-----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, GHhMHfo0IQ/ZX/qqlm4qiZxk6oSTnX33QwZqlK/AMYstd8cm72hS1rlfRlX8sVw/ 8jXVSYBcrZ6UjoXb1CxASA== 0000950134-97-002490.txt : 19970401 0000950134-97-002490.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950134-97-002490 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KITTY HAWK INC CENTRAL INDEX KEY: 0000932110 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, NONSCHEDULED [4522] IRS NUMBER: 752564006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25202 FILM NUMBER: 97569610 BUSINESS ADDRESS: STREET 1: 1515 WEST 20TH ST STREET 2: SECOND FLOOR CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75240 BUSINESS PHONE: 9724562200 MAIL ADDRESS: STREET 1: P O BOX 612787 CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 10-K405 1 FORM 10-K YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM SEPTEMBER 1, 1996 TO DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-25202 KITTY HAWK, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2564006 (State of Incorporation) (I.R.S. Employer Identification No.)
1515 WEST 20TH STREET P.O. BOX 612787 DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261 (972) 456-2200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On March 27, 1997, the aggregate market price of the voting stock held by nonaffiliates of the registrant was approximately $42.3 million. (For purposes of determination of the above stated amount, only directors, executive officers and 10% or greater stockholders have been deemed affiliates). On March 27, 1997, there were 10,451,807 outstanding shares of Common Stock, par value $0.01 per share. DOCUMENTS INCORPORATED BY REFERENCE: None. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL Kitty Hawk provides air freight charter services, emphasizing highly-reliable, time-sensitive services. The Company's air freight carrier's revenue fleet is comprised of 25 owned and 3 leased aircraft, 17 of which are currently used in scheduled airport-to-airport freight service under contracts primarily with major freight forwarders in North and Central America and the Pacific Rim. These contracts generally require the Company to supply aircraft, crew, maintenance, and insurance ("ACMI") and to meet certain on-time performance standards, while its customers are responsible for substantially all other operating expenses, including fuel. Additionally, Kitty Hawk provides same-day air logistics charter services in North America. Through its advanced, proprietary computer software, the Company manages delivery of extremely time- sensitive freight utilizing the on-demand charter services of both third-party air freight carriers and planes from the Company's fleet that are not then committed to ACMI service. The Company's principal executive offices are located at 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas 75261, its telephone number is (972) 456-2200 and its Internet address is http://www.kha.com. Unless the context otherwise requires, the "Company" or "Kitty Hawk" refers to Kitty Hawk, Inc., its predecessor and its subsidiaries. On December 4, 1996, the Company changed its fiscal year end from August 31 to December 31. The following discussion presents results for a four month interim period from September 1, 1996 to December 31, 1996 (the "Transition Period"). AIR FREIGHT CARRIER General Kitty Hawk has owned and operated aircraft for on-demand air freight charter services since 1985. In 1987, the Company's air freight carrier was expanded to include ACMI contract charter service. Pursuant to ACMI contracts, the Company's air freight carrier provides scheduled charters carrying heavyweight freight and mail for entities that engage primarily in next-day and two-day delivery service to their customers. Revenue Fleet Of the Company's revenue fleet of 28 aircraft, the Company operates 25 aircraft in active revenue service, is in the process of converting two Boeing 727-200 aircraft to cargo configuration, and anticipates converting an additional Boeing 727-200 aircraft to cargo configuration during 1997. These aircraft do not include the Company's undivided one-third interest in four Falcon 20 jet aircraft leased to a third-party operator. See "Item 11. Executive Compensation -- Compensation Committee Interlocks and Insider Participation." ACMI Contracts As an FAA Part 121 certificated carrier, the Company's air freight carrier provides primary lift capacity as well as additional lift capacity for overflow and seasonal freight transportation needs on an ACMI contract basis. During the Transition Period, ACMI contracts accounted for approximately 28.2% of the Company's total revenues. As of March 24, 1997, Kitty Hawk was operating nine Boeing 727-200s, six Convairs and two Douglas DC9-15Fs under ACMI contracts with Burlington Air Express, Inc., Ting Hong Oceanic Enterprises Co., Ltd., Pacific East Asia Cargo Airlines, Inc., DHL Airways, Inc., and Emery Worldwide Airlines, Inc. The Company's ACMI contracts typically require the Company to supply aircraft, crew, maintenance, and insurance, while its customers are responsible for substantially all other aircraft operating expenses, including fuel, fuel servicing, airport freight handling fees, landing and parking fees, ground handling expenses, and aircraft push-back costs. 2 3 These ACMI contracts also typically require the Company to operate specific aircraft and/or provide minimum air freight capacity, and generally are terminable if the Company (i) fails to meet certain minimum performance levels, (ii) otherwise breaches the contract, or (iii) becomes subject to other customary events of default. The ACMI contracts also provide that the Company has exclusive operating control and direction of each aircraft the Company operates and that certain foreign-based customers must obtain any government authorizations and permits required to service the designated routes. Therefore, the Company's route structure is limited to areas in which customers gain access from the relevant governments. The Company is permitted under certain of its ACMI contracts to utilize, and, in fact often does utilize, its aircraft in on-demand service in the periods between ACMI contract flights. Burlington Air Express, Inc. Burlington Air Express, Inc. ("Burlington") currently leases under one ACMI contract seven of the Company's Boeing 727-200s and under a separate ACMI contract one of the Company's Convairs. Under each contract, Burlington pays the Company a fixed fee for each scheduled round-trip flown by the Company and a per hour charge for any nonscheduled flight requested by Burlington. The Burlington Boeing 727-200 ACMI contract is for a term expiring on March 1, 1999, but pursuant to the terms of the contract, either party may upon thirty days' written notice terminate the services of two Boeing 727-200 aircraft immediately and one additional Boeing 727-200 aircraft on or after each of March 1, 1998 and September 1, 1998. In addition, Burlington may earlier terminate the contract if, among other reasons, the Company fails to meet certain performance standards or if majority ownership or control of the Company is acquired by a competitor of Burlington. The Company operates one Convair on behalf of Burlington pursuant to a contract between the parties on terms substantially similar to those set forth in the Boeing 727-200 ACMI contract between the parties. On-Demand Charter Service The air freight carrier provides on-demand charter service for customers of the Company's air logistics business. Approximately 7.1%, 8.7%, 9.0% and 5.8% of the on-demand charters managed by the Company during fiscal years 1994, 1995, and 1996 and the Transition Period, respectively, were flown by the air freight carrier. A substantial portion of these charters were flown for GM. The Company also has flown its own aircraft on certain of the seasonal charters it has managed for the U.S. Postal Service. Maintenance The Company's aircraft require considerable maintenance in order to remain in compliance with FAA regulations. The Company estimates that at current rates of operation of its existing fleet, during the remainder of fiscal year 1997, the next scheduled major overhaul maintenance checks for five Boeing 727-200s will be completed and, during the fiscal year 1998, one will be completed. The Company does not anticipate any of its aircraft, at current rates of operation, requiring major overhaul maintenance checks during fiscal year 1999. The Company estimates that the service life of each of its revenue aircraft extends beyond the year 2000. Kitty Hawk historically has followed, and currently intends to follow, a policy of retiring Convairs at the time of their next scheduled major overhaul maintenance checks rather than expending the amounts necessary for such checks. Any equipment being placed on the Company's operating certificate is inspected and repaired prior to being utilized by the Company for either on-demand or ACMI contract charters. The Company's maintenance facilities enable it to perform all required airframe maintenance and minor engine repairs on the aircraft ranging from overnight "turnaround" checks to major airframe overhauls. The Company performs all maintenance for its fleet, including line maintenance, at its own maintenance facilities, except for repairs to avionics and overhauls of engines and airframes. All contract maintenance is performed by subcontracted FAA-approved maintenance facilities under the on-site supervision and/or inspection of Company quality assurance personnel. Management currently anticipates no difficulties in acquiring needed parts. 3 4 Acquisition Program Kitty Hawk is engaged in a program of selective aircraft acquisitions. In October 1996, the Company sold 2,700,000 shares of Common Stock (the "Offering") raising net proceeds of approximately $29.3 million to purchase and modify to cargo configuration five Boeing 727-200 aircraft. As of March 24, 1997, the Company has purchased four of these five aircraft. As of March 24, 1997, the Company has purchased from the net proceeds of the Offering (i) one Boeing 727-200 freighter aircraft for $4.7 million, (ii) one Boeing 727-200 aircraft for $2.31 million, which is currently being modified to cargo configuration for an additional cost of approximately $3.1 million (including approximately $1.82 million for noise abatement equipment which has been purchased), (iii) one Boeing 727-200 aircraft for $3.5 million, which is currently being modified to cargo configuration for an additional cost of approximately $5.0 million (including approximately $2.45 million for noise abatement equipment), and (iv) one Boeing 727-200 aircraft for $3.5 million, which the Company anticipates modifying to cargo configuration in 1997 for an additional cost of approximately $5.0 million (including approximately $2.45 million for noise abatement equipment). As of March 24, 1997, the Company has used approximately $16.8 million of the net proceeds of the Offering to fund these expenses. The Company recently acquired an undivided one-third interest in four Falcon 20 jet aircraft and pursuant to a co-ownership agreement leases such aircraft to a third-party operator for cargo charter service. See "Item 11. Executive Compensation -- Compensation Committee Interlocks and Insider Participation." AIR LOGISTICS General On-demand air charters of heavy-weight freight generally are used when "next-flight-out" delivery services of commercial airlines or the next-day delivery services of air freight companies or other service providers cannot meet the customer's delivery deadline. Utilizing a proprietary computerized database, the Company's air logistics services involve coordinating "door-to-door" transportation by arranging for ground pick-up, loading, air transportation, unloading, and ground delivery of the freight. The most frequent use of on-demand charters is to deliver manufacturing or replacement parts to avoid a work stoppage. Manufacturers who employ "just-in-time" inventory systems encourage the order and delivery of inventory just before it is needed at the assembly plant. On-demand charters also are used to transport replacement parts on an expedited basis so that critical equipment can be kept operational or put back in service to avoid or minimize the length of a shutdown. Firms that are reducing inventory and shortening product cycle times through direct air shipments also use on-demand charters. The customers of the Company's on-demand air logistics services include companies that are engaged in industries such as automotive, chemical, computer, mail and bulk package delivery, retail merchandising, and oil field service and equipment. Typically, the premium costs incurred in utilizing on-demand charters to achieve expedited same-day delivery are justified by the Company's customers on the basis that greater costs would otherwise be incurred as a result of a work stoppage or having to maintain greater inventory levels. A significant portion of all on-demand, same-day air freight charters in North America is accounted for by the automotive industry. The importance of the automotive industry to on-demand air charters reflects the large number of automobile parts, the complexity of an automotive manufacturer's supplier and assembly plant network, and the high cost of shutting down production facilities. Kitty Hawk believes that "just-in-time" inventory systems have increased the use of on-demand air charters by the automotive industry and that on-demand air charters are an integral cost of such "just-in-time" inventory management systems. Because automotive manufacturers generally carry less inventory than in the past, unanticipated parts shortages may occur more frequently. 4 5 Delivery of Logistics Services During the Transition Period, Kitty Hawk arranged an average of approximately 34 on-demand charters per day. Each transaction originates from a customer's telephonic request to arrange a charter answered by one of the Company's full-time account managers who are on duty 24 hours per day, 365 days per year. Database, Information Software, and Tracking Systems The Company believes it provides dependable service on a cost-effective basis because of its computerized database, information software, and tracking systems, its training of account managers, and its standardized charter management procedures. Database System. Kitty Hawk believes that its database is critical to its ability to arrange on-demand air charters in a timely and reliable manner. The Company maintains in its database a carrier profile for over 500 air freight carriers that provide on-demand charter service. The Company has implemented an Internet system to provide its account managers with real-time updates on available third party on-demand air charter aircraft across North America. The most utilized carriers are visited by Company representatives at least annually to inspect the carrier's facilities and equipment and to update the carrier database. The database also contains information concerning ground transportation and aircraft loading companies in North America that is similar to its information concerning air carriers. Information Software System. The Company's logistics system was developed in 1990 to automate access to the Company's database and has been frequently revised and improved. This system provides on-screen information regarding air carriers, aircraft type and specifications, fuel suppliers, cargo handlers, and surface carriers, along with relevant cost information. In addition, Kitty Hawk is an on-line subscriber to Jeppesen's Flight Planning and Kavouras Meteorological services. The flight planning services provided by Jeppesen integrate airport analyses (comprised of runway lengths, altitudes, hours of operation and noise abatement procedures) with the current weather data and other information to provide an automated flight plan. This flight planning service then transmits electronically the automated flight plan to the pilot and to the FAA contemporaneously. Tracking System. In December 1993, the Company began operation of its HawkEye system, which was developed internally by its full time programming and computer support staff. HawkEye allows an account manager to track an aircraft's progress from origin to destination on his or her computer screen and on the main projection board of the control room. Aircraft icons show each flight, its direction, and information about the flight including the type of aircraft, the flight number, its current altitude, ground speed, distance to destination, and times of departure and estimated arrival. The data supporting the HawkEye System is a direct data feed obtained from the FAA's Air Traffic Control computer system. U. S. Postal Service Since 1986, Kitty Hawk has managed Christmas season charters for the U.S. Postal Service utilizing third-party air freight carriers in order to provide additional lift capacity for this peak period. The U.S. Postal Service awards contracts periodically pursuant to a public bidding process that considers quality of service and other factors. Bids for contracts to provide these Christmas season charters generally are submitted in the summer of each year and are typically awarded during the following fall. Of the Company's total revenues during the Transition Period, the U.S. Postal Service accounted for $26.2 million (43.7%). Of these revenues, $23.3 million (88.9%) were attributable to the Company's air logistics business in connection with its management of seasonal Christmas charters flown by third-party air cargo carriers, and $2.9 million (11.1%) were attributable to the air freight carrier for ACMI contract charters flown by the Company on designated routes. Of the Company's gross profits from air logistics during the Transition Period, the U.S. Postal Service accounted for $4.4 million (77.7%). 5 6 Relationship With GM Under the terms of its agreement with GM (the "GM Agreement"), the Company's air logistics business is encouraged to utilize the air freight carrier but is prohibited from (i) placing with the Company's air freight carrier in excess of 30% of the total number of air charters arranged for GM in any calendar year and (ii) placing with the Company's air freight carrier charters producing revenue in excess of 30% of the total revenue derived from air charters arranged for GM in any calendar year. During the Transition Period, the Company's air freight carrier flew 115 on-demand charters (or 5.4% of total charters arranged for GM by the Company's air logistics business) resulting in $1.3 million of revenues to the Company (or 13.1% of the total revenues derived by the Company from GM). The GM Agreement does not provide for automatic fuel price adjustments. The term of the GM Agreement extends through May 1997 and thereafter from month-to-month until terminated by thirty days' written notice. The GM Agreement, however, stipulates that in the event of an irreconcilable difference, either party may, with or without cause, terminate the agreement following a quarterly review meeting by giving the other party at least 30 days' prior written notice thereof. Furthermore, GM may terminate the GM Agreement on ten days' written notice if there is a change in (i) management of Kitty Hawk Charters, Inc., the Company's wholly-owned subsidiary, through which the Company's air logistics business is conducted, or (ii) the stock ownership of the Company such that (a) Mr. Christopher no longer holds a majority of the outstanding Common Stock of the Company or (b) a major automobile manufacturer acquires more than 20% of the outstanding Common Stock of the Company, unless such changes are communicated to GM at least 60 days prior to the effective date and GM concurs with the changes. Of the Company's total revenues during the Transition Period, GM accounted for $9.8 million (16.3%). Of the revenues from GM, $8.5 million (86.9%) were attributable to air logistics primarily in connection with on-demand charters flown by third-party air cargo carriers, and $1.3 million (13.1%) were attributable to on-demand charters flown by the Company's air freight carrier. Of the Company's gross profits from air logistics during the Transition Period, GM accounted for $573,000 (10.2%). GM accounted for 47.3% of the total number of on-demand charters that were flown by the air freight carrier during the Transition Period. In addition to revenues derived from GM, the Company believes approximately 12.1% of its total revenues during the Transition Period were generated from services provided to other participants in the U.S. automotive industry, a substantial portion of which the Company believes were GM suppliers. SEASONALITY Certain customers of the Company engage in seasonal businesses, especially the U.S. Postal Service, GM, and other customers in the automotive industry. As a result, Kitty Hawk's air logistics business has historically experienced its highest quarterly revenues and profitability during the fourth quarter of the calendar year due to the peak Christmas season activity of the U.S. Postal Service and during the period from June 1 to November 30 when production schedules of the automotive industry typically increase. Consequently, the Company experiences its lowest quarterly revenue and profitability during the first quarter of the calendar year. The following table reflects certain selected quarterly operating results, which have not been audited or reviewed, for each quarter since the fiscal quarter ended August 31, 1994. The information has been prepared on the same basis as the audited Consolidated Financial Statements appearing elsewhere in this Form 10-K and includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information shown. The Company's results vary significantly from quarter to quarter and the operating results for any quarter are not necessarily indicative of the results that may be expected for any future period. 6 7
FISCAL QUARTER ENDED -------------------------------------------------------------------------------- NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 29, 1994 1995 1995 1995 1995 1996 ------------ ------------ ------- ---------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues........... $29,593 $31,743 $16,835 $25,539 $36,045 $48,577 Gross profit............. 5,210 6,290 2,310 4,368 5,936 8,190 Operating income......... 3,310 3,912 660 1,463 3,564 2,447 Net income (loss)........ 1,960 2,298 192 (34) 1,956 1,273 Net income (loss) per share................... $ 0.25 $ 0.29 $ 0.02 $ (0.01) $ 0.25 $ 0.16 FISCAL QUARTER ENDED ONE MONTH ----------------------------------- ENDED MAY 31, AUGUST 31, NOVEMBER 30, DECEMBER 31, 1996 1996 1996 1996 ------- ---------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues........... $22,504 $35,289 $25,414 $34,571 Gross profit............. 3,265 6,124 5,118 7,287 Operating income......... 897 2,126 2,851 5,867 Net income (loss)........ 182 698 1,632 3,662 Net income (loss) per share................... $ 0.02 $ 0.09 $ 0.18 $ 0.35
EMPLOYEES At March 24, 1997, Kitty Hawk employed approximately 306 full-time personnel. GOVERNMENT REGULATION The Company's air freight carrier is subject to Title 49 of the United States Code (formerly the Federal Aviation Act of 1958, as amended), under which the DOT and the FAA exercise regulatory authority over air carriers. The DOT is primarily responsible for regulating economic issues affecting air service, including, among other things, air carrier certification and fitness, insurance, consumer protection, unfair methods of competition, and transportation of hazardous materials. The FAA is primarily responsible for regulating air safety and flight operations, including, among other things, airworthiness requirements for each type of aircraft the Company's air freight carrier operates, pilot and crew certification, aircraft maintenance and operational standards, noise abatement, airport slots, and other safety-related factors. In addition, the Company's air freight carrier is subject to regulation by various other federal, state, local and foreign authorities, including the Department of Defense and the Environmental Protection Agency. The Company's operations are subject to routine, and periodically more intensive, inspections and oversight by the FAA. Following a review of safety procedures at ValuJet, Inc., the FAA adopted changes to the FAA's and air carriers' oversight of contract maintenance and training procedures. The Company believes it is currently in compliance with such changes. The FAA has proposed amendments to its flight and rest time regulations which, if adopted as proposed, could restrict the ability of the Company to respond to a shipper's request for same day delivery and/or would require the Company to hire and train additional qualified pilots to perform the Company's flight operations. The adoption of new laws, policies, or regulations or changes in the interpretation or application of existing laws, policies, or regulations, whether by the FAA, the DOT, the United States government, or any foreign, state, or local government, could have a material adverse impact on Kitty Hawk and its operations. The Company's revenue fleet is comprised of fifteen Boeing 727-200 aircraft manufactured between 1969 and 1978, five Douglas DC9-15F aircraft manufactured during 1967 and 1968, and eight turbo-prop Convairs manufactured between 1948 and 1957. Manufacturer's Service Bulletins ("Service Bulletins") and FAA Airworthiness Directives ("Directives") issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis cause certain of these aircraft to be subject to extensive aircraft examinations and require certain of these aircraft to undergo structural inspections and modifications to address problems of corrosion and structural fatigue at specified times. It is possible that additional Service Bulletins or Directives applicable to the types of aircraft included in the Company's fleet could be issued in the future. The cost of compliance with such Directives and Service Bulletins cannot currently be estimated, but could be substantial. Airline operators must comply with FAA noise standard regulations primarily promulgated under the Airport Noise and Capacity Act of 1990 (the "Noise Regulations"). The Noise Regulations affect the Company's five Douglas DC9-15Fs and its fifteen Boeing 727-200s (the "Jet Fleet"). Nine of the aircraft in the Jet Fleet are currently in compliance with Stage III noise control standards. By the following deadlines, the Company must bring the Jet Fleet into Stage III compliance to the extent indicated: January 1, 1999, 75%; and January 1, 2000, 100%. Certain airport operations have adopted local regulations which, among other things, impose curfews and other noise abatement requirements. 7 8 In December 1996, the Company amended its agreement with its supplier of noise abatement equipment for Boeing 727-200 aircraft to increase the number of hushkits it has firmly committed to purchase and to establish fixed prices. In connection with this amendment, the Company paid the vendor an additional $350,000 in deposits on seven future, firm orders that will cost the Company between $13 and $17.5 million, depending on the type selected. The DOT and the FAA have the authority to modify, amend, suspend, or revoke the authority and licenses issued to the Company for failure to comply with the provisions of law or applicable regulation. In addition, the DOT and the FAA may impose civil or criminal penalties for violations of applicable rules and regulations. Such actions by the FAA or the DOT, if taken, could have a material adverse effect on Kitty Hawk. The DOT exercises regulatory jurisdiction over the transportation of hazardous materials. The Company may from time to time transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility for compliance with these regulations and are responsible for proper packaging and labeling. Substantial civil monetary penalties can be imposed on both shippers and air carriers for infractions of these regulations. Certain of the Company's air freight carrier operations are conducted wholly between two or more points that are all located outside of the United States. As with the certificates and license obtained from U.S. authorities, the Company must comply with all applicable rules and regulations imposed by these foreign aeronautical authorities or be subject to the suspension, amendment or modification of its operating authorities. On March 7, 1997, a 6.25% federal transportation excise tax applicable to air freight transportation was reinstated through September 30, 1997. Reinstatement of the tax by the government will result in higher costs to shippers of air freight and air freight carriers, which may have a material adverse effect on freight traffic, yields, revenue, and margins. The Company has been advised by the FAA that it is reexamining the supplemental type certificates previously issued to certain companies approving main deck cargo door and interior modifications to Boeing 727-200 passenger category aircraft of the type operated by the Company. The Company's Boeing 727-200 aircraft all have been modified in reliance upon the FAA's prior approval of these cargo-related modifications. As a result of the reexamination, the FAA will likely require structural changes to the previously installed modifications which may be costly to perform and require significant aircraft down time. Before such changes can be completed, the FAA will likely impose operating limitations on the Boeing 727-200 aircraft which will reduce the effective payload of the Company's Boeing 727-200 aircraft which could have a material adverse effect on Kitty Hawk and its operations. Under current federal aviation law, the Company's air freight carrier could cease to be eligible to operate as an air freight carrier if more than 25% of the voting stock of the Company were owned or controlled by non-U.S. citizens. Moreover, in order to hold an air freight carrier certificate, the president and two-thirds of the directors and officers of an air carrier must be U.S. citizens. All of the Company's directors and officers are U.S. citizens. Furthermore, (i) 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 and (ii) the Bylaws do not permit non-U.S. citizens to serve as directors or officers of the Company. INSURANCE The Company is vulnerable to potential losses which may be incurred in the event of an aircraft accident. Any such accident could involve not only repair or replacement of a damaged aircraft and its consequent temporary or permanent loss from service, but also potential claims involving injury to persons or property. The Company is required by the DOT to carry liability insurance on each of its aircraft, and each of the Company's aircraft leases and ACMI contracts also requires the Company to carry such insurance. Any extended interruption of the Company's operations due to the loss of an aircraft could have a material adverse effect on the Company. The Company currently maintains public liability and property damage insurance and aircraft liability insurance for each of the aircraft in the revenue fleet in amounts consistent with industry standards. All-risk aircraft hull insurance is maintained for all aircraft in the revenue fleet other than the 8 9 Convairs. The Company maintains baggage and cargo liability insurance if not provided by its customers under ACMI contracts. Although the Company believes that its insurance coverage is adequate, there can be no assurance that the amount of such coverage will not be changed upon renewal or that the Company will not be forced to bear substantial losses from accidents. Substantial claims resulting from an accident could have a material adverse effect on the Company's financial condition and could affect the ability of the Company to obtain insurance in the future. The Company attempts to monitor the amount of liability insurance maintained by the third-party carriers utilized in its air logistics business through, among other things, the obtaining of certificates of insurance. COMPETITION The market for air freight carrier services has been and is expected to remain highly competitive. Kitty Hawk competes with other air freight carriers with regard to furnishing on-demand charters and ACMI contract charters. The Company believes that the basis for such competition is price, quality of service, and the location and performance characteristics of aircraft. The Company's air freight carrier is also subject to competition from other modes of transportation including, but not limited to, railroads and trucking. Numerous competitors of Kitty Hawk provide or coordinate door-to-door air freight charters on an expedited basis. The market for air logistics also has been and is expected to remain highly competitive. The Company's principal competitors for on-demand air logistics services are other air logistics companies, air freight carriers which seek to book charters directly with customers, and air freight companies that offer expedited service. Each of Emery Worldwide, FedEx, and the United Parcel Service compete in the expedited freight business by offering "next-flight-out" service. The Company's ability to attract and retain business also is affected by the decisions of the transportation departments of commercial and industrial businesses whether, and to what extent, to coordinate their own transportation needs. Prior to 1990, GM conducted its air logistics business in-house. GM and certain other customers maintain transportation departments that could be expanded to manage charters in-house which could have a material adverse effect on Kitty Hawk. With respect to the Company's ACMI contract charter business, the Company could be adversely affected by the decision of certain of its certificated customers to acquire additional aircraft, or by its uncertificated customers to acquire and operate their own aircraft, to service routes currently serviced by Company aircraft. Many of the Company's competitors and customers have substantially greater financial resources than the Company. ITEM 2. PROPERTIES Kitty Hawk occupies a 40,000 square foot facility (the "Facility") located at Dallas/Fort Worth International Airport. The Facility includes administrative offices, maintenance work areas, and hangar and parts storage facilities as well as flight operations and training facilities. In February 1997, the Company purchased the lease to the Facility from the sublessor for approximately $1.76 million. The lease expires on December 31, 2007. See "Item 11. Executive Compensation -- Compensation Committee Interlocks and Insider Participation." In addition, the Company maintains an approximately 20,000 square foot secondary maintenance facility located in Ypsilanti, Michigan comprised of a maintenance work area, hangar and an area for the storage of certain aircraft repair parts and maintenance items. Additionally, Kitty Hawk rents small parts storage spaces at a number of origin airports and apartments in various locations for flight crew layovers. ITEM 3. LEGAL PROCEEDINGS ANET Litigation The U.S. Postal Service selected the Company's air freight carrier in September 1992 as the successful bidder on a contract for a multi-city network of air transportation services supporting the U.S. Postal Service's Express Mail system. Another air freight carrier (the "Co-Bidder") was associated with the Company in the 9 10 successful bid (the "ANET bid"). Two unsuccessful bidders, including Emery Worldwide Airlines, Inc. ("Emery") (the incumbent), sued to enjoin the award. This litigation (the "ANET litigation") was settled in April 1993 by agreements under which the U.S. Postal Service terminated the Company's contract for convenience and awarded the contract to Emery. In lieu of damages for the contract's termination, the U.S. Postal Service paid $10.0 million into an escrow account to be divided between the Company and the Co-Bidder. Also under the settlement, Emery delivered releases of the Company's contractual obligations to purchase more than $40 million in aircraft and equipment, paid $2.7 million into the escrow account, and agreed to pay $162,500 into the escrow each quarter for up to 10 years so long as the Emery contract remained in effect. Before settling the ANET litigation, the Company, Mr. Christopher, the Co-Bidder and the Co-Bidder's stockholder agreed, among other things, to hold the escrowed funds in escrow until they had agreed upon an allocation and distribution, or until the matter was resolved by binding arbitration. Subsequent disagreements led to litigation and arbitration among the Company, Mr. Christopher, the Co-Bidder and the Co-Bidder's stockholder that were resolved pursuant to a comprehensive settlement reached in August 1994. Under the comprehensive settlement, the Company received approximately $3.5 million in cash from the escrowed funds, and obtained a Boeing 727-200. Also under the comprehensive settlement agreement, Mr. Christopher received rights to one-half of any future contingent quarterly payments from Emery. Qui Tam Litigation In March 1995, the Company was served with a complaint filed on behalf of the U.S. government by a third-party plaintiff seeking to share a recovery under the Federal False Claims Act (the "False Claims Act"). The suit, filed in May 1994 in the federal District Court for the District of Columbia, was filed under seal in accordance with the False Claims Act, to enable the U.S. Government to review the claim before its disclosure to the defendants. The U.S. Government declined to pursue the claim, but the third-party plaintiff chose to continue. The suit claimed that the Company and the Co-Bidder fraudulently failed to disclose to the U.S. Postal Service, both in the ANET bid and in the settlement of the ANET litigation, that some of the aircraft the Company proposed to purchase and use to perform the contract were aging aircraft with high use, and claimed that the Company, the Co-Bidder and Emery similarly fraudulently conspired in connection with the settlement of the ANET litigation. The suit sought to recover treble the $10 million settlement payment made by the U.S. Postal Service in settling the ANET litigation, plus the third-party plaintiff's costs and fees. In May 1996, the court granted the Company its motion to dismiss the suit and awarded the Company its attorneys' fees and costs. The plaintiff has asked the court to reconsider its ruling. The Company does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. Litigation about Charter Agreement The Company filed suit in the 14th Judicial District Court of Dallas County, Texas against Express One International, Inc. ("Express One") in July 1992 claiming under a one-year aircraft charter by Express One to the Company that Express One breached its obligations and seeking actual damages of approximately $60,000. Express One counterclaimed that the Company wrongfully repudiated the charter and fraudulently induced Express One to provide services not required by the charter. Express One claimed damages of $356,718 for services allegedly performed, $1,140,000 for additional fees it would have received under the charter, an unspecified amount of punitive damages, and additional amounts for its attorneys' fees and costs. In February 1995, a jury verdict awarded the Company $25,000 in damages plus its attorneys' fees and denied Express One's counterclaims. In May 1995, the court entered judgment in favor of the Company for $25,000 in damages, for $148,115 in attorneys' fees through trial, and for additional attorneys' fees if Express One appealed. Before the time for appeal expired, Express One filed a petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Texas (Sherman Division). The Company filed its claim based on the judgment in the bankruptcy proceeding. In November 1995, Express 10 11 One filed an appeal, to which the Company responded. Kitty Hawk does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 3, 1996, the Company held its 1996 Annual Meeting of Stockholders. The only matter voted on at this meeting was the re-election of two persons, Mr. Richard R. Wadsworth and Mr. Lewis S. White, as Class 2 directors to serve as members of the Company's Board of Directors for terms of three years ending at the 1999 Annual Meeting of Stockholders, or until their successors are duly elected and qualified. With respect to each nominee, 7,750,000 shares were voted for such nominee and no shares were voted against or withheld. There were no abstentions or broker non-votes. Each Class 1 and 3 director continued as a member of the Company's Board of Directors after the meeting. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "KTTY". The range of high and low bid information for the Company's Common Stock during the three months ended November 30, 1996 and the one month ended December 31, 1996 is as follows:
HIGH LOW ------ ------ Three Months Ended November 30, 1996(1)..................... $14.75 $10.00 One Month Ended December 31, 1996........................... 13.50 8.00
- --------------- (1) Does not include the period prior to the Offering. At March 12, 1997, the Company had approximately 1,431 holders of record and beneficial owners of the Company's Common Stock. The Company's policy has been to reinvest earnings to fund future growth. Accordingly, the Company has not paid dividends and does not anticipate declaring dividends on its Common Stock in the foreseeable future. In addition, the terms of the Company's Credit Agreement ("Credit Agreement") with Wells Fargo Bank, National Association and Bank One, Texas, N.A. restrict Kitty Hawk's ability to declare and pay dividends to its stockholders during any fiscal year to an amount not to exceed 25% of the Company's net income during the immediately preceding fiscal year. The Company granted certain unregistered options to Mr. Tilmon J. Reeves and Mr. Wadsworth in October 1994. All such options were issued in connection with employment or consulting services rendered pursuant to Rule 701 and/or Section 4(2) of the Securities Act of 1933, as amended (the "Act"). Both stock options were canceled on June 12, 1996. See "Item 11. Executive Compensation." The Company granted certain unregistered options to Messrs. Reeves and Wadsworth in December 1995 and June 1996, respectively. All such options were issued in connection with employment or consulting services rendered pursuant to Rule 701 and/or Section 4(2) of the Act, as amended. Both stock options were exercised at an exercise price of $0.01 per share on June 26, 1996. The unregistered Common Stock issued upon exercise of such options was issued to Messrs. Reeves and Wadsworth pursuant to Rule 701, Section 4(2) and/or Section 3(a)(9) of the Act. See "Item 11. Executive Compensation." 11 12 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) The following table sets forth selected financial and operating data with respect to Kitty Hawk for each of the fiscal years indicated and for the four months ended December 31, 1995 and December 31, 1996. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Form 10-K. The selected income statement and balance sheet data as of and for each of the fiscal years ended August 31, 1992 through 1996 and for the four months ended December 31, 1996 has been derived from audited consolidated financial statements of the Company. Operating results for the four months ended December 31, 1996 are not necessarily indicative of results that may be expected for a calendar year. In the opinion of management of the Company, the selected income statement and balance sheet data presented as of and for the four months ended December 31, 1995, which are derived from the Company's unaudited consolidated financial statements, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for such period.
FOUR MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, ------------------------------------------------------ ---------------------- 1992 1993 1994 1995 1996 1995 1996 ------- ------- -------- -------- -------- ----------- ------- (UNAUDITED) INCOME STATEMENT DATA: Revenues: Air freight carrier............. $ 6,760 $12,939 $ 28,285 $ 41,117 $ 52,922 $17,994 $20,577 Air logistics................... 45,893 52,840 79,415 62,593 89,493 51,734 39,408 ------- ------- -------- -------- -------- ------- ------- Total revenues.................... 52,653 65,779 107,700 103,710 142,415 69,728 59,985 Total costs of revenues........... 48,465 55,201 92,951 85,532 118,900 57,682 47,580 ------- ------- -------- -------- -------- ------- ------- Gross profit...................... 4,188 10,578 14,749 18,178 23,515 12,046 12,405 General and administrative expenses........................ 2,930 4,394 6,013 7,832 9,080 2,862 2,725 Non-qualified profit sharing expense......................... -- 250 732 1,001 1,170 889 962 Stock option grants to executives...................... -- -- -- -- 4,231(1) -- -- ------- ------- -------- -------- -------- ------- ------- Operating income.................. 1,258 5,934 8,004 9,345 9,034 8,295 8,718 Interest expense.................. (157) (134) (343) (1,185) (1,859) (482) (684) Contract settlement income, net(2).......................... -- 725 1,178 -- -- -- -- Loss on asset disposal............ -- -- -- -- (589) -- -- Other income (expense)............ 287 193 (432) (601) 291 38 626 ------- ------- -------- -------- -------- ------- ------- Income before income taxes........ 1,388 6,718 8,407 7,559 6,877 7,851 8,660 Income taxes...................... 375 2,613 3,146 3,143 2,768 3,097 3,367 ------- ------- -------- -------- -------- ------- ------- Net income........................ $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293 ======= ======= ======== ======== ======== ======= ======= Net income per share.............. $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55 ======= ======= ======== ======== ======== ======= ======= Weighted average common and common equivalent shares outstanding... 8,671 7,968 7,968 7,968 7,928 7,968 9,610 OPERATING DATA: Air Freight Carrier Revenue Fleet (at end of period)....................... 11 10 15 21 22 21 26 Flight hours flown(3)........... 3,567 7,030 11,795 15,183 20,237 6,320 7,670 Number of on-demand charters flown......................... 292 752 1,182 1,238 1,448 827 243 Number of ACMI contract charters flown......................... 655 1,314 1,734 2,601 3,493 1,002 1,488 Air Logistics Number of on-demand charters managed(4).................... 8,708 9,748 16,713 14,198 16,043 9,356 4,185 BALANCE SHEET DATA (IN THOUSANDS): Working capital................... $ 895 $ 4,679 $ 4,223 $ 1,747 $ (6,962)(5) $12,722 $33,519 Total assets...................... 9,874 18,598 37,911 47,954 79,828 80,109 123,027 Long-term debt, including current maturities...................... 2,367 976 9,145 16,981 36,912 21,695 24,768 Stockholders' equity.............. 3,184 7,289 12,550 16,966 23,639 21,721 58,292
12 13 - --------------- (1) Results for fiscal year ended August 31, 1996, lack comparability to prior periods because such period includes nonrecurring grants to two executive officers of stock options that resulted in a charge to earnings of approximately $4,231,000. Had these grants of stock options not occurred, net income for fiscal year ended August 31, 1996 would have been approximately $6,637,000 and net income per share would have been $0.84. See "Item 11. Executive Compensation." (2) Reflects sums received in settlement of litigation. See "Item 3. Legal Proceedings -- ANET litigation" and Note 5 of Notes to Consolidated Financial Statements. (3) As reported by the Company to the FAA. (4) Includes on-demand charters flown by the Company's air freight carrier. (5) Working capital includes a $10 million Revolving Credit Facility classified as a current liability that has subsequently been repaid. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW General On December 4, 1996, the Company changed its fiscal year end from August 31 to December 31. The following discussion is of the Company's financial condition and results of operations (i) for the four months ended December 31, 1995 and December 31, 1996, and (ii) for the fiscal years ended 1994, 1995, 1996. Revenues. The Company's revenues are derived from two related businesses: (i) air freight carrier and (ii) air logistics. Air freight carrier revenues are derived substantially from ACMI contract and on-demand charters flown with Company aircraft. Air logistics revenues are derived substantially from on-demand air freight charters arranged by Kitty Hawk for its customers utilizing the flight services of third-party air freight carriers. With respect to on-demand charters that are arranged by the Company and flown by its air freight carrier, charges to the customer for air transportation are accounted for as air freight carrier revenues and charges for ground handling and transportation are accounted for as air logistics revenues. GM and the U.S. Postal Service have accounted for a substantial majority of the Company's revenues for the last three fiscal years and the Transition Period. A contract with GM for on-demand charters produced revenues of $67.9 million, $48.9 million, $58.4 million, and $9.8 million in fiscal years 1994, 1995, and 1996 and the Transition Period, respectively, which represented 63.1%, 47.1%, 41.0%, and 16.3% of the Company's total revenues for such periods. Of the revenues derived from GM for fiscal years 1994, 1995, and 1996 and the Transition Period, 15.4%, 20.8%, 20.2%, and 13.1%, respectively, were attributable to the air freight carrier and 84.6%, 79.2%, 79.8%, and 86.9%, respectively, were attributable to air logistics. Revenues derived from GM for fiscal years 1994, 1995, and 1996 and the Transition Period constituted 36.9%, 24.7%, 22.3%, and 6.2%, respectively, of the revenues derived from the air freight carrier business and 72.4%, 61.9%, 52.1%, and 21.6%, respectively, of the revenues derived from the air logistics business. Of the Company's gross profits from air logistics in fiscal years 1994, 1995, and 1996 and the Transition Period, GM accounted for $3.0 million (50.4%), $1.4 million (27.1%), $3.5 million (37.3%), and $573,000 (10.2%), respectively. The U.S. Postal Service accounted for revenues of $11.1 million, $10.0 million, 21.3 million, and $26.2 million in fiscal years 1994, 1995, and 1996 and the Transition Period, respectively, which represented 10.3%, 9.7%, 14.9%, and 43.7%, respectively, of the Company's total revenues for such periods. Of the revenues derived from the U.S. Postal Service for fiscal years 1994, 1995, and 1996 and the Transition Period, 74.5%, 59.6%, 92.5%, and 88.9%, respectively, were attributable to air logistics for seasonal Christmas charters flown by third-party air freight carriers and 25.5%, 40.4%, 7.5%, and 11.1%, respectively, were attributable to the air freight carrier for ACMI contract charters. Revenues derived from the U.S. Postal Service for fiscal years 1994, 1995, and 1996 and the Transition Period, constituted 10.0%, 9.9%, 3.0%, and 14.1%, respectively, of the revenues derived from the air freight carrier business and 10.4%, 9.6%, 22.0%, and 59.1%, respectively, of the revenues derived from the air logistics business. Of the Company's gross profits from air logistics in fiscal years 1994, 1995, and 1996 and the Transition Period, the U.S. Postal Service accounted for $2.0 million (33.8%), $1.0 million (18.9%), $3.8 million (40.6%), and $4.4 million (77.7%), respectively. Burlington accounted for revenues of $15.6 million and $7.1 million in fiscal year 1996 and the Transition Period, respectively, which represented 10.9% and 11.9%, respectively, of the total revenues for such period and constituted 28.5% and 33.8%, respectively, of the revenues derived from the air freight carrier business and 0.6% and 0.4%, respectively, of the revenues derived from the air logistics business. Of these revenues, 96.8% and 97.7%, respectively, were attributable to the air freight carrier for ACMI contract charters and 3.2% and 2.3%, respectively, were attributable to air logistics. Costs of Revenues. The principal components of the costs of revenues attributable to the air freight carrier consist of the costs for the maintenance and operation of its aircraft including the salaries of pilots and maintenance personnel, charges for fuel, insurance and maintenance, and depreciation of engines and airframes. Generally, charges for fuel are only applicable for the on-demand charters flown by the air freight carrier because fuel for the ACMI contract charters is generally provided by the customer or billed to them on 14 15 a direct pass-through basis. The principal components of the costs of revenues attributable to air logistics consist of sub-charter costs paid to third-party air freight carriers and costs paid for ground handling and transportation. With respect to on-demand charters that are flown by the air freight carrier, all related air transportation expenses are allocated to the air freight carrier and all related cargo ground handling and transportation expenses are allocated to air logistics. Under an earlier version of the Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, the Company awarded semiannual cash bonuses to its employees. The aggregate amount of the bonuses for each of fiscal years 1994, 1995, and 1996 and the Transition Period, have equaled 8.0%, 11.7%, 9.5%, and 10.0%, respectively, of the Company's income before the deduction of income taxes, stock option grants to executives and the bonuses that were paid under the Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan. Significant Events Affecting Comparability of Results of Operations. Since September 1, 1993, several events have affected the comparability of results of operations for each of the last three fiscal years. In fiscal year 1996, the Company granted Messrs. Reeves and Wadsworth options to purchase 390,707 and 153,567 shares of Common Stock, respectively, for an exercise price of $0.01 per share, that resulted in a charge to earnings of approximately $4,231,000. In fiscal year 1995, the Company expensed approximately $727,000 relating to the Company's attempted initial public offering. In fiscal year 1994, contract settlement income amounted to approximately $1,178,000. See Note 5 of Notes to Consolidated Financial Statements. Recent Developments. Due to strikes and labor disruptions at certain GM plants during the Transition Period, there was a decrease in the number of charters flown by the Company's air logistics business. These strikes and labor disruptions have been settled as of December 31, 1996. RESULTS OF OPERATIONS The following table sets forth, on a comparative basis for the periods indicated, the components of the Company's gross profit (in thousands) and the gross profit margin by revenue type:
FISCAL YEAR ENDED AUGUST 31, --------------------------------------------------- 1994 1995 1996 --------------- --------------- --------------- Air freight carrier: Revenues................................ $28,285 100.0% $41,117 100.0% $52,922 100.0% Costs of revenues....................... 19,550 69.1 28,104 68.4 38,760 73.2 ------- ----- ------- ----- ------- ----- Gross profit............................ $ 8,735 30.9% $13,013 31.6% $14,162 26.8% ======= ===== ======= ===== ======= ===== Air logistics: Revenues................................ $79,415 100.0% $62,593 100.0% $89,493 100.0% Costs of revenues....................... 73,402 92.4 57,428 91.7 80,140 89.5 ------- ----- ------- ----- ------- ----- Gross profit............................ $ 6,013 7.6% $ 5,165 8.3% $ 9,353 10.5% ======= ===== ======= ===== ======= =====
FOUR MONTHS ENDED DECEMBER 31, ------------------------------------ 1995 1996 ---------------- ---------------- (UNAUDITED) Air freight carrier: Revenues.............................................. $17,995 100.0% $20,577 100.0% Costs of revenues..................................... 11,685 64.9 13,784 67.0 ------- ----- ------- ----- Gross profit.......................................... $ 6,309 35.1% $ 6,793 33.0% ======= ===== ======= ===== Air logistics: Revenues.............................................. $51,733 100.0% $39,408 100.0% Costs of revenues..................................... 45,997 88.9 33,795 85.8 ------- ----- ------- ----- Gross profit.......................................... $ 5,736 11.1% $ 5,613 14.2% ======= ===== ======= =====
15 16 The following table presents, for the periods indicated, consolidated income statement data expressed as a percentage of total revenues:
FISCAL YEAR ENDED FOUR MONTHS ENDED AUGUST 31, DECEMBER 31, ----------------------- -------------------- 1994 1995 1996 1995 1996 ----- ----- ----- ----------- ----- (UNAUDITED) Revenues: Air freight carrier.......................... 26.3% 39.6% 37.2% 25.8% 34.3% Air logistics................................ 73.7 60.4 62.8 74.2 65.7 ----- ----- ----- ----- ----- Total revenues................................. 100.0 100.0 100.0 100.0 100.0 Total costs of revenues........................ 86.3 82.5 83.5 82.7 79.3 ----- ----- ----- ----- ----- Gross profit................................... 13.7 17.5 16.5 17.3 20.7 General and administrative expenses............ 5.6 7.6 6.4 4.1 4.5 Non-qualified profit sharing expense........... 0.7 0.9 .8 1.3 1.6 Stock option grants to executives.............. -- -- 3.0 -- -- ----- ----- ----- ----- ----- Operating income............................... 7.4 9.0 6.3 11.9 14.6 Interest expense............................... (0.3) (1.1) (1.3) (0.7) (1.2) Contract settlement income, net................ 1.1 -- -- -- -- Loss on asset disposal......................... -- -- (0.4) -- -- Other income (expense)......................... (0.4) (0.6) 0.2 0.1 1.0 ----- ----- ----- ----- ----- Income before income taxes..................... 7.8 7.3 4.8 11.3 14.4 Income taxes................................... 2.9 3.0 1.9 4.4 5.6 ----- ----- ----- ----- ----- Net income..................................... 4.9% 4.3% 2.9% 6.9% 8.8% ===== ===== ===== ===== =====
FOUR MONTHS ENDED DECEMBER 31, 1996 COMPARED TO FOUR MONTHS ENDED DECEMBER 31, 1995 Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI contract charter revenues were $3.0 million and $16.9 million, or 14.5% and 82.3%, respectively, of total air freight carrier revenues for the four months ended December 31, 1996, as compared to $7.8 million and $9.2 million, or 43.2% and 51.3%, respectively, for the four months ended December 31, 1995. ACMI contract charter revenues for the four months ended December 31, 1996, increased 83.7% over the four months ended December 31, 1995, primarily as the result of additional Boeing 727-200 ACMI contract charters. Revenues from on-demand charters flown by Company aircraft for the four months ended December 31, 1996 decreased 61.6% from the comparable prior year period primarily as the result of shifting the air freight carrier's aircraft being used for on demand charters to ACMI contract charters. For the four months ended December 31, 1996, as compared to the four months ended December 31, 1995, prices for the Company's on-demand and ACMI contract charters remained relatively constant. Revenues -- Air Logistics. Air logistics revenues decreased $12.3 million, or 23.8%, to $39.4 million in the four months ended December 31, 1996, from $51.7 million in the four months ended December 31, 1995. This decrease was primarily due to decreased demand for on demand charters from the automobile industry in the fourth quarter of calendar year 1996 and is partially offset by an increase in the number of managed charters for the U.S. Postal Service during December 1996. For the four months ended December 31, 1996, as compared to the four months ended December 31, 1995, prices for the Company's air logistics services remained relatively constant. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $2.1 million, or 18.0%, to $13.8 million in the four months ended December 31, 1996, from $11.7 million in the four months ended December 31, 1995, reflecting the increased volume of business from Boeing 727-200 ACMI contract charters. Gross profit margin from the air freight carrier decreased to 33.0% in the four months ended December 31, 1996, from 35.1% in the comparable prior year period. This decrease reflects the increase in ACMI contract charters, which produce lower gross margins than on-demand charters. 16 17 As reported to the FAA, overall aircraft utilization increased to 7,670 flight hours for the four months ended December 31, 1996, from 6,320 in the four months ended December 31, 1995, a 21.4% increase. This increase was primarily due to the increased hours flown for ACMI contract charters. Costs of Revenues -- Air Logistics. Air logistics costs of revenues decreased $12.2 million, or 26.5%, to $33.8 million in the four months ended December 31, 1996, from $46.0 million in the four months ended December 31, 1995, reflecting the decreased volume of business. The gross profit margin from air logistics increased to 14.2% in the four months ended December 31, 1996, from 11.1% in the comparable prior year period, an increase of 27.9%. This increase was primarily due to the Company's additional revenues and increased gross profit margin from the Company's U.S. Postal Service Christmas contract in December 1996, and its success in reducing its costs paid to third-party air freight carriers and ground service providers. General and Administrative Expenses. General and administrative expenses decreased $137,000, or 4.8%, to $2.7 million in the four months ended December 31, 1996, from $2.9 million in the four months ended December 31, 1995. This decrease was primarily due to a reduction of professional fees and bank charges in the four months ended December 31, 1996. As a percentage of total revenues, general and administrative expenses increased to 4.5% in the four months ended December 31, 1996, from 4.1% in the four months ended December 31, 1995. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased $73,000, or 8.2%, to $962,000 in the four months ended December 31, 1996, from $889,000 in the four months ended December 31, 1995, reflecting the increased profitability from operating activities of Kitty Hawk in the four months ended December 31, 1996. Operating Income. Operating income increased $423,000, or 5.1%, to $8.7 million in the four months ended December 31, 1996, from $8.3 million in the four months ended December 31, 1995. Operating income margin increased to 14.6% from 11.9%, for the four months ended December 31, 1996 and 1995, respectively. Interest Expense. Interest expense increased to $684,000 for the four months ended December 31, 1996 from $482,000 in the four months ended December 31, 1995, a 42.0% increase. The increase was primarily the result of the incurrence of additional long-term debt to finance the acquisition of Boeing 727-200 aircraft subsequent to December 31, 1995. Other Income (Expense). Other income increased to $626,000 in the four months ended December 31, 1996, from $38,000 in the comparable prior year period. The increase was primarily due to the temporary investment of the net proceeds of the Offering. Income Taxes. Income taxes as a percentage of income before income taxes decreased to 38.9% for the four months ended December 31, 1996, from 39.4% for the comparable prior year period. The decrease was primarily due to decreased state income taxes. Net Income. As a result of the above, net income increased to $5.3 million in the four months ended December 31, 1996, from $4.8 million in the four months ended December 31, 1995, a 11.3% increase. Net income as a percentage of total revenues increased to 8.8% in the four months ended December 31, 1996, from 6.9% in the comparable prior year period. FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995 Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI contract charter revenues were $20.7 million and $30.1 million, or 39.2% and 56.8%, respectively, of total air freight carrier revenues for fiscal year 1996, as compared to $18.1 million and $20.9 million, or 44.2% and 50.8%, respectively, for fiscal year 1995. ACMI contract charter revenues for fiscal year 1996, increased 44.0% over fiscal year 1995, primarily as the result of additional Boeing 727-200 ACMI contract charters. Revenues from on-demand charters flown by Company aircraft for fiscal year 1996 increased 14.0% from the comparable prior year period. For fiscal year 1996, as compared to fiscal year 1995, prices for the Company's on-demand and ACMI contract charters remained relatively constant. 17 18 Revenues -- Air Logistics. Air logistics revenues increased $26.9 million, or 43.0%, to $89.5 million in fiscal year 1996, from $62.6 million in fiscal year 1995. This increase was primarily due to increased demand for on demand charters from the automobile industry in the fourth quarter of calendar year 1995 and a substantial increase in the number of managed charters for the U.S. Postal Service during December 1995. For fiscal year 1996, as compared to fiscal year 1995, prices for the Company's air logistics services remained relatively constant. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $10.7 million, or 37.9%, to $38.8 million in fiscal year 1996, from $28.1 million in fiscal year 1995, reflecting the increased volume of business from Boeing 727-200 ACMI contract charters. Gross profit margin from the air freight carrier decreased to 26.8% in fiscal year 1996, from 31.6% in the comparable prior year period. This decrease reflects the increase in ACMI contract charters, which produce lower gross margins than on-demand charters. As reported to the FAA, overall aircraft utilization increased to 20,237 flight hours for fiscal year 1996, from 15,183 in fiscal year 1995, a 33.3% increase. This increase was primarily due to the increased hours flown for ACMI contract charters. Costs of Revenues -- Air Logistics. Air logistics costs of revenues increased $22.7 million, or 39.5%, to $80.1 million in fiscal year 1996, from $57.4 million in fiscal year 1995, reflecting the increased volume of business. The gross profit margin from air logistics increased to 10.5% in fiscal year 1996, from 8.3% in the comparable prior year period, a 26.5% increase. This increase was primarily due to the Company's success in reducing its costs paid to third-party air freight carriers and ground service providers and increased gross profit margin from the Company's U.S. Postal Service Christmas contract in December 1995. General and Administrative Expenses. General and administrative expenses increased $1.2 million, or 15.9%, to $9.1 million in fiscal year 1996, from $7.8 million in fiscal year 1995. This increase was primarily due to an increase in support functions and administrative costs associated with the growth in the aircraft fleet and the increased revenue volume for the air freight carrier in fiscal year 1996. As a percentage of total revenues, general and administrative expenses decreased to 6.4% in fiscal year 1996, from 7.6% in fiscal year 1995. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased $169,000, or 16.9%, to $1.2 million in fiscal year 1996, from $1.0 million in fiscal year 1995, reflecting the increased profitability from operating activities of Kitty Hawk in fiscal year 1996. Stock Option Grants to Executives. During fiscal year 1996, the Company granted two executive officers options to purchase 544,274 shares of Common Stock that resulted in a charge to earnings of approximately $4,231,000. Operating Income. Operating income decreased $311,000, or 3.3%, to $9.0 million in fiscal year 1996, from $9.3 million in fiscal year 1995. Operating income margin decreased to 6.3% from 9.0%, for fiscal year 1996 and 1995, respectively. Interest Expense. Interest expense increased to $1.9 million for fiscal year 1996 from $1.2 million in fiscal year 1995, a 56.9% increase. The increase was primarily the result of the incurrence of additional long-term debt to finance the acquisition of two Boeing 727-200 aircraft in the second half of fiscal year 1995 and two additional Boeing 727-200 aircraft in fiscal year 1996. Loss on Asset Disposal. Loss on asset disposal for fiscal year 1996 was $589,000, which resulted from write-downs associated with equipment dispositions. There were no losses on asset disposal in fiscal year 1995. Other Income (Expense). Other income increased to $291,000 in fiscal year 1996, from an expense of $601,000 in the comparable prior year period. The increase was primarily due to the write-off of costs associated with the Company's attempted initial public offering in fiscal year 1995 and increased interest income in fiscal year 1996. Income Taxes. Income taxes as a percentage of income before income taxes decreased to 40.3% for fiscal year 1996, from 41.6% for the comparable prior year period. The decrease was primarily due to decreased state income taxes. 18 19 Net Income. As a result of the above, net income decreased to $4.1 million in fiscal year 1996, from $4.4 million in fiscal year 1995, a 7.0% decrease. Net income as a percentage of total revenues decreased to 2.9% in fiscal year 1996, from 4.3% in the comparable prior year period. FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994 Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI contract charter revenues were $18.1 million and $20.9 million, or 44.2% and 50.8%, respectively, of total air freight carrier revenues for fiscal year 1995, as compared to $15.4 million and $10.6 million, or 54.5% and 37.4%, respectively, for fiscal year 1994. The increase in on-demand and ACMI contract charter revenues for fiscal year 1995 over fiscal year 1994, was 17.9% and 97.1%, respectively. These increases were primarily the result of additional Boeing 727-200 ACMI contract charters and increased on-demand charters flown by the Company's jet aircraft. For fiscal year 1995 as compared to fiscal year 1994, prices for the Company's ACMI contract charter services and U.S. Postal Service Christmas contracts remained relatively constant. Revenues -- Air Logistics. Air logistics revenues decreased $16.8 million, or 21.2%, to $62.6 million in fiscal year 1995 from $79.4 million in fiscal year 1994 primarily due to the substantial decline in volume of on-demand charters for the automobile industry in the first half of calendar 1995 as compared to the same period in 1994. This decline was primarily the result of the temporary decision by GM to significantly reduce use of expedited transportation, including Kitty Hawk's air logistics services, as part of a cost containment initiative. Prices for the Company's on-demand charters decreased slightly due to a revenue rate reduction in the GM Agreement which took effect on May 1, 1994. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $8.6 million, or 43.8%, to $28.1 million in fiscal year 1995 from $19.5 million in fiscal year 1994, reflecting the increased volume of business from ACMI contract and on-demand charters flown by the Company's jet aircraft. Gross profit margin from the air freight carrier increased slightly to 31.6% in fiscal year 1995 from 30.9% in fiscal year 1994, a 2.3% increase. As reported to the FAA, overall aircraft utilization increased to 15,183 flight hours for fiscal year 1995 from 11,795 flight hours in fiscal year 1994, a 28.7% increase. This increase was primarily the result of the inclusion of an additional four Boeing 727-200s, and two Douglas DC9-15F aircraft into the Company's operations during fiscal year 1995. Costs of Revenues -- Air Logistics. Air logistics costs of revenues decreased $16.0 million, or 21.8%, to $57.4 million in fiscal year 1995 from $73.4 million in fiscal year 1994, reflecting the decrease in the volume of business. The gross profit margin from air logistics increased to 8.3% in fiscal year 1995 from 7.6% in fiscal year 1994, a 9.2% increase. This increase was primarily due to the Company's success in reducing its costs paid to third party air freight carriers and ground service providers in the second half of fiscal year 1995. General and Administrative Expenses. General and administrative expenses increased $1.8 million, or 30.3%, to $7.8 million in fiscal year 1995 from $6.0 million in fiscal year 1994. As a percentage of total revenues, general and administrative expenses increased to 7.6% in fiscal year 1995 from 5.6% in fiscal year 1994. This increase was primarily due to an increase in support functions and number of personnel associated with the growth in the aircraft fleet and the revenue volume for the air freight carrier in fiscal year 1995. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased to $1.0 million in fiscal year 1995 from $732,000 in fiscal year 1994, a 36.8% increase, reflecting the increased profitability from operating activities of Kitty Hawk in fiscal year 1995. Operating Income. Operating income increased $1.3 million, or 16.8%, to $9.3 million in fiscal year 1995 from $8.0 million in fiscal year 1994. Operating income margin increased to 9.0% from 7.4% for fiscal year 1995 and 1994, respectively. Interest Expense. Interest expense increased to $1.2 million for fiscal year 1995 from $343,000 in fiscal year 1994, a 246.0% increase. The increase was primarily the result of the incurrence of additional long-term debt to finance the acquisition of two Boeing 727-200 aircraft in the second half of fiscal year 1994 and two Douglas DC9-15F aircraft and two Boeing 727-200 aircraft in fiscal year 1995. 19 20 Other Income (Expense). Other expense increased to $601,000 in fiscal year 1995 from $432,000 in fiscal year 1994, a 39.1% increase. This increase was primarily due to the write off of costs associated with the Company's attempted initial public offering. Income Taxes. Income taxes as a percentage of income before income taxes increased to 41.6% for fiscal year 1995 from 37.4% in fiscal year 1994. The increase was primarily due to higher state income taxes. Net Income. As a result of the above, net income decreased to $4.4 million for fiscal year 1995 from $5.3 million in fiscal year 1994, a 16.0% decrease. Net income as a percentage of total revenues was 4.3% in fiscal year 1995 compared to 4.9% for fiscal year 1994. LIQUIDITY AND CAPITAL RESOURCES In October 1996, the Company sold in an initial public offering 2,700,000 shares of Common Stock, raising net proceeds of approximately $29.3 million to purchase and modify to cargo configuration five Boeing 727-200 aircraft. The Company's capital requirements are primarily for the acquisition and modification of aircraft and working capital. In addition, Kitty Hawk has, and will continue to have, capital requirements for the requisite periodic and major overhaul maintenance checks for its air freight carrier fleet. The Company's funding of its capital requirements historically has been from a combination of internally generated funds and bank borrowings. In addition, the Company has leased aircraft and entered into a sale leaseback for aircraft acquisition and may do so in the future. Cash used in operating activities was $5.0 million and $373,000 in the four months ended December 31, 1995 and December 31, 1996, respectively. At the end of the four months ended December 31, 1995 and December 31, 1996, the Company had working capital of $12.7 million and $33.6 million, respectively. On August 14, 1996 Kitty Hawk entered into a Credit Agreement with Wells Fargo Bank (Texas), National Association ("WFB"), and Bank One, Texas, N.A. ("BOT") for a $15 million Revolving Credit Loans Facility (the "Revolving Credit Facility"), and a $10 million Term Loan Facility (the "Term Loan") (collectively, the "Commitments"). As of March 28, 1997 approximately $2.65 million was outstanding under the Revolving Credit Facility and $2.2 million was outstanding under the Term Loan. Borrowings under these Commitments bear interest at WFB's prime rate or, at Kitty Hawk's option, a Eurodollar rate plus 1.5% to 2.0% based upon a debt-to-cash flow ratio of Kitty Hawk. Under the Credit Agreement, $10.0 million of proceeds of the Revolving Credit Facility are restricted to use from time to time for interim financing of up to $6.5 million per aircraft for aircraft acquisitions by the Company; the remaining $5 million of the Revolving Credit Facility may be used for general corporate purposes, including interim financing for acquired aircraft that exceeds the limits that apply to the restricted portion. The Term Loan must be used to finance the purchase of one DC9-15F hushkit and up to seven major maintenance checks for jet aircraft. The Revolving Credit Facility expires on December 31, 1998. Any advance under the portion of the Revolving Credit Facility that is restricted to interim financing for aircraft acquisition must be repaid in full within 150 days of first advance for the acquired aircraft. All advances under the Term Loan must be made by April 29, 1998. The Term Loan matures on March 31, 2003. The Commitments are cross-collateralized and are secured by certain aircraft owned by the Company, all aircraft acquired with advances under the restricted portion of the Revolving Credit Facility while those advances are outstanding, certain leases of aircraft and engines, accounts, chattel paper, general intangibles and other personal property. The Credit Agreement prohibits (i) the redemption or repurchase of the Company's securities, (ii) the payment of dividends to Kitty Hawk's stockholders in an amount over 25% of the Company's net income of the immediately preceding fiscal year, (iii) certain investments, acquisitions of stock, acquisitions of assets to the extent that the business acquired is not in the present lines of business of the Company, and other business combinations, and (iv) certain transactions with affiliates. In addition, the Credit Agreement prohibits the Company from incurring any additional indebtedness, liabilities or obligations other than debt incurred 20 21 (a) with the prior written consent of WFB or BOT or (b) in the ordinary course of business not to exceed $25 million. The Credit Agreement also contains certain other covenants, including limitations on the ability of the Company to change its lines of business. If a "Change of Control" occurs, WFB and BOT may accelerate or terminate the Commitments. "Change of Control" includes (a) the failure of Kitty Hawk to own all of the outstanding stock of certain of its subsidiaries, (b) Mr. Christopher failing to own at least 51% of the outstanding stock of Kitty Hawk, (c) Mr. Christopher ceasing to be Chief Executive Officer of Kitty Hawk or active in the management of the Company, or (d) if, after the consummation of a public offering, any person (or two or more persons acting as a group) acquiring beneficial ownership of 25% or more of the outstanding shares of Common Stock. During the Transition Period, these restrictions and prohibitions did not have a material impact on the Company's ability to meet its cash obligations and the Company does not believe that the restrictions under the Credit Agreement will have any such impact in the future. In addition, the Company has a loan with 1st Source Bank. As of March 24, 1997, the outstanding balance of this loan was approximately $900,000. The loan bears interest at 9.75%, is secured by a DC9-15F and matures in May 2000. The 1st Source loan contains certain aircraft maintenance covenants Company's business is an event of default upon which 1st Source Bank may declare all or any part of the remaining unpaid principal due and payable. In November 1996, in connection with the Company's recent acquisition of a one-third undivided interest in four Falcon 20 jet aircraft, the Company and the two other co-owners of such aircraft entered into a five year, $4.3 million term loan. The loan bears interest at a floating prime rate, is secured by the four Falcon 20 jet aircraft and requires monthly payments of principal and interest. The Company's liability under such loan is limited to $2.0 million. See "Item 11. Executive Compensation -- Compensation Committee Interlocks and Insider Participation." Capital expenditures were $13.9 million, $17.9 million, $33.5 million, and $13.8 million for fiscal years 1994, 1995 and 1996 and the Transition Period, respectively. Capital expenditures for the Transition Period were primarily for the purchase of: (i) one Boeing 727-200 aircraft, (ii) cargo and noise abatement modifications for two Boeing 727-200 aircraft, (iii) one used JT8D-7 jet engine, (iv) various equipment and (v) leasehold improvements to a Boeing 727-200 aircraft. The $33.5 million in capital expenditures for fiscal year 1996 were primarily for the purchase of: (i) five Boeing 727-200 aircraft and the cargo and noise abatement modification of four of these aircraft and (ii) six used JT8D-7/-9 jet engines. The $17.9 million in capital expenditures for fiscal year 1995 were due primarily to the purchase of: (i) two Boeing 727-200 aircraft and their cargo modification, (ii) three JT8D15 jet engines for installation on one of the Boeing 727-200 aircraft, (iii) two Douglas DC9-15F aircraft in cargo configuration, (iv) noise abatement equipment with respect to one of the Douglas DC9-15F aircraft, (v) five used/overhauled Rolls Royce Dart Convair engines, (vi) two used JT8D7/-9 jet engines, (vii) a Westwind 1124 jet aircraft to be used for corporate purposes only, and (viii) the cargo modification of one Boeing 727-200 aircraft acquired at the end of fiscal year 1994. The $13.9 million in capital expenditures for fiscal year 1994 were primarily for the purchase of: (i) two Boeing 727- 200 aircraft and the cargo modification of these aircraft, (ii) two Douglas DC9-15F aircraft in cargo configuration, (iii) three Convair 600/640 turbo-prop aircraft, and (iv) ground handling equipment. The acquisitions of all of the Boeing 727-200 aircraft and subsequent cargo conversions, the Douglas DC9-15F aircraft and the JT8D-15 engines in the past three years were financed by bank borrowings and internally generated funds, except for one Boeing 727-200 aircraft received in the settlement of the ANET litigation described in "Item 3. Legal Proceedings." All other capital acquisitions were financed from internally generated funds. Kitty Hawk anticipates modifying to cargo configuration three of four recently purchased Boeing 727-200s (including modifying two of these Boeing 727-200s with noise abatement equipment for approximately $4.9 million) for an aggregate capital expenditure of approximately $10.0 million in fiscal year 1997. The Company further believes the $4.9 million amount for noise abatement modifications proposed for fiscal year 1997 for two of four recently purchased aircraft, together with an additional $1.4 million to modify currently owned aircraft with noise abatement equipment during fiscal 1997, represents the total capital expenditures 21 22 that would currently be necessary to comply with the requirements of existing applicable environmental regulations for such fiscal year. In fiscal year 1998, the Company anticipates an aggregate capital expenditure ranging from $9.0 million to $11.0 million for noise abatement modifications to aircraft currently owned or proposed to be purchased. In the event the Company acquires more aircraft than currently proposed, the Company's anticipated aggregate capital expenditure for noise abatement modifications in fiscal year 1998 could materially increase. See "Item 1. Business -- Government Regulation." The Company historically has followed, and currently intends to follow, a policy of retiring Convairs at the time of their next scheduled major overhaul maintenance checks rather than expending the amounts necessary for such checks. In February 1997, the Company acquired the lease to the Facility for approximately $1.76 million. See "Item 2. Properties" and "Item 11. Executive Compensation -- Compensation Committee Interlocks and Insider Participation." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company, their ages, and positions are as follows:
NAME AGE POSITION WITH COMPANY ---- --- --------------------- M. Tom Christopher(1)...................... 50 Chairman of the Board of Directors and Chief Executive Officer Tilmon J. Reeves........................... 57 President, Chief Operating Officer, and Director Richard R. Wadsworth....................... 50 Senior Vice President -- Finance, Chief Financial Officer, Secretary, and Director Ted J. Coonfield(2)........................ 48 Director James R. Craig............................. 58 Director Robert F. Grammer(1)....................... 61 Director Lewis S. White(1)(2)....................... 57 Director
- --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. The Board of Directors consists of seven members, including four independent directors. Executive officers are elected by the Board of Directors and serve at its discretion. M. TOM CHRISTOPHER has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since its inception in 1985, and serves in the class of directors whose terms expire at the 1997 annual meeting of stockholders. Prior to assuming these positions, he formed and managed Kitty Hawk Charters, Inc. He has over 20 years of experience in the air freight industry, including serving as an account manager for Burlington Northern Airfreight from 1976 to 1978. TILMON J. REEVES has served as President and Chief Operating Officer of the Company since May 1993 and has over 30 years of aviation experience. Prior to assuming his current positions, he served as Vice 22 23 President of the Company's air freight carrier from March 1992 to May 1993. Prior to joining Kitty Hawk, Mr. Reeves served as Vice President (Sales) of Express One from April 1991 to March 1992. Mr. Reeves served as the Managing Director -- Cargo Services for American Airlines, Inc. from March 1989 to January 1991. Mr. Reeves became a director in October 1994 and serves in the class of directors whose terms expire at the 1998 annual meeting of stockholders. RICHARD R. WADSWORTH has served as Senior Vice President -- Finance since October 1992, Chief Financial Officer since September 1994, and Secretary since October 1994. Prior to his current role, he served in a consulting capacity to Kitty Hawk in the preparation of various bids for the Company's contract air freight service from December 1991 to September 1992. Mr. Wadsworth became a director in October 1994 and serves in the class of directors whose terms expire at the 1999 annual meeting of stockholders. TED J. COONFIELD became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1998 annual meeting of stockholders. Since April 1996, Mr. Coonfield has been a consultant with Performance Consulting Group, a firm specializing in change management consulting primarily in the banking and insurance industry. From January 1993 to April 1996, Mr. Coonfield was a consultant with the Richard-Rogers Group, a consulting firm specializing in total quality issues, where he primarily engaged in consulting for firms in the transportation industry. From 1990 to December 1992, Mr. Coonfield was the Special Assistant to the Director of the Department of Human Resources for the State of Oregon. Since 1985, Mr. Coonfield has been the President of Oregon Wine Designs, Inc., a wine production and marketing firm. JAMES R. CRAIG became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1997 annual meeting of stockholders. Mr. Craig is an attorney who has served of counsel to Burke, Wright & Keiffer, P.C. since 1990. Prior to his affiliation with Burke, Wright & Keiffer, P.C., Mr. Craig was in private law practice in Dallas since 1971, and in 1989 served as President of Whitehall Development Company, a real estate development firm, of which he is now a director. ROBERT F. GRAMMER became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1997 annual meeting of stockholders. From 1986 to October 1993, Mr. Grammer was Chairman, President and owner of R.G. Aviation, a provider of aircraft-related services. Mr. Grammer retired from this position in October of 1993 to manage his personal investments. LEWIS S. WHITE became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1999 annual meeting of stockholders. Since 1988, Mr. White has been President of L. S. White & Co., a firm engaged in business planning, corporate finance, acquisitions, and in business start-ups, turnarounds and restructurings. Prior to 1988, he held senior management positions with Paramount Communications Inc. and Union Carbide Corporation. Mr. White is also a director of Whitehall Corporation, a company principally involved in aircraft maintenance. 23 24 ITEM 11. EXECUTIVE COMPENSATION The table below sets forth information concerning the annual and longterm compensation for services in all capacities to Kitty Hawk for fiscal years 1994, 1995, and 1996 and during the four months ended December 31, 1996, with respect to those persons who were during the four months ended December 31, 1996 (i) the Chief Executive Officer and (ii) the other two most highly compensated executive officers of the Company (collectively, with the Chief Executive Officer, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ --------------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION ---------------------------- ----------- -------- -------- ------------ ------------ ------------ M. Tom Christopher 1994 $120,000 $512,000 -- -- 25,022(1) Chairman of the Board of 1995 120,000 898,731 -- -- 352,163(2) Directors and Chief Executive 1996 190,000 719,419 -- -- 376,844(3) Officer 1996(5) 80,000 -- -- -- 81,250(4) Tilmon J. Reeves 1994 101,000 225,000 -- -- 2,982(6) President and Chief 1995 125,000 108,335 -- 245,708(7) 2,310(6) Operating Officer 1996 125,000 85,000 $3,726,182(8) 390,707 2,375(6) 1996(5) 41,667 15,000 -- -- -- Richard R. Wadsworth 1994 110,000 96,000 -- -- 1,675(6) Senior Vice President 1995 110,000 70,000 -- 92,140(7) 2,262(6) Finance, Chief Financial 1996 110,00 70,000 1,464,572(8) 153,567 2,375(6) Officer, and Secretary 1996(5) 36,664 15,000 -- -- 583(6)
- --------------- (1) Consists of (i) matching contributions of $2,975 to the Company's 401(k) Savings Plan for Mr. Christopher and (ii) life insurance premiums of $22,047 paid on Mr. Christopher's behalf. Does not include any contingent payments to Mr. Christopher under the ANET litigation settlement made subsequent to fiscal year 1994. These payments are contingent upon the Emery contract remaining in effect. See "Item 3. Legal Proceedings -- ANET litigation." (2) Consists of (i) contingent payments in the amount of $325,000 received by Mr. Christopher under the ANET litigation settlement during fiscal year 1995, (ii) life insurance premiums of $25,500 paid on Mr. Christopher's behalf, and (iii) matching contributions of $1,663 to the Company's 401(k) Savings Plan for Mr. Christopher. (3) Consists of (i) contingent payments in the amount of $325,000 received by Mr. Christopher under the ANET litigation settlement during fiscal year 1996, (ii) life insurance premiums of $48,397 paid on Mr. Christopher's behalf, and (iii) matching contributions of $3,447 to the Company's 401(k) Savings Plan for Mr. Christopher. (4) Consists of contingent payments received by Mr. Christopher under the ANET litigation settlement during the four months ended December 31, 1996. (5) Represents the four months ended December 31, 1996. (6) Consists of matching contributions to the Company's 401(k) Savings Plan. (7) The option covering these shares was rescinded on June 12, 1996. (8) Represents the difference between the exercise price and the fair market value of the Common Stock underlying the stock options on June 26, 1996, the date of exercise, of the stock options granted in fiscal year 1996. See "Item 11. Executive Compensation -- Stock Option Exercises." 24 25 STOCK OPTION GRANTS The following table sets forth certain information concerning options granted in fiscal year 1996 to the Company's Named Executive Officers. Messrs. Reeves and Wadsworth fully exercised these options on June 26, 1996. The Company did not grant any options to the Company's Named Executive Officers in the four months ended December 31, 1996. No options for the purchase of Common Stock are currently outstanding. The Company has no outstanding stock appreciation rights and granted no stock appreciation rights during fiscal year 1996 or the four months ended December 31, 1996. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------------------------------- PERCENT OF NUMBER OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OR FAIR VALUE ON OPTIONS EMPLOYEES IN BASE PRICE DATE OF GRANT NAME GRANTED FISCAL YEAR ($/SH) ($/SH) EXPIRATION DATE ---- ---------- ------------ ----------- ------------- ----------------- Tilmon J. Reeves 390,707 71.8% $0.01 $7.45 December 31, 2004 Richard R. Wadsworth 153,567 28.2% $0.01 $8.63 June 12, 2005 POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM ------------------------------------ NAME 5%($) 10%($) 0%($) ---- ---------- ---------- ---------- Tilmon J. Reeves $4,511,648 $6,859,530 $2,910,665 Richard R. Wadsworth $2,054,414 $3,123,413 $1,325,732
STOCK OPTION EXERCISES The following table sets forth certain information concerning options exercised in fiscal year 1996 by certain of the Company's Named Executive Officers. Messrs. Reeves and Wadsworth fully exercised these options on June 26, 1996. No options for the purchase of Common Stock were outstanding during the four months ended December 31, 1996 and none are currently outstanding. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
SHARES ACQUIRED VALUE NAME ON EXERCISE REALIZED($) ---- --------------- ----------- Tilmon J. Reeves............................................ 390,707(1) $3,726,182 Richard R. Wadsworth........................................ 153,567(2) $1,464,572
- --------------- (1) The Company withheld 156,283 of these shares in satisfaction of its withholding obligations with respect to the exercise of these options. (2) The Company withheld 61,427 of these shares in satisfaction of its withholding obligations with respect to the exercise of these options. DIRECTOR COMPENSATION Pursuant to the Company's Bylaws, the members of the Board of Directors may be compensated in a manner and at a rate determined from time to time by the Board of Directors. Directors who are employees of Kitty Hawk do not receive additional compensation for service as a director. Under the Company's Omnibus Securities Plan, directors who are not employees of the Company may receive shares of Common Stock in an amount equal to their net annual retainer (which is currently $10,000). COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the Offering, Mr. Christopher determined executive officer compensation. Subsequent to the Offering and prior to November 6, 1996, Messrs. Grammer, Craig and Coonfield comprised the Company's Compensation Committee and determined executive officer compensation. Subsequent to November 6, 1996, Messrs. Coonfield and White comprised the Company's Compensation Committee and determined executive 25 26 officer compensation. None of the foregoing individuals serving on the Compensation Committee are or have been officers or employees of the Company or its subsidiaries. Mr. Craig, a director of the Company, is of counsel to Burke, Wright & Keiffer, P.C., counsel to the Company. During fiscal year 1996 and the four months ended December 31, 1996, the Company paid an aggregate of approximately $506,000 to Burke, Wright & Keiffer, P.C. for legal services rendered. In August 1996, the Company acquired an undivided one-third interest in two Falcon 20 jet aircraft with two co-owners (the "Co-Owners") who are unaffiliated with the Company and who each hold a one-third interest in such aircraft. An interim acquisition note in the amount of $1,700,000, covering the purchase price and necessary maintenance, was executed by Mr. Christopher and one of the Co-Owners. In November 1996, the Company and the Co-Owners each acquired an undivided one-third interest in two additional Falcon 20 jet aircraft using the proceeds of a new five-year, $4.3 million term loan that also repaid the interim loan on the first two aircraft. The Company and the Co-Owners entered into a co-ownership and contribution agreement (the "Co-Ownership Agreement") which requires the parties to contribute equally to the payment of all amounts due under the term loan, and under which the parties leased the four Falcon 20 jet aircraft to Ameristar Jet Charters, Inc. ("Ameristar"), an air carrier affiliated with one of the Co-Owners, for operation in cargo charter service. The lease calls for monthly lease payments which exceed the installments on the term loan, and requires Ameristar to maintain the aircraft and to carry appropriate hull insurance on the aircraft and liability insurance of at least $50 million combined single limit coverage, with the Company and the Co-Owners named as loss payees and additional insureds. During fiscal year 1996 and the four months ended December 31, 1996, Mr. Grammer, a director of the Company, subleased the Facility to the Company. During such period, the Company paid an aggregate of approximately $339,000 to Mr. Grammer in lease payments. In February 1997, the Company purchased the lease to the Facility from Mr. Grammer for approximately $1.76 million. The Company believes that the terms of each transaction discussed above were as favorable to Kitty Hawk as would have been obtainable from unaffiliated parties under similar circumstances. Under the terms of the settlement allocating the benefits of the ANET litigation, Mr. Christopher received rights to certain contingent future payments. EMPLOYMENT AGREEMENTS Mr. Christopher has an employment agreement with Kitty Hawk that provides for an initial annual base salary of at least $125,000 and bonuses determined by the Compensation Committee pursuant to the Company's Annual Incentive Compensation Plan and otherwise. Mr. Christopher's employment agreement contains (i) a confidentiality provision that prohibits disclosure of the Company's proprietary information and (ii) a covenant not to compete that provides upon Mr. Christopher's termination of employment with the Company for any reason, Mr. Christopher shall not engage, directly or indirectly, in the air logistics, charter brokerage, on-demand, or scheduled carriage business under an FAA Part 121 or Part 135 certificate for five years following such termination. The employment agreement may be terminated by either party with or without cause. If the employment agreement is terminated by the Company without a material breach by Mr. Christopher, he is entitled to six months of compensation at his then-current salary. Messrs. Reeves and Wadsworth have employment agreements with Kitty Hawk that provide for an initial annual base salary of at least $115,000 and $110,000, respectively, and annual bonuses determined by the Compensation Committee pursuant to the Company's Annual Incentive Compensation Plan and otherwise. These employment agreements provide that Mr. Reeves and Mr. Wadsworth are prohibited from engaging in the air logistics, charter brokerage, on-demand, or scheduled carriage business under an FAA Part 121 or Part 135 certificate for three and two years, respectively, following termination of employment. These employment agreements also contain a confidentiality provision that prohibits disclosure of the Company's proprietary information. These employment agreements may be terminated by either party thereto with or without cause. Mr. Reeves' employment agreement provides that if he is terminated by the Company without 26 27 material breach by Mr. Reeves, he shall be entitled to 100% of his then-current salary in the year following termination and 50% of such annual compensation in both the second and third year following termination and all rights under the stock options and other benefits described above. Mr. Wadsworth's employment agreement provides that if he is terminated by the Company without material breach by Mr. Wadsworth, he shall be entitled to 100% of his then-current salary in the year following termination and 50% of such annual compensation in the second and third year following termination and all rights under the stock options and other benefits described above. ITEM 12. CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information concerning the beneficial ownership of the Company's Common Stock as of March 17, 1997 (except as noted) by (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all of the directors and executive officers of the Company as a group. Except as noted, all shares shown in the table below are held with sole voting and investment power, subject to community property laws.
SHARES OWNED BENEFICIALLY -------------------- NAME AND ADDRESS NUMBER PERCENT ---------------- --------- ------- EXECUTIVE OFFICERS: M. Tom Christopher(1)....................................... 6,673,436 63.8% Tilmon J. Reeves(1)......................................... 234,424 2.2% Richard R. Wadsworth(1)..................................... 92,140 (2) DIRECTORS: Ted J. Coonfield(1)......................................... 700 (2) James R. Craig(1)........................................... 0 (2) Robert F. Grammer(1)........................................ 2,000 (2) Lewis S. White(1)........................................... 0 (2) ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (7 PERSONS).................................................. 7,002,700 67.0% RCM Capital Management, L.L.C.(3)........................... 616,900 5.9% Four Embarcadero Center, Suite 2900 San Francisco, California 94111
- --------------- (1) The address for this stockholder is 1515 West 20th Street, Dallas/Fort Worth International Airport, Texas 75261. (2) Less than 1%. (3) Based upon a Schedule 13G filed with the Securities and Exchange Commission by such beneficial owner on February 6, 1997. RCM Capital Management, L.L.C. ("RCM Capital"), an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, holds sole dispositive power with respect to all such shares and sole voting power with respect to 525,900 of such shares. RCM Limited, L.P. ("RCM Limited") is the managing agent of RCM Capital and has beneficial ownership of such shares only to the extent it may be deemed to beneficially own such shares. RCM General Corporation is the general partner of RCM Limited and has beneficial ownership of such shares only to the extent it may be deemed to beneficially own such shares. RCM Capital is a wholly owned subsidiary of Dresdner Bank AG ("Dresdner"), an international banking organization headquartered in Frankfurt, Germany. Dresdner has beneficial ownership of such shares only to the extent it may be deemed to beneficially own such shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Item 11. Executive Compensation -- Compensation Committee Interlocks and Insider Participation." 27 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS -- see Index to Consolidated Financial Statements on page F-1. The following financial statements are filed as a part of this report: Report of Independent Auditors Consolidated Financial Statements: Consolidated Balance Sheets as of August 31, 1995 and 1996 and December 31, 1996 Consolidated Statements of Income for the years ended August 31, 1994, 1995 and 1996 and the four months ended December 31, 1995 (unaudited) and 1996 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1994, 1995 and 1996 and the four months ended December 31, 1996 Consolidated Statements of Cash Flows for the years ended August 31, 1994, 1995 and 1996 and the four months ended December 31, 1995 (unaudited) and 1996 Notes to Consolidated Financial Statements (a)2. FINANCIAL STATEMENT SCHEDULES Schedules are omitted because they are not applicable or are not required (a)3. EXHIBITS The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 -- Certificate of Incorporation of the Company.(2) 3.2 -- Bylaws of the Company.(2) 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company.(2) 3.4 -- Amendment No. 1 to the Bylaws of the Company.(2) 4.1 -- Specimen Common Stock Certificate.(3) 10.1 -- Master Agreement for Air Charter Transportation Services ("GM Agreement") dated as of June 4, 1990 by and between General Motors Corp. ("GM") and the Company.(2) 10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9, 1990 by and between the Company and GM.(2) 10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4, 1991 by and between the Company and GM.(2) 10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1, 1990 by and between the Company and GM.(2) 10.5 -- Addendum No. 3 to the GM Agreement dated as of November 5, 1990 by and between the Company and GM.(2) 10.6 -- Addendum No. 4 to the GM Agreement dated as of December 3, 1990 by and between the Company and GM.(2) 10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7, 1991 by and between the Company and GM.(2) 10.8 -- Addendum No. 6 to the GM Agreement dated as of February 4, 1991 by and between the Company and GM.(2)
28 29
EXHIBIT NO. DESCRIPTION ------- ----------- 10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4, 1991 by and between the Company and GM.(2) 10.10 -- Revision to Appendices and to Master Agreement for Air Charter Transportation Services dated August 13, 1992 by and between the Company and GM.(2) 10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1, 1994 by and between the Company and GM.(2) 10.12 -- Aircraft Charter Agreement dated as of February 9, 1994 by and between the Company and DHL Airways, Inc.(2) 10.13 -- Agreement to Furnish Three (3) CV-600 Aircraft and Air Cargo Services dated as of May 15, 1995 by and between the Company and Burlington Air Express Inc. ("Burlington").(3) 10.14 -- Agreement to Furnish Five (5) B727-200 Aircraft and Air Cargo Services dated as of March 1, 1996 by and between the Company and Burlington.(3) 10.15 -- Aircraft Operating Lease dated as of March 14, 1995 by and between Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") and the Company.(3) 10.16 -- Amendment and Extension of Aircraft Operating Lease dated April 24, 1996 by and between Ting Hong and the Company.(3) 10.17 -- Aircraft Operating Lease dated April 19, 1996 by and between the Company and Pacific East Asia Cargo Airlines, Inc.(3) 10.18 -- Settlement Agreement dated as of August 22, 1994 by and between the Company, Aircargo, Leasing, M. Tom Christopher, American International Airways, Inc., and Conrad Kalitta.(2) 10.19 -- Sublease Agreement dated as of March 1, 1993 by and between Robert F. Grammer and M. Tom Christopher.(2) 10.20 -- Transfer and Assignment of Sublease Agreement dated as of October 26, 1994 by and between the Company, M. Tom Christopher and Robert F. Grammer.(2) 10.2 -- Salary Continuation Agreement dated as of June 15, 1993 by and between the Company and M. Tom Christopher.(2)(4) 10.22 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig.(2)(4) 10.23 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig.(2)(4) 10.24 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, dated as of September 3, 1996.(3)(4) 10.25 -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan, dated as of September 3, 1996.(3)(4) 10.26 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, dated as of September 3, 1996.(3)(4) 10.27 -- Kitty Hawk, Inc. 401(k) Savings Plan.(2)(4) 10.28 -- Employment Agreement dated as of October 27, 1994 by and between the Company and M. Tom Christopher.(2)(4) 10.29 -- Amended and Restated Employment Agreement dated as of June 12, 1996 by and between the Company and Richard R. Wadsworth.(3)(4) 10.30 -- Amended and Restated Employment Agreement dated as of December 31, 1995 by and between the Company and Tilmon J. Reeves.(3)(4) 10.31 -- Request for written consent to expand ownership without management change dated as of October 26, 1994 granted by GM.(2) 10.32 -- Request for written consent to certain disclosures of Master Agreement and contractual relationship dated as of October 26, 1994 granted by GM.(2)
29 30
EXHIBIT NO. DESCRIPTION ------- ----------- 10.33 -- Kavouras Customer Order Acknowledgment.(2) 10.34 -- Kavouras Meteorological Services Agreement.(2) 10.35 -- Computer Flight Plan and Weather Service Agreement dated as of June 11, 1992 by and between Aircargo and Jeppesen DataPlan, Inc.(2) 10.36 -- Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (the "FEASI Agreement").(3) 10.37 -- Amendment No. 1 dated November 7, 1992 to the FEASI Agreement.(3) 10.38 -- Amendment No. 2 dated February 1993 to the FEASI Agreement.(3) 10.39 -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement.(3) 10.40 -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement.(3) 10.41 -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement.(3) 10.42 -- Amendment No. 6 dated December 1996 to the FEASI Agreement.(5) 10.43 -- Amended and Restated Credit Agreement, dated as of August 4, 1996, by and among the Company, Wells Fargo Bank (Texas), National Association, and Bank One, Texas, N.A.(3) 10.44 -- Aircraft Lease (N751US) between the Company and Fleet Capital Corporation ("Fleet") dated December 27, 1996.(5) 10.45 -- Aircraft Lease Agreement between the Company and Pegasus Capital Corporation dated as of November 25, 1996.(5) 10.46 -- Aircraft Lease (N750US) between the Company and Fleet dated December 27, 1996.(5) 10.47 -- Agreement for Sale of Leasehold between the Company and Robert F. Grammer dated December 6, 1996.(1) 11.1 -- Statement of Computation of Net Income per Share.(1) 21.1 -- Subsidiaries of the Registrant.(3) 23.1 -- Consent of Ernst & Young LLP.(1) 27.1 -- Financial Data Schedule.(1)
- --------------- (1) Filed herewith. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, and incorporated herein by reference. (4) The exhibit is a management contract or compensatory plan or arrangement. (5) Previously filed as an exhibit to the Company's quarterly report on Form 10-Q for the quarter ended November 30, 1996, and incorporated herein by reference. (b) REPORTS ON FORM 8-K The Company filed a Form 8-K dated December 17, 1996. The Form 8-K reported a change in fiscal year end (Item 8) from August 31 to December 31. 30 31 SIGNATURES Pursuant to the requirements of Section 13 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, on the 27th day of March, 1997. KITTY HAWK, INC. By: /s/ RICHARD R. WADSWORTH ---------------------------------- Richard R. Wadsworth Senior Vice President -- Finance, Chief Financial Officer, and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Company and in the capacities indicated on the 27th day of March, 1997.
NAME CAPACITIES ---- ---------- /s/ M. TOM CHRISTOPHER Chairman of the Board of Directors and Chief - ----------------------------------------------------- Executive Officer M. Tom Christopher /s/ TILMON J. REEVES President, Chief Operating Officer and Director - ----------------------------------------------------- Tilmon J. Reeves /s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief Financial - ----------------------------------------------------- Officer, Secretary, Director and Principal Richard R. Wadsworth Financial and Accounting Officer /s/ TED J. COONFIELD Director - ----------------------------------------------------- Ted J. Coonfield /s/ JAMES R. CRAIG Director - ----------------------------------------------------- James R. Craig /s/ ROBERT F. GRAMMER Director - ----------------------------------------------------- Robert F. Grammer /s/ LEWIS S. WHITE Director - ----------------------------------------------------- Lewis S. White
31 32 KITTY HAWK, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of August 31, 1995 and 1996 and December 31, 1996..................................... F-3 Consolidated Statements of Income for the years ended August 31, 1994, 1995, and 1996 and for the four months ended December 31, 1995 (unaudited) and 1996.................... F-4 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1994, 1995, and 1996 and for the four months ended December 31, 1996....................... F-5 Consolidated Statements of Cash Flows for the years ended August 31, 1994, 1995, and 1996 and for the four months ended December 31, 1995 (unaudited) and 1996.............. F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 33 REPORT OF INDEPENDENT AUDITORS Stockholders Kitty Hawk, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Kitty Hawk, Inc. and subsidiaries as of August 31, 1995 and 1996 and December 31, 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1996 and for the four months ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kitty Hawk, Inc. and subsidiaries at August 31, 1995 and 1996 and December 31, 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1996 and for the four months ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas February 7, 1997 F-2 34 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
AUGUST 31, AUGUST 31, DECEMBER 31, 1995 1996 1996 ----------- ------------ ------------ Current assets Cash and cash equivalents....................... $ 3,801,378 $ 5,763,904 $ 27,320,402 Trade accounts receivable....................... 12,967,734 14,195,990 37,828,018 Income tax receivable........................... -- 765,395 -- Deferred income taxes........................... 50,410 156,562 107,564 Inventory and aircraft supplies................. 98,386 1,713,812 2,789,982 Prepaid expenses and other assets............... 797,825 918,929 1,143,989 Deposits on aircraft............................ -- -- 5,438,628 ----------- ------------ ------------ Total current assets.................... 17,715,733 23,514,592 74,628,583 Property and equipment Aircraft........................................ 36,179,455 53,695,320 53,140,853 Aircraft work-in-progress....................... -- 13,476,355 6,732,878 Machinery and equipment......................... 1,425,272 1,776,319 2,680,692 Leasehold improvements.......................... -- 75,313 778,879 Furniture and fixtures.......................... 251,349 166,057 166,057 Transportation equipment........................ 176,057 236,708 289,499 ----------- ------------ ------------ 38,032,133 69,426,072 63,788,858 Less: accumulated depreciation and amortization................................. (7,794,332) (13,112,786) (15,390,015) ----------- ------------ ------------ Net property and equipment.............. 30,237,801 56,313,286 48,398,843 ----------- ------------ ------------ Total assets...................................... $47,953,534 $ 79,827,878 $123,027,426 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable................................ $ 9,327,109 $ 12,952,180 $ 8,853,292 Accrued expenses................................ 1,336,696 1,580,465 23,668,609 Income taxes payable............................ -- -- 2,526,737 Accrued maintenance reserves.................... 2,026,255 2,323,466 2,373,157 Revolving Credit Facility for aircraft acquisitions expected to be refinanced....... -- 10,000,000 -- Current maturities of long-term debt............ 3,278,553 3,620,240 3,687,888 ----------- ------------ ------------ Total current liabilities............... 15,968,613 30,476,351 41,109,683 Long-term debt.................................... 13,702,652 23,291,302 21,080,452 Deferred income taxes............................. 1,316,365 2,421,480 2,544,900 Commitments and contingencies Stockholders' equity Preferred stock, $1 par value: Authorized shares -- 1,000,000, none issued............. -- -- -- Common stock, $.01 par value: Authorized shares -- 25,000,000; issued and outstanding -- 7,423,436 and 7,967,710 at August 31, 1995 and 1996, respectively and 10,669,517 at December 31, 1996.............. 74,234 79,677 106,695 Additional paid-in capital...................... -- 4,635,524 33,968,700 Retained earnings............................... 16,891,670 20,999,846 26,293,298 Less common stock in treasury, 217,710 shares at August 31, 1996 and December 31, 1996........ -- (2,076,302) (2,076,302) ----------- ------------ ------------ Total stockholders' equity.............. 16,965,904 23,638,745 58,292,391 ----------- ------------ ------------ Total liabilities and stockholders' equity........ $47,953,534 $ 79,827,878 $123,027,426 =========== ============ ============
See accompanying notes. F-3 35 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED AUGUST 31, FOUR MONTHS ENDED DECEMBER 31, -------------------------------------------- ------------------------------ 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------- ------------- (UNAUDITED) Revenues: Air freight carrier................... $ 28,284,894 $ 41,117,564 $ 52,921,762 $17,994,371 $20,577,072 Air logistics......................... 79,414,952 62,592,819 89,492,974 51,733,438 39,408,484 ------------ ------------ ------------ ----------- ----------- Total revenues................ 107,699,846 103,710,383 142,414,736 69,727,809 59,985,556 ------------ ------------ ------------ ----------- ----------- Costs of revenues: Air freight carrier................... 19,549,833 28,104,280 38,760,430 11,684,882 13,784,331 Air logistics......................... 73,401,606 57,428,344 80,139,570 45,996,786 33,795,567 ------------ ------------ ------------ ----------- ----------- Total costs of revenues....... 92,951,439 85,532,624 118,900,000 57,681,668 47,579,898 ------------ ------------ ------------ ----------- ----------- Gross profit............................ 14,748,407 18,177,759 23,514,736 12,046,141 12,405,658 General and administrative expenses..... 6,012,975 7,832,167 9,079,891 2,861,518 2,724,763 Non-qualified employee profit sharing expense............................... 731,862 1,000,957 1,169,880 889,046 962,263 Stock option grants to executives....... -- -- 4,230,954 -- -- ------------ ------------ ------------ ----------- ----------- Operating income........................ 8,003,570 9,344,635 9,034,011 8,295,577 8,718,632 Other income (expense): Interest expense...................... (342,502) (1,184,921) (1,859,284) (481,670) (684,173) Contract settlement income, net....... 1,177,742 -- -- -- -- Loss on asset disposal................ -- -- (589,049) -- -- Other, net............................ (431,957) (600,667) 291,255 37,507 625,910 ------------ ------------ ------------ ----------- ----------- Income before income taxes.............. 8,406,853 7,559,047 6,876,933 7,851,414 8,660,369 Income taxes............................ 3,146,157 3,142,653 2,767,744 3,096,769 3,366,917 ------------ ------------ ------------ ----------- ----------- Net income.............................. $ 5,260,696 $ 4,416,394 $ 4,109,189 $ 4,754,645 $ 5,293,452 ============ ============ ============ =========== =========== Net income per share.................... $ 0.66 $ 0.55 $ 0.52 $ 0.60 $ 0.55 ============ ============ ============ =========== =========== Weighted average common and common equivalent shares outstanding......... 7,967,710 7,967,710 7,927,856 7,967,710 9,609,920 ============ ============ ============ =========== ===========
See accompanying notes. F-4 36 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL NUMBER OF COMMON PAID-IN RETAINED TREASURY SHARES STOCK CAPITAL EARNINGS STOCK TOTAL ---------- -------- ----------- ----------- ----------- ----------- Balance at August 31, 1993.............. 10,604,908 $106,048 $ -- $ 7,243,766 $ (61,000) $ 7,288,814 Retirement of treasury stock in connection with the Kitty Hawk, Inc. merger........................ (3,181,472) (31,814) -- (29,186) 61,000 -- Net income............................ -- -- -- 5,260,696 -- 5,260,696 ---------- -------- ----------- ----------- ----------- ----------- Balance at August 31, 1994.............. 7,423,436 74,234 -- 12,475,276 -- 12,549,510 Net income............................ -- -- -- 4,416,394 -- 4,416,394 ---------- -------- ----------- ----------- ----------- ----------- Balance at August 31, 1995.............. 7,423,436 74,234 -- 16,891,670 -- 16,965,904 Stock option grants to executives..... -- -- 4,230,954 -- -- 4,230,954 Exercise of employee stock options (See Note 1)....................... 544,274 5,443 -- (1,013) -- 4,430 Purchase of treasury stock, 217,710 shares, at cost.................... -- -- -- -- (2,076,302) (2,076,302) Tax benefit of stock option grants to executives......................... -- -- 404,570 -- -- 404,570 Net income............................ -- -- -- 4,109,189 -- 4,109,189 ---------- -------- ----------- ----------- ----------- ----------- Balance at August 31, 1996.............. 7,967,710 79,677 4,635,524 20,999,846 (2,076,302) 23,638,745 Shares sold in initial public offering.............................. 2,700,000 27,000 29,311,510 -- -- 29,338,510 Shares issued to employees under the Annual Incentive Compensation Plan.... 1,807 18 21,666 -- -- 21,684 Net income for the four months ended December 31, 1996..................... -- -- -- 5,293,452 -- 5,293,452 ---------- -------- ----------- ----------- ----------- ----------- Balance at December 31, 1996............ 10,669,517 $106,695 $33,968,700 $26,293,298 $(2,076,302) $58,292,391 ========== ======== =========== =========== =========== ===========
See accompanying notes. F-5 37 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOUR MONTHS ENDED YEAR ENDED AUGUST 31, DECEMBER 31, ------------------------------------------ --------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Operating activities: Net income......................... $ 5,260,696 $ 4,416,394 $ 4,109,189 $ 4,754,645 $ 5,293,452 Adjustments to reconcile net income net cash provided by operating activities: Depreciation and amortization... 1,935,348 4,095,156 6,873,033 1,681,489 3,201,903 Loss on disposal of property and equipment..................... 62,251 -- 589,049 -- -- Aircraft received in contract settlement.................... (750,000) -- -- -- -- Deferred income taxes........... (638,568) 732,795 998,963 -- 172,418 Stock option grants to executives.................... -- -- 4,230,954 -- -- Changes in operating assets and liabilities: Trade accounts receivable..... (8,036,613) 2,673,139 (1,228,256) (27,954,848) (23,632,028) Contract settlement receivable................. 3,500,000 -- -- -- -- Receivables from affiliates... (53,035) 481,297 -- -- -- Income taxes receivable....... -- -- (765,395) -- 765,395 Inventory and aircraft supplies................... (19,778) 23,285 (1,615,426) (298,872) (1,076,170) Prepaid expenses and other.... 283,342 (532,693) (121,104) (5,854,576) (5,663,688) Accounts payable and accrued expenses................... 4,063,034 (2,379,510) 3,868,840 19,622,927 17,989,256 Accrued maintenance reserves................... 379,535 1,429,886 297,211 281,184 49,691 Income taxes payable.......... 1,614,521 (1,883,898) -- 2,782,766 2,526,737 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities............... 7,600,733 9,055,851 17,237,058 (4,985,285) (373,034) Investing activities: Proceeds from sale of assets....... -- -- -- -- 18,508,431 Capital expenditures............... (13,875,983) (17,929,106) (33,537,567) (174,697) (13,795,891) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities............... (13,875,983) (17,929,106) (33,537,567) (174,697) 4,712,540 Financing activities: Proceeds from issuance of common stock........................... -- -- 4,430 -- 29,338,510 Proceeds from issuance of long-term debt............................ 10,916,656 9,911,240 23,117,000 5,725,000 1,500,000 Repayments of long-term debt....... (2,747,533) (2,074,970) (3,186,663) (1,011,103) (13,643,202) Acquisition of treasury shares..... -- -- (2,076,302) -- -- Shares issued under Annual Incentive Compensation Plan..... -- -- -- -- 21,684 Tax benefit of stock option grant to executives................... -- -- 404,570 -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided by financing activities......................... 8,169,123 7,836,270 18,263,035 4,713,897 17,216,992 ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents................... 1,893,873 (1,036,985) 1,962,526 (446,085) 21,556,498 Cash and cash equivalents at beginning of period................ 2,944,490 4,838,363 3,801,378 3,801,378 5,763,904 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period............................. $ 4,838,363 $ 3,801,378 $ 5,763,904 $ 3,355,293 $ 27,320,402 ============ ============ ============ ============ ============
See accompanying notes. F-6 38 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight services through two related businesses: (i) an air freight carrier and (ii) an air logistics service provider, all primarily in North America. The Company provided air logistics services to one customer which accounted for approximately 63%, 47%, 41% and 16% of its total revenues in fiscal years 1994, 1995, 1996 and for the four months ended December 31, 1996, respectively. Related accounts receivable from this customer at August 31, 1995 and 1996 and December 31, 1996, were approximately $5,089,000, $4,915,000 and $2,156,000, respectively. The contract for these services is effective through May 31, 1997; however, such contract may be canceled by either party with 30 days notice. Another customer accounted for approximately 10%, 10%, 15% and 44% of the Company's total revenues in fiscal years 1994, 1995, 1996 and for the four months ended December 31, 1996, respectively. Related accounts receivable from this customer at August 31, 1995 and 1996 and December 31, 1996 were approximately $22,000, $0 and $27,086,000, respectively. The Company generally sells on open accounts with 30-day terms and does not require collateral for credit sales. On December 4, 1996, the Company elected to change its fiscal year end to December 31. Operating results for the four month period ended December 31, 1996 are not necessarily indicative of the results that may be expected for a calendar year. Operating results for the four month period ended December 31, 1995 (unaudited) include all adjustments management believes are necessary for a fair presentation. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line and accelerated methods over estimated useful lives ranging from three to ten years. Convair and DC-9 airframes are fully depreciated over the period remaining to the next major airframe overhaul since the Company does not expect to perform major airframe overhauls on these aircraft. Boeing 727-200 airframes are fully depreciated over an estimated useful life of ten years. Costs relating to major airframe overhauls are capitalized as incurred and amortized over the estimated number of flight hours until the next overhaul (the deferral method). No major airframe overhauls have been performed to date. With respect to aircraft engines, the useful life is the estimated number of flight hours remaining until the next required engine overhaul. Income Taxes Income taxes have been provided using the liability method in accordance with the Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Revenue Recognition Revenues are recognized as services are provided. F-7 39 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net Income Per Share Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. The effect of options to purchase 390,707 and 153,567 shares of the Company's common stock at $0.01 granted to certain executives in December 1995 and June 1996, respectively, have been included in the calculation of weighted average common and common equivalent shares for the years ended August 31, 1994, 1995 and 1996. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and held in banks, money market funds, and other investments with original maturities of three months or less. Inventory Inventory consists of aircraft parts and supplies and is stated at the lower of average cost or market. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Stock-Based Compensation The Company accounts for stock-based compensation utilizing Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Under the provisions of SFAS No. 123, the Company has elected to continue to apply the provisions of APB Opinion No. 25 to its stock-based compensation arrangements and provide supplementary financial statement disclosures as required under SFAS No. 123. Reorganization In October, 1994, Kitty Hawk, Inc. was organized as a wholly-owned subsidiary of Kitty Hawk Group, Inc. ("Group"). Group subsequently merged with Kitty Hawk, Inc. with Kitty Hawk, Inc. being the surviving entity. In connection therewith, each outstanding share of Group common stock was exchanged for 106,049 shares of Kitty Hawk, Inc. common stock. Additionally, Group stock held in treasury was retired. The accompanying consolidated financial statements present the effects of the merger on a retroactive basis. Reclassifications Certain amounts from prior years have been reclassified to conform to current year presentation. Stock Split On June 28, 1996 the Company approved a 1.2285391-for-1 stock split effected as a stock dividend. All references to common stock and per share data have been restated to give effect to the split. F-8 40 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. DEBT Long-term debt consists of the following:
AUGUST 31, AUGUST 31, DECEMBER 31, 1995 1996 1996 ----------- ----------- ------------ (1) Note payable, bearing interest at prime plus 1.75% payable in 48 monthly installments of $25,021 plus interest, with a maturity date of December 1996.................................. $ 350,291 $ 50,042 $ -- (2) Note payable, bearing interest at 9.75% payable in 18 monthly installments of interest only and 42 monthly installments of $28,212 including interest beginning December 1996, with a maturity date of May 2000; secured by a Douglas DC-9 aircraft, with a carrying value of approximately $940,000 at December 31, 1996.... 1,000,500 1,000,500 980,417 (3) Note payable, bearing interest at an adjusted Eurodollar rate plus 1.50% to 2.00% based upon a fixed charge coverage ratio of the Company (7.125% at December 31, 1996), payable in 28 quarterly installments plus interest beginning September 1996, with a maturity date of June 2003; secured by two Boeing 727-200 aircraft, with a carrying value of approximately $11,036,000 at December 31, 1996............... -- 11,225,000 10,605,923 (4) Note payable, bearing interest at an adjusted Eurodollar rate plus 1.50% to 2.00% based upon a fixed charge coverage ratio of the Company (7.125% at December 31, 1996), payable in 23 quarterly installments of $531,000 plus interest beginning September 1996, with a maturity date of June, 2002; secured by four Douglas DC-9 aircraft and four Boeing 727-200 aircraft, with a net carrying value of approximately $17,918,000 at December 31, 1996........................................... -- 12,744,000 11,682,000 (5) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.25% payable in 21 quarterly installments of $153,354 plus interest, with a maturity date of September 1999. (See (4) above.)......................... 2,607,021 -- -- (6) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.25% payable in 71 monthly installments of $76,891 plus interest, with a maturity date of October 2000. (See (4) above.)........................................ 4,767,245 -- -- (7) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.00% payable in 72 monthly installments of $60,517 plus interest, with a maturity date of March 2001. (See (4) above.)........................................ 4,054,641 -- -- (8) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.00% payable in 72 monthly installments of $59,077 plus interest, with a maturity date of July 2001. (See (4) above.)........................................ 4,201,507 -- --
F-9 41 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, AUGUST 31, DECEMBER 31, 1995 1996 1996 ----------- ----------- ------------ (9) Revolving Credit Facility for general corporate purposes....................................... -- 1,892,000 1,500,000 ----------- ----------- ----------- 16,981,205 26,911,542 24,768,340 Less current portion................................ 3,278,553 3,620,240 3,687,888 ----------- ----------- ----------- $13,702,652 $23,291,302 $21,080,452 =========== =========== ===========
Maturities of long-term debt at December 31, 1996 are as follows: 1997........................................ $ 3,687,888 1998........................................ 5,317,534 1999........................................ 3,958,056 2000........................................ 3,911,104 2001........................................ 3,900,557 Thereafter.................................. 3,993,201 ----------- $24,768,340 ===========
During August 1996, the Company entered into a new Credit Agreement (notes (3), (4) and (9) above) with a bank and refinanced a portion of the existing notes payable. Proceeds of note (4) in the amount of $12,744,000 were used to pay down the outstanding balances of the existing notes payable (notes (5), (6), (7), and (8)). The Credit Agreement subjects the Company to financial covenants, including fixed charge coverage, cash flow and leverage ratios. In addition, the Credit Agreement prohibits redemption of Company securities, certain investments outside the Company's line of business, transactions with affiliates and additional indebtedness without prior consent of the Bank. The Credit Agreement also limits the ability of the Company to change its line of business and limits the payment of dividends. At December 31, 1996 the Company has outstanding two interest rate swap agreements with the commercial bank to whom note (3) is payable, having a total notional principal amount of $11,225,000. These swap agreements effectively change the interest rate exposure on note (3) to a fixed 7.75 percent. The notional principal amounts of the interest rate swaps reduce in proportion to required principal reductions on the related note. The Company is exposed to credit loss in the event of nonperformance by the other party in the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparty. Based on a quote provided by the bank, these swap agreements could have been terminated at December 31, 1996 in exchange for a payment to the Company of $106,059. Under the Credit Agreement, the Company also has a $15 million Revolving Credit Facility available, of which $10 million is restricted for interim financing of up to $6.5 million per aircraft for aircraft acquisitions by the Company; the remaining $5 million is for general corporate purposes, including interim financing for acquired aircraft that exceeds the limits that apply to the restricted portion. Any advance under the portion that is restricted to interim financing for aircraft acquisition ($0 at December 31, 1996) must be repaid in full within 150 days of first advance for the acquired aircraft. The outstanding balance of the Revolving Credit Facility results from borrowings in connection with working capital requirements. The Revolving Credit Facility bears interest at an adjusted Eurodollar rate plus 1.50% to 2.00% based upon a fixed charge coverage ratio of the Company or at prime (8.25% at December 31, 1996). The Revolving Credit Facility expires on December 31, 1998 and $13.5 million was available to be borrowed by the Company at December 31, 1996. Under the Credit Agreement, the Company also has a $10 million facility available to finance the purchase of one DC9-15F hushkit and up to seven major maintenance checks for jet aircraft. The funds will be F-10 42 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) available to the Company until April 29, 1998, and any borrowings under this facility mature March 31, 2003. At December 31, 1996, the entire $10 million was available to the Company. At December 31, 1996, the Company had approximately $1,400,000 in standby letters of credit outstanding. All amounts outstanding under the Credit Agreement are cross-collateralized and are secured by certain aircraft owned by the Company, all aircraft acquired under the restricted portion of the Revolving Credit Facility while those advances are outstanding, certain leases of aircraft and engines, accounts, chattel paper, general intangibles, and other personal property. Based upon the variable interest rates provided for in the substantial majority of the Company's long-term debt, management believes the fair value of its long-term debt approximates its carrying value at December 31, 1996. In connection with the Company's recent acquisition of a one-third undivided interest in four Falcon 20 jet aircraft, the co-owners of the aircraft entered into a five year, $4.3 million term loan, bearing interest at a floating prime rate, which is secured by all four Falcon 20 aircraft and requires monthly payments of principal and interest. The co-owners leased the aircraft to an air carrier affiliated with one of the co-owners. The lease calls for monthly lease payments which exceed the installments on the term loan. The Company's liability under this term loan is limited to $2.0 million. The Company made cash interest payments of $280,754, $1,088,928, $1,765,523 and $664,164 during fiscal years ended 1994, 1995, 1996 and for the four months ended December 31, 1996, respectively. 3. INCOME TAXES The provision for income taxes consists of the following:
FOUR MONTHS YEAR ENDED AUGUST 31, ENDED ------------------------------------ DECEMBER 31, 1994 1995 1996 1996 ---------- ---------- ---------- ------------ Current income tax: Federal........................... $3,434,725 $1,829,723 $1,352,390 $2,768,672 State............................. 350,000 580,135 416,391 425,827 ---------- ---------- ---------- ---------- Total current income tax..................... 3,784,725 2,409,858 1,768,781 3,194,499 ---------- ---------- ---------- ---------- Deferred income tax: Federal........................... (608,460) 627,993 758,138 141,169 State............................. (30,108) 104,802 240,825 31,249 ---------- ---------- ---------- ---------- Total deferred income tax..................... (638,568) 732,795 998,963 172,418 ---------- ---------- ---------- ---------- $3,146,157 $3,142,653 $2,767,744 $3,366,917 ========== ========== ========== ==========
The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
FOUR MONTHS YEAR ENDED AUGUST 31, ENDED ------------------------------------ DECEMBER 31, 1994 1995 1996 1996 ---------- ---------- ---------- ------------ Income tax computed at statutory rate.............................. $2,858,330 $2,570,076 $2,338,157 $3,031,129 State income taxes, net of federal benefit........................... 211,129 452,058 433,763 297,928 Other, net.......................... 76,698 120,519 (4,176) 37,860 ---------- ---------- ---------- ---------- Total..................... $3,146,157 $3,142,653 $2,767,744 $3,366,917 ========== ========== ========== ==========
F-11 43 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the net deferred tax liabilities recognized on the accompanying balance sheets are as follows:
AUGUST 31, AUGUST 31, DECEMBER 31, 1995 1996 1996 ----------- ----------- ------------ Deferred tax liabilities: Depreciation.............................. $(2,071,971) $(3,318,803) $(3,461,603) Prepaid expenses.......................... (117,440) (17,229) (66,228) ----------- ----------- ----------- Total deferred tax liabilities.... (2,189,411) (3,336,032) (3,527,831) ----------- ----------- ----------- Deferred tax assets: Nondeductible accruals.................... 167,850 173,790 173,790 Airframe reserves......................... 755,606 897,324 916,705 ----------- ----------- ----------- Total deferred tax assets......... 923,456 1,071,114 1,090,495 ----------- ----------- ----------- Net deferred tax liability.................. $(1,265,955) $(2,264,918) $(2,437,336) =========== =========== ===========
The Company made cash income tax payments of $2,170,203, $4,552,371, $2,078,673 and $571,420 during fiscal years 1994, 1995, 1996 and for the four months ended December 31, 1996, respectively. 4. COMMITMENTS The Company leases its primary office and maintenance space under a non-cancelable operating lease which expires in fiscal year 1998 from a party who, effective October 1994, became a member of the Company's Board of Directors. Rent expense under this lease was $260,970, $252,595, $254,934 and $84,305 for fiscal years 1994, 1995, 1996 and for the four months ended December 31, 1996, respectively. Under the lease agreement, the Company has the option to purchase the office facilities and the landlord's interest in the associated ground lease at any time prior to March 1, 1997 for consideration of $2,200,000 less $5,000 for each monthly rental payment made after March 1, 1993. Based upon an agreement with the lessor of the facility, the Company expects to close the purchase of the facility for approximately $1.76 million in February 1997. The Company leases its secondary maintenance space under a cancelable operating lease which expires in May 1999. The lease can be canceled by either party with 60 days notice. Rent expense under this lease was $59,853, $163,500, and $54,500 in fiscal years 1995, 1996 and for the four months ended December 31, 1996, respectively. In December 1996, the Company sold at cost two recently acquired and modified Boeing 727-200 aircraft to a third party and entered into an operating lease agreement for such aircraft commencing January 1, 1997, ending December 31, 1997, with monthly lease payments of approximately $252,000, with five successive one year renewal options. The Company has an option to purchase the aircraft at the end of each year, and guarantees to the lessor certain minimum sale values if the Company elects not to renew the lease or exercise its purchase option. The funds from the sale were partially used to pay indebtedness incurred to acquire, convert to cargo configuration, perform maintenance updates and hushkit the aircraft. In November 1996, the Company acquired a Boeing 727-200 aircraft in passenger configuration under a seven year operating lease at a monthly rate of $50,000. The aircraft is being modified to cargo configuration and is undergoing maintenance updates at the Company's cost. F-12 44 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minimum annual rentals at December 31, 1996 are as follows: 1997............................................. $3,793,476 1998............................................. 763,500 1999............................................. 668,125 2000............................................. 600,000 2001............................................. 600,000 Thereafter....................................... 1,200,000 ---------- $7,625,101 ==========
During December 1996, the Company entered into firm purchase commitments to acquire hushkits for seven of its Boeing 727-200 aircraft for a total purchase price of up to $17,500,000. 5. CONTRACT SETTLEMENT In September 1992, the Company was awarded a contract by the United States Postal Service (the "USPS"). An unaffiliated air freight carrier (the "associated bidder") was associated with the Company in the successful bid. Prior to the commencement of the contract, competing bidders filed suit against the USPS seeking to set aside the award. In April 1993, to avoid the expense and uncertainty of continued litigation, the Company accepted a settlement. Under the settlement, the contract was terminated for convenience and re-awarded to the incumbent. Additionally, the Company received $12.7 million and the right to receive up to a total of $6.5 million over ten years in installments of $162,500 per quarter, contingent on the re-awarded contract remaining in effect. Appropriate releases were exchanged. At August 31, 1993, the Company and the associated bidder had not agreed upon the division of the settlement proceeds, which were held in escrow; but the Company reasonably estimated its share of the proceeds, exclusive of the $6.5 million to be paid in installments over ten years, to be at least $3.5 million. The Company therefore recorded the $3.5 million as a receivable and, net of contract-related expense, settlement income of $724,683 for fiscal year 1993. During fiscal year 1994, the Company and the associated bidder agreed to a division of the settlement proceeds and resolution of all their related claims. Under that agreement, the Company received from escrow approximately $3.5 million cash, obtained title to a Boeing 727-200 aircraft, independently valued and recorded by the Company at $750,000, and was relieved of $1.2 million of previously accrued transportation costs. Additionally, one-half of the contingent future quarterly installment payments were allocated to the Company's majority stockholder. As a result of this settlement, for fiscal year 1994, the Company recorded additional contract settlement income of $1,177,742, which is net of approximately $730,000 in additional settlement costs, principally legal fees. This amount also included both income and an offsetting expense of $677,239, representing the estimated fair value of the future quarterly installment payments that will be paid directly to the Company's majority stockholder. 6. LITIGATION The Company filed suit against Express One International, Inc. ("Express One") in July 1992 in Dallas County, Texas, claiming that Express One breached an aircraft charter agreement and seeking actual damages of approximately $60,000. Express One counterclaimed, asserting that the Company wrongfully repudiated the lease agreement and seeking damages of $356,718 for services performed, $1,140,000 for additional fees it would have received under the contract, punitive damages and its attorney's fees and costs. F-13 45 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In February 1995, a jury verdict in the case granted the Company $25,000 in damages plus its attorneys fees and denied Express One's claims. The court entered judgment in favor of the Company for $25,000 in damages, for $148,115 in attorneys fees through trial and for additional attorneys fees if Express One appeals. Before expiration of the time for appeal, Express One filed a petition under Chapter 11 of the U.S. Bankruptcy Code. There is a dispute about whether Express One has preserved a right to appeal and whether the judgment has become final. Therefore, the judgment awarded to the Company has not been recorded in the financial statements. The Company does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. The USPS selected the Company's air freight carrier in September 1992 as the successful bidder on a contract for a multi-city network of air transportation services supporting the USPS Express Mail system. Two unsuccessful bidders sued the USPS to enjoin the award. The Company intervened. This litigation (the "ANET Litigation") was settled in April 1993 by agreements under which the USPS terminated the Company's contract for convenience and awarded the contract to the incumbent contractor, Emery Worldwide Airlines, Inc. ("Emery"). In March 1995, the Company was served with a complaint in a qui tam lawsuit filed on behalf of the U.S. Government by a third-party plaintiff seeking to share a recovery under the Federal False Claims Act (the "Act"). The suit, filed in May 1994, was filed under seal in accordance with the Act, to enable the U.S. Government to review the claim before its disclosure to the defendants. The U.S. Government declined to pursue the claim, but the third-party plaintiff chose to continue. The suit claimed that the Company and another defendant fraudulently failed to disclose to the USPS, both in the Company's successful bid and in the settlement of the ANET litigation, that some of the aircraft the Company proposed to purchase and use to perform the contract were aging aircraft with high use, and claimed that the Company and Emery similarly fraudulently conspired in connection with the settlement of the ANET litigation. The suit sought to recover treble the $10 million settlement payment made by the USPS in settling the ANET litigation, plus the third party plaintiff's costs and fees. The Company moved to dismiss the suit with prejudice on grounds that it was barred by the Act. The Company also sought to recover its attorneys' fees from the plaintiff and to obtain sanctions against the plaintiff's attorneys. The Company believes the suit was clearly frivolous because, among other things, the Company in the ANET bid identified each aircraft by serial number, age, hours and cycles, and made available use and maintenance records for each aircraft as required by the request for proposal, and that the USPS reviewed and inspected the aircraft, data and records and found them acceptable. In May 1996, the court dismissed the suit and awarded the Company its attorneys' fees and costs. The plaintiff has asked the court to reconsider its ruling. The Company does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. Additionally, in the normal course of business, the Company is a party to matters of litigation, none of which, in the opinion of management, will have a material adverse effect on the Company's financial condition or the results of operations. 7. STOCK OPTIONS In October 1994 the Company granted non-qualified options to two executives to purchase a total of 337,848 shares of common stock at $7.81 per share. In December 1995, the Company canceled 245,708 of the options outstanding and granted to an executive a nonqualified option to purchase 390,707 shares of common stock at $0.01 per share. The new option had a term of nine years and was fully vested. In June 1996, the Company canceled the remaining 92,140 options outstanding and granted to another executive a non-qualified option to purchase 153,567 shares of common stock at $0.01 per share. The new option had a term of nine years and was fully vested. On F-14 46 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) June 26, 1996, the executives fully exercised their options. No options remain outstanding at December 31, 1996. Based on an independent appraisal commissioned by the Company, the fair value of the options of $4,230,954 is reflected as a charge to earnings in the accompanying statement of income for the year ended August 31, 1996, under APB Opinion No. 25 and represents the fair value which would have been charged under SFAS 123. Accordingly, no supplemental disclosures under SFAS No. 123 are necessary. 8. RELATED PARTY TRANSACTIONS The Company provided maintenance and other services as well as cash advances to Martinaire East, Inc. ("Martinaire"), a company in which a minority interest was owned by the Company's majority stockholder. Total sales to Martinaire for fuel and services were approximately, $235,000 and $22,000 in fiscal years 1994 and 1995, respectively. Martinaire also flies charter service for the Company. During fiscal years 1994 and 1995, Martinaire provided the Company services in the amount of approximately $982,000 and $232,000, respectively. At December 31, 1996, Martinaire is no longer considered to be a related party. 9. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code which covers substantially all employees meeting minimum service requirements. Under the plan, voluntary contributions are made by employees and the Company provides matching contributions based upon the employees' contribution. The Company incurred $80,812, $121,217, $159,967 and $56,378 in matching contributions related to this plan during fiscal years 1994, 1995, 1996 and for the four months ended December 31, 1996, respectively. The Company has adopted: - An Omnibus Securities Plan (the Plan) under which 300,000 shares of its common stock are reserved for issuance to its employees. The Plan is administered by the Company's Compensation Committee which may grant stock based and nonstock based compensation to the Plan participants. No awards have been granted under the Plan as of December 31, 1996. - An Annual Incentive Compensation Plan (the Compensation Plan) under which the Compensation Committee awards semiannual bonuses to employees of the Company. The aggregate amount of bonuses available for award is limited to 10% of the Company's income before income taxes and the bonuses to be paid under the Compensation Plan. The Company may elect to pay the full amount of the bonuses in common stock, which is limited to total stock distributions of 200,000 shares of common stock. As of December 31, 1996, 198,193 shares were available for distribution. - An Employee Stock Purchase Plan covering up to 100,000 shares of the Company's common stock. F-15 47 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. CALENDAR YEAR INCOME STATEMENT (UNAUDITED) As described above, the Company has changed its year end to December 31. The following table presents historical information recast on a calendar quarter basis for 1996. QUARTERS FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
QUARTER ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 TOTAL --------- -------- ------------- ------------ -------- Revenues: Air freight carrier................ $10,059 $15,215 $14,341 $15,889 $ 55,504 Air logistics...................... 10,195 16,815 16,134 34,024 77,168 ------- ------- ------- ------- -------- Total revenues............. 20,254 32,030 30,475 49,913 132,672 ------- ------- ------- ------- -------- Costs of revenues: Air freight carrier................ 8,256 12,084 9,348 11,172 40,860 Air logistics...................... 9,155 15,112 14,872 28,799 67,938 ------- ------- ------- ------- -------- Total costs of revenues.... 17,411 27,196 24,220 39,971 108,798 ------- ------- ------- ------- -------- Gross profit......................... 2,843 4,834 6,255 9,942 23,874 General and administrative expenses........................... 2,271 2,301 2,305 2,066 8,943 Non-qualified employee profit sharing expense............................ (91) 58 477 796 1,240 Stock option grants to executives.... 0 4,232 (1) 0 4,231 ------- ------- ------- ------- -------- Operating income..................... 663 (1,757) 3,474 7,080 9,460 Other income (expense): Interest expense................... (520) (504) (507) (531) (2,062) Loss on asset disposal............. 0 0 (589) 0 (589) Other, net......................... 102 36 125 617 880 ------- ------- ------- ------- -------- Income before income taxes........... 245 (2,225) 2,503 7,166 7,689 Income taxes......................... 95 (927) 1,096 2,769 3,033 ------- ------- ------- ------- -------- Net income (loss).................... $ 150 $(1,298) $ 1,407 $ 4,397 $ 4,656 ======= ======= ======= ======= ======== Net income (loss) per share.......... $ 0.02 $ (0.16) $ 0.18 $ 0.43 $ 0.55 ======= ======= ======= ======= ======== Net income, adjusted for non-recurring items................ $ 150 $ 1,264 $ 2,467 $ 4,397 $ 8,278 ======= ======= ======= ======= ======== Net income per share, adjusted for non-recurring items................ $ 0.02 $ 0.16 $ 0.32 $ 0.43 $ 0.98 ======= ======= ======= ======= ======== Weighted average common and common equivalent shares outstanding...... 7,968 7,968 7,750 10,215 8,477 ======= ======= ======= ======= ========
F-16 48 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 -- Certificate of Incorporation of the Company.(2) 3.2 -- Bylaws of the Company.(2) 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company.(2) 3.4 -- Amendment No. 1 to the Bylaws of the Company.(2) 4.1 -- Specimen Common Stock Certificate.(3) 10.1 -- Master Agreement for Air Charter Transportation Services ("GM Agreement") dated as of June 4, 1990 by and between General Motors Corp. ("GM") and the Company.(2) 10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9, 1990 by and between the Company and GM.(2) 10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4, 1991 by and between the Company and GM.(2) 10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1, 1990 by and between the Company and GM.(2) 10.5 -- Addendum No. 3 to the GM Agreement dated as of November 5, 1990 by and between the Company and GM.(2) 10.6 -- Addendum No. 4 to the GM Agreement dated as of December 3, 1990 by and between the Company and GM.(2) 10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7, 1991 by and between the Company and GM.(2) 10.8 -- Addendum No. 6 to the GM Agreement dated as of February 4, 1991 by and between the Company and GM.(2) 10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4, 1991 by and between the Company and GM.(2) 10.10 -- Revision to Appendices and to Master Agreement for Air Charter Transportation Services dated August 13, 1992 by and between the Company and GM.(2) 10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1, 1994 by and between the Company and GM.(2) 10.12 -- Aircraft Charter Agreement dated as of February 9, 1994 by and between the Company and DHL Airways, Inc.(2) 10.13 -- Agreement to Furnish Three (3) CV-600 Aircraft and Air Cargo Services dated as of May 15, 1995 by and between the Company and Burlington Air Express Inc. ("Burlington").(3) 10.14 -- Agreement to Furnish Five (5) B727-200 Aircraft and Air Cargo Services dated as of March 1, 1996 by and between the Company and Burlington.(3) 10.15 -- Aircraft Operating Lease dated as of March 14, 1995 by and between Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") and the Company.(3) 10.16 -- Amendment and Extension of Aircraft Operating Lease dated April 24, 1996 by and between Ting Hong and the Company.(3) 10.17 -- Aircraft Operating Lease dated April 19, 1996 by and between the Company and Pacific East Asia Cargo Airlines, Inc.(3)
49
EXHIBIT NO. DESCRIPTION ------- ----------- 10.18 -- Settlement Agreement dated as of August 22, 1994 by and between the Company, Aircargo, Leasing, M. Tom Christopher, American International Airways, Inc., and Conrad Kalitta.(2) 10.19 -- Sublease Agreement dated as of March 1, 1993 by and between Robert F. Grammer and M. Tom Christopher.(2) 10.20 -- Transfer and Assignment of Sublease Agreement dated as of October 26, 1994 by and between the Company, M. Tom Christopher and Robert F. Grammer.(2) 10.2 -- Salary Continuation Agreement dated as of June 15, 1993 by and between the Company and M. Tom Christopher.(2)(4) 10.22 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig.(2)(4) 10.23 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig.(2)(4) 10.24 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, dated as of September 3, 1996.(3)(4) 10.25 -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan, dated as of September 3, 1996.(3)(4) 10.26 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, dated as of September 3, 1996.(3)(4) 10.27 -- Kitty Hawk, Inc. 401(k) Savings Plan.(2)(4) 10.28 -- Employment Agreement dated as of October 27, 1994 by and between the Company and M. Tom Christopher.(2)(4) 10.29 -- Amended and Restated Employment Agreement dated as of June 12, 1996 by and between the Company and Richard R. Wadsworth.(3)(4) 10.30 -- Amended and Restated Employment Agreement dated as of December 31, 1995 by and between the Company and Tilmon J. Reeves.(3)(4) 10.31 -- Request for written consent to expand ownership without management change dated as of October 26, 1994 granted by GM.(2) 10.32 -- Request for written consent to certain disclosures of Master Agreement and contractual relationship dated as of October 26, 1994 granted by GM.(2) 10.33 -- Kavouras Customer Order Acknowledgment.(2) 10.34 -- Kavouras Meteorological Services Agreement.(2) 10.35 -- Computer Flight Plan and Weather Service Agreement dated as of June 11, 1992 by and between Aircargo and Jeppesen DataPlan, Inc.(2) 10.36 -- Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (the "FEASI Agreement").(3) 10.37 -- Amendment No. 1 dated November 7, 1992 to the FEASI Agreement.(3) 10.38 -- Amendment No. 2 dated February 1993 to the FEASI Agreement.(3) 10.39 -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement.(3) 10.40 -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement.(3) 10.41 -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement.(3) 10.42 -- Amendment No. 6 dated December 1996 to the FEASI Agreement.(5)
50
EXHIBIT NO. DESCRIPTION ------- ----------- 10.43 -- Amended and Restated Credit Agreement, dated as of August 4, 1996, by and among the Company, Wells Fargo Bank (Texas), National Association, and Bank One, Texas, N.A.(3) 10.44 -- Aircraft Lease (N751US) between the Company and Fleet Capital Corporation ("Fleet") dated December 27, 1996.(5) 10.45 -- Aircraft Lease Agreement between the Company and Pegasus Capital Corporation dated as of November 25, 1996.(5) 10.46 -- Aircraft Lease (N750US) between the Company and Fleet dated December 27, 1996.(5) 10.47 -- Agreement for Sale of Leasehold between the Company and Robert F. Grammer dated December 6, 1996.(1) 11.1 -- Statement of Computation of Net Income per Share.(1) 21.1 -- Subsidiaries of the Registrant.(3) 23.1 -- Consent of Ernst & Young LLP.(1) 27.1 -- Financial Data Schedule.(1)
- --------------- (1) Filed herewith. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, and incorporated herein by reference. (4) The exhibit is a management contract or compensatory plan or arrangement. (5) Previously filed as an exhibit to the Company's quarterly report on Form 10-Q for the quarter ended November 30, 1996, and incorporated herein by reference. EX-10.47 2 AGREEMENT FOR SALE OF LEASEHOLD 1 EXHIBIT 10.47 AGREEMENT FOR SALE OF LEASEHOLD This Agreement ("Agreement") is made by and between Robert F. Grammer ("Seller"), a resident of Dallas County, Texas, and Kitty Hawk, Inc. ("Buyer"), a Texas corporation, as follows: R E C I T A L S A. Seller is the owner and holder of a certain lease of real property and improvements, including without limitation, an aircraft hangar, located on the promises of Dallas/Fort Worth International Airport, bearing D/FW Airport Lease No. 23555 and known generally as 1515 W. 20th Street, Dallas/Fort Worth Airport, Texas 75261. Such lease, together with all amendments and supplements thereto is hereafter referred to as the "Lease." A true copy of the Lease is attached to this Agreement as Exhibit "A" and incorporated herein by reference for all purposes. A legal description of the leased land is attached hereto as Exhibit "B" and incorporated herein by reference for all purposes. The leased land and all improvements and fixtures located thereon are hereafter referred to as the "Leased Property." B. Buyer is the current Sublessee of the Leased Property (the "Sublease") and has been in possession of such Property since March 1, 1993, and has all knowledge of the condition of the Leased Property, including without limitation, the building and all fixtures attached thereto, that it deems necessary to make this Agreement. A true copy of the Sublease is attached hereto as Exhibit "C" and incorporated herein by reference. C. Buyer desires to purchase and acquire all of Seller's right, title and interest in the Leased Property, and Seller desires to sell, assign and convey to Buyer all of Seller's right, title and interest to the Leased Property, all on the following terms and conditions: 1. Subject to the approval of the Dallas/Fort Worth Airport Board, Seller hereby sells, assigns, transfers and conveys to Buyer, and Buyer hereby accepts from Seller, effective the date of Closing, all of Seller's right, title and interest in and to the Lease, and the Leased Property, including without limitation, all improvements, fixtures and personal property located thereon owned by Seller, subject to the terms and conditions herein set forth. Pending the Closing of this Agreement, AGREEMENT FOR SALE OF LEASEHOLD - PAGE 1 February 19, 1997 2 Buyer's Sublease shall continue pursuant to its terms. 2. The purchase price shall be $1,760,000 payable at Closing in cash or by wire transfer received in Seller's account on the day of Closing. 3. Except as specifically provided in paragraph 4 below, the Leased Property is being conveyed by Seller and accepted by Buyer "AS IS, WHERE IS", without warranty, express or implied, as to condition, habitability, suitability for occupancy, use or fitness for any particular purpose. 4. Seller warrants and represents to Buyer that: a. Exhibit "A" is a true copy of the Ground Lease of the land that is a part of the Leased Property, between Dallas/Fort Worth Regional Airport Board (the "Ground Lessor"), and Seller as Successor-in-Interest of Sedalia-Marshall-Boonville Stage Line, Inc.; the Ground Lease is in full force and effect, and to Seller's knowledge, without default or notice of default, and without any condition known to Seller that would result in a default with the passage of time; b. Seller holds all rights and interests of Lessee of the Premises under the Lease; and has full right and authority to execute and perform this Agreement, subject only to the approvals required by the Dallas/Fort Worth Airport Board; c. There are no liens or encumbrances upon Seller's interest in the Leased Property; and d. Seller knows of no condition of the Leased Property that might violate environmental laws, except as disclosed in the Sublease. Buyer acknowledges that in or around December 31, 1993, Seller caused to be removed four underground storage tanks from the Leased land. 5. Buyer hereby agrees to indemnify and hold Seller harmless from any and all claims based on or arising out of any State or Federal environmental rule and regulation, including claims based on "hazardous substances" as defined in Section 5.03 AGREEMENT FOR SALE OF LEASEHOLD - PAGE 2 February 19, 1997 3 of Buyer's Sublease, save and except any such claim based on or arising out of the four underground storage tanks referenced in paragraph 4d above. 6. The Closing shall take place on February 1, 1997, or as soon thereafter as Buyer and Seller shall obtain the approval of the Assignment of the Lease from the Dallas/Fort Worth Airport authority. If such approval is not obtained by _____________, 1997, and prior to receipt of such approval at any time after such date either Buyer or Seller may terminate this Agreement by written notice to the other. 7. This transaction is subject to receipt by Buyer and Seller in form reasonably acceptable to them, that the Dallas/Fort Worth International Airport Board consents and agrees to the Assignment from Seller to Buyer, and will release Seller from any further obligations or liability under the Lease. In connection with such consent, Buyer and Seller agree to execute an "Agreement and Assumption of Lease" and submit it to the Dallas/Fort Worth International Airport Board for its approval, and to make such modifications thereto as shall be required by the Board and as shall be reasonably acceptable to both Buyer and Seller. The form of the proposed Agreement and Assumption of Lease is attached hereto as Exhibit "D" and incorporated herein by reference for all purposes. 8. Buyer and Seller shall each bear their own legal expenses incurred in connection with this Agreement. Buyer shall have the right, at its sole expense, to obtain a Title Policy and/or Survey of the Leased Property. 9. Upon Closing of this Agreement, the Sublease between Buyer and Seller shall terminate, but neither the Closing of this Agreement nor the termination of the Sublease shall affect any provision of the Sublease that is, by its terms, to survive termination. 10. Seller is also the owner and holder of a certain Lease of Real Property and improvements at the D/FW International Airport bearing D/FW Airport's Lease No. _________________, and known generally as ________________________ Street, Dallas/Fort Worth Airport, Texas 75261, which is currently subleased to GTE (the "GTE Lease"). Seller hereby grants to AGREEMENT FOR SALE OF LEASEHOLD - PAGE 3 February 19, 1997 4 Buyer a nonassignable option to purchase and acquire the GTE Lease on the following terms: a. The option must be exercised by notice in writing from Buyer to Seller, received by Seller within 180 days from the date of Closing of this Agreement; b. Sale must be closed with 3 months after receipt of the notice of exercise; c. The purchase price shall be $860,000 paid at Closing in cash or by wire transfer received by Seller on the date of Closing; d. The property is sold "AS IS, WHERE IS" without warranty, express or implied; e. Seller must be released from all further liability under the Lease by the D/FW Airport Board, and the Tenant of the GTE Property, if any; and f. The sale and assignment is subject to the approval of the D/FW Airport Board. 11. This Agreement may not be transferred or assigned by Buyer without the express written consent of Seller, which may be denied in Seller's sole discretion. 12. At Buyer's request, Seller has begun negotiations to acquire from Sky Chefs, Inc., an assignment of lease of a 20-foot strip of land out of D/FW Airport Lease No. 25210, contiguous to the Eastern boundary of the Leased Property described in this Agreement for $10,000, plus expenses for relocating a fence on the property line and legal costs of preparation of the documents in form acceptable to D/FW Airport Board, including the preparation of Surveyor- prepared legal descriptions of both tracts, giving effect to such transfer. Buyer and Seller each acknowledge and agree that Seller is under no obligation to acquire such assignment, but if he does acquire such assignment, he will transfer it to Buyer "AS IS, WHERE IS", without warranty, of any nature, express or implied, subject only to D/FW Airport Board approval, at his actual cost for such assignment, including purchase money, and related attorneys' fees, surveyor legal description fees and any related costs of Sky Chefs AGREEMENT FOR SALE OF LEASEHOLD - PAGE 4 February 19, 1997 5 or D/FW which he pays; and Buyer hereby agrees to purchase and acquire such Leasehold and land on such terms if this Agreement is closed, and to lease such property on the terms of the Sublease, if this Agreement is not closed. 13. This Agreement together with any exhibits constitutes the entire understanding of the parties with respect to the subject matter hereof and shall not be amended or modified except by written instrument signed by all parties. All prior agreements or understandings concerning the subject matter of this Agreement are superseded hereby. 14. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs, representatives and estates, but no party may assign or delegate any of their obligations or liabilities hereunder without the prior written consent of the other party hereto. EXECUTED this 6th day of December, 1996. BUYER: KITTY HAWK, INC.: By: /s/ RICHARD R. WADSWORTH ------------------------------- Its: Vice President Address: 1515 W. 20th Street D/FW Airport, TX 75261 SELLER: /s/ ROBERT F. GRAMMER ----------------------------------- Robert F. Grammer Address: 201 Tampico Irving, TX 75062 AGREEMENT FOR SALE OF LEASEHOLD - PAGE 5 February 19, 1997 6 Airport Board Lease Agreement No. 23555H EXHIBIT A AGREEMENT OF LEASE Between Dallas/Fort Worth Regional Airport Board And Sedalia-Marshall-Boonville Stage Line, Inc. 7 Airport Board Lease Agreement No. 23555H AGREEMENT OF LEASE State of Texas ) County of Dallas ) County of Tarrant ) This Agreement of Lease, made as of the 1st day of February, 1983 by and between Dallas/Fort Worth Regional Airport Board (hereinafter called the "Board") having an office at East Airfield Drive, Dallas/Fort Worth Airport, Texas 75261; and Sedalia-Marshall-Boonville Stage Line, Inc. (hereinafter called the "Lessee"), a corporation of the State of Missouri, having an office and place of business at ) 1060 East Northwest Highway, Grapevine, Texas 76051, evidences the following: WHEREAS, Lessee desires to construct and operate a maintenance hanger, office building, and airfreight complex at the Dallas/Fort Worth Regional Airport (hereinafter called the "Airport"); and WHEREAS, Lessee desires to lease land from Board for the construction of such maintenance hanger, office building, and airfreight complex as aforesaid; and WHEREAS, Board desires to lease to Lessee certain land at the Airport for the purpose of Lessee's constructing and operating a maintenance hangar, office building, and airfreight complex together with ancillary services; and WHEREAS, Lessee desires to have facilities at the site financed by mortgagees/lenders or other secure parties on the security of the leasehold interests of Lessee. 8 NOW, THEREFORE, for and in consideration of the premises, mutual promises and other good and valuable consideration the parties hereto do hereby agree as follows: Section 1. Letting, Conditions of Letting, Property Description and Height Description. Board hereby lets to Lessee and Lessee hereby hires and takes from Board at the Airport, the tract of land containing approximately 7.299 acres such tract being described by metes and bounds on Exhibit A hereof and such tract being hereinafter referred to as the "premises" together with the right to the use and enjoyment of all improvements now or hereafter placed thereon by the Lessee. Except to the extent required for the performance of the obligation of Lessee hereunder, nothing contained in this Agreement of Lease (hereinafter called the "Agreement") shall grant to Lessee any rights whatsoever in the airspace above the premises in excess of 100 feet above the present ground level thereof. Section 2. Term, Rental, Charges and Options. This Agreement shall become effective as of December 6, 1982 (the "Effective Date"), and unless otherwise terminated shall expire on December 31, 2007. Lessee shall pay Board an annual rental equal to the rental per acre paid by Board's Signatory Airlines under the formula set forth in the Use Agreement in effect between Board and such Signatories. The formula in such Use Agreement provides that the rental per acre is computed by dividing the "Airport Services Cost" (as defined therein) projected to be incurred by the Board during the next succeeding fiscal year by the "Total Developed Acreage of the Airport" (as defined therein) projected for the first day of the next succeeding fiscal year. This present annual rental per acre is Eight Thousand Seventy-Six Dollars ($8,076.00), but as shown by such formula, it is subject 2 9 to change from year to year. Rental shall be payable by Lessee to Board in advance, the first installment to be payable on the first day of the month following the date the premises, as developed property are furnished to Lessee in accordance with Section 3 hereof, and on the first day of each month thereafter throughout the Term hereof, Lessee shall store its garbage, debris and other waste materials in a clean and sanitary condition in trash receptacles, which Board shall provide at the premises, the size, number and location of which shall be at the discretion of the Board, but which shall in all events be adequate to meet the reasonable needs of Lessee, and Board further agrees to periodically remove such trash from THE receptacles. In consideration for the services hereinabove described, Lessee shall pay a standard Airport fee, such fee to be periodically adjusted in accordance with the debt service on the capital investment required, as well as the operation and maintenance expenses incurred in the furnishing of such service. The cost to Lessee for such service shall be reasonable and consistent with other tenants on the Airport. Any Increase in such fee to Lessee shall be preceded by thirty (30) days written notice. Lessee shall have the option to extend the Term of this Agreement upon the same terms and conditions herein stated for either one (1) or two (2) periods of five (5) years each, provided Lessee shall notify Board of same not less than six (6) months prior to the expiration of the initial Term herein, and not less than six (6) months prior to expiration of First Extension, if once extended. Section 3. Construction Lessee shall have the right to erect and construct improvements on the premises, but prior to the commencement of construction, Lessee shall submit preliminary plans, elevations, 3 10 specifications and renderings, if necessary, descriptive of the proposed construction to Board for approval of Board's Director of Planning and Engineering (hereinafter referred to as the "Director"). The preliminary submission by Lessee shall employ essentials of aesthetics, convenience, function and design, and shall be compatible in such respect with those of the Airport. Upon approval of such preliminary plans, Lessee shall prepare complete plans and specifications of the proposed construction. A Construction Application, final plans and specifications, when rendered, shall be submitted to the Director for approval, or for required changes. Lessee shall include in all construction contracts entered into by it, in connection with any or all of the construction work aforesaid, a provision requiring the contractor, or, in the alternative, Lessee, to indemnify, hold harmless, defend and insure Board, the Cities of Dallas and Fort Worth, and their directors, officers, agents and employees against the risk of legal liability for death, injury or damage to persons or property, direct or consequential, arising out of or in connection with the performance of any or all of such construction work against the risk of claims and demands, whether such claims and demands are just or unjust, when made by third persons arising or alleged to arise out of the performance of the construction work, unless same are caused by the negligence or willful act of Board, and Lessee shall require the contractor to furnish liability Insurance in such reasonable amounts as may be approved by the Executive Director of the Board. Lessee shall also include in any construction contract such provisions as may be reasonably required by the Board or its Executive Director relating to the operations of the 4 11 contractor on the Airport; such provisions interalia, may include the requirement for a Payment Bond for any work in excess of $25,000.00 to be performed by the contractor, Prior to entering into any contract for construction work, Lessee shall submit to the Director for approval the name of the contractor or construction manager to whom Lessee proposes to award the contract for the construction work. Director shall have the right to approve or disapprove any such contractor. Lessee further agrees that all construction work to be performed by it or its contractor, including all workmanship or materials, shall be of first class quality and shall be substantially in accordance with the plans and specifications approved by Director. As used herein, the term "first class quality" shall mean of the same quality as buildings for offices or training already constructed on the Airport. Lessee agrees that it shall deliver to Director "as built" transparencies of the improvements constructed by it and all other construction which may be performed by it as aforesaid and shall, during the term of this Agreement, keep said transparencies, if any, current, showing therein any changes or modifications which may be made in or to the improvements. It is understood and agreed that the Premises are to be delivered to Lessee by Board on or before effective date. The Board assures the Lessee that adequate streets and necessary utilities (water, telephone, electricity, and sanitary sewer), adequate to enable Lessee to conduct its business are in reasonable proximity to the premises. Lessee, at its sole expense, shall make such connections with the streets and utilities in a manner approved by Director. Board agrees that in the event it or its contractor shall engage in or perform any construction work on the Premises, during the term of this Agreement, Board, to the extent of its 5 12 statutory liabilities, shall indemnify and hold harmless Lessee, its officers, agents and employees against the risk of death, personal injury or property damage, direct or consequential, arising out of or in connection with the negligent performance of any or all such construction work performed by Board or its Independent contractors. However, except as to any rights granted herein to a Mortgagee (as defined herein) of the Lessee's leasehold estate created hereunder, nothing in this Agreement shall be construed for the benefit of third parties or to expand Board's limitation of liability for injuries or damages in tort under the laws and court decisions of the State of Texas. When the construction work hereinabove provided has been completed, Lessee shall, within a reasonable time thereafter, deliver to Board a certificate, certifying that the Premises and such other construction has been constructed substantially in accordance with the approved plans and specifications and in compliance with all laws, rules, ordinances and governmental rules, regulations and orders. When Director is satisfied that such construction is so in compliance, he shall deliver a Certificate of Occupancy to Lessee. All Improvements constructed on, installed upon, or affixed to the Premises by Lessee as permitted by this Agreement shall be owned by Lessee until expiration of the term or sooner termination of this Agreement, at which time title to all of such improvements shall vest in the Airport and the Cities of Dallas and Fort Worth. Notwithstanding the foregoing, the Lessee shall have the right but not the obligation to remove its trade fixtures in accordance with Section 24 hereof. Lessee shall have the right to claim the depreciation deductions and investment tax credit under this Agreement, and on the improvements constructed on the Premises and the equipment installed therein, and Board shall in no event claim such deductions and credits. 6 13 Lessee shall designate areas not to exceed twenty (20) feet in width along the periphery of the Premises for use and to be maintained as landscaped areas. Lessee shall furnish to Board, within sixty (60) days after completion of any construction on the Premises, a statement certified by an officer of Lessee, showing the total cost of the capital Improvements, including architects' and engineers' fees. Section 4. Lessee Financing Lessee shall have the right at any time and from time-to-time during the Term hereof and during any Extended Term to mortgage, encumber, or hypothecate the leasehold estate of Lessee created hereby and all right, title and interest of Lessee therein. In the event that Lessee, pursuant to a mortgage, deed of trust, or other instrument, mortgages or otherwise encumbers, conveys, or transfers an interest in the leasehold estate of Lessee created hereby, the mortgagee or other secured party or pledgee (the "Mortgagee") shall in no event become liable to perform the obligations of the Lessee under this Agreement unless and until said Mortgagee becomes the owner of the leasehold estate pursuant to foreclosure, assignment in lieu of foreclosure, or otherwise; and thereafter, said Mortgagee shall remain liable for such obligations only so long as such Mortgagee remains the owner of the leasehold estate. Any purchase money, mortgage or deed of trust delivered in connection with any assignment of this Agreement by such a leasehold Mortgagee shall be entitled to the benefit of all of the provisions of this Agreement with respect to a leasehold mortgage. If any Mortgagee requests any changes in this Agreement as a condition to funding any loan to Lessee, Board agrees to cooperate in amending this Agreement so long as the changes 7 14 requested do not materially increase the obligations of, or decrease the rental payable to, Board under this Agreement. Section 5. Rights of User Lessee may use the Premises for the following purposes only and for no purposes whatsoever: (a) For the maintenance. upkeep, repair and storage of aircraft parts, and related equipment. (b) For all purposes related to the gathering, receiving, storing, delivery and shipping of property, freight, and cargo by air and ground transportation systems. (c) For a business office. (d) For the parking of automobiles operated by the officers, employees and business visitors of Lessee; and (e) For any other purposes or activity for which the Airport Board expressly, in writing, authorizes the Premises to be used. Section 6. Ingress and Egress (a) Lessee, its sublessees, its contractors, suppliers of materials and furnishers of services, and employees and business invitees of Lessee or its sublessees, shall have the right of ingress and egress between the premises and a public right-of-way outside the Airport by means of an existing access road known as West Airfield Drive, the same to be used in common with others having rights of passage within the Airport, provided that Board may from time to time substitute other means herein provided. If Board does so substitute other means of paved and improved ingress or egress to the premises herein provided, Board shall pay to Lessee, upon demand, all costs and expenses incurred by Lessee in the redesigning and reconstruction of roadway, or driveway and parking areas on the premises. 8 15 (b) The use of such roadway shall be subject to the Rules and Regulations of Board uniformly applicable to lessees of the Board at the Airport. Section 7. Governmental and Other Requirements (a) Lessee shall procure from all governmental authorities having jurisdiction of the operations of Lessee hereunder all licenses, franchises, certificates, permits or other authorization which may be necessary for the conduct of such operations. (b) Lessee shall promptly observe, comply with, and execute the provisions of any and all present and future governmental laws, ordinance, rules, regulations, requirements, orders and directions which may pertain or apply to its operations or the use and occupancy of the Premises hereunder and, in addition, shall make all structural and nonstructural improvements, repairs and alterations to any and all facilities located on the premises which may be necessary. Where any such improvements, repairs, and alterations cannot be amortized over the remaining Term or Extended Term of this Agreement, Lessee shall have the right to seek an extension of this Agreement. Lessee shall have the right, after written notice to Board, to contest by appropriate legal proceedings, diligently conducted in good faith, the validity or application of any such law, ordinance, rule, regulation, requirement, order, and direction, and, with the exception of any such law, rule, regulation, requirement, order, and direction of Board, to delay compliance therewith pending the prosecution of such proceedings, provided no civil damages or criminal penalty would be incurred by Board and no lien or, charge would be imposed upon or satisfied out of the Premises by reason of such delay, and the Lessee shall indemnify and hold Board harmless from any such damages, penalty, lien, or charge. 9 16 (c) Lessee agrees that it shall not enter into any contracts of a type which would permit a lien or liens to become attached to the remainder interests of Board and the Cities of Dallas and Fort Worth. Lessee further agrees to pay, as they become due and payable, and before they become delinquent, all ad valorem taxes, both general and special assessments, and governmental charges lawfully levied or assessed against the leasehold interest, or any part thereof, and upon all the improvements; provided, Lessee shall have the right, upon posting security as required by law, to contest the amount or legality of any tax or assessment levied or assessed against it by any taxing authority. (d) The Lessee covenants and agrees to observe and obey the reasonable Rules and Regulations of Board for the government of the conduct and operations of Lessee as may from time to time during the letting be promulgated by Board to promote (i) air traffic safety and security and (ii) compatible operations with other activities of the Airport. Section 8. Prohibited Acts (a) Lessee shall neither install in any public area any vending machine or device designed to dispense or sell food, beverages, tobacco, tobacco products or merchandise of any kind, nor operate any restaurant, cafeteria, kitchen stand, or other establishment for the purpose of dispensing or selling such products to any member of the public other than Lessee's students, employees, officers and invitees, without the approval in advance of the Executive Director. (b) Lessee shall commit no nuisance on the premises and shall not do or permit to be done anything which may result in the creation or commission or maintenance of a nuisance on the premises. 10 17 (c) Lessee shall not fuel or defuel its automobile vehicles or other equipment in the enclosed space on the premises without the prior approval of the Executive Director. (d) Lessee shall not start or operate any engine or any item or automotive equipment in any enclosed space on the Premises unless such engine is equipped with a proper spark-arresting device. Section 9. Maintenance and Repairs Lessee shall at all times keep in a clean and orderly condition and appearance the Premises and improvements, equipment and personal property thereon. Except as otherwise provided in Section 3, Section 11, and Section 25, Lessee shall maintain, repair, replace and paint all or any part of the improvements on the Premises including therein, without limitations thereto, walls, partitions, floors, ceilings, columns, windows, doors, glass of every kind, fixtures, systems for the furnishing of a fire alarm, fire protection sprinkler, sewerage, drainage and telephone service, including lines, pipes, mains, wires, conduits, and other equipment connected with or appurtenant to all such systems which may be damaged or destroyed by the acts or omissions of the Lessee, its sublessees, employees, agents, representatives, contractors, customers, guests or invitees. Lessee is responsible for, and shall peform at its own cost, all such repairs and replacements. Where any such repairs or replacements cannot be amortized over the remaining Term or Extended Term of this Agreement, Lessee shall have the right to seek an extension of this Agreement. In the event Lessee fails to commence so to make or do repairs, replacements or painting within a period of thirty (30) days after written notice from Board so to do or falls to diligently continue to complete the repair, replacement or painting of the premises and improvements 11 18 thereon required to be repaired, replaced or painted by Lessee, Board may, at its option, repair, replace or paint all or any part thereof included in the said notice, the cost thereof to be paid by the Lessee on demand. Board assumes no responsibility for any property placed in the premises or any part thereof, and Board is hereby expressly released and discharged from any and all liability for any loss, injury or damage to persons or property that may be sustained by reason of the occupancy of said Premises under this Agreement, unless caused by the negligence or willful act of Board. Section 10. Insurance Lessee shall, during the term of this Agreement, cover and keep insured, to the extent of not less than eighty percent (80%) of the insurable value thereof, all buildings, structures, fixtures and equipment on the Premises against fire and other hazards of extended coverage policies and all risks against loss by windstorm, cyclone, tornado, hail, explosion (including boiler explosion, if applicable), riot, civil commotion, aircraft, vehicles and smoke. Such policy shall be in amounts and in carriers as shall be satisfactory to Board's Executive Director. The aforesaid policy of fire and extended coverage insurance and renewal thereof shall Insure Board, the Cities of Dallas and Fort Worth, Lessee and any Mortgagee as their interests may appear. If requested by a Mortgagee, such policy of Insurance shall provide (a) that a duplicate original policy be delivered to and retained by such Mortgagee, (b) that the payment of proceeds from losses insured under such policy be made to an insurance trustee for disbursement in accordance with the provisions of this Agreement, and (c) that no adjustment of losses or settlement of claims under such policy shall be made without the consent of such Mortgagee. 12 19 In the event the improvements erected or constructed by Lessee are damaged or destroyed by fire or other casualty to the extent that the reasonable cost to repair or restore is sixty percent (60%) or more of the original total cost thereof, Lessee shall have the right, at its election, to repair and replace such improvements to substantially the same condition they were in prior to such damage or destruction, or to terminate this Lease. As used herein, the term "original total cost" shall not include the cost of the construction of the foundation, footings, site preparations (unless such portions of.the improvements were actually damaged), and other costs which would not be incurred in reconstructing the damaged improvements. Lessee shall give Board notice of its election hereunder within sixty (60) days next following after the adjustment by the insurer of such loss by damage or destruction. If Lessee elects to repair or reconstruct the improvements, the insurance proceeds, to the extent a Mortgagee does not require the application of such proceeds to Lessee's obligation to such Mortgagee, shall be made available to Lessee for that purpose; if the insurance proceeds made available to Lessee are not sufficient, Lessee agrees to bear and pay the deficiency. If the insurance proceeds are more than sufficient to pay the cost of such repair and reconstruction, then such excess proceeds shall be paid to any such Mortgagee to be applied against the loan. If Lessee shall elect not to repair or reconstruct the improvements, this Agreement and all of Lessee's and Board's unaccrued obligations hereunder shall terminate, including Board's obligation to reimburse Lessee for other parties' utilization of the extended utility and road systems. The insurance proceeds, after payment of the balance owing to the Mortgagee, shall be divided between Board and Lessee according to the following formula: first, such proceeds shall be paid to Lessee for payment of any deficiency between the proceeds and the amount needed to pay the cost of repair and reconstruction and, second, Board shall 13 20 receive an amount equal to two percent (2%) of such remaining proceeds times the number of years elapsed in the Term of this Agreement, and the Lessee shall receive the balance. If the reasonable cost to repair or restore the damage or destruction to the improvements should be less than sixty percent (60%) of the original total cost of the Improvements. and provided this Agreement has a remaining term of not less than forty-eight (48) months, Lessee shall be obligated to repair and replace such damage at its sole cost and expense and shall have the right to apply the insurance proceeds to the cost thereof. If less than forty-eight (48) months remains on the Term of this Agreement at the time of any such damage or destruction. Lessee may elect to repair or replace at its cost and apply the insurance proceeds to such cost, or Lessee may elect to not repair and terminate this Agreement. Such election shall be made in writing to Board not more than sixty (60) days after the date of the fire or other casualty. If Lessee elects to terminate this Agreement. Board and Lessee shall be relieved and released of all unaccrued liability under this Agreement and the insurance proceeds shall be paid first to the Mortgagee, if any, to the extent of the balance owing to such Mortgagee, and the balance of such proceeds shall be paid to the parties as follows: Board shall receive an amount equal to two percent (2%) of such proceeds times the number of years elapsed in the Term of this Agreement, and the Lessee shall receive the balance. In the event of damage or destruction to any of the improvements upon the premises, Board shall have no obligation to repair or rebuild the improvements or any fixtures, equipment or other personal property installed by Lessee pursuant to this Agreement, provided that such damage or destruction was not caused by the negligence or willful act of Board. Section 11. Indemnity; Liability Insurance 14 21 Lessee covenants and agrees to indemnify and hold harmless Board, the Cities of Dallas and Fort Worth, their directors, officers, agents and employees from and against any and all claims for damages or injuries, including death, to persons or property (other than the premises) arising out of or incident to the leasing of, or the use and occupancy of, the Premises by Lessee unless caused by the negligence or willful act of Board. Lessee further covenants and agrees to obtain and keep in force during the term of this Agreement a policy of liability insurance providing for bodily injury (including death) and property damage to third persons in amounts not less than $250,000.00 for any one person and $500,000.00 for any one accident for bodily injury and death and $500,000.00 for property damage. Such coverage shall be in an insurance carrier licensed to do business in Texas and satisfactory to Board, and Board shall receive a copy of such policy of insurance or a certificate, validly executed by or on behalf of the insurance company, certifying that such insurance is in full force and effect. Section 12. Signs (a) Except with the prior approval of the Director, Lessee shall not erect, maintain or display any advertising, signs, posters or similar devices at or on the Premises or elsewhere at the Airport. (b) Upon demand by Board, Lessee shall remove, obliterate or paint out any and all advertising, signs, posters and similar devices placed by Lessee on the Premises or elsewhere on the Airport without the prior approval of the Director. In the event of a failure on the part of Lessee so to remove, obliterate, or paint out each and every sign or piece of advertising, Board may perform the necessary work and Lessee shall pay the costs thereof to Board on demand. 15 22 Section 13. Assignment and Subletting Any Mortgagee (or its nominee) may sell, convey, transfer, assign, or sublet, in whole or in part, this Agreement and all of Lessee's right, title and interest hereunder, without the approval of Board, and such right shall not be affected by any foreclosure by, or conveyance in lieu of foreclosure received by, any Mortgagee (or its nominee). Lessee shall not assign, sell, convey or transfer (except to Mortgagees or their nominees), or sublet (except to subtenants in the ordinary course of Lessee's business) this Agreement, in whole or in part, or the right, title and interest of Lessee hereunder, without the written approval of Board, provided, however, that the approval of Board shall not be required for any such assignment, sale, conveyance, transfer or subletting to an individual, corporation or other entity having (or, in the case of a partnership, one or more of whose partners have) a net worth in an amount at least equal to ten (10) times the annual rent payable hereunder at the time of such assignment, sale, conveyance, transfer or subletting. Where an assignment, sale, conveyance, transfer or subletting described in the preceding sentence occurs, Lessee shall give Board thirty (30) days advance written notice of such transaction. No assignment, sale, conveyance, transfer, pledge or subletting shall in anywise affect the terms, conditions, covenants, agreements and provisions herein set forth. In the event of a total assignment of this Agreement to an assignee approved by Board, Lessee shall be released from any and all liability arising or accruing under this Agreement after the date of such assignment, provided that the assignee executes, acknowledges and delivers to Lessee and Board a valid, binding and sufficient instrument in writing, directly enforceable by Board; containing the assignee's assumption and agreement to pay all rent and other amounts reserved in this 16 23 Agreement and to perform all of the covenants, provisions and conditions of the Agreement to be performed by Lessee. In no event shall Board's consent be required for subleases entered into in the ordinary course of Lessee's business. Board agrees upon request of Lessee from time to time to execute and deliver to any permitted subtenant an agreement in form and substance reasonably acceptable to Lessee providing that Board will not disturb the possession of such subtenant under the terms of its sublease in the event of any termination (or exercise of any remedies) in connection with any default by Lessee hereunder, so long as such subtenant is not in default under its sublease and provided the subtenant agrees to attorn to Board under the terms of the sublease upon any termination of this Lease; provided, however, no subtenant shall be entitled to possession of the Premises after the expiration date of this Lease, or, if the Lease is extended, the expiration date of any extended term hereof and provided further, that the terms and provisions of such sublease shall be satisfactory to Board. Section 14. Additional Construction by the Lessee Except as hereinbefore provided in Section 3 hereof or as permitted by Sections 10, 11, and 25, Lessee shall not, without the prior written approval of the Director, erect any structures, make any improvements or do any other construction work on the premises or alter, modify, or make additions, improvements or repairs to or replacements of, any structure now existing or built at any time during the letting, or install any fixtures (other than trade fixtures, removable without material damage to the freehold, any such damage to be immediately repaired by Lessee). Notwithstanding the foregoing, Lessee shall have the right without the prior approval of the Director to replace or repair floor and wall coverings and to make nonstructural repairs 17 24 and additions to the Premises the cost of which does not exceed Five Thousand Dollars ($5,000.00) per project. Section 15. Rights of Entry Reserved (a) Board, its officers and employees shall have the right during normal business hours, after notice to Lessee and when accompanied by a representative of Lessee, to enter upon the Premises for the purpose of inspecting same, and for the doing of any act or thing which Board may be obligated to do or have the right to do under this Agreement. (b) Without limiting the generality of the foregoing, Board shall have the right, for its own benefit, for the benefit of Lessee, or for the benefit of others than Lessee at the Airport, to maintain existing and future utilities systems, other systems, or portions thereof on the Premises, including, without limitation, systems for the supply of heat, water, gas fuel and electricity and for the furnishing of fire alarm, fire protection, sprinkler, sewerage, drainage, telephone and telegraph service, including all lines, pipes, mains, wires, conduits, and equipment connected with or appurtenant to such to make such repairs, replacements or alterations as may, in the opinion of Board, be deemed necessary or advisable; provided, however, that such systems and ingress and egress thereto shall not unreasonably interfere with Lessee's facilities nor with clearances therefor. Board shall indemnify and hold Lessee harmless from and against any cost, expense, liability, or action caused by or arising out of the actions taken by Board pursuant to this Section 16(b). Section 16. Place of Payments 18 25 All payments required of the Lessee by this Agreement shall be made at the office of the Director of Finance, Dallas/Fort Worth Regional Airport Board, P. O. Drawer DFW, Dallas/Fort Worth Airport, Texas 75261, or to such other office or address as may be substituted therefor. Section 17. Default; Termination (a) Board, subject to the provisions of subparagraphs (b), (c), and (d) hereafter, may declare this Agreement to be in default upon the occurrence of any one or more of the following events: (1) When any Lien shall be filed against the Premises (except for a lien for a mortgage, or other instrument used to secure financing, or a lien for taxes, assessments or other governmental charges so long as such taxes, assessments or charges are not delinquent or are being contested in accordance with the provisions of Section 8(c) hereof and not released or otherwise removed or bonded within sixty (60) days after written notice to the Lessee of the filing thereof; or (2) When Lessee shall fail to pay the rental or to make any other payment required hereunder to Board within thirty (30) days after the due date; or (3) When Lessee shall fail to keep, perform and observe each and every covenant and agreement set forth in this Agreement on its part to be kept, performed or observed within thirty (30) days after written notice to the Lessee of such failure. (b) In the event Board has declared this Agreement to be in default pursuant to the provisions of subparagraph (a) above, Board may enforce the performance of this Agreement in any method provided by law, and this Agreement may be terminated at Board's discretion if such default continues for a period of sixty (60) days after Board notifies Lessee and any Mortgagee 19 26 in writing of such default and of Board's intention to declare this Agreement terminated; and thereupon (unless Lessee or any Mortgagee shall have completely removed or cured said default or unless,the provisions of subparagraphs (c) and (d) below are applicable), this Agreement shall cease and come to an end as if it were the day originally fixed herein for the expiration of the term hereof; and Board, its agents and attorneys shall have the right, without further notice or demand, to re-enter and remove all persons and property therefrom without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of rent or breach of covenant. (c) Irrespective of the provisions of subparagraph (b) above, if any default set forth in Board's notice is other than an uncured failure to pay rent and the payment of rent is continued and the Lessee or any Mortgagee or permitted assignee is diligently attempting to cure the default complained of (even though the Lessee or such Mortgagee or permitted assignee is unable to do so within sixty (60) days after such notice), this Agreement shall not terminate so long as the Lessee or any Mortgagee or permitted assignee continues diligently to attempt to cure the default. (d) If the leasehold estate is encumbered by a mortgage. deed of trust, or other instrument used to secure financing, and there is an uncured default, Board may not terminate this Agreement by reason of such default, if a Mortgagee, within sixty (60) days after receipt of such notice of default, as provided herein, shall commence to cure such default or shall commence foreclosure or similar proceedings under the mortgage or deed of trust, for the purpose of acquiring Lessee's interest in this Agreement and thereafter diligently prosecutes the same and upon the completion of such foreclosure proceedings, the Mortgagee shall diligently 20 27 attempt to cure such default. Any default by Lessee, not reasonably susceptible of being cured by the Mortgagee, shall be deemed to have been waived by Board upon completion of such foreclosure proceedings or upon such acquisition of Lessee's interest in this Agreement, except that any of such events of default which are reasonably susceptible of being cured after such completion and acquisition shall then be cured with reasonable diligence. (e) A Mortgagee or its nominee may become the legal owner and holder of the leasehold estate under this Agreement by foreclosure or similar proceedings under its mortgage or deed of trust or as a result of the assignment of this Agreement in lieu of foreclosure. (f) It is understood and agreed that in the event there is a default hereunder and Board has sent the sixty (60) day notice as provided in subparagraph (d) above, then and in such event Board shall have the right and option, but not the obligation, to pay in full the indebtedness, including any penalties arising from such prepayment, owing to the Mortgagee by Lessee and secured by a mortgage or deed of trust upon the leasehold estate; and upon such payment Board shall be subrogated to all of the rights, liens, interests and remedies of the Mortgagee. Board shall exercise its option, if at all, by written notice to Lessee and the Mortgagee, and by payment of such indebtedness at any time prior to the completion of such foreclosure or similar proceedings. Section 18. Obstruction Lights Lessee shall furnish such obstruction lights as Board shall direct, of the type and design approved by the Director, and shall install said lights in the locations of the Premise, designated by Board and furnish and install the bulbs and furnish the electricity necessary for the operation of said lights, and shall operate the same in accordance with the directions of Board. Board 21 28 hereby directs that all obstruction lights shall, until further notice, be operated daily for a period commencing thirty (30) minutes before sunset and ending thirty (30) minutes after sunrise (as sunset and sunrise may vary from day to day throughout the year) and for such other periods as may be directed or requested by the Control Tower of the Airport. Section 19. Services to Lessee (a) Board, at its sole cost and expense, covenants and agrees promptly at all times during the term of this Agreement to maintain, replace and repair the existing access road referred to in Section 7(a) of this Agreement and any and all improvements constructed by it pursuant to the terms of this Agreement, including, but not limited to, the streets, all utilities (water, electricity, telephone, and sanitary sewers), all outside of and to the exterior boundary of the premises and to furnish police and fire protection to the premises. (b) Except as may otherwise be expressly provided herein, Board shall have no obligation to furnish or supply for or on behalf of Lessee, any services whatsoever on the Premises. Lessee shall have the obligation to arrange with the appropriate utility or service companies, municipalities, or other supplier, including Board, supplying utilities and services in the area for the supply of all other services including electric power. Lessee shall have the responsibility to arrange for the maintenance and good repair of all such service lines on the Premises furnished to it by such utility companies and for all water mains and sewers constructed and installed within Lessee's Premises by Lessee. (c) Except as provided in this Agreement, no failure, delay or interruption in any service or services, whether such service or services shall be supplied by Board or by others, shall relieve Lessee of any of its obligations hereunder, or shall be construed to be an eviction of 22 29 Lessee, or of the rental payable under this Agreement, or grounds for any claims by Lessee for damages, consequential or otherwise, unless caused by the negligence or willful act of Board. Section 20. Brokerage Board and Lessee shall indemnify and save harmless each other of and from any claim or commission or brokerage made by any broker when such claim is based in whole or in part upon any act or omission of Lessee of Board. Section 21. Termination of Agreement by Lessee Lessee, with the written consent of all Mortgagees, if any, may terminate this Agreement upon the default by Board in the performance of any covenant or agreement herein required to be performed by Board, if such default is not cured within sixty (60) days following written notice thereof from Lessee to Board; provided, however, if such condition of default is not reasonably susceptible to cure within such sixty (60) day period, Lessee may not terminate this Agreement by reason of such condition of default, if Board commenced its effort to cure such condition of default within such sixty (60) day period, so long as Board proceeds with reasonable diligence to the cure of such condition of default; provided, further, as to.any such condition of default which continues beyond sixty (60) days, after such sixty (60) day period, Lessee shall be entitled to a reasonable abatement of rent commensurate with the extent to which such condition of default substantially interferes with Lessee's use of the premises. Section 22. Non-Discrimination Without limiting the generality of any of the provisions of this Agreement, Lessee, in its operations at the Airport, and also as a part of the consideration hereof, shall maintain and operate its facilities and provide its services in compliance with and pursuant to Title 49, Part 21 23 30 (Non-Discrimination in federally-assisted programs of the Department of Transportation - Effectuation of Title VI) of the Civil Rights Act of 1964, and as said Regulations may be amended; and shall not on the grounds of race. creed, color or national origin discriminate against any person or group of persons in any manner whatsoever. Lessee shall indemnify and hold harmless Board and the Cities of Dallas and Fort Worth from any claims and demands of third persons, including the United States of America, resulting from Lessee's non-compliance with any of the provisions of this Section; and Lessee shall reimburse Board for any loss or expense incurred by reason of such non-compliance. Section 23. Removal of Property Upon termination of this Agreement by lapse of time or otherwise, Lessee shall have the right but not the obligation to remove from said Premises its trade fixtures, including display signs, counters, furniture, equipment, and other items of personal property installed and place in and upon the premises, and in any event shall clean up the debris and leave said premises in a safe, sanitary and sightly condition. Section 24. Condemnation (a) In the event that title to or use of the premises, or a substantial part thereof, shall be taken or condemned in any eminent domain, condemnation, compulsory acquisition or like proceeding or by any competent authority or conveyed under the threat thereof, for any public or quasi-public use or purpose (hereinafter called "by the power of eminent domain") the following provisions shall be applicable: (1) If at any time of the taking Lessee requests, with the consent of all Mortgagees, that the improvements be rebuilt elsewhere and if land suitable for such purpose is 24 31 available elsewhere, such improvements shall be rebuilt elsewhere and paid for with the proceeds of condemnation allocable to Board's reversionary interest in the improvements taken, and the proceeds of condemnation allocable to the fair market value of Lessee's lost leasehold estate for the then remaining Term of the Agreement and any extension thereof to which Lessee may be entitled hereunder ("Lessee's Proceeds"), and if such proceeds are insufficient for such purposes Lessee shall pay the deficiency. If Lessee's Proceeds are in excess of the amount necessary for such purpose, any such excess, after first repaying the indebtedness owing to any Mortgage in order of priority, shall be paid to Lessee if the condemning authority is Board or either the City of Dallas or Fort Worth. If, however, the condemning authority is other than Board or the Cities of Dallas or Fort Worth, such excess, after first repaying the indebtedness owing to any Mortgagees in order of priority, shall be paid to Board and deposited by it as a credit to the next due payment(s) of rentals, with such credit to continue until the amount thereof is exhausted. The rebuilding of such improvements shall be in accordance with the original plans and specifications, together with alterations or modifications made or agreed upon prior to the taking, or in accordance with the original plans and specifications, together with alterations or modifications made or agreed upon prior to the taking, or in accordance with new or modified plans and specifications, the alternative to be determined by the Lessee. (2) If (A) Lessee elects not to have the improvements rebuilt elsewhere (in which event Lessee will advise Board of such decision within one hundred twenty (120) days after the date of the taking), or (B) all Mortgagees do not consent to the rebuilding of improvements, or (C) Lessee's Proceeds are insufficient for such purpose and Lessee fails to agree to bear and pay the deficiency, or (D) land suitable for such purpose is not available 25 32 elsewhere, this Agreement and all unaccrued obligations hereunder shall thereupon be terminated and all condemnation proceeds, after first repaying the indebtedness owing to all Mortgagees, shall be divided between Board and Lessee as their respective interests appear at the time of the taking, with Lessee being entitled to the present fair market value of its lost leasehold estate (less the amount of proceeds paid to Mortgagees, if any) together with any allowance receivable for relocation or removal. Notwithstanding any other provision hereof or any right of Lessee or Mortgagee herein contained, as between Board, Lessee and any Mortgagee, Board shall be entitled to be paid out of the proceeds of condemnation not less than the present fair market value of its lost reversionary interest in the Premises taking into consideration any right of Lessee to extend the term of this Agreement, but exclusive of the value of improvements constructed by Lessee thereon. (3) For purpose of this Section 25(a), "land suitable for such purpose available elsewhere" shall mean other land on Airport property managed by Board. If the improvements are rebuilt elsewhere, this Agreement shall continue in force and effect, unchanged, as to the rebuilt improvements and substitute land. Rental shall abate from the time of the taking until rebuilding is completed. (b) In the event that title to or use of less than a substantial part of the Premises is taken by the power of eminent domain (that is, if the primary use of the improvements is not substantially impaired by deletion of the part taken) Lessee shall restore, repair or refurbish the remainder of the improvements to the Premises following the taking to the extent Board may reasonably require. Such restoration, repair or refurbishment shall be at Lessee's sole cost and expense; provided, however, with the consent of all Mortgagees, the cost of such restoration, 26 33 repair or refurbishment may be paid for with Lessee's Proceeds (as defined in Section 25(a)(l). Any of Lessee's Proceeds not used for the purposes of rebuilding shall first be used to repay the indebtedness owing to any Mortgagees in order of priority and then shall be applied until exhausted in reduction of the rentals payable hereunder. The rentals payable hereunder shall be reduced for the remainder of the term hereof because of the taking in a manner that is fair and equitable under the circumstances. (c) Before any reconstruction or repair under this Section, Lessee shall submit a Construction Application and plans and specifications to the Director for approval and construction shall be substantially in accordance therewith subject to such changes as may be reasonably requested by Lessee and approved by the Director; the Director reserves the right specifically to approve the contractor and/or the architect/engineer selected by Lessee for such reconstruction or repair work. Section 25. Recording - Memorandum of Lease Board and Lessee agree, upon the request of either of them, to execute a short form of memorandum of this Agreement in recordable form for recordation in the deed records of the County where the Premises are situated. The cost of recording shall be borne by the party requesting it. Section 26. Estoppel Certificates Board agrees to execute and deliver, from time to time, such estoppel certificates or other instruments to the Mortgagee, assignees and sublessees of Lessee which certificates, to the extent the facts recited therein are true, shall certify to such Mortgagee, assignees and sublessees that this Agreement is in full force and effect, that there are no defaults existing, the date through 27 34 which the rental has been paid and such other matters as may be reasonably requested by such assignees, sublessees and the Mortgagee, it being intended that any such statement delivered pursuant to this Section may be relied upon by any prospective purchaser, assignee, sublessee or mortgagee of the leasehold estate. Section 27. Leasehold Title Certification Board agrees to furnish to Lessee, if requested, at Board's expense an Abstractor's Certification covering the Premises. Section 28. Quiet Enjoyment Board agrees that, on payment of rentals, fees and charges herein provided for and the performance hereunder, Lessee shall peaceably have and enjoy the Premises, appurtenances, facilities, licenses and privileges granted herein, Section 29. Force Majeure Neither Board nor Lessee nor any assignee or sublessee shall be deemed in violation of this Agreement if it is prevented from performing any of its obligations hereunder by reasons of strikes, boycotts, labor disputes, embargoes, shortages of material, acts of God, acts of the public enemy, acts of superior governmental authority, weather conditions, floods, riots, rebellions, acts of sabotage, or any other circumstances for which it is not responsible or which area not in its control; provided, however, that this section shall not apply to failures by Lessee to pay the rentals, fees and charges hereinbefore specified or to the obligations of Board under Section 29 hereof. All assertions of force majeure interference by a party places the burden of proof of same as a reason for failure to perform upon the party claiming same. Section 30. Severability 28 35 Should any provision of this Agreement be finally declared to be invalid by a court of competent jurisdiction, provided such provision is not material to the performance of the contract, it is the intention of the parties that the remaining portions of this Agreement shall remain in full force and effect. Section 31. Non-Liability No member, director, officer, or employee of either party shall be charged personally or held contractually liable by or to the other part under any term or provision of this Agreement, or of any supplement, modification or amendment of this Agreement, or because of any breach thereof, or because of its or their execution or attempted execution of same. Section 32. Notices to Leasehold Mortgagees Upon execution and recordation in the Deed of Trust Records of Dallas County, Texas of any leasehold mortgage, the leasehold Mortgagee shall notify Board in writing that a leasehold Mortgage has been given and executed by Lessee, and shall furnish to Board at the same time the address to which it desires copies of notices to be mailed, or, designate some person or corporation in the City of Dallas, Texas, as its agent and representative for the purpose of receiving copies of notices. Board hereby agrees that it will thereafter mail to each leasehold Mortgagee from whom it has received such notice, or to the agent or representative so designated by each such leasehold Mortgagee, at the address so given, duplicate copies of any and all notices in writing which Board may from time to time give or serve upon Lessee under and pursuant to the terms and provisions of this Agreement. No notice to Lessee under the terms and provisions of this Agreement shall be effective unless a duplicate copy thereof is mailed in 29 36 the manner provided for the giving of notices in Section 38 hereof to each leasehold Mortgagee of whom Board has been notified as aforesaid. Section 33. Leasehold Mortgagees May perform Covenants To the extent that Lessee may grant the right to any such leasehold Mortgagee or same may be provided for herein, any such leasehold Mortgagee may, at its option, at any time before the rights of Lessee hereunder shall have been terminated, pay any rental due hereunder, effect any insurance, pay any taxes, discharge any lien, make any repairs and improvements, make any deposits, or make any other payment required of Lessee by the terms of this Agreement, or do any act or thing which may be necessary and proper to be done in the observance of the covenants and conditions of this Agreement, or to prevent the termination of this Agreement; and all payments so made and all things so done and performed by any such leasehold Mortgagee shall be as effective to prevent a forfeiture of the rights of Lessee hereunder as the same would have been if done and performed by Lessee instead of by any such leasehold Mortgagee. Any leasehold mortgage so given by Lessee may, if Lessee desires, be so conditioned as to provide that, as between any leasehold Mortgagee and Lessee, the leasehold Mortgagee shall, on making good any such default or defaults on the part of Lessee, be thereby subrogated to or put in the position of assignee of any or all of the rights of Lessee under the terms and provisions of this Agreement. Section 34. Leasehold Mortgagees Not Liable No leasehold Mortgagee of Lessee hereunder shall be or become liable to Board, as an assignee of this Agreement or otherwise, for the payment or performance of any obligation of Lessee until it expressly assumes the payment or performance of such obligation, by written 30 37 instrument; and no assumption of liability shall be inferred or result from foreclosure or other appropriate proceedings in the nature thereof or as the result of any other action or remedy provided for by any leasehold estate to such leasehold Mortgagee in lieu of foreclosure, or pursuant to which any purchaser at foreclosure shall acquire the rights and interest of Lessee under the terms of this Agreement. Section 35. Parties' Authority Each party represents and warrants that it has the full right, power and authority to make this Agreement and that no other persons need to join in the execution of this instrument in order for this Agreement to be binding on all parties having an interest in the subject matters; and each party agrees to execute or procure any further necessary assurances of title that may be reasonably required for the protection of the other party. Further, Board warrants that it has good and merchantable title to the Premises. Section 36. Approval of Parties In any case in this Agreement where approval or consent or satisfaction is required to be obtained by one party from the other, it is understood and agreed that any such approval or consent or satisfaction shall not be unreasonably withheld, conditioned, or delayed. Failure of Board either to give written notice of approval or disapproval (specifying the basis for any such disapproval with particularity) within thirty (30) days following submittal by Lessee of any request for approval (accompanied by appropriate plans, specifications or other materials) shall conclusively be deemed approval thereof. The party alleging that such approval, consent, or satisfaction is withheld without good reason shall have the burden of proof that allegation in any adversary proceeding, provided the reasons for the failure by the other party are stated in writing. 31 38 Section 37. Notices (a) Any notice, request or demand to be given or served under the terms and provisions of this Agreement must be in writing, and shall be deemed to have been given and received 48 hours after a certified or registered letter containing such notice, request or demand, with postage prepaid, return receipt requested, is deposited in a United States Postal Service depository, addressed as follows: If to the Airport Board: Dallas/Fort Worth Regional Airport Board East Airfield Drive P. O, Drawer DFW Dallas/Fort Worth Airport, Texas 75261 Attention: Executive Director If to Lessee: Sedalia-Marshall-Boonville Stage Line, Inc. 1060 East Northwest Highway Grapevine, Texas 75261 with copy to each leasehold Mortgagee of which Board has notice; provided, however that any party may at any time change the place of receiving notices, requests or demands by ten (10) days' written notice of such change of address to the other. (b) If and when included in the terms "Board" or "Lessee" as used in this Agreement there shall at any time be more than one person, firm or corporation, they shall arrange among themselves for the joint execution of such notice, specifying one of their number for the receipt of notices, requests, demands and payments, and any notices, requests, demands and payments made by either Board or Lessee in accordance with each such notice from the other (such arrangements for notices, requests, demands and payments being subject to change by the delivery of a different notice) shall constitute notice, request, demand or payment to all persons, firms and corporations included within the terms "Board" or "Lessee," as the case may be. 32 39 Section 38. Mineral Rights It is agreed and understood that all water, gravel, rock, earth, gas, oil and all other minerals or materials and the rights thereto, in and under the soil (with the exception of gravel, rock, earth, and other materials removed in the course of construction of Lessee's improvements on the premises), are expressly reserved to Board, but Board hereby waives and covenants not to grant, sell, or convey any right to enter upon the surface of the premises to conduct any drilling or exploration activities during the term of this Agreement for the purpose of producing any such water, gravel, rock, earth, gas, oil or all other minerals or materials. Section 39. Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. Section 40. Entire Agreement This Agreement constitutes the entire agreement of the parties on the subject matter hereof and may not be changed, modified, discharged, voluntarily surrendered or terminated or extended except by a written instrument duly executed by Board, Lessee and any Mortgagee. The parties agree that no representations or warranties shall be binding upon either party unless expressed in writing in this Agreement or by Supplements thereto. Section 41. Venue Venue on any suit brought hereunder shall lie exclusively in Dallas or Tarrant County, Texas. Section 42. Right of First Refusal 33 40 Board agrees to use its best efforts to cause a right of first refusal to be granted to Lessee in the event the Premises are sold, provided, that Board shall have no such obligation up a sale of the entire Airport. IN WITNESS WHEREOF, the parties hereto have executed this instrument at East Airfield Drive, Dallas/Fort Worth Airport, Texas 75261, as of the day and year first above written. DALLAS/FORT WORTH REGIONAL AIRPORT BOARD By: ___________________________________ Executive Director ATTEST: _________________________________ Staff Secretary to the Board APPROVED: __________________________________ Legal Counsel to the Board SEDALIA-MARSHALL-B00NVILLE STAGE LINE, INC. By: ___________________________________ Its: ___________________________________ ATTEST: By: ______________________________ 34 41 EXHIBIT B LEGAL DESCRIPTION BEING a 4.557 acre tract of land situated in the Morgan Hood Survey, Abstract No. 698, Tarrant County, Texas, and within the boundary of the Dallas/Forth Worth Airport, and being all of that called 4.460 acre tract described in DFW Airport Lease No. 23555 and the westerly most 20 feet of that called 4.89 acre tract described in DFW Lease No. 25210, and being more particularly described as follows: COMMENCING at the airport reference point, which is located at Texas Lambert coordinates of north 447,856.04 and east 2,140,991.46 and is the basis for a plane grid established for the Dallas/Fort Worth Airport; THENCE West a distance of 7,586.46 feet to a point for corner; THENCE North a distance of 3,808.78 feet to a point in the east right-of-way line of a 50 foot access easement (unrecorded) and the north right-of-way of' West 20th Street (Hangar Road) (70 foot right-of-way); for the POINT OF BEGINNING of the herein described tract of land, said point also being the southeast corner of said 4.460 acre tract; THENCE West along the north right-of-way line of Hangar Road, a distance of 322.29 feet to a point for corner; THENCE North a distance of 457.68 feet to a point in a concrete apron; THENCE East, at 272.29 feet pass the west line of aforementioned 50 foot access easement, and continue in all a total distance of 312.29 feet to a point for corner; THENCE North 45 degrees 00 minutes 00 seconds East, at 14.14 feet past the east line of said 50 foot access easement, and continue in all a total distance of 197.99 feet to a point for corner; THENCE South a distance of 110.00 feet to a point for corner; THENCE East a distance of 155.87 feet to a point for corner; THENCE South 45 degrees 00 minutes 00 seconds West, a distance of 376.00 feet to a point for corner located 20 feet east of the east right-of-way line of aforementioned 50 foot access easement; THENCE South along a line 20 feet east of and parallel to the east right-of-way line of said 50 foot access easement, a distance of 221 .81 feet to a point of the said north line of Hanger Road; THENCE West along said north line, a distance of 20.00 feet to the POINT OF BEGINNING AND CONTAINING 198,503 square feet or 4.557 acres of land, more or less. This description was prepared solely from existing lease documents, with closure verified by coordinate geometry. No field work was performed to locate this property on the ground. Basis of bearing is the referenced DFW Airport Lease No. 23555. 42 EXHIBIT 10.19 EXHIBIT C SUBLEASE AGREEMENT Dated: March 1, 1993 By and Between ROBERT F. GRAMMER ("Landlord") and M. TOM CHRISTOPHER ("Tenant") 43 TABLE OF CONTENTS
Page ---- ARTICLE I - PREMISES Section 1.01 - Premises 1 Section 1.02 - Landlord Repairs 1 Section 1.03 - Landlord's Representations and Warranties 1-2 ARTICLE II - TERM Section 2.01 - Term 2 ARTICLE III - RENT Section 3.01 - Base Monthly Rent 2-3 Section 3.02 - Ground Rent 3 Section 3.03 - Security Deposit 3-4 ARTICLE IV - USE OF PREMISES Section 4.01 - Permitted Use 4 Section 4.02 - Prohibited Uses 4-5 Section 4.03 - Non-Discrimination 5 ARTICLE V - TENANT'S COMPLIANCE WITH GROUND LEASE, RULES AND REGULATIONS Section 5.01 - Ground Lease 6 Section 5.02 - Compliance with Laws, Rules and Regulations 6 Section 5.03 - Hazardous Substances 6-7 ARTICLE VI - IMPROVEMENTS AND ALTERATIONS Section 6.01 - Improvements and Alterations 7-8 Section 6.02 - Liens 8-9 ARTICLE VII - INDEMNITY Section 7.01 - Indemnity 9-10 ARTICLE VIII - INSURANCE Section 8.01 - Insurance 10 Section 8.02 - Waiver of Right of Recovery 10-11 Section 8.03 - Certificates of Insurance 11 ARTICLE IX - COMMON AREAS Section 9.01 - License 11 ARTICLE X - ASSIGNMENT OR SUBLEASE Section 10.01 - Assignment or Sublease by Tenant 11-12 Section 10.02 - Request for Assignment of Sublease by Tenant 12 Section 10.03 - Assignment by Landlord 12
44 ARTICLE XI - TAXES AND UTILITIES Section 11.01 - Taxes 13 Section 11.02 - Utilities 13 ARTICLE XII - REPAIR AND MAINTENANCE Section 12.01 - Repair and Maintenance by Tenant 13-14 Section 12.02 - Repair and Maintenance by Landlord 14 Section 12.03 - Condition of Premises at Surrender 14 Section 12.04 - Acceptance of Premises 14-15 Section 12.05 - Entry for Repairs and Inspection 15 ARTICLE XIII - DEFAULT AND REENTRY. 15-17 ARTICLE XIV - CONDEMNATION Section 14.01 - Total Taking 18 Section 14.02 - Partial Taking 18 Section 14.03 - Temporary 18-19 Section 14.04 - Awards 19 ARTICLE XV - CASUALTY 19 ARTICLE XVI - INABILITY TO PERFORM. 20 ARTICLE XVII -SUBORDINATION AND ESTOPPEL Section 17,01 - Subordination 20 Section 17.02 - Attornment 20-21 Section 17.03 - Estoppel 21 Section 17.04 - Notice to Mortgagee 21 ARTICLE XVIII - SIGNS 21-22 ARTICLE XIX - QUIET ENJOYMENT . 22 ARTICLE XX - SURRENDER OF PREMISES Section 20.01 - Surrender of Premises 22 Section 20.02 - Environmental Inspection 22 ARTICLE XXI - HOLDING OVER. 23 ARTICLE XXII - NET LEASE 23 ARTICLE XXIII - NOTICES 23-24 ARTICLE XXIV - MISCELLANEOUS Section 24.01 - Easements 24 Section 24.02 - Access 24-25
45 Section 24.03 - Late Charges 25 Section 24.04 - Waiver 25 Section 24.05 - Captions 25 Section 24.06 - Severability 25 Section 24.07 - Entire Agreement 25-26 Section 24.08 - Limitation of Liability of Landlord 26 Section 24.09 - Construction 26 Section 24.10 - Authority. 26 Section 24.11 - Joint and Several Liability 26 Section 24.12 - Costs and Attorney's 26 Section 24.13 - Sublease Subject to Consent of Ground Lessor 26-27 Section 24.14 - Successors and Assigns 27 Section 24.15 - Financial Information 27 Section 24.16 - Submission of Sublease 27 Section 24.17 - Exhibits 27 Section 24.18 - Purchase Option 27-28 ARTICLE XXV - RECORD OF MEMORANDUM Section 25.01 - Memorandum of Lease 28 SIGNATURE PAGE 29
46 SUBLEASE AGREEMENT This SUBLEASE AGREEMENT ("Sublease") is made and entered into as of this 1st day of March, 1993, by and between Robert F. Grammar ("Landlord") and M. Tom Christopher ("Tenant"). W I T N E S S E T H: For and in consideration of the covenants and agreements hereinafter set forth to be performed by Landlord and Tenant, Landlord hereby subleases to Tenant and Tenant hereby subleases from Landlord the Premises hereinafter described, for the term, at the rental, and subject to all of the terms, covenants and conditions hereinafter set forth. ARTICLE I PREMISES Section 1.01 Premises. Landlord hereby subleases to Tenant and Tenant hereby subleases from Landlord that certain parcel of land and all of its improvements and appurtenances (all hereinafter, the "Premises"), including without limitation, an aircraft hangar and offices; containing approximately 40,000 square feet of floor space including office space, all of which is located on that certain parcel of land containing approximately 4.460 acres, located at 1515 W. 20th Street, Dallas/Fort Worth Airport, Texas 75261, the legal description of which is set forth in Exhibit "A" attached hereto and incorporated herein for all purposes. Nothing contained in this Sublease shall grant Tenant any rights in the air space above the Premises. Section 1.02 Landlord Repairs. On or before December 31, 1993, Landlord shall repair or remove the four underground storage tanks to the extent, if any, required to bring such tanks into compliance with applicable environmental requirements. Subject only to these repairs, the Premises is subleased "AS IS." 47 Section 1.03 Landlord's Representations and Warranties. Landlord represents and warrants to Tenant that: (A) Landlord knows of no condition of the Premises that might violate Environmental Laws, except those identified in Section 1.02; (B) Exhibit B is a true copy of the Ground Lease of the land that is a part of the premises, between Dallas/Fort Worth Regional Airport Board (the "Ground Lessor") and Sedalia-Marshall-Boonville Stage Line, Inc., dated February 1, 1983 (the "Ground Lease"), with all of its currently-effective amendments; and as so amended the Ground Lease is in full force and effect, without default or notice of default, and without any condition known to Landlord that would result in default with the passage of time; (C) Landlord holds all rights and interests as Lessee of the Premises under the Ground Lease; and has full right and authority to execute and perform under this Sublease, subject only to the approvals required by the Dallas/Fort Worth Airport Board under this Sublease; and all prior rights in the Premises have been fully, lawfully and finally extinguished; (D) There are no liens or encumbrances upon Landlord's interests in the Premises; and (E) No adverse person or entity possesses any interest in any portion of the Premises. ARTICLE II TERM Section 2.01 Term. Subject to and upon the terms and conditions set forth herein, or in any exhibit or addendum hereto, the term of this Sublease shall have a 5-year term commencing as of March 1, 1993 (the "Effective Date") and ending February 28 1998 (the "Expiration Date"), unless sooner terminated pursuant to the terms and provisions of this Sublease (the "Sublease Term"). 2 48 ARTICLE III RENT Section 3.01 Base Monthly Rent. Tenant covenants and agrees to pay to Landlord a net lease rental as follows: Beginning the Effective Date of this Sublease and continuing on the same day of each month thereafter during the term and any extension or renewals of this Sublease, Tenant shall pay Landlord a monthly "Base Rent" of $21,000 per month in advance. Tenant shall also pay with the Base Rent, as additional rent, all other sums of money that shall become due from and payable by Tenant to Landlord under this Sublease. Landlord shall also have the same remedies for default for the payment of additional rent as are available to Landlord in the case of default in the payment Base Rent. The Base Rent, together with any adjustments of rent provided for herein then in effect, shall be due and payable on the first day of each calendar month during the Sublease Term and any extensions or renewals thereof. Tenant hereby agrees to so pay such rent to Landlord at Landlord's address herein provided (or such other address as Landlord may designate to Tenant in writing from time to time) monthly in advance, without demand, counterclaim or offset except as provided herein. If the Sublease Term, as heretofore established, commences on other than the first day of a month or terminates on other than the last day of the month, then the installment of Base Rent for such month or months shall be prorated based on the number of days in such month which are a part of the Sublease Term and the installment(s) so prorated shall be paid in advance on either the Commencement Date or the first day of the last month of the Sublease Term, as the case may be. Section 3.02 Ground Rent. The Base Rent which Tenant is obligated to pay hereunder includes Tenant's proportionate share of the ground rental which Landlord is obligated to pay as of 3 49 the Effective Date of this Sublease under the Ground Lease. The Tenant's share of the ground rental rate under the Ground Lease which is in effect as of the Effective Date of this Sublease is $5,500.67 per month. The initial Base Rent has been calculated based upon the ground rental rate in effect as of the Effective Date of this Sublease. However, said Ground Lease provides for potential periodic increases of ground rental payable by Landlord to the Ground Lessor, and for potential charges for the cost of construction, relocation or extension of any utilities or improvements in the future. In the event of any such increase in the ground rental, or the imposition of any additional charges by Ground Lessor under the Ground Lease, Tenant agrees to pay to Landlord in monthly installments, as additional rent, such increase in said ground rental, as well as any other charges payable under the Ground Lease by Landlord to Ground Lessor in addition to those currently being charged. Section 3.03 Security Deposit. Concurrent with Tenant's execution of this Sublease, Tenant shall deposit with Landlord the sum of $21,000 cash (the "Security Deposit"). Said sum shall be held by Landlord as a security deposit for the faithful performance by Tenant of all terms, covenants and conditions of this Sublease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Sublease, including but not limited to, the provisions relating to the payment of rent and any of the monetary sums due therewith, Landlord may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any sum which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Security Deposit is so applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount; Tenant's failure to do so within said ten (10) day period shall be a material breach of this Sublease. Landlord shall not be required to keep the Security Deposit 4 50 separate from its general funds, and Tenant shall not be entitled to interest on said Security Deposit. If Tenant shall fully and faithfully perform each and all of its obligations under this Sublease, the Security Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the expiration of the Sublease Term (or any renewal term) and after Tenant has vacated the Premises. Tenant shall not offset its last month's rent against the Security Deposit. ARTICLE IV USE OF PREMISES Section 4.01 Permitted Use. The Premises shall be used and occupied by Tenant only for the following specific purposes and for no other purposes whatsoever without obtaining the prior written consent of Landlord which may be withheld in Landlord's sole discretion: office and aircraft maintenance, together with aircraft handling, fueling, de-icing, lubrication and parking associated therewith, and other lawful uses incidental and necessary to such specific uses. Tenant warrants and represents to Landlord that the Premises shall be used and occupied only for the purpose set forth in this Section 4.01. Section 4.02 Prohibited Uses. (A) Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with or cause a breach under the Ground Lease or conflict with or violate any law, statute, zoning restriction, deed restriction, ordinance, or any environmental, hazardous waste or governmental rules or regulations or requirements now in force or which may hereafter be enacted or promulgated. Tenant shall at its sole cost and expense promptly comply with all said laws, rules and regulations to the extent that they relate to Tenant's use of the premises. 5 51 Tenant shall not use the Premises for any purpose which is illegal, or which in Landlord's reasonable opinion, creates a factual or legal nuisance, or which violates the Ground Lease. (B) Tenant shall not do or permit anything to be done in or about the Premises which will increase the existing rate of insurance upon the Premises (but Tenant shall pay such increased premiums as additional Rent, and the payment thereof shall not give Tenant the right to continue such activity nor waive the restrictions of this Section 4.02) or cause the cancellation or reduction of coverage of any insurance policy covering said Premises or any building of which the Premises may be a part, nor shall Tenant sell or permit to be kept, used or sold in or about said premises, any articles which may be prohibited by a standard form policy of fire insurance. (C) Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants, users or occupants of other property located on D/FW International Airport property, including, without limitation, the open taxiway on the North side of the Premises. Tenant shall not commit, or suffer to be committed, any waste in or upon the Premises. (D) Tenant shall not install in the Premises or in any public area any vending machine or device designed to dispense or sell food, beverages, tobacco, tobacco products or merchandise of any kind to the general public, nor operate any restaurant, cafeteria, kitchen, stand or other establishment for the purpose of dispensing or selling such products to any member of the general public, other than to Tenant's employees, officers and business invitees, without the prior express written approval of Landlord and Ground Lessor. (E) Tenant shall not violate any provision of the Airport Building Code or the Airport Fire Code, or any other Code or Regulation promulgated by D/FW International Airport Board. 6 52 (F) Tenant shall not permit the accumulation of paper, cans, bottles, wrappers, rags, trash, junk or debris on the Premises. Tenant agrees to promptly comply with any notices concerning any such accumulation, given to Tenant by either Landlord or Ground Lessor. Failure by Tenant to comply with any such clean-up notice within 10 business days after receipt of such notice shall constitute a material default by Tenant under this Sublease entitling Landlord to exercise any remedy set forth in Article XIII hereof. Section 4.03 Non-Discrimination. Tenant, in its operations at the Airport, and as part of the consideration hereof, shall maintain and operate its facilities and provide its services in compliance with and pursuant to Title 49, Part 21 (Non-Discrimination in Federally-Assisted Programs of the Department of Transportation-Effectuation of Title VI) of the Code of Federal Regulations, as said Regulations may be amended and all other applicable non-discrimination laws. Further, Tenant shall not unlawfully discriminate in its operations at the Premises against any person or group of persons on the grounds stated therein. Tenant shall indemnify and hold harmless Landlord and Ground Lessor from any claims and demands of third persons and the United States of America resulting from Tenant's non-compliance with the provisions of this Section 4.03, and Tenant shall reimburse Ground Lessor and Landlord for any loss or expense incurred by reason of such non-compliance. ARTICLE V TENANT'S COMPLIANCE WITH GROUND LEASE RULES AND REGULATIONS Section 5.01 Ground Lease. Tenant agrees to not cause any breach of Landlord's covenants under the Ground Lease, and to be bound by all the terms and provisions of the Ground Lease. Tenant shall indemnify Landlord against: all actions, expenses, claims and demands made, 7 53 suffered or sustained by the Landlord as a result of breach by the Tenant of the covenants as aforesaid. Landlord shall not consent to any amendment to the Ground Lease without Tenant' s prior consent, which shall not be withheld unreasonably. Section 5.02 Compliance with Laws, Rules and Regulations. Tenant agrees to comply and cause its employees, agents, invitees and licensees to comply, with reasonable promptness after being advised thereof, with all applicable rules, regulations, orders and directives, pertaining to the Airport, now in existence or hereafter promulgated by any governmental authority or agency having jurisdiction thereover in the interest of health, safety, sanitation and good order at the Airport, and to cause its various tenants, invitees and licensees to comply with all present and future federal, state and municipal laws, statutes, ordinances and regulations hereafter enacted or promulgated, which may apply to the Airport or to the use of the Premises and the Airport by Tenant. Tenant agrees to promptly make all nonstructural improvements, repairs and alterations to any and all facilities located in the Premises when required by law, ordinance, rule, order or regulation, except to the extent that they relate to matters required by environmental laws as to conditions preceding this Sublease. Further, Tenant shall also comply and cause its employees, agents, invitees and licensees to comply with all valid and applicable rules, orders and regulations of (i) the police, health and fire departments, and (ii) the National Board of Fire Underwriters or similar organizations for the prevention of fire or for the correction of unhealthy or hazardous conditions. Section 5.03 Hazardous Substances. As used below, "Hazardous Substances" shall mean threshold quantities of any substances, or materials which are categorized or defined as hazardous or toxic under any present or future local, state or federal law, rule or regulation pertaining to environmental regulation, contamination, cleanup or disclosure, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as now or 8 54 hereafter amended ("CERCLA"), the Resources Conservation and Recovery Act (including, without limitation, the Hazardous and Solid Waste Amendments), as now or hereafter amended ("RCRA"), Superfund Amendments and Re-authorization Act of 1986, as now or hereafter amended ("TSCA"), or state super lien or environmental cleanup or disclosure statutes (including, without limitation, the Texas Substances Control Act, the Texas Solid Waste Disposal Act, the Texas Hazardous Substance Spill Prevention and Control Act, and the Texas Underground Storage Tanks Act) (all such laws, rules and regulations, whether listed above or not, being referred to collectively as "Environmental Laws"). Tenant warrants, represents and covenants as follows: (A) Neither the Tenant, the Premises, nor the Building shall become subject to any private or governmental lien or judicial or administrative notice, order or action relating to Hazardous Substances or subject to any public or governmental lien or judicial or administrative notice, order or action relating to any environmental problems, impairments or liabilities with respect to the Building or the Premises, as a result of Tenant's violation of any environmental laws. (B) Tenant shall immediately notify Landlord should Tenant become aware of (i) any Hazardous Substance in the Premises or the Building or on the property on which the Building is situated, (ii) any lien, action or notice of the nature described in subparagraph (A) above, or (iii) any litigation or threat of litigation relating to any alleged unauthorized release of any Hazardous Substance or the existence of any Hazardous Substance therein or thereon. (C) Tenant hereby covenants and agrees not to do or take any action or omit or fail to take any such action which will violate any Environmental Laws. ARTICLE VI IMPROVEMENTS AND ALTERATIONS 9 55 Section 6.01 Improvements and Alterations. After occupance by Tenant pursuant to the terms of this Sublease, Tenant shall make no alterations, additions, or improvements in or to the Premises without the prior written consent of Landlord, which shall not be withheld unreasonably. Landlord may require Tenant to provide a Completion Bond and a Bond against liens in connection with the construction of any such improvements. Tenant shall be solely responsible for any alterations required to bring the Leased Premises into compliance with, or maintain such compliance with any applicable State or Federal law or regulation, including, without limitation, the Americans With Disabilities Act, except to the extent that they relate to matters required by environmental laws as to conditions preceding this Sublease. Any permitted alterations, additions or improvements prior to Tenant's occupancy or after occupancy shall be at Tenant's sole expense. Tenant shall secure any and all governmental permits required in connection with any such work, and shall hold Landlord harmless from any and all liability (including reasonable attorney' s fees) resulting therefrom. All alterations, additions and improvements (except trade fixtures, appliances and equipment which shall not be deemed a part of the Premises), shall immediately become the property of Landlord without any obligation to pay Tenant therefor and shall not be removed by Tenant except as hereinafter provided. Upon the expiration or sooner termination of the term hereof, Tenant shall, upon written demand by Landlord which shall be given at least ten (10) days prior to the end of the term, at Tenant's sole cost and expense forthwith and with all due diligence remove any alterations, additions or improvements made by Tenant which are designated by Landlord for removal, repair any damage to the Premises caused by such removal and, if requested by Landlord, restore the altered Premises to its original condition. Section 6.02 Liens. Tenant agrees that it shall not create or permit to be created any lien against the Premises or any part thereof. Further, Tenant agrees that it shall not enter into any 10 56 contracts of a type which would attempt to permit a lien or liens to become attached to the remainder interests of Ground Lessor in the Premises . At Landlord' s request, Tenant shall furnish written proof of payment of any items which would or might constitute the basis for such a lien on the Premises if not paid, and if an item is being contested by Tenant, evidence satisfactory to the Landlord that Tenant is contesting the validity thereof in good faith and has the financial ability to discharge the debt if the matter is decided adversely to Tenant. Nothing herein or elsewhere in this Sublease shall imply, and it is not intended, that the Ground Lessor's fee title, Landlord's leasehold title, or other interest in the Premises may in any manner whatsoever be subordinated to any lien or other encumbrance. In the event that any such lien is filed against the Premises or the Building, or any portion thereof, or any interest therein, Tenant shall cause the same to be canceled or discharged of record by payment, bonding or otherwise within twenty (20) days of the filing thereof. In the event that any such lien, claim or claims exceed, individually or in the aggregate, the sum of $10,000, bonding by Tenant with respect to such excess amount shall not be sufficient to comply with Tenant's obligations hereunder; and Tenant shall cause any such lien to be canceled or discharged of record by payment within twenty (20) days after the filing thereof, or at such earlier time as shall be necessary to prevent foreclosure thereof. In the event that any such lien is attached to the Premises, the Building or any portion thereof or interest therein, and Tenant shall fail to obtain the cancellation, discharge or bonding of the same within the time period provided hereinabove, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same, and any amount paid by Landlord for any of the aforesaid purposes shall be paid by Tenant to Landlord on demand as additional rent. Tenant shall indemnify and hold Landlord harmless from all costs, damage, claims and expense (including reasonable attorneys' fees) occasioned by the filing of any such lien. 11 57 ARTICLE VII INDEMNITY Section 7.01 Indemnity. Tenant agrees that Landlord shall not be liable for injury to any person, or for the loss of, or for the damage to, any property (including, without limitation, property of Tenant and claims for consequential or special damages) occurring in or about the Premises, including, without limitation, the ordinary negligence of Landlord or his agents, employees or representatives. Subject to Section 8.01, Tenant hereby indemnifies and holds harmless Landlord from and against same and agrees to defend Landlord against: any and all claims, charges, liabilities, obligations, penalties, damages, costs and expenses (including reasonable attorneys' fees) arising, claimed, charged, or incurred against or by Landlord from any matter or thing arising from Tenant's use of the Premises, the conduct of its business or from any activity, work or other things done, permitted, or suffered by the Tenant in or about the Premises, including without limitation, ordinary negligence of Landlord and his agents and representatives. Tenant shall further indemnify and hold harmless Landlord from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part, or arising from any act or negligence of Tenant, or any officer, agent, employee, guest, or invitee of Tenant, and from all costs, reasonable attorney's fees, and liabilities incurred in or about the defense of any such claim or any action or proceeding brought thereon. In case any action or proceeding be brought against Landlord by reason of any such claim Tenant shall defend the same at Tenant's sole expense. Subject to Section 8.01, the indemnification provided in this section shall survive any termination or expiration of this Sublease. Without limiting the generality of the above, Landlord and its agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Premises, or from pipes, appliances 12 58 or plumbing works therein or from the roof, parking area, street or subsurface or from any other place resulting from dampness or any other cause whatsoever, unless caused by or due to the gross negligence or willful act or omission of Landlord, its agents, servants or employees. Landlord and its agents shall not be liable for consequential damages or special damages of any nature, whether foreseeable or not, nor for interference with the utilities, light or air on the Premises. Tenant shall give prompt notice to Landlord in case of casualty or accidents on the Premises. ARTICLE VIII INSURANCE Section 8.01 Insurance. Tenant shall, at its own expense, maintain at all times during the Sublease Term adequate comprehensive liability insurance with an insurance company or companies acceptable to Ground Lessor and Landlord with minimum Combined Single Limit Coverage of TWO MILLION AND NO/100 DOLLARS ($2,000,000.00) (including, but not limited to, personal injury broad form contractual liability, products liability, broad form property damage and contractor's protective), to insure Landlord, Tenant and Ground Lessor against any such claims, demands, losses, damages, liabilities and expenses. So long as Tenant maintains such insurance, with Landlord as an additional insured and otherwise as provided below, Landlord shall look first to such insurance for Tenant's indemnity under Section 7.01. Tenant shall, at its own expense, also maintain at all times during the Sublease Term (a) Worker's Compensation insurance, and (b) comprehensive automobile liability insurance covering all owned, non-owned and hired motor vehicles with a Combined Single Limit of not less than TWO MILLION AND NO/100 DOLLARS ($2,000,000.00) . Landlord and Ground Lessor shall be named as additional Insureds as their interests may appear and waiver of subrogation among named insured in all of said policies referred to in this Section 8.01 (except for any policy of insurance covering Worker's Compensation), when 13 59 applicable, each such policy shall have deductibles of not more than $2,000 per occurrence or such other amounts as may be acceptable to Landlord, and Landlord and Ground Lessor shall each be furnished with a certificate of insurance which shall bear an endorsement that same shall not be canceled, terminated or materially changed without thirty (30) days prior written notice to Ground Lessor and Landlord. If Tenant fails to maintain such insurance, Landlord may (but is not obligated to) maintain the same on behalf of Tenant, and any premiums paid by Landlord shall be deemed additional rent and shall be due on the payment date of the next installment of rental hereunder. Tenant may maintain Fire and Extended Coverage insurance in Tenant's discretion on Tenant's property on the Leased Premises and on Tenant's interest in the Leasehold estate, and Landlord shall have no obligation to Tenant regarding such insurance. Section 8.02 Waiver of Right of Recovery. Landlord and Tenant hereby mutually release each other from liability and waive all right of recovery against each other for any property loss in or about the Premises from perils insured against under their respective prior insurance policies to the extent covered by such prior insurance policies (but not the policies as provided pursuant to paragraph 8.01 above) including any extended coverage endorsements thereof, whether due to negligence or any other cause; provided that this section shall be inapplicable if it would have the effect, but only to the extent that it would have such effect, of invalidating any insurance coverage of Landlord or Tenant. Section 8.03 Certificates of Insurance. A certificate issued by the insurance carrier for each policy of insurance required to be maintained by Tenant under the provisions of this Sublease shall be delivered to Landlord on or before the Effective Date of this Sublease and thereafter, at time of policy renewals, within thirty (30) days prior to the expiration of the term of each such policy. Each of said certificates of insurance and each such policy of insurance required to be maintained 14 60 by Tenant hereunder shall expressly evidence insurance coverage as required by this Sublease. All such policies shall be written as primary policies not contributing with and not in excess of coverage which Landlord may carry. ARTICLE IX COMMON AREAS Section 9.01 License. Not applicable. ARTICLE X ASSIGNMENT OR SUBLEASE Section 10.01 Assignment or Sublease by Tenant. Tenant shall have the right, without notice to or consent of Landlord, to sublease or rent any portion or all of the Premises to any one or more entities in which Kitty Hawk Group, Inc., or Tenant hold a majority interest; the right with Landlord's reasonable approval to assign, sublease or rent to any other person or entity, A transfer of tenant's rights in the Sublease to his executor or heirs in the event of Tenant's death is a permitted assignment. Tenant shall not otherwise assign, sublease, mortgage, sell and lease back, hypothecate, or transfer all or any part of this Sublease, or any interest therein . Tenant acknowledges that , pursuant to the provisions of the Ground Lease, any assignment or sublease is also subject to obtaining the prior written approval of the Ground Lessor and also subject to certain other conditions set forth in the Ground Lease. If Tenant assigns or transfers all or any part of its interest in this Sublease or subleases the Premises, or any portion thereof, without first obtaining Ground Lessor's prior written approval and Landlord's prior written consent, such assignment, transfer or sublease shall be construed to be a material default by Tenant hereunder; however, Landlord may collect rent from such party in possession and apply the amount collected to the rent hereby reserved, but no such collection and application shall be considered a waiver of the requirements of this paragraph 15 61 the acceptance of such party as tenant, nor the consent of Landlord to such assignment, sublease or transaction. Any collection of rent directly by Landlord from any such assignee or sublessee shall not be construed to constitute a novation or a release of Tenant or any guarantor from the further performance of their respective obligations under this Sublease. Tenant agrees to reimburse Landlord for Landlord's reasonable attorney's fees incurred in conjunction with the processing and documentation of any requested transfer or sublease pursuant to this Section 10.01. Section 10.02 Request for Assignment or Sublease by Tenant. If Tenant desires to assign, sublease or rent any portion of the Premises in a transaction that requires notice to or consent of Landlord under Section 10.01, it shall notify Landlord at least thirty (30) days in advance of the date on which Tenant desires to make such assignment or sublease. Tenant shall provide Landlord a copy of the proposed assignment or sublease and such reasonable information as Ground Lessor or Landlord might request concerning the proposed assignee or sublessee to allow Ground Lessor and Landlord to make informed judgments as to the financial condition, operations expertise and management ability of the proposed assignee or sublease. In the event Landlord consents to any assignment, transfer or sublease, Tenant shall remain fully liable for the performance of all obligations under this Sublease unless expressly released from such liabilities in writing by Landlord. Section 10.03 Assignment by Landlord. Landlord shall have the absolute right to assign or otherwise transfer its interest hereunder and/or in the Premises or any portion thereof without the consent of Tenant, provided that Landlord shall give Tenant notice of such transaction and provided further that any such transaction shall not affect Tenant's right to possession and use of the Premises or its rights under this Sublease so long as Tenant is not in default under any of the terms and conditions of this Sublease. Tenant shall attorn to any assignee of Landlord, but assignment by 16 62 Landlord shall not in any way diminish Landlord's obligations under this Sublease for any matter preceding the assignment. The covenants and obligations contained in this Sublease on the part of Landlord shall, subject as aforesaid, be binding on Landlord, its successors and assigns, only during and in respect to their respective periods of ownership, except as may be expressly otherwise stated in this Sublease. Any estate, right, title or interest of Landlord assigned hereunder may be assigned in like manner by any assignee thereof. ARTICLE XI TAXES AND UTILITIES Section 11.01 Taxes. Tenant shall pay or cause to be paid before delinquency all income and personal property taxes, assessments, license fees and public charges levied, assessed or imposed upon or measured by the value of its business operation, including, but not limited to, the furniture, fixtures, leasehold improvements, equipment and other property of Tenant at any time situated on or installed in the Premises. If at any time during the term of this Sublease any of the foregoing are assessed as part of the real property of which the Premises are a part, Tenant shall pay to Landlord upon demand, as rent in addition to the Base Rent, the amount of such additional taxes as may be levied against said real property by reason thereof. For the purpose of determining said amount, the determination by the Dallas County or Tarrant County Tax Assessor, or other taxing authority, as applicable, as to amount so assessed shall be conclusive. Landlord shall pay any real property taxes levied against the Premises. Section 11.02 Utilities. Tenant shall pay throughout the term of this Sublease for all charges charged to the Premises for utilities including, but not limited to, electricity, heat, oil, gas, water, sewage, garbage, disposal, telephone and telegraph. Tenant shall also provide its own 17 63 janitorial services, replacement of lightbulbs and tubes and all washroom and toilet supplies, and parking area maintenance. ARTICLE XII REPAIR AND MAINTENANCE Section 12.01 Repair and Maintenance by Tenant. Tenant shall at all times throughout the term of this Sublease at its sole cost and expense keep the Premises (including exterior doors and entrances, all windows and molding and trim of all doors and windows) , and appurtenances thereof (including, without limitation, all heating, air conditioning, plumbing and electrical systems as well as the fire protection alarm and sprinkler systems of the Premises) in good order, condition and repair, damage by unavoidable casualty and Landlord's obligations under Section 12.02 excepted. Without limiting the general requirements contained herein, Tenant shall keep the glass of all windows and doors unbroken, in good repair, clean and presentable, at reasonable intervals paint or refinish the interior of the Premises and keep same free from uncleanliness or obstruction. Tenant shall give Landlord or its agents prompt written notice of any accident to or defects in the plumbing systems, electrical systems, and heating and air conditioning systems and fire protection alarm and sprinkler systems. Any damage to same resulting from misuse, acts or omissions of Tenant, its employees, agents, or invitees shall be repaired at Tenant's sole cost. Section 12.02 Repair and Maintenance by Landlord. Landlord shall at all times throughout the term of this Sublease keep the roof (both interior and exterior), exterior walls, foundations and building structure of the Premises in as good a state of repair as at the commencement of this Sublease, reasonable wear excepted, and shall promptly accomplish such repairs as may be needed. Tenant shall immediately inform Landlord of any necessary repairs, but make no such repairs without Landlord's prior written consent. Landlord shall make such repairs to 18 64 the roof, exterior walls, foundations and building structure of the Premises, without liability to Tenant for any loss or damage which may result in Tenant's stock or business by reason of such repairs and maintenance. Landlord shall have the right, without liability, to enter the Premises for the purpose of inspection or making those repairs required under this Section 12.02. Except as otherwise specifically provided herein, there shall be no liability of Landlord (including, without limitation, consequential or special damages or ordinary negligence of Landlord, his agents, employees or representatives) by reason of any injury to or interference with Tenant's business arising from the making of, or failure to make, any repairs, alterations or improvements in or to any portion of the Premises or in or to fixtures, appurtenances and equipment therein. Section 12.03 Condition of Premises at Surrender. At the expiration or sooner termination of this Sublease, Tenant shall return the Premises to Landlord in the same condition as the Premises existed at the commencement of this Sublease (or, if altered by Landlord or Tenant with Landlord's consent, then the Premises shall be returned in such altered condition subject to Landlord's right to require removal of such alterations), with reasonable wear and tear excepted. Tenant shall remove all trade fixtures, appliances and equipment which do not become a part of the Premises together with those alterations which Landlord designates to be removed, and subject thereto, Tenant shall restore the Premises to the original condition existing prior to the installation of said items. Tenant's obligation to perform this covenant shall survive the expiration or termination of this Sublease. Section 12.04 Acceptance of Premises. By entry thereon, but subject to the completion of the items set forth in Section 1.02 of this Sublease, Tenant shall be deemed to have accepted the Premises "AS IS" except for latent defects known to Landlord but not disclosed, and except for 19 65 the existing environmental issue described in Section 1.02 and as being in good and sanitary order, condition and repair, and suitable for the uses permitted by this Sublease. Section 12.05 Entry for Repairs and Inspection. Tenant covenants and agrees to permit Landlord or its agents or representatives to enter into and upon any part of the Premises at all reasonable hours to inspect the same, make repairs, alterations or additions thereto; and to show the Premises to prospective purchasers, mortgagees and tenants (but only during the last six (6) months of the Sublease Term or any renewal term with respect to prospective tenants), and Tenant shall not be entitled to any abatement or reduction of rent by reason thereof; provided however, that Landlord agrees not to unreasonably interfere with Tenant's business operations in connection with any such entry. ARTICLE XIII DEFAULT AND REENTRY Time is of the essence of this Sublease. In the event any of the following events occur: (1) Tenant fails to timely pay Landlord any installment of rent or other payments required under Article III hereof or any other payment required under the provisions of this Sublease and such default shall not have been remedied within 10 days after notice from Landlord to Tenant for such default, provided that Landlord shall not be required to give more than two such notices in any calendar year; or (2) The Premises are deserted or vacated by Tenant for a period of fifteen (15) consecutive days without prior written consent of Landlord; or (3) A voluntary petition in bankruptcy is filed against Tenant under any chapter of the Bankruptcy Code, 11 U.S.C. Paragraph 101 et seq., or Tenant makes an assignment for the benefit of creditors, or becomes insolvent; or 20 66 (4) There shall be an involuntary bankruptcy or receivership petition filed with respect to Tenant, or any attachment, execution or other judicial seizure of, or affecting, the properties and assets of Tenant, or affecting the Premises, or any part thereof, unless Tenant causes such petition to be dismissed, or dissolves, bonds against, or otherwise eliminates such attachment, execution or seizure within thirty (30) days of its occurrence; or (5) There is a transfer, hypothecation, assignment, sublease or conveyance of the Premises or any portion thereof or interest therein by Tenant in violation of Section 10.01 of this Sublease or without Ground Lessor's prior written approval; or (6) Tenant shall default in the observance or performance of any term, covenant (including, without limitation , the covenant to provide an estoppel certificate as required by Section 17.03 of this Sublease), condition or provision of this Sublease, or the Ground Lease, and such default shall not have been remedied within ten (10) days after notice from Landlord to Tenant such default, provided that the l0-day cure period shall be applicable only to the first occurrence of each such event during the term of this Sublease. THEN, AND IN SUCH EVENT, in addition to any other remedies conferred upon Landlord at law or in equity, Landlord shall have the absolute right, at its election any time after such event, and to the extent permitted by applicable laws, without further notice or demand, to exercise any one or more of the following remedies: (A) Landlord may terminate this Sublease and forthwith repossess the Premises and be entitled to recover forthwith as damages, a sum of (i) all rents and other indebtedness accrued to the date of such termination, (ii) the reasonable cost of recovering the Premises, (iii) the cost of removing and storing Tenant's and any other occupant's property located therein, (iv) the cost of reletting the Premises (including, without limitation, reasonable brokerage commissions and the 21 67 amount of Rent lost from the time of recovery of the Premises to the beginning date of any reletting thereof), (v) the cost of repairs, changes, alterations and additions to the Premises whether accomplished in one or more steps or phases, (vi) the reasonable cost of collecting such amounts from Tenant hereunder and (vii) any other reasonable sums of money or damages that may be owed to Landlord as a result of a default by Tenant or the exercise of Landlord's rights at law or in equity. If upon such reentry there remains any personal property of Tenant or any other person upon the Premises, the Landlord may, but is without obligation to do so, remove such personal property and hold it for the owner thereof or place the same in a public garage or warehouse in Tenant's name, all at the expense and risk of the owner thereof, and Tenant shall reimburse Landlord for any expenses incurred in connection with such removal and storage. Landlord shall have the right to sell such stored property provided it has given Tenant not less than thirty (30) days prior written notice of such intended sale. The proceeds of such sale shall be applied first to the cost of sale (including without limitation, attorneys' fees and court costs, second to payment of storage charges, third to payment of any other amounts then due from Tenant to Landlord, and the balance, if any, shall be paid to Tenant. (B) Landlord may terminate Tenant's right of possession (but not this Sublease) and may repossess the Premises by forcible entry or detainer suit or otherwise, without demand or notice of any kind to Tenant and without terminating this Sublease, in which event Landlord may, but shall be under no obligation to do so, relet the Premises or any portion thereof for the account of Tenant for such rent and upon such terms as shall be satisfactory to Landlord. If Landlord shall fail or refuse to relet the Premises, or if the same are relet and a sufficient sum shall not be realized from such reletting to satisfy the rent provided for in this Sublease to be paid, then Tenant shall pay to Landlord as damages a sum equal to the amount of the rental reserved in this Sublease for such 22 68 period or periods, or if the Premises have been relet, the Tenant shall satisfy and pay any such deficiency upon written demand therefor from time to time. Landlord shall also be entitled to recover forthwith as damages, a sum of (i) all rents and other indebtedness accrued to the date of such termination, (ii) the reasonable cost of recovering the Premises, (iii) the cost of removing and storing Tenant's and any other occupant's property located therein, (iv) the cost of reletting the Premises (including, without limitation, reasonable brokerage commissions), (v) the cost of repairs, changes, alterations, and additions to the Premises whether accomplished in one or more steps or phases, (vi) the reasonable cost of collecting such amounts from Tenant hereunder and (vii) any other sums of money or damages that may be owed to Landlord as a result of a default by Tenant or the exercise of Landlord's rights at law or in equity, including without limitation, attorneys' fees and court costs. Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this subparagraph (B) from time to time, and that no delivery or recovery of any portion due Landlord hereunder shall be any defense to any subsequent action brought for any amount not theretofore reduced to judgment in election on the part of Landlord to terminate this Sublease unless a written notice of such intention be given to Tenant by Landlord. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Sublease for such previous breach. ARTICLE XIV CONDEMNATION Section 14.01 Total Taking. If the entire Premises are taken under the power of eminent domain or conveyed under the threat of the exercise of said power or otherwise pursuant to the Ground Lease (all of which is hereafter referred to as "condemnation"), this Sublease shall terminate 23 69 as of the date the condemning authority is entitled to possession. All Base Rent, additional rent and other charges payable by Tenant hereunder shall be apportioned and paid to the date of such taking. Section 14.02 Partial Taking. If a portion of the Premises should be taken by a governmental authority, corporation or other entity under the right of eminent domain, condemnation, pursuant to the Ground Lease or similar right, this Sublease shall nevertheless continue in effect as to the remainder of the Premises unless, in Ground Lessor's judgment, so much of the Premises shall have been taken so as to make it economically unsound to use the remainder of the Premises for the uses and purposes contemplated by this Sublease. If the Ground Lessor determines that so much of the Premises has been taken as to make it economically unsound to use the remainder of the Premises for the uses and purposes contemplated by this Sublease, this Sublease shall terminate as of the date of the taking of possession by the condemning authority, and all Base Rent, additional rent and other charges payable by Tenant hereunder shall be apportioned and paid to the date of such taking. In the event of a partial taking where this Sublease is not terminated, then to the extent of the condemnation proceeds received by Landlord, Landlord shall proceed promptly to restore the remaining portion of the Premises to a safe integral unit resembling, so far as practicable, the Premises prior to such taking, and the Base Rent, additional rent and other charges payable by Tenant hereunder during the remainder of the Sublease Term after taking of possession by the condemning authority shall be reduced on a just and proportionate basis having due regard for the relative value and square footage of the portion of the Premises thus taken as compared to the remainder thereof and taking into consideration the extent, if any, to which Tenant's use of the remainder of the Premises shall have been impaired or interfered with by reason of such partial taking. 24 70 Section 14.03 Temporary Taking. If the whole or any portion of the Premises shall be taken for temporary use or occupancy, the Sublease Term shall not be reduced or affected and the Base Rent, additional rent and other charges payable by Tenant hereunder shall be abated in proportion to the portion of the Premises taken. Except to the extent Tenant is prevented from so doing pursuant to the terms of the order of the condemning authority, Tenant shall continue to perform and observe all of the other covenants, agreements, terms and provisions of this Sublease. Section 14.04 Awards. All awards for the taking of any part of the Premises or any payment made under threat of exercise of power of eminent domain, condemnation or pursuant to the Ground Lease shall be the sole property of Landlord, whether made as compensation for diminution in value of the leasehold or severance damages or any other costs. Neither Landlord nor Ground Lessor shall have any liability whatsoever to Tenant for said condemnation and Tenant waives all rights to claim damages or awards for loss of its leasehold interest or to seek recovery of any condemnation award or settlement. ARTICLE XV CASUALTY In the event the Premises are damaged or destroyed to such an extent as to render the same untenantable in whole or in substantial part, the Base Rent, additional rent and other charges payable by Tenant hereunder shall abate during the time Tenant is unable to use the Premises, Landlord shall, within thirty (30) days of receipt of notice from Tenant of said damage or destruction, advise Tenant in writing of Landlord's determination of whether to repair or rebuild same, which shall be at the sole election of Landlord. In the event that Landlord has determined to repair the damage but the Premises are incapable of being repaired within one hundred thirty-five (135) days from date of Landlord's notice to Tenant, this Sublease may be terminated by Tenant by written notice given by 25 71 the terminating party to the other party. If Landlord elects not to repair or rebuild, or if repair and rebuilding will require more than 135 days from Landlord's notice, Tenant may by notice to Landlord within 30 days after Landlord's notice elect to purchase the Premises under the option in section 24.18, in which case the Premises shall include all proceeds of casualty insurance received or receivable by Landlord with respect to the damage or destruction. On such termination date, Tenant shall immediately surrender the Premises and all interest therein to Landlord, and Tenant shall pay Base Rent, additional rent and other charges payable by Tenant hereunder only to the date of termination or the date the Premises are surrendered, whichever occurs later. Landlord shall at all times maintain adequate fire and casualty insurance upon the Premises up to $1,700,000. Tenant may maintain such fire and casualty insurance on its leasehold interest as it chooses pursuant to paragraph 8.01. ARTICLE XVI INABILITY TO PERFORM This Sublease and the obligation of Tenant to pay Base Rent, additional rent and the other charges payable by Tenant hereunder and to perform all of the other covenants and agreements set forth herein shall in no event be affected, impaired or excused because either the Ground Lessor or the Landlord is unable to supply, or is delayed in supplying, any service to be supplied by Ground Lessor under the Ground Lease or Landlord under this Sublease or is unable to make or is delayed in making, any repairs required of such party, if either the Ground Lessor or Landlord is prevented or delayed from so doing by reason of strikes or labor troubles or for any cause beyond the control of Ground Lessor or Landlord, including, but not limited to, governmental preemption in connection with a National Emergency, or by reason of any rule, order or regulation of any department or 26 72 subdivision of any other government agency or by reason of the conditions of supply and demand which have been or are affected by war, natural disaster or other emergency. ARTICLE XVII SUBORDINATION AND ESTOPPEL Section 17.01 Subordination. This Sublease is subject and hereby subordinated to all present and future mortgages, deeds of trust and other encumbrances of the Landlord, his successors or assigns , affecting the Premises or the property described in Exhibit "A" of which the Premises are a part, provided that such subordination shall not affect the Tenant's right to possession and use of the Premises so long as Tenant is not in default under any of the terms and conditions of this Sublease. Tenant will, promptly upon Landlord's request, execute such instruments as may be reasonably required from time to time to subordinate the rights and interest of Tenant under this Sublease to the lien of any mortgage or deed of trust which may at any time be placed upon the land or Building of which the Premises are a part; provided, however, such subordination shall not affect the Tenant's option to purchase pursuant to 24.18 below nor the Tenant's right to possession, use and occupancy of the Premises as long as Tenant is not in default under any of the terms and conditions of this Sublease or the Ground Lease. Section 17.02 Attornment. Tenant agrees that any such subordination agreement will contain a provision satisfactory to Landlord's lender whereby Tenant will agree, in the event of foreclosure of any such mortgage or deed of trust, to attorn to and recognize as its Landlord under the terms of this Sublease said lender, any purchaser of this Leasehold at a foreclosure sale, or their successors or assigns. 27 73 Section 17.03 Estoppel Certificate. Tenant agrees that it will upon request execute and deliver to Landlord, Landlord's lender, or to the Ground Lessor, an estoppel certificate in the form requested by Landlord or such party. Section 17.04 Notice to Mortgagee. Tenant agrees to give any present or future mortgagee of the Premises or the property described in Exhibit "A" of which the Premises are a part, a copy of any notice of default served upon Landlord by Tenant. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Sublease, then any such mortgagee shall have an additional fifteen (15) days within which to cure such default or if such default cannot be cured within such time, then such additional period of time as may be necessary to cure such default if within such fifteen (15) days the mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default, in which event this Sublease shall not be terminated while such remedies are being so diligently pursued. ARTICLE XVIII SIGNS Tenant shall have the right, as limited herein, to install and maintain signs in and on the Premises identifying it and its operations; provided, however, that all such signs shall conform to all applicable governmental and Airport regulations and requirements as to design, placement, erection, repair and maintenance and shall be subject to the prior written approval of Landlord and the Director of Planning and Engineering (the "Director") for Ground Lessor as to content, color, size, design and location. Further, upon demand, written or oral, by Ground Lessor, Tenant shall remove, obliterate or paint out any and all advertising, signs, poster and similar devices that were placed by Tenant on the Premises or elsewhere on the Airport without the prior written approval of the Director. In the event of a failure on the part of the Tenant to so remove, obliterate or paint out 28 74 each and every sign or piece of advertising within seven (7) days after receipt of such demand, Tenant acknowledges that the Ground Lessor has the right under the Ground Lease to perform the necessary work and demand that Landlord pay the cost thereof to Ground Lessor on demand as additional rental under the Ground Lease, all of which shall be immediately paid by Tenant to Landlord as additional Rent, upon Tenant's receipt of Landlord's notice thereof. Tenant agrees to indemnify and hold harmless Landlord from any and all costs and expenses incurred by Landlord by reason of Tenant's failure to comply with the provisions of this Article XVIII. If any such charge is not paid by Tenant to Ground Lessor or Landlord within thirty (30) days after the date of completion of Ground Lessor's work, Landlord shall have the right, but not the obligation, to pay for such work and Tenant shall reimburse to Landlord such amounts as have been advanced by Landlord to Ground Lessor within ten (10) days after demand therefor. ARTICLE XIX QUIET ENJOYMENT Landlord agrees that, upon payment of rental and performance of all covenants and agreements on the part of Tenant to be performed hereunder, Tenant shall peaceably have and enjoy the Premises and all rights and privileges granted herein. Tenant agrees that temporary inconveniences, including as illustration and not limitation, such occurrences as reasonable noise, reasonable disturbance, reasonable traffic detours caused or associated with Airport or Building operations as well as those caused by or associated with the construction of Airport or Building improvements, shall not constitute a breach of this paragraph. ARTICLE XX SURRENDER OF PREMISES 29 75 Section 20.01 Surrender of Premises. At the expiration or sooner termination of this Sublease, Tenant shall promptly surrender possession of the Premises broom clean to Landlord and shall deliver to Landlord all keys that it may have to any and all parts of the Premises and the Building. Section 20.02 Environmental Inspection. At the expiration or sooner termination of this Sublease, Tenant shall have conducted, at Tenant's expense, a Phase I Environmental Inspection and any additional inspection such Phase I Inspection indicates is appropriate or necessary. Upon receipt of such environmental reports, Tenant shall, at its sole cost and expense, bring the Leased Premises into compliance with all applicable State and Federal Environmental Laws, as reflected in such environmental inspections. In the event Tenant fails to have such inspections completed within 30 days subsequent to the termination of the Sublease, Landlord may, but shall not be required, to conduct such inspections and remedy such deficiencies, and Tenant shall be fully liable for the total cost. ARTICLE XXI HOLDING OVER If Tenant shall, with the consent of Landlord, hold over after the expiration or sooner termination of the term of this Sublease, the resulting tenancy shall be a month-to-month tenancy, which tenancy may be terminated upon thirty (30) days' written notice by Tenant to Landlord, or by seven (7) days' written notice from Landlord to Tenant. Notwithstanding the foregoing, any holding over by Tenant after termination of this Sublease without Landlord's consent or while Tenant is in default hereunder shall be terminable at will by Landlord. During such tenancy, Tenant agrees to pay to Landlord rental at a rate equal to one hundred twenty-five percent (125%) of the rental applicable for the last month of term of this Sublease unless a different rate is agreed upon in 30 76 writing, and to be bound by all of the terms, covenants, and conditions as herein specified to the extent applicable. ARTICLE XXII NET LEASE This Sublease is a "net" Lease and Tenant shall (except as expressly provided to the contrary herein) pay all costs, taxes and assessments which are connected with or arise out of the possession, use or occupancy of the Premises or any portion thereof. All amounts payable by Tenant to Landlord hereunder shall be paid by Tenant without notice or demand (except as herein otherwise expressly provided) and without any set-off, counterclaim, deduction, defense, abatement, suspension, diminution or reduction of any kind or for any reason. ARTICLE XXIII NOTICES Any notice required or permitted to be given hereunder shall be in writing and shall be considered properly given if mailed by first class United States mail, postage prepaid, certified with return receipt requested, or by delivering same in person to the intended addressee. For purposes of notice, the addresses of the parties hereto shall be as set forth below: LANDLORD : Robert F. Grammer 201 Tampico Irving, Texas 75062 TENANT: M. Tom Christopher 700 Villa Wood Circle Coppell, Texas 75019 31 77 Any party hereto shall have the right to change such party's address for notice hereunder by the giving of ten (10) days' notice to all other parties in the manner set forth hereinabove. Notices sent by certified mail shall be deemed to have been given five (5) business days following the date of mailing. Notices given in any other manner shall be effective only if and when received by the addressee. ARTICLE XXIV MISCELLANEOUS Section 24.01 Easements. Tenant acknowledges that the Premises are subject to easements reserved by the applicable public utilities for water mains and other utilities and the right to operate, repair, maintain, construct, reconstruct and alter said utility lines and construct new and additional lines within said easement areas. Tenant agrees to release Landlord from any and all liability of every kind and nature resulting from the exercise by said public utilities of their rights under said retained easements. Section 24.02 Access. Landlord, its employees, agents, and contractors, shall have the right to enter the Premises at any reasonable time to examine same, make such repairs, alterations, improvements or additions as Landlord may deem necessary or desirable, and to show the Premises to prospective tenants, insurance representatives and such other persons who in the judgment of the Landlord have a legitimate and appropriate interest in viewing the Premises. In addition, Tenant acknowledges and agrees that Ground lessor, its officers and employees, have the right under the Ground Lease, during business hours (and at any time in the case of an emergency), to enter upon the Premises for the purposes of inspecting the Premises or doing any act or thing which either the Ground Lessor or Landlord may be obligated to do, or have the right to do, under the Ground Lease. If Tenant is not present to permit entry and entry is necessary, Landlord may, in case of emergency, 32 78 forcibly enter the Premises without rendering Landlord liable therefor, except for the gross negligence or willful acts of Landlord, its agents or employees . Nothing contained herein shall be construed to impose upon Landlord any duty of inspection or repair of the premises or the Building of which the Premises are a part except as otherwise specifically provided herein, Section 24.03 Late Charges. If any installment of rent or other sum due from Tenant is not received by Landlord or its designee within ten (10) days after such amount is due, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount as partial compensation for additional costs incurred by Landlord due to payment delinquency. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default, if any, with respect to such overdue amount, nor prevent Landlord from exercising any other rights granted herein. Section 24.04 Waiver. The failure of Landlord to insist upon strict performance of any of the covenants or conditions of this Sublease, or to exercise any option herein conferred in any one or more instances, shall not be construed to be a waiver or relinquishment of any covenant or condition, but the same shall be and remain in full force and effect. Section 24.05 Captions. The captions in this Sublease are for convenience only and do not in any manner limit or amplify the provisions of this Sublease. Section 24.06 Severability. If any term or provision of this Sublease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Sublease or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and shall continue in full force and effect, provided, however, if Landlord, in his sole discretion, shall determine such unenforceable provision to be material to this Sublease, Landlord shall have the right to terminate the Sublease on 30-days' prior written notice to Tenant. 33 79 Section 24.07 Entire Agreement. IT IS EXPRESSLY AGREED BY LANDLORD AND TENANT, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS SUBLEASE, THAT THIS SUBLEASE, WITH ITS SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS SUBLEASE OR TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN WRITING IN THIS SUBLEASE. NO MODIFICATION OR AMENDMENT OF THIS SUBLEASE SHALL BE VALID OR EFFECTIVE UNLESS EVIDENCED BY AN AGREEMENT IN WRITING EXECUTED BY LANDLORD AND TENANT. Section 24.08 Limitation of Liability of Landlord. Notwithstanding anything to the contrary contained in this Sublease, in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Sublease to be observed, honored or performed by Landlord, Tenant shall look solely to the estate and property of Landlord in the leasehold estate and Building owned by Landlord for the collection of any judgment (or any other judicial procedures requiring the payment of money by Landlord), it being agreed that Landlord shall never be personally liable for any such judgment and no other property or assets of Landlord shall be subject to levy, execution, or other procedures for satisfaction of Tenant's remedies. Landlord shall not be liable to Tenant under any circumstances for consequential or special damages, including, without limitation, claims arising out of or based on the ordinary negligence of Landlord, his agents, employees or representatives. 34 80 Section 24.09 Construction. This Sublease shall be deemed to be made in and construed in accordance with the laws of the State of Texas. Section 24.10 Authority. If Tenant is a corporation, each individual executing this Sublease on behalf of said corporation represents and warrants that he/she is duly authorized to execute and deliver this Sublease in accordance with a duly adopted resolution of the Board of Directors of said corporation and in accordance with its terms. Section 24.11 Joint and Several Liability. If Tenant consists of more than one person or entity, all terms, covenants and conditions contained in this Sublease shall be deemed to be the joint and several responsibility of each party, and all rights and remedies of the Landlord shall be cumulative and nonexclusive of any other remedy at law or in equity. Section 24.12 Costs and Attorney's Fees. If, by reason of any default on the part of Tenant or Landlord, it becomes necessary for the other to employ an attorney to take any action to collect rent or other sums due hereunder or cure any breach or to bring suit in court to recover any rent or other sums due hereunder, or for the breach of any provision of this Sublease, or to recover possession of the Premises, the prevailing party shall recover all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees) expended or incurred in addition to other relief granted therein. Section 24.13 Sublease Subject to Consent of Ground Lessor, The parties hereto recognize and agree that this Sublease shall not become effective until approved by Ground Lessor pursuant to certain rights reserved by Ground Lessor in the Ground Lease. In connection with obtaining such approval, Tenant agrees to provide to the Ground Lessor such information as may be required by the Ground Lessor in considering a request for its approval of this Sublease. Consent by the Ground Lessor to any of the provisions of this Sublease which may be inconsistent with the Ground Lease 35 81 does not constitute an amendment to the Ground Lease. The Ground Lease shall supersede this Sublease in the event of any inconsistency or contradiction between the two and this Sublease is in all things subordinate to the Ground Lease. Section 24.14 Successors and assigns. This Sublease shall extend to and bind the successors, heirs and assigns of the respective parties hereto, provided that this provision shall not authorize or permit any assignment or other transfer of this Sublease or any part thereof, except as expressly permitted in Article X hereof. Section 24.15 Financial Information. Within twenty (20) days after written request from Landlord, Tenant shall deliver to Landlord or lender designated by Landlord such financial information as is reasonably required. This financial information shall be kept confidential. Section 24.16 Submission of Sublease. Submission of this Sublease to Tenant for signature does not constitute a reservation of space or an option to lease. In addition to any other conditions to the effectiveness of this Sublease set forth herein, this Sublease shall not become effective until fully executed by, and delivered to, both Landlord and Tenant and approved in writing by Ground Lessor. Section 24.17 Exhibits. All exhibits referred to herein and any exhibits which may be referred to in any amendment hereto are by such reference incorporated herein and shall be deemed a part of this Sublease as fully as if set forth herein. The following numbered or lettered exhibits are attached hereto and made a part hereof for all purposes: Exhibit "A" - Legal Description of Land Exhibit "B" - Ground Lease No. 23555-H, Supplemental Agreements Nos. 23555-H1 and 23555-H2, 4.460 acres more or less 36 82 Section 24.18 Purchase Option. Tenant is hereby granted an Option to purchase Landlord's interest in the Leased Premises and Ground Lease on the following terms and conditions: (a) The Option must be exercised and closed within four years from the Effective Date of this Lease; (b) Notice of the exercise of the Option shall be given by Tenant to Landlord in writing at least 60 days prior to the proposed closing date; (c) The purchase price shall be $2,200,000, payable in cash at closing. The purchase price shall be reduced by the sum of $5,000 for each month prior to closing that Tenant has leased the Premises and paid its full monthly rent according to this Sublease; (d) Such Sale is expressly subject to the consent of Ground Lessor and Ground Lessor's further agreement to release Landlord from any further obligations or liability to it arising out of the Ground Lease. The obligation to obtain such consent shall be Tenant's. Landlord shall give his reasonable cooperation in obtaining such consent but shall not be required to expend any money or assume any obligations in connection with obtaining the consent of Ground Lessor or assigning Landlord's interest; (e) Tenant shall purchase the Property "AS IS" without warranty, express or implied other than that Landlord transfers to Tenant good and unencumbered title to all interest in the Premises under the Ground Lease. Any survey or title policy shall be at Tenant's cost. Ad valorem taxes on the Leased Property for the year in which the sale is closed shall be pro rated to date of closing. Tenant shall pay all other costs of closing, the Purchase Price set forth in paragraph 24.18(c) being net to Landlord less only Landlord's pro rated portion of taxes for the year of closing; and (f) All closing documents shall be in form reasonably acceptable to Landlord. 37 83 ARTICLE XXV RECORD OF MEMORANDUM 25.01 Memorandum of Lease. Landlord and Tenant shall execute and acknowledge an appropriate record memorandum of this Sublease, which shall give notice of the existence of the Sublease and of the purchase option in Section 23.18. EXECUTED as of this 15th day of March, 1993. LANDLORD : ROBERT F. GRAMMER: __________________________________________ Robert F. Grammer TENANT: M. TOM CHRISTOPHER __________________________________________ M. Tom Christopher 38 84 EXHIBIT A Commencing at the Airport reference point which is located at Texas Lambert coordinates of North 447,356.04 and East 2,140,991.46 and is the basis for a plane grid established for the Dallas/Fort Worth Airport; Thence West 7,586.46 feet to a point for corner; Thence North 3,808.78 feet to a 5/8 inch iron pin in the east right-of-way line of a 50 foot access easement (unrecorded) and the north right-of-way of Hangar Road (a 70 foot public right-of-way) said iron pin having Dallas/Fort Worth Regional Airport coordinates of North 451,664.82 and East 2,133,405.00 (coordinates not Lambert) said iron pin also being the point of beginning of the herein described tract of land; Thence West along the north right-of-way line of Hangar Road 322.29 feet to a 5/8 inch iron pin with plastic cap stamped "Carter & Burgess" (set); Thence North 457.63 feet to an "X" cut in concrete apron (set) at base of fence; Thence East at 272.29 feet pass the west line of aforementioned 50 foot access easement and continue on in all a total distance of 312.29 feet to a point; Thence N 45degrees00'00" E, at 14.14 feet past the east line of said 50 foot access easement and continue on in all a total distance of 197.99 feet to a point; Thence South 110.00 feet to a point; Thence East 155.37 feet to a point; Thence S 45degrees00'00" W, 404.28 feet to a point, said point being in the east right-of-way line of aforementioned 50 foot access easement; Thence South along the east right-of-way line of said 50 foot access easement 201.81 feet to the point of beginning and containing 194,277.60 square feet or 4.460 acres of land, more or less. 85 EXHIBIT D AGREEMENT AND ASSUMPTION OF LEASE This Agreement and Assumption of Lease ("Agreement") is made by and between the Dallas/Fort Worth International Airport Board (the "Board"), Kitty Hawk, Inc. ("KHI: "), and Robert F. Grammar ("Grammar") on the following terms and conditions: WHEREAS, by Agreement of Lease bearing D/FW Airport Lease No. 23555, dated as of February 1, 1983, the Board as Lessor leased certain real property located on D/FW Regional Airport (the "Property") to Sedalia-Marshall-Boonville Stage Line, Inc. ("SMB") as Lessee, incorporated herein by reference; and WHEREAS, by Supplemental Agreements of March 6, 1984 and April 1, 1986 the leased acreage was reduced to 4.460 acres more or less, said Supplemental Agreements being incorporated herein by reference) (said Agreement of Lease and Supplemental Agreements being referred to herein collectively as the "Lease"); and WHEREAS, by Letter Agreement dated January 17, 1997, Grammar and Sky Chefs, Inc. jointly requested this Board to transfer a 20-foot strip of property from D/FW Lease No. 25210 to Grammar D/FW Lease No. 23555, and such action is pending for approval of the Board (hereinafter referred to as the "20-foot strip"); and WHEREAS, SMB with the consent of the Board caused an aircraft hangar (the "Hangar") to be built on the leased Property, which hangar was financed with one certain $1,500,000 Grapevine Industrial Development Corporation Industrial Development Revenue Bond, Series 1982 (Sedalia-Marshall-Boonville Stage Line, Incorporated Project) (the "Bond"), and said Bond was secured by a Deed of Trust, Assignment of Rents and Financing Statement dated December 1, 1982 and recorded in Volume 7421, Page 269, of the Deed of Trust Records of Tarrant County, Texas (the "Deed of Trust"), creating a first lien on the Hanger and other Mortgaged Property as defined therein; and WHEREAS, the Lease permits the mortgagee to become the legal owner and holder of the leasehold estate under the Lease by foreclosure or similar proceedings; and AGREEMENT AND ASSUMPTION OF LEASE - Page 1 January 31, 1997 86 WHEREAS, Grammar lawfully and for good consideration, as represented to the Board, did purchase and acquire all rights and interests of the original mortgagee, Mercantile National Bank at Dallas; and WHEREAS, SMB filed for bankruptcy in BK No. 390-33170-HCA-ll in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, and Grammar thereafter obtained an Order Modifying Automatic Stay which granted Grammar the right to foreclose the Deed of Trust; and WHEREAS, on August 7, 1990 Grammar, as owner and holder of the Bond and Deed of Trust Lien securing the Bond, after having first given notice as required by Texas law, did foreclose said Deed of Trust, as amended, at the Courthouse of Tarrant County, Texas, at which sale Grammar purchased the Mortgaged Property including the Hangar; and WHEREAS, on October 1, 1990 Grammar and the Board as "Lessor" entered into an "Assignment and Assumption of Lease" whereby, on the terms and conditions contained therein, the Board allowed Grammar to assume the Lease; and WHEREAS, KHI and Grammar desire to have the Board recognize KHI as the Lessee under the Lease (including, without limitation, the 20-foot strip of land referenced above) and release Grammar from all further obligations thereunder, and the Board is willing to accept KHI as such Lessee and release Grammar, all on the terms and conditions hereinafter set forth; NOW THEREFORE, the Board, KHI and Grammar agree as follows: 1. As of the effective date of this Agreement, KHI hereby assumes and agrees to be bound by and comply with all of the terms, conditions and covenants of the Lease and Supplements thereto arising on or after the date of this Agreement (including, without limitation, the 20-foot strip of land referenced above), and the Board hereby consents to KHI as Lessee under said Lease, and hereby releases Grammar from all obligations of the Lease, and the October 1, 1990 Agreement and Assumption of Lease, together with all Supplements and modifications thereto through the effective date of this Agreement (including, without limitation, the 20-foot strip of land referenced above). The Board agrees to be bound by and honor its obligations as Lessor under said Lease. The legal description of said lease as supplemented by the addition AGREEMENT AND ASSUMPTION OF LEASE - Page 2 January 31, 1997 87 of the 20-foot strip is attached hereto as Exhibit "A," with a separate description of the 20-foot strip attached as Exhibit "B." 2. Except as modified by this Agreement, all of the terms, rents, conditions and provisions of the Lease as amended or supplemented through the effective date of this Agreement are hereby ratified and confirmed. 3. This Agreement (together with its Exhibits which are incorporated herein by reference) represents the entire understanding and agreement of the parties hereto and may not be amended or modified except in writing signed by the parties affected thereby. All prior agreements and understandings between the parties with regard to the subject matter hereof, are merged herein and superseded hereby. Further, all rights and obligations of the Mortgagee under the Lease are hereby merged into KHI as Lessee, and Grammar is released therefrom. 4. This Agreement shall be construed in accordance with the laws of the State of Texas. Venue for any suit brought hereunder shall lie exclusively in Dallas or Tarrant County, Texas. 5. Any notice to be given to Lessee pursuant to the Lease or this Agreement shall be given to Kitty Hawk, Inc., 1515 W. 20th Street, D/FW Airport, Texas 75261, Attention: M. Tom Christopher, with copy to: James Craig, Attorney, 2900 Renaissance Tower, 1201 Elm Street, Dallas, Texas 75270-2102, until such address is changed by written notice given in compliance with the terms of the Lease. (THIS SPACE INTENTIONALLY LEFT BLANK) AGREEMENT AND ASSUMPTION OF LEASE - Page 3 January 31, 1997 88 EXECUTED as of this _____ day of ______________, 1997. LESSOR: DALLAS/FORT WORTH INTERNATIONAL AIRPORT BOARD: By: __________________________________ Executive Director ATTEST: ________________________________ Secretary to the Board APPROVED: _________________________________ Legal Counsel to the Board LESSEE: KITTY HAWK, INC.: By : __________________________________ Its: __________________________________ ATTEST: By: __________________________ ASSIGNOR: __________________________________ Robert F. Grammar AGREEMENT AND ASSUMPTION OF LEASE - Page 4 January 31, 1997 EX-11 3 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 KITTY HAWK, INC. STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
FOUR MONTHS ENDED YEAR ENDED AUGUST 31, DECEMBER 31, ------------------------------------ ----------------------- 1994 1995 1996 1995 1996 ---------- ---------- ---------- ---------- ---------- Primary net income per share(1): Weighted average number of common shares outstanding........................... 7,423,436 7,423,436 7,481,999 7,423,436 9,609,920 Common shares related to SAB No. 83(2)................................. 544,274 544,274 445,857(3) 544,274 --(3) ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding...... 7,967,710 7,967,710 7,927,856 7,967,710 9,609,920 ========== ========== ========== ========== ========== Net income.............................. $5,260,696 $4,416,394 $4,109,189 $4,754,645 $5,293,452 ========== ========== ========== ========== ========== Net income per share.................... $ 0.66 $ 0.55 $ 0.52 $ 0.60 $ 0.55 ========== ========== ========== ========== ========== Fully diluted net income per share: Weighted average number of common shares outstanding........................... 7,423,436 7,423,436 7,481,999 7,423,436 9,609,920 Common shares related to SAB No. 83(2)................................. 544,274 544,274 445,857(3) 544,274 --(3) ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding...... 7,967,710 7,967,710 7,927,856 7,967,710 9,609,920 ========== ========== ========== ========== ========== Net income.............................. $5,260,696 $4,416,394 $4,109,189 $4,754,645 $5,293,452 ========== ========== ========== ========== ========== Net income per share.................... $ 0.66 $ 0.55 $ 0.52 $ 0.60 $ 0.55 ========== ========== ========== ========== ==========
- --------------- (1) The Company reports primary net income per share as the effect of dilutive securities is less than 3%. (2) Stock options granted to executives within 12 months of the filing date have been included in this line item through the date of exercise. See Note 1 of Notes to Consolidated Financial Statements. (3) Stock option grants were exercised on June 26, 1996. EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-15667) pertaining to the Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan and in the Registration Statement (Form S-8 No. 333-23597) pertaining to the Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan of our report dated February 7, 1997, with respect to the consolidated financial statements of Kitty Hawk, Inc. included in the Transition Report (Form 10-K) for the four months ended December 31, 1996. Ernst & Young LLP Dallas, Texas March 27, 1997 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 4-MOS DEC-31-1996 SEP-01-1996 DEC-31-1996 27,320,402 0 37,828,018 0 2,789,982 74,628,583 63,788,858 (15,390,015) 123,027,426 41,109,683 0 0 0 106,695 58,185,696 123,027,426 0 59,985,556 0 47,579,898 336,353 0 684,173 8,660,369 3,366,917 5,293,452 0 0 0 5,293,452 .55 .55
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