly waived by the Debtors, the following conditions must occur and be satisfied on or before the Effective Date: (a) the Confirmation Order shall have been signed by the Court and duly entered on the docket for the Reorganization Cases by the clerk of the Court in form and substance acceptable to the Debtors; (b) the Confirmation Order shall have become an Effective Confirmation Order and not have been stayed, modified, reversed or amended; and (c) the Debtors have secured exit financing in a sufficient amount, when combined with the Debtors' available resources, to fund the Reorganized Debtor's obligations under the Plan and to meet its ongoing business needs. 2. WAIVER OF CONDITIONS. The Debtors and any co-Plan proponent may waive any condition set forth in Article 9 of the Plan at any time, without notice, without leave of or order of the Court, and without any formal action other than proceeding to consummate the Plan; provided however, that the Debtors may not waive the condition set forth in 9.1(c) without the consent of the Bank Group. 3. NO REQUIREMENT OF FINAL ORDER. So long as no stay is in effect, the Debtors' Effective Date of the Plan will occur notwithstanding the pendency of an appeal of the Confirmation Order or any Order related thereto. In that event, the Debtors or Reorganized Debtor may seek dismissal of any such appeal as moot following the Effective Date of the Plan. L. EFFECTS OF PLAN CONFIRMATION 1. BINDING EFFECT. The Plan shall be binding upon all present and former holders of Claims and Equity Interests, and their respective successors and assigns, including the Reorganized Debtors. 2. MORATORIUM, INJUNCTION AND LIMITATION OF RECOURSE FOR PAYMENT. Except as otherwise provided in the Plan or by subsequent order of the Bankruptcy Court, the Confirmation Order shall provide, among other things, that from and after the Confirmation Date, all Persons or entities who have held, hold, or may hold Claims against or Equity Interests in the Debtors are permanently enjoined from taking any of the following actions against the Estates, the Reorganized FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 53 Debtors, the Creditors' Committee, the Indenture Trustee, and the Unofficial Noteholders' Committee or any of their property on account of any such Claims or Equity Interests: (i) commencing or continuing, in any manner or in any place, any action or other proceeding; (ii) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order; (iii) creating, perfecting or enforcing any lien or encumbrance; (iv) asserting a setoff, right of subrogation or recoupment of any kind against any debt, liability or obligation due to the Debtor other than through a proof of claim or adversary proceeding; and (v) commencing or continuing, in any manner or in any place, any action that does not comply with or is inconsistent with the provisions of the Plan; PROVIDED, HOWEVER, that nothing contained herein shall preclude such persons from exercising their rights pursuant to and consistent with the terms of this Plan. This provision enjoins the enumerated actions against the Debtors on claims that have been discharged or treated pursuant to Section 1141 of the Bankruptcy Code. The provision expands the discharge of Section 1141 to include the Creditors' Committee, the Indenture Trustee and the Unofficial Noteholders' Committee. The purpose of expanding the injunction is to prevent lawsuits against the Committees and the Indenture Trustee on matters that are forever resolved by the Plan. None of the Creditors' Committee, the Indenture Trustee or the Unofficial Noteholders' Committee has provided any consideration for the inclusion of this language. This provision will be removed or limited to the Debtors if the Court finds that the Plan cannot be confirmed with this provision included. 3. EXCULPATION AND LIMITATION OF LIABILITY. None of the Indenture Trustee and any professional Persons retained by it; the Official Committee of Unsecured Creditors or any professional Persons retained by it; the Unofficial Noteholders' Committee, its members and any professional Persons retained by it; the Debtors and the professional Persons employed by the Debtors; any of their affiliates nor any of their officers, directors, partners, associates, employees, members of agents (collectively, the "Exculpated Persons"), shall have or incur any liability to any person for any act taken or omission made in good faith in connection with or related to the Bankruptcy Cases or actions taken therein, including negotiating, formulating , implementing, confirming or consummating the Plan, the Disclosure Statement, or any contract, instrument, or other agreement or document created in connection with the Plan. The Exculpated Persons shall have no liability to any Creditors or Equity Security Holders for actions taken under the Plan, in connection therewith or with respect thereto in good faith, including, without limitation, failure to obtain Confirmation of the Plan or to satisfy any condition or condition, or refusal to waive any condition or conditions, precedent to Confirmation or to the occurrence of the Effective Date. Further, the Exculpated Persons will not have or incur any liability to any holder of a Claim, holder of an Interest, or party-in-interest herein or any other Person for any act or omission in connection with or arising out of their administration of the Plan or the property to be distributed under the Plan, except for gross negligence or willful misconduct as finally determined by the Bankruptcy Court, and in all respect such person will be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan. This provision essentially releases any claim that any party has against the Debtors, the Unofficial Committee, the Indenture Trustee for the Senior Notes, and the Unofficial Noteholders' Committee and professional Persons retained by them for actions related to the Bankruptcy Cases, other than claims arising out of gross negligence or willful misconduct. This provision is common in reorganization plans and is designed to prevent harrassment suits by parties who are dissatisfied with the treatment provided in a Plan. None of the Creditors' Committee, the Indenture Trustee or the Unofficial Noteholders' Committee has provided any consideration for the inclusion of this language. This provision will be removed if the Court finds that the Plan cannot be confirmed with this provision included. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 54 4. REVESTING. On the Effective Date, the Reorganized Debtor will be vested with all the property of the respective estates of the Debtors free and clear of all Claims and other interests of creditors and equity holders, except as provided herein; provided, however, that the Debtors shall continue as debtors in possession under the Bankruptcy Code until the Effective Date, and, thereafter, the Reorganized Debtor may conduct its business free of any restrictions imposed by the Bankruptcy Code or the Court. 5. OTHER DOCUMENTS AND ACTIONS. The Debtors, the Debtors-In-Possession, and Reorganized Kitty Hawk may execute such documents and take such other action as is necessary to effectuate the transactions provided for in the Plan. 6. POST-CONSUMMATION EFFECT OF EVIDENCES OF CLAIMS OR INTERESTS. Senior Notes, Old Common Stock certificates, and other evidences of Claims against or Interests in the Debtors shall, effective upon the Effective Date, represent only the right to participate in the distributions contemplated by the Plan. 7. TERM OF INJUNCTIONS OR STAYS. Unless otherwise provided, all injunctions or stays provided for in the Reorganization Cases pursuant to sections 105 or 362 of the Bankruptcy Code or otherwise and in effect on the Confirmation Date shall remain in full force and effect until the Effective Date. M. CONFIRMABILITY OF PLAN AND CRAMDOWN. The Debtors request Confirmation under section 1129(b) of the Bankruptcy Code if any impaired class does not accept the Plan pursuant to section 1126 of the Bankruptcy Code. In that event, the Debtor reserves the right to modify the Plan to the extent, if any, that Confirmation of the Plan under section 1129(b) of the Bankruptcy Code requires modification. N. RETENTION OF JURISDICTION. The Plan provides for the Bankruptcy Court to retain the broadest jurisdiction over the reorganization case as is legally permissible so that the Bankruptcy Court can hear all matters related to the consummation of the Plan and the claims resolution process. The Plan specifically retains jurisdiction for the Bankruptcy Court to enter orders (a) approving the sale of the Noteholders' Wide Body Collateral and (b) confirming that such sale is free and clear of all liens, claims and interests in property that arose before the Confirmation Date. VIII. FEASIBILITY OF THE PLAN A. FEASIBILITY Kitty Hawk carefully reviewed its options for future operations. In doing so, it charted a course that should provide it with stable operations in the upcoming years. Its strategy for future operations is grounded in fundamental business strategies - sound capitalization (through avoiding excessive debt), concentration in an area with demonstrated growth potential, streamlined operations (operating a single type of aircraft) and conservative financial forecasting. These "fundamentals" should keep Kitty Hawk from a "round trip" back into bankruptcy court. The projections for Reorganized Kitty Hawk's future operations, as well as the assumptions supporting these projections, are set forth in Exhibit "A." FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 55 1. BUSINESS STRATEGY Kitty Hawk's business strategy is based upon the premise of the following macroeconomic trends: o Increasing Demand for Airfreight The primary demand drivers of air cargo growth are: (i) globalization of trade and "just-in-time" inventory management, (ii) manufacturer outsourcing of shipping and logistics functions, (iii) consumer demand for foreign goods, (iv) diversity of geographical regions served and product transported, (v) increased trade spurred by floating exchange rates, and (vi) continued expansion of free trade. According to Boeing's 1998/1999 World Air Cargo Forecast,7 global airfreight, as measured by freight ton-miles, has grown at an eight percent CAGR since 1980. The air cargo market within the U.S. is forecast to average 4.9 percent in the period 1998 through 2007 and 5.0 percent for the period 1998 through 2017. o Increased Requirement for Time-definite Delivery The projected growth in airfreight demand is partially attributable to overall changes in business and new air cargo-eligible commodities, such as those resulting from on- line and customer-direct retail sales. Reliability and time-definite delivery have joined price and speed, traditional factors considered in shipping by air, to become significant factors in bolstering demand. Moreover, airfreight has evolved from an "airport-to-airport" service to a "door-to-door" service, requiring the effective integration of ground and air logistics as part of an overall production process. The requirement for time-definite delivery, which effectively has fueled the growth of the small-package and overnight segment of the airfreight industry, is now impacting the heavyweight sector. o Increasing Demand for Dedicated Air Freighter Capacity Although over half of all airfreight is presently transported on scheduled passenger aircraft, freighter aircraft continue to increase their share of total world cargo capacity relative to cargo transportation in passenger aircraft. Bolstering this trend is the projected slower passenger traffic growth relative to growth in airfreight, which translates into slower growth in the scheduled passenger aircraft fleet and consequently in lower-hold cargo capacity. Increasingly important has been the trend toward the ubiquitous use of smaller aircraft by the scheduled passenger airlines, including regional jets, which reduces cargo capacity. As passenger load factors and passenger related baggage rises, space available for freight is reduced. Kitty Hawk's business strategy includes the following primary lines of business: o Scheduled Airfreight Overnight System A growing number of U.S. shippers require expedited time-definite heavyweight shipments. Kitty Hawk believes that the heavyweight segment of the U.S. expedited cargo market is currently underserved and that the marketplace will increase its - ----------------------------- (7) Boeing (provider of the Boeing 1998/1999 World Air Cargo Forecast) is one of several widely accepted sources who forecast global airfreight trends. The Seabury Group consulted several sources to determine the validity of certain of its assumptions used in the Plan and determined that each source provided forecasts with similar results. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 56 demand for a provider focused solely on the heavyweight, time-definite freight market. Asset-based/integrated carriers, such as Airborne, FedEx, UPS, USPS (referred to collectively as the "Integrated Carrier(s)") have been able to garner a larger share of the heavyweight airfreight market because they presently offer the only time-definite service available to shippers. Kitty Hawk differentiates its scheduled overnight freight operations in the marketplace with time-definite systems that enable freight forwarders to provide superior performance with respect to the features of service that are most critical to shippers of heavyweight freight: highly reliable and scheduled on-time delivery, superior customer service, track and trace service and reasonable prices. Kitty Hawk expects to expand its position as the critical component to freight forwarders, enabling them to increase their share of the total U.S. domestic expedited cargo market against further encroachment by the Integrated Carriers. o United States Postal Service "USPS" Kitty Hawk has historically performed a variety of services for the USPS, ranging from regularly scheduled delivery throughout the year to special contracts to meet increased demand during the holiday season during the fourth quarter of the calendar year. Kitty Hawk's USPS contracts generally allow it to pass-through fuel costs, landing charges and other variable costs. Accordingly, Kitty Hawk is not generally at risk of loss in the event that these variable costs increase during the term of these fixed-price arrangements. o ACMI Services Freighter aircraft continue to increase their share of total world cargo capacity relative to cargo transportation in passenger aircraft. As a result of this trend Kitty Hawk believes that there is an increasing demand for dedicated airlift in support of shippers. As of August 1, 2000, Kitty Hawk has seven Boeing 727-200F aircraft dedicated to BAX Global pursuant to ACMI contracts. Although Kitty Hawk does not necessarily intend to increase the number of aircraft devoted to this business line, it expects to obtain higher rate for the ACMI Service provided by upgrading all of the aircraft in its ACMI business to higher gross weight B727-200F powered by JT8D-15 engines. 2. FACTORS ENHANCING KITTY HAWK'S FUTURE BUSINESS PROSPECTS A. DIVERSIFIED REVENUE BASE Kitty Hawk plans to maintain revenue diversification through participation in three complementary core markets segments of the airfreight industry: (i) scheduled overnight airfreight, (ii) USPS and (iii) ACMI Services. Kitty Hawk believes that its diversification strategy allows it to mitigate risk by placing a portion of its fleet under contract at fixed rates (i.e. USPS and ACMI Services). B. LARGE MARKET IN AN UNDER-SERVED, GROWING INDUSTRY SEGMENT Kitty Hawk believes that the heavyweight freight segment of the U.S. expedited cargo market is currently being underserved because much of the existing freight service is dependent upon operational systems designed for other types of traffic (i.e. small packages). Kitty Hawk expects to enhance its position as critical component to the freight forwarder market, enabling intermediaries FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 57 such as freight forwarders to protect and expand their share of the total U.S. domestic expedited cargo market against further encroachment by the Integrated Carriers. C. EFFICIENT, UTILITARIAN AIRCRAFT FLEET Kitty Hawk expects to conduct its operations with a fleet of company-operated B727- 200F aircraft. The B727-200F is considered to be one of the most versatile and cost-effective freighter aircraft in its category. By focusing its operation on a single aircraft type Kitty Hawk expects to improve overall efficiencies, through reduced maintenance costs, reduced flight crew and maintenance personnel training and reduced spare part inventories. In operating a common aircraft type, Kitty Hawk believes it will also be able to streamline hub operations for its scheduled airfreight services, which is expected to improve overall customer service. D. LOW COST OPERATOR OF B727-200F Kitty Hawk believes that it is one of the lowest cost operators of the B727-200F in cargo operations. The table set forth below summarizes cockpit crew and maintenance costs on a per block hour basis for select U.S. operators of the B727-200F for the calendar year ending December 31, 1999. Costs Per Block Hour of Operation FEDERAL DHL EXPRESS EXPRESS ONE UPS KITTY HAWK - ------------ ------------ ------------ ------------ ------------- ------------ Cockpit Crew $ 86 $ 1,569 $ 897 $ 1,439 $ 473 - ------------ ------------ ------------ ------------ ------------- ------------ Maintenance 1,466 1,432 1,312 3,669 1,179 - ------------ ------------ ------------ ------------ ------------- ------------ Daily Block 5.1 2.7 8.1 1.7 3.9 Hour Utilization - ------------ ------------ ------------ ------------ ------------- ------------ Number of 6 70 3 8 38 B727-200F Aircraft in Fleet - ------------ ------------ ------------ ------------ ------------- ------------ Source: Department of Transportation Form 41 E. SIGNIFICANT OPPORTUNITY TO EXPAND FORT WAYNE HUB Based on its current level of operations, Kitty Hawk's typical throughput utilizes approximately 50 percent of the facility's capacity. By 2005, Kitty Hawk expects to increase utilization to 65 percent of capacity. Fort Wayne International Airport provides Kitty Hawk with access to a 12,000 foot lighted runway equipped for full instrument approach which allows for flights to be operated anywhere on the globe using all current and prospective freighter aircraft in service. F. SUBSTANTIAL LEVERAGE TO ATTRACT STRATEGIC PARTNER(S) Kitty Hawk believes its scheduled overnight airfreight operations are ideally suited to complement the requirements of strategic alliance partners such as an international airfreight carrier, freight forwarders and surface transport cargo operators. Kitty Hawk's new facility in Fort Wayne is capable of handing transoceanic freighter services from across the Atlantic and Pacific Rim. Kitty Hawk believes that there is a strategic fit with surface-based freight carriers. Fort Wayne is geographically positioned such that more than 65 percent of the total U.S. and FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 58 Canadian population are within 650 miles. Access to global and coastal markets is provided in record time. Fort Wayne is currently served by two major rail freight services operated by Norfolk Southern Rail Road and Conrail. Additionally, 43 trucking firms operate terminal in Fort Wayne, and serve all states as well as Canada and Mexico. B. ALTERNATIVES TO CONFIRMATION OF THE PLAN There are three possible consequences if the Plan is rejected or if the Bankruptcy Court refuses to confirm the Plan: (a) the Bankruptcy Court could dismiss the Debtors' Chapter 11 bankruptcy cases, (b) the Debtors' Chapter 11 bankruptcy cases could be converted to liquidation cases under Chapter 7 of the Bankruptcy Code or (c) the Bankruptcy Court could consider an alternative plan of reorganization proposed by some other party. 1. DISMISSAL If the Debtors' bankruptcy cases were to be dismissed, the Debtors would no longer have the protection of the Bankruptcy Court and the applicable provisions of the Bankruptcy Code. The Bank Group would immediately exercise its rights as a secured creditor to foreclose and liquidate the Debtors' most valuable assets. The Noteholders would similarly exercise their rights with respect to the Noteholders' 727 Collateral. Dismissal would force a race among other creditors to take over and dispose of any remaining assets. In the event of dismissal, even the most diligent unsecured creditors would likely fail to realize any significant recovery on their claims. 2. CHAPTER 7 LIQUIDATION If the Plan is not confirmed, it is possible that the Debtors' Chapter 11 cases will be converted to cases under Chapter 7 of the Bankruptcy Code, in which a trustee would be elected or appointed to liquidate the assets of the Debtors for distribution to creditors in accordance with the priorities established by the Bankruptcy Code. Whether a bankruptcy case is one under Chapter 7 or Chapter 11, secured creditors, Administrative Claims and Priority Claims are entitled to be paid in cash and in full before unsecured creditors receive any funds. If the Debtors' Chapter 11 cases were converted to Chapter 7, the present Priority Claims may have a priority lower than priority claims generated by the Chapter 7 cases, such as the Chapter 7 trustee's fees or the fees of attorneys, accountants and other professionals engaged by the trustee. The Debtors believe that liquidation under Chapter 7 would result in far smaller distributions being made to Creditors than those provided for in the Plan. Conversion to Chapter 7 would give rise to (a) additional administrative expenses involved in the appointment of a trustee and attorneys and other professionals to assist such trustee; (b) additional expenses and Claims, some of which would be entitled to priority, which would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of the Debtors' operations; and (c) a failure to realize the going concern value of the Debtors' assets. In a Chapter 7 liquidation, it is likely that general unsecured creditors would receive a significantly smaller distribution on their claims. The Liquidation Analysis attached as Exhibit "B" reflects the likely distribution to unsecured creditors in the event of an orderly liquidation of the Debtors in Chapter 11. In a Chapter 7, additional administrative claims would likely reduce distributions. Additionally, the Liquidation Analysis assumes that the Bank Claims will be paid equitably out of the proceeds of each Debtors' estate that has assets pledged to the Bank Group. In reality, the proceeds of the first assets that sell would be used to pay the Bank Claims so that one Debtor may bear a disproportionate share of repaying the Bank Claims and distributions to its unsecured creditors would be materially reduced. The following chart compares distributions under the Plan with the distributions in an orderly FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 59 Chapter 11 liquidation with the Bank Claims allocated proportionately to asset value among the Debtors. RECOVERY IN ORDERLY LIQUIDATION ON AN ESTIMATED UNCONSOLIDATED BASIS RECOVERY UNDER PLAN DEBTOR (EXPRESSED AS % OF CLAIM) (EXPRESSED AS % OF CLAIM) - ------ ------------------------- ------------------------- Kitty Hawk 2.62% 30% Kitty Hawk Cargo 4.00% 30% Kitty Hawk Aircargo 12.27% 30% Kitty Hawk International 1.50% 30% Kitty Hawk Charters 9.27% 30% Longhorn Solutions* 0.00% 30% Aircraft Leasing 4.33% 30% American International Travel* 0.00% 30% Flight One Logistics* 0.00% 30% OK Turbines 0.33% 30% *These entities have few unsecured creditor claims. 3. CONFIRMATION OF AN ALTERNATIVE PLAN. If the Plan is not confirmed, it is possible that the Debtors or a third party would file and pursue confirmation of an alternative plan. The Debtors believe the Plan provides the best prospect for reorganizing the Debtor and maximizing creditor recoveries that can be achieved quickly. The Debtors believe that any material delay in the Debtors' exit from bankruptcy will harm its business and lessen creditor recoveries. By exiting bankruptcy quickly, the Debtors will eliminate the expense of being in bankruptcy (currently approximately $1 million per month). A quick confirmation will also assist the Debtors in maintaining the confidence of their key customers. 4. CHRISTOPHER PLAN On August 31, 2000, M. Tom Christopher filed a plan of reorganization (the "Christopher Plan") and a disclosure statement regarding the Christopher Plan. The disclosure statement for the Christopher Plan describes the Christopher Plan as follows: The Christopher Plan(8) contemplates that an investor group will provide approximately $25,000,000.00 in new capital to the company in exchange for issuance of a majority interest in the Reorganized Debtor's New Common Stock. The proceeds of this investment will be utilized by the Reorganized Debtor for payments due on the Effective Date of the Christopher Plan, as well as for working capital purposes. In addition to the capital infusion from the investor group, the Reorganized Debtors will execute new credit facilities which will replace the existing Wells Fargo facility. The proceeds from this new financing will be utilized to pay in full the claim of Wells Fargo Bank as agent. Funds from the capital infusion and from the new financing in addition to cash on hand will be further utilized by the Reorganized Debtor to make a cash payment of between $50 and $55 million on the Effective Date to the 9.95% Senior Secured Noteholders in exchange for release of - --------------------- (8) For consistency in this Disclosure Statement, the Christopher Plan is referred to as the "Christopher Plan" in this document even though it internally refers to itself as the "Plan." FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 60 the liens held by the Senior Secured Noteholders on the Debtors' B727 Assets. In satisfaction of the balance of the Senior Secured Noteholders Secured Claim, the Reorganized Debtor will issue a new Senior Secured Note in the amount of $100,000,000.00. This Note will mature on December 31, 2004, and will feature a non-collateral payment of 9.95% of the outstanding balance of the note, paid semi- annually. The new note will be collateralized by the remaining Wide Body Assets which will be liquidated in an orderly fashion throughout the life of the new note. It is anticipated that this liquidation will be completed in approximately 18-24 months. The proceeds of the sales of all of the Wide Body Collateral will be distributed to the Senior Secured Noteholders on a pro rata basis in satisfaction of the New Wide Body Note. The unsecured claim of the Senior Secured Noteholders will be satisfied by a cash payment of $15,000,000.00 made on the Effective Date and the issuance of a $50,000,000 note with a maturity of December 31, 2004 payable in semi-annual installments. From the capital sources identified above, General Unsecured Creditors will receive a cash payment of $15,000,000.00 on the Effective Date of the Christopher Plan, and a note for an additional $15,000,000.00 to be paid in equal semi-annual installments over a two year period. Additionally, unsecured creditors will be entitled to certain additional payments up to the full amount of their Allowed Unsecured Claims if certain performance criteria are achieved by the Reorganized Debtor post confirmation.9 Neither the Christopher Plan nor its related disclosure statement identify the potential investor or source of exit financing. The Debtors do not believe that the Christopher Plan can be confirmed over the objection of the Noteholders. The Noteholders currently oppose the Christopher Plan. In an Objection of Indenture Trustee and Unofficial Committee of Noteholders to the Official Unsecured Creditors' Committee Motion to Adjourn the Hearing on the Adequacy of the Debtor's Disclosure Statement, the Noteholders stated that the Christopher Plan impermissibly discriminates against the Noteholders and that the Trustee and the Noteholders' Committee "expect that the Noteholders will vote en masse to reject the Christopher Plan." IX. VALUATION OF KITTY HAWK, INC. AND ITS SUBSIDIARIES ON A STAND-ALONE BASIS A. CAUTIONARY NOTE. The Debtors have presented a substantial amount of their financial information upon the assumption that there would be cooperation between the Debtors, on the one hand, and the Wells Fargo Bank Group and the Senior Noteholders, on the other in regard to their rights in collateral. Among other things, in its Liquidation Analysis (Exhibit B), the Debtors have allocated the assets available to pay the Wells Fargo Bank Group among all Wells Fargo obligors on a proportionate basis. In an adversarial context, the Debtors believeWells Fargo would seek to realize upon its most liquid collateral first, resorting to tangible collateral for only the unpaid balance. If Wells Fargo proceeded against its more liquid collateral first, it could substantially impair the stand-alone going concern viability of both Kitty Hawk Cargo and Kitty Hawk Aircargo unless alternative financing was immediately available. The subsequent analysis assumes either cooperation from the Wells Fargo Bank Group or entry of court orders, limiting as necessary for stand-alone viability, the right - --------------------------------- (9) Christopher Plan's Disclosure Statement, Section VIII, A., page 17. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 61 of the Wells Fargo Bank Group in applying proceeds to its debt. Moreover, this analysis assumes a relatively high recovery by the Senior Noteholders from their wide body and 727 collateral; hence a Class 6 deficiency claim of $200,730,000. In a stand-alone scenario, the net credit to the Senior Note obligation from collateral dispositions could be substantially less than the credits on such Notes in the event of a less controlled, less orderly collateral disposition. For example, the Noteholders could conduct auctions of the aircraft and could likely have substantially fewer proceeds. This in turn would increase the amount of their claims in all Cases, particularly Kitty Hawk Cargo and Kitty Hawk Aircargo. A larger Class 6 Noteholder claim would correspondingly reduce the share of Class 7 creditors in any distribution at the entity level. Finally, this analysis assumes that the reorganizable Debtors will emerge from bankruptcy during either November or December of 2000. 1. KITTY HAWK, INC. owns 100% of the stock of each of the subsidiaries. Based on the debt levels and asset values of each of these subsidiaries, Kitty Hawk, Inc.'s investment in its subsidiaries is of little or no value. Since Kitty Hawk, Inc. has no operations; it would not be a candidate for a stand-alone reorganization. Kitty Hawk, Inc. had limited cash on the petition date and has not generated any cash from operations and the cash is assumed to be consumed by administrative expenses in its Chapter 11 proceeding. Kitty Hawk, Inc. had petition date assets consisting of intercompany claims against several of its subsidiaries, a leasehold interest in the Fort Wayne, Indiana airport cargo facility, and a leasehold interest in an office building and aircraft hangar/maintenance facility at DFW Airport, TX, pursuant to a ground lease with the DFW Airport Authority. Under a stand-alone outcome, Kitty Hawk, Inc.'s assets would be liquidated and the proceeds distributed to its Creditors. On a liquidation basis, the Debtors estimate that the amount available for distribution to unsecured creditors of Kitty Hawk, Inc. would be $5,196,000 for a recovery of 2.62% of their claims. SEE LIQUIDATION ANALYSIS ATTACHED AS EXHIBIT B TO DISCLOSURE STATEMENT. 2. FLIGHT ONE LOGISTICS, INC. is a non-operating company with no operations, assets or liabilities. 3. AMERICAN INTERNATIONAL TRAVEL, INC. no longer has any operations, assets, or personnel. As a stand-alone entity, American International Travel, Inc. would have no value for distribution to prepetition creditors. 4. LONGHORN SOLUTIONS, INC. owns software utilized by airlines for maintenance tracking, parts and material tracking and purchasing, and airline records. The value of this software is limited, and the company has only one customer utilizing its software other than Kitty Hawk Aircargo, Inc. Longhorn has no working capital and, without the infusion of new capital, does not have an ability to operate on a stand-alone basis. Under a stand-alone analysis, Longhorn would liquidate its limited assets and distribute the proceeds to its creditors. On a liquidation basis, Longhorn Solutions has no money available for distribution to unsecured creditors. SEE LIQUIDATION ANALYSIS ATTACHED AS EXHIBIT B TO DISCLOSURE STATEMENT. 5. AIRCRAFT LEASING, INC. owns aircraft that are operated by Kitty Hawk Aircargo, Inc. Since Aircraft Leasing, Inc. is not an FAA certificated air carrier, it cannot operate aircraft even on an ACMI basis. As such, Aircraft Leasing has no option on a stand-alone basis other than to relinquish to the holders of Senior Notes its ten (10) 727 aircraft (or alternatively to sell them), to sell or lease its 4 DC-9 aircraft and to deliver the proceeds of such sale or lease to its creditors. Aircraft Leasing has no material creditors other than the Wells Fargo Bank Group and the Holders of the Senior Notes. On a stand-alone basis, Aircraft Leasing would dispose of its aircraft and deliver the proceeds to secured and unsecured creditors. In this case, it is anticipated that all of the 727 proceeds and all but a de minimus amount of the proceeds of the sale of the DC-9's would be distributed to the holders of Senior Notes. On a liquidation basis, the Debtors estimate that the FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 62 amount available to unsecured creditors of Aircraft Leasing would be $8,060,000 for a recovery of 4.33% of their claims. SEE LIQUIDATION ANALYSIS ATTACHED AS EXHIBIT B TO DISCLOSURE STATEMENT. 6. KITTY HAWK INTERNATIONAL, INC., the former operator of the wide-body aircraft, has sold its FAR Part 121 operating certificate. Unless it were to able to acquire a new operating certificate and to regain operational control of its wide body fleet, Kitty Hawk International has no prospect of reorganization in any configuration comparable to its pre-petition operations. To return to stand-alone operations would require a very substantial capital infusion. Thus, on a stand-alone basis, there is no going concern value to Kitty Hawk International. The only practical course for Kitty Hawk International is to dispose of or abandon its wide body aircraft for the account of the holders of Senior Notes and to use collection of its accounts receivables to reduce its indebtedness to the Wells Fargo Bank Group. Kitty Hawk International's remaining assets, which consist primarily of two parcels of real estate, one fee simple and one leasehold, would be sold and proceeds distributed to its priority and unsecured creditors. The results for creditors in such event are indicated in the Debtors' Liquidation Analysis. On a liquidation basis, the Debtors estimate that the amount available for distribution to unsecured creditors of Kitty Hawk International would be $3,855,000 for a recovery of 1.50% of their claims. SEE LIQUIDATION ANALYSIS ATTACHED AS EXHIBIT B TO DISCLOSURE STATEMENT. 7. OK TURBINES, INC. continues to operate and is viable as a stand-alone entity. OK Turbines has been marketed for sale, and has been allocated a value of $2.4 million by the prospective purchaser in its contract for purchase of OK Turbines and Kitty Hawk Charters. The distribution of sales proceeds is indicated in the Debtors' Liquidation Analysis. On a liquidation basis, the Debtors estimate that the amount available for distribution to unsecured creditors of OK Turbines would be $632,000 for a recovery of .33% of their claims. SEE LIQUIDATION ANALYSIS ATTACHED AS EXHIBIT B TO DISCLOSURE STATEMENT. 8. KITTY HAWK CHARTERS, INC. continues to operate and is viable as a stand-alone entity. This company has been marketed for sale, and has been allocated a value of $19.9 million by the prospective purchaser in its contract for purchase of Kitty Hawk Charters and OK Turbines. Therefore, the market place has determined the stand-alone value of Charters. The distribution of sales proceeds is indicated in the Debtors' Liquidation Analysis. On a liquidation basis, the Debtors estimate that the amount available for distribution to unsecured creditors of Kitty Hawk Charters would be $18,568,000 for a recovery of 9.27% of their claims. SEE LIQUIDATION ANALYSIS ATTACHED AS EXHIBIT B TO DISCLOSURE STATEMENT. 9. EXPLANATORY NOTE AS TO KITTY HAWK AIRCARGO AND KITTY HAWK CARGO VALUATIONS.10 Kitty Hawk Aircargo, Inc. and Kitty Hawk Cargo, Inc. are the entities whose ongoing operations form the cornerstone for Kitty Hawk's plan of reorganization. Both entities could be viable on a stand-alone basis. However, the following analysis maintains the benefits of a consolidated group, as it simply allocates the respective operating income and expenses, and overhead expenses, pursuant to Kitty Hawk's consolidated plan of reorganization. Thus it does not take into account increased costs and expenses that would likely be born by each of the two entities if they were truly separated. For example, both entities benefit in terms of employee benefits costs, insurance rates, working capital interest expense, facility rent, utilities, and equipment costs, etc., on a combined basis. Additionally, certain overhead costs, including senior management, - -------- 10 The combined values of Kitty Hawk Aircargo and Kitty Hawk Cargo are less than the $140 million to $160 million estimated values of the Reorganized Debtor because the Reorganized Debtor benefits from being able to use the value of the Debtors other than Kitty Hawk Aircargo and Kitty Hawk Cargo to facilitate its reorganization. As a result, the Reorganized Debtor takes on less debt to pay plan obligations and to maintain sufficient operating capital. The combined stand-alone value of Kitty Hawk Aircargo and Kitty Hawk Cargo is $111.8 million. The combined liquidation value that would be available to unsecured creditors of the other Debtors is approximately $37.5 million. When this amount is added to the $111.8 million combined value of Kitty Hawk Aircargo and Kitty Hawk Cargo, the total falls within the range of values for the Reorganized Debtor. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 63 sales/marketing/customer service, accounting management and audits, human resources, legal support and contract administration, billing, credit and collections, board of director costs and expenses, computer system and software licensing costs, etc., are less when shared on an allocated basis rather than purchased separately by each of the two entities. Therefore, if the two entities were actually separated, the Debtors believe that their respective costs would be higher, and thus their respective values would be less, but this has not been quantified at this time. Kitty Hawk Aircargo, Inc. is the FAR Part 121 operator of the Boeing 727 aircraft and DC 9 aircraft. Kitty Hawk Aircargo is an integral part of the Debtor's plan of reorganization. It is assumed that Kitty Hawk Aircargo will own and operate all the B727 aircraft, will not continue to operate DC 9's, and will retain the BAX Global contract, all the USPS business, and continue to provide 15 aircraft to Kitty Hawk Cargo at market rates. In order to do so, Kitty Hawk Aircargo would have to replace the ten (10) 727 aircraft that it currently operates, but which are owned by Aircraft Leasing. This stand-alone analysis assumes that replacement aircraft could be obtained at costs comparable to the cost currently being incurred by Aircargo for the use of the ten (10) Aircraft Leasing 727's. This stand-alone analysis suggests a year one EBITDA of $32.5 million could be generated providing an enterprise value (using a multiple of EBITDA of 6.0) of $194.9 million, less proforma net debt of $130.4 million necessary to support the business, which produces an equity value of $64.3 million. Unsecured Creditors in Class 7C hold claims totaling approximately $26,591,000 and holders of Claims in Class 6 (Noteholder deficiency claims) are projected to have a deficiency claim in Class 6 of $200,730,000. If holders of Claims in these classes were to share prorata in the equity value of a stand-alone Aircargo, they would own, respectively, 12% and 88% of the equity of Reorganized stand-alone Aircargo. In order for this stand-alone scenario to be realized, the Wells Fargo Bank Group would need to agree or be compelled to forebear from seeking to satisfy its $108 Million secured claim from the assets of Aircargo. Moreover, this outcome depends upon Aircargo being able to seamlessly replicate the functionality it enjoys from its being part of the currently combined enterprise. Kitty Hawk Cargo, Inc. is the operator of the Scheduled Freight business out of the Fort Wayne, Indiana overnight freight hub. It is assumed that Kitty Hawk Cargo will continue to operate the Scheduled Freight business as it is currently structured, will continue to obtain most of its aircraft from Kitty Hawk Aircargo at current rates, and would be able to obtain adequate working capital financing. The stand-alone reorganization analysis of Kitty Hawk Cargo suggests year one EBITDA of $23.1 million could be generated providing an enterprise value (using a multiple of EBITDA of 3.2) of $74 million. Subtracting proforma stand-alone net debt of $26.5 million necessary to support the business produces a net worth of $47.5 million. Unsecured creditors in Class 7B hold claims totaling approximately $5,588,000. Claims in Class 6 (Noteholder deficiency claims) are estimated to aggregate $200,730,000. If holders of Claims in these classes were to share prorata in the equity value of a stand-alone Kitty Hawk Cargo, they would own, respectively, 3% and 97% of the equity of Reorganized stand-alone Cargo. In order for this stand-alone scenario to be realized, the Wells Fargo Bank Group would need to agree or be compelled to forebear from seeking to satisfy its $108 Million secured claim from the assets of Cargo. Moreover, this outcome depends upon Cargo being able to seamlessly replicate the functionality it enjoys from its being part of the currently combined enterprise. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 64 X. DESCRIPTION OF SECURITIES TO BE ISSUED UNDER THE PLAN A. NEW COMMON STOCK The Reorganized Debtor will have 65,000,000 shares of common stock, par value $.01 per share, authorized pursuant to its Certificate of Incorporation ("New Common Stock"). On the Effective Date, or as soon thereafter as practicable, Reorganized Debtor will issue approximately 55,000,000 shares of New Common Stock pursuant to the Plan. Of these shares, 50,000,000 will be distributed to Class 6 and Class 7. The remaining 5,000,000 shares will be available for purchase through the Private Placement. The 10,000,000 shares of New Common Stock not distributed on the Effective Date or as soon thereafter as practicable, will be reserved for future issuance, as determined by the Board of Reorganized Kitty Hawk. No fractional shares will be issued pursuant to the Plan. The shares of New Common Stock will be fully paid and non-assessable. The Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter. Holders of shares of New Common Stock: o are entitled to one vote per share in the election of directors and on all other matters submitted to a vote of stockholders; o do not have the right to cumulate their votes in the election of directors; o have no redemption, conversion or preemptive rights or other rights to subscribe for securities of Reorganized Debtor; o upon the liquidation, dissolution or winding up of Reorganized Debtor, are entitled to share equally and ratably in all of the assets remaining, if any, after satisfaction of all of Reorganized Debtor's debts and liabilities and the preferential rights of any series of preferred stock then outstanding; and o have an equal and ratable right to receive dividends, when, as and if declared by the board of directors out of funds legally available therefor and only after payment of, or provision for, full dividends on all outstanding shares of any series of preferred stock and after any provision for any required sinking or purchase funds for series of preferred stock. The rights, preferences and privileges of holders of New Common Stock are subject to the rights, preferences and privileges granted to the holders of any series of preferred stock which the Reorganized Debtor may issue in the future. The Certificate of Incorporation and bylaws of Reorganized Debtor include provisions that could have anti-takeover effects. The provisions are intended to enhance the likelihood of continuity and stability in the composition of and in the policies formulated by, the board of directors. These provisions also are intended to help ensure that the board of directors, if confronted by a surprise proposal from a third party that has acquired a block of New Common Stock, will have sufficient time to review the proposal, to develop appropriate alternatives to the proposal and to act in what the board of directors believes to be the best interests of the Reorganized Debtor and its stockholders. The following is a summary of the provisions contained in the Certificate of Incorporation and bylaws. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 65 NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL. The Certificate of Incorporation provides that the board of directors will fix the number of members of the board of directors to consist of at least one member (plus such number of directors as may be elected from time to time pursuant to the terms of any series of preferred stock that may be issued and outstanding from time to time). The bylaws provide that the board of directors, acting by majority vote of the directors then in office, may fill any newly created directorship or vacancies on the board of directors. SPECIAL MEETINGS. The bylaws and Certificate of Incorporation provide that special meetings of stockholders may be called by a majority of the board of directors, the chairman of the board of directors, or by any holder or holders of at least 25% of any class of the Reorganized Debtor's outstanding capital stock then entitled to vote at the meeting. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINEES. The bylaws establish an advance notice procedure with regard to business proposed to be submitted by a stockholder at any annual or special meeting of stockholders of the Reorganized Debtor, including the nomination of candidates for election as directors. The procedure provides that a written notice of proposed stockholder business at any annual meeting must be received by the Secretary of the Reorganized Debtor not more than 90 days nor less than 60 days before the first anniversary of the prior year's annual meeting or, in the event of a special meeting, not more than 10 days after the notice of the special meeting. Notice to Reorganized Debtor from a stockholder who proposes to nominate a person at a meeting for election as a director must contain all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, including such person's written consent to being named in a proxy statement as a nominee and to serving as a director if elected. The chairman of a meeting of stockholders may determine that a person is not nominated in accordance with the nominating procedure, in which case such person's nomination will be disregarded. If the chairman of a meeting of stockholders determines that other business has not been properly brought before such meeting in accordance with the bylaw procedures, such business will not be conducted at the meeting. Nothing in the nomination procedure or the business will preclude discussion by any stockholder of any nomination or business properly made or brought before the annual or any other meeting in accordance with the foregoing procedures. RESTRICTIONS ON FOREIGN DIRECTORS, OFFICERS AND VOTING. The Reorganized Debtor's Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 221/2% of the votes voting on or consenting to any matter. Furthermore, the bylaws do not permit non-U.S. citizens to serve as directors or officers of the Reorganized Debtor. B. PRIVATE PLACEMENT Through the Private Placement, the Reorganized Debtor hopes to sell up to 5,000,000 shares of New Common Stock . The New Common Stock sold through the Private Placement will be exempt from registration under section 5 of the Securities Act of 1933 by virtue of section 4(2) of the Securities Act of 1933. The Debtors will not sell shares of New Common Stock to any Person who is an owner of Old Common Stock. The Debtors have not yet identified a purchaser or purchasers of the shares to be sold in the Private Placement and there is no guaranty that the Debtors will be able to find purchasers. The Debtors will not sell shares to a prospective purchaser unless the purchaser and the sale meet the requirements for exemption from registration under section 5 of the Securities Act of 1933 by virtue of section 4(2) of the Act. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 66 C. ISSUANCE OF THE NEW COMMON STOCK UNDER THE PLAN Section 1145 of the Bankruptcy Code exempts the original issuance of securities under a plan of reorganization from the registration requirements of section 5 of the 1933 Act and state and local laws requiring registration or licensing if three principal requirements are satisfied: (i) the securities must be issued by the debtor, its successor, or an affiliate participating with the debtor under a plan of reorganization; (ii) the recipients of the securities must hold a claim against the debtor, an interest in the debtor or a claim for an administrative expense against the debtor; and (iii) the securities must be issued entirely in exchange for the recipient's claim against or interest in the debtor, or "principally" in such exchange and "partly" for cash or property. The issuance of the New Common Stock to creditors under the Plan satisfies these requirements and will be, therefore, exempt from the registration requirements of section 5 of the 1933 Act and applicable state laws. D. POST-CONFIRMATION TRANSFERS OF THE NEW COMMON STOCK Resales of and subsequent transactions in the New Common Stock issued pursuant to the Plan after the original issuance are also exempted from the registration requirements of section 5 of the 1933 Act and applicable state laws, except for certain transactions by "underwriters," as that term is defined in section 1145(b) of the Bankruptcy Code. Section 1145(b) of the Bankruptcy Code defines four types of "underwriters": (i) persons who purchase a claim against, an interest in, or a claim for administrative expense against the debtor with a view to distributing any security received in exchange for such a claim or interest ("accumulators"); (ii) persons who offer to sell securities offered under a plan for the holders of such securities ("distributors"); (iii) persons who offer to buy such securities for the holders of such securities, if the offer is (a) with a view to distributing them or (b) made under a distribution agreement ("syndicators"); and (iv) a person who is an "issuer" with respect to the securities, as the term "issuer" is defined in section 2(11) of the 1933 Act. Under section 2(11) of the 1933 Act, an "issuer" includes any person directly or indirectly controlling or controlled by Reorganized Debtor, or any person under direct or indirect common control with Reorganized Debtor (a "control person"). Whether a person is an "issuer", and therefore an "underwriter", for purposes of section 1145(b) of the Bankruptcy Code, depends on a number of factors. These include: (i) the person's equity interest in the Reorganized Debtor; (ii) the distribution and concentration of other equity interests in Reorganized Debtor; (iii) whether the person is an officer or director of Reorganized Debtor; (iv) whether the person, either alone or acting in concert with others, has a contractual or other relationship giving that person power over management policies and decisions of Reorganized Debtor; and (v) whether the person actually has such power notwithstanding the absence of formal indicia of control. An officer or director of Reorganized Debtor may be deemed a controlling person, particularly if his position is coupled with ownership of a significant percentage of voting stock. In addition, the legislative history of section 1145 of the Bankruptcy Code suggests that a creditor with at least 10% of the securities of a debtor could be deemed a controlling person. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 67 At the Confirmation Hearing, the Debtors will request that the Bankruptcy Court make a specific finding and determination that the issuance and distribution of the New Common Stock will be covered by the provisions of section 1145 of the Bankruptcy Code. To the extent that a holder of an Allowed Claim is deemed to be an "underwriter," such holder may make public offers and sales of the New Common Stock only in accordance with the registration requirements of the 1933 Act or exemptions therefrom (see disclosure concerning Rule 144 below). In addition, transfers of such securities may be restricted by, and will require compliance with, state securities laws. The staff of the Securities and Exchange Commission (the "Commission") has taken the position that control persons may resell securities issued under a plan or reorganization that was confirmed under the Bankruptcy Code by complying with Rule 144 (except for the holding period of Rule 144(d)). Holders of Allowed Claims who believe that they may be statutory "underwriters" under the definition of that term contained in section 1145(b) of the Bankruptcy Code are advised to consult with their own counsel as to the availability of any exemptions under the 1933 Act. GIVEN THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE PLAN PROPONENTS MAKE NO REPRESENTATION CONCERNING THE RIGHT OF ANY PERSON TO TRADE THE NEW COMMON STOCK. THE PLAN PROPONENTS RECOMMEND THAT RECIPIENTS OF THE NEW COMMON STOCK CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES OR WHETHER THERE ARE ANY RESTRICTIONS ON THE RESALE OF THE NEW COMMON STOCK UNDER ANY APPLICABLE "BLUE SKY" OR OTHER SECURITIES LAWS. E. TRADING IN THE OVER-THE-COUNTER MARKET The Reorganized Debtor will take reasonable efforts to have the New Common Stock traded in the over-the-counter market and listed on the NASDAQ National Market. Even if the New Common Stock is listed on the NASDAQ National Market, there is no assurance that an active market will develop for the New Common Stock. F. CERTAIN TRANSACTIONS BY STOCKBROKERS Under section 1145(a)(4) of the Bankruptcy Code, stockbrokers are required to deliver a copy of this Disclosure Statement (and supplement hereto, if any) at or before the time of delivery of securities issued under the Plan to their customers for the first 40 days after the Effective Date. This requirement specifically applies to trading and other after-market transactions in such securities. XI. VALUATION OF NEW COMMON STOCK As noted elsewhere in this Disclosure Statement, the Debtors have estimated that the Kitty Hawk common stock to be issued to holders of claims in Classes 6 and 7 will have an aggregate value of $150 million. The Company and its financial advisor, Seabury Securities LLC estimated the value of the New Common Stock using conventional, well-accepted methodologies for valuation of equity securities. Seabury used a variety of methods in assessing the valuation of the Company, which were FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 68 of necessity dependent on the financial forecasts included in the Business Plan prepared by management. After considering a number of ways to value the company, Seabury concluded, based on the available information, that the best methods of valuing the Company were the discounted cash flow (DCF) method and the comparable company method. After reviewing the results of the different methodologies, Seabury derived a valuation for the equity of the reorganized company in the range of $150-175 million. In a DCF analysis, the cash to be produced by a company over a period of time and the company's value at the end of that period are forecasted. These cash flows are then discounted back to the present using a discount rate which reflects the risk associated with the company. The cash flows used are the actual cash to be produced after taking into account capital expenditures, changes in working capital and non-cash income statement items such as depreciation. The terminal value can be estimated in several different ways, but the most commonly used method is to use a multiple of the projected EBITDA. In performing the DCF analysis, Seabury used inputs it considered reasonable based on the Company's status, anticipated capital structure and the valuations of comparable companies and applied them to the Company's projections. Specifically, Seabury used five years of projections, a 15% discount rate and an "exit multiple" of EBITDA of 3.5-4.0 times projected 2005 results. This exit multiple was largely based on the market valuations of comparable companies today. This produced a valuation range of $167.2-$208.3 million. Since this valuation is highly sensitive to 2005 projections, Seabury put less reliance on this methodology than the others, which are based on nearer-term projections. Comparable Company Analysis compares a company's financial statistics to those of other similar companies and values the company by analogy to those companies. It is especially useful for valuing a publicly traded company, since the valuation is explicitly based on other public companies. Two of the most common techniques of Comparable Company Analysis are Price/Earnings multiples and Enterprise Value to EBITDA multiple. Price/earnings multiples value the equity of a company based on reported earnings. This method of valuing public companies is very widely used and easily applied and understood. On the other hand, it can be distorted by the different capital structures or accounting techniques used by those companies. For this reason, many financial professionals prefer to analyze companies on the basis of Enterprise Value (i.e. the sum of market value of equity plus debt plus preferred stock) to EBITDA, since this largely eliminates those distortions. Since the companies most comparable to the Company (Emery and BAX) are not independently publicly traded, only a limited universe of comparables was available. The public comparables selected were Airborne Freight, AirNet Systems and CNF Transportation (the parent of Emery) and to a lesser extent, Atlas Air. The multiples to 2001 projected earnings for the first three companies produced a range of 7.2-9.0 times net income; Seabury applied this range to the Company's projected 2001 net income and the resulting valuation range was $142.6-$178.2 million. For purposes of the EBITDA multiple analysis, Seabury looked at the scheduled business and ACMI business separately, since the market value of Atlas, the only public ACMI carrier, is significantly different from the other companies. Specifically, it used a multiple of 3.0-3.2x 2001 EBITDA for the scheduled operations and 4.5-5.0 times 2001 EBITDA for the ACMI business (which includes Postal). When appropriately adjusted to reflect the seasonality of the Company's business, this produced a value of $139.4-160.2 million. There was not sufficient information about precedent M&A transactions for comparable companies to produce any meaningful analysis. This was also less important since the valuation FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 69 applies to the new public entity, not an acquisition transaction. Seabury also considered liquidation of the Company's assets as an alternative to valuing the Company as a going concern, but this produced a much lower valuation. Seabury has assumed and relied upon without independent verification the accuracy and completeness of the information reviewed by it for the purposes of this valuation. With respect to the financial projections, Seabury has assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company. Seabury has not made any independent valuation or appraisal of the assets or liabilities of the Company, nor has it been furnished with any such appraisals. The valuation is necessarily based on economic, market and other conditions as in effect on, and the information made available to it as of the date of the valuation. XII. RISK FACTORS The following discussion addresses the risk factors that may affect the Reorganized Debtor's ability to meet its projections as well as the value of the New Common Stock. A. RISKS RELATING TO CONFIRMATION 1. RISKS RELATED TO EXIT FINANCING. Kitty Hawk's Plan is conditioned upon the Debtors securing exit financing in a sufficient amount, when combined with the Debtors' available cash resources, to fund the Debtors' obligations under the Plan and to meet its ongoing business needs. The Debtors received lending proposals from four parties. All of the potential lenders are major institutions and there is no question that they have the resources to make the contemplated loan. After negotiating with the lenders, the Debtors decided that Deutsche Bank had made the most attractive proposal. Deutsche Bank is currently in the process of conducting due diligence. The Debtors can not be sure that the selected lender will be willing to lend the Reorganized Debtor the amount that it needs for the exit financing. There is also a risk that the ultimate lending terms are unacceptable to the Debtors. The anticipated lending terms are discussed in Section VII, J, 1. 2. RISKS RELATED TO ANNUAL MEETING By Order dated August 3, 2000, the Bankruptcy Court ordered Kitty Hawk to conduct an annual meeting of shareholders on October 31, 2000. Tom Christopher, former Chairman and Chief Executive Officer of Kitty Hawk, demanded the annual meeting. By agreement between Mr. Christopher and Kitty Hawk, the Bankruptcy Court will modify its Order to provide that the annual meeting will not be set before the Confirmation Hearing concludes. 3. RISKS RELATED TO PRIVATE PLACEMENT The Plan provides that the Debtors will use commercially reasonable efforts to sell up to five (5) million shares of New Common Stock through a Private Placement. The price per share placed will be $3 per share or more. The Debtors will use the proceeds of the Private Placement to redeem shares of New Common Stock distributed to holders of Allowed Class 7 Claims who elect to receive cash rather than New Common Stock. There is no guaranty that the Debtors will be able to place the shares or that the Reorganized Debtor will have the funds to redeem the shares. If the Debtors are not able to sell five (5) million shares through the Private Placement and a large proportion of the FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 70 holders of Allowed Class 7 Claims elect to have their New Common Stock redeemed, the Debtors may not be able to redeem all the shares of New Common Stock offered for redemption, and the holders of Allowed Class 7 Claims requesting redemption may have fewer than all their shares of New Common Stock redeemed. 4. RISKS RELATED TO PEGASUS AVIATION LEASES Prior to the chapter 11 filing, Aircargo entered into leases with Pegasus Aviation, Inc. ("Pegasus") for nine Boeing 727-200 aircraft (the "Pegasus Aircraft"). Because the Pegasus Aircraft had been used in passenger service by other airlines, Pegasus paid the cost of converting each of the Aircraft to cargo service pursuant to Kitty Hawk's specifications. Prior to the chapter 11 filing, the cargo conversions had been completed on seven of the nine Pegasus Aircraft, and they had been placed in Kitty Hawk's service. During the chapter 11 case, Kitty Hawk notified Pegasus that it did not intend to and would not use the last two Pegasus Aircraft which either had been completed or were nearing completion of their cargo conversions. Thereafter, Pegasus terminated the leases for the two Pegasus Aircraft. The leases for all nine of the Pegasus Aircraft contain cross default clauses. Consequently, Pegasus contends that the breach of the two leases also resulted in defaults under the leases for the other seven Aircraft. Aircargo disagrees. Although Pegasus contends that the cross default clauses are enforceable and that Pegasus at any time could take back the seven remaining Pegasus Aircraft, the Debtors and Pegasus have concluded an agreement, subject to Court approval, under which Kitty Hawk will be assured of retaining the seven remaining Pegasus Aircraft in return for assuming the leases immediately under Bankruptcy Code ss. 365. The terms of the settlement will be set forth a motion to the Court seeking approval of the assumption of the leases. However, creditors should be apprized that if the settlement with Pegasus is not approved, Pegasus contends that it has the right on short notice to take possession of its seven remaining Pegasus Aircraft. Without the seven Pegasus Aircraft, Aircargo will have to find substitute aircraft or the Reorganized Debtor may not be able achieve its business plan as currently contemplated. B. KITTY HAWK RELATED RISKS 1. DEPENDENCE ON SIGNIFICANT CUSTOMERS Kitty Hawk's three largest customers are the U.S. Postal Service, BAX Global and Eagle Airfreight. Of Kitty Hawk's total revenues in 1999, the USPS accounted for $175.9 million, or 24 percent; BAX Global accounted for $63.7 million, or 8.7 percent; and Eagle Airfreight accounted for $128.4 million, or 17.6 percent. Of its total revenues in 1998, the USPS accounted for $120 million, or 16.8 percent; BAX Global accounted for $71.5 million, or 10%; and Eagle Airfreight accounted for $54.2 million, or 7.7 percent. As of August 1, 2000, Kitty Hawk had 13 B727-200 aircraft under contract to the USPS. The USPS awards contracts periodically pursuant to a public bidding process which incorporates: (i) quality of service, (ii) financial stability of shipper, and (iii) price. The USPS contracts include both multi-year and seasonal contracts. While the multi-year contracts typically have terms of six years with renewal options, bids for contracts to provide holiday season charters during the fourth quarter of each calendar year are generally submitted in the summer of each year and are awarded in August of the same year. Kitty Hawk's CNET contract was first granted in 1996. It had a renewal option limited only by the Procurement Manual's 5-year limit. Each year the contract has been renewed and negotiated under a new contract number. The Procurement Manual's 5-year limit was removed in 1997. Thus, the CNET contract for 1999 (CNB-9901) permits unlimited renewal. The 2000 renewal has not yet been awarded, but Kitty Hawk is working with the USPS in the apparently mutual expectation of the award. Kitty Hawk's inability to demonstrate appropriate financial capacity and FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 71 stability or its inability to remain competitive with respect to quality of service and price could have a material adverse effect on its ability to retain such contracts. Kitty Hawk's inability to retain such contracts in the future would have a material adverse effect on its business. Kitty Hawk's contracts with the USPS are subject to termination at the convenience of the USPS, but in such a case, the USPS would be required to pay Kitty Hawk for services provided to the date of termination and reimburse Kitty Hawk for settlement expenses with suppliers and subcontractors for certain capital expenditures made under the cancelled contract. BAX Global leases seven aircraft from Kitty Hawk pursuant to an ACMI contract. BAX Global may terminate the contract if, among other reasons, Kitty Hawk does not meet specified on- time performance standards [or if majority ownership or control of Kitty Hawk is acquired by a competitor of BAX Global.] The loss of this customer, or a reduction in pounds shipped by BAX Global, could have a material adverse effect on Kitty Hawk's business. 2. EMPLOYEE RELATIONS Kitty Hawk's employees have been subject to union organization efforts from time to time, and Kitty Hawk believes they are likely to be subject to future unionization efforts as its operations expand. Several months ago, Aircargo's flight crew members (727-100, 727-200 and DC-9), in an election under the Railway Labor Act, voted overwhelmingly by write-in to be represented by the Air Line Pilots Association ("ALPA"), in preference to the International Brotherhood of Teamsters and an unaffiliated employee group calling themselves the Kitty Hawk Pilots Association ("KHPA"), which were on the ballot. ALPA declined to accept representation. KHPA then petitioned for another election, which is now being conducted, in which only KHPA is on the ballot. Ballots are expected to be counted in September, 2000. Although Kitty Hawk believes it has excellent employee relations, the unionization of its workforce could result in higher employee compensation and working condition demands that could increase Kitty Hawk's operating costs or constrain its operating flexibility. C. AIRCRAFT RELATED RISKS 1. FUTURE OPERATIONS BASED ON CONTINUED ACCEPTANCE OF SCHEDULED AIRFREIGHT Kitty Hawk's business plan is based substantially on the continued acceptance of a scheduled overnight airfreight network in support of the freight forwarders. Kitty Hawk believes there are over 3,500 freight forwarders in business today, which could comprise a substantial portion of Kitty Hawk's customer base. Recently, there has been an increase in the number of mergers and consolidations among freight forwarders. Certain of the larger freight forwarders have periodically contracted for dedicated air freighter capacity in lieu of using Kitty Hawk's services. The continued consolidation of this sector could have a material adverse impact on Kitty Hawk's business. 2. DEPENDENCE ON AIRCRAFT AVAILABILITY Kitty Hawk's revenues are dependent on having aircraft available for revenue service. The CNET contract depends very heavily on contracted third-party aircraft. The biggest risk-factors for CNET are probably the inability to obtain contract lift commitments without guaranteed pre- payments by letters of credit ('LCs") or deposit before Kitty Hawk obtains the enforceable commitment of the USPS, the possibility that Kitty Hawk will be unable to find the cash resources to supply those LCs or make those deposits, and the risk that having supplied the LCs or made the deposits, Kitty Hawk does not obtain or lose the CNET contract. It is also increasingly true of the Fort Wayne hub operation that Kitty Hawk relies on third-party lift, as it expands the use of wet- leased A300s. Any time Kitty Hawk uses third-party lift, it incurs the risk that the supplier defaults for any reason, leaving Kitty Hawk without replaceable lift - this is a major exposure in CNET, FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 72 where Kitty Hawk depends heavily on a few carriers to supply the bulk of the lift. In the past, Kitty Hawk has experienced unanticipated Federal Aviation Administration ("FAA") Airworthiness Directives ("Directives") or excessive unscheduled maintenance due to equipment failures, or accidental damage, that has made its own or third-party contracted aircraft unavailable for revenue service. In the event one or more of Kitty Hawk's aircraft or its third-party contracted aircraft are out of service for an extended period of time, whether due to Directives, unscheduled maintenance, accidents or otherwise, Kitty Hawk may be forced to lease or purchase replacement aircraft and may be unable to fulfill its obligations under customer contracts. Kitty Hawk cannot assure that, if necessary, it could locate suitable replacement aircraft on acceptable terms. Loss of revenue from any such business interruption, damages for non-performance under customer contracts, or costs to replace aircraft could have a material adverse effect on Kitty Hawk's business. Kitty Hawk's business plan includes acquiring additional heavyweight B727-200F aircraft for its scheduled overnight freight operations and its ACMI Services. Kitty Hawk's business plan for its scheduled overnight freight operations also includes acquiring, pursuant to an ACMI contract, additional A300F aircraft. Inability to procure B727-200F and/or A300F aircraft on reasonable terms, or if at all, could have a material adverse effect of Kitty Hawk's business. 3. CAPITAL INTENSIVE NATURE OF AIRCRAFT OWNERSHIP Kitty Hawk's airfreight carrier business is highly capital intensive. In order to expand its airfreight carrier business, Kitty Hawk intends to acquire used jet aircraft, primarily B727-200F aircraft. Used aircraft typically require certain modifications, including reconfiguring the aircraft from passenger to cargo use and depending upon its prior operator and use, installing equipment to make the aircraft more compatible with the Kitty Hawk fleet or to comply with the noise regulations. The market for used jet aircraft is volatile and can be adversely affected by limited supply, increased demand, and other market factors. Kitty Hawk cannot assure that it will be able to purchase and, if necessary, modify additional B727-200F aircraft at favorable prices or that it will have or be able to obtain sufficient resources with which to make such acquisitions. 4. AGING AIRCRAFT REGULATIONS; POTENTIAL COMPLIANCE COSTS All of Kitty Hawk's Boeing 727-200F aircraft and its third-party contracted aircraft used in the scheduled-freight operation are subject to FAA Airworthiness Directives ("Directives") issued at any time. These Directives can cause Kitty Hawk or the operator to conduct extensive examinations and structural inspections of its aircraft and to make modifications to its aircraft to address or prevent problems of corrosion and structural fatigue among other things. Kitty Hawk's or the operator's cost to comply with such Directives issued by the FAA cannot currently be estimated, but could be substantial and, if material, could have a material adverse effect on Kitty Hawk's business. As of August 1, 2000, Kitty Hawk's fleet under its Part 121 certificate consists primarily of B727-200F aircraft. The FAA has issued certain Directives that subject B727-200 operators to extensive aircraft examinations and require B727-200 aircraft to undergo structural inspections and modifications to address problems of corrosion and structural fatigue and freighter conversion related issues. A Directive requiring significant modifications to this aircraft type could require Kitty Hawk to invest significant additional funds in its aircraft or potentially ground its fleet pending compliance. Kitty Hawk cannot predict when and whether new Directives covering its aircraft will be promulgated, and there can be no assurance that compliance with these Directives will not adversely affect Kitty Hawk's business, financial condition or results of operations. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 73 D. INDUSTRY RELATED RISKS 1. CYCLICALITY AND SEASONALITY OF BUSINESS Kitty Hawk provides services to numerous industries and customers that experience significant fluctuations in demand based on economic conditions and other factors beyond its control. Demand for its services could be materially adversely affected by downturns in its customers' businesses. Kitty Hawk believes a significant percentage of its revenues derived from its scheduled airfreight operations will continue to be generated by the U.S. automotive industry, which has historically been a cyclical industry. A contraction in the U.S. automotive industry, a prolonged work stoppage or other significant labor dispute involving that industry, or a reduction in the use of air transportation could have a material adverse effect on Kitty Hawk's business. Additionally, the air cargo industry itself is seasonal in nature with a majority of the industry's flying activities being conducted in the second half of the year (principally the fourth quarter) as more air cargo is transported in anticipation of and during the December holiday season. A significant portion of Kitty Hawk's profitability of Kitty Hawk is dependent on the ability of Kitty Hawk to conduct a significant portion of its flying activities during this critical period. Certain of Kitty Hawk's customers engage in seasonal businesses, especially the USPS, and customers in the U.S. automotive industry. As a result, Kitty Hawk's airfreight carrier business has historically experienced its highest quarterly revenues and profitability during the last three months of the year due to the peak holiday season activity of the USPS in the fourth quarter of the calendar year and during the period from June 1 to November 30 when production schedules of the U.S. automotive industry typically increase. Consequently, Kitty Hawk historically experiences its lowest quarterly revenue and profitability during the first three months of the year. 2. VOLATILITY OF AIR FREIGHT SERVICES MARKET The demand for airfreight services is highly dependent on the strength of both the domestic and global economy. Although the airfreight services industry has experienced strong growth over the last several years, general economic downturns, particularly any downturn affecting North America, could have a material adverse effect on Kitty Hawk's business. 3. GOVERNMENT REGULATION A. GENERAL Under Title 49 of the United States Code (formerly the Federal Aviation Act of 1958, as amended), the Department of Transportation ("DOT") and the FAA exercise regulatory authority over Kitty Hawk. Kitty Hawk has obtained the necessary authority to conduct flight operations, including a Certificate of Public Convenience and Necessity from the DOT and an Air Carrier Operating Certificate from the FAA, however, the continuation of such authority is subject to continued compliance by Kitty Hawk with applicable statutes, rules and regulations pertaining to the airline industry, including any new rules and regulations that may be adopted in the future. All air carriers are subject to the strict scrutiny of FAA officials and to the imposition of regulatory demands that can negatively affect their operations. B. INTERNATIONAL REGULATION Although Kitty Hawk does not presently conduct any material international operations, it may do so in the future. As such Kitty Hawk's international operations would be governed by air services agreements between the U.S. and foreign countries in which Kitty Hawk may operate. Under certain of these air services agreements, traffic rights in those countries are FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 74 available to only a limited number of, and in some cases only one or two, U.S. air carriers and are subject to approval by the applicable foreign regulators, limiting growth opportunities in such countries. C. STOCK OWNERSHIP BY NON-U.S. CITIZENS Under current federal aviation law, Kitty Hawk could cease to be eligible to operate as an airfreight carrier if more than 25 percent of its voting stock were owned or controlled by non- U.S. citizens. Moreover, in order to hold an airfreight carrier certificate, the president and two-thirds of the directors and officers must be U.S. citizens. Kitty Hawk expects that its Plan of Reorganization will not result in a stock ownership profile that will result in more than 25% being held by non-U.S. citizens. There are provisions in the certificate of incorporation of Kitty Hawk, Inc. that limit the voting power of non-U.S. stockholders to protect against this risk. Similar provisions will be in the certificate of incorporation of the Reorganized Kitty Hawk. D. NOISE ABATEMENT REGULATIONS Airline operators must comply with FAA noise control regulations primarily promulgated under the Airport Noise and Capacity Act of 1990 (the "Noise Regulations"). Under the Noise Regulations, in general, as of January 1, 2000, each jet aircraft operated in the U.S. must comply with Stage 3 of the Noise Regulations. All of the aircraft currently operated by Kitty Hawk are in compliance with Stage 3 of the Noise Regulations. Any jet aircraft that Kitty Hawk may add to its fleet must meet Stage 3 of the Noise Regulations before it can be operate the aircraft in revenue service. Certain airport operators have adopted local regulations that, among other things, impose various time curfews and other noise limiting requirements and other airport operators may adopt similar restrictions in the future. E. SAFETY, TRAINING AND MAINTENANCE REGULATIONS Virtually every aspect of Kitty Hawk's air carrier operations is subject to extensive FAA regulation, including the areas of safety, training, and maintenance. To ensure compliance with FAA rules and regulations, the FAA routinely inspects air carrier operations and aircraft and proposes civil monetary penalties in the event of non-compliance. Periodically, the FAA focuses on particular aspects of air carrier operations occasioned as a result of a major incident. These types of inspections and regulations often impose additional burdens on air carriers and increase their operating costs. Kitty Hawk cannot predict when it will be subject to such inspections or regulations, or the impact of such inspections or regulations. Other regulations promulgated by state and federal Occupational Safety and Health Administrations, dealing with the health and safety of its employees, impact Kitty Hawk's operations. This extensive regulatory framework, coupled with federal, state and local environmental laws, imposes significant compliance burdens and risks that substantially affect Kitty Hawk's operational costs. F. HAZARDOUS MATERIALS REGULATIONS The FAA exercises regulatory jurisdiction over transporting hazardous materials. Kitty Hawk regularly transports articles that are subject to these regulations. Shippers of hazardous materials share responsibility with the air carrier for compliance with these regulations and are primarily responsible for proper packaging and labeling. If Kitty Hawk fails to discover any undisclosed hazardous materials or mislabel or otherwise ship hazardous materials, it may suffer possible aircraft damage or liability, as well as, substantial monetary penalties. The FAA has recently increased its monitoring of shipments of hazardous materials. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 75 XIII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES A. GENERAL Under the Internal Revenue Code of 1986, as amended (the "TAX CODE"), there are certain significant federal income tax consequences associated with the Plan described in this Disclosure Statement. Certain of these consequences are discussed below. Due to the unsettled nature of certain of the tax issues presented by the Plan, the differences in the nature of Claims of the various creditors, their taxpayer status, residence and methods of accounting (including creditors within the same creditor class) and prior actions taken by creditors with respect to their Claims, as well as the possibility that events or legislation subsequent to the date hereof could change the federal tax consequences of the transactions, the tax consequences described below are subject to significant considerations applicable to each creditor. HOLDERS OF CLAIMS AND INTERESTS ARE URGED TO CONSULT THEIR TAX ADVISORS RESPECTING THE INDIVIDUAL TAX CONSEQUENCES OF THE TRANSACTIONS, CONTEMPLATED UNDER OR IN CONNECTION WITH THE PLAN, INCLUDING STATE, LOCAL AND FOREIGN TAX CONSEQUENCES. B. TAX CONSEQUENCES TO THE DEBTORS 1. IN GENERAL Section 368 of the Tax Code defines certain tax reorganizations under the Tax Code, including reorganizations under the Bankruptcy Code. Tax reorganizations include an exchange of a corporation's outstanding debt securities for the corporation's common stock The Debtor's exchange of New Common Stock for the Senior Notes should constitute a tax reorganization under the Tax Code although this issue is not free from doubt. As a result, Debtors should recognize no gain or loss with respect to the transfer of New Common Stock in exchange for the Senior Notes pursuant to the Plan except to the extent Debtors are deemed to incur discharge of indebtedness income upon the exchange (see "Reduction of Debtors' Indebtedness" below). The remainder of the discussion under this "Certain Federal Income Tax Consequences" section assumes that the exchange constitutes a tax reorganization under the Tax Code. 2. CARRYOVER OF TAX ATTRIBUTES A. NET OPERATING LOSS CARRYOVERS. Under the Tax Code, the Debtors' net operating loss carryovers (the "NOL CARRYOVERS") should carry over and generally be available for use by Reorganized Debtor. However, the amount of such losses will be reduced by an amount equal to the amount of indebtedness from which Debtors are discharged pursuant to the Plan (see "Reduction of the Debtors' Indebtedness" below). In addition, any remaining amount of NOL Carryovers (following such reduction) may be subject to limitation and/or further reduction pursuant to section 382 of the Tax Code. The amount of these NOL Carryovers also could be reduced as a result of future IRS audits. B. SECTION 382. Section 382 of the Tax Code describes the limitation placed on NOL Carryovers and certain built-in losses following certain changes in a corporation's ownership. Final and Temporary Treasury Regulations issued under section 382 of the Tax Code resolve certain issues, but leave other matters unresolved and subject to varying interpretations. One uncertainty concerns the application of section 382 to a consolidated group of corporations, particularly where certain members of the group are in bankruptcy while other group members are not. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 76 In general, the limitations under section 382 are triggered by a greater than 50% change in ownership of the value of stock in a loss corporation within a three-year testing period. After such a change, the amount of a loss corporation's taxable income that can be offset by pre- ownership change NOL Carryovers cannot exceed an amount equal to the value of the loss corporation immediately prior to the ownership change (excluding proscribed contributions to capital) multiplied by a specified rate of interest (the federal long-term tax exempt rate). Moreover, no NOL Carryovers will survive unless a continuity of business enterprise requirement is met during the two-year period beginning on the date of the change in ownership of the loss corporation. Under this business requirement, the loss corporation is required to continue its historic business or to use a significant portion of its assets in such business. The limitations of section 382 of the Tax Code arise upon the occurrence of an "ownership change." An ownership change occurs if, following an owner shift involving a five percent shareholder or any equity structure shift during a three-year testing period, there is more than a 50 percentage point increase in the total value of the stock of the loss corporation held at the close of the testing period by one or more five percent shareholders during the testing period over the lowest percentage holdings by such shareholder(s) during the testing period. An equity structure shift consists of tax reorganizations under the Tax Code and, to the extent provided in Treasury Regulations, other stock issuances, including public offerings and similar transactions. The term "five percent shareholder" includes any person holding five percent (5%) or more in value of the stock of the corporation at any time during the testing period. In general, stock includes all equity interests that participate in the earnings or growth of the corporation, that vote, or are convertible into such stock. Special attribution rules are provided in section 382. Among them, stock owned by a corporation or other entity is attributed to its shareholders. C. SPECIAL BANKRUPTCY EXCEPTION TO SECTION 382. If an ownership change occurs in a bankruptcy case, the bankrupt corporation may be able to utilize a special bankruptcy exception provided under section 382(1)(5). Under section 382(1)(5), the corporation's NOL Carryovers are reduced according to a formula but any NOL Carryovers that remain following this reduction are not otherwise limited as to their future use (the "SPECIAL BANKRUPTCY EXCEPTION"). To qualify for this Special Bankruptcy Exception, certain creditors and shareholders of the corporation immediately before the exchange must acquire, as a result of such exchange, at least 50% of the stock of the reorganized corporation after the exchange. Only claims held by persons who were creditors as of the date eighteen months prior to the filing of the bankruptcy petition or whose claims arose in the ordinary course of the debtor corporation's trade or business (and were at all times beneficially owned by such persons) are taken into account ("QUALIFYING CREDITORS"). If the bankrupt corporation does not qualify for, or elects out of, section 382(1)(5), then section 382(1)(6) would apply. Under section 382(1)(6), the section 382 limitation is imposed on the corporation, but the amount of this limitation is determined based on the corporation's post- bankruptcy reorganization value. This has the effect of increasing the amount of the section 382 limitation. An ownership change will result from the exchange of New Common Stock for Senior Notes under the Plan. Because Qualifying Creditors of the Debtors should receive at least 50% of the stock of Reorganized Debtor, the Special Bankruptcy Exception should apply to Reorganized Debtor, unless Reorganized Debtor makes an election not to have these rules apply. At present, the Debtors currently believe that they will elect out of the Special Bankruptcy Exception. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 77 If the Special Bankruptcy Exception applies to Reorganized Debtor, then the occurrence of a second ownership change within two years of the bankruptcy exchange will completely eliminate its NOL Carryovers. 3. REDUCTION OF DEBTORS' INDEBTEDNESS Under the Plan, the amount of the Debtors' aggregate outstanding indebtedness will be reduced. In general, the Tax Code provides that a taxpayer that realizes a "discharge of indebtedness" must include the amount of discharged indebtedness in taxable gross income to the extent that the indebtedness discharged exceeds any consideration given in exchange for such discharge. The Tax Code further provides that if a taxpayer is in a Title 11 case and the discharge of indebtedness is pursuant to a plan approved by the bankruptcy court, such discharge of indebtedness is not required to be included in gross income. Accordingly, the Debtors will not be required to include in their income any amounts resulting from any discharge of indebtedness. Discharge of indebtedness will arise to the extent Claims are discharged by the Debtors' payment of cash or distributions of other property with a fair market value less than the face amount of the Claims. Although discharge of indebtedness amounts are excluded from gross income, such amounts must be applied to reduce certain of the Debtors' tax attributes. In particular, assuming no election is made to reduce depreciable property first, any net operating loss for the taxable year of the discharge, and any NOL Carryovers to the taxable year are reduced. Thereafter, in most cases, the bases of property held on the first day of the year following the year of the discharge are reduced, provided the basis reduction may not exceed the excess of the aggregate of the bases of the property immediately after the discharge over the aggregate of the Debtors' liabilities after the discharge. The Debtors may elect to reduce the adjusted basis of the depreciable property they hold as of the beginning of the taxable year in which the discharge occurs before reducing the NOL Carryovers and other tax attributes. Net operating losses and the bases of property are reduced on a dollar-for-dollar basis regardless of whether an election is made to reduce the basis of depreciable property first. C. TAX CONSEQUENCES TO CREDITORS The tax consequences of the implementation of the Plan to a creditor will depend in part on whether the creditor's present debt constitutes a "security" for federal income tax purposes, the type of consideration received by the creditor in exchange for its Allowed Claim, whether the creditor reports income on the accrual or cash basis, whether the creditor receives consideration in more than one tax year of the creditor, whether the creditor is a resident of the United States, and whether all the consideration received by the creditor is deemed to be received by that creditor in an integrated transaction. The tax consequences of the receipt of cash or property that is allocable to interest are discussed below in the section entitled "Receipt of Interest." 1. CLAIMS CONSTITUTING SECURITIES A. DEFINITION OF SECURITY. The determination as to whether a Claim of any particular creditor constitutes a "security" for federal income tax purposes is based on the facts and circumstances surrounding the origin and nature of the claim and its maturity date. Generally, claims arising out of the extension of trade credit have been held not to be securities. Instruments with a five year term or less also rarely qualify as securities. On the other hand, bonds or debentures with an original term in excess of ten years have generally been held to be securities. The Debtors believe that the Senior Notes constitute securities but that the claims of the trade creditors probably do not constitute securities. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 78 B. RECEIPT OF STOCK OR SECURITIES. Section 354 of the Tax Code provides for nonrecognition of gain or loss by holders of securities of a corporation who exchange these claims only for new stock and securities pursuant to certain reorganizations. The nonrecognition rule of section 354 is not applicable if: (i) the principal amount of securities received exceeds the principal amount of securities surrendered; (ii) securities are received, but none are surrendered; or (iii) stock or securities are received for accrued interest. An unsecured creditor whose existing Claim constitutes securities may recognize gain (but not loss), if in addition to New Common Stock, it receives other property or money. The amount of such gain, if any, should equal the lesser of (i) the excess, if any, of the fair market value of any New Common Stock received over the basis of the creditor in its existing claim (other than any claim in respect of accrued interest); or (ii) the fair market value of the other property and money received. C. DETERMINATION OF CHARACTER OF GAIN. In the case of a creditor whose existing claim constitutes capital assets in his hands, the gain required to be recognized should be classified as a capital gain, other than amounts received on account of interest. It should be noted that Tax Code section 582(c) provides that the sale or exchange of a bond, debenture, note or certificate, or other evidence of indebtedness by a bank or certain other financial institutions will not be considered the sale or exchange of a capital asset. Accordingly, any gain recognized by such creditors as a result of the implementation of the Plan will be ordinary income, notwithstanding the nature of their claims. Any capital gain recognized by a creditor will be long-term capital gain with respect to those Claims for which the creditor's holding period is more than one year, and short-term capital gain with respect to such Claims for which the creditor's holding period is one year or less. D. TAX BASIS AND HOLDING PERIOD. The aggregate tax basis for any New Common Stock received, other than amounts received on account of interest, will be a substituted basis equal to the creditor's basis in the claim surrendered (other than any claims in respect of accrued interest), increased by any gain recognized on the exchange, and decreased by the fair market value of any other property or money received. The tax basis of any other property will be equal to such property's fair market value at the time of the exchange. If the creditor subsequently recognizes any gain on the sale or exchange of New Common Stock received, the gain recognized by such creditor on such sale or exchange will be treated as ordinary income to the extent of any bad debt deduction attributable to its claim, and thereafter, as capital gain provided that the New Common Stock constitutes a capital asset in the creditor's hands. The creditor's holding period for the New Common Stock will include the period during which such creditor held the security exchanged. The holding period for any other property will begin on the day following the day such property is deemed received. E. MARKET DISCOUNT WITH RESPECT TO SENIOR NOTES. Generally, a debt instrument will have "market discount" for federal income tax purposes if it is acquired after its original issuance for less than the issue price of such instrument plus the aggregate amount, if any, of original issue discount included in the income of all holders of such instrument prior to such acquisition. A holder of a Claim with market discount must treat any gain recognized with respect to the principal amount of such Claim on the satisfaction of such Claim pursuant to the Plan as ordinary income to the extent of the Claim's accrued market discount. A Noteholder holding a Senior Note with market discount must treat any gain recognized with respect to the principal amount of such Senior Note on the satisfaction of such Senior Note pursuant to the Plan as ordinary income to the extent of the Senior Note's accrued market discount. A Noteholder on an accrual basis will recognize ordinary income to the extent the consideration received that is allocable to accrued interest exceeds the amount of interest previously included in income, and will recognize a loss to the extent that the amount of interest previously FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 79 included in income exceeds the consideration that is allocated to such interest. It is unclear whether such a loss is capital or ordinary. Any other loss recognized by a Noteholder will generally be a capital loss. 2. CLAIMS NOT CONSTITUTING SECURITIES A. GAIN/LOSS ON EXCHANGE. A creditor whose existing Claim does not constitute a security will recognize gain or loss on the exchange of its existing claims (other than claims for accrued interest) for New Common Stock received equal to the difference between (i) the "amount realized" in respect of such claims and (ii) the creditor's tax basis in such claims. The "amount realized" will be equal to the fair market value of all New Common Stock received, less any amounts allocable to interest, unstated interest, or original issue discount. B. TAX BASIS AND HOLDING PERIOD. The aggregate tax basis in all New Common Stock received by a creditor will equal the amount realized on the receipt of such securities (other than amounts allocable to any accrued interest). Should the creditor subsequently recognize any gain on the sale or exchange of the New Common Stock received pursuant to the Plan, the gain recognized by such creditor on such sale or exchange will be treated as ordinary income to the extent of any bad debt deduction attributable to its claim, or ordinary loss claimed by it with respect to the exchange of its claim for New Common Stock pursuant to the Plan (to the extent properly attributable to such sale), and, thereafter, as capital gain, provided that the New Common Stock constitutes a capital asset in the creditor's hands. The holding period for the New Common Stock will begin on the day following the date such securities are deemed to be received. 3. CREDITORS RECEIVING SOLELY CASH A creditor who receives cash in full satisfaction of its Claim will be required to recognize gain or loss on the exchange. The creditor will recognize gain or loss equal to the difference between the amount realized in respect of such Claim and the creditor's tax basis in the Claim. 4. CONSIDERATION ALLOCABLE TO INTEREST OR ORIGINAL ISSUE DISCOUNT Consideration received by a creditor that is attributable to accrued but unpaid interest will be treated as ordinary income, regardless of whether the creditor's existing Claims are capital assets in his hands or whether the exchange is pursuant to a tax reorganization. Part of the consideration received under the Plan in exchange for a Claim may be allocable to interest (including original issue discount) accrued while such creditor held the instrument underlying the Claim. If the consideration received with respect to a Claim is less than the amount of such Claim, there is some doubt as to how the consideration should be allocated between principal and such accrued interest. The Plan provides that consideration given in exchange for Senior Notes will be allocated first to principal and then, to the extent that such consideration exceeds the principal amount of such Claim, to accrued but unpaid interest. A holder of a Claim on an accrual basis will be required to recognize ordinary income to the extent the consideration received that is allocable to accrued interest exceeds the amount of interest previously included in income, and will recognize a loss to the extent that the amount of interest previously included in income exceeds the consideration that is allocated to such interest. It is unclear whether such a loss is capital or ordinary. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 80 5. BACKUP WITHHOLDING Under the Tax Code, interest, dividends and other "reportable payments" may, under certain circumstances, be subject to "backup withholding" at a 31% rate. Withholding generally applies if the holder: (a) fails to furnish his social security number or other taxpayer identification number ("TIN"), (b) furnishes an incorrect TIN, (c) fails properly to report interest or dividends, or (d) under certain circumstances, fails to provide a certified statement, signed under penalty of perjury, that the TIN provided is its correct number and that it is not subject to backup withholding. XIV. CONCLUSION This Disclosure Statement has attempted to provide information regarding the Debtors' estates and the potential benefits that might accrue to holders of Claims against and Interests in the Debtors under the Plan as proposed. The Plan is the result of extensive efforts by the Debtors, their advisors, and management to provide the creditors with a meaningful dividend. The Debtors believe that the Plan is feasible and will provide each holder of a Claim against the Debtors with an opportunity to receive greater benefits than those that would be received by termination of the Debtors' business and the liquidation of their assets, or by any alternative plan or sale of the business to a third party. The Debtors, therefore, hereby urge you to vote in favor of the Plan. WHETHER OR NOT YOU EXPECT TO ATTEND THE CONFIRMATION HEARING, WHICH IS SCHEDULED TO COMMENCE ON DECEMBER 5, 2000, AT 10:00 A.M. DALLAS TEXAS TIME, YOU MUST SIGN, DATE, AND MAIL YOUR BALLOT AS SOON AS POSSIBLE FOR THE PURPOSE OF HAVING YOUR VOTE COUNT AT SUCH HEARING. ALL VOTES MUST BE RETURNED TO THE SOLICITATION AGENT: LAIN FAULKNER & CO., 400 N. ST. PAUL STREET, SUITE 600, DALLAS, TEXAS 75201, TELEPHONE (214) 720-1929, TELECOPY (214) 720-1450, ATTENTION: DENNIS FAULKNER, AS INDICATED ON THE BALLOT ON OR BEFORE 4:00 P.M. DALLAS TEXAS TIME ON NOVEMBER 14, 2000. ANY BALLOT WHICH IS ILLEGIBLE OR WHICH FAILS TO DESIGNATE AN ACCEPTANCE OR REJECTION OF THE PLAN WILL BE COUNTED AS A VOTE IN FAVOR OF THE PLAN. FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 81 Dated: October 10, 2000. KITTY HAWK, INC. OK TURBINES, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ------------------------------------- ------------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK AIRCARGO, INC. LONGHORN SOLUTIONS, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ------------------------------------- ------------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK CHARTERS, INC. AIRCRAFT LEASING, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ------------------------------------- ------------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK INTERNATIONAL, INC. AMERICAN INTERNATIONAL TRAVEL, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J. REEVES - ------------------------------------- ------------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer KITTY HAWK CARGO, INC. FLIGHT ONE LOGISTICS, INC. Debtor and Debtor-In-Possession Debtor and Debtor-In-Possession /S/ TILMON J. REEVES /S/ TILMON J.REEVES - ------------------------------------- ------------------------------------- By: Tilmon J. Reeves By: Tilmon J. Reeves Its: Chief Executive Officer Its: Chief Executive Officer FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000
Robert D. Albergotti John D. Penn Sarah B. Foster State Bar No. 00969800 State Bar No. 15752300 State Bar No. 07297500 Haynes and Boone, LLP Haynes and Boone, LLP Haynes and Boone, LLP 901 Main Street, Suite 3100 201 Main Street, Suite 2200 600 Congress Ave., Suite 1600 Dallas, Texas 75202 Fort Worth, Texas 76102 Austin, Texas 78701 Tel. No. (214) 651-5000 Direct Tel. No. (817) 347-6610 Tel. No. (512) 867-8400 Fax No. (214) 651-5940 Direct Fax No. (817) 348-2300 Fax No. (512) 867-8470
/S/ JOHN D. PENN - ------------------------------------ Robert D. Albergotti (No. 00969800) John D. Penn (No. 15752300) Sarah B. Foster (No. 07297500) COUNSEL TO THE DEBTORS AND THE DEBTORS-IN-POSSESSION FINAL DISCLOSURE STATEMENT UNDER 11 U.S.C. SS. 1125 IN SUPPORT OF THE DEBTORS' JOINT PLAN OF REORGANIZATION DATED OCTOBER 10, 2000 EXHIBIT "A" PROJECTIONS OF REORGANIZED DEBTOR'S OPERATIONS MANAGEMENT DISCUSSION OF THE PRO FORMA FINANCIAL STATEMENTS The Company's management has prepared the following financial projections. While management believes the underlying assumptions to be reasonably accurate, a large percentage of these assumptions are based solely upon management's industry experience and judgment. Therefore, the Company can give no assurance that such assumptions will prove to be correct. Persons interested in a transaction with the Company should conduct their own due diligence as to the accuracy and completeness of these assumptions and financial projections before making such investment. The forecasts detailed herein are provided for informational purposes only, and are based on estimates and assumptions made at the date of this Memorandum. The Company has no responsibility to update these forecasts for subsequent influences or events that may modify or change certain forecast results. The Company will provide more revenue and expense detail to investors interested in pursuing a transaction with the Company. The Company currently operates a fleet of B727-200F aircraft some of which are nearing the end of their economic useful life, primarily as a result of the increased maintenance costs associated with operating older aircraft. As a result, the Company is initiating an aggressive fleet renewal program that it believes will reduce the overall maintenance costs of its B727-200F fleet and increase its operational reliability. The following table summarizes the Company's aggressive fleet renewal program: B727 Composition (End of Year) - -------------------------------------------------------------------------------- Vintage 2000 2001 2002 2003 2004 2005 - -------------------------------- ---- ---- ---- ---- ---- ---- 1969 and Earlier ............... 17 14 9 6 2 -- 1973 to 1979 ................... 18 18 18 18 18 18 1980 and Later` ................ 3 8 13 16 20 22 ---- ---- ---- ---- ---- ---- 38 40 40 40 40 40 In order to execute this fleet renewal program the Company will require additional financing. The Company believes that the disposition of the older vintage aircraft units will approximate the equity necessary for the replacement units. The Company has assumed that additional units both replacement units and growth units acquired through year-end 2002 will be financed pursuant to debt structures and those acquisitions after 2003 will be financed pursuant to operating lease structures. The following table summarizes the capital requirements to fund the Company's proposed fleet renewal program:
FLEET RENEWAL PROGRAM - ------------------------------------------------------------------------------------------------------------------------------------ 2001 2002 2003 2004 2005 ------- ------- ------- ------- ------- Replaced Units ................................ 3 5 3 4 2 Proceed from Dispostion ....................... $10,125 $14,675 $ 6,917 $ 7,583 $ 2,833 Proceeds from Acquisition(1) .................. 5,760 9,150 -- -- -- Proceeds from Leased/AC ....................... -- -- 609 772 364 ------- ------- ------- ------- ------- Net Cash Proceeds/(Needs) ..................... $ 4,365 $ 5,525 $ 6,308 $ 6,811 $ 2,469 ======= ======= ======= ======= =======
EXHIBIT "A" - Page 1 Summary of Major Assumptions GENERAL All values are expressed in nominal dollars (subject to an assumed 2.5 percent per annum inflation assumption). These pro forma results assume that the Company is a taxpayer, however, the Company has not yet determined its net tax paying position upon emergence from bankruptcy. Currently, the Company has an estimated NOL that exceeds $100.0 million. The ability of the Company to retain any portion of this NOL may impact these pro forma results and thus the overall valuation of the Company. Generally, the assumptions used to derive these pro forma operating results are based on historical experience of the Company. The Company believes that these projections can be improved upon emergence from bankruptcy, primarily as a result of a more strategically focused business plan. OPERATING REVENUES Over the projection period, management believes that that it will be able to steadily improve total revenues as a result of an overall growth in the air cargo industry. On a consolidated basis revenues are projected to increase from $394.9 million in 2001 to $499.9 million in 2005, representing a CAGR of 4.8%. This revenue growth is detailed as follows: The scheduled business is assumed to increase from $212.1 million in 2001 to $289.2 million in 2005, representing a CAGR of 6.4%. This growth rate is a combination of increased freight on the scheduled system (assumed at 4.0% per annum) as well as a yield increase (assumed at 2.5% per annum). The USPS business line is assumed to increase from $151.1 million in 2001 to $172.8 million in 2005, representing a CAGR of 2.7%. This growth rate is substantially a result of two additional units added to this business line beginning in September 2001. No other revenue growth is assumed in this business line other than inflation increases resulting from the terminal handling portion f this business line. The Company believes that this business line can further be expanded with additional resources. The ACMI business line is assumed to increase form $31.7 million in 2001 to $37.9 million in 2005 representing a CAGR of 3.6%. This growth is substantially a result of an assumed 5% price increase beginning in 2002, upon expiration of the existing contract with BAX Global. Growth is assumed to be at the rate of inflation thereafter. Additional revenue growth is generated from the assumption that as the Company replaces its fleet of lightweight B727 aircraft with heavyweight B727 aircraft the customer will derive increased utilization and higher rates. This assumption is based on the historical experience of the Company. These pro forma results have been adjusted for seasonality based on the Company's historical experience. The ability of the Company to grow it revenue base will be impacted by a number of factors. The key factors are highlighted below: MARKET SHARE Management believes that in order to realize its projected revenue growth in the scheduled overnight air freight business it will have to obtain market share from its competitors. YIELD MANAGEMENT In order to increase yields above those assumed in these projections, the Company believes that it may be advisable to install a sophisticated yield management system to assist in driving yields upward. Additionally, the Company believes that as it demonstrates an improved reliability, the demand for its priority delivery product will increase, thereby increasing the overall yield. OPERATING EXPENSES EXHIBIT "A" - Page 2 During the projection period, management expects operating expenses on a consolidated basis (including depreciation and amortization), to grow from $355.7 million in 2001 to $429.8 million in 2005, representing a CAGR of 3.9%. This growth is at a slower rate that total revenues projected to grow at a CAGR of approximately 4.9% through 2005. Therefore, total operating expenses as a percentage of total revenues are projected to decrease from 90.1% in 2001 to 86.0% in 2005. The major components of the total expenses include salaries and wages, fuel costs, aircraft maintenance, aircraft rentals and expenses relating to operating a hub and spoke operation. The chart below summarizes these major cost components and their percentage of total revenue.
OPERATING EXPENSE AS A % OF TOTAL REVENUE -------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 ------------ ------------ ------------ ------------ ------------ Aircraft Rentals .............................. 4.1% 3.7% 4.0% 4.6% 5.0% Flight Crews .................................. 10.1% 9.6% 9.5% 9.3$ 9.1% Aircraft Maintenance .......................... 15.3% 15.1% 14.5% 14.1% 13.9% Ground Handling and Trucking .................. 13.1% 13.4% 13.5% 13.6% 13.8% Fuel .......................................... 9.4% 9.5% 9.0% 8.5% 8.2% A300 ACMI Expenses ............................ 9.3% 11.0% 11.8% 11.9% 11.6% ============ ============ ============ ============ ============ Sub-total Operating Expenses ................ 61.3% 62.3% 62.3% 62.0% 61.6%
AIRCRAFT RENT EXPENSE The Company has assumed that any fleet decisions with respect to the B727-200F fleet after 2002 will be financed on an operating lease basis. This assumption is based on the belief that the Company does not want to speculate on the long-term viability of the B727-200F freighter. While there currently is no replacement for the B727-200F, alternatives, including the B737 and B757 aircraft types, are emerging as potential candidates albeit several years from being economically viable, primarily due to high currently high capital costs. FLIGHT CREWS The Company has historically had a high turnover in its flight crews as demand from the major passenger air carriers continues to outpace supply. As a result the Company typically has a high number of training sessions for new crewmembers. Additionally, the Company has historically devoted significant resources to a travel budget for its crew members in a large amount of its annual expenses in travel expenses incurred a large amount The Company has initiated a revised crew scheduling policy that it believes will substantially reduce its historically high travel costs associated with moving crews in support of its operation. Additionally, the projections assume 3 crews (9 crew members) per aircraft to meet the operating and training requirements of the Company. AIRCRAFT MAINTENANCE These projections assume the Company's historical maintenance approximates future performance. Currently, the Company's fleet of aging B727-200F aircraft requires an extensive amount of aging aircraft inspections and maintenance requirements. However, the Company believes that by embarking on a fleet renewal program that it will be able to reduce its overall maintenance costs. These projections do not attempt to quantify such benefits. GROUND HANDLING AND TRUCKING This operating expense is directly related to the amount of freight that the Company can deliver through its scheduled freight system and to a lesser extent the USPS terminal handling portion of a USPS contract. These projections assume the Company's historical experience is indicative of its future performance. EXHIBIT "A" - Page 3 FUEL The Company has assumed that the price of fuel (including into-plane costs) is constant at $0.97 cents per gallon and that the fuel burn associated with both the B727-200F and A300F remain as historically experienced. The addition of units is substantially completed by 2002 and the overall aircraft utilization stabilizes throughout the projection period. As a result, total fuel expense remains relatively constant throughout the projection period. A300F ACMI AIRCRAFT The Company has assumed that it will continue to operate its existing fleet of A300F aircraft, which are operated under wet-lease ACMI contracts with a third party. Additionally, the Company assumes that it will add A300F aircraft under similar contracts with other third parties. The Company believes that obtaining these aircraft under similar arrangements allows it the flexibility to access these domestic wide-body freighters without having to take ownership and maintenance risks associated with this relatively new freighter variant. AIRCRAFT ACQUISITION ASSUMPTIONS As stated earlier, the Company is embarking on an aggressive fleet renewal program. Fleet acquisitions through year-end 2002 are assumed to be financed pursuant to a debt structure based on a 70% advance rate fully-amortizing over seven years. Aircraft acquisitions after 2002 are assumed to be financed pursuant to an operating lease structure at a 1.75% rental factor. Acquisition prices for B727-200F aircraft are assumed at $6.4 million in 2001 falling to $5.2 million in 2005. BALANCE SHEET ASSUMPTIONS As a result of the bankruptcy filing the Company will have be required to adopt "fresh-start" accounting which will require the reorganized Company to mark its assets and liabilities to market value based upon its post-emergence equity valuation. The Company has assumed that as a result of this accounting principal an intangible asset entitled Assets in Excess of Reorganized Value will be created and amortized over forty years. The opening balance sheet assumed as of December 31, 2000 is the Company's current best estimate as to its financial position as of this date. Of significant interest is the assumption as to the financing of the C-Net contract. The Company has assumed that it will use $20.0 million of its cash balance to secure a significant portion of the expenses associated with executing this contract. The balance (assumed at $46.0 million) is assumed to be funded pursuant to normal credit terms from its vendors. EXIT FINANCING The Company intends to acquire two forms of exit financing (i) a $60.0 million terms loan secured by 24 B727-200F aircraft and (ii) a $50.0 million revolving credit facility secured by accounts receivable and inventory. The term loan is assumed to be amortized over five years and requires additional principal reduction as a result of the B727-200F collateral retirements pursuant to the Company's fleet renewal program. As a result, the average life of the term loan is 39 months. The revolving credit facility is secured by the accounts receivable and inventory of the Company. The Company has assumed that it will be able to achieve an advance rate of (i) 80% of its total accounts receivable balance and that 95% of its total accounts receivable balance will be considered eligible and (ii) 45% of its total rotable inventory balance and that 90% of its total rotable inventory balance will be considered eligible. CAPITALIZED EXPENDITURES Capitalized expenditures are assumed to consist of heavy maintenance ("D"-Check) requirements, assumed at two units per year. Additional capital expenditures are assumed to be equal to the depreciated amount of the rotable inventory, or approximately $144 thousand per month. EXHIBIT "A" - Page 4 KH 5 YEAR BUSINESS PLAN PRO FORMA OPERATING STATEMENT CONSOLIDATED BUSINESS LINES (000'S)
PROJECTED ------------------------------------------------------------------------------------- 2001 % 2002 % 2003 % ---------- ---------- ---------- ---------- ---------- ---------- REVENUES: Scheduled Services ................... $ 212,124 53.7% $ 240,229 54.7% $ 255,786 55.8% USPS ....................... 151,077 38.3% 166,196 37.9% 168,357 36.7% ACMI ....................... 31,620 8.0% 32,488 7.4% 34,032 7.4% Total Operating Revenue .................. 394,822 100.0% 438,913 1 00.0% 458,175 100.0% OPERATING EXPENSES: B727 Operating Expenses Aircraft Rentals .................. 16,116 4.1% 16,105 3.7% 18,365 4.0% Flight Crew (Salaries, Wages, & Benefits) ....... 39,724 10.1% 42,252 9.6% 43,322 9.5% Maintenance .............. 60,392 15.3% 66,130 15.1% 66,330 14.5% Insurance ................ 1,569 0.4% 1,669 0.4% 1,711 0.4% Transportation Related Expenses Ground Handling and Trucking ................. 51,533 13.1% 58,829 13.4% 62,030 13.5% Peak Season Expenses ................. 46,000 11.7% 47,164 10.7% 48,358 10.6% Other Aircraft Related Expenses Fuel ..................... 37,271 9.4% 41,532 9.5% 41,350 9.0% A300 ACMI Expenses ....... 36,561 9.3% 48,098 11.0% 54,001 11.8% Aircraft & Traffic Handling ................. 2,177 0.6% 2,446 0.6% 2,491 0.5% Landing/Parking/De-Icing Charges .................. 13,272 3.4% 14,632 3.3% 14,978 3.3% Other Operational Related Expenses Scheduled Related Expenses 6,125 1.6% 6,186 1.4% 6,249 1.4% Postal Related Expenses ................. 1,255 0.3% 1,286 0.3% 1,319 0.3% General and Administrative Expenses Scheduled Related Expenses 3,792 1.0% 3,888 0.9% 3,986 0.9% Postal Related Expenses ................. 409 0.1% 420 0.1% 430 0.1% PROJECTED -------------------------------------------------------- 2004 % 2005 % ---------- ---------- ---------- ---------- REVENUES: Scheduled Services ................... $ 272,066 56.8% $ 289,246 57.8% USPS ....................... 170,573 35.6% 172,845 34.6% ACMI ....................... 36,691 7.7% 37,916 7.6% Total Operating Revenue .................. 479,330 100.0% 500,007 100.0% OPERATING EXPENSES: B727 Operating Expenses Aircraft Rentals .................. 22,231 4.6% 24,855 5.0% Flight Crew (Salaries, Wages, & Benefits) ....... 44,418 9.3% 45,543 9.1% Maintenance .............. 67,634 14.1% 69,405 13.9% Insurance ................ 1,754 0.4% 1,799 0.4% Transportation Related Expenses Ground Handling and Trucking ................. 65,370 13.6% 68,884 13.8% Peak Season Expenses ................. 49,583 10.3% 50,838 10.2% Other Aircraft Related Expenses Fuel ..................... 40,964 8.5% 40,859 8.2% A300 ACMI Expenses ....... 56,802 11.9% 58,159 11.6% Aircraft & Traffic Handling ................. 2,550 0.5% 2,615 0.5% Landing/Parking/De-Icing Charges .................. 15,347 3.2% 15,718 3.1% Other Operational Related Expenses Scheduled Related Expenses 6,313 1.3% 6,379 1.3% Postal Related Expenses ................. 1,352 0.3% 1,386 0.3% General and Administrative Expenses Scheduled Related Expenses 4,087 0.9% 4,191 0.8% Postal Related Expenses ................. 441 0.1% 452 0.1%
EXHIBIT "A" - Page 5 KH 5 YEAR BUSINESS PLAN PRO FORMA OPERATING STATEMENT CONSOLIDATED BUSINESS LINES (000'S)
PROJECTED -------------------------------------------------------------------------------------- 2001 % 2002 % 2003 % ---------- ---------- ---------- ---------- ---------- ---------- Depreciation and Amortization ............. 16,487 4.2% 17,541 4.0% 16,897 3.7% General and Administrative Expenses ................. 23,000 5.8% 23,269 5.3% 23,546 5.1% Total Operating Expenses 355,681 90.1% 391,449 89.2% 405,363 88.5% EBIT ....................... $ 39,140 9.9% $ 47,464 10.8% $ 52,812 11.5% Interest Income/(Expense): Interest Income (Prior Month End. Cash Bal.) ............ 467 0.1% 919 0.2% 1,896 0.4% Interest Expense .................... (6,694) -1.7% (4,450) -1.0% (3,079) -0.7% Total Interest Income/(Expense): ........ (6,226) -1.6% (3,531) -0.8% (1,183) -0.3% EARNINGS BEFORE TAXES .......................... 32,914 8.3% 43,933 10.0% 51,629 11.3% Income Tax Expense ....... 13,166 3.3% 17,573 4.0% 20,651 4.5% NET INCOME ......................... $ 19,748 5.0% $ 26,360 6.0% $ 30,977 6.8% EBITDA ..................... $ 55,627 14.1% $ 65,005 14.8% $ 69,709 15.2% EBITDAR .................... $ 71,743 18.2% $ 81,110 18.5% $ 88,074 19.2%
PROJECTED -------------------------------------------------------- 2004 % 2005 % ---------- ---------- ---------- ---------- Depreciation and Amortization ............. 15,429 3.2% 14,585 2.9% General and Administrative Expenses ................. 23,829 5.0% 24,119 4.8% Total Operating Expenses 418,105 87.2% 429,788 86.0% EBIT ....................... $ 61,225 12.8% $ 70,220 14.0% Interest Income/(Expense): Interest Income (Prior Month End. Cash Bal.) ............ 3,187 0.7% 5,173 1.0% Interest Expense .................... (1,036) -0.2% (1) 0.0% Total Interest Income/(Expense): ........ 2,150 0.4% 5,171 1.0% EARNINGS BEFORE TAXES .......................... 63,375 13.2% 75,391 15.1% Income Tax Expense ....... 25,350 5.3% 30,156 6.0% NET INCOME ......................... $ 38,025 7.9% $ 45,235 9.0% EBITDA ..................... $ 76,654 16.0% $ 84,805 17.0% EBITDAR .................... $ 98,884 20.6% $ 109,660 21.9%
EXHIBIT "A" - Page 6 KH 5 YEAR BUSINESS PLAN PRO FORMA OPERATING STATEMENT SCHEDULED BUSINESS LINE (000'S)
PROJECTED ----------------------------------------------------------------------------------- 2001 % 2002 % 2003 % ---------- ---------- ---------- ---------- ---------- ---------- Scheduled Freight .......................... $ 209,184 98.6% $ 237,215 98.7% $ 252,695 98.8% Other Scheduled Revenue .......... 2940 1.4% 3,014 1.3% 3,091 1.2% TOTAL REVENUE ........................ 212,124 100.0% 240229 100.0% 255,786 100.0% Aircraft Rentals .......................... 5,148 2.4% 4,959 2.1% 5,918 2.3% Flight crews (Salaries and Travel Related) ......................... 16,706 7.9% 17,129 7.1% 17,563 6.9% Maintenance - Line/Labor ......... 7,337 3.5% 7,434 3.1% 6,996 2.7% Insurance - Aircraft/Inventory ............... 660 0.3% 676 0.3% 694 0.3% Heavy Maintenance - Reserves ......................... 9,952 4.7% 10,084 4.2% 9,490 3.7% Total B727 Operating Expenses 39,803 18.8% 40,282 16.8% 40,661 15.9% SCHEDULED RELATED EXPENSES: Transportation Related Ground Handling - Outsourced ..................... 16,908 8.0% 19,173 8.0% 20,425 8.0% Ground Handling - Internal ....................... 10,836 5.1% 12,288 5.1% 13,090 5.1% Trucking ....................... 6,424 3.0% 7,284 3.0% 7,760 3.0% Contract Labor .......................... 3,604 1.7% 4,087 1.7% 4,353 1.7% Total Transportation Related Expenses ..................... 37,771 17.8% 42,833 17.8% 45,628 17.8% Other Aircraft Related Expenses Fuel ........................... 37,271 17.6% 41,532 17.3% 41,350 16.2% A300 ACMI ...................... 36,561 17.2% 48,098 20.0% 54,001 21.1% Landing Fees (B727 and A300) ...................... 5,354 2.5% 5,965 2.5% 6,082 2.4% Parking Fees (B727 and A300) ...................... 621 0.3% 671 0.3% 669 0.3% De-Icing ....................... 6,100 2.9% 6,323 2.6% 6,511 2.5% Total Other Aircraft Related Expenses ..................... 85,906 40.5% 102,589 42.7% 108,612 42.5% Other Operational Related Expenses Rent ........................... 3,708 1.7% 3,708 1.5% 3,708 1.4% Utilities ...................... 990 0.5% 1,015 0.4% 1,041 0.4% Other Operations Expenses ....................... 1,426 0.7% 1,463 0.6% 1,500 0.6% Scheduled G&A Expenses ......... 3,792 1.8% 3,888 1.6% 3,986 1.6% PROJECTED ------------------------------------------------------ 2004 % 2005 % ---------- ---------- ---------- ---------- Scheduled Freight .......................... $ 268,897 98.8% $ 285,997 98.9% Other Scheduled Revenue .......... 3,169 1.2% 3249 1.1% TOTAL REVENUE ........................ 272,066 100.0% 289246 100.0% Aircraft Rentals .......................... 7,559 2.8% 8631 3.0% Flight crews (Salaries and Travel Related) ......................... 18,007 6.6% 18463 6.4% Maintenance - Line/Labor ......... 6,873 2.5% 7,029 2.4% Insurance - Aircraft/Inventory ............... 711 0.3% 729 0.3% Heavy Maintenance - Reserves ......................... 9,323 3.4% 9,534 3.3% Total B727 Operating Expenses 42,473 15.6% 44,386 15.3% SCHEDULED RELATED EXPENSES: Transportation Related Ground Handling - Outsourced ..................... 21,734 8.0% 23,116 8.0% Ground Handling - Internal ....................... 13,930 5.1% 14,815 5.1% Trucking ....................... 8,257 3.0% 8,783 3.0% Contract Labor .......................... 4,632 1.7% 4,927 1.7% Total Transportation Related Expenses ..................... 48,553 17.8% 51,641 17.9% Other Aircraft Related Expenses Fuel ........................... 40,964 15.1% 40,859 14.1% A300 ACMI ...................... 56,802 20.9% 58,159 20.1% Landing Fees (B727 and A300) ...................... 6,215 2.3% 6,356 2.2% Parking Fees (B727 and A300) ...................... 675 0.2% 691 0.2% De-Icing ....................... 6,697 2.5% 6,867 2.4% Total Other Aircraft Related Expenses ..................... 111,355 40.9% 112,932 39.0% Other Operational Related Expenses Rent ........................... 3,708 1.4% 3,708 1.3% Utilities ...................... 1,067 0.4% 1,094 0.4% Other Operations Expenses ....................... 1,538 0.6% 1,576 0.5% Scheduled G&A Expenses ......... 4,087 1.5% 4,191 1.4%
EXHIBIT "A" - Page 7 KH 5 YEAR BUSINESS PLAN PRO FORMA OPERATING STATEMENT SCHEDULED BUSINESS LINE (000'S)
PROJECTED ---------------------------------------------------------------------------------- 2001 % 2002 % 2003 % ---------- ---------- ---------- ---------- ---------- ---------- Total Other Operational Related Expenses ............ 9,917 4.7% 10,074 4.2% 10,235 4.0% Total Scheduled Related Expenses 133,594 63.0% 155,495 64.7% 164,475 64.3% GROSS PROFIT ....................... 38,727 18.3% 44,452 18.5% 50,650 19.8% ALLOCATED OVERHEAD Depreciation & Amortization ..................... 6,321 3.0% 6,360 2.6% 5,968 2.3% Aircraft and Traffic Handling Expenses ......................... 853 0.4% 953 0.4% 960 0.4% Allocated Ownership of B727 "Hot" Spares ........................... 1,359 0.6% 1,359 0.6% 1,337 0.5% Allocated Ownership of B727 Mx Spares ........................... 1,019 0.5% 1,019 0.4% 1,003 0.4% General and Administrative Expenses ......................... 12,357 5.8% 12,357 5.1% 12,357 4.8% TOTAL COST OF ALLOCATIONS .................. 21,909 10.3% 22,048 9.2% 21,625 8.5% EBIT ............................. $ 16,817 7.9% $ 22,404 9.3% $ 29,025 11.3% EBITDA ........................... $ 23,138 10.9% $ 28,763 12.0% $ 34,993 13.7% EBITDAR .......................... $ 30,664 14.5% $ 36,100 15.0% $ 43,250 16.9% PROJECTED ----------------------------------------------------- 2004 % 2005 % ---------- ---------- ---------- ---------- Total Other Operational Related Expenses ............ 10,400 3.8% 10,570 3.7% Total Scheduled Related Expenses 170,308 62.6% 175,143 60.6% GROSS PROFIT ....................... 59,285 21.8% 69,717 24.1% ALLOCATED OVERHEAD Depreciation & Amortization ..................... 5,241 1.9% 4,768 1.6% Aircraft and Traffic Handling Expenses ......................... 970 0.4% 992 0.3% Allocated Ownership of B727 "Hot" Spares ........................... 1,286 0.5% 1,265 0.4% Allocated Ownership of B727 Mx Spares ........................... 965 0.4% 949 0.3% General and Administrative Expenses ......................... 12,357 4.5% 12,357 4.3% TOTAL COST OF ALLOCATIONS .................. 20,820 7.7% 20,331 7.0% EBIT ............................. $ 38,465 14.1% $ 49,386 17.1% EBITDA ........................... $ 43,706 16.1% $ 54,154 18.7% EBITDAR .......................... $ 53,517 19.7% $ 64,999 22.5%
EXHIBIT "A" - Page 8 KH 5 YEAR BUSINESS PLAN PRO FORMA OPERATING STATEMENT USPS BUSINESS LINE (000'S)
PROJECTED ----------------------------------------------------------------------------------- 2001 % 2002 % 2003 % ---------- ---------- ---------- ---------- ---------- ---------- Revenues: USPS Line Haul ......................... $ 70,123 46.4% $ 80,818 48.6% $ 80,818 48.0% USPS Ground Handling ......... 25,954 17.2% 28,985 17.4% 29,719 17.7% Peak Season Revenue .......... 55,000 36.4% 56,392 33.9% 57,820 34.3% Total ...................... Revenue .................... 151,077 100.0% 166,196 100.0% 168,357 100.0% B727 Operating Expenses: Aircraft Rentals ...................... 4,682 3.1% 4,959 3.0% 5,918 3.5% Flight crews (Salaries and Travel Related) .............. 15,221 10.1% 17,129 10.3% 17,563 10.4% Maintenance - Line/Labor ................... 12,747 8.4% 14,945 9.0% 15,323 9.1% Insurance - Aircraft/Inventory 601 0.4% 676 0.4% 694 0.4% Heavy Maintenance - Reserves . 17,291 11.4% 20,272 12.2% 20,786 12.3% Total B727 Operating Expenses ................... 50,542 33.5% 57,982 34.9% 60,283 35.8% Postal Related Expenses: Peak Season Expenses ......... 46,000 30.4% 47,164 28.4% 48,358 28.7% Terminal Handling ..................... 13,761 9.1% 15,997 9.6% 16,402 9.7% Landing Fees ................. 1,197 0.8% 1,674 1.0% 1,716 1.0% Other Operations Expenses ..................... 1,255 0.8% 1,286 0.8% 1,319 0.8% General and Administrative ............... 409 0.3% 420 0.3% 430 0.3% Total Postal Related Expenses ................... 62,622 41.2% 66,541 39.8% 68,226 40.3% Depreciation & Amortization ................. 5,908 3.9% 6,458 3.9% 6,066 3.6% Aircraft and Traffic Handling Expenses ..................... 923 0.6% 1,082 0.7% 1,109 0.7% Total Cost of Revenues ................... 119,995 79.2% 132,063 79.2% 135,684 80.3% Gross Profit ..................... 31,082 20.8% 34,133 20.8% 32,673 19.7% Allocation of Overhead B727 Maintenance Spare ........................ 1,019 0.7% 1,019 0.6% 1,003 0.6% General and Administrative Expenses ..................... 8,801 5.8% 9,024 5.4% 9,252 5.5% EBIT ......................... $ 21,262 14.3% $ 24,090 14.7% $ 22,418 13.6% EBITDA ....................... $ 27,170 19.1% $ 30,548 20.1% $ 28,485 22.2% EBITDAR ...................... $ 32,871 22.9% $ 36,526 23.7% $ 35,405 26.3% ----------------------------------------------------- 2004 % 2005 % ---------- ---------- ---------- ---------- Revenues: USPS Line Haul ......................... $ 80,818 47.4% $ 80,818 46.8% USPS Ground Handling ......... 30,471 17.9% 31,243 18.1% Peak Season Revenue .......... 59,284 34.8% 60,784 35.2% Total ...................... % Revenue .................... 170,573 100.0% 172,845 100.0 B727 Operating Expenses: Aircraft Rentals ...................... 7,559 4.4% 8,631 5.0% Flight crews (Salaries and Travel Related) .............. 18,007 10.6% 18,463 10.7% Maintenance - Line/Labor ................... 15,711 9.2% 16,109 9.3% Insurance - Aircraft/Inventory 711 0.4% 729 0.4% Heavy Maintenance - Reserves . 21,312 12.5% 21,851 12.6% Total B727 Operating Expenses ................... 63,300 37.1% 65,783 38.1% Postal Related Expenses: Peak Season Expenses ......... 49,583 29.1% 50,838 29.4% Terminal Handling ..................... 16,817 9.9% 17,243 10.0% Landing Fees ................. 1,760 1.0% 1,804 1.0% Other Operations Expenses ..................... 1,352 0.8% 1,386 0.8% General and Administrative ............... 441 0.3% 452 0.3% Total Postal Related Expenses ................... 69,953 40.8% 71,724 41.2% Depreciation & Amortization ................. 5,340 3.1% 4,867 2.8% Aircraft and Traffic Handling Expenses ..................... 1,137 0.7% 1,166 0.7% Total Cost of Revenues ................... 139,730 81.7% 143,540 82.8% Gross Profit ..................... 30,843 18.3% 29,305 17.2% Allocation of Overhead B727 Maintenance Spare ........................ 965 0.6% 949 0.5% General and Administrative Expenses ..................... 9,486 5.6% 9,726 5.6% EBIT ......................... $ 20,391 12.2% $ 18,630 11.0% EBITDA ....................... $ 25,732 24.9% $ 23,497 27.0% EBITDAR ...................... $ 34,256 29.9% $ 33,077 32.6%
EXHIBIT "A" - Page 9 KH 5 YEAR BUSINESS PLAN PRO FORMA OPERATING STATEMENT ACMI BUSINESS LINE (000'S)
PROJECTED ---------------------------------------------------------------------------------- 2001 % 2002 % 2003 % ---------- ---------- ---------- ---------- ---------- ---------- Revenues: ACMI .......................... $ 31,620 100.0% $ 32,488 100.0% $ 34,032 100.0% Total Revenue ..................... 31,620 100.0% 32,488 100.0% 34,032 100.0% B727 OPERATING EXPENSES: Aircraft Rentals ....................... 2,413 7.6% 2,314 7.1% 2,719 8.0% Flight crews (Salaries and Travel Related) ............... 7,796 24.7% 7,994 24.6% 8,196 24.1% Maintenance - Line/Labor .................... 5,544 17.5% 5,685 17.5% 5,828 17.1% Insurance - Aircraft/Inventory 308 1.0% 316 1.0% 324 1.0% Heavy Maintenance - Reserves .. 7,521 23.8% 7,711 23.7% 7,906 23.2% Total B727 Operating Expenses 23,582 74.6% 24,019 73.9% 24,974 73.4% Gross Profit .................... 8,038 25.4% 8,469 26.1% 9,058 26.6% Allocation of Overhead Depreciation & Amortization ... 2,697 8.5% 2,719 8.4% 2,553 7.5% Aircraft and Traffic Handling Expenses ...................... 401 1.3% 411 1.3% 422 1.2% B727 Maintenance Spares ........................ 476 1.5% 476 1.5% 468 1.4% General and Administrative Expenses ...................... 1,842 5.8% 1,889 5.8% 1,936 5.7% Total Cost of Allocations . 5,416 17.1% 5,495 16.9% 5,379 15.8% EBIT .......................... $ 2,622 8.3% $ 2,974 9.2% $ 3,679 10.8% EBITDA ........................ $ 5,319 16.8% $ 5,694 17.5% $ 6,232 18.3% EBITDAR ....................... $ 8,208 18.3% $ 8,483 19.0% $ 9,419 19.7% PROJECTED ----------------------------------------------------- 2004 % 2005 % ---------- ---------- ---------- ---------- Revenues: ACMI .......................... $ 36,691 100.0% $ 37,916 100.0% Total Revenue ..................... 36,691 100.0% 37,916 100.0% B727 OPERATING EXPENSES: Aircraft Rentals ....................... 3,446 9.4% 3,988 10.5% Flight crews (Salaries and Travel Related) ............... 8,403 22.9% 8,616 22.7% Maintenance - Line/Labor .................... 6,117 16.7% 6,315 16.7% Insurance - Aircraft/Inventory 332 0.9% 340 0.9% Heavy Maintenance - Reserves .. 8,298 22.6% 8,567 22.6% Total B727 Operating Expenses 26,597 72.5% 27,827 73.4% Gross Profit .................... 10,094 27.5% 10,089 26.6% Allocation of Overhead Depreciation & Amortization ... 2,230 6.1% 1,993 5.3% Aircraft and Traffic Handling Expenses ...................... 443 1.2% 457 1.2% B727 Maintenance Spares ........................ 450 1.2% 443 1.2% General and Administrative Expenses ...................... 1,985 5.4% 2,036 5.4% Total Cost of Allocations . 5,108 13.9% 4,929 13.0% EBIT .......................... $ 4,986 13.6% $ 5,160 13.6% EBITDA ........................ $ 7,216 19.7% $ 7,154 18.9% EBITDAR ....................... $ 11,112 20.9% $ 11,584 20.0%
EXHIBIT "A" - Page 10 KH 5 YEAR BUSINESS PLAN PRO FORMA BALANCE SHEET (000'S)
PROJECTED -------------------------------------------------------------------------------- YE 2000 YE 2001 YE 2002 YE 2003 YE 2004 YE 2005 ---------- ---------- ---------- ---------- ---------- ---------- ASSETS: CURRENT ASSETS: Cash & Cash Equivalents ................................ $ 16,033 $ 9,847 $ 15,702 $ 39,955 $ 70,258 $ 118,146 Accounts Receivable, Net ........................................ 100,954 111,535 115,799 120,267 124,884 129,660 Inventory & Aircraft Supplies ................................... 1,160 1,160 1,160 1,160 1,160 1,160 Prepaid Expenses & Other Current Assets ..................................... 4,600 4,700 4,742 4,785 4,830 4,830 Total Current Assets ................................... 122,747 127,242 137,403 166,167 201,132 253,796 PROPERTY & EQUIPMENT: Aircraft & Engines .................................... 99,905 89,780 75,405 68,488 60,905 58,072 Additional Aircraft ................................... -- 25,600 56,100 56,100 56,100 56,100 Rotable Inventory (B727) ..................................... 12,099 13,827 15,556 17,284 19,013 20,741 Capitalization of Heavy Mx. Events ......... -- 3,230 6,460 9,690 12,920 16,150 Machinery & Equipment ...................... 7,518 7,518 7,518 7,518 7,518 7,518 Buildings & Leasehold Improvements ......... 2,929 2,929 2,929 2,929 2,929 2,929 Total Property & Equipment ............... 122,451 142,884 163,968 162,010 159,385 161,510 Less Accumulated Depreciation .............. -- 15,119 31,168 46,573 60,509 73,602 Net Property & Equipment ................................ 122,451 127,765 132,800 115,437 98,875 87,908 OTHER ASSETS Assets in excess of reorg. value, net ........................................ 59,695 59,695 59,695 59,695 59,695 59,695 Amortization of Excess Reorg ............. Value .................................... -- 1,492 2,985 4,477 5,970 7,462 Net Assets in Excess of Reorg. Value ........................... 59,695 58,203 56,710 55,218 53,726 52,233 Other Assets (F&F) ......................... 1,817 1,817 1,817 1,817 1,817 1,817 Aircraft Lease Deposits ................................... 2,600 2,600 2,600 3,412 4,182 4,546 Total Other Assets ....................... 64,112 62,620 61,127 60,447 59,725 58,596 TOTAL ASSETS ............................... $ 309,310 $ 317,627 $ 331,330 $ 342,051 $ 359,732 $ 400,300 LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Revolving Credit Facility ................................... 50,000 10,173 -- -- -- -- Accounts Payable .................................... 41,000 65,216 67,381 69,249 70,938 72,723 Accrued Taxes .............................. -- -- -- -- -- -- CMLTD-Initial Funding (A/C) .............................. 9,843 10,734 11,800 7,479 -- -- CMLTD-First Source (A/C) ...................................... 1,613 1,930 2,109 2,304 201 -- CMLTD-Additional A/C ....................... -- 3,200 6,250 6,250 6,250 6,250 TOTAL CURRENT LIABILITIES .............................. 102,455 91,253 87,540 85,282 77,390 78,973
EXHIBIT "A" - Page 11 KH 5 YEAR BUSINESS PLAN PRO FORMA BALANCE SHEET (000'S)
PROJECTED -------------------------------------------------------------------------------- YE 2000 YE 2001 YE 2002 YE 2003 YE 2004 YE 2005 ---------- ---------- ---------- ---------- ---------- ---------- LONG-TERM LIABILITIES: Long-Term Debt (Initial Financing A/C) ....................................... 50,157 34,838 15,445 6,000 -- -- Long-Term Debt-First Source (A/C) .......... 6,697 4,614 2,506 201 -- -- Long-Term Debt Additional A/C .............. -- 17,173 29,732 23,482 17,232 10,982 TOTAL LONG-TERM LIABILITIES .............................. 56,855 56,626 47,682 29,683 17,232 10,982 STOCKHOLDERS' EQUITY: Common Stock ............................... 1,000 1,000 1,000 1,000 1,000 1,000 Additional Capital .................................... 149,000 149,000 149,000 149,000 149,000 149,000 Retained Earnings ................................... -- 19,748 46,108 77,085 115,110 160,345 TOTAL STOCKHOLDERS' EQUITY ................................... 150,000 169,748 196,108 227,085 265,110 310,345 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ..................................... $ 309,310 $ 317,627 $ 331,330 $ 342,051 $ 359,732 $ 400,300
EXHIBIT "A" - Page 12 KH 5 YEAR BUSINESS PLAN PRO FORMA CASH FLOW STATEMENT, (000'S)
PROJECTED ---------------------------------------------------------------------- YE 2001 YE 2002 YE 2003 YE 2004 YE 2005 ---------- ---------- ---------- ---------- ---------- Beginning Cash Balance .................................. $ 16,033 $ 9,847 $ 15,702 $ 39,955 $ 70,258 Cash Flow from Operating Activities: Net Income/(Loss) Available to Common .................................................. 19,748 26,360 30,977 38,025 45,235 Adjustments to Reconcile NI to Net Cash: Depreciation & Amortization Addback ............................................. 15,119 16,049 15,405 13,936 13,093 Amortization Assets in Excess Reorg Value ............................................... 1,492 1,492 1,492 1,492 1,492 Other, Net Total Operating Activities ........................................ 36,360 43,901 47,875 53,454 59,820 Changes in Operating Assets & Liabilities: (Incr)/Decr in Trade Accounts Receivable, Net ..................................... (10,581) (4,263) (4,468) (4,617) (4,776) (Incr)/Decr in Inventory and Aircraft Supplies ............................................ -- -- -- -- -- (Incr)/Decr in Prepaid Expenses & Other .................................... (100) (42) (43) (44) -- (Incr)/Decr in Other Assets (F&F) ............................................... -- -- -- -- -- (Incr)/Decr in Aircraft Lease Deposits ............................................ -- -- (812) (770) (364) Incr/(Decr) in Accounts Payable ............................................. 24,216 2,166 1,867 1,690 1,785 Incr/(Decr) in Accrued Taxes ....................................... -- -- -- -- -- Total Changes in Operating Assets & Liabilities ....................................... 13,534 (2,140) (3,456) (3,742) (3,355) Net Cash Provided/(Used) by Operating Activities .......................................... 49,894 41,761 44,419 49,712 56,465 Cash Flow from Investing Activities: Sale of Initial Aircraft and Engines ....................................... 10,125 14,375 6,917 7,583 2,833 Acquisition of Additional B727 Aircraft .......................................... (25,600) (30,500) -- -- -- Rotable Inventory ......................................... (1,728) (1,728) (1,728) (1,728) (1,728) Capitalization of Heavy Maintenance ....................................... (3,230) (3,230) (3,230) (3,230) (3,230) Machinery & Equipment ......................................... -- -- -- -- -- Buildings & Leasehold Improvements ...................................... -- -- -- -- -- Net Cash Provided/(Used) by Investing Activities .......................................... (20,433) (21,083) 1,958 2,625 (2,125) Cash Flow from Financing Activities: Borrowings on Revolving Credit Facility, Net ..................................... (39,827) (10,173) -- -- -- Issuance/(Retire) Additional B727 Debt .............................. 20,373 15,608 (6,250) (6,250) (6,250) Retire Initial Aircraft and Engines ........................................... (14,428) (18,328) (13,765) (13,479) -- Retire First Source Debt .............................................. (1,766) (1,930) (2,109) (2,304) (201) Net Cash Provided/(Used) by Financing Activities .......................................... (35,647) (14,823) (22,124) (22,034) (6,451) Net Increase (Decrease) in Cash ................................................. (6,186) 5,855 24,253 30,303 47,888 Ending Cash Balance ..................................... $ 9,847 $ 15,702 $ 39,955 $ 70,258 $ 118,146
EXHIBIT "A" - Page 13 KITTY HAWK, INC., ET AL LIQUIDATION ANALYSIS AMENDED AS OF OCTOBER 5, 2000 (IN THOUSANDS)
NET VALUE LESS: REALLOCATION OF ASSETS ESTIMATED BASED ON LIQUIDATION LESS: ASSETS AVAILABLE FOR ADMINISTRATIVE INTERCOMPANY VALUE SUBJECT TO LIENS, UNSECURED AND PRIORITY RECEIVABLES/ OF ASSETS (1) AS ADJUSTED (2) CREDITORS CLAIMS PAYABLES (3) --------------- --------------- --------------- --------------- --------------- Kitty Hawk, Inc. .... $ 17,680 $ 10,952 $ 6,728 $ 5,161 3,750 Kitty Hawk Cargo .... 35,127 22,324 12,803 5,515 959 Kitty Hawk Aircargo . 103,164 68,194 34,970 5,190 (1,902) Kitty Hawk Int'l .... 133,171 118,421 14,750 7,212 (4,120) Kitty Hawk Charters . 34,038 11,241 22,797 4,194 986 Longhorn Solutions .. 189 128 61 73 10 Aircraft Leasing .... 61,238 50,693 10,545 2,085 289 American Int'l Travel 138 93 45 17 0 Flight One .......... 0 0 0 38 1 Logistics ........... (37) OK Turbines ......... 2,927 1,797 1,130 485 27 --------------- --------------- --------------- --------------- --------------- $ 387,672 $ 283,843 $ 103,829 $ 29,970 (0) NET AMOUNT AVAILABLE FOR ESTIMATED GENERAL GENERAL ESTIMATED UNSECURED UNSECURED RECOVERY CREDITORS CLAIMS (4) PERCENTAGE --------------- --------------- --------------- Kitty Hawk, Inc. .... $ 5,317 203,182 2.62% Kitty Hawk Cargo .... 8,247 206,318 4.00% Kitty Hawk Aircargo . 27,878 227,291 12.27% Kitty Hawk Int'l .... 3,418 228,206 1.50% Kitty Hawk Charters . 19,589 211,383 9.27% Longhorn Solutions .. (2) 200,798 0.00% Aircraft Leasing .... 8,749 202,030 4.33% American Int'l Travel 28 200,732 0.00% Flight One .......... 200,730 0.00% Logistics ........... OK Turbines ......... 672 200,755 0.33% --------------- --------------- --------------- $ 73,859
FOOTNOTES: (1) The liquidation value(s) represent the expected value to be received upon the sale of the relevant asset pursuant to an orderly sale taking into account the age of the asset and the speed that the asset could be sold. All airframe and engine values are presumed to be "half-time" with regard to condition since no valuation based upon condition was performed upon each airframe and engine. Additional detail of assets is attached as a separate exhibit. (2) Certain assets are subject to the liens of various secured creditors. Deficiency claims have been included with "Estimated General Unsecured Claims." For purposes of this analysis, the claim of the Wells Fargo Bank Group has been allocated to each applicable Debtor on a pro rata basis using the estimated liquidation values of assets subject to its liens held by such Debtor. (3) The Debtors have not maintained their intercompany balances on an entity-by-entity basis, but rather on a pooled basis. For purposes of this analysis, each Debtor has either a receivable or a payable from/to the intercompany pool. Based on estimated liquidation recoveries by the Debtors which have payables to the intercompany pool, an allocation of such expected recoveries has been reallocated to those Debtors with receivables from the intercompany pool. (4) Each Debtor was a guarantor of the Senior Secured Notes Payable. For purposes of this analysis, the deficiency for the Senior Secured Notes is estimated at $200,730,000. Therefore, each Debtor has this amount included in its "Estimated General Unsecured Claims." EXHIBIT "B" - Page 1 KITTY HAWK, INC. ET AL ESTIMATED LIQUIDATION VALUE OF ASSETS AS OF 8/31/2000 (IN THOUSANDS)
KITTY KITTY KITTY KITTY KITTY HAWK, HAWK HAWK HAWK HAWK LONGHORN INC. CARGO AIRCARGO INT'L CHARTERS SOLUTIONS ------------ ------------ ------------ ------------ ------------ ------------ CURRENT ASSETS CASH & CASH EQUIVALENTS .......... $ 16,180 $ 6,756 $ 12,972 $ 0 $ 8,627 $ 186 ACCOUNTS RECEIVABLE, NET ......... 0 26,225 12,480 0 5,641 0 ASSETS HELD FOR RESALE ........... 0 0 0 1,000 0 0 EXPENDABLE SPARE PART & SUPPLIES . 0 0 414 7,400 1,600 0 POST-PETITION ADJUSTMENTS ........ 0 0 0 0 0 3 ------------ ------------ ------------ ------------ ------------ ------------ SUB-TOTAL NET CURRENT ASSETS ..... $ 16,180 $ 32,981 $ 25,866 $ 8,400 $ 15,868 $ 189 ------------ ------------ ------------ ------------ ------------ ------------ PROPERTY, PLANT & EQUIPMENT ...... 0 0 0 0 0 0 BUILDING & LEASEHOLD IMPROVEMENTS 1,500 0 0 6,400 450 0 JT8 -7/-9 SPARE ENGINES .......... 0 0 5,250 0 0 0 AIRCRAFT - KH CHARTERS/OK TURBINES 0 0 0 0 16,500 0 AIRCRAFT - UNENCUMBERED DC9-15F .. 0 0 0 0 0 0 DC 9-15F (N112PS) (INCL. & ENGINE) 0 0 0 0 0 0 L1011 AIRCRAFT ................... 0 0 0 28,924 0 0 B727 AIRCRAFT - WELLS FARGO BANK . 0 0 44,289 0 0 0 B727 AIRCRAFT - SR. SECURED ...... 0 0 14,951 0 0 0 B747 AIRCRAFT .................... 0 0 0 66,246 0 0 OTHER AIRCRAFT (GATX/HULLS) ...... 0 0 3 56 0 0 DC8-62F (N801MG) ................. 0 0 0 2,000 0 0 DC8-62F (N802MG) ................. 0 0 0 2,000 0 0 DC8-62F (N803CK) ................. 0 0 0 2,000 0 0 DC8-63F (N811CK) ................. 0 0 0 2,500 0 0 DC8-63F (N815CK) ................. 0 0 0 2,500 0 0 DC8-62F (N818CK) ................. 0 0 0 2,000 0 0 LEAR 25-030 (N500JS) ............. 0 0 0 0 500 0 EQUIPMENT ........................ 0 2,146 4,300 145 720 0 ROTABLE SPARE PARTS .............. 0 0 8,505 0 0 0 JT9D/RB211 SPARE AIRCRAFT ENGINES 0 0 000 5,000 0 0 JT9D SPARE AIRCRAFT ENGINES - AAR 0 0 0 1,000 0 0 JT9D/RB211 SPARE ENGINES - M/L'S . 0 0 0 4,000 0 0 ------------ ------------ ------------ ------------ ------------ ------------ SUB-TOTAL PROP., PLANT & EQUIP ... $ 1,500 $ 2,146 $ 77,298 $ 124,771 $ 18,170 $ 0 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL ............................ $ 17,680 $ 35,127 $ 103,164 $ 133,171 $ 34,038 $ 189 ============ ============ ============ ============ ============ ============ AMERICAN AIRCRAFT OK INT'L FLIGHT ONE TOTAL LEASING TURBINES TRAVEL LOGISTICS COMBINED ------------ ------------ ------------ ------------ ------------ CURRENT ASSETS CASH & CASH EQUIVALENTS .......... $ 4,781 $ 0 $ 138 $ 0 $ 49,640 ACCOUNTS RECEIVABLE, NET ......... 0 505 0 0 44,851 ASSETS HELD FOR RESALE ........... 0 0 0 0 1,000 EXPENDABLE SPARE PART & SUPPLIES . 0 2,150 0 0 11,564 POST-PETITION ADJUSTMENTS ........ 0 0 0 0 3 ------------ ------------ ------------ ------------ ------------ SUB-TOTAL NET CURRENT ASSETS ..... $ 4,781 $ 2,655 $ 138 $ 0 $ 107,058 ------------ ------------ ------------ ------------ ------------ PROPERTY, PLANT & EQUIPMENT ...... 0 0 0 0 0 BUILDING & LEASEHOLD IMPROVEMENTS 0 0 0 0 8,350 JT8 -7/-9 SPARE ENGINES .......... 0 0 0 0 5,250 AIRCRAFT - KH CHARTERS/OK TURBINES 0 85 0 0 16,585 AIRCRAFT - UNENCUMBERED DC9-15F .. 9,000 0 0 0 9,000 DC 9-15F (N112PS) (INCL. & ENGINE) 2,803 0 0 0 2,803 L1011 AIRCRAFT ................... 0 0 0 0 28,924 B727 AIRCRAFT - WELLS FARGO BANK . 0 0 0 0 44,289 B727 AIRCRAFT - SR. SECURED ...... 44,654 0 0 0 59,605 B747 AIRCRAFT .................... 0 0 0 0 66,246 OTHER AIRCRAFT (GATX/HULLS) ...... 0 0 0 0 59 DC8-62F (N801MG) ................. 0 0 0 0 2,000 DC8-62F (N802MG) ................. 0 0 0 0 2,000 DC8-62F (N803CK) ................. 0 0 0 0 2,000 DC8-63F (N811CK) ................. 0 0 0 0 2,500 DC8-63F (N815CK) ................. 0 0 0 0 2,500 DC8-62F (N818CK) ................. 0 0 0 0 2,000 LEAR 25-030 (N500JS) ............. 0 0 0 0 500 EQUIPMENT ........................ 0 187 0 0 7,498 ROTABLE SPARE PARTS .............. 0 0 0 0 8,505 JT9D/RB211 SPARE AIRCRAFT ENGINES 0 0 0 0 5,000 JT9D SPARE AIRCRAFT ENGINES - AAR 0 0 0 0 1,000 JT9D/RB211 SPARE ENGINES - M/L'S . 0 0 0 0 4,000 ------------ ------------ ------------ ------------ ------------ SUB-TOTAL PROP., PLANT & EQUIP ... $ 56,457 $ 272 $ 0 $ 0 $ 280,614 ------------ ------------ ------------ ------------ ------------ TOTAL ............................ $ 61,238 $ 2,927 $ 138 $ 0 $ 387,672 ============ ============ ============ ============ ============
EXHIBIT "B" - Page 2 -----END PRIVACY-ENHANCED MESSAGE-----