-----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, N0pj9YKsGXBliLaNr787Maeqi7uQKk/tZZkHRSWxLdbSMf6WShZPdIbgUqCDHkma gBPxszIAAcDgZfZ5pzf8mw== 0000950134-97-007664.txt : 19971028 0000950134-97-007664.hdr.sgml : 19971028 ACCESSION NUMBER: 0000950134-97-007664 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19971027 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-36125 FILM NUMBER: 97701141 BUSINESS ADDRESS: STREET 1: P O BOX 612787 STREET 2: 1515 W 20TH ST CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 BUSINESS PHONE: 2144562220 MAIL ADDRESS: STREET 1: P O BOX 612787 CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 S-1/A 1 AMENDMENT TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1997 REGISTRATION NO. 333-36125 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- KITTY HAWK, INC. (Exact name of registrant as specified in its charter) DELAWARE 4731 75-2564006 (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) identification no.) M. TOM CHRISTOPHER CHIEF EXECUTIVE OFFICER 1515 WEST 20TH STREET 1515 WEST 20TH STREET P.O. BOX 612787 P.O. BOX 612787 DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261 75261 (972) 456-2200 (972) 456-2200 (Address, including zip code, and telephone (Name, address, including zip code, and telephone number, including number, area code, of registrant's principal executive including area code, of agent for service) offices)
--------------------- Copies of communications to: MICHAEL M. BOONE JOEL S. KLAPERMAN GREG R. SAMUEL JAMES S. SCOTT, SR. HAYNES AND BOONE, LLP SHEARMAN & STERLING 3100 NATIONSBANK PLAZA 599 LEXINGTON AVENUE 901 MAIN STREET NEW YORK, NEW YORK 10022 DALLAS, TEXAS 75202-3789 (212) 848-4000 (214) 651-5000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject To Completion) Issued October 27, 1997 4,100,000 Shares [KITTY HAWK, INC. LOGO] KITTY HAWK, INC. COMMON STOCK ------------------------ Of the 4,100,000 shares of Common Stock offered hereby (the "Common Stock Offering"), 3,000,000 shares of Common Stock are being sold by the Company and 1,100,000 shares are being sold by stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the net proceeds from the sale of shares of Common Stock by the Selling Stockholders. The Common Stock is quoted on the Nasdaq National Market System under the symbol "KTTY." On October 23, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market System was $19 15/16 per share. Concurrently with the Common Stock Offering, the Company is offering $340,000,000 aggregate principal amount of Senior Secured Notes (the "Notes") of the Company due 2004 (the "Note Offering"). The closing of the Common Stock Offering is subject to the concurrent consummation of the Merger (as defined) and the Note Offering and entering into the New Credit Facility (as defined) and Term Loan (as defined). See "The Merger," "Use of Proceeds" and "Description of Certain Indebtedness." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS -------- -------------- ----------- ------------ Per Share.................. $ $ $ $ Total(3)................... $ $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities including liabilities under the Securities Act of 1933. See "Underwriters." (2) Before deducting expenses payable solely by the Company estimated to be $ . (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 615,000 additional shares of Common Stock at the price to public, less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. See "Underwriters." If the Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $ , $ and $ , respectively. ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the several Underwriters, subject to approval of certain legal matters by Shearman & Sterling, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1997 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER BT ALEX. BROWN SCOTT & STRINGFELLOW, INC. FIELDSTONE FPCG SERVICES, L.P. , 1997 3 KEEPING BUSINESS IN MOTION [This page contains a series of photographs of airplanes flying and being loaded and unloaded and of Kitty Hawk's corporate headquarters. This page also unfolds to display a route map of Kitty Hawk, including short-term, seasonal passenger charter routes.] 2 4 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................... 4 Risk Factors............................ 14 The Merger.............................. 25 Use of Proceeds......................... 30 Price Range of Common Stock and Dividend Policy................................ 31 Capitalization.......................... 32 Unaudited Pro Forma Combined Financial Information........................... 33 Selected Financial and Operating Data... 40 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 44
PAGE ---- Business................................ 65 Management.............................. 80 Certain Transactions.................... 88 Principal and Selling Stockholders...... 91 Description of Capital Stock............ 92 Description of Certain Indebtedness..... 94 Shares Eligible for Future Sale......... 96 Underwriters............................ 98 Legal Matters........................... 100 Experts................................. 100 Available Information................... 100 Index to Financial Statements........... F-1
--------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR, AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITERS." --------------------- Industry statistics and projections presented herein were obtained from the 1996/97 World Air Cargo Forecast published by the Boeing Company (the "Boeing Report") which the Company has not independently verified. --------------------- FORWARD LOOKING STATEMENTS STATEMENTS CONTAINED IN THIS PROSPECTUS REGARDING THE COMPANY'S EXPECTATIONS WITH RESPECT TO THE INTEGRATION OF KITTY HAWK AND THE KALITTA COMPANIES, INCLUDING THE SYNERGIES RELATED THERETO, FUTURE OPERATIONS AND OTHER INFORMATION, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL," "EXPECT," "COULD," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, ARE FORWARD LOOKING STATEMENTS. SEE "RISK FACTORS" FOR CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD LOOKING STATEMENTS, INCLUDING IMPORTANT RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM RESULTS REFERRED TO IN THE FORWARD LOOKING STATEMENTS. THERE CAN BE NO ASSURANCE THAT THE COMPANY'S EXPECTATIONS REGARDING ANY OF THESE MATTERS WILL BE FULFILLED. 3 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) and pro forma financial information appearing elsewhere in this Prospectus. The closing of this Common Stock Offering is conditioned on (i) the concurrent consummation of the mergers (collectively, the "Merger") of American International Airways, Inc. ("AIA"), American International Travel, Inc. ("AIT"), Flight One Logistics, Inc. ("FOL"), Kalitta Flying Service, Inc. ("KFS") and O.K. Turbines, Inc. ("OK") (collectively, the "Kalitta Companies") with and into separate subsidiaries of Kitty Hawk pursuant to the Merger Agreement (as defined), (ii) the concurrent consummation of the Note Offering and (iii) entering into the New Credit Facility (as defined) and the Term Loan (as defined). This Common Stock Offering, the Merger and the Note Offering are referred to herein collectively as the "Transactions". Unless otherwise indicated or the context otherwise requires, references in this Prospectus to (i) "Kitty Hawk" refer to Kitty Hawk, Inc. and its consolidated subsidiaries prior to giving effect to the consummation of the Transactions, (ii) the "Company" refer to Kitty Hawk and the Kalitta Companies on a combined basis after giving effect to the consummation of the Transactions, including the combination of the businesses conducted by Kitty Hawk and the Kalitta Companies prior to the Merger and (iii) "Refinancings" refers to the refinancing of substantially all of the currently outstanding indebtedness of Kitty Hawk and the Kalitta Companies with a portion of the net proceeds of this Common Stock Offering, the Note Offering and the Term Loan. THE COMPANY BUSINESS The Company is a leading U.S. and international air freight carrier and a leading provider of air freight charter logistics services in the U.S. The Company also provides airframe and engine maintenance services for third parties as well as for its own fleet. On a pro forma basis, after giving effect to the Merger, the Company's total revenues for the twelve months ended December 31, 1996 and the six months ended June 30, 1997 were $552 million and $256 million, respectively. Air Freight Carrier Services. The Company is a leading provider of scheduled and charter air freight carrier services. The Company's scheduled air freight operations include an overnight freight service operating within a network of 47 North American cities and a service between Los Angeles, the Hawaiian Islands and several Pacific Rim countries. The Company's charter air freight operations include (i) contractual charters under which the Company generally supplies aircraft, crew, maintenance and insurance ("ACMI") and (ii) on-demand charters. The Company also provides air passenger charter services on a contractual and on-demand basis. Air Freight Logistics Services. The Company is a leading provider of same-day air freight charter logistics services in the U.S. The Company arranges the delivery of time sensitive freight using aircraft of third party air freight carriers as well as its own fleet. During 1996 the air logistics business managed over 14,000 on-demand flights. Aircraft Maintenance Services. The Company is one of the few dedicated air freight carriers in the world that provides comprehensive aircraft maintenance services, including airframe repair and engine overhaul (with the exception of certain aircraft engine components), to other aircraft operators as well as for its own fleet. This capability allows the Company to reduce its overall maintenance costs, including reduced aircraft downtime. The Company has major maintenance facilities in Oscoda and Ypsilanti, Michigan and Dallas, Texas. FLEET The Company operates a fleet of 120 aircraft, including (i) four Boeing 747s, six Lockheed L-1011s, 19 Douglas DC-8s, 31 Boeing 727s and five Douglas DC-9-15Fs for its air freight carrier business, (ii) two 4 6 Boeing 747s and two Lockheed L-1011s for its air passenger charter business and (iii) 51 small jet and prop aircraft (which include primarily Lear jets and Convairs) in air freight and/or air passenger charter service. AIR FREIGHT MARKET According to the Boeing Report, the world air cargo market grew at an average rate of more than 8% per year from 1970 to 1995 as measured in revenue ton kilometers, more than 2.5 times the growth rate of world Gross Domestic Product. Also, according to the Boeing Report, the world air freight market is expected to grow at 6.7% annually through 2015. Management believes this projected growth in the world air freight market will be fueled by many factors, including economic growth, relaxation of international trade barriers, increasingly time-sensitive product delivery schedules, increased use of "just-in-time" inventory management systems and increasing levels of Internet commerce. In addition, according to the Boeing Report, there is a trend towards shipping freight in dedicated freighter aircraft rather than in cargo space of passenger aircraft. COMPETITIVE STRENGTHS The Company believes that the following factors are competitive strengths and promote strong relationships with its diversified customer base. - Established Market Position. The Company, including its predecessors, has provided air freight carrier services for more than 30 years. The Company's extensive fleet and the diversity of its air freight carrier services (scheduled, contract charters and on-demand charters) have enabled it to become a leading U.S. and international air freight carrier. The Company has a diversified customer base, including (i) freight forwarders such as Burlington Air Express, Eagle USA and Emery Worldwide Airlines, (ii) U.S. government agencies such as the U.S. Postal Service and the U.S. Military and (iii) businesses such as General Motors and Boeing. - Attractive Fleet Characteristics. The Company believes that it has been successful in purchasing and modifying aircraft for its own fleet at favorable costs. The aircraft in the Company's fleet range from Boeing 747s to prop aircraft, enabling the Company to provide its customers with the aircraft type best suited to their particular transportation needs. The size and diversity of its fleet also allows the Company to deploy aircraft among its three air freight carrier service lines in a manner which improves fleet utilization. - Broad Service Capabilities. The Company believes that its air freight carrier services are attractive to its customers for several reasons, including (i) its history of providing reliable service, (ii) its ability to provide time-definite air transportation of almost any type or size of freight to most destinations worldwide upon short notice, (iii) its ability to manage critical freight shipments in North America from pick-up through delivery and (iv) its ability to provide its customers with real time updates of aircraft location and progress. In addition, the Company is able to coordinate its domestic and international scheduled services to offer customers reliable freight delivery service to and from North America and the Pacific Rim and Central and South America. The Company's capabilities are enhanced by its management information systems which enable the Company to continually monitor its flight operations, thereby facilitating aircraft and flight crew scheduling. RATIONALE FOR THE MERGER The combination of Kitty Hawk and the Kalitta Companies pursuant to the Merger makes the Company one of the leading U.S. and international air freight carriers as well as a leading provider of air freight charter logistics services in the U.S. The Merger also permits the Company to achieve a number of strategic and financial objectives, including: - Increased Utilization of On-Demand Aircraft. Prior to the Merger, less than 10% of the on-demand charters arranged by Kitty Hawk were flown on Kitty Hawk's aircraft. With the addition of the Kalitta Companies' aircraft, the Company will direct a larger percentage of its on-demand charters to its own aircraft, rather than to third parties. Because on-demand charters flown on the Company's aircraft 5 7 generate a higher gross margin than charters subcontracted to third parties, the Company believes this strategy will improve its profitability over time. - Opportunities for Cost Savings. The Company believes the Merger will permit it to achieve annual cost savings by enabling it to increase the Kalitta Companies' crew utilization, reduce Kitty Hawk's reliance on third party maintenance, reduce parts inventory and consolidate duplicative airport support bases as well as through other economies of scale, including lower aircraft insurance premiums. - Integration of Fleet Operations. The Company believes the Merger will permit it to integrate the Kalitta Companies' scheduled air freight operations with Kitty Hawk's air freight carrier services, resulting in expanded customer services and increased revenues. The combined fleet should also enhance operating efficiencies by better matching aircraft size and operating capabilities with route systems and customer needs. Finally, the Company believes the resultant combination of services and fleet capabilities will provide new domestic and international marketing opportunities. GROWTH STRATEGIES The Company's revenue has grown significantly over the last several years and the Company believes it can continue to increase revenues through the following opportunities: - Expansion of ACMI Charter Business. The Company believes there are, and will continue to be, opportunities to obtain ACMI contracts with international air carriers due to the projected shortage of wide-body aircraft needed to service those carrier's markets. The Company plans to focus its expansion efforts in the European, South American and Asia/Pacific markets and to connect route systems in those markets with its scheduled North American route systems. The Company recently acquired one Boeing 747 which it is currently converting to freighter configuration and has an option to acquire two additional used Boeing 747s (the "Optioned Boeing 747s") which it expects to convert to freighter configuration in 1998. - Expansion of On-Demand Charter Business. The Company believes there are significant opportunities to grow its on-demand charter business because of continuing demand for expedited air freight services, especially in the case of "just-in-time" inventory systems and other time sensitive shipments. In addition to improving the utilization of the Kalitta Companies' aircraft, the Company anticipates purchasing additional aircraft to capitalize on this expected growth. - Expansion of Third Party Maintenance Services. The Company is one of the few dedicated air freight carriers in the world capable of maintaining and repairing aircraft which range in size from Boeing 747s to prop aircraft. Although the Company currently provides aircraft maintenance services to several customers, including Lufthansa, the Company intends to significantly increase marketing of its third party maintenance services. In particular, the Company intends to focus on marketing jet engine overhauls and maintenance, for which management believes there is a trend toward a limited number of service providers. - Expansion of Scheduled Freight Business. Because of the growth in the amount of freight shipped through its scheduled overnight freight hub in Terre Haute, Indiana, the Company anticipates moving its hub from Terre Haute to a new facility in Fort Wayne, Indiana in the spring of 1999. This new facility is expected to have nearly twice the sorting capacity of the Terre Haute, Indiana facility. In addition, the new facility is designed to improve productivity by reducing the time to load and unload aircraft and by decreasing sorting times. - Strategic Acquisitions. The Company will, from time to time, pursue acquisitions that enable it to (i) acquire complementary aircraft at favorable costs, (ii) expand its operations in selected geographic areas or (iii) achieve other strategic or operational benefits. RECENT FINANCIAL PERFORMANCE OF THE KALITTA COMPANIES The Kalitta Companies posted net losses in 1996 and net losses and a negative gross profit for the first six months of 1997. The Kalitta Companies' management believes that the recent negative financial performance 6 8 can be attributed to a number of factors, including (i) the incurrence of abnormally high engine overhaul expenses due to Federal Aviation Administration Airworthiness Directives ("Directives"), (ii) the loss of revenue resulting from the effective grounding of two Boeing 747s in January 1996 due to a series of Directives, (iii) the incurrence principally in 1997 of start-up costs associated with establishing the Kalitta Companies' wide-body passenger charter business, (iv) the incurrence of costs to add and maintain flight crews in anticipation of increased air freight carrier business which has not yet materialized in part due to delays in acquiring aircraft and (v) lower revenues from the U.S. Military which the Company believes will be mitigated as the Company has recently become eligible to operate passenger charters for the U.S. Military. Kitty Hawk has taken these factors into account in evaluating the merits of the Merger and the Kalitta Companies' future financial performance. Kitty Hawk has also considered that the Kalitta Companies' management focused primarily on growing revenues and fleet size, rather than on profitability. After the Merger, the Company's management will focus on meeting profit objectives in day-to-day operations and believes the Kalitta Companies' recent financial performance can be substantially improved following the Merger, although there can be no assurance in this regard. See "The Merger -- Recent Financial Performance of the Kalitta Companies and the Merger Rationale." RECENT DEVELOPMENTS -- THIRD QUARTER FINANCIAL RESULTS Kitty Hawk. For the three months ended September 30, 1997, Kitty Hawk had total revenues of $41.2 million, an increase of 35.2% from $30.5 million in the same period of 1996. Total costs of revenues were $32.5 million in the three months ended September 30, 1997, an increase of 34.0% from $24.2 million in same period of 1996. Operating income was $5.6 million in the three months ended September 30, 1997 an increase of 61.1% from $3.5 million in the same period of 1996, and net income was $3.0 million in the three months ended September 30, 1997 an increase of 113.6% from $1.4 million in the same period of 1996. For the three months ended September 30, 1997, net income per share was $0.29, an increase of 61.1% from $0.18 in the three months ended September 30, 1996. The foregoing financial information represents unaudited financial results of Kitty Hawk. Revenues for the air freight carrier increased $8.2 million in the third quarter of 1997 compared to 1996, due principally to an increase in fleet size from 23 aircraft to 44 aircraft, including the 16 Boeing 727 aircraft acquired from the Kalitta Companies on September 17, 1997. Revenue for air logistics increased $2.5 million in the third quarter of 1997 compared to 1996 due to an increase in number of charters flown and an increase in the revenue per charter due to the provision of a larger proportion of higher revenue aircraft. General and administrative expenses increased approximately $0.4 million due to an increase in support functions and administrative costs associated with the growth in the aircraft fleet and increased volume in the business of the air freight carrier. Compared to the prior year period, interest expense increased approximately $0.3 million due to additional debt incurred during the period for aircraft maintenance costs and the acquisition of the 16 Boeing 727 aircraft from the Kalitta Companies. The Kalitta Companies. Based on preliminary unaudited information, the Kalitta Companies expect to report revenues of approximately $128.8 million for the third quarter of 1997, an increase of 16.7% from $110.4 million for the third quarter of 1996. Operating income for the third quarter of 1997 is expected to be approximately $10.4 million, an increase of 19.5% from $8.7 million in the third quarter of 1996. The increase in revenues is primarily attributable to increased large aircraft air passenger charter revenues of approximately $17.4 million (the large aircraft air passenger charter business for tour operators was not started until the fourth quarter of 1996), increased revenues from flying for Kitty Hawk's air logistics business (in 1996, Kitty Hawk did not use the Kalitta Companies for a material portion of flights arranged by its air logistics business) and increased flights in the Hawaiian Islands and an additional aircraft on the Los Angeles-Honolulu route. The increase in revenues was partially offset by a $9.5 million reduction in revenues from the U.S. Military. The Kalitta Companies' operating expenses for the third quarter of 1997 generally increased in proportion to the increase in revenues, except that maintenance expense and selling, general and administrative expense increased at a greater rate. Maintenance expense increased due to an increased number of engine overhauls (after the Merger, to conform with Kitty Hawk's accounting policies, the Kalitta Companies will capitalize and amortize a larger proportion of such maintenance expense). Selling, general and administrative expense 7 9 increased due to increased legal and accounting fees, as well as additional personnel and information technology costs incurred to support anticipated increases in revenues. In the third quarter of 1997, the Kalitta Companies expect to report approximately $2.1 million of increased interest expense compared to the third quarter of 1996 and approximately $1.3 million of Merger-related costs. As a result of the foregoing, the Kalitta Companies' net income for the third quarter of 1997 is expected to be approximately $.2 million, compared to approximately $2.8 million in the third quarter of 1996. The Kalitta Companies' business is seasonal, with a substantial majority of its operating income occurring in the third and fourth quarters. NEW CREDIT FACILITY AND TERM LOAN Concurrently with the consummation of the Transactions, the Company will enter into a new $100 million senior secured revolving credit facility (the "New Credit Facility") and a new $45.9 million term loan (the "Term Loan") with Wells Fargo Bank (Texas), National Association ("WFB"), individually and as agent for other lenders. The New Credit Facility and Term Loan will be secured by accounts receivable, all inventory (including rotables), intangibles and contract rights, cash and 16 Boeing 727 aircraft and related engines acquired by Kitty Hawk from the Kalitta Companies in September 1997. 8 10 THE OFFERING Common Stock offered: Total Common Stock offered......... 4,100,000 shares By the Company................ 3,000,000 shares By the Selling Stockholders... 1,100,000 shares Common Stock to be outstanding after the offering................. 17,550,957 shares(1)(2) Concurrent Transactions............ Concurrently with the Common Stock Offering, the Company is conducting the Note Offering under Rule 144A of the Securities Act, consummating the Merger and entering into the New Credit Facility. The Common Stock Offering will be closed concurrently with and is conditioned upon, the consummation of the Note Offering and the Merger and entering into the New Credit Facility. See "Description of Certain Indebtedness." Use of proceeds.................... For (i) the repayment or refinancing of substantially all of the indebtedness of Kitty Hawk and the Kalitta Companies, (ii) the acquisition and conversion to freighter configuration of the Optioned Boeing 747s, (iii) the payment of $20.0 million in cash pursuant to the Merger Agreement, (iv) working capital purposes and (v) the payment of approximately $2.0 million in miscellaneous expenses. See "Use of Proceeds" and "Description of Certain Indebtedness." Nasdaq National Market Symbol...... KTTY - --------------- (1) Does not include (i) 300,000 shares of Common Stock available for issuance under the Company's Amended and Restated Omnibus Securities Plan, (ii) 198,193 shares of Common Stock available for issuance under the Company's Amended and Restated Annual Incentive Compensation Plan and (iii) 100,000 shares of Common Stock available for issuance under the Company's Amended and Restated Employee Stock Purchase Plan. See "Management -- Employee Compensation Plans and Arrangements." (2) Includes the issuance of 4,099,150 shares of Common Stock pursuant to the Merger Agreement. See "The Merger." All information in this Prospectus assumes (i) a public offering price of $19 15/16 per share for the shares offered hereby, which was the closing price of the Common Stock as reported by the Nasdaq National Market on October 23, 1997, (ii) no exercise of the Underwriters' over-allotment option and (iii) an interest rate of 10% on the Notes and 8.5% on the Term Loan. Unless otherwise indicated, the pro forma financial information in this Prospectus gives effect to the Transactions and the Refinancings. RISK FACTORS Prospective investors should carefully consider all of the information set forth in this Prospectus and, in particular, should evaluate the specific risk factors set forth under "Risk Factors" for risks involved with an investment in the Common Stock offered hereby. GENERAL The Company is a Delaware corporation. The Company's principal executive offices are located at 1515 West 20th Street, Dallas/Fort Worth International Airport, Texas 75261 and its telephone number at that address is (972) 456-2200. 9 11 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The following summary historical financial and operating data and pro forma financial and operating data, giving effect to the Transactions and Refinancings as if they occurred on January 1, 1996 and, in the case of balance sheet data, as if they occurred on June 30, 1997, should be read in conjunction with Kitty Hawk's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus and the Kalitta Companies' Combined Financial Statements and Notes thereto included elsewhere in this Prospectus as well as the information appearing in "Unaudited Pro Forma Combined Financial Information," "Selected Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma results have not been adjusted to eliminate abnormally high engine overhaul expenses associated with responding to certain Directives, costs incurred to add and maintain flight crews in anticipation of increased air freight carrier business which has not yet materialized in part due to delays in acquiring aircraft and start-up costs associated with establishing the Kalitta Companies' wide-body passenger charter business. In addition, although approximately $56 million of the proceeds of the Common Stock Offering and the Note Offering are expected to be used to purchase and modify the Optioned Boeing 747s, no adjustments have been made to reflect revenues or operating costs expected to be generated by these aircraft. The Company experiences its lowest quarterly revenue and profitability during the first quarter of the calendar year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality."
YEAR ENDED DECEMBER 31, 1996 --------------------------------------------------------- HISTORICAL PRO FORMA ---------------------------- ------------------------ KALITTA KITTY HAWK(1) COMPANIES ADJUSTMENTS COMBINED -------------- --------- ----------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenues: Air freight carrier................... $ 55,504 $388,193 $ (5,432) $438,265 Air logistics......................... 77,168 -- -- 77,168 Maintenance and other................. -- 36,348(2) -- 36,348 -------- -------- -------- -------- Total revenues.......................... 132,672 424,541 (5,432) 551,781 Gross profit (loss)..................... 23,874 44,395 (1,297) 66,972 Stock option grants to executives....... 4,231(3) -- -- 4,231 Operating income (loss)................. 9,457 21,495 (1,297) 29,655 Interest expense........................ (2,062) (21,632) (15,765) (39,459)(4) Minority interest....................... -- (1,146) -- (1,146) Income (loss) before income taxes....... 7,686 (17) (17,062) (9,393) Net income (loss)....................... $ 4,648(3) $ (17)(5) $(14,024) $ (9,393) Net income (loss) per share............. $ 0.55(3) -- -- $ (0.60) Weighted average common and common equivalent shares outstanding......... 8,477 -- 7,099 15,576 OTHER FINANCIAL DATA: Capital expenditures.................... $ 47,159 $ 53,413 $ -- $100,572 Adjusted EBITDA(6)...................... $ 22,372 $ 53,586 $ 3,555(7) $ 79,513 Ratio of adjusted EBITDA to total interest expense...................... 10.8x 2.4x -- 2.0x Ratio of earnings to fixed charges...... 4.5x 1.0x(8) -- --(8) OPERATING DATA: Aircraft (at end of period)............. 26 97 (1)(9) 122 Flight hours(10)........................ 21,587 91,690 -- 113,277
10 12
SIX MONTHS ENDED JUNE 30, 1997 ----------------------------------------------------- HISTORICAL PRO FORMA ------------------------ ----------------------- KALITTA KITTY HAWK COMPANIES ADJUSTMENTS COMBINED ---------- --------- ----------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenues: Air freight carrier..................................... $33,237 $182,352 $(1,588) $214,001 Air logistics........................................... 27,232 -- -- 27,232 Maintenance and other................................... -- 14,488(2) -- 14,488 ------- -------- ------- -------- Total revenues............................................ 60,469 196,840 (1,588) 255,721 Gross profit (loss)....................................... 12,806 (7,475) 9,916 15,247 Operating income (loss)................................... 7,250 (19,443) 9,916 (2,277) Interest expense.......................................... (1,049) (12,098) (6,583) (19,730)(4) Minority interest......................................... -- (893) -- (893) Income (loss) before income taxes......................... 6,625 (30,943) 3,333 (20,985) Net income (loss)......................................... $ 3,975 $(30,943)(5) $ 5,983 $(20,985) Net income (loss) per share............................... $ 0.38 -- -- $ (1.20) Weighted average common and common equivalent shares outstanding...................................... 10,452 -- 7,099 17,551 OTHER FINANCIAL DATA: Capital expenditures...................................... $39,544 $ 14,101 $ -- $ 53,645 Adjusted EBITDA(6)........................................ $12,134 $ (1,976) $12,284(7) $ 22,442 Ratio of adjusted EBITDA to total interest expense........ 11.6x --(11) 1.1x Ratio of earnings to fixed charges........................ 5.0x --(8) --(8) OPERATING DATA: Aircraft (at end of period)............................... 28 97 (1)(9) 124 Flight hours(10).......................................... 13,461 43,161 56,622
JUNE 30, 1997 ---------------------------------------------------- HISTORICAL PRO FORMA ------------------------ ---------------------- KALITTA KITTY HAWK COMPANIES ADJUSTMENTS COMBINED ---------- --------- ----------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficiency)............................... $ 10,588 $(222,422)(12) $361,786 $144,952 Total assets............................................... 117,358 366,848 204,564 688,770 Total debt................................................. 34,051 248,256 103,893 386,200 Stockholders' equity....................................... $ 62,249 $ 35,531 $ 80,962 $178,742
- --------------- (1) On December 4, 1996, Kitty Hawk changed its fiscal year end to December 31 from August 31. The financial and operating data presented above is based on the unaudited twelve month period ended December 31, 1996. (2) Includes revenues from related parties. See "Certain Transactions" and Note 8 of Notes to Combined Financial Statements of the Kalitta Companies. (3) Includes nonrecurring grants of stock options to two executive officers that resulted in a charge to earnings of approximately $4,231. Had these grants of stock options not occurred, net income for the twelve months ended December 31, 1996 would have been approximately $7,187 and net income per share would have been $0.85. See "Management -- Stock Option Grants." (4) Pro forma interest expense assumes a rate of 10% on the Notes and 8.5% on the Term Loan. Each 1/4 percentage point change in the interest rate on the Notes results in a change in interest expense of $850 for 1996 and $425 for the six months ended June 30, 1997. Each 1/4 percentage point change in the interest rate on the Term Loan results in a change in interest expense of $115 for 1996 and $57 for the six months ended June 30, 1997. (5) Prior to the Merger, the Kalitta Companies filed income tax returns under Subchapter S of the U.S. Federal Income Tax Code. Therefore, all taxable income or losses of each of the Kalitta Companies have passed through to the sole shareholder of the Kalitta Companies. (6) Adjusted EBITDA represents net income (loss) before income tax expense, interest expense, depreciation, amortization (and, with respect to the Kalitta Companies, minority interest) and certain items described below. Kitty Hawk's adjusted EBITDA excludes approximately $4,231 from stock options granted to executives in fiscal year 1996. The Kalitta Companies' adjusted EBITDA excludes gains and losses from dispositions of aircraft held for resale in each period presented (see "Selected Financial and Operating Data -- The Kalitta Companies") and approximately $1,123 from a gain from settlement of a contract dispute in 1996 and a gain on an insurance settlement of approximately $542 for the six months ended June 30, 1997. Adjusted EBITDA is presented because it is a financial indicator of the Company's ability to incur and service debt. However, adjusted EBITDA is not calculated under generally accepted accounting principles ("GAAP"), is not necessarily comparable to similarly titled measures of other companies and should not be considered in isolation, as a substitute for operating income, net income or cash flow data prepared in accordance with GAAP, or as a measure of the Company's profitability or liquidity. (7) Includes the effect of conforming the Kalitta Companies' aircraft maintenance policy to that of Kitty Hawk and decreased insurance costs for the combined fleet. (8) In calculating the ratio of earnings to fixed charges, earnings consist of income (loss) prior to income tax expense (benefit) (and, with respect to the Kalitta Companies, minority interest) and fixed charges (less capitalized interest). Fixed charges consist of capitalized interest, interest expense, amortization of debt expense and one-third of rental payments on operating leases (such factor having been deemed by the Company to represent the interest portion of such payments). The Kalitta Companies' historical earnings were not sufficient to cover fixed charges by approximately $30,050 for the six months ended June 30, 1997. On a pro forma basis, the Company's earnings would not have been sufficient to cover fixed charges by $8,809 for 1996 and $20,092 for the six months ended June 30, 1997. (9) Includes the effect of the Hawker Acquisition (as defined). (10) As reported to the Federal Aviation Administration. Flight hours reported are less than block hours, which also include the time an aircraft is operating under its own power whether or not airborne. The Company generally bills its customers on a block hour basis. (11) For the six months ended June 30, 1997, the Kalitta Companies' adjusted EBITDA was $(1,976) and interest expense was $12,098, resulting in a failure to cover interest expense. (12) Includes long-term debt and notes payable reclassified as current of $203,016 and $201,443 at December 31, 1996 and June 30, 1997, respectively. 11 13 SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF KITTY HAWK The summary historical financial and operating data below represents financial information of Kitty Hawk and its subsidiaries for each of the fiscal years indicated in the five year period ended August 31, 1996 and the six months ended June 30, 1996 and 1997, which information was derived from the audited consolidated financial statements of Kitty Hawk for each of the fiscal years indicated in the five year period ended August 31, 1996 and from the unaudited condensed consolidated financial statements of Kitty Hawk for the six months ended June 30, 1996 and 1997. Operating results for the six months ended June 30, 1996 and 1997 are not necessarily indicative of results that may be expected for a calendar year. In the opinion of management of Kitty Hawk, the selected statement of operations data presented as of and for the six months ended June 30, 1996 and 1997, which are derived from Kitty Hawk's unaudited Consolidated Financial Statements appearing elsewhere in this Prospectus, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for such periods. On December 4, 1996, Kitty Hawk changed its fiscal year end from August 31 to December 31.
SIX MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, JUNE 30, -------------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenues: Air freight carrier......................... $ 6,760 $12,939 $ 28,285 $ 41,117 $ 52,922 $25,274 $33,237 Air logistics............................... 45,893 52,840 79,415 62,593 89,493 27,010 27,232 ------- ------- -------- -------- -------- ------- ------- Total revenues................................ 52,653 65,779 107,700 103,710 142,415 52,284 60,469 Gross profit.................................. 4,188 10,578 14,749 18,178 23,515 7,676 12,806 Stock option grants to executives(1).......... -- -- -- -- 4,231 4,231 -- Operating income (loss)....................... 1,258 5,934 8,004 9,345 9,034 (1,095) 7,250 Interest expense.............................. (157) (134) (343) (1,185) (1,859) (1,023) (1,049) Net income (loss)............................. 1,013 4,105 5,261 4,416 4,109 (1,149) 3,975 Net income (loss) per share................... $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52 $ (0.14) $ 0.38 Weighted average common and common equivalent shares outstanding.......................... 8,671 7,968 7,968 7,968 7,928 7,968 10,452 OTHER FINANCIAL DATA: Capital expenditures.......................... $ 3,019 $ 1,318 $ 13,876 $ 17,929 $ 33,538 $17,008 $39,544 Adjusted EBITDA(2)............................ $ 2,149 $ 7,104 $ 9,507 $ 12,839 $ 19,840 $ 6,890 $12,134 Ratio of adjusted EBITDA to interest expense..................................... 13.7x 53.0x 27.7x 10.8x 10.7x 6.7x 11.6x Ratio of earnings to fixed charges(3)......... 7.9x 33.6x 20.6x 6.9x 4.4x -- 5.0x OPERATING DATA: Aircraft owned (at end of period)............. 11 10 15 21 22 23 28 Flight hours(4)............................... 3,567 7,030 11,795 15,183 20,237 10,029 13,461 Number of on-demand charters flown............ 292 752 1,182 1,238 1,918 879 580 Number of ACMI contract charters flown........ 655 1,314 1,734 2,601 3,514 1,741 2,415 Number of on-demand charters managed(5)....... 8,708 9,748 16,713 14,198 19,578 7,459 6,640
- --------------- (1) Results for fiscal year ended August 31, 1996 and six months ended June 30, 1996 lack comparability to other periods because such periods include nonrecurring grants to two executive officers of stock options that resulted in a charge to earnings of approximately $4,231. Had these grants of stock options not occurred, net income for the fiscal year ended August 31, 1996 and the six months ended June 30, 1996, would have been approximately $6,648 and $1,390, respectively, and net income per share would have been $0.84 and $0.17, respectively. See "Management -- Stock Option Grants." (2) Adjusted EBITDA represents net income (loss) before interest expense, income tax expense, depreciation, amortization and certain items described below. Adjusted EBITDA excludes approximately $4,231 from stock options granted to executives in 1996 and approximately $725 and $1,178 in contract settlements in fiscal 1993 and 1994, respectively. Adjusted EBITDA is presented because it is a financial indicator of Kitty Hawk's ability to incur and service debt. However, adjusted EBITDA is not calculated under GAAP, is not necessarily comparable to similarly titled measures of other companies and should not be considered in isolation, as a substitute for operating income, net income or cash flow data prepared in accordance with GAAP or as a measure of Kitty Hawk's profitability or liquidity. (3) In calculating the ratio of earnings to fixed charges, earnings consist of income (loss) prior to income tax expense (benefit) and fixed charges (less capitalized interest.) Fixed charges consist of capitalized interest, interest expense, amortization of debt expense and one-third of rental payments on operating leases (such factor having been deemed by Kitty Hawk to represent the interest portion of such payments). Earnings were not sufficient to cover fixed charges by $1,980 for the six month period ended June 30, 1996. (4) As reported by Kitty Hawk to the Federal Aviation Administration. Flight hours reported are less than block hours, which also include the time an aircraft is operating under its own power whether or not airborne. Kitty Hawk generally bills its customers on a block hour basis. (5) Includes on-demand charters flown by Kitty Hawk aircraft. 12 14 SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA OF THE KALITTA COMPANIES The summary historical combined financial and operating data below represents financial information of the Kalitta Companies for each of the fiscal years indicated in the five year period ended December 31, 1996 and the six months ended June 30, 1996 and 1997 which information was derived from the audited combined financial statements of the Kalitta Companies for each of the fiscal years indicated in the five year period ended December 31, 1996 and from the unaudited combined financial statements of the Kalitta Companies for the six months ended June 30, 1996 and 1997. The selected statement of operations data for the six months ended June 30, 1996 and 1997 have been derived from the unaudited Combined Financial Statements of the Kalitta Companies, which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information set forth therein. Operating results for the six months ended June 30, 1996 and 1997 are not necessarily indicative of results that may be expected for a calendar year.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenues: Air freight carrier.................... $95,144 $194,525 $298,081 $359,404 $388,193 $177,431 $182,352 Maintenance and other(1)............... 2,606 5,584 7,449 14,279 36,348 13,164 14,488 ------- -------- -------- -------- -------- -------- -------- Total revenues........................... 97,750 200,109 305,530 373,683 424,541 190,595 196,840 Gross profit (loss)...................... 12,870 34,323 54,023 26,010 44,395 15,133 (7,475) Operating income (loss).................. 7,081 23,222 38,519 2,471 21,495 3,608 (19,443) Interest expense, net.................... (4,396) (6,745) (8,007) (14,749) (21,632) (10,187) (12,098) Minority interest........................ (424) (1,458) (2,758) (3,092) (1,146) (511) (893) Net income (loss)(2)..................... $ 5,161 $ 16,543 $ 30,593 $ 4,486 $ (17) $ (5,558) $(30,943) UNAUDITED PRO FORMA DATA: Unaudited pro forma net income (loss)(3).............................. $ 3,200 $ 10,257 $ 18,968 $ 2,781 $ (17) $ (5,558) $(30,943) OTHER FINANCIAL DATA: Capital expenditures..................... $55,863 $ 20,468 $ 77,832 $153,719 $ 53,413 $ 29,697 $ 14,101 Adjusted EBITDA(4)....................... $16,080 $ 35,645 $ 52,328 $ 23,443 $ 53,586 $ 19,454 $ (1,976) Ratio of adjusted EBITDA to total interest expense(5).................... 3.7x 5.3x 6.4x 1.6x 2.4x 1.9x -- Ratio of earnings to fixed charges (6)... 2.0x 2.4x 3.3x 1.2x 1.0x -- -- OPERATING DATA: Aircraft (at end of period).............. 59 65 86 95 98 94 98 Flight hours(7).......................... 39,404 55,220 76,346 84,058 91,690 43,347 43,161
- --------------- (1) Includes revenues from related parties. See "Certain Transactions" and Note 8 of Notes to Combined Financial Statements of the Kalitta Companies. (2) The Kalitta Companies filed income tax returns under Subchapter S of the U.S. Federal Income Tax Code. Therefore, all taxable income or losses of the Kalitta Companies have passed through to the sole shareholder of the Kalitta Companies. (3) Represents net income adjusted for the approximate federal and state income taxes (by applying statutory rates) assuming the Kalitta Companies had been subject to tax as a C corporation. No tax benefit has been provided for 1996 and for the six months ended June 30, 1996 and 1997 due to the uncertainty of the Kalitta Companies' ability to recover such benefits. (4) Adjusted EBITDA represents net income (loss) before minority interest, interest expense (net of capitalized interest), depreciation, amortization and certain items described below. Adjusted EBITDA excludes approximately $8,148 and $542 from gains on insurance settlements in 1995 and the six months ended June 30, 1997, respectively, $1,123 from a gain from settlement of a contract dispute in 1996 and the six months ended June 30, 1996 and net gains from disposition of aircraft held for resale in each period presented. Adjusted EBITDA is presented because it is a financial indicator of the Kalitta Companies' ability to incur and service debt. However, adjusted EBITDA is not calculated under GAAP, is not necessarily comparable to similarly titled measures of other companies and should not be considered in isolation, as a substitute for operating income, net income or cash flow data prepared in accordance with GAAP or as a measure of the Kalitta Companies' profitability or liquidity. (5) For the six months ended June 30, 1997, the Kalitta Companies' adjusted EBITDA was $(1,976) and interest expense was $12,098, resulting in a failure to cover interest expense. (6) In calculating the ratio of earnings to fixed charges, earnings consist of income (loss) before minority interest and fixed charges (less capitalized interest). Fixed charges consist of capitalized interest, interest expense, amortization of debt expense and one-third of rental payments on operating leases (such factor having been deemed by the Kalitta Companies to represent the interest portion of such payments). Earnings were not sufficient to cover fixed charges by approximately $5,368 and $30,050 for the six months ended June 30, 1996 and June 30, 1997, respectively. (7) As reported to the Federal Aviation Administration. Flight hours reported are less than block hours, which also include the time an aircraft is operating under its own power whether or not airborne. The Kalitta Companies generally bill customers on a block hour basis. 13 15 RISK FACTORS An investment in the Common Stock involves a high degree of risk. In addition to the other information in this Prospectus, prospective investors should carefully consider the following risk factors relating to the Company and its Common Stock before making an investment. This Prospectus contains forward-looking statements which involve risk and uncertainties. The discussions set forth below constitute cautionary statements regarding important matters that could cause actual results to differ significantly from the results discussed in the forward-looking statements. If the Company should experience the adverse effects of any of these risks, it could have a material adverse effect on the Company and the value of the Common Stock. COMPANY RELATED RISKS RECENT FINANCIAL PERFORMANCE OF THE KALITTA COMPANIES The Kalitta Companies' operations will constitute a majority of the combined operations of the Company after the Merger is consummated. For 1996 and the first six months of 1997, the financial operating results of the Kalitta Companies have shown a significant negative trend. For the first six months of 1997, the Kalitta Companies sustained a negative gross profit of $7.5 million, an operating loss of $19.4 million and a net loss of $30.9 million. The Kalitta Companies' operating losses for the six months ended June 30, 1997 were primarily the result of abnormally high engine overhaul expenses, the continued grounding of certain aircraft, certain continuing start-up costs, low flight crew utilization and lower U.S. military revenues. See "The Merger -- Recent Financial Performance of the Kalitta Companies and the Merger Rationale" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Kalitta Companies." While the Company believes the Kalitta Companies are taking steps necessary to improve their financial performance, there can be no assurance that any such improvement will occur or that the Kalitta Companies will become profitable. The failure to improve the financial performance of the Kalitta Companies would have a material adverse effect on the Company and the value of the Common Stock. The Kalitta Companies have been and continue to be in default under certain bank loan agreements, including defaults arising from failure to make certain principal payments. The defaults entitle the affected lenders to accelerate repayment of their loans and to foreclose on collateral securing these loans, including aircraft. The outstanding indebtedness of the Kalitta Companies under these loan agreements will be refinanced with the net proceeds of this Common Stock Offering and the Note Offering. See " -- Substantial Leverage and Debt Service" and "Use of Proceeds." For additional information on recent financial performance of the Kalitta Companies, see "The Merger -- Third Quarter Financial Results of the Kalitta Companies." SUBSTANTIAL LEVERAGE AND DEBT SERVICE The Company will incur substantial indebtedness through the issuance of the Notes and will enter into the New Credit Facility, which will allow revolving borrowings up to $100 million. In addition, Kitty Hawk will enter into the Term Loan to refinance a $45.9 million loan which was incurred in September 1997 in connection with the acquisition of 16 Boeing 727s from the Kalitta Companies. See "Description of Certain Indebtedness." As of June 30, 1997, after giving effect to the Transactions and Refinancings, on a pro forma basis, the Company's total indebtedness would have been approximately $386 million (substantially all of which would have been secured) and its stockholders' equity would have been $178.7 million. On a pro forma basis, assuming the Transactions and Refinancings had occurred at the beginning of each of the following fiscal periods, earnings would not have been sufficient to cover fixed charges by approximately $8.8 million and $20.1 million for 1996 and for the six months ended June 30, 1997, respectively. The Indenture under which the Notes will be issued (the "Indenture") will permit the Company to incur substantial amounts of additional indebtedness, including an unlimited amount to acquire aircraft and aircraft-related assets. The Company's Term Loan and the New Credit Facility will mature prior to the maturity date of the Notes. The degree to which the Company is leveraged could have important consequences to holders of Common Stock, including (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired in the future; (ii) a 14 16 substantial portion of the Company's cash flow from operations will be dedicated to the payment of principal and interest on its indebtedness, thereby reducing funds available to the Company for other purposes; and (iii) the Company's substantial leverage may place the Company at a competitive disadvantage, hinder its ability to adjust rapidly to changing market conditions and make it more vulnerable in the event of a downturn in general economic conditions or its business or in the event of a strike or other labor problems at one of its significant customers. The Company's ability to make scheduled principal and interest payments, or to refinance its indebtedness (including the Notes) will depend on its future financial performance, which to a certain extent will be subject to economic, financial, competitive and other factors beyond its control. Based upon the Company's current operations and anticipated growth, management believes that future cash flows from operations, together with the proceeds of this Common Stock Offering and the Note Offering and available borrowings under the New Credit Facility, will be adequate to meet its anticipated requirements for working capital, capital expenditures and scheduled principal and interest payments for at least the next twelve months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will generate sufficient cash flow from operations to service its indebtedness and make necessary capital expenditures. If unable to do so, the Company may be required to refinance all or a portion of its indebtedness, including the Notes, to sell assets or to obtain additional financing. There can be no assurance that any such refinancing would be possible, that any assets could be sold (or, if sold, of the timing of such sales and the amount of proceeds realized therefrom) or that additional financing could be obtained, any of which could have a material adverse effect on the Company and the value of the Common Stock. RISKS OF BUSINESS INTEGRATION There can be no assurance that the Company will be able to integrate the operations of Kitty Hawk and the Kalitta Companies successfully or achieve the potential benefits of the Merger. The benefits of the Merger will require (i) the integration of administrative, finance, purchasing, dispatching, maintenance, sales and marketing organizations, (ii) the coordination of aircraft operations and (iii) the implementation of appropriate operational, financial and management systems and controls. This will require substantial attention from the Company's management. The failure to successfully integrate Kitty Hawk and the Kalitta Companies would have a material adverse effect on the Company and the value of the Common Stock. Moreover, no assurance can be given that the impact of integrating the Kalitta Companies as presented in such Unaudited Pro Forma Combined Financial Information will be as presented. See "Unaudited Pro Forma Combined Financial Information." CONTROL BY MESSRS. CHRISTOPHER AND KALITTA Immediately after completion of this Common Stock Offering, M. Tom Christopher as Chairman and Chief Executive Officer will own 5,673,436 shares, or approximately 32.3%, of the outstanding Common Stock, and Conrad A. Kalitta as Vice Chairman will own 4,099,150 shares, or approximately 23.4%, of the outstanding Common Stock, of which 650,000 shares will be held in escrow to secure Mr. Kalitta's indemnification obligations under the Merger Agreement. As a consequence, the success of the Company will depend, in some part, upon the ability of Messrs. Christopher and Kalitta to work together. Prior to the Merger, Messrs. Christopher and Kalitta were competitors and had disagreements, one of which resulted in litigation between Kitty Hawk and the Kalitta Companies. See "Business -- Legal Proceedings -- U.S. Postal Service Contract." Disagreements between Messrs. Christopher and Kalitta in the future could delay or disrupt the Company's operations and have a material adverse effect on the Company and the value of the Common Stock. Messrs. Christopher and Kalitta will enter into a voting agreement that, among other things, provides that for thirty-six months after the Merger, Messrs. Christopher and Kalitta will vote their shares of Common Stock in favor of director nominees selected by a Nominating Committee or in certain cases, the Board of Directors. See "The Merger -- Bylaw Amendments Concerning Governance of the Company and Stockholders' Agreement." 15 17 CYCLICALITY AND SEASONALITY The Company's services are provided to numerous industries and customers that experience significant fluctuations in demand based on economic conditions and other factors beyond the control of the Company. The demand for the Company's services could be materially adversely affected by downturns in the businesses of the Company's customers. The Company believes a significant percentage of its revenues will continue to be generated from services provided to the U.S. automotive industry, which has historically been a cyclical industry. A contraction in the U.S. automotive industry, a prolonged work stoppage or other significant labor dispute involving that industry, or a reduction in the use of air freight charters by that industry, could have a material adverse effect on the Company and the value of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Certain customers of the Company engage in seasonal businesses, especially the U.S. Postal Service, General Motors Corp. ("GM") and other customers in the automotive industry. As a result, the Company's air carrier business and air freight charter logistics business have historically experienced their 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 generally experiences its lowest quarterly revenue and profitability during the first quarter of the calendar year. In addition, the Company has provided charter carrier services to the U.S. Military during periods of heightened military activity, such as the Persian Gulf conflict, which has caused its results of operations to fluctuate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality" and "Business." AVAILABILITY OF FACILITIES The Company leases the majority of its facilities from third parties. If the Company continues to grow, it must be able to expand its current facilities or relocate to new ones. The Company's scheduled air freight operations utilize a sorting space at the Hulman Regional Airport in Terre Haute, Indiana. This sorting space is licensed from Roadway Global Air for a term which expires in August 1998. Because of the growth in the amount of freight sorted at this facility, the lack of available expansion space and the limited airport facilities in Terre Haute, the Company plans to move this sorting operation to Fort Wayne, Indiana in the spring of 1999. The Company is currently negotiating a lease with the airport authority in Fort Wayne and an interim lease for its current space in Terre Haute. There can be no assurance that the Company will be able to complete either of these negotiations or do so on favorable terms. Moreover, the move to Fort Wayne is dependent on the issuance of bonds by the Fort-Wayne-Allen County Airport Authority (the "Fort Wayne Authority"). There can be no assurance that the Fort Wayne Authority will complete the bond issuance in a timely manner or at all. The failure of the Company to successfully obtain sufficient space to operate would have a material adverse effect on the Company and the value of the Common Stock. See "Business -- Scheduled Freight Services" and "Business -- Ground Facilities." The Company also leases its Oscoda, Michigan maintenance facilities under various subleases from the Oscoda-Wurtsmith Airport Authority (the "Wurtsmith Authority"). These subleases expire on dates ranging from October 1997 to December 2013 and are subject to earlier termination upon termination of the prime lease between the U.S. Government and the Wurtsmith Authority. The Company is highly dependent on its facilities in Oscoda. There can be no assurance that the Company will be successful in extending these subleases or do so on favorable terms. Failure to extend one or more of the subleases would force the Company either to reduce substantially its maintenance capabilities or relocate the Oscoda maintenance operations, either of which could increase costs and reduce revenues. If the Company were forced to relocate these maintenance operations, there can be no assurance that the Company would be able to find alternative space on acceptable terms. In addition, the cost to move to another site would be significant. The occurrence of any of these events, or the failure in general of the Company to obtain facilities to conduct efficiently any of its operations, would have a material adverse effect on the Company and the value of the Common Stock. See "Business -- Maintenance" and "Business -- Ground Facilities." 16 18 DEPENDENCE ON AIRCRAFT AVAILABILITY The Company's revenues are dependent on the availability of its aircraft. In the event that one or more of the Company's aircraft are lost or out of service for an extended period of time, the Company may be forced to lease or purchase replacement aircraft or, if necessary, convert an aircraft from passenger to freighter configuration. There can be no assurance that suitable replacement aircraft could be located on acceptable terms. The Company does not maintain business interruption insurance to cover this risk. Loss of revenue resulting from any such business interruption or costs to replace aircraft could have a material adverse effect on the Company and the value of the Common Stock. DEPENDENCE ON KEY PERSONNEL The Company believes that its continued success depends and will continue to depend, on the services of Mr. Christopher, the founder of Kitty Hawk and Chairman of the Board of Directors and Chief Executive Officer of the Company, Mr. Kalitta, the Vice Chairman (upon consummation of the Merger), Tilmon J. Reeves, the President of the Company and Richard R. Wadsworth, the Senior Vice President -- Finance, Chief Financial Officer and Secretary. The loss of the services of any of Messrs. Christopher, Kalitta, Reeves or Wadsworth, particularly Mr. Christopher, could have a material adverse effect on the Company and the value of the Common Stock. Each of Messrs. Christopher, Reeves and Wadsworth have entered into employment agreements with the Company. Mr. Kalitta will enter into an employment agreement with the Company upon consummation of the Merger. See "Management -- Employment Agreements." EMPLOYEE RELATIONS The Company believes that it has good relations with its employees. One of the Kalitta Companies is, and after the Merger will continue to be, subject to a collective bargaining agreement (the "Collective Bargaining Agreement") with the Airline Division of the International Brotherhood of Teamsters (the "Teamsters Union") covering its employee pilots and flight engineers. The Collective Bargaining Agreement became amendable on August 29, 1997, and the parties have commenced "interest-based" bargaining for a successor agreement. Although the parties have commenced "interest-based" bargaining, there can be no assurance that a new collective bargaining agreement can be reached or that negotiations will not result in work stoppages, a substantial increase in salaries or wages, changes in work rules or other changes adverse to the Company. The cockpit crews of Kitty Hawk are not unionized. There can be no assurance that upon consummation of the Merger, Kitty Hawk's cockpit crews will remain non-unionized. Unionization of Kitty Hawk's cockpit crews, work stoppages, increased wages or other labor related matters could have a material adverse effect on the Company and the value of the Common Stock. See "Business -- Employees." RISKS RELATED TO GROWTH THROUGH ACQUISITIONS One of the Company's business strategies is to continue its growth by pursuing the strategic acquisition of both domestic and international providers of air freight carrier or logistics services. Growing through acquisitions involves substantial risks, including overvaluing the acquired business and inadequately or unsuccessfully integrating the acquired business. There can be no assurance that suitable acquisition candidates will be available, that the Company will be able to acquire, profitably manage or successfully integrate such additional companies or that any such future acquisitions will produce returns justifying the investment by the Company. In addition, the Company may compete for acquisition candidates with its competitors or other companies that have significantly greater resources than the Company. Additionally, the terms of the New Credit Facility and Term Loan will restrict the Company's ability to make certain acquisitions. Further, acquisitions can result in an increase in goodwill on the Company's balance sheet, which would be amortized in subsequent periods, reducing earnings per share. See "Business -- Growth Strategies" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 17 19 The Company may finance future acquisitions by issuing shares of Common Stock. Any future issuance of Common Stock may result in substantial dilution to purchasers of the shares of Common Stock offered hereby. In addition, any acquisition could result in the Company increasing the amount of goodwill reflected on its consolidated balance sheet, which will be charged against net earnings in future periods as such goodwill is amortized. DEPENDENCE ON COMPUTER SYSTEMS The Company utilizes a number of computer systems to schedule flights and personnel, track aircraft and freight, bill customers, pay expenses and monitor a variety of its activities, ranging from safety compliance to financial performance. The failure of the hardware or software that support these computer systems, or the loss of data contained in any of them, could significantly disrupt the Company's operations, which could have a material adverse effect on the Company and the value of the Common Stock. See "Business -- Air Freight Charter Logistics Services -- Database, Information Software and Tracking Systems." In addition, like most businesses which are highly dependent on their computer systems, some of the Company's computer software may not correctly record, manipulate and retrieve dates from the year 2000 and beyond. Accordingly, the Company may be forced to expend significant sums to overcome this problem. The failure of the Company to adequately address this problem could have a material adverse effect on the Company and the value of the Common Stock. RESTRICTIVE COVENANTS The Indenture restricts, among other things, the Company's ability to pay dividends or make certain other restricted payments, to incur additional indebtedness, to encumber or sell assets, to enter into transactions with stockholders and affiliates, to guarantee indebtedness, to merge or consolidate with any other entity and to transfer or lease all or substantially all of its assets. The Company's New Credit Facility and Term Loan also will contain restricted financial and operating covenants with respect to liens, indebtedness, capital expenditures, investments, prepayments of debt, dividends and certain requirements to maintain financial ratios. See "Description of Certain Indebtedness." Immediately following the consummation of the Transactions and the Refinancings, the Company will be in compliance with the financial and other covenants in the New Credit Facility and Term Loan. The ability of the Company to comply with such covenants, including financial maintenance covenants, in the future will depend on the Company's future financial performance. The Company's failure to comply with such covenants would constitute an event of default under the New Credit Facility and Term Loan, which could result in (i) the acceleration of debt maturities, including under the Notes, the New Credit Facility and the Term Loan, (ii) the loss of the Company's borrowing capacity and (iii) the foreclosure upon the Company's pledged assets securing such indebtedness. The declaration of an event of default under the New Credit Facility and Term Loan could result in a default by the Company under other loan agreements or leases that contain cross-default or cross-acceleration provisions. Under these circumstances, there can be no assurance that the Company would have sufficient funds or other resources to satisfy all of its obligations on a timely basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Certain Indebtedness." POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS AND AGREEMENTS The Certificate of Incorporation and Bylaws of the Company include certain provisions that have anti-takeover effects and may delay, defer or prevent a takeover attempt that a stockholder of the Company might consider to be in the best interests of the Company or its stockholders, including provisions which (i) classify the Company's Board of Directors into three classes, each of which serve for different three year periods, (ii) provide that only the Board of Directors, the Chairman of the Board of Directors or the beneficial owners of 25% or more of the outstanding voting capital stock may call special stockholders' meetings, (iii) require the vote of the holders of at least two-thirds of the outstanding shares of each class of the 18 20 Company's capital stock then entitled to vote thereon to amend or repeal the Bylaws or certain provisions of the Certificate of Incorporation, (iv) require the vote of at least two-thirds of the members of the Board of Directors to amend or repeal the Bylaws, (v) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings, (vi) subject the Company to a provision of Delaware law that restricts certain "business combinations" involving a stockholder who owns 15% or more of the Company's outstanding voting stock, (vii) limit the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter and (viii) prohibit non-U.S. citizens from serving as directors or officers of the Company. See "Description of Capital Stock -- Special Provisions of the Certificate of Incorporation and Bylaws" and "Business -- Government Regulation." In addition, the requirement that the vote of the holders of at least two-thirds of the outstanding shares of each class of the Company's capital stock is necessary to amend or repeal the Bylaws or certain provisions of the Certificate of Incorporation may adversely affect the extent to which stockholders, other than Messrs. Christopher and Kalitta acting together, exercise control over the Company. In addition, holders of the Notes will have the right to require the Company to repurchase the Notes upon a Change of Control (as defined in the Indenture) and all indebtedness under the New Credit Facility and Term Loan must be repaid on a Change of Control (as defined therein). Any of the foregoing provisions could have a material adverse effect on the value of the Common Stock. ABILITY TO ISSUE PREFERRED STOCK The authorized capital stock of the Company includes 1,000,000 shares of preferred stock (the "Preferred Stock"). The Board of Directors, in its sole discretion, may designate and issue one or more series of Preferred Stock from the authorized and unissued shares of Preferred Stock. Subject to limitations imposed by law or the Company's Certificate of Incorporation, the Board of Directors is empowered to determine (i) the designation of and the number of shares constituting each series of Preferred Stock, (ii) the dividend rate for each series, (iii) the terms and conditions of any voting, conversion and exchange rights for each series, (iv) the amounts payable on each series upon redemption or the Company's liquidation, dissolution or winding-up, (v) the provisions of any sinking fund for the redemption or purchase of shares of any series and (vi) the preferences and the relative rights among the series of Preferred Stock. At the discretion of the Board of Directors and subject to its fiduciary duties, the Preferred Stock could be used to deter any takeover attempt, by tender offer or otherwise. In addition, Preferred Stock could be issued with voting and conversion rights that could adversely affect the voting power of holders of Common Stock. The issuance of Preferred Stock could also result in a series of securities outstanding that would have preferences over the Common Stock with respect to dividends and in liquidation. Any of the foregoing could have a material adverse effect on the value of the Common Stock. The Board of Directors has no current intention to issue shares of Preferred Stock. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following this offering, or the market perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Upon completion of this offering, 17,550,957 shares (18,165,957 shares if the Underwriters' over-allotment option is exercised in full) of Common Stock will be outstanding. The 4,100,000 shares (4,715,000 shares, if the Underwriters' over-allotment option is exercised in full) offered hereby will be freely tradable by persons who are not "affiliates" of the Company without restriction under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to Rule 144 under the Securities Act, upon completion of this Common Stock Offering, 9,929,150 shares of Common Stock will be deemed "restricted securities" that may be resold to the extent permitted under Rule 144 and Rule 701 of the Securities Act or under any exemption under the Securities Act. Under the terms of a Stockholders' Agreement to be entered into contemporaneously with the Merger, Messrs. Christopher and Kalitta will have registration rights for the ten-year period commencing with the Closing, subject to customary cutback and exclusion provisions; provided, that the number of shares proposed 19 21 to be sold by either Mr. Christopher or Mr. Kalitta in any such registration shall not be less than 50,000 shares. The Company has filed registration statements under the Securities Act covering 600,000 shares of Common Stock reserved for issuance under the Company's Amended and Restated Omnibus Securities Plan, Amended and Restated Annual Incentive Compensation Plan and Amended and Restated Employee Stock Purchase Plan (collectively, the "Plans"). See "Management -- Employee Compensation Plans and Arrangements." As of the date hereof, 1,807 shares had been issued under these Plans. Shares registered under such registration statements are available for sale in the open market when issued pursuant to the Plans, subject to Rule 144 volume limitations applicable to affiliates and to provisions of the Plans, including vesting. Messrs. Christopher, Kalitta, Reeves and Wadsworth, who collectively will hold 9,929,150 shares of Common Stock in the aggregate after this Common Stock Offering and the Merger, along with the Company and its other directors and executive officers have agreed that, for a period of 90 days from the date of this Prospectus, they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for, Common Stock, except for up to 10,000 shares issuable pursuant to the Plans. Such consent of Morgan Stanley & Co. Incorporated may be provided without notice to purchasers of the Common Stock or to officials of the Nasdaq National Market System. See "Management -- Employee Compensation Plans and Arrangements." INDUSTRY RELATED RISKS GOVERNMENT REGULATION General. The Company is subject to Title 49 of the United States Code (formerly the Federal Aviation Act of 1958, as amended), under which the Department of Transportation ("DOT") and the Federal Aviation Administration ("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 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 aircraft, pilot and crew certification, aircraft maintenance and operational standards, noise abatement, airport slots and other safety-related factors. Certain of the Company's aircraft are subject to Directives which require modifications to the affected aircraft. See "Business -- Fleet" and "Business -- Government Regulation." In addition, the Company 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 understands that the Inspector General's office of the DOT is conducting an investigation of certain FAA regional offices. The Company is not a subject of any such investigation. However, the Company does not know the effect, if any, that any such investigation could have on it. The Company's international operations are governed by bilateral air services agreements between the United States and foreign countries where the Company operates. Under some of these bilateral air services agreements, traffic rights in those countries are available to only a limited number of and in some cases only one or two, U.S. carriers and are subject to approval by the DOT and applicable foreign regulators, limiting growth opportunities in such countries. 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 regulations. 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 the Company and the value of the Common Stock. 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 U.S. government or any foreign, state or local government, could have a material adverse effect on the Company and the value of the Common Stock. 20 22 Safety, Training and Maintenance Regulations. 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. ("ValuJet"), the FAA adopted changes to procedures concerning oversight of contract maintenance and training. The Company believes it is currently in compliance with such changes. It is possible that subsequent events, such as the recent crash of a cargo aircraft owned by Fine Air Services Inc., ("Fine Air") could result in additional Directives, which could have a material adverse effect on the Company and the value of the Common Stock. In September 1996, pursuant to the FAA's National Aviation Safety Inspection Program, the Kalitta Companies underwent a broad inspection of all of the Kalitta Companies' aircraft and maintenance operations. This inspection resulted in a report from the FAA citing the Kalitta Companies with a number of regulatory infractions, none of which were sufficiently serious to cause the FAA to curtail or otherwise restrict any of the Kalitta Companies' operations. As a consequence of the FAA's inspection, however, the FAA and the Kalitta Companies entered into a Consent Order in January 1997 which required the Kalitta Companies to revise certain internal policies and procedures to address the regulatory violations noted in the inspection report as well as enforcement actions that had been pending prior to the inspection. Without admitting any fault, the Kalitta Companies agreed to pay a fine of $450,000, one-third of which is suspended and will be forgiven if the Kalitta Companies comply with all the terms of the Consent Order. At this time, the Kalitta Companies' management believes the Kalitta Companies are in compliance with the Consent Order and expects the FAA to conduct another inspection of similar scope in the fourth quarter of 1997 to verify such compliance. The Consent Order also provides that it is a full and conclusive settlement of any civil penalties the Kalitta Companies could incur for regulatory violations occurring before January 1, 1997, but does not preclude the FAA from taking enforcement action to revoke the Kalitta Companies' air carrier operating certificate, which could have a material adverse effect on the Company and the value of the Common Stock. Modification of Aircraft. The Company owns 36 aircraft and leases three aircraft (not including aircraft held for sale) that do not meet FAA noise abatement standards. All of these aircraft must be brought into compliance with these standards by January 1, 2000. The Company may retire or terminate the leases related to some of these aircraft instead of modifying them. If all 39 aircraft are brought into compliance, the Company estimates that the cost would be approximately $93.4 million, not including aircraft downtime. There can be no assurance regarding the actual cost or that the Company will have or be able to raise the necessary funds. See "Business -- Government Regulation." In addition, the Company expects to purchase the Optioned Boeing 747s and convert the Optioned Boeing 747s and one recently acquired Boeing 747 to freighter configuration so they can be placed into revenue service during 1998. However, there can be no assurance as to when these aircraft will be purchased or how quickly and at what cost they can be modified or placed in revenue service. Aging Aircraft Regulations; Potential Compliance Costs. All of the Company's aircraft are subject to Manufacturer's Service Bulletins ("Service Bulletins") and Directives issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis. These Service Bulletins or Directives could 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, particularly in light of recent aircraft crashes at ValuJet and Fine Air. The cost of compliance with such Directives and Service Bulletins cannot currently be estimated, but could be substantial. COMPETITION The market for air freight services is highly competitive. Because the Company offers a broad range of air freight services, its competitors vary by geographic market and type of service. The Company competes on the basis of size and availability of aircraft with required performance characteristics, price and reliability. The Company's air freight carrier services are also subject to competition from other modes of transportation, including, but not limited to, railroads and trucking. Additional demand for air freight carrier services over the 21 23 last few years has resulted in numerous new entrants in this business. The Company believes there are limited barriers to entry into this business and that increased demand may stimulate additional competition. The Company's air freight business competes primarily with air freight carriers, and from time to time, with integrated carriers such as Burlington Air Express and Emery Air Freight. The Company also competes on a limited basis with scheduled freight operations of passenger airlines and overnight delivery services such as Airborne Express, Inc., DHL Airways, Inc., Federal Express and United Parcel Service. Numerous competitors of the Company provide or coordinate door-to-door air freight charters on an expedited basis. The Company also competes with other dedicated air freight carriers such as Atlas Air, Cargolux, Challenge Air Cargo, Emery Worldwide, Evergreen International Airlines, Gemini Air Cargo, Polar Air Cargo and Southern Air Transport. 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. The Company's ability to attract and retain business also is affected by whether and to what extent its customers decide to coordinate their own transportation needs. For example, 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 the Company and the value of the Common Stock. 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. In this regard, many of the Company's competitors and customers have substantially greater financial resources than the Company. ENVIRONMENTAL MATTERS The Company's operations must comply with numerous environmental laws ordinances and regulations. Under current federal, state and local environmental laws ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the ability of the owner of the property to use such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated and may impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have a material adverse effect on the Company and the value of the Common Stock. See "Business -- Environmental." The Company is aware of the presence of environmental contamination on properties that the Kalitta Companies lease or own. The Company does not believe that the costs of responding to the known contamination should or will be borne solely by the Company, if at all. While the Company does not believe that the costs of responding to the presence of such contamination is likely to have a material adverse effect on the Company or the value of the Common Stock there can be no assurance in this regard. Pursuant to the Merger Agreement, Mr. Kalitta has agreed, subject to certain limitations, to indemnify the Company for a period of 42 months against any losses arising with respect to environmental liabilities related to contamination at any of the Kalitta Companies' facilities. See "The Merger -- Indemnitees." In part because of the highly industrialized nature of many of the locations at which the Company operates, there can be no assurance that the Company has discovered all environmental contamination for which it may be responsible. 22 24 CAPITAL INTENSIVE NATURE OF AIRCRAFT OWNERSHIP AND OPERATION Capital Investment. The Company's air carrier business is highly capital intensive. In order to further expand the Company's air carrier business, the Company intends to purchase used jet aircraft that typically require certain modifications, including reconfiguring the aircraft from passenger to cargo use and installing equipment to comply with noise abatement regulations. See "Business -- Government Regulation -- Noise Abatement Regulations." The market for used jet aircraft is volatile and can be negatively affected by limited supply, increased demand and other market factors and recently has experienced significant price increases. Therefore, there can be no assurance that the Company will be able to purchase and modify additional aircraft at favorable prices or that the Company will have or be able to obtain sufficient resources with which to make such purchases and modifications. See "Business -- Growth Strategies," "Business -- Government Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Operating Costs. The operation of the Company's air freight and passenger carrier business incurs considerable operational, maintenance, fuel and personnel costs. The Company's financial results can be adversely affected by unexpected engine or airframe repairs, compliance with maintenance directives and regulations of the FAA and associated aircraft downtime. In addition, spare or replacement parts and components may not be readily available in the marketplace. Failure to obtain necessary parts or components in a timely manner or at favorable prices could have a material adverse effect on the Company and the value of the Common Stock. Fuel is a significant cost of operating the Company's aircraft for on-demand services and the aircraft of third party providers of charter services. Both the cost and availability of fuel are subject to many economic and political factors and events occurring throughout the world and recently the cost of fuel has fluctuated markedly. The Company has no agreement with any fuel supplier assuring the availability or price stability of fuel and such agreements are generally not available in the industry. The Company generally passes on fuel cost increases to its customers under ACMI charter contracts, but under certain contracts and the Company's scheduled operations, the Company's ability to pass on increased fuel costs is limited. Accordingly, the future cost and availability of fuel to the Company cannot be predicted and substantial price increases in, or the unavailability of adequate supplies of, fuel may have a material adverse effect on the Company and the value of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Maintenance" and "Business -- Government Regulation." VOLATILITY OF AIR FREIGHT SERVICES MARKET The demand for air freight services is highly dependent on the strength of both the domestic and global economy. Although the air freight services industry has experienced strong growth over the last several years (see "Business -- Industry Overview"), general economic downturns could have a material adverse effect on the Company and the value of the Common Stock. UTILIZATION OF AIRCRAFT The Company's operating results are highly dependent on its ability to effectively utilize its diverse fleet of aircraft. There can be no assurance, however, that operation of any of the various types of aircraft in the Company's fleet will prove to be profitable. The failure of the Company to keep its aircraft in revenue service or achieve an acceptable level of aircraft utilization could have a material adverse effect on the Company and the value of the Common Stock. RISK OF ACCIDENT; INSURANCE COVERAGE AND EXPENSES The Company's operations involve risks of potential liability against the Company in the event of aircraft accidents and, in the case of the Company's air ambulance services, for medical malpractice. The Company is required by the DOT to carry liability insurance on each of its aircraft. The Company also carries medical liability insurance for its air ambulance business. Although the Company believes its current insurance coverage is adequate and consistent with current industry practice, there can be no assurance that the amount 23 25 of such coverage will not be changed or that the Company will not bear substantial losses and lost revenues from accidents. Substantial claims resulting from an accident in excess of related insurance coverage could have a material adverse effect on the Company and the value of the Common Stock. In addition, any significant increase in the Company's current insurance expense could have a material adverse effect on the Company and the value of the Common Stock. Moreover, any aircraft accident, even if fully insured, could cause a public perception that some of the Company's aircraft are less safe or reliable than other aircraft, which could have a material adverse effect on the Company and the value of the Common Stock. During the last five years, the Kalitta Companies have had eight accidents and several other safety related incidents involving its aircraft with varying degrees of damage to the aircraft involved. In 1992, the pilot of one of the Kalitta Companies' small aircraft was fatally injured in one of these accidents. See "Business -- Insurance" and "Business -- Training and Safety." INTERNATIONAL BUSINESS RISK The Company expects to continue to derive a substantial portion of its revenues from providing air freight carrier services to customers in South and Central America and the Pacific Rim. The risks of doing business in foreign countries include potential adverse changes in the diplomatic relations between foreign countries and the U.S., hostility from local populations directed at a U.S. flag carrier, government policies against foreign-owned businesses, adverse effects of currency exchange controls, restrictions on the withdrawal of foreign investment and earnings and the risk of insurrections that could result in losses against which the Company is not insured. The Company's international operations also are subject to economic uncertainties, including risks of renegotiation or modification of existing agreements or arrangements with exchange restrictions and changes in taxation. Any of these events could have a material adverse effect on the Company and the value of the Common Stock. Nearly all of the Company's revenue is denominated in U.S. dollars. However, a meaningful portion of the Company's revenue is derived from customers whose revenue is denominated in foreign currencies. Therefore, any significant devaluation in such currencies relative to the U.S. dollar could have an adverse effect on such customer's ability to pay the Company or to continue to use its services, which could have a material adverse effect on the Company and the value of the Common Stock. CONTRABAND RISK Although required to do so, customers may fail to inform the Company about hazardous or illegal cargo. If the Company fails to discover any undisclosed weapons, explosives, illegal drugs or other hazardous or illegal cargo or mislabels or otherwise ships hazardous materials, it may suffer possible aircraft damage or liability, as well as fines, penalties or flight bans, imposed by both the country of origin and of destination. Any of these events could have a material adverse effect on the Company and the value of the Common Stock. The Company is a member of the U.S. Super Carrier Initiative. Members of the U.S. Super Carrier Initiative work with representatives of the U.S. Customs Service and the U.S. Drug Enforcement Agency to prevent the importation of illegal drugs into the U.S. 24 26 THE MERGER THE MERGER AGREEMENT On September 22, 1997, Kitty Hawk, Mr. Christopher, the Kalitta Companies and Mr. Kalitta entered into an Agreement and Plan of Merger, which was subsequently amended (as so amended, the "Merger Agreement"). Pursuant to the Merger Agreement, upon the satisfaction of the conditions to the Merger, each of the respective Kalitta Companies will be merged with and into separate subsidiaries of Kitty Hawk, with each of the respective Kalitta Companies surviving the Merger as a direct, wholly owned subsidiary of Kitty Hawk. At the effective time ("Effective Time") of the Merger, the outstanding shares of capital stock of four of the Kalitta Companies will be converted, in the aggregate, into the right to receive 4,099,150 shares of Common Stock and the outstanding shares of the remaining Kalitta Company will be converted into the right to receive $20 million cash. Prior to the execution of the Merger Agreement, the respective Boards of Directors of Kitty Hawk and the Kalitta Companies and Mr. Kalitta, as the sole shareholder of each of the Kalitta Companies, voted affirmatively to approve the Merger in accordance with the terms of the Merger Agreement and applicable law. No other corporate action is required for obtaining board of directors' and stockholders' approval of Kitty Hawk or the Kalitta Companies for the Merger. RECENT FINANCIAL PERFORMANCE OF THE KALITTA COMPANIES AND THE MERGER RATIONALE In 1996, the Kalitta Companies reported a small net loss. During the first six months of 1997, the financial performance deteriorated substantially with the Kalitta Companies sustaining a negative gross profit of $7.5 million, an operating loss of $19.4 million and a net loss of $30.9 million. In addition, the Kalitta Companies are heavily leveraged. Since 1995, the Kalitta Companies have from time to time been in default under certain covenants of their loan agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview of the Kalitta Companies." These financial issues contributed to the Kalitta Companies (i) entering into an agreement on July 31, 1997 to sell 16 Boeing 727s to Kitty Hawk in order to generate cash for the acquisition and modification of wide-body aircraft and to provide working capital and (ii) pursuing the Merger. In evaluating the merits of the Merger, among other things, the management teams of the two companies focused on the primary factors that have contributed to the recent deterioration in the financial performance of the Kalitta Companies and whether these factors would be expected to have a continuing negative impact on the financial performance of the Kalitta Companies. Moreover, they examined whether the combination of Kitty Hawk and the Kalitta Companies would help eliminate, or at least mitigate, the effect of these factors. As a result of their analysis, the management of the two companies expects the financial performance of the Kalitta Companies to improve and significant financial benefits to result following the consummation of the Merger. Management's expectation is based on the following: - Diminishing Impact of Recent Adverse Factors. The Kalitta Companies believe that the following five factors have primarily accounted for the decline in their financial performance since January 1, 1996 (i) the incurrence of abnormally high jet engine overhaul expenses resulting from the Kalitta Companies compliance with a series of Directives issued in early 1996, (ii) beginning in January 1996, the loss of revenues resulting from the effective grounding of two Boeing 747s pursuant to a series of Directives, (iii) the incurrence principally in 1997 of start-up costs associated with establishing the Kalitta Companies' large aircraft passenger charter business, (iv) the incurrence of costs to add and maintain flight crews in anticipation of increased air carrier business which has not yet materialized in part due to delays in acquiring aircraft and (v) a decline in revenues from the U.S. Military resulting from a decrease in the air freight-only charter requirements of the U.S. Military and an increase in competition for that business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview of the Kalitta Companies." The Kalitta Companies expect engine overhaul expense to return to normalized levels in future periods and do not expect passenger charter service start-up costs to recur. They also believe that crew and aircraft utilization can be improved because the Merger will afford the Company opportunities to 25 27 (i) direct more on-demand charters to the Kalitta Companies' small aircraft, rather than to third parties and (ii) direct on-demand charters to Boeing 727s used in the Company's scheduled overnight freight operations which have been used infrequently for on-demand charters in the past. After the Merger, the Company also expects to increase its charter business with the U.S. Military because the Kalitta Companies recently became eligible to fly passenger charters for the U.S. Military. Management also expects to partially mitigate the ongoing effects of the Directive that effectively grounded the Boeing 747s by returning one of them to limited load service in the latter half of 1998. - Expense Reductions. Several means were identified for substantially reducing the current levels of certain operating expenses of the Kalitta Companies following the consummation of the Transactions. By insuring all the aircraft of the combined companies under one hull and liability policy, it is estimated that the Company's annual insurance premium costs will be reduced by approximately $1.5 million during the first year following the Merger. Management also expects that Kitty Hawk's maintenance expense can be reduced by shifting previously outsourced maintenance to the Kalitta Companies' maintenance facilities. Furthermore, there are potential cost savings to be gained (i) from purchasing in bulk certain supplies, including fuel and (ii) through parts inventory reduction permitted by the scale of the combined operations. - Improved Capital Resources. The consummation of this Common Stock Offering and the Note Offering and entering into the New Credit Facility will enable the Company to refinance indebtedness of the Kalitta Companies on more favorable terms and provide working capital. In particular, the Company will have sufficient capital resources to enable it to acquire and modify the Optioned Boeing 747s. Recently, the Kalitta Companies have been hindered due to their liquidity problems and lack of capital resources. - Adoption of Kitty Hawk Management Discipline. Finally, in examining ways for improving the financial performance of the Kalitta Companies, it was recognized that Kitty Hawk's management has emphasized profitability, as contrasted to the Kalitta Companies which have primarily focused on growing revenues and fleet size. After the Merger, the Company intends to apply the management discipline of Kitty Hawk to the day-to-day operations of the Kalitta Companies. There can be no assurance that the expectations described above for improving the performance of the Kalitta Companies will be realized. The failure to achieve the contemplated improvement of the financial performance of the Kalitta Companies could have a material adverse effect on the Company and the value of the Common Stock. For a description of important factors that could cause actual results to differ materially from those referenced in the foregoing forward looking statements, see "Risk Factors." 26 28 THIRD QUARTER FINANCIAL RESULTS OF THE KALITTA COMPANIES The Kalitta Companies. Based on preliminary unaudited information, the Kalitta Companies expect to report revenues of approximately $128.8 million for the third quarter of 1997, an increase of 16.7% from $110.4 million for the third quarter of 1996. Operating income for the third quarter of 1997 is expected to be approximately $10.4 million, an increase of 19.5% from $8.7 million in the third quarter of 1996. The increase in revenues is primarily attributable to increased large aircraft air passenger charter revenues of approximately $17.4 million (the large aircraft air passenger charter business for tour operators was not started until the fourth quarter of 1996), increased revenues from flying for Kitty Hawk's air logistics business (in 1996, Kitty Hawk did not use the Kalitta Companies for a material portion of flights arranged by its air logistics business) and increased flights in the Hawaiian Islands and an additional aircraft on the Los Angeles-Honolulu route. The increase in revenues was partially offset by a $9.5 million reduction in revenues from the U.S. Military. The Kalitta Companies' operating expenses for the third quarter of 1997 generally increased in proportion to the increase in revenues, except that maintenance expense and selling, general and administrative expense increased at a greater rate. Maintenance expense increased due to an increased number of engine overhauls (after the Merger, to conform with Kitty Hawk's accounting policies, the Kalitta Companies will capitalize and amortize a larger proportion of such maintenance expense). Selling, general and administrative expense increased due to increased legal and accounting fees, as well as additional personnel and information technology costs incurred to support anticipated increases in revenues. In the third quarter of 1997, the Kalitta Companies expect to report approximately $2.1 million of increased interest expense compared to the third quarter of 1996 and approximately $1.3 million of Merger-related costs. As a result of the foregoing, the Kalitta Companies' net income for the third quarter of 1997 is expected to be approximately $.2 million, compared to approximately $2.8 million in the third quarter of 1996. The Kalitta Companies' business is seasonal, with a substantial majority of its operating income occurring in the third and fourth quarters. CONDITIONS TO THE MERGER Pursuant to the Merger Agreement, the consummation of the Merger is subject to the satisfaction or waiver of certain conditions to the closing of the Merger, including (i) the respective representations and warranties set forth in the Merger Agreement made by Kitty Hawk, Mr. Kalitta and the Kalitta Companies shall be true and correct, (ii) Mr. Christopher, Kitty Hawk, Mr. Kalitta and the Kalitta Companies shall have performed or complied with their respective covenants and conditions set forth in the Merger Agreement, (iii) all required regulatory approvals and consents of third parties shall have been obtained, (iv) there shall have been no change in Kitty Hawk's or the Kalitta Companies' respective business, labor relations, financial condition, properties, assets, liabilities or results of operations (or the occurrence of any events which might reasonably be expected to result in any such change), which in the respective judgment of Kalitta or Kitty Hawk, made in good faith, has had or would reasonably be expected to have a material adverse effect (as defined in the Merger Agreement) on Kitty Hawk or the Kalitta Companies (as the case may be), (v) the last reported sale price of a share of Common Stock on the Nasdaq National Market immediately preceding the closing date of the Merger and the average of the last reported sales price of a share of Common Stock on the Nasdaq National Market for the 20 consecutive trading days ending on the trading day immediately preceding the closing date shall be at least $12.00, (vi) the Note Offering shall have been consummated and the net proceeds to the Company from the Common Stock Offering and the Note Offering shall be greater than or equal to $380 million, (vii) Mr. Kalitta shall have been released from all of his personal guaranties of the indebtedness of the Kalitta Companies to be repaid as a consequence of the Refinancings, (viii) the fairness opinion rendered to the Board of Directors of Kitty Hawk shall have not been withdrawn or materially and adversely modified, (ix) certain aspects of the Merger as related to Mr. Kalitta must qualify as a tax-free reorganization and (x) Kitty Hawk shall have obtained certain confirmations from the Securities and Exchange Commission (the "Commission") regarding future financial reporting requirements. 27 29 INDEMNITIES Under the terms of the Merger Agreement, Mr. Kalitta has agreed to indemnify Kitty Hawk and certain of its affiliates against any loss, damage, deficiency, liability, judgment, claim or expense (collectively, the "Losses") incurred by Kitty Hawk or such affiliates that arise out of (i) a breach or alleged breach by Mr. Kalitta or any of the Kalitta Companies (other than KFS) of the Merger Agreement or (ii) certain environmental matters relating to the Kalitta Companies (other than KFS) as described in the Merger Agreement. Separate indemnity is provided by Mr. Kalitta and KFS to Kitty Hawk and certain of its affiliates for Losses that arise out of (i) a breach or alleged breach by Mr. Kalitta or KFS of the Merger Agreement or (ii) certain environmental claims relating to KFS. Under the terms of the Merger Agreement, Kitty Hawk has agreed to indemnify Mr. Kalitta against any Losses incurred by Mr. Kalitta and certain affiliates that arise out of (i) a breach or alleged breach of the Merger Agreement by the Company or Mr. Christopher. No party has the right to any indemnification until the aggregate amount of its indemnity claims exceeds $1.0 million. The indemnification obligations of Mr. Kalitta are limited generally to the sum of (i) the fair market value from time to time of 1,150,000 shares of Common Stock with respect to Losses, other than those relating to KFS, and (ii) $6 million for certain Losses relating to KFS. Mr. Kalitta will place 650,000 shares of Common Stock and $3 million cash in escrow to secure these respective indemnity obligations. The indemnification obligations of Kitty Hawk are limited generally to $10 million. Generally, no claims for indemnification may be brought by any party after 30 months from the date of the Merger, except that Kitty Hawk and certain affiliates may make indemnity claims for certain environmental matters for up to 42 months from the date of the Merger. BYLAW AMENDMENTS CONCERNING GOVERNANCE OF THE COMPANY Pursuant to the Merger Agreement, effective at or prior to the Effective Time (i) the Bylaws of Kitty Hawk shall be amended to provide that the number of directors comprising the full Board of Directors will be seven and (ii) such persons named as directors under "Management" shall be the directors of the Company to serve in the classes so indicated in "Management." Pursuant to the Merger Agreement, on or prior to the Effective Time, the Bylaws of the Company also shall be amended to provide that (i) a joint nominating committee (the "Joint Nominating Committee"), a Christopher Nominating Committee (herein so called) and a Kalitta Nominating Committee (herein so called) of the Board of Directors shall be created for a 36-month period commencing with the Effective Time, (ii) such Joint Nominating Committee shall consist of Messrs. Christopher and Kalitta for so long as each is a director of the Company, (iii) the Christopher Nominating Committee shall consist of Mr. Christopher for so long as he is a director of the Company and (iv) the Kalitta Nominating Committee shall consist of Mr. Kalitta for so long as he is a director of the Company. To the extent permitted by applicable law, such Joint Nominating Committee shall have the exclusive power on behalf of the Board of Directors to nominate persons for election as a director of the Company as a Joint Designee and to fill any vacancy of the Joint Designee on the Board of Directors. The Christopher Nominating Committee shall have the exclusive power on behalf of the Board of Directors of Kitty Hawk to nominate Mr. Christopher and persons for election as directors of Kitty Hawk as Christopher designees and to fill vacancies on the Board of Directors vacated by Christopher designees, and the Kalitta Nominating Committee shall have the exclusive power on behalf of the Board of Directors to nominate Mr. Kalitta and persons for election as directors of Kitty Hawk as Kalitta designees and to fill vacancies on the Board of Directors vacated by the Kalitta designees. Messrs. Christopher and Kalitta have agreed under the Merger Agreement and the Stockholders' Agreement (described below) to (i) vote, and cause each of their respective affiliates to vote (x) for the nominees of the Joint Nominating Committee (or the nominee as a Joint Designee of the entire Board of Directors in accordance with the Bylaws if the Joint Nominating Committee cannot agree within 10 days) except for cause, (y) for Christopher and the nominees of the Christopher Nominating Committee for election as a director of Kitty Hawk as a Christopher designee and against removal except for cause and (z) for Kalitta and the nominees of the Kalitta Nominating Committee for election as a director of Kitty Hawk as a Kalitta designee and against removal except for cause and (ii) not vote, nor permit any of their respective affiliates to vote, any shares of Common Stock they beneficially own in favor of any person to serve as a director of the Company unless such person has 28 30 been so nominated. Each of the nominating committees shall nominate the persons named in this Prospectus under "Management" for re-election when their terms expire unless any such persons are unable or unwilling to serve or if such persons have been removed for "cause" within the meaning of the Certificate of Incorporation of the Company. However, Mr. Christopher will have the right to fill any vacancy in the board seats of Messrs. Coonfield or Reeves and Mr. Kalitta will have the right to fill any vacancy in the board seats of Messrs. Kelsey or Sauder. If the Joint Nominating Committee does not agree within 10 days upon a nominee or a person to fill a vacancy, then either member may by written notice require a meeting of the Board of Directors to resolve such disagreement. Any individual selected to serve as a member of the Board of Directors, if the Joint Nominating Committee is unable to agree upon a nominee or a person to fill a vacancy, must (i) not be a Family Member (as defined in the Merger Agreement) of either Messrs. Kalitta or Christopher, (ii) not be a former or current employee of any Kalitta Company, AIC or Kitty Hawk, (iii) have within the preceding 60 months been a director, chief financial officer or chief executive officer of a company whose capital stock is listed on the New York Stock Exchange or the American Stock Exchange or quoted on the Nasdaq National Market System and (iv) be a citizen of the United States. The rights and obligations of Messrs. Christopher and Kalitta relating to the selection of directors and director nominees shall terminate upon the earlier of (a) 36 months after the Effective Time, (b) the death, Disability (as defined in the Merger Agreement) or voluntary resignation as a director of Kitty Hawk of either Mr. Christopher or Mr. Kalitta or (c) the sale of all shares beneficially owned by both Messrs. Christopher and Kalitta; provided, that in the event of the voluntary resignation as a director of Mr. Christopher or Mr. Kalitta, the resigning director will remain subject to his obligations to vote the Common Stock and other voting securities of the Company as provided above. If the Board is unable to agree on a nominee or person to fill a vacancy, stockholders have a statutory right to petition a Delaware court to resolve the deadlock or any other deadlock. The Bylaws of Kitty Hawk also shall be amended to provide that until the first anniversary of the Effective Time, (a) the Chairman of the Board and Chief Executive Officer shall be elected exclusively by the stockholders and shall serve as the chief executive officer of Kitty Hawk and, subject to the supervision of the Board of Directors, shall have the general management and control of the Company and (b) the Vice Chairman shall be elected exclusively by the stockholders and shall serve as an officer of Kitty Hawk. Pursuant to the Merger Agreement, Kitty Hawk has agreed to cause the election of Mr. Kalitta as President of AIA until the first anniversary of the Effective Time and Messrs. Christopher and Kalitta have agreed to vote their Common Stock or other voting securities in favor of Mr. Christopher as Chairman of the Board and Chief Executive Officer and Mr. Kalitta as Vice Chairman until the first anniversary of the Effective Time. The Bylaws of the Company also shall be amended to provide that the provisions of the Bylaws concerning the number and classification of directors, the powers and duties of the Joint Nominating Committee, the Christopher Nominating Committee and the Kalitta Nominating Committee the provisions concerning a deadlock of the Joint Nominating Committee and the offices of Chairman of the Board and Chief Executive Officer and Vice Chairman and related Bylaw provisions may be amended or repealed prior to the end of the 36-month period commencing with the Effective Time only by the affirmative vote of 70% of the members of the entire Board of Directors or the holders of 75% of the outstanding Common Stock. STOCKHOLDERS' AGREEMENT Messrs. Christopher and Kalitta and the Company will, contemporaneously with the Closing and pursuant to the terms of the Merger Agreement, enter into a Stockholders' Agreement. Under the terms of the Stockholders' Agreement, Messrs. Christopher and Kalitta will have incidental registration rights for the ten- year period commencing with the Effective Time, subject to customary cutback and exclusion provisions; provided, that the number of shares proposed to be sold by Mr. Christopher or Mr. Kalitta in any such registration shall not be less than 50,000 shares. The expenses relating to such registrations will be paid by the Company. In addition to the voting provisions described above, the Stockholders' Agreement permits transfers to certain Affiliates that agree to be bound by the terms of the Stockholders' Agreement. 29 31 THE NOTE OFFERING AND REFINANCINGS Concurrently with this Common Stock Offering, the Company is offering $340 million aggregate principal amount of Senior Secured Notes. The consummation of the Note Offering is conditioned upon (i) the consummation of the Merger and this Common Stock Offering and (ii) entering into the New Credit Facility. The Company intends to use the net proceeds of this Common Stock Offering and the Note Offering, along with the new Term Loan, to accomplish the Refinancings. The Company believes the Refinancings will provide the Company with greater financial flexibility by, among other things, (i) extending maturities of certain indebtedness, (ii) reducing the weighted average interest rate of outstanding indebtedness and (iii) increasing operating flexibility. See "Description of Certain Indebtedness." To the extent the foregoing constitutes a summary of the material terms of the Merger Agreement and the Stockholders' Agreement, it is qualified in its entirety by reference to the agreements which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. USE OF PROCEEDS This Common Stock Offering is conditioned on (i) the concurrent consummation of the Merger and the Note Offering and (ii) entering into the New Credit Facility and Term Loan. The net proceeds from this Common Stock Offering, the Note Offering and the Term Loan, after deducting underwriting discounts, placement fees and estimated offering expenses, are estimated to be approximately $430.0 million ($441.6 million if the Underwriters' over-allotment option is exercised in full). The estimated sources and uses of net proceeds to the Company from this Common Stock Offering, the Note Offering and the Term Loan are summarized as follows (dollars in millions): SOURCES: Note Offering, net of underwriting discounts and estimated expenses.................................................. $329.1 Common Stock Offering, net of underwriting discounts and estimated expenses........................................ 55.0 Term Loan(1)................................................ 45.9 ------ Total............................................. $430.0 ====== USES: Refinancings(2)............................................. $330.9 Escrow for acquisition and conversion to freighter configuration of the Optioned Boeing 747s................. 56.0 Cash paid pursuant to the Merger Agreement.................. 20.0 Working capital............................................. 20.6 Estimated expenses(3)....................................... 2.5 ------ Total............................................. $430.0 ======
- --------------- (1) The Company anticipates contemporaneously borrowing a de minimis amount under the New Credit Facility. (2) This indebtedness has interest rates ranging from 6.4% to 18.0% and maturity dates ranging from less than one year to September 2006. This amount includes approximately $3.0 million of prepayment penalties related to the Refinancings. For a description of the indebtedness being refinanced, see "Description of Certain Indebtedness." (3) Represents estimated expenses to be incurred in connection with the Merger, the New Credit Facility and the acquisition of 16 Boeing 727s from the Kalitta Companies. The Company will not receive any proceeds from the sale of shares of Common Stock offered by the Selling Stockholders. 30 32 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock has traded on the Nasdaq National Market System under the symbol "KTTY" since the Company's initial public offering on October 9, 1996. The following table sets forth the range of high and low sale prices of the Common Stock for the periods shown below.
PRICE RANGE ------------ HIGH LOW ---- ---- October 9, 1996 through November 30, 1996................... $14 3/4 $ 10 One Month Ended December 31, 1996........................... 13 1/2 8 Three Months Ended March 31, 1997........................... 12 3/4 10 Three Months Ended June 30, 1997............................ 17 1/4 11 7/8 Three Months Ended September 30, 1997....................... 20 3/4 13 3/8 Three Months Ending December 31, 1997 (through October 24, 1997)..................................................... 23 3/4 18 7/8
See the cover page of this Prospectus for a recent sale price of the Common Stock on the Nasdaq National Market. At October 13, 1997, the Company had approximately 1,300 holders of record and beneficial owners of the Company's Common Stock. Kitty Hawk has never declared or paid any cash dividends on the Common Stock. The Company presently intends to retain earnings, if any, for development and growth of its business and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The New Credit Facility and the Indenture contain significant limitations on the Company's ability to pay dividends. See "Description of Certain Indebtedness." Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors, after taking into account various factors, including the Company's earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations and there can be no assurance that dividends will be paid. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- the Company." 31 33 CAPITALIZATION The following table sets forth the capitalization of Kitty Hawk at June 30, 1997 and the Company on a pro forma basis to give effect to the consummation of (i) the Common Stock Offering and the Note Offering, (ii) the Merger, including the issuance of 4,099,150 shares of Common Stock in connection therewith, (iii) the Refinancings and (iv) the application of the estimated net proceeds to be received by the Company from the Common Stock Offering and the Note Offering as described in "Use of Proceeds."
JUNE 30, 1997 -------------------- KITTY THE HAWK COMPANY ------- --------- ACTUAL PRO FORMA ------- --------- (IN THOUSANDS) Current maturities of long-term debt........................ $ 4,774 $ -- ======= ======== Long-term debt: New Credit Facility(1).................................... $ -- $ -- Term Loan................................................. -- 45,900 Notes..................................................... -- 340,000 Other long-term debt(2)................................... 29,277 -- ------- -------- 29,277 385,900 ------- -------- Stockholders' equity: Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued........................... -- -- Common stock, $0.01 par value; 25,000,000 shares authorized; 10,669,517 shares issued and outstanding; 17,768,667 shares issued and outstanding pro forma(3)........................................... 107 178 Paid-in capital........................................... 33,950 150,372 Retained earnings......................................... 30,268 30,268 Common stock in treasury -- 217,710 shares................ (2,076) (2,076) ------- -------- Total stockholders' equity........................ 62,249 178,742 ------- -------- Total capitalization.............................. $91,526 $564,642 ======= ========
- --------------- (1) Approximately $100 million will be available for borrowing under the New Credit Facility upon consummation of the Refinancings. (2) Consists of indebtedness owed to WFB, Bank One Texas, N.A. and 1st Source Bank, all of which will be refinanced in connection with the Refinancings. (3) Does not include (i) 300,000 shares of Common Stock available for the future grant under the Company's Amended and Restated Omnibus Securities Plan, (ii) 198,193 shares of Common Stock available for issuance under the Company's Amended and Restated Annual Incentive Compensation Plan and (iii) 100,000 shares of Common Stock available for issuance under the Company's Amended and Restated Employee Stock Purchase Plan. See "Management -- Employee Compensation Plans and Arrangements." 32 34 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following sets forth the Company's Unaudited Pro Forma Combined Financial Information for 1996 and the six months ended June 30, 1997, in each case giving effect to the Transactions, the Refinancings and the acquisition of a Hawker Siddeley HS-125 aircraft from the Kalitta Companies by Mr. Kalitta on or prior to the closing date (the "Hawker Acquisition"). The Company's Unaudited Pro Forma Combined Statement of Operations Information gives effect to the Transactions, the Refinancings and the Hawker Acquisition, as if they had been consummated at the beginning of 1996. The Company's Unaudited Pro Forma Combined Balance Sheet Information gives effect to the Transactions, the Refinancings and the Hawker Acquisition as if they had been consummated on June 30, 1997. The Unaudited Pro Forma Combined Financial Information of the Company is presented for illustrative purposes only and does not purport to present the financial position or results of operations of the Company had the Transactions, the Refinancings and the Hawker Acquisition occurred on the dates indicated, nor are they necessarily indicative of the results of operations which may be expected to occur in the future. The Unaudited Pro Forma Combined Financial Information should be read in conjunction with the separate historical financial statements of Kitty Hawk and the Kalitta Companies appearing elsewhere in this Prospectus. Certain amounts reported in the Kalitta Companies' historical combined financial statements have been reclassified to conform with the Kitty Hawk presentations in the Unaudited Pro Forma Combined Financial Information The accompanying Unaudited Pro Forma Combined Financial Information has been prepared under guidelines established by Article 11 of Regulation S-X under the Securities Act. Under those guidelines, there are limitations on the adjustments that can be made in the presentation of pro forma financial information. Accordingly, no pro forma adjustments have been applied to reflect (i) revenues or operating costs expected to be generated from the Optioned Boeing 747 aircraft expected to be purchased and modified with approximately $56 million of the net proceeds from this Common Stock Offering and the Note Offering or the recent purchase of one Boeing 747 or (ii) operating efficiencies or cost savings (other than approximately $1.5 million of insurance savings) expected to result from the Merger. In addition, pro forma results have not been adjusted to eliminate abnormally high engine overhaul expenses, costs incurred to add and maintain flight crews in anticipation of increased air freight carrier business which has not yet materialized in part due to delays in acquiring aircraft and start-up costs associated with establishing the Kalitta Companies' wide-body passenger charter business. The historical balance sheet information for Kitty Hawk and the Kalitta Companies has been derived from the unaudited June 30, 1997 balance sheets of Kitty Hawk and the Kalitta Companies included elsewhere in this Prospectus. The historical statement of operations data for 1996 has been derived from unaudited information presented in Footnote 10 to Kitty Hawk's audited financial statements included elsewhere in this Prospectus and from the audited combined statements of operations of the Kalitta Companies for the year ended December 31, 1996 included elsewhere in this Prospectus. The historical statement of operations data for Kitty Hawk and the Kalitta Companies for the six months ended June 30, 1997 has been derived from their respective unaudited statements of operations for the six months ended June 30, 1997 included elsewhere in this Prospectus. The pro forma adjustments relating to the purchase of the Kalitta Companies represent the Company's preliminary determinations of these adjustments and are based upon available information and certain assumptions the Company considers reasonable under the circumstances. Final amounts could differ from those set forth therein and those differences could be material. The Company will finalize its purchase price allocation subsequent to the completion of these Transactions. The unaudited interim financial statements of Kitty Hawk referred to above include, in the opinion of management of Kitty Hawk, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of Kitty Hawk for the unaudited interim period. The unaudited interim financial statements of the Kalitta Companies referred to above include, in the opinion of management of the Kalitta Companies, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the Kalitta Companies for the unaudited interim period. 33 35 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION BALANCE SHEET JUNE 30, 1997
HISTORICAL ---------------------- PRO FORMA KALITTA ----------------------- KITTY HAWK COMPANIES ADJUSTMENTS COMBINED ---------- --------- ----------- -------- Current Assets Cash and cash equivalents....................... $ 8,952 $ 2,701 $ 55,4713a $ 67,124 Restricted cash................................. -- 2,868 67,0003b 69,868 Trade accounts receivable....................... 15,122 54,700 69,822 Accounts receivable -- related parties.......... -- 2,642 2,642 Inventory and aircraft supplies................. 4,435 23,213 27,648 Prepaid expenses and other current assets....... 5,366 19,229 (186)3c 24,409 -------- -------- --------- -------- Total current assets.................... 33,875 105,353 122,285 261,513 Property and equipment, net....................... 83,483 260,616 72,2583d 416,357 Other assets...................................... -- 879 10,0213e 10,900 -------- -------- --------- -------- Total assets............................ $117,358 $366,848 $ 204,564 $688,770 ======== ======== ========= ======== Current Liabilities Accounts payable and accrued expenses........... $ 18,513 $ 79,819 $ 13,2293f $111,561 Notes payable to bank, reclassified as current...................................... -- 56,483 (56,483)3g -- Long-term debt, reclassified as current......... -- 188,782 (188,782)3g -- Note payable and bank line of credit............ -- 2,691 (2,691)3g -- Current maturities of long-term debt............ 4,774 (4,774)3g -- -------- -------- --------- -------- Total current liabilities............... 23,287 327,775 (239,501) 111,561 Note payable...................................... -- 300 300 Existing long-term debt........................... 29,277 -- (29,277)3g -- Notes............................................. -- -- 340,0003g 340,000 Term Loan......................................... -- -- 45,9003g 45,900 Deferred income taxes............................. 2,545 -- 6,4803h 9,025 Minority interest................................. -- 3,242 3,242 Stockholders' equity, net......................... 62,249 35,531 80,9624 178,742 -------- -------- --------- -------- $117,358 $366,848 $ 204,564 $688,770 ======== ======== ========= ========
See accompanying notes. 34 36 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
HISTORICAL ---------------------- PRO FORMA KALITTA ----------------------- KITTY HAWK COMPANIES ADJUSTMENTS COMBINED ---------- --------- ----------- -------- Revenues: Air freight carrier.............................. $ 55,504 $388,193 $ (5,432)2a $438,265 Air logistics.................................... 77,168 -- 77,168 Maintenance and other............................ -- 36,348 36,348 -------- -------- -------- -------- Total revenues........................... 132,672 424,541 (5,432) 551,781 Cost of Revenues: Air freight carrier.............................. 40,860 357,830 (4,135)2b 394,555 Air logistics.................................... 67,938 -- 67,938 Maintenance and other............................ -- 22,316 22,316 -------- -------- -------- -------- Total costs of revenues.................. 108,798 380,146 (4,135) 484,809 -------- -------- -------- -------- Gross profit (loss)................................ 23,874 44,395 (1,297) 66,972 General and administrative expenses................ 8,943 22,900 31,843 Non-qualified employee profit sharing.............. 1,243 -- 1,243 Stock option grants to executive................... 4,231 -- 4,231 -------- -------- -------- -------- Total operating expenses................. 14,417 22,900 -- 37,317 -------- -------- -------- -------- Operating income (loss)............................ 9,457 21,495 (1,297) 29,655 Other Income (expense): Interest expense, net............................ (2,062) (21,632) (15,765)2c (39,459) Other, net....................................... 291 1,266 1,557 -------- -------- -------- -------- Income (loss) before income taxes and minority interest......................................... 7,686 1,129 (17,062) (8,247) Minority interest.................................. -- 1,146 1,146 -------- -------- -------- -------- Income (loss) before income taxes.................. 7,686 (17) (17,062) (9,393) Income taxes (benefit)............................. 3,038 -- (3,038)2d -- -------- -------- -------- -------- Net income (loss)........................ $ 4,648 $ (17) $(14,024) $ (9,393) ======== ======== ======== ======== Net income (loss) per share........................ $ 0.55 $ (0.60) ======== ======== Weighted average common and common equivalent shares outstanding............................... 8,477 7,099 15,576 ======== ======== ========
See accompanying notes. 35 37 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997
HISTORICAL ----------------------- PRO FORMA KALITTA ------------------------ KITTY HAWK COMPANIES ADJUSTMENTS COMBINED ---------- --------- ----------- -------- Revenues: Air freight carrier...................... $33,237 $182,352 $ (1,588)2a $214,001 Air logistics............................ 27,232 -- 27,232 Maintenance and other.................... -- 14,488 14,488 ------- -------- -------- -------- Total revenues................... 60,469 196,840 (1,588) 255,721 Cost of Revenues: Air freight carrier...................... 22,844 194,115 (11,504)2b 205,455 Air logistics............................ 24,819 -- 24,819 Maintenance and other.................... -- 10,200 10,200 ------- -------- -------- -------- Total costs of revenues.......... 47,663 204,315 (11,504) 240,474 ------- -------- -------- -------- Gross profit (loss)........................ 12,806 (7,475) 9,916 15,247 General and administrative expenses........ 4,884 11,968 16,852 Non-qualified employee profit sharing...... 672 -- 672 ------- -------- -------- -------- Total operating expenses......... 5,556 11,968 -- 17,524 ------- -------- -------- -------- Operating income (loss).................... 7,250 (19,443) 9,916 (2,277) Other Income (expense): Interest expense, net.................... (1,049) (12,098) (6,583)2c (19,730) Other, net............................... 424 1,491 1,915 ------- -------- -------- -------- Income (loss) before income taxes and minority interest................................. 6,625 (30,050) 3,333 (20,092) Minority interest.......................... -- (893) (893) ------- -------- -------- -------- Income (loss) before income taxes.......... 6,625 (30,943) 3,333 (20,985) Income taxes (benefit)..................... 2,650 -- (2,650)2d -- ------- -------- -------- -------- Net income....................... $ 3,975 $(30,943) $ 5,983 $(20,985) ======= ======== ======== ======== Net income per share....................... $ 0.38 $ (1.20) ======= ======== Weighted average common and common equivalent shares outstanding............ 10,452 7,099 17,551 ======= ======== ========
See accompanying notes. 36 38 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) 1. Allocation of Purchase Price -- Based upon the Kalitta Companies' June 30, 1997 unaudited balance sheet, the purchase price would have been calculated and allocated as follows: PURCHASE PRICE DETERMINATION: Cash...................................................... $ 20,000 4,099,150 shares of Kitty Hawk common stock at an assumed value of $15.00 per share.............................. 61,487 Related expenses.......................................... 2,528 Plus fair value of liabilities assumed: Accounts payable and accrued expenses (including $13,229 maintenance accrual to conform to Kitty Hawk accounting method).................................... 93,048 Notes payable, reclassified as current................. 59,174 Long-term debt, reclassified as current, including approximately $3,000 in early payment penalties....... 191,782 Note payable........................................... 300 Deferred income taxes.................................. 6,480 Minority interest...................................... 3,242 --------- Total purchase price to allocate.................. $ 438,041 ========= PURCHASE PRICE ALLOCATION: Current assets............................................ $ 105,167 Property and equipment, principally aircraft.............. 332,874 --------- $ 438,041 =========
The foregoing purchase price determination and allocation are based on the June 30, 1997 Kalitta Companies' balance sheet and preliminary estimates of fair value of assets acquired and liabilities assumed. The final purchase price allocation is contingent upon final assessment or appraisal of the fair value of the net assets acquired and the final consideration given. 37 39 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) (DOLLARS IN THOUSANDS) 2. Pro Forma Combined Statement of Operations -- The Company's Pro Forma Combined Statement of Operations data for the year ended December 31, 1996 and the six months ended June 30, 1997 includes the following adjustments:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1996 1997 ------------ ---------- a. Revenue: - Elimination of intercompany revenue.................... $ (4,914) $ (1,373) - Elimination of revenue on aircraft to be purchased by Mr. Kalitta............................................ (518) (215) -------- -------- (5,432) (1,588) -------- -------- b. Cost of revenues: - Elimination of intercompany revenue.................... (4,914) (1,373) - Elimination of the cost of revenues associated with the aircraft to be purchased by Mr. Kalitta................ (466) (194) - Conforming the Kalitta Companies' aircraft maintenance accounting policy to that of Kitty Hawk................ (2,107) (11,555) - Decreasing insurance costs for the combined fleet...... (1,500) (750) - Increase in depreciation expense from the step-up in fair value of acquired property and equipment, principally aircraft, and adjusting the useful lives of the acquired aircraft.................................. 4,852 2,368 -------- -------- (4,135) (11,504) -------- -------- c. Interest expense: - Repaying existing Kalitta Company credit facilities.... 21,632 12,098 - Repaying existing Kitty Hawk credit facilities......... 2,062 1,049 - The Notes.............................................. (34,000) (17,000) - Term Loan.............................................. (3,902) (1,951) - Amortizing deferred financing costs.................... (1,557) (779) -------- -------- (15,765) (6,583) d. Adjustments to reduce income tax expense by the amount incurred by Kitty Hawk................................... (3,038) (2,650) -------- -------- $(14,024) $ 5,983 ======== ========
The tax effects of the remaining pro forma net operating loss carryforward at December 31, 1996 and at June 30, 1997 have not been reflected as an income tax benefit in the pro forma income statements due the uncertainty of future realization. Interest expense on the Notes is calculated assuming an interest rate of 10%. Each 1/4 percentage point change in the interest rate of the Notes results in a change in interest expense of $850 and $425 for 1996 and the six months ended June 30, 1997, respectively. Interest expense on the Term Loan is calculated assuming an interest rate of 8.5%. Interest on the Term Loan will accrue initially at LIBOR plus 2.75% or the Base Rate plus 1.25%, subject to reduction. See "Description of Certain Indebtedness." Each 1/4 percentage point change in the interest rate of the Term Loan results in a change in interest expense of $115 and $57 for 1996 and the six months ended June 30, 1997, respectively. 38 40 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) (DOLLARS IN THOUSANDS) 3. Pro Forma Balance Sheet -- For purposes of preparing the Unaudited Pro Forma Combined Balance Sheet, the Kalitta Companies' assets and liabilities assumed have been recorded at their estimated fair values, the final determination of which has not yet been made. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma financial information reflect the Company's best estimate based upon currently available information. However, such adjustments could change and such changes may be material.
AS OF JUNE 30, 1997 --------------------- a. Cash: - Issuing 3,000,000 shares of common stock at an assumed price of $19 15/16 per share........................... $ 59,813 - Cash payment to Mr. Kalitta............................ (20,000) - Proceeds of the Notes.................................. 340,000 - Repaying existing credit facilities including an early payment penalties of approximately $3,000.............. (285,007) - Restricted cash........................................ (56,000) - Expenses of the Transactions and the Refinancing....... (17,885) - Remaining proceeds from the Term Loan, net of expenses............................................... 34,550 --------- $ 55,471 b. Restricted Cash: - Proceeds from the sale of the 16 Boeing 727 aircraft to Kitty Hawk used to fund modification costs on the recently acquired Boeing 747........................... 11,000 - Proceeds from the Note Offering used to fund the acquisition of the Optioned Boeing 747s................ 56,000 --------- 67,000 c. Other current assets..................................... (186) d. Property and equipment................................... 72,258 e. Other assets, principally deferred debt costs............ 10,021 f. Adjusting accrued maintenance to conform the Kalitta Companies' accounting policy to that of Kitty Hawk...... 13,229 g. Adjusting notes payable, reclassified as current, long-term debt, reclassified as current and note payable for the following: - The Note Offering...................................... 340,000 - Repayment of existing credit facilities................ (282,007) - Term Loan.............................................. 45,900 --------- 103,893 h. Recording deferred income taxes related to the book and tax basis differences of the assets acquired and liabilities assumed in the Merger........................ 6,480
On September 17, 1997, Kitty Hawk acquired 16 Boeing 727 aircraft from the Kalitta Companies for $51 million, $45.9 million of which was financed with a term loan that will be refinanced with the Term Loan on the Closing Date. The Kalitta Companies used a portion of these proceeds to acquire a Boeing 747 aircraft for approximately $21 million and to fund the anticipated modification costs of approximately $8 million (for which $11 million has been placed in escrow and is reflected as restricted cash). The remaining proceeds have been reflected in the Unaudited Pro Forma Combined Balance Sheet as cash. 4. Stockholders' Equity -- Stockholders' equity has been adjusted to reflect the issuance of 4,099,150 shares of Kitty Hawk's common stock in conjunction with the Merger and the issuance of 3,000,000 shares at an assumed offering price of $19 15/16 per share. 39 41 SELECTED FINANCIAL AND OPERATING DATA KITTY HAWK The following table sets forth selected financial and operating data with respect to Kitty Hawk for each of the fiscal years indicated, for the four months ended December 31, 1995 and 1996 and for the six months ended June 30, 1996 and 1997. 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 Prospectus. The selected statement of operations 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 Kitty Hawk appearing elsewhere in this Prospectus. Operating results for the four months ended December 31, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 are not necessarily indicative of results that may be expected for a calendar year. In the opinion of management of Kitty Hawk, the selected statement of operations and balance sheet data presented as of and for the four months ended December 31, 1995 and for the six months ended June 30, 1996 and 1997, which are derived from Kitty Hawk's unaudited Consolidated Financial Statements appearing elsewhere in this Prospectus, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for such periods.
FOUR MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, JUNE 30, -------------------------------------------------- ----------------- ------------------- 1992 1993 1994 1995 1996 1995 1996 1996 1997 ------- ------- -------- -------- -------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Air freight carrier revenues..... $ 6,760 $12,939 $ 28,285 $ 41,117 $ 52,922 $17,994 $20,577 $25,274 $33,237 Air logistics revenues........... 45,893 52,840 79,415 62,593 89,493 51,734 39,408 27,010 27,232 ------- ------- -------- -------- -------- ------- ------- ------- ------- Total revenues................... 52,653 65,779 107,700 103,710 142,415 69,728 59,985 52,284 60,469 Total costs of revenues.......... 48,465 55,201 92,951 85,532 118,900 57,682 47,580 44,608 47,663 ------- ------- -------- -------- -------- ------- ------- ------- ------- Gross profit..................... 4,188 10,578 14,749 18,178 23,515 12,046 12,405 7,676 12,806 General and administrative expenses....................... 2,930 4,394 6,013 7,832 9,080 2,862 2,725 4,572 4,884 Non-qualified profit sharing expense........................ -- 250 732 1,001 1,170 889 962 (32) 672 Stock option grants to executives..................... -- -- -- -- 4,231(1) -- -- 4,231(1) -- ------- ------- -------- -------- -------- ------- ------- ------- ------- Operating income................. 1,258 5,934 8,004 9,345 9,034 8,295 8,718 (1,095) 7,250 Interest expense................. (157) (134) (343) (1,185) (1,859) (482) (684) (1,023) (1,049) Contract settlement income, net(2)......................... -- 725 1,178 -- -- -- -- -- -- Loss on asset disposal........... -- -- -- -- (589) -- -- -- -- Other income (expense)........... 287 193 (432) (601) 291 38 626 138 424 ------- ------- -------- -------- -------- ------- ------- ------- ------- Income (loss) before income taxes.......................... 1,388 6,718 8,407 7,559 6,877 7,851 8,660 (1,980) 6,625 Income taxes..................... 375 2,613 3,146 3,143 2,768 3,097 3,367 (831) 2,650 ------- ------- -------- -------- -------- ------- ------- ------- ------- Net income (loss)................ $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293 $(1,149)(1) $ 3,975 ======= ======= ======== ======== ======== ======= ======= ======= ======= Net income (loss) per share...... $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55 $ (0.14)(1) $ 0.38 ======= ======= ======== ======== ======== ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding.................... 8,671 7,968 7,968 7,968 7,928 7,968 9,610 7,968 10,452 OTHER FINANCIAL DATA: Capital expenditures............. $ 3,019 $ 1,318 $ 13,876 $ 17,929 $ 33,538 $ 175 $13,796 $17,008 $39,544 Adjusted EBITDA(3)............... $ 2,149 $ 7,104 $ 9,507 $ 12,839 $ 19,840 $10,014 $12,546 $ 6,890 $12,134 Ratio of adjusted EBITDA to total interest expense............... 13.7x 53.0x 27.7x 10.8x 10.7x 20.8x 18.3x 6.7x 11.6x Ratio of earnings to fixed charges(4)..................... 7.9x 33.6x 20.6x 6.9x 4.4x 15.9x 12.9x -- 5.0x OPERATING DATA: Air freight carrier Aircraft owned (at end of period)........................ 11 10 15 21 22 21 26 23 28 Flight hours(5).................. 3,567 7,030 11,795 15,183 20,237 6,320 7,670 10,029 13,461 Number of on-demand charters flown.......................... 292 752 1,182 1,238 1,918 827 243 879 580 Number of ACMI contract charters flown.......................... 655 1,314 1,734 2,601 3,514 1,049 1,586 1,741 2,415 Air freight charter logistics Number of on-demand charters managed(6)..................... 8,708 9,748 16,713 14,198 19,578 9,356 4,185 7,459 6,640
40 42
AUGUST 31, DECEMBER 31, JUNE 30, ---------------------------------------------- ------------------ ------------------ 1992 1993 1994 1995 1996 1995 1996 1996 1997 ------ ------- ------- ------- ------- ------- -------- ------- -------- BALANCE SHEET DATA: Working capital (deficit)............. $ 895 $ 4,679 $ 4,223 $ 1,747 $(6,962)(7) $12,722 $ 33,519 $ 6,370 $ 10,588 Total assets.......................... 9,874 18,598 37,911 47,954 79,828 80,109 123,027 68,136 117,358 Total debt............................ 2,367 976 9,145 16,981 36,912 21,695 24,768 25,602 34,051 Stockholders' equity.................. $3,184 $ 7,289 $12,550 $16,966 $23,639 $21,721 $ 58,292 $24,796 $ 62,249
- --------------- (1) Results for the fiscal year ended August 31, 1996 and the six months ended June 30, 1996 lack comparability to other periods because such periods include nonrecurring grants to two executive officers of stock options that resulted in a charge to earnings of approximately $4,231. Had these grants of stock options not occurred, net income for fiscal year ended August 31, 1996 and the six months ended June 30, 1996 would have been approximately $6,648 and $1,390, respectively, and net income per share would have been $0.84 and $0.17, respectively. See "Management -- Stock Option Grants." (2) Reflects sums received in settlement of litigation. See "Legal Proceedings -- Litigation and Arbitration Related to Postal Contract" and Note 5 of Notes to Consolidated Financial Statements. (3) Adjusted EBITDA represents net income (loss) before income tax expense, interest expense, depreciation, amortization and certain items described below. Adjusted EBITDA excludes approximately $4,231 from stock options granted to executives in 1996 and approximately $725 and $1,178 in contract settlements in fiscal 1993 and 1994, respectively. Adjusted EBITDA is presented because it is a financial indicator of Kitty Hawk's ability to incur and service debt. However, adjusted EBITDA is not calculated under GAAP, is not necessarily comparable to similarly titled measures of other companies and should not be considered in isolation, as a substitute for operating income, net income or cash flow data prepared in accordance with GAAP or as a measure of Kitty Hawk's profitability or liquidity. (4) In calculating the ratio of earnings to fixed charges, earnings consist of income (loss) prior to income tax expense (benefit) and fixed charges (less capitalized interest). Fixed charges consist of capitalized interest, interest expense, amortization of debt expense and one-third of rental payments on operating leases (such factor having been deemed by Kitty Hawk to represent the interest portion of such payments). Earnings were not sufficient to cover fixed charges by $1,980 for the six month period ended June 30, 1996. (5) As reported by Kitty Hawk to the FAA. Flight hours reported are less than block hours, which also include the time an aircraft is operating under its own power whether or not airborne. Kitty Hawk generally bills its customers on a block hour basis. (6) Includes on-demand charters flown by Kitty Hawk aircraft. (7) Working capital includes a $10 million Revolving Credit Facility classified as a current liability that was subsequently repaid. 41 43 THE KALITTA COMPANIES The following table sets forth selected financial and operating data with respect to the Kalitta Companies for each of the fiscal years indicated and for the six months ended June 30, 1996 and 1997. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. The selected statement of operations and balance sheet data as of and for each of the fiscal years indicated in the five year period ended December 31, 1996 have been derived from the audited Combined Financial Statements of the Kalitta Companies. The selected statement of operations and balance sheet data for the six months ended June 30, 1996 and 1997 have been derived from the unaudited Combined Financial Statements of the Kalitta Companies, which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information set forth therein. The information presented under the captions "Other Financial Data" and "Aircraft Data" have not been derived from audited data for any periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results which may be expected for the full year.
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ---------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT OPERATING DATA) STATEMENT OF OPERATIONS DATA: REVENUES: Air freight carrier services....................... $ 95,144 $194,525 $298,081 $359,404 $388,193 $177,431 $182,352 Maintenance and other(1)........................... 2,606 5,584 7,449 14,279 36,348 13,164 14,488 -------- -------- -------- -------- -------- -------- -------- Total revenues....................................... 97,750 200,109 305,530 373,683 424,541 190,595 196,840 OPERATING COSTS AND EXPENSES(2): Flight............................................. 37,259 62,877 115,614 168,775 150,256 68,663 82,229 Maintenance........................................ 22,114 51,933 64,722 103,389 115,082 50,337 69,121 Fuel............................................... 16,508 38,554 57,362 54,538 82,717 40,616 35,498 Depreciation....................................... 8,999 12,422 13,809 20,972 32,091 15,846 17,467 Selling, general and administrative................ 4,232 9,554 13,273 21,676 21,889 10,088 11,284 Provision for doubtful accounts.................... 1,557 1,547 2,231 1,862 1,011 1,437 684 -------- -------- -------- -------- -------- -------- -------- Total operating costs and expenses................... 90,669 176,887 267,011 371,212 403,046 186,987 216,283 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations........................ 7,081 23,222 38,519 2,471 21,495 3,608 (19,443) OTHER INCOME (EXPENSE): Interest expense................................... (4,396) (6,781) (8,121) (15,064) (22,012) (10,402) (12,371) Interest income.................................... -- 36 113 315 379 216 273 Gain on disposition of aircraft held for resale and property and equipment, net...................... 3,018 1,945 3,390 11,708 131 395 949 Gain on contract termination....................... -- -- -- -- 1,123 1,123 -- Gain on insurance settlement(3).................... -- -- -- 8,148 -- -- 542 Miscellaneous...................................... (118) (421) (550) -- 13 13 -- -------- -------- -------- -------- -------- -------- -------- Total other income (expense)......................... (1,496) (5,221) (5,168) 5,107 (20,365) (8,655) (10,607) -------- -------- -------- -------- -------- -------- -------- Income (loss) before minority interest............... 5,585 18,001 33,351 7,578 1,129 (5,047) (30,050) Minority interest(4)................................. (424) (1,458) (2,758) (3,092) (1,146) (511) (893) -------- -------- -------- -------- -------- -------- -------- Net income (loss)(5)................................. $ 5,161 $ 16,543 $ 30,593 $ 4,486 $ (17) $ (5,558) $(30,943) ======== ======== ======== ======== ======== ======== ======== UNAUDITED PRO FORMA DATA: Unaudited pro forma net income (loss)(6)............. $ 3,200 $ 10,257 $ 18,968 $ 2,781 $ (17) $ (5,558) $(30,943) OTHER FINANCIAL DATA: Capital expenditures................................. $ 55,863 $ 20,468 $ 77,832 $153,719 $ 53,413 $ 29,697 $ 14,101 Adjusted EBITDA(7)................................... $ 16,080 $ 35,645 $ 52,328 $ 23,443 $ 53,586 $ 19,454 $ (1,976) Ratio of adjusted EBITDA to total interest expense(8)......................................... 3.7x 5.3x 6.4x 1.6x 2.4x 1.9x -- Ratio of earnings to fixed charges(9)................ 2.0x 2.4x 3.3x 1.2x 1.0x -- --
42 44
DECEMBER 31, JUNE 30, ----------------------------------------------------- --------------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- --------- --------- --------- BALANCE SHEET DATA: Working capital (deficit)(10)..................... $ (6,242) $ 4,299 $(12,037) $(19,700) $(195,413) $(195,330) $(222,422) Total assets...................................... 123,773 163,925 272,461 377,597 380,103 355,080 366,848 Total debt........................................ 80,010 84,936 137,405 220,471 238,350 222,504 248,256 Stockholder's equity.............................. $ 31,043 $ 46,461 $ 77,099 $ 66,292 $ 67,085 $ 58,232 $ 35,531 OPERATING DATA: Aircraft under operating leases................... 7 8 4 4 2 3 4 Aircraft owned.................................... 52 57 82 91 96 91 94 -------- -------- -------- -------- --------- --------- --------- Total aircraft.................................... 59 65 86 95 98 94 98 ======== ======== ======== ======== ========= ========= ========= Flight hours(11).................................. 39,404 55,220 76,346 84,058 91,690 43,347 43,161
- --------------- (1) Includes revenues from related parties. See "Certain Transactions" and Note 8 of Notes to Combined Financial Statements. (2) Includes expenses to related parties. See "Certain Transactions" and Note 8 of Notes to Combined Financial Statements. (3) The gain for the year ended December 31, 1995 represents the amount by which the insurance settlement received by AIA by reason of damage to one of its aircraft exceeded the actual costs incurred to repair the damage. The difference occurred because AIA was able to effect the repair using its own maintenance capability and obtain the replacement parts from an unused airframe having no book value. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) American International Cargo is a general partnership in which AIA holds a 60% interest. See "Business -- Scheduled Cargo Services." (5) The Kalitta Companies filed income tax returns under Subchapter S of the U.S. Federal Income Tax Code. Therefore, all taxable income or losses of the Kalitta Companies have passed through to the sole shareholder of the Kalitta Companies. (6) Represents net income adjusted for the approximate federal and state income taxes (by applying statutory rates) assuming the Kalitta Companies had been subject to tax as a C corporation. No tax benefit has been provided for the year ended December 31, 1996 and for the six months ended June 30, 1996 and 1997 due to the uncertainty of the Kalitta Companies' ability to recover such benefits. (7) Adjusted EBITDA represents net income (loss) before minority interest, interest expense (net of capitalized interest), depreciation, amortization and certain items described below. Adjusted EBITDA excludes approximately $8,148 and $542 from gains on insurance settlements in 1995, and the six months ended June 30, 1997, respectively, $1,123 from a gain from settlement of a contract dispute in 1996 and the six months ended June 30, 1996, and net gains from disposition of aircraft held for resale in each period presented. Adjusted EBITDA is presented because it is a financial indicator of the Kalitta Companies' ability to incur and service debt. However, adjusted EBITDA is not calculated under GAAP, is not necessarily comparable to similarly titled measures of other companies and should not be considered in isolation, as a substitute for operating income, net income or cash flow data prepared in accordance with GAAP or as a measure of the Kalitta Companies' profitability or liquidity. (8) For the six months ended June 30, 1997, the Kalitta Companies' adjusted EBITDA was ($1,976) and interest expense was $12,098, resulting in a failure to cover interest expense. (9) In calculating the ratio of earnings to fixed charges, earnings consist of income (loss) before minority interest and fixed charges (less capitalized interest). Fixed charges consist of capitalized interest, interest expense, amortization of debt expense and one-third of rental payments on operating leases (such factor having been deemed by the Kalitta Companies to represent the interest portion of such payments). Earnings were not sufficient to cover fixed charges by approximately $5,368 and $30,050 for the six months ended June 30, 1996 and June 30, 1997, respectively. (10) Includes long-term debt and notes payable reclassified to current of $203,016, $173,765 and $201,443 at December 31, 1996, June 30, 1996 and June 30, 1997, respectively. (11) As reported to the FAA by the Kalitta Companies. Flight hours reported are less than block hours, which also include the time an aircraft is operating under its own power whether or not airborne. The Kalitta Companies generally bill its customers on a block hour basis. 43 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OF KITTY HAWK Change of Fiscal Year. On December 4, 1996, Kitty Hawk changed its fiscal year end from August 31 to December 31. The following discussion is of Kitty Hawk's financial condition and results of operations (i) for the six months ended June 30, 1996 and 1997, (ii) for the four months ended December 31, 1995 and December 31, 1996 and (iii) for the fiscal years ended August 31, 1994, 1995 and 1996. Revenues. Kitty Hawk'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 Kitty Hawk's 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 Kitty Hawk and flown with its own aircraft, 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. The principal factors that have contributed to revenue growth over the past several years have been increases in the size of Kitty Hawk's fleet (from 10 aircraft at December 31, 1993 to 28 aircraft at June 30, 1997), the general U.S. economic expansion since 1992 and the increased global demand for time sensitive air freight services. Costs of Revenues. The principal components of the costs of revenues attributable to the air freight carrier business consist of the costs for the maintenance and operation of 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 the customer on 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 on Kitty Hawk's aircraft, all related air transportation expenses are allocated to the air freight carrier business and all related cargo ground handling and transportation expenses are allocated to the air logistics business. Under the Kitty Hawk Amended and Restated Annual Incentive Compensation Plan, Kitty Hawk awards semiannual cash bonuses to its employees. The aggregate amount of the bonuses for each of fiscal years 1994, 1995 and 1996, the Transition Period and the six months ended June 30, 1996 and 1997, have equaled 8.0%, 11.7%, 9.5%, 10.0%, (1.5%) and 9.2%, respectively, of Kitty Hawk's income before the deduction of income taxes, stock option grants to executives and the bonuses that were expensed under this plan. Kitty Hawk's gross margins have been substantially higher in its air freight carrier business (which uses Kitty Hawk aircraft) than in its air logistics business (which principally uses third party aircraft). However, the air freight carrier business provides a more predictable revenue base. Accordingly, Kitty Hawk is shifting its planes from on-demand to ACMI contracts. Of the 16 Boeing 727s acquired in September 1997, 14 operate under ACMI contracts. 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, Kitty Hawk 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, Kitty Hawk expensed approximately $727,000 relating to its 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. Post-Merger Results. Beginning in the fourth quarter of 1997, the Company's results will be affected by the Transactions and the Refinancings. Expenses will be increased by the amortization of the stepped up value 44 46 of the Kalitta Companies' fleet (approximately $4.9 million of non-cash annual expense), the amortization of deferred financing costs associated with the Note Offering, the New Credit Facility and the Term Loan (approximately $1.5 million of non-cash annual expense) and cash interest expense with respect to the Notes (approximately $34.0 million of annual expense) and the Term Loan (approximately $3.9 million of annual expense). After the Merger, the Company may incur Merger-related integration costs in the fourth quarter of 1997. If incurred, these costs are not expected to exceed approximately $2 million. Reduced Dependence on Significant Customers. Historically, Kitty Hawk derived a substantial amount of revenue from a limited number of customers. Upon consummation of the Merger, the Company will be significantly less dependent on revenues from these customers. RESULTS OF OPERATIONS OF KITTY HAWK The following table sets forth, on a comparative basis for the periods indicated, the components of Kitty Hawk'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, SIX MONTHS ENDED JUNE 30, --------------------------------- --------------------------------- 1995 1996 1996 1997 --------------- --------------- --------------- --------------- AIR FREIGHT CARRIER: Revenues..................................... $17,994 100.0% $20,577 100.0% $25,274 100.0% $33,237 100.0% Costs of revenues............................ 11,685 64.9 13,784 67.0 20,340 80.5 22,844 68.7 ------- ----- ------- ----- ------- ----- ------- ----- Gross profit................................. $ 6,309 35.1% $ 6,793 33.0% $ 4,934 19.5% $10,393 31.3% ======= ===== ======= ===== ======= ===== ======= ===== AIR LOGISTICS: Revenues..................................... $51,734 100.0% $39,408 100.0% $27,010 100.0% $27,231 100.0% Costs of revenues............................ 45,997 88.9 33,796 85.8 24,268 89.8 24,819 91.1 ------- ----- ------- ----- ------- ----- ------- ----- Gross profit................................. $ 5,737 11.1% $ 5,612 14.2% $ 2,742 10.2% $ 2,412 8.9% ======= ===== ======= ===== ======= ===== ======= =====
45 47 The following table presents, for the periods indicated, consolidated income statement data expressed as a percentage of total revenues:
FISCAL YEAR FOUR MONTHS SIX MONTHS ENDED ENDED ENDED AUGUST 31, DECEMBER 31, JUNE 30, --------------------- ------------- ------------- 1994 1995 1996 1995 1996 1996 1997 ----- ----- ----- ----- ----- ----- ----- REVENUES: Air freight carrier....................................... 26.3% 39.6% 37.2% 25.8% 34.3% 48.3% 55.0% Air logistics............................................. 73.7 60.4 62.8 74.2 65.7 51.7 45.0 ----- ----- ----- ----- ----- ----- ----- Total revenues.............................................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total costs of revenues..................................... 86.3 82.5 83.5 82.7 79.3 85.3 78.8 ----- ----- ----- ----- ----- ----- ----- Gross profit................................................ 13.7 17.5 16.5 17.3 20.7 14.7 21.2 General and administrative expenses......................... 5.6 7.6 6.4 4.1 4.5 8.8 8.1 Non-qualified profit sharing expense........................ 0.7 0.9 0.8 1.3 1.6 (0.1) 1.1 Stock option grants to executives........................... -- -- 3.0 -- -- 8.1 -- ----- ----- ----- ----- ----- ----- ----- Operating income (loss)..................................... 7.4 9.0 6.3 11.9 14.6 (2.1) 12.0 Interest expense............................................ (0.3) (1.1) (1.3) (0.7) (1.2) (2.0) (1.7) 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 0.3 0.7 ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes........................... 7.8 7.3 4.8 11.3 14.4 (3.8) 11.0 Income taxes................................................ 2.9 3.0 1.9 4.4 5.6 (1.6) 4.4 ----- ----- ----- ----- ----- ----- ----- Net income (loss)........................................... 4.9% 4.3% 2.9% 6.9% 8.8% (2.2)% 6.6% ===== ===== ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Revenues -- Air Freight Carrier. Air freight carrier revenues increased to $33.2 million, or 31.5%, from $25.3 million for the six months ended June 30, 1997 as compared to the six months ended June 30, 1996, principally from an increase in fleet size from 23 aircraft at June 30, 1996 to 28 aircraft at June 30, 1997. Air freight carrier on-demand and ACMI contract charter revenues were $7.5 million and $25.0 million or 22.4% and 75.1%, respectively, of total air freight carrier revenues for the six months ended June 30, 1997, as compared to $10.2 million and $14.3 million or 40.3% and 56.5%, respectively, for the six months ended June 30, 1996. Revenues from on-demand charters flown by Kitty Hawk aircraft for the six months ended June 30, 1997 decreased 26.9% from the comparable prior year period due to aircraft being shifted from on-demand to ACMI contract charters which is consistent with Kitty Hawk's strategy of using more of its fleet in ACMI business which produces relatively stable revenues. Prices for Kitty Hawk's on-demand and ACMI contract charters remained relatively constant. Revenues -- Air Logistics. Air logistics revenues were relatively flat registering $27.2 million in the six months ended June 30, 1997, compared to $27.0 million in the six months ended June 30, 1996. Prices for Kitty Hawk's air logistics services remained relatively constant. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $2.5 million or 12.3% to $22.8 million in the six months ended June 30, 1997, from $20.3 million in the six months ended June 30, 1996, reflecting increased costs associated with increased fleet size and ACMI contract charters. The gross profit margin from the air freight carrier increased to 31.3% in the six months ended June 30, 1997, from 19.5% in the six months ended June 30, 1996. The increase was primarily the result of reduced maintenance costs from operational efficiencies associated with increased fleet size and reduced depreciation costs resulting from the sale of four JT8D-9A engines. As reported to the FAA, overall aircraft utilization increased to 13,461 flight hours for the six months ended June 30, 1997, from 10,029 in the six months ended June 30, 1996, a 34.2% increase. This increase was primarily due to increased hours flown for ACMI contract charters. Costs of Revenues -- Air Logistics. Air logistics costs of revenues increased $551,000, or 2.3%, to $24.8 million in the six months ended June 30, 1997, from $24.3 million in the six months ended June 30, 46 48 1996. The gross profit margin from air logistics decreased to 8.9% in the six months ended June 30, 1997, from 10.2% in the comparable prior year period. This decrease was primarily due to increased costs paid to third party air freight carriers temporarily resulting from increased carrier costs that Kitty Hawk was not able to pass through to customers. General and Administrative Expenses. General and administrative expenses increased $312,000, or 6.8%, to $4.9 million in the six months ended June 30, 1997, from $4.6 million in the six months ended June 30, 1996. 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 volume of air freight carrier business. As a percentage of total revenues, general and administrative expenses decreased to 8.1% in the six months ended June 30, 1997, from 8.8% in the six months ended June 30, 1996. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased $705,000, to $672,000 in the six months ended June 30, 1997, from ($33,000) in the six months ended June 30, 1996, reflecting the increase of net income before taxes in the six months ended June 30, 1997. Stock Option Grants to Executives. There was no stock option grant expense during the six months ended June 30, 1997. During the six month period ended June 30, 1996, Kitty Hawk 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. As a result of the above, operating income increased $8.3 million, to $7.2 million in the six months ended June 30, 1997, from ($1.1) million in the six months ended June 30, 1996. Operating income margin increased to 12.0% in the six months ended June 30, 1997, from (2.1%) in the six months ended June 30, 1996. Interest Expense. Interest expense remained relatively constant at $1.0 million. Other Income (Expense). Other income increased to $425,000 in the six months ended June 30 1997, from $138,000 in the comparable prior year period. The increase was primarily due to increased interest income in the six months ended June 30, 1997, from the investment of proceeds from the Company's initial public offering. Income Taxes. Income taxes as a percentage of income before income taxes decreased to 40% for the six months ended June 30, 1997, from 42% for the comparable prior year period. The decrease was primarily due to decreased state income taxes, based on state apportionment factors. Net Income. As a result of the above, net income increased to $4.0 million in the six months ended June 30, 1997, compared to ($1.1) million in the six months ended June 30, 1996. Net income as a percentage of total revenues increased to 6.6% in the six months ended June 30, 1997, from (2.2%) in the comparable prior year period. FOUR MONTHS ENDED DECEMBER 31, 1996 COMPARED TO FOUR MONTHS ENDED DECEMBER 31, 1995 Revenues -- Air Freight Carrier. Air freight carrier revenues increased to $20.6 million, or 14.4%, from $18.0 million for the four months ended December 31, 1996 compared to the four months ended December 31, 1995, principally from an increase in fleet size from 21 aircraft to 26 aircraft during the comparable periods. 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. Revenues from on-demand charters flown by Kitty Hawk aircraft for the four months ended December 31, 1996 decreased 61.6% from the comparable prior year period primarily as the result of Kitty Hawk's strategy to use as many aircraft as possible under ACMI contracts, which provide more stable, predictable revenues. Prices for Kitty Hawk'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. 47 49 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. Prices for Kitty Hawk'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. 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 Kitty Hawk's additional revenues and increased gross profit margin from the U.S. Postal Service Christmas contract in December 1996 and Kitty Hawk's 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 Kitty Hawk's initial public 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. 48 50 FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995 Revenues -- Air Freight Carrier. Air freight carrier revenues increased $11.8 million or 28.7% from $41.1 million for fiscal year 1995 to $52.9 million for fiscal year 1996. 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. Revenues from on-demand charters flown by Kitty Hawk aircraft for fiscal year 1996 increased 14.0% from the prior year. The increase in ACMI revenues of $9.2 million from 1995 to 1996 was principally due to Kitty Hawk's strategy to increase its Boeing 727 fleet and dedicate more aircraft to ACMI contract service. Prices for Kitty Hawk's on-demand and ACMI contract charters remained relatively constant. 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. Prices for Kitty Hawk'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 Kitty Hawk's success in reducing its costs paid to third party air freight carriers and ground service providers and increased gross profit margin from the 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, Kitty Hawk 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. 49 51 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 Kitty Hawk'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. 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 revenue increased $12.8 million, or 45.4% from $28.3 million for fiscal year 1994 to $41.1 million for fiscal year 1995, principally as a result of an increase in the fleet size from 15 to 21 aircraft for the same period. 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. The increase in ACMI revenues of $10.3 million from 1994 to 1995 was principally due to Kitty Hawk's strategy to increase its Boeing 727 fleet and dedicate more aircraft to ACMI contract service. Prices for Kitty Hawk'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 Kitty Hawk's on-demand charters decreased slightly due to a 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 Kitty Hawk'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 DC-9-15F aircraft into Kitty Hawk'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 Kitty Hawk'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. 50 52 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 DC-9-15F aircraft and two Boeing 727-200 aircraft in fiscal year 1995. 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 Kitty Hawk'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. OVERVIEW OF THE KALITTA COMPANIES Revenues. The Kalitta Companies derive their revenues primarily from two types of services: air freight carrier services and third party maintenance. During the past three years, the Kalitta Companies' revenues increased at a compound annual rate of 29.5% to $424.5 million in 1996 from $200.1 million in 1993. The Kalitta Companies revenue growth has been substantially the result of new scheduled freight contracts and an increase in aircraft capacity. Revenues from air freight carrier services are derived from three sources (i) scheduled cargo services, (ii) on-demand cargo charter services, and (iii) passenger charter services. Scheduled cargo services are generally utilized by other airlines and freight forwarders. These services range in type from a commitment by the Kalitta Companies to transport freight on its scheduled freight routes to the lease of the entire capacity of one or more aircraft with crew, also known as a "wet-lease." Also included in scheduled cargo services is revenue generated from the Kalitta Companies' overnight freight service operating within a network of 45 North American cities, and from the Kalitta Companies' consolidated 60% partnership interest in American International Cargo ("AIC"), which flies scheduled routes from the West Coast of the United States to the Pacific Rim. On-demand cargo services are derived from single trip or short-term airfreight customers. Customers may be charged in one of two ways, (i) an "all-inclusive" flat fee on the basis of the aircraft type and number of miles to be flown, or, (ii) the customer may charter the aircraft on an ACMI basis where the customer pays a negotiated rate for each "block hour" during which the aircraft is operating under its own power. This rate covers the cost to operate the aircraft, including crew, the cost of scheduled maintenance, insurance and ground support. Additional fees may be applicable for such costs as fuel, handling and ramp fees, customs support and ground transport. With both scheduled and contract services, operating costs such as fuel, landing rights and cargo handling are either (i) paid directly by the customer or (ii) included in the contract price and paid by the Kalitta Companies. Revenues from passenger charter services consist principally of arrangements with tour operators for the transport of leisure travelers to domestic and international locations. The tour operators generally pay a fixed 51 53 price for the use of the aircraft and assume the risk for both the sale of seats and any increase in fuel prices after a date fixed in the contract. Revenues from third party maintenance services are generated from engine, airframe and component repairs and overhauls provided to third parties. Operating Expenses. Operating expenses consist of flight expenses, maintenance, fuel, depreciation and selling, general and administrative ("SG&A") expenses. Flight expenses are comprised principally of salaries and benefits for crews and other flight related personnel, hull and liability insurance of aircraft, aircraft and engine lease expense, crew travel and meal expenses, crew training costs, navigational expenses and other expenses necessary to conduct flight operations. Flight expenses attributable to crew salaries and benefits are particularly sensitive to crew utilization. Crews are guaranteed a fixed salary based upon 60 block hours per month. To the extent they actually fly less than 60 hours, the expense attributable to the fixed portion of their salaries is not offset by revenue. Crew utilization is measured by the actual hours flown as a percentage of the crew member's 60-hour guaranty. Flight expenses also include aircraft lease, or subcharter, expense incurred to lease or charter aircraft from other airlines, as well as costs associated with the Kalitta Companies' ground handling and flight planning operations. Flight expenses associated with scheduled and charter services, such as landing and parking fees and overflight fees are either paid directly by the Kalitta Companies' customer or billed to the customer on a direct pass-through basis. Pass-through expenses are offset by an equal amount of revenue derived from inclusion of those expenses in the aggregate amount charged to the customer. Maintenance expenses are comprised principally of labor, parts and supplies associated with the maintenance, repair and overhaul of the Kalitta Companies' aircraft and engines and maintenance services provided by others. Costs associated with major maintenance checks have been expensed when incurred. Kitty Hawk capitalizes the costs of major maintenance checks and, after the Merger, the Kalitta Companies' policies will be adjusted to conform with Kitty Hawk's policies. Costs associated with the modification of aircraft from passenger to freight capacity are capitalized when incurred and amortized over their expected useful lives, ranging from 7 to 14 years, depending on the type of aircraft. Maintenance expenses also include the cost of sales associated with third party maintenance revenues. Fuel expenses are comprised principally of fuel costs associated with the Kalitta Companies' scheduled and chartered cargo and passenger services. Fuel costs are either paid directly by the Kalitta Companies' customer or billed to the customer on a direct pass-through basis and are offset by an equal amount of revenue derived from inclusion of the fuel expense in the total price paid by the customer. Depreciation expenses are comprised principally of depreciation on aircraft, aircraft components and ground equipment and the amortization of capitalized airframe modifications and repairs. SG&A expenses are comprised principally of salaries and benefits for sales, administrative, accounting and information system personnel and corporate executives. Also included in administrative expenses are commissions paid to third party sales agents, advertising and marketing expenses and legal expenses. 52 54 RESULTS OF OPERATIONS OF THE KALITTA COMPANIES The following table sets forth, on a comparative basis for the periods indicated, the components of the Kalitta Companies' gross profit (in thousands) and the gross profit margin by revenue type:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1994 1995 1996 ----------------- ----------------- ----------------- Air freight carrier services: Revenues........................ $298,081 100.0% $359,404 100.0% $388,193 100.0% Costs of revenues............... 247,023 82.9 338,538 94.2 357,830 92.2 -------- ----- -------- ----- -------- ----- Gross profit.................... $ 51,058 17.1% $ 20,866 5.8% $ 30,363 7.8% ======== ===== ======== ===== ======== ===== Maintenance and other: Revenues........................ $ 7,449 100.0% $ 14,279 100.0% $ 36,348 100.0% Costs of revenues............... 4,484 60.2 9,135 64.0 22,316 61.4 -------- ----- -------- ----- -------- ----- Gross profit.................... $ 2,965 39.8% $ 5,144 36.0% $ 14,032 38.6% ======== ===== ======== ===== ======== =====
SIX MONTHS ENDED JUNE 30, -------------------------------------- 1996 1997 ----------------- ----------------- Air freight carrier services: Revenues............................................ $177,431 100.0% $182,352 100.0% Costs of revenues................................... 167,520 94.4 194,115 106.5 -------- ----- -------- ----- Gross profit (loss)................................. $ 9,911 5.6% $(11,763) (6.5)% ======== ===== ======== ===== Maintenance and other: Revenues............................................ $ 13,164 100.0% $ 14,488 100.0% Costs of revenues................................... 7,942 60.3 10,200 70.4 -------- ----- -------- ----- Gross profit........................................ $ 5,222 39.7% $ 4,288 29.6% ======== ===== ======== =====
53 55 The following table presents, for the periods indicated, consolidated income statement data expressed as a percentage of total revenues:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- REVENUES: Air freight carrier services...... 97.6% 96.2% 91.4% 93.1% 92.6% Maintenance and other............. 2.4 3.8 8.6 6.9 7.4 ----- ----- ----- ----- ----- Total revenues...................... 100.0 100.0 100.0 100.0 100.0 OPERATING EXPENSES: Flight............................ 37.8 45.2 35.4 36.0 41.8 Maintenance....................... 21.2 27.7 27.1 26.4 35.1 Fuel.............................. 18.8 14.6 19.5 21.3 18.0 Depreciation...................... 4.5 5.6 7.6 8.3 8.9 Selling, general and administrative................. 4.3 5.8 5.2 5.3 5.7 Provision for doubtful accounts... 0.7 0.5 0.2 0.8 0.3 ----- ----- ----- ----- ----- Total operating expenses............ 87.3 99.4 95.0 98.1 109.8 ----- ----- ----- ----- ----- Operating income (loss)............. 12.7 0.6 5.0 1.9 (9.8) ----- ----- ----- ----- ----- OTHER INCOME (EXPENSE): Interest expense, net............. (2.6) (3.9) (5.1) (5.3) (6.1) Other income net.................. 0.9 5.3 0.3 0.8 0.8 ----- ----- ----- ----- ----- Total other income (expense)........ (1.7) 1.4 (4.8) (4.5) (5.3) ----- ----- ----- ----- ----- Income (loss) before minority interest.......................... 11.0 2.0 0.2 (2.6) (15.1) Minority interest................... (0.9) (0.8) (0.2) (0.3) (0.5) ----- ----- ----- ----- ----- Net income (loss)(1)................ 10.1% 1.2% 0.0% (2.9)% (15.7)% ===== ===== ===== ===== =====
- --------------- (1) Prior to the Merger, the Kalitta Companies filed income tax returns under Subchapter S of the U.S. Federal Income Tax Code. Therefore, all taxable income or losses of each of the Kalitta Companies have passed through to the sole shareholder of the Kalitta Companies. SIX MONTHS ENDED AS OF JUNE 30, 1997 AS COMPARED TO THE SIX MONTHS ENDED AS OF JUNE 30, 1996 Revenues. Revenues increased $6.2 million, or 3.3%, to $196.8 million in first six months of 1997 as compared to $190.6 million in first six months of 1996. This increase reflected the increase of four aircraft available to the Kalitta Companies on a weighted average basis over the first six months of 1997 compared to the first six months of 1996, including two Lockheed L-1011-200s (one of which was modified from passenger to freighter configuration), one Boeing 727-200 freighter and one Douglas DC-8-50 freighter. Air freight carrier service revenue increased $4.9 million, or 2.8%, to $182.3 million in the first six months of 1997 from $177.4 million in the first six months of 1996. This increase resulted from three factors. First, the addition of a Lockheed L-1011-200 freighter in late 1996 to the Los Angeles-Honolulu route for AIC. Second, the Kalitta Companies realized the full period effect of contract charter flights into and out of Brazil and Columbia, which commenced late in the second quarter of 1996 when the Kalitta Companies was awarded operating authority for these countries. Third, the Kalitta Companies experienced an increase in the number of customers serviced in on-demand cargo services. Offsetting these increases, however, was (i) a reduction in the number of aircraft leased to DHL Airways, Inc., (ii) a reduction in the number of aircraft operated by the Kalitta Companies for Burlington and (iii) a decline in revenue generated from flights operated for the U.S. Military. The decline in revenues from the U.S. Military occurred because of increased competition for this business, as well as an increase in contract awards to airlines able to provide both freight and passenger service, the latter of which AIA was not qualified 54 56 by the military to provide. The Kalitta Companies have recently become eligible to provide passenger charter service for the U.S. Military. Third party maintenance and other revenue increased $1.3 million or 10.1%, to $14.5 million in the first six months of 1997 from $13.2 million in the first six months of 1996. The Kalitta Companies increased third-party engine maintenance work during the second half of 1996 and throughout the first six months of 1997 as a result of new contracts with Lufthansa and International Turbine. Operating Expenses. Operating expenses increased by $29.3 million, or 15.7%, to $216.3 million for the first six months of 1997 from $187.0 million in the same period in 1996. As a percent of revenues, operating expenses increased to 109.8% for the first six months of 1997 from 98.1% in the same period in 1996. Flight expenses increased $13.6 million, or 19.8%, to $82.2 million for the first six months of 1997 from $68.7 million in the same period in 1996. The increase was due primarily to (i) an increase in crew labor and training costs, (ii) increased subcharter expense and (iii) an increase in the overall level of operating activity. Crew labor and training costs increased and average crew utilization dropped to approximately 45% in the first six months of 1997 compared to approximately 53% in the prior year period, primarily as a result of an increased number of crews hired and trained in advance of anticipated increased levels of flight activity which did not materialize in part due to delays in acquiring aircraft. Expenses also increased because the Kalitta Companies were forced to subcharter three aircraft from third parties in order to meet service commitments during periods of unscheduled maintenance on their aircraft. Maintenance expenses increased $18.8 million, or 37.3%, to $69.1 million in the first six months of 1997, as compared to $50.3 million in the same six month period in 1996. Maintenance expenses increased as a percentage of revenues to 35.1% from 26.4%. The increase was primarily attributable to (i) engine repairs beginning in August 1996 relating to a Directive affecting the RB211 engines that power the Lockheed L-1011 aircraft and unanticipated repairs and overhauls on the JT3, JT8 and JT9 engines, (ii) start-up costs associated with the preparation of two L-1011 aircraft to initiate the Company's wide-body passenger charter service, (iii) a substantial increase in the number of aircraft serviced at the Oscoda maintenance facility and the related costs of components and aircraft parts and (iv) the addition of personnel required to perform the increased levels of aircraft maintenance and repair in the Kalitta Companies' facilities. Fuel costs decreased $5.1, million, or 12.6%, to $35.5 million for the six months ended June 30, 1997, as compared to $40.6 million in the same period in 1996. This decrease was attributable to a drop in the amount of charter activity for the U.S. Military. The Kalitta Companies' contracts with the U.S. Military include the cost of fuel in the contract price. Consequently, fuel expense is directly offset by revenue attributable to the fuel cost portion of the contract price. Depreciation expense increased $1.6 million, or 10.2%, to $17.5 million for the six months ended June 30, 1997 from $15.8 million for the same period in 1996, primarily as a result of the increase in the number of aircraft in the Kalitta Companies' fleet during the latter part of 1996 and in 1997. Selling, general and administrative expenses increased $1.2 million, or 11.9%, to $11.3 million for the six months ended June 30, 1997 from $10.1 million for the six months ended June 30, 1996, primarily due to increased payroll related costs. Administrative understaffing, the expansion of maintenance operations and increases in overall activity generated the need for increased support personnel in the areas of information systems, human resources and sales and marketing. In addition, the Kalitta Companies experienced an increase in fees associated with its indebtedness over the latter part of 1996 and into the first six months of 1997. As a result of the above facts, the Kalitta Companies experienced an operating loss of $19.4 million (9.9% of revenue) during the six months ended June 30, 1997 compared to an operating income of $3.6 million during the six months ended June 30, 1996. Other Income (Expense). Net interest expense increased $1.9 million, or 18.8%, to $12.1 million in the six months ended June 30, 1997 from $10.2 million in the six months ended June 30, 1996. The increase was due to increased borrowings relating to the acquisition of new aircraft and ground support equipment, as well 55 57 as increased borrowings under the Kalitta Companies' revolving credit line. The average interest rate on the Kalitta Companies' borrowings decreased to 9.5% from 9.9% in the prior year period. Gain on disposition of property and equipment, net, increased $0.5 million to $0.9 million for the six months ended June 30, 1997, as compared to $0.4 million for the first six months of 1996. The increase resulted from the sale of one Boeing 727-100 passenger aircraft in January 1997. Minority Interest. Minority interest represents the earnings attributable to the 40% of AIC owned by a third party. Minority interest increased $0.4 million to $0.9 million for the first six months of 1997, as compared to $0.5 million for the same period in 1996. The increase is attributable to higher earnings at AIC resulting from the addition of a Lockheed L-1011 aircraft to the Los Angeles-Honolulu route and the implementation of inter-island service in Hawaii. YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. Revenues increased $50.8 million, or 13.6%, to $424.5 million in 1996 from $373.7 million in 1995. This was due to an increase in scheduled cargo revenues and to an increase in the average number of aircraft available. In 1996, the Kalitta Companies added four Lockheed L-1011s, three Boeing 727s, one DC-8-50 and three additional Hansa aircraft to their fleet. Air freight carrier service revenues increased $28.8 million, or 8.0%, to $388.2 million in 1996 from $359.4 million in 1995. This increase was due to four factors. First, the Kalitta Companies increased the number of cities served by its overnight cargo service and introduced a second-day product. Second, AIC introduced inter-island flights in the Hawaiian Islands in December 1995, and added a second Lockheed L-1011 to its Los Angeles-Honolulu route. Third, the Kalitta Companies obtained new contract work for International Air Charter, AeroFloral and Fast Air, as well as additional charter work for the U.S. Military. Fourth, passenger charter revenues increased as a result of the Kalitta Companies decision to enter the passenger charter market for leisure travel in the fourth quarter of 1996. Offsetting these increases was a decrease in revenues due to the loss of the U.S. Postal Service (the "Postal Service") Christmas Network ("CNET") contract. In 1995, the Kalitta Companies' revenues from CNET were approximately $42.9 million, $4.1 million of which represented fuel and other charges passed- through to the Postal Service and booked by the Kalitta Companies as an expense. Third party maintenance revenue increased $22.0 million or 153.8%, to $36.3 million in 1996 from $14.3 million in 1995. This is due to engine maintenance contracts with Lufthansa and Spirit Airlines which were executed in 1996, as well as increased activity for the Kalitta Companies' small engine maintenance division because of continuous expansion of its customer base and the business failure of a competitor. Operating Expenses. As a percentage of total revenues, operating expenses decreased to 95.0% of revenues in 1996 from 99.4% in 1995. This decrease was largely due to the costs to hire and train flight and maintenance crews in 1995 in anticipation of the expansion of the Kalitta Companies' fleet in 1995. Flight expenses decreased $18.5 million, or 11%, to $150.3 million in 1996 from $168.8 million in 1995. The operation of additional aircraft in the latter part of 1995 with crews hired and trained in 1995 caused crew utilization in 1996 to increase to 52.0%, as compared to 44.0% in 1995. As a consequence, the Kalitta Companies were able to better absorb labor and benefit costs associated with these crews in 1996 than in 1995. Training costs associated with the reduction in the average number of crews decreased $0.4 million in 1996, as compared to 1995. Flight expenses also decreased because (i) the Kalitta Companies lost the 1996 CNET contract to Kitty Hawk which eliminated costs associated with the subcharter in 1995 of several aircraft required to fulfill the contract, (ii) the Kalitta Companies purchased a Boeing 747 freighter in June of 1996 that it had been leasing and (iii) subcharter expense for KFS decreased $1.6 million in 1996 as compared to 1995 because of an increase in available aircraft. These decreases were offset by increases in revenue related costs such as parking, air navigation and landing fees and ground handling costs resulting from increased flight activity in 1996 as compared to 1995. 56 58 Maintenance expense increased $11.7 million, or 11.3%, to $115.1 million in 1996 from $103.4 million in 1995. The increase was due to extensive engine maintenance and overhaul costs incurred in 1996 as compared to 1995 and, in part, as a consequence, an increase in employee-related maintenance costs. The increase was partially offset by a decrease in both maintenance work performed for the Kalitta Companies by outside parties and in the number of contract laborers which had both been used in 1995 to complete significant maintenance checks on a number of the Kalitta Companies' aircraft. Fuel costs increased $28.2 million, or 51.7%, to $82.7 million in 1996 from $54.5 million in 1995 because of an increase in charter activity for the U.S. Military, increased flight activity for on-demand charters, and fuel price increases during the latter half of 1996. This increase, however, did not have as significant an effect on the Kalitta Companies' results of operations because the increased fuel costs were included in the charges to customers and booked as revenues which offsets fuel expense. Depreciation expense increased $11.1 million, or 53.0%, to $32.1 million in 1996, as compared to $21.0 million in 1995 due to an increase in the number of aircraft brought into the Kalitta Companies' fleet during the latter part of 1995 and present during all of 1996. Selling, general and administrative expenses increased $0.2 million, or 1.0%, to $21.9 million in 1996 from $21.7 million in 1995. This increase was attributable to increases in administrative payroll related costs during 1996 over 1995. Other Income (Expense). Interest expense net increased $6.9 million, or 46.7%, to $21.6 million in 1996 from $14.7 million in 1995, due to an increase in indebtedness relating to the acquisition of aircraft and ground support equipment and to an increase in the Kalitta Companies' revolving credit line. Gain on disposition of property and equipment, net, decreased to $0.1 million for 1996 from $11.7 million for 1995. The net gain in 1995 mainly represents the sale of an aircraft engine, four Boeing 727-200 freighter aircraft, one Beech aircraft, one Boeing 727-200 passenger aircraft and one Douglas DC-8-50 freighter aircraft. Minority Interest. Minority interest in AIC decreased $2.0 million, or 64.5%, to $1.1 million in 1996 from $3.1 million in 1995. This decrease was due to increased costs associated with additional aircraft service, the start-up of inter-island service in Hawaii and an increase in cost for the use of aircraft. YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenues. Revenues increased $68.2 million, or 22.3%, to $373.7 million in 1995 from $305.5 million in 1994. This was due to new contract cargo business and additional aircraft capacity resulting from the completion of modification from passenger to freighter configuration of 13 aircraft acquired by the Kalitta Companies from late 1994 through the end of 1995, including one Lockheed L-1011-200, one Douglas DC-8 and 11 Boeing 727-200s. KFS also added three aircraft to its fleet in 1995. Air freight carrier service revenues increased $61.3 million, or 20.6%, to $359.4 million in 1995 from $298.1 million in 1994. This increase was due primarily to three factors. First, an increase in the number of cities serviced during 1995 over 1994 as well as an overall increase in lift capacity resulting from both an increase in the average number of aircraft operated per night by AIA and a change in the mix of the types of aircraft used by the Kalitta Companies. Second, the impact of the full year effect of AIC's service to Australia which commenced in the third quarter of 1994 led to increased revenues along with the addition by AIC of a weekend round trip between San Francisco and Honolulu in 1995. Third, six new contracts for which a majority of the revenues were realized in 1995, as well as AIA's 1995 CNET contract for the Postal Service during the holiday season led to increased revenues. Offsetting these increases were decreases in revenues generated in 1995 from flights for the U.S. Military as compared to 1994. Third party maintenance revenue increased $6.9 million or 93.2%, to $14.3 million in 1995 from $7.4 million in 1994. This was due to an increase in maintenance work for third parties. Operating Expenses. As a percentage of total revenues, operating expenses increased to 99.4% of revenues in 1995 from 87.3% in 1994. Most of the increase resulted from the cost to hire and train flight and 57 59 maintenance crews in connection with the expansion of the Kalitta Companies' fleet of aircraft with Boeing 747-200, Lockheed L-1011 and Boeing 727-200 freighters. Also contributing to the increased percentage of costs to revenue during 1995 was the one-time cost associated with the relocation of hub operations from Ypsilanti, Michigan to Terre Haute, Indiana in May 1995 at a cost of $2.6 million. The Kalitta Companies made the move to overcome operating restrictions at Willow Run Airport in Ypsilanti, Michigan relating to adverse weather conditions and inadequate facilities. Flight expenses increased $53.2 million, or 46.0%, to $168.8 million in 1995, as compared to $115.6 million in 1994. In anticipation of the expansion of its fleet, the Kalitta Companies increased its number of pilots by an average of 182 pilots, a 54.0% increase. Because not all of the new aircraft for which these pilots had been hired had yet been acquired or were still in modification, crew utilization for 1995 was approximately 44% as compared to approximately 53% in 1994. Additionally, travel and training costs associated with the new and current crew members increased approximately $3.9 million. Aircraft lease expense also increased 50.4% to $19.4 million in 1995 from $12.9 million in 1994 for three reasons. First, the Kalitta Companies leased a Boeing 747 aircraft to fulfill its obligations while casualty damage to one of its own Boeing 747s was being repaired. Second, the increase in the number of cities serviced forced the Kalitta Companies to subcharter additional aircraft. Finally, flight expenses were higher in 1995 than in 1994 because of an increase in revenue-related costs such as landing, air navigation and parking fees and ground handling costs. Maintenance expenses increased $38.7 million, or 59.8%, to $103.4 million in 1995 from $64.7 million in 1994 due to (i) an increase in regular, recurring maintenance on aircraft resulting from the growth in size of the fleet, (ii) unusually high maintenance costs because of special maintenance on damaged aircraft, (iii) a decision to perform "C-Check" level maintenance on all of its Boeing 727-200s while they were undergoing modification to freighters and (iv) additional maintenance required on the Boeing 727-200s to meet FAA "Aging Aircraft" requirements. See "Business -- Regulation." In conjunction with these costs, employee-related costs increased $12.4 million, or 49.6%, to $37.4 million in 1995, as compared to $25.0 million in 1994. In addition, costs for aircraft parts increased $12.8 million, or 50.8%, to $38.3 million in 1995 from $25.5 million in 1994. Finally, outside maintenance labor costs increased during 1995 to meet peak maintenance demands throughout the year. Fuel costs decreased $2.9 million, or 5.1%, to $54.5 million in 1995 from $57.4 million in 1994 because of a decrease in contract cargo service for customers where the Kalitta Companies were directly responsible for the cost of fuel. Depreciation expense increased $7.2 million, or 52.2%, to $21.0 million in 1995 from $13.8 million in 1994. This increase was the result of the significant number of aircraft which were modified to freighters and placed in revenue service during the second half of 1994 and in 1995, including two Boeing 747-200s, ten Boeing 727-200s, three Douglas DC-8s and one Lockheed L-1011 aircraft. KFS also added three aircraft to its fleet during 1995. Selling, general and administrative expenses increased $8.4 million, or 63.2%, to $21.7 million in 1995 from $13.3 million in 1994. The majority of this increase resulted from the addition of administrative staff to support expansion. In addition, during 1995, the Kalitta Companies incurred $1.9 million in professional services primarily consisting of consulting costs associated with improving its support systems. Other Income (Expense). Interest expense net increased $6.7 million, or 83.8%, to $14.7 million in 1995 from $8.0 million in 1994 due to an increase in indebtedness relating to the acquisition of aircraft, as well as the purchase of related ground support equipment. Net gain on disposition of property and equipment was $11.7 million in 1995, as compared to $3.4 million in 1994. The gain in 1995 resulted from the sale of an aircraft engine, four Boeing 727-200 freighters, one Douglas DC-8 freighter, one Boeing 727-200 passenger aircraft and one Beech aircraft. In June 1995, one of the Kalitta Companies' Boeing 747 aircraft sustained damage to the underside of its fuselage when wind shear conditions experienced on approach to the Panama City airport caused the fuselage to drag over some fixed landing lights and received an insurance award of $11.2 million (net of a $250,000 58 60 deductible) as a result of the casualty. The Kalitta Companies were able to use its own maintenance capability to complete repairs to the aircraft and obtain spare parts from an owned airframe which had zero book value. The cost incurred by the Kalitta Companies to complete the repair was approximately $3.1 million. The excess insurance proceeds resulted in a gain. However, the Kalitta Companies lost revenue during the 14 weeks while the aircraft was out of service, incurred costs to maintain crews and maintenance personnel and experienced the higher cost of increased use of a Boeing 747-200 freighter dry-leased to meet obligations to third parties while the damaged aircraft was in repair. Minority Interest. Minority interest in AIC increased $0.3 million, or 10.7%, to $3.1 million in 1995, as compared to $2.8 million in 1994 due to increased revenue activities. LIQUIDITY AND CAPITAL RESOURCES A discussion of the liquidity and capital resources of the Company after the Transactions and Refinancings is set forth below under "The Company's Liquidity and Capital Resources." Kitty Hawk. Kitty Hawk's capital requirements have been 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 fleet and, subsequent to the Note Offering, Kitty Hawk will have substantial debt service expenses. Kitty Hawk's funding of its capital requirements historically has been primarily from a combination of internally generated funds, bank borrowings and the proceeds of its initial public offering. In addition to purchasing aircraft, Kitty Hawk has leased aircraft and entered into a sale leaseback transaction to acquire aircraft and may enter into similar transactions in the future. Cash provided by operating activities was $11.9 million and $13.7 million in the six months ended June 30, 1997 and 1996, respectively. As of June 30, 1997 and 1996, Kitty Hawk had working capital of $10.6 million and $6.4 million, respectively. Cash provided/(used) by investing activities was $(33.5 million), $4.7 million and $(39.5 million) for the fiscal year ended August 31, 1996, the Transition Period and the six months ended June 30, 1997, respectively. Cash provided/(used) by financing activities was $18.3 million, $17.2 million and $9.3 million for the fiscal year ended August 31, 1996, the Transition Period and the six months ended June 30, 1997, respectively. As of September 30, 1997, Kitty Hawk had approximately $34.8 million of indebtedness with WFB, Bank One, Texas, N.A. and 1st Source Bank. In addition, in November 1996, in connection with Kitty Hawk's acquisition of a one-third undivided interest in four Falcon 20 jet aircraft, Kitty Hawk and the two other co-owners of such aircraft entered into a five year, $4.3 million term loan. See "Description of Certain Indebtedness." Capital expenditures were $39.5 million and $17 million for the six months ended June 30, 1997 and 1996, respectively. Capital expenditures for the six months ended June 30, 1997 were primarily for the overhaul of two JT8D-7 jet engines and the purchase of (i) two Boeing 727-200 aircraft, (ii) cargo and noise abatement modifications for two Boeing 727-200 aircraft, (iii) noise abatement equipment with respect to one DC-9-15F aircraft, (iv) six reconditioned JT8D-7 jet engines, (v) leasehold improvements to Boeing 727-200 aircraft, (vi) the lease and improvements of its 40,000 square foot headquarters facility, (vii) major maintenance checks and (viii) ground service equipment for use in the USPS Christmas 1997 Contract. Capital expenditures for the six months ended June 30, 1996 were primarily for the purchase of (i) three Boeing 727-200 aircraft and (ii) cargo and noise abatement modifications for two Boeing 727-200 aircraft. In October 1996, Kitty Hawk 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. As of October 24, 1997, Kitty Hawk has used approximately $28.9 million of the net proceeds of the initial public offering to fund these expenses. Kitty Hawk has purchased (i) one Boeing 727-200 freighter aircraft for $4.7 million, (ii) one Boeing 727-200 aircraft for $2.3 million which is being modified to cargo configuration for an additional cost of approximately $3.5 million (including 59 61 approximately $2.2 million for noise abatement equipment), (iii) one Boeing 727-200 aircraft for $3.5 million which was modified to cargo configuration for an additional cost of approximately $5.0 million (including noise abatement equipment for approximately $2.5 million), (iv) one Boeing 727-200 aircraft for $3.5 million which was placed into revenue service as a leased passenger aircraft until its next major maintenance check (approximately 3,000 flight hours) at which time Kitty Hawk currently anticipates modifying the aircraft to cargo configuration for an additional cost of approximately $5.0 million (including $2.5 million for noise abatement equipment) and (v) $5.0 million for partial payment on the 16 Boeing 727 aircraft acquired from the Kalitta Companies. In December 1996, Kitty Hawk amended its agreement with its supplier of noise abatement equipment to increase the number of hushkits it has firmly committed to purchase and to establish fixed prices. In connection with this new agreement, Kitty Hawk paid the vendor an additional $350,000 in deposits on future, firm orders valued between $13 and $17.5 million, depending on type selected. In fiscal year 1997, Kitty Hawk anticipates an aggregate capital expenditure of $8.0 million for noise abatement modifications. In fiscal year 1998, Kitty Hawk anticipates an aggregate capital expenditure ranging from $9 million to $11 million for noise abatement modifications to aircraft currently owned. In fiscal year 1998, Kitty Hawk anticipates an aggregate capital expenditure ranging from $18 million to $20 million for noise abatement modifications to the Boeing 727 aircraft acquired from the Kalitta Companies in September 1997. In the event Kitty Hawk acquires more aircraft than currently proposed, Kitty Hawk's anticipated aggregate capital expenditures for noise abatement modifications in fiscal year 1998 could materially increase. As of September 30, 1997, Kitty Hawk's fleet was comprised of 41 owned and 3 leased aircraft, which includes 32 Boeing 727 aircraft, 5 Douglas DC-9-15F aircraft and 7 turbo-prop Convairs. Kitty Hawk anticipates converting one passenger configured Boeing 727-200 aircraft to cargo configuration in 1998. These aircraft do not include Kitty Hawk's undivided one-third interest in four Falcon 20 jet aircraft leased to a third party operator. Service Bulletins and 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 Kitty Hawk'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. See "Risk Factors -- Government Regulation." As of September 30, 1997, Kitty Hawk owned 29 and leased 3 Boeing 727 aircraft, 29 of which were previously converted from passenger configuration to freighter configuration by the installation of a large cargo door and numerous interior modifications related to the installation of cargo container handling systems. The FAA has issued a proposed Directive, which if adopted, would limit the cargo capacity of 28 of these Boeing 727s until certain modifications are made. See "Business -- Aircraft Fleet." 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 to complete such checks. Two Convairs have been retired since December 31, 1996. The Kalitta Companies. The Kalitta Companies' capital requirements have been primarily for the acquisition and modification of aircraft and for the expansion and improvement of maintenance and support facilities and infrastructure. In addition, the Kalitta Companies had capital requirements for the requisite and periodic routine overhaul maintenance on aircraft. The Kalitta Companies also lease aircraft from time to time. Capital needs have historically been funded with a combination of cash flow from operations, aircraft sales and bank borrowings. Cash provided by operating activities was $2.8 million and $22.7 million for the first six months of 1997 and 1996, respectively. As of June 30, 1997, the Kalitta Companies had cash and cash equivalents of $2.7 million, as compared to $2.4 million as of June 30, 1996. The Kalitta Companies had a working capital deficit of $222.4 million at June 30, 1997, compared to a deficit of $195.3 million at June 30, 1996. The decrease in cash flow from operating activities was due primarily to the increase in net loss and a decrease in accounts receivable for the first six months of 1997 as compared to the first six months of 1996. Net cash 60 62 provided by operating activities was $26.4 million, $49.5 million and $33.8 million in 1996, 1995 and 1994, respectively. Net cash used in investing activities was $10.6 million and $19.8 million for the six months ended June 30, 1997 and 1996, respectively. Total capital expenditures decreased 52.5% to $14.1 million for the six months ended June 30, 1997 from $29.7 million for the same period in 1996. Expenditures in the first six months of 1996 represented the purchase of additional aircraft and capitalization of costs to modify the aircraft to freighter configuration. Net cash used in investing activities was $42.4 million, $120.9 million and $72.5 million in 1996, 1995 and 1994, respectively, and primarily represented additional aircraft added to the fleet, flight equipment acquired and capitalized airframe maintenance. Net cash used in investing activities in 1995 included costs of modification of the Kalitta Companies' Boeing 727-200 aircraft to freighters as a majority of these aircraft were acquired in 1994 and were placed in revenue service throughout 1995. Net cash provided by financing activities was $8.1 million for the six months ended June 30, 1997 as compared to net cash used in financing activities of $1.6 million in the six months ended June 30, 1996. Net cash provided by financing activities was $17.2 million, $67.8 million and $42.3 million in 1996, 1995 and 1994, respectively. Cash provided by financing activities for each year primarily represented additional borrowings to fund the Kalitta Companies' acquisition of aircraft and equipment and to assist in funding operations during those years. The Kalitta Companies' liquidity is affected by the seasonal nature of their businesses. Primarily because of the increase in airfreight during the Christmas holiday season, a significant portion of the revenues are earned in the fourth calendar quarter. During the first quarter, the Kalitta Companies typically experience lower levels of utilization and yields as demand for cargo charters is reduced relative to other times of the year. The Kalitta Companies have a revolving credit and term loan facility under an Amended and Restated Credit Agreement, as amended (the "Kalitta Companies Credit Agreement"), with Comerica Bank, Detroit, Michigan ("Comerica") and Heller Financial, Inc. ("Heller"). Under the Kalitta Companies Credit Agreement, the Kalitta Companies may borrow up to $55 million on a revolving credit basis, subject to a borrowing base formula (the "Credit Facility"). In addition, the Kalitta Companies may borrow up to an additional $5 million, subject to a borrowing base formula (the "Second Credit Facility"). As of June 30, 1997, the outstanding principal balance on the Credit Facility was $55 million and the outstanding principal balance of the Second Credit Facility was approximately $4.6 million. Amounts outstanding under the Credit Facility bear interest at a per annum variable rate equal to Comerica's prime rate plus 1.25% (subject to certain adjustments as set forth in the Credit Agreement), and AIA and KFS are obligated to make monthly payments of accrued interest. All of the indebtedness under the Credit Facility must be repaid by December 9, 1999. Pursuant to the Credit Agreement, Comerica has made two additional loans to AIA to finance aircraft acquisitions, one in the principal amount of $13.8 million outstanding on June 30, 1997 (the "Bridge Loan"), and the other in the principal amount of $3.9 million outstanding on June 30, 1997 (the "Mortgage Loan"). Both the Bridge Loan and the Mortgage Loan are payable in monthly installments of principal and interest with interest accruing at Comerica's prime rate, plus 2% and 1.75%, respectively. The Bridge Loan is due on December 9, 1999, and the Mortgage Loan on May 19, 1999. In addition, AIA has a term loan from Comerica (the "Comerica Term Loan") under a separate term loan agreement (the "Comerica Term Loan Agreement") to which Heller is not a party. AIA used the Comerica Term Loan to refinance certain other indebtedness owed to Comerica. As of June 30, 1997, the outstanding principal balance of the Comerica Term Loan was $13.9 million. The principal balance accrues interest at a per annum variable rate equal to Comerica's prime rate plus two percent, subject to certain adjustments. The Comerica Term Loan is payable in equal monthly principal installments of approximately $309,090 plus accrued interest until February 15, 2001, when the entire outstanding principal amount and all accrued interest is due. The loans under the Credit Agreement and the Comerica Term Loan Agreement are secured by substantially all of the assets of AIA, KFS and FOL, except for certain assets pledged to other lenders and for 61 63 certain real estate. In addition, the Credit Agreement contains restrictions on the ability of AIA, KFS and FOL to pledge assets to their respective future lenders. AIA and Mr. Kalitta have guaranteed all indebtedness owing to Heller and Comerica by KFS or FOL; and Mr. Kalitta, KFS and FOL have guaranteed all indebtedness owed to Heller and Comerica by AIA. The Credit Agreement, Comerica Term Loan Agreement and related documents contain a number of restrictive covenants, as well as affirmative covenants requiring the maintenance of certain financial conditions. At December 31, 1996 and continuing in 1997, the Kalitta Companies were in violation of these covenants, as well as other covenants contained in the Credit Agreement and the related documents. See "Risk Factors -- Recent Financial Performance of the Kalitta Companies." The Kalitta Companies have generally financed the acquisition and, when necessary, the modification of aircraft to freighter configuration, with the proceeds of financings secured by airframes, engines and, in some cases, ground handling equipment. Sources for this type of financing presently include Comerica, FINOVA Capital Corporation ("Finova"), First National Bank of Ohio, Sanwa Business Credit Corporation, NationsBank (formerly known as Boatmen's National Bank of Saint Louis), 1st Source Bank, Fleet Credit Corporation, General Electric Capital Corporation, First Security Bank National Association, as trustee, Morgans Waterfall, BSI Nassau (Bahamas), Michigan National Bank and Concord Capital Corporation. As of June 30, 1997, total indebtedness of the Kalitta Companies (excluding payables, accrued liabilities, minority interest and indebtedness incurred under the Credit Facility and the Second Credit Facility) was approximately $188.8 million, approximately $71.5 million of which was held by Finova. Approximately $128.5 million of this indebtedness accrues interest at fixed rates ranging from 6.4% to 18.0% per annum, while the remainder accrues interest at variable rates ranging from one to four percent over a specified per annum prime or other base rate. Maturities of term indebtedness range between one and seven years, with current maturities at June 30, 1997 of approximately $43.8 million. The Kalitta Companies have been and continue to be in default with respect to essentially all of their lenders, including Comerica and Finova. The defaults relate to non-compliance with certain financial, operating and other covenants that restrict the activities of the Kalitta Companies. These covenants restrict, among other things, the ability to grant liens, incur indebtedness, make capital expenditures, make investments, prepay debt, pay dividends and redeem equity. See "Risk Factors -- Recent Financial Performance of the Kalitta Companies." All of the indebtedness of the Kalitta Companies will be retired with the net proceeds of this Common Stock Offering and the Note Offering, subject to the payment of approximately $3 million in prepayment penalties. See "Use of Proceeds." THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are expected to be primarily for the acquisition and modification of aircraft, working capital and the expansion and improvement of maintenance and support facilities. In addition, the Company has, and will continue to have, capital requirements for the requisite periodic and major overhaul maintenance checks for its fleet and for debt service. The Company also has seasonal working capital needs, because it generates higher revenue and cash flow in the fourth quarter and lower revenue and cash flow in the first quarter. Funding of capital requirements has historically been through internally generated funds, bank borrowings, aircraft sales and, in the case of Kitty Hawk, its initial public offering. From time to time, the Company has entered into sale/leaseback transactions to acquire aircraft and may continue to do so in the future. Upon consummation of the Transaction and the Refinancings, all of the existing debt of Kitty Hawk and the Kalitta Companies will be refinanced. The net proceeds of this Common Stock Offering, the Note Offering and the Term Loan will be used to refinance this indebtedness. See "Use of Proceeds" and "Descriptions of Certain Indebtedness." The Term Loan will be incurred to refinance the indebtedness incurred in September 1997 to finance the acquisition of 16 Boeing 727s from the Kalitta Companies. The Term Loan will have an initial principal amount of $45.9 million, will mature five years after issuance and will be payable in equal quarterly principal installments of $2.25 million commencing in 1999 and ending in 2002, with a balance of approximately 62 64 $12.15 million due at maturity. Interest on the Term Loan will accrue initially at LIBOR plus 2.75% or the Base Rate plus 1.25%, subject to reduction. See "Description of Certain Indebtedness." The Term Loan will be secured by accounts receivable, all inventory (including rotables), intangibles and contract rights, cash and the 16 Boeing 727s and related engines recently acquired from the Kalitta Companies. In addition, to fund ongoing capital requirements, including possible acquisitions, the Company will enter into the New Credit Facility with WFB, individually and as agent for various lenders. The New Credit Facility will provide the Company with up to $100.0 million in revolving loans to be secured by the same collateral as the Term Loan. The facility will bear interest initially at LIBOR plus 2.5% or a Base Rate plus 1%, subject to adjustment within the same parameters as the Term Loan. The Base Rate is WFB's Prime Rate or the Federal Funds Rate plus 5%. Borrowings under the New Credit Facility will be subject to borrowing base limitations based on eligible inventory and accounts receivable and will mature five years from execution of the New Credit Facility. The Company currently estimates that it will make in the fourth quarter of 1997 and in 1998 an aggregate capital expenditure of $100 million and will make substantial capital expenditures thereafter. However, the foregoing forward-looking statement is only a current estimate and actual capital expenditures could be substantially different. The amount of capital expenditures will depend on the extent and timing of purchases of aircraft (including the Optioned Boeing 747s), the cost and availability of parts to modify aircraft to freighter configuration and the timing and content of Service Bulletins and Directives, all of which are beyond the Company's control. See "Risk Factors -- Capital Intensive Nature of Aircraft Ownership and Operation." In October 1997, the Company acquired one Boeing 747 and expects to make approximately $8.0 million of capital expenditures in the fourth quarter of 1997 to modify this Boeing 747 to freighter configuration. In the fourth quarter of 1997 and/or 1998 the Company expects to acquire the Optioned Boeing 747s for $40 million and to modify these aircraft to freighter configuration for approximately $16.0 million. There can be no assurance that the costs to acquire or modify these aircraft will not exceed these amounts. Additionally, the Company anticipates converting one Boeing 727 aircraft from passenger to freighter configuration during 1998 at a cost of approximately $5.0 million. During 1998, the Company anticipates capital expenditures ranging from $27 million to $32 million for noise abatement modifications to DC-9 and Boeing 727 aircraft currently owned. The Company's total capital expenditures for noise abatement modifications for its existing fleet is expected to be approximately $93.4 million. The entire fleet must be Stage III compliant by the year 2000. In the event more aircraft are acquired, anticipated capital expenditures for noise abatement modifications could materially increase. Service Bulletins and Directives issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis cause certain of the Company's aircraft to be subject to extensive aircraft examinations and require certain of the Company's 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 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. See "Risk Factors -- Government Regulation." The Company operates a fleet of 31 Boeing 727s, all of which were previously converted from passenger configuration to freighter configuration by the installation of a large cargo door and numerous interior modifications related to the installation of cargo container handling systems. The FAA has issued a proposed Directive, which if adopted, would limit the cargo capacity of 30 of these Boeing 727s until certain modifications are made. The cost to make such modifications and the amount of revenue that could be lost securities or obtain additional credit facilities. However, there can be no assurance that the Company will be able to obtain additional financing. SEASONALITY Certain of the Company's customers engage in seasonal businesses, especially the U.S. Postal Service and customers in the automotive industry. As a result, the Company's air freight charter logistics business has historically experienced its highest quarterly revenues and profitability during the fourth quarter of the 63 65 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 tables reflect certain selected quarterly operating results, which have not been audited or reviewed. The information has been prepared on the same basis as the Consolidated Financial Statements appearing elsewhere in this Prospectus 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. KITTY HAWK
QUARTER ENDED ONE MONTH QUARTER ENDED ----------------------------------------------------------------- ENDED -------------------- NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1996 1996 1996 1996 1996 1997 1997 ------------ ------------ ------- ---------- ------------ ------------ --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues....... $36,045 $48,577 $22,504 $35,289 $25,414 34,572 $28,102 $32,366 Gross profit......... 5,936 8,190 3,265 6,124 5,118 7,288 5,355 7,451 Operating income..... 3,564 2,447 897 2,126 2,851 5,868 2,571 4,679 Net income........... 1,956 1,273 182 698 1,632 3,661 1,414 2,561 Net income per share.............. $ 0.25 $ 0.16 $ 0.02 $ 0.09 $ 0.18 $ 0.37 $ 0.14 $ 0.25
THE KALITTA COMPANIES
QUARTER ENDED -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1996 1996 1996 1996 1997 1997 --------- -------- ------------- ------------ --------- -------- (IN THOUSANDS) Total revenue............................ $ 84,303 $106,292 $110,417 $123,529 $ 92,898 $103,943 Gross profit (loss)...................... (1,440) 16,573 14,921 14,341 (12,058) 4,583 Operating income (loss).................. (6,626) 10,233 8,707 9,180 (17,940) (1,503) Net Income (loss)........................ $$(12,019) $ 6,461 $ 2,771 $ 2,770 $(22,786) $ (8,157)
64 66 BUSINESS The description of the business of the Company that follows is the business of Kitty Hawk and the Kalitta Companies on a combined basis as if the Merger had been consummated. The closing of this Common Stock Offering is conditioned on (i) the concurrent consummation of the Merger and the Note Offering and (ii) entering into the New Credit Facility. GENERAL The Company is a leading U.S. and international air freight carrier and a leading provider of air freight logistics services for the delivery of freight on a highly-reliable, time sensitive basis. The Company also provides air passenger charter services and aircraft maintenance services. INDUSTRY OVERVIEW Air Freight Carrier Services. The market for air freight services is served by an industry which is composed of (i) "door-to-door" express package delivery companies such as Federal Express and United Parcel Service, (ii) "freight-forwarders" that contract for air freight carrier service, (iii) air freight carriers that provide scheduled air freight delivery service and (iv) air freight carriers that provide on-demand charter service. These participants in the air freight services industry provide same-day, next-day and/or two-day delivery services. A number of air freight carriers, including the Company, provide a combination of these services. The Company directly participates in the same-day service segment of this industry by providing (i) regularly scheduled air freight service between certain airports, (ii) contract charter services and (iii) on-demand charter services. The Company also participates indirectly in the next-day and two-day freight delivery business by providing primary and additional lift capacity through contract charters for integrated air freight companies (such as Burlington Air Express, Inc., DHL Airways, Inc. and Emery Worldwide Airlines, Inc.) on designated routes for specified time periods. The Company has also historically provided contract charters for mail delivery for the U.S. Postal Service. The Company does not engage directly in the next-day or two-day "door-to-door" delivery business and, therefore, does not compete directly with its customers in this segment. According to the Boeing Report, the world air cargo market grew at an average rate of more than 8% per year from 1970 to 1995 as measured in revenue ton kilometers, more than 2.5 times the growth rate of world Gross Domestic Product. Also, according to the Boeing Report, the world air freight market is expected to increase at 6.7% annually through 2015. Management believes this projected growth in the world air freight market will be fueled by many factors, including economic growth, relaxation of international trade barriers, increasingly time-sensitive product delivery schedules and increased use of "just-in-time" inventory management systems as well as a shift towards dedicated air freight carriers and away from utilizing cargo space in commercial airlines due to the higher levels of service and reliability. The foregoing projected growth rate is only an estimate and there can be no assurance that such rate of growth will be achieved. See "Risk Factors." Air Freight Logistics Services. Demand for air freight charter logistics services is driven by demand for same day delivery of time sensitive freight. Factors which have contributed to the growth in demand for air logistics services include (i) outsourcing -- an increasing number of companies requiring same-day delivery of freight have decided to outsource air freight delivery operations; (ii) "just-in-time" inventory management -- many manufacturers have adopted just-in-time inventory management techniques which, while enhancing such manufacturers' inventory turnover, increases the importance of just-in-time delivery of needed component parts; and (iii) increased customer expectations -- more companies are requiring suppliers to meet specified delivery requirements in order to remain qualified as suppliers and such suppliers will utilize same day air freight as necessary to meet these delivery requirements. In contrast to the market for next-day and two-day freight delivery services, the Company believes that the market in North America for on-demand charters is served by hundreds of air freight carriers, the vast 65 67 majority of which are privately held, operate from only one location and do not coordinate "door-to-door" charter delivery services to the extent of the Company's air logistics business. Other. The Company believes there is a substantial market for aircraft maintenance services in the United States and a trend towards a limited number of providers of all levels of maintenance checks on large and small jet engines. Because of the Company's comprehensive engine and aircraft maintenance capabilities, management believes it is well positioned to capitalize on this trend. The Company's passenger charter airline primarily caters to leisure travelers booking scheduled trips through tour operators and does not generally compete with scheduled passenger airlines. In addition, U.S. passenger charter operators have traditionally provided service to the U.S. Military to supplement its lift capacity, particularly during times of conflict. COMPETITIVE STRENGTHS The Company believes that the following factors are competitive strengths and promote strong relationships with its diversified customer base. - Established Market Position. The Company, including its predecessors, has provided air freight carrier services for more than 30 years. The Company's extensive fleet and the diversity of its air freight carrier services (scheduled, contract charters and on-demand charters) have enabled it to become a leading U.S. and international air freight carrier. The Company has a diversified customer base, including (i) freight forwarders such as Burlington Air Express, Eagle USA and Emery Worldwide Airlines, (ii) U.S. government agencies such as the U.S. Postal Service and the U.S. Military and (iii) businesses such as General Motors and Boeing. - Attractive Fleet Characteristics. The Company believes that it has been successful in purchasing and modifying aircraft for its own fleet at favorable costs. The aircraft in the Company's fleet range from Boeing 747s to prop aircraft, enabling the Company to provide its customers with the aircraft type best suited to their particular transportation needs. The size and diversity of its fleet also allows the Company to deploy aircraft among its three air freight carrier service lines in a manner which improves fleet utilization. - Broad Service Capabilities. The Company believes that its air freight carrier services are attractive to its customers for several reasons, including (i) its history of providing reliable service, (ii) its ability to provide time-definite air transportation of almost any type or size of freight to most destinations worldwide upon short notice, (iii) its ability to manage critical freight shipments in North America from pick-up through delivery and (iv) its ability to provide its customers with real time updates of aircraft location and progress. In addition, the Company is able to coordinate its domestic and international scheduled services to offer customers reliable freight delivery service to and from North America and the Pacific Rim and Central and South America. The Company's capabilities are enhanced by its management information systems which enable the Company to continually monitor its flight operations, thereby facilitating aircraft and flight crew scheduling. GROWTH STRATEGIES The Company's revenue has grown significantly over the last several years and the Company believes it can continue to increase revenues through the following opportunities: - Expansion of ACMI Charter Business. The Company believes there are, and will continue to be, opportunities to obtain ACMI contracts with international air carriers due to the projected shortage of wide-body aircraft needed to service those carrier's markets. The Company plans to focus its expansion efforts in the European, South American and Asia/Pacific markets and to connect route systems in those markets with its scheduled North American route systems. The Company recently acquired one Boeing 747 which it is currently converting to freighter configuration and has an option to acquire the Optioned Boeing 747s which it expects to convert to freighter configuration. 66 68 - Expansion of On-Demand Charter Business. The Company believes there are significant opportunities to grow its on-demand charter business because of continuing demand for expedited air freight services, especially in the case of "just-in-time" inventory systems and other time sensitive shipments. In addition to improving the utilization of the Kalitta Companies' aircraft, the Company anticipates purchasing additional aircraft to capitalize on this expected growth. - Expansion of Third Party Maintenance Services. The Company is one of the few dedicated air freight carriers in the world capable of maintaining and repairing aircraft which range in size from Boeing 747s to prop aircraft. Although the Company currently provides aircraft maintenance services to several customers, including Lufthansa, the Company intends to significantly increase marketing of its third party maintenance services. In particular, the Company intends to focus on marketing jet engine overhauls and maintenance, for which management believes there is a trend toward a limited number of service providers. - Expansion of Scheduled Freight Business. Because of the growth in the amount of freight shipped through its scheduled overnight freight hub in Terre Haute, Indiana, the Company anticipates moving its hub from Terre Haute to a new facility in Fort Wayne, Indiana in the spring of 1999. This new facility is expected to have nearly twice the sorting capacity of the Terre Haute, Indiana facility. In addition, the new facility is designed to improve productivity by reducing the time to load and unload aircraft and by decreasing sorting times. - Strategic Acquisitions. The Company will, from time to time, pursue acquisitions that enable it to (i) acquire complementary aircraft at favorable costs, (ii) expand its operations in selected geographic areas or (iii) achieve other strategic or operational benefits. SERVICES AIR CARRIER SERVICES The Company uses a diversified fleet of four Boeing 747s, six Lockheed L-1011s, 19 Douglas DC-8s, five Douglas DC-9s, 31 Boeing 727s and seven turbo-prop Convairs to provide air freight services on (i) a regularly scheduled basis between certain airports, (ii) a contract charter basis and (iii) an on-demand charter basis. Scheduled Freight Services Domestic. The Company operates a scheduled airport-to-airport air freight carrier service which provides overnight delivery to and from 47 cities in the United States. Freight received each evening is delivered by 8:00 a.m. the next day, Tuesday through Friday mornings, throughout the year. The majority of overnight deliveries are routed through the Company's 90,000 square foot sorting center located at the Hulman Regional Airport in Terre Haute, Indiana. In the first six months of 1997, an average of 1,055 shipments, totaling approximately 442 tons of freight, were processed during each nightly primary sorting operation at the Hulman Regional Airport. The Company's right to use its space at the Hulman Regional Airport expires in August 1998. The Company is currently negotiating an extension of this lease through the spring of 1999, at which time the Company anticipates relocating its sorting operations from the Hulman Regional Airport to the Fort Wayne-Allen County Airport in Fort Wayne, Indiana in the spring of 1999. This new facility is expected to permit the Company to handle nearly twice the sorting capacity of the Terre Haute facility. In addition, the facility is designed to improve productivity by reducing the time to load and unload aircraft and decreasing sorting times. See "Risk Factors -- Availability of Facilities" and "Business -- Ground Facilities." The Company's overnight operation caters primarily to freight-forwarders and other cargo airlines which either handle ground transport themselves or contract with others to do so. The Company competes with certain of these companies that ship large and odd-sized freight, including the United Parcel Service, Emery Air Freight and Burlington Air Express, as well as commercial passenger airlines which provide freight service on their scheduled flights. 67 69 The Company's scheduled air freight service currently transports air freight to and from airports located in 23 cities. In addition, the Company contracts with third parties to transport freight between those 23 airports and 24 other airport locations at which the Company receives and delivers freight at scheduled times. The following is a list of the current delivery locations for the Company's scheduled operations:
AIRPORT DELIVERY LOCATIONS TRUCK DELIVERY LOCATIONS -------------------------- ------------------------ Atlanta, GA El Paso, TX Newark, NJ Albany, NY Grand Rapids, MI Omaha, NE Baltimore, MD Hartford, CT Orlando, FL Chicago, IL Indianapolis, IN Pittsburgh, PA Boston, MA Houston, TX Philadelphia, PA Cincinnati, OH Jacksonville, FL San Diego, CA Charlotte, NC Kansas City, KS San Francisco, CA Columbus, OH Joplin, MO South Bend, IN Cleveland, OH Los Angeles, CA Seattle, WA Dayton, OH Louisville, KY Springfield, MO Dallas/Fort Miami, FL Terre Haute, IN Detroit, MI Milwaukee, WI St. Louis, MO Worth, TX Minneapolis, MN Toronto, Ontario (Canada) Washington, D.C. Nashville, TN Tampa, FL Denver, CO Memphis, TN Ypsilanti, MI Fort Wayne, IN New York, NY Wichita, KS
International. The Company provides scheduled international service through American International Cargo, a general partnership in which the Company owns a 60% interest. AIC was formed in October 1992. The 40% interest in AIC which is not owned by the Company is owned by Pacific Aviation Logistics, Inc., which also serves as the managing partner of AIC. AIC operates scheduled air freight service between Los Angeles and Honolulu every Tuesday through Saturday and each Saturday, from Honolulu to the South Pacific and Asia, including Pago Pago, Auckland, Melbourne, Singapore, Hong Kong and Anchorage. AIC also operates scheduled air freight service five times per week between Los Angeles and Honolulu and the Hawaiian Islands. AIC charters from the Company under ACMI contracts a Boeing 747, a Lockheed L-1011 and a Boeing 727 to provide these scheduled air freight services. The Company believes the contracts for these services contain hourly rates that are below market rates. However, the Company can adjust these rates at any time, other than the hourly rate for the Boeing 747 which is fixed through the end of 1997. AIC is responsible for the cost of fuel, landing fees and ground handling charges. Contract Charter Freight Services The Company provides air freight charter services on a contractual basis for a variety of customers, including the U.S. Postal Service, the U.S. Military and freight forwarders and other airlines including Burlington Air Express, Emery Worldwide Air Freight Co., DHL Airways, Inc., Ting Hong Oceanic Enterprises Co., Ltd., Pacific East Asia Cargo Airlines, Inc., Japan Airlines and AeroLineas Argentina S.A. ACMI Domestic. The terms of the Company's ACMI contracts vary, but they 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, landing and parking fees, ground handling expenses and aircraft push-back costs. 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 Company is permitted under its ACMI Contracts to utilize and, in fact often does utilize, its aircraft in on-demand service in the periods between ACMI contract flights. ACMI International. The Company operates ACMI contracts in foreign countries as well as between the U.S. and foreign countries. The ACMI contracts 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. See "Risk Factors -- Government Regulation." Therefore, the Company's route structure is limited to areas in which customers gain authority from the relevant governments. The Company currently supplies supplemental airlift capacity to the flag carriers of five Central American countries, including Aviateca (Guatemala), Taca International Airlines (El Salvador), Nica 68 70 (Nicaragua), Copa (Panama) and Lacsa (Costa Rica). Because these airlines are the national airlines of their respective countries, the Company receives operating authority for each of those countries. The Company also has operating authority for Brazil, Columbia and Ecuador. From its Miami location, the Company currently operates four trips per week to Brazil pursuant to a contract with International Air Charter and six trips per week to Cali and Medellin, Columbia for AeroFloral for the shipment of fresh flowers. In addition, the Company operates two Boeing 727 aircraft in ACMI service between countries in the Pacific Rim. U.S. Postal Service. The Company has historically performed a variety of services for the U.S. Postal Service, ranging from regularly scheduled delivery throughout the year to special contracts bid by the U.S. Postal Service to meet increased demand during the Christmas holiday season. Similar to an ACMI contract, the Company's contracts with the U.S. Postal Service generally allow the Company to pass-through its fuel costs, landing charges and other variable costs. Accordingly, the Company is not generally at risk of loss in the event these variable costs increase during the term of these fixed-price arrangements. Since 1993, the Company has been the prime contractor for the "Christmas Network" established by the U.S. Postal Service to provide air transportation and ground handling services primarily for second-day mail among a network of domestic cities during the December holiday rush. The U.S. Postal Service awards contracts periodically pursuant to a public bidding process that considers quality of service and other factors, including to a lesser extent price. Recently, the U.S. Postal Service notified the Company that it intends to renew the Company's contract for the 1997 "Christmas Network." The Company is currently making scheduled mail flights from Seattle to Anchorage for the U.S. Postal Service six days per week. The Company's contract for this service runs through February 1998 and is subject to annual renewal by either the Company or the U.S. Postal Service. In general, the Company's contracts with the U.S. Postal Service can be canceled by either party upon 30 days notice. U.S. Military. The Company has historically provided air freight charter services for the U.S. Military. The U.S. Military pays the Company's fuel costs, landing fees and other variable charges. The Company has recently become eligible to operate passenger charters for the U.S. Military. The Company believes that its ability to provide both air freight and air passenger charter service to the U.S. Military will enhance its ability to obtain contract charters for the U.S. Military. On-Demand Charter Freight Services The Company's aircraft are utilized to fly on-demand charters for customers of the Company's air logistics business. Approximately 7.1%, 8.7%, 9.8% and 8.7% of the on-demand charters managed by Kitty Hawk during fiscal years 1994, 1995 and 1996 and the six months ended June 30, 1997, respectively, were flown on Kitty Hawk's aircraft. With the addition of the Kalitta Companies aircraft upon consummation of the Merger, the Company will direct a higher percentage of on-demand charters to its fleet, rather than to third party carriers. On-demand contract charters flown on the Company's aircraft generate a higher gross margin to the Company than charters subcontracted to third party carriers. Another on-demand service provided by the Company is medical air ambulance services. Air Passenger Charters The Company operates a fleet of 33 passenger configured aircraft, including two Boeing 747s, two Lockheed L-1011s, 20 Lear jets and 9 other small aircraft. The Company's principal customers for large aircraft air passenger charters are independent tour operators, cruise lines, sponsors of incentive travel packages and specialty charters and passenger airlines that "wet" lease aircraft. Sales to tour operators represent the most significant portion of the Company's passenger charter business. These leisure-market programs are generally contracted for repetitive, round-trip patterns, operating during seasonal periods. The tour operator pays a fixed price for use of the aircraft and assumes responsibility and risk for the actual sale of the available aircraft seats and fuel increases. The Company also operates on-demand passenger charter flights using large and small aircraft. 69 71 AIR FREIGHT CHARTER LOGISTICS SERVICES General. The Company is a leading provider of same-day air freight charter logistics services in North America. The Company arranges the delivery of time sensitive freight utilizing aircraft of third party air freight carriers as well as its own fleet. On-demand air charters of 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. The Company's air freight 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 Company has managed a broad variety of freight shipments including military equipment, satellites, rescue/disaster recovery supplies and exotic animals. The customers of the Company's on-demand air freight charter 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. For the six months ended June 30, 1997, Kitty Hawk arranged an average of approximately 37 on-demand charters per day and has arranged as many as 208 charters in a single day. 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. The Company provides logistics services 24 hours per day, 365 days per year. Database, Information Software and Tracking Systems. The Company 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 detailed carrier profile for over 500 air freight carriers that provide on-demand charter service and information concerning ground transportation and aircraft loading companies in North America. The Company has implemented an Internet system to provide its account managers with real-time updates on available third party on-demand charter aircraft across North America. The Company believes that this system enables it to meet customer demands more efficiently and quickly. In addition, the Company anticipates marketing its services to firms engaged in direct marketing over the Internet. 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, the Company 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 current weather data and other information necessary 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. The Company operates a proprietary software system ("HawkEye"), which was developed internally by its full time programming and computer support staff. HawkEye allows account managers to track an aircraft's progress from origin to destination on his or her computer screen and on the control room's main projection board. 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 HawkEye is a direct data feed obtained from the FAA's Air Traffic Control computer system. The Company believes that its computer systems are generally year 2000 compliant. The Company does not know whether the computer systems of its customers, suppliers, vendors and air logistics services providers are generally year 2000 compliant. 70 72 AIRCRAFT MAINTENANCE SERVICES General. The Company is one of the few dedicated air freight carriers in the world capable of maintaining and repairing its own aircraft fleet (with the exception of certain aircraft engine components), which range in size from its Boeing 747s to its small prop aircraft. As a result, the Company has the capacity to provide aircraft maintenance services to other aircraft operators. The Company's maintenance services to third parties include primarily engine overhauls and air frame repairs. In the last year, the Company serviced the aircraft of Lufthansa, Spirit Airlines and Aero California. The Company has extensive maintenance facilities in Oscoda and Ypsilanti, Michigan and Dallas, Texas. Maintenance services at these facilities operate twenty-four hours per day, seven days per week. See "Business -- Ground Facilities" below. Engine and Airframe Maintenance. The Company provides FAA-certified inspection, maintenance, overhaul and repair services for large and small jet engines and auxiliary power units (with the exception of certain aircraft engine components) at both the Ypsilanti and Oscoda facilities, including all levels of maintenance checks on large and small jet engines and auxiliary power units. The Company also performs all levels of aircraft maintenance checks, as well as modifying certain aircraft from passenger to freighter configuration. In addition, the Company performs avionics maintenance, component overhaul, strip and paint operations, sheet metal fabrications and repair and other related services. The Company believes that it is one of a limited number of providers of all levels of maintenance checks on large and small jet engines for third parties. Aircraft Components, Instruments and Accessories. The Company is certified by the FAA to service the aircraft and engine accessories used in its fleet. These accessories include hydraulic, pneumatic, electrical, mechanical and electronic aircraft components. The Company also maintains an FAA-approved station for repair of a wide variety of cockpit instrumentation. This portion of the Company's business, operated as the Aerodata Aircraft Instrument Division, services instrumentation, not only for the Company, but also for outside customers, including the Pentastar Aviation Division of the Chrysler Corporation, Reliant Airlines and American Trans Air, Inc. AIRCRAFT FLEET The Company currently owns 124 aircraft and leases 5 aircraft from third parties, not including three aircraft held for sale and the Company's undivided one-third interest in four Falcon 20C jet aircraft. Of these aircraft, the Company operates 120 aircraft in revenue service. The following is a summary of certain information on these aircraft: Large Aircraft
NUMBER OPERATED NUMBER NUMBER IN MANUFACTURER OWNED BY LEASED BY REVENUE NUMBER STAGE III AND MODEL SERIES(1) THE COMPANY THE COMPANY SERVICE CONFIGURATION MAXIMUM PAYLOAD(2) COMPLIANT(3) - --------------- --------- ----------- ----------- -------- ------------- -------------------- ---------------- Boeing 747 200 4 -- 2(4)(5) Freight 213,000-245,000 lbs. 4 Boeing 747 100 3 -- 2(5) Freight 218,000 lbs. 3 Boeing 747 100 2 -- 2 Passenger 476 passengers 2 Lockheed L-1011 200 6 -- 6 Freight 125,000 lbs. 6 Lockheed L-1011 200 2 -- 2 Passenger 354 passengers 2 Douglas DC-8 60 11 -- 11 Freight 80,000-112,000 lbs. 6 Douglas DC-8 50 9 -- 8(6) Freight 58,500-97,300 lbs. 0 Boeing 727 200 24 4 28 Freight 44,000-63,000 lbs. 10 Boeing 727 200 3 -- --(7) Passenger 160 passengers 1 Boeing 727 100 2 1 3 Freight 40,000-54,500 lbs. 0 Douglas DC-9 15F 5 -- 5 Freight 22,000-24,000 lbs. 3 -- -- -- Total 71 5 69 37 == === == ==
- --------------- (1) The series designation for certain models of aircraft shown varies within the designation listed. The Company, for example, owns Douglas DC-8-60 series aircraft with sub-series designations of 61, 62 and 63. (2) All figures are approximate and vary from aircraft to aircraft. (continued on following page) 71 73 (3) This column indicates how many of the listed aircraft are now compliant with the Stage III noise control standards. Aircraft not meeting this standard must either be modified to do so or removed from domestic service before January 1, 2000. See "Risk Factors -- Government Regulation" and "Business -- Government Regulation." (4) One of these Boeing 747s was recently acquired by the Company and is currently being modified to freighter configuration. In addition, the Company expects to purchase the Optioned Boeing 747s. (5) One of these Boeing 747s is currently effectively grounded due to a series of Directives restricting its payload. See "-- Boeing 747 Airworthiness directives." (6) One of these DC8s is currently leased to Trans Continental Airlines, Inc. See "Certain Transactions." (7) Two of these Boeing 727s are currently leased to third parties and one was recently returned to the Company by a lessee. The aircraft described above do not include one passenger configured Boeing 727-100 and one passenger configured Boeing 727-200 which the Company is currently negotiating to sell in one transaction. This transaction is expected to be consummated before the end of 1997. Small Aircraft
PROPULSION MANUFACTURER MODEL(1) NUMBER(2) CONFIGURATION(3) TYPE MAXIMUM PAYLOAD(4) ------------ -------- --------- ---------------- ----------- ------------------ Convair 640 2 Freight Turbo-prop 18,000 lbs. Convair 600 5 Freight Turbo-prop 12,000-14,000 lbs. Falcon(5) 20C 1 Freight Jet turbine 6,000 lbs Lear L-36-A 1 Freight/Passenger/Ambulance Jet turbine 3,000 lbs./8 passengers Lear L-35-A 1 Freight/Passenger/Ambulance Jet turbine 3,000 lbs./8 passengers Lear L-25 8 Freight/Passenger/Ambulance Jet turbine 3,000 lbs./8 passengers Lear L-24 6 Freight/Passenger/Ambulance Jet turbine 2,000 lbs./5 passengers Lear L-23 4 Freight/Passenger/Ambulance Jet turbine 2,000 lbs./5 passengers Hansa HFB-320 3 Freight Jet turbine 4,000 lbs. Westwind 1124 1 Passenger Jet turbine 8 passengers Mitsubishi MU-2B 2 Freight/Passenger Turbo-prop 1,500 lbs./6 passengers Mitsubishi MU-2B 1 Freight/Passenger/Ambulance Turbo-prop 2,000 lbs./7 passengers Beechcraft BE8T 13 Freight Turbo-prop 3,400 lbs. Cessna C-152 2 Passenger Piston prop 4 passengers Cessna C-172 1 Passenger Piston prop 4 passengers Piper PA-32-300 2 Freight/Passenger Piston prop 1,200 lbs./6 passengers -- Total 53 ==
- --------------- (1) The series designation for each model of aircraft shown varies within the designation listed. For example, Mitsubishi MU-2B aircraft have series designations of 20, 25 and 35. (2) Each of these aircraft is owned by the Company and operated by the Company in revenue service, except the Westwind 1124 which is utilized solely to transport Company personnel and the Falcon 20C which currently being modified from passenger to freighter configuration. (3) Not all aircraft of a particular type are configured for each of the multiple uses shown. (4) All figures are approximate. (5) This aircraft is currently being converted from passenger to freighter configuration. The aircraft described above do not include (i) the Company's undivided one-third interest in four Falcon 20C jet aircraft presently leased to a third party operator and (ii) one Hawker Siddeley HS-125 which the Kalitta Companies anticipate selling to Mr. Kalitta prior to closing. See "Certain Transactions." 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 to complete such checks. Boeing 747 Airworthiness Directives. In January 1996, the FAA issued a series of Directives on certain Boeing 747 aircraft which were modified for freight hauling by GATX-Airlog Company, a subsidiary of General American Transportation Corp ("GATX"). The Directives, which became effective on January 30, 1996, were issued because of concerns relating to the integrity of the cargo door and surrounding floor area in the event the aircraft were operated at their maximum cargo capacity of approximately 220,000 pounds. In spite of the fact that the aircraft affected by the Directives have flown over 83,000 hours without incident, the Directives require certain modifications to be made to the aircraft. Absent such modifications, the Directives limit the cargo capacity of these aircraft to 120,000 lbs., a limit which significantly restricts the Company's ability to profitably operate the aircraft. 72 74 One of each of the Kalitta Companies' Boeing 747-200 and Boeing 747-100 freighters are affected by these Directives and have been out of service since January 1996. GATX has proposed a solution to the problem identified by one of the Directives which has been approved by the FAA. An appropriate means to test the proposed solution, however, has not yet been identified. Currently, the Company anticipates modifying the Boeing 747-100 to be in compliance with a portion of the Directive for which the FAA has approved a solution by the latter half of 1998, which will allow the Company to operate it with a reduced cargo capacity of 160,000 lbs. The Company is awaiting engineering solutions to address the remaining Directives. If the cost necessary to implement fully these solutions and return both the Boeing 747-100 and -200 to maximum cargo capacity is uneconomical, the Company may either operate one or both of the aircraft at limited load or use one or both of them for spare parts. The Company is currently involved in litigation against GATX to recover the cost to the repair these aircraft as well as revenues lost as a consequence of the aircraft downtime. See "Business -- Litigation." Acquisition of Optioned Boeing 747s. In September 1997, the Kalitta Companies acquired one Boeing 747, its associated engines and one spare engine for approximately $21 million. The Company is currently converting this Boeing 747 to freighter configuration for an estimated additional $8.0 million. In October 1997, the Kalitta Companies entered into an option to purchase for $40.0 million (i) the Optioned Boeing 747s and associated engines, (ii) two additional spare engines and (iii) certain other related spare parts and support equipment. The Company expects to complete the purchase of the Optioned Boeing 747s by the end of January 1998. In addition, the Company expects to spend an additional approximately $16.0 million to convert the Optioned Boeing 747s from passenger to freighter configuration. The Optioned Boeing 747s and the one recently acquired Boeing 747 are not affected by the Directive related to Boeing 747s modified by GATX. See "Use of Proceeds." Adding the Optioned Boeing 747s and the recently acquired Boeing 747 to the Company's operating fleet will substantially increase the Company's long-haul lift capacity and enable expansion of its current ACMI operations in Central and South America. The addition of these aircraft will also enable the Company to expand its service in the Middle East market and to Asia where the need for long-haul, heavy-lift air cargo service is expected to grow. Boeing 727 Cargo Door and Floor Modifications Regulations. The Company currently operates a fleet of 31 Boeing 727s, all of which were previously converted from passenger configuration to freighter configuration by the installation of a large cargo door and numerous interior modifications for cargo container handling systems. The aircraft conversions were approved by the FAA upon the issuance of supplemental type certificates ("STCs") to four firms that engineered and designed the conversion hardware and aircraft modification processes. Thirty of the Company's aircraft have been modified utilizing STCs held by three of these four firms. The FAA has reevaluated the engineering analysis which supported the issuance of the Boeing 727 cargo modification STCs and has preliminarily determined that the STC design features do not meet FAA certification criteria in several respects. The FAA has issued a proposed Directive to address the first of the FAA's concerns -- the structural strength of the aircraft floor structure. Other areas of concern relate to the strength of various cargo-handling system components of the Boeing 727 aircraft and are expected to be addressed by the FAA in subsequently issued Directives. If the proposed Directive is adopted, each operator of Boeing 727 freighter aircraft modified by any of the four firms will be required to limit the weight of each container (or pallet) position and to adopt other aircraft operating restrictions depending on the configuration of the aircraft, until the operator can demonstrate that the floor strength meets the FAA's certification criteria. Under the proposed Directive, the Company would be required to limit the weight per container/pallet position to approximately 4,000 pounds from a current maximum of 8,000 pounds. After a period of 120 days from the date the Directive becomes effective, the maximum per position weight will be fixed at approximately 3,000 pounds, until the Company can demonstrate that the floor strength meets the FAA's certification criteria. The Company believes this Directive will not have a material adverse effect on the Company and value of the Common Stock. 73 75 The Company is urging the FAA to allow additional time before requiring operators to modify the aircraft to bring them into compliance. In addition, the Company is working with the STC holders which are performing engineering analysis to seek a cost effective solution. There can be no assurance as to the terms of the final Directive and whether a satisfactory solution can be engineered. If no such solution is developed and approved by the FAA, the capacity of the Company's Boeing 727 fleet will be reduced. The FAA's proposed Directive is being opposed on its merits by a number of Boeing 727 operators. One of the Company's Boeing 727 aircraft was converted to freighter configuration by Boeing and is not subject to the foregoing proposed Directive. TRAINING AND SAFETY The Company's management believes that high quality personnel and intensive training programs are key to the Company's success and the maintenance of a good safety record. As a result, the Company hires experienced flight crews and maintenance personnel and ensures that both receive ongoing training. The Company maintains its own Douglas DC-8 simulator in Miami which it both uses to train its own pilots and hires out for use by other airlines. The Company also makes use of the training facilities of other airlines, including American Airlines, Northwest Airlines, TWA and United Airlines. The Company has an ongoing safety program that employs an industry standard database to track safety performance. Open facsimile and phone lines are available for crews to report safety problems which are entered into the database and monitored for any re-occurrence. Direct communication between flight crews and Company management is available at all times through the Company's dispatch system. The Company also maintains on-line communications with other airlines and agencies. During the last five years, the Kalitta Companies had eight accidents and several other safety related incidents involving its aircraft with varying degrees of damage to the aircraft involved. In 1992, the pilot of one of the Kalitta Companies' small aircraft was fatally injured in one of these accidents. In September 1996, pursuant to the FAA's National Aviation Safety Inspection Program, the Kalitta Companies underwent a broad but routine inspection of all of the Kalitta Companies' aircraft and maintenance operations. As a consequence of the FAA's inspection, the FAA and the Kalitta Companies entered into a Consent Order in January 1997 which required the Kalitta Companies to revise certain internal policies and procedures to address certain regulatory violations noted in the inspection report. See "Risk Factors -- Government Regulation" and "Business -- Government Regulation." SALES AND MARKETING The Company's marketing focus is on major users of air freight transportation services and other logistics providers. In connection with the Company's emphasis on developing and maintaining long-term relationships with major customers, the Company employs 25 account managers who are dedicated to major accounts. An account manager is responsible for educating the client about the Company's service capabilities, ensuring quality service and determining how the Company can best serve the customer. The marketing effort on behalf of the air freight carrier business is primarily focused on selected freight forwarders and integrators and existing customers. The Company also dedicates two individuals to passenger air charter marketing and intends to increase its sales efforts for third party maintenance services. The Company does not engage in mass media advertising. The Company, however, does promote its business through trade specific publications and trade shows as well as through its sponsorship of drag and short-track racing. The Company believes that retaining existing customers is equally as important as generating new clients and is a direct result of customer satisfaction. The Company will continue to upgrade its database, information software and tracking systems to maintain high quality service. The Company has developed a feature that enables customers to access the Company's aircraft tracking system on a "real time" basis to monitor their own freight. This feature contributes to customer satisfaction and allows account managers to be more productive by reducing time spent updating customers on the status of shipments. 74 76 MAINTENANCE The Company's aircraft require considerable maintenance in order to remain in compliance with FAA regulations. 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 contract charters. The Company has extensive maintenance facilities in Oscoda and Ypsilanti, Michigan and Dallas, Texas. The Company also has significant maintenance capability in Los Angeles, Miami and Terre Haute, Indiana. Maintenance services at Ypsilanti, Oscoda, Dallas, Los Angeles and Miami operate twenty-four hours per day, seven days per week. See "Business -- Services -- Aircraft Maintenance Services." GROUND FACILITIES General. The Company's facilities consist of office space, hangars, maintenance facilities and warehouse and storage space. Some of the Company's hangar facilities are constructed on property ground leased from airport owners. Accordingly, the hangar improvements revert to the owner when the ground lease expires. These leases expire on various dates through November 2021. The Company also has various agreements with municipalities and governmental authorities that own and operate airports throughout the United States. These agreements generally relate to the Company's use of general airport facilities, but may also include leases or licenses to use hangar and maintenance space. The following is a summary of the Company's major facilities:
LOCATION USE OF SPACE OWNED/LEASED/LICENSED -------- ------------ --------------------- 1515 West 20th Street, Company headquarters Owned (1) Dallas/Fort Worth International Airport, TX 1349 South Huron, Ypsilanti, MI Offices(2) Leased Willow Run Airport, Ypsilanti, MI Office, hangar, maintenance, fuel farm & Leased storage N. I-94 Service Drive, Ypsilanti, MI Office, storage & maintenance Owned Oscoda, MI Office, hangar, maintenance, housing, fuel Leased farm & storage Hulman Regional Airport, Terre Haute, IN Office, hangar and sorting space Licensed Los Angeles International Airport Office, hangar & ramp Leased Honolulu International Airport(3) Office & warehouse Leased Miami International Airport Office, hangar, ramp & maintenance Leased
- --------------- (1) The Company owns the building and improvements and leases the land from the Dallas/Fort Worth International Airport. (2) The Kalitta Companies lease their headquarters building from a limited liability company owned by Mr. Kalitta, his son Scott Kalitta and his nephew Doug Kalitta. See "Certain Transactions." (3) The Company has constructed a warehouse at the Honolulu International Airport which it leases to AIC. See "Certain Transactions." Proposed New Sorting Facility. The Company currently licenses its sorting space at the Hulman Regional Airport in Terre Haute, Indiana from Roadway Global Air for a term which will expire in August 1998. Because of the growth in the volume of freight shipped in its domestic scheduled service, the lack of available expansion space and the limited airport facilities in Terre Haute, the Company plans to move this sorting center to Fort Wayne, Indiana in the spring of 1999. As part of a proposed $33.1 million bond issue by the Fort Wayne Authority, the Fort Wayne Authority would develop an air trade center with the Company as its principal tenant. This center would be a foreign free trade zone and have customs support for international operations. Other planned improvements include the addition of a second runway to the airport's existing 11,000 foot runway and the expansion and improvement of associated ramp and other facilities and infrastructure. Under a proposed 20 year lease from the Fort Wayne Authority, the Company would occupy a sorting facility with 264,000 square feet of space (including office space), a 17,000 square foot operations building, a 79,000 square foot maintenance hangar (large enough to simultaneously accommodate a wide- and narrow-bodied aircraft) and a new fuel facility. The Company has entered into discussions with the Hulman Regional Airport Authority to obtain an interim lease of its current space in Terre Haute until it is able to 75 77 move to Fort Wayne. There is no assurance that the Company will be able to extend the term of the sort space sublease. See "Risk Factors -- Availability of Facilities." Oscoda Base. The Company subleases its maintenance facility at the former Wurtsmith Air Force Base in Oscoda, Michigan from the Oscoda-Wurtsmith Airport Authority pursuant to a prime lease from the U.S. Government. The terms of the various subleases expire on dates ranging from October 1997 to December 2013. Under the subleases, the Company has access to an 11,800 foot lighted runway equipped for full instrument approach, as well as office, hangar, maintenance and storage space. The hangar space includes seven hangars, two of which can completely enclose a single wide-bodied aircraft or two narrow-bodied aircraft. This ability to completely enclose aircraft is critical to meeting important FAA maintenance requirements. Because the Oscoda facility is a former Air Force base, it is also complete with living quarters and support buildings, which the Company leases from Oscoda Township under leases which expire on dates ranging from October 1997 to August 2005. Until 2011, the Oscoda facility is part of a "renaissance" zone which means that the Company does not pay real or personal property taxes on its facilities and equipment in Oscoda. EMPLOYEES General. At June 30, 1997, on a pro forma basis assuming the Merger had occurred prior to such time, the Company would have employed approximately 3,600 full-time personnel, of which approximately 200 would have been involved in sales and administrative functions and approximately 3,400 in maintenance and flight operations (including approximately 800 pilots). The Company considers its relations with its employees to be satisfactory. The Company intends to motivate certain employees through ownership of Common Stock and options to purchase Common Stock and to encourage all employees to own Common Stock. Collective Bargaining Agreement with Flight Crews of the Kalitta Companies. Certain employee pilots and flight engineers of the Kalitta Companies are members of the Teamsters Union and are employed pursuant to the Collective Bargaining Agreement. The Collective Bargaining Agreement became amendable on August 29, 1997, but remains in effect while the parties are in negotiation for a successor collective bargaining agreement. Pilots and flight engineers subject to the agreement are guaranteed pay based upon a minimum of 60 block hours per month. The agreement requires that all flight crew personnel must meet minimum qualifications and includes typical seniority, furlough, grievance, group health insurance, sick leave and vacation provisions. The seniority provisions require that the most senior flight crews have the opportunity to operate larger aircraft or move to new crew positions as aircraft or crew positions become available by reason of flight crew attrition or aircraft acquisitions. As a consequence, the contract obligates the Company to incur costs to retrain crews as they advance in seniority and progress to new aircraft or crew positions. In addition, the Company may incur costs to train flight crews to fill positions vacated by more senior flight crews. The collective bargaining agreement provides that so long as it is in effect, the Teamsters Union will not authorize a strike and the Kalitta Companies will not lockout union employees. Although the Kalitta Companies and the Teamsters Union have commenced "interest-based" bargaining, there can be no assurance that a new collective bargaining agreement can be reached or that negotiations will not result in work stoppages, a substantial increase in salaries or wages, changes in work rules or other changes adverse to the Company. ENVIRONMENTAL The Company's operations must comply with numerous environmental laws ordinances and regulations regarding air quality and other matters. Under current federal, state and local environmental laws ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the ability of the owner of the property to use such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be 76 78 operated and may impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have a material adverse effect on the Company and the value of the Common Stock. The Company leases office space, hangar space, ramp space and unimproved area at various airport locations throughout the U.S. See "Business -- Ground Facilities." Most of these leases require the Company to indemnify the lessor for any environmental contamination caused by the Company. In particular, the Company leases an underground fuel storage facility from Wayne County, Michigan at Willow Run Airport. If the soil or groundwater in the vicinity of this underground facility is found to be contaminated by environmental regulators, the Company will lose its right to continue to use the facility. Moreover, the lease provides that the Company will be solely responsible for the costs to remediate any such contamination. If such contamination occurs or is otherwise discovered by governmental authorities during the term of the lease with Wayne County, the Company may incur significant expense to effect either or both of required relocation of operations or the required clean-up. The Company is aware of the presence of environmental contamination on properties that the Kalitta Companies lease or own. The Company does not believe that the costs of responding to the known contamination should or will be borne solely by the Company, if at all. While the Company does not believe that the costs of responding to the presence of such contamination is likely to have a material adverse effect on the Company or the value of the Common Stock there can be no assurance in this regard. Pursuant to the Merger Agreement, Mr. Kalitta has agreed, subject to certain limitations, to indemnify the Company for a period of four years against any losses arising with respect to environmental liabilities related to contamination at any of the Kalitta Companies' facilities. See "The Merger -- Indemnitees." In part because of the highly industrialized nature of many of the locations at which the Company operates, there can be no assurance that the Company has discovered all environmental contamination for which it may be responsible. GOVERNMENT REGULATION General. The Company 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 operates, pilot and crew certification, aircraft maintenance and operational standards, noise abatement, airport slots and other safety-related factors. Certain of the Company's aircraft are subject to Directives which require modifications to the affected aircraft. See "-- Fleet." In addition, the Company 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 international operations are governed by bilateral air services agreements between the United States and foreign countries where the Company operates. Under some of these bilateral air services agreements, traffic rights in those countries are available to only a limited number of and in some cases only one or two, U.S. carriers and are subject to approval by the applicable foreign regulators, limiting growth opportunities in such countries. 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 regulations. In addition, the DOT and the FAA may impose civil or criminal penalties for violations of applicable rules and regulations. Safety, Training and Maintenance Regulations. 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, the FAA adopted changes to procedures concerning oversight of contract maintenance and training. 77 79 The Company believes it is currently in compliance with such changes. It is possible that subsequent events, such as the recent crash of a cargo aircraft owned by Fine Air could result in additional Directives, which could have a material adverse effect on the value of the Common Stock. In September 1996 pursuant to the FAA's National Aviation Safety Inspection Program, the Kalitta Companies underwent a broad inspection of all of the Kalitta Companies' aircraft and maintenance operations. This inspection resulted in a report from the FAA citing the Kalitta Companies with a number of regulatory infractions, none of which were sufficiently serious to cause the FAA to curtail or otherwise restrict any of the Kalitta Companies' operations. As a consequence of the FAA's inspection, however, the FAA and the Kalitta Companies entered into a Consent Order in January 1997 which required the Kalitta Companies to revise certain internal policies and procedures to address the regulatory violations noted in the inspection report as well as enforcement actions that had been pending prior to the inspection. Without admitting any fault, the Kalitta Companies agreed to pay a fine of $450,000, one-third of which is suspended and will be forgiven if the Kalitta Companies comply with all the terms of the Consent Order. At this time, the Kalitta Companies' management believes they are in compliance with the Consent Order and expects the FAA to conduct another inspection of similar scope in the fourth quarter of 1997 to verify such compliance. The Consent Order also provides that it is a full and conclusive settlement of any civil penalties the Kalitta Companies could incur for regulatory violations occurring before January 1, 1997, but does not preclude the FAA from taking enforcement action to revoke Kalitta Companies' air carrier operating certificate. Aging Aircraft Regulations; Potential Compliance Costs. All of the Company's aircraft are subject to Service Bulletins and Directives issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis. These Service Bulletins or Directives could 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, particularly in light of recent aircraft crashes at ValuJet and Fine Air. The cost of compliance with such Directives and Service Bulletins cannot currently be estimated, but could be substantial. Noise Abatement Regulations. Airline operators must comply with FAA noise standard regulations primarily promulgated under the Airport Noise and Capacity Act of 1990 (the "Noise Regulations"). Currently, Kitty Hawk and the Kalitta Companies are, and upon consummation of the Merger, the Company will be, in compliance with the Noise Regulations. The Company owns 71 aircraft and leases 5 aircraft which are affected by the Noise Regulations, including nine Boeing 747s (two of which are effectively grounded due to a series of Directives unrelated to Noise Regulations), eight Lockheed L-1011s, 20 Douglas DC-8s, 34 Boeing 727s (not including aircraft held for sale) and five Douglas DC-9-15Fs (collectively, the "Jet Fleet"). Of the aircraft in the Jet Fleet, 37 are currently in compliance with Stage III noise control standards, including all of the Company's Boeing 747s and Lockheed L-1011s. The Company must bring the Jet Fleet into Stage III compliance by January 1, 2000. Any aircraft in the Jet Fleet that is not in compliance with the Stage III noise control standards on January 1, 2000 may not be operated in the U.S. until it complies with such standards. There can be no assurance that the Company will have sufficient funds or be able to obtain financing to cover the costs of modifying additional aircraft to meet these deadlines. The failure to modify these aircraft could have a material adverse effect on the Company's financial condition or results of operations. In addition, certain airport operators have adopted local regulations which, among other things, impose curfews and other noise abatement requirements. Finally, the Company's international operations are affected by noise regulations in foreign countries which may be stricter than those in effect in the U.S. Only six of the Company's 20 Douglas DC-8 aircraft comply with the Stage III noise control standards. The Company may elect not to modify the 14 remaining Douglas DC-8 aircraft to meet the Stage III noise control standards because the anticipated cost of approximately $3.5 million per aircraft (not including aircraft downtime) may exceed the economic benefits of such modifications. If the Company cannot or does not modify these 14 Douglas DC-8 aircraft, the Company will have to remove these aircraft from service in the United States before January 1, 2000 and may have to replace them with other aircraft. In addition, 23 of the Company's Boeing 727 aircraft currently do not comply with the Stage III noise control standards. The Company currently anticipates modifying its Boeing 727 fleet (at an anticipated cost of approximately 78 80 $41.4 million, not including aircraft downtime) to be in compliance with the Stage III noise control standards by the applicable deadlines. However, there can be no assurance regarding the actual cost or that the Company will have sufficient funds or be able to obtain financing to cover the costs of these modifications or to replace such aircraft. Hazardous Materials Regulations. 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. Foreign Operations Regulated. Certain of the Company's operations are conducted between the U.S. and foreign countries, as well as wholly between two or more points that are all located outside of the United States. As with the certificates and licenses 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 licenses issued by those authorities. Stock Ownership by Non-U.S. Citizens. Under current federal aviation law, the Company's air freight carriers could cease to be eligible to operate as air freight carriers 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 freight 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 many of the Company's aircraft leases and contracts also require the Company to carry such insurance. The Company also carries medical liability 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 and the value of the Common Stock. 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 Convairs and Beechcraft BE8Ts. The Company maintains baggage and cargo liability insurance if not provided by its customers under 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 and the value of the Common Stock. 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. LEGAL PROCEEDINGS GATX Litigation. In January 1997, the Kalitta Companies filed suit against GATX (the "GATX Litigation") to recover damages related to the January 1996 effective grounding of two of the Kalitta Companies' Boeing 747s pursuant to the Directive affecting GATX-modified Boeing 747s. See "Business -- Aircraft Fleet -- Boeing 747 Airworthiness Directive." Other defendants include Pemco Aeroplex Co. (the successor to Hayes International, Inc.) which developed the design for the STC relating to the modifications and Central Texas Airborne Systems, Inc. (successor to Chrysler Technologies Airborne Systems, Inc.) 79 81 which modified the Kalitta Companies' Boeing 747s as a subcontractor for GATX. The suit is pending in the Federal District Court for the Northern District of California and covers a variety of claims. In connection with the consummation of the Merger, the Company will enter into an agreement with Mr. Kalitta that will provide that any amounts recovered by the Company through the GATX Litigation shall be applied first to reimburse the Company for its legal costs incurred in connection with the GATX Litigation and then to correct the mechanical problems associated with the grounded Boeing 747s. Any additional amounts will be allocated 10% to the Company and 90% to Mr. Kalitta. In the event the amounts recovered by the Company, if any, are insufficient to reimburse the Company for its legal costs incurred in connection with the GATX Litigation, Mr. Kalitta will reimburse the Company for the unreimbursed portion of its legal costs related to the GATX Litigation incurred after October 23, 1997. U.S. Postal Service Contract. In September 1992, the U.S. Postal Service awarded an air freight services contract to Kitty Hawk and one of the Kalitta Companies, as co-bidders. 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 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 Kitty Hawk and one of the Kalitta Companies. Also under the settlement, Emery paid $2.7 million into the escrow account and agreed to pay $162,500 into the escrow account each quarter for up to 10 years, so long as the Emery contract remained in effect. Before settling the ANET Litigation, Kitty Hawk, one of the Kalitta Companies and Messrs. Christopher and Kalitta 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 Kitty Hawk, one of the Kalitta Companies and Messrs. Christopher and Kalitta that were resolved pursuant to a comprehensive settlement reached in August 1994. Under the comprehensive settlement, Kitty Hawk 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. Routine Litigation. The Company from time to time is involved in various routine legal proceedings incidental to the conduct of its business. As of the date of this Prospectus, the Company was not engaged in any legal proceeding expected to have a material adverse effect upon the Company and the value of the Common Stock. MANAGEMENT The following table sets forth the executive officers and directors of the Company, their ages and positions, immediately prior to the Merger. As of the date hereof, there was one vacancy on the Board of Directors.
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- M. Tom Christopher(1)................. 50 Chairman of the Board of Directors and Chief Executive Officer Tilmon J. Reeves...................... 58 President, Chief Operating Officer and Director Richard R. Wadsworth.................. 50 Senior Vice President -- Finance, Chief Financial Officer, Secretary and Director Ted J. Coonfield(1)(2)................ 49 Director James R. Craig........................ 59 Director Lewis S. White(1)(2).................. 57 Director
- --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. 80 82 Concurrently with the consummation of the Merger, Messrs. Craig and Wadsworth will resign from the Board of Directors and Mr. Reeves will resign as Chief Operating Officer of the Company, but will continue to serve as the President of Kitty Hawk. Pursuant to the Merger Agreement, the vacancies in the Board of Directors will be filled with Messrs. Kalitta, George W. Kelsey and Philip J. Sauder. Immediately after the effectiveness of the Merger, the executive officers and directors of the Company, their ages and positions will be as follows:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- M. Tom Christopher(1)................. 50 Chairman of the Board of Directors and Chief Executive Officer Conrad A. Kalitta..................... 59 Vice Chairman and Director Tilmon J. Reeves...................... 58 President and Director Richard R. Wadsworth.................. 50 Senior Vice President -- Finance, Chief Financial Officer and Secretary Ted J. Coonfield...................... 49 Director George W. Kelsey...................... 57 Director Philip J. Sauder(1)(2)................ 44 Director Lewis S. White(1)(2).................. 57 Director
- --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Immediately after effectiveness of the Merger, the members of the Company's Board of Directors will be classified as follows: Class I -- Serves until the 1998 Annual Meeting of Stockholders Ted J. Coonfield George W. Kelsey Class II -- Serves until the 1999 Annual Meeting of Stockholders Tilmon J. Reeves Philip J. Sauder Class III -- Serves until the 2000 Annual Meeting of Stockholders M. Tom Christopher Conrad A. Kalitta Lewis S. White 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 after effectiveness of the Merger, will serve in the class of directors whose terms expire at the 2000 annual meeting of stockholders. He has over 20 years of experience in the air freight industry. CONRAD A. KALITTA. Upon consummation of the Merger, Mr. Kalitta will serve as Vice Chairman of the Company and will serve in the class of directors whose terms expire at the 2000 annual meeting of stockholders. Mr. Kalitta founded each of the Kalitta Companies and has been the Chief Executive Officer of each of the Kalitta Companies since that time. He also founded several other aircraft service companies, some of which are now part of the Company. Mr. Kalitta is also a professional drag racer in the "top-fuel" class and has won three national championships. 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. Concurrently with the consummation of the Merger, Mr. Reeves will resign as the Chief Operating Officer of the Company, but will continue to serve as the President of Kitty Hawk. Prior to assuming his current positions, he served as Vice President of the Company's air freight carrier from March 1992 to May 1993. Mr. Reeves became a director in October 1994 81 83 and after effectiveness of the Merger, will serve in the class of directors whose terms expire at the 1999 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. Mr. Wadsworth became a director in October 1994 and pursuant to the Merger Agreement will resign from the Board of Directors concurrently with the consummation of the Merger. TED J. COONFIELD became a director of the Company in October 1994 and after effectiveness of the Merger, will serve in the class of directors whose terms expire at the 1998 annual meeting of stockholders. Since October 1997, Mr. Coonfield has been in private consulting practice. From April 1996 to October 1997, 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. 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 pursuant to the Merger Agreement will resign from the Board of Directors concurrently with the consummation of the Merger. 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. GEORGE W. KELSEY. Upon consummation of the Merger, Mr. Kelsey will become a director of the Company and will serve in the class of directors whose terms expire at the 1998 annual meeting of stockholders. Mr. Kelsey has served as a director of AIA since July 1995. Mr. Kelsey is currently the owner of Kelsey Law Offices, P.C., a law firm located in Ann Arbor, Michigan. Mr. Kelsey has practiced law in Michigan for 27 years, and has been the principal outside counsel for the Kalitta Companies. Mr. Kelsey currently specializes in commercial transactions and commercial litigation with emphasis in aviation law. PHILIP J. SAUDER. Upon consummation of the Merger, Mr. Sauder will become a director of the Company and will serve in the class of directors whose terms expire at the 1999 annual meeting of stockholders. Mr. Sauder has served as a director of AIA since July 1995. Mr. Sauder is currently a limited partner of Carlisle Enterprises, L.P. which acquires manufacturers of engineered products and the Chairman and Chief Executive Officer of Alpha Technologies, U.S., L.P., which manufactures high tech instrumentation for the polymer and rubber industries. He participates in locating and evaluating acquisition targets. From 1989 through 1994, Mr. Sauder was employed by Abex, Inc., first as the general manager of its Cleveland Pneumatic Division and then as the group vice president of its Aerospace Division. LEWIS S. WHITE became a director of the Company in October 1994 and after effectiveness of the Merger, will serve in the class of directors whose terms expire at the 2000 annual meeting of stockholders. Since 1988, Mr. White has been President of L. S. White & Co., a firm engaged in business planning and corporate finance. 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. 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 the Company 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 shall receive shares of Common Stock in an amount equal to their net annual retainer (which is currently approximately $14,000). 82 84 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to Kitty Hawk's October 1996 initial public offering (the "IPO"), Mr. Christopher determined executive officer compensation. Subsequent to the IPO and prior to November 6, 1996, Messrs. Robert F. Grammer (a former director of the Company), 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 officer compensation. After the effectiveness of the Merger, Messrs. Sauder and White will comprise the Company's Compensation Committee and determine executive 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 years 1994, 1995 and 1996 and the four months ended December 31, 1996, the Company paid an aggregate of approximately $650,000 to Burke, Wright & Keiffer, P.C. for legal services rendered. During fiscal years 1994 and 1995, Martinaire East, Inc. ("Martinaire"), a corporation 50% owned by Mr. Christopher, leased a Lear jet, 50% owned by Mr. Christopher, from the Company and provided the Company with on-demand charter services utilizing the Lear jet. During fiscal years 1994 and 1995, the Company paid Martinaire $1.0 million and $232,000, respectively, for use of the Lear jet, which amounts the Company believes represented market rates. The Company's charges to Martinaire for leasing the Lear jet and related operating expenses (at costs the Company believes represented market rates) went largely unpaid until October 1994. At fiscal year end 1994, the balance owed to Kitty Hawk for the Lear jet lease and related operating expenses was $481,297. No interest was accrued on this amount. On October 24, 1994, the owners of the Lear jet, including Mr. Christopher, agreed to sell the Lear jet. In connection with this sale, Martinaire repaid the Company all unpaid amounts owed to the Company at that date for the Lear jet lease and related operating expenses. In August 1996, Kitty Hawk acquired an undivided one-third interest in four 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, Kitty Hawk 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. 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. See "Business -- Legal Proceedings." 83 85 COMPENSATION The table below sets forth information concerning the annual and long-term 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 Kitty Hawk (collectively, with the Chief Executive Officer, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------------------------- ------------ SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION ---------------------------- ------ -------- -------- ------------ ------------ ------------ M. Tom Christopher 1996(1) $ 80,000 $ -- $ -- -- $ 81,250(2) Chairman of the Board of 1996 195,500 719,419 -- -- 369,720(3) Directors and Chief Executive 1995 120,000 898,731 -- -- 352,163(4) Officer 1994 120,000 512,000 -- -- 25,022(5) Tilmon J. Reeves 1996(1) 41,667 15,000 -- -- -- President and Chief 1996 125,000 85,000 3,726,182(6) 390,707 2,375(7) Operating Officer 1995 125,000 108,335 -- 245,708(8) 2,310(7) 1994 101,000 225,000 -- -- 2,982(7) Richard R. Wadsworth 1996(1) 36,664 15,000 -- -- 583(7) Senior Vice President 1996 110,000 70,000 1,464,572(6) 153,567 2,375(7) Finance, Chief Financial 1995 110,000 70,000 -- 92,140(8) 2,262(7) Officer and Secretary 1994 $110,000 $ 96,000 $ -- -- $ 1,675(7)
- --------------- (1) Represents the four months ended December 31, 1996. (2) Consists of contingent payments received by Mr. Christopher under the ANET Litigation settlement during the four months ended December 31, 1996. (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 $41,645 paid on Mr. Christopher's behalf and (iii) matching contributions of $3,075 to the Company's 401(k) Savings Plan for Mr. Christopher. (4) 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. (5) 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 $22,047 paid on Mr. Christopher's behalf. Does not include any contingent payments to Mr. Christopher under the ANET Litigation settlement made subsequent to fiscal year 1994. (6) Represents the difference between the exercise price and the fair market value of the Common Stock underlying the stock options on June 26, 1996, the date of exercise, of the stock options granted in fiscal year 1996. See "Management -- Stock Option Exercises." (7) Consists of matching contributions to the Company's 401(k) Savings Plan. (8) The option covering these shares was rescinded on June 12, 1996. 84 86 STOCK OPTION GRANTS The following table sets forth certain information concerning options granted in fiscal year 1996 to the Company's Named Executive Officers. Messrs. Reeves and Wadsworth fully exercised these options on June 26, 1996. The Company did not grant any options to the Company's Named Executive Officers in the four months ended December 31, 1996 or the nine months ended September 30, 1997. No options for the purchase of Common Stock are currently outstanding. The Company has no outstanding stock appreciation rights and granted no stock appreciation rights during fiscal year 1996, the four months ended December 31, 1996 or the nine months ended September 30, 1997. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------------------------------- PERCENT OF NUMBER OF TOTAL SECURITIES OPTIONS FAIR VALUE ON UNDERLYING GRANTED TO EXERCISE OR DATE OF OPTIONS EMPLOYEES IN BASE PRICE GRANT NAME GRANTED FISCAL YEAR ($/SH) ($/SH) EXPIRATION DATE ---- ---------- ------------ ----------- ------------- ----------------- Tilmon J. Reeves...... 390,707 71.8% $0.01 $7.45 December 31, 2005 Richard R. Wadsworth........... 153,567 28.2% $0.01 $8.63 December 31, 2015 POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM ------------------------------------ NAME 5%($) 10%($) 0%($) ---- ---------- ---------- ---------- Tilmon J. Reeves...... $4,737,426 $7,545,873 $2,910,665 Richard R. Wadsworth........... $2,157,211 $3,435,907 $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. 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. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS Omnibus Securities Plan. The Company's Amended and Restated Omnibus Securities Plan (the "Omnibus Plan") provides for stock based and non-stock based compensation to Omnibus Plan participants, including nonqualified stock options, incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, tandem and independent stock appreciation rights, other derivative securities, stock bonuses, restricted stock, awards denominated in stock units, securities convertible into stock, phantom stock, dividend equivalent rights and performance awards that are contingent upon the Company's performance or the performance of the Omnibus Plan participant. The number of shares of Common Stock reserved for issuance under the Omnibus Plan is 300,000 shares. The Omnibus Plan is administered by the Compensation Committee of the Board of Directors. Awards under the Omnibus Plan may contain provisions that, if a change in control of the Company occurs, give the Compensation Committee discretion to offer to purchase awards from Omnibus Plan participants and make adjustments or modifications to outstanding awards to protect and maintain the rights and interests of the Omnibus Plan participants or take any other action the award agreements may authorize. A change in control of the Company is deemed to occur upon any of the following events (i) a consolidation or merger in which the Company does not survive, unless the 85 87 Company's stockholders retain the same proportionate common stock ownership in the surviving company after the merger, (ii) a sale of all or substantially all of the Company's assets, (iii) the approval by the Company's stockholders of a plan to dissolve or liquidate the Company, (iv) a third party acquires 20% or more of the Company's voting securities or (v) during any two-year period, persons who constituted a majority of the Company's Board of Directors at the beginning of such period cease to serve as directors for any reason other than death, unless each new director was approved by at least two-thirds of the directors then still in office who were directors at the beginning of the two-year period. Annual Incentive Compensation Plan. Under the Company's Amended and Restated Annual Incentive Compensation Plan (the "Annual Incentive Compensation Plan"), the Compensation Committee may award semiannual bonuses to employees of the Company. The aggregate amount of bonuses available for award by the Compensation Committee is limited to 10% of the Company's income before the deduction of income taxes and the bonuses that may be paid under the Annual Incentive Compensation Plan. The Company may elect under the Annual Incentive Compensation Plan to pay up to the full amount of the bonuses in Common Stock. Up to an additional 198,193 shares may be awarded as bonuses under the Annual Incentive Compensation Plan. Employee Stock Purchase Plan. Recently, the Company implemented an Employee Stock Purchase Plan ("Stock Purchase Plan") which permits employees of the Company to purchase up to an aggregate of 100,000 shares of Common Stock under Section 423 of the Internal Revenue Code of 1986, as amended, at a price equal to 85% of the market value of the Common Stock on certain specified dates. As of the date hereof, no shares had been issued under the Stock Purchase Plan. Kitty Hawk has adopted its employee compensation plans and arrangements to motivate certain employees through ownership of Common Stock and options to purchase Common Stock and to encourage all employees to own Common Stock. Option Grants. On October 5, 1994, the Company granted Mr. Reeves and Mr. Wadsworth nonqualified options to purchase an aggregate of 245,708 shares and 92,140 shares, respectively, of Common Stock. These options had a term of 10 years, an exercise price of $7.81 per share and vested in five equal annual increments commencing on August 31, 1995. During the fiscal year ended August 31, 1996, the Company granted Mr. Reeves an option to purchase 390,707 shares of Common Stock and on June 12, 1996, rescinded all options earlier granted to Mr. Reeves. The option would have terminated upon the earliest of (i) the date at which all optioned shares had been delivered, (ii) December 31, 2005 or (iii) the date 12 months after Mr. Reeves' death. The option was fully vested and had an exercise price of $0.01 per share. During the fiscal year ended August 31, 1996, the Company granted Mr. Wadsworth an option to purchase 153,567 shares of Common Stock and rescinded all options earlier granted to Mr. Wadsworth. The option would have terminated upon the earliest of (i) the date at which all optioned shares had been delivered, (ii) December 31, 2015, or (iii) the date 12 months after Mr. Wadsworth's death. The option was fully vested and had an exercise price of $0.01 per share. On June 26, 1996, Messrs. Reeves and Wadsworth fully exercised their options. In order to satisfy any income tax withholding obligations arising by virtue of the exercise of their options, at the election of each of Messrs. Reeves and Wadsworth pursuant to the terms of their respective options, the Company withheld from the shares to be delivered to Mr. Reeves, 156,283 shares and Mr. Wadsworth, 61,427 shares, the fair market value of which was anticipated to equal to the Company's tax withholding obligation with respect thereto. Pursuant to their respective option agreements, Messrs. Reeves and Wadsworth have the right to have the Company register shares received upon exercise of their options in at least the same ratio of ownership as the number of Mr. Christopher's common shares included in a registration of the Company's shares. Death and Disability Benefits. The Company also has entered into split-dollar life insurance agreements with a trust for the benefit of Mr. Christopher and his wife to provide the trust with death benefits of an aggregate of $5 million under life insurance policies. Under the split-dollar agreements, the Company pays the premiums under the insurance policies. Upon Mr. Christopher's death or the termination of the agreements, 86 88 the Company is entitled to reimbursement of premiums it has paid to the extent of the death benefits paid or the cash surrender value of the policies, as applicable. Pursuant to a salary continuation agreement, in the event that the Board of Directors determines that Mr. Christopher has become disabled, the Company has agreed to continue to pay Mr. Christopher the average monthly compensation he received during the two years prior to the date of his disability until he dies or is no longer disabled. EMPLOYMENT AGREEMENTS Mr. Christopher. 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 FAR Part 121 (now Part 119) 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. Mr. Kalitta. Concurrently with the consummation of the Merger, the Company will enter into an employment agreement with Mr. Kalitta that provides for an initial annual base salary of at least $600,000 and bonuses determined by the Compensation Committee pursuant to the Company's Annual Incentive Compensation Plan and otherwise. Mr. Kalitta'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. Kalitta's termination of employment with the Company for any reason, Mr. Kalitta shall not engage, directly or indirectly, in the air logistics, charter brokerage, on-demand, or scheduled carriage business under an FAR Part 121 (now Part 119) 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. Kalitta, he is entitled to three years of compensation at his then-current salary. Messrs. Reeves and Wadsworth. 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 FAR Part 121 (now Part 119) 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 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. 87 89 CERTAIN TRANSACTIONS PURCHASE OF AIRCRAFT FROM THE KALITTA COMPANIES In September 1997, the Kalitta Companies sold to Kitty Hawk for $51.0 million 16 Boeing 727 aircraft, comprising 15 aircraft in freighter configuration and one aircraft in passenger configuration. As part of the transaction, the Kalitta Companies assigned to Kitty Hawk all of their customer contracts relating to the aircraft sold. The agreement pursuant to which the sale took place includes an option in favor of the Kalitta Companies to repurchase 13 of the aircraft on or before March 31, 1998 at a price equal to $37.0 million plus any costs incurred by Kitty Hawk to maintain the aircraft to be repurchased, including compliance with Directives and noise reduction standards. The agreement also includes an option in favor of Kitty Hawk to put 13 aircraft back to the Kalitta Companies on or before December 31, 1997 at the same price as applies to the repurchase option. Should either party elect to exercise its option, the Kalitta Companies would be obligated to operate the repurchased aircraft to meet any contractual obligations of Kitty Hawk relating thereto. In connection with the sale of these Boeing 727 aircraft, Kitty Hawk entered into a three year ACMI contract with the Kalitta Companies to furnish six Boeing 727s to the Kalitta Companies and one Boeing 727 to AIC. PURCHASE OF SERVICES FROM AFFILIATES OF MR. KALITTA Mr. Kalitta is the sole stockholder of AIT, OK and FOL, each of which provided services to the other Kalitta Companies. AIT is a certified travel agency that makes business travel arrangements for the employees of the Kalitta Companies, particularly flight crews. OK repairs aircraft turbine engines for small aircraft and leases and sells aircraft engine parts, but does not compete with the aircraft maintenance operations of the other Kalitta Companies. OK does business with KFS and over the three year period ended December 31, 1996, KFS received parts and services from OK having fair market values of approximately $151,000 in 1994, $150,000 in 1995 and $560,000 in 1996. No payments were made to OK by KFS for these parts and services. During 1996, OK began leasing two Hansa jets from KFS to provide cargo service for United Parcel Service. The fair market value of the lease charges for that year was approximately $768,000. No payments were made to KFS by OK for these lease amounts. FOL is a charter manager for a variety of customers, including, particularly, the Delco Electronics division of GM ("Delco") and provides logistics services for Delco. FOL has used KFS to provide charter aircraft for Delco. Over the two-year period ended December 31, 1996, FOL incurred KFS charter fees with a fair market value of approximately $547,000 in 1995 and $159,000 in 1996. KFS has historically provided charter services and auxiliary power unit maintenance for AIA. AIA has chartered KFS to ferry AIA flight and maintenance crews and other AIA personnel, as well as airframe and engine parts. During the three year ended December 31, 1996, the total charges of KFS to AIA were approximately $605,000 in 1994, $1.3 million in 1995 and $1.5 million in 1996. Mr. Kalitta is the sole shareholder of ConWes, Inc., which is a 50% joint venture partner with National Aircraft Service, Inc. ("NAS"). NAS holds an STC to replace a portion of the turbo-compressor in Douglas DC-8 aircraft for the purpose of improving its heating, cooling and pressurization systems. NAS has made these modifications to the Kalitta Companies' Douglas DC-8 aircraft for which the joint venture was paid approximately $368,000 in 1996 and $96,000 in 1995. TRANSACTIONS WITH A RELATIVE OF MR. KALITTA One of the Kalitta Companies currently dry leases one Douglas DC-8-50 aircraft to Trans Continental Airlines, Inc. ("Trans Continental"), a corporation owned solely by Scott Kalitta, Mr. Kalitta's son. The lease rate is $1,000 per flight hour for the first 80 hours per month and $800 for each flight hour per month thereafter, which the Company believes is representative of market rates. The lease expires on December 31, 1998. In addition to providing services to unrelated third parties, Trans Continental flies subcharter flights for the Kalitta Companies and is part of the Kalitta Companies' "contractor team" for U.S. Miliary charters. Beginning in December 1994, the Kalitta Companies leased three Douglas DC-8 aircraft to Trans Continental at rates the management of the Kalitta Companies believes represent fair market rates. In December 1995, 88 90 the Kalitta Companies sold Trans Continental a Douglas DC-8-62 for a purchase price of $5.1 million. In March 1996, the Kalitta Companies sold Trans Continental a Douglas DC-8-50 for a purchase price of $750,000 after Trans Continental had completed a heavy maintenance check on this aircraft at its cost. The management of the Kalitta Companies believes that it sold both of these aircraft to Trans Continental at market rates. The Kalitta Companies also have three service contracts with Trans Continental, including an airframe maintenance agreement, an engine maintenance agreement and a parts exchange agreement pursuant to which the Kalitta Companies repair and replace parts for Trans Continental at the Kalitta Companies' cost plus 10%. The Kalitta Companies believe that the labor rates provided for in these agreements are more favorable than market rates. The Kalitta Companies and Trans Continental also have a parts master lease agreement pursuant to which Trans Continental leases aircraft parts from the Company at favorable rates. Other than the engine maintenance agreement which expires on December 31, 1998, either party may terminate any of these agreements at any time upon 30 days' notice to the other. During the three years ended December 31, 1996, Trans Continental paid the Kalitta Companies approximately $353,000 in 1994, $11.6 million in 1995 and $5.2 million in 1996 for aircraft and parts leases, maintenance and parts. LEASE OF FACILITIES FROM KALITTA AFFILIATES The headquarters of the Kalitta Companies is owned by Kalitta, L.L.C., a Michigan limited liability company that is 20% owned by Mr. Kalitta. The remaining 80% is separately owned in equal shares by Mr. Kalitta's son, Scott Kalitta, and Mr. Kalitta's nephew, Doug Kalitta. The Kalitta Companies have a 10 year "net" lease for the facility which expires on May 14, 2007 and which obligates the Kalitta Companies to pay annual rent of approximately $712,800, as well as all costs associated with the facility, including taxes, insurance, capital repair and replacement and other operating expenses. Kalitta, L.L.C., however, assumed the cost of all leasehold improvements and provides all of the furniture and fixtures for the building as part of the lease rate. The limited liability company purchased the building in December 1996 for approximately $2.3 million. The Company believes that this rental rate may be greater than the fair market rent for the building. Pursuant to the Merger Agreement, Kitty Hawk will obtain an appraisal of the fair market rental for the building by October 31, 1997. Kalitta, L.L.C. must then either terminate or modify the lease to reflect the appraised rent. LOAN TO AND GUARANTY OF INDEBTEDNESS OF KALITTA COMPANIES In 1997, Mr. Kalitta has made a number of advances to the Kalitta Companies to cover cash shortfalls. As of June 30, 1997, the total amount of such advances was $300,462. Interest does not accrue on the amount advanced. Under the Merger Agreement, the Kalitta Companies are obligated to repay these advances prior to consummation of the Merger. In addition, essentially all of the indebtedness of the Kalitta Companies is personally guaranteed by Mr. Kalitta. As of June 30, 1997, the total principal amount of the indebtedness so guaranteed was approximately $248 million. PROMOTIONAL ACTIVITIES The Kalitta Companies have historically sponsored and generally provide all of the financial support for the racing activities of Mr. Kalitta, his son Scott Kalitta, and his nephew, Doug Kalitta, including the costs to build, maintain and transport the race cars. Over the three years ended December 31, 1996, the total payments made by the Kalitta Companies to support these activities were approximately $2.6 million in 1994, $3.6 million in 1995 and $3.1 million in 1996. In return, the Kalitta Companies have received promotional benefits including placement of the names of the Kalitta Companies on the vehicles and relating promotional items, as well as the opportunity to entertain customers at racing events. Pursuant to the Merger Agreement, Mr. Kalitta will form a new entity to purchase the racing related assets now owned by the Kalitta Companies for $350,000 on or before the consummation of the Merger. The Company will have no ownership interest in this entity. The Company has agreed, however, to sponsor the racing activities of the new entity for a period of three years in an amount of up to $2.0 million per year. Consequently, the Company will have the same promotional opportunities as those previously used by the Kalitta Companies. 89 91 LEGAL FEES Mr. Kelsey, a future director of the Company, is currently the owner of Kelsey Law Offices, P.C. For 1994, 1995 and 1996, the Kalitta Companies paid Kelsey Law Offices, P.C. an aggregate of approximately $3.1 million in legal fees. Mr. Kelsey will be paid additional amounts for 1997, including in connection with the Transactions. For a description of legal fees paid to other firms associated with related parties, see "Management -- Compensation Committee Interlocks and Insider Participation." GATX LITIGATION In connection with the consummation of the Merger, the Company will enter into an agreement with Mr. Kalitta that will provide that any amounts recovered by the Company through the GATX Litigation shall be applied first to reimburse the Company for its legal costs incurred in connection with the GATX Litigation and then to correct the mechanical problems associated with the grounded Boeing 747s. Any additional amounts will be allocated 10% to the Company and 90% to Mr. Kalitta. In the event the amounts recovered by the Company, if any, are insufficient to reimburse the Company for its legal costs incurred in connection with the GATX Litigation, Mr. Kalitta will reimburse the Company for the unreimbursed portion of its legal costs related to the GATX Litigation incurred after October 23, 1997. PURCHASE OF AIRCRAFT Prior to closing, the Kalitta Companies anticipate selling a Hawker Siddeley HS-125 aircraft to Mr. Kalitta at the aircraft's appraised value. CONSULTING ARRANGEMENTS Following the consummation of the Merger, the Company intends to employ Mr. Coonfield as a management consultant in connection with the integration of Kitty Hawk and the Kalitta Companies. The Company anticipates Mr. Coonfield will receive consulting fees in excess of $60,000 for these services. OTHER TRANSACTIONS For a description of other transactions with related parties, see "Management -- Compensation Committee Interlocks and Insider Participation." 90 92 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of the Company's Common Stock as of October 13, 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 SHARES SHARES OWNED BENEFICIALLY BEING BENEFICIALLY BEFORE THE OFFERING SOLD AFTER THE TRANSACTIONS ------------------- --------- ---------------------- NAME AND ADDRESS NUMBER PERCENT NUMBER NUMBER PERCENT ---------------- --------- ------- --------- ----------- -------- DIRECTORS AND EXECUTIVE OFFICERS: M. Tom Christopher(1)......................... 6,673,436 63.8% 1,000,000 5,673,436 32.3% Conrad Kalitta(1)(2)(3)....................... 0 -- 0 4,099,150 23.4% Tilmon J. Reeves(1)........................... 184,424 1.8% 75,000 109,424 (4) Richard R. Wadsworth(1)(5).................... 72,140 (4) 25,000 47,140 (4) DIRECTORS: Ted J. Coonfield(1)........................... 600 (4) 0 600 (4) James R. Craig(1)(5).......................... 0 -- 0 0 -- George W. Kelsey(1)(3)........................ 0 -- 0 0 -- Philip J. Sauder(1)(3)........................ 0 -- 0 0 -- Lewis S. White(1)............................. 0 -- 0 0 -- ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (7 PERSONS)........................... 6,930,600 66.3% 1,100,000 9,929,750 56.6% RCM Capital Management, L.L.C.(6)............. 953,800 9.1% 0 953,800 5.4% Four Embarcadero Center, Suite 2900 San Francisco, California 94111 Skyline Asset Management, L.P.(7)............. 536,100 5.1% 0 536,100 3.1% 311 S. Wacker Drive, Suite 4500 Chicago, IL 60606
- --------------- (1) The address for this stockholder is 1515 West 20th Street, Dallas/Fort Worth International Airport, Texas 75261. (2) Mr. Kalitta will receive 4,099,150 shares of Common Stock upon consummation of the Merger, of which 650,000 will be held in escrow for 42 months to satisfy Mr. Kalitta's indemnification obligations, if any, under the Merger Agreement. Mr. Kalitta will retain the right to vote such shares while they are being held in escrow. (3) Pursuant to the Merger Agreement, Messrs. Kalitta, Kelsey and Sauder will be appointed to the Board of Directors. (4) Less than 1%. (5) Concurrently with the consummation of the Merger, Messrs. Craig and Wadsworth will resign from the Board of Directors. (6) Based upon a Schedule 13F filed with the Commission by such beneficial owner for the quarter ended June 30, 1997. RCM Capital Management, L.L.C. ("RCM Capital"), an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner 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. (7) Based upon a Schedule 13F filed with the Commission by such beneficial owner for the quarter ended June 30, 1997. 91 93 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Kitty Hawk consists of (i) 25,000,000 shares of Common Stock and (ii) 1,000,000 shares of Preferred Stock. At October 13, 1997, the Company had approximately 1,300 holders of record and beneficial owners of Common Stock with 10,451,807 shares outstanding and no shares of Preferred Stock outstanding. COMMON STOCK Holders of shares of Common Stock are entitled to share ratably in such dividends as may be declared by the Board of Directors and paid by the Company out of funds legally available therefor, subject to prior rights of any outstanding shares of any preferred stock. See "Price Range of Common Stock and Dividend Policy." In the event of any dissolution, liquidation or winding up of the Company, holders of shares of Common Stock are entitled to share ratably in assets remaining after payment of all liabilities and liquidation preferences, if any. Except as otherwise required by law or the Certificate of Incorporation, the holders of Common Stock are entitled to one vote per share on all matters voted on by stockholders, including the election of directors. 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. See "Business -- Government Regulation." Holders of shares of Common Stock have no preemptive, cumulative voting, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of Common Stock are subject to the rights, preferences and privileges granted to the holders of any series of preferred stock which the Company may issue in the future. PREFERRED STOCK The Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of fully authorized shares of preferred stock in classes or series and may, at the time of issuance, determine the powers, rights, preferences and limitations of each class or series. Satisfaction of any dividend preferences on outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on Common Stock. Also, holders of preferred stock would be entitled to receive a preference payment in the event of any liquidation, dissolution or winding up of the Company before any payment is made to the holders of Common Stock. Under certain circumstances, the issuance of such preferred stock may render more difficult or tend to discourage a merger, tender offer, or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS General. The Certificate of Incorporation and Bylaws of Kitty Hawk include certain provisions that could have anti-takeover effects. The provisions are intended to enhance the likelihood of continuity and stability in the composition of and in the policies formulated by, the Board of Directors. These provisions also are intended to help ensure that the Board of Directors, if confronted by a surprise proposal from a third party that has acquired a block of Common Stock of the Company, will have sufficient time to review the proposal, to develop appropriate alternatives to the proposal and to act in what the Board of Directors believes to be the best interests of the Company and its stockholders. These provisions of the Certificate of Incorporation may not be amended or repealed by the stockholders of the Company except upon the vote of the holders of at least two-thirds of the outstanding shares of each class of the Company's capital stock then entitled to vote thereon. The following is a summary of the provisions contained in the Company's Certificate of Incorporation and Bylaws and is qualified in its entirety by reference to such documents in the respective forms filed as exhibits to the Registration Statement of which this Prospectus forms a part. In addition, pursuant to the Merger Agreement, the Company's Bylaws will be amended to add certain other provisions. See "The Merger -- Bylaw Amendments Concerning Governance of the Company and Stockholders' Agreement." 92 94 Amendment of Bylaw Provisions. The Certificate of Incorporation provides that Bylaw provisions may be adopted, altered, amended, or repealed only by the affirmative vote of (i) at least two-thirds of the members of the Board of Directors who are elected by the holders of Common Stock or (ii) the holders of at least two-thirds of the outstanding shares of each class of the Company's capital stock then entitled to vote thereon. Classified Board of Directors. The Certificate of Incorporation provides for a Board of Directors divided into three classes of directors serving staggered three-year terms. The classification of directors has the effect of making it more difficult for stockholders to change the composition of the Board of Directors in a short period of time. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Number of Directors; Removal. The Certificate of Incorporation provides that the Board of Directors will fix the number of members of the Board of Directors to consist of at least one member (plus such number of directors as may be elected from time to time pursuant to the terms of any series of preferred stock that may be issued and outstanding from time to time). Under the Delaware General Corporation Law (the "DGCL"), in the case of a corporation having a classified board, stockholders may remove a director only for cause (unless the certificate of incorporation provides otherwise). The Company's Certificate of Incorporation provides that a director may only be removed for cause. "Cause" is defined in the Certificate of Incorporation to mean that a director (i) has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal, (ii) has missed 12 consecutive meetings of the Board of Directors or (iii) has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of his duties to the corporation in a matter of substantial importance to the corporation and such adjudication has become final and non-appealable. These provisions will preclude a stockholder from simultaneously removing incumbent directors without cause and gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. Special Meetings. The Bylaws and Certificate of Incorporation provide that special meetings of stockholders may be called by a majority of the Board of Directors, the Chairman of the Board of Directors, or by any holder or holders of at least 25% of any class of the Company's outstanding capital stock then entitled to vote at the meeting. Advance Notice Requirements for Stockholder Proposals and Director Nominees. The Bylaws establish an advance notice procedure with regard to business proposed to be submitted by a stockholder at any annual or special meeting of stockholders of the Company, including the nomination of candidates for election as directors. The procedure provides that a written notice of proposed stockholder business at any annual meeting must be received by the Secretary of the Company not more than 180 days nor less than 120 days before the first anniversary of the prior year's annual meeting or, in the event of a special meeting, not more than 10 days after the notice of the special meeting. Notice to Kitty Hawk from a stockholder who proposes to nominate a person at a meeting for election as a director must contain all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Exchange Act"), including such person's written consent to being named in a proxy statement as a nominee and to serving as a director if elected. The chairman of a meeting of stockholders may determine that a person is not nominated in accordance with the nominating procedure, in which case such person's nomination will be disregarded. If the chairman of a meeting of stockholders determines that other business has not been properly brought before such meeting in accordance with the Bylaw procedures, such business will not be conducted at the meeting. Nothing in the nomination procedure or the business will preclude discussion by any stockholder of any nomination or business properly made or brought before the annual or any other meeting in accordance with the foregoing procedures. Limitations on Directors' Liability. The Company's Certificate of Incorporation provides that, to the fullest extent permitted by Delaware law, no director shall be liable to the Company or its stockholders for 93 95 monetary damages for breach of fiduciary duty as a director. The effect of this provision is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from gross negligence), except for liability (i) for any breach of his duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (unlawful payments of dividends or unlawful stock repurchases or redemptions) or (iv) for any transaction from which the director derived an improper personal benefit. This provision also will not limit the liability of directors under federal securities laws for violations not involving a breach of fiduciary duty. This elimination of liability for monetary damages permitted by Delaware law does not alter the standard of conduct with which directors must comply nor does it affect the availability of equitable relief to the Company and its stockholders. Restrictions on Foreign Directors, Officers and Voting. The Company's 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. Furthermore, the Bylaws do not permit non-U.S. citizens to serve as directors or officers of the Company. DELAWARE STATUTE The Certificate of Incorporation of Kitty Hawk provides for the Company to be subject to Section 203 of the DGCL ("Section 203"). Under Section 203, certain transactions and business combinations between a corporation and an "interested stockholder" owning 15% or more of the corporation's outstanding voting stock are restricted, for a period of three years from the date the stockholder becomes an interested stockholder. Generally, Section 203 prohibits significant business transactions such as a merger with, disposition of assets to or receipt of disproportionate financial benefits by, the interested stockholder, or any other transaction that would increase the interested stockholder's proportionate ownership of any class or series of the Company's capital stock unless (i) the transaction resulting in a person's becoming an interested stockholder, or the business combination, has been approved by the Board of Directors before the person becomes an interested stockholder; (ii) the interested stockholder acquires 85% or more of the outstanding voting stock of the Company in the same transaction that makes it an interested stockholder; or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the Board of Directors and by the holders of at least two-thirds of the Company's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a summary of material terms of certain indebtedness of the Company and is qualified in its entirety by reference to the related underlying documents, copies of which are filed as an exhibit to the Registration Statement of which this Prospectus is a part. PRE-TRANSACTION DEBT During August 1996, Kitty Hawk entered into a Credit Agreement with WFB and BOT. This Credit Agreement relates to a $15 million Revolving Credit Facility, an approximate $12 million Term Loans A Facility, an approximate $11.2 million Term Loans B Facility and a $10 million Term Loans C Facility (collectively, the "Commitments"). As of September 30, 1997, approximately $7.7 million was outstanding under the Revolving Credit Facility, approximately $10.1 million was outstanding under Terms Loans A, approximately $9.6 million was outstanding under Term Loans B and approximately $5.4 million was outstanding under Term Loans C. These Commitments bear interest at WFB's prime rate, or at Kitty Hawk's option, the Eurodollar rate plus 1.5% to 2.0%, based upon a debt-to-cash flow ratio of Kitty Hawk. 94 96 In connection with consummation of this Common Stock Offering and the Note Offering, the Company intends to repay all outstanding borrowings under the Commitments. Kitty Hawk also has two loans with 1st Source Bank. As of September 30, 1997, the outstanding balance of the first loan was approximately $791,000. The loan bears interest at 9.75%, is secured by a DC-9-15F and matures in May 2000. As of September 30, 1997, the outstanding balance of the second loan was approximately $1.2 million. The loan bears interest at 8.5%, is secured by a DC-9-15F and matures in July, 2002. The 1st Source loans contain certain aircraft maintenance covenants and provides that a change in Kitty Hawk's business is an event of default upon which 1st Source may declare all or any part of the remaining unpaid principal due and payable. In connection with the consummation of this Common Stock Offering and the Note Offering, the Company intends to discharge this debt. In November 1996, in connection with Kitty Hawk's acquisition of a one-third undivided interest in four Falcon 20 jet aircraft, Kitty Hawk 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. Kitty Hawk's liability under such loan is limited to $2.0 million. This debt will remain outstanding following consummation of this Common Stock Offering and the Note Offering. In September 1997, Kitty Hawk purchased 16 Boeing 727 aircraft from the Kalitta Companies for an aggregate cash consideration of approximately $51 million. The purchase of this aircraft was financed by a $45.9 million term loan with WFB. This loan bears interest at the applicable rate under the Credit Agreement, plus 1.0% from January 1 through December 31, 1999 and 1.5% beginning January 1, 2000 and matures on June 30, 2001. Interest only is payable through March 31, 1998. The term loan begins to amortize on June 30, 1998 with equal quarterly installments of principal and interest until maturity. This debt will be refinanced in connection the Term Loan. See "-- New Credit Facility and Term Loan." As of June 30, 1997, total indebtedness of the Kalitta Companies for money borrowed was approximately $248.3 million. Approximately $131.1 million of this indebtedness accrues interest at fixed rates ranging from 6.4% to 18.0% per annum, while the remainder accrues interest at variable rates ranging from one percent to four percent over a specified per annum prime or other base rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Kalitta Companies." Substantially all of this indebtedness has been reclassified as current. All of this indebtedness will be retired with the net proceeds of this Common Stock Offering and the Note Offering, subject to payment of approximately $3 million in prepayment penalties. See "Use of Proceeds." NEW CREDIT FACILITY AND TERM LOAN The Term Loan will be incurred to refinance the indebtedness incurred in September 1997 to finance the acquisition of 16 Boeing 727s from the Kalitta Companies. The Term Loan will mature five years after issuance and will be payable in equal quarterly principal installments of $2.25 million commencing in 1999 and ending in 2002, with a balance of approximately $12.15 million due at maturity. Interest on the Term Loan will accrue initially at LIBOR plus 2.75% or the Base Rate plus 1.25%, subject to reduction. See "Description of Certain Indebtedness." The Base Rate is WFB's Prime Rate or the Federal Funds Rate plus .5%. The Term Loan will be secured by accounts receivable, all inventory (including rotables), intangibles and contract rights, cash and the 16 Boeing 727s and related engines recently acquired from the Kalitta Companies. The Company will enter into the New Credit Facility with WFB, individually and as agent for various lenders, which will provide the Company with up to $100 million in revolving loans to be secured by the same collateral as the Term Loan. The facility will bear interest initially at LIBOR plus 2.5% or the Base Rate plus 1%, subject to adjustment within the same parameters as the Term Loan. Borrowings under the New Credit Facility will be subject to a Borrowing Base (as defined) and will mature five years from execution of the New Credit Facility. The New Credit Facility and the Term Loan contain certain financial and other covenants customary to similar financings including, without limitation, a prohibition on changes in the Company's business, a 95 97 prohibition on sales of all or substantially all the Company's assets, limitations on mergers, certain acquisitions, reorganizations and liens, restrictions on debt incurrence, dividends and distributions, and various financial ratios. In addition, the New Credit Facility and Term Loan subject the Company to limits on capital expenditures in excess of $90 million for fiscal year 1998. Finally, the New Credit Facility and Term Loan contain events of default customary in similar financings. SENIOR SECURED NOTES Consummation of the Common Stock Offering is conditioned upon consummation of the Note Offering. The Notes will mature seven years after issuance and will be issued in an aggregate principal amount of approximately $340 million. The Notes are expected to bear interest at a rate of approximately 10% per annum, payable in cash semiannually. The Notes will be secured by certain of the Company's aircraft and the Optioned Boeing 747s. The Notes will be guaranteed on a senior secured basis by substantially all of the Company's subsidiaries, other than AIC. The Notes will be redeemable at the Company's option, beginning in 2002, at a premium. Up to 35% of the Notes will also be redeemable at the Company's option, until 2000, with proceeds from public equity offerings. The Notes will be initially issued under Rule 144A, but will be required to be exchanged for Notes of substantially identical terms registered under the Securities Act. The Indenture will contain the following restrictive covenants, among others: limitation on indebtedness; limitation on restricted payments (including dividends); limitation on dividend restrictions of subsidiaries; limitation on capital stock of subsidiaries; limitation on transactions with affiliates; limitation on liens; limitation on sale-leaseback transactions; limitation on asset sales; and limitation on mergers and similar transactions. In addition, the Notes will be redeemable, at the holder's option, upon a change of control of the Company. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Common Stock Offering, 17,550,957 shares (18,165,957 shares if the Underwriters' over-allotment option is exercised in full) of Common Stock will be outstanding. The 4,100,000 shares (4,715,000 shares if the Underwriters' over-allotment option is exercised in full) of Common Stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless acquired by "affiliates" of the Company. Pursuant to Rule 144 under the Securities Act, upon completion of this Common Stock Offering, 9,929,150 shares of Common Stock will be deemed "restricted securities" within the meaning of Rule 144 under the Securities Act (the "Restricted Shares") and may be resold to the extent permitted under Rule 144 and Rule 701 of the Securities Act or under any exemption under the Securities Act. Under the terms of a Stockholders' Agreement to be entered into contemporaneously with the Merger, Messrs. Christopher and Kalitta will have incidental registration rights for the ten-year period commencing with the Closing, subject to customary cutback and exclusion provisions; provided that the number of shares proposed to be sold by either Mr. Christopher or Mr. Kalitta in any such registration shall not be less than 50,000 shares. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an "affiliate," who has beneficially owned his or her shares for at least one year from the later of the date such Restricted Shares were acquired from the Company or (if applicable) the date they were acquired from an "affiliate," is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the then outstanding shares during the four calendar weeks preceding each such sale. Sales under Rule 144 also are subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. A person (or persons whose shares are aggregated) who is not deemed an "affiliate" of the Company and has not been an affiliate of the Company for at least the prior three months and who has owned shares for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares under Rule 144 without regard to the volume limitations and the other conditions described above. As defined in Rule 144, an "affiliate" of an issuer is a 96 98 person that directly or indirectly, through the use of one or more intermediaries, controls, or is controlled by, or is under the common control with, such issuer. Any employee, officer, or director of Kitty Hawk who purchases his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits non-affiliates, subject to the limitations and requirements of Rule 701, to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitations, or notice provisions of Rule 144 and permits affiliates, subject to the limitations and restrictions of Rule 701, to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days from the date of this Prospectus. The Company has filed registration statements under the Securities Act covering 600,000 shares of Common Stock reserved for issuance under the Plans. See "Management -- Employee Compensation Plans and Arrangements." As of the date hereof, 1,807 shares had been issued under the Plans. Shares registered under such registration statements are available for sale in the open market when issued pursuant to the Plans, subject to Rule 144 volume limitations applicable to affiliates and provisions of the Plans, including vesting. Messrs. Christopher, Kalitta, Reeves and Wadsworth, who collectively will hold 9,929,150 shares of Common Stock in the aggregate after this Common Stock Offering, along with the Company and its other directors and executive officers have agreed that, for a period of 90 days from the date of this Prospectus, they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for, Common Stock, except for up to 10,000 shares issuable pursuant to the Plans. Such consent of Morgan Stanley & Co. Incorporated may be provided without notice to purchasers of the Common Stock or to officials of the Nasdaq National Market System. See "Management -- Employee Compensation Plans and Arrangements." 97 99 UNDERWRITERS Under the terms and subject to conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters named below, for whom Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated, Scott & Stringfellow, Inc. and Fieldstone FPCG Services, L.P. are acting as Representatives, have severally agreed to purchase, and the Company and the Selling Stockholders have agreed to sell to them, severally, the respective number of shares of Common Stock set forth opposite the name of such Underwriters below:
NUMBER OF NAME SHARES ---- --------- Morgan Stanley & Co. Incorporated........................... BT Alex. Brown Incorporated................................. Scott & Stringfellow, Inc. ................................. Fieldstone FPCG Services, L.P. ............................. --------- Total............................................. 4,100,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the Underwriters' over-allotment option described below) if any such shares are taken. Each Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares of the Company's Common Stock being sold in this Common Stock Offering, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and has represented that any offer or sale of shares of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each Underwriter has further agreed to send to any dealer who purchases from it any of the shares of Common Stock a notice stating in substance that, by purchasing such shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer or sale of shares of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and that such dealer will deliver to any other dealer to whom it sells any of such shares a notice containing substantially the same statement as is contained in this sentence. The Underwriters initially propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, the public offering price and other selling terms may from time to time be varied by the Representatives. 98 100 Pursuant to the Underwriting Agreement, the Company has granted to the Underwriters an option, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of 615,000 additional shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered by the Underwriters hereby. The Company and each director and executive officer has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 90 days after the date of this Prospectus, (i) register for sale, issue, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (other than shares of Common Stock acquired in the open market after the date of this Prospectus) or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, other than (x) the shares of Common Stock to be sold hereunder, and (y) 10,000 shares issuable pursuant to the Plans. In order to facilitate this Common Stock Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with this Common Stock Offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the Underwriters may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Common Stock in this Common Stock Offering, if the Underwriters repurchase previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company, the Selling Stockholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Underwriters and dealers may engage in passive market making transactions in the Common Stock in accordance with Rule 103 of Regulation M promulgated by the Securities and Exchange Commission. In general, a passive market maker may not bid for, or purchase, the Common Stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the Common Stock during the specified two month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq electronic inter-dealer reporting system. Passive market making may stabilize or maintain the market price of the Common Stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. BT Alex. Brown Incorporated, one of the Underwriters, rendered a fairness opinion to the Company in connection with the Merger and received customary fees for rendering such opinion. Fieldstone FPCG Services, L.P., one of the Underwriters, and its affiliates have provided investment banking services to the Company from time to time, for which it has received customary fees, including acting as financial advisor and placement agent in connection with the Company's issuance of senior secured debt and as financial advisor to Kitty Hawk and the Kalitta Companies in connection with the Merger. 99 101 LEGAL MATTERS The validity of the shares of Common Stock offered hereby and certain other legal matters will be passed upon for the Company and the Selling Stockholders by Haynes and Boone, LLP, Dallas, Texas. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Shearman & Sterling, New York, New York. EXPERTS The consolidated financial statements of Kitty Hawk, Inc., at August 31, 1995 and 1996 and at December 31, 1996 and for each of the three years in the period ended August 31, 1996 and for the four month period ended December 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The combined financial statements of American International Airways, Inc. and related companies as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere (which report expresses an unqualified opinion and includes an explanatory paragraph which indicates that there are matters that raise substantial doubt about the ability of American International Airways, Inc. and related companies to continue as a going concern), and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act. In accordance with the Exchange Act, the Company files reports, proxy and information statements and other information with the Commission. The reports, proxy and information statements and other information can be inspected and copied at the public reference facilities that the Commission maintains at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of these materials can be obtained at prescribed rates from the Public Reference Section of the Commission at the principal offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such documents may also be obtained at the Web site maintained by the Commission (http://www.sec.gov). In addition, copies of documents relating indebtedness of Kitty Hawk and the Kalitta Companies existing prior to the Refinancings may be obtained from the Company at 1515 West 20th Street, Dallas/Fort Worth International Airport, Texas 75261, (972) 456-2200. The Company's Common Stock is quoted on the Nasdaq National Market and such reports, proxy and information statements and other information may be inspected at the National Association of Securities Dealers, Inc., 1735 K. Street N.W., Washington, D.C. 20006. The Company has filed with the Commission a registration statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the Common Stock. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain items of which are contained in schedules and exhibits to the Registration Statement as permitted by the rules and regulations of the Commission. Statements made in the Prospectus concerning the contents of any documents referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description and each such statement shall be deemed qualified in its entirety by such reference. 100 102 INDEX TO FINANCIAL STATEMENTS KITTY HAWK, INC. AND SUBSIDIARIES 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 Condensed Consolidated Balance Sheet as of June 30, 1997 (unaudited)............................................... F-17 Condensed Consolidated Statements of Operations for the six month periods ended June 30, 1996 and 1997 (unaudited).... F-18 Condensed Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1997 (unaudited)............ F-19 Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 1996 and 1997 (unaudited).... F-20 Notes to Condensed Consolidated Financial Statements........ F-21 THE KALITTA COMPANIES (AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES) Independent Auditors' Report................................ F-23 Combined Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (unaudited)................................. F-24 Combined Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the six month periods ended June 30, 1996 and 1997 (unaudited).................. F-25 Combined Statements of Stockholder's Equity for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997 (unaudited)........................... F-26 Combined Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the six month periods ended June 30, 1996 and 1997 (unaudited).................. F-27 Notes to Combined Financial Statements...................... F-29
F-1 103 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-2 104 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-3 105 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOUR MONTHS ENDED YEAR ENDED AUGUST 31, 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-4 106 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-5 107 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-6 108 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 on the Company's aircraft since their respective dates of acquisition. 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-7 109 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-8 110 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 -- --
F-9 111 (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 -- -- (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 F-10 112 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 DC-9-15F hushkit and up to seven major maintenance checks for jet aircraft. The funds will be 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 ENDED YEAR ENDED AUGUST 31, 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 ========== ========== ========== ============
F-11 113 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ========== ========== ========== ==========
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 F-12 114 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. F-13 115 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. F-14 116 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. During the fiscal year ended August 31, 1996, 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 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-15 117 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 certain historical information recast on a calendar basis for 1996. INFORMATION FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1996 DECEMBER 31, 1996 ------------- ----------------- Revenues: Air freight carrier....................................... $25,274 $ 55,504 Air logistics............................................. 27,010 77,168 ------- -------- Total revenues.................................... 52,284 132,672 ------- -------- Costs of revenues: Air freight carrier....................................... 20,340 40,860 Air logistics............................................. 24,268 67,938 ------- -------- Total costs of revenues........................... 44,608 108,798 ------- -------- Gross profit................................................ 7,676 23,874 General and administrative expenses......................... 4,572 8,943 Non-qualified employee profit sharing expense............... (32) 1,243 Stock option grants to executives........................... 4,231 4,231 ------- -------- Operating income............................................ (1,095) 9,457 Other income (expense): Interest expense.......................................... (1,023) (2,062) Loss on asset disposal.................................... -- (589) Other, net................................................ 138 880 ------- -------- Income (loss) before income taxes........................... (1,980) 7,686 Income taxes (benefit)...................................... (831) 3,038 ------- -------- Net income (loss)........................................... $(1,149) $ 4,648 ======= ======== Net income (loss) per share................................. $ (0.14) $ 0.55 ======= ======== Net income, adjusted for non-recurring items................ $ 1,414 $ 8,278 ======= ======== Net income per share, adjusted for non-recurring items...... $ 0.18 $ 0.98 ======= ======== Weighted average common and common equivalent shares outstanding............................................... 7,968 8,477 ======= ========
F-16 118 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS
JUNE 30, 1997 ------------ Current assets Cash and cash equivalents................................. $ 8,952,142 Trade accounts receivable................................. 15,122,410 Deferred income taxes..................................... 107,564 Inventory and aircraft supplies........................... 4,434,467 Prepaid expenses and other assets......................... 1,422,498 Deposits on aircraft...................................... 3,835,909 ------------ Total current assets.............................. 33,874,990 ------------ Property and equipment Aircraft.................................................. 72,352,742 Aircraft work-in-progress................................. 22,508,984 Machinery and equipment................................... 3,118,992 Leasehold improvements.................................... 3,061,731 Building.................................................. 1,798,119 Furniture and fixtures.................................... 166,057 Transportation equipment.................................. 325,764 ------------ 103,332,389 Less: accumulated depreciation and amortization........... (19,849,788) ------------ Net property and equipment........................ 83,482,601 ------------ Total assets...................................... $117,357,591 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 5,986,169 Accrued expenses.......................................... 8,850,700 Income taxes payable...................................... 1,077,057 Accrued maintenance reserves.............................. 2,598,562 Current maturities of long-term debt...................... 4,774,363 ------------ Total current liabilities......................... 23,286,851 Long-term debt.............................................. 29,277,295 Deferred income taxes....................................... 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 -- 10,669,517.............................. 106,695 Additional paid-in capital............................. 33,949,825 Retained earnings...................................... 30,268,327 Less common stock in treasury, -- 217,710 shares at June 30, 1997 and December 31, 1996................... (2,076,302) ------------ Total stockholders' equity........................ 62,248,545 ------------ Total liabilities and stockholders' equity........ $117,357,592 ============
See accompanying notes. F-17 119 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1996 1997 ----------- ----------- Revenues: Air freight carrier....................................... $25,274,245 $33,237,034 Air logistics............................................. 27,010,379 27,231,490 ----------- ----------- Total revenues.................................... 52,284,624 60,468,524 ----------- ----------- Costs of revenues: Air freight carrier....................................... 20,340,217 22,843,865 Air logistics............................................. 24,267,931 24,818,999 ----------- ----------- Total costs of revenues........................... 44,608,148 47,662,864 ----------- ----------- Gross profit................................................ 7,676,476 12,805,660 General and administrative expenses......................... 4,572,011 4,884,325 Non-qualified employee profit sharing expense............... (32,778) 671,757 Stock option grants to executives........................... 4,232,204 -- ----------- ----------- Operating income (loss)..................................... (1,094,961) 7,249,578 Other income (expense): Interest expense.......................................... (1,023,278) (1,049,382) Other, net................................................ 137,680 424,853 ----------- ----------- Income (loss) before income taxes........................... (1,980,559) 6,625,049 Income taxes (benefit)...................................... (831,242) 2,650,020 ----------- ----------- Net income (loss)........................................... (1,149,317) 3,975,029 =========== =========== Net income (loss) per share................................. $ (0.14) $ 0.38 =========== =========== Weighted average common and common equivalent shares outstanding............................................... 7,967,710 10,451,807 =========== ===========
See accompanying notes. F-18 120 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
ADDITIONAL NUMBER OF COMMON PAID-IN RETAINED TREASURY SHARES STOCK CAPITAL EARNINGS STOCK TOTAL ---------- -------- ----------- ----------- ----------- ----------- Balance at December 31, 1996................. 10,669,517 $106,695 $33,968,700 $26,293,298 $(2,076,302) $58,292,391 Additional costs relating to initial public offering...... -- -- (18,875) -- -- (18,875) Net income............. -- -- -- 3,975,029 -- 3,975,029 ---------- -------- ----------- ----------- ----------- ----------- Balance at June 30, 1997................. 10,669,517 $106,695 $33,949,825 $30,268,327 $(2,076,302) $62,248,547 ========== ======== =========== =========== =========== ===========
See accompanying notes. F-19 121 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1996 1997 ------------ ------------ Operating activities: Net income (loss)......................................... $ (1,149,317) $ 3,975,029 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................. 3,616,752 4,459,773 Deferred income taxes..................................... (43,658) -- Stock option grants to executives......................... 4,230,954 -- Changes in operating assets and liabilities: Trade accounts receivable................................. 21,617,441 22,705,608 Inventory and aircraft supplies........................... 307,547 (1,644,485) Prepaid expenses and other................................ 5,256,173 (278,509) Deposits on aircraft...................................... -- 1,602,719 Accounts payable and accrued expenses..................... (17,008,776) (17,685,032) Accrued maintenance reserves.............................. (466,694) 225,405 Income taxes payable...................................... (2,614,105) (1,449,680) ------------ ------------ Net cash provided by operating activities................... 13,746,317 11,910,828 Investing activities: Capital expenditures........................................ (17,007,546) (39,543,531) ------------ ------------ Financing activities: Proceeds from issuance of long-term debt.................... 5,525,018 11,112,999 Repayments of long-term debt................................ (1,618,350) (1,829,681) Additional costs relating to initial public offering........ (18,875) Proceeds from issuance of common stock...................... 4,430 -- ------------ ------------ Net cash provided by (used in) financing activities......... 3,911,098 9,264,443 ------------ ------------ Net increase (decrease) in cash and cash equivalents........ 649,869 (18,368,260) Cash and cash equivalents at beginning of period............ 3,355,293 27,320,402 ------------ ------------ Cash and cash equivalents at end of period.................. $ 4,005,162 $ 8,952,142 ============ ============
See accompanying notes. F-20 122 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes appearing elsewhere herein are unaudited, but have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. Net income (loss) per share is computed by dividing net income (loss) 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 1996 have been included in the calculation of weighted average common and common equivalent shares for the six month period ended June 30, 1996. 2. REGISTRATION OF STOCK OFFERING In October 1996, the Company sold in an initial public offering 2,700,000 shares of Common Stock. 3. 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. In February 1995, a jury awarded the Company $25,000 in damages plus its attorneys' fees and denied Express One's counterclaims. The court entered judgment in favor of the Company for $25,000 in damages, for $148,115 in attorney's 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 of this matter to have a material adverse effect on the Company's financial condition or results of operations. The U.S. Postal Service ("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 F-21 123 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 certain 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. 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 of this matter to have a material adverse effect on the Company's financial condition or results of operations. 4. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. Early adoption of the new standard is not permitted. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. Because the application of SAB No. 83, in calculation of per share amounts under FAS 128 is presently uncertain, the Company is unable to determine the effect of this new standard on per share amounts prior to 1997. The effect on 1997 per share amounts is not expected to be material. 5. SUBSEQUENT EVENTS On September 22, 1997, the Company, the sole stockholder of the Kalitta Companies, and the Kalitta Companies entered into a merger agreement, under which each of the respective Kalitta Companies will be merged with separate subsidiaries of Kitty Hawk, with each of the Kalitta Companies surviving the merger as a direct, wholly owned subsidiary of Kitty Hawk. At the effective time of the proposed Merger, the outstanding shares of capital stock of four Kalitta Companies (AIA, AIT, FOL and O.K.) will be converted, into the right to receive their prorata portion of 4,099,150 shares of Kitty Hawk common stock. The outstanding shares of capital stock of KFS will be converted into the right to receive $20,000,000. Concurrent with the consummation of the merger agreement will be the closing of a proposed common stock offering of 3,000,000 shares of common stock by Kitty Hawk and the consummation of a proposed note offering under Rule 144A of the Securities Act for $340,000,000 aggregate principal amount of senior secured notes of Kitty Hawk. The proceeds of the notes and a portion of the proceeds of the sale of shares will be used to pay the cash portion of the acquisition of the Kalitta Companies and to refinance and restructure the outstanding debt of the Kalitta Companies and Kitty Hawk. As an interim step toward the merger, on September 17, 1997, the Company purchased sixteen Boeing 727-200 aircraft constituting the Kalitta Companies' 727-200 fleet for approximately $51 million. As part of the transaction, the Kalitta Companies assigned to Kitty Hawk all of its customer contracts relating to the aircraft sold. The purchase agreement provides the Kalitta Companies the option to repurchase, no later than March 31, 1998, all except three of the 727-200 aircraft from Kitty Hawk at Kitty Hawk's purchase price, less $14 million for the three aircraft not subject to the option, plus any costs incurred by Kitty Hawk to maintain the repurchased aircraft. Similarly, Kitty Hawk has the option to require the Kalitta Companies to repurchase, no later than December 31, 1997, all except three of the 727-200 aircraft at Kitty Hawk's purchase price less $14 million for the three aircraft not subject to the option, plus any costs incurred by Kitty Hawk to maintain the repurchased aircraft. Of the purchase price, $45.9 million was financed through an amendment of the Company's existing Credit Agreement. The loan bears interest at a Eurodollar rate plus 1.5% to 2.0% based upon a debt-to-cash flow ratio of the Company plus an additional 1.0% beginning in 1999 and 1.5% beginning in 2000, with maturity on June 30, 2001. F-22 124 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of American International Airways, Inc. and Related Companies Ypsilanti, Michigan We have audited the accompanying combined balance sheets of American International Airways, Inc. and related companies as of December 31, 1996 and 1995, and the related combined statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1996. The combined financial statements include the accounts of American International Airways, Inc. and its 60% owned partnership, American International Cargo; and related companies Kalitta Flying Services, Inc., O.K. Turbines, Inc., American International Travel, Inc. and Flight One Logistics, Inc. (collectively, the "Companies"). These Companies are under common ownership and common management. These financial statements are the responsibility of the Companies' 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, such financial statements present fairly, in all material respects, the combined financial position of American International Airways, Inc. and related companies as of December 31, 1996 and 1995, and the results of their combined operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Companies will continue as a going concern. As discussed in Note 11 to the financial statements, the Companies (1) are experiencing difficulty in generating sufficient cash flows to meet their obligations and sustain their operations, (2) failed to make certain principal payments and are not in compliance with certain covenants of their long-term debt agreements (3) have negative working capital and (4) have incurred substantial losses subsequent to December 31, 1996, which raises substantial doubt about their ability to continue as a going concern. Management's plans concerning these matters are described in Note 11. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Ann Arbor, Michigan October 16, 1997 F-23 125 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES COMBINED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 ASSETS
DECEMBER 31, --------------------------- JUNE 30, 1995 1996 1997 ------------ ------------ ------------ (UNAUDITED) CURRENT ASSETS: Cash...................................................... $ 1,091,960 $ 2,324,353 $ 2,700,753 Restricted cash........................................... 795,030 2,867,933 Accounts receivable, net (Notes 1 and 3).................. 88,273,823 67,081,125 54,699,709 Accounts receivable -- related parties.................... 4,390,261 2,960,778 2,641,938 Expendable parts and supplies............................. 12,330,854 20,742,140 23,212,703 Aircraft held for resale (Note 4)......................... 6,593,069 6,117,266 5,402,466 Deposits, prepaid expenses and other assets............... 4,914,056 8,018,273 7,696,102 Prepaid fuel.............................................. 4,080,373 5,828,047 5,944,772 Notes receivable, current................................. 186,085 186,085 186,085 ------------ ------------ ------------ Total current assets.................................... 121,860,481 114,053,097 105,352,461 PROPERTY AND EQUIPMENT: Land and improvements..................................... 228,678 228,678 228,678 Building and leasehold improvements (Note 4).............. 9,347,825 12,752,356 13,974,397 Rotable parts (Note 3).................................... 14,560,287 16,779,386 17,397,571 Equipment (Note 3)........................................ 19,685,442 23,677,640 25,395,893 Aircraft (Note 3)......................................... 264,266,383 320,276,140 326,179,416 ------------ ------------ ------------ Total............................................... 308,088,615 373,714,200 383,175,955 Less accumulated depreciation............................. 81,246,881 109,707,512 124,989,977 ------------ ------------ ------------ Net................................................. 226,841,734 264,006,688 258,185,978 Aircraft in modification (Note 3)......................... 25,557,078 988,541 1,561,611 Construction in progress.................................. 3,152,560 923,150 868,912 ------------ ------------ ------------ Total property and equipment, net................... 255,551,372 265,918,379 260,616,501 NOTES RECEIVABLE, LESS CURRENT PORTION...................... 184,968 131,805 131,805 RECEIVABLE FROM AFFILIATED COMPANY.......................... -- -- 747,284 ------------ ------------ ------------ TOTAL ASSETS (Notes 3 and 4)................................ $377,596,821 $380,103,281 $366,848,051 ============ ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable: Trade (Note 1).......................................... $ 62,125,228 $ 46,070,230 $ 52,207,904 Related parties......................................... 4,421,143 77,450 56,619 Accrued liabilities....................................... 20,342,988 24,172,883 24,685,595 Deferred revenue.......................................... -- 795,030 2,867,933 Notes payable to bank, reclassified as current (Note 3)... -- 47,105,413 56,482,835 Long term debt, reclassified as current (Note 4).......... -- 155,910,954 144,959,737 Notes payable to bank (Note 3)............................ 12,226,496 1,024,035 2,691,056 Current maturities of long-term debt (Note 4)............. 42,444,612 34,310,440 43,822,404 ------------ ------------ ------------ Total current liabilities........................... 141,560,467 309,466,435 327,774,083 NOTES PAYABLE, NONCURRENT (Note 3).......................... 34,983,000 -- -- LONG-TERM DEBT, LESS CURRENT PORTION (Note 4)............... 130,717,485 -- -- NOTE PAYABLE TO STOCKHOLDER (Note 8)........................ 100,000 -- 300,462 ------------ ------------ ------------ Total liabilities................................... 307,360,952 309,466,435 328,074,545 COMMITMENTS AND CONTINGENCIES (Notes 6 and 9) MINORITY INTEREST IN AMERICAN INTERNATIONAL CARGO........... 3,944,070 3,551,735 3,242,145 STOCKHOLDERS EQUITY (Note 5): Common stock, par value $1 per share, authorized 275,000 shares in 1995, 1996 and 1997, issued and outstanding 53,000 shares in 1995, 1996 and 1997.................... 53,000 53,000 53,000 Additional paid-in capital.................................. 14,062,669 17,839,157 17,839,157 Retained earnings........................................... 52,176,130 49,192,954 17,639,204 ------------ ------------ ------------ Total stockholders equity........................... 66,291,799 67,085,111 35,531,361 ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS EQUITY................... $377,596,821 $380,103,281 $366,848,051 ============ ============ ============
See notes to combined financial statements. F-24 126 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
DECEMBER 31, JUNE 30, ------------------------------------------ --------------------------- 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues (Note 9): Air transportation services..... $298,080,850 $359,404,248 $388,192,479 $177,431,725 $182,351,799 Maintenance and other........... 7,448,982 14,278,793 36,348,245 13,163,678 14,487,759 ------------ ------------ ------------ ------------ ------------ Total revenues........... 305,529,832 373,683,041 424,540,724 190,595,403 196,839,558 Operating Costs and Expenses: Flight.......................... 115,613,706 168,774,779 150,255,587 68,663,478 82,229,134 Maintenance..................... 64,722,079 103,388,710 115,081,955 50,336,936 69,120,548 Fuel............................ 57,361,888 54,538,321 82,717,539 40,616,342 35,497,840 Depreciation.................... 13,809,281 20,971,405 32,091,119 15,845,819 17,467,008 Selling, general and administrative................ 13,272,361 21,676,079 21,889,355 10,088,173 11,284,404 Provision for doubtful accounts...................... 2,231,485 1,862,283 1,010,663 1,436,966 684,004 ------------ ------------ ------------ ------------ ------------ Total cost and expenses............... 267,010,800 371,211,577 403,046,218 186,987,714 216,282,938 ------------ ------------ ------------ ------------ ------------ Income (Loss) from Operations..... 38,519,032 2,471,464 21,494,506 3,607,689 (19,443,380) Other Income (Expense): Interest expense, net........... (8,007,389) (14,748,611) (21,632,389) (10,186,510) (12,098,100) Gain on disposition of property and equipment, net............ 3,389,881 11,707,673 130,934 395,019 948,504 Gain on contract settlement..... -- -- 1,123,200 1,123,200 -- Gain on insurance reimbursement................. -- 8,147,878 -- -- 542,302 Net, miscellaneous.............. (550,000) (110) 13,116 13,214 -- ------------ ------------ ------------ ------------ ------------ Total other (expense) income................. (5,167,508) 5,106,830 (20,365,139) (8,655,077) (10,607,294) ------------ ------------ ------------ ------------ ------------ Income (Loss) Before Minority Interest in American International Cargo............. 33,351,524 7,578,294 1,129,367 (5,047,388) (30,050,674) Minority Interest in American International Cargo............. (2,758,372) (3,092,513) (1,146,019) (510,528) (892,524) ------------ ------------ ------------ ------------ ------------ Net Income (Loss)................. $ 30,593,152 $ 4,485,781 $ (16,652) $ (5,557,916) $(30,943,198) ============ ============ ============ ============ ============ Unaudited Pro forma Data (Note 1): Income (loss) before provision for income taxes.............. $ 30,593,152 $ 4,485,781 $ (16,652) $ (5,557,916) $(30,943,198) Provision for income taxes...... 11,625,398 1,704,597 -- -- -- ------------ ------------ ------------ ------------ ------------ Pro forma net income (loss)....... $ 18,967,754 $ 2,781,184 $ (16,652) $ (5,557,916) $(30,943,198) ============ ============ ============ ============ ============
See notes to combined financial statements. F-25 127 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AMERICAN KALITTA AMERICAN FLIGHT INTERNATIONAL FLYING O.K. GRAND INTERNATIONAL ONE AIRWAYS SERVICES, TURBINES, HOLDINGS, TRAVEL, LOGISTICS INC. INC. INC. INC. INC. INC. TOTAL ------------- --------- --------- --------- ------------- --------- ------- Balance, December 31, 1993..... $25,000 $25,000 $1,000 $ -- $ -- $ -- $51,000 Acquisition of Grand Holdings, Inc. (Note 2).... -- -- -- 100 -- -- 100 Distributions to stockholder................ -- -- -- -- -- -- -- Net income................... -- -- -- -- -- -- -- ------- ------- ------ ----- ------ ------ ------- Balance, December 31, 1994..... 25,000 25,000 1,000 100 -- -- 51,100 Issuance of common stock..... -- -- -- -- 1,000 1,000 2,000 Disposal of Grand Holdings, Inc. (Note 2).............. -- -- -- (100) -- -- (100) Contributions by stockholder (Note 2)................... -- -- -- -- -- -- -- Distributions to stockholder................ -- -- -- -- -- -- -- Net income................... -- -- -- -- -- -- -- ------- ------- ------ ----- ------ ------ ------- Balance, December 31, 1995..... 25,000 25,000 1,000 -- 1,000 1,000 53,000 Contributions by stockholder................ -- -- -- -- -- -- -- Distributions to stockholder................ -- -- -- -- -- -- -- Net loss..................... -- -- -- -- -- -- -- ------- ------- ------ ----- ------ ------ ------- Balance, December 31, 1996..... 25,000 25,000 1,000 -- 1,000 1,000 53,000 Distributions to stockholder (unaudited)................ -- -- -- -- -- -- -- Net loss (unaudited)......... -- -- -- -- -- -- -- ------- ------- ------ ----- ------ ------ ------- Balance, June 30, 1997 (Unaudited).................. $25,000 $25,000 $1,000 $ -- $1,000 $1,000 $53,000 ======= ======= ====== ===== ====== ====== ======= ADDITIONAL PAID-IN RETAINED CAPITAL EARNINGS ----------- ------------ Balance, December 31, 1993..... $ 7,054,995 $ 39,354,622 Acquisition of Grand Holdings, Inc. (Note 2).... 8,875,000 -- Distributions to stockholder................ -- (8,830,125) Net income................... -- 30,593,152 ----------- ------------ Balance, December 31, 1994..... 15,929,995 61,117,649 Issuance of common stock..... -- -- Disposal of Grand Holdings, Inc. (Note 2).............. (8,875,000) 303,411 Contributions by stockholder (Note 2)................... 7,007,674 -- Distributions to stockholder................ -- (13,730,711) Net income................... -- 4,485,781 ----------- ------------ Balance, December 31, 1995..... 14,062,669 52,176,130 Contributions by stockholder................ 3,776,488 -- Distributions to stockholder................ -- (2,966,524) Net loss..................... -- (16,652) ----------- ------------ Balance, December 31, 1996..... 17,839,157 49,192,954 Distributions to stockholder (unaudited)................ -- (610,552) Net loss (unaudited)......... -- (30,943,198) ----------- ------------ Balance, June 30, 1997 (Unaudited).................. $17,839,157 $ 17,639,204 =========== ============
See notes to combined financial statements. F-26 128 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
DECEMBER 31, JUNE 30, ------------------------------------------ --------------------------- 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss).............................. $ 30,593,152 $ 4,485,781 $ (16,652) $ (5,557,916) $(30,943,198) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation................................. 13,809,281 20,971,405 32,091,119 15,845,819 17,467,008 Provision for doubtful accounts.............. 2,231,485 1,862,283 1,010,663 1,436,966 684,004 Gain (loss) on disposition of property and equipment.................................. (3,389,881) (11,707,673) (130,934) (395,019) (948,504) Minority interest in American International Cargo...................................... 2,758,372 3,093,262 1,143,637 510,528 892,524 Changes in assets and liabilities which provided (used) cash: Accounts receivable........................ (20,725,807) (17,819,263) 21,611,518 35,453,786 12,591,252 Expendable parts and supplies.............. (4,454,286) (3,470,152) (7,034,678) (5,013,941) (2,782,230) Deposits, prepaid expenses and other assets................................... (1,845,978) (3,740,088) (3,972,997) (3,732,762) (88,458) Aircraft held for resale................... (6,975,000) 21,754,521 (1,702,354) 40,867 (1,263,843) Accounts payable........................... 17,099,346 26,128,641 (20,398,691) (19,081,144) 6,691,843 Accrued liabilities........................ 4,742,342 7,956,796 3,829,895 3,180,360 512,712 ------------ ------------ ------------ ------------ ------------ Total adjustments........................ 3,249,874 45,029,732 26,447,178 28,245,460 33,756,308 ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities............................. 33,843,026 49,515,513 26,430,526 22,687,544 2,813,110 Cash flows from investing activities: Purchase of property and equipment............. (77,831,613) (153,719,347) (53,413,262) (29,697,122) (14,100,804) Proceeds from disposition of property and equipment.................................... 5,250,000 33,603,329 11,008,725 9,833,763 4,274,697 Collections on note receivable................. 139,620 119,324 53,163 53,163 -- Issuance of notes receivable to affiliated company...................................... -- -- -- -- (747,284) Disposal of Grand Holdings, Inc., net of cash......................................... -- (948,818) -- -- -- Acquisition of Grand-Holdings, Inc. net of cash acquired..................................... (97,077) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities.... (72,539,070) (120,945,512) (42,351,374) (19,810,196) (10,573,391) Cash flows from financing activities: Repayments of notes and long-term debt......... (21,997,617) (36,899,953) (52,117,964) (25,893,535) (21,635,491) Borrowings under notes and long-term debt agreements................................... 74,466,207 119,952,548 70,097,213 27,585,104 31,282,262 Net (repayments) borrowings under note payable to stockholder............................... -- 14,000 (100,000) 340,462 300,462 Issuance of common stock....................... -- 2,000 -- -- -- Contribution of capital by stockholder......... -- 554,102 3,776,488 53,923 -- Distributions to American International Cargo minority stockholder......................... (1,367,328) (2,106,000) (1,535,972) (1,100,000) (1,200,000) Distributions to stockholder................... (8,830,125) (13,730,711) (2,966,524) (2,572,286) (610,552) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities............................. 42,271,137 67,785,986 17,153,241 (1,586,332) 8,136,681 ------------ ------------ ------------ ------------ ------------ Increase (decrease) in cash...................... 3,575,093 (3,644,013) 1,232,393 1,291,016 376,400 Cash, beginning of period........................ 1,160,880 4,735,973 1,091,960 1,091,960 2,324,353 ------------ ------------ ------------ ------------ ------------ Cash, end of period.............................. $ 4,735,973 $ 1,091,960 $ 2,324,353 $ 2,382,976 $ 2,700,753 ============ ============ ============ ============ ============ Supplemental disclosure of cash flow information -- Cash paid during the period for interest....................................... $ 7,677,452 $ 16,334,750 $ 21,806,688 $ 10,124,254 $ 11,014,595 ============ ============ ============ ============ ============
F-27 129 Noncash operating and investing activities: In 1994, the Companies transferred assets with a net book value of $738,094 from property and equipment to aircraft held for resale. In 1995, the sole stockholder sold 80% of Grand Holdings, Inc. The nonmonetary combining effect on the Companies was $8,193,747. In 1995, the Companies refinanced $680,000 of notes payable to a bank on a long-term basis. In 1995, the sole stockholder of the Companies contributed property and equipment of $6,453,572. In 1996, the Companies transferred assets with a net book value of $1,436,000 from aircraft held for resale to property and equipment. In 1996, the Companies transferred assets with a net book value of $1,376,608 from property and equipment to inventory. In 1996, the Companies received $795,030 in restricted cash from customers for deposit. In 1996, the Companies deferred a $878,894 loss on the sale-leaseback of an aircraft held for resale. In 1997 (unaudited), the Companies sold certain assets held for resale for $1,150,000 in exchange for accounts receivable and reduction of outstanding liabilities. In 1997 (unaudited), the Companies received $2,073,000 in restricted cash from customers for deposit. In 1997 (unaudited), the Companies transferred assets with a net book value of $137,000 from inventory to property and equipment. See notes to combined financial statements. F-28 130 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description -- American International Airways, Inc. and its related companies (the "Companies") provide worldwide scheduled air cargo and charter services. The scheduled air cargo delivery business includes an overnight freight service operating within a network of North American cities. By integrating their scheduled and charter freight business and scheduled air cargo from the United States to the Far East, the Companies are able to provide air express delivery of virtually any type of air freight throughout the world. The Companies also provide a wide variety of aviation services, including ground handling support and airframe and engine maintenance and overhaul for their own aircraft and for other aircraft operators, travel services for the Companies' flight crews and maintenance personnel, and air charter management and services for the Companies. Significant Accounting Policies: Principles of Combined Financial Statements -- The combined financial statements include the accounts of American International Airways, Inc. and its 60% owned partnership, American International Cargo ("AIA"); and related companies Kalitta Flying Services, Inc. ("KFS"), O.K. Turbines, Inc. ("O.K."), American International Travel, Inc. ("AIT") and Flight One Logistics, Inc. ("FOL") (collectively referred to as the "Companies"). Combined financial statements are presented because AIA and the related companies are owned by the same individual and are operated by common management. All significant intercompany accounts and transactions have been eliminated. Interim Financial Statement -- The combined financial statements as of and for the six months ended June 30, 1996 and 1997 reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for such periods. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments of the Companies consist principally of accounts receivable, accounts payable, notes payable to stockholder, debt and letters of credit. The recorded value of financial instruments included in the financial statements approximates fair value. Restricted Cash represents passenger customer deposits held in escrow with a corresponding credit to deferred revenue until the charter services are provided. Accounts Receivable are net of an allowance of $2,062,000 and $2,389,000 for the years ended December 31, 1995 and 1996 and $2,529,000 for the six months ended June 30, 1997 (unaudited), respectively. Expendable Parts and Supplies are carried at the lower of cost (using the first-in, first-out method or average cost convention) or market. Aircraft Held for Resale -- The Companies may periodically purchase aircraft for resale. These aircraft are carried at the lower of cost or net realizable value. The long-term portion of debt associated with these aircraft is classified as current (Note 4). The sale of such assets is expected within twelve months. F-29 131 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
YEARS ------ Building and leasehold improvements......................... 5 - 40 Aircraft.................................................... 5 - 14 Equipment................................................... 3 - 10 Rotable parts............................................... 3 - 7
During 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to these assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 is required to be adopted for the Companies' 1996 fiscal year. The Companies have completed the process of evaluating the impact on the combined financial statements that will result from adopting SFAS 121 and does not believe the effect to be material. Rotable Parts are net of an allowance of $1,016,667 and $816,667 for the years ended December 31, 1995 and 1996 and $941,667 for the six months ended June 30, 1997 (unaudited), respectively. Aircraft In Modification includes aircraft in the process of being converted from passenger to freighter configuration. Accounts Payable Trade includes bank overdrafts of $4,954,225 and $4,812,147 at December 31, 1995 and 1996 and $6,898,895 at June 30, 1997 (unaudited), respectively. Revenue Recognition -- Revenue from scheduled and chartered services represent charges for movement of air cargo and passengers and is recognized when movement is complete. Revenue for maintenance, overhaul and repair services is recognized when services are rendered. Export Sales -- The Companies consider sales of services to unaffiliated customers in foreign countries as export sales. Taxes on Income -- The Companies have elected to be taxed as S Corporations under the Internal Revenue Code. As S Corporations, the income of the Companies is taxable to the sole stockholder and, accordingly, these combined financial statements do not include a provision for corporate income taxes. Approximately $3,390,000 of the Companies' retained earnings at December 31, 1996 was earned prior to the S Corporation elections and would be taxed to the sole stockholder in the event of distribution. The unaudited pro forma provision for income taxes reported on the combined statements of operations shows the approximate federal and state income taxes (by applying statutory rates) that would have been incurred if the Companies had been subject to tax as a C Corporation. No tax benefit has been provided for the year ended December 31, 1996 and for the six months ended June 30, 1996 and 1997 due to the uncertainty of the Companies' ability to recover such benefits. Interest Costs -- Interest on funds used to finance the acquisition and modification of aircraft up to the date the asset is placed in service is capitalized and included in the cost of the asset. Interest capitalized during the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 was $668,000, $1,692,000, $562,000 and $321,000, respectively. No interest cost was capitalized for the six months ended June 30, 1997 (unaudited). F-30 132 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Foreign Transactions -- All significant monetary transactions of the Companies are denominated in U.S. currency. Reclassifications -- Certain reclassifications were made to the 1994, 1995 and 1996 financial statements to conform with the classifications used in 1997. 2. ACQUISITION AND DISPOSAL OF RELATED COMPANY On December 31, 1994, the sole stockholder of the Companies acquired all outstanding shares of Grand Holdings, Inc. ("GHI") for $8,875,100 in cash and notes. GHI operated a charter passenger service. The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the fair value of assets acquired and liabilities assumed. The primary assets acquired from the transaction were three aircraft. On June 30, 1995, the sole stockholder of the Companies sold 80% of his share in Grand Holdings, Inc. ("GHI"). Prior to June 30, 1995, the aircraft of GHI were distributed to the sole stockholder and in turn contributed to AIA. 3. NOTES PAYABLE TO BANK Notes payable to banks consist of the following:
DECEMBER 31, ------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) Current: Outstanding borrowings on a bridge loan with a bank (Note 10), at the bank's prime rate plus 2% (10.25% effective rate at December 31, 1996), expires December 9, 1999. Under the terms of the bridge loan, the Companies may borrow up to $14,250,000 to cover the purchase and modification of certain aircraft until permanent financing is obtained. The principal collateral for the bridge loan is the related aircraft. The loan is also secured by all assets of KFS and the assignment of a life insurance policy on the stockholder and the guaranty of the stockholder...................................... $ 9,456,496 $ -- $ -- Outstanding borrowings on a note payable with a bank at 8.7%, expires February 4, 1998................ -- -- 36,056 Outstanding borrowings on a $3,000,000 revolving credit agreement with a bank under which the Companies may borrow up to 75% on eligible accounts receivable. The agreement calls for interest at the bank's prime rate plus .5% (8.75% effective rate at December 31, 1996). Security consists of accounts receivable and the guaranty of the stockholder and the minority interest holder of American International Cargo........... 2,770,000 1,024,035 2,655,000 ----------- ----------- ----------- Total....................................... $12,226,496 $ 1,024,035 $ 2,691,056 =========== =========== ===========
F-31 133 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) Long-term, reclassified as current: Outstanding borrowings on a $60,000,000 revolving credit agreement with a bank under which the Companies may borrow on eligible accounts receivable, a percentage of eligible rotable and consumable parts and 50% of the fair value of eligible aircraft. The agreement calls for interest at the bank's prime rate plus 1.25% (9.5% effective at December 31, 1996). The agreement expires December 9, 1999 at which time the entire amount outstanding is due. At December 31, 1996 and June 30, 1997 (unaudited), the credit available was $4,521,537 and $208,000, respectively. Security consists of accounts receivable and aircraft spare parts as well as an assignment of life insurance policy on the stockholder. Also secured by all assets of KFS and guaranteed by the stockholder................ $ -- $47,105,413 $56,482,835 =========== =========== =========== Long-Term: Outstanding borrowings on a $40,000,000 revolving credit agreement with a bank under which the Companies may borrow on eligible accounts receivable. The agreement calls for interest at the bank's prime rate plus .5% (9.0% effective at December 31, 1995). The agreement expires June 1, 1997 at which time the entire amount outstanding is due. Security consists of accounts receivable and aircraft spare parts as well as an assignment of life insurance policy on the stockholder. The note is also secured by all assets of KFS and guaranteed by the stockholder.................... $34,983,000 $ -- $ -- =========== =========== ===========
These credit agreements include certain restrictive covenants. At December 31, 1996, the Companies were in violation of the following covenants: (1) maintaining a combined fixed charge ratio of 1 to 1 and (2) certain cross collateralization covenants. As a result of these and other non-financial loan covenant violations, all debt has been classified as current. At June 30, 1997 (unaudited), the Companies had failed to make certain principal payments and were in violation of the following covenants: (1) maintaining a minimum tangible net worth of not less than $60 million; (2) maintaining a minimum debt to net worth ratio of not more than 5.0 to 1.0 and (3) certain cross collateralization covenants. As a result of these and other non-financial loan covenant violations, all debt has been classified as current. F-32 134 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, JUNE 30, --------------------------- ------------ 1995 1996 1997 ------------ ------------ ------------ (UNAUDITED) Various notes payable with interest rates ranging from 7.49% to 12.0%. Certain interest rates are at prime plus 1% to 2.5% (9.25% to 10.75% effective rates at December 31, 1996). The notes are secured by property and equipment with a net book value of $216,578,406. Certain notes are also secured by substantially all of the Companies' assets, and the personal guaranty of the stockholder.................................. $173,162,097 $190,221,394 $188,782,141 Less: Current maturities of long-term debt............. 37,608,059 31,568,769 41,430,734 Outstanding debt on aircraft held for resale..... 4,836,553 2,741,671 2,391,670 ------------ ------------ ------------ Total.................................... 42,444,612 34,310,440 43,822,404 ------------ ------------ ------------ Net long-term debt, reclassified as current........ -- 155,910,954 144,959,737 ------------ ------------ ------------ Net long-term debt................................. $130,717,485 $ -- $ -- ============ ============ ============
Without regard to the lenders exercising their right to demand payment, the aggregate amount of required payments on long-term debt and notes payable to bank (Note 3) as of December 31, 1996 are as follows: 1997................................................... $ 35,334,475 1998................................................... 69,298,498 1999................................................... 75,547,575 2000................................................... 23,925,286 2001................................................... 19,417,825 Thereafter............................................. 14,827,183 ------------ Total........................................ $238,350,842 ============
These credit agreements include certain restrictive covenants. At December 31, 1996, the Companies were in violation of the following covenants: (1) maintaining a minimum net worth of not less than $78 million; (2) maintaining a debt service coverage ratio of not less than 1.2 to 1; (3) maintaining a maximum debt to net worth ratio of not more than 4.0 to 1; (4) maintaining an EBITDA ratio of not less than 1.1 to 1; and (5) certain cross collateralization covenants. As a result of these and other non-financial loan covenant violations, all debt has been classified as current. At June 30, 1997 (unaudited), the Companies had failed to make certain principal payments on indebtedness and were in violation of the following covenants: (1) ratio of earnings to fixed charges; (2) ratio of cash flow to fixed charges; (3) cash flow to coverage; (4) minimum net income; (5) current ratio; (6) tangible net worth; (7) shareholder's equity; (8) debt service coverage; (9) fixed charge coverage; (10) debt to net worth ratios; (11) certain cross collateralization covenants as well as restrictions relating to encumbering their assets. As a result of these and other non-financial loan covenant violations, all debt has been classified as current. F-33 135 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Effective in July and August 1997, the Companies entered into agreements with certain lenders for the deferment of principal payments for a period of one to eight months. The aggregate monthly deferrals range from $693,000 to $2,824,000. The Companies are to make interest payments only during this period. At the end of the deferral periods, the Companies will resume principal payments in accordance with the terms of the loan agreement. 5. COMMON STOCK Common stock of the Companies is as follows:
DECEMBER 31, JUNE 30, ------------------ ----------- 1995 1996 1997 ------- ------- ----------- (UNAUDITED) American International Airways, Inc., $1 par value; 25,000 shares authorized, 25,000 shares issued and outstanding........................................ $25,000 $25,000 $25,000 Kalitta Flying Services, Inc., $1 par value; 100,000 shares authorized, 25,000 shares issued and outstanding........................................ 25,000 25,000 25,000 O.K. Turbines, Inc., $1 par value; 50,000 shares authorized, 1,000 shares issued and outstanding.... 1,000 1,000 1,000 American International Travel, Inc., $1 par value; 50,000 shares authorized, 1,000 shares issued and outstanding........................................ 1,000 1,000 1,000 Flight One Logistics, Inc., $1 par value; 50,000 shares authorized, 1,000 shares issued and outstanding........................................ 1,000 1,000 1,000 ------- ------- ------- Total...................................... $53,000 $53,000 $53,000 ======= ======= =======
6. OPERATING LEASES The Companies lease office building, hangars, cargo storage, and related facilities under noncancelable operating leases which expire on various dates through 2011. In addition, the Companies periodically lease aircraft and other equipment under month-to-month lease agreements. Lease expense for all operating leases was $15,659,000, $24,095,000, $10,815,000, $3,989,000 and $3,466,000, for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited), respectively. Aggregate future minimum rental payments required under noncancelable operating leases at December 31, 1996 are as follows:
AMOUNT ----------- Years Ending December 31: 1997.................................................. $ 3,177,000 1998.................................................. 1,950,000 1999.................................................. 1,620,000 2000.................................................. 1,006,000 2001.................................................. 789,000 Thereafter............................................ 5,685,000 ----------- Total minimum rental payments................. $14,227,000 ===========
F-34 136 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. EMPLOYEE SAVINGS PLAN The Companies have three separate 401(k) employee savings plans, covering substantially all employees. The Companies' contributions to the plans are discretionary and were $133,000, $158,000, $353,000, $4,430 and $74,918, for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited), respectively. 8. RELATED PARTY TRANSACTIONS The Companies lease certain aircraft to a company owned and operated by a relative of the sole stockholder of the Companies. In addition to providing services to unrelated third parties, the related company flies subcharter flights for the Companies and also provides lift capacity for the Companies' overnight scheduled cargo service. The Companies perform ground handling for the related company in certain locations. The related company also reimburses the Companies for certain applicable fuel, parking and landing and ground handling paid on the related company's behalf. The Companies also have certain transactions with an affiliated company that is partially owned by the Companies' sole stockholder. The remaining ownership of this affiliated company are relatives of the sole stockholder of the Companies. The Companies lease an office facility from this affiliated company for an annual rent of approximately $713,000. The lease expires May 14, 2007. Transactions and balances with related parties were as follows:
DECEMBER 31, JUNE 30, ------------------------------------- ----------------------- 1994 1995 1996 1996 1997 ---------- ----------- ---------- ---------- ---------- (UNAUDITED) Transactions and balances with sole stockholder: Note payable, noninterest bearing................ $ -- $ 100,000 $ -- $ -- $ 300,462 Contribution of cash...... -- 473,972 2,266,630 -- -- Contribution of aircraft and equipment.......... -- 6,453,572 -- -- -- Transactions with a company owned by a relative of the sole stockholder: Revenues.................. 352,800 11,582,257 5,176,150 2,674,911 1,468,768 Cost of revenues.......... 2,366,288 6,097,447 28,727 23,680 121,511 Sale of DC8............... -- 5,200,000 -- -- -- Transactions and balances with an affiliated company: Receivable from affiliated company................... -- -- -- -- 747,284 Rental expense............ -- -- -- -- 88,142 Transactions with GHI -- Purchase of three DC8 engines................... -- 1,950,000 -- -- -- Transactions with sole stockholder and relatives of the sole stockholder -- Promotional revenues...... 830,616 1,257,771 1,206,529 666,645 271,111 Promotional expenses...... 2,602,038 3,643,611 3,096,724 1,094,020 1,478,415
F-35 137 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES Purchase Commitments -- In March 1997, the Companies committed to purchase three Boeing 747-200 aircraft and associated engines, four additional spare engines and certain other related spare parts for approximately $63,000,000. In connection with these purchase commitments, the Companies intend to modify these aircraft for approximately $24,000,000. The Companies took delivery of one of the aircraft and a spare engine on September 26, 1997, for $21 million and negotiated a revised agreement to purchase the remaining two aircraft and related spare parts for $42 million which includes a $1 million non-refundable deposit and a $1 million option purchase price which the seller can retain if the Companies fail to complete the purchase by February 16, 1998. In July 1997, the Companies purchased two L1011 aircraft for a total purchase price of $7,000,000. In connection with this purchase, the Companies have a commitment for the modification of these aircraft for $11,400,000. In addition, the Companies have a nonrefundable deposit of $320,000 with respect to a purchase commitment of $1,400,000. The realization of this deposit is dependent upon the Companies' ability to fulfill this purchase commitment. Letters of Credit -- The Companies' banks have issued to various airports and suppliers letters of credit totaling $5,071,000, $3,088,000, and $3,160,032, at December 31, 1995 and 1996 and June 30, 1997, respectively, against which accounts receivable are pledged as collateral. The last of the letters of credit expires in 1998. Legal Proceedings, Claims and Other -- The Companies are subject to legal proceedings and claims which have arisen in the ordinary course of business. Management intends to vigorously defend against these legal proceedings and believes, based upon the advice of legal counsel, that the outcome will not have a materially adverse effect on the Companies' financial position, results of operations, or cash flows. In January 1996, the FAA issued a series of Directives on certain Boeing 747 aircraft which were modified for freight hauling by GATX-Airlog Company, a subsidiary of General American Transportation Corp ("GATX"). The Directives, which became effective on January 30, 1996, were issued because of concerns relating to the integrity of the cargo door and surrounding floor area in the event the aircraft were operated at their maximum cargo capacity of approximately 220,000 pounds. In spite of the fact that the aircraft affected by the Directives have flown over 83,000 hours without incident, the Directives require certain modifications to be made to the aircraft. Absent such modifications, the Directives limit the cargo capacity of these aircraft to 120,000 lbs., a limit which restricts the Companies' ability to profitably operate the aircraft. One of each of the Companies' Boeing 747-200 and Boeing 747-100 freighters are affected by these Directives and have been out of service since January 1996. GATX has proposed a solution to the problem identified by one of the Directives which has been approved by the FAA. An appropriate means to test the proposed solution, however, has not yet been identified. Currently, the Companies anticipate modifying the Boeing 747-100 to be in compliance with a portion of the Directive for which the FAA has approved a solution by the latter half of 1998, which will allow the Companies to operate it with a reduced cargo capacity of 160,000 lbs. The Companies are awaiting engineering solutions to address the remaining Directives. If the cost necessary to fully implement these solutions and return both the Boeing 747-100 and -200 to maximum cargo capacity is uneconomical, the Companies may either operate one or both of the aircraft at limited load or use one or both for spare parts. The Companies are currently involved in litigation against GATX to recover the cost to repair these aircraft as well as revenues lost as a consequence of the aircraft downtime. In September 1996 pursuant to the FAA's National Aviation Safety Inspection Program, the Companies underwent a broad but routine inspection of all of the Companies' aircraft and maintenance operations. This F-36 138 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) inspection resulted in a report from the FAA citing the Companies with a number of regulatory infractions, none of which were sufficiently serious to cause the FAA to curtail or otherwise restrict any of the Companies' operations. As a consequence of the FAA's inspection, however, the FAA and the Companies entered into a Consent Order in January 1997 which required the Companies to revise certain internal policies and procedures to address the regulatory violations noted in the inspection report as well as enforcement actions that had been pending prior to the inspection. Without admitting any fault, the Companies agreed to pay a fine of $450,000, one-third of which is suspended and will be forgiven if the Companies comply with all the terms of the Consent Order. At this time, management believes the Companies are in compliance with the Consent Order and expect the FAA to conduct another inspection of similar scope in the fourth quarter of 1997 to verify such compliance. The Consent Order also provides that it is a full and conclusive settlement of any civil penalties the Companies could incur for regulatory violations occurring before January 1, 1997, but does not preclude the FAA from taking enforcement action to revoke the Companies' air carrier operating certificate. Only six of the Companies' twenty Douglas DC-8 aircraft comply with the FAA Stage III noise control standards. The Companies may elect not to modify the fourteen remaining Douglas DC-8 aircraft to meet the Stage III noise control standards because the anticipated cost of approximately $3.5 million per aircraft (not including aircraft downtime) may exceed the economic benefits of such modifications. If the Companies cannot or do not modify these fourteen Douglas DC-8 aircraft, the Companies will have to remove these aircraft from service in the United States before January 1, 2000 and may have to replace them with other aircraft. In addition, thirteen of the Companies' Boeing 727 aircraft currently do not comply with the Stage III noise control standards. The Companies currently anticipate modifying their Boeing 727 fleet (at an anticipated cost of approximately $24 million) to be in compliance with the Stage III noise control standards by the applicable deadlines. However, there can be no assurance that the Companies will have sufficient funds or be able to obtain financing to cover the costs of these modifications or to replace such aircraft. 10. MAJOR CUSTOMERS The Companies had sales to two major customers which are entities of the United States Government, representing approximately 28%, 17%, 21%, 6% and 8% of combined revenues for the years ended December 31, 1994, 1995, 1996 and for the six months ended June 30, 1996 and 1997 (unaudited), respectively. Accounts receivable from these customers were approximately $45,118,000, $12,024,000 and $2,295,000 at December 31, 1995, 1996 and June 30, 1997 (unaudited), respectively. 11. MANAGEMENT'S PLANS -- SALE OF AIRCRAFT AND PLANNED MERGER The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Companies (1) are experiencing difficulty in generating sufficient cash flows to meet their obligations and sustain their operations, (2) failed to make certain principal payments and are not in compliance with certain covenants of their long-term debt agreements (3) have negative working capital and (4) have incurred substantial losses subsequent to December 31, 1996. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Companies be unable to continue as a going concern. The Companies' continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet their obligations on a timely basis, to comply with the terms and covenants of their financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations from sources that are described below. F-37 139 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) On September 22, 1997, the Companies, the sole stockholder of the Companies, and Kitty Hawk, Inc. ("Kitty Hawk") entered into a merger agreement, under which each of the respective Companies will be merged with separate subsidiaries of Kitty Hawk, with each of the Companies surviving the merger as a direct, wholly owned subsidiary of Kitty Hawk. On October 23, 1997, the merger agreement was amended so that at the effective time of the merger, the outstanding shares of capital stock of four Companies (AIA, AIT, FOL and O.K.) will be converted, into the right to receive their prorata portion of 4,099,150 shares of Kitty Hawk common stock (unaudited). The outstanding shares of capital stock of KFS will be converted into the right to receive $20,000,000. Concurrent with the consummation of the merger agreement will be the closing of a proposed common stock offering of 3,000,000 shares of Kitty Hawk common stock and the consummation of a proposed note offering under Rule 144A of the Securities Act for $340,000,000 aggregate principal amount of senior secured notes of Kitty Hawk. The proceeds of the notes and a portion of the proceeds of the sale of shares will be used to pay the cash portion of the acquisition of the Companies and to refinance and restructure the outstanding debt of the Companies and Kitty Hawk. As an interim step toward the merger, on September 17, 1997, the Companies sold to Kitty Hawk sixteen Boeing 727-200 aircraft constituting the Companies' 727-200 fleet for approximately $51 million. This interim transaction was deemed necessary in order to generate cash to be used to pay for the acquisition of a Boeing 747 aircraft from an unrelated third party (see Note 9), to acquire an L-1011 aircraft and provide the Companies with working capital. As part of the transaction, the Companies assigned to Kitty Hawk all of its customer contracts relating to the aircraft sold. The purchase agreement provides the Companies the option to repurchase, no later than March 31, 1998, all except three of the 727-200 aircraft from Kitty Hawk at Kitty Hawk's purchase price, less $14 million for the three aircraft not subject to the option, plus any costs incurred by Kitty Hawk to maintain the repurchased aircraft. Similarly, Kitty Hawk has the option to require the Companies to repurchase, no later than December 31, 1997, all except three of the 727-200 aircraft at Kitty Hawk's purchase price less $14 million for the three aircraft not subject to the option, plus any costs incurred by Kitty Hawk to maintain the repurchased aircraft. F-38 140 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Estimated expenses payable solely by the Company in connection with the issuance and distribution of the securities to be registered, other than underwriting discounts and expenses, are as follows: SEC registration fee........................................ $ 26,000 NASD filing fee............................................. 9,100 Nasdaq application fee...................................... 17,500 Printing and engraving expenses............................. 175,000 Legal fees and expenses..................................... 425,000 Accounting fees and expenses................................ 800,000 Blue sky fees and expenses.................................. 10,000 Transfer agent and registrar fees........................... 5,000 Miscellaneous expenses...................................... 50,000 ---------- Total............................................. $1,417,600 ==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's Certificate of Incorporation provides that no director of the Company will be personally liable to the Company or any of its stockholders for monetary damages arising from the director's breach of fiduciary duty as a director. However, this does not apply with respect to any action in which the director would be liable under Section 174 of the General Corporation Law of the State of Delaware ("Delaware Code") nor does it apply with respect to any liability in which the director (i) breached his duty of loyalty to the Company or its stockholders; (ii) did not act in good faith or, in failing to act, did not act in good faith; (iii) acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law; or (iv) derived an improper personal benefit. The Certificate of Incorporation of the Company provides that the Company shall indemnify its directors and officers and former directors and officers to the fullest extent permitted by the Delaware Code. Pursuant to the provisions of Section 145 of the Delaware Code, the Company has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee, or agent of the Company, against any and all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit, or proceeding. The power to indemnify applies only if such person acted in good faith and in a manner he reasonably believed to be in the best interest, or not opposed to the best interest, of the Company and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the Company as well, but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment or settlement of the claim itself and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of negligence or misconduct unless the court, in its discretion, believes that in light of all the circumstances indemnification should apply. The statute further specifically provides that the indemnification authorized thereby shall not be deemed exclusive of any other rights to which any such officer or director may be entitled under any bylaws, agreements, vote of stockholders or disinterested directors, or otherwise. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been II-1 141 advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Company granted certain options to Messrs. Reeves and Wadsworth in December 1995 and June 1996, respectively. See "Management -- Employee Compensation Plans and Arrangements." 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 and were exercised on June 27, 1996. In connection with the consummation of the Merger, the Company will issue 4,099,150 shares of Common Stock to Messrs. Kalitta, Kelsey, and two other individuals. All of the shares issued in connection with the Merger will be issued pursuant to Section 4(2) of the Securities Act and/or Regulation D promulgated pursuant to the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
1.1** -- Form of Underwriting Agreement. 2.1* -- Agreement and Plan of Merger, dated September 22, 1997 (the "Merger Agreement"), by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad A. Kalitta. 2.2** -- Amendment No. 1 to the Merger Agreement, dated October 23, 1997, by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad A. Kalitta. 3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the "Company"), filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.2** -- Amended and Restated Bylaws of the Company. 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 4.1 -- Specimen Common Stock Certificate, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 4.2* -- Form of Stockholders' Agreement to be entered into among the Company, M. Tom Christopher and Conrad A. Kalitta. 5.1** -- Opinion of Haynes and Boone, LLP, regarding legality of the Common Stock being issued. 10.1 -- 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.2 -- Salary Continuation Agreement dated as of June 15, 1993 by and between the Company and M. Tom Christopher, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
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10.3 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.4 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.5 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, dated as of September 3, 1996, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.6 -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan, dated as of September 3, 1996, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.7 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, dated as of September 3, 1996, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.8 -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.9 -- Employment Agreement dated as of October 27, 1994 by and between the Company and M. Tom Christopher, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.10 -- Amended and Restated Employment Agreement dated as of June 12, 1996 by and between the Company and Richard R. Wadsworth, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.11 -- Amended and Restated Employment Agreement dated as of December 31, 1995 by and between the Company and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.12 -- Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (the "FEASI Agreement"), filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.13 -- Amendment No. 1 dated November 17, 1992 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.14 -- Amendment No. 2 dated February 1993 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference.
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10.15 -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.16 -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.17 -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.18 -- Amendment No. 6 dated December 6, 1996 to the FEASI Agreement, filed as an Exhibit to the Company's Form 10-Q for the quarter ended November 30, 1996, which exhibit is incorporated herein by reference. 10.19 -- Amended and Restated Credit Agreement, dated as of August 14, 1996, by and among the Company, Wells Fargo Bank (Texas), National Association and Bank One, Texas, N.A., filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.20* -- Agreement, dated July 20, 1995, between American International Airways, Inc. and the Pilots, Co-Pilots and Flight Engineers in the service of American International Airways, Inc., as represented by The International Brotherhood of Teamsters -- Airline Division. 10.21** -- Form of Employment Agreement to be entered into by and between Conrad A. Kalitta and AIA. 10.22** -- Form of Consulting Agreement to be entered into by and between Conrad A. Kalitta and AIA. 12.1* -- Statement of Computation of ratio of earnings to fixed charges. 21.1 -- Subsidiaries of the Registrant, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 23.1* -- Consent of Ernst & Young LLP. 23.2* -- Consent of Deloitte & Touche LLP. 23.3 -- Consent of Haynes and Boone, LLP (contained in legal opinion). 24.1*** -- The power of attorney of officers and directors of the Company.
- --------------- * Filed herewith. ** To be filed by amendment. *** Previously filed. (b) Financial Statement Schedule and Auditors' Report on Schedule: Schedules filed The Kalitta Companies -- Schedule II Valuation and Qualifying Accounts No other financial statement schedules are filed as part of this Registration Statement since the required information is included in the financial statements, including the notes thereto, or circumstances requiring the inclusion of such schedules are not present. II-4 144 ITEM 17. UNDERTAKINGS The undersigned Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-5 145 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 24th day of October, 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 Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities indicated on the 24th day of October, 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 and Richard R. Wadsworth Director and Principal Financial and Accounting Officer /s/ TED J. COONFIELD* Director - ----------------------------------------------------- Ted J. Coonfield /s/ JAMES R. CRAIG* Director - ----------------------------------------------------- James R. Craig /s/ LEWIS S. WHITE* Director - ----------------------------------------------------- Lewis S. White */s/ RICHARD R. WADSWORTH - ----------------------------------------------------- Richard R. Wadsworth (As Attorney-in-Fact for each person indicated)
II-6 146 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of American International Airways, Inc. and Related Companies Ypsilanti, Michigan We have audited the combined financial statements of American International Airways, Inc. and related companies (collectively, the "Companies") as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated October 16, 1997 (which report expresses an unqualified opinion and includes an explanatory paragraph which indicates that there are matters that raise substantial doubt about the Companies' ability to continue as a going concern); such financial statements and report are included elsewhere in this Form S-1. Our audits also included the financial statement schedule of the Companies, listed in Item 16. This financial statement schedule is the responsibility of the Companies' management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ann Arbor, Michigan October 16, 1997 DELOITTE & TOUCHE LLP S-1 147 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS -------------------------- CHARGED DEDUCTIONS- CHARGED TO TO OTHER WRITE-OFFS BALANCE COSTS AND ACCOUNTS- AND BALANCE JANUARY 1 EXPENSES ACQUISITIONS DISPOSALS DECEMBER 31 --------- ---------- ------------ ----------- ----------- DOUBTFUL ACCOUNTS RESERVES For the Year Ended December 31, 1996............................ $2,062 $1,011 $ (684) $2,389 1995............................ 1,950 1,862 (1,750) 2,062 1994............................ 1,363 2,231 (1,644) 1,950
S-2 148 [This page contains a series of pictures of airplanes being loaded and unloaded and of the control room of Kitty Hawk.] 149 [KITTY HAWK, INC. LOGO] KITTY HAWK, INC. 150 INDEX TO EXHIBITS
EXHIBIT NUMBER ITEM ------- ---- 1.1** -- Form of Underwriting Agreement. 2.1* -- Agreement and Plan of Merger, dated September 22, 1997 (the "Merger Agreement"), by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad A. Kalitta. 2.2** -- Amendment No. 1 to the Merger Agreement, dated October 23, 1997, by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad A. Kalitta. 3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the "Company"), filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.2** -- Amended and Restated Bylaws of the Company. 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 4.1 -- Specimen Common Stock Certificate, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 4.2* -- Form of Stockholders' Agreement to be entered into among the Company, M. Tom Christopher and Conrad A. Kalitta. 5.1** -- Opinion of Haynes and Boone, LLP, regarding legality of the Common Stock being issued. 10.1 -- 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.2 -- Salary Continuation Agreement dated as of June 15, 1993 by and between the Company and M. Tom Christopher, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.3 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.4 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.5 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, dated as of September 3, 1996, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.6 -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan, dated as of September 3, 1996, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference.
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EXHIBIT NUMBER ITEM ------- ---- 10.7 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, dated as of September 3, 1996, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.8 -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.9 -- Employment Agreement dated as of October 27, 1994 by and between the Company and M. Tom Christopher, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.10 -- Amended and Restated Employment Agreement dated as of June 12, 1996 by and between the Company and Richard R. Wadsworth, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.11 -- Amended and Restated Employment Agreement dated as of December 31, 1995 by and between the Company and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.12 -- Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (the "FEASI Agreement"), filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.13 -- Amendment No. 1 dated November 17, 1992 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.14 -- Amendment No. 2 dated February 1993 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.15 -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.16 -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.17 -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.18 -- Amendment No. 6 dated December 6, 1996 to the FEASI Agreement, filed as an Exhibit to the Company's Form 10-Q for the quarter ended November 30, 1996, which exhibit is incorporated herein by reference.
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EXHIBIT NUMBER ITEM ------- ---- 10.19 -- Amended and Restated Credit Agreement, dated as of August 14, 1996, by and among the Company, Wells Fargo Bank (Texas), National Association and Bank One, Texas, N.A., filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 10.20* -- Agreement, dated July 20, 1995, between American International Airways, Inc. and the Pilots, Co-Pilots and Flight Engineers in the service of American International Airways, Inc., as represented by The International Brotherhood of Teamsters -- Airline Division. 10.21** -- Form of Employment Agreement to be entered into by and between Conrad A. Kalitta and AIA. 10.22** -- Form of Consulting Agreement to be entered into by and between Conrad A. Kalitta and AIA. 12.1* -- Statement of Computation of ratio of earnings to fixed charges. 21.1 -- Subsidiaries of the Registrant, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, which exhibit is incorporated herein by reference. 23.1* -- Consent of Ernst & Young LLP. 23.2* -- Consent of Deloitte & Touche LLP. 23.3 -- Consent of Haynes and Boone, LLP (contained in legal opinion). 24.1*** -- The power of attorney of officers and directors of the Company.
- --------------- * Filed herewith. ** To be filed by amendment. *** Previously filed. (b) Financial Statement Schedule and Auditors' Report on Schedule: Schedules filed The Kalitta Companies -- Schedule II Valuation and Qualifying Accounts No other financial statement schedules are filed as part of this Registration Statement since the required information is included in the financial statements, including the notes thereto, or circumstances requiring the inclusion of such schedules are not present. EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.1 ------------------------------------------------------------ AGREEMENT AND PLAN OF MERGER AMONG KITTY HAWK, INC. KITTY HAWK - AIA, INC. KITTY HAWK - AIT, INC. KITTY HAWK - FOL, INC. KITTY HAWK - KFS, INC. KITTY HAWK - OK, INC. M. TOM CHRISTOPHER AND AMERICAN INTERNATIONAL AIRWAYS, INC. AMERICAN INTERNATIONAL TRAVEL, INC. FLIGHT ONE LOGISTICS, INC. KALITTA FLYING SERVICE, INC. O.K. TURBINES, INC. CONRAD KALITTA Dated September 22, 1997 AN APPENDIX OF DEFINED TERMS BEGINS ON PAGE (VII) ------------------------------------------------------------ 2 TABLE OF CONTENTS
Page ARTICLE I THE MERGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 The Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Effective Time of the Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II THE CONSTITUENT AND SURVIVING CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Constituent Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.3 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.4 Board of Directors and Officers of the Surviving Corporations . . . . . . . . . . . . . . . . 5 2.5 Effects of Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III CONVERSION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Consideration for Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Surrender of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.3 Conversion of Subs' Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.4 Shareholder to Have No Further Rights as to Kalitta Companies . . . . . . . . . . . . . . . . 9 3.5 Written Consent of Sole Shareholder of Subs . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.6 Written Consent of Sole Shareholder of each Kalitta Company . . . . . . . . . . . . . . . . . 9 3.7 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1 Representations and Warranties of Kalitta and the Kalitta Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1.1 Corporate Existence and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1.2 Capitalization of the Kalitta Companies . . . . . . . . . . . . . . . . . . . . . . 10 4.1.3 Validity and Authorization; Corporate Power and Authority . . . . . . . . . . . . . 11 4.1.4 Execution; No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1.5 Governmental and Other Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.1.7 Absence of Certain Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.1.8 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.1.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.1.10 Disputes and Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.1.11 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1.13 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.1.14 Real Property and Real Property Leases . . . . . . . . . . . . . . . . . . . . . . 20 4.1.15 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1.16 Intangible Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(i) 3 4.1.17 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.1.18 Office Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.1.19 Indebtedness and Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.1.20 Debts to and from Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.1.21 Banking Arrangements and Powers of Attorney . . . . . . . . . . . . . . . . . . . . 23 4.1.22 Articles of Incorporation, Partnership Agreement and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.1.23 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.1.24 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.1.25 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.1.26 No Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.1.27 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.1.28 Aviation Act; Aircraft; Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.1.29 No Solicitation or Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.1.30 Information Supplied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.2 Representations and Warranties of Kalitta . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.3 Representations and Warranties of Kitty Hawk . . . . . . . . . . . . . . . . . . . . . . . 30 4.3.1 Corporate Existence and Authority . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.3.2 Capitalization of Kitty Hawk and its Subsidiaries . . . . . . . . . . . . . . . . . 30 4.3.3 Validity and Authorization; Corporate Power and Authority . . . . . . . . . . . . . 31 4.3.4 Execution; No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4.3.5 Governmental and Other Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.3.6 Stock Merger Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.3.7 Acquisition of Kalitta Companies' Stock . . . . . . . . . . . . . . . . . . . . . . 32 4.3.8 SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.3.9 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.3.10 Controlling Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.3.11 Absence of Certain Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.3.12 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.3.13 Disputes and Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.3.14 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.3.15 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.3.16 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.3.17 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.3.18 Indebtedness and Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 4.3.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 4.3.20 Aviation Act; Aircraft; Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 37 4.3.21 No Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.3.22 Articles of Incorporation and Bylaws . . . . . . . . . . . . . . . . . . . . . . . 38 4.3.23 No Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.3.24 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.4 Representations and Warranties as to Subs . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.4.1 Corporate Existence and Authority . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.4.2 Capitalization of the Subs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.4.3 Validity and Authorization; Corporate Power and Authority . . . . . . . . . . . . . 39 4.4.4 Execution; No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.4.5 Governmental and Other Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.5 Disclosure Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(ii) 4 ARTICLE V COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 5.1 Mutual Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 5.1.1 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.1.2 Notices and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.1.3 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.1.4 Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.1.5 Repairs; FAA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.1.6 Reports and Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.1.7 Assist in Obtaining Licenses, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 43 5.1.8 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.1.9 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.1.10 Preservation of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.1.11 Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.1.12 Other Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.2 Kalitta and the Kalitta Companies Covenants . . . . . . . . . . . . . . . . . . . . . . . . 44 5.2.1 Information for Kitty Hawk's Statements, Reports, Applications and SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.2.2 No Solicitation or Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.2.3 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.2.4 Payment of Indebtedness of Related Persons . . . . . . . . . . . . . . . . . . . . 45 5.2.5 Restriction on Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.2.6 Exemptions from Sales Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.2.7 Office Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.2.8 Sale of Racing Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.2.9 Commercially Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.2.10 Life Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.2.11 Assurances to Cooperate with SEC Filings . . . . . . . . . . . . . . . . . . . . . 47 5.2.12 Other Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.3 Kitty Hawk Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.3.1 Kitty Hawk Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.3.2 Assurances to Cooperate with SEC Filings . . . . . . . . . . . . . . . . . . . . . 48 5.3.3 GM Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.3.4 SEC Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.4 Covenants of Christopher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.4.1 Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.4.2 Repayment of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.4.3 Assurances to Cooperate with SEC Filings . . . . . . . . . . . . . . . . . . . . . 48 5.4.4 Other Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.5 Certain Covenants Relating to the Governance of Kitty Hawk after the Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.5.1 Electing the Initial Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.5.2 Nominating Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.5.3 Deadlock Resolution at the Joint Nominating Committee . . . . . . . . . . . . . . . 50 5.5.4 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 5.5.5 Termination of Governance Obligations . . . . . . . . . . . . . . . . . . . . . . . 52
(iii) 5 ARTICLE VI CONDITIONS PRECEDENT TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 6.1 Conditions Precedent to Obligations of Christopher, Kitty Hawk and the Subs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 6.1.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 53 6.1.2 Performance by Kalitta and the Kalitta Companies . . . . . . . . . . . . . . . . . 53 6.1.3 Regulatory Approvals and Consents . . . . . . . . . . . . . . . . . . . . . . . . . 53 6.1.4 No Court Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.1.5 Certificates of the Kalitta Companies . . . . . . . . . . . . . . . . . . . . . . . 54 6.1.6 Opinions of Kalitta's Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.1.7 Satisfaction with Review of Kalitta Companies . . . . . . . . . . . . . . . . . . . 54 6.1.8 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.1.9 Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.1.10 Minimum Share Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.1.11 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.1.12 MEA 747 Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.1.13 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.1.14 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.1.15 Dissenter's Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.2 Conditions Precedent to Obligations of the Kalitta Companies . . . . . . . . . . . . . . . 55 6.2.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.2.2 Performance by Christopher and Kitty Hawk . . . . . . . . . . . . . . . . . . . . . 55 6.2.3 Regulatory Approvals and Consents . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.2.4 No Court Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.2.5 Certificate of Kitty Hawk and Subs . . . . . . . . . . . . . . . . . . . . . . . . 56 6.2.6 Opinions of Kitty Hawk's Counsel . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.2.7 Satisfaction with Review of Kitty Hawk . . . . . . . . . . . . . . . . . . . . . . 56 6.2.8 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.2.9 Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.2.10 Minimum Share Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.2.11 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.2.12 Tax Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 6.2.13 Release of Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 6.2.14 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ARTICLE VII CLOSING AND DELIVERY OF DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 7.1 Deliveries by Kalitta and the Kalitta Companies . . . . . . . . . . . . . . . . . . . . . . 58 7.2 Delivery by Kitty Hawk and the Subs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 7.3 Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE VIII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.1 Reasons for Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.1.1 By Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.1.2 By Kitty Hawk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.1.3 By Kalitta and the Kalitta Companies . . . . . . . . . . . . . . . . . . . . . . . 60 8.1.4 Drop-Dead Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.2 Notice of Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
(iv) 6 8.3 Kitty Hawk Termination Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8.4 Kalitta Termination Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8.5 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 ARTICLE IX POST-CLOSING AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 9.1 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 9.2 Certain Transfer and Similar Taxes of the Kalitta Companies . . . . . . . . . . . . . . . . 62 9.3 Inspection of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 9.4 Continuation of Existence and Business of Kalitta Companies . . . . . . . . . . . . . . . . 63 9.5 Indemnification of Directors and Officers of the Kalitta Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 9.6 Office Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 9.7 Release and Indemnification for Kalitta Guaranties . . . . . . . . . . . . . . . . . . . . 64 ARTICLE X INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 10.1 Survival, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 10.1.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 10.1.2 No Effect on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 10.1.3 Commencing Arbitrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 10.2 Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 10.2.1 Indemnification of Kitty Hawk . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 10.2.2 Indemnification of Kalitta . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 10.3 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 10.4 Notice and Opportunity to Defend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 10.4.1 Notice, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 10.4.2 Defense Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 10.4.3 Third-Party Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 10.4.4 Indemnification Based Upon Net Losses . . . . . . . . . . . . . . . . . . . . . . . 73 10.5 EXCLUSIVE REMEDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 10.6 No Other Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 10.7 Delays or Omissions; Waiver; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 76 10.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 10.9 Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 10.9.1 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 10.9.2 Emergency Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 11.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 11.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 11.5 Incorporated by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.6 Number and Gender of Words . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.7 Execution of Additional Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.8 Finders' and Related Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.9 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
(v) 7 11.10 No Third Party Beneficiary, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.11 Reformation; Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.12 Binding Effect and Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.13 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 11.14 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 11.15 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 11.16 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 11.17 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
(vi) 8 APPENDIX OF DEFINED TERMS "AAA" shall mean the American Arbitration Association. "ADJOINING LOTS" shall have the meaning ascribed to it in Section 4.1.18. "AFFILIATE" shall mean, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. "AGREEMENT" shall have the meaning ascribed to it in the preamble to this Agreement. "AIA" shall have the meaning ascribed to it in the preamble to this Agreement. "AIA CERTIFICATE" shall have the meaning ascribed to it in Section 3.1(a). "AIA COMMON STOCK" shall have the meaning ascribed to it in Section 3.1(a). "AIA MERGER" shall have the meaning ascribed to it in Section 1.2(a). "AIA MERGER CONSIDERATION" shall have the meaning ascribed to it in Section 3.1(a). "AIA OPERATING AUTHORIZATIONS" shall have the meaning ascribed to it in Section 4.1.28(a). "AIA SHARE" shall have the meaning ascribed to it in Section 3.1(a). "AIC" shall have the meaning ascribed to it in Section 4.1.1(b). "AIC PARTNERSHIP AGREEMENT" shall have the meaning ascribed to it in Section 4.1.1(b). "AIT" shall have the meaning ascribed to it in the preamble to this Agreement. "AIT CERTIFICATE" shall have the meaning ascribed to it in Section 3.1(b). "AIT COMMON STOCK" shall have the meaning ascribed to it in Section 3.1(b). "AIT MERGER" shall have the meaning ascribed to it in Section 1.2(b). "AIT MERGER CONSIDERATION" shall have the meaning ascribed to it in Section 3.1(b). "AIT SHARE" shall have the meaning ascribed to it in Section 3.1(b). "ASSERTED LIABILITY" shall have the meaning ascribed to it in Section 10.4.1. (vii) 9 "AVIATION ACT" shall mean Title 49 of the United States Code (formerly the Federal Aviation Act of 1958, as amended). "BOARD OF DIRECTORS" shall mean the board of directors of Kitty Hawk. "BENEFICIALLY OWN" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. "BREACH" shall mean, with respect to a party hereto, any representation or warranty of such party under this Agreement (including in the tax representation letters referred to in Section 5.1.11) being untrue when made by such party or any breach of any of such party's covenants or agreements under this Agreement (except that in the case of the indemnification obligations of Kalitta after the Closing, Breach shall not include any Breach by any Kalitta Company of any covenant or agreement to be performed after the Closing). "BUSINESS DAY" shall mean a day other than a Saturday or Sunday on which trading occurs on the New York Stock Exchange. "CAP" shall have the meaning ascribed to it in Section 10.3.2. "CHIEF EXECUTIVE OFFICER" shall have the meaning ascribed to it in Section 5.5.4. "CHRISTOPHER" shall have the meaning ascribed to it in the preamble to this Agreement. "CHRISTOPHER DESIGNEES" shall mean Ted Coonfield, Jim Reeves and any successors thereto selected by the Christopher Nominating Committee. "CHRISTOPHER NOMINATING COMMITTEE" shall have the meaning ascribed to it in Section 5.5.2. "CHRISTOPHER STOCKHOLDER" shall mean Christopher and each Permitted Transferee (as defined in the Stockholders' Agreement) who receives a Transfer (as defined in the Stockholders' Agreement) of Kitty Hawk Common Stock from Christopher or another Christopher Stockholder and each person who receives an Exempt Transfer (as defined in the Stockholders' Agreement) of Kitty Hawk Common Stock from Christopher or another Christopher Stockholder. "CLOSING" shall mean the consummation of the Mergers and the closing of the transactions contemplated by this Agreement. "CLOSING DATE" shall have the meaning ascribed to it in Section 3.7. "CLOSING DATE FINANCINGS" shall have the meaning ascribed to it in Section 5.3.1. "CODE" shall have the meaning ascribed to it in the Recitals. "CONFIDENTIAL INFORMATION" shall have the meaning ascribed to it in Section 11.14. (viii) 10 "CONSTITUENT CORPORATIONS" shall have the meaning ascribed to it in Section 2.1. "CONTRACTS" shall have the meaning ascribed to it in Section 4.1.17. "CORPORATE LIABILITY" shall have the meaning ascribed to it in Section 6.2.11. "COSTS" shall have the meaning ascribed to it in Section 11.8. "D&T" shall mean Deloitte & Touche, L.L.P. "D&T CONSENT" shall have the meaning ascribed to it in Section 5.2.3. "D&T FINANCIAL STATEMENTS" shall have the meaning ascribed to it in Section 5.2.3. "DEBT OFFERING DOCUMENTS" means the offering circular or memorandum relating to the senior notes offered in the Closing Date Financings as amended or supplemented. "DEDUCTIBLE" shall have the meaning ascribed to it in Section 10.3.1. "DEFENSE COSTS" shall have the meaning ascribed to it in Section 10.4.2. "DISABILITY" shall mean with respect to an individual (a) a finding by a court of competent jurisdiction that such individual is mentally incompetent or (b) such individual's inability to function on his or her own or conduct his or her own affairs due to mental or physical infirmity for six (6) consecutive months. If any individual disputes that he or she is suffering from a Disability, unless a court of competent jurisdiction has determined such individual is mentally incompetent which determination shall be binding, such dispute shall be submitted to a physician mutually satisfactory to such individual and the Board of Directors (including for this purpose only the vote of such individual). If such individual and the Board of Directors are unable to mutually agree on a mutually satisfactory physician, then such individual and the Board of Directors shall each select a reputable physician, who, together, shall in turn select a third physician whose determination of such individual's Disability shall be conclusive and binding on all parties hereto. Evidence of such Disability, as so certified, shall be conclusive notwithstanding that a disability policy, or clause in an insurance policy, covering such individual shall contain a different definition of "disabled" or "disability." "DISCLOSING PARTY" shall have the meaning ascribed to it in Section 11.14. "DISCLOSURE SCHEDULE" shall mean (a) in the case of the Kalitta Companies and Kalitta, the Disclosure Schedule delivered by the Kalitta Companies to Kitty Hawk at or prior to the date of this Agreement pursuant to Section 4.1, and (b) in the case of Kitty Hawk and the Subs, the Disclosure Schedule delivered by it to the Kalitta Companies and Kalitta pursuant to Sections 4.3 and 4.4 hereof. "DOT" shall mean the U.S. Department of Transportation. "EFFECTIVE TIME" shall have the meaning ascribed to it in Section 1.3. (ix) 11 "EMPLOYEE BENEFIT PLAN" shall have the meaning ascribed to it in Section 4.1.24(a). "ENVIRONMENTAL CLAIM" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, claims, Liens, Proceedings or notices of non-compliance or violation (or to the Knowledge of Kalitta Management, investigation) by any Person alleging potential liability (including, without limitation, potential liability for enforcement, investigatory costs, cleanup costs, governmental response costs, removal costs, remedial costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (A) the presence, or release or threatened release into the environment, of any Hazardous Material at any location, whether owned, operated, leased or managed by the Kalitta Companies or AIC (or in the case of Section 4.3.19, Kitty Hawk or any of its Subsidiaries) with respect to their businesses; (B) circumstances reasonably forming the basis of any violation, or alleged violation, of any Environmental Law by the Kalitta Companies or AIC (or in the case of Section 4.3.19, Kitty Hawk or any of its Subsidiaries); or (C) any and all written claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence or release of any Hazardous Materials. "ENVIRONMENTAL COUNSEL" shall have the meaning ascribed to it in Section 10.2.1(b)(ii). "ENVIRONMENTAL LAWS" shall mean all laws or orders relating to the regulation or protection of human health, safety or the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), including, without limitation, laws and regulations relating to releases or threatened releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, recycling or handling of Hazardous Materials. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ESCROW AGENT" shall mean Wells Fargo Bank N.A. or any other national banking association designated by Kitty Hawk. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "FAA" shall mean the U.S. Federal Aviation Administration. "FAIR MARKET VALUE" means an amount (expressed in dollars) equal to the arithmetic average of the last reported sales price of a share of Kitty Hawk Common Stock as quoted on the National Association of Securities Dealers Automated Quotation System (or any national securities exchange on which the Kitty Hawk Common Stock is listed, or if not so listed, its fair market value as determined in good faith by the Board of Directors) for the twenty (20) consecutive trading days ending on the immediately preceding trading day, as adjusted to reflect any stock split, stock dividend, merger, consolidation, reorganization, recapitalization or similar event occurring during such valuation period. (x) 12 "FAIRNESS OPINION" shall mean the fairness opinion dated on or about September 22, 1997 from BT Alex. Brown & Sons Incorporated, to the effect that the consideration for the Mergers is fair to Kitty Hawk, from a financial point of view. "FAMILY MEMBER" shall mean with respect to an individual that individual's spouse, natural or adopted sibling, ancestor or descendant of that individual or any spouse or descendant of any such ancestor, descendant or sibling. "FINANCIAL STATEMENTS" shall have the meaning ascribed to it in Section 4.1.6. "FOL" shall have the meaning ascribed to it in the preamble to this Agreement. "FOL CERTIFICATE" shall have the meaning ascribed to it in Section 3.1(c). "FOL COMMON STOCK" shall have the meaning ascribed to it in Section 3.1(c). "FOL MERGER" shall have the meaning ascribed to it in Section 1.2(c). "FOL MERGER CONSIDERATION" shall have the meaning ascribed to it in Section 3.1(c). "FOL SHARE" shall have the meaning ascribed to it in Section 3.1(c). "FRAUDULENT CONVEYANCE ACT" shall mean any statute substantially similar to the Uniform Fraudulent Conveyance Act. "FRAUDULENT TRANSFER ACT" shall mean any statute substantially similar to the Uniform Fraudulent Transfer Act. "FRINGE BENEFITS" shall have the meaning ascribed to it in Section 4.1.25(a). "GAAP" shall mean those generally accepted accounting principles and practices which are used in the United States and recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods so as to properly reflect the financial position, results of operations and operating cash flow on a consolidated basis of the party, except that any accounting principle or practice required to be changed by the Accounting Principles Board or Financial Accounting Standards Board (or other appropriate board or committee) in order to continue as a generally accepted accounting principle or practice may be so changed. "GENERAL INCREASE" shall have the meaning ascribed to it in Section 4.1.8(g). "GM" shall mean the General Motors Corporation. "GM WAIVER" shall have the meaning ascribed to it in Section 5.3.2. "GOVERNANCE AMENDMENTS" shall have the meaning ascribed to it in the Recitals. (xi) 13 "GUARANTOR DOCUMENTS" shall have the meaning ascribed to it in Section 6.2.11. "GUARANTY" shall have the meaning ascribed to it in Section 6.2.11. "HAZARDOUS MATERIALS" shall mean any waste or other substance that is listed, defined, designated or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "INDEMNIFIED LIABILITIES" shall have the meaning ascribed to it in Section 9.5(a). "INDEMNIFIED PARTY" shall have the meaning ascribed to it in Section 10.4.1. "INDEMNIFYING PARTY" shall have the meaning ascribed to it in Section 10.4.1. "INTELLECTUAL PROPERTY" shall have the meaning ascribed to it in Section 4.1.16. "JOINT DESIGNEE" shall mean Lewis White and any successors thereto selected by the Joint Nominating Committee. "JOINT NOMINATING COMMITTEE" shall have the meaning ascribed to it in Section 5.5.2. "KALITTA" shall have the meaning ascribed to it in the preamble to this Agreement. "KALITTA COMPANIES" shall have the meaning ascribed to it in the preamble to this Agreement. "KALITTA COMPANIES INDEMNIFIED PARTIES" shall have the meaning ascribed to it in Section 9.5(a). "KALITTA COMPANIES PERMITTED TRANSACTIONS" shall mean (a) the transactions contemplated by the 727 Purchase Agreement, (b) the purchase and financing by AIA of the MEA 747s, (c) the repurchase by AIA of an L-1011 from ACG Nevada Three LLC pursuant to that certain Purchase Option Agreement dated April 12, 1996, between ACG Nevada Three LLC and AIA, (d) the sale by AIA of one L-1011 aircraft, (e) the sale of aircraft N504MG and N705CA, (f) the transactions contemplated by the Racing Entity Purchase Agreement, (g) to the extent all conditions to the obligations of AIA are satisfied pursuant to that letter agreement relating to the Ft. Wayne facility are satisfied, the transactions contemplated thereby, (h) the borrowing of approximately $7,750,000 and the granting of Liens on a DC-8-63F owned by AIA to secure such borrowing, (i) up to $250,000 in miscellaneous financings of equipment, (j) the sale by KFS to Kalitta or his Affiliate of the Hawker aircraft and the lease back of such aircraft, in each case on terms no less favorable to KFS than those (xii) 14 that could be obtained in an arm's length transaction, (k) any debt refinancing or restructuring transactions that are consented to by Kitty Hawk (which consent shall not be unreasonably withheld), (l) the financing of insurance premium deductibles consistent with past practice, (m) the distribution net of prior distributions for such purpose, of up to $1,500,000 solely for the payment by Kalitta of personal income Taxes attributable to earnings of the Kalitta Companies from January 1997, net of prior distributions until the Closing Date, (n) the transfer from Kalitta to Doug Kalitta, George Kelsey and Don Schilling of an aggregate of 885 shares of AIA (provided that no such transfers shall be made until each such transferee has delivered to Kitty Hawk a written waiver of any dissenter's rights related to the Mergers) and (o) any transactions between Kalitta, AIC or any of the Kalitta Companies, on the one hand, and Kitty Hawk or any Subsidiary, on the other hand. "KALITTA COMPANIES SHARES" shall have the meaning ascribed to it in Section 4.3.7. "KALITTA CONSENTS" shall have the meaning ascribed to it in Section 4.1.5. "KALITTA DESIGNEES" shall mean George Kelsey, Phil Sauder and any successors thereto selected by the Kalitta Nominating Committee. "KALITTA NOMINATING COMMITTEE" shall have the meaning ascribed to it in Section 5.5.2. "KALITTA ESTABLISHED LOSS" shall have the meaning ascribed to it in Section 10.2.3. "KALITTA GROUP" shall have the meaning ascribed to it in Section 5.2.1. "KALITTA INDEMNIFIED PARTIES" shall have the meaning ascribed to it in Section 10.2.2. "KALITTA MANAGEMENT" shall mean David Ahles, William Gray, Kalitta, Douglas Kalitta, Michael Maraone, Jane Phifer, Donald Schilling, Diana Schilling, Beti Ward and Ken Welsch. "KALITTA STOCKHOLDER" shall mean Kalitta and each Permitted Transferee (as defined in the Stockholders' Agreement) who receives a Transfer (as defined in the Stockholders' Agreement) of Kitty Hawk Common Stock from Kalitta or another Kalitta Stockholder or a person who receives an Exempt Transfer (as defined in the Stockholders' Agreement) of Kitty Hawk Common Stock from Kalitta or another Kalitta Stockholder. "KFS" shall have the meaning ascribed to it in the preamble to this Agreement. "KFS CASH MERGER CONSIDERATION" shall mean $20,000,000. "KFS CERTIFICATE" shall have the meaning ascribed to it in Section 3.1(d). "KFS COMMON STOCK" shall have the meaning ascribed to it in Section 3.1(d). (xiii) 15 "KFS ENVIRONMENTAL CONDITION" shall have the meaning ascribed to it in Section 10.2.1(e). "KFS ENVIRONMENTAL OBLIGATION" shall have the meaning ascribed to it in Section 10.2.1(e)(ii). "KFS ESCROW AGREEMENT" shall mean an Escrow Agreement, effective as of the Closing Date, among Kitty Hawk, Kalitta and the Escrow Agent, the form of which is attached as Exhibit 7.3(d). "KFS ESCROW AMOUNT" shall mean $3,000,000. "KFS MERGER" shall have the meaning ascribed to it in Section 1.2(d). "KFS OPERATING AUTHORIZATIONS" shall have the meaning ascribed to it in Section 4.1.28(c). "KFS PROPERTIES" shall mean any real property, leaseholds or other realty interests currently or formerly owned or operated by KFS and any buildings, plants or structures currently or formerly owned or operated by KFS. "KFS SHARE" shall have the meaning ascribed to it in Section 3.1(d). "KITTY HAWK" shall have the meaning ascribed to it in the preamble to this Agreement. "KITTY HAWK - AIA" shall have the meaning ascribed to it in the preamble to this Agreement. "KITTY HAWK - AIT" shall have the meaning ascribed to it in the preamble to this Agreement. "KITTY HAWK COMMON STOCK" shall have the meaning ascribed to it in Section 3.1(f). "KITTY HAWK CONSENTS" shall have the meaning ascribed to it in Section 4.3.5. "KITTY HAWK CONTRACTS" shall have the meaning ascribed to it in Section 4.3.17. "KITTY HAWK ESTABLISHED KFS LOSS" shall have the meaning ascribed to it in Section 10.2.1(f). "KITTY HAWK ESTABLISHED LOSS" shall mean a Kitty Hawk Established KFS Loss or a Kitty Hawk Established Non-KFS Loss. "KITTY HAWK ESTABLISHED NON-KFS LOSS" shall have the meaning ascribed to it in Section 10.2.1(c). (xiv) 16 "KITTY HAWK - FOL" shall have the meaning ascribed to it in the preamble to this Agreement. "KITTY HAWK INDEMNIFIED PARTY" shall have the meaning ascribed to it in Section 10.2.1(a). "KITTY HAWK - KFS" shall have the meaning ascribed to it in the preamble to this Agreement. "KITTY HAWK - OK" shall have the meaning ascribed to it in the preamble to this Agreement. "KITTY HAWK OPERATING AUTHORIZATIONS" shall have the meaning ascribed to it in Section 4.3.20(a). "KITTY HAWK PERMITTED TRANSACTIONS" shall mean (a) the transactions contemplated by the 727 Purchase Agreement, (b) the transactions contemplated by this Agreement, including the Closing Date Financings, (c) the adoption of the Governance Amendments, (d) the election of Christopher as Chairman of the Board and Chief Executive Officer, (e) the issuance of contractual indemnity agreements to each member of the Board of Directors (including, subject to Closing, those prospective members of the Board of Directors set forth on Exhibit 5.5.1) and (f) any transactions between Kalitta, AIC or any of the Kalitta Companies, on the one hand, and Kitty Hawk or any Subsidiary, on the other hand. "KITTY HAWK PROPOSALS" shall have the meaning ascribed to it in the Recitals. "KNOWLEDGE OF KALITTA MANAGEMENT" shall mean the actual (rather than imputed) knowledge of any individual member of the Kalitta Management and the phrase "Known to Kalitta Management" and similar phrases shall have a correlative meaning thereto. "KNOWLEDGE OF KITTY HAWK" shall mean the actual (rather than imputed) knowledge of Christopher, Jim Reeves or Rick Wadsworth and the phrase "Known to Kitty Hawk" and similar phrases shall have a correlative meaning thereto. "LANDLORD" shall mean Kalitta, L.L.C., a Michigan limited liability company. "LEASE-MODIFICATION PROPOSAL" shall have the meaning ascribed to it in Section 5.2.7(b). "LIEN" shall mean any mortgage, deed of trust, lien, pledge, adverse claim, security interest or encumbrance of any nature whatsoever but shall exclude ordinary utility and other similar easements of record that do not materially interfere with the use of real property. "LOSSES" shall have the meaning ascribed to it in Section 10.2.1(a). (xv) 17 "MATERIAL ADVERSE EFFECT" shall mean (i) with respect to any of the Kalitta Companies or AIC, a material adverse effect on (x) the business, results of operations or financial condition of the Kalitta Companies in each case taken as a whole, (y) on their ability to consummate the transactions contemplated in this Agreement and in the Related Agreements or (z) the enforceability of this Agreement or the Related Agreements identified in Section 7.3(b) - (f) against Kalitta, or with respect to either the KFS Escrow Agreement or the Non-KFS Escrow Agreement, the Escrow Agent and (ii) with respect to Kitty Hawk or any of the Subsidiaries, a material adverse effect on (x) the business, results of operations or financial condition in each case on a consolidated basis of Kitty Hawk and its Subsidiaries, (y) on their ability to consummate the transactions contemplated in this Agreement and in the Related Agreements or (z) the enforceability of this Agreement or the Related Agreements identified in Sections 7.3(b), (d) - (f) against Kitty Hawk, or with respect to the Stockholders' Agreement, against Christopher. "MBCA" shall have the meaning ascribed to it in the Recitals. "MEA 747S" shall mean the three Boeing-747 aircraft the subject of that certain Aircraft Purchase Agreement dated as of March 20, 1997, between AIA and Middle East Airlines Airliban, S.A.L. "MERGER PROPOSALS" shall have the meaning ascribed to it in the Recitals. "MERGERS" shall have the meaning ascribed to it in the Recitals. "NON-KFS ENVIRONMENTAL CONDITION" shall have the meaning ascribed to it in Section 10.2.1(b). "NON-KFS ENVIRONMENTAL OBLIGATION" shall have the meaning ascribed to it in Section 10.2.1(b)(i). "NON-KFS ESCROW AGREEMENT" shall mean an Escrow Agreement effective as of the Closing Date, among Kitty Hawk, Kalitta and the Escrow Agent, the form of which is attached as Exhibit 7.3(d). "NON-KFS ESCROW AMOUNT" shall mean 1,150,000 shares of Kitty Hawk Common Stock. "NON-KFS PROPERTIES" shall mean any real property, leaseholds, or other realty interests currently or formerly owned or operated by any of AIA, AIT, FOL or OK and any buildings, plants or structures currently or formerly owned or operated by any of AIA, AIT, FOL or OK. "NOTES" shall have the meaning ascribed to it in Section 6.2.11. "OFFICE LEASE" shall mean that certain Corporate Office Lease dated as of February 25, 1997 between AIA and the Landlord under which AIA occupies the Office Premises. (xvi) 18 "OFFICE MORTGAGE" shall have the meaning ascribed to it in Section 4.1.18. "OFFICE PREMISES" shall mean the office building containing approximately 18,399 square feet and associated parking lot and premises located at 1349 S. Huron Street in Ypsilanti, Michigan. "OK" shall have the meaning ascribed to it in the preamble to this Agreement. "OK CERTIFICATE" shall have the meaning ascribed to it in Section 3.1(e). "OK COMMON STOCK" shall have the meaning ascribed to it in Section 3.1(e). "OK MERGER" shall have the meaning ascribed to it in Section 1.2(e). "OK MERGER CONSIDERATION" shall have the meaning ascribed to it in Section 3.1(e). "OK OPERATING AUTHORIZATIONS" shall have the meaning ascribed to it in Section 4.1.28(e). "OK SHARE" shall have the meaning ascribed to it in Section 3.1(e). "PERMITTED LIEN" shall mean (a) any Lien for Taxes not yet due and payable or contested in good faith by appropriate Proceedings, (b) any Lien described as a "Permitted Lien" in a Disclosure Schedule, (c) any Lien as would be shown by a current survey of the property (in the case of real property), (d) any Lien of mechanics, materialmen, laborers, warehousemen, carriers and other similar common law or statutory liens which are not yet due and payable or are being contested in good faith, (e) zoning, entitlement, land use, environmental and other regulation by governmental agencies, (f) any Liens that may arise or be created after the date of this Agreement that are incidental to the conduct of the business of the Kalitta Companies or AIC in the ordinary course of the business of the Kalitta Companies or AIC, (g) any Lien granted to any lenders prior to the date hereof for obligations set forth in the Disclosure Schedule, (h) any Lien arising by virtue of this Agreement or any Related Agreement or pursuant to a Kalitta Companies Permitted Transaction, (i) any Lien granted in connection with the Closing Date Financings and (j) other Liens and defects in title which do not, individually or in the aggregate, materially interfere with the use of the properties or materially detract from their value. "PERMITTED TRANSACTIONS" shall mean, collectively, the Kalitta Companies Permitted Transactions and the Kitty Hawk Permitted Transactions. "PERSON" shall mean any individual, corporation, association, partnership, proprietorship, joint venture or other entity. "PROCEEDINGS" shall have the meaning ascribed to it in Section 4.1.10(a). "RACING ENTITY" shall have the meaning ascribed to it in Section 5.2.8. (xvii) 19 "RACING ENTITY PURCHASE AGREEMENT" shall have the meaning ascribed to it in Section 5.2.8. "RELATED AGREEMENTS" shall have the meaning ascribed to it in Section 7.3. "RELATED PERSONS" shall have the meaning ascribed to it in Section 4.1.20. "RELEASE" shall mean a Mutual Release, effective as of the Closing Date, between Kalitta, each of the Kalitta Companies, Christopher, Kitty Hawk, the Subs and the Subsidiaries, the form of which is attached as Exhibit 7.3(f). "REPRESENTATIVES" shall have the meaning ascribed to it in Section 11.14. "REQUISITE CHRISTOPHER STOCKHOLDERS" shall mean Christopher Stockholders Beneficially Owning at least a majority of the Kitty Hawk Common Stock Beneficially Owned by all Christopher Stockholders. "REQUISITE KALITTA STOCKHOLDERS" shall mean Kalitta Stockholders Beneficially Owning at least a majority of the Kitty Hawk Common Stock Beneficially Owned by all Kalitta Stockholders. "SEC" shall mean the Securities and Exchange Commission. "SEC DOCUMENTS" shall have the meaning ascribed to it in Section 4.3.8. "SEC FILINGS" shall have the meaning ascribed to it in Section 4.3.9. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "727 PURCHASE AGREEMENT" shall mean that certain Agreement for Sale and Purchase of the AIA 727 Fleet, dated as of July 31, 1997, by and between AIA, KFS, Kalitta and Kitty Hawk Aircargo, Inc., as amended. "STOCKHOLDERS" shall mean Christopher and Kalitta. "STOCKHOLDERS' AGREEMENT" shall mean the Stockholders' Agreement, effective as of the Closing Date, between Christopher, Kalitta and Kitty Hawk, the form of which is attached as Exhibit 7.3(b). "STOCK MERGER CONSIDERATION" shall have the meaning ascribed to it in Section 3.1(f). "SUBS" shall have the meaning ascribed to it in the preamble to this Agreement. "SUBS CONSENTS" shall have the meaning ascribed to it in Section 4.4.5. "SUBSEQUENT DISCLOSURE SCHEDULE" shall have the meaning ascribed to it in Section 4.5. (xviii) 20 "SUBSEQUENT EVENT" shall have the meaning ascribed to it in Section 4.5. "SUBSIDIARIES" shall mean Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc. and Skyfreighters, Inc. "SURVIVING CORPORATIONS" shall have the meaning ascribed to it in Section 1.2. "TAXES" shall mean all federal, state, local, foreign and other governmental or quasi-governmental net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, unemployment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees and assessments or charges of any kind whatever in the nature of taxes, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. "TAX RETURNS" shall have the meaning ascribed to it in Section 4.1.9(b). "TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT" and similar phrases shall not include the Closing Date Financings. (xix) 21 EXHIBITS Exhibit 2.2(a) Form of Articles of Incorporation of the surviving AIA Exhibit 2.2(b) Form of Articles of Incorporation of the surviving AIT Exhibit 2.2(c) Form of Articles of Incorporation of the surviving FOL Exhibit 2.2(d) Form of Articles of Incorporation of the surviving KFS Exhibit 2.2(e) Form of Articles of Incorporation of the surviving OK Exhibit 2.3(a) Form of Bylaws of the surviving AIA Exhibit 2.3(b) Form of Bylaws of the surviving AIT Exhibit 2.3(c) Form of Bylaws of the surviving FOL Exhibit 2.3(d) Form of Bylaws of the surviving KFS Exhibit 2.3(e) Form of Bylaws of the surviving OK Exhibit 5.28 Form of Racing Entity Purchase Agreement Exhibit 5.5.1 Members of the Board of Directors of Kitty Hawk at the Effective Time Exhibit 6.1.6 Form of Opinions of Kalitta's Counsel Exhibit 6.2.6 Form of Opinions of Kitty Hawk's Counsel Exhibit 7.3(a) Form of Severance and Noncompetition Agreement Exhibit 7.3(b) Form of Stockholders' Agreement Exhibit 7.3(d) Form of KFS Escrow Agreement Exhibit 7.3(e) Form of Non-KFS Escrow Agreement Exhibit 7.3(f) Form of Release
(xx) 22 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of September 22, 1997, is entered into by and among Kitty Hawk, Inc., a Delaware corporation ("KITTY HAWK"), Kitty Hawk - AIA, Inc., a Michigan corporation ("KITTY HAWK - AIA"), Kitty Hawk - AIT, Inc., a Michigan corporation ("KITTY HAWK - AIT"), Kitty Hawk - FOL, Inc., a Michigan corporation ("KITTY HAWK - FOL"), Kitty Hawk - KFS, Inc., a Michigan corporation ("KITTY HAWK - KFS"), Kitty Hawk - OK, Inc., a Michigan corporation ("KITTY HAWK - OK"), M. Tom Christopher ("CHRISTOPHER"), American International Airways, Inc., a Michigan corporation ("AIA"), American International Travel, Inc., a Michigan corporation ("AIT"), Flight One Logistics, Inc., a Michigan corporation ("FOL"), Kalitta Flying Service, Inc., a Michigan corporation ("KFS"), O.K. Turbines, Inc., a Michigan corporation ("OK"), and Conrad Kalitta ("KALITTA"). As used herein, Kitty Hawk - AIA, Kitty Hawk - AIT, Kitty Hawk - FOL, Kitty Hawk - KFS, and Kitty Hawk - OK shall be collectively referred to as the "SUBS," and AIA, AIT, FOL, KFS and OK shall be collectively referred to as the "KALITTA COMPANIES." RECITALS The parties hereto desire to effect the following separate mergers (collectively, the "MERGERS"), all with the effect that the Kalitta Companies, as the surviving corporations of the Mergers, will become wholly-owned subsidiaries of Kitty Hawk: (a) Kitty Hawk - AIA with and into AIA; (b) Kitty Hawk - AIT with and into AIT; (c) Kitty Hawk - FOL with and into FOL; (d) Kitty Hawk - KFS with and into KFS; and (e) Kitty Hawk - OK with and into OK. In connection with, and as a condition to the consummation of, the Mergers, it is contemplated that Kitty Hawk will engage in certain financing transactions more fully described herein, the proceeds of which will be used to pay the KFS Cash Merger Consideration and the balance of which will be used to refinance certain indebtedness of Kitty Hawk and the Kalitta Companies and for working capital of Kitty Hawk. The Boards of Directors of each of the Kalitta Companies (a) have determined it advisable and in the best interests of the Kalitta Companies' and its sole shareholder to consummate the Mergers, upon the terms and subject to the conditions set forth herein and in accordance with the applicable provisions of the Michigan Business Corporation Act ("MBCA"), (b) have adopted and approved this Agreement and the transactions contemplated hereby and (c) have recommended approval of the Mergers and this Agreement to their sole shareholder. 23 The Board of Directors of Kitty Hawk has determined it advisable and in the best interests of Kitty Hawk and of its stockholders to adopt and approve, and have approved and adopted, (a) this Agreement, the Mergers and the other transactions contemplated hereby including, without limitation, the issuance of the Stock Merger Consideration (the "MERGER PROPOSALS") and (b) amendments to the Bylaws of Kitty Hawk, to be effective upon Closing, with respect to each of the governance matters described in Section 5.5 hereof (the "GOVERNANCE AMENDMENTS," and, together with the Merger Proposals, the "KITTY HAWK PROPOSALS"). The Boards of Directors of each of the Subs (a) have determined it advisable and in the best interests of the Subs' sole shareholder to consummate the Mergers, upon the terms and subject to the conditions set forth herein and in accordance with the MBCA, (b) have adopted and approved this Agreement and the transactions contemplated hereby, and (c) have recommended approval of the Mergers and this Agreement to their respective shareholder. Kitty Hawk, the Kalitta Companies, the Subs and the Subsidiaries desire to operate their respective businesses both before and after the Closing Date in accordance with the highest standards of business ethics. The parties intend that for Federal income tax purposes each of the AIA Merger, the AIT Merger, the FOL Merger and the OK Merger (all as hereinafter defined) shall qualify as a reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE") but that the KFS Merger will not so qualify. The parties are entering into this Agreement to set forth the "plans of merger" with respect to the Mergers in accordance with the MBCA, to make certain representations, warranties and agreements as to the Mergers, and to prescribe various conditions as to the Mergers. AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I THE MERGERS 1.1 Definitions. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed thereto in the Definition Appendix attached hereto beginning on page (vii). 1.2 The Mergers. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the MBCA, at the Effective Time: (a) Kitty Hawk - AIA shall be merged with and into AIA (the "AIA MERGER") with AIA being the surviving corporation of the AIA Merger; 2 24 (b) Kitty Hawk - AIT shall be merged with and into AIT (the "AIT MERGER") with AIT being the surviving corporation of the AIT Merger; (c) Kitty Hawk - FOL shall be merged with and into FOL (the "FOL MERGER") with FOL being the surviving corporation of the FOL Merger; (d) Kitty Hawk - KFS shall be merged with and into KFS (the "KFS MERGER") with KFS being the surviving corporation of the KFS Merger; and (e) Kitty Hawk - OK shall be merged with and into OK (the "OK MERGER") with OK being the surviving corporation of the OK Merger. Upon consummation of each of the Mergers, the separate corporate existence of each of the Subs shall thereupon cease, and each of the Kalitta Companies, as the surviving corporations in the Mergers (the "SURVIVING CORPORATIONS"), shall by virtue of its respective Merger continue its corporate existence in accordance with the MBCA. 1.3 Effective Time of the Mergers. The Mergers shall become effective at the date and time (the "EFFECTIVE TIME") when properly executed certificates of merger, in such form as is required by and executed in accordance with the MBCA, are duly filed with the Department of Consumer and Industry Services of the State of Michigan or at such later time as the parties hereto shall have provided in such certificates. The parties hereto shall cause such filings to occur as soon as practicable on or after the Closing Date. ARTICLE II THE CONSTITUENT AND SURVIVING CORPORATIONS 2.1 Constituent Corporations. The names and designations and number of outstanding shares of each class of shares of capital stock of each of the constituent corporations (the "CONSTITUENT CORPORATIONS") entitled to vote are as follows:
Constituent Shares Entitled Merger Corporations Outstanding Shares to Vote ------ ------------ ------------------ --------------- AIA Merger AIA 25,000 shares of common stock common stock Kitty Hawk - AIA 1,000 shares of common stock common stock AIT Merger AIT 1,000 shares of common stock common stock Kitty Hawk - AIT 1,000 shares of common stock common stock FOL Merger FOL 1,000 shares of common stock common stock Kitty Hawk - FOL 1,000 shares of common stock common stock KFS Merger KFS 25,000 shares of common stock common stock Kitty Hawk - KFS 1,000 shares of common stock common stock OK Merger OK 1,000 shares of common stock common stock Kitty Hawk - OK 1,000 shares of common stock common stock
3 25 The number of outstanding shares of each of the Constituent Corporations are not subject to change before the Effective Time within the meaning of Section 701(2)(b) of the MBCA. 2.2 Articles of Incorporation. (a) At the Effective Time, the Articles of Incorporation of AIA, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.2(a) hereto, and such Articles of Incorporation, as so amended and restated, shall be the Articles of Incorporation of the Surviving Corporation resulting from the AIA Merger until thereafter amended as provided by law. (b) At the Effective Time, the Articles of Incorporation of AIT, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.2(b) hereto, and such Articles of Incorporation, as so amended and restated, shall be the Articles of Incorporation of the Surviving Corporation resulting from the AIT Merger until thereafter amended as provided by law. (c) At the Effective Time, the Articles of Incorporation of FOL, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.2(c) hereto, and such Articles of Incorporation, as so amended and restated, shall be the Articles of Incorporation of the Surviving Corporation resulting from the FOL Merger until thereafter amended as provided by law. (d) At the Effective Time, the Articles of Incorporation of KFS, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.2(d) hereto, and such Articles of Incorporation, as so amended and restated, shall be the Articles of Incorporation of the Surviving Corporation resulting from the KFS Merger until thereafter amended as provided by law. (e) At the Effective Time, the Articles of Incorporation of OK, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.2(e) hereto, and such Articles of Incorporation, as so amended and restated, shall be the Articles of Incorporation of the Surviving Corporation resulting from the OK Merger until thereafter amended as provided by law. 2.3 Bylaws. (a) At the Effective Time, the Bylaws of AIA, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.3(a) hereto, and such Bylaws, as so amended and restated, shall be the Bylaws of the Surviving Corporation resulting from the AIA Merger until thereafter amended as provided by law. Kitty Hawk, as the sole shareholder of such Surviving Corporation, shall so amend and restate such Bylaws at the Effective Time. 4 26 (b) At the Effective Time, the Bylaws of AIT, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.3(b) hereto, and such Bylaws, as so amended and restated, shall be the Bylaws of the Surviving Corporation resulting from the AIT Merger until thereafter amended as provided by law. Kitty Hawk, as the sole shareholder of such Surviving Corporation, shall so amend and restate such Bylaws at the Effective Time. (c) At the Effective Time, the Bylaws of FOL, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.3(c) hereto, and such Bylaws, as so amended and restated, shall be the Bylaws of the Surviving Corporation resulting from the FOL Merger until thereafter amended as provided by law. Kitty Hawk, as the sole shareholder of such Surviving Corporation, shall so amend and restate such Bylaws at the Effective Time. (d) At the Effective Time, the Bylaws of KFS, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.3(d) hereto, and such Bylaws, as so amended and restated, shall be the Bylaws of the Surviving Corporation resulting from the KFS Merger until thereafter amended as provided by law. Kitty Hawk, as the sole shareholder of such Surviving Corporation, shall so amend and restate such Bylaws at the Effective Time. (e) At the Effective Time, the Bylaws of OK, as they are in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit 2.3(e) hereto, and such Bylaws, as so amended and restated, shall be the Bylaws of the Surviving Corporation resulting from the OK Merger until thereafter amended as provided by law. Kitty Hawk, as the sole shareholder of such Surviving Corporation, shall so amend and restate such Bylaws at the Effective Time. 2.4 Board of Directors and Officers of the Surviving Corporations. At the Effective Time, the directors and officers of each Kalitta Company shall remain the directors and officers of the respective Surviving Corporation until their respective successors shall be duly elected or appointed and qualified, or until their earlier death, resignation or removal. 2.5 Effects of Mergers. The Mergers shall have the effects set forth in Section 724(l) and any other applicable provisions of the MBCA. Without limiting the foregoing, the corporate existence of each of the Kalitta Companies, with all their purposes, powers and objects, shall continue unaffected and unimpaired by the Mergers and, as the Surviving Corporation of the respective Merger, each such Kalitta Company shall be governed by the laws of the State of Michigan and shall succeed to all rights, assets, liabilities, properties, privileges, powers, franchises and obligations of the respective Sub in accordance with the laws of the State of Michigan. As of the Effective Time, each of the Surviving Corporations shall be a wholly-owned subsidiary of Kitty Hawk. 5 27 ARTICLE III CONVERSION OF SECURITIES 3.1 Consideration for Mergers. (a) At the Effective Time, by virtue of the AIA Merger of Kitty Hawk - AIA with and into AIA and without any action on the part of Kitty Hawk - AIA, AIA, Kitty Hawk or their respective shareholders or stockholders (other than the filing of the certificate of merger referred to in Section 1.3 hereof), (i) each share (an "AIA SHARE") of AIA's common stock, par value $1.00 per share ("AIA COMMON STOCK"), issued and outstanding immediately prior to the Effective Time (other than shares of AIA Common Stock held in the treasury of AIA) shall be canceled and extinguished and be converted automatically into the right to receive 169.2532 shares of Kitty Hawk Common Stock (the "AIA MERGER CONSIDERATION") payable, less any required withholding Taxes, as provided in Section 3.2 upon surrender of the certificate formerly representing such AIA Share (an "AIA CERTIFICATE"), and (ii) each AIA Share then held in the treasury of AIA shall be canceled and retired without conversion thereof and without payment of any consideration and shall cease to exist. (b) At the Effective Time, by virtue of the AIT Merger of Kitty Hawk - AIT with and into AIT and without any action on the part of Kitty Hawk - AIT, AIT, Kitty Hawk or their respective shareholders or stockholders (other than the filing of the certificate of merger referred to in Section 1.3 hereof), (i) each share (an "AIT SHARE") of AIT's common stock, par value $1.00 per share ("AIT COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than shares of AIT Common Stock held in the treasury of AIT) shall be canceled and extinguished and be converted automatically into the right to receive 5.672 shares of Kitty Hawk Common Stock (the "AIT MERGER CONSIDERATION") payable, less any required withholding Taxes, as provided in Section 3.2 upon surrender of the certificate formerly representing such AIT Share (an "AIT CERTIFICATE") and (ii) each AIT Share then held in the treasury of AIT shall be canceled and retired without conversion thereof and without payment of any consideration and shall cease to exist. (c) At the Effective Time, by virtue of the FOL Merger of Kitty Hawk - FOL with and into FOL and without any action on the part of Kitty Hawk - FOL, FOL, Kitty Hawk or their respective shareholders or stockholders (other than the filing of the certificate of merger referred to in Section 1.3 hereof), (i) each share (a "FOL SHARE") of FOL's common stock, par value $1.00 per share ("FOL COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than shares of FOL Common Stock held in the treasury of FOL) shall be canceled and extinguished and be converted automatically into the right to receive 323.305 shares of Kitty Hawk Common Stock (the "FOL MERGER CONSIDERATION") payable, less any required withholding Taxes, as provided in Section 3.2 upon surrender of the certificate formerly representing such FOL Share (a "FOL CERTIFICATE") and (ii) each FOL Share then held in the treasury of FOL shall be canceled and retired without conversion thereof and without payment of any consideration and shall cease to exist. 6 28 (d) At the Effective Time, by virtue of the KFS Merger of Kitty Hawk - KFS with and into KFS and without any action on the part of Kitty Hawk - KFS, KFS, Kitty Hawk or their respective shareholders or stockholders (other than the filing of the certificate of merger referred to in Section 1.3 hereof), (i) each share (a "KFS SHARE") of KFS' common stock, par value $1.00 per share ("KFS COMMON STOCK"), issued and outstanding immediately prior to the Effective Time (other than shares of KFS Common Stock held in the treasury of KFS) shall be canceled and extinguished and be converted automatically into the right to receive without interest $800 payable, less any required withholding Taxes, as provided in Section 3.2 upon surrender of the certificate formerly representing such KFS Share (a "KFS CERTIFICATE") and (ii) each KFS Share then held in the treasury of KFS shall be canceled and retired without conversion thereof and without payment of any consideration and shall cease to exist. (e) At the Effective Time, by virtue of the OK Merger of Kitty Hawk - OK with and into OK and without any action on the part of Kitty Hawk - OK, OK, Kitty Hawk or their respective shareholders or stockholders (other than the filing of the certificate of merger referred to in Section 1.3 hereof), (i) each share (an "OK SHARE") of OK's common stock, par value $1.00 per share ("OK COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than shares of OK Common Stock held in the treasury of OK) shall be canceled and extinguished and be converted automatically into the right to receive 538.843 shares of Kitty Hawk Common Stock (the "OK MERGER CONSIDERATION") payable, less any required withholding Taxes, as provided in Section 3.2 upon surrender of the certificate formerly representing such OK Share (an "OK CERTIFICATE") and (ii) each OK Share then held in the treasury of OK shall be canceled and retired without conversion thereof and without payment of any consideration and shall cease to exist. (f) As used herein, "STOCK MERGER CONSIDERATION" shall mean 5,099,150 duly authorized, validly issued, fully paid and nonassessable shares of Kitty Hawk common stock, par value $0.01 per share ("KITTY HAWK COMMON STOCK") issuable as the total number of shares in the AIA Merger, the AIT Merger, the FOL Merger and the OK Merger. In the event that, subsequent to the date of this Agreement but prior to the Effective Time, the outstanding shares of Kitty Hawk Common Stock, AIA Common Stock, AIT Common Stock, FOL Common Stock, KFS Common Stock or OK Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities through a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in capitalization, or there shall have been proposed any such change with a record date prior to the Effective Time, then an appropriate and proportionate adjustment shall be made in the Stock Merger Consideration, the Non-KFS Escrow Amount and, if applicable, the KFS Cash Merger Consideration and the KFS Escrow Amount. 3.2 Surrender of Certificates. At Closing, Kalitta shall surrender all AIA Certificates, AIT Certificates, FOL Certificates, KFS Certificates and OK Certificates, and Kitty Hawk shall pay and deliver the Stock Merger Consideration payable as a result of the AIA Merger, the AIT Merger, the FOL Merger and the OK Merger and the KFS Cash Merger Consideration payable as a result of the KFS Merger in exchange for such certificates as follows: 7 29 (a) a portion of the AIA Merger Consideration equal to 1,150,000 shares of Kitty Hawk Common Stock shall, pursuant to the irrevocable direction of Kalitta, be deposited at Closing with the Escrow Agent to be held and administered in accordance with the Non-KFS Escrow Agreement; (b) a portion of the KFS Cash Merger Consideration equal to $3,000,000, shall, pursuant to the irrevocable direction of Kalitta, be deposited at Closing with the Escrow Agent to be held and administered in accordance with the KFS Escrow Agreement; and (c) the balance of the AIA Merger Consideration, the AIT Merger Consideration, the FOL Merger Consideration, the OK Merger Consideration and the KFS Cash Merger Consideration shall be paid and delivered to Kalitta at Closing. 3.3 Conversion of Subs' Securities. (a) At the Effective Time, each share of common stock of Kitty Hawk - AIA issued and outstanding immediately prior to the Effective Time shall be converted, by virtue of the AIA Merger and without any action on the part of the holder thereof, into one fully paid and nonassessable share of common stock of AIA as the Surviving Corporation of the AIA Merger. (b) At the Effective Time, each share of common stock of Kitty Hawk - AIT issued and outstanding immediately prior to the Effective Time shall be converted, by virtue of the AIT Merger and without any action on the part of the holder thereof, into one fully paid and nonassessable share of common stock of AIT as the Surviving Corporation of the AIT Merger. (c) At the Effective Time, each share of common stock of Kitty Hawk - FOL issued and outstanding immediately prior to the Effective Time shall be converted, by virtue of the FOL Merger and without any action on the part of the holder thereof, into one fully paid and nonassessable share of common stock of FOL as the Surviving Corporation of the FOL Merger. (d) At the Effective Time, each share of common stock of Kitty Hawk - KFS issued and outstanding immediately prior to the Effective Time shall be converted, by virtue of the KFS Merger and without any action on the part of the holder thereof, into one fully paid and nonassessable share of common stock of KFS as the Surviving Corporation of the KFS Merger. (e) At the Effective Time, each share of common stock of Kitty Hawk - OK issued and outstanding immediately prior to the Effective Time shall be converted, by virtue of the OK Merger and without any action on the part of the holder thereof, into one fully paid and nonassessable share of common stock of OK as the Surviving Corporation of the OK Merger. 8 30 3.4 Shareholder to Have No Further Rights as to Kalitta Companies. At and after the Effective Time, Kalitta shall cease to have any rights as a shareholder of AIA, AIT, FOL, KFS and OK, other than indirectly as a stockholder of Kitty Hawk. 3.5 Written Consent of Sole Shareholder of Subs. Concurrent with the execution of this Agreement, Kitty Hawk, as the sole shareholder of the Subs, shall duly adopt and approve this Agreement and the Related Agreements, the Mergers and the transactions contemplated by this Agreement and the Related Agreements by written consent. Kitty Hawk, as the sole shareholder of each Sub, shall not amend, rescind or withdraw its adoption and approval of this Agreement and the Related Agreements, the Mergers and the transactions contemplated by this Agreement and the Related Agreements. 3.6 Written Consent of Sole Shareholder of each Kalitta Company. Concurrent with the execution of this Agreement, Kalitta, as the sole shareholder of the Kalitta Companies, shall duly adopt and approve this Agreement, the Related Agreements to which the Kalitta Companies are parties or signatories, the Mergers and the transactions contemplated by this Agreement and such Related Agreements. Kalitta shall not as the sole shareholder of the Kalitta Companies amend, rescind or withdraw his adoption and approval of the Agreement and the Mergers and the transactions contemplated by this Agreement and the Related Agreements. 3.7 Closing. Unless this Agreement is terminated and the transactions contemplated herein abandoned pursuant to Article VIII and subject to the satisfaction or, if permissible, waiver of the conditions set forth in Article VI, the consummation of the Closing shall take place (a) at the offices of Haynes and Boone, LLP, Dallas, Texas, at 11:00 A.M. local time on a date to be specified by Kitty Hawk and Kalitta, but as soon as practicable (and in any event within two Business Days) after the day on which the last of the conditions set forth in Article VI is fulfilled (other than deliveries of instruments to be made at Closing) or, if permissible, waived by the relevant party or (b) at such other date, time and place as Kitty Hawk and Kalitta shall agree upon in writing. The date on which the Closing occurs is referred to herein as the "CLOSING DATE." ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of Kalitta and the Kalitta Companies. To induce Kitty Hawk and the Subs to enter into this Agreement and to consummate the transactions contemplated hereby, each of the Kalitta Companies severally and solely as to representations and warranties concerning itself and not with respect to any other Kalitta Company and Kalitta represents and warrants to Kitty Hawk and the Subs as follows (each such representation and warranty being qualified in its entirety by the disclosures set forth in the Disclosure Schedule of the Kalitta Companies): 4.1.1 Corporate Existence and Authority. (a) Each of the Kalitta Companies is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. Each of the Kalitta Companies has all requisite corporate power and authority to own its properties and assets and to carry on its business as it has been and is being 9 31 conducted. Each of the Kalitta Companies is qualified to do business as a foreign corporation and is in good standing in each state, nation or other jurisdiction listed on the Disclosure Schedule, being each state, nation or other jurisdiction wherein the character of the properties owned or held under lease by it or the nature of the business transacted by it makes such qualification necessary, except for any state, nation or other jurisdiction where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. (b) American International Cargo ("AIC") is a co-partnership organized pursuant to and presently existing under the laws of the State of Michigan under a revised and restated partnership agreement (the "AIC PARTNERSHIP AGREEMENT") dated September 29, 1994. AIC has the partnership power to carry on its business as it has been and is now being conducted. The only co-partners of AIC are AIA and Pacific Aviation Logistics, Inc., a California corporation, wholly-owned by Beti Ward. AIA owns a 60% interest in AIC's net income, in its capital accounts, and in the partnership shares or interests of AIC for purposes of determining management decisions under Section 5.1 of the AIC Partnership Agreement. AIC is qualified to do business and is in good standing in each state, nation or other jurisdiction listed on the Disclosure Schedule, being each state, nation or other jurisdiction wherein the character of the properties owned or held under lease by it or the nature of the business transacted by it makes such qualification necessary, except for any state, nation or other jurisdiction where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. The AIC Partnership Agreement has not been amended, and remains in full force and effect without uncured default by either co-partner. The Kalitta Companies have previously provided a true and correct copy of the AIC Partnership Agreement to Kitty Hawk. 4.1.2 Capitalization of the Kalitta Companies. (a) The authorized capital stock of AIA consists solely of 25,000 shares of AIA Common Stock of which 25,000 shares are issued and outstanding. (b) The authorized capital stock of AIT consists of 50,000 shares of AIT Common Stock of which 1,000 shares are issued and outstanding. (c) The authorized capital stock of FOL consists of 50,000 shares of FOL Common Stock of which 1,000 shares are issued and outstanding. (d) The authorized capital stock of KFS consists of 100,000 shares of KFS Common Stock of which 25,000 shares are issued and outstanding. (e) The authorized capital stock of OK consists of 50,000 shares of OK Common Stock of which 1,000 shares are issued and outstanding. (f) No other shares of capital stock of the Kalitta Companies are issued and outstanding. On the date hereof, all the issued and outstanding shares of capital stock of the Kalitta Companies are held solely by Kalitta free and clear of any Lien and Kalitta is the record and beneficial owner of such shares. The co- partnership interest of AIA in AIC is held solely by AIA free and clear of any Lien except 10 32 Permitted Liens, if any. All of the issued and outstanding shares of capital stock of the Kalitta Companies have been duly authorized and validly issued in accordance and compliance with all applicable laws, rules and regulations and are fully paid and nonassessable. There are no securities, options, warrants, rights, calls, commitments, plans, contracts or other agreements of any character granted or issued by any of the Kalitta Companies which provide for the purchase, issuance or transfer of any shares of the capital stock of any of the Kalitta Companies, nor are there any outstanding securities granted or issued by any of the Kalitta Companies that are convertible into or exchangeable for any shares of the capital stock of any of the Kalitta Companies, and none are authorized. There are no securities, options, warrants, rights, calls, commitments, plans, contracts or other agreements of any character granted or issued by AIC which provide for the purchase, issuance or transfer of any of the co-partnership interests in AIC, nor are there any outstanding obligations or securities granted or issued by AIC that are convertible into or exchangeable for any co-partnership interests of AIC, and none are authorized. None of the Kalitta Companies are obligated or committed to purchase, redeem or otherwise acquire any of their capital stock. AIC is not obligated or committed to purchase, redeem or otherwise acquire any of its co-partnership interests. All presently exercisable voting rights in the Kalitta Companies are vested exclusively in their respective outstanding shares of common stock, each share of which is entitled to one vote on every matter to come before such corporations' sole shareholder. There are no voting trusts or other voting arrangements with respect to any of the Kalitta Companies' capital stock or the co-partnership interests of AIC. None of the Kalitta Companies have any subsidiaries. 4.1.3 Validity and Authorization; Corporate Power and Authority. Each of the Kalitta Companies has full corporate power and authority to execute, deliver and perform this Agreement, the Related Agreements and the other instruments called for by this Agreement to which it is or is to be a party. This Agreement has been duly authorized, executed and delivered by each of the Kalitta Companies and constitutes the legal, valid and binding obligation of each of the Kalitta Companies, enforceable against the Kalitta Companies in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). When the Related Agreements and the other instruments called for by this Agreement to which any of the Kalitta Companies is a party are executed and delivered at the Closing, such Related Agreements and instruments will have been duly authorized, executed and delivered by each such Kalitta Company, enforceable against each such Kalitta Company in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). Kalitta has full requisite power and authority to execute, deliver and perform this Agreement, the Related Agreements and the other instruments called for by this Agreement to which he is a party and this Agreement has been duly authorized, executed and delivered by Kalitta and constitutes the legal, valid and binding obligation of Kalitta, enforceable against Kalitta in accordance with its terms, except as such enforcement may be limited by 11 33 bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). When the Related Agreements and the other instruments called for by this Agreement to which Kalitta is a party are executed and delivered at the Closing, such Related Agreements and instruments will have been duly authorized, executed and delivered by Kalitta pursuant to full requisite power and authority to execute, deliver and perform such Related Agreements and the other instruments called for by this Agreement and will constitute the legal, valid and binding obligations of Kalitta, enforceable against Kalitta in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). 4.1.4 Execution; No Violations. The execution and delivery of this Agreement and each of the Related Agreements by Kalitta and each of the Kalitta Companies does not, and the consummation by Kalitta and each of the Kalitta Companies of the transactions contemplated hereby and thereby will not: (a) violate, conflict with, modify, result in the incurrence of any prepayment penalties or cause any default under or acceleration of (or give any party any right to declare any default or acceleration upon notice or passage of time or both), in whole or in part, any articles of incorporation, bylaw, Lien, indenture, lease, agreement, instrument, order, injunction, decree, or judgment to which Kalitta or any of the Kalitta Companies are a party or by which any of them or any of their properties are bound; (b) result in the creation of any Lien on any property or asset (whether real, personal, mixed, tangible or intangible) of Kalitta or any of the Kalitta Companies; (c) violate any law, rule or regulation applicable to Kalitta or any of the Kalitta Companies; or (d) permit any federal or state regulatory agency to impose any restrictions or limitations of any nature on Kalitta or any of the Kalitta Companies or any of their respective activities, except in each case as would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. 4.1.5 Governmental and Other Consents. Except for filings under the HSR Act, approval by the DOT of the deemed "de facto" transfer of the foreign air transportation authority issued to AIA and KFS and the filing of the certificates of merger contemplated by Section 1.3, no consent, approval or authorization of, or designation, declaration or filing with, any governmental authority is required on the part of Kalitta or any Kalitta Company in connection with the execution or delivery of this Agreement, the Related Agreements or the consummation by them of the transactions contemplated hereby and thereby, except as would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. The Disclosure Schedule lists all consents, approvals or authorizations of third Persons, required in connection with Kalitta's and each of the Kalitta Companies' valid execution, delivery or performance of this Agreement and the Related Agreements to which they are a party or the consummation of any of the transactions contemplated hereby or thereby on the part of any of them (collectively, the "KALITTA CONSENTS"), including but not limited to the consents required under the Contracts, except, in each case, as would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. 12 34 4.1.6 Financial Statements. The Disclosure Schedule contains true and correct copies of (i) the audited combined balance sheets for the Kalitta Companies and AIC at December 31, 1996, 1995 and 1994 and the related statements of profit and loss and cash flows for each of the one-year periods then ended, (ii) the unaudited, combined balance sheets for AIC and the Kalitta Companies and AIC at June 30, 1996 and 1997 and the related statements of profit and loss and cash flows for each of the six-month periods then ended, and (iii) when delivered pursuant to this Agreement, similar financial statements for each additional month ending more than thirty (30) Business Days before the Closing (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements present fairly the financial position of the Kalitta Companies as of the dates thereof and the results of the Kalitta Companies' and AIC's operations and cash flows for the periods then ended, in accordance with GAAP, except that in the case of the Financial Statements described in clauses (ii) and (iii) above are also subject to recurring year end adjustments, if any, that are normal in nature and amount. The Kalitta Companies and AIC maintain a system of accounting, including without limitation a system of internal controls, which permits them to prepare financial statements that present fairly their respective financial positions and results of operations. 4.1.7 Absence of Certain Liabilities. Other than liabilities and obligations covered by another representation and warranty of the Kalitta Companies in Section 4.1 (such as Taxes, Environmental Matters and Compliance with Laws), it being the intention of the parties that any such liabilities and obligations shall be governed, if at all, by such other representations and warranties, (a) as of December 31, 1996, none of the Kalitta Companies had any material liabilities or obligations of any nature (whether absolute, accrued, contingent, due or to become due) except as and to the extent reflected and fully reserved against in the Financial Statements (including general reserves) and (b) since December 31, 1996, the Kalitta Companies have not incurred any such liabilities or obligations of any nature other than those reflected or reserved against in the Financial Statements (including general reserves) or incurred in the ordinary course of business since the date thereof. 4.1.8 Absence of Changes. Except as expressly provided in this Agreement or as disclosed on the Disclosure Schedules in alphabetical order corresponding to the following subsections, since December 31, 1996 there has not been: (a) Any change or aggregate of changes in the condition (financial or otherwise), business, assets, or liabilities of any of the Kalitta Companies or AIC that would reasonably be expected to result in a Material Adverse Effect in the Kalitta Companies; (b) Any change in the capitalization of the Kalitta Companies or AIC, including, without limitation, the issuance by any of the Kalitta Companies or AIC of any shares of stock of any class, any subscriptions, options, warrants, convertible securities, rights, calls, agreements, commitments or rights affecting or relating in any manner whatsoever to any equitable interests in the Kalitta Companies or AIC; (c) Any purchase, redemption or other acquisition by the Kalitta Companies or AIC, or any commitment, plan or agreement by any of the Kalitta Companies or AIC to purchase, redeem or otherwise acquire any shares of their capital stock or other equitable interests; 13 35 (d) Any merger or consolidation or agreement to merge or consolidate by any of the Kalitta Companies or AIC with another Person, or any purchase of or investment in or agreement to purchase or invest by any of the Kalitta Companies or AIC in the business of another Person; (e) Any declaration, payment or setting aside by any of the Kalitta Companies of any dividends or other distributions of any assets of any kind whatsoever to their shareholders or other equitable owners, except for ordinary salary payments for services actually rendered and except for a distribution of up to $1,500,000 solely for the payment by Kalitta of Taxes attributable to earnings of the Kalitta Companies since January 1, 1997; (f) Any amendment to the articles of incorporation or bylaws of any of the Kalitta Companies or the co-partnership agreement of AIC; (g) Any increase in the compensation or rate of compensation or commission payable or to become payable by any of the Kalitta Companies or AIC to any of their directors, officers, salaried employees earning more than $75,000 per annum, salesmen or agents, or any General Increase in the compensation or rate of compensation payable or to become payable to any of their hourly employees or salaried employees earning $75,000 per annum or less ("GENERAL INCREASE" for purposes hereof shall mean any increase applicable to a class or group of employees and does not include increases granted to individual employees for merit, length of service, change in position or responsibility or other reasons applicable to specific employees and not generally to a class or group thereof), or any aggregate increase in compensation to any directors, officers or salaried employees, of more than $20,000, or any hiring of any employee at a salary in excess of $75,000 per annum, or any termination of any key employee or any employee whose compensation was in excess of $75,000 per annum; (h) Any material change in any existing, or adoption of or entering into any new, benefit plan or arrangement (whether written or oral) affecting any of the officers, directors, employees, salesmen or agents of any of the Kalitta Companies or AIC, including, without limitation, any bonus, profit-sharing, pension, deferred compensation, severance or termination pay benefit, stock option, group life or health insurance or other similar plans, agreements or arrangements; (i) Any release, cancellation, modification or waiver of any obligation, indebtedness, liability or Lien held by any of the Kalitta Companies or AIC, unless such obligation, indebtedness, liability or Lien has been paid in full at the time of release; (j) Any waivers, compromises or settlements by any of the Kalitta Companies of any right or claim of any of the Kalitta Companies or AIC in excess of $500,000 in the aggregate; or any institution or settlement of, or agreement to settle, 14 36 any litigation, action or proceeding before any court or governmental body relating to any of the Kalitta Companies or AIC or any of their properties; (k) Any mortgage, pledge or other subjection to any Lien or option of any property, asset, right or business of any of the Kalitta Companies or AIC, other than Permitted Liens and those incurred in the ordinary course of business; (l) Any assumptions or guarantees (except endorsements of negotiable instruments in the ordinary course of business) by any of the Kalitta Companies or AIC of the obligations of any Person, except in the ordinary course of business and consistent with past practice, but in no event in excess of $50,000 when all such assumptions, guarantees and endorsements are aggregated; (m) Any payment or satisfaction by any of the Kalitta Companies or AIC of any material liability, obligation or indebtedness, other than those reflected on the Financial Statements and those incurred in the ordinary course of business and consistent with past practice; (n) Any loan or advance, any commitment to loan or advance, or any renewal, refunding or extension of any existing loan, made by any of the Kalitta Companies to any Person, except in the ordinary course of business and consistent with past practice, but in no event any loan or advance, any commitment to loan or advance, or any renewal, refunding or extension of any existing loan, by any of the Kalitta Companies or AIC to Kalitta or any of their officers or directors or to any Affiliate of Kalitta or any such officer or director; (o) Any actions taken or transactions entered into by any of the Kalitta Companies or AIC involving more than $100,000 in the aggregate, other than the Kalitta Companies Permitted Transactions or in the ordinary course of business and consistent with past practice, or any capital expenditures or commitments therefor in excess of $100,000 in the aggregate, other than in the ordinary course of business; (p) Any creations, renewals, material changes or terminations, or any notice of any proposed renewal, material change or termination of any contract, agreement, commitment, obligation, lease or license involving more than $100,000 in the aggregate or extending beyond six (6) months from the date of this Agreement, to which any of the Kalitta Companies or AIC is a party or by which any of the Kalitta Companies or AIC or their property is bound, other than in the ordinary course of business; (q) Any sale, assignment, lease, abandonment or other disposition by any of the Kalitta Companies or AIC of any real property, or any sale, assignment, transfer, license, lapse, or other disposition by any of the Kalitta Companies or AIC of any material trademark, trade name, copyright (or pending application for any material trademark or copyright), or other intangible asset; (r) Any sale, assignment or transfer of any contract, agreement, lease, or asset by any of the Kalitta Companies or AIC, except the Kalitta Companies Permitted Transactions or in the ordinary course of business and consistent with past practice; 15 37 (s) Any general labor dispute, or threat of a general labor dispute, or any attempt or threat of any attempt by a union to organize any employees of any of the Kalitta Companies or AIC who are not now covered under an existing union or collective bargaining agreement; (t) Any lapse of any material insurance policy or coverage of any of the Kalitta Companies or AIC, except for normal renewals and/or replacements; (u) Any failure by any of the Kalitta Companies or AIC to replenish inventories and supplies in a normal and customary manner consistent with prior practice; any purchase commitment by any of the Kalitta Companies or AIC in excess of the normal, ordinary and usual requirements of business or at any price in excess of the then current market price or upon terms and conditions more onerous than those usual and customary in the Kalitta Companies' or AIC's business; (v) Any material damage, destruction or loss to the business or properties of any of the Kalitta Companies or AIC, whether or not covered by insurance, including, without limitation, any damage, destruction or loss as a result of fire, explosion, accident, earthquake, lightning, aircraft, vehicle, smoke, hail, flood, drought, storm, strike, work stoppage, lockout, sabotage, embargo, condemnation, riot, civil disturbance, vandalism or act of God or public enemy the result of which is a Material Adverse Effect on the Kalitta Companies; (w) Any granting of powers of attorney by any of the Kalitta Companies or AIC; any material change in their banking or safe deposit arrangements; any material writing up or writing down of the carrying value of any of their assets; any material change in their depreciation or amortization policies or rates heretofore adopted; or any material change in any basic policy or practice by any of the Kalitta Companies or AIC with respect to liquidity management and cash flow planning, lending, budgeting, pricing, profit and tax planning, personnel practices and accounting practices; or (x) Any other material action taken or transaction entered into by any of the Kalitta Companies or AIC other than in the ordinary course of business. 4.1.9 Taxes. (a) Each of the Kalitta Companies (and any predecessor of each) has elected to be treated as a Subchapter S corporation under the Code. Each such Subchapter S corporation election is valid, currently effective and has not been violated or terminated. To the extent required, each of the Kalitta Companies has made an election equivalent to a Subchapter S election under analogous laws of the states where such companies are qualified or are otherwise doing business and such elections are valid, currently effective and have not been violated or terminated; 16 38 (b) The Kalitta Companies and AIC have duly and timely filed all required federal, state, local and other tax returns, information returns, notices and reports (including, without limitation, income, property, sales, use, franchise, capital stock, excise, value added, employees' income withholding, social security and unemployment tax returns, notices and reports) (collectively, "TAX RETURNS") related to the Kalitta Companies heretofore due, and all such Tax Returns are correct, accurate and complete in all material respects; (c) All deposits required to be made by the Kalitta Companies or AIC with respect to any Tax (including, without limitation, estimated income, franchise and employee withholding Taxes) have been duly and timely made; (d) There has not been during the past five (5) years any audits or examinations of any tax returns filed by any of the Kalitta Companies or AIC, no audits or examinations of any tax returns of any of the Kalitta Companies or AIC are in progress, and none of the Kalitta Companies nor AIC have been notified by any tax authority that any such audits or examinations are contemplated or pending; (e) All Taxes with respect to each of the Kalitta Companies and AIC that have become due and payable on or before June 30, 1997 have been timely paid in full or adequately reserved against on the Financial Statements, and all Taxes which have become due and payable subsequent to June 30, 1997 have been paid in full or adequately reserved against on their books of account and the amounts reflected on the Financial Statements and such books are sufficient for the payment of all unpaid Taxes with respect to the periods then ended and for all periods prior thereto. There are no Liens on any of the assets of any of the Kalitta Companies or AIC that arose in connection with any failure (or alleged failure) to pay any Tax, except those that are not yet due and payable or are being contested in good faith by appropriate proceedings; (f) There are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment or collection of any Tax against any of the Kalitta Companies or AIC, nor are there any actions, suits, proceedings, investigations or claims now pending against any of the Kalitta Companies or AIC in respect of any Tax, or any matters under discussion with any federal, state, local or foreign authority, or any claims for refund by the Kalitta Companies or AIC for overpaid Taxes relating to any Taxes, or any claims for additional Taxes asserted by any such authority, and there is no basis for the assertion of any additional Taxes against any of the Kalitta Companies or AIC; (g) None of the Kalitta Companies, Kalitta or AIC has ever filed a consent pursuant to Section 341(f) of the Code. None of Kalitta, the Kalitta Companies or AIC has entered into a closing agreement pursuant to Section 7121 of the Code. None of Kalitta, the Kalitta Companies or AIC are parties to any tax sharing or similar agreement; (h) To the Knowledge of Kalitta Management, the consummation of the transactions contemplated by this Agreement will not result in the imposition of any 17 39 additional Taxes on any of the Kalitta Companies or AIC, except for Taxes relating to the consummation of the Kalitta Companies Permitted Transactions; (i) None of the Kalitta Companies or AIC has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Section 280G of the Code; (j) Each of the Kalitta Companies and AIC has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party; (k) None of the assets of any of the Kalitta Companies or AIC constitutes tax-exempt bond financed property or tax-exempt use property within the meaning of Section 168 of the Code; (l) None of the Kalitta Companies or AIC is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code; (m) There are no accounting method changes or proposed or threatened accounting method changes of any of the Kalitta Companies or AIC that could give rise to an adjustment under Section 481 of the Code for periods after the Closing Date; (n) Each of the Kalitta Companies and AIC has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income tax returns all positions taken therein could give rise to a substantial understatement of federal income tax within the meaning of Section 6662(d) of the Code; and (o) For purposes of this Agreement, all references to sections of the Code shall include any predecessor provisions to such sections and any similar provisions of state, local or foreign law. 4.1.10 Disputes and Litigation. (a) There is no suit, arbitration, action, litigation, proceeding, investigation, claim, complaint or accusation pending (the "PROCEEDINGS") of which any of the Kalitta Companies have received written notice or, to the Knowledge of Kalitta Management, threatened against or affecting any of the Kalitta Companies, AIC or Kalitta or any of their properties, assets or business or to which any of the Kalitta Companies, AIC or Kalitta is a party, in any court or before any arbitrator of any kind or before or by any governmental agency (including, without limitation, any federal, state, local, foreign or other governmental department, commission, board, bureau, agency or instrumentality), and no facts are Known by Kalitta Management which are reasonably likely to give rise to any such Proceeding, the result of which would reasonably be expected to result in a Material Adverse Effect on the Kalitta Companies; (b) to the Knowledge of Kalitta Management, there is no pending or threatened change in any environmental, zoning or building laws, regulations or ordinances the result of which would reasonably be expected to result in a Material Adverse Effect on the Kalitta Companies; and (c) there is no 18 40 outstanding order, writ, injunction, decree, judgment or award by any court, arbitrator or governmental body against or affecting any of the Kalitta Companies or any of their properties, assets or business. None of the items nor aggregate of items listed in the Disclosure Schedule would, if adversely determined, reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. To the Knowledge of Kalitta Management, there is no Proceeding, formal or informal, pending or threatened which would give rise to any right of indemnification on the part of any director or officer of any of the Kalitta Companies or any such person's heirs, executors or administrators as against any of the Kalitta Companies or AIC. 4.1.11 Compliance with Laws. Except for any noncompliance to be covered by any other representation and warranty of Kalitta or the Kalitta Companies contained in Section 4.1 (for example, Taxes or Employees), it being the intention of the parties that such noncompliance shall be governed, if at all, by such other representations and warranties, the Kalitta Companies and AIC presently are and have at all times been since September 1, 1994 and to the Knowledge of Kalitta Management have at all times during the period preceding September 1, 1994, been in full compliance with any applicable federal, state, local, foreign and other laws, rules and regulations other than those where noncompliance would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies, and neither the Kalitta Companies nor AIC has received any written or, to the Knowledge of Kalitta Management, oral notice of any claimed violation of any such law, rule or regulation which would reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. The Kalitta Companies and AIC have filed all returns, reports and other documents and furnished all information required or requested by any federal, state, local or foreign governmental or quasi- governmental agency and all such returns, reports, documents and information are true and complete in all respects except where such failure to file or inaccuracies would not be reasonably expected to result in a Material Adverse Effect on the Kalitta Companies. All permits, licenses, orders, franchises and approvals of all federal, state, local and foreign governmental or quasi-governmental or regulatory bodies required of the Kalitta Companies and AIC for the conduct of their businesses have been obtained, other than those where noncompliance would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies, no violations are or have been recorded in respect of any such permits, licenses, orders, franchises and approvals, and there is no Proceeding, formal or informal, pending or, to the Knowledge of Kalitta Management, threatened, which may revoke, limit, or question the validity, sufficiency or continuance of any such permit, license, order, franchise or approval, except in each case where the same would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. Such permits, licenses, orders, franchises and approvals are valid and sufficient for all activities presently carried on by the Kalitta Companies and AIC, except in each case where the same would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. Neither the Kalitta Companies, nor any officer, director, employee, shareholder or agent of the Kalitta Companies has made any offer, payment, promise to pay, or authorization of the payment of any money, offer, gift, promise to give, or authorization of anything of value to any Person named or identified in Section 30A of the Exchange Act for any unlawful purpose described in Section 30A of the Exchange Act. 4.1.12 Insurance. The Disclosure Schedule sets forth a true and complete list of all insurance policies (including the policy number, the name of the insurer, the amounts of coverage, the premium rate, the cash value, if any, the expiration date and the risks and 19 41 losses insured against) maintained by any of the Kalitta Companies or AIC on their properties, assets, products, businesses and personnel, and the Kalitta Companies and AIC shall deliver copies of all such policies, agreements, studies and analyses to Kitty Hawk not later than fourteen (14) days after the date of this Agreement. All of the foregoing insurance policies are in full force and effect and are fully paid as to all premiums heretofore due. None of the Kalitta Companies or AIC has failed to give any notice or present any material claim under such insurance policies in timely fashion, nor has the Kalitta Companies or AIC received any written notification of the cancellation of any of such policies or that any of them will not be renewed. 4.1.13 Title to Properties. The properties and assets of each of the Kalitta Companies consist of (a) all of the properties and assets reflected on the Financial Statements as owned by it and (b) all other material properties and assets presently carried on the Kalitta Companies' books as owned by it or used in their businesses at any time since December 31, 1996, except, in each case, properties and assets licensed, leased or as to which a Kalitta Company otherwise has the right to use and assets subsequently disposed of, or are disposed of pursuant to the Kalitta Companies Permitted Transactions. Neither Kalitta nor any Affiliate of Kalitta owns any properties or assets used in or related to, the aviation, transportation or travel services industries. Except as set forth in the Disclosure Schedule, the Kalitta Companies and AIC have good and marketable title to all of their respective properties and assets (whether real, personal, mixed, tangible or intangible) owned by them free and clear of all Liens, except Permitted Liens, if any. 4.1.14 Real Property and Real Property Leases. The Disclosure Schedule contains a true and complete list of (a) all real property owned by the Kalitta Companies or AIC, (b) all real estate leases to which any of the Kalitta Companies or AIC is a party, and (c) all other material interests, if any, in real property owned or claimed by the Kalitta Companies or AIC. To the Knowledge of Kalitta Management, the Kalitta Companies and AIC have all material easements and rights, including parking rights and easements for power lines, water lines, roadways and other access, necessary to conduct the businesses they now conduct and enjoy peaceful and undisturbed possession of all properties occupied by them. To the Knowledge of Kalitta Management, neither the whole nor any portion of any real property owned, occupied or leased to or by the Kalitta Companies and AIC has been rezoned or condemned or otherwise taken by any public authority and, to the Knowledge of Kalitta Management, no such rezoning, condemnation or other taking is threatened or contemplated. None of the real properties owned, occupied or leased to or by the Kalitta Companies and AIC, or the occupancy or operation thereof, constitutes a nuisance or violation of any law or any building, zoning or other ordinance, code or regulation or any private or public covenant or restriction, and no written notice from any governmental body or other Person has been served upon the Kalitta Companies and AIC claiming any outstanding violation of any such law, ordinance, code, regulation, covenant or restriction, or requiring or calling attention to the need for any material amount of work, repairs, construction, alterations or installations on or in connection with any of such properties which has not been complied with. All leases of real property to which any of the Kalitta Companies or AIC is a party are valid, binding and in full force and effect, and, there exists no material default thereunder by the Kalitta Companies or, to the Knowledge of Kalitta Management, any other party thereto, nor any events which, with notice or lapse of time, or both, would constitute a material default by the Kalitta Companies thereunder, and all rents heretofore payable under such leases have been paid in full. The Kalitta Companies shall deliver to Kitty Hawk 20 42 not later than fourteen (14) days after the date of this Agreement, true, correct and complete copies of all deeds to the real property listed on the Disclosure Schedule and true, correct and complete copies of all real estate leases listed on the Disclosure Schedule, including all amendments, modifications, letter agreements and assignments relating thereto. 4.1.15 Equipment. The Disclosure Schedule contains a true and complete list of engines and airframes of the Kalitta Companies or AIC having a cost in excess of $25,000 and used by the Kalitta Companies in their businesses except for engines and airplanes used for spare parts, and (b) all equipment (including, but not limited to, trade fixtures and motor vehicles) leased by the Kalitta Companies or AIC with annual lease payments of $20,000 or more, including the name and address of each lessor and lessee, the expiration date of each lease, the monthly rent and any additional rent payable under each such lease. None of the Kalitta Companies are in material default under any such lease and to the Knowledge of Kalitta Management, each such lease is valid, binding and in full force and effect. The Kalitta Companies shall deliver to Kitty Hawk not later than fourteen (14) days after the date of this Agreement, true, correct and complete copies of all such leases, including all amendments, modifications, letter agreements and assignments relating thereto. 4.1.16 Intangible Personal Property. The Disclosure Schedule contains a true and complete list of all material trademarks, service marks, trade names (including the name "Kalitta" and all derivations thereof used by the Kalitta Companies), and copyrights and applications for the foregoing ("INTELLECTUAL PROPERTY") owned by the Kalitta Companies and AIC, all material licenses to which any of the Kalitta Companies is a licensor or licensee, and all non- competition covenants of the Kalitta Companies or AIC. Each of the Kalitta Companies and AIC is the sole and exclusive owner of the Intellectual Properties indicated on the Disclosure Schedule to be owned by it free and clear of all Liens, except Permitted Liens, if any, and has the right to use said properties, having not granted or entered into any agreement, covenant, license or sublicense with respect thereto. No written claims or demands have been asserted against the Kalitta Companies or AIC with respect to any of the Intellectual Property, and no proceedings have been instituted, are pending or, to the Knowledge of Kalitta Management, threatened against the Kalitta Companies which challenge the rights of the Kalitta Companies or AIC with respect to any of such assets. To the Knowledge of Kalitta Management, the businesses and operations of the Kalitta Companies and AIC, and the use or publication by them of their material trademarks, trade names, and advertising literature do not involve infringement or claimed infringement of any United States trademark, trade name, or copyright. No director, officer or shareholder, or, to the Knowledge of Kalitta Management, employee, consultant, distributor, representative, advisor, salesman or agent of the Kalitta Companies or AIC owns, directly or indirectly, in whole or in part, any trademarks, trade names, or copyrights, or applications for the foregoing, or other material tangible personal property which any of the Kalitta Companies is presently using or the use of which is necessary for the business of any of the Kalitta Companies or AIC as now conducted. None of the directors, officers or shareholders of the Kalitta Companies or AIC has entered into any agreement regarding know-how, trade secrets, or prohibition or restriction of competition, or solicitation of customers or any other similar restrictive agreement or covenant, whether written or oral, with any Persons other than the Kalitta Companies or AIC. 21 43 4.1.17 Agreements. The Disclosure Schedule contains a true and complete list of all (i) oral contracts and licenses the breach of which would result in a Material Adverse Effect on the Kalitta Companies and (ii) all written contracts and licenses, including the AIC Partnership Agreement (collectively, the "CONTRACTS") in each case to which any of the Kalitta Companies or AIC is a party or by which any of them or their properties may be bound and which (a) involve obligations by any party thereto in excess of $500,000, (b) extend beyond six months from the date of this Agreement and are not terminable on thirty (30) days' notice or less without any liability or continuing obligation on the part of the Kalitta Companies (including any management, consulting or retainer agreement) or AIC and which involve obligations by any party thereto in excess of $75,000; (c) require the consent of any party thereto to the consummation of the transactions contemplated by this Agreement or the Related Agreements; (d) contain covenants limiting the freedom of the Kalitta Companies or AIC to compete in any line of business or with any Person or in any geographical area; (e) contain any provision or option relating to the acquisition by the Kalitta Companies or AIC of any business or relating to the sale by the Kalitta Companies or AIC of any business; (f) contain an agreement or commitment by the Kalitta Companies or AIC for a material capital expenditure, other than the Kalitta Companies Permitted Transactions; or (g) are contracts or agreements to which the United States government is a party; provided, that notwithstanding the foregoing provisions of this Section 4.1.17, the Disclosure Schedule need not list, and the term "Contracts" shall not include: (i) agreements the obligations of the parties thereto have been fulfilled, (ii) agreements that, to the Knowledge of Kalitta Management, will not result in contingent liability to the Kalitta Companies or (iii) (A) aircraft sales, purchase and lease agreements, (B) aircraft engine sales, purchase and (C) real property and lending agreements unless, to the Knowledge of Kalitta Management, such agreements will result in contingent liability to the Kalitta Companies. All of the Contracts were entered into by the Kalitta Companies or AIC (as applicable) in the ordinary course of business, are valid and binding and in full force and effect as against the Kalitta Companies that are parties thereto, and there exists no material breach or default by any of the Kalitta Companies, or any event which, with notice or lapse of time or both, would constitute a material breach or default by any of the Kalitta Companies or AIC, or to the Knowledge of Kalitta Management, by any other party thereto. The Kalitta Companies shall deliver to Kitty Hawk not later than fourteen (14) days after the date of this Agreement, true and complete copies, including all amendments, modifications, letter agreements and assignments relating thereto, of all of the aforesaid written agreements and true and correct summaries of all such oral agreements. 4.1.18 Office Lease. Kalitta has the authority to cause the Landlord to perform the actions and transactions contemplated by Section 5.2.7. The Landlord has good and marketable fee simple title to the Office Premises and unimproved lots nos. 1 and 3 (the "ADJOINING LOTS") that adjoin the Office Premises, with all related rights and appurtenances, subject to no Lien except a mortgage lien (the "OFFICE MORTGAGE") securing a loan to a federally-insured lending institution for a portion of the purchase price paid by the Landlord to The Environmental Quality Company, Inc. for the Office Premises and the Adjoining Lots. The term of the Office Lease commenced in May 1997 and ends in May 2007. The aggregate amount of rent (payable on a "triple-net" basis) for the first year under the Office Lease is $712,800 and for each subsequent year will increase to reflect increases in the Consumer Price Index applicable to Ypsilanti, Michigan. The Office Lease is unmodified and effective and without uncured default by either party. The aggregate amount of rent and all other payments by AIA under the Office Lease are properly reflected in AIA's books of account. 22 44 4.1.19 Indebtedness and Guaranties. The Disclosure Schedule sets forth a true and complete list of all promissory notes, loan agreements, security agreements and guarantees relating to indebtedness for borrowed money or money loaned to others to which any of the Kalitta Companies or AIC is a party or obligor. None of the Kalitta Companies nor AIC have guaranteed any dividend, obligation or indebtedness of any Person (except for the endorsement of negotiable instruments in the ordinary course of business). All of the aforesaid items were entered into in the ordinary course of business, are valid and binding and in full force and effect as against the Kalitta Companies or AIC (as applicable) and there exists no material breach or default by the Kalitta Companies, or any event which with notice or lapse of time or both, would constitute a material breach or default by the Kalitta Companies or AIC or, to the Knowledge of Kalitta Management, any other parties thereto. 4.1.20 Debts to and from Related Parties. Except as set forth on the Disclosure Schedule, there presently is no indebtedness owing to any of the Kalitta Companies or AIC by, or any contractual agreements between the Kalitta Companies or AIC and any shareholder, director, partner, or officer of the Kalitta Companies or AIC, any Family Member of their respective families, or to the Knowledge of Kalitta Management, any Affiliate or Associate (as such term is defined in Rule 405 of the Securities Act) of any of the foregoing individuals (collectively, "RELATED PERSONS"), and none of the foregoing individuals or any Affiliate or Associate of them owns any material property or rights, tangible or intangible (other than an equitable interest), used in the Kalitta Companies' or AIC's business. Except as set forth on the Financial Statements, none of the Kalitta Companies nor AIC is indebted to any shareholder, officer, director, partner or employee of the Kalitta Companies, AIC or any co-partner of AIC, or to any member of their respective families or the families of the shareholders of the co-partners of AIC, or, to the Knowledge of Kalitta Management, to any Affiliate or Associate of any of the foregoing individuals, in any amount whatsoever, other than, to the Knowledge of Kalitta Management, for payment of salaries, normal Fringe Benefits and compensation for services actually rendered to the Kalitta Companies or AIC in the ordinary course of their businesses. Neither Kalitta nor any Related Person has any material claim or right against the Kalitta Companies or AIC. AIA has no claim or obligation under Section 2.3 of the AIC Partnership Agreement which is attributable to any extension of credit by or for an AIC partner for an additional capital contribution. 4.1.21 Banking Arrangements and Powers of Attorney. The Disclosure Schedule sets forth a true and complete list of the name of each bank in or with which any of the Kalitta Companies or AIC has an account, credit line or safety deposit box, and a brief description of each such account, credit line or safety deposit box, including the names of all persons authorized to draw thereon or having access thereto; and the names of all persons, if any, now holding powers of attorney from the Kalitta Companies or AIC and a summary statement of the terms thereof. 4.1.22 Articles of Incorporation, Partnership Agreement and Bylaws. Not later than fourteen (14) days after the date of this Agreement, the Kalitta Companies shall deliver to Kitty Hawk true and complete copies of their articles of incorporation and bylaws and a true and complete copy of the AIC partnership agreement. All such articles of incorporation and bylaws were duly adopted and are in full force and effect, and there are no amendments or modifications thereto except as included in said articles of incorporation and bylaws. 23 45 4.1.23 Books and Records. The minute books of each of the Kalitta Companies contain accurate records of all material actions taken by the shareholders and directors of the Kalitta Companies. The books, records and accounts of the Kalitta Companies, all of which have been made available to Kitty Hawk, have been maintained in accordance with the requirements of Section 13(b)(2) of the Exchange Act (regardless of the fact that the Kalitta Companies are not currently subject to that Section), including the maintenance of an adequate system of internal controls. The stock certificate books and stock transfer ledgers of each of the Kalitta Companies are correct and complete and reflect accurately the number of shares of stock held by its shareholder. AIC's partnership books and records contain complete and accurate records of the ownership of all partnership interests in AIC and all material actions of the co-partners of AIC. 4.1.24 ERISA. (a) Except as set forth on the Disclosure Schedule, neither the Kalitta Companies nor AIC maintains, administers, or contributes to or has maintained, administered, or contributed to (or had an obligation to maintain, administer or contribute to) any "qualified" plans within the meaning of the Code in the last six years. Except as set forth on the Disclosure Schedule, neither Kalitta Companies nor AIC maintains, administers, or contributes to (or had an obligation to maintain, administer or contribute to) any "EMPLOYEE BENEFIT PLAN," as defined in Section 3(3) of ERISA), which is subject to any provisions of ERISA and which covers any employee, whether active or retired, of the Kalitta Companies or AIC. No "qualified" plan that the Kalitta Companies or AIC maintains, administers, or contributes to or has maintained, administered, or contributed to is subject to the requirements of Title IV of ERISA. (b) Neither the Kalitta Companies nor AIC has any withdrawal liability, under the terms of the applicable plan, any collective bargaining agreement or any other labor agreement or otherwise, with respect to any "multi-employer" plan (within the meaning of Section 3(37) or 4001(a)(3) of ERISA) to which it contributes; nor has any event occurred or does any circumstance exist that presents a risk of the occurrence of any withdrawal liability with respect to any such multi-employer plan. (c) Other than the Kalitta Companies and AIC, there are no other corporations or trades or business controlled by, controlling, or under common control with the Kalitta Companies and AIC (within the meaning of Section 414 of the Code or Section 4001(a)(14) or 4001(b) of ERISA). 4.1.25 Employees. (a) The Disclosure Schedule sets forth a true and complete list of: (i) all collective bargaining agreements to which any of the Kalitta Companies or AIC is a party; (ii) all material employment, profit-sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consultant, retirement, welfare and incentive plans, agreements or contracts, written or, to the Knowledge of Kalitta Management, oral, to which any of the Kalitta Companies or AIC is a party; (iii) all material written and, to the Knowledge of Kalitta Management, oral agreements and 24 46 plans to which any of the Kalitta Companies or AIC is a party and which constitute "FRINGE BENEFITS" to their employees or salesmen, including, without limitation, group life and health insurance, vacation plans or programs, sick leave plans or programs, termination or severance pay programs and employee discounts; and (iv) the name and current annual compensation of each director and each officer of the Kalitta Companies, and of each employee thereof whose current annual salary and/or estimated current annual commission is $75,000 or more, together with such person's job title and amounts and forms of compensation and Fringe Benefits. The Kalitta Companies and AIC shall deliver to Kitty Hawk not later than fourteen (14) days after the date of this Agreement, true and complete copies of all written, and correct summaries of all oral, contracts, agreements, plans and programs set forth in the Disclosure Schedule. (b) To the Knowledge of Kalitta Management, all of the aforesaid contracts, agreements, plans and programs are in full compliance with all applicable federal, state and local laws, and the Kalitta Companies and AIC are in full compliance with all federal, state and local laws respecting employment, wages and hours in each case except to the extent as would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. To the Knowledge of Kalitta Management, the Kalitta Companies and AIC are in full compliance with all applicable federal and state laws and regulations respecting occupational safety and health standards other than those where noncompliance would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies and the Kalitta Companies and AIC have received no written complaints from any federal or state agency or regulatory body alleging outstanding violations of any such laws and regulations. (c) The Kalitta Companies and AIC are in full compliance in all material respects with the terms of all contracts, agreements, plans and programs described above. To the Knowledge of Kalitta Management, the employment of all persons and officers employed by the Kalitta Companies and AIC is terminable at will, without any penalty or severance obligation of any kind on the part of the employer, and the consummation of the transactions contemplated by this Agreement will not by themselves trigger any payments to any officers, directors or employees of the Kalitta Companies or AIC. All material sums due for employee compensation and benefits and all vacation time owing to any employees have been duly and adequately accrued on the books of the Kalitta Companies or AIC pursuant to past practice. To the Knowledge of Kalitta Management, all employees of the Kalitta Companies and AIC located in the United States are either United States citizens or are authorized to be employed in the United States in accordance with all applicable laws. To the Knowledge of Kalitta Management, the Kalitta Companies have not been informed that any key employee or material consultant, distributor, representative, advisor, salesman, agent, customer or supplier of the Kalitta Companies or AIC will terminate his or her employment or cease to do business with the Kalitta Companies or AIC after the Mergers. (d) None of the Kalitta Companies nor AIC has experienced since December 31, 1996, any general labor troubles or strife, work stoppages, slowdowns by their employees. To the Knowledge of Kalitta Management, none of the Kalitta Companies nor AIC has experienced since December 31, 1996 any union or collective bargaining 25 47 organization efforts or negotiations, or requests for negotiations, for any representation or any labor contract relating to any employees of the Kalitta Companies or AIC not covered by a union or collective bargaining agreement as of December 31, 1996. (e) The Kalitta Companies with employees in the State of Michigan and AIC subscribe to, or are otherwise insured under, the worker's compensation or similar statute in the State of Michigan with respect to such employees. The Disclosure Schedule describes all claims filed by employees of the Kalitta Companies and AIC in respect of employment-related injury or illness from January 1, 1995 through June 30, 1997. None of the Kalitta Companies nor AIC has received any report or notice from the Occupational Safety and Health Administration. 4.1.26 No Conflicts of Interest. The Disclosure Schedule sets forth a list of all agreements which the Kalitta Companies and AIC have with their directors, officers, employees, consultants, distributors, representatives, advisors, salesmen and agents that prohibit or restrain such individuals from competing with the Kalitta Companies or AIC in their respective businesses. None of the Kalitta Companies or Kalitta, nor any Family Member of Kalitta, owns, directly or indirectly, a controlling interest in, or is an employee of, any Person which is a customer, supplier, competitor or potential competitor of the Kalitta Companies or AIC; neither does Kalitta, any Family Members of Kalitta, nor to the Knowledge of Kalitta Management, any of the aforesaid individuals control the management or policies of any Person which is a customer, supplier, competitor or potential competitor of the Kalitta Companies or AIC by means of a management contract or otherwise. 4.1.27 Environmental Matters. (a) To the Knowledge of Kalitta Management, the Kalitta Companies and AIC are in compliance with all applicable Environmental Laws and none of the Kalitta Companies nor AIC have received any written communication from any Person that alleges that any of the Kalitta Companies or AIC are not in compliance with applicable Environmental Laws. (b) There is no Environmental Claim pending or, to the Knowledge of Kalitta Management, overtly threatened (i) against the Kalitta Companies or AIC, (ii) against any Person whose liability for any Environmental Claim the Kalitta Companies or AIC have retained or assumed either contractually or, to the Knowledge of Kalitta Management, by operation of law, or (iii) against any real or personal property or operations which are now or, to the Knowledge of Kalitta Management, have been previously owned, leased, operated or managed, in whole or in part, based on activities conducted by the Kalitta Companies or AIC. 4.1.28 Aviation Act; Aircraft; Assets. (a) AIA is an air carrier operating under one or more Certificates of Public Convenience and Necessity issued by the DOT under the Aviation Act, and holding an air carrier operating certificate and operations specifications issued pursuant to Part 119 (formerly Part 121) of the Federal Aviation Regulations issued by the FAA under the Aviation Act and all other DOT and FAA authorizations and permits 26 48 necessary or required to conduct its business as it is currently being conducted (collectively such certificates are called the "AIA OPERATING AUTHORIZATIONS"), which AIA Operating Authorizations are in full force and effect, and AIA is operating in compliance with all rules and regulations of the FAA, the DOT, the AIA Operating Authorizations and of any foreign government or quasi-government entity, except where the failure to maintain such AIA Operating Authorizations or comply with such rules and regulations would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. AIA does not operate under any orders pursuant to the Essential Air Service Program for the DOT. AIA and its Affiliates have complied in all respects with Consent Order and Settlement Agreements (as modified orally by AIA and the FAA) to which AIA and the FAA are parties, including without limitation that Consent Order and Settlement Agreement signed by AIA on January 8, 1997. (b) All aircraft operated or "dry" leased by AIA are in sound operating condition and are being maintained in all material respects, where applicable, according to FAA regulatory standards, AIA's FAA-authorized maintenance program and all other applicable laws, except where the failure to maintain such AIA Operating Authorizations or comply with such rules, regulations and laws would not have a Material Adverse Effect on the Kalitta Companies. A list of all aircraft now owned, leased or in the possession and control of AIA is set forth on the Disclosure Schedule. (c) KFS is an air carrier operating under one or more Certificates of Public Convenience and Necessity issued by the DOT under the Aviation Act and holding an air carrier operating certificate and operations specifications issued pursuant to Part 135 of the Federal Aviation Regulations issued by the FAA under the Aviation Act and all other DOT and FAA authorizations and permits necessary or required to conduct its business as it is currently being conducted (collectively such certificates are called the "KFS OPERATING AUTHORIZATIONS"), which KFS Operating Authorizations are in full force and effect, and KFS is operating in compliance with all rules and regulations of the FAA, the DOT, the KFS Operating Authorizations and of any foreign government or quasi-government entity, except where the failure to maintain such KFS Operating Authorizations or comply with such rules and regulations would not have a Material Adverse Effect on KFS or its business. KFS does not operate under any orders pursuant to the Essential Air Service Program for the DOT. (d) All aircraft set forth on the Disclosure Schedule operated or "dry" leased by KFS, are in sound operating condition and are being maintained in all material respects, where applicable, according to FAA regulatory standards, KFS' FAA-authorized maintenance program and all other applicable laws, except where the failure to maintain or comply with such rules, regulations and laws would not have a Material Adverse Effect on the Kalitta Companies. A list of all operating aircraft now owned, leased or in the possession and control of KFS is set forth on the Disclosure Schedule. (e) OK is an air carrier operating under Certificates of Public Convenience and Necessity issued by the DOT under the Aviation Act and holding an air carrier operating certificate and operations specifications issued pursuant to Part 135 of the 27 49 Federal Aviation Regulations issued by the FAA under the Aviation Act and all other DOT and FAA authorizations and permits necessary or required to conduct its business as it is currently being conducted (collectively such certificates are called the "OK OPERATING AUTHORIZATIONS"), which OK Operating Authorizations are in full force and effect, and OK is operating in compliance with all rules and regulations of the FAA, the DOT, the OK Operating Authorizations and of any foreign government or quasi-government entity, except where the failure to maintain such OK Operating Authorizations or comply with such rules and regulations would not have a Material Adverse Effect on OK or its business. OK does not operate under any orders pursuant to the Essential Air Service Program for the DOT. (f) All aircraft set forth on the Disclosure Schedule operated or "dry" leased by OK, are in sound operating condition and are being maintained in all material respects, where applicable, according to FAA regulatory standards, OK's FAA-authorized maintenance program and all other applicable laws, except where the failure to maintain or comply with such rules, regulations and laws would not have a Material Adverse Effect on the Kalitta Companies. A list of all operating aircraft now owned, leased or in the possession and control of OK is set forth on the Disclosure Schedule. 4.1.29 No Solicitation or Negotiation. None of Kalitta, the Kalitta Companies nor AIC have made any agreement to sell the stock, business or any material asset of any of the Kalitta Companies or AIC to another Person, or to merge, consolidate or combine assets or business of any of the Kalitta Companies or AIC with another Person, except for the Kalitta Companies Permitted Transactions, and none of Kalitta, the Kalitta Companies nor AIC are currently engaged in negotiations or discussions concerning any other sale of the stock, or the sale, merger or combination of any material asset or business of any of the Kalitta Companies or AIC to or with another (except for the Kalitta Companies Permitted Transactions). 4.1.30 Information Supplied. None of the information supplied by the Kalitta Companies to Kitty Hawk expressly for inclusion in the Debt Offering Documents or the SEC Filings (as identified pursuant to Section 5.2.1) will, at the time of the consummation of the Closing Date Financings or the date such SEC Filing is declared effective by the SEC, respectively, contain any untrue statement of material fact or omit a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they were made, not misleading. 4.1.31 Letter from Tax Advisor. The Kalitta Companies have received a letter from D&T dated September 18, 1997 to the effect that, as of such date, the AIA Merger, the AIT Merger, the FOL Merger and the OK Merger should qualify as reorganizations under Section 368 of the Code. A copy of such letter has been delivered to Kitty Hawk. 4.1.32 Receivables. To the Knowledge of Kalitta Management, all notes and accounts receivable in amounts in excess of $25,000 of the Kalitta Companies and AIC reflected in the Financial Statements and all those arising since December 31, 1996 have arisen in the ordinary course of business and are, or shall be, fully collectible, net of applicable reserves, when due after collection efforts in the aggregate face amounts thereof. 28 50 4.2 Representations and Warranties of Kalitta. To induce Kitty Hawk and the Subs to enter into this Agreement and to consummate the transactions contemplated hereby, Kalitta represents and warrants to Kitty Hawk and the Subs as follows: (a) Kalitta is acquiring the Stock Merger Consideration for investment for his own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof in violation of the Securities Act. Kalitta does not have any present intention of selling, granting any participation in, or otherwise distributing the Stock Merger Consideration otherwise than pursuant to an effective registration statement under the Securities Act or in a transaction exempt from the registration requirements under the Securities Act and applicable state securities laws. Except as set forth in the Registration Rights Agreement, Kalitta does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Stock Merger Consideration. (b) Kalitta acknowledges that the issuance of the Stock Merger Consideration will not be registered under the Securities Act or any state securities laws on the basis of a claimed exemption by Kitty Hawk that the issuance of the Stock Merger Consideration as provided for herein is exempt from registration under the Securities Act and such state laws. Kalitta acknowledges that the availability of such exemptions is predicated in part on Kalitta's representations set forth in this Section and that Kitty Hawk and the Subs are relying on such representations. (c) Kalitta has received all the information he considers necessary or appropriate for deciding whether to accept the Stock Merger Consideration. Kalitta has had an opportunity to ask questions and to receive answers from Kitty Hawk regarding the terms and conditions of the issuance of the Stock Merger Consideration and the business properties, and financial condition of Kitty Hawk and to obtain additional information (to the extent Kitty Hawk possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Kalitta or to which Kalitta had access. (d) Kalitta acknowledges that he is able to bear the economic risk of the investment in the Stock Merger Consideration, and has such knowledge and experience in financial and business matters that he is capable of evaluating the permits and risks of the investment in the Stock Merger Consideration. (e) Kalitta is an Accredited Investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. (f) Kalitta acknowledges that the Stock Merger Consideration may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom and that in the absence of an effective registration statement covering the Stock Merger Consideration or an available exemption from registration under the Securities Act, the Stock Merger Consideration must be held indefinitely. Kalitta further acknowledges that the Stock Merger Consideration may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that rule are met. 29 51 (g) Kalitta acknowledges that each certificate representing any shares Stock Merger Consideration will be endorsed with a legend substantially similar to the following: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SO REGISTERED OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Representations and Warranties of Kitty Hawk. To induce Kalitta and the Kalitta Companies to enter into this Agreement and to consummate the transactions contemplated hereby, Kitty Hawk represents and warrants to Kalitta and the Kalitta Companies as of the date hereof as follows (each such representation and warranty being qualified in its entirety by the disclosures set forth (a) in the Disclosure Schedule of Kitty Hawk or (b) in the SEC Documents filed with the SEC on or prior to the date of the Agreement: 4.3.1 Corporate Existence and Authority. Kitty Hawk is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. Kitty Hawk and each of its Subsidiaries has all requisite corporate power and authority to own its properties and assets and to carry on its business as it has been and is being conducted. Kitty Hawk and each of its Subsidiaries is qualified to do business as a foreign corporation and is in good standing in each state, nation or other jurisdiction listed in the Disclosure Schedule, being each state, nation or other jurisdiction wherein the character of the properties owned or held under lease by it or the nature of the business transacted by it makes such qualification necessary, except for any state, nation or other jurisdiction where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 4.3.2 Capitalization of Kitty Hawk and its Subsidiaries. (a) As of the date of this Agreement, the authorized capital stock of Kitty Hawk consists of (i) 25,000,000 shares of Kitty Hawk Common Stock, of which 10,451,807 shares are issued and outstanding; and (ii) 1,000,000 shares of preferred stock, par value $1.00 per share, of which no shares are issued and outstanding. As of the date of this Agreement, no other shares of capital stock of Kitty Hawk are issued and outstanding other than those issued under employee benefit plans of Kitty Hawk. All of the issued and outstanding shares have been duly and validly issued in accordance and compliance with all applicable laws, rules and regulations and are fully paid and nonassessable. There are no securities, options, warrants, rights, calls, commitments, plans, contracts or other agreements of any character granted or issued by Kitty Hawk which provide for the purchase, issuance or transfer of any shares of the capital stock of Kitty Hawk, nor are there any outstanding securities granted or 30 52 issued by Kitty Hawk that are convertible into or exchangeable for any shares of the capital stock of Kitty Hawk, and none are authorized, except pursuant to this Agreement and employee benefit plans of Kitty Hawk as disclosed in the SEC Documents. Kitty Hawk is not obligated or committed to purchase, redeem or otherwise acquire any of its capital stock. All presently exercisable voting rights in Kitty Hawk are vested exclusively in its outstanding shares of common stock, each share of which is entitled to one vote on every matter to come before such corporation's stockholders. There are no voting trusts or other voting arrangements with respect to Kitty Hawk's capital stock, except as contemplated hereby. (b) All the issued and outstanding shares of capital stock of the Subsidiaries are held solely by Kitty Hawk, free and clear of any Lien. All of the issued and outstanding shares have been duly and validly issued in accordance and compliance with all applicable laws, rules and regulations and are fully paid and nonassessable. There are no securities, options, warrants, rights, calls, commitments, plans, contracts or other agreements of any character granted or issued by any of the Subsidiaries which provide for the purchase, issuance or transfer of the capital stock of any of the Subsidiaries, nor are there any outstanding securities granted or issued by any of the Subsidiaries that are convertible into or exchangeable for any shares of the capital stock of any of the Subsidiaries, and none are authorized. None of the Subsidiaries is obligated or committed to purchase, redeem or otherwise acquire any of its capital stock. All presently exercisable voting rights in the Subsidiaries are vested exclusively in their outstanding capital stock. There are no voting trusts or other voting arrangements with respect to the capital stock of any of the Subsidiaries. 4.3.3 Validity and Authorization; Corporate Power and Authority. Kitty Hawk has full corporate power and authority to execute, deliver and perform this Agreement, the Related Agreements and the other instruments called for by this Agreement to which it is or is to be a party. This Agreement has been duly authorized, executed and delivered by Kitty Hawk and constitutes the legal, valid and binding obligation of Kitty Hawk, enforceable against Kitty Hawk in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). When the Related Agreements and the other instruments called for by this Agreement to which Kitty Hawk is a party are executed and delivered at the Closing, such Related Agreements and instruments will have been duly authorized, executed and delivered by Kitty Hawk and will constitute the legal, valid and binding obligations of Kitty Hawk, enforceable against Kitty Hawk in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditor's rights generally, and by general principles of equity (whether applied in a proceeding at law or in equity). 4.3.4 Execution; No Violations. The execution and delivery of this Agreement by Kitty Hawk does not, and the consummation by Kitty Hawk of the transactions contemplated hereby will not: (a) violate, conflict with, modify or cause any default under or acceleration of (or give any party any right to declare any default or acceleration upon notice or passage of time or both), in whole or in part, any certificate of incorporation, bylaw, Lien, indenture, lease, agreement, instrument, order, injunction, decree or judgment to which Kitty Hawk or any of its Subsidiaries is a party or by which any of them or any of their properties 31 53 is bound; (b) result in the creation of any Lien on any property or asset (whether real, personal, mixed, tangible or intangible) of Kitty Hawk or any of its Subsidiaries; (c) violate any law, rule or regulation applicable to Kitty Hawk or any of its Subsidiaries; or (d) permit any federal or state regulatory agency to impose any restrictions or limitations of any nature on Kitty Hawk or any of its Subsidiaries or any of their activities, except in each case as would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 4.3.5 Governmental and Other Consents. Except for filings under the HSR Act, approval by the DOT of the deemed "de facto" transfer of the foreign air transportation authority issued to AIA and KFS, and the filing of certificates of merger as contemplated by Section 1.3 hereof, no consent, approval or authorization of, or designation, declaration or filing with, any governmental authority is required on the part of Kitty Hawk or any of its Subsidiaries in connection with the execution or delivery of this Agreement, the Related Agreements or the consummation by Kitty Hawk of the transactions contemplated hereby and thereby, except as would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. The Disclosure Schedule lists all material consents, approvals or authorizations of third Persons, required in connection with Kitty Hawk's valid execution, delivery or performance of this Agreement and the Related Agreements to which it is a party or the consummation of any of the transactions contemplated hereby or thereby on the part of any of them (collectively, the "KITTY HAWK CONSENTS"), including, but not limited to, the consents required under the Kitty Hawk Contracts, except, in each case, as would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 4.3.6 Stock Merger Consideration. The Stock Merger Consideration, when issued and delivered in accordance with the terms hereof will be duly authorized and validly issued, fully paid and nonassessable and free and clear of any preemptive rights or Liens through Kitty Hawk. 4.3.7 Acquisition of Kalitta Companies' Stock. Kitty Hawk is acquiring the shares of common stock of AIA, AIT, FOL, KFS and OK (collectively, the "KALITTA COMPANIES SHARES") to be issued to it upon conversion of the shares of common stock of the Subs held by it pursuant to Section 3.3 for investment for its own account, not as a nominee or agent, and not with a view to the resale or present distribution of any part thereof in violation of the Securities Act. Kitty Hawk has no present intention of selling, granting any participation in or otherwise distributing any of the Kalitta Companies Shares and Kitty Hawk has no contract, undertaking, agreement or arrangement with any Person to sell, transfer, grant participations to such person or to any third Person, with respect to any of the Kalitta Companies Shares. 4.3.8 SEC Documents. Kitty Hawk has heretofore delivered or made available to Kalitta and the Kalitta Companies true and complete copies of all registration statements filed under the Securities Act and reports, statements (including definitive proxy statements) and other filings filed under Sections 13(a), 14(a), 14(c) and 15(d) of the Exchange Act with the SEC (the "SEC DOCUMENTS") which are all the documents (other than preliminary material and reports required pursuant to Section 13(d) or 13(g) of the Exchange Act) that Kitty Hawk was required to file with the SEC. As of their respective dates, each of the SEC Documents complied in all material respects with all applicable requirements of the 32 54 Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Kitty Hawk included in the SEC Documents comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by the SEC) and fairly present (subject, in the case of the unaudited statements, to recurring audit adjustments normal in nature and amount) the consolidated financial position of Kitty Hawk as at the dates thereof and the consolidated results of its operations and cash flows or changes in financial position for the periods then ended. 4.3.9 SEC Filings. At the time it becomes effective under the Securities Act, any registration statement or registration statements filed by Kitty Hawk with the SEC related to the Closing Date Financings (and any final prospectus contained therein or filed pursuant to Rule 430A under the Securities Act) (the "SEC FILINGS") will comply in all material respects as to form with the provisions of the Securities Act and the rules and regulations thereunder. The Debt Offering Documents will not, at the time of the consummation of the Closing Date Financings, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The SEC Filings will not, at the time they become effective under the Securities Act, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, that notwithstanding anything in this Agreement to the contrary, no representation or warranty is made in this Agreement by Kitty Hawk with respect to information provided by, or portions of the SEC Filings based upon or derived from information provided by, the Kalitta Companies or Kalitta expressly for use in the SEC Filings. 4.3.10 Controlling Person. Christopher is a "controlling person" of Kitty Hawk as such term is defined in Sections 15 and 20 for purposes of the Securities Act and the Exchange Act respectively. 4.3.11 Absence of Certain Liabilities. Other than liabilities and obligations covered by another representation and warranty of Kitty Hawk in Section 4.3 (such as Taxes, Environmental Matters and Compliance with Laws), it being the intention of the parties that any such liabilities and obligations shall be governed, if at all, by such other representations and warranties, (a) as of August 31, 1996, neither Kitty Hawk nor any of its Subsidiaries had any material liabilities or obligations of any nature (whether absolute, accrued, contingent, due or to become due) except as and to the extent reflected and fully reserved against in the financial statements (including general reserves) contained or incorporated by reference in Kitty Hawk's Form 10-K for the fiscal year ended August 31, 1996 and (b) since August 31, 1996, neither Kitty Hawk nor any of its Subsidiaries have incurred any such liabilities or obligations of any nature other than those reflected or reserved against in Kitty Hawk's financial statements or incurred in the ordinary course of business since the date thereof. 33 55 4.3.12 Absence of Changes. Except as expressly provided in this Agreement, since June 30, 1997 there has not been with respect to Kitty Hawk or any of its Subsidiaries: (a) Any change or aggregate of changes constituting a Material Adverse Effect on Kitty Hawk; (b) Any change in the capitalization of Kitty Hawk or any of its Subsidiaries, including, without limitation, the issuance by any of them of any shares of stock of any class, any subscriptions, options, warrants, convertible securities, rights, calls, agreements, commitments or rights affecting or relating in any manner whatsoever to any equitable interests in Kitty Hawk or any of its Subsidiaries other than pursuant to employee benefit plans of Kitty Hawk. (c) Any purchase, redemption or other acquisition by Kitty Hawk or any of its Subsidiaries, or any commitment, plan or agreement by Kitty Hawk or any of its Subsidiaries to purchase, redeem or otherwise acquire any shares of their capital stock or other equitable interests; (d) Any merger or agreement to merge by Kitty Hawk or any of its Subsidiaries with another Person, or any purchase of or investment in or agreement to purchase or invest by Kitty Hawk or any of its Subsidiaries in the business of another Person; (e) Any declaration, payment or setting aside by Kitty Hawk or any of its Subsidiaries of any dividends or other distributions of any assets of any kind whatsoever to their stockholders or other equitable owners, except for ordinary salary payments for services actually rendered and except for distributions by a Subsidiary of Kitty Hawk to Kitty Hawk; (f) Any amendment to the certificate of incorporation, articles of incorporation or bylaws of Kitty Hawk or any of its Subsidiaries; (g) Any waivers, compromises or settlements by Kitty Hawk or any of its Subsidiaries of any right or claim in excess of $500,000 in the aggregate; or any institution or settlement of, or agreement to settle, any litigation, action or proceeding before any court or governmental body relating to Kitty Hawk or any of its Subsidiaries or any of their properties in excess of $500,000; (h) Any assumptions or guarantees (except endorsements of negotiable instruments in the ordinary course of business) by Kitty Hawk or any of its Subsidiaries of the obligations of any Person, except in the ordinary course of business; (i) Any payment or satisfaction by Kitty Hawk or any of the Subsidiaries of any material liability, obligation or indebtedness except pursuant to the terms thereof or otherwise in the ordinary course of business; (j) Any loan or advance, any commitment to loan or advance, or any renewal, refunding or extension of any existing loan, made by Kitty Hawk or any of 34 56 its Subsidiaries to any Person, except in the ordinary course of business, but in no event any loan or advance, any commitment to loan or advance, or any renewal, refunding or extension of any existing loan, by Kitty Hawk or any of its Subsidiaries to any of their officers or directors or to any Affiliate of Kitty Hawk or any such officer or director; (k) Any actions taken or transactions entered into by Kitty Hawk or any of its Subsidiaries involving more than $500,000 in the aggregate, other than the Kitty Hawk Permitted Transactions or in the ordinary course of business, or any capital expenditures or commitments therefor in excess of $500,000 in the aggregate other than in the ordinary course of business; (l) Any sale, assignment, lease, abandonment or other disposition by Kitty Hawk or any of its Subsidiaries of any real property, or any sale, assignment, transfer, license, lapse, or other disposition by Kitty Hawk or any of its Subsidiaries of any material trademark, trade name, copyright (or pending application for any material trademark or copyright) or other intangible asset; (m) Any material damage, destruction or loss to the business or properties of Kitty Hawk or any of its Subsidiaries, not adequately covered by insurance, including, without limitation, any damage, destruction or loss as a result of fire, explosion, accident, earthquake, lightning, aircraft, vehicle, smoke, hail, flood, drought, storm, strike, work stoppage, lockout, sabotage, embargo, condemnation, riot, civil disturbance, vandalism or act of God or public enemy the result of which has been a Material Adverse Effect on Kitty Hawk and its Subsidiaries; (n) Any other material transaction entered into by Kitty Hawk or any of its Subsidiaries other than in the ordinary course of business; or (o) Any sale, assignment or transfer of any material asset by Kitty Hawk, except the sale for leaseback of three Boeing 727 aircraft or in the ordinary course of business and consistent with past practice. 4.3.13 Disputes and Litigation. (a) There is no Proceeding pending of which Kitty Hawk or one of the Subsidiaries have received written notice or, to the Knowledge of Kitty Hawk, threatened against Kitty Hawk or any of its Subsidiaries or any of their properties, assets or business or to which Kitty Hawk or any of its Subsidiaries is a party, in any court or before any arbitrator of any kind or before or by any governmental agency (including, without limitation, any federal, state, local, foreign or other governmental department, commission, board, bureau, agency or instrumentality). (b) There is no outstanding order, writ, injunction, decree, judgment or award by any court, arbitrator or governmental body against or affecting Kitty Hawk or any of its Subsidiaries or any of their properties, assets or business. 4.3.14 Compliance with Laws. Except for any noncompliance to be covered by any other representation and warranty of Kitty Hawk contained in Section 4.3 (for example, 35 57 Taxes), it being the intention of the parties that such noncompliance shall be governed, if at all, by such other representations and warranties, to the Knowledge of Kitty Hawk, Kitty Hawk and its Subsidiaries presently are and have at all times been in full compliance with all applicable federal, state, local, foreign and other laws, rules and regulations other than those where noncompliance would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk, and neither Kitty Hawk nor any of its Subsidiaries have received written notice, or to the Knowledge of Kitty Hawk, oral notice of any such claimed violation of any such law, rule or regulation which would reasonably be expected to have a Material Adverse Effect on Kitty Hawk. Kitty Hawk and each of its Subsidiaries have filed all material returns, reports and other documents and furnished all information required or requested by any federal, state, local or foreign governmental or quasi-governmental agency and all such returns, reports, documents and information are true and complete in all material respects, except where such failure to file or inaccuracies would not be reasonably expected to result in a Material Adverse Effect on Kitty Hawk. All permits, licenses, orders, franchises and approvals of all federal, state, local and foreign governmental or quasi-governmental or regulatory bodies required of Kitty Hawk and each of its Subsidiaries for the conduct of their businesses have been obtained, except for any the failure to have obtained would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. No written notice of any outstanding violations have been received by Kitty Hawk or any of its Subsidiaries in respect of any such permits, licenses, orders, franchises and approvals. Such permits, licenses, orders, franchises and approvals are valid and sufficient for all activities presently carried on by Kitty Hawk and any of its Subsidiaries, except where they would not be reasonably expected to have a Material Adverse Effect on Kitty Hawk. Neither Kitty Hawk, nor any officer, director, employee, shareholder or agent of Kitty Hawk has made any offer, payment, promise to pay, or authorization of the payment of any money, offer, gift, promise to give, or authorization of anything of value to any Person named or identified in Section 30A of the Exchange Act for any unlawful purpose described in Section 30A of the Exchange Act. 4.3.15 Insurance. Kitty Hawk has insurance coverage as required by any contract to which it is party, by any rule or regulation applicable to Kitty Hawk and as is customary for businesses of similar nature to that of Kitty Hawk, and Kitty Hawk shall deliver copies of all such policies, agreements, studies and analyses to the Kalitta Companies upon request of the Kalitta Companies. All of the insurance policies are in full force and effect and are fully paid as to all premiums heretofore due. None of Kitty Hawk or any of its Subsidiaries has failed to give any notice or present any material claim under such insurance policies in timely fashion, nor has Kitty Hawk or any of its Subsidiaries received any written notification of the cancellation of any of such policies or that any of them will not be renewed. 4.3.16 Title to Properties. The properties and assets of Kitty Hawk and each of its Subsidiaries consist of all of the material properties and assets presently carried on Kitty Hawk's books as owned by them. 4.3.17 Agreements. All of the contracts listed or required to be listed in Item 10 of Kitty Hawk's SEC Documents, other than those contracts which have been terminated or which have expired (collectively, the "KITTY HAWK CONTRACTS"), are valid and binding and in full force and effect against Kitty Hawk or any of its Subsidiaries that are parties thereto, and there exists no material breach or default by Kitty Hawk or any of its Subsidiaries, or any event which, with notice or lapse of time or both, would constitute a material breach or default by Kitty Hawk or any of its Subsidiaries thereunder. 36 58 4.3.18 Indebtedness and Guaranties. The Disclosure Schedule sets forth a true and complete list of all promissory notes, security agreements and guarantees relating to indebtedness for borrowed money or money loaned to others to which Kitty Hawk or any of its Subsidiaries is a party or obligor. None of Kitty Hawk nor any of its Subsidiaries have guaranteed any dividend, obligation or indebtedness of any third Person. All of the items of indebtedness set forth in the Disclosure Schedule or on the financial statements contained in the Quarterly Report of Kitty Hawk on Form 10-Q for the quarter ended June 30, 1997 are valid and binding and in full force and effect as against Kitty Hawk and any of its Subsidiaries (as applicable) and there exists no material breach or default by Kitty Hawk or any of its Subsidiaries, or any event which with notice or lapse of time or both, would constitute a breach or default by Kitty Hawk and each of its Subsidiaries. 4.3.19 Environmental Matters. (a) To the Knowledge of Kitty Hawk, Kitty Hawk and each of its Subsidiaries are in compliance with all applicable Environmental Laws and none of Kitty Hawk nor any of its Subsidiaries have received any written communication from any Person that alleges that Kitty Hawk or any of its Subsidiaries are not in compliance with applicable Environmental Laws, in each case except as would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. (b) There is no Environmental Claim pending or, to the Knowledge of Kitty Hawk, overtly threatened (i) against Kitty Hawk or any of its Subsidiaries, (ii) against any Person whose liability for any Environmental Claim Kitty Hawk or any of its Subsidiaries have retained or assumed either contractually or, to the Knowledge of Kitty Hawk, by operation of law, or (iii) against any real or personal property or operations which are now or, to the Knowledge of Kitty Hawk, have been previously owned, leased, operated or managed, in whole or in part, based on activities conducted by Kitty Hawk or any of its Subsidiaries. 4.3.20 Aviation Act; Aircraft; Assets. (a) Kitty Hawk's wholly owned subsidiary Kitty Hawk Aircargo, Inc. is an air carrier operating under one or more Certificate of Public Convenience and Necessity issued by the DOT under the Aviation Act and holding an air carrier operating certificate and operations specifications issued pursuant to Part 119 (formerly 121) of the Federal Aviation Regulations issued by the FAA under the Aviation Act (collectively such certificates are called the "KITTY HAWK OPERATING AUTHORIZATIONS"), which Kitty Hawk Operating Authorizations are in full force and effect, and Kitty Hawk is operating in compliance with all rules and regulations of the FAA, the DOT, the Kitty Hawk Operating Authorizations and of any foreign government or quasi-government entity, except where the failure to maintain such Kitty Hawk Operating Authorizations or comply with such rules and regulations would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk and its Subsidiaries on a combined basis. Kitty Hawk does not operate under any orders pursuant to the Essential Air Service Program for the DOT. 37 59 (b) All aircraft owned or "dry" leased by Kitty Hawk are in sound operating condition and are being maintained in all material respects, where applicable, according to FAA regulatory standards, Kitty Hawk's FAA-authorized maintenance program and all other applicable laws, except where the failure to maintain such Kitty Hawk Operating Authorizations or comply with such rules and regulations would not have a Material Adverse Effect on Kitty Hawk. A list of all aircraft now owned, leased or in the possession and control of Kitty Hawk is set forth on the Disclosure Schedule. 4.3.21 No Insolvency. Neither Kitty Hawk nor any of its Subsidiaries is "insolvent" (as defined in the United States Bankruptcy Code, 11 U.S.C. Section 101 et seq.); Kitty Hawk and each of its Subsidiaries is able to pay its debts as they come due and has capital sufficient to carry on its business. 4.3.22 Articles of Incorporation and Bylaws. Not later than fourteen (14) days after the date to this Agreement, Kitty Hawk shall deliver to Kalitta and the Kalitta Companies true and complete copies of its certificate of incorporation and bylaws. Such certificate of incorporation and bylaws were duly adopted and are in full force and effect, and there are no amendments or modifications thereto except as included in said certificate of incorporation and bylaws. 4.3.23 No Appraisal Rights. The stockholders of Kitty Hawk will not be entitled to exercise appraisal rights in connection with, or as a result of, any of the transactions contemplated in this Agreement. 4.3.24 Taxes. Kitty Hawk has duly and timely filed all Tax Returns related to Kitty Hawk heretofore due, and all such Tax Returns are correct, accurate and complete in all material respects. Kitty Hawk has paid all Taxes that have become due pursuant to those Tax Returns. 4.4 Representations and Warranties as to Subs. To induce Kalitta and the Kalitta Companies to enter into this Agreement and to consummate the transactions contemplated hereby, Kitty Hawk and the Subs, jointly and severally, represent and warrant to Kalitta and the Kalitta Companies as of the date hereof as follows (each such representation and warranty being qualified in its entirety by the disclosures set forth (a) in the Disclosures Schedule of Kitty Hawk or (b) in the SEC Documents filed with the SEC on or prior to the date of this Agreement): 4.4.1 Corporate Existence and Authority. Each Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. Each of the Subs has all requisite corporate power and authority to own its properties and assets and to carry on its business as it has been and is being conducted. Each of the Subs is qualified to do business as a foreign corporation and is in good standing in each state, nation or other jurisdiction listed in the Disclosure Schedule, being each state, nation or other jurisdiction wherein the character of the properties owned or held under lease by it or the nature of the business transacted by it makes such qualification necessary, except for any state, nation or other jurisdiction where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 38 60 4.4.2 Capitalization of the Subs. The authorized capital stock of each Sub consists solely of 60,000 shares of common stock, of which 1,000 shares are issued and outstanding. No other shares of capital stock of the Subs are issued and outstanding. On the date hereof all the issued and outstanding shares of capital stock of the Subs are held solely by Kitty Hawk, free and clear of any Lien. All of the issued and outstanding shares have been duly and validly issued in accordance and compliance with all applicable laws, rules and regulations and are fully paid and nonassessable. There are no securities, options, warrants, rights, calls, commitments, plans, contracts or other agreements of any character granted or issued by any of the Subs which provide for the purchase, issuance or transfer of any shares of the capital stock of any of the Subs, nor are there any outstanding securities granted or issued by any of the Subs that are convertible into or exchangeable for any shares of the capital stock of any of the Subs, and none are authorized. 4.4.3 Validity and Authorization; Corporate Power and Authority. The Subs have full corporate power and authority to execute, deliver and perform this Agreement, the Related Agreements and the other instruments called for by this Agreement to which they are or are to be a party. This Agreement has been duly authorized, executed and delivered by each of the Subs and constitutes the legal, valid and binding obligation of each of the Subs, enforceable against the Subs in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). When the Related Agreements and the other instruments called for by this Agreement to which any of the Subs are a party are executed and delivered at the Closing, such Related Agreements and instruments will have been duly authorized, executed and delivered by the Sub, and will constitute the legal, valid and binding obligations of the Subs, enforceable against the respective Sub in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditor's rights generally, and by general principles of equity (whether applied in a proceeding at law or in equity). 4.4.4 Execution; No Violations. The execution and delivery of this Agreement by each of the Subs does not, and the consummation by each of the Subs of the transactions contemplated hereby will not: (a) violate, conflict with, modify or cause any default under or acceleration of (or give any party any right to declare any default or acceleration upon notice or passage of time or both), in whole or in part, any article of incorporation, bylaw, Lien, indenture, lease, agreement, instrument, order, injunction, decree or judgment, to which any of the Subs are a party or by which any of them or any of their properties is bound; (b) result in the creation of any Lien on any property or asset (whether real, personal, mixed, tangible or intangible), of any of the Subs; (c) violate any law, rule or regulation applicable to any of the Subs; or (d) permit any federal or state regulatory agency to impose any restrictions or limitations of any nature on any of the Subs or any of their respective activities, except in each case as would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 4.4.5 Governmental and Other Consents. Except for filings under the HSR Act, approval by the DOT of the deemed "de facto" transfer of the foreign air transportation authority issued to AIA and KFS and the filing of certificates of merger as contemplated by 39 61 Section 1.3 hereof, no consent, approval or authorization of, or designation, declaration or filing with, any governmental authority is required on the part of Subs in connection with the execution or delivery of this Agreement, the Related Agreements or the consummation by the Subs of the transactions contemplated hereby and thereby, except as would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. The Disclosure Schedule lists all material consents, approvals or authorizations of third Persons, required in connection with each Subs' valid execution, delivery or performance of this Agreement and the Related Agreements or the consummation of any of the transactions contemplated hereby or thereby on the part of any of them (collectively, the "SUBS CONSENTS"), except in each case, as would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 4.5 Disclosure Schedules. If, subsequent to the date of this Agreement and prior to the date of Closing, an event occurs that renders untrue any representation or warranty of a party made herein (a "SUBSEQUENT EVENT"), such party shall promptly deliver to the other parties an amended or supplemental disclosure schedule (a "SUBSEQUENT DISCLOSURE SCHEDULE") which will contain a description of the Subsequent Event. The existence of a Subsequent Event which is disclosed on a Subsequent Disclosure Schedule shall not constitute a Breach by such party of any of its representations or warranties hereunder or be taken into account in determining whether the condition precedents set forth in Section 6.1.1 or 6.2.1 has been satisfied or form a basis for any indemnification or other claim by the other parties hereunder; provided, however, that all matters therein disclosed, together with all other events, circumstances and occurrences (including Subsequent Events, if any), may be taken into account by the other parties in determining whether the condition set forth in Section 6.1.7 or 6.2.7 has been satisfied; and provided, further, that this Section is not intended to permit a party to alter or amend its representations and warranties as made herein as of the date of this Agreement, including any Disclosure Schedule, and any Subsequent Disclosure Schedule provided by any party pursuant to this Section shall not cure the inaccuracy thereof as of the date of this Agreement for any purpose under this Agreement. Disclosure of any fact or item in any Disclosure Schedule or Subsequent Disclosure Schedule referred by a particular Section shall, should the existence of the fact or item or its contents be relevant to any other Section, be deemed to be disclosed with respect to such other Section(s) whether or not an explicit cross reference appears and whether or not the Section(s) make reference to any Schedule. The disclosure of any particular fact or item in any Disclosure Schedule or Subsequent Disclosure Schedule shall not be deemed any admission as to whether the fact or item is "material" or would constitute a "Material Adverse Effect". ARTICLE V COVENANTS 5.1 Mutual Covenants. To induce the other parties to enter into this Agreement and to consummate the transactions contemplated hereby, and without limiting any covenant, agreement, representation or warranty made elsewhere in this Agreement, each of the Kalitta Companies agree, as to itself and, in the case of AIA, as to AIC, and each of Kitty Hawk and the Subs agrees as to itself and, in the case of Kitty Hawk, as to its Subsidiaries and the 40 62 Subs, that between the date of this Agreement and the earlier of the Effective Time or the termination of this Agreement pursuant to Article VIII, except as may be consented to by the other parties or as otherwise contemplated by this Agreement (including the Permitted Transactions), as follows: 5.1.1 Access and Information. Each party will, and AIA will cause AIC, and Kitty Hawk will cause the Subsidiaries, to (a) provide the other parties and their Representatives, during normal business hours, or otherwise if another party reasonably requests, and upon reasonable advance notice, access to all of the properties, assets, agreements, commitments, books, records, accounts, Tax Returns, correspondence and documents of such party and permit them to make copies thereof; (b) furnish the other parties and their Representatives with all information concerning the business, properties and affairs of such party, and, in the case of AIA, AIC or, in the case of Kitty Hawk, the Subsidiaries, as the other parties reasonably request; (c) use commercially reasonable efforts to cause its accountants to make available to the other parties and their representatives all financial information relating to such party, and, in the case of AIA, AIC or, in the case of Kitty Hawk, the Subsidiaries, including all working papers pertaining to audits and reviews made heretofore by such auditors; (d) furnish the other parties true and complete copies of all financial and operating statements of such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries; (e) permit access to customers and suppliers for consultation or verification of any information; and (f) cause its employees, and use commercially reasonable efforts to cause its accountants, to cooperate fully with any audit, review, investigation or examination made by the other party and its representatives, including, without limitation, with respect to: (i) The books and records of such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries; (ii) The reports of state and federal regulatory examinations; (iii) Leases, contracts and commitments between such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries, on the one hand, and any other Person, on the other hand; (iv) Physical examination of any real properties owned by, or leased to or by such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries; and (v) Physical examination of any furniture, fixtures, equipment (including aircraft and engines) or other personal property owned by or leased to or by such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries. 5.1.2 Notices and Approvals. Each party agrees: (a) to give all notices to third parties which may be necessary in connection with this Agreement, the Related Agreements and the consummation of the transactions contemplated hereby and thereby; (b) to use such party's commercially reasonable efforts to obtain all federal, state and foreign governmental and quasi-governmental approvals, consents, permits, authorizations and orders necessary in connection with this Agreement, the Related Agreements and the 41 63 consummation of the transactions contemplated hereby and thereby; and (c) to use such party's commercially reasonable efforts to obtain all consents and authorizations of any governmental or quasi-governmental authorities or other Persons necessary in connection with this Agreement, the Related Agreements and the consummation of the transactions contemplated hereby and thereby. At least five (5) Business Days prior to the submission of any application with respect to any of the foregoing approvals, consents, permits, authorizations and orders, such party shall deliver a copy thereof to the other party. In the event the other party shall reasonably request any change or modification in the form or content of any such application, such submitting party shall make such change or modification and submit the application as modified or changed. 5.1.3 Conduct of Business. Unless otherwise expressly contemplated hereby (including the Permitted Transactions) or approved in writing by the other party, each party agrees that the businesses and operations of such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries, shall be conducted only in, and such party shall not take any material action except in, the ordinary course of business and consistent with past practice (which both parties acknowledge includes the purchase, sale or lease of aircraft engines and parts consistent with past practice). Without limitation, each party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries, shall not take, nor enter into any agreements to take, any of the following actions except in each such case in connection with this Agreement (including the Permitted Transactions) or, in the case of actions described in clauses (a) - (c) of this Section 5.1.3, in the ordinary course of business: (a) dispose of, or acquire, any material assets, other than the Permitted Transactions, (b) incur any indebtedness for borrowed money, (c) pay any discretionary bonuses (other than bonuses already accrued on the date hereof) to, or alter the compensation or benefit of, any director, officer or employee, (d) enter into any transaction or agreement with any Affiliate, Associate (as defined in Rule 405 under the Securities Act) or, with respect to Kalitta, a Family Member of such party, (e) institute any reduction in force, (f) close any office, base or station, (g) take any action not in the ordinary course of business that will knowingly cause any of such party's representations or warranties to be untrue or incorrect in any material respect, (h) omit any commercially reasonable action that such party would take in the ordinary course of business, which omission will knowingly cause any of such party's representations or warranties to be untrue or incorrect in any material respect, (i) declare or pay any dividends on, or make any distribution or payment with respect to, or redeem or repurchase, any shares of capital stock of any of such party or take any other actions which would have a similar effect or (j) issue any shares of capital stock of such party or subsidiaries (other than pursuant to Kitty Hawk's existing employee benefit plans) or any securities, options, warrants, rights, calls, commitments, plans, contracts or other agreements of any character whatsoever which provide for the purchase, issuance or transfer of any shares of capital stock, or any securities that are convertible into or exchangeable for any shares of capital stock or increase or decrease, change into or exchange any such shares for a different number or kind of shares or securities through a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in capitalization. Notwithstanding the foregoing, AIC shall be permitted to make distributions of gross profit to its co-partners in accordance with the AIC Partnership Agreement in amounts consistent with past practice. 5.1.4 Proceedings. Each party shall promptly notify the other party of any material Proceedings that are threatened in writing or commenced against such party, and, 42 64 in the case of AIA, AIC, or, in the case of Kitty Hawk, any of the Subsidiaries, or their employees, consultants, officers or directors which may relate to, or affect, the business, assets or liabilities of such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, any the Subsidiaries. Such party shall not and, in the case of AIA, shall not permit AIC, or, in the case of Kitty Hawk, the Subsidiaries, to knowingly fail to comply in any material respect with any laws, regulations, ordinances, orders, injunctions and decrees applicable to them, their properties, and the conduct of their respective businesses. 5.1.5 Repairs; FAA Compliance. Each party shall maintain, preserve and protect the operating aircraft and engines used in the conduct of the business of such party, or, in the case of AIA, AIC or, in the case of Kitty Hawk, any of the Subsidiaries, and keep the same in compliance in all material respects with applicable FAA airworthiness directives, rules, regulations and orders and such party's FAA-approved maintenance program except as determined in the good faith exercise of such party's business judgment. Each party shall comply with any Consent Order and Settlement Agreement to which it and the FAA are parties. 5.1.6 Reports and Returns. Each party shall and, in the case of AIA, shall cause AIC or, in the case of Kitty Hawk, shall cause the Subsidiaries to, duly and timely file all reports and returns required to be filed with federal, state, local and other authorities prior to Closing, including without limitation any Tax Returns, which reports and returns shall be prepared in accordance with all regulatory requirements in all material respects. Each party shall promptly pay all Taxes and other quasi-governmental charges levied or assessed upon such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, any of the Subsidiaries, or their respective properties prior to the date on which penalties attach thereto and all lawful claims which, if unpaid when due and payable, might become a Lien upon property of such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries, except Permitted Liens. Each party shall duly and timely make all deposits required of such party, and, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries, with respect to any Taxes (including, without limitation, employee withholding Taxes). 5.1.7 Assist in Obtaining Licenses, Etc. Each party shall reasonably assist the other party in obtaining all permits, licenses and authorizations necessary for the continued operation of the Kalitta Companies at and after the Effective Time. 5.1.8 Consents. The Kalitta Companies shall use their commercially reasonable efforts to obtain the Kalitta Consents, and Kitty Hawk shall use its commercially reasonable efforts to obtain the Kitty Hawk Consents. 5.1.9 Insurance. The Kalitta Companies and Kitty Hawk shall continue in force all existing insurance now carried by such party. 5.1.10 Preservation of Business. Each party shall use its commercially reasonable efforts to preserve and keep intact its business and the business of, in the case of AIA, AIC, or, in the case of Kitty Hawk, the Subsidiaries, to retain its officers, and to preserve the goodwill of its key employees, and material customers, suppliers and other Persons having business relations with such party. 43 65 5.1.11 Tax Treatment. Each of Kalitta and Kitty Hawk will use his or its commercially reasonable efforts to cause the AIA Merger, the AIT Merger, the FOL Merger and the OK Merger to qualify as reorganizations under the provisions of Section 368 of the Code and to deliver, in connection with the opinions referred to in Section 6.2.12, letters of representation reasonable under the circumstances as to his or its intentions and knowledge. 5.1.12 Other Covenants. Each party shall use its commercially reasonable efforts to satisfy the conditions to the obligations of the parties hereunder within such party's reasonable control, and to consummate and make effective as promptly as practicable the transactions provided for herein including but not limited to the following: (a) Defending the Agreement. Defending Proceedings challenging this Agreement or any Related Agreement or the consummation of the transactions provided for in this Agreement or any Related Agreement; (b) Lifting Injunctions. Using commercially reasonable efforts to lift or rescind any injunction, restraining order or other order adversely affecting the ability of the parties to consummate the transactions provided for in this Agreement or any Related Agreement; and (c) Other Actions. Taking such other reasonable actions that are necessary, appropriate or advisable. 5.2 Kalitta and the Kalitta Companies Covenants. To induce the other parties to enter into this Agreement and to consummate the transactions contemplated hereby, and without limiting any covenant, agreement, representation or warranty made elsewhere in this Agreement, Kalitta and each of the Kalitta Companies (as to itself) agree that between the date of this Agreement and the earlier of the Effective Time or termination of this Agreement pursuant to Article VIII, except as may be consented to by the other parties or as otherwise contemplated by this Agreement, as follows: 5.2.1 Information for Kitty Hawk's Statements, Reports, Applications and SEC Filings. Kalitta and the Kalitta Companies will, and the Kalitta Companies shall use commercially reasonable efforts to cause AIC and the employees, accountants and attorneys of any of AIC or the Kalitta Companies (collectively, the "KALITTA GROUP") to cooperate fully with Kitty Hawk and its employees, accountants and attorneys in the preparation of (i) any statements, reports and applications, (ii) the SEC Filings and (iii) the Debt Offering Documents, in each case, made by Kitty Hawk and, in the case of (i) and (ii), filed with any federal, state or foreign governmental regulatory agency or quasi- governmental authority in connection with this Agreement, the Related Agreements, the Closing Date Financings and the transactions contemplated hereby and thereby and furnish Kitty Hawk with all information concerning the Kalitta Companies and AIC necessary or reasonably deemed desirable by Kitty Hawk for inclusion in such statements, reports, applications, SEC Filings, and Debt Offering Documents, including, without limitation, all requisite financial statements and schedules. At the time any such statement, report, application or SEC Filing is filed or, with respect to the Debt Offering Documents or the SEC Filings, the consummation of the Closing Date Financings, or the SEC Filings are declared effective by the SEC, respectively, the Kalitta Companies and AIC shall provide Kitty Hawk with a certificate executed by Kalitta (a) confirming the accuracy in all material respects of the information concerning the 44 66 Kalitta Companies or AIC that is contained in such statement, report, or application, (b) acknowledging that such information is supplied by the Kalitta Companies or AIC to Kitty Hawk expressly for inclusion in such statement, report, application and (c) in the case of the SEC Filings or the Debt Offering Document, identifying the information expressly provided for inclusion in the SEC Filings or the Debt Offering Document, as described in Sections 4.1.30 or 4.3.9. In furtherance thereof, the Kalitta Group shall actively participate at the expense of the Kalitta Companies in the drafting of all sections of the Debt Offering Documents and the SEC Filings, and all amendments thereto, relating to the business, financial condition, management and all related disclosures concerning Kalitta, the Kalitta Companies and AIC, as shall be required pursuant to all rules and regulations, including, without limitation, Regulation C and Regulation S-X, as promulgated under the Securities Act, or as may be requested by the SEC in any comment letters received by Kitty Hawk (one copy of which shall be promptly furnished by Kitty Hawk to the Kalitta Companies). 5.2.2 No Solicitation or Negotiation. (a) Except for the Kalitta Companies Permitted Transactions, none of Kalitta, the Kalitta Companies nor AIC will solicit, discuss, negotiate or agree to (i) the sale of any stock or other equity interest in any of the Kalitta Companies or AIC, except to Kitty Hawk, (ii) a merger, consolidation or combination of any material asset or business, or any share exchange, of any of the Kalitta Companies or AIC, except to Kitty Hawk, or (iii) a sale or disposition of any of the business or operating aircraft assets of any of the Kalitta Companies or AIC. (b) The Kalitta Companies will give prompt notice to Kitty Hawk if any of them receives any communication from any Person not a party to this Agreement that proposes any discussion, negotiation or agreement prohibited under Section 5.2.2(a). (c) Except for Kitty Hawk Permitted Transactions, until December 31, 1997, Kitty Hawk will not agree (i) to any merger, consolidation or combination of any material asset or business or any share exchange, of Kitty Hawk or (ii) to any acquisition of any material equity interest in any business entity or any operating segment of any business entity. 5.2.3 Financial Statements. The Kalitta Companies will exert their commercially reasonable efforts to obtain from D&T and deliver to Kitty Hawk such audited and unaudited balance sheets, statements of income, statements of shareholder's equity and statements of cash flows as Kitty Hawk may be required to file with the SEC in connection with the SEC Filings (the "D&T FINANCIAL STATEMENTS") and D&T's consent (the "D&T CONSENT") to Kitty Hawk's use of the D&T opinions accompanying such audited statements in the SEC Filings. In addition, the Kalitta Companies shall deliver to Kitty Hawk not later than the 45th day after the end of each month, financial statements of the kind described in Section 4.1.6 (Financial Statements) for the month ended July 31, 1997 and each subsequent month before the Closing. 5.2.4 Payment of Indebtedness of Related Persons. Kalitta will repay in full prior to Closing all indebtedness, if any, that Kalitta owes to the Kalitta Companies or AIC, and the Kalitta Companies and AIC will repay in full prior to Closing all indebtedness, if any, that the Kalitta Companies or AIC owe to Kalitta. 45 67 5.2.5 Restriction on Transfers. Kalitta shall not, nor shall Kalitta enter into any agreement to, sell, transfer, pledge, hypothecate, or dispose of any of the Kalitta Companies Shares other than pursuant to the Kalitta Companies Permitted Transactions described in clause (n) of the definition thereof. 5.2.6 Exemptions from Sales Tax. The Kalitta Companies shall file with appropriate state, local and foreign taxing authorities such documents, forms and/or requests for exemption that are reasonably requested by Kitty Hawk as necessary or appropriate to cause the transactions contemplated hereby to be exempt from sales Tax. 5.2.7 Office Lease. (a) Until the Effective Time, Kalitta shall cause the Landlord to (i) not amend the Office Lease or sell or lease the Office Premises or the Adjoining Lots, (ii) comply timely with all its obligations under and not modify, or consent to a modification of, the Office Mortgage and (iii) not grant, modify or restrict or consent to any grant, modification or restriction of, any rights of the Landlord in the Office Premises or Adjoining Lots. (b) Prior to October 31, 1997, Kitty Hawk will obtain an appraisal of the fair market rental value of the Office Premises from a certified real estate appraiser selected by Kitty Hawk with the consent of Kalitta (which consent shall not be unreasonably withheld) and will by notice to Kalitta and AIA propose a modification to the Office Lease (a "LEASE-MODIFICATION PROPOSAL") to reflect the fair market value rental rate as set forth in such appraisal. (c) If Kitty Hawk makes a timely Lease-Modification Proposal, Kalitta shall use commercially reasonable efforts to cause the Landlord to either (i) accept the Lease-Modification Proposal by written notice to Kitty Hawk and AIA no later than the Effective Time, in which case the Office Lease will ipso facto be modified in accordance with the Lease-Modification Proposal or (ii) terminate the Office Lease to be effective thirty (30) days after the Effective Time without termination penalty or damages, or further rent, indemnity or other tenancy obligations thereunder by AIA or any Person; provided, the Office Lease will automatically terminate thirty (30) days after the Effective Time without termination penalty or damages, or further rent, indemnity or other tenancy obligations thereunder by AIA or any Person if the Landlord fails to take either of the actions set forth in clause (i) or clause (ii). 5.2.8 Sale of Racing Assets. On or before the Effective Time, Kalitta and the Kalitta Companies shall cause all of the personal property assets of the Kalitta Companies used exclusively in their promotional drag racing activities, including, without limitation, racing vehicles, transport vehicles, testing equipment, supplies, tools, insurance policies and materials to be purchased by an existing or newly formed entity that is not Affiliated (other than through Kalitta) with the Kalitta Companies (the "RACING ENTITY"), for a price of $350,000 pursuant to an asset purchase agreement between the Kalitta Companies and the Racing Entity, the form of which is attached as Exhibit 5.2.8 (the "RACING ENTITY PURCHASE AGREEMENT"). The Kalitta Companies shall terminate all of the employees of the Kalitta Companies employed exclusively in the operation of such drag racing activities as of the date 46 68 of such asset sale without cost (other than accrued salaries and wages payable consistent with past practice) to the Kalitta Companies. The Kalitta Companies shall terminate without cost to them any existing, and shall not enter into any, contracts with the Racing Entity other than the Racing Entity Purchase Agreement. 5.2.9 Commercially Reasonable Efforts. The Kalitta Companies shall use their commercially reasonable efforts to obtain (a) the D&T Consent, (b) the purchase contracts related to two (2) the MEA 747s and the MEA 747 described in Section 6.1.13, and (c) the tax opinions described in Section 6.2.12. 5.2.10 Life Insurance Policy. AIA shall change, at no cost to AIA, the beneficiary of three existing life insurance policies on the life of Kalitta and ownership to a designee of Kalitta and Kalitta shall reimburse AIA the amount of the unearned premium relating to such life insurance policy. 5.2.11 Assurances to Cooperate with SEC Filings. Each of the Kalitta Companies and, except for the covenants in Section 5.2.11(a), Kalitta shall (a) execute and deliver to the representatives of the several underwriters, such indemnification agreements as may be reasonably required by the representative of the several underwriters (as are traditional in securities offerings) in connection with disclosures contained in SEC Filings, as amended, relating to them; (b) use their commercially reasonable efforts to cause the Kalitta Companies' auditors to deliver such "cold comfort" and related letters as the representatives of the several underwriters may require in the underwriting agreement concerning financial and other numerical disclosures contained in the SEC Filings and all exhibits and schedules thereto; and (c) furnish all documents and other agreements which counsel for Kitty Hawk may reasonably require or request to be filed as exhibits to the SEC Filings, as amended from time to time, or supplemental information provided to the SEC. 5.2.12 Other Covenants. Kalitta shall use his commercially reasonable efforts to satisfy the conditions to the obligations of the parties hereunder within his reasonable control, and to consummate and make effective as promptly as practicable the transactions provided for herein. Kalitta shall use his commercially reasonable efforts to obtain the Kalitta Consents. 5.3 Kitty Hawk Covenants. To induce the other parties to enter into this Agreement and to consummate the transactions contemplated hereby, and without limiting any covenant, agreement, representation or warranty made elsewhere in this Agreement, Kitty Hawk agrees that between the date of this Agreement and the earlier of the Effective Time or termination of this Agreement pursuant to Article VIII, except as may be consented to by the other parties or as otherwise contemplated by this Agreement, as follows: 5.3.1 Kitty Hawk Financing. Kitty Hawk intends to engage certain nationally recognized investment banking firms to act as co-managing underwriters in connection with a contemplated securities offering of debt securities and Kitty Hawk Common Stock (including Kitty Hawk Common Stock for the account of Christopher) (the "CLOSING DATE FINANCINGS"). The proceeds of such Closing Date Financings, if consummated, shall be used to pay Kalitta the KFS Cash Merger Consideration (which KFS Cash Merger Consideration shall be payable solely from the sale of Kitty Hawk Common Stock) and to repay outstanding indebtedness of Kitty Hawk and the Kalitta Companies on the Closing Date, other than any 47 69 indebtedness under certain existing credit facilities with Wells Fargo Bank (Texas) N.A. and Bank One Texas N.A. to be described in the SEC Filings. Kitty Hawk shall use its commercially reasonable efforts to consummate the Closing Date Financings as promptly as practicable. 5.3.2 Assurances to Cooperate with SEC Filings. Kitty Hawk shall (a) execute and deliver to the representatives of the several underwriters, such indemnification agreements as may be reasonably required by the representative of the several underwriters (as are traditional in securities offerings) in connection with disclosures contained in SEC Filings, as amended, relating to it and (b) use its commercially reasonable efforts to cause Kitty Hawk's auditors to deliver such "cold comfort" and related letters as the representatives of the several underwriters may require underwriting agreement concerning financial and other numerical disclosures contained in the SEC Filings and all exhibits and schedules thereto. 5.3.3 GM Waiver. Kitty Hawk shall use its commercially reasonable efforts to obtain the waiver (the "GM WAIVER") of GM to Paragraph 4 of the Agreement between GM and Kitty Hawk Aircargo, Inc. dated June 4, 1990 and as amended by letter between GM and Kitty Hawk Aircargo, Inc. dated October 26, 1994. 5.3.4 SEC Confirmation. Kitty Hawk shall use its commercially reasonable efforts to obtain as soon as practicable the confirmation from the SEC as may be necessary to satisfy the condition set forth in Section 6.1.16. 5.4 Covenants of Christopher. To induce the other parties to enter into this Agreement and to consummate the transactions contemplated hereby, and without limiting any covenant, agreement, representation or warranty made elsewhere in this Agreement, Christopher agrees that between the date of this Agreement and the earlier of the Effective Time or the termination of this Agreement pursuant to Article VII, except as may be consented to by the other parties or as otherwise contemplated by this Agreement, as follows: 5.4.1 Restrictions on Transfer. Christopher shall not, nor shall Christopher enter into any agreement to, sell, transfer, pledge, hypothecate, or dispose of any Kitty Hawk Common Stock except as contemplated in connection with the Closing Date Financings. 5.4.2 Repayment of Indebtedness. Christopher will repay in full prior to Closing all indebtedness, if any, that Christopher owes to Kitty Hawk or any Subsidiary, and Kitty Hawk and any Subsidiary will repay in full prior to Closing all indebtedness, if any, that Kitty Hawk owes to Christopher. 5.4.3 Assurances to Cooperate with SEC Filings. Christopher shall execute and deliver to the representatives of the several underwriters, such indemnification agreement as may be reasonably required by the representative of the several underwriters (as are traditional in securities offerings) in connection with disclosures contained in SEC Filings relating to Christopher. 5.4.4 Other Covenants. Christopher shall use his commercially reasonable efforts to satisfy the conditions to the obligations of the parties hereunder within his reasonable control, and to consummate and make effective as promptly as practicable the transactions provided for herein. 48 70 5.5 Certain Covenants Relating to the Governance of Kitty Hawk after the Effective Time. To induce the other parties to enter into this Agreement and to consummate the transactions contemplated hereby, and without limiting any covenant, agreement, representation or warranty made elsewhere in this Agreement, Christopher, Kalitta and Kitty Hawk agree as follows: 5.5.1 Electing the Initial Board. At or prior to the Effective Time, Christopher and Kitty Hawk shall use commercially reasonable efforts to cause (a) Kitty Hawk's Bylaws to be amended on or prior to the Effective Time to provide that the number of directors comprising the full Board of Directors of Kitty Hawk at the Effective Time will be seven (7) and shall be comprised of Christopher and two (2) Christopher Designees, Kalitta and two (2) Kalitta Designees and a Joint Designee, and (b) if such persons (other than existing members of the Board of Directors and Kalitta, who shall be deemed to so consent by his execution of this Agreement) have consented in writing to serve as members of the Board of Directors and to being named as a director in the SEC Filings and any other filings to be made with the SEC, the persons named in Exhibit 5.5.1 to be elected to the Board of Directors at the Effective Time to serve in the classes as indicated in Exhibit 5.5.1 and (c) the Bylaws of Kitty Hawk to be amended on or prior to the Effective Time to provide that the Bylaw provisions concerning the number and classification of directors may be amended or repealed prior to the end of the 36-month period commencing with the Effective Time only by the affirmative vote of 70% of the members of the entire Board of Directors or the holders of 75% of the outstanding Kitty Hawk Common Stock. If prior to the Effective Time, any of the persons named in Exhibit 5.5.1 declines or is unable to serve as a director of Kitty Hawk, his substitute shall be chosen before the Effective Time using the procedure set forth in Sections 5.5.2 and Section 5.5.3, with Christopher and Kalitta acting as the Joint Nominating Committee, if applicable. 5.5.2 Nominating Committees. At or prior to the Effective Time, Kitty Hawk shall amend its Bylaws to provide that (a) a joint nominating committee, a Christopher nominating committee and a Kalitta nominating committee of the Board of Directors of Kitty Hawk shall be created for a 36-month period commencing with the Effective Time, (b) such Joint Nominating Committee (the "JOINT NOMINATING COMMITTEE") shall consist of Christopher and Kalitta for so long as each is a director of Kitty Hawk, (c) the Christopher nominating committee (the "CHRISTOPHER NOMINATING COMMITTEE") shall consist of Christopher for so long as he is a director of Kitty Hawk, (d) the Kalitta nominating committee (the "KALITTA NOMINATING COMMITTEE") shall consist of Kalitta for so long as he is a director of Kitty Hawk and (e) each such Nominating Committee shall have the powers and duties described in, and be subject to the applicable provisions concerning notice, quorum, membership and resolution of deadlock and related provisions of, Sections 5.5.2 and 5.5.3. The Bylaws shall be further amended at or prior to the Effective Time to provide that such Joint Nominating Committee shall have the exclusive power on behalf of the Board of Directors to nominate persons for election as directors of Kitty Hawk as a Joint Designee and to fill any vacancy of the Joint Designee on the Board of Directors. The Christopher Nominating Committee shall have the exclusive power on behalf of the Board of Directors of Kitty Hawk to nominate Christopher and persons for election as directors of Kitty Hawk as Christopher Designees and to fill vacancies on the Board of Directors vacated by Christopher 49 71 Designees, and the Kalitta Nominating Committee shall have the exclusive power on behalf of the Board of Directors to nominate Kalitta and persons for election as directors of Kitty Hawk as Kalitta Designees and to fill vacancies on the Board of Directors vacated by the Kalitta Designees. The Bylaws shall be amended prior to the Effective Time to provide that the Bylaw provisions described in this Section 5.5 may be amended or repealed only by the affirmative vote of 70% of the members of the entire Board of Directors or the holders of 75% of the outstanding Kitty Hawk Common Stock. During the 36-month period commencing with the Effective Time, but subject to Section 5.5.5, and except as otherwise agreed in writing by the Requisite Christopher Stockholders and the Requisite Kalitta Stockholders, each of the Stockholders shall, and shall cause each of such Stockholder's Affiliates to, (i) vote (or act by written consent with respect to ) any shares of Kitty Hawk Common Stock and other Kitty Hawk voting securities each Beneficially Owns (x) for the nominee of the Joint Nominating Committee for election as a director of Kitty Hawk as a Joint Designee (or the nominee as a Joint Designee of the entire Board of Directors in accordance with the Bylaws if the Joint Nominating Committee cannot agree within ten (10) days as contemplated in Section 5.5.3 below) and against removal except for cause, (v) for Christopher and the nominees of the Christopher Nominating Committee for election as a director of Kitty Hawk as a Christopher Designee and against removal except for cause and (z) for Kalitta and the nominees of the Kalitta Nominating Committee for election as a director of Kitty Hawk as a Kalitta Designee and against removal except for cause and (ii) not vote (or act by written consent with respect to) any shares of Kitty Hawk Common Stock or other Kitty Hawk voting securities each Beneficially Owns in favor of any person to serve as a director of Kitty Hawk unless such person has been so nominated. The Joint Nominating Committee, the Christopher Nominating Committee and the Kalitta Nominating Committee shall nominate the persons named on Exhibit 5.5.1 for re-election when their terms expire unless such person is unable or unwilling to serve or if such person has been removed for cause. For the purposes of this Section 5.5.2, "cause" shall have the meaning set forth in the Certificate of Incorporation of Kitty Hawk. In the case of the Joint Nominating Committee, the presence, either telephonically or in person, of both members of the Joint Nominating Committee shall constitute a quorum for the transaction of business and meetings may be called on two (2) days' written notice given in accordance with the Bylaws of Kitty Hawk by either member. 5.5.3 Deadlock Resolution at the Joint Nominating Committee. The Bylaws of Kitty Hawk shall be amended at or prior to the Effective Time to provide that if the Joint Nominating Committee does not agree on the selection of (a) a nominee to serve as a member of the Board of Directors as a Joint Designee to be elected at a meeting of the stockholders of Kitty Hawk or (b) an individual to fill a vacancy on the Board of Directors as a Joint Designee, then either member of the Joint Nominating Committee may by written notice to the other member require such nominee or vacancy to be selected or filled, respectively, at a meeting of the Board of Directors called by such member in accordance with the Bylaws of Kitty Hawk at any time after the tenth day following the receipt of notice of the first meeting of the Joint Nominating Committee called for the express purpose of selecting such nominee or filling such vacancy. Any individual selected by the Board of Directors to serve as a member of the Board of Directors as a Joint Designee, if the Joint Nominating Committee 50 72 is unable to agree upon a nominee or a person to fill a vacancy, must (a) not be a Family Member of either Christopher or Kalitta, (b) not be a former or current employee of any Kalitta Company or AIA, Kitty Hawk, the Subs or the Subsidiaries, (c) have within the preceding sixty (60) months been a director, chief financial officer, or chief executive officer of a company listed on the New York Stock Exchange or the American Stock Exchange or quoted on the NASDAQ Stock Market's National Market System and (d) be a citizen of the United States. If the person so chosen by the Board of Directors declines or is unable to serve, then either member of the Joint Nominating Committee may call a meeting of the Nominating Committee to choose another person to serve as a director of Kitty Hawk (in which case all of the provisions of this Section 5.5.3 shall again apply). 5.5.4 Officers. (a) The Bylaws of Kitty Hawk shall be amended at or prior to the Effective Time to provide (i) that, until the first anniversary of the Effective Time, the Chairman of the Board and Chief Executive Officer (the "CHIEF EXECUTIVE OFFICER") shall be elected exclusively by the stockholders and shall serve as the chief executive officer of Kitty Hawk and, subject to the supervision of the Board of Directors, shall have the general management and control of Kitty Hawk and its subsidiaries (including the right to vote (except as provided in clause (b) below solely for the one year period commencing with the Effective Time) the voting securities of the subsidiaries of Kitty Hawk held by Kitty Hawk on its behalf) and (ii) for the additional office of Vice Chairman who, until the first anniversary of the Effective Time, shall be elected exclusively by the stockholders and shall serve as an officer of Kitty Hawk and shall have the right to vote the voting securities of AIA until the first anniversary of the Effective Time solely for the purpose of electing the President of AIA and against his removal except for cause. Until the first anniversary of the Effective Time, Christopher and Kalitta hereby agree to vote, and to cause each of his respective Affiliates to vote, all shares of Kitty Hawk Common Stock and other Kitty Hawk voting securities Beneficially Owned by him and his respective Affiliates in favor of Christopher as Chairman of the Board and Chief Executive Officer of Kitty Hawk and Kalitta as Vice Chairman of Kitty Hawk and against their removal except for cause. Kitty Hawk hereby agrees to vote, and to cause each of its Affiliates to vote, all shares of common stock of AIA and any other AIA voting securities Beneficially Owned by Kitty Hawk and its Affiliates until the first anniversary of the Effective Time for Kalitta as President of AIA and against his removal except for cause. The Bylaws of Kitty Hawk shall be amended at or prior to the Effective Time to provide that the provisions of such Bylaws described in this Section 5.5.4 may be amended or repealed only by the affirmative vote of 70% of the members of the entire Board of Directors or holders of 75% of the outstanding Kitty Hawk Common Stock. (b) The Amended and Restated Articles of Incorporation and Bylaws of AIA to be in effect at the Effective Time will provide (i) that, until the first anniversary of the Effective Time, the person serving as the President of AIA shall serve as the chief executive officer of AIA and shall have the general management and control of AIA subject only to supervision of the Chief Executive Officer of Kitty Hawk. Until the first anniversary of the Effective Time, Kitty Hawk hereby agrees to vote and to cause each of its Affiliates to vote (or act by written consent), all shares of common stock of AIA and any other AIA voting securities Beneficially Owned by Kitty Hawk and its Affiliates, and Christopher, agrees to vote such shares and voting securities as Chief Executive Officer of Kitty Hawk for Kalitta as President of AIA and against any removal of Kalitta as President of AIA except for cause (as defined in the Articles of Incorporation of AIA) and to refrain from changing any provisions of the Articles of Incorporation or Bylaws of AIA described in this Section 5.5.4. The Bylaws of 51 73 Kitty Hawk shall be amended at or prior to the Effective Time to provide that the President of AIA is to report only to the Chief Executive Officer and that such provision may be amended or repealed only by the affirmative vote of 70% of the members of the entire Board of Directors or holders of 75% of the outstanding Kitty Hawk Common Stock. 5.5.5 Termination of Governance Obligations. The rights and obligations of the parties set forth in this Section 5.5 shall terminate upon the earlier of (a) the 36-month anniversary of the Effective Time, (b) the death, Disability or voluntary resignation as a director of Kitty Hawk of, either Christopher or Kalitta or (c) the sale of all shares Beneficially Owned by both Christopher and Kalitta; provided, that in the event of the voluntary resignation of Kalitta as a director, Kalitta shall remain subject to all of his obligations to vote shares of Kitty Hawk Common Stock and other voting securities of Kitty Hawk as provided in this Article V; and, provided further, that in the event of the voluntary resignation of Christopher as a director, Christopher and Kitty Hawk shall remain subject to all of its obligations to vote shares of AIA Common Stock and other voting securities of AIA as provided in this Article V and Christopher shall remain subject to all of his obligations to vote shares of Kitty Hawk Common Stock and other voting securities of Kitty Hawk as provided in this Article V. 5.5.6 General. During the 36-month period commencing with the Effective Time, but subject to Section 5.5.5, and in each case except as may be agreed in writing by the Requisite Kalitta Stockholders and the Requisite Christopher Stockholders, each of Christopher and Kalitta agree to, and to cause each of their Affiliates to, vote (or act by written consent with respect to) all shares of Kitty Hawk Common Stock and all other Kitty Hawk voting securities Beneficially Owned by such Stockholder and such Affiliates, and otherwise take such action as may be appropriate: (a) to implement the agreements set forth in this Section 5.5 with respect to the nomination, election and filling of vacancies of directors of Kitty Hawk, and the election of the Chairman of the Board and Chief Executive Officer and Vice Chairman of Kitty Hawk and the President of AIA; (b) to not amend or repeal any of the provisions of the Bylaws of Kitty Hawk described in this Section 5.5; (c) to not change the Certificate of Incorporation of Kitty Hawk in any respect that would have the effect of conflicting with any of the provisions of the Bylaws of Kitty Hawk described in this Section 5.5 or that would amend or repeal the current provisions of the Certificate of Incorporation of Kitty Hawk as to permit the removal of directors without cause as defined therein; (d) for the nomination and election as directors of Kitty Hawk of the Christopher Designees, the Kalitta Designees and the Joint Designees and against their removal except for cause as defined in the Certificate of Incorporation of Kitty Hawk; (e) during the period ending on the first anniversary of the Effective Time only, for the election of Christopher as Chairman of the Board and Chief Executive Officer of Kitty Hawk and for the election of Kalitta as the Vice Chairman of Kitty 52 74 Hawk and the President of AIA and against their removal from such offices except for cause (as defined in the Certificate of Incorporation of Kitty Hawk or the Articles of Incorporation of AIA, as applicable); and (f) during the period ending on the first anniversary of the Effective Time, against any change in the Articles of Incorporation or Bylaws of AIA that would have the effect of changing the governance provisions described in this Section 5.5. ARTICLE VI CONDITIONS PRECEDENT TO CLOSING 6.1 Conditions Precedent to Obligations of Christopher, Kitty Hawk and the Subs. The obligations of Christopher, Kitty Hawk and the Subs under this Agreement shall be subject to the fulfillment of each and all of the following conditions at or before the Closing (unless an earlier time is specified in this Agreement, in which case on or before such earlier time), each of which is individually hereby deemed material, and any one or more of which may be waived in writing by Kitty Hawk: 6.1.1 Representations and Warranties. Each of the representations and warranties made by Kalitta and the Kalitta Companies contained in this Agreement shall be true and correct as of the date when made and (except for changes contemplated by this Agreement and except to the extent any such representation and warranty that speaks of an earlier date, in which case such representation or warranty shall have been true and correct as of such date) shall be true and correct on and as of the Closing to the same extent and with the same effect as if made on and as of the Closing; provided, that this condition shall be deemed to be satisfied notwithstanding that any representation or warranty may not be true and correct so long as the same shall not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. 6.1.2 Performance by Kalitta and the Kalitta Companies. Kalitta and each of the Kalitta Companies shall have fully performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by him or it on or before the Closing (unless an earlier time is specified in this Agreement, in which case on or before such earlier time), including, without limitation, the execution and delivery by them of all documents and instruments required under the terms of Article VII of this Agreement; provided, that this condition shall be deemed to be satisfied notwithstanding that any such obligation (other than the delivery of the documents under Article VII) shall not have been so performed or complied with so long as the same shall not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies. 6.1.3 Regulatory Approvals and Consents. There shall have been duly and validly obtained all consents, approvals, authorizations, permits and orders of all federal, state, foreign and other governmental regulatory agencies required in connection with this Agreement and the consummation of the transactions contemplated hereby (including under the HSR Act, the Kalitta Consents, the Kitty Hawk Consents, the Subs Consents and the approval by the DOT of the "de facto" transfer of the foreign air transportation authority issued to AIA and KFS), and all such consents, approvals, authorizations, permits and orders shall be in full force and effect as of the Closing, except in each case for any the failure to 53 75 have been obtained would not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 6.1.4 No Court Orders. On the Closing Date, there shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by any court or governmental regulatory agency of competent jurisdiction directing that the transactions contemplated herein or any of them not be consummated as herein provided, or awarding damages or any other remedy to any Person with respect to any of the transactions contemplated hereby. 6.1.5 Certificates of the Kalitta Companies. Each of the Kalitta Companies shall have provided to Kitty Hawk a certificate, dated the Closing Date, executed by such Kalitta Company confirming that the conditions in Section 6.1.1 and Section 6.1.2 as to such Kalitta Company have been satisfied. Kalitta shall have provided to Kitty Hawk a certificate, dated the Closing Date, executed by Kalitta confirming that the conditions in Section 6.1.1 and Section 6.1.2 as to Kalitta have been satisfied. 6.1.6 Opinions of Kalitta's Counsel. The Kalitta Companies shall have delivered to Kitty Hawk at the Closing the opinions of the Kalitta Companies' counsel, Miller, Canfield, Paddock and Stone, P.L.C. and Kelsey Law Offices, P.C., which opinions shall be dated the Closing Date and addressed to Kitty Hawk substantially in the forms attached hereto as Exhibit 6.1.6(a) and Exhibit 6.1.6(b), respectively. 6.1.7 Satisfaction with Review of Kalitta Companies. After the date of this Agreement, there shall have been no change or changes in the Kalitta Companies' business, labor relations, financial condition, properties, assets, liabilities or results of operations (or the occurrence of any events which might reasonably be expected to result in any such change or changes), which in the judgment of Kitty Hawk, made in good faith, has had or would reasonably be expected to have a Material Adverse Effect on the Kalitta Companies other than as disclosed in the Disclosure Schedule delivered on the date of this Agreement. 6.1.8 Good Standing. Each of the Kalitta Companies shall have furnished to Kitty Hawk at the Closing certificates of the appropriate governmental officials, dated within thirty (30) days of the Closing Date, confirming that such Kalitta Company is in good standing and is duly qualified to transact business in the State of Michigan and in each jurisdiction listed on the Disclosure Schedule. 6.1.9 Related Agreements. The parties to the Related Agreements (other than Kitty Hawk, the Subs and the Subsidiaries and employees, in their respective individual capacities, of the Kalitta Companies or AIC) shall have executed and delivered the Related Agreements to which each is a party. 6.1.10 Minimum Share Price. The last reported sale price of a share of Kitty Hawk Common Stock on the Nasdaq National Market on the last trading day immediately preceding the Closing Date and its Fair Market Value shall be at least $12.00. 6.1.11 Financing. Kitty Hawk shall have received (a) net proceeds of at least $40,000,000 from the sale of Kitty Hawk Common Stock and (b) net proceeds from the sale of Kitty Hawk senior notes in a principal amount greater than or equal to $340,000,000. 54 76 6.1.12 MEA 747 Purchase Agreement. AIA shall have (a) with respect to two (2) of the MEA 747s, obtained a legally binding contract by October 20, 1997 to purchase such MEA 747s after November 30, 1997 but before January 15, 1998 and (b) with respect to the third MEA 747, consummated the purchase of such MEA 747 by October 20, 1997. 6.1.13 Fairness Opinion. The Fairness Opinion shall not have been withdrawn or materially and adversely modified. 6.1.14 SEC Filings. No stop order suspending the effectiveness of any SEC Filing shall have been issued by the SEC and no Proceedings for that purpose shall have been initiated or, to the Knowledge of Kitty Hawk, threatened by the SEC. 6.1.15 Dissenter's Rights. No shareholder of AIA shall seek dissenter's rights in connection with the AIA Merger. 6.1.16 SEC Confirmation. Kitty Hawk shall have obtained confirmation from the SEC, in form and substance reasonably satisfactory to Kitty Hawk, (i) that the Guaranty of the Notes by each of the Kalitta Companies and the exclusion of AIC as a guarantor of such Notes, as described in Section 6.2.12, does not create any requirement that separate audited financial statements of any of the Kalitta Companies or AIC be included in the offering documents relating to the Closing Date Financings or subsequently included in Kitty Hawk filings with the SEC and (ii) that summarized capsulized footnote disclosure of the financial information of each such Kalitta Company is acceptable in the offering documents relating to the Closing Date Financings and in filings with the SEC following the Merger. 6.2 Conditions Precedent to Obligations of the Kalitta Companies. The obligations of Kalitta and each of the Kalitta Companies under this Agreement shall be subject to the fulfillment of each and all of the following conditions at or before the Closing (unless an earlier time is specified in this Agreement, in which case on or before such specified time), each of which is individually hereby deemed material, and any one or more of which may be waived in writing by the Kalitta Companies: 6.2.1 Representations and Warranties. Each of the representations and warranties made by Kitty Hawk and the Subs contained in this Agreement shall be true and correct as of the date when made and (except for changes contemplated by this Agreement and except to the extent that any such representation and warranty that speaks of an earlier date, in which case such representation or warranty shall have been true and correct as of such date) shall be true and correct on and as of the Closing to the same extent and with the same effect as if made on and as of the Closing; provided, that this condition shall be deemed to be satisfied notwithstanding that any representation or warranty may not be true and correct so long as the same shall not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 6.2.2 Performance by Christopher and Kitty Hawk. Christopher and Kitty Hawk shall have fully performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by them on or before the Closing (unless an earlier time is specified in this Agreement, in which case on or before such earlier time), including without limitation, the execution and delivery by them of all 55 77 documents and instruments required under the terms of Article VII of this Agreement; provided, that this condition shall be deemed to be satisfied notwithstanding that any such obligation (other than the delivery of the documents under Article VII) shall not have been so performed or complied with so long as the same shall not reasonably be expected to have a Material Adverse Effect on Kitty Hawk. 6.2.3 Regulatory Approvals and Consents. There shall have been duly and validly obtained all consents, approvals, authorizations, permits and orders of all federal, state, foreign and other governmental regulatory agencies required in connection with this Agreement and the consummation of the transactions contemplated hereby (including under the HSR Act, the Kalitta Consents, the Kitty Hawk Consents, the Subs Consents and the approval by the DOT of the "de facto" transfer of the foreign air transportation authority issued to AIA and KFS), and all such consents, approvals, authorizations, permits and orders shall be in full force and effect as of the Closing, except in each case for any the failure to have been obtained would not reasonably be expected to have a Material Adverse Effect on the Kalitta Companies or Kitty Hawk. 6.2.4 No Court Orders. On the Closing Date, there shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by any court or governmental regulatory agency of competent jurisdiction directing that the transactions contemplated herein or any of them not be consummated as herein provided, or awarding damages or any other remedy to any Person with respect to any of the transactions contemplated hereby. 6.2.5 Certificate of Kitty Hawk and Subs. Kitty Hawk, the Subsidiaries and each of the Subs shall have furnished to the Kalitta Companies a certificate, dated the Closing Date, executed by Kitty Hawk, the Subsidiaries and each of the Subs confirming that the conditions in Section 6.2.1 and Section 6.2.2 have been satisfied. 6.2.6 Opinions of Kitty Hawk's Counsel. Kitty Hawk shall have delivered to Kalitta at the Closing the opinions of Kitty Hawk's counsel, Haynes and Boone, LLP, Burke, Wright & Keiffer, P.C. and Dickinson, Wright, Moon, Van Dusen & Freeman which opinions shall be dated the Closing Date and addressed to Kalitta, substantially in the forms attached hereto as Exhibit 6.2.6(a), Exhibit 6.2.6(b) and Exhibit 6.2.6(c), respectively. 6.2.7 Satisfaction with Review of Kitty Hawk. After the date of this Agreement, there shall have been no change or changes in Kitty Hawk's business, labor relations, financial condition, properties, assets, liabilities or results of operations (or the occurrence of any events which might reasonably be expected to result in any such change or changes), which in the judgment of Kalitta, made in good faith, has had or would reasonably be expected to have a Material Adverse Effect on Kitty Hawk other than as disclosed in the Disclosure Schedule delivered on the date of this Agreement or the SEC Documents filed with the SEC on or prior to the date of this Agreement. 6.2.8 Good Standing. Kitty Hawk shall have furnished to the Kalitta Companies at the Closing certificates of the appropriate governmental officials, dated within fifteen (15) days of the Closing Date, confirming that Kitty Hawk is in good standing and duly qualified to transact business in the State of Delaware, that each of the Subs is in good standing in the State of Michigan, that each of the Subsidiaries is in good 56 78 standing in the State of Texas, and, as applicable, in each jurisdiction listed on in the Disclosure Schedule. 6.2.9 Related Agreements. The parties to the Related Agreements (other than Kalitta, the Kalitta Companies, AIC and, in their respective individual capacities, the employees of any of the foregoing) shall have executed and delivered the Related Agreements to which each is a party. 6.2.10 Minimum Share Price. The last reported sale price of a share of Kitty Hawk Common Stock on the Nasdaq National Market on the last trading day immediately preceding the Closing Date and its Fair Market Value shall be at least $12.00. 6.2.11 Financing. AIC shall not be obligated to guaranty, pledge any of its assets or otherwise secure all or any portion of the obligations of Kitty Hawk with respect to the notes to be sold by Kitty Hawk pursuant to the Closing Date Financings (the "NOTES"). Each (i) guaranty ("GUARANTY") given by any of the Kalitta Companies, (ii) document pursuant to which any of the Kalitta Companies shall grant a security interest, or otherwise pledge or mortgage any of its assets, to secure all or any portion of the indebtedness evidenced by the Notes or its Guaranty, (iii) any other document pursuant to which any Kalitta Company shall secure in any form all or any portion of the obligations of Kitty Hawk with respect to the Notes or any indenture pursuant to which the Notes are or may be issued and its Guaranty and (iv) any other document executed and delivered by any such Kalitta Company in connection with the foregoing documents (the documents described in the foregoing clauses (i) through (iv) shall be collectively referred to herein as the "GUARANTOR DOCUMENTS") shall provide that the maximum liability of each of the Kalitta Companies under all of the Guarantor Documents applicable to such Kalitta Company, shall not be greater than one dollar ($1.00) less than the lesser of (a) the amount which would cause the Guarantor Documents applicable to such Kalitta Company or the obligations evidenced thereby to be rendered voidable as to such Kalitta Company under Section 548 or under Section 544(b) of the United States Bankruptcy Code, as amended, (b) the amount which would permit a creditor of such Kalitta Company (including, without limitation, any holder of such Notes or any trustee acting on behalf of the holders of the Notes) to avoid the Guarantor Documents applicable to such Kalitta Company or the obligations evidenced thereby in whole or in part, under an applicable Fraudulent Transfer Act or similar law, (c) the amount which would permit a creditor of the such Kalitta Company (including, without limitation, any holder of such Notes or any trustee acting on behalf of the holders of the Notes) to have the Guarantor Documents applicable to such Kalitta Company set aside or the obligations thereunder annulled, in each case whether in whole or in part, under any applicable Fraudulent Conveyance Act or similar law. In addition, if the execution and delivery of and/or incurrence of obligation evidenced by, the Guarantor Documents applicable to such Kalitta Company constitutes a "distribution" under the MBCA, as amended, the maximum liability of, and value of the transferences from, such Kalitta Company under the Guarantor Documents applicable to such Kalitta Company (collectively, the "CORPORATE LIABILITY") shall be limited to one dollar ($1.00) less than the maximum amount of the Corporate Liability which such Kalitta Company is permitted to incur under the Guarantor Documents applicable to such Kalitta Company in compliance with Section 345 of the MBCA. 57 79 6.2.12 Tax Opinions. Kalitta shall have received opinions of D&T dated the Closing Date to the effect that each of the AIA Merger, the AIT Merger, the FOL Merger and the OK Merger should qualify as reorganizations under Section 368 of the Code, and such opinions shall be in form and substance reasonably acceptable to Kalitta. 6.2.13 Release of Guaranties. All guaranties by Kalitta of the indebtedness to be repaid at Closing of any of the Kalitta Companies shall have been released as a result of the refinancing of all of such indebtedness of the Kalitta Companies and such releases are not separately bargained for consideration. 6.2.14 Financing. Kitty Hawk shall have received (a) net proceeds of at least $40,000,000 from the sale of Kitty Hawk Common Stock and (b) net proceeds from the sale of Kitty Hawk senior notes in a principal amount greater than or equal to $340,000,000. ARTICLE VII CLOSING AND DELIVERY OF DOCUMENTS At the Closing, the following shall occur as a single integrated transaction: 7.1 Deliveries by Kalitta and the Kalitta Companies. At Closing, Kalitta and each of the Kalitta Companies shall use commercially reasonable efforts to deliver or cause to be delivered to Kitty Hawk the following items: (a) The AIA Certificates, the AIT Certificates, the FOL Certificates, the KFS Certificates and the OK Certificates; (b) The opinion of the Kalitta Companies' counsel described in Section 6.1.6; (c) Copies of the Kalitta Consents; (d) The certificates identified in Section 6.1.5 hereof; (e) The good standing certificates identified in Section 6.1.8 hereof; (f) Copies, certified or otherwise identified to Kitty Hawk's satisfaction, of all corporate documents that Kitty Hawk shall reasonably request, including resolutions of the boards of directors of each of the Kalitta Companies and resolutions of the sole shareholder of each of the Kalitta Companies, dated on or before the date hereof to authorize this Agreement, the Related Agreements and the transactions and other acts contemplated either by this Agreement or the Related Agreements; and (g) the MEA 747 purchase agreements not previously consummated as described in Section 6.1.14. 7.2 Delivery by Kitty Hawk and the Subs. At Closing, Kitty Hawk shall deliver or cause to be delivered to Kalitta the following items: (a) The Stock Merger Consideration and the KFS Cash Merger Consideration in accordance with Section 3.2; 58 80 (b) The opinions of Kitty Hawk's counsel described in Section 6.2.6; (c) Copies of the Kitty Hawk Consents and the Subs Consents; (d) The certificate identified in Section 6.2.5 hereof; (e) The good standing certificates identified in Section 6.2.8 hereof; (f) Copies, certified or otherwise identified to Kalitta's satisfaction, of all corporate documents that Kalitta shall reasonably request, including resolutions of the board of directors (or written consents in lieu thereof) of Kitty Hawk and each Sub and a written consent of the sole shareholder of the Subs, dated on or before the date hereof to authorize this Agreement, the Merger Proposals, the Governance Amendments, the Related Agreements and the transactions and other acts contemplated either by this Agreement or the Related Agreements; and (g) the release of guaranties described in Section 6.2.14. 7.3 Related Agreements. At Closing, the parties, as appropriate, shall execute and deliver at Closing the following documents (the "RELATED AGREEMENTS"): (a) Separate severance and noncompetition agreements, effective as of the Closing Date, shall have been offered by AIA to each of David Ahles, William Gray, Michael Hartley, M. Hutchison, Kalitta, Douglas Kalitta, Michael Maraone, Steve Murray, Jane Phifer, R. Pickett, Vince Puccia and Donald Schilling, in substantially the form attached as Exhibit 7.3(a). (b) A Stockholders' Agreement, effective as of the Closing Date, between Christopher, Kalitta and Kitty Hawk, the form of which is attached as Exhibit 7.3(b). (c) Intentionally omitted. (d) An Escrow Agreement relating to the AIA Merger, the AIT Merger, the FOL Merger and the OK Merger, effective as of the Closing Date, between Kitty Hawk, Kalitta and the Escrow Agent, the form of which is attached as Exhibit 7.3(d) with such changes as are reasonably requested by the Escrow Agent affecting its duties and liabilities and permissible investments (as long as such investments are comparable with respect to risk) thereunder. (e) An Escrow Agreement relating to the KFS Merger, effective as of the Closing Date, between Kitty Hawk, Kalitta and the Escrow Agent, the form of which is attached as Exhibit 7.3(e) with such changes as are reasonably requested by the Escrow Agent affecting its duties and liabilities and permissible investments (as long as such investments are comparable with respect to risk) thereunder. (f) A Mutual Release, effective as of the Closing Date, between Kitty Hawk and Kalitta, the form of which is attached as Exhibit 7.3(f). 59 81 ARTICLE VIII TERMINATION 8.1 Reasons for Termination. This Agreement may be terminated and the Mergers abandoned before the Closing as follows: 8.1.1 By Mutual Consent. By the mutual consent of the parties. 8.1.2 By Kitty Hawk. By Kitty Hawk after compliance with the procedure set forth in this Article, if (i) any of Kalitta's or the Kalitta Companies representations or warranties contained herein is untrue or incorrect and the basis for such untruth or incorrectness has caused, or is reasonably likely to cause, any of the Kalitta Companies to suffer a Material Adverse Effect, (ii) Kalitta or any of the Kalitta Companies fails to perform any of his or its covenants or agreements contained herein and such Breach has caused, or is reasonably likely to cause, Kitty Hawk or the Kalitta Companies to suffer a Material Adverse Effect, (iii) Kitty Hawk in its sole and absolute discretion elects prior to October 3, 1997 to not proceed with the transactions contemplated by this Agreement following its review of the Disclosure Schedule proffered on the date hereby by the Kalitta Companies or (iv) any of the conditions to the consummation by Christopher, Kitty Hawk and the Subs of the transactions provided for herein shall have become impossible to satisfy; provided, that a wilful material Breach of this Agreement shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section 8.1.2. 8.1.3 By Kalitta and the Kalitta Companies. By Kalitta, after compliance with the procedure set forth in this Article, if (i) any of Kitty Hawk's or the Subs' representations or warranties contained herein is untrue or incorrect and the basis for such untruth or incorrectness has caused, or is reasonably likely to cause, Kitty Hawk to suffer a Material Adverse Effect, (ii) Christopher, Kitty Hawk or any of the Subs fails to perform any of his or its covenants or agreements contained herein and such Breach has caused, or is reasonably likely to cause, Kitty Hawk or the Kalitta Companies to suffer a Material Adverse Effect or (iii) any of the conditions to the consummation by Kalitta or the Kalitta Companies of the transactions provided for herein shall become impossible to satisfy; provided, that a wilful material Breach of this Agreement shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section 8.1.3. 8.1.4 Drop-Dead Date. By Kalitta or Kitty Hawk if the Closing shall not have occurred by March 31, 1998, provided, such date shall be extended by the number of days, if any, to cure any matter that is the subject of a notice under Section 8.3 (Kitty Hawk Termination Procedure) or Section 8.4 (Kalitta Termination Procedure). 8.2 Notice of Problems. Each party will promptly give written notice to the other parties when any of them becomes aware of the occurrence or failure to occur, or the impending or threatened occurrence or failure to occur, of any fact or event that would cause or constitute, or would be likely to cause or constitute (a) any of its representations or warranties contained herein being untrue or incorrect and the basis for such untruth or incorrectness has caused or is reasonably likely to cause, it to suffer a Material Adverse Effect, (b) its failure to perform any of its covenants or agreements contained herein and such Breach has caused or is reasonably likely to cause it to suffer a Material Adverse Effect or 60 82 (c) any of the conditions to Closing set forth in Article VI it must satisfy being or becoming impossible to satisfy. No such notice shall affect the representations, warranties, covenants, agreements or conditions of the parties hereunder or their liability therefor, or prevent any party from relying on the representations and warranties contained herein. 8.3 Kitty Hawk Termination Procedure. If Kitty Hawk discovers, by reason of a notice given pursuant to this Agreement or otherwise, that (a) any of Kalitta's or the Kalitta Companies' representations or warranties is untrue or incorrect when made and the basis for such untruth or incorrectness has caused, or is reasonably likely to cause, the Kalitta Companies to suffer a Material Adverse Effect, (b) Kalitta or any of the Kalitta Companies has failed to perform any of his or its covenants or agreements contained herein in any material respect, and such Breach has caused, or is reasonably likely to cause, the Kalitta Companies to suffer a Material Adverse Effect, (c) any of the conditions to Christopher's, Kitty Hawk's and the Subs' obligations to consummate the transactions provided for herein has become impossible to satisfy or (d) Kitty Hawk is not satisfied in its sole and absolute discretion with its review of the Disclosure Schedule of Kalitta and the Kalitta Companies, then Kitty Hawk may deliver a notice to Kalitta of such event, specifying the factual basis therefor in reasonable detail (which notice, in the case of clause (d) must be delivered on or prior to October 3, 1997). Kalitta and the Kalitta Companies shall have the right to cure any matter referred to in clause (a) or (b) of this Section within fifteen (15) Business Days following the date of delivery of such notice. Upon such notice and, in the case of clause (a) or (b), upon Kalitta's or the Kalitta Companies' failure to cure, Kitty Hawk may terminate this Agreement by giving a notice of termination to Kalitta. 8.4 Kalitta Termination Procedure. If Kalitta discovers, by reason of a notice given pursuant to this Agreement or otherwise, that (a) any of Kitty Hawk's representations or warranties is untrue or incorrect when made and the basis for such untruth or incorrectness has caused, or is reasonably likely to cause, Kitty Hawk to suffer a Material Adverse Effect, (b) Christopher, Kitty Hawk or any of the Subs has failed to perform any of his or its covenants or agreements contained herein in any material respect or (c) any of the conditions to Kalitta's and the Kalitta Companies' obligations to consummate the transactions provided for herein has become impossible to satisfy, then Kalitta may deliver a notice to Kitty Hawk of such event, specifying the factual basis therefor in reasonable detail. Christopher, Kitty Hawk and the Subs shall have the right to cure any matter referred to in clause (a) or (b) of this Section within fifteen (15) Business Days following the date of delivery of such notice. Upon such notice and, in the case of clause (a) or (b), upon Kitty Hawk's failure to cure, Kalitta may terminate this Agreement by giving a notice of termination to Kitty Hawk. 8.5 Effect of Termination. Upon termination of this Agreement pursuant to this Article, no party shall have any liability or continuing obligation to another party arising out of this Agreement, or out of actions taken in connection with this Agreement, except that this Section 8.5 and Article XI shall survive termination of this Agreement. Notwithstanding the foregoing, termination of this Agreement shall not relieve any party from its liability for the Breach, prior to termination, of (a) its covenants or agreements or (b) the representations or warranties. 61 83 ARTICLE IX POST-CLOSING AGREEMENTS After the Closing, Kalitta and Kitty Hawk covenant and agree as follows: 9.1 Cooperation. (a) Kalitta shall at the reasonable request and sole cost of Kitty Hawk use commercially reasonable efforts to aid Kitty Hawk in establishing itself as the new owner and operator of the Kalitta Companies and, in connection therewith, shall use commercially reasonable efforts to maintain the Kalitta Companies' goodwill and reputation with material suppliers, customers, distributors, creditors and others having business relations with the Kalitta Companies and in the business community generally. (b) Kitty Hawk, the Kalitta Companies and Kalitta shall cooperate fully, as and to the extent reasonably requested by the other, in connection with the filing of Tax Returns by either such party after the Closing Date and any audit or other Proceeding with respect to Taxes for periods ending prior to the first anniversary of the Closing Date. Such cooperation shall include the retention and (upon the other's request) the provision of records and information which are reasonably relevant to any such audit or other Proceeding. The Kalitta Companies agree (1) to retain all books and records with respect to Tax matters pertinent to the Kalitta Companies or Kalitta relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Kitty Hawk, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any Taxing authority, and (2) to give Kalitta reasonable written notice prior to destroying or discarding any such books and records and, if Kalitta so requests, the Kalitta Companies shall allow Kalitta to take possession of such books and records if the Kalitta Companies determine to destroy or discard such books and records. (c) Kitty Hawk and Kalitta each further agree, upon request by the other, to use their commercially reasonable efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated by this Agreement). 9.2 Certain Transfer and Similar Taxes of the Kalitta Companies. All transfer, documentary, sales, use, stamp, and registration Taxes incurred in connection with this Agreement (excluding any shareholder and/or corporate-level gains Tax triggered by the Mergers), shall be paid by Kitty Hawk when due, and Kitty Hawk will, at its own expense, file all such necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration Taxes, and, if required by applicable law, the Kalitta Companies and Kalitta will join in the execution of any such Tax Returns and other documentation. 9.3 Inspection of Records. The Kalitta Companies shall each retain and make their respective books and records (including work papers in the possession of their respective 62 84 accountants) available for inspection and copying by Kalitta and his Representatives, for reasonable business purposes at all reasonable times during normal business hours, for a ten-year period after the Closing Date, with respect to all transactions of the Kalitta Companies occurring prior to and those relating to the Closing, and the historical financial condition, assets, liabilities, operations, Taxes and cash flows of the Kalitta Companies for such periods. 9.4 Continuation of Existence and Business of Kalitta Companies. After the Effective Time, Kitty Hawk shall (i) continue the separate corporate existence of each of the Kalitta Companies (as subsidiaries of Kitty Hawk), and shall continue the use of the current names of each of the Kalitta Companies in the conduct of their businesses and (ii) preserve and continue without material change the nature of the businesses of each of the Kalitta Companies, including, without limitation, the business and operations of the American International Freight Division of AIA, the Central and South American operations of AIA and the Oscoda maintenance operation of AIA, subject, in the case of (i) and (ii), to the evaluation and modification by the Board of Directors from time to time. 9.5 Indemnification of Directors and Officers of the Kalitta Companies. (a) From and after the Effective Time, Kitty Hawk shall indemnify, defend vigorously and in good faith and hold harmless each person who is now, or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer, director, employee or agent of any of the Kalitta Companies (the "KALITTA COMPANIES INDEMNIFIED PARTIES") against all Losses, including amounts that are paid in settlement (which settlement shall require the approval of Kitty Hawk, which approval shall not be unreasonably withheld) of or in connection with any Proceeding based in whole or in part on or arising in whole or in part out of the fact that such person is or was a director, officer, employee or agent of any of the Kalitta Companies or is or was serving at the request of any of the Kalitta Companies as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprises, if such Proceeding pertains to any matter or fact arising, existing or occurring at or prior to the Effective Time, regardless of whether such Proceeding is asserted or claimed prior to, or at or after, the Effective Time (the "INDEMNIFIED LIABILITIES") to the full extent permitted under Delaware law (and Kitty Hawk shall promptly pay expenses in advance of the final disposition of any such Proceeding to each Kalitta Companies Indemnified Party to the full extent permitted by Delaware law upon receipt of any undertaking required by applicable Delaware law). (b) Kitty Hawk and the Kalitta Companies each agree to (i) cause the Surviving Corporations to honor the indemnification and expense payment or reimbursement obligations of the Kalitta Companies in their respective bylaws in accordance with the terms in effect on the date hereof and under applicable Michigan law as the same shall apply to current and former directors, officers, employees and agents and (ii) maintain the elimination and limitation of liability provisions contained in the Articles of Incorporation of the Surviving Corporations. (c) If Kitty Hawk, any of the Kalitta Companies or any of their respective successors or assigns (i) shall consolidate with or merge into any other Person prior to the seventh anniversary of the Effective Time and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all 63 85 or substantially all of its properties and assets to any other Person prior to the seventh anniversary of the Effective Time, then and in each such case, proper provision shall be made so that such other Person and the successors and assigns of Kitty Hawk and the Kalitta Companies shall assume the obligations set forth in this Section. (d) The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each Kalitta Companies Indemnified Party, his heirs, executors, administrators, personal representatives and his Representatives. Kitty Hawk shall make or cause to be made all determinations required under Delaware or Michigan law (as applicable) concerning its indemnification and expense reimbursement obligations under this Section 9.5 as promptly as practical. 9.6 Office Lease. Kalitta shall use commercially reasonable efforts to cause the Landlord not to develop or sell the Adjoining Lots during the term of the Office Lease. 9.7 Release and Indemnification for Kalitta Guaranties. To the extent that Kalitta shall have personally guaranteed any indebtedness of any one or more of the Kalitta Companies and any of such guaranties are not released at Closing as a consequence of the satisfaction of such indebtedness with the net proceeds of the Closing Date Financings, Kitty Hawk shall promptly make all commercially reasonable efforts to cause any such remaining guaranties to be released and to fully acquit and relieve Kalitta from any liability, cost or other obligation whatsoever with respect to the related indebtedness. In addition, to the extent that Kitty Hawk shall fail to cause such release of any such guaranty, Kitty Hawk shall defend, indemnify and hold Kalitta harmless from and against, and promptly reimburse Kalitta for, any Losses that Kalitta actually incurs or to which Kalitta becomes subject, which Losses arise either directly or indirectly, out of the enforcement of, or payment or performance by Kalitta under, any such guaranty. ARTICLE X INDEMNIFICATION 10.1 Survival, Etc. 10.1.1 Survival. Subject to the provisions of Section 10.1.3 below, the representations, warranties and covenants (other than the covenants set forth in Sections 5.1, 5.2, 5.3 and 5.4) of Kitty Hawk, Kalitta and the Kalitta Companies made in this Agreement shall survive the Closing. 10.1.2 No Effect on Liability. None of (a) the consummation of the transactions contemplated by this Agreement or the Related Agreements, (b) except as provided in Section 10.1.3, the delay or omission of any party to exercise any of its rights under this Agreement or any Related Agreement or (c) any investigation or disclosure that any party makes, any notice that any party gives, or any knowledge that any party obtains as a result thereof, or otherwise shall (i) affect the liability of the parties to one another for any Breach of this Agreement or any Related Agreement or (ii) prevent any party from relying on the representations or warranties contained in this Agreement or any Related Agreement. 10.1.3 Commencing Arbitrations. 64 86 (a) No party shall have any liability for any Breach of this Agreement or for any claims for indemnification hereunder unless a demand for arbitration is made (or Kitty Hawk and Kalitta agree in writing that Kalitta shall have liability for a Kitty Hawk Established Loss or Kitty Hawk shall have liability for a Kalitta Established Loss) as provided in Section 10.9 related to such Breach prior to the thirty (30) month anniversary of the Effective Time and any such liability shall be deemed waived, and no Person shall have any remedy for any such Breaches; it being the intention of the parties that all claims relating to a Breach of the Agreement shall thereafter be forever barred. Any demand for arbitration seeking indemnification hereunder made during such thirty (30) month period shall remain valid and the representations, warranties, covenants and agreements relating thereto shall remain in effect for purposes of such indemnification notwithstanding that the amount or validity of such claim may not be established or resolved within such thirty (30) month period. (b) Notwithstanding the provisions of 10.1.3(a), Kalitta shall have liability under Section 10.2.1(b) and Section 10.2.1(e) for Losses that relate to, or result from, a demand for arbitration made (or Kitty Hawk and Kalitta agree in writing that Kalitta shall have liability for a Kitty Hawk Established Loss) as provided in Section 10.9 prior to the forty-two (42) month anniversary of the Effective Time, and unless brought (or so agreed to) before such forty-two (42) month anniversary, such liability shall be deemed waived and shall thereafter be forever barred. Any demand for arbitration seeking indemnification hereunder pursuant to Section 10.2.1(b) and Section 10.2.1(e) made during such forty-two (42) month period shall remain valid and the covenants and agreements relating thereto shall remain in effect for purposes of such indemnification notwithstanding that the amount or validity of such claim may not be established or resolved within such forty-two (42) month period. 10.2 Indemnities. 10.2.1 Indemnification of Kitty Hawk. (a) Indemnification for Breaches or Alleged Breaches by AIA, AIT, FOL or OK. Subject to the other provisions of this Article, Kalitta shall defend, indemnify and hold Kitty Hawk, its Subs, its Subsidiaries, the Surviving Corporations, and their respective officers, directors, employees, agents and controlling persons (each a "KITTY HAWK INDEMNIFIED PARTY") harmless from and against, and promptly reimburse such Kitty Hawk Indemnified Party for, any loss, damage, deficiency, liability, judgment, claim or expense, including reasonable investigative costs, costs of defense, settlement costs (subject to approval as provided below), costs of cleanup, containment or other remediation and including reasonable attorneys' and accountants' fees, whether or not involving a third-party claim (collectively, "LOSSES"), that any Kitty Hawk Indemnified Party actually incurs or to which such Kitty Hawk Indemnified Party becomes subject, which Losses arise, either directly or indirectly, out of (i) any Breach by Kalitta or any of the Kalitta Companies (other than KFS) of this Agreement or (ii) any claim asserted by any third party that, assuming the truth thereof, would constitute a Breach by Kalitta or any of the Kalitta Companies (other than KFS) of this Agreement. 65 87 (b) Indemnification for Non-KFS Environmental Obligations. In addition to the provisions of Section 10.2.1(a), and subject to the provisions of this Article, Kalitta shall defend, indemnify and hold the Kitty Hawk Indemnified Parties harmless from and against, and promptly reimburse such Kitty Hawk Indemnified Parties for, any Losses that any Kitty Hawk Indemnified Party actually incurs or to which such Kitty Hawk Indemnified Party becomes subject, which Losses arise either directly or indirectly, out of (i) any Hazardous Materials or other contaminants that were present on any of the Non-KFS Properties at any time prior to the Closing Date, (ii) the emanation from any of the Non-KFS Properties of any Hazardous Material or other contaminant that was present or stored on, or transported from, any of the Non-KFS Properties on or before the Closing Date, or (iii) any release by any of the Kalitta Companies (other than KFS) on any of the Non-KFS Properties of any Hazardous Material or other contaminant on or before the Closing Date (the conditions and events described in the foregoing clauses (i) through (iii) shall each, without distinction, be hereinafter referred to as a "NON-KFS ENVIRONMENTAL CONDITION"); provided, however, that Kalitta shall have no obligation of indemnity or other liability under this Section 10.2.1(b) to any one or more of the Kitty Hawk Indemnified Parties for a discrete item of Loss unless the following conditions shall have been satisfied with respect to such discrete item of Loss: (i) such discrete item of Loss results from (A) the imposition by the United States Environmental Protection Agency, the Michigan Department of Environmental Quality or any other governmental entity of competent jurisdiction on any of such Kitty Hawk Indemnified Parties of an obligation to (x) remediate or otherwise mitigate any Non-KFS Environmental Condition, or (y) pay clean-up costs or civil penalties in connection with such Non-KFS Environmental Condition (resulting, in the case of the foregoing clause (y), either from a Proceeding or a settlement made by such Kitty Hawk Indemnified Parties on the advice of Environmental Counsel (as hereinafter defined) and subject to the requirements relating to approval of settlements set forth in Section 10.4), (B) an affirmative obligation of any of the Kitty Hawk Indemnified Parties under applicable Environmental Laws (which shall, for purposes of this Section, be deemed to include laws relating to health and safety in the work place) to remediate or otherwise mitigate any Non-KFS Environmental Condition which is discovered other than by reason of a voluntary investigation, test or survey conducted by any of such Kitty Hawk Indemnified Parties solely for environmental purposes and which is not required by applicable Environmental Laws, as determined by an opinion of Environmental Counsel which the Kitty Hawk Indemnified Parties shall have obtained and provided to Kalitta and which may be qualified by reasonable and appropriate assumptions, qualifications and exceptions, or (C) a Proceeding initiated against any of the Kitty Hawk Indemnified Parties by a third party pursuant to a claimed private right of action under Environmental Laws which results in an obligation of any of the Kitty Hawk Indemnified Parties to either (x) remediate or otherwise mitigate a Non-KFS Environmental Condition, or (y) pay damages to such third party as a consequence of a judgement or settlement of such Proceeding by such Kitty Hawk Indemnified Parties upon advice of Environmental Counsel and subject to the requirements relating to 66 88 approval of settlements set forth in Section 10.4) (each of the matters referred to in the foregoing sub-clauses (A) through (C) shall be referred to herein, without distinction, as a "NON-KFS ENVIRONMENTAL OBLIGATION"); (ii) before incurring such discrete item of Loss in connection with any Non-KFS Environmental Obligation, the affected Kitty Hawk Indemnified Parties first seek, obtain and provide to Kalitta the opinion of either Dykema Gossett or Warner, Norcross and Judd (or other recognized environmental counsel reasonably acceptable to the affected Kitty Hawk Indemnified Parties and Kalitta) ("ENVIRONMENTAL COUNSEL") to the effect that the Non-KFS Environmental Condition resulting in such Non-KFS Environmental Obligation violates applicable Environmental Laws, which opinion may be subject to reasonable and appropriate assumptions, qualifications and exceptions); provided, however, that the affected Kitty Hawk Indemnified Parties may incur such discrete item of Loss in connection with (x) the order of any court of competent jurisdiction without the obligation to deliver such opinion, or (y) any "due care" obligations under M.C.L.A. Section 324.20107 with respect to a Non-KFS Environmental Condition prior to delivering such opinion to Kalitta so long as in the case of this clause (y), Kalitta receives a copy thereof as soon thereafter as is practicable; (iii) the affected Kitty Hawk Indemnified Parties provide Kalitta written notice (or if time does not reasonably permit, oral notice) of, and the invitation to attend, or, if possible and available to Kalitta, to participate in, any Proceeding relating to such Non-KFS Environmental Obligation of which the Kitty Hawk Indemnified Parties have knowledge and are themselves entitled to attend and/or participate, unless the failure to give such notice is attributable to an action or omission of any employee of, or attorney for, any of the Surviving Corporations during any time when Kalitta is the president of AIT. In addition, Kalitta shall have no obligation of indemnity or other liability under this Section 10.2.1(b) to any one or more of the Kitty Hawk Indemnified Parties with respect to any discrete item of Loss resulting from either or both of (x) the failure of the Kitty Hawk Indemnified Parties to prudently exercise "due care" obligations under M.C.L.A. Section 324.20107a, or (y) the cost or expense relating to any remediation or mitigation of any Non-KFS Environmental Condition in excess of the level of remediation or mitigation required by the violated Environmental Laws, as determined by a written statement which the Kitty Hawk Indemnified Parties shall obtain from Environmental Counsel (which statement may be supported by the report on the Non-KFS Environmental Condition by either of NTH Consultants or SME, or such other recognized independent engineering or environmental testing firm reasonably acceptable to the affected Kitty Hawk Indemnified Parties and Kalitta) as to the nature and scope of any such remediation or mitigation required to comply with the violated Environmental Laws; provided, however, that nothing contained in this clause (y) shall prevent Kitty Hawk from additionally remediating or mitigating such Non-KFS Environmental Condition at its own expense and without obligation to Kalitta. The Kitty Hawk Indemnified Parties shall promptly provide Kalitta with copies of such statement and any supporting report they obtain pursuant to the foregoing clause (y). Notwithstanding the foregoing and the provisions of Section 10.4 hereof, Kitty Hawk will be 67 89 entitled to control any remediation or mitigation of any such Non-KFS Environmental Condition, any relating Proceeding, and, except as provided in the following sentence, any other Proceeding with respect to which indemnity may be sought under this Section 10.2.1(b). The procedure described in Section 10.4 hereof will apply to any claim solely for monetary damages relating to a matter covered by this Section 10.2.1(b). (c) Non-KFS Escrow Agreement. If the Closing shall occur and subject to the further provisions of this Article (including, but not limited to, Sections 10.1.3 and 10.3), any Kitty Hawk Indemnified Party shall be promptly reimbursed for any Kitty Hawk Established Non-KFS Loss solely from the Non-KFS Escrow Amount under the Non-KFS Escrow Agreement (as provided in the Non-KFS Escrow Agreement) for the amount of all Losses after the amount of any such Loss and Kalitta's and the Kalitta Companies' (other than KFS) liability therefor is established by (i) agreement in writing between Kitty Hawk and Kalitta or (ii) arbitration pursuant to Section 10.9 (any Loss so determined is referred to herein as a "KITTY HAWK ESTABLISHED NON-KFS LOSS"); provided, that a demand for arbitration relating to a Kitty Hawk Established Non-KFS Loss arising after the thirty (30) month anniversary of the Effective Time but prior to the forty-two (42) month anniversary of the Effective Time under Section 10.2.1(b), subject to Section 10.3.2 shall be payable by Kalitta personally and not from the Non-KFS Escrow Amount to the extent that such Kitty Hawk Established Non-KFS Loss is not recoverable from the Non-KFS Escrow Amount. Kalitta may, at his sole option, pay any Kitty Hawk Established Non-KFS Loss in cash or by the delivery of shares of Kitty Hawk Common Stock directly to the Kitty Hawk Indemnified Party in lieu of from the Non-KFS Escrow Amount. If such Kitty Hawk Established Loss is satisfied in shares of Kitty Hawk Common Stock, the value of such Kitty Hawk Common Stock shall be determined by its Fair Market Value at the date any claim becomes a Kitty Hawk Established Non-KFS Loss. (d) Indemnification for Breaches or Alleged Breaches by KFS. Subject to the other provisions of this Article, Kalitta shall defend, indemnify and hold each Kitty Hawk Indemnified Party harmless from and against, and promptly reimburse such Kitty Hawk Indemnified Party for, any Losses that any Kitty Hawk Indemnified Party actually incurs or to which such Kitty Hawk Indemnified Party becomes subject, which Losses arise, either directly or indirectly, out of (i) any Breach by Kalitta or KFS of this Agreement or (ii) any claim asserted by any third party that, assuming the truth thereof, would constitute a Breach by Kalitta or KFS of this Agreement. (e) Indemnification for KFS Environmental Obligations. In addition to the provisions of Section 10.2.1(d), and subject to the provisions of this Article, Kalitta shall defend, indemnify and hold the Kitty Hawk Indemnified Parties harmless from and against, and promptly reimburse such Kitty Hawk Indemnified Parties for, any Losses that any Kitty Hawk Indemnified Party actually incurs or to which such Kitty Hawk Indemnified Party becomes subject, which Losses arise either directly or indirectly, out of (i) any Hazardous Materials or other contaminants that were present on any of the KFS Properties at any time prior to the Closing Date, (ii) the emanation from any of the KFS Properties of any Hazardous Material or other contaminant that was present or stored on, or transported from, any of the KFS Properties on or before the Closing Date, or (iii) any release by KFS on any of the KFS Properties of any Hazardous Material or other contaminant on or before the Closing Date (the 68 90 conditions and events described in the foregoing clauses (i) through (iii) shall each, without distinction, be hereinafter referred to as a "KFS ENVIRONMENTAL CONDITION"); provided, however, that Kalitta shall have no obligation of indemnity or other liability under this Section 10.2.1(e) to any one or more of the Kitty Hawk Indemnified Parties for a discrete item of Loss unless the following conditions shall have been satisfied with respect to such discrete item of Loss: (i) such discrete item of Loss results from (A) the imposition by the United States Environmental Protection Agency, the Michigan Department of Environmental Quality or any other governmental entity of competent jurisdiction on any of such Kitty Hawk Indemnified Parties of an obligation to (x) remediate or otherwise mitigate any KFS Environmental Condition, or (y) pay clean-up costs or civil penalties in connection with such KFS Environmental Condition (resulting, in the case of the foregoing clause (y), either from a Proceeding or a settlement made by such Kitty Hawk Indemnified Parties on the advice of Environmental Counsel (as hereinafter defined) and subject to the requirements relating to approval of settlements set forth in Section 10.4), (B) an affirmative obligation of any of the Kitty Hawk Indemnified Parties under applicable Environmental Laws (which shall, for purposes of this Section, be deemed to include laws relating to health and safety in the work place) to remediate or otherwise mitigate any KFS Environmental Condition which is discovered other than by reason of a voluntary investigation, test or survey conducted by any of such Kitty Hawk Indemnified Parties solely for environmental purposes and which is not required by applicable Environmental Laws, as determined by an opinion of Environmental Counsel which the Kitty Hawk Indemnified Parties shall have obtained and provided to Kalitta and which may be qualified by reasonable and appropriate assumptions, qualifications and exceptions, or (C) a Proceeding initiated against any of the Kitty Hawk Indemnified Parties by a third party pursuant to a claimed private right of action under Environmental Laws which results in an obligation of any of the Kitty Hawk Indemnified Parties to either (x) remediate or otherwise mitigate a KFS Environmental Condition, or (y) pay damages to such third party as a consequence of a judgement or settlement of such Proceeding by such Kitty Hawk Indemnified Parties upon advice of Environmental Counsel and subject to the requirements relating to approval of settlements set forth in Section 10.4) (each of the matters referred to in the foregoing sub-clauses (A) through (C) shall be referred to herein, without distinction, as a "KFS ENVIRONMENTAL OBLIGATION"); (ii) before incurring such discrete item of Loss in connection with any KFS Environmental Obligation, the affected Kitty Hawk Indemnified Parties first seek, obtain and provide to Kalitta the opinion of either Dykema Gossett or Warner, Norcross and Judd (or other recognized environmental counsel reasonably acceptable to the affected Kitty Hawk Indemnified Parties and Kalitta) ("ENVIRONMENTAL COUNSEL") to the effect that the KFS Environmental Condition resulting in such KFS Environmental Obligation violates applicable Environmental Laws, which opinion may be subject to reasonable and appropriate assumptions, qualifications and exceptions); provided, however, that the affected Kitty Hawk Indemnified Parties may incur 69 91 such discrete item of Loss in connection with (x) the order of any court of competent jurisdiction without the obligation to deliver such opinion, or (y) any "due care" obligations under M.C.L.A. Section 324.20107 with respect to a KFS Environmental Condition prior to delivering such opinion to Kalitta so long as in the case of this clause (y), Kalitta receives a copy thereof as soon thereafter as is practicable; (iii) the affected Kitty Hawk Indemnified Parties provide Kalitta written notice (or if time does not reasonably permit, oral notice) of, and the invitation to attend, or, if possible and available to Kalitta, to participate in, any Proceeding relating to such KFS Environmental Obligation of which the Kitty Hawk Indemnified Parties have knowledge and are themselves entitled to attend and/or participate, unless the failure to give such notice is attributable to an action or omission of any employee of, or attorney for, any of the Surviving Corporations during any time when Kalitta is the president of AIT. In addition, Kalitta shall have no obligation of indemnity or other liability under this Section 10.2.1(e) to any one or more of the Kitty Hawk Indemnified Parties with respect to any discrete item of Loss resulting from either or both of (x) the failure of the Kitty Hawk Indemnified Parties to prudently exercise "due care" obligations under M.C.L.A. Section 324.20107a, or (y) the cost or expense relating to any remediation or mitigation of any KFS Environmental Condition in excess of the level of remediation or mitigation required by the violated Environmental Laws, as determined by a written statement which the Kitty Hawk Indemnified Parties shall obtain from Environmental Counsel (which statement may be supported by the report on the KFS Environmental Condition by either of NTH Consultants or SME, or such other recognized independent engineering or environmental testing firm reasonably acceptable to the affected Kitty Hawk Indemnified Parties and Kalitta) as to the nature and scope of any such remediation or mitigation required to comply with the violated Environmental Laws; provided, however, that nothing contained in this clause (y) shall prevent Kitty Hawk from additionally remediating or mitigating such KFS Environmental Condition at its own expense and without obligation to Kalitta. The Kitty Hawk Indemnified Parties shall promptly provide Kalitta with copies of such statement and any supporting report they obtain pursuant to the foregoing clause (y). Notwithstanding the foregoing and the provisions of Section 10.4 hereof, Kitty Hawk will be entitled to control any remediation or mitigation of any such KFS Environmental Condition, any relating Proceeding, and, except as provided in the following sentence, any other Proceeding with respect to which indemnity may be sought under this Section 10.2.1(e). The procedure described in Section 10.4 hereof will apply to any claim solely for monetary damages relating to a matter covered by this Section 10.2.1(e). (f) KFS Escrow Agreement. If the Closing shall occur and subject to the further provisions of this Article (including, but not limited to, Section 10.3), any Kitty Hawk Indemnified Party shall be promptly reimbursed for any Kitty Hawk Established KFS Loss solely from the KFS Escrow Amount under the KFS Escrow Agreement (as provided in the KFS Escrow Agreement) for the amount of all Losses after the amount of any such Loss and Kalitta's and KFS' liability therefor is established by (i) agreement in writing between Kitty Hawk and Kalitta or (ii) arbitration pursuant to Section 10.9 (any Loss so determined is referred to herein 70 92 as a "KITTY HAWK ESTABLISHED KFS LOSS"); provided, that a demand for arbitration relating to a Kitty Hawk Established KFS Loss arising after the thirty (30) month anniversary of the Effective Time but prior to the forty-second (42) month anniversary of the Effective Time under Section 10.2.1(e) or, subject to Section 10.3.2, which exceeds any then remaining KFS Escrow Amount shall be payable by Kalitta personally and not from the KFS Escrow Account. Kalitta may, at his sole option, pay any Kitty Hawk Established Loss directly to the Kitty Hawk Indemnified Party in lieu of from the KFS Escrow Amount. (g) Exclusive Benefit. The parties hereto acknowledge and agree that Kalitta's and the Kalitta Companies' indemnification obligations under this Section 10.2.1 are for the exclusive benefit of Kitty Hawk and the Kitty Hawk Indemnified Parties and enforceable only by Kitty Hawk and the other Kitty Hawk Indemnified Parties and no other Person shall have any claim in respect thereto under any theory whatsoever whether by assignment, subrogation or otherwise. 10.2.2 Indemnification of Kalitta. Subject to the other provisions of this Article, Kitty Hawk shall defend, indemnify and hold Kalitta, the Kalitta Companies and their respective officers, directors, employees, agents and controlling persons (each a "KALITTA INDEMNIFIED PARTY") harmless from and against, and promptly reimburse each Kalitta Indemnified Party for, any Losses that any Kalitta Indemnified Party actually incurs or to which such Kalitta Indemnified Party becomes subject, which Losses, whether or not involving a third-party claim, arise, either directly or indirectly, out of any (a) Breach by Christopher, Kitty Hawk or the Subs of this Agreement or Breach by any of the Kalitta Companies of any agreements or covenants for the benefit of Kalitta to be performed after Closing, (b) any claim asserted by any third party that, assuming the truth thereof, would constitute a Breach by Christopher, Kitty Hawk or the Subs of this Agreement. Subject to the further provisions of this Article (including, but not limited to, Section 10.3), Kitty Hawk shall promptly pay to any Kalitta Indemnified Party the amount of all Losses after the amount of any such Loss and Kitty Hawk's liability therefor is established by (a) agreement in writing between Kalitta and Kitty Hawk, or (b) arbitration pursuant to Section 10.9 (any Loss so determined is referred to herein as an "KALITTA ESTABLISHED LOSS"). If Kalitta receives an opinion from D&T (or any successor thereto) to the effect that a cash payment of a Kalitta Established Loss must be paid in Kitty Hawk Common Stock in order to avoid jeopardizing the status of the AIA Merger, the AIT Merger, the FOL Merger or the OK Merger as tax free reorganizations under Section 368 of the Code, the payment of the Kalitta Established Loss shall be in shares of Kitty Hawk Common Stock having a Fair Market Value equal to the Kalitta Established Loss in lieu of cash; provided Kitty Hawk shall be given a reasonable time to register such Kitty Hawk Common Stock under the Securities Act if Kitty Hawk so determines such registration is necessary or appropriate. The parties hereto acknowledge and agree that Kitty Hawk's indemnification obligations under this Section 10.2.2 are for the exclusive benefit of Kalitta and the Kalitta Indemnified Parties and enforceable only by Kalitta and the Kalitta Indemnified Parties. 71 93 10.3 Limitations. 10.3.1 Deductibles. Neither Kalitta nor Kitty Hawk shall be liable for, and neither Kalitta pursuant to Section 10.2.1 nor Kitty Hawk pursuant to Section 10.2.2 shall be obligated to pay, any amount until the party to be indemnified has incurred aggregate Kitty Hawk Established Losses or Kalitta Established Losses, as applicable, in excess of $1,000,000 (the "DEDUCTIBLE"). At such time as the aggregate Kitty Hawk Established Losses or Kalitta Established Losses, as applicable, incurred by the party to be indemnified shall exceed the Deductible, the claimant shall be entitled to the full amount of such Losses in excess of the Deductible; subject, however, to the further provisions of this Article. 10.3.2 Cap. Neither Kalitta nor Kitty Hawk shall be liable for, and neither Kalitta pursuant to Section 10.2.1 nor Kitty Hawk pursuant to Section 10.2.2 shall be obligated to pay, an amount in excess of the applicable Cap (as defined below). For purposes hereof, the applicable "CAP" (a) if the Closing shall occur, in the case of Kalitta for all Kitty Hawk Established Non-KFS Losses shall be the Fair Market Value from time to time of 1,150,000 shares of Kitty Hawk Common Stock, (b) if the Closing shall occur, in the case of Kalitta for all Kitty Hawk Established KFS Losses shall be $6,000,000, (c) if the Closing shall not occur, in the case of Kalitta $10,000,000 in the aggregate for all Kitty Hawk Established Losses and (d) whether or not the Closing shall occur, in the case of Kitty Hawk shall mean an amount equal to $10,000,000 for all Kalitta Established Losses. 10.3.3 Duty to Mitigate. Each Kitty Hawk Indemnified Party and Kalitta Indemnified Party shall be required to use commercially reasonable efforts to mitigate any Loss as a condition to recovery hereunder. 10.3.4 Exceptions. Notwithstanding the foregoing, Sections 10.1.3, 10.3.1 and 10.3.2 shall not apply to any Breach of Section 4.1.2, Section 4.3.6, Section 5.1.3(i), Section 5.1.3(j), Section 9.5 as to Kalitta Companies Indemnified Parties and the heirs, executors, administrators, personal representatives and Representatives (other than Kalitta) or Section 11.1 nor to Kitty Hawk's failure to deliver the Stock Merger Consideration and the KFS Cash Merger Consideration in accordance with Section 3.2 hereof. Notwithstanding the foregoing, Sections 10.1.3 and 10.3.1 shall not apply to any Breach of Section 9.7 10.4 Notice and Opportunity to Defend. 10.4.1 Notice, Etc. Whenever a claim shall arise for which any party (the "INDEMNIFIED PARTY") shall be entitled to indemnification hereunder, including receipt of notice of any third-party claim or commencement of any third-party Proceeding (an "ASSERTED LIABILITY") and any other party (an "INDEMNIFYING PARTY") is obligated to provide indemnification pursuant to Section 10.2.1 or Section 10.2.2, the Indemnified Party shall promptly give all Indemnifying Parties notice thereof. The Indemnified Party's failure so to notify an Indemnifying Party shall not cause the Indemnified Party to lose its right to indemnification under this Article, except to the extent that such failure materially prejudices the Indemnifying Party's ability to defend against an Asserted Liability that such Indemnified Party has the right to defend against hereunder (and except as otherwise set forth in this Article). Such notice shall describe the Asserted Liability in reasonable detail, and if practicable shall indicate the amount (which may be estimated) of the Losses that have been or may be asserted by the Indemnified Party. Notwithstanding anything in this 72 94 Article X to the contrary, each of the Indemnifying Parties may defend against an Asserted Liability on behalf of the Indemnified Party utilizing counsel reasonably acceptable to the Indemnified Party, unless (a) the Indemnified Party reasonably objects to such assumption on the grounds that counsel for such Indemnifying Parties cannot represent both the Indemnified Party and the Indemnifying Parties because such representation would be reasonably likely to result in a conflict of interest or because there may be defenses available to the Indemnified Party that are not available to such Indemnifying Parties, (b) the Indemnifying Party is not capable (by reason of Disability, death, insufficient financial capacity, bankruptcy, receivership, liquidation, managerial deadlock, managerial neglect or similar events) of maintaining a reasonable defense of such action or proceeding, or (c) the action or proceeding seeks injunctive or other equitable relief against the Indemnified Party. 10.4.2 Defense Costs. If any Indemnifying Party defends an Asserted Liability, it shall do so vigorously and in good faith at its own expense and shall not be responsible for the costs of defense, investigative costs, attorney's fees or other expenses incurred to defend the Asserted Liability (collectively, "DEFENSE COSTS") of the Indemnified Party (which may continue to defend, at its own expense). If the Indemnified Party assumes the defense of an Asserted Liability by reason of clauses (a), (b) or (c) of Section 10.4.1, or because the Indemnifying Party has not elected to assume the defense, then it shall do so vigorously and in good faith and such Indemnifying Party shall indemnify the Indemnified Party for its Defense Costs; provided, the Indemnifying Parties shall not be liable for the costs of more than one counsel for all Indemnified Parties in any one jurisdiction. An Indemnifying Party and Indemnified Party may settle any Asserted Liability only with the consent of the other, which consent shall not be unreasonably withheld. 10.4.3 Third-Party Claims. The parties shall cooperate with each other with respect to the defense of any claims or litigation made or commenced by third-parties subsequent to the Closing Date with respect to which indemnification is not available (for any reason) under this Article; provided, that the party requesting cooperation shall reimburse the other party for the other party's reasonable out-of-pocket costs and expenses of furnishing such cooperation. 10.4.4 Indemnification Based Upon Net Losses. The duty and obligation of the Indemnifying Party to provide indemnification hereunder shall be limited to the net amount of any Losses actually sustained or paid. In determining the net amount of Losses, the actual amount of Losses shall be the amount in excess of any insurance coverage and shall be reduced by the aggregate value of any assets, properties and rights, including, without limitation, proceeds of insurance, claims, cross-claims, counterclaims and the like which are received or reasonably expected to be received by the Indemnified Party and the Tax benefits realized or reasonably expected to be realized by such party as a direct result of the Loss. The Kalitta Companies of Kitty Hawk shall use their commercially reasonable efforts to cause their insurers to waive subrogation against Kalitta. In such connection, an Indemnified Party shall use its commercially reasonable efforts to pursue, and shall fully cooperate with the Indemnifying Party in pursuing by all appropriate action, all amounts which commercially reasonably may be available from third persons. In addition, in determining the net amount of such Losses for which indemnification is required, the amount of indemnification shall be increased to include any Tax liability incurred or reasonably expected to be incurred by a party as a direct result of such indemnification. If any Tax benefit expected to be realized is in fact not realized, or any Tax liability expected to be 73 95 incurred is not in fact incurred, then an adjustment shall be made promptly to compensate the other party. 10.5 EXCLUSIVE REMEDY. 10.5.1 THE INDEMNIFICATION PROVISIONS AS PROVIDED IN THIS AGREEMENT SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND RECOURSE FOR ANY BREACH OF THIS AGREEMENT BY KALITTA OR ANY KALITTA COMPANY OR ANY OTHER CLAIM BY CHRISTOPHER, KITTY HAWK OR THE SUBS UNDER OR WITH RESPECT TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY AND CHRISTOPHER, KITTY HAWK OR THE SUBS SHALL HAVE NO OTHER ENTITLEMENT, REMEDY OR RECOURSE, WHETHER IN CONTRACT, TORT OR OTHERWISE, AGAINST KALITTA, ANY KALITTA COMPANY, OR THEIR RESPECTIVE AFFILIATES UNDER OR WITH RESPECT TO THIS AGREEMENT, ALL OF SUCH ENTITLEMENTS, REMEDIES AND RECOURSE BEING HEREBY EXPRESSLY WAIVED BY CHRISTOPHER, KITTY HAWK AND THE SUBS TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW. IN ADDITION, THE AMOUNT OF THE CAPS APPLICABLE TO KALITTA OR ANY KALITTA COMPANY SET FORTH IN SECTION 10.3.2 SHALL BE THE MAXIMUM AMOUNT OF THE INDEMNIFICATION OBLIGATIONS OF KALITTA HEREUNDER, SUBJECT TO THE EXCLUSIONS OF SECTION 10.3.4, AND NEITHER KALITTA, ANY KALITTA COMPANY, NOR THEIR RESPECTIVE AFFILIATES SHALL HAVE FURTHER PERSONAL LIABILITY THEREFOR. TO THE EXTENT PERMITTED BY APPLICABLE LAW, NEITHER CHRISTOPHER, KITTY HAWK NOR THE SUBS SHALL BE ENTITLED TO A RESCISSION OF THIS AGREEMENT OR TO ANY FURTHER INDEMNIFICATION RIGHTS OR CLAIMS OF ANY NATURE WHATSOEVER HEREUNDER, ALL OF WHICH KITTY HAWK, SUBS AND CHRISTOPHER HEREBY WAIVE TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW. 10.5.2 THE INDEMNIFICATION PROVIDED IN THIS AGREEMENT SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND RECOURSE FOR ANY BREACH OF THIS AGREEMENT BY CHRISTOPHER, KITTY HAWK OR THE SUBS OR ANY OTHER CLAIM BY KALITTA OR ANY KALITTA COMPANY UNDER OR WITH RESPECT TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY AND KALITTA AND EACH KALITTA COMPANY SHALL HAVE NO OTHER ENTITLEMENT, REMEDY OR RECOURSE, WHETHER IN CONTRACT, TORT OR OTHERWISE, AGAINST CHRISTOPHER, KITTY HAWK, THE SUBS, OR THEIR RESPECTIVE AFFILIATES UNDER OR WITH RESPECT TO THIS AGREEMENT, ALL OF SUCH ENTITLEMENTS, REMEDIES AND RECOURSE BEING EXPRESSLY WAIVED BY KALITTA AND EACH KALITTA COMPANY TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW. IN ADDITION, THE AMOUNT OF THE CAP APPLICABLE TO KITTY HAWK SET FORTH IN SECTION 10.3.2 SHALL BE THE MAXIMUM AMOUNT OF THE INDEMNIFICATION OBLIGATIONS OF KITTY HAWK HEREUNDER SUBJECT TO THE EXCLUSIONS OF SECTION 10.3.4. TO THE EXTENT PERMITTED BY APPLICABLE LAW, NEITHER KALITTA NOR ANY KALITTA COMPANY SHALL BE ENTITLED TO A RESCISSION OF THIS AGREEMENT OR TO ANY FURTHER INDEMNIFICATION 74 96 RIGHTS OR CLAIMS OF ANY NATURE WHATSOEVER HEREUNDER, ALL OF WHICH KALITTA AND EACH KALITTA COMPANY HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW. 10.5.3 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, (1) THE RIGHTS AND OBLIGATIONS OF CERTAIN OF THE PARTIES HERETO UNDER THE 727 PURCHASE AGREEMENT, INCLUDING RIGHTS AND OBLIGATIONS WITH RESPECT TO INDEMNIFICATION AND SECTION 4.18 THEREOF, SHALL REMAIN UNAFFECTED BY THE EXECUTION OF THIS AGREEMENT OR THE RELATED AGREEMENTS AND (2) NOTHING HEREIN SHALL BE CONSTRUED OR INTERPRETED AS LIMITING OR IMPAIRING THE RIGHTS OR REMEDIES THAT THE PARTIES HERETO MAY HAVE (A) AT EQUITY FOR INJUNCTIVE RELIEF OR SPECIFIC PERFORMANCE, (B) RIGHTS UNDER APPLICABLE LAW FOR CONTRIBUTION, INDEMNITY AND SIMILAR RIGHTS IN RESPECT OF CLAIMS BY THIRD PARTIES UNDER OR RELATING TO THE CLOSING DATE FINANCINGS, (C) UNDER ANY RELATED AGREEMENTS (D) THE SETTLEMENT AGREEMENT EXECUTED IN AUGUST 1994 RELATED TO THE U.S. POSTAL SERVICE'S ANET 93-01 SOLICITATION, AND (E) ANY AIRCRAFT CHARTER OR MAINTENANCE AGREEMENTS BETWEEN THE PARTIES. 10.6 No Other Representation. (a) Notwithstanding anything to the contrary contained in this Agreement, Kitty Hawk and the Subs acknowledge and agree that except for the representations and warranties made by Kalitta and the Kalitta Companies in Section 4.1 hereof and Kalitta in Section 4.2, that neither Kalitta nor the Kalitta Companies have made any other representations or warranties of any kind (including any representation or warranty with respect to any projections, forecasts or forward looking statements relating to the Kalitta Companies, or any other information that may have been provided to Kitty Hawk and the Subs in connection with the transactions contemplated hereby and neither Kitty Hawk nor the Subs have relied upon any projections, forecasts or other information). Kitty Hawk further acknowledges and agrees that Kalitta has not made any representations or warranties of any kind to Kitty Hawk or the Subs under this Agreement or otherwise in connection with the transactions set forth herein except as set forth above or in any of the Related Agreements to which he is a party. (b) The limitations on Kitty Hawk's and the Subs' claims, rights, and remedies set forth in this Agreement are a material consideration for Kalitta and the Kalitta Companies' willingness to enter into this Agreement and the Related Agreements and to consummate the transactions contemplated hereby and thereby. (c) Notwithstanding anything to the contrary contained in this Agreement, Kalitta and the Kalitta Companies acknowledge and agree that except for the representations and warranties made by Kitty Hawk in Section 4.3 and the Subs in Section 4.4 hereof and the representations and warranties made in the tax representation letter referred to in Section 5.1.11, that neither Kitty Hawk nor any Affiliate thereof has made any other representations or warranties of any kind 75 97 (including any representation or warranty with respect to any projections, forecasts or forward looking statements relating to the Kitty Hawk or its Affiliates, or any other information that may have been provided to Kalitta and the Kalitta Companies in connection with the transactions contemplated hereby and neither Kalitta nor the Kalitta Companies have relied upon any projections, forecasts or other information). (d) The limitations on Kalitta's and the Kalitta Companies' claims, rights, and remedies set forth in this Agreement are a material consideration for Kitty Hawk's and the Subs' willingness to enter into this Agreement and to consummate the transactions contemplated hereby and the Related Agreements to which it is a party. (e) Whether or not the Closing shall occur, no incorporator, director, officer, employee of the Kalitta Companies or Kitty Hawk or its Affiliates (in each case solely in their capacities as such) shall have any liability to any Person under the terms of this Agreement or as a result of the transactions contemplated hereby, and no recourse of any kind shall be had by the parties hereto against any such incorporator, director, officer, employee of the Kalitta Companies or Kitty Hawk or its Affiliates (in each case solely in their capacities as such) whether by virtue of any constitutional provision or statute or rule of law, or by enforcement of any assessment or penalty or in any other manner, all such liability being expressly waived and released by the parties hereto to the fullest extent permitted by law as part of the consideration in entering into this Agreement; provided, that the parties expressly agree that nothing in this Section 10.6(e) shall affect any liability of any person for any contribution, indemnity and similar rights in respect of claims by third parties under or relating to the Closing Date Financings. 10.7 Delays or Omissions; Waiver; Amendment. Except as provided in Section 10.1.3 and Section 10.4.1, no delay or omission to exercise any right, power or remedy inuring to any party upon any Breach or default of any party under this Agreement or any Related Agreement shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such Breach or default, or an acquiescence therein, or of or in any similar Breach or default thereafter occurring; nor shall any waiver of any single Breach or default be deemed a waiver of any other Breach or default theretofore or thereafter occurring. Neither the exercise of nor the failure to exercise any remedy under this Agreement or any Related Agreement will constitute an election of remedies or limit in any manner enforcement of any remedies. Any term, provision, covenant, representation, warranty or condition of this Agreement may be waived, but only by a written instrument signed by the party entitled to the benefits thereof. No modification or amendment of this Agreement shall be valid and binding unless it be in writing and signed by all the parties hereto. 10.8 Governing Law. This Agreement and the Related Agreements shall be governed by, construed, interpreted and applied in accordance with the laws of the State of Texas, without giving effect to any conflict of laws rules that would refer the matter to the laws of another jurisdiction except to the extent expressly provided herein and or in any Related Agreement and except to the extent Michigan law is mandatorily applicable to the Mergers and the rights of the shareholders of the Subs and the Kalitta Companies thereunder and, to the extent Delaware law is mandatorily applicable to the provisions of Section 5.5 and 9.5, and except as provided in Section 9.5. 76 98 Subject to Section 10.9, each party hereto hereby irrevocably submits to the jurisdiction of the United States District Court for the Northern District of Texas and, if such court does not have jurisdiction, of the courts of the State of Texas in Dallas County, for the purposes of any action arising out of this Agreement or any of the Related Agreements, or the subject matter hereof or thereof, brought by any other party. Subject to Section 10.9, to the extent permitted by applicable law, each party hereby waives and agrees not to assert, by way of motion, as a defense or otherwise in any such action, any claim (i) that it is not subject to the jurisdiction of the above-named courts, (ii) that the action is brought in an inconvenient forum, (iii) that it is immune from any legal process with respect to itself or its property, (iv) that the venue of the suit, action or proceeding is improper or (v) that this Agreement or any of the Related Agreements or the subject matter hereof or thereof may not be enforced in or by such courts. 10.9 Dispute Resolution. 10.9.1 Arbitration. All disputes and controversies of every kind and nature between the parties hereto arising out of or in connection with this Agreement (including without limitation this Article X) or any of the Related Agreements shall be submitted to arbitration pursuant to the following procedures: (i) Except as modified hereby, the arbitration shall be governed by the Commercial Arbitration Rules of the AAA including the Supplementary Procedures for Large Complex Disputes. After a dispute or controversy arises, any party may, in a written notice delivered to the other party, demand such arbitration. Such notice shall designate the name of the arbitrator (who shall be an impartial person) appointed by such party demanding arbitration, together with a statement of the matter in controversy in reasonable detail. (ii) Within thirty (30) days after receipt of such demand, the other party shall, in a written notice delivered to the other party, name such party's arbitrator (who shall be an impartial person). If such party fails to name an arbitrator, then the second arbitrator shall be named by the AAA. The two arbitrators so selected shall name a third arbitrator (who shall be an impartial person) within thirty (30) days, or in lieu of such agreement on a third arbitrator by the two arbitrators so appointed, the third arbitrator shall be appointed by the AAA. If any arbitrator appointed hereunder shall die, resign, refuse, or become unable to act before an arbitration decision is rendered, then the vacancy shall be filled by the methods set forth in this Section for the original appointment of such arbitrator. (iii) Except as provided in Section 10.9.2, each party shall bear its own arbitration costs and expenses. The arbitration hearing shall be held in Dallas, Texas at a location designated by a majority of the arbitrators. The substantive laws of the State of Texas (excluding conflict of laws provisions) and the Federal Arbitration Act shall apply. 77 99 (iv) An award rendered by a majority of the arbitrators appointed pursuant hereto shall be final and binding on all parties to the Proceeding, shall resolve the question of costs of the arbitrators, legal fees and expenses and all related matters, and judgment on such award may be entered and enforced by either party in any court of competent jurisdiction. (v) The arbitrators may by an interim or final award grant injunctive relief. (vi) Except as provided in Section 10.9.2, the parties stipulate that the provisions of this Section shall be a complete defense to any Proceeding instituted in any federal, state or local court or before any administrative tribunal with respect to any controversy or dispute arising out of this Agreement. The arbitration provisions hereof shall, with respect to such controversy or dispute, survive the termination or expiration of this Agreement. The parties hereto and the arbitrators may not disclose the existence or results of any arbitration hereunder without the prior written consent of the other party; nor will any party hereto disclose to any third party any confidential information disclosed by any other party hereto in the course of an arbitration hereunder without the prior written consent of such other party. Notwithstanding the foregoing, a party may disclose the existence or results of an arbitration hereunder, as well as information otherwise required to be disclosed by deposition, subpoena or other court or governmental action, in connection with their respective obligations under the Exchange Act and the rules and regulations promulgated thereunder, in connection with registration of offerings of securities under the Securities Act and the rules and regulations promulgated thereunder, or otherwise required to be disclosed under applicable law. 10.9.2 Emergency Relief. Notwithstanding anything in this Section 10.9 to the contrary and subject to the provisions of Section 10.8, any party may seek from a court any provisional remedy or injunctive relief that may be necessary to protect any rights or property of such party pending the establishment of the arbitral tribunal or its determination of the merits of the controversy. The prevailing party in any Proceeding based upon this Agreement shall be entitled to reasonable attorney's fees and arbitral and court costs, in addition to any other recoveries allowed by law. ARTICLE XI MISCELLANEOUS 11.1 Expenses. Except as otherwise specifically provided for herein, whether or not the transactions contemplated hereby are consummated, each of the parties hereto shall bear all fees and expenses relating to or arising from his or its compliance with the various provisions of this Agreement and such party's covenants to be performed hereunder, and except as otherwise specifically provided for herein, each of the parties hereto agrees to pay all of its own expenses (including, without limitation, attorneys and accountants' fees and printing expenses) incurred in connection with this Agreement, the transactions contemplated hereby, the negotiations leading to the same and the preparations made for carrying the same into effect, and, to the extent practical, all such fees and expenses of the parties hereto 78 100 shall be paid prior to Closing. For purposes of clarification, it is agreed by the parties that all fees and expenses that may be incurred by Kalitta shall be paid and/or reimbursed by the Kalitta Companies. 11.2 Notices. Any notice, request, instruction or other document required by the terms of this Agreement, or deemed by any of the parties hereto to be desirable, to be given to any other party hereto shall be in writing and shall be given by prepaid telex or telecopy or delivered or mailed by certified mail, postage prepaid, with return receipt requested, to the following addresses: If to Kalitta: Conrad Kalitta 2701 N. I-94 Service Drive Ypsilanti, Michigan 48197 Telecopy: (313) 484-3686 With a copy to: George W. Kelsey, Esq. Kelsey Law Offices, P.C. 2395 S. Huron Parkway Suite 200 Ann Arbor, Michigan 48104 Telecopy: (313) 973-1223 If to AIA, AIT, FOL, 842 Willow Run Airport KFS or OK: Ypsilanti, Michigan 48198 Attn: President Telecopy: (313) 484-3630 With a copy to: George W. Kelsey, Esq. Kelsey Law Offices, P.C. 2395 S. Huron Parkway Suite 200 Ann Arbor, Michigan 48104 Telecopy: (313) 973-1223 With a copy after Closing to: M. Tom Christopher Chairman of the Board and Chief Executive Officer 1515 West 10th Street DFW Airport, Texas 75261 Telecopy: (972) 456-2221 Greg R. Samuel, Esq. Haynes and Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202-3789 Telecopy: (214) 651-5940 79 101 If to Kitty Hawk M. Tom Christopher or the Subs: Chairman of the Board and Chief Executive Officer 1515 West 10th Street DFW Airport, Texas 75261 Telecopy: (972) 456-2221 With a copy to: Greg R. Samuel, Esq. Haynes and Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202-3789 Telecopy: (214) 651-5940 The persons and addresses set forth above may be changed from time to time by a notice sent as aforesaid. If notice is given by delivery in accordance with the provisions of this Section, said notice shall be conclusively deemed given at the time of such delivery. If notice is given by mail in accordance with the provisions of this Section, such notice shall be conclusively deemed given upon the second Business Day following deposit thereof in the United States mail. If notice is given by telex or telecopy in accordance with the provisions of this Section, such notice shall be conclusively deemed given upon receipt. 11.3 Entire Agreement. This Agreement (together with the schedules and exhibits hereto), the Related Agreements, the other documents delivered pursuant hereto and referenced herein and the 727 Purchase Agreement set forth the entire agreement and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersede all other prior agreements, arrangements and understandings related to the subject matter hereof. This Agreement supersedes in its entirety (a) that certain Letter of Intent dated July 15, 1997 among certain of the parties hereto, as amended, and (b) that certain Confidentiality Agreement between AIA and Kitty Hawk effective June 26, 1997, as amended. No understanding, promise, inducement, statement of intention, representation, warranty, covenant or condition, written or oral, express or implied, whether by statute or otherwise, has been made by any party hereto with respect to the subject matter hereof which is not embodied in this Agreement and the tax representation letters referred to in Section 5.1.11 delivered pursuant hereto or in connection with the transactions contemplated hereby, and no party hereto shall be bound by or liable for any alleged understanding, promise, inducement, statement, representation, warranty, covenant or condition not so set forth with respect to the subject matter hereof. This Agreement in no way affects or amends any obligation of any party under or in connection with (i) the Settlement Agreement executed in August 1994 related to the U.S. Postal Service's ANET 93-01 solicitation, (ii) any aircraft charter or maintenance agreements between the parties or (iii) the 727 Purchase Agreement. 11.4 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 80 102 11.5 Incorporated by Reference. The Disclosure Schedules, Subsequent Disclosure Schedules and tax representation letter referred to in Section 5.1.11 are incorporated as a part of this Agreement by reference. 11.6 Number and Gender of Words. When the context so requires in this Agreement, words of any gender shall include either or both of the other genders and the singular number shall include the plural. 11.7 Execution of Additional Documents. Each party hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. 11.8 Finders' and Related Fees. Each of the parties hereto is responsible for, and shall indemnify the other parties against, any claim by any third party to a fee, commission, bonus or other remuneration arising by reason of any services alleged to have been rendered to or at the instance of said party to this Agreement with respect to this Agreement or to any of the transactions contemplated hereby. For purposes of clarification, it is agreed by the parties that all fees and expenses relating to the Mergers that may be incurred by Kalitta prior to the Closing Date shall be paid and/or reimbursed by the Kalitta Companies. 11.9 Interpretation. References to "Sections" herein are references to sections of this Agreement. The words "herein," "hereof," "hereto" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. 11.10 No Third Party Beneficiary, Etc. Except as otherwise expressly provided for herein, there shall be no third party beneficiary of this Agreement and this Agreement shall not inure to the benefit of, be enforceable by, or create any right or cause of action in any Person other than the parties hereto and their heirs, executors, administrators, legal representatives, successors and permitted assigns. Neither the availability of, nor any limit on, any remedy hereunder shall limit the remedies of any party hereto against third parties except as provided in Article X. 11.11 Reformation; Severability. In case any provision hereof shall be invalid, illegal or unenforceable, such provision shall be reformed to best effectuate the intent of the parties and permit enforcement thereof, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. If such provision is not capable of reformation, it shall be severed from this Agreement and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 11.12 Binding Effect and Assignment. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, executors, administrators, legal representatives and permitted assigns. This Agreement, and the rights and obligations created hereunder, may not be transferred or assigned by any party without the prior consent of the other parties. 11.13 Public Announcements. Any public announcement or similar publicity with respect to this Agreement will be issued, if at all, at such time and in such manner as Kitty 81 103 Hawk determines; provided, that the Kalitta Companies will be given a copy in advance of such proposed press release. Unless consented to by Kitty Hawk in advance or required by legal requirements, prior to the Closing, Kalitta and the Kalitta Companies shall keep this Agreement strictly confidential and may not make any disclosure of this Agreement to any Person. 11.14 Confidentiality. Between the date of this Agreement and for the five (5) year period following (i) termination of this Agreement pursuant to Article VIII or (ii) Closing, Kitty Hawk, Kalitta and the Kalitta Companies will maintain in confidence, and will cause their respective directors, officers, employees, agents, and advisors (the "REPRESENTATIVES") to maintain in confidence, any written, oral, electronic, or other information of every kind (including all analyses, compilations, forecasts, studies or other documents prepared by a receiving party that contain or in any way reflect Confidential Information) that has been or may be furnished by either party or its Representatives obtained in confidence (the "CONFIDENTIAL INFORMATION") from another party to this Agreement (the "DISCLOSING PARTY"), and will not use, and will cause their respective Representatives not to use, any such information except for the purpose of this Agreement or in connection with any Proceedings between any of the parties, unless (a) such information is already known to such party and such party is not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, (b) the use of such information is necessary in making any release, report, filing (including filings with the SEC or, if required by applicable law, release required by the NASDAQ Stock Market) or obtaining any consent or approval required for the consummation of the transactions contemplated by the Agreement, or (c) the furnishing or use of such information is required by Proceedings. Each party shall only reveal Confidential Information of the Disclosing Party to the receiving party's Representatives (a) who reasonably need to have the Confidential Information for purposes of evaluating the potential Mergers and (b) who are aware of the confidential nature of the Confidential Information and of this Section 11.4. Each party shall cause its Representatives to observe the restrictions of this Section 11.14 and shall be responsible for any Breach of this Section 11.14 by its Representatives. If this Agreement is terminated for any reason, each party must promptly return to the Disclosing Party all Confidential Information obtained from the Disclosing Party that is by nature returnable, and each receiving party will thereafter continue to comply with its obligations under this Section 11.14. 11.15 Time of the Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. 11.16 Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. 11.17 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. * * * * * 82 104 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written hereinabove. KITTY HAWK, INC. By: /s/ M. TOM CHRISTOPHER --------------------------------- Name: M. Tom Christopher ------------------------------- Title: CEO ------------------------------ KITTY HAWK - AIA, INC. By: /s/ M. TOM CHRISTOPHER --------------------------------- Name: M. Tom Christopher ------------------------------- Title: President ------------------------------ KITTY HAWK - AIT, INC. By: /s/ M. TOM CHRISTOPHER --------------------------------- Name: M. Tom Christopher ------------------------------- Title: President ------------------------------ KITTY HAWK - FOL, INC. By: /s/ M. TOM CHRISTOPHER --------------------------------- Name: M. Tom Christopher ------------------------------- Title: President ------------------------------ KITTY HAWK - KFS, INC. By: /s/ M. TOM CHRISTOPHER --------------------------------- Name: M. Tom Christopher ------------------------------- Title: President ------------------------------ KITTY HAWK - OK, INC. By: /s/ M. TOM CHRISTOPHER --------------------------------- Name: M. Tom Christopher ------------------------------- Title: President ------------------------------ /s/ M. TOM CHRISTOPHER ------------------------------------ M. Tom Christopher 83 105 AMERICAN INTERNATIONAL AIRWAYS, INC. By: /s/ CONRAD KALITTA --------------------------------- Name: Conrad Kalitta ------------------------------- Title: ------------------------------ AMERICAN INTERNATIONAL TRAVEL, INC. By: /s/ MIKE MARAONE --------------------------------- Name: Mike Maraone ------------------------------- Title: ------------------------------ FLIGHT ONE LOGISTICS, INC. By: /s/ MIKE MARAONE --------------------------------- Name: Mike Maraone ------------------------------- Title: ------------------------------ KALITTA FLYING SERVICES, INC. By: /s/ DONALD SCHILLING --------------------------------- Name: Donald Schilling ------------------------------- Title: ------------------------------ O.K. TURBINES, INC. By: /s/ MIKE MARAONE --------------------------------- Name: Mike Maraone ------------------------------- Title: ------------------------------ /s/ CONRAD KALITTA ------------------------------------ Conrad Kalitta 84 EX-4.2 3 STOCKHOLDER'S AGREEMENT 1 EXHIBIT 4.2 STOCKHOLDERS' AGREEMENT STOCKHOLDERS' AGREEMENT, dated as of __________, 199__ among Kitty Hawk, Inc., a Delaware corporation (the "Company"), M. Tom Christopher ("Christopher") and Conrad Kalitta ("Kalitta"). WHEREAS, this Agreement is being executed and delivered by and among the parties hereto pursuant to, and in satisfaction of certain conditions precedent set forth in, that certain Agreement and Plan of Merger dated as of September___, 1997 (the "Merger Agreement") by and among the Company, certain subsidiaries of the Company, Christopher, Kalitta, American International Airways, Inc. ("AIA"), American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Services, Inc., and O.K. Turbines, Inc. (the "Kalitta Companies"); WHEREAS, at the time the transactions contemplated by the Merger Agreement are consummated, each of Christopher and Kalitta will be the record and Beneficial Owner of the number of issued and outstanding shares of Common Stock of the Company set forth opposite such person's name on Schedule 1 hereto; WHEREAS, Christopher and Kalitta desire to provide herein for certain matters relating to the control and operation of the Company; WHEREAS, the Company desires to grant to Christopher and Kalitta certain incidental registration rights with respect to the shares of Common Stock of the Company now owned or hereafter acquired by either of them; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Article I - Definitions 1. General. When used in this Agreement, the terms set forth in this Article I shall have the meanings ascribed to them herein. 1.1 Definitions. "Affiliate" means, with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified. 2 "Agreement" or "this Agreement" means this Stockholders' Agreement and the Schedule hereto, each as it may be amended from time to time as permitted herein. "Beneficial Owner" means a "beneficial owner", as defined in Regulation Section 240.13d-3 under the Exchange Act. "Christopher Stockholder" shall mean Christopher and each Permitted Transferee who receives a Transfer of Common Stock from Christopher or another Christopher Stockholder and each person who receives an Exempt Transfer of Common Stock from Christopher or another Christopher Stockholder. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock, par value $0.01 per share, of the Company with respect to which a Stockholder is or at any time during the Term becomes a Beneficial Owner, whether as a result of purchase or dividend or upon an increase, reduction, substitution, reorganization or reclassification of the shares of Common Stock of the Company, or otherwise, including upon the exercise of options or other rights convertible into or exchangeable for, with or without the payment of consideration, shares of Common Stock. Common Stock shall also include all classes of preferred stock of the Company now or hereafter issued and securities issued to any of the Stockholders upon any merger, consolidation, sale of assets or other business disposition involving the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exempt Transfer" means any Transfer of Common Stock to any marital trust, non-marital trust, family trust or beneficiary pursuant to the terms of the applicable trust agreement on the death of the grantor or otherwise by will or the laws of descent and distribution, it being agreed that prior to the making of an Exempt Transfer, the Stockholder proposing the Exempt Transfer shall notify the Company in writing and the proposed transferee shall deliver to the Company a written instrument pursuant to which the proposed transferee becomes a party to this Agreement and agrees to be bound by the terms and conditions hereof to the same extent as if an original signatory hereto. "Family Member" means the spouse or the natural or adopted sibling, ancestor or descendent of a Stockholder or any spouse or descendant of any such ancestor, descendant or sibling. "Kalitta Stockholder" shall mean Kalitta and each Permitted Transferee who receives a Transfer of Common Stock from Kalitta or another Kalitta Stockholder or a person who receives an -2- 3 Exempt Transfer of Common Stock from Kalitta or another Kalitta Stockholder. "Permitted Transferee" means any Family Member of such Stockholder or a trustee of a trust for the sole benefit of such Stockholder and/or any Family Member of such Stockholder or any partnership, corporation or other entity which is controlled by such Stockholder and/or any Family Member, it being agreed that prior to the making of a Transfer of Common Stock to a Permitted Transferee, the Stockholder proposing the Transfer shall notify the Company in writing and the proposed transferee shall deliver to the Company a written instrument pursuant to which the proposed transferee becomes a party to this Agreement and agrees to be bound by the terms and conditions hereof to the same extent as if an original signatory hereto. "person" means any individual, corporation, association, partnership, proprietorship, joint venture, trust or other entity. "Pro Rata" means, with respect to the shares of Common Stock held by a Stockholder to be excluded from an underwritten public offering as provided in Article VI of this Agreement, the number which bears the same proportion as the total number of shares of Common Stock proposed to be offered by such Stockholder bears to the number of share of Common Stock proposed to be offered by all of the Stockholders in such underwritten public offering. "Registration Expenses" means all expenses incident to the Company's performance of, or compliance with, its obligations pursuant to Article VI of this Agreement and the completion of transactions relating thereto including, without limitation, all registration and filing fees, all fees and expenses in complying with securities or blue sky laws, all printing expenses, the fees and disbursements of the Company's independent public accountants, including the expenses of any special audits, reviews, compilations or other reports or information required by or incident to such performance and compliance, and any fees or expenses of counsel for the Company but excluding (i) any fees or expenses of special counsel to represent the holders on whose behalf any Common Stock is being registered (the "Selling Stockholders"), (ii) any allocation of personnel or other general overhead expenses of the Company or of any Selling Stockholder or other expenses for the preparation of financial statements or other data, other than financial statements or other data normally prepared by the Company in the ordinary course of its business, which in all cases shall be borne by the party causing such expenses to be incurred and (iii) any underwriting discounts and commissions relating to the Common Stock being sold by the Selling Stockholder. "Registrable Securities" means shares of Common Stock now or hereafter Beneficially Owned by a Stockholder; provided that Registrable Securities shall cease to be Registrable Securities when (i) a registration statement with respect to the same of such -3- 4 shares of Common Stock shall have become effective under the Securities Act and such shares of Common Stock have been disposed of by a Stockholder in accordance with such registration statement, (ii) such shares of Common Stock shall have been sold pursuant to Rule 144 or Rule 145 (or any successor provisions) under the Securities Act or (iii) such shares of Common Stock shall have been otherwise transferred, new certificates therefor not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of such shares of Common Stock shall not require the registration or qualification of such shares of Common Stock under the Securities Act or any similar state law then in effect. "Requisite Christopher Stockholders" means Christopher Stockholders beneficially owning at least a majority of the Common Stock owned by all Christopher Stockholders. "Requisite Kalitta Stockholders" means Kalitta Stockholders beneficially owning at least a majority of the Common Stock owned by all Kalitta Stockholders. "Securities Act" means the Securities Act of 1933, as amended. "Selling Stockholder" means a Stockholder who has any shares of Registrable Securities registered by the Company pursuant to Article VI hereof. "Stockholder" means, (i) each Kalitta Stockholder and each Christopher Stockholder, and (ii) "Stockholders" means collectively, all of the foregoing Stockholders. "Subsidiary" means any corporation fifty percent (50%) of the voting stock of which is owned, directly or indirectly, through one or more subsidiaries, by the Company. "Term" shall have the meaning set forth in Article II. "Transfer" means any sale, assignment, transfer, gift or other disposition of any of the shares of Common Stock by any Stockholder. 1.2 Rules of Construction. Unless the context otherwise requires, (i) a term shall have the meaning assigned to it in Section 1.1, (ii) "or" shall not be exclusive, (iii) words in the singular shall include the plural, and vice versa and (iv) words in the masculine gender shall include the feminine and neuter, and vice versa. -4- 5 Article II - Term 2. Term. Unless sooner terminated as provided in Section 8.10, the term of this Agreement (the "Term") shall commence on the date hereof and continue until the third anniversary of the date of this Agreement; provided, however, that the provisions of Articles VI, VII and VIII shall terminate ten (10) years from the date hereof. Article III - Certain Governance Matters 3. Nomination and Election of Directors; Election of Chairman of the Board and CEO and Other Matters. 3.1 General. During the Term, but subject to Section 3.1.5 below, and in each case except as may be agreed in writing by the Requisite Kalitta Stockholders and the Requisite Christopher Stockholders, each of the Stockholders agrees to, and to cause each of their Affiliates to, vote (or act by written consent with respect to) all shares of Common Stock and all other Company voting securities Beneficially Owned by such Stockholder and such Affiliates, and otherwise to take such actions as may be appropriate: (a) to implement the agreements set forth below in this Article III with respect to the nomination, election and filling of vacancies of directors of the Company, and the election of the CEO and President of the Company and the President of AIA; (b) to not amend or repeal any of the provisions of the Bylaws of the Company described in this Article III; (c) to not change the Certificate of Incorporation of the Company in any respect that would have the effect of conflicting with any of the provisions of the Bylaws of the Company described in this Article III or that would amend or repeal the provisions of the Certificate of Incorporation of the Company as to the removal of directors without cause as defined therein; (d) for the nomination and election as directors of the Company of the Christopher Designees, the Kalitta Designees and the Joint Designees and against their removal except for cause as defined in the Certificate of Incorporation of the Company; (e) during the period ending on the first anniversary of the date of this Agreement, for the election of Christopher as Chairman of the Board and Chief Executive Officer of the Company and for the election of Kalitta as the Vice Chairman of the Company and as the President of AIA and against their removal from such offices except for cause (as defined in the Certificate of Incorporation of the Company or the Articles of Incorporation of the AIA, as applicable); and -5- 6 (f) during the period ending on the first anniversary of the date of this Agreement, against any change in the Articles of Incorporation or Bylaws of AIA that would have the effect of changing the governance provisions described in this Article III below. 3.1.1 Election of the Initial Board. At or prior to the date hereof, (a) the Company's Bylaws have been amended to provide that the number of directors comprising the full Board of Directors of the Company as of the date hereof is seven (7) and shall be comprised of Christopher and two (2) Christopher Designees, Kalitta and two (2) Kalitta Designees and a Joint Designee; (b) the persons named in Schedule 2 have been duly elected to the Board of Directors of the Company to serve in the classes as indicated in Schedule 2 and Schedule 2 identifies the Christopher Designees, the Kalitta Designees and the Joint Designee; and (c) the Bylaws of the Company have been amended to provide that the Bylaw provisions concerning the number and classification of directors and the other provisions described above in this Section 3.1.1 may be amended or repealed prior to the end of the Term only by the affirmative vote of 70% of the members of the entire Board of Directors or the holders of 75% of the outstanding Common Stock. 3.1.2 Nominating Committee. (a) At or prior to the date of this Agreement, the Bylaws of the Company have been amended to provide that: (i) a Joint Nominating Committee, a Christopher Nominating Committee and a Kalitta Nominating Committee of the Board of Directors of the Company shall be created for the period beginning on the date of this Agreement and expiring at the end of the Term; (ii) the Joint Nominating Committee shall consist of Christopher and Kalitta for so long as each is a director of the Company; (iii) the Christopher Nominating Committee shall consist of Christopher for so long as he is a director of the Company; (iv) the Kalitta Nominating Committee shall consist of Kalitta for so long as he is a director of the Company; (v) each such Nominating Committee shall have the powers and duties described in, and be subject to the applicable provisions concerning notice, quorum, membership and resolution of deadlock and related provisions of, Sections 3.1.2 and 3.1.3; and (vi) such Bylaw provisions and the Bylaw provisions described below in this Section 3.1.2 may be amended or -6- 7 repealed only by the affirmative vote of 70% of the members of the entire Board of Directors or the holders of 75% of the outstanding Common Stock. (b) The Bylaws of the Company have been further amended at or prior to the date of this Agreement to provide that (i) the Joint Nominating Committee shall have the exclusive power on behalf of the Board of Directors to nominate a person for election as a director of the Company as a Joint Designee and to fill any vacancy of the Joint Designee on the Board of Directors of the Company; (ii) the Christopher Nominating Committee shall have the exclusive power on behalf of the Board of Directors of the Company to nominate Christopher and persons for election as directors of the Company as Christopher Designees and to fill vacancies on the Board of Directors vacated by Christopher Designees; and (iii) the Kalitta Nominating Committee shall have the exclusive power on behalf of the Board of Directors to nominate Kalitta and persons for election as directors of the Company as Kalitta Designees and to fill vacancies on the Board of Directors vacated by the Kalitta Designees. (c) During the Term, but subject to Section 3.1.5, and except as otherwise agreed in writing by the Requisite Christopher Stockholders and the Requisite Kalitta Stockholders, each of the Stockholders shall, and shall cause each of such Stockholder's Affiliates to, (i) vote (or act by written consent with respect to) any shares of Common Stock and other Company voting securities each Beneficially Owns (x) for the nominee of the Joint Nominating Committee for election as a director of the Company as a Joint Designee (or the nominee as a Joint Designee of the entire Board of Directors in accordance with the Bylaws if the Joint Nominating Committee cannot agree within ten (10) days as contemplated in Section 3.1.3 below) and against removal except for cause, (y) for Christopher and the nominees of the Christopher Nominating Committee for election as a director of the Company as a Christopher Designee and against removal except for cause and (z) for Kalitta and the nominees of the Kalitta Nominating Committee for election as a director of the Company as a Kalitta Designee and against removal except for cause and (ii) not vote (or act by written consent with respect to) any shares of Common Stock or other the Company voting securities each Beneficially Owns in favor of any person to serve as a director of the Company unless such person has been so nominated. (d) The Joint Nominating Committee, the Christopher Nominating Committee and the Kalitta Nominating Committee (as applicable) shall nominate the persons named on Schedule 2 for re-election when their terms expire unless such person is unable or unwilling to serve or if such person has been removed for cause. For purposes of this Section 3.1.2, "cause" shall have the meaning set forth in the Certificate of Incorporation of the Company. -7- 8 (e) In the case of the Joint Nominating Committee, the presence, either telephonically or in person, of both members of the Joint Nominating Committee shall constitute a quorum for the transaction of business and meetings may be called on two days' written notice given in accordance with the Bylaws of the Company by either member. 3.1.3 Deadlock Resolution at the Joint Nominating Committee. The Bylaws of the Company have been amended at or prior to the date of this Agreement to provide that if the Joint Nominating Committee does not agree on the selection of (a) a nominee to serve as a member of the Board of Directors as a Joint Designee to be elected at a meeting of the stockholders of the Company or (b) an individual to fill a vacancy on the Board of Directors as a Joint Designee then either member of the Joint Nominating Committee may by written notice to the other member require such nominee or vacancy to be selected or filled, respectively, at a meeting of the Board of Directors called by such member in accordance with the Bylaws of the Company at any time after the tenth day following the receipt of notice of the first meeting of the Joint Nominating Committee called for the express purpose of selecting such nominee or filing such vacancy. Any individual selected by the Board of Directors to serve as a member of the Board of Directors as a Joint Designee if the Joint Nominating Committee is unable to agree upon a nominee or a person to fill a vacancy, must (i) not be a Family Member of either Christopher or Kalitta, (ii) not be a former or current employee of any Kalitta Company or AIA, the Company, the Subs or the Subsidiaries, (iii) have within the preceding sixty (60) months been a director, chief financial officer, or chief executive officer of a company listed on the New York Stock Exchange or the American Stock Exchange or quoted on the NASDAQ Stock Market's National Market System and (iv) be a citizen of the United States. If the person so chosen by the Board of Directors declines or is unable to serve, then either member of Joint Nominating Committee may call a meeting of the Nominating Committee to choose another person to serve as a director of the Company (in which case all of the provisions of this Section 3.1.3 shall again apply). 3.1.4 Officers. (a) The Bylaws of the Company have been amended at or prior to the date of this Agreement to provide (i) that, until the first anniversary of the date of this Agreement, the Chairman of the Board and Chief Executive Officer shall be elected exclusively by the holders of Common Stock and shall serve as the chief executive officer of the Company and, subject to the supervision of the Board of Directors, shall have the general management and control of the Company and its subsidiaries (including the right to vote (except as provided in clause (ii) below solely for the one year period commencing on the date of this Agreement) the voting securities of the subsidiaries of the Company held by the Company on its behalf) and (ii) for the additional office of Vice Chairman who until the -8- 9 first anniversary of the date of this Agreement, shall be elected exclusively by the holders of Common Stock and shall serve as an officer of the Company and shall have the right to vote the voting securities of AIA until the first anniversary of the date of this Agreement solely for the purpose of electing the President of AIA and against his removal except for cause. Until the first anniversary of the date of this Agreement, each Stockholder hereby agrees to vote (or to act by written consent with respect to), and to cause each of such Stockholder's Affiliates to vote (or so act by written consent), all shares of Common Stock and other Company voting securities Beneficially Owned by each of them in favor of Christopher as Chairman of the Board and Chief Executive Officer of the Company and Kalitta as Vice Chairman and against their removal except for cause. (b) The Amended and Restated Articles of Incorporation and Bylaws of AIA in effect as of the date of this Agreement provide (i) that, until the first anniversary of the date of this Agreement, the person serving as the President of AIA shall serve as the chief executive officer of AIA and shall have the general management and control of AIA subject only to supervision of the Chief Executive Officer of the Company. The Company hereby agrees to vote and to cause each of its Affiliates to vote (or act by written consent), all shares of common stock of AIA and any other AIA voting securities Beneficially Owned by the Company and its Affiliates, and Christopher, agrees to vote such shares and voting securities as Chief Executive Officer of the Company for Kalitta as President of AIA and against any removal of Kalitta as President of AIA except for cause as defined in the Articles of Incorporation of AIA until the first anniversary of the date of this Agreement and to refrain from changing any provisions of the Articles of Incorporation or Bylaws of AIA described in this Section 3.1.4(b). The Bylaws of the Company further provide that the President of AIA is to report only to the Chief Executive Officer. (c) The Bylaws of the Company have been amended to provide that the provisions of such Bylaws described in this Section 3.1.4 may be amended only by the affirmative vote of 70% of the members of the entire board of Directors of holders of 75% of the outstanding Common Stock. 3.1.5 Termination of Governance Obligations. The rights and obligations of the parties set forth in this Article III shall terminate upon the earlier of (a) the expiration of the Term, (b) the death, Disability, or voluntary resignation as a director of Kitty Hawk of, either Christopher or Kalitta or (c) the sale of all shares Beneficially Owned by all Stockholders; provided, that in the event of the voluntary resignation of Kalitta as a director of Kitty Hawk, the Kalitta Stockholders shall remain subject to all obligations to vote Common Stock and other Company voting securities as provided in this Article III; and, provided further, that in the event of the voluntary resignation of Christopher as a director of Kitty Hawk, Christopher and Kitty Hawk shall remain -9- 10 subject to all of their and its obligations to vote AIA common stock and other voting securities of AIA as provided in this Article III and the Christopher Stockholders shall remain subject to all of his obligations to vote Common Stock and other Company voting securities as provided in this Article III. Article IV - Restrictions on Transfer of Common Stock 4. Restrictions on Transfers. Each of the Stockholders hereby agrees that from the date hereof until the conclusion of the Term no Transfers of any shares of Common Stock shall be made by such Stockholder to Permitted Transferees or pursuant to an Exempt Transfer unless the Stockholder proposing the Transfer shall notify the Company in writing and the proposed transferee shall deliver to the Company a written instrument pursuant to which the proposed transferee becomes a party to this Agreement and agrees to be bound by the terms and conditions hereof to the same extent as if an original signatory hereto. Article V - Legend 5. Restrictive Legend. 5.1 Restrictive Legend. Each certificate evidencing shares of Common Stock held by a Stockholder shall conspicuously contain a restrictive legend substantially as follows: "The sale, assignment, transfer, pledge, encumbrance, or other disposition of the shares evidenced by this certificate, or any interest in such shares, is restricted by the terms of a Stockholders' Agreement dated as of __________, 199__, a copy of which is on file at the principal office of the corporation. No such sale, assignment, transfer, pledge, encumbrance or other disposition shall be effective unless and until the terms and conditions of the aforesaid Stockholders' Agreement shall have been complied with in full." 5.2 Removal of Restrictive Legend. The Company shall, or shall cause its transfer agent to, remove such legend so that shares can be transferred free of the legend upon the earlier to occur of (a) the third anniversary date of this Agreement, (b) the termination of this Agreement or (c) receipt of a written certification of a Stockholder that the shares in question are being Transferred to person other than a Permitted Transferee or to a person other than pursuant to an Exempt Transfer. -10- 11 Article VI - Registration of Common Stock 6. Registration of Common Stock. 6.1 Incidental Registration. If, at any time during the Term, the Company proposes to register any of its securities under the Securities Act, whether or not for sale for its own account, on a form and in a manner which would permit registration of Registrable Securities for sale to the public under the Securities Act (other than pursuant to a registration statement filed pursuant to Rule 415 under the Securities Act), it will each such time give prompt notice to all Stockholders who then hold Registrable Securities of its intention to do so, describing such securities and specifying the form and manner and the other relevant facts involved in such proposed registration, and upon the request of any Stockholder delivered to the Company within thirty (30) days after the giving of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Stockholder, which shall not be less than the greater of (x) fifty thousand (50,000) shares of Registrable Securities (as such minimum number may be adjusted pursuant to Section 6.1(iii) below) or (y) the number of shares of Registrable Securities then owned by such Stockholder, and the intended method of disposition thereof), the Company will use its commercially reasonable efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Stockholder, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, provided that: (i) if, at any time after giving such notice of its intention to register any of its securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give notice of such determination to each Selling Stockholder and thereupon shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith); and (ii) if the registration so proposed by the Company involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and the managing underwriter of such underwritten offering shall advise the Company by letter that, in its opinion, the distribution of all or a specified portion of the Registrable Securities which the Selling Stockholders have requested the Company to register in accordance with this Section 6.1 concurrently with the securities being distributed by such underwriters could adversely affect the distribution of such securities by such underwriters (such letter to state the reasons therefor), then the Company will promptly furnish each Selling Stockholder with a copy of such letter and the Company -11- 12 may deny, by notice to each Selling Stockholder accompanying such letter, the registration of all or a specified portion of such Registrable Securities (in case of a denial as to a portion of such Registrable Securities, such portion to be allocated Pro Rata among the Selling Stockholders); and (iii) the minimum number of shares specified in Section 6.1(x) above shall be appropriately adjusted in the event that, subsequent to [INSERT DATE OF THE MERGER AGREEMENT] the outstanding shares of Common Stock of the Company shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities through a reorganization, recapitalization, stock split, reverse stock split or other similar change in the Company's capitalization; (iv) if a Stockholder decides not to include all of its Registrable Securities in any registration statement filed by the Company pursuant to this Article VI, such Stockholder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement(s) as may be filed by the Company with respect to offerings of securities, all upon the terms and conditions set forth herein. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 6.1. 6.2 Registration Procedures. If and whenever the Company is required to use its commercially reasonable efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Section 6.1, the Company will as expeditiously as possible: (i) prepare and promptly file with the Commission a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective as promptly as practicable; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities and other securities covered by such registration statement until the earlier of such time as all of such Registrable Securities and other securities have been disposed of in accordance with the intended methods of disposition thereof set forth in such registration statement or the expiration of thirty (30) days after such registration statement becomes effective; -12- 13 (iii) furnish to each Selling Stockholder, without charge, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as such Selling Stockholder may reasonably request; (iv) use its commercially reasonable efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as each Selling Stockholder (or in an underwritten offering, the managing underwriter) shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable such Selling Stockholder to consummate the disposition in such jurisdictions of his or its Registrable Securities covered by such registration statement, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (v) furnish to each Selling Stockholder a signed counterpart, addressed to such Selling Stockholder, of (A) an opinion of counsel for the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement speaking both as of the effective date of the registration statement and the date of the closing under the underwriting agreement) and (B) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration statement includes an underwritten public offering, dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have certified the Company's financial statements included in such registration statements, covering substantially the same matters with respect to such registration statement (and the prospectus included therein), and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, as such Selling Stockholder may reasonably request; -13- 14 (vi) immediately notify each Selling Stockholder, at any time when a prospectus relating to such Selling Stockholders' Registrable Securities is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of any such Selling Stockholder prepare and furnish to such Selling Stockholder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities or other securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (vii) otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month of the first fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (viii) use its commercially reasonable efforts to have such securities listed on the New York Stock Exchange or included for quotation on the Nasdaq National Market or listed on each securities exchange on which the securities of the Company are then listed or quoted, if such securities are not already so listed or quoted and if such quotation or listing is then permitted under the rules of such self-regulatory association or exchange, and, if necessary, provide a transfer agent and registrar for such securities not later than the effective date of such registration statement. The Company may require each Selling Stockholder to furnish to the Company such information regarding such Selling Stockholder and the distribution of such securities as the Company may from time to time reasonably request and as shall be required by law or by the Commission in connection therewith. 6.3 Stockholder Undertakings. Each Stockholder covenants with the Company as follows: (a) No Stabilization. No Stockholder shall effect any stabilization transactions or engage in any stabilization activity proscribed by Regulation M under the Exchange Act in connection -14- 15 with any securities of the Company during the period of any distribution of the Registrable Securities by Selling Stockholders pursuant to any Registration Statement. (b) Brokers. Each Selling Stockholder (i) shall furnish each broker through whom such Selling Stockholder offers the Registrable Securities such number of copies of any Prospectus and any supplements thereto or amendments thereof which such broker may require (provided that the Company has provided such Selling Stockholder with such Prospectus, supplements and amendments), (ii) shall inform such broker as to the number of Registrable Securities offered through such broker, that such Registrable Securities are part of a distribution and that such broker is subject to the provisions of Regulation M under the Exchange Act until such time as such broker has completed the sale of all such Registrable Securities, and (iii) shall notify such broker when distribution of the sale of all such Registrable Securities, and (iii) shall notify such broker when distribution of the Registrable Securities by such Selling Stockholder pursuant to any registration statement has been completed or any registration statement is no longer effective or is withdrawn. (c) Amendments and Supplements. Each Selling Stockholder shall promptly furnish to each person (including each broker) to whom such Selling Stockholder has delivered copies of the prospectus an equivalent number of copies of any amendment thereof or supplement thereto (provided that the Company has provided such Selling Stockholder with such amendment or supplement). (d) Transaction Information. Each Selling Stockholder shall report promptly to the Company upon any disposition of Registrable Securities by such Selling Stockholder and upon completion of the distribution of such Selling Stockholder's Registrable Securities pursuant to any registration statement. (e) Exchange Act Compliance. Each Selling Stockholder shall, at any time such Selling Stockholder is engaged in a distribution of the Registrable Securities under any registration statement, comply to the extent required with Rules 10b-5 and Regulation M (as currently in effect or as amended or any successor or similar provisions) promulgated under the Exchange Act and shall distribute the Registrable Securities solely in the manner described in any registration statement, and shall not do any of the following during the period from the effective date of any Registration Statement until the completion of any offering of the Registrable Securities by such Selling Stockholder pursuant to such registration statement: (i) Bid for or purchase, for any account in which such Selling Stockholder or any affiliate of such Selling Stockholder has a beneficial interest, any securities of the -15- 16 Company other than in transactions permitted by Regulation M under the Exchange Act; (ii) Attempt to induce any person to purchase any securities of the Company other than in transactions permitted by Regulation M under the Exchange Act; and (iii) pay or offer or agree to pay to anyone, directly or indirectly, any compensation for soliciting another to purchase any securities of the Company on a national securities exchange or automated quotation system or pay or offer of agree to pay to anyone any compensation for purchasing securities of the Company on a national securities exchange or automated quotation system other than those securities offered by such Selling Stockholder. (f) Publicity; Selling Efforts. Each Selling Stockholder shall not, during the period of any offering by such Selling Stockholder of any Registrable Securities under any registration statement, use or disseminate any information concerning the Company other than the prospectus (or any amendment thereof or supplement thereto furnished by the Company) and may not undertake any form of publicity with respect to the Company or engage in any similar activities that may be deemed to be an unlawful selling effort within the meaning of Section 10 of the Exchange Act. (g) Brokerage Commissions. Except as disclosed in the prospectus, a Selling Stockholder will not pay unusual or special brokerage commissions (other than ordinary brokerage arrangements) on any sales effected through a broker, and no selling arrangement will have been entered into between a Selling Stockholder and any securities dealer or broker. (h) Intentionally Omitted. (i) Conditions to Inclusion. As a condition to each Selling Stockholder's right to include Registrable Securities in a registration pursuant to this Article VI, such Selling Stockholder shall if requested by the Company in connection with such registration, (i) agree to sell such Registrable Securities to be included in such registration on the basis applicable to other selling security holders as provided in any underwriting arrangements entered into by the Company in connection therewith, (ii) complete and execute all questionnaires, powers of attorney, underwriting agreements and other documents that are reasonably requested and are customary under such arrangements (and as are required of all other selling security holders) and (iii) promptly provide any information reasonably requested by the Company concerning such Selling Stockholder's specified plan of distribution and other information. -16- 17 6.4 Underwriters. If the Company at any time proposes to register any of its securities under the Securities Act whether or not for sale or for its own account, and such securities are to be distributed by or through one or more underwriters, the Company will use commercially reasonable efforts, if requested by a Selling Stockholder who requests incidental registration of Registrable Securities in connection therewith pursuant to Section 6.1, to arrange for such underwriters to include such Registrable Securities among those securities to be distributed by or through such underwriters; provided that, without limitation, neither the Company nor any other holder of the securities proposed to be distributed by or through such underwriters shall be required or obligated to reduce the amount or sale price of such securities proposed to be so distributed. The Selling Stockholders on whose behalf Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such holders of Registrable Securities. If the Company at any time proposes to register any of its securities under the Securities Act for sale of its own account and such securities are to be distributed by or through one or more underwriters, the managing underwriter shall be selected by the Company. If any registration pursuant to Section 6.1 shall be in connection with any underwritten public offering, each holder of Registrable Securities agrees, if so required by the managing underwriters, not to effect any public sale or distribution of Registrable Securities (other than as part of such underwritten public offering) within the period of time between seven (7) days prior to the effective date of such registration statement and 180 days after the effective date of such registration statement. 6.5 Preparation; Reasonable Investigation. In connection with the preparation and filing of such registration statement registering Registrable Securities under the Securities Act, the Company will give the Selling Stockholders on whose behalf such Registrable Securities are to be so registered and their underwriters, if any, and their respective counsel and accountants, reasonable opportunity to review and comment upon such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them reasonable access to its books and records and reasonable opportunity to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of such holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. Notwithstanding anything herein to the contrary, the Company shall have the sole right to determine the content of any registration statement, prospectus, supplement thereto or amendment thereof, provided such determination is in accordance with the applicable requirements of the Securities Act. -17- 18 6.6 Company's Indemnification. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 6.1, each Selling Stockholder of any Registrable Securities covered by such registration statement, each officer and director of each underwriter and each Selling Stockholder, each other person who participates as an underwriter in the offering or sale of such securities and each other person, if any, who controls any Selling Stockholder or any such underwriter within the meaning of the Securities Act against any losses, claims, damages, liabilities and expenses, joint or several, to which any such Selling Stockholder or any such director or officer or participating or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings or investigations in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus (unless any such statement is corrected in a subsequent prospectus and Selling Stockholder (and the underwriters, if any) is given the opportunity to circulate the corrected prospectus to all persons receiving the preliminary prospectus), final prospectus or summary prospectus included therein, or any amendment or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any violation by the Company of any securities laws, and the Company will reimburse each such Selling Stockholder and each such director, officer, participating person and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable to any Selling Stockholder, director, officer, participating person or controlling person in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company in an instrument executed by or under the direction of such seller, director, officer, participating person or controlling person for use in the preparation thereof, which information was expressly provided for use in the registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any such Selling Stockholder or any such director, officer, participating person or controlling person and shall survive the -18- 19 transfer of such securities by such seller. The Company shall agree to provide for a customary contribution provision relating to such indemnity if requested by any Selling Stockholder or the underwriters. 6.7 Selling Stockholders Indemnification. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 6.1, that the Company shall have received an agreement reasonably satisfactory to it from each of the prospective Selling Stockholders of such Registrable Securities and their underwriters, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 6.6) the Company, each director of the Company, each officer of the Company who shall sign such registration statement and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement in or omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus included therein, or any amendment or supplement thereto, but only if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed or provided by such Selling Stockholder (or in the case of indemnification by the underwriters, by such underwriters) which specifically states or otherwise identifies it as being expressly for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such Registrable Securities by such Selling Stockholders. 6.8 Indemnification; Contribution Mechanism. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in either Section 6.6 or 6.7, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 6.6 or 6.7, as is applicable, except to the extent that the indemnifying party's liabilities and obligations are increased as a result of such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party. After notice from the indemnifying party to such indemnified party to its election so as to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense -19- 20 thereof unless (i) the indemnifying party shall have failed to retain counsel for the indemnified party as aforesaid, (ii) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (iii) representation of such indemnified party by the counsel retained by the indemnified party would be inappropriate due to actual or potential differing interests between such indemnified party and any other person represented by such counsel in such proceeding or (iv) the indemnified party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. The indemnifying party shall not be liable for any settlement of any proceeding effected without the written consent of such indemnifying party, but if settled with such consent or if there shall be a final judgment for the plaintiff, the indemnifying party agrees to indemnify each indemnified party from and against any loss or liability by reason of such settlement or judgment. 6.9 Other Indemnification. Indemnification similar to that specified in Section 6.6 and Section 6.7 (with appropriate modifications) shall be given by the Company and each Selling Stockholder of Registrable Securities with respect to any required registration or other qualification of such Registrable Securities under any state securities law or regulation. Article VII - Representations 7. Representations and Warranties. 7.1 Stockholders' Representations and Warranties. Each Stockholder hereby represents and warrants to the Company and to the other Stockholder as follows: (i) Such Stockholder has the requisite capacity, power and authority to enter into and perform such Stockholder's obligations under this Agreement. (ii) The execution, delivery and performance of this Agreement has been duly authorized by all requisite action by such Stockholder. This Agreement has been duly executed and delivered by such Stockholder and constitutes the legal, valid and binding obligation of such Stockholder enforceable in accordance with its terms, except as such enforcement may be limited be general principles of equity, whether applied in a court of law or a court of equity, and bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. -20- 21 (iii) Neither the execution or delivery of this Agreement nor the consummation of the transactions contemplated hereby, nor compliance with the terms and provisions hereof, will conflict with, or result in a breach of, the terms, conditions or provisions of, or constitute a default under, any applicable law, or of any order, writ, injunction or decree of any court, administrator or arbitrator, or of any agreement or instrument under which such Stockholder is obligated or by which any of such Stockholder's property is bound. (iv) There are no agreements to which such Stockholder is a party that relate to the voting of Common Stock, the nomination or election of directors or the control of the Company, except for this Agreement. (v) Each Stockholder is the record and Beneficial Owner of the number of share of Common Stock of the Company set forth opposite such Stockholder's name on Schedule 1 hereto, and owns such shares of Common Stock free and clear of all liens, security interests, pledges, charges or encumbrances of any nature whatsoever. 7.2 Company's Representations and Warranties. The Company hereby represents and warrants to each Stockholder as follows: (i) The Company has the requisite corporate power to enter into and perform the Company's obligations under this Agreement. (ii) The execution, delivery and performance of this Agreement has been duly authorized by all requisite corporate action by the Company. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceable in accordance with its terms, except as such enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. (iii) Neither the execution nor delivery of this Agreement nor the consummation of the transactions contemplated hereby, nor compliance with the terms and provisions hereof, will conflict with, or result in a breach of, the terms, conditions or provisions of, or constitute a default under, any applicable law, or of any order, writ, injunction or decree of any court, administrator or arbitrator, or of any agreement or instrument under which the Company is obligated or by which any of the Company's property is bound. -21- 22 (iv) There are no agreements to which the Company is a party that relate to the voting of Common Stock, the nomination or election of directors or the control of the Company, except for this Agreement. Article VIII - General Provisions 8. General Provisions. 8.1 Notices. All notices, requests and other communications ("Notices") to any party hereunder shall be in writing and shall be deemed to have been duly given and received (i) upon receipt, if delivered personally with receipt acknowledged, (ii) three (3) business days after mailing by certified or registered mail or equivalent, return receipt requested, postage prepaid or one (1) day after mailing by overnight courier for next day delivery, in each case addressed to the Company at 1515 West 10th Street, Suite 3100, Dallas Texas 75261, Attention: Chairman, to any Stockholder at his or its address set forth on Schedule 1 hereto, as is applicable, or to such other address as such party may hereafter specify by Notice to the other parties or (iii) one (1) business day after telecopying to the Company at (972) 456-2221 and to any Stockholder at the number set forth on Schedule 1 hereto, as is applicable, or to such changed number as such party shall hereafter specify by Notice to the other parties; provided, however, that any Notice of change of address or telecopier number shall be effective only upon receipt and a copy of any Notice sent by telecopier shall also be sent by registered or certified mail or equivalent, return receipt requested, postage prepaid. 8.2 Equitable Relief. The parties hereto agree that legal remedies may be inadequate to enforce the provisions of this Agreement, and that each party shall have the right, in addition to any other rights it may have at law, to equitable relief, including specific performance and injunctive relief, to enforce the provisions of this Agreement. 8.3 No Third Party Beneficiaries; Additional Parties. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement except that any Permitted Transferee or person receiving a Transfer pursuant to an Exempt Transfer shall be deemed to be a Stockholder and shall be bound by all obligations and, except to the extent limited in such agreement, entitled to all rights and privileges of a Stockholder as if such person had been an original signatory to this Agreement. 8.4 Amendments. Any provision of this Agreement may be amended only if such amendment is in writing and is signed by the Company and by the Requisite Christopher Stockholders and the Requisite Kalitta Stockholders. -22- 23 8.5 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective personal or legal representatives, executors, heirs, successors and permitted assigns. 8.6 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas without regard to any applicable conflicts of law provisions thereof. 8.7 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. An executed counterpart received by telecopy shall have the same effect as an originally-executed counterpart. 8.8 Captions. The captions in this Agreement are included for convenience of reference only, do not constitute a part hereof and shall be disregarded in the interpretation or construction hereof. 8.9 Entire Agreement. This Agreement, together with the Schedules hereto, constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all previous agreements, whether written or oral, relating to the same subject matter, including without limitation any existing stockholder agreements and agreements in respect of registration rights. All such previous agreements, if any, among the parties hereto (or any of them) are hereby terminated and shall have no further force or effect. 8.10 Termination. This Agreement may be terminated at any time by an instrument in writing signed by the Company, the Requisite Christopher Stockholders and the Requisite Kalitta Stockholders. This Agreement shall automatically terminate on the earlier of the date when none of the Stockholders is the Beneficial Owner of any shares of Common Stock or the expiration of the Term. 8.11 Minimum Equity Ownership Requirement. Notwithstanding anything to the contrary otherwise contained elsewhere in this Agreement, in the event that the Kalitta Stockholders or the Christopher Stockholders shall cease to be the Beneficial Owners of an aggregate of at least one percent (1%) of the outstanding shares of Common Stock, then the Kalitta Stockholders or the Christopher Stockholders, as applicable, shall no longer be deemed "Stockholders" for purposes of Article VI of this Agreement and shall have no further rights or obligations as "Stockholders" under Article VI hereof. -23- 24 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Kitty Hawk, Inc. By: ------------------------------------- Its: ------------------------------ ---------------------------------------- M. Tom Christopher ---------------------------------------- Conrad Kalitta -24- 25 Schedule 1 Stockholders
Name and Address Shares of Common Stock ---------------- ---------------------- Conrad Kalitta [ADDRESS AND FAX NO.] ------------ M. Tom Christopher [ADDRESS AND FAX NO.] ------------
-25- EX-10.20 4 AGMT DATED 7/20/95-PILOTS,CO-PILOTS,FLT ENGINEERS 1 EXHIBIT 10.20 AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. And The PILOTS, CO-PILOTS AND FLIGHT ENGINEERS In The Service Of AMERICAN INTERNATIONAL AIRWAYS, INC. As Represented By THE TEAMSTERS - AIRLINE DIVISION 2 July 20, 1995 TENTATIVE CONTRACT AGREEMENT In reference to NMB Case: A-1602 On July 20, 1995, American International Airways, Inc., and the International Brotherhood of Teamsters agree that the attached "Tentative Contract" between the parties is final and binding upon the parties, pending ratification of the membership. Dated: July 20, 1995 For American International Airways, Inc. Airways, Inc. - ----------------------------------------------- For: The International Brotherhood of Teamsters Brotherhood of Teamsters - ----------------------------------------------- 3 TABLE OF CONTENTS
Page Article Title No. - ------- ----- ---- I RECOGNITION, PURPOSE, SCOPE AND MERGERS II DEFINITIONS III UNION SECURITY IV SENIORITY V GRIEVANCE PROCEDURE VI SYSTEM BOARD OF ADJUSTMENT VII BOARD OF ARBITRATION VIII FURLOUGH AND RECALL IX LEAVES OF ABSENCE X SICK LEAVE XI VACATION XII VACANCY BIDDING XIII TRAINING AND UPGRADING XIV SCHEDULING XV HOURS OF SERVICE XVI UNIFORMS XVII PHYSICAL EXAMINATIONS XVIII HEALTH AND WELFARE XIX COMPENSATION XX EXPENSES, LODGING & TRANSPORTATION XXI GENERAL CONDITIONS XXII MISSING, INTERNMENT, PRISONER OR HOSTAGE OF WAR BENEFITS, HIJACKING XXIII STRIKE, LOCKOUT RIGHTS XXIV EXTENDED ROTATION XXV MANAGEMENT RIGHTS XXVI NEW BASES XXVII DURATION LETTER OF AGREEMENT
Dated: July 28, 1994 - Flight Engineer Upgrade 4 AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND THE PILOTS, CO-PILOTS AND FLIGHT ENGINEERS IN THE SERVICE OF AMERICAN INTERNATIONAL AIRWAYS, INC. AS REPRESENTED BY THE TEAMSTERS AIRLINE DIVISION This Agreement is made and entered into in accordance with the provisions of the Railway Labor Act, as amended, by and between American International Airways, Inc., hereinafter known as the "Company", and the Pilots, Co-Pilots and Flight Engineers (herein after known as the "Crewmembers") in the service of the Company as represented by the International Brotherhood of Teamsters Airline Division, hereinafter known as the "Union". ARTICLE I - RECOGNITION, PURPOSE, SCOPE AND MERGERS (A) NATIONAL MEDIATION BOARD CERTIFICATION Pursuant to the certification by the National Mediation Board in Case Nos. R-6152 (Pilots) and R-6145 (Flight Engineers) dated December 17, 1992, the Company hereby recognizes the International Brotherhood of Teamsters Airline Division, as the duly designated and authorized representative of the Pilots, Co-Pilots and Flight Engineers in the employ of American International Airways, Inc. D/B/A Connie Kalitta Services, Inc for the purposes of the Railway Labor Act, as amended. (B) PURPOSE OF AGREEMENT In the mutual interests of the Crewmembers and of the Company, the purpose of this Agreement is to provide for orderly collective bargaining relations between the Company and the Union and a method for the prompt and equitable disposition of grievances, and a method for the establishment of fair wages, hours and working conditions for the crewmembers covered hereunder. In making this Agreement, it is recognized to be the duty of the Union, the Crewmembers and the Company to cooperate fully for the advancement of the purpose of this Agreement. (C) SOLE AGREEMENT This Agreement shall supersede all existing or previously executed Agreements by and between the Company and the Union or any other labor organization or individual with respect to the rates of pay, rules, or working conditions specifically covered by the provisions of the Agreement in accordance with the provisions of the 1 5 Railway Labor Act, as amended. Any and all subsequent modification of this agreement shall be reduced to writing, signed by their authorized representatives, and become a part of this Agreement. (D) Whenever the words "Pilot(s)", "Flight Engineer(s)", or "Crewmember(s)" are used in this Agreement, they designate and refer to only such employees as are covered by this Agreement. It is further recognized that wherever Crewmembers are referred to in this Agreement in either the masculine or feminine gender, it shall be understood to mean both male and female Crewmembers. It is further understood that there shall be no discrimination by either party against any Crewmember who is now, or may become, subject to the terms of this Agreement because of age, race, sex, color, religion or national origin. (E) SCOPE, CONSOLIDATION OR ACQUISITION 1. It is agreed that all present and future flying performed in and for the service of the Company under FAR Part 121, and all ferry flights under FAR Part 91 for the purpose of positioning and/or depositioning from or to a revenue trip, in aircraft listed on the Company's Operations Specifications List presently issued by the FAA, or any future list, shall be performed by Crewmembers on the Company Master Seniority List in accordance with the terms and conditions of this Agreement or any other applicable agreement between the Company and the Union. 2. In the event that no Crewmember on the Company Master Seniority List is available, or qualified for the purpose of operating a flight, the Company shall have the right to obtain temporary crewmembers to operate said flight. This applies only to FAR part 91 ferry flights. No Crewmember on the Company Master Seniority List shall be reduced in crew class or suffer any loss of guarantee as defined in Article XIX, or employee benefits as defined in Article XVIII, as a result of the flight. 3. In the event the Company's operational requirements necessitate the wet lease of additional equipment in order to provide service to its customers or potential clients and/or the expansion of its markets, the following procedures shall apply: a. The Company shall notify the Union within three (3) working days prior to the commencement of any lease operation, to include the reason(s) for the lease, the equipment to be utilized, the hours of flying, the duration, and the effect of the operation upon the Company's Crewmembers. This applies only to wet lease agreements of more than fifteen (15) days. b. No Crewmember within the bargaining unit on the date of any wet lease shall be reduced in crew class or suffer any loss of guarantee as defined in Article XIX, or employee benefits as defined in Article XVIII, as a result of the wet lease agreement. 2 6 4. In the event the Company purchases or acquires another Company that employs Crewmembers or has a lease agreement for Crewmembers, no Crewmember within the bargaining unit on the date of acquisition or purchase shall be reduced in crew class or suffer any loss of guarantee as defined in Article XIX, or employee benefits as defined in Article XVIII, as a result of such acquisition or purchase. 5. The Company agrees not to establish a third party leasing device to evade this Agreement. ARTICLE II - DEFINITIONS As used in this Agreement, except as otherwise provided: (A) "Pilot" means Captain or First Officer as herein defined. (B) "Captain" means the Pilot who is designated to be in command of the aircraft and its crewmembers while on duty and who is properly qualified under F.A.R. Part 121 to serve as a Captain and holds a Crew Class bid as a Captain. (C) "First Officer" means a Pilot, who is designated as second in command, and who is properly qualified under F.A.R. Part 121 to serve as a First Officer and holds a Crew Class bid as a First Officer. (D) "Flight Engineer" means a Crewmember whose duty is to perform the function of a Flight Engineer as designated and who is properly qualified to serve as a Flight Engineer under F.A.R. Part 121, and holds a Crew Class bid as a Flight Engineer. (E) "A & P Flight Engineer" means a Crewmember whose duty is to perform the function of a Flight Engineer as specified by the Company and who holds an Airframe and Powerplant Certificate and has been designated by the Company to perform required maintenance on Company Aircraft and holds a Crew Class bid as a Flight Engineer. (F) "Category" means the respective crew skill (Pilot or Flight Engineer) held by a Crewmember. (G) "Crewmember" means the Pilots and Flight Engineers covered by this Agreement employed by the Company. (H) "Crew Class" means the respective job designation of a Crewmember within his respective category, as follows: 3 7
CATEGORY CREW CLASS (Craft) (Bid) Pilot Captain First Officer Flight Engineer Flight Engineer A & P Flight Engineer
(I) "Flight Pay" means the hourly rate of pay based on the time the Crewmember performs the duties of a Crewmember, and shall be measured Block to Block. (J) "Block to Block" means the period of time from the moment the restraining devices are removed from the aircraft for the purposes of flight, until restraining devices are reinstalled at either the point of departure, an intermediate stop, or the final destination. (K) "Standing bid on File", is a bid submitted in conjunction with a Master bid that reflects a Crewmember's preference(s). (L) "Master Bid" is a list of current and projected aircraft type and Crew Class positions provided by the Company. (M) "Type" means the various aircraft operated by the Company. (N) "Base" means the geographical point designated by the Company from which a Crewmember operates. (O) "Domestic" means the forty-eight (48) contiguous states and the District of Columbia as defined in the F.A.R.'s. (P) "International" means any point or area outside the forty-eight (48) contiguous states and the District of Columbia as defined in the F.A.R.'s. (Q) "Reduction" means a reduction in flying hours caused by whatever reason and is considered a temporary situation. (R) "Revenue Flying" for crew pay purposes means all flying performed on aircraft operated by the Company. 4 8 (S) "Duty Time" means that time interval between the time a Crewmember is required to report for duty and the time he is released from duty as specified in Article XV, Section B. (T) "Day" means a calendar day, measured form 0001z to 2400z as specified. (U) "Active Service" means all accumulated time, commencing with date of hire as a Crewmember, for which the Crewmember is paid by the Company, including any time that he receives any portion of sick leave pay. (V) "Foreign Base" means any base outside the United States and the District of Columbia. (W) Bid Period - a period of duty days and intervening days off, beginning at 0001Z on the first day of the month and ending at 2400Z on the last day of the month. There are 12 bid periods in a calendar year. (X) "Month" means the period of time commencing with and including the first day of the month up to and including the last of the month with the exception of the first quarter of the year which shall be as follows: January shall commence on January 1 at 0001Z, and end on January 30 at 2400Z; February shall commence on January 31 at 0001Z and end March 1 at 2400Z; March shall commence on March 2 at 0001Z and end March 31 at 2400Z. (AA) Deadhead - the time spent by a Crewmember in traveling from one point to another at the direction of the Company, either for duty or returning from duty. (BB) Wet Lease - The leasing of aircraft with a flight crew. (CC) A Line of Flying - a Crewmember's scheduled activities and intervening days off for a bid period, including scheduled flights, layovers, deadhead time and other related activities. (DD) Master Crew Schedule - the schedule of all Crewmember's work and trip information for a bid period, including, but not limited to, all regular and reserve lines of flying, training, layovers, etc., which is posted by the Company after assignments have been awarded to the Crewmembers in accordance with their seniority. (EE) Minimum Bid Period Guarantee (MBPG) - the minimum credit hours a Crewmember will receive in a bid period. 5 9 (FF) Open Time - flights which have become available because of training, vacations, sick leave, etc., after completion of the bid awards. (GG) Reserve Line - a Crewmember's scheduled days of reserve duty and intervening days off for a bid period. (HH) Training - all types of training to include, but not limited to Initial, Transaction, Recurrent, Proficiency, Upgrade, Differences, etc. (II) Dry Lease - The leasing of an aircraft without a flight crew. (JJ) Reserve Crewmember - A Crewmember that holds or is assigned to a Reserve Line of flying that contains open time trips that do not fit into the Master Crew Schedule for a bid period. (KK) Reserve Period - A fixed period of time within a 24 hour day, that a Crewmember may be assigned to a trip. (LL) "F.A.R." shall mean Federal Aviation Regulations. (MM) "Duty Day" means a scheduled day that a Crewmember is required to report for work. (NN) Bid Selection Board - A Board of review that determines the fitness and qualifications of Crewmembers recommended for advancement in Category or Crew Class to fill vacancy positions created by the Company. (OO) "Aloft" shall mean the same as "block to block" as defined in this Agreement. (PP) "Flight Deck Duty" is defined as the time a required Crewmember is at his station in the cockpit during block to block operations. (QQ) New Base a. A new base is geographical location to which Crewmembers are assigned, but to which no Crewmembers were assigned the prior month. A base shall be considered new for a period of six (6) months after any Crewmembers covered by this Agreement were first assigned to it. b. In the event the Company assigns a new or existing aircraft type to an established base to which such equipment was not assigned in the prior month, such base will be deemed to be a new base for Crewmembers awarded 6 10 permanent positions in such equipment at such base for a period of six (6) months from the introduction of such aircraft type to that base. ARTICLE III - UNION SECURITY (A) UNION MEMBERSHIP As a condition of employment, all employees of the Company that are covered by this Agreement shall, not later than the first month after the effective date of this Agreement or initial employment, and monthly thereafter, either tender to the Union directly or authorize the employer to check off periodic and uniformly required Union initiation fees and dues, or in the alternative, service fees in an amount not more than the amount of initiation fees and dues. It shall be a condition of employment that all Crewmembers of the Company covered by this Agreement and hired on or after its effective date shall, on or before the ninetieth (90) day following the beginning of such employment, become and remain members in good standing in the Union, or in the alternative, tender to the Union monthly dues required of the Union members, such sums to be recognized as "Service Fee". (B) INITIATION FEES AND DUES DEDUCTION The Company shall deduct from the wages of any employee covered by this Agreement said employee's dues plus $13.00, as a member of the Union, or service fee plus $13.00, upon receiving the employee's voluntary and individual written authorization for the Company to make such deductions, signed by the employee. Such authorization form to be provided by the Union. It is expressly agreed that no employee shall be deprived of employment under this Article for any reason other than his failure to tender or authorize the check off of periodic dues and/or initiation fees which are uniformly required as a condition of acquiring and retaining membership in the Union or service fees which shall be not more than the dues and initiation fees uniformly required for Union members. The Company shall deduct said employee's dues in the month in which the employee is recalled from furlough or returns from a leave of absence. In the event the employee is recalled from furlough or returns from a leave of absence after the dues have been deducted for the month, the Company will be permitted make a double deduction in the following month. The Company shall pay to the proper officers of the Union the wages withheld for such initiation fees, service fees and/or Union dues. The amount so withheld shall be deducted from the first paycheck in each month, reported and paid to the Union within seven (7) days of the issuance of the paychecks. The following information will be reported and transmitted with the monthly checkoff: Employee's Social Security number, full name, due's rate, service fees, rate of pay and status of employment. 7 11 (C) INDEMNIFICATION CLAUSE The Union agrees that it shall indemnify the Company and hold the Company harmless from any and all claims which may be made by the employee or employees against the Company by virtue of the wrongful application or misapplication of any of the terms of this Article. (D) DUES COLLECTION AFTER TERMINATION In the event of termination of employment, there shall be no obligation upon the Company to collect dues until all other deductions have been made. (E) FAILURE TO PAY DUES OR SERVICE FEE The Union agrees that written notice shall be given to the Company at least thirty (30) days before the Company is required to remove such employee from his employment by reason of his failure to maintain his membership in good standing in the Union or pay service fee in accordance with Section (A) of this Article. (F) EMPLOYEE LIST The Company will notify the Union each month of all new hires, terminations, recalls and/or furloughs. The notification will include the employee's name, address, social security number, classification and date of hire, termination, recall or furlough. (G) INDIVIDUAL DUES PAYMENT It shall be the responsibility of any employee who is not on a dues deduction program to keep his membership current by direct payment of monthly dues to the Union. (H) DUES DEDUCTION ERROR Should a deduction be missed, or in the event an insufficient amount is deducted, it is the employee's responsibility to make the proper adjustment with the Union. ARTICLE IV - SENIORITY SECTION A. Seniority, except as modified below, shall be used to determine promotion, retention in case of reduction, assignment or reassignment due to expansion or reduction, and recall from furlough. Seniority shall also apply in the following Articles: Furlough and Recall, Vacations, Leave of Absence, Health and Welfare, Compensation, Vacancy Bidding, Training, and Scheduling. 8 12 1. VACANCIES A. Vacancy - The Company shall determine the number(s) of vacancies per Article XII - Vacancy Bidding. B. Crewmember(s) bidding vacancies shall meet qualification for those positions as outlines in Article XIII - Training and Upgrading. C. Qualified bidders must be recommended by the Bid Selection Board prior to selection for training Crewmembers that fail to qualify or be selected by the Bid Selection Board shall be notified in writing of the reason(s) for non- acceptance and recommendations for improvement. D. The initial vacancy(s) shall be filled from Crewmembers(s) that bid and are awarded the position(s) by Company System-Wide Category Seniority, except as provided for in Articles XII and XIII. E. Providing a vacancy(s) is created by (D) above, the vacancy(s) shall be filled by the most senior Crewmember(s) from the same aircraft type that bid the position(s). F. Any additional vacancies created by (E) above may be filled at the Company's discretion within thirty (30) days. 2. REDUCTIONS When the Company determines that a furlough is necessary the following procedure shall apply. A. The Company shall determine the number of Crewmembers that must be furloughed. B. If the Company elects to discontinue or reduce the use of a certain type of aircraft, Crewmembers from the discontinued or reduced aircraft type shall be retained and trained in accordance with Article VIII - Furlough/Recall. 3. Two separate Seniority Lists shall be established upon the date of ratification of this Agreement. The Pilots' Category Seniority List shall be based on the Crewmember's date of hire with the Company, as defined in C-1 of this Article, adjusted, if necessary, for leaves of absence or furlough. The Flight Engineers' Category Seniority List shall be based on Crewmembers date of hire with the Company, as defined in C-1 of this Article, adjusted, if necessary, for leaves of absence or furlough. The Pilots' Category Seniority List and the Flight Engineers' Category Seniority List shall be established no later than 30 days from date of ratification of this Agreement by the parties. All Crewmembers on the payroll of the 9 13 Company on the date of ratification shall be listed, by date of hire, on either the Pilots' Category Seniority List or the Flight Engineers' Category Seniority List. 4. The Pilots' Category Seniority List shall include all Captains, and First Officers, as defined in Article II, Definitions. The Flight Engineers' Category Seniority List shall include all Flight Engineers and A & P Flight Engineers as defined in Article II, Definitions. All Crewmembers hired by the Company after the date of ratification of this Agreement shall be placed on either the Pilot Category Seniority List or the Flight Engineers Category Seniority List based upon the date of hire. 5. The Company shall post the Pilot Category Seniority List and the Flight Engineer Category Seniority list at the Company base(s) of operations, and stations where the Company maintains an office. The Company shall mail a copy of the Seniority List, to each Crewmember's home address. The person issuing the List shall date and sign the List as of the date of issue and shall provide a copy to the Union. 6. In addition to the Pilot Category Seniority list and the Flight Engineer Category Seniority List, the Company shall construct and post a seniority list by aircraft type. All Crewmembers shall be listed by original date of hire, as defined in C-1 of this Article. SECTION B. The Pilot Category Seniority List and the Flight Engineer Category Seniority List at the time of execution of this Agreement is accepted as final and binding on all parties, not withstanding B-1, B-2, of this section. 1. All Crewmembers shall be listed on the Pilot Category Seniority List or the Flight Engineer Category Seniority List, and each Crewmember shall be permitted a period of ninety (90) days after posting of such List in which to protest in writing to the Company any omission or incorrect posting affecting his seniority. Any dispute that cannot be resolved, shall be presented to an Arbitration process determined by the Executive Council. 2. In the event such Crewmember does not file a protest with the Company within ninety (90) days, after the posting of such list, he shall not thereafter be entitled to file such protest. SECTION C. Seniority position shall be determined by applying the following rules. 1. Seniority shall begin to accrue from the date a Crewmember is first employed by the Company as a Crewmember in the FAR Part 121 Operations, and shall continue to accrue during such period of employment except as otherwise provided in this Agreement. A Crewmember shall be considered as first employed on the date 10 14 he is hired as a Crewmember in the FAR 121 operations. When two (2) or more Crewmembers are employed on the same date in the same Category, they shall be placed on such Category Seniority List according to their age; i.e., the oldest Crewmember shall receive the most senior position on the list. 2. Any Crewmember once having established a seniority date hereunder shall not lose that date except as provided below: (a) Resignation or Retirement; (b) Termination; (c) Furlough of more than four (4) continuous years. 3. When a junior Crewmember is promoted over a senior Crewmember by reason of the failure of the latter to qualify in his turn, the more senior Crewmember shall continue to retain his position on the Crewmember Category Seniority List. 4. Seniority for longevity pay and other benefits not specifically addressed herein shall be based upon the Crewmember's date of hire with the Company in any capacity, adjusted, if necessary, for leaves of absence and furloughs. 5. Crewmembers furloughed out of Seniority prior to the signing of this Agreement will not have their original date of hire adjusted. SECTION D. All of the Seniority Lists shall contain the following information: (a) The date of the list; (b) The category identification of the list, i.e., pilot or flight engineer; (c) Seniority numbers; (d) Crewmember's name: (e) Date of hire; (f) Birth date; (g) Current aircraft assignment; (h) Status (crew class); (i) Check or management status; and (j) Leave Status (Aircraft Type Seniority List only). (k) Assigned Crew Base 1. Crewmembers shall be on probation until they have accumulated 14 months of service from date of hire in FAR 121 operation as a Crewmember, or completed their annual proficiency check, whichever comes first. During this period, such Crewmember will be placed on the Seniority List, but does not accrue Seniority and may be discharged or disciplined without recourse to the Grievance Procedure. At the completion of such probationary period, the Seniority shall date back to the original date of hire as a Crewmember in the FAR 121 operation. All time spent by a newly hired Crewmember in training or probationary periods, shall be cumulative. A probationary Crewmember that is furloughed or takes leave of absence during his 11 15 probationary period shall, upon recall, complete his probationary period; however, previous active service will be cumulative for all pay and benefits. SECTION E. In recognition of the fact that as of the date of ratification of this Agreement, certain Crewmembers are holding Type and Crew Class assignments not warranted by their date-of-hire seniority, the Company and the Union agree that Crewmembers holding such assignments shall not be displaced. As vacancies are filled by more senior Crewmember, these senior Crewmembers shall be placed in Type and Crew Class according to their respective Category Seniority list upon achieving required experience. 1. Upon establishment of the Pilot's Category and Flight Engineer's Category Seniority Lists as outlined in this Article, the Company shall post a "Master Bid". The Master bid shall clearly indicate all positions by Type and Crew Class for each Type of aircraft being operated by the Company. The Master Bid shall be mailed to each Crewmember's home address and posted at the all Company base(s) of the operations, and at stations where the Company maintains an office. The Company shall mail a copy of the Master Bid to the Union. The Master Bid shall close thirty (30) days after date of posting. The Master Bid shall remain in effect until a new Master Bid is issued by the Company. A Crewmember may amend his "Standing Bid on File" any time prior to the closing date for posted vacancies. 2. On the Master Bid, all Crewmembers shall submit bids. The Crewmember may list multiple choices on his bid such as B-747 Captain, B-747 First Officer, B-747 Flight Engineer, DC-8 Captain, DC-8 First Officer, DC-8 Flight Engineer, etc. All Crewmembers will be assumed to have bid their present position, if no bid is submitted. 3. All bids shall be made on forms provided and directed to the Office of the Director of Operations. Each bid submitted shall become a "Standing Bid on File" and shall be used for all subsequent bids or vacancies. 4. All Crewmembers holding a position in Type and Crew Class as of the date of ratification of this Agreement may not be displaced by a more senior Crewmember, except as provided for in this Agreement. 5. The Company shall issue a new "Master Bid" when it is known that a type of aircraft, not currently listed on the Company's FAA certificate is to placed into service. SECTION F. Within the first ten (10) days of January and the first ten (10) days of July, of each year, the Company shall issue and post at the Company's base(s) of operation and stations where the Company maintains an office, a Pilot Category Seniority List and Flight Engineer Category Seniority List, compiled in accordance 12 16 with this Article. Such lists shall contain all information as defined in Section D. of this Article. The person issuing the Lists shall date and sign the Lists as of the date of issue, and shall provide a copy to the Union. The provisions of Section (B) (1)-(2) of this Article shall apply. SECTION G. The following provisions will apply to Pilots and First Officers over FAA Mandatory age. 1. Pilots and First Officers, whether in Active Service, on leave, or on furlough status, who attain the age of sixty (60) years (or the then current mandatory age) and are therefore not permitted by Federal Air Regulations to fly as a Captain or First Officer may elect to exercise their seniority to fill a vacancy as a Flight Engineer. The Crewmember must meet minimum experience requirements as set forth in this Agreement. When the Crewmember has completed training and is qualified in the new position, his name shall be placed at the bottom of the Flight Engineers Seniority List for bidding purposes only. He shall continue to retain his Company-Wide Seniority number, for longevity and other benefits. The Crewmember shall complete a new Probationary Period as covered in Section D-1 of this Article. 2. The Pilot must possess the appropriate medical certificate, A & P License and evidence of satisfactory completion of required FAA written examination to hold a Flight Engineer's position. The Crewmember must make himself available at a time convenient to the Company for training for the Flight Engineer position. 3. The Pilot electing to exercise this option, must notify the Director of Operations, in writing, at least sixty (60) days prior to reaching age (60). Failure to provide such notification to the Company shall constitute a waiver of his rights under this Section. SECTION H. The following provisions will apply to Pilots that fail to maintain a First Class Medical certificate as required by the FAA. 1. Any Pilot that is able to maintain a Second Class medical certificate may elect to remain as a First Officer. ARTICLE V - GRIEVANCE PROCEDURE SECTION 1. Any Crewmember or group of Crewmembers covered by this Agreement who have a grievance shall have such grievance(s) considered and processed in accordance with the following procedure. It is the intent of the parties to resolve grievances or potential grievances informally, whenever possible, and there shall be 13 17 an earnest effort on the part of the parties to settle grievances promptly in accordance with the procedure outlined herein. A grievance is hereby jointly defined to-be any controversy, complaint, misunderstanding, or dispute arising as to interpretation, application or observance of this Agreement. All unsettled grievances, as defined above, shall be subject to the following procedure: (A) Any Captain or First Officer having a grievance shall present it to the Chief Pilot or his designee. Any Flight Engineer having a grievance shall present it to the Chief Flight Engineer or his designee. The Crewmember must present the grievance within ten (10) days of his knowledge of its occurrence. If satisfactory settlement is not reached within ten (10) days thereafter, then the grievant(s) may proceed to Step "B" below. (B) The Crewmember shall reduce the grievance to writing and present it to the Director of Operations or his designee. All grievances must be filed in writing within fifteen (15) days of failure to resolve the grievance in Step "A" above. If satisfactory settlement is not reached within fifteen (15) days thereafter, then the grievant(s) may proceed to Step "E" below. (C) A Union Representative may accompany or represent any Crewmember in Steps "A" and "B" above. (D) The time limits set forth in Paragraphs "A" and "B" above, may be extended in writing, by mutual agreement of the Company and the grievant(s). (E) If the grievant(s) is not satisfied with the decision of the Director of Operations or his designee or the Company fails to respond within the time limits set forth, within "B" above, the grievant(s) may appeal such decision to the Crewmember's Systems Board of Adjustment. Such appeal shall be made by the grievant(s) in writing within fifteen (15) calendar days from the date of receipt by the grievant(s) of the decision of the Director of Operations or his designee. (F) Failure on the part of the grievant(s) to appeal within the limits specified herein, shall constitute a waiver of the failing party's position unless an extension of time has been mutually agreed to in writing between the Company and the grievant(s) or the Union. SECTION 2. Nothing in this section shall be construed as extending the rights of Section 1. to a probationary Crewmember as it relates to discipline and/or discharge. 14 18 (A) The employer shall not be required to recognize any Crewmember as a Union Representative unless, and until, the Union has duly certified, in writing, that the Crewmember is a designated Union Representative. (B) The Employer shall provide the Union, on the effective date of this agreement, and immediately thereafter upon the effectuating of any changes herein, the name of any individual to whom grievances are to be directed pursuant to the steps outlined in Section 1., Paragraphs "A" and "B". (C) In the case of discipline or discharge, such Crewmember shall be notified in writing of the precise charge or charges against him, with a copy to the Union Representative. ARTICLE VI - SYSTEM BOARD OF ADJUSTMENT SECTION 1. In compliance with Section 204, Title II of the Railway Labor Act, as amended, there is hereby established a System Board of Adjustment for the purpose of adjusting and deciding disputes which may arise under the terms of the Grievance Procedure and which are properly submitted to it. The Board shall be known as American International Airways Crewmembers Systems Board of Adjustment, hereafter referred to as the "Board". SECTION 2. COMPOSITION OF THE BOARD (A) The Board shall consist of four (4) members, two (2) of whom shall be selected and appointed by the Company and two (2) of whom shall be selected by the Union, and such appointees shall be known as "Board Members." In addition, the Company and the Union shall each designate/select an alternate, and in the event of unavailability of a Board Member, such alternate shall serve in place of the absent Board Member. (B) The two (2) Board Members appointed by the Company and the two (2) Board Members selected by the Union, and their alternates, shall serve for one (1) year from the date of their selection and thereafter until their successors have been duly selected. Vacancies shall be filled within thirty (30) days in the same manner as is provided herein for the selection of the original Board Members and the original alternates. (C) The terms of office of Chairman and Vice Chairman shall be one (1) year. Thereafter, from year to year, the Board shall designate one (1) member to act as Chairman and one (1) member to act as Vice Chairman for one (1) year or until his or her successor has been duly selected. Such terms of office shall commence on January 1 of each year. 15 19 (D) The office of Chairman shall be filled and held alternately by a Board Member selected by the Union and by a Board Member appointed by the Company. When a Board Member selected by the Union is Chairman, a Board Member appointed by the Company shall be Vice Chairman and vice versa. The Chairman, or in his absence, the Vice Chairman, shall preside at meetings of the Board and at hearings and shall have a vote in connection with all actions taken by the Board. (E) The Board shall meet at any location of its choosing commencing the months of January, April, July and October of each year, at a time to be fixed by the Board, provided that at such time there are cases filed with the Board for consideration. The meetings shall continue in session until all matters before it have been considered unless otherwise mutually agreed upon in writing. The Chairman may schedule additional board meetings if requested by other Board members as specified in Section 4-B below. Each party shall assume the cost of their own expenses. (F) Employees required to serve a Board Members shall be released from flight duty and shall suffer no loss of guarantee pay. (G) All members of the Board shall be employees of the Company. SECTION 3. JURISDICTION OF THE BOARD (A) The Board shall have jurisdiction over all disputes growing out of the Grievance Procedure. The jurisdiction of the Board shall not extend to negotiations of a new or revised Agreement. (B) The Board shall consider any dispute properly submitted to it when such dispute has not been previously settled in accordance with the provisions of Grievance Procedure. SECTION 4. PROCEEDING BEFORE THE BOARD (A) All disputes properly referred to the board for consideration shall be addressed, in writing, to the Chairman. Five (5) copies of each petition, including all papers and exhibits in connection therewith, shall be forwarded to the Chairman, who shall transmit one (1) copy thereof to each member of the Board within seven (7) calendar days. Each case submitted in writing shall include the following: 1. question or questions at issue; 2. statement of facts; 3. position of grievant(s); 4. position of the Company. 16 20 (B) Upon receipt of notice of the submission of a dispute, the Chairman shall set a date for hearing, which shall be the time of the next regular meeting of the Board as provided in Section 2-E. above, or if at least two (2) Board Members, one (1) from the Company and one (1) from the Union, consider the matter of sufficient urgency and importance, then at such earlier date and at such place as the Chairman shall agree upon, but not more than thirty (30) days after such request for a meeting is made. The Chairman shall give the necessary notices in writing of such meeting to the Board Members and to the parties to the dispute. (C) Crew members covered by the grievance procedure may be represented at the Board hearing by such person or persons as they may choose and designate, and the Company may be represented by such person or persons as it may choose to designate. Evidence may be presented either orally or in writing, or both. (D) The Board Member(s) may summon witnesses who are deemed necessary by the Board. (E) The Board shall be competent to hear the disputes properly submitted to it and decide such disputes by a majority vote of all members of the Board. Decisions of the Board shall be final and binding upon the parties hereto. SECTION 5. DEADLOCK PROCEDURES (A) When a dispute is properly submitted to the Board for hearing before the two (2) Company and two (2) Union Board Members, or their alternates, and the Board is unable, by majority vote, to decide the dispute, the Board shall declare itself deadlocked and the dispute may be submitted to the Board of Arbitration by the Union within twenty (20) calendar days from the close of the Board Hearing by written notice to the company with copies to the Chairman. (B) If the Union fails to serve such notice within twenty (20) calendar days, the Board of Arbitration shall have no jurisdiction. In such case, the controversy shall be considered withdrawn and no action thereon shall be taken thereafter by any party. (C) It is understood and agreed that each and every Board Member shall be free to discharge his duty in an independent and uncoerced manner without fear that his individual relations with the Company, with the Crewmembers, or with the Union will be affected in any manner by any action taken by him in good faith in his capacity as a Board Member. (D) If new evidence becomes available to the Company or the Union prior to the scheduled date of Arbitration, the evidence shall be provided to the System Board for consideration. If the Board determines that the evidence justifies a "New Hearing" 17 21 the Board shall notify the parties concerned. If the Board "deadlocks" on the evidence submitted, the evidence shall be given to the arbitrator for his consideration. ARTICLE VII - BOARD OF ARBITRATION SECTION 1. There is hereby established a Board of Arbitration, hereinafter referred to as the "Arbitration Board," for the purpose of adjusting disputes or grievances of any Crewmember which may arise under the terms of this Grievance Procedure and which are properly submitted to it after all steps for settling disputes or grievances, as set forth in Grievance Procedures and System Board of Adjustment have been exhausted. SECTION 2. The Arbitration Board shall consist of two (2) members of the System Board of Adjustment elected by the Union and two (2) members selected by the Company and a fifth member selected as set forth below. SECTION 3. In the event any dispute or grievance is properly appealed to the Arbitration Board, the Union may request the National Mediation Board to provide a list of seven (7) names. The parties shall select one (1) name by alternately striking names from the list of seven (7) names. The order of striking shall be determined by lot for the first case in which a neutral member is chosen under the provision hereof and in subsequent cases, the parties shall alternate taking the first strike. SECTION 4. The Arbitration Board shall hear and determine the dispute or controversy as promptly as possible. The decision of the majority of the Arbitration Board shall be final, binding, and conclusive to the parties thereto. Such decision shall be within the scope and terms of this Agreement but shall not change any of its terms and conditions. All Arbitration Board hearings will be held at a place determined by the Board. SECTION 5. (A) Each of the parties hereto shall assume the compensation, traveling expense, and other expenses of its Arbitration Board Members and witnesses called or summoned by it. The party whose position is not sustained by the Arbitrator shall pay all of the expenses of the fifth Arbitration Board Member, unless the Arbitrator should determine otherwise. (B) Should the Company or the Union independently request a "court reporter" be present at the hearing, the cost of the "court reporter" shall be borne by the requesting party, unless both parties request a "court report," then the cost shall be equally split between the parties. 18 22 SECTION 6. (A) The Arbitrator shall have no power to add to, or subtract from, or modify any of the terms of this Agreement, nor shall he substitute his discretion for that of the employer or the Union. (B) The Arbitrator shall have no right to accept evidence that was not submitted in System Board of Adjustment. (C) The decision of the Arbitrator shall be final and binding on both parties and the award of the Arbitrator shall be enforceable as the agreement of the parties, at law or in equity, in any Federal Court having jurisdiction thereon. (D) The Arbitrator shall have the sole and exclusive power and jurisdiction to determine whether or not a particular grievance dispute or complaint is arbitrable under the terms of this Agreement. ARTICLE VIII - FURLOUGH AND RECALL (A) Prior to a "reduction in force" by reverse category seniority order, a "voluntary furlough" may be granted to any Crewmember that requests such with the understanding that all recall rights are subject to the provisions in this Article. (B) 1. When a reduction in force for Crewmembers covered by this Agreement becomes necessary, only those Crewmembers(s) who have less than two (2) years of active service with the Company on the date of furlough may be furloughed in reverse order of seniority by equipment type. When a Crewmember is to be furloughed, he shall be given fourteen (14) days advance notice, or pay in lieu thereof. 2. In the event it becomes necessary to displace Crewmembers with more than two (2) years of active service on the effective date of the furlough, these Crewmembers shall have seniority rights as provided for in this Agreement, including the right to displace a more junior Crewmember on any type of equipment, within their "Category", as defined in Article II, of this Agreement. 3. Crewmembers that are displaced in Section (B)2. of this Article and exercise their seniority rights to displace a more junior Crewmember shall be selected if required by Article XII, Section R and trained by the Company as provided for in Article XIII, of this Agreement. 4. A Crewmember recalled from furlough as provided in (B)1. above shall be paid "Training Pay", while requalifying. 19 23 (C) Such advance notice shall not be required where the furlough is cause by a strike, Act of God, involuntary grounding of Company aircraft, or other circumstances over which the Company has no control; however in such cases the Company shall give as much notice as possible. All notices of reduction in force shall be in writing and posted at the Company base and other stations where the Company maintains an office. Notification shall be registered or certified mail, return receipt, mailed to the Crewmembers last address on file with the Company or hand-delivered to and receipted by the Crewmember(s). (D) Crewmembers who are furloughed shall continue to accrue seniority during the period of furlough for re-bid purposes, but shall not accrue longevity for pay purposes. Reemployment shall be subject to the recalled Crewmember's holding of the appropriate current FAA medical certificate required by his position. The Crewmember shall be required to serve the unexpired portion of his probationary period if any. (E) A Crewmember shall file his address with the Company and thereafter advise of any change of address immediately. It is the Crewmembers responsibility to ensure the Company has his current address and telephone number on file. (F) All furloughs shall expire at the end of four (4) years from the effective date of such furlough and any accrued seniority shall be forfeited. (G) A Crewmember may pass up recall if there are sufficient Crewmembers to fill all positions. A Crewmember must honor a recall if there are no Crewmembers junior to him on furlough. If the junior Crewmember refuses recall he shall be terminated. (H) All recalls of furloughed Crewmembers shall be accomplished through the following procedure: 1. Crewmembers on furlough shall be recalled in the order of category seniority. The recall shall be accomplished in such manner that Crewmembers who have been reduced and those being recalled from furlough are able to exercise seniority to the type, Category and Crew Class to which their respective seniority would entitle them. 2. A Crewmember's notice of recall from furlough shall be in writing, by certified or registered mail, return receipt, to the Crewmember's last address on file with the Company. This written notice shall fulfill the Company's obligation to notify a Crewmember of a recall. A copy of all recall notice shall be supplied to the Union. The Crewmember shall reply, in writing, to the Company within fourteen (14) days of the recall notice by certified or registered mail, return receipt. If he accepts recall, he shall present himself to the Company prepared to return to duty within fourteen 20 24 (14) days of the recall notice. If the Crewmember's address on file with the Company is outside the 48 contiguous states he shall be allowed thirty-one (31) days in which to return. After accepting recall, should a Crewmember fail to report within the time specified he shall be considered to have waived all of his rights under this Agreement. However if, after accepting recall, the Crewmember is unable to report due to circumstances beyond his control he may remain on furlough status until the next recall is issued. 3. A Crewmember shall be considered terminated if he fails to return to duty or advise the Company of his acceptance of the recall, within the terms stated in paragraph 2. above. 4. A recall shall be for a minimum of two (2) bid periods. 5. Newly hired Crewmembers may not fly on the line until Crewmembers senior to them have been recalled. 6. Crewmembers may accept early recall and waive the provisions of H-2 above. Early recall may be through the use of telephone or other means available to contact the Crewmember(s). ARTICLE IX - LEAVES OF ABSENCE (A) PERSONAL LEAVES When the requirements of the Company will permit, at the sole discretion of the Company, and upon written request submitted by the Crewmember to the Company as far in advance as possible, a Crewmember may be granted a leave of absence without pay. When such leaves are granted, the Crewmember shall retain and continue to accrue seniority during the first sixty (60) days of leave in any twelve (12) consecutive months. The Crewmember shall not accrue sick leave credit, vacation or longevity for pay purposes, starting with the first day of the month following the month in which his leave commenced. Accrual shall commence on the first day of the month in which he returns from leave. Such leave or leaves may be extended for additional periods when approved in writing by the Company. The Crewmember shall be responsible to pay for his Group Health Care Benefits during any personal Leave period. A Crewmember returning from an authorized leave or extension thereof, as provided herein, shall be permitted to resume his position in accordance with his seniority. (B) MILITARY LEAVE OF ABSENCE Any Crewmember who enters military service shall be granted military leave in accordance with applicable federal laws and regulations. Such military leave shall 21 25 be without pay from the Company. Return to Company duty shall be subject to a reasonable requalifying period not to exceed thirty (30) days. (C) UNION LEAVE OF ABSENCE One Crewmember appointed as a Union official, representative, or delegate shall be granted a leave of absence without pay, and shall be guaranteed reemployment at the end of such period with the same seniority rights as if he had been continuously employed. The Crewmember shall be responsible to pay for his Group Health Care Benefits during any Union Leave period. (D) MEDICAL LEAVE OF ABSENCE When a Crewmember's sick leave bank has been exhausted and his still unable to return to Active Status, he will automatically be placed on Medical Leave of Absence without pay, and shall not accrue vacation time. A Crewmember may supplement his sick leave bank with earned vacation time. A Medical Leave of Absence shall not exceed three (3) years. (E) FUNERAL LEAVE OF ABSENCE In the case of death in the immediate family, a Crewmember is entitled to three (3) days leave with pay for the purpose of attending the funeral. Immediate family shall be limited to the Crewmember's spouse, children, stepchildren, father, father-in-law, stepfather, mother, mother-in-law, stepmother, sister stepsister, brother, and stepbrother. Additional time for bereavement may be requested from the Crewmember's accumulated vacation days, if any. The Crewmember may be required to provide verification of attendance at the funeral. A Crewmember who has a death of an immediate family member during a vacation period must notify his supervisor immediately upon receiving notice of the death and shall have up to three (3) days of remaining vacation rescheduled at a later date, provided the Crewmember attends the funeral service. Funeral Leave of Absence shall not apply when the Crewmember was scheduled for days off. (E) Family Medical and Leave Act (FMLA) Crewmembers are permitted leaves of absence to the extent required by, and in accordance with the terms of, the Family Medical and Leave Act (FMLA). All requests for FMLA leaves, and the terms of such leave, are governed by the FMLA. A Crewmember may request leave in excess of that required by the FMLA, or under circumstances not covered by the FMLA. Such leave shall be governed by the Personal Leave provisions of this Article. During personal leave required by FMLA, the Crewmember continues to accrue seniority and longevity for pay purposes. A 22 26 Crewmember returning from a leave required by the FMLA shall be permitted to resume his position in accordance with his seniority. (F) CONDITIONS 1. A Crewmember on personal-leave shall not, without prior written permission of the Company, engage in any employment. 2. A Crewmember returning from leave shall receive training pay during the requalification period, if required, not to exceed thirty (30) days. ARTICLE X - SICK LEAVE (A) 1. Upon date of ratification of this Agreement, each Crewmember shall begin accruing sick days at the rate of seven twelfth (.58333) of a day per month or seven (7) days annually. Upon date of ratification of this Agreement, all Crewmembers shall be credited with seven (7) days of sick leave. Crewmembers with less than one (1) year of service on date of ratification, shall not accrue additional sick leave until they complete one (1) year of service. 2. All Crewmembers hired after the date of ratification, shall be credited with seven (7) days of sick leave, but shall not accrue additional sick leave credit until they have completed one (1) full year of service. 3. The maximum accrual for sick leave is twenty-eight (28) days. Except as otherwise provided for in this Article, there will not be a payoff of sick leave when a Crewmember reaches this maximum. 4. Normal sick leave shall be used only for absence resulting from non-occupational illness or injury. No Crewmember can perform any services of any kind for any other employer during any time he is on sick leave from the Company. 5. No Crewmember shall be charged sick leave on days that he was scheduled to be off. 6. A Crewmember on sick leave shall retain and continue to accrue seniority irrespective of whether or not he is able to maintain the certificate required for his status until he is able to return to duty. 7. A Crewmember returning from sick leave shall exercise his seniority to resume his assignment. 8. A day of sick leave shall be worth 2 hours of flight pay for credit purposes. 23 27 (B) 1. Crewmember's eligible for Worker's Compensation benefits are not eligible for Company sick leave benefits. 2. Crewmembers eligible for short term or long term disability payments from Company sponsored insurance programs will not be concurrently eligible for sick leave benefits. 3. Crewmembers eligible for state or federal disability benefits will have their sick leave benefits reduced by the amount of the payment provided by the state or federal benefit. (C) A Crewmember shall be considered on sick leave from the time he is unavailable for flight duty because of illness or injury until he reports that he is available for flight duty or goes on days off. (D) 1. The Company reserves the right to require a doctor's excuse to substantiate each occurrence of illness or injury. In the event that the Crewmember is required to see a doctor designated by the Company, the Company shall pay the cost of the exam. 2. The Company reserves the right to require a doctor's release that authorizes return to duty status for each occurrence of illness or injury. In the event that the Crewmember is required to see a doctor designated by the Company, the Company shall pay the cost of the exam. (E) A Crewmember who takes sick leave shall not have such time deducted from his scheduled vacation time. A Crewmember on sick leave at the time his scheduled vacation time commences shall be removed from sick leave status during the vacation and returned to sick leave status at the end of the vacation period if the illness persists. (F) A Crewmember who is on paid sick leave shall continue to accrue vacation time during the first month of his sick leave. (G) A Crewmember furloughed due to a reduction in force shall have all sick leave accrued prior to the furlough credited to him in the event of a recall. (H) Within one hundred and twenty (120) days of the ratification of this Agreement, each Crewmember's pay statement shall show his accrued sick leave. (I) Each Crewmember's pay statement shall show his accrued normal sick leave credits. 24 28 (J) No Crewmember shall be entitled to sick leave when sickness or injury is due to Crewmember's willful disregard of accepted safety practices, willful intention to injure himself or another, sickness or injury while in the employ of anyone else or the use of alcohol or illegal drugs. (K) If the Crewmember elects to continue working until reaching retirement age imposed by the FAR's, the Company shall pay the Crewmember fifty percent (50%) of any accumulated sick leave at the time of retirement. This shall be paid at the base rate for the current category that the Crewmember holder. This will not include longevity pay. (L) Maximum charged sick leave in a bid period cannot exceed the duty days in a bid period. (M) Each Crewmember while on sick leave shall receive payment from his sick leave bank in any bid period that he loses pay hours. Such payment will be limited to his applicable (MBPG). His sick leave bank will be debited in the amount of his applicable (MBPG) less his pay hours. ARTICLE XI - VACATION (A) 1. A Crewmember employed by the Company shall earn a vacation based on his active service with the Company in accordance with the following schedule:
Vacation Days Vacation Days Years of Service Earned Per Month Earned per Year ---------------- ---------------- --------------- 1 - 4 1.16 14 5 + 1.75 21
2. Vacation shall be available for use after one year of service. Crewmembers shall not be eligible to receive Vacation Pay until they have completed one (1) full year of service. 3. A Crewmember shall be paid at the regular pay periods while on vacation. Vacation pay shall be computed at the Crewmember's rate of pay in effect at the time such vacation is taken. In no event shall a Crewmember receive, for a bid period in which all or part of his vacation may occur, less than any guarantee he may be entitled to as specified in Article XIX, Compensation. (B) 1. For Crewmembers with less than one (1) year of service as of December 31, the Company shall credit the Crewmember with (1.16) days for each month of Active Service. A Crewmember with less than one year of service, may bid a vacation period in the following calendar year based on the vacation days accrued through December 31, of the current year. 25 29 Example: Crewmember hired in April bids a vacation in October for the following year. The Crewmember has earned nine (9) months of vacation at (1.16) days per month, as of December 31, for a total vacation of ten (10) days. 2. A Crewmember shall not be required to perform any duties while on a scheduled vacation. 3. A Crewmember shall not be charged vacation days on scheduled days off. Any vacation days that conflict shall be banked for future use by the Crewmember. The Crewmember may elect to receive payment for the vacation in lieu of banking the time for future use. (C) 1. On or before October 1st of each year, the Company shall post the vacation periods available for the next calendar year. Preference for the periods in which Crewmembers shall take their vacation shall be granted in order of seniority, in Type and Crew Class at the Crewmember's base. The Company shall post the vacation awards or assignments, in Type, Crew Class and Base, as indicated from the Crewmember's preferences no later than the 10th of November of each year. 2. VACATION SPLITS AND OPTIONS (a) Subject to the provisions of this Article, A Crewmember's vacation earned may be: (1) Taken in the calendar year bid; (2) Purchased by the Company, at the Crewmember's option; and (3) Banked by the Crewmember for future use. Each Crewmember must indicate on the bid form his option(s) as provided for in this section regarding the use of vacation time for the following year. (b) Vacations may be split into periods of not less than (7) seven days, i.e., 14 days vacation = 2 periods; 21 days vacation = 3 periods; etc. The Crewmember that elects to split his vacation periods shall have seniority preference to one (1) vacation block only. The remaining vacation block(s) shall be awarded after all other Crewmembers have exercised their choice under paragraph (1) above. A Crewmember may elect to submit a bid for a vacation period of more than (7) days but less than (14) days. The Crewmember shall be awarded the vacation period as provided for in paragraph C-1 of this Article. Any remaining vacation time in excess of actual days used may 26 30 be purchased back by the Company at the Crewmember's option or banked for future use. Example: Crewmember has earned (14) days of vacation and bids one vacation period of (10) days for the following year. The Crewmember is awarded the vacation bid as provided for in paragraph C-1 of this Article. The Crewmember elects to bank the remaining four (4) days of vacation time to the following year. (C) At the Company's option, and providing the Crewmember has earned vacation days banked, the Company may grant short term vacation periods. A Crewmember requesting a short term vacation period must provide at least five (5) days notice to the Company prior to the start of the vacation date. (D) A Crewmember may elect to have the vacation time purchased back by the Company. A Crewmember must indicate his option(s) as provided for in Section 2-a of this Article at the time bids are submitted. The Crewmember shall receive payment for the vacation in the month of his date of hire or any other time mutually agreed to between the Crewmember and the Company. Vacation shall be paid based on three and one-third (3 1/3) hours pay, per day, at the Crewmembers current hourly rate. 3. Vacation Bids and Notification (a) The Company shall send written notification to each Crewmember indicating his: equipment seniority by crew class, type, base and the vacation days to be bid. The notification shall be sent to the Crewmember's home address, placed in his Company mail box, and a master notification posted at all Company base(s), and any line station where Crewmembers will or may transit during October. (b) Bidding for vacations must be made on the form(s) provided by the Company and bidding shall close on October 31, and shall be awarded as assigned by November 10th. If November 10th falls on a weekend, the awards will be posted on the first working day thereafter. (c) The Crewmember must include enough choices for his seniority position. A Crewmember failing to notify the Company during the vacation selection schedule of his bid preferences shall have his vacation time banked for the following year. 4. (a) After vacation dates have been awarded or assigned, they shall not be changed except where the demands of the service require, or by mutual agreement between the Crewmember involved and the Company. The Company shall not change any vacation date after the sixtieth (60) day prior to the beginning of the 27 31 vacation except by mutual agreement between the Crewmember involved and the Company. (b) A Crewmember may elect to relinquish his awarded or assigned vacation by giving the Company written notice at least (60) days prior to the beginning of the vacation. The Crewmember may elect to receive payment for the vacation or bank the remaining vacation days for the following year, providing the total bank days do not exceed the provisions of E-1 of this Article. The vacation period that is vacated by the Crewmember may be given to any Crewmember on a first come, first serve basis. 5. Irrespective of paragraph (4) above, a Crewmember who changes Type or Crew Class after vacation periods have been assigned shall be granted his choice of remaining available vacation periods in his new Type and Crew Class. The Company shall make every effort to permit the Crewmember to retain his originally assigned vacation period. In the event the needs of service preclude retention of this period, the Crewmember shall be notified within twenty-one (21) days that his vacation must be changed and shall be provided a list of vacation periods available. (D) 1. Vacation will begin at 0001Z and end at 2400Z at the Crewmember's Base. 2. The Crewmember's vacation period will slide to commence the next day if such Crewmember, due to a reroute/reschedule, had less than a twelve (12) hour rest period following his release at Base. The Company will return the Crewmember to the Crewmember's Base or other mutually agreed to location to start the Crewmember's vacation. (E) 1. Banked Vacation Time - Earned Credit (a) Vacation time is cumulative for a period not to exceed two (2) years of active service. A Crewmember may bank up to two years of vacation time based on his rate of earned vacation days as provided for in paragraph A-1 of this Article. Example: A Crewmember has completed six (6) years of service with the Company and banks his vacation time for two (2) years. His maximum vacation bank shall not exceed forty-two (42) days. (b) A Crewmember that maintains a vacation bank with maximum credit as provided for in paragraph A-1 of this Article, shall not bid or be awarded vacation periods in the following year in excess of the vacation total days earned, based on years of service. 28 32 Example: Crewmember in E-(1)a, above has a bank of forty-two (42) days vacation time. The Crewmember must take twenty-one (21) days vacation or be paid in lieu thereof in the following year. The Crewmember may not bid or be awarded a vacation in excess of the earned vacation rate for the number of years service in any one year. (F) 1. In the event of termination of employment or retirement a Crewmember shall be paid for all vacation earned and accrued but not previously taken or paid for provided the Crewmember has completed his probationary period, and in case of voluntary termination, he gives the Company at least fourteen (14) days advance written notice of termination. 2. In the event of termination by death, all earned and accrued vacation pay due shall be paid to such deceased Crewmember's designated beneficiary(s), as indicated by such Crewmember's group insurance policy, or by other Company records if that Crewmember was not a member of the group insurance plan, or the Crewmember's estate in the event of insufficient evidence of a designated beneficiary. 3. At the Crewmember's option, he may choose to use part of his earned vacation on a pro rata basis, to supplement his accident and sickness or long term disability benefits. The sum of his disability benefits plus vacation pay may not exceed his normal base pay for the period of absence. 4. A Union representative may be present during the awarding of the vacations. 5. "Active Service" means all accumulated time, commencing with date of hire as a Crewmember, for which the Crewmember is paid by the Company, including any time that he receives any portion of sick leave pay. ARTICLE XII - VACANCY BIDDING (A) A vacancy shall mean additional or open positions in any Category, Crew Class and Type as required by the Company. (B) Any vacancies in Category, Crew Class and Type shall be filled in accordance with the following procedure: 1. The Company shall determine the number of vacancies available and shall post bulletins announcing such vacancies, stating the effective date. A Copy of such bulletin shall be posted at all Company Base(s) and a copy mailed to all Crewmembers, including furloughed Crewmembers. 29 33 2. The bulletin shall stipulate a closing date and time, indicating a deadline for Crewmembers bids for such positions. This date and time shall not be less than fourteen (14) days after the date such bulletin is posted and mailed as provided in paragraph (1). All such bulletins shall be numbered consecutively during a calendar year. 3. All bids for vacancies shall be made on forms provided by and directed to the office of the Director of Operations. Every bid submitted shall become a "standing bid on file" and shall be used for all subsequent bids until a new bid sheet is received. A new bid form may be submitted at any time after the final results are posted of a previously closed bid, thereby updating the "standing bid on file". A supply of these bid forms shall be available at all Company Base(s) and all stations where the Company maintains an office. For purposes of the time limit set forth in paragraph (2) in this section, the bid must be mailed certified, faxed, or hand delivered. 4. A bulletin announcing the results of all bidding for, or assignment to, vacancies shall be posted at all Company Base(s) and line stations where the Company maintains an office, within (10) days after the specified closing date and shall refer to the bulletin number which announced such vacancy(s). Such bulletin shall state the effective date, Crew Class and Type, and the name and seniority number of the successful bidder or Crewmember assigned. (C) A Crewmember is not eligible to bid on any type of aircraft other than type he is flying unless he has completed twenty-four (24) months of Active Service flying from completion of his initial line check in his Crew Class on his Type at the time of the bidding. This provision shall not apply in the case of any Crewmember who has received notice of reduction in his Crew Class, in which case he may fully exercise his seniority rights. The Company, when posting a bulletin on any vacancy, may waive this provision provided the waiver is stated in the bulletin. ARTICLE XIII - TRAINING AND UPGRADING (A) A Crewmember shall receive at least seven (7) days advance notice of all ground and simulator training unless the Crewmember agrees to less notice. (B) A Crewmember, except a new hire during initial training, who is assigned to ground school training program involving five (5) or more days of training shall be given one (1) period of twenty-four (24) consecutive hours free of all duty with the Company during any seven (7) consecutive days assigned to such training. (C) Simulator and flight training will not be scheduled for more than six (6) periods in seven (7) days. After completion of four (4) simulator periods, in four (4) consecutive days, the Crewmember may elect to take twenty-four (24) consecutive 30 34 hours free of all duty. The Crewmember may elect to receive twenty-four (24) consecutive hours free of all duty with the Company prior to resuming any flying duties or additional training duties. (D) Simulator Training or check periods, other than type ratings, shall be scheduled not to exceed four (4) hours per day. Crewmembers receiving type ratings may not exceed five (5) hours of simulator time per day. A Crewmember may elect to waive the provisions of this Section. (E) Training for any additional qualifications required by the Company or the FAA by the Crewmembers covered by this Agreement shall be made available at the Company's expense. (F) A Crewmember shall not fly any revenue flights while in transition or upgrade training, provided however, that such Crewmember may fly revenue flights for the purpose of line qualifications. (G) Each Crewmember shall review his performance and grading sheet at the conclusion of each training or check period. A Copy of his training record shall be furnished him at the conclusion of each training course or check period. A Crewmember shall sign for the receipt of the training record. (H) All training as defined in this Agreement shall be administered in accordance with the Company's FAA approved training manual(s) to all Crewmembers covered by this Agreement. The Company shall provide training in accordance with requirements for that position on that equipment type. (I) QUALIFICATIONS 1. Crewmembers must meet all FAA qualifications and certification requirements applicable to his Crew Class and Type. 2. Article IV, Seniority, Article XII, Vacancy Bidding and the provisions of Section (R) shall govern the filling of all Crew Class and Type vacancies on all equipment operated by the Company. 3. Minimum experience requirements for hiring and bidding are set forth below: (a) HIRING REQUIREMENTS: FIRST OFFICERS: Commercial Pilot Certificate, Instrument and Multi-engine Rating. A minimum of 1,500 hours pilot experience and FAA First Class Medical. 31 35 In addition to an interview the Pilot shall meet the following requirements: (1) Receive a simulator evaluation of his flying abilities. (2) Take an equivalent ATP written examination with a passing score of 80%. (b) HIRING REQUIREMENTS: FLIGHT ENGINEER: Flight Engineer Certificate, Turbojet Powered Rating; First or Second Class FAA Medical and A&P Certificate. (c) CAPTAIN UPGRADING REQUIREMENTS: (1) FAA Airline transport Pilot (written) (2) 5,000 hours flight experience, or twenty-four (24) months active flying as a First Officer on any AIA equipment or; (3) 1,000 flight hours or twelve (12) months active flying as a First Officer with AIA on the equipment he is bidding. 4. The provisions of this paragraph may be exercised by the Company during the term of this Agreement. Providing the Company exercises this option, the Flight Engineer upgrading to First Officer must meet the requirements of (3)(a) above and the provisions of Section R of this Article. 5. The Company may reduce the upgrading requirements equally applicable to all Crewmembers in any bulletin of vacancy. (J) When a successful bidder fails to qualify as specified in this Article, he shall forthwith be returned to his former Category, Crew Class and Type not withstanding the provisions of Article IV, Seniority and Article XII, Vacancy Bidding, and shall be given training in accordance with the Company's FAA approved training manual(s). If the Crewmember fails requalification the Company has the option to terminate his employment. The Crewmember may be frozen in his former position from bidding as outlined in Section (P) of this Article. (K) INITIAL TRAINING. The training of Probationary Crewmembers will be handled at the Company's discretion. (L) RECURRENT TRAINING. When required, recurrent ground school will be successfully completed prior to administering simulator training and/or proficiency check. Crewmembers shall receive their proficiency checks no earlier than one (1) 32 36 month prior to or no less than one (1) month after their anniversary month. The Company may elect to move or reschedule anniversary months to equalize the number of Crewmembers needing checks over a twelve (12) month period. The Company shall give at least thirty (30) days advance notice to any Crewmember whose anniversary month is being rescheduled. (M) The Company shall advise a member of the Professional Standards Committee whenever a Crewmember fails any portion of his recurrent ground school, simulator or flight training or proficiency checks. The Training Department, after consultation with the Professional Standards Committee Member shall determine the additional training for the individual for the recheck. Any subsequent simulator or flight training periods may be considered the recheck at the discretion of the Check Airman. If the Crewmember fails the recheck, the Company shall consult with him and a member of the Professional Standards Committee before determining the disposition of his case. The Crewmember may be suspended without pay until a final disposition of his case is made. (N) UPGRADE TRAINING. All Vacancies for upgrading will bid in accordance with the provisions of Article IV, Seniority, and Article XII, Vacancy Bidding. All First Officers upgrading to Captain and First Officers and Captains moving to Flight Engineer position at mandatory retirement age must meet the minimum requirements set forth in this Agreement. All Crewmembers upgrading must meet the requirements of Section R of this Article. (O) If the Company and the Union agree that a Professional Standards Committee Member is necessary for a training or recheck review of a Crewmember, the Committee Member shall suffer no loss of guarantee pay or benefits. (P) A Crewmember assigned pursuant to Section (J) of this Article, after failing to complete training, shall be ineligible to bid on any vacancy requiring training until such Crewmember has completed an additional 500 hours or twelve (12) months of active flying, whichever occurs first, on the Type to which he is assigned unless released by the Company from this restriction. (Q) The Company shall provide the necessary manuals, school, and training to meet the requirements of this Article, at no cost to the Crewmember. (R) BID SELECTION BOARD. Bidding, selection, and awarding of bids for advancement in Category or Crew Class of any Crewmember shall be conducted in the following manner. Bids shall be posted as set forth in Article XII, Vacancy Bidding. Crewmembers meeting the qualifications set forth in this Article, or as 33 37 established by the Company, if lesser, may bid. All bids shall be reviewed by the Bid Selection Board. 1. A Bid approved by the Bid Selection Board or a bid the Board deadlocks on shall be forwarded to the Director of Operations for review. The Director of Operations shall award or deny the bid. 2. If the bid is denied, the bidder or the Union may grieve the denial and the grievance shall be expedited to a hearing by the System Board of Adjustment. A bid denied by the Bid Selection Board shall be returned to the bidder with a written explanation of the reasons for which the bid was denied and recommendations as to the actions needed by the bidder to improve his opportunity for selection by a future Board. 3. The bidder shall be advised of the data relied upon for the decision. If appealed to the System Board, the Bid Selection Board shall submit the documentation considered in arriving at the denial with an explanation of the Bid Selection Board's rationale in arriving at their decision. 4. The Director of Operations may not award a bid for upgrade to a bidder who does not receive at least 50% percent of the Bid Selection Board's vote. The Bid Selection Board may not convene unless all member's are present or available. Alternate members may be appointed by either or both parties should they so choose. 5. Lateral movements between Crew Class positions shall be awarded by System-wide Seniority and are not subject to review by the Bid Selection Board. 6. If the Company elects to by-pass a Crewmember who has been selected for up-grade training by the Bid Selection Board, the Crewmember has the right to the provisions of the Grievance Procedures. If the System Board of Adjustment elects to award the Crewmember a training position for up-grade, and the Crewmember fails any portion of the training, the Crewmember is subject to termination or equipment freeze to his last position. The Crewmember shall receive the same training as any other Crewmember up-grading to the same position. ARTICLE XIV - SCHEDULING SECTION A. GENERAL. 1. The Union shall appoint a Scheduling Committee composed of Crewmembers assigned to the different types of equipment being operated by the 34 38 Company. The Company shall consider all recommendations by the Scheduling Committee concerning any scheduling policies, construction of Lines of Flying or Reserve Lines, or problems, including the development and updating of a Company Crew Scheduling Manual. 2. As scheduling policies are developed, they shall be published in a Company Scheduling Manual. One copy will be kept in Scheduling and one will be provided to the Scheduling Committee of the Union. 3. Crewmembers will bid Lines of Flying or Reserve Lines each bid period. 4. A Crew List shall be maintained with Crewmembers listed in Seniority order by Type, Crew Class and Base. The Crewmember must be Crew Class and Type qualified to fill the position for which he is bidding. Crewmembers in training may bid a line providing the planned completion date of training is prior to the start of the bid line. Crewmembers completing training after the start of the bid period, shall be assigned a Reserve Line with pro rata days on duty and days off. The Company will consider any requests from the Crewmember regarding duty days and days off. 5. Awards will be based on seniority (Crew Class, Type and Base) and eligibility as set forth in the F.A.R.'s and the applicable provisions of this Agreement. 6. Bids will be submitted as follows: a. The Company will mail a complete bid package to each Crewmember's home and post the bid package at the Crewmember's base and all line stations where crews may transit. b. Completed bid forms may be submitted to the Scheduling Department in person, by U.S. Mail, or Fax. Crewmembers may request confirmation of bid received by the Company prior to closure date. 7. Crewmembers that fail to submit a bid prior to the close of the Bid Period or do not bid in accordance with this Article, will be assigned after all other bids are awarded. 8. If a Crewmember is removed from his Line of Flying due to nonscheduled changes such as sickness, cancellations due to weather, or mechanical delays, flight time limitations, or personal emergencies, the Company will make every effort to return the Crewmember(s) to his original bid line as soon as possible. A Crewmember will not be required to make-up lost time on his scheduled days off. 35 39 9. If the Company removes a Crewmember(s) from a Line of Flying for training purposes, the Crewmember(s) shall suffer no loss of pay or incur any additional expenses. If the Company removes a Crewmember(s) from a Line of Flying or Reserve Line, the Crewmember(s) shall not incur any additional expenses. The Crewmember will not be required to make-up time during his scheduled days off as planned on the Bid line. The Company will make every effort to return the Crewmember(s) to this original scheduled bid line as soon as possible. The Company shall have the right to designate some lines as training lines for each type of equipment. 10. The Director of Training or Crew Scheduling will advise each Crewmember of his projected recurrent ground school and simulator training schedule with the posting of the bid package for that Bid Period. 11. The Company may release a Crewmember from his bid at the Crewmember's request. 12. Trip trading is permitted in accordance with guidelines set forth in the Company's Crew Scheduling Manual. 13. If a Crewmember(s) becomes aware of a potential scheduling conflict or irregularity that cannot be resolved with Crew Scheduling directly, the Crewmember(s) shall notify the Manager of Operations by the most expeditious means available. The Crewmember(s) shall submit a "Trip Report" directly to the Manager of Operations. SECTION B. LINES OF FLYING/RESERVE LINES. 1. Lines of Flying and Reserve lines shall be posted at Crewmember's Base and all line stations where Crewmembers may or will transit. The next month bid package will be mailed as soon as feasible but no later than the 10th day of the current Bid Period. All known flying will be included in the bid package. 2. The Bid Period Package will be published once every bid period for each aircraft type. A Bid Period Package will contain, but is not limited to, the Flying and Reserve Lines, bid seniority list, list of Crewmembers vacation dates, list of Crewmembers due for Recurrent Training, and available Training periods. The yearly schedule consists of twelve (12) monthly bid periods. 3. Lines of Flying and Reserve Lines shall be one (1) calendar month in length. At the option of the Company, two (2) or three (3) periods of flying may be established. Each bid period shall be bid and awarded separately. 36 40 4. The Company shall post for the calendar year a schedule for all bid periods, including the opening date, closure date, and award date of each bid period. Each bid period shall close no later than the 20th day of the current bid period. The Company shall award and post each bid no more than five (5) days after closure. The Company shall not re-award the bid lines after the original posting is completed. 5. Each Line of Flying or Reserve Line shall contain not more than eighteen (18) twenty-four (24) hour duty days in each calendar month. A day means a "calendar day", measured from 0001z to 2400z. The Company may construct Lines of Flying or Reserve Lines with less than eighteen (18) duty days. a) A Crewmember may be released by the Company at any point on the bid line providing there are no additional flying or reserve requirements. b) Crewmembers commuting to or from his assigned base for a bid line shall not be considered as working on a day off. At the Crewmember's option, he may elect to commute to the first point of departure or reserve assignment of the Bid Line in lieu of reporting to his assigned base. The Crewmember that elects to exercise this option must be in position at the departure location or reserve assignment no later than 2000Z on his first duty day. Any positioning or depositioning of a Crewmember to or from an assignment outside the 48 contiguous states shall be the responsibility of the Company. A Crewmember that elects to work on a duty free day, shall be positioned and depositioned between his residence and the duty station at no cost to the Crewmember. c) All positioning to the flying or reserve assignment or depositioning shall occur within the eighteen (18) duty days as specified in Paragraph [5] above. d) A Crewmember may satisfy his duty day(s) on a Line of Flying or Reserve Line at his residence at the Company's discretion. 6. A Crewmember need not be available until his scheduled show time for his bid line, but shall call Crew Scheduling twenty-four (24) hours prior to his duty day for instructions. Crewmembers that are assigned to Reserve status may be positioned to a location, which may include his residence, by the Company for operational requirements. Any Crewmember that is assigned to reserve at a location other than his base shall receive per diem and hotel as provided for in this Agreement. 7. When military leave or drill duty conflicts with the Line of Flying that a Crewmember can hold, he will be assigned duty days that will not conflict with military leave or drill duty requirements. 37 41 8. For pay purposes only, a Crewmember assigned a special project by the Company may bid and be awarded a Line of Flying or Reserve Line if his seniority permits. As a result of these duties, the Crewmember shall not lose any pay nor shall the Crewmember be required to work on his days off. The Crewmember shall be paid his (MBPG) or the scheduled hours on his bid line, whichever is higher. 9. A Crewmember positioning for a bid line shall ensure he is adequately rested to perform his required duties. SECTION C. BID LINE CONSTRUCTION. The Company and the Union agree that no Crewmember is required to "reside" or have his "residence" at the Company's Corporate Offices in Ypsilanti, MI., or his assigned base. In establishing bid lines for each bid period, the Company will construct all bid lines in accordance with the provisions of this Article and the Company's scheduling manual. The starting and stopping point for all lines shall be the Crewmember's-assigned base. The Company shall determine the trip pairings as necessary to provide flexibility and efficiency. 1. In constructing Lines of Flying or Reserve lines, the days off in a block shall not be less than five (5) consecutive twenty-four (24) hour periods. The provisions of this paragraph may be modified by agreement between the Company and the Union. The Company shall construct Lines of Flying or Reserve lines with variations in blocks of days off. 2. If the first point of departure or the last point of arrival on a Line of Flying or Reserve Line is other than the Crewmember's assigned base, the bid lines shall clearly indicate a positioning or depositioning movement. 3. Each Crewmember that bids and is awarded a Line of Flying or Reserve Line shall be positioned to the first point of departure from the Crewmember's assigned base at no cost to the Crewmember. The Company is responsible for all other transportation as necessary, including the depositioning of the Crewmember to the Crewmember's assigned base at the conclusion of the bid line. The provisions of Section B, para's (5-b) and (6), of this Article shall apply in the movement of Crewmembers between their place of residence and the first point of departure and return. If the Company elects to position the Crewmember via freighter jumpseat and the Crewmember fails to make his duty assignment, the Crewmember shall not be held responsible. 4. If the bidding or assignment of Lines of Flying results in a potential conflict with the F.A.R.'s, the affected Crewmember's schedule shall be adjusted. Duty days may be moved to provide the Crewmember with no more than eighteen (18) duty days in a bid period. 38 42 SECTION D. DEFINITIONS 1. "Commute", as defined in this Agreement, relates to a Crewmember that does not reside at the Crewmember's assigned base. Anytime "Commute" is used in this Agreement, it shall be the responsibility of the Crewmember to provide his own transportation. 2. "Positioning or depositioning" as used in this Agreement relates to the movement of a Crewmember at the direction of the Company. All positioning or depositioning is the responsibility of the Company. ARTICLE XV - HOURS OF SERVICE (A) GENERAL: 1. Where this Article may be interpreted as less restrictive than the current FAR's, the appropriate FAR shall apply. Changes to the current FAR's that affect this Article shall cause the Company and the Union to re-open under Section (6) of Railway Labor Act, as amended, to re-negotiate only those conflicts created by the changes. 2. If the Company elects to use the flight time and duty limitations of FAR 121.523, the aircraft used must have adequate rest facilities, as defined by the FAR's to allow each Crewmember to sleep. 3. All flights operated by Crewmembers covered by this Agreement shall constitute duty time as a flight Crewmember. 4. The Company shall provide adequate rest facilities in hotels or motels or their equivalent for each Crewmember. The Company shall book lodging to provide each Crewmember with a separate room. 5. The Company shall provide Crewmembers with rest facilities any time the scheduled or block-to-block time on the ground is six (6) hours or more or the departure time is undetermined. 6. Domestic and International flight and duty time limitations, except as otherwise specified in this Agreement, will be in accordance with the FAR's. (B) DUTY TIME AND REST: 1. Duty time shall commence when a Crewmember is required to report for duty (one hour prior to scheduled departure domestic-two hours international) or actually reports to the airport, whichever is later. Duty time shall end thirty (30) 39 43 minutes after the flight arrives at the blocks at the point where the flight terminates, or when the Crewmember is released by the Company, whichever is later. If a Crewmember is called to the field for the purposes of serving as a Flight Crewmember, and is not used, his duty time shall end when the Crewmember is released by the Company for a rest period. 2. "Deadhead" as defined in Article II of this Agreement shall be considered as duty time under the following conditions: Deadhead time shall be computed at one half (1/2) time toward the maximum allowable duty time limitations of this Article, section (2a), (2b), and (2c) only. (a) Whenever a Crewmember is required to report for duty and the first assignment prior to a flight or series of flights is deadhead, the time spent in traveling shall be considered duty time. The Crewmember shall be considered on duty as specified in Section (B-1) of this Article and all time spent in traveling shall be credited as deadhead duty time as specified in Section (B-2). (b) If a Crewmember is required to deadhead between flight duty assignments, and is not provided a rest period as defined in this Article, the time spent in traveling shall be considered duty time. (c) If a Crewmember's last assignment is to deposition from a flight or series of flights to his residence or base, the time spent in deadheading shall not be considered duty time, providing the Crewmember waives his rest period. (d) Crewmembers shall not receive deadhead time when traveling between their place of residence and a training assignment or return. 3. A Crewmember required to deadhead more than ten (10) hours prior to the start of his assigned trip shall be given a minimum of twelve (12) hours of rest on the ground prior to commencing his duty period. 4. During duty time a Crewmember is under the control and direction of the Company. 5. A Crewmember's duty time shall be broken any time the Crewmember is released for a rest period. Rest time is measured from release from duty, as specified in Section (B) (1) of this Article, until report for duty. A rest period is defined to be freedom from all restraint including freedom from work and from responsibility for work should the occasion arise. 6. During a rest period the Crewmember shall not be disturbed except to receive calls from the Company no more than two (2) hours prior to show time, to assign a schedule or a call from the Crewmember requesting such assignment. Any 40 44 preceding calls from the Company during a rest period, shall constitute a broken rest period, requiring the Crewmember to re-start a new rest period. This shall not apply to a personal emergency. (C) DOMESTIC FLYING: 1. For Domestic flying the rest period will be as specified in F.A.R. 121 with a minimum of nine (9) and one half (1/2) hours block to block with a minimum of eight (8) hours free of duty. The Company shall provide rest facilities for the Crewmember(s) as specified in this Agreement. 2. The Company may combine a domestic flight or series of flights with an international flight or series of flights, providing the Crewmember(s) do not exceed the maximum flight time limitations of F.A.R. 121 and the duty time limitations of this Article. (D) INTERNATIONAL FLYING: 1. The Company shall not schedule a crew consisting of two pilots and one additional airman, as required, for more than eighteen (18) hours of duty time. If the Crewmember(s) duty period is less than eighteen (18) hours, the rest period shall be a minimum of ten (10) hours free of all duty. If the Crewmember(s) duty period exceeds eighteen (18) hours, the rest period shall be twelve (12) hours free of all duty. All rest periods shall be at a place of lodging as defined in this Agreement. 2. If the crew determines fatigue will be a factor in continuing the flight, they shall coordinate a rest period with the Company. The minimum rest period shall be twelve (12) hours free of all duty or greater if required by the FAR's. All rest periods shall be at a place of lodging as defined in this Agreement. 3. At the option of the affected Crewmembers and the Director of Operations, a portion of the "report for duty" time specified in B.1. of this Article, may be reduced as provided in the G.O.M. A late departure caused by this reduced "show" time shall not be the responsibility of the Crew. (E) TIME AT HOME FREE OF DUTY: 1. No Crewmember shall be required to keep the Company advised of his whereabouts during any scheduled days off, except as provided for in Article XIV, Section (B) (6). When a Crewmember completes a flight or a series of flights, or training, he shall be advised by Crew Scheduling of his next projected flight and the date of such flight. 41 45 2. A Crewmember may be scheduled through his Base by a Line of Flying. The Company may schedule a Crewmember through his Base, providing the scheduled transit time is less than four (4) hours block-to-block. The Company shall provide hotel and ground transportation anytime the transit ground time exceed six (6) hours. The Crewmember will remain on duty, until a legal rest period is provided. 3. Crewmembers awarded or assigned a Line of Flying or Reserve Line shall receive not less than twelve (12) twenty-four (24) hour periods free of duty in a thirty (30) day month or thirteen (13) twenty-four (24) hour periods free of duty in a thirty-one (31) day month. All scheduled or projected duty free periods that are shown on the bid lines shall be considered the Crewmember's days off for the bid period. Each Line of Flying or Reserve Line shall clearly indicate all duty free days and shall meet the requirements of Article XIV, Scheduling and this Article. 4. If the Company contacts a Crewmember on his days off for a trip or duty assignment and the Crewmember agrees to such trip or assignment, he shall be paid in accordance with Article XIX, Section (H), Paragraph (2), Compensation, of this Agreement. 5. Any Crewmember who elects to work on any of his days off, shall be provided all transportation between his residence and duty assignment and return. The Crewmember shall receive per diem and hotel accommodations at all locations. (F) RESERVE REST AND DUTY PERIODS: 1. Any Crewmember who has reported to the airport or location assigned by the Company shall start duty time as defined in this Article. 2. All Reserve duty days and duty free days, where possible, shall be clearly indicated on each Reserve Line. Any changes or adjustments to the reserve duty periods must be given to the Crewmember prior to the start of the reserve assignment. (G) SCHEDULED DUTY TIME LIMITATIONS 1. When scheduling Crewmembers for "Revenue Flying" as defined in Article II, Section R, of this Agreement, the Company shall use the following guidelines: Crewmembers shall be considered on duty, as specified in B-1, of this Article and shall not be scheduled to exceed the following duty time limitations. (a) Single Crew, as defined, operating domestic flight(s) only - 16 hours. 42 46 (b) Single Crew, as defined, operating international flight(s) only - 18 hours. (c) Double Crew, as defined, operating international flight(s) only - 30 hours. 2. Crewmembers released from flight duty after a flight or series of flights may elect to continue with deadhead or remain at his last stop for a crew rest period. If electing crew rest the Company shall provide the Crewmember(s) with rest facilities and transportation to his home or next duty assignment. ARTICLE XVI - UNIFORMS (A) UNIFORM RESPONSIBILITIES Crewmembers shall wear the standard uniform as prescribed by the Company at all times while on duty. The cost of the original uniform, not to exceed $410.00 dollars, and any prescribed change shall be borne by the Company after the signing of this Agreement. The standard uniform issue will include one (1) blouse; two (2) pairs of pants; five (5) shirts; two (2) neckties; one (1) hat (optional); insignias for blouse and hat; and one (1) winter coat. The uniform maintenance allowance for each Crewmember shall be $142.70 for each three (3) years of active service. In addition to the uniform maintenance allowance, the Company shall reimburse to the Crewmember any replacement items of the uniform that are damaged during the time a Crewmember is performing his duties. If a Crewmember leaves the service of the Company prior to completing his probationary period, the original uniform shall be returned in serviceable condition to the Company. The uniform item(s) may be re-issued to a Crewmember. (B) COMPANY INSIGNIAS The Company will provide to each Crewmember, free of charge, the original issue of any Company insignia, epaulets or emblem that is required to be worn as part of the prescribed uniform. Such insignia, epaulets or emblem shall remain the property of the Company, and each Crewmember shall be responsible for same if lost. (C) CONSULTATION The Company will consider the recommendations of the Crewmembers regarding any changes in uniform. (D) UNION INSIGNIA A Union lapel pin may be worn on the uniform. 43 47 ARTICLE XVII - PHYSICAL EXAMINATIONS (A) The physical standards required of a Crewmember shall be the standards established by the Federal Aviation Administration, outlined in Part 67. (B) Any information obtained by or as a result of a Company physical examination shall be kept confidential between the doctor(s), the Crewmember, and the administrative personnel of the Company concerned with the Crewmember's physical condition. (C) It is the responsibility of the Crewmember to provide the Company's Flight Operations Department with a copy of his new current medical certificate by the 25th day of the month in which the old medical certificate is due to expire. (D) The Company shall advise all Crewmembers, by written notice mailed to the Crewmember's home address, of the due date of their FAA physical examination. This provision does not relieve the Crewmember of the responsibility in Paragraph (C) above, or prevent the Company from taking the Crewmember out of service without pay if he fails to remain currently qualified. (E) During the month the Crewmember is due his physical examination, the Company shall ensure he is not prevented from taking the examination. It is the Crewmember's responsibility to schedule his physical examination on his days off. (F) If a Crewmember is eligible for, and has elected to carry the Company's health insurance, the cost of one physical examination annually will be paid subject to the following conditions. The examination will be paid for in full up to $100.00 without regard to the annual deductible. If the cost of the examination exceeds $100.00, the additional amount will be covered at 80% provided that the annual deductible has already been paid. (G) The Company and the Crewmembers shall adhere to the Current FAA Drug and Alcohol Testing Programs. The Company shall provide at no cost to the Crewmembers all FAA required material and information regarding the programs. The Company will make every effort to schedule the FAA Drug Testing on a Crewmembers duty day. During the term of this Agreement, the Company shall notify all Crewmembers in writing as to any changes, modifications, or additions to the current programs. ARTICLE XVIII - HEALTH AND WELFARE (A) The Company shall provide -- on a fully paid basis -- life insurance and A.D.&D., for all Crewmembers covered by this Agreement equal to one (1) year of the 44 48 Crewmember's base guarantee plus longevity. Eligibility for this benefit shall begin following six (6) months of continuous full-time employment. (B) During the term of this Agreement, the Company may offer additional and optional life insurance that each Crewmember would be eligible to purchase. (C) Upon ratification of this Agreement, the Company shall continue to provide the health and dental insurance that is currently in effect including "Short Term Disability". Eligibility for health, dental benefits and "Short Term Disability" shall begin following six months of continuous full-time employment. In determining length of employment for this benefit, all periods of absence (paid or unpaid) will be deducted, except for holidays, vacations, military leave, sick leave, and as defined by the provisions of the Family and Medical Leave Act. The Company may, during the term of this Agreement, change insurance carriers but in no case shall the benefits currently in effect be reduced in any way. At the Company's option, the Company and the Crewmember may share any premium increase, provided however, that Crewmembers shall not be required to pay a larger proportion of any premium increase than any other Company employee. 1. Whenever a Crewmember leaves the service of the Company, he may be entitled to a continuation of health care and dental benefits under COBRA. If a Crewmember is eligible for COBRA coverage, all information regarding coverage, premiums, deadlines and forms will be forwarded to him at the address that the Company has on file. 2. Whenever a Crewmember takes a leave of absence or is unable to perform his duties, as specified in Article II of this Agreement, and wants to keep his insurance active he will be required to pay the employee portion of the health and dental insurance premiums during the first thirty (30) days of leave. If the leaves extends beyond thirty (30) days, the Company will no longer continue to cover any portion of the insurance premiums (except as provided by Military Leaves and FMLA). However, the Crewmember may be entitled to a continuation of health care benefits under COBRA. If a Crewmember is eligible for COBRA coverage, all information regarding coverage, premiums, deadlines and forms will be forwarded to him at the address that the Company has on file. (D) The graduated co-payment policy that is currently in effect for medical and hospitalization shall remain in effect. All Crewmembers with more than five (5) years of active service shall not be required to make co-payments for medical and dental insurance. (E) Within one hundred twenty (120) days after the ratification of this Agreement, the Company shall offer Long Term Disability insurance to each Crewmember. The 45 49 cost of this insurance will be paid for by the Crewmember if he elects this coverage. The premiums will be paid bi- weekly through payroll deductions. (F) All Crewmembers will be covered by health, dental and life insurance while operating a Company flight in a "Hostile" area -- as defined by the U.S. Department of State -- under the following conditions. 1. If a Crewmember has elected to take the Company health and dental insurance, then he shall be covered by this insurance while operating a Company flight within a hostile area. 2. If a Crewmember is eligible for the Company life insurance program, then he will be covered by this insurance while operating a Company flight within a hostile area. 3. Any Crewmember that has less than six (6) months of active service with the Company shall be covered by health and life insurance while operating a Company flight within a hostile area. 4. All flight(s) operated in a "Hostile" area, as defined by the U.S. Department of State, shall be on a voluntary basis only. Only those flights operated by the Department of Defense within the terms and conditions of the CRAF program shall be mandatory. (G) Tax Deferred Savings Plan 401(k) 1. The Company agrees to extend the "Teamsters National 401(k) Tax Deferred Savings Plan" -- as the sole 401(k) plan offered -- to all Crewmembers that are covered by this Agreement. This plan will be referred to hereinafter as the "Teamster's 401(k) plan." 2. The Company will make payroll deductions on a bi-weekly basis from any Crewmember who chooses to participate in this plan. (a) The Company will deposit this money into the account that is designated by the Teamster's 401(k) Plan in compliance with, and subject to, the Internal Revenue Service, ERISA regulations and the Department of Labor. (b) For each deposit made, the Company will forward a list of all participants and the amount of their current deferrals to the plan administrator of the Teamster's 401(k) Plan. 46 50 (c) Within one hundred and twenty (120) days after the ratification of this Agreement, the Company will begin to withhold payroll deductions from all Crewmembers who have submitted a form authorizing the 401(k). 3. All moneys that are invested by Crewmembers in the Company's 401(k) Plan will be transferred into the Teamster's 401(k) Plan in compliance with, and subject to, the Internal Revenue Service, ERISA regulations and the Department of Labor. (a) The transfer of this money will begin within one hundred and twenty (120) days after the ratification of this Agreement and will be completed no later than one hundred and eighty (180) days from the date of ratification. (b) The Company will not pay any fees that are associated with the withdrawal or transfer of the funds from the Company's 401(k) Plan to the Teamster's 401(k) Plan. 4. Other than as set forth above, the Company will not participate in the administration of this 401(k) Plan. ARTICLE XIX - COMPENSATION (A) 1. (a) Crewmembers in their first year of Active Service with the Company, shall not receive Longevity Pay until they have completed their first year of Active Service as defined in Article II of this Agreement. Each Crewmember, after completing their first year of Active Service with the Company, shall be compensated with Longevity Pay in accordance with the following schedule. 1st year of Active Service completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5% increase 2nd year of Active Service completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5% increase 3rd year of Active Service completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4% increase 4th year of Active Service completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3% increase Each additional year thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3% increase
(b) The percentage increases shown in 1.(a) above, are cumulative, but not compounded, and relate to the base hourly rate for the Crew Class and Category to which the Crewmember is assigned. Longevity pay as provided in this Section shall adjust the pay per hour, described in Paragraph 2. below. 2. Each Crewmember shall be compensated for his hourly flight time based on his Crew Class position as defined in Article II, Section (H), as set forth below: Pay will be computed to the nearest one-tenth (1/10th) of an hour. 47 51
CREW CLASS BASE RATE + LONGEVITY PAY= RATE AT DOS ---------- --------- ---------------------------- Captain $70.00 As described in Will vary by paragraph 1(a) above. Crewmember and years First Officer $47.50 of Active Service Flight Engineer $47.50 Flight Engineer + A&P $52.50
3. The International Pay Rate shall be paid at the rate of ten dollars ($10.00) per hour in addition to any other compensation as defined in this Agreement, for all international hours flown as defined in Article II. 4. Crewmember(s) that accept a check or instructor position, as specified in Article XXI, Section E, shall receive additional compensation as follows: (a) Check Airmen . . . . . . . . . . . . $15.00/hour additional Check Engineer . . . . . . . . . . . $15.00/hour additional Ground School Instructor . . . . . . $10.00/hour additional per class room hour Simulator Instructor . . . . . . . . Hours will be credited toward the monthly guarantee and paid appropriately
(b) The rates set forth in (A) above for Check Airmen and Check Engineer are valid whether the Crewmember is providing this service for strictly domestic flights, strictly international flights, or a combination of both. There shall be no additional "International Pay" for Crewmembers who are filling Check Airman or Check Engineer positions. 5. a) All pay under this Agreement shall be paid in United States dollars. Crewmembers shall be paid on a bi-weekly basis. After the close of the bid period, the first paycheck shall contain one half (1/2) the flight pay guarantee for the bid period, including appropriate adjustments; the second paycheck shall contain one half (1/2) the flight pay guarantee, plus all additional compensation earned in the prior bid period. All additional adjustments including overtime pay, pay for performing duties on a duty free day, etc., shall be made on the second paycheck following the bid period in which it was earned. b) Whenever a Crewmember is called to the field for the purpose of serving a Flight Crewmember and is not used, he shall be credited the equivalent of 48 52 one (1) hour of flight pay for each four (4) hours of duty or fraction thereof, with a minimum of one (1) hour's flight pay credit. Whenever a Crewmember is called to the field for the purpose of serving as a Flight Crewmember and is used, he shall be credited with the actual flight time. In the event that the flight time is less than one (1) hour, then the Crewmember will be credited with one hour flight pay. c) In the event an aircraft is forced to return to its originating station due to malfunction of the aircraft or other causes and the flight is canceled, the Crewmember shall be credited with hourly flight pay, based on actual flight time. d) Whenever a Crewmember performs or supervises maintenance work in addition to his normal duties on the aircraft, as defined in Article II of this Agreement, he shall be paid fifteen dollars ($15.00) per hour or fraction thereof. This compensation shall be in addition to any other compensation listed in this Agreement. e) A newly hired Crewmember who receives training prior to his qualification as a Crewmember shall be paid a minimum of five hundred ($500.00) dollars per week while in training. The Company shall pay the hotel expense when a newly hired Crewmember is assigned to training at a location other than the Company's base of operation. This sum shall include all compensation while in training. Upon qualification as a Crewmember, compensation shall begin in accordance with Section (A) of this Article. f) Unless otherwise required by applicable law, a furloughed Crewmember shall receive his pro- rated guarantee and all other pay due him, on the first regularly scheduled paycheck that includes the pay period in which he was furloughed. g) Anytime a Crewmember deadheads on International flight(s) (where authorized), instead of the Company paying commercial transportation, the Crewmember shall be compensated $200.00. Each time the entire flight crew is changed, the deadheading Crewmember shall receive an additional $200.00. If the deadheading Crewmember lays over at any enroute station, the Crewmember shall be compensated an additional $200.00 for the follow-on deadhead movement. Example: Trip route VHHH/RJTT/PANC/KLAX Operating Crew Change scheduled for PANC. Deadheading Crew boarded at VHHH and scheduled layover KLAX Deadheading Crew to receive $200.00 for VHHH/PANC and $200.00 for PANC/KLAX. Total compensation to deadheading Crewmember $400.00. h) Crewmembers shall be compensated for their hourly pay as show in Section (A) of this Article in accordance with the following rules: 49 53 1. Flight pay hours - as defined in Article II, are actual block-to-block time, computed to one tenth (1/10th) of an hour. Crewmembers are credited with one (1) pay hour or portion thereof, for every one (1) flight hour or portion thereof. 2. Anytime a Crewmember elects to perform any duties on a scheduled duty free day, he shall be paid four (4) hours of pay at his rate, as set forth in Section (A) of this Article, or the actual hours flown, whichever is greater. This shall be in addition to any other compensation as provided in this Agreement. i) The Minimum Bid Period Guarantee (MBPG) shall be sixty (60) flight pay hours in a one (1) month bid period compensated at the Crewmember's appropriate hourly rate as shown in Section (A), Paragraphs 1 and 2 of this Article. j) The Minimum Bid Period Guarantee (MBPG) for Crewmembers assigned or awarded a bid rotation in excess of the normal rotation of eighteen (18) duty days and twelve (12) or thirteen (13) duty free days, shall be one hundred and eight (108) flight pay hours for a thirty (30) day month or one hundred twelve (112) flight pay hours for a thirty-one (31) day month. All rates of pay in this paragraph shall be compensated at the International Pay rate, as outlined in Section (A) 3. of this Article. Anytime a Crewmember is required to deadhead prior to the start of the bid period or deadhead at the end of the bid period, he shall be compensated for all days of travel as if worked on a duty free day. k) TAXI PAY: 1. Whenever a Crewmember(s) is called to the field for the purpose of positioning or de-positioning an aircraft, not for the purpose of flight, it shall be described as "Taxi Pay". The Crewmember(s) shall be compensated at his appropriate hourly pay for all taxi time with a minimum of one hour flight pay credit. The crew shall enter block times in the aircraft log book and note "Taxi only" in the remarks section. 2. Any time a Crewmember(s) is required to position or de-position an aircraft within the same duty period, for any reason, the Crewmember(s) shall be compensated for all time spent at his appropriate hourly flight pay credit. Taxi time shall be accounted for as provided for in "1." above. 50 54 ARTICLE XX - EXPENSES, LODGING & TRANSPORTATION (A) Per Diem and Lodging 1. While away from the Crewmember's assigned base or his residence, the Crewmember shall be paid per diem at the following hourly rate:
Domestic International As per Article XXIV D.O.S. $1.00 $2.00 $3.00
2. International Per Diem shall be paid according to Paragraph (1) above while the Crewmember is on assignment outside the contiguous 48 states. On a continuation flight the International Per Diem rate shall be paid for all hours from block out at the last domestic airport, on an international trip, to block in at the first domestic airport. Otherwise, the International Per Diem Rate shall start as specified in Paragraph 5 of this Article. 3. When a Crewmember is assigned to lines of time that exceed the normal bid rotation outside of the contiguous 48 states -- as defined by the conditions in Article XXIV, the Per Diem shall be paid, according to Paragraph 1. above, for all hours from the time the Crewmember departs the last domestic airport on an international trip, to block in at the first domestic airport on an international trip. 4. In addition to the expenses provided in Section A, the Company shall furnish suitable single occupancy hotel accommodations or crew apartments in a location convenient to the airport and chosen by the Company. These accommodations shall be provided for Crewmembers when the Company determines it necessary or where the layover is greater than six (6) hours, measured block in to block out. The Company will pay for room, tax, and Company related telephone calls or faxes. All other incidental charges will be paid by the Crewmember when checking out. Direct billing will be arranged by the Company for all designated hotels and also for unscheduled accommodations, whenever possible. (a) When hotel accommodations are required in accordance with Paragraph 2. above, expeditious transportation to and from the hotel to the airport shall be furnished by the Company. (b) When transportation on a layover is not provided by the Company within one (1) hour after the aircraft blocks in, Crewmembers may use any other available means of ground transportation to their place of lodging and shall be reimbursed for claimed, receipted expenses. 51 55 5. Per Diem shall be paid at the hourly rate as set forth in this Article, commencing when the Crewmember is required to report for duty at his base or depart his residence, until the Crewmember is returned to his base or his residence. 6. Crewmembers on layover of forty-eight (48) hours or more shall be allowed reimbursement for rental car transportation, and will be limited to one (1) car per crew, when approved by the Director of Operations or his designee. 7. All Per Diem will be paid no later than the end of the following bid period in which it was earned. 8. In the event a Crewmember is authorized and uses his automobile on Company business, he shall be reimbursed at the rate of twenty-nine ($.29) cents per mile. The Crewmember must indicate the origination point and termination point of travel and submit the proper reimbursable expense report. ARTICLE XXI - GENERAL CONDITIONS (A) The Company shall provide identification cards to each Crewmember indicating his category position. The Company shall not require any Crewmember to update or maintain manuals, documents or charts during flight. The Company shall provide charts, and manuals with associated revisions for each aircraft. (B) A Crewmember shall not be required to pay for the use of any Company equipment used in training and will not be required to pay for any Company aircraft damaged while under the direction of the Company. (C) The Company shall pay for all visas and necessary photographs and inoculations required of Crewmembers and if practicable the Company will obtain such visas. (D) 1. If a Crewmember is scheduled for eight hours of duty time or more and is not scheduled for an enroute stop of at least (3) hours where ground transportation to a restaurant is provided, the Company shall provide crew meals. 2. Crew meals shall be provided by the Company for all Crewmembers on all flight segments of six (6:00) hours or more. When possible, all crew meals shall be delivered directly to the aircraft prior to departure, and no Crewmember is responsible to provide his own crew meal while on flight duty with the Company, if the Company is required to provide such meal. No flight will be delayed due to the failure of the Company to provide crew meals. (E) No Crewmember shall be required to accept a position in a supervisory or check airman capacity. 52 56 (F) No Crewmember when deadheading at the direction of the Company by air transportation shall be required to operate such aircraft. (G) PERSONNEL AND TRAINING FILES. The Company shall maintain a personnel file, and a training file for each Crewmember. The personnel file shall contain all personnel related documents involving the Crewmember and the training file shall contain all the Crewmember's training records. Upon request, a Crewmember may review his Personnel file in the presence of the appropriate Company official at a time and place mutually agreed upon between the Crewmember and the Company. Such written request shall be limited to one every six (6) months. 1. Upon written request, a Crewmember shall be entitled to copies of any document(s) in his personnel file. The Crewmember shall be given a copy of any infractions at the time such entry is made in his personnel file, and the Company shall send an additional copy of such entry to the Union. 2. All orders to a Crewmembers involving promotions, demotions, furloughs and leaves of absences shall be stated in writing, and shall be placed in the Crewmember's personnel file. (H) If any article, section, or provision of this Agreement should be held invalid by operation of law or by any court of competent jurisdiction, or if compliance with or enforcement of any article, section, or provision should be restrained by such court pending a final determination as to its validity, the remainder of this Agreement, or the application of such article, section, or provision to persons or circumstances other than those as to which it has been held invalid or as to which compliance with or enforcement of has been restrained, shall not be affected thereby. In the event that any article, section, or provision is held invalid, either party may request negotiations for the purpose of arriving at a mutually satisfactory replacement of such article, section or provision. In the event such negotiations fail to produce an agreement as to such replacement, either party, notwithstanding the provisions of Article XXVII, Duration, may invoke the services of the National Mediation Board in accordance with the provision of Section 6, Title I, of the Railway Labor Act, as amended, to resolve such dispute. (I) UNION REPRESENTATION. The Company shall provide the Union with a suitable location for a bulletin board at the all Company crew base(s) for the posting of official notices of Union meetings, elections, and other notices pertaining to internal Union matters. 1. The Company agrees to admit to its Company crew base(s) and all operational line stations, the official designated representatives of the Union to transact such business as is necessary for the administration of this contract. The 53 57 Union will provide the Company with prior notice of any such request to be admitted to any operational line station. All such requests must be approved by the Company. 2. The Union shall select Crewmember representatives and shall notify the Company from time to time of their appointment or removal. The number of employee representatives shall be limited to those necessary to provide convenient representation for Crewmembers. The Company shall notify the Union of the appropriate Company representatives. 3. Any Crewmember required to be present at a Company hearing or investigation involving the Crewmember will be entitled to Union representation at such hearing or investigation, providing the Crewmember makes such request. 4. The Company shall allow a reasonable period of time during new hire indoctrination for Union orientation. The time period shall be after a normal training day. 5. The Union Executive Council shall appoint a Professional Standards Committee, composed of Crewmembers which shall confer with the Company on matters pertaining to the professional proficiency or conduct of Crewmembers. Members of this Committee shall be permitted to observe any training period or proficiency check at the request of the Company or the Crewmember obtaining such training/proficiency check. The Company shall release such member(s) to participate in such hearings, training periods, or check rides consistent with reasonable scheduling requirements, at no loss of pay. (J) Crewmembers will not be required to participate in publicity or promotional activities. (K) The Company shall negotiate reciprocal jumpseat agreements with other airlines and provide a list every year to all Crewmembers. (L) Aircraft cabin entry area and flight decks shall be clean and properly maintained; it is the Crewmember's duty to assure that they will be left in an orderly condition. Hot cups, microwaves or ovens in aircraft equipped with such, as of July 18, 1995, shall remain in the aircraft and be maintained in an operable condition. The Company shall provide all appropriate cleaning supplies, including approved wipes for oxygen mask equipment. (M) Consistent with the Company's pass policy and interline agreements with other carriers, if any, all Crewmembers covered under this Agreement and their immediate families shall be entitled to the same pass or reduced fare privileges afforded or available to other A.I.A. Inc. employees and their families. The Company will provide 54 58 a current list of all agreements and interline privileges to the Crewmembers, once each year. (N) The Company shall include the Crewmembers as an insured under the Company's Airline Liability Policy, while the Crewmember is acting on behalf of the Company. (O) Upon written request to the Company Payroll Department, the Company shall mail a Crewmember's paycheck to a specified address. Such request must be received by the Company at least 30 days before the paycheck is due. Providing, electronic direct deposit of paychecks and per diem expense checks becomes available, the Company shall provide the service. Any additional cost required by the bank or transfer agency will be paid by the Crewmember. The Company shall provide withholding for state taxes if requested by a Crewmember. (P) A Crewmember who is required to serve on jury duty shall receive no pay from the Company, unless required by applicable state law. Any Crewmember who receives notice of jury duty will inform his supervisor and will cooperate with the Company in obtaining a postponement from jury duty if required. (Q) The pilot-in-command on all engine out ferry flights may be a management or check Crewmember. In the event a management or check Crewmember is not available, the Company may designate a line Captain to operate such flight if he is qualified and he so agrees. (R) The Union recognizes the right of the Company to "Lease" an aircraft(s) to another Company at such times as the Company is unable to obtain sufficient business for profitable operations of said aircraft. In such event, the Company shall endeavor to arrange with the lessee to provide for the employment of a full or partial complement of Crewmembers covered by this Agreement and constitute a "Wet Lease" operations. If the Company's endeavors are unsuccessful, it will upon request of the Union state in writing the reasons as to why such employment is not acceptable to the lessee. In the event a furlough is necessary due to the "Lease" of equipment, the Company shall provide the following information: Duration of Lease Agreement, duration of furlough, number of Crewmembers effected by type and crew class, number of aircraft effected by the "Lease", approximate date of recall of Crewmembers. (S) Any Crewmember who becomes sick or injured while away from their base on Company business shall be provided with any necessary transportation arising from his illness or injury. Such transportation shall be provided at Company expense if not otherwise covered by applicable insurance. The Crewmember will be returned to the Crewmember's assigned base or his residence by the Company at the earliest possible time. 55 59 (T) If a Crewmember suffers a compensable work-related illness or injury away from his base, on Company business, and his injury requires hospitalization away from his base, the Company shall pay those hospitalization expenses to the extent to which such hospital expenses are not otherwise covered by applicable insurance. ARTICLE XXII - MISSING, INTERNMENT, PRISONER OR HOSTAGE OF WAR BENEFITS, HIJACKING (A) Any Crewmember who in the course of his employment becomes involuntarily missing, who is interned or held hostage shall be entitled to compensation of his applicable MBPG until released from interment or hostage, or, if missing, until proof of death is established in fact (or until there is reasonable presumption of death) and only to a maximum of twenty-four (24) months will such compensation be paid to the beneficiary or beneficiaries designated in writing by the Crewmember as set forth in paragraph (E) below. (B) Any payments due to any Crewmember under this section which are not covered by a written direction as above shall be held by the Company for such Crewmember and in the event of his death shall be paid to the legal representative of his estate. (C) Crewmembers shall retain their seniority and continue to accrue longevity for pay purposes, vacations, sick leave, and retirement benefits during periods in which they are missing. (D) A Crewmember who requires the use of sick leave due to having been a Crewmember on an aircraft that is hijacked shall be allowed to use such with no charge to his sick leave account. (E) The Minimum Monthly Guarantee allowable under Article XIX, shall be disbursed by the Company in accordance with written directions from the Crewmember. The Company shall require all Crewmembers employed in the Company's operation to execute and deliver to the Company such written direction. The direction referred to shall be in substantially the following form: TO: American International Airways, Inc. You are hereby directed to pay all monthly compensation allowable to me, and any other benefits stipulated in this Agreement, while missing, or resulting from death or any other condition which causes direct payment to me impossible, under sections of this Agreement as follows: $__________ per month to ________________________________________________ as long as living, and thereafter to __________________________________________ as long as 56 60 living. The balance, if any, and any amounts accrued after the death of all persons named in above designation shall be held for me, or in the event of my death before receipt thereof, shall be paid to the legal representative of my estate. The foregoing direction may be modified from time to time by letter signed by the undersigned and any such modification shall become effective upon receipt of such letters by you. Payments made by the Company pursuant to this direction shall fully relieve the Company from the obligation of making payments with respect thereto. ARTICLES XXIII - STRIKE, LOCKOUT RIGHTS (A) During the term of this Agreement, the Union shall not authorize, cause, sanction or engage in any strike, picketing, slowdown, or stoppage of work. (B) During the term of this Agreement, the Company shall not cause, permit, or engage in any lockout of its employees. ARTICLE XXIV - EXTENDED ROTATION (A) The provisions of this Article shall only apply when the Company determines that the provisions of Article XIV - Schedule, do not meet the flying requirements for crew rotations outside the contiguous U.S. This Article shall only apply for Crewmembers that are assigned or awarded lines of time that exceed the normal bid rotation outside the contiguous U.S. (B) ELIGIBILITY 1. The Crewmember must be current and qualified for the line being bid or assigned. a. The Crewmember is considered current and qualified if no currency requirements will lapse during his assignment. 2. No Crewmember may be assigned a bid under this Agreement if his awarded vacation bid falls within such bid period, unless the Crewmember elects to relinquish his vacation. Any changes or adjustments in vacation time must be negotiated between the Company and the Crewmember. 3. No Crewmember shall be assigned for more than one month in any three (3) consecutive months, unless the entire eligible seniority list has been assigned in the preceding month. 57 61 (C) BID/ASSIGNMENT PROCEDURE 1. The Company shall determine the number of positions required. 2. Crewmembers bidding, and meeting eligibility requirements shall be awarded lines in seniority order. Crewmembers may bid and be awarded more than one period. 3. If insufficient bids are received, Crewmembers meeting eligibility requirements shall be assigned lines in reverse order of seniority. The Company shall assign the most junior Crewmembers in accordance with the eligibility requirements as set forth above. The Company shall not by-pass any eligible Crewmember. The Company shall keep and maintain a record of all Crewmembers who have been awarded or assigned to ensure compliance with this Article. 4. When the crew compliments are to be reduced, return to the CONUS shall be offered in seniority order beginning with the most senior Crewmember(s) assigned through all assigned, then the senior bid Crewmember(s) through all bids, then forced recall in reverse seniority order. 5. All rotations for Crewmembers awarded/assigned per this Article, shall be scheduled to commence with the start of each month and terminate at the end of the month. Travel time is not included for duty purposes but will be counted and paid as having worked on days off, unless the travel days were duty days. No Crewmember shall be required to remain at the duty station more than one (1) month plus travel time, unless he bids the following month, or waives the provisions of this Article. 6. A Crewmember who bids or is assigned a line under this Article shall, at his option, have minimum of six (6) days free of duty before departure from his residence and a minimum of six (6) days free of duty after return to his residence. The bid period prior to and after assignment under this Article shall be adjusted by agreement between the Crewmember and the Company to eighteen (18) duty days. Providing no agreement is reached, the Company shall make the necessary adjustments. The Crewmember must advise the Company of his intent to exercise this option and make such adjustments as required prior to the beginning of an affected bid period. 7. Crewmembers assigned under this Article, may be on duty for the entire month, but shall not receive less than one (1) twenty-four (24) hour period free of all duty in any seven (7) consecutive days. For pay purposes only, no days shall be considered duty free days. 58 62 8. Crewmembers returning from assignment shall not be entitled to additional days off. 9. If travel to the duty assignment exceeds eight (8) hours, the Crewmember shall have a rest period of at least twelve (12) hours prior to any assignment. (D) COMPENSATION: 1. A Crewmember awarded/assigned per this Article shall receive an hourly per diem rate as set forth in Article XX, Section A-1, from the time he leaves his assigned crew base or his residence for such assignment until he returns to his assigned crew base or his residence. Crewmembers will not receive additional per diem payments applicable to flights away from his assigned location. 2. All Crewmembers awarded/assigned per this Article, shall be paid in accordance with Article XIX, Paragraph J. Crewmembers shall be entitled to additional pay as defined in this Agreement. (E) CONDITIONS: 1. When establishing crew rotation as per this Article, the Company shall consider crewing it in the following manner: a. Crewing out of the permanent Base; b. Rotating Crewmembers out of the permanent Base on a monthly basis in accordance with this Article. 2. Should the above two methods not appear feasible, the Company and the Union shall meet to establish the best method of crewing the flight requirements. ARTICLE XXV - MANAGEMENT RIGHTS The Company retains the sole and exclusive right to operate, control and manage its business and exercise all traditional management rights, powers, or authorities it had prior to signing this Union Agreement, except those modified specifically by an express provision(s) of this Agreement. Included by way of description and not by way of limitation are rights to: direct the working force and determine its size and composition; maintain order and efficiency; hire, transfer, and promote employees and discipline, suspend, and discharge them for cause; assign work to employees; extend, maintain, curtail or terminate its operations in whole or part; determine the nature and extent of services to be rendered; determine the business concerns with whom it will deal and the customers it wishes to serve; establish and enforce quality 59 63 standards for its services; determine and change methods, processes, techniques of operation, for lack of work; determine the number and starting of duty periods and determine when and if vacancies shall be filled; establish and modify reasonable rules and regulations and require observance thereof. A right of management shall not be impaired or waived by any contrary course of conduct. ARTICLE XXVI - NEW BASES A. If during the term of this Agreement the Company elects to open additional "New Base(s)", as defined in Article II of this Agreement, within the 48 contiguous States and the District of Columbia, the following procedures shall apply. 1. The Company shall determine the number of initial vacancies required to staff the New Base(s), based on Type and Crew Class. The Company shall post at the Company Base(s) and line stations where the Company maintains an office, the initial vacancy bid for a period of not less than thirty (30) days. 2. The Company shall mail to each Crewmember's home address a copy of the initial New Base(s) vacancy bid, including the Type and Crew Class and New Base location(s). The Company shall send a copy of the initial New Base vacancy bid to all furloughed Crewmember(s) at the same time. The bid package shall include a copy of the projected bid lines and type of flying for the New Base(s). The bid shall close thirty (30) days after posting. B. SIXTY PERCENT (60%) RULE: The Company shall not open any new base(s), as covered in this Article, unless, on the initial new base bid, there are successful qualified bidders for at least 60% of all positions posted for the bid. Example (1): Company initial vacancy bid is for ten (10) B-727 Crews. The total Crewmembers needed to fill the initial vacancy is 30. The Company receives 20 bids from B-727 eligible Crewmembers. The 60% requirement is 18. The New base is opened, and the provisions of this Article apply. Example (2): Company initial vacancy bid is for nine (9) B-747 Crews. The Crewmembers needed to fill the initial vacancy is 27. The Company receives 13 bids from B-747 eligible Crewmembers. The 60% requirement is 16. The New Base vacancy bid is canceled. C. Providing the bids received for the initial vacancies are greater than 60% of the number of Crewmembers in the crew class and type that bid, the Company may open the New Base(s) under the following conditions. 60 64 1. Once the initial vacancy bid has closed, the Company shall award to all Crewmember(s) that have bid, the position(s) in accordance with the following procedure. 2. Initial positions as defined in Paragraph (A)(1) above, shall be awarded in seniority order, by Crew Class and Type to any Crewmember(s) or furloughed Crewmember(s) that bid. 3. If there are insufficient bidders, the Company shall award by reverse seniority order, by Crew Class and Type in order to fill the vacancy positions. 4. Crewmembers that are subject to displacement from their current Category, Crew Class and Type due to a reduction at their present base shall be allowed to bump any position of the same Category at any base their seniority may hold. The provisions of Article VIII, paragraphs (B)(2) and (B)(3) shall apply. 5. Crewmember(s) that are displaced as a result of a furlough, after a New Base has been established may exercise their rights within the terms and conditions of Article VIII and displace any junior Crewmember at any base in the same Category. D. Once initial base vacancies have been bid and awarded or assigned, as provided for in (C) above, any additional base vacancies shall be posted and bid in accordance with Article IV of this Agreement. 1. The Company shall determine the additional vacancies required and shall post at all locations where they maintain bases and locations where they maintain offices, for a period of not less than thirty (30) days, the vacancy bid. 2. The Company shall mail to each Crewmember's home address a copy of the vacancy bid, including the Category/Crew Class, Type and Base location. The Company shall send a copy of the vacancy bid to all furloughed Crewmembers at the same time. The bid package shall include a copy of the projected bid lines and type of flying for the base. 3. New hire Crewmembers may be assigned any base once all vacancy positions have been bid and awarded. E. In the event a base(s) is reduced in crew staff level or closed, the Company shall notify all affected Crewmembers at least thirty (30) days prior to the actual closure date, or applicable Federal Law. 61 65 F. Moving Expenses 1. A Crewmember shall be entitled to move at Company expense to a permanent position under any one (1) or combination of the following circumstances, provided they move within one hundred (100) miles of the new base. (a) When Crewmember(s) are awarded a vacancy at a new base as a result of a successful bid. (b) When Crewmember(s) are involuntarily assigned to fill a new base vacancy as a result of insufficient bidders. (c) When the Crewmember's move results from a closing of his base. (d) A furloughed Crewmember recalled to a different base than from which he was furloughed. 2. Crewmembers shall be given thirty (30) days notice of the effective date of a new base assignment. 3. If a Crewmember eligible for moving expenses covered by this Article, elects not to move to the new base, the Company shall pay hotel and per diem for the first two bid periods at the new base. G. If the Crewmember elects to commute, he is responsible for being at the location designated for show time for a designated trip. H. New hire Crewmembers shall not be eligible for moving expenses when reporting to their initial base assignment or award. I. Expenses covered under this Article shall include the following: (a) Actual moving expenses up to a maximum of fifteen thousand pounds (15,000#) for household effects (including yard and workshop tools, motorcycles and lawn equipment). Moving expenses of household effects provided for in this paragraph shall be substantiated by receipts for shipping, insurance, or other normal costs incurred for shipping. (b) When a Crewmember transfers his car(s) from his former residence to his new residence, the rate of reimbursement will be twenty-nine ($.29) cents per mile for the most direct AAA mileage between such points for the first two (2) automobiles. The Company shall reimburse the Crewmember for the reasonable and actual expenses of meals and lodging for the Crewmember and his family for the time to travel to the new base. A day of 62 66 travel shall be 400 miles by the most direct AAA mileage. All lodging will be the quality of that used on scheduled layovers. (c) The Crewmember shall have up to one (1) year to move and claim the allowances provided for in this Article. (d) A Crewmember owning and living in a mobile home who moves such mobile home to his new base shall be allowed actual moving expenses not to exceed the limitations of (e) below. (e) The maximum dollar amount shall not exceed the amount for moving expenses as described in paragraphs (a) or (b) above. J. Initial Crew Base alignment. The Company shall determine the number of Crewmembers assigned to each Crew Class at each base. Upon date of ratification of this agreement, the Company shall post and provide to the Union a list of the numbers of Crewmembers, by Crew Class. The crew bases at time of ratification of this agreement shall be: YIP/B-747, YIP/B-727, YIP/DC-8 and YIP/L-1011. L. Lines of Flying The Company shall construct Lines of Flying in accordance with Article XIV of this Agreement. A Crewmember assigned to the base shall be returned to his original bid line as soon as possible. ARTICLE XXVII - DURATION This Agreement shall become effective on August 29, 1995, unless otherwise specifically noted, and shall continue in full force and effect until August 29, 1997, and shall renew itself until each successive August 29 thereafter until written notice of an intended change is served in accordance with Section Six (6), Title I, of the Railway Labor Act, as amended, by either party hereto at least thirty (30) days (but not more than sixty (60) days prior to August 29, 1997 or August 29 of any subsequent year. 63 67 IN WITNESS WHEREOF, the parties hereto have signed this Agreement on the 5th day of September, 1995. For the International For the American International Brotherhood of Teamsters Airways, Inc. - ------------------------------ ----------------------------------- Ray W. Benning, Jr. William Gray Assistant to the Director V.P. and General Manager - ------------------------------ ----------------------------------- Noel "Bush" Bohinov Tom Jones Business Representative Director of Operations - ------------------------------ Dale Busby Executive Council Chairman - ------------------------------ Dave Lyon Captain Representative - ------------------------------ Bassel Fares Member at Large - ------------------------------ John Maslankowski Flight Engineer Representative - ------------------------------ Ralph Fritsch DC-8 Engineer 64 68 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION MODIFIED The International Brotherhood of Teamsters - Airline Division and American International Airways, Inc. enter into a Letter of Agreement to establish an upgrade provision for Flight Engineers, employed as of July 28, 1994. The parties agree to the following terms and conditions: MINIMUM UPGRADE REQUIREMENTS 1. At least 1,000 hours pilot time, to include 100 hours of multi-engine time. Recent experience must include 50 hours during the six (6) months preceding qualification; AND 2. Employed as a Flight Engineer for a period of one (1) year with American International Airways prior to July 28, 1994. AND 3. Commercial Pilots License with instrument and multi-engine ratings and a current FAA First Class Medical certificate. Flight Engineers that desire to be considered for upgrade to First Officer must notify the Chief Pilot within sixty (60) days of this Agreement. The Flight Engineer that desires to become a First Officer has two (2) years to meet the Minimum Upgrade Requirements as set forth in this Agreement. The Company and the Union may extend the time limitations as set forth in this agreement. WHEN A VACANCY EXISTS ON THE APPROPRIATE EQUIPMENT, THE COMPANY SHALL; 1. Conduct a simulator evaluation of the Flight Engineer's flying ability. 2. Administer an equivalent ATP written examination with a passing score of 80% required. 65 69 3. The Crewmember shall have the option to re-take items (1) or (2) one time only. The Flight Engineer who fails this provision shall be returned to his former position as a Flight Engineer. 4. Upon successful completion of (1) and (2) above, the Company shall schedule the Crewmember for appropriate training to First Officer position. A Flight Engineer who fails to complete the training shall retain his position on the Flight Engineers Seniority List, and may, at the discretion of the Company, be given the opportunity to upgrade at a later date. The First Officer shall be on an evaluation period until he has completed 14 months of flying, or completed his annual proficiency check, whichever comes first. The First Officer that fails to complete the evaluation period, shall be returned to his former position as a Flight Engineer. The qualified First Officer must serve thirty-six (36) months on the same aircraft type prior to bidding different aircraft type. Upon successful completion of training the Crewmember shall have his name removed from the Flight Engineers Seniority List, and placed on the Pilots Seniority List according to his System-wide Seniority. Date: July 28, 1994 American International International Brotherhood of Airways, Inc. Teamsters - Airline Division American International International Brotherhood of Airways, Inc. Teamsters - Airline Division - ---------------------------- ---------------------------- - ---------------------------- ---------------------------- ---------------------------- ---------------------------- 66 70 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 American International Airways, Inc., and the International Brotherhood of Teamsters - Airline Division - Local 747, agree to amend the current contract language contained in this Agreement between the parties, as ratified by the membership on August 29, 1995. The current contract language contained in Article XIV - Section B, Paragraph 4 is hereby amended as follows: 4. The Company shall post for the calendar year a schedule for all bid periods, including the opening date, closure date, and award date of each bid period. The Company shall post at the Crewmember's Base and all line stations where Crewmembers may or will transit the next month bid package no later than the 10th day of the current Bid period. The next month bid package shall be mailed (postmarked and delivered to the Post Office) to each Crewmember's home address no later than the 10th day of the current bid period. a). Each bid period shall close on the 20th day of the current bid month. The Company shall award and post the results of each bid package on the 25th day of the current month for bid lines awarded or assigned in the following month. The bid results shall be posted at the Crewmember's Base and all line stations where Crewmembers may or will transit on the 25th day of each month. The Company shall not re-award the bid lines after the original posting is completed. b). Each Crewmember will be required to contact Crew Scheduling between the 25th day of month and the last day of the month to confirm his/her bid line award and training assignment for the following month. 67 71 Date: 21 Nov 1995 For: American International For: International Brotherhood of Airways, Inc. Teamsters - Local 747 - ------------------------------- ----------------------------------- 68 72 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 American International Airways, Inc. and the International Brotherhood of Teamsters - Airline Division - Local 747, agree to amend the current contract language contained in the Agreement between the parties, as ratified by the membership on August 29, 1995. The current contract language contained in Article XIV - Section A, Paragraph 9, the last sentence is amended as follows: When the bid package(s) are posted for the following month, the Company shall have the right to designate some lines of flying for training purposes. The training lines shall be designated by type of equipment, crew class position(s) and clearly indicated on each bid package(s). The assignment or award of Check Airmen to training lines shall be at the discretion of the Company. Date: Nov 21, 1995 For: American International For: International Brotherhood of Airways, Inc. Teamsters - Local 747 - ------------------------------- ------------------------------------ 69 73 LOA 96-07 February 2, 1996 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 The International Brotherhood of Teamsters - Airline Division - Local 747 and American International Airways, Inc., enter into a Letter of Agreement to modify the current Contract Language as contained in Article XVI, Paragraph (A)(1) and (A)(2), Page 53 (added) with the following new contract language; (1) Crewmembers requesting reimbursement for their initial uniform purchase must submit a Special Pay Request Form to the Company with "Original" receipts. (2) Crewmembers uniform maintenance allowance will be paid automatically on the first pay period of their anniversary month, every three (3) years following their date of hire. (3) Crewmembers requesting reimbursement for uniform items damaged in the performance of duty must submit a Special Pay Request Form to the Company with "Original" receipts. In addition, the damaged uniform item must be turned into the Company before payment will be made for reimbursement. Dated: Feb 27, 1996 For: American International For: International Brotherhood of Airways, Inc. Teamsters Airline Division - Local 747 - ------------------------------- ------------------------------------- 70 74 LOA 96-08 February 2, 1996 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 The International Brotherhood of Teamsters - Airline Division, Local 747 and American International Airways, Inc., enter into a Letter of Agreement to modify the current Contract Language as contained in Article XIX, Paragraph (A)1.g), Page 60 with the following new contract language; g) Anytime a Crewmember deadheads [rides the jumpseat] on an International Flight(s) [at the direction of the Company], in lieu of being positioned/depositioned using a scheduled commercial passenger carrier, the Crewmember shall be compensated $200.00. Each time the entire flight crew is changed, the deadheading Crewmember shall receive an additional $200.00. If the deadheading Crewmember is required to lay over at an enroute station, the deadheading Crewmember shall be compensated an additional $200.00 for the follow-on deadhead movement. Dated: Feb. 27, 1996 For: American International Airways, Inc. For: International Brotherhood of Teamsters Airline Division - Local 747 - ----------------------------------------- ---------------------------------- 71 75 LOA 96-06 February 2, 1996 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 The International Brotherhood of Teamsters - Airline Division, Local 747 and American International Airways, Inc., enter into a Letter of Agreement to modify the current Contract Language as contained in Article V - Section I., Paragraphs (B) and (E), Page 16, with the following new contract language: (B) Providing a satisfactory settlement is not reached within ten (10) days as provided in paragraph (A), the Crewmember shall reduce the grievance to writing and present it to the Union within thirty (30) days. All grievances must be filed with the Union within thirty (30) days of failure to resolve the grievance in Paragraph (A) above. The Crewmember must supply all necessary supporting documentation with his/her grievance. The Union shall review each grievance and forward to the Company no later than the tenth (10th) day of the month all grievances received within the past thirty (30) days. (E) All grievances shall be sent to the Director of Operations or his designee by the Union. If the grievant(s) is not satisfied with the decision of the Director of Operations (or his designee), or the Company fails to respond within thirty (30) days, the Union of the grievant(s) may appeal such decision to the Crewmember's System Board of Adjustment. Such appeal shall be made by the Union or the grievant(s) in writing within fifteen (15) days from the date of receipt by the Union or the grievant(s) of the decision of the Director of Operations or his designee. 72 76 Dated: Feb. 27, 1996 For: American International Airways, Inc. For: International Brotherhood of Teamsters Airline Division - Local 747 - ---------------------------------------- ---------------------------------- 73 77 LOA 96-05 February 2, 1996 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 The International Brotherhood of Teamsters - Airline Division, Local 747 and American International Airways, Inc., enter into a Letter of Agreement to modify the current Contract Language as contained in Article XI - Section E, Paragraph 1.(c), Page 34 (added) with the following new contract language; (c) On December 31st of each year, all vacation days accrued in excess of the maximum (28 or 42 days) allowable bank, will automatically be paid out on the January 22nd paycheck. Dated: Feb. 27, 1996 For: American International Airways, Inc. For: International Brotherhood of Teamsters Airline Division - Local 747 - ---------------------------------------- ---------------------------------- 74 78 LOA 96-04. Rev 1 March 22, 1996 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 The International Brotherhood of Teamsters - Airline Division, Local 747 and American International Airways, Inc., enter into a Letter of Agreement to modify the current Contract Language as contained in Article XX - Section A, Paragraph 7, Page 63 with the following new contract language; 7. Crewmembers shall provide to the Company, no later than the seventh (7th) calendar day of the month, their Per Diem and Overtime Request Form for all pay earned in the previous month. Crewmembers may fax or mail to the Company their Per Diem and Overtime Request Form. a. The company shall provide a Fax number to the Crewmembers not later than 30 days after signing of this LOA to be used to receive the Per Diem and Overtime Request Forms. b. Crewmembers who Fax their Per Diem and Overtime Request Forms need not and should not mail an original copy to the Company. c. All Per Diem Request Forms, received the 7th of the month, shall be paid by check, post marked and placed in the mail to the Crewmembers not later than the last business day of the month, following the month in which its was earned. d. Crewmembers requesting additional reimbursable expenses must file a Special Pay Request Form and all "Original Receipts". (Reference LOA 96-12) Note: This LOA becomes effective with the Per Diem Request for April 1-30. 75 79 Dated: 22/3/96 For: American International Airways, Inc. For: International Brotherhood of Teamsters Airline Division - Local 747 - ---------------------------------------- ---------------------------------- 76 80 LOA 96-12 March 22, 1996 LETTER OF AGREEMENT BETWEEN AMERICAN INTERNATIONAL AIRWAYS, INC. AND INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION - LOCAL 747 The International Brotherhood of Teamsters - Airline Division, Local 747 and American International Airways, Inc., enter into a Letter of Agreement to modify the current Contract Language as contained in Article XX - Section A, Paragraph 9., Page 63 [added] with the following new contract language; 9. Crewmembers shall file for additional reimbursable expenses using the "Reimbursable Expense Request Form". Crewmembers shall provide to the Company, no later than the tenth (10th) calendar day of the month, their Reimbursable Expense Request Form with all "Original Receipts". Faxed forms and copies of receipts "will not be" accepted. The following are examples of what must be submitted with their Reimbursable Expense Request Form. a) Original receipts for all commercial airline tickets purchase, indicating origin, destination and class flown. b) Original receipts for all charges and cash purchase claimed, including a detailed written explanation of the charges. c) All Reimbursable Expense Request Forms, received by the 10th of the month, shall be paid by check, post marked and placed in the mail to the Crewmembers not later than the last business day of the month, following the month in which the funds were expended. Note: This LOA becomes effective with the Reimbursable Expense Request for April 1-30. 77 81 Dated: 3/22/96 For: American International Airways, Inc. For: International Brotherhood of Teamsters Airline Division - Local 747 - ---------------------------------------- ---------------------------------- 78 EX-12.1 5 STATEMENT RE: COMPUTATION OF EARNINGS 1 EXHIBIT 12.1 KITTY HAWK, INC. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN THOUSANDS)
12 MONTHS FOUR MONTHS ENDED ENDED FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, DECEMBER 31, ---------------------------------------------- ------------ ---------------- 1992 1993 1994 1995 1996 1996 1995 1996 ------ ------ ------ ------ ------ ------------ ------ ------ Earnings Income(loss) before income taxes...................... $1,388 $6,718 $8,407 $7,559 $6,877 $7,686 $7,851 $8,660 Add: Fixed charges........... 202 206 430 1,289 1,998 2,200 528 730 ------ ------ ------ ------ ------ ------ ------ ------ Total.................. $1,590 $6,924 $8,837 $8,848 $8,875 $9,886 $8,379 $9,390 ====== ====== ====== ====== ====== ====== ====== ====== Fixed charges Interest expense............. $ 157 $ 134 $ 343 $1,185 $1,859 $2,061 $ 482 $ 684 Add: Interest factor of operating lease expense.... 45 72 87 104 139 139 46 46 ------ ------ ------ ------ ------ ------ ------ ------ Total.................. $ 202 $ 206 $ 430 $1,289 $1,998 $2,200 $ 528 $ 730 ====== ====== ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges...................... 7.9x 33.6x 20.6x 6.9x 4.4x 4.5x 15.9x 12.9x ====== ====== ====== ====== ====== ====== ====== ====== SIX MONTHS ENDED JUNE 30, --------------------- 1996 1997 ------- ------ Earnings Income(loss) before income taxes...................... $(1,980) $6,625 Add: Fixed charges........... 1,092 1,643 ------- ------ Total.................. $ (888) $8,268 ======= ====== Fixed charges Interest expense............. $ 1,023 $1,049 Add: Interest factor of operating lease expense.... 69 594 ------- ------ Total.................. $ 1,092 $1,643 ======= ====== Ratio of earnings to fixed charges...................... --(1) 5.0x ======= ======
THE KALITTA COMPANIES CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------- ----------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- -------- Earnings Income (loss) before minority interest......... $ 5,585 $18,001 $33,351 $ 7,578 $ 1,129 $(5,047) $(30,050) Add: Fixed charges............................. 5,688 12,485 14,009 24,788 26,179 12,053 13,526 Less: Capitalized interest..................... -- -- (668) (1,692) (562) (321) -- ------- ------- ------- ------- ------- ------- -------- Total.................................... $11,273 $30,486 $46,692 $30,674 $26,743 $ 6,685 $(16,524) ======= ======= ======= ======= ======= ======= ======== Fixed charges Interest expense............................... 4,396 6,781 8,121 15,064 22,012 10,402 12,371 Add: Interest factor of operating lease expense...................................... 1,292 5,704 5,220 8,032 3,605 1,330 1,155 Add: Capitalized interest...................... -- -- 668 1,692 562 321 -- ------- ------- ------- ------- ------- ------- -------- Total.................................... $ 5,688 $12,485 $14,009 $24,788 $26,179 $12,053 $ 13,526 ======= ======= ======= ======= ======= ======= ======== Ratio of earnings to fixed charges............... 2.0x 2.4x 3.3x 1.2x 1.0x --(2) --(2) ======= ======= ======= ======= ======= ======= ========
- --------------- (1) Earnings of Kitty Hawk were not sufficient to cover fixed charges by $1,980 for the six month period ended June 30, 1996. (2) Earnings of The Kalitta Companies were not sufficient to cover fixed charges by approximately $5,368 and $30,050 for the six months ended June 30, 1996 and 1997, respectively. EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 7, 1997 in the Registration Statement (Form S-1 No. 333-36125) and related Prospectus of Kitty Hawk, Inc. dated October 20, 1997. /s/ ERNST & YOUNG LLP Dallas, Texas October 22, 1997 EX-23.2 7 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-36125 of Kitty Hawk, Inc. on Form S-1 of our report relating to the combined financial statements of American International Airways, Inc. and related companies (collectively the "Companies") dated October 16, 1997 (which report expresses an unqualified opinion and includes an explanatory paragraph which indicates that there are matters that raise substantial doubt about the Companies' ability to continue as a going concern) appearing in the Prospectus, which is part of this Registration Statement, and of our report dated October 16, 1997 relating to the financial statement schedule of the Companies appearing elsewhere in this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Ann Arbor, Michigan October 24, 1997 -----END PRIVACY-ENHANCED MESSAGE-----