-----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, I/jHwKKi2ZPV5Dph/OZuScFN50EkKOj8B/P5kywpzR8ksXh6NyZncYG7dN7ufBDN zm8/6VZsy0gT4pQZzLz0Mw== 0000950134-98-000858.txt : 19980209 0000950134-98-000858.hdr.sgml : 19980209 ACCESSION NUMBER: 0000950134-98-000858 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19980206 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-4/A SEC ACT: SEC FILE NUMBER: 333-43645 FILM NUMBER: 98524602 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-4/A 1 AMENDMENT NO. 1 TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1998 REGISTRATION NO. 333-43645 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-4 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 (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code) Identification Number) organization)
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, DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261 TEXAS 75261 (972) 456-2200 (972) 456-2200 (Address, including zip code, and telephone (Name, address, including zip code, and number, telephone number, including area code, including area code, of registrant's principal of agent for service) executive offices)
--------------------- Copies of communications to: JANICE V. SHARRY HAYNES AND BOONE, LLP 901 MAIN STREET, SUITE 3100 DALLAS, TEXAS 75202 (214) 651-5000 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. --------------------- If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, 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, 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. [ ] ------------------ ================================================================================ 2 PROSPECTUS , 1998 OFFER TO EXCHANGE 9.95% SENIOR SECURED NOTES DUE 2004 FOR ALL OUTSTANDING 9.95% SENIOR SECURED NOTES DUE 2004 OF [KITTY HAWK, INC. LOGO] KITTY HAWK, INC. --------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH , 1998, UNLESS EXTENDED. The Company is offering upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal") (which together constitute the "Exchange Offer") to exchange $1,000 principal amount of its new 9.95% Senior Secured Notes due 2004 (the "New Notes") for each $1,000 principal amount of its outstanding 9.95% Senior Secured Notes due 2004 (the "Old Notes") in the aggregate principal amount of $340 million. The form and terms of the New Notes are identical to the form and terms of the Old Notes, except that the Old Notes were offered and sold in reliance upon certain exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act"), while the offering and sale of the New Notes in exchange for the Old Notes has been registered under the Securities Act, with the result that the New Notes will not bear any legends restricting their transfer. The New Notes will evidence the same debt as the Old Notes and will be issued pursuant to, and entitled to the benefits of, the indenture among the Company, each wholly owned subsidiary of the Company and the Trustee (as defined herein) thereunder, dated November 15, 1997, as supplemented (as supplemented, the "Indenture"), governing the Old Notes. The Exchange Offer is being made in order to satisfy certain contractual obligations of the Company. See "The Exchange Offer" and "Description of Notes." The New Notes and the Old Notes are sometimes collectively referred to herein as the "Notes." The Notes are redeemable, at the Company's option, in whole or in part, at any time on or after November 15, 2001, at the redemption prices set forth herein. In addition, at any time prior to November 15, 2000, the Company may redeem in aggregate up to 35% of the original principal amount of the Notes with the FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 18. 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. --------------------- 3 proceeds of one or more Public Equity Offerings at the redemption price set forth herein; provided that at least $150 million in principal amount of the Notes remain outstanding. The Notes will be senior secured obligations of the Company, and will rank pari passu in right of payment with all other senior indebtedness of the Company, except to the extent of any collateral securing the Notes or such other senior indebtedness, and senior to all subordinated indebtedness of the Company. The Notes will be initially guaranteed on a senior secured basis by all of the Company's wholly owned subsidiaries. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where the Old Notes were acquired by that broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. See "The Exchange Offer" and "Plan of Distribution." The Company will accept for exchange any and all validly tendered Old Notes on or before 5:00 p.m., New York City time, on March , 1998, unless extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration Date, but after that time are irrevocable. Bank One, N.A. will act as Exchange Agent in connection with the Exchange Offer. The Exchange Offer is not conditioned on any minimum principal amount of Old Notes being tendered for exchange, but is otherwise subject to certain customary conditions. The New Notes will bear interest from the date of issuance of the Old Notes at a rate per annum of 9.95%. Interest on the New Notes will be payable in cash, semiannually on each May 15 and November 15, commencing May 15, 1998. No interest will be paid on Old Notes which are exchanged for New Notes, and holders of Old Notes which are exchanged for New Notes will be deemed to have waived the right to receive interest accrued thereon to the date of exchange. The Old Notes were sold by the Company on November 19, 1997, to Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Fieldstone FPCG Services, L.P. (the "Placement Agents") in a transaction not registered under the Securities Act in reliance on the exemption provided in Section 4(2) of the Securities Act. The Placement Agents subsequently placed the Old Notes with qualified institutional buyers in reliance on Rule 144A under the Securities Act. Accordingly, the Old Notes may not be reoffered, resold or otherwise transferred in the United States unless registered or unless an applicable exemption from the registration requirements of the Securities Act is available. The New Notes are being offered hereunder in order to satisfy the obligations of the Company under a Registration Rights Agreement entered into among the Company, various subsidiary guarantors of the Notes and the Placement Agents (the "Registration Rights Agreement"). See "The Exchange Offer." Based on an interpretation by the staff of the Securities and Exchange Commission (the "Commission" or the "SEC") set forth in no-action letters issued to third parties unrelated to the Company, the Company believes that the New Notes issued pursuant to this Exchange Offer may be offered for resale, resold and otherwise transferred by a holder thereof who is not an "affiliate" of the Company or any Guarantor within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in the ordinary course of its business and is not participating in and has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the New Notes. Persons wishing to exchange Old Notes in the Exchange Offer must represent to the Company that these conditions have been met. The Company expects the New Notes will be designated for trading in the Private Offerings, Resales and Trading through Automated Linkages (PORTAL) market upon issuance. The Company does not intend to list the New Notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. The Placement Agents have advised the Company that they intend to make a market in the New Notes; however, they are not obligated to do so and any market-making may be discontinued at any time without notice. Accordingly, no assurance can 2 4 be given that an active public or other market will develop for the New Notes or as to the liquidity of or the trading market for the New Notes. Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding. To the extent that any Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes could be adversely affected. Following consummation of the Exchange Offer, the holders of Old Notes will continue to be subject to the existing restrictions on transfer thereof. The Company expects that the New Notes issued pursuant to this Exchange Offer will be issued in the form of one or more permanent global notes (the "Global New Notes"), which will be deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in its name or in the name of its nominee. Beneficial interests in the Global New Notes representing the New Notes will be shown on, and transfers thereof will be effected through, records maintained by DTC and its participants. After the initial issuance of the Global New Notes, New Notes in certificated form will be issued in exchange for the Global New Notes on the terms set forth in the Indenture. See "Description of Notes -- Book Entry; Delivery and Form." 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. 3 5 TABLE OF CONTENTS Summary..................................................... 5 Risk Factors................................................ 18 The Exchange Offer.......................................... 30 The Company................................................. 38 Use of Proceeds............................................. 38 Capitalization.............................................. 39 Unaudited Pro Forma Combined Financial Statements........... 40 Selected Financial and Operating Data....................... 47 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 51 Business.................................................... 72 Management.................................................. 88 Principal Stockholders...................................... 90 Description of Notes........................................ 90 Description of Other Indebtedness........................... 125 Certain U.S. Federal Income Tax Considerations.............. 125 Plan of Distribution........................................ 126 Legal Matters............................................... 127 Experts..................................................... 127 Available Information....................................... 127 Incorporation of Certain Documents by Reference............. 128 Index to Financial Statements............................... F-1
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NEW NOTES OFFERED HEREBY. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. --------------------- 4 6 SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) and pro forma combined financial information appearing elsewhere in this Prospectus. This Exchange Offer is a result of contractual obligations of the Company to the Placement Agents arising from the offering of the Old Notes (the "Old Note Offering"), which was consummated on November 19, 1997 concurrently with (i) the 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 consummation of a common stock offering (the "Common Stock Offering") by the Company and certain stockholders of the Company and (iii) entering into the New Credit Facility (as defined) and the Term Loan (as defined). The Old Note Offering, the Merger and the Common Stock 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) the "Refinancings" refer to the refinancing (concurrently with the consummation of the Merger) of all but approximately $10 million of the then outstanding indebtedness of Kitty Hawk and the Kalitta Companies with a portion of the net proceeds of the Old Note Offering, the Common Stock Offering and the Term Loan. This Prospectus includes "forward-looking statements" within the meaning of various provisions of the Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act"). All statements, other than statements of historical facts, included in this Prospectus that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including statements regarding future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success, references to intentions as to future matters and other similar matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including the risk factors discussed in this Prospectus; general economic, market or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive actions by other companies; changes in laws or regulations; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this Prospectus are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company, its business or its operations. 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 November 19, 1997, Kitty Hawk merged certain wholly owned subsidiaries with and into each of the Kalitta Companies. Concurrently with the Merger, the Company completed the Common Stock Offering, the Old Note Offering and the Refinancings. 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 nine months ended September 30, 1997 were approximately $552 million and $422 million, respectively. 5 7 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 117 aircraft, including (i) four Boeing 747s, six Lockheed L-1011s, 19 Douglas DC-8s, 30 Boeing 727s and five Douglas DC-9-15Fs for its air freight carrier business, (ii) two Boeing 747s and two Lockheed L-1011s for its air passenger charter business and (iii) 49 small jet and prop aircraft (which include primarily Lear jets, Beechcraft 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 6 8 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 three used Boeing 747s, one of which is currently being converted to freighter configuration. The Company expects to convert the remaining two recently acquired Boeing 747s to freighter configuration during 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 for the first nine months of 1997 and sustained a negative gross profit of $7.5 million for the first six months of 1997. In addition, based on preliminary 7 9 unaudited financial information, during the period October 1, 1997 through November 18, 1997 (the day immediately preceding the consummation of the Merger), the Kalitta Companies posted net losses of $9.1 million. The Kalitta Companies' management believes that the recent negative financial performance 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. The Company's management intends to focus on meeting profit objectives in day-to-day operations and believes the Kalitta Companies' recent financial performance can be substantially improved, although there can be no assurance in this regard. See "Risk Factors -- Recent Financial Performance of the Kalitta Companies." THE MERGER AND RELATED TRANSACTIONS PURCHASE OF BOEING 727S FROM THE KALITTA COMPANIES In September 1997, prior to the Merger, the Kalitta Companies sold to Kitty Hawk for $51 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. 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 American International Cargo ("AIC"), a general partnership in which one of the Kalitta Companies owns a 60% interest. THE MERGER On September 22, 1997, Kitty Hawk and certain of its subsidiaries, 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, on November 19, 1997, separate subsidiaries of Kitty Hawk were merged with and into each of the Kalitta Companies, with each of the respective Kalitta Companies surviving the Merger as a direct, wholly owned subsidiary of Kitty Hawk. In connection with the Merger, the outstanding shares of capital stock of four of the Kalitta Companies were converted, in the aggregate, into the right to receive 4,099,150 shares of the Company's Common Stock and the outstanding shares of the remaining Kalitta Company were converted into the right to receive $20 million cash. THE COMMON STOCK OFFERING Concurrently with the Merger, the Company consummated a 3,000,000 share Common Stock Offering at $19 per share. Of the 3,000,000 shares offered in the Common Stock Offering, 2,200,000 shares were sold by the Company and 800,000 shares were sold by certain stockholders of the Company (the "Selling Stockholders"). The Company did not receive any of the net proceeds from the sale of shares of Common Stock by the Selling Stockholders. NEW CREDIT FACILITY AND TERM LOAN Concurrently with the consummation of the Transactions, the Company entered into a new senior secured revolving credit facility providing for borrowings of up to $100 million, subject to a current borrowing base limitation of approximately $28.7 million (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 are secured by accounts receivable, all spare parts (including rotables), inventory, intangibles and contract rights, cash, 16 Boeing 727 aircraft and related 8 10 engines acquired by Kitty Hawk from the Kalitta Companies prior to the Merger in September 1997, the stock of each of the Company's subsidiaries and the Company's 60% interest in AIC. In addition, the New Credit Facility and Term Loan are guaranteed by each of the Company's subsidiaries (other than AIC). As of January 31, 1998, there was no outstanding balance under the New Credit Facility and a balance of approximately $45.9 under the Term Loan. THE OLD NOTE OFFERING The Old Notes.............. The Old Notes were sold by the Company on November 19, 1997 to the Placement Agents pursuant to a Placement Agreement. The Placement Agents resold the Old Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act. Registration Rights Agreement.................. In connection with the Old Note Offering, the Company entered into a Registration Rights Agreement with the Placement Agents, among others, which grants the holders of the Old Notes certain registration rights. The Exchange Offer is intended to satisfy such rights, which terminate upon consummation of the Exchange Offer. If applicable law or applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, or in certain other circumstances, the Company has agreed to file a shelf registration statement covering resales of Registrable Securities (as defined in the Registration Rights Agreement). THE EXCHANGE OFFER The Exchange Offer applies to the entire $340 million aggregate principal amount of the Old Notes. The form and terms of the New Notes are identical to the form and terms of the Old Notes, except that the Old Notes were offered and sold in reliance upon certain exemptions from registration under the Securities Act, while the offering and sale of the New Notes in exchange for the Old Notes has been registered under the Securities Act, with the result that the New Notes will not bear any legends restricting their transfer. See "Description of Notes." The Exchange Offer......... The Company is hereby offering to exchange $1,000 principal amount of New Notes for each $1,000 principal amount of Old Notes that are properly tendered and accepted. As of the date hereof, Old Notes representing an aggregate principal amount of $340 million are outstanding. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, the Company believes that the New Notes issued pursuant to this Exchange Offer may be offered for resale, resold and otherwise transferred by a holder thereof who is not an "affiliate" of the Company or any Guarantor within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in the ordinary course of its business and is not participating in and has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the New Notes. Persons wishing to exchange Old Notes in the Exchange Offer must represent to the Company that these conditions have been met. The Company has not sought, and does not intend to seek, its own no-action letter, and there can be no assurance that the Commission's staff would make a similar determination with respect to this Exchange Offer. Each broker-dealer that receives New Notes for its 9 11 own account in exchange for Old Notes, where the Old Notes were acquired by that broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer -- Purpose and Effect" and "Plan of Distribution." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, on March , 1998, unless the Exchange Offer is extended by the Company in its sole discretion, in which case, the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. Withdrawal Rights.......... The tender of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Notes and Old Notes.............. Interest on each New Note will accrue from the date of issuance of the Old Note for which the New Note is exchanged. No interest will be paid on Old Notes which are exchanged for New Notes, and holders of Old Notes which are exchanged for New Notes will be deemed to have waived the right to receive interest accrued thereon to the date of exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offer -- Conditions." Procedures for Tendering Old Notes.................. Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or a copy thereof, together with the Old Notes and any other required documentation, to the Exchange Agent at the address set forth herein. Persons holding Old Notes through DTC and wishing to accept the Exchange Offer must do so pursuant to DTC's Automated Tender Offer Program, by which each tendering Participant (as defined) will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Company that, among other things, (i) any New Notes to be received by such holder in connection with the Exchange Offer will be acquired by such holder in the ordinary course of its business and (ii) such holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company or any Guarantor, or if it is an affiliate, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the holder is not a broker-dealer, such holder will be required to represent that it is not engaged in, and does not intend to engage in, the distribution of the New Notes and has no arrangement with any person to participate in the distribution of the New Notes. If the holder is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of 10 12 market-making activities or other trading activities, such holder will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. Pursuant to the Registration Rights Agreement, the Company is required to file a registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if applicable law or SEC staff interpretations otherwise prevent registration of the New Notes pursuant to the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Acceptance of Old Notes and Delivery of New Notes.... Subject to the satisfaction or waiver of the conditions to the Exchange Offer, the Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. Bank One, N.A. is serving as Exchange Agent in connection with the Exchange Offer and is also serving as Trustee under the Indenture. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Certain U.S. Federal Income Tax Considerations." Effect of Not Tendering.... Old Notes that are eligible for exchange in the Exchange Offer, but are not tendered or are tendered but not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Company will have no further obligation to provide for the registration under the Securities Act of such Old Notes. Global Note................ The New Notes will be issued in fully registered form and are expected to initially be represented by one or more Global New Notes, registered in the name of DTC or its nominee and deposited with DTC. Holders of beneficial interests in the Global New Notes will not be considered the owners or holders of any New Notes under the Global New Notes or the Indenture for any purpose. Holders of beneficial interests in the Global New Notes may be unable to transfer or pledge their interest in the Global New Notes if physical delivery is required. Payments by DTC Participants (as defined) and DTC Indirect Participants (as defined) to the beneficial owners of New Notes will be governed by standing instructions and customary practice and will be the responsibility of the DTC Participants or DTC Indirect Participants and not the Company or the Trustee. See "Exchange Offer -- Book Entry Transfer." TERMS OF THE NEW NOTES Securities Offered......... $340 million principal amount of 9.95% Senior Secured Notes Due 2004, issued by the Company. Maturity................... November 15, 2004. 11 13 Interest................... The New Notes will bear interest from the date of issuance of the Old Notes at a rate of 9.95% per annum. Interest on the New Notes will be payable in cash, semiannually in arrears on each May 15 and November 15, commencing May 15, 1998. See "Description of Notes" for a description of the circumstances under which the interest rate on the Notes may be increased. Collateral................. All amounts payable pursuant to the Notes will be secured by, among other things, a security interest in certain aircraft (the "Aircraft") owned by the Company, including nine Boeing 747s, eight Lockheed L-1011s and thirteen Boeing 727s (collectively, the "Collateral"). Independent appraisers have attributed an initial aggregate value to the Aircraft of approximately $441 million in October 1997. See "Description of Notes -- Collateral." Escrow Account............. The Company has purchased and pledged to the Trustee under the Indenture, as security for the benefit of the holders of both New and Old Notes, approximately $16.4 million of Pledged Securities (as defined herein) consisting of U.S. government securities, which the Company expects to use to pay a portion of the estimated $25.4 million cost to modify two recently acquired Boeing 747s to freighter configuration in 1998. These two Boeing 747s are included in the Collateral. See "Business -- Aircraft Fleet -- Acquisition of Boeing 747s" and "Description of Notes -- Escrow Account." Optional Redemption........ On or after November 15, 2001, the New Notes are redeemable at the option of the Company, in whole or in part, at any time or from time to time at the redemption prices set forth herein. In addition, prior to November 15, 2000, up to 35% of the aggregate principal amount of the New Notes may be redeemed with the net cash proceeds of one or more Public Equity Offerings (as defined) at the redemption price set forth herein; provided that at least $150 million in principal amount of the New Notes remain outstanding. See "Description of Notes -- Optional Redemption." Ranking.................... The New Notes will be senior secured obligations of the Company, ranking senior in right of payment to all subordinated indebtedness of the Company and, except with respect to collateral, pari passu in right of payment with other unsubordinated indebtedness of the Company. Lenders under the New Credit Facility and Term Loan have prior claims with respect to the Company's accounts receivable, all spare parts (including rotables), inventory, intangibles and contract rights, cash, 16 Boeing 727s and related engines acquired from the Kalitta Companies prior to the Merger, the stock of each of the Company's subsidiaries and the Company's 60% interest in AIC. In addition, the New Credit Facility and Term Loan are guaranteed by each of the Company's subsidiaries (other than AIC). The New Credit Facility and Term Loan will effectively rank senior in right of payment to the claims of holders of the New Notes with respect to such assets. At September 30, 1997, on a pro forma basis, after giving effect to the Transactions and the Refinancings, on a consolidated basis the Company would have had outstanding approximately $396 million of indebtedness, including approximately $55.9 million of other secured indebtedness (consisting of the Term Loan and approximately $10 million of other indebtedness) and no subordinated indebtedness. The Company would also have had 12 14 approximately $28.7 million in unused senior secured borrowing capacity under its New Credit Facility. See "Description of Notes." Guarantees................. All payments with respect to the New Notes are guaranteed (the "Note Guarantees") on a senior basis by each of the wholly owned subsidiaries of the Company (the "Guarantors"). The Guarantors include all of the Company's subsidiaries except AIC. The Note Guarantees will rank senior in right of payment to any subordinated indebtedness and, except with respect to collateral, pari passu with all existing and future unsubordinated indebtedness of the Guarantors. Change of Control.......... Upon a Change of Control (as defined herein), the Company is required to make an offer to purchase the New Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued interest, if any. See "Description of Notes -- Repurchase of Notes Upon a Change of Control." Certain Covenants.......... The Indenture contains certain covenants that, subject to certain exceptions, restrict the ability of the Company and the Guarantors to make certain restricted payments, incur Indebtedness (as defined herein), create certain liens, sell assets, engage in transactions with Affiliates (as defined herein), and, with respect to the Company, merge or consolidate with other entities. See "Description of Notes -- Covenants." Book-Entry; Delivery and Form................. New Notes will initially be represented by one or more Global New Notes registered in the name of a nominee of DTC. Beneficial interests in the Global New Notes will be shown on, and transfers thereof will be effected only through, records maintained in book-entry form by DTC with respect to its participants. See "Description of Notes -- Book- Entry; Delivery and Form." RISK FACTORS For a discussion of certain factors that should be considered by perspective investors in connection with an investment in the New Notes, see "Risk Factors." 13 15 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 September 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 exchange of the New Notes for the Old Notes would have no effect on the pro forma information. 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 $39.6 million of the net proceeds from the sale of the Old Notes were used to purchase two Boeing 747s and an additional approximately $16.4 million of such proceeds will be used to pay a portion of the estimated $25.4 million cost to modify these Boeing 747s to freighter configuration (see "Use of Proceeds" and "Business -- Aircraft Fleet -- Acquisition of 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 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 (1,436) 66,833 Stock option grants to executives.................. 4,231(3) -- -- 4,231 Operating income (loss)............................ 9,457 21,495 (1,436) 29,516 Interest expense................................... (2,062) (21,632) (16,632) (40,326)(4) Minority interest.................................. -- (1,146) -- (1,146) Income (loss) before income taxes.................. 7,686 (17) (18,068) (10,399) Net income (loss).................................. $ 4,648(3) $ (17)(5) $(15,030) $(10,399) Net income (loss) per share........................ $ 0.55(3) -- -- $ (0.70) Weighted average common and common equivalent shares outstanding............................... 8,477 -- 6,299 14,776 OTHER FINANCIAL DATA: Capital expenditures............................... $ 47,159 $ 53,413 $ -- $100,572 Adjusted EBITDA(6)................................. $ 22,372 $ 53,586 $ 3,771(7) $ 79,729 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 owned (at end of period).................. 25 95 (2)(9) 118 Flight hours(10)................................... 21,587 91,690 -- 113,277
14 16
NINE MONTHS ENDED SEPTEMBER 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................................. $ 55,789 $302,345 $(4,942) $353,192 Air logistics....................................... 45,878 -- -- 45,878 Maintenance and other............................... -- 23,2999(2) -- 23,299 -------- -------- ------- -------- Total revenues........................................ 101,667 325,644 (4,942) 422,369 Gross profit.......................................... 21,554 10,441 11,799 43,774 Operating income (loss)............................... 12,843 (9,040) 11,799 15,582 Interest expense...................................... (1,809) (19,740) (8,696) (30,245)(4) Minority interest..................................... -- (1,859) -- (1,859) Income (loss) before income taxes..................... 11,613 (30,742) 3,083 (16,046) Net income (loss)..................................... $ 6,968 $(30,742)(5) $ 7,728 $(16,046) Net income (loss) per share........................... $ 0.67 -- -- $ (0.96) Weighted average common and common equivalent shares outstanding......................................... 10,452 -- 6,299 16,751 OTHER FINANCIAL DATA: Capital expenditures.................................. $ 99,575 $ 54,509 $ -- $154,084 Adjusted EBITDA(6).................................... $ 21,039 $ 16,159 $15,629(7) $ 52,827 Ratio of adjusted EBITDA to total interest expense.... 11.6x --(11) 1.7x Ratio of earnings to fixed charges.................... 5.3x --(8) -- OPERATING DATA: Aircraft owned (at end of period)..................... 42 84 (2)(9) 124 Flight hours(10)...................................... 21,912 70,721 92,633
SEPTEMBER 30, 1997 ------------------------------------------------------ HISTORICAL ------------------------ PRO FORMA KALITTA ------------------------- KITTY HAWK COMPANIES ADJUSTMENTS COMBINED ---------- --------- ----------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficiency)............................ $ 103 $(233,073)(12) $335,802 $102,831 Total assets............................................ 176,801 400,476 118,263 695,540 Total debt.............................................. 81,047 255,093 60,060 396,200 Stockholders' equity.................................... $ 65,241 $ 35,650 $ 63,820 $164,711
- --------------- (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 is based upon a rate of 9.95% on the Notes and assumes a rate of 8.8% on the Term Loan. 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 $86 for the nine months ended September 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 nine months ended September 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 eliminating the gross profit on the Hawker Sale (as defined), conforming the Kalitta Companies' aircraft maintenance policy to that of Kitty Hawk and decreasing 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 $28,883 for the nine months ended September 30, 1997. On a pro forma basis, the Company's earnings would not have been sufficient to cover fixed charges by $9,815 for 1996 and $14,187 for the nine months ended September 30, 1997. (9) Includes the effect of the Hawker Sale and the sale of one Boeing 727-100 which the Company is currently negotiating to sell. (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 nine months ended September 30, 1997, the Kalitta Companies' adjusted EBITDA was $16,159 and interest expense was $19,740, resulting in a failure to cover interest expense. (12) Includes long-term debt and notes payable reclassified as current $160,058 at September 30, 1997. 15 17 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 nine months ended September 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 nine months ended September 30, 1996 and 1997. Operating results for the nine months ended September 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 nine months ended September 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.
NINE MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenues: Air freight carrier............................. $ 6,760 $12,939 $28,285 $41,117 $52,922 $39,615 $55,789 Air logistics................................... 45,893 52,840 79,415 62,593 89,493 43,144 45,878 ------- ------- ------- ------- ------- ------- ------- Total revenues.................................... 52,653 65,779 107,700 103,710 142,415 82,759 101,667 Gross profit...................................... 4,188 10,578 14,749 18,178 23,515 13,932 21,554 Stock option grants to executives(1).............. -- -- -- -- 4,231 4,231 -- Operating income.................................. 1,258 5,934 8,004 9,345 9,034 2,377 12,843 Interest expense.................................. (157) (134) (343) (1,185) (1,859) (1,530) (1,809) Net income........................................ $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,109 $ 251 $ 6,968 Net income per share.............................. $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52 $ 0.03 $ 0.67 Weighted average common and common equivalent shares outstanding.............................. 8,671 7,968 7,968 7,968 7,928 7,891 10,452 OTHER FINANCIAL DATA: Capital expenditures.............................. $ 3,019 $ 1,318 $13,876 $17,929 $33,538 $31,367 $99,575 Adjusted EBITDA(2)................................ $ 2,149 $ 7,104 $ 9,507 $12,839 $19,840 $10,582 $21,039 Ratio of adjusted EBITDA to interest expense...... 13.7x 53.0x 27.7x 10.8x 10.7x 6.9x 11.6x Ratio of earnings to fixed charges(3)............. 7.9x 33.6x 20.6x 6.9x 4.4x 1.3x 5.3x OPERATING DATA: Aircraft owned (at end of period)................. 11 10 15 22 25 25 42 Flight hours(4)................................... 3,567 7,030 11,795 15,183 20,237 15,628 21,912 Number of on-demand charters flown................ 292 752 1,182 1,238 1,918 1,182 911 Number of ACMI contract charters flown........................................... 655 1,314 1,734 2,601 3,514 2,818 3,883 Number of on-demand charters managed(5)........... 8,708 9,748 16,713 14,198 19,578 11,607 10,640
- --------------- (1) Results for fiscal year ended August 31, 1996 and nine months ended September 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 nine months ended September 30, 1996, would have been approximately $6,648 and $2,790, respectively, and net income per share would have been $0.84 and $0.35, respectively. See "Management -- Stock Option Grants." (2) Adjusted EBITDA represents net income 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 prior to income tax expense 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). (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. 16 18 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 nine months ended September 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 nine months ended September 30, 1996 and 1997. The selected statement of operations data for the nine months ended September 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 nine months ended September 30, 1996 and 1997 are not necessarily indicative of results that may be expected for a calendar year.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenues: Air freight carrier............................ $95,144 $194,525 $298,081 $359,404 $388,193 $275,212 $302,345 Maintenance and other(1)....................... 2,606 5,584 7,449 14,279 36,348 25,801 23,299 ------- -------- -------- -------- -------- -------- -------- Total revenues................................... 97,750 200,109 305,530 373,683 424,541 301,013 325,644 Gross profit..................................... 12,870 34,323 54,023 26,010 44,395 30,054 10,441 Operating income (loss).......................... 7,081 23,222 38,519 2,471 21,495 12,314 (9,040) Interest expense, net............................ (4,396) (6,745) (8,007) (14,749) (21,632) (15,755) (19,740) Minority interest................................ (424) (1,458) (2,758) (3,092) (1,146) (908) (1,859) Net income (loss)(2)............................. $ 5,161 $ 16,543 $ 30,593 $ 4,486 $ (17) $ (2,786) $(30,742) UNAUDITED PRO FORMA DATA: Unaudited pro forma net income (loss)(3)......... $ 3,200 $ 10,257 $ 18,968 $ 2,781 $ (17) $ (2,786) $(30,742) OTHER FINANCIAL DATA: Capital expenditures............................. $55,863 $ 20,468 $ 77,832 $153,719 $ 53,413 $ 43,598 $ 54,509 Adjusted EBITDA(4)............................... $16,080 $ 35,645 $ 52,328 $ 23,443 $ 53,586 $ 36,723 $ 16,159 Ratio of adjusted EBITDA to total interest expense(5)..................................... 3.7x 5.3x 6.4x 1.6x 2.4x 2.3x -- Ratio of earnings to fixed charges(6)............ 2.0x 2.4x 3.3x 1.2x 1.0x -- -- OPERATING DATA: Aircraft owned(at end of period)................. 52 57 82 91 95 94 84 Flight hours(7).................................. 39,404 55,220 76,346 84,058 91,690 66,858 70,721
- --------------- (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 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 nine months ended September 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 nine months ended September 30, 1997, respectively, $1,123 from a gain from settlement of a contract dispute in 1996 and the nine months ended September 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 nine months ended September 30, 1997, the Kalitta Companies' adjusted EBITDA was $16,159 and interest expense was $19,740, 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 $2,412 and $28,883 for the nine months ended September 30, 1996 and September 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. 17 19 RISK FACTORS An investment in the New Notes offered hereby 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 the New Notes 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 its ability to make payments on the Notes. In this Prospectus, unless otherwise indicated, the term "Notes" includes both the Old Notes and the New Notes. COMPANY RELATED RISKS ADVERSE CONSEQUENCES OF FAILURE TO EXCHANGE The Old Notes were sold pursuant to an exemption from the registration requirements of the Securities Act and their transfer is subject to certain restrictions under the Securities Act. In general, Old Notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to such transfer restrictions on the Old Notes. The Company currently does not anticipate that it will register the Old Notes under the Securities Act. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "The Exchange Offer -- Consequences of Failure to Exchange." RISKS ASSOCIATED WITH EXCHANGE OFFER PROCEDURES The New Notes will be issued in exchange for Old Notes only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documentation. Therefore, holders of Old Notes desiring to tender such Old Notes in exchange for New Notes should allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor the Company is under any duty to give notification of defects or irregularities with respect to tenders of Old Notes for exchange. Old Notes that are not tendered or are tendered but not accepted will, following consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. In addition, any holder of Old Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the New Notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where the Old Notes were acquired by the broker-dealer as a result of market-making or any other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." SUBSTANTIAL LEVERAGE AND DEBT SERVICE The Company incurred substantial indebtedness through the issuance of the Old Notes and contemporaneously with the issuance thereof entered into the New Credit Facility, which allows for revolving borrowings of up to $100 million, subject to a current borrowing base limitation of approximately $28.7 million. See "Description of Other Indebtedness." In addition, Kitty Hawk entered 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 Other Indebtedness." As of September 30, 1997, after giving effect to the Transactions and Refinancings, on a pro forma basis, the Company's total indebtedness would have been approximately $396 million (substantially all of which would have been secured) and its stockholders' equity would have been approximately $165 million. On a pro forma basis, assuming the Transactions and Refinancings had occurred at the beginning of each of the following fiscal 18 20 periods, earnings would not have been sufficient to cover fixed charges by approximately $9.8 million and $14.2 million for 1996 and for the nine months ended September 30, 1997, respectively. At January 31, 1998, there was no outstanding balance under the New Credit Facility and a balance of approximately $45.9 million under the Term Loan. The Indenture pursuant to which the Old Notes were issued, and the New Notes will be issued, permits 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 mature prior to the maturity date of the Notes. The degree to which the Company is leveraged could have important consequences to holders of the New Notes, 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 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 New 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 (i) the proceeds derived from the Old Note Offering and the Common Stock Offering and (ii) 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 its ability to make payments on the Notes. RECENT FINANCIAL PERFORMANCE OF THE KALITTA COMPANIES The Kalitta Companies' operations constitute a majority of the combined operations of the Company. For 1996 and the first nine months of 1997, the financial operating results of the Kalitta Companies have shown a significant negative trend. In 1996, the Kalitta Companies reported a small net loss. For the first nine months of 1997, the Kalitta Companies sustained an operating loss of $9 million and a net loss of $30.7 million and for the first six months of 1997, the Kalitta Companies sustained a negative gross profit of $7.5 million. In addition, based on preliminary unaudited financial information, during the period October 1, 1997 through November 18, 1997 (the day immediately preceeding the consummation of the Merger), the Kalitta Companies posted net losses of $9.1 million. The Kalitta Companies' management believes that the recent negative financial performance can be attributed to a number of factors, including (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 -- The Kalitta Companies." While the Company believes it is 19 21 taking steps necessary to improve the Kalitta Companies' 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 its ability to make payments on the Notes. RISKS OF BUSINESS INTEGRATION There can be no assurance that the Company will be able to successfully integrate the operations of Kitty Hawk and the Kalitta Companies or achieve the aims of the Merger. The benefits of the Merger 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 ongoing 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 its ability to make payments on the Notes. 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 As of the date hereof, M. Tom Christopher, the Company's Chairman and Chief Executive Officer, beneficially owns 5,948,436 shares, or approximately 35.5% of the outstanding Common Stock, and Conrad A. Kalitta, the Company's Vice Chairman, beneficially owns 4,099,150 shares, or approximately 24.5% of the outstanding Common Stock, of which 650,000 shares are held in escrow to secure Mr. Kalitta's indemnification obligations under the Merger Agreement. As a consequence, the success of the Company depends, 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 its ability to make payments on the Notes. Messrs. Christopher and Kalitta have entered into a voting agreement that, among other things, provides that for 36 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. 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 its ability to make payments on the Notes. 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 20 22 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 its ability to make payments on the Notes. See "Business -- Scheduled Freight Services" and "Business -- Ground Facilities." The Company also leases its Oscoda, Michigan maintenance facilities under various subleases from the OscodaWurtsmith Airport Authority (the "Wurtsmith Authority"). These subleases vary in duration from month-to-month to long-term (the last of which expires in December 2015) 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 or that the prime lease will not terminate prior to its stated expiration. Failure to extend one or more of the subleases or early termination of the prime lease 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 its ability to make payments on the Notes. See "Business -- Maintenance" and "Business -- Ground Facilities." 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 Company's ability to make payments on the Notes. 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 of the Company, Tilmon J. Reeves, the President of the Company and Richard R. Wadsworth, the Senior Vice President -- Finance, Chief Financial Officer and Secretary of the Company. The loss of the services of any of Messrs. Christopher, Kalitta, Reeves or 21 23 Wadsworth, particularly Mr. Christopher, could have a material adverse effect on the Company and its ability to make payments on the Notes. Each of Messrs. Christopher, Kalitta, Reeves and Wadsworth have entered into employment agreements with the Company. See "Management -- Employment Agreements." EMPLOYEE RELATIONS The Company believes that it has good relations with its employees. One of the Company's subsidiaries is 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 the Company's other subsidiaries are not unionized. There can be no assurance that the Company's non-union cockpit crews will remain non-unionized. Unionization of the Company's non-union cockpit crews, work stoppages, increased wages or other labor related matters could have a material adverse effect on the Company and its ability to make payments on the Notes. 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 restrict the Company's ability to make certain acquisitions. See "Business -- Growth Strategies" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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 Company's ability to make payments on the Notes. 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 its ability to make payments on the Notes. RESTRICTIVE COVENANTS The Indenture restricts, among other things, the Company's and its Restricted Subsidiaries' (as defined herein) ability to pay dividends or make certain other Restricted Payments (as defined herein), to incur additional Indebtedness, to encumber or sell assets, to enter into transactions with stockholders and Affiliates, 22 24 to guarantee Indebtedness, to merge or consolidate with any other entity and to transfer or lease all or substantially all of their assets. See "Description of Notes -- Covenants." The Company's New Credit Facility and Term Loan also contain restrictive 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 Other Indebtedness." As of the date hereof, the Company is 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 "Description of Other Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." LACK OF SECTION 1110 PROTECTION Although the Indenture and other documents give the Trustee a first priority perfected security interest in the Aircraft, the protections of Section 1110 under Title 11 of the United States Bankruptcy Code will not be available. Section 1110 grants special rights to parties who acquire security interests in various aircraft-related transactions if such security interests are purchase money security interests and the security interests are granted by a U.S. certificated air carrier. Under Section 1110, the right of a party to repossess an aircraft in compliance with the terms of the security agreement relating to the aircraft will not be affected in a Chapter 11 bankruptcy reorganization case by the automatic provisions of the Bankruptcy Code or any power of the bankruptcy court to enjoin such repossession unless, within 60 days after commencement of a Chapter 11 bankruptcy reorganization case, the debtor agrees, with the court's approval, to perform its obligations under the security agreement that are or thereafter become due and cures all outstanding defaults (other than defaults relating to financial condition or bankruptcy). Because the protections of Section 1110 will not be available, payments under the Notes might be interrupted without the ability to repossess the Aircraft and the ability of the Trustee to exercise its remedies under the Notes may be adversely affected. PAYMENT UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of the Notes may require the Company to repurchase all or a portion of such holder's Notes at 101% of the principal amount of the Notes, together with accrued and unpaid interest to the date of repurchase. If a Change of Control were to occur, the Company may not have the financial resources to repay the Notes, its credit facilities and any other indebtedness that would become payable upon the occurrence of such Change of Control. The "Repurchase of Notes upon a Change of Control" covenant requiring the Company to repurchase the New Notes will, unless consents are obtained, require the Company to repay all indebtedness then outstanding which by its terms would prohibit such Note repurchase. See "Description of Notes -- Repurchase of Notes upon a Change of Control." FRAUDULENT TRANSFER LAWS Under federal or state fraudulent transfer laws, if a court of competent jurisdiction were to find, in a lawsuit by an unpaid creditor or a representative of creditors, a trustee in bankruptcy or a debtor-in-possession, that the Company or any Guarantor issued the Notes or a Note Guarantee, as the case may be, with the intent to hinder, delay or defraud present or future creditors, or received less than a reasonably equivalent value or fair consideration for any such indebtedness, and at the time of such incurrence (i) was insolvent, (ii) was rendered insolvent by reason of such incurrence, (iii) was engaged or about to engage in a business or 23 25 transaction for which its remaining assets constituted unreasonably small capital to carry on its business or (iv) intended to incur, or believed or reasonably should have believed that it would incur, debts beyond its ability to pay as such debts matured, such court could avoid the Company's or such Guarantor's obligations to the holders of the Notes, subordinate the Company's or such Guarantor's obligations to the holders of the Notes to all other obligations of the Company or such Guarantor or take other action detrimental to the holders of the Notes. In that event, there can be no assurance that any repayment of principal and accrued interest on the Notes could ever be recovered by the holders of the Notes. The Guarantees are each limited to amounts that any such Guarantor can guarantee without violating such laws. See "Description of Notes -- Guarantees." LACK OF PUBLIC MARKET The Old Notes are, and the Company expects the New Notes will be upon issuance, designated for trading in the Private Offerings, Resales and Trading through Automatic Linkages (PORTAL) market. There is no established trading market for the New Notes and the Company does not currently intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system. Accordingly, there can be no assurance regarding the future development of any market for the Notes, the liquidity of any market that may develop for the Notes or the ability of holders of the Notes to sell their Notes or the price at which such holders may be able to sell their Notes. If such a market were to develop, no assurance can be given as to the trading prices of the Notes, which may be higher or lower than the initial offering price of the Old Notes depending on many factors, including, among other things, prevailing interest rates, the Company's operating results and prospects and the market for similar securities. The liquidity of, and trading market for, the Notes may be adversely affected by general declines in the market for similar securities. Such a decline may adversely affect liquidity and trading markets independent of the financial performance of, and prospects for, the Company. CERTAIN RISKS RELATING TO COLLATERAL Claims of Secured Lenders. The New Notes (like the Old Notes) will be secured by the Collateral. Claims of other secured creditors of the Company will have priority to the extent of the other collateral securing such creditors' obligations. Amounts owed under the New Credit Facility and the Term Loan are secured by a first priority perfected security interest in accounts receivable, all spare parts (including rotables), inventory, intangibles and contract rights, cash, the 16 Boeing 727s and related engines acquired from the Kalitta Companies and the stock of each of the Company's subsidiaries and the Company's 60% interest in AIC. In addition, the New Credit Facility and Term Loan are guaranteed by each of the Company's subsidiaries (other than AIC). Accordingly, the lenders under the New Credit Facility and the Term Loan have priority over the holders of the Notes with respect to, and to the extent of, these pledged assets. Aging Collateral. Additionally, the Aircraft securing the Notes were manufactured between 1968 and 1981. Because the Indenture does not require the Company to maintain any minimum loan to collateral value ratio and it is likely that the value of the Collateral will decline in value, no assurance can be given that the Collateral will be available to satisfy fully the obligations represented by the Notes when due. Appraisals of Aircraft; Realizable Values. Appraisals in respect of the Aircraft have been prepared by Pro-Tech Advisors Inc. and GRA Aviation Specialists, Inc. According to the appraisals of these firms, the Aircraft had an initial aggregate value of approximately $441 million in October 1997. See " -- Aging Collateral." Although the appraisals were prepared with a physical inspection of the Aircraft, an appraisal is only an estimate of value and should not be relied upon as a measure of realizable value. The appraised value assumes willing and informed buyers under no duress. However, if it becomes necessary to foreclose upon and sell the Collateral, it is likely that such sale would occur under duress. In addition, there is a very limited number of potential buyers of used aircraft. Accordingly, the proceeds realized upon a sale of any Aircraft may be less than the appraised value thereof. The value of the Aircraft in the event of the exercise of remedies under the Indenture will depend on market and economic conditions, the availability of buyers, the condition of the Aircraft and other similar factors. Accordingly, there can be no assurance that the proceeds realized upon any such exercise pursuant to the Indenture would be sufficient to satisfy in full payments due on the 24 26 Notes. If such proceeds are not sufficient to pay or repay all amounts due under the Notes, holders of the Notes would bear their allocable percentage of such insufficiency and any resultant loss. Escrowed Proceeds. Of the $329.1 million of net proceeds derived from the sale of the Old Notes, approximately $16.4 million will be used to pay a portion of the estimated $25.4 million cost to modify two recently acquired Boeing 747s to freighter configuration. The Company expects to fund the remaining approximately $9 million of these conversion costs with internally generated funds or borrowings under its New Credit Facility. See "Use of Proceeds" and "Business -- Aircraft Fleet -- Acquisition of Boeing 747s." These two Boeing 747s are included in the Collateral. Pending application of such net proceeds, the funds designated for this purpose have been invested in U.S. government securities, which were deposited in an Escrow Account (as defined herein) with the Trustee. These securities have been pledged to secure the Old Notes and will continue to secure the Notes until the monies are utilized. See "Description of Notes -- Collateral." Repossession. Although the Company has no current intention to do so, the Company is permitted, upon compliance with the Indenture, to register the Aircraft in certain foreign jurisdictions and to lease the Aircraft to certain Permitted Air Carriers (as defined herein). While the Trustee's rights and remedies in the event of a default under the Indenture include the right to repossess the Aircraft, it may be difficult, expensive and time-consuming for the Trustee to obtain possession of the Aircraft, particularly when an Aircraft located outside the United States has been registered in a foreign jurisdiction or is leased to a foreign operator. Any such exercise of the right to repossess the Aircraft may be subject to the limitations and requirements of applicable law, including the need to obtain consents or approvals for deregistration and re-export of the Aircraft, which may be subject to delays and to political risk. When a defaulting lessee or other permitted transferee is the subject of a bankruptcy, insolvency or similar event, additional limitations may apply. Despite the limitations contained in the Indenture, certain jurisdictions in which the Aircraft may be operated or registered may not accord recognition to, or recognize the priority of, the security interests granted under the Indenture or may have no specific laws providing for the creation, recognition or registration of mortgages over aircraft such as those created under the Indenture and or may accord higher priority to certain other liens or other third party rights over the Aircraft. Some or all of these factors could limit the benefits to the holders of the security interest in the Aircraft. Maintenance. The Company is responsible for the maintenance, service, repair and overhaul of the Aircraft, but only to the extent described in the Indenture. The failure of the Company (or any lessee) to adequately maintain, service, repair or overhaul the Aircraft may adversely affect the value of such Aircraft and, thus, upon a liquidation of the Aircraft, may affect the proceeds available to repay the holders of the Notes. Notwithstanding compliance by the Company (or any lessee) with its obligations under the Indenture to adequately maintain, service, repair or overhaul the Aircraft, the value of the Aircraft may deteriorate. Such a deterioration in the value of the Aircraft would not, in and of itself, constitute a breach by the Company of its obligations under the Indenture. See "Description of Notes -- Possession, Maintenance and Lease of Aircraft." Insurance. The Company is responsible for the maintenance of public liability, property damage and all-risk aircraft hull insurance on the Aircraft to the extent described in the Indenture. The failure of the Company to adequately insure the Aircraft, or the retention of self-insurance amounts, will affect the proceeds which could be obtained upon an Event of Loss (as defined herein) and, thus, may affect the proceeds available to repay the holders of the Notes. See "Description of Notes -- Covenants -- Insurance." 25 27 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 its ability to make payments on the Notes. 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 its ability to make payments on the Notes. 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 its ability to make payments on the Notes. In 1984, a predecessor of one of the Kalitta Companies had its small aircraft operating certificate suspended for a period of 90 days for failure to maintain certain records and other violations of FAA regulations and, in connection therewith, pled guilty to a misdemeanor charge. The Kalitta Companies subsequently corrected the conditions which had resulted in the operating certificate being suspended. 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 (the "Consent Order") which required the Kalitta Companies to revise certain internal policies and procedures to address 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 was suspended 26 28 and subsequently forgiven. The Consent Order also provided that it was a full and conclusive settlement of any civil penalties the Kalitta Companies could incur for regulatory violations occurring before January 1, 1997. Modification of Aircraft. The Company owns 34 aircraft and leases three aircraft (not including aircraft held for sale and aircraft currently being brought into compliance with Stage III noise control standards) that do not meet FAA Stage III 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 37 aircraft are brought into compliance, the Company estimates that the cost would be approximately $89.8 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 recently purchased three Boeing 747s, one of which is currently being converted to freighter configuration. The Company expects to convert the remaining two recently acquired Boeing 747s to freighter configuration and to place all three Boeing 747s into revenue service during 1998. However, there can be no assurance as to the cost of the modifications or when these Boeing 747s can be placed into revenue service. See "Use of Proceeds" and "Business -- Aircraft Fleet -- Acquisition of Boeing 747s." 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 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 Company's ability to make payments on the Notes. With respect to the Company's ACMI contract charter business, the Company could be adversely affected by the decision of certain of its certificated 27 29 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 its ability to make payments on the Notes. 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 its ability to make payments on the Notes 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. 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. 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. The capital intensive nature of the Company's business could adversely impact the Company's ability to make payments on the Notes. 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 its ability to make payments on the Notes. 28 30 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 its ability to make payments on the Notes. 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 its ability to make payments on the Notes. 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 its ability to make payments on the Notes. 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 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 its ability to make payments on the Notes. In addition, any significant increase in the Company's current insurance expense could have a material adverse effect on the Company and its ability to make payments on the Notes. 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 Company's ability to make payments on the Notes. 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 29 31 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 its ability to make payments on the Notes. 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 its ability to make payments on the Notes. 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's ability to make payments on the Notes. 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. THE EXCHANGE OFFER PURPOSE AND EFFECT The Old Notes were sold by the Company on November 19, 1997, in a private placement pursuant to an exemption from registration under the Securities Act. In connection with that private placement, the Company and the Guarantors entered into the Registration Rights Agreement which requires the Company and the Guarantors file the registration statement of which this Prospectus is a part (the "Registration Statement") under the Securities Act with respect to the New Notes as expeditiously as possible after the date of issuance of the Old Notes. The Registration Rights Agreement further requires that, upon the effectiveness of the Registration Statement, the Company offer to the holders of the Old Notes the opportunity to exchange their Old Notes for a like principal amount of New Notes, which will be issued without a restrictive legend and, with certain exceptions, may be reoffered and resold by the holder without further registration under the Securities Act. The Company and the Guarantors have agreed to use their reasonable best efforts to cause the Registration Statement to be prepared, filed and declared effective as expeditiously as possible after the issuance of the Old Notes and to consummate the Exchange Offer within 120 days after the effective date of the Registration Statement. Once the Exchange Offer is commenced, the Company and the Guarantors must keep the Exchange Offer open for at least 20 business days. A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement. In order to participate in the Exchange Offer, a holder must represent to the Company, among other things, that (i) any New Notes to be received by it will be acquired in the ordinary course of its business, (ii) if the holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the New Notes and it has no arrangement with any person to participate in the distribution of the New Notes and (iii) it is not an affiliate of the Company or the Guarantors, or if it is an affiliate, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer should acknowledge that it acquired the Old Notes for its own account as the result of market making activities or other trading activities. Any holder who is unable to make the appropriate representations to the Company will not be permitted to tender the Old Notes in the Exchange Offer and will be required to comply with the registration and prospectus delivery requirements of the Securities Act (or an appropriate exemption therefrom) in connection with any sale or transfer of the Old Notes. 30 32 Pursuant to the terms of the Indenture, the Collateral securing the Old Notes will also secure the obligations represented by the New Notes. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, the Company believes that, with the exceptions discussed herein, New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of the Company or the Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution (within the meaning of the Securities Act) of the New Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Notes. See "Plan of Distribution." CONSEQUENCES OF FAILURE TO EXCHANGE The Old Notes are, and the Company expects the New Notes to be upon issuance, designated for trading in the PORTAL market. To the extent Old Notes are tendered and accepted in the Exchange Offer, the principal amount of outstanding Old Notes will decrease with a resulting decrease in the liquidity in the market therefor. Following the consummation of the Exchange Offer, holders of Old Notes who were eligible to participate in the Exchange Offer but who did not tender their Old Notes will not be entitled to certain rights under the Registration Rights Agreement, and such Old Notes will continue to be subject to certain restrictions on transfer. In general, Old Notes may not be offered or sold, unless registered under the Securities Act and applicable state securities laws, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not intend to register the Old Notes under the Securities Act and, after consummation of the Exchange Offer, will not be obligated to do so. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. As soon as practicable after the Expiration Date, the Company will issue a principal amount of New Notes in exchange for each like principal amount of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in integral multiples of $1,000 in principal amount. The form and terms of the New Notes are identical to the form and terms of the Old Notes except that the Old Notes were offered and sold in reliance upon certain exemptions from registration under the Securities Act, while the offering and sale of the New Notes in exchange for the Old Notes have been registered under the Securities Act, with the result that the New Notes will not bear any legends restricting their transfer. Also, holders of the New Notes will not be entitled to certain rights under the Registration Rights Agreement. The New Notes will evidence the same debt as the Old Notes and will be issued pursuant to, and entitled to the benefits of, the Indenture. As of the date of this Prospectus, $340 million aggregate principal amount of the Old Notes was outstanding and registered in the name of Cede & Co., as nominee for DTC. The Company has fixed the close of business on March , 1998, as the record date for the Exchange Offer for purposes of determining the persons to whom this Prospectus, together with the Letter of Transmittal, will initially be sent. Holders of Old Notes do not have any appraisal or dissenters' rights under the General Corporation Law of the State of Delaware or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, including Rule 14e-1 thereunder. 31 33 The Company shall be deemed to have accepted validly tendered Old Notes when, as, and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders for the purpose of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders who tender Old Notes in the Exchange Offer will be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. See "The Exchange Offer -- Solicitation of Tenders; Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time, on March , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Old Notes, to extend the Exchange Offer or, if any of the conditions set forth under "The Exchange Offer -- Conditions" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the holders of the Old Notes of such amendment. Without limiting the manner in which the Company may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the Exchange Offer, the Company shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. INTEREST ON THE NEW NOTES The New Notes will bear interest from the date of issuance of the Old Notes that are tendered for exchange for the New Notes (or from the most recent interest payment date to which interest on such Old Notes has been paid). Accordingly, holders of Old Notes accepted for exchange will not receive interest that is accrued but unpaid on the Old Notes at the time of tender, but such interest will be payable on the first interest payment date after the consummation of the Exchange Offer. Holders of Old Notes accepted for exchange in the Exchange Offer will be deemed to have waived the right to receive interest accrued but unpaid thereon as of the date of exchange. Interest on the New Notes will be payable semi-annually on May 15 and November 15 of each year, commencing May 15, 1998. PROCEDURES FOR TENDERING Only a registered holder of Old Notes may tender Old Notes in the Exchange Offer. Except as set forth under "The Exchange Offer -- Book Entry Transfer," to tender in the Exchange Offer a holder must complete, sign and date the Letter of Transmittal, or a copy thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver the Letter of Transmittal or copy to the Exchange Agent for receipt prior to 5:00 p.m. on the Expiration Date. In addition, either (i) certificates for such Old Notes must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if that procedure is available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the holder must comply with the guaranteed delivery procedures described below. To be tendered effectively, the Old Notes, Letter of Transmittal and other required documents must be received 32 34 by the Exchange Agent at the address set forth under "The Exchange Offer -- Exchange Agent" prior to 5:00 p.m. on the Expiration Date. The tender by a holder that is not withdrawn before the Expiration Date will constitute an agreement between that holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M. ON THE EXPIRATION DATE AND PROPER INSURANCE SHOULD BE OBTAINED. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company, or other nominee and who wishes to tender should contact the registered holder promptly and instruct the registered holder to tender on the beneficial owner's behalf. If the beneficial owner wishes to tender on its own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering the owner's Old Notes, either make appropriate arrangements to register ownership of the Old Notes in the beneficial owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined herein) unless the Old Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box titled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, the guarantee must be by any eligible guarantor institution that is a member of or participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchange Medallion Program (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by a properly completed bond power, signed by the registered holder as that registered holder's name appears on the Old Notes with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations, or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal unless waived by the Company. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. Although the Company intends to notify holders of defects or irregularities with respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any other 33 35 person shall incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that the Company determines are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion to purchase or make offers for any Old Notes that remain outstanding after the Expiration Date or, as set forth under "The Exchange Offer -- Conditions," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. By tendering, each holder will represent to the Company that, among other things, (i) the New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder, (ii) if it is not a broker-dealer, neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Notes nor has an arrangement or understanding with any person to participate in the distribution of such New Notes, and (iii) neither the holder nor any such other person is an affiliate of the Company. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities may participate in the Exchange Offer but may be deemed an "underwriter" under the Securities Act and, therefore, must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such New Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "Plan of Distribution." In all cases, issuance of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal (or, with respect to the DTC and its participants, electronic instructions in which the tendering holder acknowledges its receipt of and agreement to be bound by the Letter of Transmittal), and all other required documents. If any tendered Old Notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged Old Notes will be returned without expense to the tendering holder thereof (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, such non-exchanged Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration of the Exchange Offer. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility system may make book-entry delivery of Old Notes being tendered by causing the Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Old Notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with any required signature guarantees and any other required documents, must, in any case other than as set forth in the following paragraph, be transmitted to and received by the Exchange Agent at the address set forth under "The Exchange Offer -- Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. DTC's Automated Tender Offer Program ("ATOP") is the only method of processing exchange offers through DTC. To accept the Exchange Offer through ATOP, participants in DTC must send electronic instructions to DTC through DTC's communication system in lieu of sending a signed, hard copy Letter of 34 36 Transmittal. DTC is obligated to communicate those electronic instructions to the Exchange Agent. To tender Old Notes through ATOP, the electronic instructions sent to DTC and transmitted by DTC to the Exchange Agent must contain the character by which the participant acknowledges its receipt of and agrees to be bound by the Letter of Transmittal. GUARANTEED DELIVERY PROCEDURES If a registered holder of the Old Notes desires to tender such Old Notes and the Old Notes are not immediately available, or time will not permit such holder's Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent received from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Old Notes and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL RIGHTS Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. For a withdrawal of a tender of Old Notes to be effective, a written or (for DTC participants only) electronic ATOP transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes), (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Old Notes register the transfer of such Old Notes into the name of the person withdrawing the tender, and (iv) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, in its sole discretion, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer -- Procedures for Tendering" at any time on or prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as provided herein before the acceptance of such Old Notes, if (i) the Exchange Offer shall violate applicable law or any 35 37 applicable interpretation of the staff of the Commission, (ii) any action or proceeding is instituted or threatened in any court or by any governmental agency that might materially impair the ability of the Company to proceed with the Exchange Offer or any material adverse development has occurred in any existing action or proceeding with respect to the Company, or (iii) any governmental approval has not been obtained, which approval the Company shall deem necessary for the consummation of the Exchange Offer. If the Company determines in its sole discretion that any of the conditions are not satisfied, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to the tendering holders (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility), (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of holders to withdraw such Old Notes (see "-- Withdrawal Rights") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered holders, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders, if the Exchange Offer would otherwise expire during such five-to-ten-business-day period. EXCHANGE AGENT All executed Letters of Transmittal should be directed to the Exchange Agent. Bank One, N.A. has been appointed as Exchange Agent for the Exchange Offer. Questions, requests for assistance and requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: By Registered or Certified Mail: BANC ONE INVESTMENT MANAGEMENT GROUP ATTN: CORPORATE TRUST OPERATIONS 235 W. SCHROCK ROAD WESTERVILLE, OHIO 43271-0184 By Overnight Mail or Hand Delivery: 235 W. SCHROCK ROAD WESTERVILLE, OHIO 43081-0184 By Facsimile: BANC ONE INVESTMENT MANAGEMENT GROUP ATTN: CORPORATE TRUST OPERATIONS (614) 248-9987 SOLICITATIONS OF TENDERS; FEES AND EXPENSES The expenses of soliciting acceptances to the Exchange Offer will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitations may be made in person or by telephone by officers and employees of the Company. The Company has not retained any dealer-manager or similar agent in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. Other cash expenses to be incurred in connection with the Exchange Offer and to be paid by the Company include registration, accounting and legal fees and printing costs, among others. 36 38 ACCOUNTING TREATMENT For accounting purposes, the Company will recognize no gain or loss as a result of the Exchange Offer. The expenses of the Exchange Offer will be amortized over the term of the New Notes. TRANSFER TAXES Holders who tender their Old Notes for exchange will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct the Company to register New Notes in the name of, or request that Old Notes not tendered or not accepted in the Exchange Offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax thereon. 37 39 THE COMPANY In 1980, Mr. M. Tom Christopher, founded Christopher Charters, Inc. which arranged on-demand air charters using third-party air freight carriers. In 1985, Mr. Christopher formed Kitty Hawk, Inc. to acquire Kitty Hawk Airways, Inc., an FAA certified Part 135 (small aircraft) operator, and to acquire Christopher Charters, Inc. (whose name was later changed to Kitty Hawk Charters, Inc.). Kitty Hawk Airways, Inc. was an independent on-demand air freight carrier used frequently by Christopher Charters, Inc. The Company obtained FAA Part 121 certification (transport category aircraft) in 1987 through the acquisition of a small independent air freight carrier. Kitty Hawk was reincorporated in Delaware in October 1994. Pursuant to the Merger Agreement, on November 19, 1997, separate subsidiaries of Kitty Hawk were merged with and into each of the Kalitta Companies, with each of the respective Kalitta Companies surviving the Merger as direct, wholly owned subsidiaries of Kitty Hawk. Prior to the Merger, Kitty Hawk conducted its operations through Kitty Hawk Charters, Inc., Aircraft Leasing, Inc. and Kitty Hawk Aircargo, Inc. Currently, the Company conducts operations through the Kalitta Companies, Kitty Hawk Charters Inc., Aircraft Leasing, Inc. and Kitty Hawk Aircargo, Inc. The Company's principal executive offices are located at 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas 75261 and its telephone number is (972) 456-2200. USE OF PROCEEDS There will be no cash proceeds to the Company from the Exchange Offer. The net proceeds from the Old Note Offering, the Common Stock Offering and the Term Loan, after deducting underwriting discounts, placement fees and offering expenses, were approximately $413 million. The sources and uses of net proceeds to the Company from the Old Note Offering, the Common Stock Offering and the Term Loan are summarized as follows (dollars in millions): SOURCES: Note Offering, net of underwriting discounts and expenses... $329.1 Common Stock Offering, net of underwriting discounts and expenses.................................................. 38.0 Term Loan................................................... 45.9 ------ Total............................................. $413.0 ====== USES: Refinancings(1)............................................. $328.8 Acquisition of two Boeing 747s.............................. 39.6 Cash paid pursuant to the Merger Agreement.................. 20.0 Escrow for conversion to freighter configuration of two Boeing 747s(2)............................................ 16.4 Working capital............................................. 6.0 Estimated expenses(3)....................................... 2.2 ------ Total............................................. $413.0 ======
- --------------- (1) The indebtedness that was refinanced had interest rates ranging from 5.3% to 18% and maturity dates ranging from less than one year to September 2006. This amount includes approximately $3 million of prepayment penalties related to the Refinancings. (2) The Company estimates the cost of converting these two Boeing 747s to freighter configuration will be approximately $25.4 million. The Company expects to fund the remaining approximately $9 million of conversion costs with internally generated funds or borrowings under its New Credit Facility. See "Business -- Aircraft Fleet -- Acquisition of Boeing 747s." (3) Represents estimated expenses incurred in connection with the Merger, the New Credit Facility and Term Loan. 38 40 CAPITALIZATION The following table sets forth the capitalization of Kitty Hawk at September 30, 1997 and the Company on a pro forma basis to give effect to the consummation of (i) the Old Note Offering and exchange of the Old Notes for New Notes, (ii) the Common Stock Offering, (iii) the Merger, including the issuance of 4,099,150 shares of Common Stock in connection therewith, (iv) the Refinancings and (v) the application of the net proceeds received by the Company from the Old Note Offering, the Common Stock Offering and the Term Loan as described in "Use of Proceeds."
SEPTEMBER 30, 1997 ------------------------ KITTY THE HAWK COMPANY ACTUAL PRO FORMA -------- --------- (IN THOUSANDS) Current maturities of long-term debt(1)..................... $ 8,373 $ 3,800 ======== ======== Long-term debt: New Credit Facility(2).................................... $ -- $ -- Term Loan................................................. -- 45,900 New Notes................................................. -- 340,000 Other long-term debt(1)................................... 72,674(3) 6,200 -------- -------- 72,674 392,100 -------- -------- Stockholders' equity: Preferred stock, $1 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; 16,968,667 shares issued and outstanding pro forma(4)............................................... 107 170 Paid-in capital............................................. 33,950 133,357 Retained earnings........................................... 33,260 33,260 Common stock in treasury -- 217,710 shares.................. (2,076) (2,076) -------- -------- Total stockholders' equity........................... 65,241 164,711 -------- -------- Total capitalization.............................. $137,915 $556,811 ======== ========
- --------------- (1) Approximately $10 million of current maturities of long-term debt and other long-term debt (comprised of approximately $2 million of Kitty Hawk's indebtedness and approximately $8 million of the Kalitta Companies' indebtedness) were not refinanced in connection with the Refinancings. (2) The New Credit Facility provides for borrowings of up to $100 million, subject to a current borrowing base limitation of approximately $28.7 million. As of January 31, 1998, there was no outstanding balance under the New Credit Facility. See "Description of Other Indebtedness." (3) Consists of indebtedness owed to WFB, Bank One Texas, N.A. ("BOT") and 1st Source Bank. (4) Does not include (i) 300,000 shares of Common Stock available for the future grant at September 30, 1997 under the Company's Amended and Restated Omnibus Securities Plan, (ii) 198,193 shares of Common Stock available for issuance at September 30, 1997 under the Company's Amended and Restated Annual Incentive Compensation Plan and (iii) 100,000 shares of Common Stock available for issuance at September 30, 1997 under the Company's Amended and Restated Employee Stock Purchase Plan. In January 1998, the Company issued 9,084 shares to employees pursuant to the Company's Amended and Restated Employee Stock Purchase Plan. See "Management -- Employee Compensation Plans and Arrangements." 39 41 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following sets forth the Company's Unaudited Pro Forma Combined Financial Information for 1996 and the nine months ended September 30, 1997, in each case giving effect to the Transactions, the Refinancings, the $750,000 distribution to Mr. Kalitta for a portion of his 1997 income tax liability (the "Kalitta Tax Distribution") (see "Certain Transactions -- Tax Distribution to Mr. Kalitta") and the sale of a Hawker Siddeley HS-125 aircraft by the Kalitta Companies to Mr. Kalitta (the "Hawker Sale") (see "Certain Transactions -- Purchase of Aircraft by Mr. Kalitta"). The Company's Unaudited Pro Forma Combined Statement of Operations Information gives effect to the Transactions, the Refinancings, the Kalitta Tax Distribution and the Hawker Sale 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, the Kalitta Tax Distribution and the Hawker Sale as if they had been consummated on September 30, 1997. The exchange of the New Notes for the Old Notes would have no effect on the pro forma information. 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, the Kalitta Tax Distribution and the Hawker Sale 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 three recently acquired Boeing 747s, including two Boeing 747s acquired with approximately $39.6 million of the net proceeds derived from the Old Note Offering (see "Business -- Aircraft Fleet -- Acquisition of Boeing 747s") or (ii) operating efficiencies or cost savings (other than approximately $1.5 million of insurance savings) expected to result from the Merger. In addition, the 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 September 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 1996 included elsewhere in this Prospectus. The historical statement of operations data for Kitty Hawk and the Kalitta Companies for the nine months ended September 30, 1997 has been derived from their respective unaudited statements of operations for the nine months ended September 30, 1997 included elsewhere in this Prospectus. The pro forma adjustments relating to the purchase of the Kalitta Companies represent preliminary determinations of these adjustments prior to the consummation of the Transactions and were based upon available information and certain assumptions the Company considered 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 at a later time. 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. The unaudited Pro Forma Combined Financial Information should be read in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," Kitty Hawk's Consolidated Financial Statements, including the Notes thereto, included elsewhere in this Prospectus and the Kalitta Companies' Combined Financial Statements, including the Notes thereto, included elsewhere in this Prospectus. 40 42 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION BALANCE SHEET SEPTEMBER 30, 1997
HISTORICAL --------------------- PRO FORMA KITTY KALITTA ------------------------ HAWK COMPANIES ADJUSTMENTS COMBINED -------- --------- ----------- -------- Current Assets Cash and cash equivalents.................. $ 2,403 $ 3,282 $ 5,965 3a $ 11,650 Restricted cash............................ -- 14,037 56,000 3b 70,037 Trade accounts receivable.................. 21,645 64,909 -- 86,554 Accounts receivable -- related parties..... -- 1,255 -- 1,255 Inventory and aircraft supplies............ 5,588 24,624 -- 30,212 Prepaid expenses and other current assets.................................. 6,808 19,773 (101)3c 26,480 -------- -------- --------- -------- Total current assets............... 36,444 127,880 61,864 226,188 Property and equipment, net.................. 140,357 271,819 46,276 3d 458,452 Other assets................................. -- 777 10,123 3e 10,900 -------- -------- --------- -------- Total assets....................... $176,801 $400,476 $ 118,263 $695,540 ======== ======== ========= ======== Current Liabilities Accounts payable and accrued expenses...... $ 27,968 $ 75,906 $ 15,683 3f $119,557 Deferred gain on sale of aircraft.......... -- 30,255 (30,255)3g -- Notes payable to bank, classified as current................................. -- 55,434 (55,434)3h -- Long-term debt, classified as current...... -- 196,364 (196,364)3h -- Note payable and bank line of credit....... -- 2,995 (2,995)3h -- Current maturities of long-term debt....... 8,373 -- (4,573) 3,800 -------- -------- --------- -------- Total current liabilities.......... 36,341 360,954 (273,938) 123,357 Note payable................................. -- 300 -- 300 Existing long-term debt...................... 72,674 -- (66,474)3h 6,200 Notes........................................ -- -- 340,000 3h 340,000 Term Loan.................................... -- -- 45,900 3h 45,900 Deferred income taxes........................ 2,545 -- 8,955 3i 11,500 Minority interest............................ -- 3,572 -- 3,572 Stockholders' equity, net.................... 65,241 35,650 63,820 4 164,711 -------- -------- --------- -------- Total liabilities and stockholders' equity........................... $176,801 $400,476 $ 118,263 $695,540 ======== ======== ========= ========
See accompanying notes. 41 43 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 COSTS OF REVENUES: Air freight carrier.......................... 40,860 357,830 (3,996)2b 394,694 Air logistics................................ 67,938 -- -- 67,938 Maintenance and other........................ -- 22,316 -- 22,316 -------- -------- -------- -------- Total costs of revenues............ 108,798 380,146 (3,996) 484,948 -------- -------- -------- -------- Gross profit (loss).......................... 23,874 44,395 (1,436) 66,833 General and administrative expenses.......... 8,943 22,900 -- 31,843 Non-qualified employee profit sharing........ 1,243 -- -- 1,243 Stock option grants to executives............ 4,231 -- -- 4,231 -------- -------- -------- -------- Total operating expenses........... 14,417 22,900 -- 37,317 -------- -------- -------- -------- Operating income (loss)...................... 9,457 21,495 (1,436) 29,516 OTHER INCOME (EXPENSE): Interest expense, net........................ (2,062) (21,632) (16,632)2c (40,326) Other, net................................... 291 1,266 -- 1,557 -------- -------- -------- -------- Income (loss) before income taxes and minority interest.......................... 7,686 1,129 (18,068) (9,253) Minority interest............................ -- (1,146) -- (1,146) -------- -------- -------- -------- Income (loss) before income taxes............ 7,686 (17) (18,068) (10,399) Income taxes (benefit)....................... 3,038 -- (3,038)2d -- -------- -------- -------- -------- Net income (loss).................. $ 4,648 $ (17) $(15,030) $(10,399) ======== ======== ======== ======== Net income (loss) per share.................. $ 0.55 $ (0.70) ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding......................... 8,477 6,299 14,776 ======== ======== ========
See accompanying notes. 42 44 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997
HISTORICAL ----------------------- PRO FORMA KALITTA ------------------------- KITTY HAWK COMPANIES ADJUSTMENTS COMBINED ---------- --------- ----------- -------- REVENUES: Air freight carrier......................... $ 55,789 $302,345 $ (4,942)2a $353,192 Air logistics............................... 45,878 -- -- 45,878 Maintenance and other....................... -- 23,299 -- 23,299 -------- -------- -------- -------- Total revenues.................... 101,667 325,644 (4,942) 422,369 COSTS OF REVENUES: Air freight carrier......................... 38,076 297,968 (16,721)2b 319,323 Air logistics............................... 42,037 -- -- 42,037 Maintenance and other....................... -- 17,235 -- 17,235 -------- -------- -------- -------- Total costs of revenues........... 80,113 315,203 (16,721) 378,595 -------- -------- -------- -------- Gross profit................................ 21,554 10,441 11,779 43,774 General and administrative expenses......... 7,550 19,481 -- 27,031 Non-qualified employee profit sharing....... 1,161 -- -- 1,161 -------- -------- -------- -------- Total operating expenses.......... 8,711 19,481 -- 28,192 -------- -------- -------- -------- Operating income (loss)..................... 12,843 (9,040) 11,779 15,582 OTHER INCOME (EXPENSE): Interest expense, net....................... (1,809) (19,740) (8,696)2c (30,245) Other, net.................................. 579 (103) -- 476 -------- -------- -------- -------- Income (loss) before income taxes and minority interest......................... 11,613 (28,883) 3,083 (14,187) Minority interest........................... -- (1,859) -- (1,859) -------- -------- -------- -------- Income (loss) before income taxes........... 11,613 (30,742) 3,083 (16,046) Income taxes (benefit)...................... 4,645 -- (4,645)2d -- -------- -------- -------- -------- Net income (loss)................. $ 6,968 $(30,742) $ 7,728 $(16,046) ======== ======== ======== ======== Net income (loss) per share................. $ 0.67 $ (0.96) ======== ======== Weighted average common and common equivalent shares outstanding............. 10,452 6,299 16,751 ======== ======== ========
See accompanying notes. 43 45 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) 1. Allocation of Purchase Price -- Based upon the Kalitta Companies' September 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 per share................................. 61,487 Related expenses.......................................... 2,178 Plus fair value of liabilities assumed: Accounts payable and accrued expenses (including $14,933 maintenance accrual to conform to Kitty Hawk accounting method and record the Kalitta Tax Distribution)......................................... 91,589 Notes payable, reclassified as current................. 58,429 Long-term debt, reclassified as current, including approximately $3,000 in early payment penalties....... 199,364 Note payable........................................... 300 Deferred income taxes.................................. 8,955 Minority interest...................................... 3,572 -------- Total purchase price to allocate.................. $445,874 ======== PURCHASE PRICE ALLOCATION: Current assets............................................ $127,779 Property and equipment, principally aircraft.............. 318,095 -------- $445,874 ========
The foregoing purchase price determination and allocation are based on the September 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. 44 46 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) 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 nine months ended September 30, 1997 includes the following adjustments:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- a. Revenues: - Elimination of intercompany revenue.................. $ (4,914) $ (4,639) - Elimination of revenue on aircraft to be purchased by Mr. Kalitta.......................................... (518) (303) -------- -------- (5,432) (4,942) -------- -------- b. Costs of revenues: - Elimination of intercompany revenue.................. (4,914) (4,639) - Elimination of the cost of revenues associated with the aircraft to be purchased by Mr. Kalitta.......... (466) (273) - Conforming the Kalitta Companies' aircraft maintenance accounting policy to that of Kitty Hawk.. (2,323) (14,534) - Decreasing insurance costs for the combined fleet.... (1,500) (1,125) - 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............................. 5,207 3,850 -------- -------- (3,996) (16,721) -------- -------- c. Interest expense: - Repaying existing Kalitta Companies' credit facilities........................................... 20,912 19,200 - Repaying existing Kitty Hawk credit facilities....... 1,882 1,674 - The Notes............................................ (33,830) (25,373) - Term Loan............................................ (4,039) (3,029) - Amortizing deferred financing costs.................. (1,557) (1,168) -------- -------- (16,632) (8,696) -------- -------- d. Adjustments to reduce income tax expense by the amount incurred by Kitty Hawk................................. (3,038) (4,645) -------- -------- $(15,030) $ 7,728 ======== ========
The tax effects of the remaining pro forma net operating loss carryforward at December 31, 1996 and at September 30, 1997 have not been reflected as an income tax benefit in the pro forma statements of operations due the uncertainty of future realization. Interest expense on the Notes is based upon an interest rate of 9.95%. Interest expense on the Term Loan is calculated assuming an interest rate of 8.8%. Interest on the Term Loan accrues initially at LIBOR plus 3% or the Base Rate plus 1.5%, subject to reduction. See "Description of Other 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 $86 for 1996 and the nine months ended September 30, 1997, respectively. 45 47 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) 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 SEPTEMBER 30, 1997 ----------------------------- a. Cash: - Issuing 2,200,000 shares of common stock at a price of $19 per share....................................... $ 41,800 - Cash payment to Mr. Kalitta.......................... (20,000) - Proceeds of the Notes................................ 340,000 - Repaying existing credit facilities including early payment penalties of approximately $3,000.............. (328,840) - Restricted cash...................................... (56,000) - Expenses of the Transactions and the Refinancings.... (16,895) - Proceeds from the Term Loan.......................... 45,900 --------- $ 5,965 b. Restricted Cash resulting from the proceeds from the Note Offering used to fund the acquisition of two Boeing 747s and certain modifications thereto.......... 56,000 c. Other current assets................................... (101) d. Property and equipment................................. 46,276 e. Other assets, principally deferred debt costs.......... 10,123 f. Adjusting accrued maintenance to conform the Kalitta Companies' accounting policy to that of Kitty Hawk and recording the Kalitta Tax Distribution................. 15,683 g. Deferred gain on sale of aircraft...................... (30,255) h. Adjusting debt outstanding for the following: - The Notes............................................ 340,000 - Repayment of existing credit facilities.............. (325,840) - Term Loan............................................ 45,900 --------- 60,060 i. Recording deferred income taxes related to the book and tax basis differences of the assets acquired and liabilities assumed in the Merger...................... $ 8,955
Approximately $10 million of existing debt was not refinanced in connection with the Refinancings. This amount has been reflected on the pro forma balance sheet as Current maturities of long-term debt and Existing long-term debt. 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 2,200,000 shares of Kitty Hawk's common stock in connection with the Common Stock Offering at an offering price of $19 per share. 46 48 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 NINE MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, SEPTEMBER 30, -------------------------------------------------- ----------------- --------------------- 1992 1993 1994 1995 1996 1995 1996 1996 1997 ------- ------- -------- -------- -------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT OPERATING DATA) STATEMENT OF OPERATIONS DATA: Air freight carrier revenues.................... $ 6,760 $12,939 $ 28,285 $ 41,117 $ 52,922 $17,994 $20,577 $39,615 $ 55,789 Air logistics revenues........ 45,893 52,840 79,415 62,593 89,493 51,734 39,408 43,144 45,878 ------- ------- -------- -------- -------- ------- ------- ------- -------- Total revenues................ 52,653 65,779 107,700 103,710 142,415 69,728 59,985 82,759 101,667 Total costs of revenues....... 48,465 55,201 92,951 85,532 118,900 57,682 47,580 68,827 80,113 ------- ------- -------- -------- -------- ------- ------- ------- -------- Gross profit.................. 4,188 10,578 14,749 18,178 23,515 12,046 12,405 13,932 21,554 General and administrative expenses.................... 2,930 4,394 6,013 7,832 9,080 2,862 2,725 6,877 7,550 Non-qualified profit sharing expense..................... -- 250 732 1,001 1,170 889 962 447 1,161 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 2,377 12,843 Interest expense.............. (157) (134) (343) (1,185) (1,859) (482) (684) (1,530) (1,809) Contract settlement income, net(2)...................... -- 725 1,178 -- -- -- -- -- -- Loss on asset disposal........ -- -- -- -- (589) -- -- (589) -- Other income (expense)........ 287 193 (432) (601) 291 38 626 262 579 ------- ------- -------- -------- -------- ------- ------- ------- -------- Income before income taxes.... 1,388 6,718 8,407 7,559 6,877 7,851 8,660 520 11,613 Income taxes.................. 375 2,613 3,146 3,143 2,768 3,097 3,367 269 4,645 ------- ------- -------- -------- -------- ------- ------- ------- -------- Net income.................... $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293 $ 251(1) $ 6,968 ======= ======= ======== ======== ======== ======= ======= ======= ======== Net income per share.......... $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55 $ 0.03(1) $ 0.67 ======= ======= ======== ======== ======== ======= ======= ======= ======== Weighted average common and common equivalent shares outstanding................. 8,671 7,968 7,968 7,968 7,928 7,968 9,610 7,891 10,452 OTHER FINANCIAL DATA: Capital expenditures.......... $ 3,019 $ 1,318 $ 13,876 $ 17,929 $ 33,538 $ 175 $13,796 $31,367 $ 99,575 Adjusted EBITDA(3)............ $ 2,149 $ 7,104 $ 9,507 $ 12,839 $ 19,840 $10,014 $12,546 $10,582 $ 21,039 Ratio of adjusted EBITDA to total interest expense...... 13.7x 53.0x 27.7x 10.8x 10.7x 20.8x 18.3x 6.9x 11.6x Ratio of earnings to fixed charges(4).................. 7.9x 33.6x 20.6x 6.9x 4.4x 15.9x 12.9x 1.3x 5.3x OPERATING DATA: Air freight carrier Aircraft owned (at end of period)..................... 11 10 15 22 25 22 25 25 42 Flight hours(5)............... 3,567 7,030 11,795 15,183 20,237 6,320 7,670 15,628 21,912 Number of on-demand charters flown....................... 292 752 1,182 1,238 1,918 827 243 1,182 911 Number of ACMI contract charters flown.............. 655 1,314 1,734 2,601 3,514 1,070 1,586 2,818 3,883 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 11,607 10,640
47 49
AUGUST 31, DECEMBER 31, SEPTEMBER 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 $(7,231)(7) $ 103 Total assets...................... 9,874 18,598 37,911 47,954 79,828 80,109 123,027 79,628 176,801 Total debt........................ 2,367 976 9,145 16,981 36,912 21,695 24,768 36,049 81,047 Stockholders' equity.............. $3,184 $ 7,289 $12,550 $16,966 $23,639 $21,721 $ 58,292 $24,536 $ 65,241
- --------------- (1) Results for the fiscal year ended August 31, 1996 and the nine months ended September 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 nine months ended September 30, 1996 would have been approximately $6,648 and $2,790, respectively, and net income per share would have been $0.84 and $0.35, 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 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 prior to income tax expense 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). (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. 48 50 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 nine months ended September 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 nine months ended September 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.
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 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 $275,212 $302,345 Maintenance and other(1)......................... 2,606 5,584 7,449 14,279 36,348 25,801 23,299 ------- -------- -------- -------- -------- -------- -------- Total revenues..................................... 97,750 200,109 305,530 373,683 424,541 301,013 325,644 OPERATING COSTS AND EXPENSES(2): Flight........................................... 37,259 62,877 115,614 168,775 150,256 107,006 126,208 Maintenance...................................... 22,114 51,933 64,722 103,389 115,082 81,561 107,432 Fuel............................................. 16,508 38,554 57,362 54,538 82,717 58,434 55,095 Depreciation..................................... 8,999 12,422 13,809 20,972 32,091 23,959 26,468 Selling, general and administrative.............. 4,232 9,554 13,273 21,676 21,889 15,353 17,848 Provision for doubtful accounts.................. 1,557 1,547 2,231 1,862 1,011 2,386 1,633 ------- -------- -------- -------- -------- -------- -------- Total operating costs and expenses............... 90,669 176,887 267,011 371,212 403,046 288,699 334,684 ------- -------- -------- -------- -------- -------- -------- Income (loss) from operations.................... 7,081 23,222 38,519 2,471 21,495 12,314 (9,040) OTHER INCOME (EXPENSE): Interest expense................................. (4,396) (6,781) (8,121) (15,064) (22,012) (16,043) (20,089) Interest income.................................. -- 36 113 315 379 288 349 Gain on disposition of aircraft held for resale and property and equipment, net................ 3,018 1,945 3,390 11,708 131 426 624 Gain on contract termination..................... -- -- -- -- 1,123 1,123 -- Gain on insurance settlement(3).................. -- -- -- 8,148 -- -- 542 Miscellaneous.................................... (118) (421) (550) -- 13 13 (1,269)(12) ------- -------- -------- -------- -------- -------- -------- Total other income (expense)....................... (1,496) (5,221) (5,168) 5,107 (20,365) (14,193) (19,843) ------- -------- -------- -------- -------- -------- -------- Income (loss) before minority interest............. 5,585 18,001 33,351 7,578 1,129 (1,879) (28,883) Minority interest(4)............................... (424) (1,458) (2,758) (3,092) (1,146) (908) (1,859) ------- -------- -------- -------- -------- -------- -------- Net income (loss)(5)............................... $ 5,161 $ 16,543 $ 30,593 $ 4,486 $ (17) $ (2,787) $(30,742) ======= ======== ======== ======== ======== ======== ======== UNAUDITED PRO FORMA DATA: Unaudited pro forma net income (loss)(6)........... $ 3,200 $ 10,257 $ 18,968 $ 2,781 $ (17) $ (2,787) $(30,742) OTHER FINANCIAL DATA: Capital expenditures............................... $55,863 $ 20,468 $ 77,832 $153,719 $ 53,413 $ 43,598 $ 54,509 Adjusted EBITDA(7)................................. $16,080 $ 35,645 $ 52,328 $ 23,443 $ 53,586 $ 36,273 $ 16,159 Ratio of adjusted EBITDA to total interest expense(8)....................................... 3.7x 5.3x 6.4x 1.6x 2.4x 2.3x -- Ratio of earnings to fixed charges(9).............. 2.0x 2.4x 3.3x 1.2x 1.0x -- --
49 51
DECEMBER 31, SEPTEMBER 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) $(194,251) $(233,073) Total assets..................................... 123,773 163,925 272,461 377,597 380,103 364,650 400,476 Total debt....................................... 80,010 84,936 137,405 220,471 238,350 228,601 255,093 Stockholder's equity............................. $ 31,043 $ 46,461 $ 77,099 $ 66,292 $ 67,085 $ 67,265 $ 35,650 OPERATING DATA: Aircraft under operating leases.................. 7 8 4 4 2 2 2 Aircraft owned................................... 52 57 82 91 95 94 84 -------- -------- -------- -------- --------- --------- --------- Total aircraft................................... 59 65 86 95 97 96 86 ======== ======== ======== ======== ========= ========= ========= Flight hours(11)................................. 39,404 55,220 76,346 84,058 91,690 66,858 70,721
- --------------- (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 nine months ended September 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 nine months ended September 30, 1997, respectively, $1,123 from a gain from settlement of a contract dispute in 1996 and the nine months ended September 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 nine months ended September 30, 1997, the Kalitta Companies' adjusted EBITDA was $16,159 and interest expense was $19,740, 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 $2,412 and $28,883 for the nine months ended September 30, 1996 and September 30, 1997, respectively. (10) Includes long-term debt and notes payable reclassified to current of $203,016, $177,402 and $160,058 at December 31, 1996, September 30, 1996 and September 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 their customers on a block hour basis. (12) Represents Merger-related costs for the nine months ended September 30, 1997. 50 52 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, resulting in a transition period from September 1, 1996 to December 31, 1996 (the "Transition Period"). The following discussion is of Kitty Hawk's financial condition and results of operations (i) for the nine months ended September 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 42 aircraft at September 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 nine months ended September 30, 1996 and 1997, have equaled 8%, 11.7%, 9.5%, 10%, 8.6% and 9.1%, 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 aircraft 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. 51 53 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 of the Kalitta Companies' fleet (approximately $5.2 million of non-cash annual expense), the amortization of deferred financing costs associated with the Old Note Offering, the New Credit Facility and the Term Loan (approximately $1.6 million of non-cash annual expense) and cash interest expense with respect to the Notes (approximately $33.8 million of annual expense) and the Term Loan (approximately $4 million of annual expense). Reduced Dependence on Significant Customers. Historically, Kitty Hawk derived a substantial amount of revenue from a limited number of customers. As a result of the Merger, the Company is 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, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- ---------------------------------- 1995 1996 1996 1997 --------------- --------------- --------------- --------------- AIR FREIGHT CARRIER: Revenues............. $17,994 100.0% $20,577 100.0% $39,615 100.0% $55,789 100.0% Costs of revenues.... 11,685 64.9 13,784 67.0 29,688 74.9 38,076 68.3 ------- ----- ------- ----- ------- ----- ------- ----- Gross profit......... $ 6,309 35.1% $ 6,793 33.0% $ 9,927 25.1% $17,713 31.7% ======= ===== ======= ===== ======= ===== ======= ===== AIR LOGISTICS: Revenues............. $51,734 100.0% $39,408 100.0% $43,144 100.0% $45,878 100.0% Costs of revenues.... 45,997 88.9 33,796 85.8 39,139 90.7 42,038 91.6 ------- ----- ------- ----- ------- ----- ------- ----- Gross profit......... $ 5,737 11.1% $ 5,612 14.2% $ 4,005 9.3% $ 3,840 8.4% ======= ===== ======= ===== ======= ===== ======= =====
52 54 The following table presents, for the periods indicated, consolidated income statement data expressed as a percentage of total revenues:
FOUR MONTHS NINE MONTHS FISCAL YEAR ENDED ENDED ENDED AUGUST 31, DECEMBER 31, SEPTEMBER 30, --------------------- ------------- ------------- 1994 1995 1996 1995 1996 1996 1997 ----- ----- ----- ----- ----- ----- ----- REVENUES: Air freight carrier................... 26.3% 39.6% 37.2% 25.8% 34.3% 47.9% 54.9% Air logistics......................... 73.7 60.4 62.8 74.2 65.7 52.1 45.1 ----- ----- ----- ----- ----- ----- ----- 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 83.2 78.8 ----- ----- ----- ----- ----- ----- ----- Gross profit............................ 13.7 17.5 16.5 17.3 20.7 16.8 21.2 General and administrative expenses..... 5.6 7.6 6.4 4.1 4.5 8.3 7.4 Non-qualified profit sharing expense.... 0.7 0.9 0.8 1.3 1.6 0.5 1.2 Stock option grants to executives....... -- -- 3.0 -- -- 5.1 -- ----- ----- ----- ----- ----- ----- ----- Operating income........................ 7.4 9.0 6.3 11.9 14.6 2.9 12.6 Interest expense........................ (0.3) (1.1) (1.3) (0.7) (1.2) (1.9) (1.8) Contract settlement income, net......... 1.1 -- -- -- -- -- -- Loss on asset disposal.................. -- -- (0.4) -- -- (0.7) -- Other income (expense).................. (0.4) (0.6) 0.2 0.1 1.0 0.3 0.6 ----- ----- ----- ----- ----- ----- ----- Income before income taxes.............. 7.8 7.3 4.8 11.3 14.4 0.6 11.4 Income taxes............................ 2.9 3.0 1.9 4.4 5.6 0.3 4.6 ----- ----- ----- ----- ----- ----- ----- Net income.............................. 4.9% 4.3% 2.9% 6.9% 8.8% 0.3 6.8 ===== ===== ===== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues -- Air Freight Carrier. Air freight carrier revenues increased to $55.8 million, or 40.8%, from $39.6 million for the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996, principally due to an increase in fleet size. Air freight carrier on-demand and ACMI contract charter revenues were $12 million and $42.4 million, or 21.5% and 76.1%, respectively, of total air freight carrier revenues for the nine months ended September 30, 1997, as compared to $14.1 million and $24.2 million or 35.5% and 61.1%, respectively, for the nine months ended September 30, 1996. Revenues from on-demand charters flown by Company aircraft for the nine months ended September 30, 1997 decreased 14.5% from the comparable prior year period due to aircraft being shifted from on-demand to ACMI contract charter service, which is consistent with Kitty Hawk's strategy of using more of its fleet in ACMI business which produces relatively stable revenues. Prices for the Company's on-demand and ACMI contract charters remained relatively constant. Revenues -- Air Logistics. Air logistics revenues increased $2.7 million, or 6.3%, to $45.9 million in the nine months ended September 30, 1997, from $43.1 million in the nine months ended September 30, 1996. This increase was primarily due to increased demand in the first and third quarters for on-demand charters generally and specifically for charters that require larger aircraft, which generate greater revenues. Prices for the Company's air logistics services remained relatively constant. The number of on-demand charters managed decreased by 967 charters, or 8.3%, to 10,640 for the nine months ended September 30, 1997 from 11,607 for the nine months ended September 30, 1996. This was principally due to a strike at GM during the fourth quarter of 1996 and in the first nine months of 1997. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $8.4 million, or 28.3%, to $38.1 million in the nine months ended September 30, 1997, from $29.7 million in the nine months ended September 30, 1996, reflecting increased costs associated with increased fleet size and additional ACMI contract charters. The gross profit margin from the air freight carrier increased to 31.7% in the nine months ended September 30, 1997, from 25.1% in the nine months ended September 30, 1996. This increase was 53 55 primarily the result of lower maintenance costs resulting from operational efficiencies associated with increased fleet size and lower depreciation costs resulting from the sale of eight JT8D-9A engines. As reported to the FAA, overall aircraft utilization increased to 21,912 flight hours for the nine months ended September 30, 1997, from 15,628 in the nine months ended September 30, 1996, a 40.2% increase. This increase was primarily due to increased fleet size and hours flown for ACMI contract charters. Costs of Revenues -- Air Logistics. Air logistics costs of revenues increased $2.9 million, or 7.4%, to $42 million in the nine months ended September 30, 1997, from $39.1 million in the nine months ended September 30, 1996, reflecting an increased volume of business. The gross profit margin from air logistics decreased to 8.4% in the nine months ended September 30, 1997, from 9.3% in the comparable prior year period, a decrease of 9.7%. This decrease was primarily due to increased rates paid to third party air freight carriers which could not be passed on to the Company's customers due to contractually established rates. General and Administrative Expenses. General and administrative expenses increased $673,000, or 9.8%, to $7.6 million in the nine months ended September 30, 1997, from $6.9 million in the nine months ended September 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 business of the air freight carrier in the nine months ended September 30, 1997. As a percentage of total revenues, general and administrative expenses decreased to 7.4% in the nine months ended September 30, 1997, from 8.3% in the nine months ended September 30, 1996. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased $714,000, or 159.8%, to $1.2 million in the nine months ended September 30, 1997, from $447,000 in the nine months ended September 30, 1996, reflecting the increase of net income before taxes in the nine months ended September 30, 1997. Stock Option Grants to Executives. There was no stock option grant expense during the nine months ended September 30, 1997. During the nine month period ended September 30, 1996, the Company granted two executive officers options to purchase 544,274 shares of Common Stock that resulted in a charge to earnings of approximately $4,231,000. Operating Income. As a result of the above, operating income increased $10.5 million, or 440.3%, to $12.8 million in the nine months ended September 30, 1997, from $2.4 million in the nine months ended September 30, 1996. Operating income margin increased to 12.6% in the nine months ended September 30, 1997, from 2.9% in the nine months ended September 30, 1996. Interest Expense. Interest expense increased to $1.8 million for the nine months ended September 30, 1997, as compared to $1.5 million for the nine months ended September 30, 1996 due to an increase in long term debt associated with financing major aircraft maintenance costs and the acquisition of 16 Boeing 727 aircraft from the Kalitta Companies in September 1997. Loss on Asset Disposal. Loss on asset disposal during the nine months ended September 30, 1996 was $589,000, which resulted from write-downs associated with equipment dispositions. Other Income (Expense). Other income increased to $579,000 in the nine months ended September 30, 1997, from $263,000 in the comparable prior year period. The increase was primarily due to increased interest income in the nine months ended September 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 nine months ended September 30, 1997, from 51.7% 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 $7 million in the nine months ended September 30, 1997, compared to $251,000 in the nine months ended September 30, 1996. Net income as a percentage of total revenues increased to 6.8% in the nine months ended September 30, 1997, from 0.3% in the comparable prior year period. 54 56 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 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 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. 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%, 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% 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 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. 55 57 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% 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. 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% 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%, 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 56 58 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 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 million in fiscal year 1996, from $9.3 million in fiscal year 1995. Operating income margin decreased to 6.3% from 9%, for fiscal year 1996 and 1995, respectively. Interest Expense. Interest expense increased to $1.9 million for fiscal year 1996 from $1.2 million in fiscal year 1995, a 56.9% increase. The increase was primarily the result of the incurrence of additional long-term debt to finance the acquisition of two Boeing 727-200 aircraft in the second half of fiscal year 1995 and two additional Boeing 727-200 aircraft in fiscal year 1996. Loss on Asset Disposal. Loss on asset disposal for fiscal year 1996 was $589,000, which resulted from write-downs associated with equipment dispositions. There were no losses on asset disposal in fiscal year 1995. Other Income (Expense). Other income increased to $291,000 in fiscal year 1996, from an expense of $601,000 in the comparable prior year period. The increase was primarily due to the write-off of costs associated with 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% 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. 57 59 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 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 million in fiscal year 1994. As a percentage of total revenues, general and administrative expenses increased to 7.6% in fiscal year 1995 from 5.6% in fiscal year 1994. This increase was primarily due to an increase in support functions and number of personnel associated with the growth in the aircraft fleet and the revenue volume for the air freight carrier in fiscal year 1995. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased to $1 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 million in fiscal year 1994. Operating income margin increased to 9% 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% 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% 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 58 60 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 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 air freight 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 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 are being 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. 59 61 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. 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% ======== ===== ======== ===== ======== =====
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 1996 1997 ---------------- ---------------- AIR FREIGHT CARRIER SERVICES: Revenues............................................ $275,212 100.0% $302,345 100.0% Costs of revenues................................... 256,232 93.1 297,968 98.6 -------- ----- -------- ----- Gross profit........................................ $ 18,980 6.9% $ 4,377 1.4% ======== ===== ======== ===== MAINTENANCE AND OTHER: Revenues............................................ $ 25,801 100.0% $ 23,299 100.0% Costs of revenues................................... 14,727 57.1 17,235 74.0 -------- ----- -------- ----- Gross profit........................................ $ 11,074 42.9% $ 6,064 26.0% ======== ===== ======== =====
60 62 The following table presents, for the periods indicated, consolidated statement of operations data expressed as a percentage of total revenues:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------- -------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- REVENUES: Air freight carrier services..................... 97.6% 96.2% 91.4% 91.4% 92.8% Maintenance and other............................ 2.4 3.8 8.6 8.6 7.2 ----- ----- ----- ----- ----- Total revenues..................................... 100.0 100.0 100.0 100.0 100.0 OPERATING EXPENSES: Flight........................................... 37.8 45.2 35.4 35.5 38.8 Maintenance...................................... 21.2 27.7 27.1 27.1 33.0 Fuel............................................. 18.8 14.6 19.5 19.4 16.9 Depreciation..................................... 4.5 5.6 7.6 8.0 8.1 Selling, general and administrative.............. 4.3 5.8 5.2 5.1 5.5 Provision for doubtful accounts.................. 0.7 0.5 0.2 0.8 0.5 ----- ----- ----- ----- ----- Total operating expenses........................... 87.3 99.4 95.0 95.9 102.8 ----- ----- ----- ----- ----- Operating income (loss)............................ 12.7 0.6 5.0 4.1 (2.8) ----- ----- ----- ----- ----- OTHER INCOME (EXPENSE): Interest expense, net............................ (2.6) (3.9) (5.1) (5.2) (6.1) Other income net................................. 0.9 5.3 0.3 0.5 -- ----- ----- ----- ----- ----- Total other income (expense)....................... (1.7) 1.4 (4.8) (4.7) (6.1) ----- ----- ----- ----- ----- Income (loss) before minority interest............. 11.0 2.0 0.2 (0.6) (8.9) Minority interest.................................. (0.9) (0.8) (0.2) (0.3) (0.6) ----- ----- ----- ----- ----- Net income (loss)(1)............................... 10.1% 1.2% 0.0% 0.9)% (9.5)% ===== ===== ===== ===== =====
- --------------- (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. NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues. Revenues increased $24.6 million, or 8.2%, to $325.6 million in the first nine months of 1997 as compared to $301 million in the first nine months of 1996. This increase reflected the average number of aircraft available to the Kalitta Companies in the first nine months of 1997, including two Lockheed L-1011-200s (which were modified from passenger to freighter configuration), one Boeing 727-200 freighter and one Douglas DC-8-50 freighter. Air freight carrier service revenue increased $27.1 million, or 9.8%, to $302.3 million in the first nine months of 1997 from $275.2 million in the first nine months of 1996. This increase resulted from four factors. First, the addition of a Lockheed L-1011-200 freighter in late 1996 on 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 were awarded operating authority for these countries. Third, the Kalitta Companies recognized the full period effect of passenger revenues in 1997, which commenced in the fourth quarter of 1996. Fourth, the Kalitta Companies experienced an increase in the number of customers serviced in on-demand cargo services. Offsetting these increases, however, was (i) a decline in revenue generated from flights operated for the U.S. Military, (ii) a reduction in the number of aircraft operated by the Kalitta Companies for Burlington and (iii) a reduction in the number of aircraft leased to DHL Airways, Inc. The decline in revenues from the U.S. Military occurred because of increased competition for this business, as well as an increase in contract 61 63 awards to airlines able to provide both freight and passenger service, the latter of which the Kalitta Companies were not qualified to provide to the U.S. Military. The Kalitta Companies expect to become eligible to operate passenger charters for the U.S. Military in December 1997. Third party maintenance and other revenue decreased $2.5 million, or 9.7%, to $23.3 million in the first nine months of 1997 from $25.8 million in the first nine months of 1996. The Kalitta Companies increased third-party engine maintenance work during the second half of 1996 as a result of new contracts with Lufthansa and International Turbine which terminated in the first half of 1997. Operating Expenses. Operating expenses increased by $46 million, or 15.9%, to $334.7 million in the first nine months of 1997 from $288.7 million in the same period in 1996. As a percent of revenues, operating expenses increased to 102.8% for the first nine months of 1997 from 95.9% in the same period in 1996. Flight expenses increased $19.2 million, or 17.9%, to $126.2 million for the first nine months of 1997 from $107 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 47% in the first nine 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 $25.8 million, or 31.6%, to $107.4 million in the first nine months of 1997 from $81.6 million in the first nine months of 1996. Maintenance expenses increased as a percentage of revenues to 33% from 27.1%. The increase was primarily attributable to (i) engine repairs beginning in August 1996 relating to a Directive affecting the RB211 engines that power 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 Lockheed 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 $3.3 million, or 5.7%, to $55.1 million for the nine months ended September 30, 1997 as compared to $58.4 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 $2.5 million, or 10.4%, to $26.5 million for the nine months ended September 30, 1997 from $24 million for the comparable period in 1996, primarily as a result of the average number of aircraft in the Kalitta Companies' fleet during the latter part of 1996 and in 1997. Selling, general and administrative expenses increased $2.4 million, or 15.6%, to $17.8 million in the nine months ended September 30, 1997 from $15.4 million in the same period in 1996, primarily due to increased payroll related costs. 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 nine months of 1997. As a result of the above factors, the Kalitta Companies experienced an operating loss of $9 million during the nine months ended September 30, 1997 compared to operating income of $12.3 million during the nine months ended September 30, 1996. Other Income (Expense). Net interest expense increased $3.9 million, or 24.7%, to $19.7 million in the nine months ended September 30, 1997 from $15.8 million in the nine months ended September 30, 1996. The increase was due to increased borrowings relating to the acquisition of new aircraft and ground support 62 64 equipment, as well as increased borrowings under the Kalitta Companies' revolving credit line. The average interest rate on the Kalitta Companies' borrowings increased to 9.3% from 9.1% in the prior year period. Gain on disposition of property and equipment, net, increased $0.2 million to $0.6 million for the nine months ended September 30, 1997 as compared to $0.4 million for the first nine months of 1996. The increase resulted from the sale of one Boeing 727-100 passenger aircraft in January 1997. Gain on contract termination decreased $1.2 million for the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996 due to the cancellation of an operating agreement between the Kalitta Companies and a third party. Under the settlement agreement, rent was waived for the Kalitta Companies through the end of the original lease term resulting in a gain to the Kalitta Companies. Gain on insurance reimbursement increased $0.5 million in the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996 due to a Boeing 747-200 freighter aircraft sustaining damage from a hard landing. The Kalitta Companies used its own maintenance capabilities to complete the repairs to the aircraft and incurred costs less than originally anticipated. Consequently, the excess of the insurance proceeds received resulted in a gain in the nine months ended September 30, 1997. Merger-related costs were $1.3 million for the nine months ended September 30, 1997. These expenses represent legal and accounting fees incurred in connection with the Transactions and the sale of 16 Boeing 727s to Kitty Hawk. There were no such costs in the prior year. Minority Interest. Minority interest represents the earnings attributable to the 40% of AIC owned by a third party. Minority interest increased $1 million to $1.9 million for the first nine months of 1997, as compared to $0.9 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 achievement of better yields in the 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%, 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 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% 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. 63 65 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%, as compared to 44% 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. 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%, to $32.1 million in 1996, as compared to $21 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%, 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 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 interisland 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 64 66 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 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%, 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% 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 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 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 65 67 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 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 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 for debt service. 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 $18.4 million and $19.6 million in the nine months ended September 30, 1997 and 1996, respectively. As of September 30, 1997, Kitty Hawk had working capital of $0.1 million compared to $33.5 million at December 31, 1996. Cash provided/(used) by investing activities was $(33.5 million), $4.7 million and $(99.6 million) for the fiscal year ended August 31, 1996, the Transition Period and the nine months ended September 30, 1997, respectively. Cash provided by financing activities was $18.3 million, $17.2 million and $56.3 million for the fiscal year ended August 31, 1996, the Transition Period and the nine months ended September 30, 1997, respectively. As of September 30, 1997, Kitty Hawk had approximately $80.8 million of indebtedness with WFB, BOT 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. On September 30, 1997, the balance on this loan was $3.4 million. Capital expenditures were $99.6 million and $31.4 million for the nine months ended September 30, 1997 and 1996, respectively. Capital expenditures for the nine months ended September 30, 1997 were primarily for the overhaul of several JT8D-7 jet engines and the purchase of (i) 18 Boeing 727-200 aircraft, (ii) cargo and noise abatement modifications for one Boeing 727-200 aircraft, (iii) noise abatement equipment with respect 66 68 to two DC-9-15F aircraft, (iv) ten reconditioned JT8D jet engines, (v) leasehold improvements to Boeing 727-200 aircraft, (vi) the 40,000 square foot headquarters facility and related ground sublease at Dallas/Fort Worth International Airport, (vii) major maintenance checks and (viii) ground service equipment for use in the USPS Christmas 1997 Contract. Capital expenditures for the nine months ended September 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 November 10, 1997, Kitty Hawk has used all of the net proceeds of the initial public offering to fund these costs. Kitty Hawk has purchased (i) one Boeing 727-200 freighter aircraft for $4.4 million, (ii) one Boeing 727-200 aircraft for $2.3 million which was modified to cargo configuration for an additional cost of approximately $3.3 million (including 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 $5.2 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 and which was modified to be in compliance with the Stage III noise control standards for an additional $2.5 million and (v) $5 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 1998, Kitty Hawk anticipates an aggregate capital expenditure ranging from $27 million to $32 million for noise abatement modifications to aircraft currently owned. In the event Kitty Hawk acquires more aircraft than currently proposed, Kitty Hawk's anticipated aggregate capital expenditures for noise abatement modifications in 1998 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 Kitty Hawk's aircraft to be subject to extensive aircraft examinations and require certain of Kitty Hawk'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 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." 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 used in operating activities was $13.1 million for the first nine months of 1997 as compared to cash provided by operating activities of $27.7 million in the same period in 1996. As of September 30, 1997, the Kalitta Companies had cash and cash equivalents of $3.3 million, as compared to $3.3 million as of September 30, 1996. The Kalitta Companies had a working capital deficit of $233.1 million at September 30, 1997, compared to a deficit of $194.3 million at September 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 nine months of 1997 as compared to the first nine months of 1996. Also contributing to the decrease was an 67 69 increase in restricted cash at September 30, 1997 compared to September 30, 1996. Net cash 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 $0.2 million for the nine months ended September 30, 1997 as compared to net cash used in investing activities of $33.4 million for the nine months ended September 30, 1996. Total capital expenditures increased 25% to $54.5 million for the nine months ended September 30, 1997 from $43.6 million for the same period in 1996. Expenditures in the nine months ended September 30, 1997 represented the purchase of additional aircraft and capitalization of costs to modify the aircraft to freighter configuration. In addition, the sale of 16 Boeing 727 aircraft to Kitty Hawk resulted in proceeds of $51 million of which $21 million was used to purchase a Boeing 747-200 aircraft, $9 million was used to purchase a Lockheed L-1011 freighter and $11 million was placed in escrow to pay for converting this Boeing 747-200 aircraft from passenger to freighter configuration. The Kalitta Companies estimate these conversion costs will be approximately $8 million. 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 $14.2 million for the nine months ended September 30, 1997 as compared to $8 million for the nine months ended September 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 fund operating activities during those years. The Kalitta Companies' liquidity is affected by the seasonal nature of their businesses. Primarily because of the increase in air freight during the Christmas holiday season, a significant portion of the Kalitta Companies' 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 air cargo charters is reduced relative to other times of the year. 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 have included 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. At September 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 $196.4 million. All but approximately $8 million of the Kalitta Companies' indebtedness was retired with the net proceeds derived from the Old Note Offering and the Common Stock Offering. 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 public offerings. From time to time, the Company has entered into sale/leaseback transactions to acquire aircraft and may continue to do so in the future. 68 70 As a result of the Transactions and the Refinancings, all but approximately $10 million of the existing indebtedness of Kitty Hawk and the Kalitta Companies was refinanced with the net proceeds derived from the Old Note Offering, the Common Stock Offering and the Term Loan. See "Use of Proceeds." The Term Loan was incurred to refinance indebtedness incurred in September 1997 to finance the acquisition of 16 Boeing 727s from the Kalitta Companies. The Term Loan matures in November 2002 and is 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 accrues at LIBOR plus 3% or the Base Rate plus 1.5%, subject to reduction. The Base Rate is WFB's Prime Rate or the Federal Funds Rate plus .5%. The Term Loan is secured by accounts receivable, all spare parts (including rotables), inventory, intangibles and contract rights, cash, the 16 Boeing 727s and related engines acquired from the Kalitta Companies prior to the Merger, the stock of each of the Company's subsidiaries and the Company's 60% interest in AIC. In addition, the New Credit Facility and Term Loan are guaranteed by each of the Company's subsidiaries (other than AIC). As of January 31, 1998, there was a balance of approximately $45.9 million on the Term Loan. See "Description of Other Indebtedness." In addition, to fund ongoing capital requirements, including possible acquisitions, the Company has a New Credit Facility with WFB, individually and as agent for various lenders. The New Credit Facility provides the Company with up to $100 million in revolving loans (subject to a current borrowing base limitation of approximately $28.7 million) and is secured by the same collateral as the Term Loan. The facility currently bears interest at LIBOR plus 2.75% or a Base Rate plus 1.25%, 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 are subject to borrowing base limitations based on eligible inventory and accounts receivable and will mature five years from execution of the New Credit Facility. As of January 31, 1998, there was no outstanding balance under the New Credit Facility. See "Description of Other Indebtedness." The Company currently estimates that capital expenditures in 1998 will aggregate approximately $110 million (including the recent acquisitions of two Boeing 747s and modifications to be made thereto and noise abatement modifications to existing aircraft) and that it 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, 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 September 1997, the Company acquired one Boeing 747 and expects to make approximately $8 million of capital expenditures to modify this Boeing 747 to freighter configuration in 1998. In February 1998, the Company purchased two Boeing 747s for approximately $39.6 million and expects to modify these aircraft to freighter configuration for approximately $25.4 million. There can be no assurance that the costs to modify these aircraft will not exceed this amount. Additionally, the Company is in the process of converting one Boeing 727 aircraft from passenger to freighter configuration at a cost of approximately $5 million. During 1998, the Company anticipates capital expenditures ranging from $27 million to $32 million for noise abatement modifications to aircraft currently owned. The Company's total capital expenditures for noise abatement modifications for its existing fleet of owned and leased aircraft is expected to be approximately $89.8 million, not including two Boeing 727s currently being modified. 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. See "Business -- Government -- Noise Abatement Regulations." 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 69 71 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 30 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 29 of these Boeing 727s until certain modifications are made. The cost to make such modifications and the amount of revenue that could be lost cannot currently be estimated. However, the Company believes this Directive will not have a material adverse effect on the Company. See "Business -- Aircraft Fleet -- Boeing 727 Cargo Door and Floor Modification Regulations." The Company believes that available funds (including the New Credit Facility), bank borrowings and cash flows expected to be generated by operations, along with the net proceeds of the Old Note Offering and the Common Stock Offering, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Thereafter, if cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may sell additional equity or debt securities or obtain additional credit facilities. However, there can be no assurance that the Company will be able to sell any additional equity or debt securities or obtain any additional credit facilities. 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 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. 70 72 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 ----------------------------------------------------------------- ENDED NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30, DECEMBER 31, 1995 1996 1996 1996 1996 1996 ------------ ------------ ------- ---------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues............ $36,045 $48,577 $22,504 $35,289 $25,414 $34,572 Gross profit.............. 5,936 8,190 3,265 6,124 5,118 7,288 Operating income.......... 3,564 2,447 897 2,126 2,851 5,868 Net income................ 1,956 1,273 182 698 1,632 3,661 Net income per share...... $ 0.25 $ 0.16 $ 0.02 $ 0.09 $ 0.18 $ 0.37 QUARTER ENDED ------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, 1997 1997 1997 --------- -------- ------------- Total revenues............ $28,102 $32,366 $41,199 Gross profit.............. 5,355 7,451 8,748 Operating income.......... 2,571 4,679 5,593 Net income................ 1,414 2,561 2,993 Net income per share...... $ 0.14 $ 0.25 $ 0.29
THE KALITTA COMPANIES
QUARTER ENDED ------------------------------------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1996 1996 1996 1996 1997 1997 1997 --------- -------- ------------- ------------ --------- -------- ------------- (IN THOUSANDS) Total revenues..................... $ 84,303 $106,292 $110,417 $123,529 $ 92,898 $103,943 $128,803 Gross profit (loss)................ (1,440) 16,573 14,921 14,341 (12,058) 4,583 17,916 Operating income (loss)............ (6,626) 10,233 8,707 9,180 (17,940) (1,503) 10,403 Net income (loss).................. $(12,019) $ 6,461 $ 2,771 $ 2,770 $(22,786) $ (8,157) $ 201
71 73 BUSINESS 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 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 72 74 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 three used Boeing 747s, one of which is currently being converted to freighter configuration. The Company expects to convert the remaining two recently acquired Boeing 747s to freighter configuration during 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. 73 75 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, 30 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 nine months of 1997, an average of 1,147 shipments, totaling approximately 458 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. 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. 74 76 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 AIC, 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. 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., Pacific East Asia Cargo Airlines, Inc. and Iberia. 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 six countries, including Aviateca (Guatemala), Iberia (Spain), Lacsa (Costa Rica), Nica (Nicaragua), Taca International Airlines (El Salvador) and Varig (Brazil). Because these airlines are the national airlines of their respective 75 77 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 six trips per week to Cali and Medellin, Columbia for AeroFloral for the shipment of fresh flowers. 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. 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. In January 1998, the Company became 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 from 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 8.6% of the on-demand charters managed by Kitty Hawk during fiscal years 1994, 1995 and 1996 and the nine months ended September 30, 1997, respectively, were flown on Kitty Hawk's aircraft. With the addition of the Kalitta Companies aircraft, the Company expects to 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 31 passenger configured aircraft, including two Boeing 747s, two Lockheed L-1011s, 19 Lear jets and 8 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. 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 76 78 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 nine months ended September 30, 1997, Kitty Hawk arranged an average of approximately 39 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. 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 77 79 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 two aircraft held for sale and the Company's undivided one-third interest in four Falcon 20C jet aircraft. Of these aircraft, the Company operates 117 aircraft in revenue service. The following is a summary of certain information on these aircraft: Large Aircraft
NUMBER NUMBER NUMBER OPERATED OWNED BY LEASED BY IN MANUFACTURER THE THE REVENUE MAXIMUM NUMBER STAGE III AND MODEL SERIES(1) COMPANY COMPANY SERVICE CONFIGURATION PAYLOAD(2) COMPLIANT(3) ------------ --------- -------- --------- -------- ------------- ---------- ---------------- Boeing 747............ 200 6 -- 2(4)(5) Freight 213,000-245,000 lbs. 6 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 4 -- --(7) Passenger 160 passengers 1 Boeing 727............ 100 1 1 2 Freight 40,000-54,500 lbs. 0 Douglas DC-9.......... 15F 5 -- 5 Freight 22,000-24,000 lbs. 3 -- -- -- -- Total......... 73 5 68 39 == == == ==
- --------------- (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. (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. The Company is currently modifying two Boeing 727s to be in compliance with Stage III noise control standards. See "Risk Factors -- Government Regulation" and "-- Government Regulation." (4) Three of these Boeing 747s were recently acquired by the Company, one of which is currently being modified to freighter configuration. The Company expects to convert the remaining two recently acquired Boeing 747s to freighter configuration during 1998. 78 80 (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 two were recently returned to the Company by a lessee. One of these aircraft is currently being converted from passenger configuration to freighter configuration. The aircraft described above do not include one passenger configured Boeing 727-100 which the Company is currently negotiating to sell. This sale is expected to be consummated during the first quarter of 1998. 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 5 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 12 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 51 ==
- --------------- (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 is 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 Company expects to sell to Mr. Kalitta in the first quarter of 1998. 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 79 81 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. 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 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 at its Oscoda, Michigan facility for an estimated additional $8 million. In February 1998, the Company acquired for approximately $39.6 million (i) two additional used Boeing 747s and associated engines, (ii) two additional spare engines and (iii) certain other related spare parts and support equipment. The Company is currently negotiating with a third party to have these two recently acquired Boeing 747s converted from passenger to freighter configuration in 1998 at a cost of up to $25.4 million. However, there can be no assurance that the Company will enter into a contract with this third party to perform such freighter conversions or that the cost of such freighter conversions will not be higher or lower than $25.4 million. For the purposes hereof, the Company has assumed the cost of such freighter conversions will be $25.4 million. None of these Boeing 747s are affected by the Directive related to Boeing 747s modified by GATX. See "Use of Proceeds." Adding these Boeing 747s and the other 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 30 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. Twenty-nine 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 80 82 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 its ability to make payments on the Notes. 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 81 83 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. 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 1535 West 20th Street Dallas/Fort Worth International Airport, TX Offices and warehouse Leased 1349 South Huron, Ypsilanti, MI Offices(2) Leased Willow Run Airport, Ypsilanti, MI Office, hangar, maintenance, fuel farm & storage Leased N. I-94 Service Drive, Ypsilanti, MI Office, storage & maintenance Owned Oscoda, MI Office, hangar, maintenance, housing, fuel farm & storage Leased 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 Company leases this 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 $28 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 82 84 operations. Under a proposed 20 year lease from the Fort Wayne Authority, the Company would occupy a sorting facility with 249,000 square feet of space (including office space), a 15,000 square foot operations building, a 30,000 square foot maintenance building 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 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. These subleases vary in duration from month-to-month to long-term (the last of which expires in December 2015) and are subject to earlier termination upon termination of the prime lease between the U.S. Government and the Wurtsmith Authority. 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 of varying duration from month-to-month to long-term, the last of which expires in 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 January 31, 1998, the Company employed approximately 3,800 full-time personnel, of which approximately 250 were involved in sales and administrative functions and approximately 3,500 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 negotiations 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, substantial increases 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 83 85 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 its ability to make payments on the Notes. The Company is subject to the regulations of the Environmental Protection Agency and state and local governments regarding air quality and other matters. 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 its ability to make payments on the Notes, 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. 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 84 86 addition, the DOT and the FAA may impose civil or criminal penalties for violations of applicable rules and regulations. The DOT views the Merger as a de facto transfer of the Kalitta Companies' foreign operating authority, which requires prior DOT approval. Consequently, Kitty Hawk and the Kalitta Companies filed an application with the DOT seeking temporary and permanent approval to transfer the Kalitta Companies' foreign operating authority to Kitty Hawk. On November 6, 1997, the DOT granted Kitty Hawk and the Kalitta Companies a temporary exemption from the requirement to receive DOT approval prior to the de facto transfer. While the Company believes it will receive permanent approval of the de facto transfer from the DOT, there can be no assurance in this regard. In the event the Company does not receive permanent DOT approval, the Company would be required, at its option, either to relinquish the Kalitta Companies' foreign operating authority or divest itself of the Kalitta Companies. 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. 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 Company and its ability to make payments on the Notes. In 1984, a predecessor of one of the Kalitta Companies had its small aircraft operating certificate suspended for a period of 90 days for failure to maintain certain records and other violations of FAA regulations and, in connection therewith, pled guilty to a misdemeanor charge. The Kalitta Companies subsequently corrected the conditions which had resulted in the operating certificate being suspended. 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 was suspended and subsequently forgiven. The Consent Order also provided that it was a full and conclusive settlement of any civil penalties the Kalitta Companies could incur for regulatory violations occurring before January 1, 1997. 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, the Company is in compliance with the Noise Regulations. The Company owns 73 aircraft and leases 5 aircraft which are affected by the Noise Regulations, including eleven 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 one aircraft held for sale) and five Douglas DC-9-15Fs (collectively, the "Jet Fleet"). Of the aircraft in the Jet Fleet, 41 are currently in compliance with Stage III noise control standards or are currently being modified to be in compliance with such 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 85 87 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 and its ability to make payments on the Notes. 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, 21 of the Company's Boeing 727 aircraft currently do not comply with the Stage III noise control standards, not including two Boeing 727s currently being modified to be in compliance with such standards and one Boeing 727 held for sale. The Company currently anticipates modifying its Boeing 727 fleet (at an anticipated cost of approximately $37.8 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 nonU.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 its ability to make payments on the Notes. 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 86 88 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 its ability to make payments on the Notes. 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.) 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 Merger, the Company entered into an agreement with Mr. Kalitta which provides that any amounts recovered by the Company through the GATX Litigation are first to be applied 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 November 19, 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 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 its ability to make payments on the Notes. 87 89 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the executive officers and directors of the Company, their ages and positions:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- M. Tom Christopher(1)................... 51 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.................... 51 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. The members of the Company's Board of Directors are 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 serves 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 Mr. Kalitta serves as Vice Chairman of the Company and 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 and has over 30 years of aviation experience. Concurrently with the Merger, Mr. Reeves resigned as the Chief Operating Officer of the Company, but continues to serve as the President of Kitty Hawk. Previously, 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 and serves in the class of directors whose terms expire at the 1999 annual meeting of stockholders. 88 90 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 also served as a director from October 1994 to November 1997. Ted J. Coonfield became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1998 annual meeting of stockholders. Since 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. George W. Kelsey became a director of the Company in November 1997 and serves 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 became a director of the Company in November 1997 and serves 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 serves 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. 89 91 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of the Company's Common Stock as of January 31, 1998 (except as noted) by (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company and (iv) all of the directors and executive officers of the Company as a group. Except as noted, all shares shown in the table below are held with sole voting and investment power, subject to community property laws.
SHARES OWNED BENEFICIALLY --------------------- NAME AND ADDRESS NUMBER PERCENT ---------------- ---------- ------- DIRECTORS AND EXECUTIVE OFFICERS: M. Tom Christopher(1)(2).................................... 5,948,436 35.5% Conrad A. Kalitta(1)(2)(3).................................. 4,099,150 24.5% Tilmon J. Reeves(1)......................................... 128,174 (4) EXECUTIVE OFFICER: Richard R. Wadsworth(1)..................................... 53,390 (4) DIRECTORS: Ted J. Coonfield(1)......................................... 600 (4) George W. Kelsey(1)......................................... 0 -- Philip J. Sauder(1)......................................... 0 -- Lewis S. White(1)........................................... 0 -- ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (8 PERSONS)............................................... 10,229,750 61.0%
- --------------- (1) The address for this stockholder is 1515 West 20th Street, Dallas/Fort Worth International Airport, Texas 75261. (2) Messrs. Christopher and Kalitta have entered into a voting agreement that, among other things, provides that for 36 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. (3) Mr. Kalitta received 4,099,150 shares of Common Stock upon consummation of the Merger, of which 650,000 are held in escrow for 42 months to satisfy Mr. Kalitta's indemnification obligations, if any, under the Merger Agreement. Mr. Kalitta retains the right to vote such shares while they are being held in escrow. (4) Less than 1%. DESCRIPTION OF NOTES The Old Notes were, and the New Notes will be, issued under an Indenture, dated November 15, 1997, between the Company, as issuer, each Subsidiary of the Company (other than AIC), as a Guarantor (each a "Guarantor"), and Bank One, N.A., as Trustee and Collateral Trustee (the "Trustee"). The Indenture has been supplemented, and the Indenture and the supplement thereto are filed as exhibits to the Registration Statement. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof pursuant to the Trust Indenture Act of 1939, as amended. Whenever particular defined terms of the Indenture not otherwise defined herein are referred to, such defined terms are incorporated herein by reference. As noted above, in this Prospectus, unless otherwise indicated, the term "Notes" includes both the Old Notes and New Notes. For definitions of certain capitalized terms used in the following summary, see "-- Certain Definitions." 90 92 GENERAL The Old Notes are, and the New Notes will be, senior secured obligations of the Company, limited to $340 million aggregate principal amount, and will mature on November 15, 2004. The Old Notes bore interest at 9.95% from November 19, 1997, the date of issuance of the Old Notes. Interest on the New Notes will accrue from the date of issuance of the Old Note for which a New Note is exchanged. Interest on the New Notes will be payable in cash, semiannually in arrears (to Holders of record at the close of business on the May 1 or November 1 immediately preceding the Interest Payment Date) on each May 15 and November 15, commencing May 15, 1998. If by April 19, 1998, the Company has not issued the New Notes pursuant to an effective registration statement or caused a shelf registration statement with respect to resales of the Old Notes to be declared effective, the interest rate on the Old Notes will increase by .5% per annum until the consummation of a registered exchange offer or the effectiveness of a shelf registration statement. The New Notes will be, and the Old Notes were, issued only in fully registered form, without coupons, in denominations of $1,000 of principal amount and any integral multiple thereof. See "-- Book-Entry; Delivery and Form." No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. The Old Notes have been, and the Company expects the New Notes will be upon issuance, designated eligible for trading on the PORTAL market. The Company does not currently intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system. GUARANTEES The Company's obligations under the New Notes will be, and under the Old Notes were, fully and unconditionally guaranteed on a senior basis, jointly and severally, by the Guarantors; provided that the maximum liability of each Guarantor must be $1.00 less than the lesser of (a) the amount which would render the Guaranty voidable under either Section 548 or 544(b) of the Bankruptcy Code, (b) the amount permitting avoidance of the Guaranty as a fraudulent transfer under any applicable Fraudulent Transfer Act (as defined) or similar law and (c) the amount permitting the Guaranty to be set aside as a fraudulent conveyance under any applicable Fraudulent Conveyance Act (as defined) or similar law. In addition, if the execution and delivery and/or incurrence evidenced by the Guaranty constitutes a "distribution" under the Michigan Business Corporation Act (the "MCBA"), the maximum liability under the Guaranty with respect to such Guarantor shall be limited to $1.00 less than the maximum liability which such Guarantor is permitted to incur under Section 345 of the MCBA. Each Guaranty provides by its terms that it shall be automatically and unconditionally released and discharged upon any sale, exchange or other transfer to any Person that is not an Affiliate of the Company, of all of the Company's and each Restricted Subsidiary's (as defined herein) Capital Stock (as defined herein) issued by, all or substantially all of the assets of, such Guarantor (which sale, exchange or transfer is not prohibited by the Indenture). AIC is a general partnership in which the Company owns a 60% interest. Any amounts received by the Company with respect to its interest in AIC will, as an asset of the Company, be available to the holders of the New Notes. COLLATERAL The collateral (the "Collateral") securing the Old Notes consists of, and that securing the New Notes will consist of, (i) nine Boeing 747s, eight Lockheed L-1011s and thirteen Boeing 727s, along with the Engines (as defined herein); (ii) all insurance and requisition proceeds and other similar payments with respect to each of the Aircraft; (iii) all monies and securities deposited or required to be deposited with the Trustee; (iv) any purchase agreements and any related documentation to the extent assignable for each of the Aircraft; (v) all logs, records and data relating to the Aircraft; (vi) all proceeds of the foregoing and (vii) the 91 93 Pledged Securities on deposit in the Escrow Account, the Escrow Account and certain related assets as described in the Escrow Agreement (as defined herein). The Lien on the Collateral pursuant to the Indenture will remain in full force and effect for so long as any Note remains outstanding except as otherwise set forth herein. The table below sets forth certain additional information for the Aircraft. All Aircraft are owned by Wholly Owned Subsidiaries.
APPRAISED ENGINE AIRCRAFT YEAR MARKET AIRCRAFT TYPE CONFIGURATION TYPE TAIL# MANUFACTURED VALUE ------------- ------------- ------ -------- ------------ ------------ 747-132......................... freighter TJ9D-7A N625PL 1971 $ 16,880,496 747-146......................... freighter JT9D-7A N702CK 1971 18,080,668 747-146......................... passenger JT9D-7A N703CK 1970 6,871,001 747-146......................... passenger JT9D-7A N704CK 1972 7,091,705 747-269BF....................... freighter JT9D-7J N707CK 1978 37,957,596 747-269BF....................... freighter JT9D-7J N708CK 1979 37,277,714 747-2B4B........................ passenger JT9D-7J N710CK 1975 35,962,600 747-2B4B(1)..................... passenger JT9D-7J N203AE 1975 36,400,000 747-2B4B(1)..................... passenger JT9D-7J N204AE 1975 36,400,000 L-1011-200F(2).................. freighter RB211-524 N102CK 1980 17,650,000 L-1011-200F(2).................. freighter RB211-524 N103CK 1981 17,400,000 L-1011-200F(2).................. freighter RB211-524 N104CK 1980 17,250,000 L-1011-200F(2).................. freighter RB211-524 N105CK 1980 17,100,000 L-1011-200F(2).................. freighter RB211-524 N106CK 1981 17,200,000 L-1011-200F(2).................. freighter RB211-524 N107CK 1980 17,100,000 L-1011-200(2)................... passenger RB211-524 N108CK 1981 9,800,000 L-1011-200(2)................... passenger RB211-524 N109CK 1981 10,000,000 727-251......................... freighter JT8D-7B N252US 1969 5,983,543 727-251......................... freighter JT8D-15A N278US 1975 9,064,223 727-251......................... freighter JT8-15/15A N279US 1975 9,016,681 727-2J0......................... freighter JT8D-15 N281KH 1975 9,794,597 727-2J0......................... passenger JT8D-15 N284KH 1975 7,984,565 727-223......................... freighter JT8D-9A N6809 1968 5,702,537 727-223......................... freighter JT8D-9A N6827 1969 4,803,585 727-223......................... freighter JT8D-7B N6833 1969 7,452,700 727-223......................... freighter JT8D-7B N69739 1975 5,640,712 727-224......................... freighter JT8D-9A/7B N69740 1975 3,923,651 727-224......................... passenger JT8D-15 N79746 1981 5,200,000 727-223......................... freighter JT8D-15 N854AA 1976 5,033,417 727-223......................... freighter JT8D-9A/7B N855AA 1976 4,816,227 ------------ Total $440,838,218 ============
- --------------- (1) These Boeing 747s will be converted to freighter configuration for approximately $25.4 million, of which approximately $16.4 million will be from the net proceeds derived from the sale of the Old Notes. The Company expects to fund the additional approximately $9 million of conversion costs with internally generated funds or borrowings under its New Credit Facility. See "Use of Proceeds" and "Business -- Aircraft Fleet -- Acquisition of Boeing 747s." (2) Appraised Market Value represents the mid-point of the range of values provided. The Company has obtained the above appraisals from Pro-Tech Advisors, Inc. ("Pro-Tech"), with respect to the Boeing 747s and Boeing 727s, and GRA Aviation Specialists, Inc. ("GRA"), with respect to 92 94 the Lockheed L-1011s. Copies of these appraisals may be obtained from the Company, as set forth under "Available Information." The appraised market value represents an estimate of each Aircraft's market value as of the date of the appraisal. This appraised market value represents the most likely trading price that, in the opinion of the appraiser, may be generated for an aircraft under the market conditions that are perceived to exist at the time in question. Appraised market value assumes that the aircraft is valued for its highest, best use, that the parties to the hypothetical sale transaction are willing, able, prudent and knowledgeable, and under no unusual pressure for a prompt sale, and that the transaction would be negotiated in an open and unrestricted market on an arm's length basis, for cash or equivalent consideration, and given an adequate amount of time for effective exposure to prospective buyers. In making such appraisals, the appraisers assumed (i) the Aircraft have "half-time" remaining to the next major overhauls or scheduled shop visit on the Aircraft's airframe or major components, (ii) the Aircraft are in compliance with all FAA airworthiness directives, (iii) the interior is in a standard configuration, (iv) the Aircraft is in current flight operations and (v) the Aircraft is sold for cash without seller financing. Pro-Tech performed a physical inspection of the Aircraft and GRA relied on Pro-Tech with respect to such inspection and with respect to a review of records with respect to each such Aircraft. The appraised market value of each Aircraft was determined by adjusting the foregoing for actual maintenance checks recently performed. An estimate of appraised market value should not be relied upon as a measure of realizable value. The appraised value assumes willing and informed buyers under no duress. However, if it becomes necessary to foreclose upon and sell the Collateral, it is likely that such sale would occur under duress. In addition, there is a limited number of potential buyers of used aircraft. Accordingly, the proceeds realized upon a sale of any Aircraft would likely be less than the appraised value thereof. The value of the Aircraft in the event of the exercise of remedies under the Indenture will depend on (i) market and economic conditions, (ii) the availability of buyers, (iii) the condition of the Aircraft and (iv) other similar factors. Accordingly, there can be no assurance that the proceeds realized upon any such exercise pursuant to the Indenture would be sufficient to satisfy in full payments due on the Notes. If such proceeds are not sufficient to pay or repay all amounts due under the Notes, holders of the Notes would bear their allocable percentage of such insufficiency and any resultant loss. The Aircraft were manufactured between 1968 and 1981. Twenty-three of the Aircraft are in compliance with the Stage III noise control standards. The remaining Aircraft must be Stage III compliant by January 1, 2000. See "Risk Factors -- Government Regulation" and "Business -- Government Regulation." ESCROW ACCOUNT; OFFER TO PURCHASE Pursuant to the Indenture, the Company has purchased and pledged to the Trustee as security for the benefit of the holders of the Old Notes approximately $16.4 million of Pledged Securities, which the Company intends to use to pay a portion of the estimated $25.4 million cost to modify two recently acquired Boeing 747s to freighter configuration. See "Business -- Aircraft Fleet -- Acquisition of Boeing 747s." Prior to the issuance of the New Notes, the Pledged Securities will be pledged to the Trustee as security for the benefit of the holders of the New Notes. The Pledged Securities were purchased and subsequently pledged pursuant to the Escrow Agreement and will be held by the Trustee in the Escrow Account. Pursuant to the Escrow Agreement, the Company may, from time to time, direct the Trustee to release a portion of the Pledged Securities from the Escrow Account to pay for such conversion costs as they are incurred. The Pledged Securities also secure the repayment of the Old Notes and will secure repayment of the New Notes. Under the Escrow Agreement, after the Company converts these Boeing 747s to freighter configuration, all remaining Pledged Securities, if any, will be promptly released from the Escrow Account and delivered to the Company. On the date that is 18 months after the Closing Date, the chief financial officer of the Company shall in good faith determine the value of the assets remaining in the Escrow Account, if any. If such value (as so 93 95 determined) exceeds $5 million, the Company will make an Offer to Purchase (as defined herein) New or Old Notes having a principal amount equal to such value (as so determined). On the Business Day immediately prior to the Payment Date (as defined herein) with respect to such Offer to Purchase, the Trustee will release all assets then held in the Escrow Account to the Company, which assets, to the extent necessary, will be used to consummate such Offer to Purchase or, if not needed for such purpose, may be used by the Company for general corporate purposes. If such value (as so determined) is less than $5 million, the Trustee will promptly release all assets then held in the Escrow Account to the Company, and the Company will be entitled to liquidate such assets and use such assets for general corporate purposes. AIRCRAFT REGISTRATION The Company will be required, except under certain circumstances, to keep the Aircraft registered under the provisions of the Federal Aviation Act of 1958, as amended (the "Aviation Act"), and to record the Indenture at the FAA registry and, if applicable, the aircraft registry of other aeronautics authorities. Such recordation of the Indenture and certain other documents (including supplements to the Indenture) will give the Trustee a perfected first priority security interest in each of the Aircraft whenever any such Aircraft is located in the United States or any of its territories and possessions and, with certain exceptions, in those jurisdictions that have ratified or adhere to the Convention on the International Recognition of Rights in Aircraft (the "Convention"). The operation of the Aircraft by the Company (and by any lessee of the Company) will be geographically limited to Permitted Countries (as defined herein). Although the Company has no current intention to do so, the Company, or any subsequent lessee of the Aircraft, will also have the right, subject to certain conditions, to register, at its own expense, any of the Aircraft in the Permitted Countries. Prior to any such change in the jurisdiction of registry, the Trustee shall have received an opinion of counsel to the effect that (i) the laws of the new country of registration will recognize the Company's right of ownership and repossession and will give effect to the security interest in the Aircraft created by the Indenture and (ii) the right to repossession by the Trustee upon the exercise of remedies is valid under the laws of the country of registration. See "-- Maintenance, Lease and Possession." MAINTENANCE, LEASE AND POSSESSION The Company shall or shall cause each Aircraft to be, at its expense or at the expense of the Restricted Subsidiary that owns such Aircraft (the "Owner"), maintained, serviced, and repaired so as to keep each Aircraft in as good operating condition as on the Closing Date, ordinary wear and tear excepted, and shall cause the airworthiness certification thereof to be maintained in good standing at all times (other than during temporary periods of repair, maintenance, modification, storage or grounding) under the Aviation Act, including compliance with all then applicable and effective Noise Regulations and FAA Directives; provided that in the event the Company or any Owner leases any of its Aircraft in accordance with the terms of the Indenture to a Permitted Air Carrier organized and operating under the laws of a Permitted Country (as defined herein), such lease shall provide that the lessee shall (i) throughout the terms of such lease, inspect, service, repair, overhaul, and test the Aircraft in compliance with such lessee's maintenance program as approved by the applicable governmental authority and maintain the airworthiness certification of such Aircraft in such Permitted Country in good standing throughout the term of the lease; and (ii) return the Aircraft at the end of the term of the lease in an operating condition sufficient to qualify for a United States standard FAA certificate of airworthiness, including compliance with all then applicable and effective Noise Regulation and FAA Service Bulletins and Directives. Notwithstanding the foregoing, if an FAA Service Bulletin, Directive or the Noise Regulation require the Owner to maintain a specified portion of its fleet in a given condition, the Owner must maintain such portion of the Aircraft in such condition. The Company shall be obligated, at its expense, to replace, or cause to be replaced, all parts (other than severable parts added at the option of the Company or any Restricted Subsidiary and obsolete or unsuitable parts that the Company is permitted to remove to the extent described below) that may from time to time be incorporated or installed in or attached to any aircraft and that may become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or rendered permanently unfit for use. The Company or any Owner will have the right to make (or cause to be made) such alterations and modifications in and additions to (including removal of parts from) each Aircraft as the Company or any Owner deems desirable; provided that no such alteration, 94 96 modification, addition, or removal shall materially diminish the value, utility, or condition of such Aircraft in the service in which it is operated by the Company or any Restricted Subsidiary or impair the airworthiness thereof. The Company or any Owner may sell, lease or transfer any Aircraft or Engine to any Restricted Subsidiary (other than any Excluded Restricted Subsidiary (as defined herein)) or to the Company, and may lease any Aircraft or Engine to a Permitted Air Carrier; provided that the Trustee shall have received an opinion (or opinions) of counsel to the effect that, among other things, the Lien (as defined herein) pursuant to the Indenture continues to be perfected and in full force and effect, the Indenture continues to be enforceable against the parties thereto, and the Trustee maintains its right to repossession thereunder, in each case pursuant to applicable law. In addition, subject to certain limitations, the Company or any Restricted Subsidiary (and any permitted lessee) may (i) transfer possession of any Aircraft pursuant to "wet lease" or similar arrangements, in each case whereby the Company or any Restricted Subsidiary (or such permitted lessee) maintains operational control of the Aircraft, (ii) transfer possession of any Aircraft or Engine, other than by lease, to the United States Government and transfers of possession in connection with maintenance or modifications, (iii) transfer possession of any Engine and any parts from time to time installed on any Aircraft or Engine, other than by lease, through transfers in connection with interchange and pooling arrangements with certified "air carriers" within the meaning of the Aviation Act, and transfers of possession to FAA licensed repair stations, or (iv) install one or more of the Engines on airframes owned, mortgaged, leased, or subject to conditional purchase by, the Company or any Restricted Subsidiary (or any such permitted lessee); provided that such Engines shall not become subject to any Lien other than the Lien securing the Notes under the Indenture notwithstanding the installation thereof on such airframe. If any Aircraft is leased or the possession is otherwise transferred, such Aircraft will remain subject to the Lien under the Indenture. Other than pursuant to a "wet lease" or similar arrangement, no lease of any Aircraft shall be for a term in excess of five years beyond the maturity of the Notes. If the lease is for a period in excess of three months, the Owner shall grant to the Trustee, for the equal and ratable benefit of the Holders of the Notes, a security interest in such lease and if the lease is for a period in excess of two years, shall deliver a legal opinion to the Trustee stating (subject to customary qualifications) that such security interest has been created and perfected under the law of the United States or a state of the United States; provided that at all times, other than when an Event of Default (as defined herein) has occurred and is continuing, the Company or any Affiliate (x) shall be entitled to receive and retain all payments made pursuant to the lease; and (y) shall be entitled to exercise (to the exclusion of the Trustee) all rights and remedies of the "lessor" under the lease and grant such consents, waivers and enter into such amendments to the lease as are consistent with the provisions of the Indenture as the Company may determine appropriate in its sole discretion. Nothing permitted herein shall be deemed an "Asset Sale." LIMITATION ON COLLATERAL SALES; EVENT OF LOSS Neither the Company nor any Owner may transfer, convey, sell, lease or otherwise dispose (other than by lease, in compliance with the Maintenance, Lease and Possession covenant) of (a "Sale") any Aircraft or Engine unless (i) the Owner thereof receives (x) consideration, consisting solely of cash, at the time of such Sale at least equal to the fair market value of the Aircraft or Engine disposed of (determined by the chief financial officer of the Company in good faith) or (y) an Aircraft or Engine having a value at least equal to, and in as good operating condition and repair and as airworthy as, the Aircraft or Engine subject to the Sale, assuming such Aircraft or Engine, as the case may be, was in the condition and repair required by the Indenture immediately prior to such Sale (determined by the chief financial officer of the Company in good faith). If any Owner consummates a Sale for cash, or if an Event of Loss (as defined herein) occurs, with respect to any Aircraft or Engine, the Trustee will receive and hold, and if received by the Owner, the Owner will pay over to the Trustee, the proceeds of such Sale or Event of Loss. The Owner may, within 365 days after such Sale or Event of Loss, subject to the Lien created pursuant to the Indenture, substitute an Aircraft or Engine, having a value at least equal to, and in as good operating condition and repair and as airworthy as, the Aircraft or Engine subject to the Sale or Event of Loss, assuming such Aircraft or Engine was in the condition and repair required by the Indenture immediately prior to the occurrence of such Sale or Event of Loss (determined by the chief financial officer of the Company in good faith), and the Trustee shall, upon receipt 95 97 of evidence of such substitution, pay to the Owner the proceeds of such Sale or Event of Loss and any related additional amounts held by it. In the event the Company elects not to replace such Aircraft (or in the event such Aircraft or Engine is not replaced within 365 days after such Sale or Event of Loss), the Trustee will refund to the Owner, and the Company will be required to apply, an amount equal to the proceeds received from such Sale or Event of Loss to make an Offer to Purchase Notes in accordance with "Events of Loss" below; provided that with respect to the proceeds of any Sale or Event of Loss with respect to an Aircraft, in no event shall any Owner be required to so apply, and the Owner shall be permitted to retain, amounts, if any, in excess of the initial appraised value of such Aircraft. Notwithstanding the foregoing, if the Owner consummates a Sale, or an Event of Loss occurs, with respect to an Engine alone, the Owner must replace such Engine with another engine suitable for installation and use on the Aircraft, and having a value at least equal to and in as good operating condition as, the Engine subject to the Sale or Event of Loss, assuming such Engine was of the value and in the condition and repair required by the Indenture immediately prior to the occurrence of such Sale or Event of Loss (as determined by the chief financial officer of the Company in good faith). Any cash received in connection with a Sale or an Event of Loss shall be held by the Trustee and invested as directed by the Company in Cash Equivalents or Temporary Cash Investments (as defined herein) until applied in accordance with this covenant. Upon payment to the Trustee of the proceeds from the Sale or an Event of Loss (as defined herein) with respect to an Aircraft as required by this "Limitation on Collateral Sales; Event of Loss" covenant, the Lien created pursuant to the Indenture with respect to such Aircraft (but not the proceeds with respect thereto) shall terminate. SUBSTITUTION OF COLLATERAL In the event any Owner requests the release of any Aircraft or Engine from the Lien pursuant to the Indenture, the Trustee shall be required to immediately release such Aircraft or Engine from such Lien upon fulfillment of the following conditions: (i) the Owner delivers a written request to the Trustee, requesting such release and specifically describing the Aircraft or Engine so to be released and the replacement Aircraft or replacement Engine therefor; (ii) the replacement Aircraft or replacement Engine has a value at least equal to, and in as good operating condition and repair and as airworthy as the Aircraft or Engine subject to the substitution (determined by the chief financial officer of the Company in good faith); (iii) the Owner delivers to the Trustee a supplemental indenture subjecting the replacement Aircraft or replacement Engine to the Lien pursuant to the Indenture; (iv) the Owner delivers an opinion of counsel that the Trustee has a valid, perfected, first priority security interest in the replacement Aircraft or replacement Engine; and (v) the replacement Aircraft or replacement Engine otherwise complies with the terms and provisions of the Indenture. Notwithstanding the foregoing, with respect to any substitution of Collateral, or any series of related substitutions of Collateral, where the initial appraised value of such Collateral exceeds $25 million, the Company shall be required to obtain one or more appraisals from an aircraft appraisal firm of national standing. Such appraisal(s) must indicate that the value (or fair value or similar measure) of the replacement Collateral is at least equal to the value (or fair value or similar measure) of the Collateral which is being replaced. RELEASE OF COLLATERAL If at any time, or from time to time, the aggregate principal amount of all Notes outstanding is less than $340 million and no Event of Default has occurred and is continuing, the Company shall be entitled to release a portion of the Collateral, so long as the aggregate value of the Collateral so released does not exceed the aggregate principal amount of all Notes which are no longer outstanding (in the good faith opinion of the chief financial officer of the Company). The Company will be entitled to substitute additional Collateral in connection with any such release (in accordance with "Substitution of Collateral" above) if the aggregate value of Collateral released exceeds the aggregate principal amount of Notes which are no longer outstanding. Upon delivery of a certificate regarding such good faith opinion or the appraisal referred to in the immediately succeeding sentence, the Trustee shall immediately execute and deliver all releases and certificates necessary or desirable to release the such Collateral from the Lien created pursuant to the Indenture. Notwithstanding the foregoing, in the event of any release of Collateral, or any series of related releases of Collateral, where the initial appraised value of such Collateral exceeds $10 million, the Company shall be required to obtain one or 96 98 more appraisals from an aircraft appraisal firm of national standing. Such appraisal(s) must indicate that the aggregate value (or fair value or similar measure) of the Collateral released. OPTIONAL REDEMPTION The Old Notes are and the New Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after November 15, 2001 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing November 15, of the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2001..................................................... 104.975% 2002..................................................... 102.488 2003..................................................... 100.000
In addition, at any time prior to November 15, 2000, the Company may redeem up to 35% of the principal amount of any Notes with the proceeds of one or more Public Equity Offerings (as defined herein), at any time or from time to time, at a Redemption Price (expressed as a percentage of principal amount) of 109.95%, plus accrued and unpaid interest to the Redemption Date (subject to the rights of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date); provided that at least $150 million aggregate principal amount of all Notes remain outstanding after each such redemption. A portion of the Collateral will be subject to release upon any such optional redemption. See "-- Release of Collateral." Furthermore, if more than 90% of the outstanding principal amount of all Notes are tendered pursuant to one or more Offers to Purchase pursuant to the "Limitation on Assets Sales" or "Repurchase of Notes Upon a Change of Control" covenants (described herein), the balance of any Notes will be redeemable, at the Company's option, in whole but not in part, at any time thereafter, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at a Redemption Price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on a record date that is on or prior to the Redemption Date to receive interest due on the next Interest Payment Date). In the case of any partial redemption, selection of any Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which any Notes may be listed or, if Notes are not listed on a national securities exchange, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate; provided that no Note of $1,000 in principal amount or less will be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A replacement in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of an original Note. RANKING The Old Notes were and the New Notes will be senior secured obligations of the Company ranking pari passu in right of payment with all existing and future unsubordinated indebtedness of the Company (except to the extent of any Collateral) and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Old Notes were, and the New Notes will be, secured by certain Collateral as described in "-- Collateral" above. After giving pro forma effect to the Transactions and the Refinancing, 97 99 on a consolidated basis, as of September 30, 1997, the Company and its Subsidiaries would have had approximately $396 million of indebtedness outstanding, including approximately $55.9 million of secured indebtedness (consisting of the Term Loan and approximately $10 million of other indebtedness) and no subordinated indebtedness. The Company would also have had unused senior secured borrowing capacity of approximately $28.7 million under its New Credit Facility. As of January 31, 1998, there was no outstanding balance under the New Credit Facility. See "Capitalization" and "Description of Other Indebtedness." Lenders under the New Credit Facility and the Term Loan will have prior claims with respect to certain assets of the Company. See "Description of Other Indebtedness." "Risk Factors -- Substantial Leverage and Debt Service." In addition, the Kalitta Companies have been in default with respect to their prior Indebtedness (which was repaid with the proceeds derived from the sale of the Old Notes and the Common Stock Offering). "Risk Factors -- Recent Financial Performance of the Kalitta Companies." CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the Indenture. Reference is made to the Indenture for the full definition of all terms as well as any other capitalized term used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition (as defined herein) by a Restricted Subsidiary and not Incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of such Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Company and its Restricted Subsidiaries for such period determined in conformity with GAAP (defined herein); provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person that is not a Restricted Subsidiary, except to the extent of the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries by such Person during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of the "Limitation on Restricted Payments" covenant described below (and in such case, except to the extent includable pursuant to clause (i) above), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Company or any of its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted (unless such permission could, as determined by the chief financial officer of the Company in good faith, be readily and reasonably obtained) by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales (as defined herein); (v) except for purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of the "Limitation on Restricted Payments" covenant described below, any amount paid or accrued as dividends on Preferred Stock of the Company or any Restricted Subsidiary owned by Persons other than the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary losses. "Adjusted Consolidated Net Tangible Assets" means the total amount of assets of the Company and its Restricted Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom (i) all current liabilities of the Company and its Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries, 98 100 prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; provided that, with respect to the Company, ownership of Capital Stock (as defined herein) representing more than 10% of the voting power of the Company's Capital Stock shall be deemed control. "Aircraft" means each of the Airframes (as defined herein) together with the Engines relating thereto and hush kits, if any, installed thereon, upon which the Trustee has been granted a security interest and mortgage lien by the Owner thereof pursuant to the Indenture and any Airframes which may from time to time be substituted for such Airframes pursuant to the terms of the Indenture. "Airframes" means each of the nine Boeing 747 Aircraft, eight Lockheed L-1011 Aircraft and thirteen Boeing 727 Aircraft (except Engines or engines from time to time installed on such Aircraft) initially pledged to secure the Company's obligations under the Indenture and the Notes and any Aircraft (except Engines or engines from time to time installed on such Aircraft) which may from time to time be substituted for such Aircraft (except Engines or engines from time to time installed on such Aircraft) pursuant to the Indenture. "Asset Acquisition" means (i) an investment by the Company or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with the Company or any of its Restricted Subsidiaries; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such investment or (ii) an acquisition by the Company or any of its Restricted Subsidiaries of the property and assets of any Person other than the Company or any of its Restricted Subsidiaries that constitute substantially all of a division or line of business of such Person; provided that the property and assets acquired are related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such acquisition. "Asset Disposition" means the sale or other disposition, outside the ordinary course of business, by the Company or any of its Restricted Subsidiaries (other than to the Company or another Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary of the Company or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Restricted Subsidiaries. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale/leaseback transaction) in one transaction or a series of related transactions by the Company or any of its Restricted Subsidiaries to any Person other than the Company or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary (other than director's qualifying shares), (ii) all or substantially all of the property and assets of an operating unit or business of the Company or any of its Restricted Subsidiaries or (iii) any other property and assets of the Company or any of its Restricted Subsidiaries outside the ordinary course of business of the Company or such Restricted Subsidiary and, in each case, that is not governed by the provisions of the Indenture applicable to mergers, consolidations and sales of assets of the Company; provided that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current assets, (b) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, to the extent that the consideration received would satisfy clause (B) of the "Limitation on Asset Sales" covenant, (c) leases of aircraft, including the Aircraft and any engines, including the Engines, pursuant to the provisions of the "Maintenance, Lease and Possession of Aircraft Transfer" covenant or similar arrangements, including pooling or interchange arrangements as described therein, (d) sales, transfers or other dispositions of assets that have a fair market value of less than $20 million from the Closing Date through the final stated maturity of the Notes, (e) Sales 99 101 or Events of Loss and (f) sales of collateral which is pledged to secure the New Credit Facility or Term Loan, so long as the proceeds are applied to reduce the aggregate Indebtedness thereunder. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Aviation Act" means the Federal Aviation Act of 1958, as amended, and applicable regulations thereunder. "Borrowing Base" shall have the meaning given such term in the New Credit Facility, as in effect from time to time. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligations" means the discounted present value of the rental obligations under a Capitalized Lease. "Cash Equivalents" means (i) United States dollars or foreign currency that is readily exchangeable into United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than 12 months from the date of acquisition, (iii) certificates of deposit and Eurodollar time deposits with maturities of 12 months or less from the date of acquisition, bankers' acceptances with maturities not exceeding 12 months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for the underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, and (v) commercial paper having the highest rating obtainable from Moody's Investor Service, Inc. or Standard & Poor's Corporation and in each case maturing not more than 90 days after the date of acquisition. "Change of Control" means such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock (as defined herein) of the Company on a fully diluted basis and such ownership represents a greater percentage of the total voting power of the Voting Stock of the Company, on a fully diluted basis, than is held by the Existing Stockholders (as defined herein) on such date or (ii) individuals who on the Closing Date constitute the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by the Company's stockholders was approved by a vote of at least two-thirds of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. "Change of Control Triggering Event" means both the occurrence of a Change of Control and a Rating Decline (as defined herein). "Closing Date" means the date on which the Old Notes are originally issued under the Indenture. "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income for such period plus, to the extent such amount was deducted in calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest Expense (as defined herein), (ii) income taxes (other than income taxes (either 100 102 positive or negative) attributable to extraordinary and nonrecurring gains or losses or sales of assets), (iii) depreciation expense, (iv) amortization expense and (v) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), all as determined on a consolidated basis for the Company and its Restricted Subsidiaries otherwise in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned (as defined herein) Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced hereunder) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries. "Consolidated Interest Expense" means, for any period, the aggregate amount of interest in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements (as defined herein); and Indebtedness that is Guaranteed or secured by the Company or any of its Restricted Subsidiaries) and all but the principal component in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Company and its Restricted Subsidiaries during such period; excluding, however, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Notes and the establishment of the New Credit, Facility and the Term Loan and the other transactions contemplated by and relating to the Transactions and Refinancings, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries (as defined herein)) in conformity with GAAP. "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Company (which shall be as of a date not more than 90 days prior to the date of such computation, and which shall exclude Unrestricted Subsidiaries), less any amounts attributable to Disqualified Stock (as defined herein) or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of its Restricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of any Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity (as defined herein) of any Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes other than Capital Stock issued to employees; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of any Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital 101 103 Stock than the provisions contained in "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants described below and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of any Notes as are required to be repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants described below. "Eligible Aircraft" means one or more aircraft that would be useful in the Company's business and having a value (or fair value or similar measure) determined by an aircraft appraisal firm of national standing equal to or in excess of the price paid therefor by the Company. "Engines" means for each of the Boeing 747 Airframes, each of the 36 Pratt & Whitney JT9D-7A Engines and each of the 20 JT9D-7J Engines relating thereto, as specified in the Indenture and any engines which may from time to time be substituted for such engines pursuant to the Indenture and with respect to the Boeing 727 Airframes means each of the 9 Pratt & Whitney JT8D-7B Engines, each of the 3 JT8D-15A Engines, each of the 3 JT8D-15/15A Engines, each of the 12 JT8D15 Engines, each of the 6 JT8D-9A Engines and each of the 6 JT8D-9A/7B Engines relating thereto, as specified in the Indenture and any engines which may from time to time be substituted for such engines pursuant to the Indenture and with respect to the Lockheed L-1011 Airframes, each of the 24 Rolls Royce RB211-524 Engines relating thereto, as specified in the Indenture and any engines which may from time to time be substituted for such Engines pursuant to the Indenture. "Escrow Account" means an account established with the Trustee pursuant to the terms of the Escrow Agreement for the deposit of the Pledged Securities to be purchased by the Company with the net proceeds from the sale of the Old Notes. "Escrow Agreement" means the Escrow and Security Agreement, dated as of the Closing Date, made by the Company and the Guarantors in favor of the Trustee, governing the disbursement of funds from the Escrow Account, as such agreement may be amended, restated, supplemented or otherwise modified from time to time. "Excluded Restricted Subsidiary" means any Restricted Subsidiary principally engaged in a business similar to that of the Company or any of its Restricted Subsidiaries or any business reasonably related thereto and domiciled outside the United States of America if the issuance of a Guarantee by such Subsidiary would, as determined in good faith in a resolution of the Board of Directors, create a material tax disadvantage or would be illegal under applicable law. "Existing Stockholders" means Mr. M. Tom Christopher, his spouse and children and any trust the sole beneficiaries of which consist of the foregoing persons. "fair market value" means the price that would be paid in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution. "Fraudulent Conveyance Act" means any statute based on or substantially similar to the Uniform Fraudulent Conveyance Act. "Fraudulent Transfer Act" means any statute based on or substantially similar to the Uniform Fraudulent Transfer Act. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. The numbers used to calculate all ratios and perform all computations contained or referred to in the Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of the Indenture shall be made without 102 104 giving effect to (A) the amortization of any expenses incurred in connection with the offering of the Notes and (B) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Guarantee" means, without duplication, any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto, but excluding obligations with respect to letters of credit (including trade letters of credit) securing obligations (other than obligations described in clause (i) or (ii) above or (v), (vi) or (vii) below) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables (as defined herein) and accrued expenses, (v) all Capitalized Lease Obligations, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided that (A) the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the then remaining unamortized portion of the original issue discount of such Indebtedness as determined in conformity with GAAP, (B) money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to prefund the payment of the interest on such Indebtedness shall be deemed not to be "Indebtedness" and (C) Indebtedness shall not include any liability for federal, state, local or other taxes. "Interest Coverage Ratio" means, on any Transaction Date (as defined herein), the ratio of (i) the aggregate amount of Consolidated EBITDA for the then most recent four fiscal quarters prior to such Transaction Date for which reports have been filed with the Commission pursuant to the "Commission Reports and Reports to Holders" covenant (the "Four Quarter Period") to (ii) the aggregate Consolidated Interest Expense during such Four Quarter Period. In making the foregoing calculation, (A) pro forma effect shall be given to any Indebtedness Incurred or repaid during the period (the "Reference Period") commencing on the first day of the Four Quarter Period and ending on the Transaction Date (other than 103 105 Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such Four Quarter Period unless any portion of such Indebtedness is projected, in the reasonable judgment of the senior management of the Company, to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof), in each case as if such Indebtedness had been Incurred or repaid on the first day of such Reference Period; (B) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the Transaction Date (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months or, if shorter, at least equal to the remaining term of such Indebtedness) had been the applicable rate for the entire period; (C) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions (including giving pro forma effect to the application of proceeds of any Asset Disposition) that occur during such Reference Period as if they had occurred and such proceeds had been received on the first day of such Reference Period; and (D) pro forma effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into the Company or any Restricted Subsidiary during such Reference Period and that would have constituted Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such Reference Period; provided that, to the extent that clause (C) or (D) of this sentence requires that pro forma effect be given to an Asset Acquisition or Asset Disposition, such pro forma calculation shall be based upon the four full fiscal quarters immediately preceding the Transaction Date of the Person, or division or line of business of the Person, that is acquired or disposed for which financial information is available. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, option or future contract or other similar agreement or arrangement, including, without limitation, any fuel hedging or fuel protection agreement. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Company or its Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary, including without limitation, by reason of any transaction permitted by clause (iii) of the "Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the fair market value of the Investment remaining in any Person that has ceased to be a Restricted Subsidiary shall be deemed not to exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made less the net reduction of such Investments. For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant described below, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer. 104 106 "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to give any security interest), but excluding any operating lease. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or Cash Equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or Cash Equivalents, net of attorney's fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "New Credit Facility" means the $100 million senior secured revolving credit facility with Wells Fargo Bank (Texas), National Association, individually and as agent for other lenders, as amended, refinanced or substituted from time to time; provided that Affiliates of the Company cannot constitute majority lenders thereunder. "Noise Regulations" means FAA noise standard regulations primarily promulgated under the Airport Noise and Capacity Act of 1990. "Note Guarantee" means the Guarantee by the Guarantors of the Company's obligations under all the Notes and the Indenture and any other Guarantee of such obligations by any Person. "Offer to Purchase" means an offer to purchase Notes by the Company from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless the Company defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and 105 107 (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Company shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Company will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Notes pursuant to an Offer to Purchase. "Permitted Air Carrier" means (i) a United States "air carrier" within the meaning of the Aviation Act or (ii) an air carrier which, among other things, (A) is duly organized and operating pursuant to a license or authorization issued under the laws of any Permitted Country and (B) will perform or cause to be performed maintenance or engine preventative maintenance, and inspections for such Aircraft, Airframe or any Engine in accordance with standards which are approved by the aeronautical authority in the country or registration of the Aircraft. "Permitted Country" means, with respect to any Aircraft, any country for which (i) an insurer of national or international standing has provided significant insurance coverage for such Aircraft or (ii) the United States government has assumed liability, including, without limitation, a significant portion of the cost of replacing such Aircraft, for operation of such Aircraft within such country. "Permitted Investment" means (i) an Investment in the Company or a Restricted Subsidiary (other than an Excluded Restricted Subsidiary) or a Person which will, upon the making of such Investment, become a Restricted Subsidiary (other than an Excluded Restricted Subsidiary) or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, the Company or a Restricted Subsidiary (other than an Excluded Restricted Subsidiary); provided that such person's primary business is related, ancillary or complementary to the businesses of the Company or its Restricted Subsidiaries on the date of such Investment; (ii) Cash Equivalents and Temporary Cash Investments; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) stock, obligations or securities received in satisfaction of judgments; (v) loans or advances to employees of the Company or any Restricted Subsidiary not to exceed $1 million at any time outstanding; (vi) Investments of up to $25 million in Permitted Joint Ventures (as defined herein); and (vii) Investments in Excluded Restricted Subsidiaries the aggregate amount of which does not at any time outstanding exceed 10% of Adjusted Consolidated Net Tangible Assets. "Permitted Joint Ventures" means any Unrestricted Subsidiary or any other Person in which the Company or a Restricted Subsidiary owns an ownership interest, directly or indirectly (other than a Restricted Subsidiary) and whose business is related or ancillary to the business of the Company or any of its Restricted Subsidiaries at the time of determination. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as 106 108 shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred, in accordance with the "Limitation on Indebtedness" covenant described below, to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness of, any Person existing at the time such Person becomes, or becomes a part of, any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets acquired; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Company or any Restricted Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits, and other Liens that are within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, future contracts, futures options or similar agreements or arrangements designed solely to protect the Company or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens to secure Indebtedness incurred pursuant to clause (vii) of the second paragraph of the "Limitation on Indebtedness" covenant; provided the assets securing such Indebtedness were or are acquired with the proceeds of such Indebtedness; (xix) Liens on or sales of receivables; and (xx) Liens created pursuant to the terms of any aircraft lease or any lease or pooling or interchange arrangement relating to an Engine incurred in compliance with the "Maintenance, Lease and Possession" covenant; provided that no such Liens exist with respect to the Collateral except as otherwise permitted pursuant to the terms hereof. "Pledged Securities" means the U.S. government securities purchased by the Company and held in the Escrow Account in accordance with the Escrow Agreement. "Public Equity Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act. "Rating Agencies" means (i) S&P and (ii) Moody's and (iii) if S&P or Moody's or both shall not make a rating of the Notes publicly available, a nationally recognized United States securities rating agency or 107 109 agencies, as the case may be, selected by the Company, which shall be substituted for S&P or Moody's or both, as the case may be. "Rating Category" means (i) with respect to S&P, any of the following categories: A, BBB, BB, B, CCC, CC, C and D (or equivalent successor categories); (ii) with respect to Moody's, any of the following categories: A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor categories); and (iii) the equivalent of any such category of S&P or Moody's used by another Rating Agency. In determining whether the rating of the Notes has decreased by one or more gradations, gradations with Rating Categories (+ and -- for S&P; 1, 2 and 3 for Moody's; or equivalent gradations for another Rating Agency) shall be taken into account (e.g., with respect to S&P, a decline in a rating from BB+ to BB, as well as from BB-- to B+, will constitute a decrease of one gradation). "Rating Date" means the date which is 90 days prior to the earlier of (x) Change of Control and (y) public notice of the occurrence of a Change of Control or of the intention by the Company or any Person to effect a Change of Control. "Rating Decline" means the decrease (as compared with the Rating Date) by one or more gradations (including gradations within the Rating Categories as well as between Rating Categories) of the rating of any Notes by either Rating Agency on, or within six months after, the date of public notice of the occurrence of a Change of Control or of the intention of the Company or of any Person to effect a Change of Control (which period shall be extended for so long as the rating of the Notes is under publicly announced consideration for possible downgrade by any of the Rating Agencies); provided, however, that in the event the Notes are not rated by two Rating Agencies at the time a Change of Control occurs, a Rating Decline shall be deemed to have occurred. "Refinancings" means the refinancing of substantially all of the currently outstanding indebtedness of the Company and the Kalitta Companies with a portion of the net proceeds derived from the Old Note Offering, the Common Stock Offering and the Term Loan. "Released Indebtedness" means, with respect to any Asset Sale, Indebtedness (i) which is owed by the Company or any Restricted Subsidiary (the "Obligors") prior to such Asset Sale, (ii) which is assumed by the purchaser or any affiliate thereof in connection with such Asset Sale and (iii) with respect to which the Obligors receive written, unconditional releases from each creditor, no later than the closing date of such Asset Sale. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "S&P" means Standard & Poor's Ratings Service and its successors. "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits 108 110 maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or Moody's. "Term Loan" means the $45.9 million term loan with Wells Fargo Bank (Texas), National Association, individually and as agent for other lenders, entered into as of the Closing Date, together with any other loan or credit agreements entered into from time to time with one or more banks or other lenders, for the purpose of refinancing or refunding such Term Loan in an amount not to exceed $45.9 million (plus premiums, accrued interest, fees and expenses). "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transactions" means the sale of the Old Notes, the Merger and the Common Stock Offering. "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Company or any of its Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the Company or such Restricted Subsidiary (or both, if applicable) at the time of such designation, (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the "Limitation on Restricted Payments" covenant described below and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under the "Limitation on Indebtedness" and "Limitation on Restricted Payments" covenants described below. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of the Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. 109 111 "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law and up to 5% of the Capital Stock of such Subsidiary) by such Person or one or more Wholly Owned Subsidiaries of such Person. COVENANTS Limitation on Indebtedness (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the Notes, the Guarantees and Indebtedness existing on the Closing Date); provided that the Company and any Restricted Subsidiary may Incur Indebtedness if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Interest Coverage Ratio would be at least 2.25:1 in the case of an Incurrence during the period ending on the second anniversary of the Closing Date and 2.75:1 in the case of any subsequent Incurrence. Notwithstanding the foregoing, the Company and any Restricted Subsidiary (except as specified below) may Incur each and all of the following: (i) Indebtedness of the Company or any Guarantor outstanding at any time in an aggregate principal amount not to exceed the greater of (A) $100 million, less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant described below and (B) the Borrowing Base; (ii) Indebtedness owed (A) to the Company evidenced by an unsubordinated promissory note or (B) to any Restricted Subsidiary; provided that any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, then outstanding Indebtedness (other than Indebtedness Incurred under clause (i), (ii), (iv), (vi) or (viii) of this paragraph) and any refinancing thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that Indebtedness the proceeds of which are used to refinance or refund any Notes or Indebtedness that is pari passu with, or subordinated in right of payment to, the Notes shall only be permitted under this clause (iii) if (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes and (C) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness of the Company be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that such agreements (a) are designed solely to protect the Company or its Restricted Subsidiaries against fluctuations in foreign currency exchange rates, fuel rates, or interest rates and (b) do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates, fuel rates, or interest rates or by reason of fees, indemnities and compensation payable thereunder, and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in any case 110 112 Incurred in connection with the disposition of any business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by the Company or any Restricted Subsidiary in connection with such disposition; (v) Indebtedness of the Company, to the extent the net proceeds thereof are promptly (A) used to purchase Notes tendered in an Offer to Purchase made as a result of a Change in Control or (B) deposited to defease the Notes as described below under "Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary provided the Guarantee of such Indebtedness is permitted by and made in accordance with the "Issuance of Guarantees by New Restricted Subsidiaries" covenant described below; (vii) Indebtedness of the Company or any Guarantor Incurred to finance the cost (including the costs of installation) of acquiring aircraft, engines, spare engines, hush kits, spare parts or equipment attached thereto or any other aircraft-related asset used or useful in the business of the Company or any of its Restricted Subsidiaries on the date of such Incurrence (including acquisitions by way of a Capitalized Lease and any acquisitions of the Capital Stock of a Person that becomes a Restricted Subsidiary, to the extent of the fair market value of the aircraft, engines, equipment related thereto and such aircraft-related assets of such Person at the time of such Incurrence); provided that such Indebtedness is created solely for the purpose of financing the costs (including transaction costs and the costs of improvement or construction) of property or assets and is Incurred prior to, at the time of or within 12 months after, the later of the acquisition, the completion of construction or the commencement of full operation of such property or assets, and (b) the principal amount of such Indebtedness does not exceed 100% of such costs; (viii) the Term Loan; and (ix) Indebtedness not to exceed $50 million in aggregate principal amount at any one time outstanding. (b) Notwithstanding any other provision of this "Limitation on Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant shall not be deemed to be exceeded, with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies. (c) For purposes of determining any particular amount of Indebtedness under this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens, letters of credit or other obligations supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (2) any Liens granted pursuant to the equal and ratable provisions referred to in the "Limitation on Liens" covenant described below shall not be treated as Indebtedness. For purposes of determining compliance with this "Limitation on Indebtedness" covenant, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. Limitation on Restricted Payments The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries held by minority stockholders) held by Persons other than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) the Company or an Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary), (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to any Notes or (iv) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) above being collectively "Restricted Payments") if, at the time 111 113 of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing, (B) the Company could not Incur at least $1 of Indebtedness under the first paragraph of the "Limitation on Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments (the amount, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount of such loss) (determined by excluding income resulting from transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter immediately following the Closing Date and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant plus (2) the aggregate Net Cash Proceeds received by the Company after the Closing Date from the issuance and sale permitted by the Indenture of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Company, including an issuance or sale permitted by the Indenture of Indebtedness of the Company for cash subsequent to the Closing Date upon the conversion of such Indebtedness into Capital Stock (other than Disqualified Stock) of the Company, or from the issuance to a Person who is not a Subsidiary of the Company of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, exclusive of any Disqualified Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the Notes) plus (3) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds are included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed, in each case, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person or Unrestricted Subsidiary plus (4) $5 million. The foregoing provision shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to Notes including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the second paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the repurchase, redemption or other acquisition of Capital Stock of the Company or an Unrestricted Subsidiary (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (iv) the making of any principal payment or the repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness of the Company which is subordinated in right of payment to Notes in exchange for, or out of the proceeds of, a substantially concurrent offering of, shares of the Capital Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (v) payments or distributions, to dissenting stockholders pursuant to applicable law, pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of the Company; (vi) Investments acquired in exchange for or out of the proceeds of a substantially concurrent issuance of Capital Stock (other than Disqualified Stock) of the Company; (vii) the repurchase, redemption, retirement, defeasance or other acquisition for value of subordinated Indebtedness of the Company in the event of a change of control (to the extent required pursuant to the terms of such Indebtedness when Incurred), if prior thereto or contemporaneously therewith the Company has made or makes an Offer to Purchase Notes and has repurchased and accepted and paid for all Notes validly tendered and not withdrawn with respect thereto; or (viii) the repurchase, redemption or other acquisition of Capital Stock of the Company issued to employees of the Company or any Restricted 112 114 Subsidiary, for consideration not to exceed $1 million in any twelve month period and $3 million in aggregate; provided that, except in the case of clauses (i) and (iii), no Default or Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof and an Investment referred to in clause (vi) thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) and (iv), shall be included in calculating whether the conditions of clause (C) of the first paragraph of this "Limitation on Restricted Payments" covenant have been met with respect to any subsequent Restricted Payments. In the event the proceeds of an issuance of Capital Stock of the Company are used for the redemption, repurchase or other acquisition of Notes, or Indebtedness that is pari passu with Notes, then the Net Cash Proceeds of such issuance shall be included in clause (C) of the first paragraph of this "Limitation on Restricted Payments" covenant only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Indebtedness. Any Restricted Payments made other than in cash shall be valued at fair market value. The amount of any Investment "outstanding" at any time shall be deemed to be equal to the amount of such Investment on the date made, less the return of capital to the Company and its Restricted Subsidiaries with respect to such Investment (up to the amount of such Investment on the date made). Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries The Company will not, and will not permit any Restricted Subsidiary other than a Guarantor to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Company or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in any agreement, and any extensions, refinancing, renewals or replacements of any such agreement; provided that the encumbrances and restrictions in any such extensions, refinancing, renewals or replacements are no less favorable in any material respect to the Holders, when looked at in the aggregate, than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction applies only in the event of a payment default or a default with respect to a financial covenant contained in such Indebtedness or agreement, (B) the encumbrance or restriction is not materially more disadvantageous to the Holders of Notes than is customary in comparable financings (as determined by the 113 115 Company) and (C) the Company determines that any such encumbrance or restriction will not materially affect the Company's ability to make principal or interest payments on Notes. Nothing contained in this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2) restricting the sale or other disposition of property or assets of the Company or any of its Restricted Subsidiaries that secure Indebtedness of the Company or any of its Restricted Subsidiaries, including, without limitation, the Collateral in accordance with the terms hereof. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries The Company will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Company or a Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales to foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent required by applicable law; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under the "Limitation on Restricted Payments" covenant if made on the date of such issuance or sale or (iv) issuances or sales of Common Stock of a Restricted Subsidiary if the Net Cash Proceeds thereof are applied in accordance with clause (A) or (B) of the "Limitation on Asset Sales" covenant. Issuances of Guarantees by New Restricted Subsidiaries The Company will provide to the Trustee, on the date that any Person (other than an Excluded Restricted Subsidiary) becomes a Restricted Subsidiary, a supplemental indenture to the Indenture, executed by such new Restricted Subsidiary, providing for a full and unconditional guarantee on a senior basis by such new Restricted Subsidiary of the Company's obligations under any Notes and the Indentures to the same extent as that set forth in the Indenture; provided that, in the case of any new Restricted Subsidiary that becomes a Restricted Subsidiary through the acquisition of a majority of its voting Capital Stock by the Company or any other Restricted Subsidiary, such guarantee may be subordinated to the extent required by the obligations of such new Restricted Subsidiary existing on the date of such acquisition that were not incurred in contemplation of such acquisition. Limitation on Transactions with Shareholders and Affiliates The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any Affiliate of the Company or any Restricted Subsidiary, except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors or (B) for which the Company or a Restricted Subsidiary delivers to the Trustee a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between the Company and any of its Restricted Subsidiaries or solely between Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; (iv) any payments or other transactions pursuant to any tax-sharing agreement between the Company and any other Person with which the Company files a consolidated tax return or with which the Company is part of a consolidated group for tax purposes; (v) any Restricted Payments not prohibited by the "Limitation on Restricted Payments" covenant; (vi) the execution of, and transactions pursuant to, employment agreements entered into in the ordinary course of the Company's 114 116 or its Restricted Subsidiaries' business that are consistent with the Company's or such Restricted Subsidiaries' past practice; (vii) transactions pursuant to agreements existing on the Closing Date, as in effect on the Closing Date; or (viii) grants of stock options, restricted stock and other non-cash equity incentive compensation. Notwithstanding the foregoing, any transaction or series of related transactions covered by the first paragraph of this "Limitation on Transactions with Shareholders and Affiliates" covenant and not covered by clauses (ii) through (v) of this paragraph, (a) the aggregate amount of which exceeds $3 million in value, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) above and (b) the aggregate amount of which exceeds $10 million in value, must be determined to be fair in the manner provided for in clause (i)(B) above. Limitation on Liens Other than the rights of the Trustee under the Indenture, the Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its assets or properties of any character, including, without limitation, the Collateral, without making effective provision for all of the Notes and all other amounts due under the Indenture to be directly secured equally and ratably with (or, if the obligation or liability to be secured by such Lien is subordinated in right of payment to any Notes, prior to) the obligation or liability secured by such Lien. The foregoing limitation does not apply to (i) Liens granted on the Closing Date on assets whenever acquired, and substitutions and replacements for such Liens; (ii) Liens granted after the Closing Date on any assets or Capital Stock of the Company or its Restricted Subsidiaries created in favor of the Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Company or a Restricted Subsidiary to secure Indebtedness owing to the Company or such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under clause (iii) of the second paragraph of the "Limitation on Indebtedness" covenant; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (v) Liens on any property or assets of a Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant; (vi) Permitted Liens; (vii) Liens on assets having a fair market value not in excess (on the date any such Lien is incurred) of 20% of Adjusted Consolidated Net Tangible Assets; or (viii) Liens on Capital Stock of Subsidiaries in favor of the lenders incurred under clause (i) of the second paragraph of the "Limitation on Indebtedness" covenant. Limitation on Sale-Leaseback Transactions The Company will not, and will not permit any Restricted Subsidiary to, enter into any sale-leaseback transaction involving any of its assets or properties whether now owned or hereafter acquired, whereby the Company or a Restricted Subsidiary sells or transfers such assets or properties and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which the Company or such Restricted Subsidiary, as the case may be, intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred. The foregoing restriction does not apply to any sale-leaseback transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between the Company and any Restricted Subsidiary or solely between Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12 months after the sale or transfer of any assets or properties is completed, applies an amount not less than the net proceeds received from such sale in accordance with clause (A) or (B) of the first paragraph of the "Limitation on Asset Sales" covenant described below. Limitation on Asset Sales The Company will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Company or such Restricted Subsidiary (including the amount of 115 117 any Released Indebtedness) is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received (excluding the amount of any Released Indebtedness) consists of cash or Cash Equivalents or Temporary Cash Investments. In the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of the Company and its Subsidiaries has been filed with the Commission pursuant to the "Commission Reports and Reports to Holders" covenant), then the Company shall or shall cause the relevant Restricted Subsidiary to (i) within twelve months after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the Company, or any Restricted Subsidiary providing a Note Guarantee or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this "Limitation on Asset Sales" covenant totals at least 10% of Adjusted Consolidated Net Tangible Assets, the Company must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued interest (if any) to the Payment Date. If the aggregate principal amount of Notes tendered pursuant to an Offer to Purchase pursuant to this covenant is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. Upon completion of such Offer to Purchase, the amount of Excess Proceeds shall be reset at zero. In the event that more than 90% of the outstanding principal amount of any Notes are tendered to such Offer to Purchase, the balance of Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time thereafter, at a Redemption Price equal to the price specified in such Offer to Purchase plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of holders' age of record on the Relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date). Insurance The Company will, at its expense, maintain or cause to be maintained all-risk aircraft hull insurance covering the Aircraft, and, to the extent available at reasonable cost, all-risk property damage insurance covering the Engines and parts, including while temporarily removed from an Aircraft pending replacement, at all times in an amount not less than the sum of (i) the aggregate outstanding principal amount of any Notes and (ii) the scheduled amount of interest payable on Notes on the next interest payment date. During any period when an Aircraft is on the ground and not in operation, the Company may carry or cause to be carried, in lieu of the insurance required by the previous sentence, insurance otherwise conforming with the provisions of said sentence except that the scope of the risks covered and the type of insurance shall be the same as are from time to time applicable to aircraft owned or leased by the Company of the same type as such Aircraft similarly on the ground and not in operation, provided that in all cases full amounts shall not be less than that 116 118 described in the immediately preceding sentence. All policies covering loss of or damage to an Aircraft shall be made payable to the Trustee for any loss in excess of $5 million. With respect to the Collateral, the Company may maintain customary deductibles. With respect to all other aircraft owned by the Company or any Restricted Subsidiary, the Company shall insure such aircraft in a manner consistent with past practice. In addition, the Company will, at its expense, maintain or cause to be maintained comprehensive airline liability (including, without limitation, passenger, contractual, bodily injury and property damage liability) insurance (exclusive of manufacturer's product liability insurance) and cargo liability insurance with respect to each Aircraft (i) in amounts that are not less than the comprehensive airline liability insurance as is from time to time normally applicable to aircraft owned and operated by the Company of the same type as such Aircraft and (ii) of the types and covering the same risks as are from time to time applicable to aircraft owned or operated by the Company of the same type as such Aircraft and which is maintained in effect with insurers of recognized responsibility. During any period when an Aircraft is on the ground and not in operation, the Company may carry or cause to be carried, in lieu of the insurance required by the previous sentence, insurance otherwise conforming with the provisions of said sentence except that the amounts of coverage shall not be required to exceed the amounts of comprehensive airline liability insurance, and the scope of risks covered and type of insurance shall be the same, as are from time to time in effect with respect to aircraft owned or leased by the Company of the same type as such Aircraft similarly on the ground and not in operation. The Company may also self-insure a portion of these risks by means of deductible or premium adjustment provisions subject to the same limitations described above for insurance for risks of loss or damage to such Aircraft. The Company is also permitted a deductible per occurrence not in excess of the prevailing standard market deductible for similar aircraft. The Trustee will be named as additional insured parties under all liability insurance policies required with respect to the Aircraft. In addition, the insurance policies will provide that, in respect of the interest of the Trustee, the insurance shall not be invalidated by any action or inaction of the Company and shall insure the interest of the Trustee as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by the Company. If and to the extent that the Company or a lessee operates an Aircraft (A) on routes where it maintains war risk insurance in effect with respect to other similar equipment, or (B) on routes other than routes within or between the United States, Canada, Mexico, Bermuda and islands other than Cuba in the Caribbean Basin where the custom in the industry is to carry war risk insurance, the Company or such lessee shall maintain such insurance with respect to the Aircraft in an amount not less than the lesser of the aggregate unpaid principal of, together with accrued interest on, a ratable portion of any Notes (based on the initial appraised value of such Aircraft) and the amount of such insurance customarily carried by corporations engaged in the same or similar business similarly situated with the Company and with respect to similar equipment on similar routes; provided that, if the requirement to maintain war risk insurance arises solely by reason of clause (A) of this sentence, such insurance shall be maintained in an amount not less than that maintained by the Company or such lessee on other similar aircraft in its fleet. Unless an Aircraft is operated or used under a contract with the United States government pursuant to which the United States government assumes liability for damage to or loss of such Aircraft and to other property or persons, the Company may not operate or locate any Aircraft outside the United States and Canada (i) in any war zone or recognized or, in the Company's reasonable judgment, threatened area of hostilities, unless such Aircraft is fully covered by war risk insurance, or (ii) in any area excluded from the insurance coverage required under the Indenture. Insurance proceeds, if any, held from time to time by the Trustee with respect to any Aircraft, prior to the distribution thereof, will be invested and reinvested by the Trustee at the direction of the Company (except after the occurrence and during the continuance of a Collateral Access Event) in certain investments described in the Indenture. The net amount of any loss resulting from any such investments will be paid by the Company. EVENTS OF LOSS If an Event of Loss occurs with respect to an Aircraft, the Company shall either make an Offer to Purchase a pro rata portion of any Notes or the Company shall subject a replacement aircraft to the Lien on the Collateral pursuant to the Indenture. In the event the Company elects to replace an Aircraft, it must do so within 365 days of the Event of Loss with an aircraft having a value at least equal to, and in as good operating condition and repair and as airworthy as, the Aircraft subject to the Event of Loss, assuming such Aircraft was 117 119 in the condition and repair required by the Indenture immediately prior to the occurrence of the Event of Loss, all as determined by the chief financial officer of the Company in good faith. In the event the Company elects not to replace such Aircraft, the Company is required to make an Offer to Purchase, not later than 365 days after the occurrence of such Event of Loss, a pro rata amount (based on the ratio borne by the initial appraised value of such Aircraft to the initial aggregate appraised value) of the outstanding principal amount of any Notes at 100% of the principal amount thereof together with accrued and unpaid interest thereon. In the event of an Event of Loss with respect to the Aircraft for which no initial appraisal was conducted, the "initial appraised value" for the purpose of the prior sentence will be determined, in good faith, by the chief financial officer of the Company. Upon such payment, the Lien on the Collateral pursuant to the Indenture with respect to such Aircraft shall terminate. If an Event of Loss occurs with respect to an Engine alone, the Company shall replace such Engine with another engine suitable for installation and use on the Aircraft as determined by the chief financial officer of the Company in good faith. An "Event of Loss" with respect to the Aircraft or Engine means any of the following events: (i) payment of an insurance settlement with respect to such property on the basis of an actual or constructive total loss; (ii) destruction or damage beyond repair; provided that, if it was not clear whether damage constitutes damage beyond repair, an Event of Loss will be deemed to occur when it is determined by the Company that such damage is beyond repair; (iii) theft or disappearance for a period in excess of 120 days, unless the location of the Aircraft is known and the Company is diligently pursuing its recovery; (iv) the condemnation or taking of title to such Aircraft by the United States government or any foreign government or instrumentality or agency thereof; (v) the requisition or taking of use of such Aircraft or airframe by a foreign government or instrumentality or agency for a continuous period of more than six months; (vi) with respect to an Engine only, the requisition for use by any government or the divestiture of title resulting from the installation of such Engine on an airframe leased to the Company or purchased by the Company subject to a conditional sale agreement, in either case, under circumstances where the Trustee's security interest in such Engine is adversely affected thereby; or (vii) "grounding" of such Aircraft for a period of twelve consecutive months (or such shorter period determined by the Company) due to an action by a governmental body, unless prior to and after the expiration of such period, the Company is diligently carrying forward all necessary steps to permit normal use. REPURCHASE OF NOTES UPON A CHANGE OF CONTROL TRIGGERING EVENT Upon the occurrence of a Change of Control Triggering Event, the Company must commence, within 30 days of the occurrence of a Change of Control Triggering Event, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. There can be no assurance that the Company will have sufficient funds available at the time of any Change of Control to make any debt payment (including repurchases of Notes) required by the foregoing covenant (as well as may be contained in other securities of the Company which might be outstanding at the time). The above covenant requiring the Company to repurchase Notes will, unless consents are obtained, require the Company to repay all indebtedness then outstanding which by its terms would prohibit such Note repurchase, either prior to or concurrently with such Note repurchase. In the event that more than 90% of the outstanding principal amount of Notes are tendered pursuant to such Offer to Purchase, the balance of Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time thereafter, at a Redemption Price equal to the price specified in such Offer to Purchase plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the Relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date). 118 120 COMMISSION REPORTS AND REPORTS TO HOLDERS At all times, whether or not the Company is then required to file reports with the Commission, the Company shall file with the Commission all such reports and other information as it would be required to file with the Commission by Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were subject thereto. The Company shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. In addition, at all times prior to the effectiveness of a Registration Statement, upon the request of any Holder or any prospective purchaser of Notes designated by a Holder, the Company shall supply to such Holder or such prospective purchaser the information required under Rule 144A under the Securities Act. COLLATERAL ACCESS EVENTS Collateral Access Events under the Indenture include: (a) the failure by the Company to make an expected payment of principal or any payment of interest or premium when due, and the continuation of such failure unremedied for 15 days, (b) the failure to procure and maintain property and liability insurance in accordance with the provisions of the Indenture and the continuation of such failure, in the case of maintenance of such insurance, until the earlier of (i) 60 days after notice to the Company or the Trustee that such insurance is subject to lapse or cancellation or (ii) the date such lapse or cancellation is effective as to the Trustee, (c) operation of the Aircraft after receipt of notice that the insurance required by the Indenture has been canceled, (d) the failure by the Company to perform any covenants contained in the Indenture and the continuation of such failure for a period of 60 days after notice to the Company by the Trustee or by Holders of 25% of outstanding Notes under the Indenture, unless such failure is curable and the Company is diligently proceeding to correct such failure and shall in fact correct such failure within 180 days after delivery of such notice, (e) any representation or warranty made by the Company in the Indenture, if any, or in any document or certificate furnished to the Trustee or the Holders under the Indenture shall be incorrect in any material respect as of the date made and shall be material at the time of determination and shall not have been remedied within 60 days after notice has been given to the Company by the Trustee or Holders of 25% of any outstanding Notes under the Indenture, (f) operation of any Aircraft in a country that has not recognized or does not adhere to the Convention and (g) the occurrence of certain events of bankruptcy, reorganization or insolvency of the Company. EVENTS OF DEFAULT The following events will be defined as "Events of Default" in the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) default in the performance or breach of the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the assets of the Company or the failure to make or consummate an Offer to Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control" covenant; (d) the Company or any Guarantor defaults in the performance of or breaches any other covenant or agreement of the Company in the Indenture or under any Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of any Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Guarantor or Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders 119 121 against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Guarantor or Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company, any Guarantor or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; (h) the Company, any Guarantor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors; or (i) any Note Guarantee shall cease to be, or shall be asserted in writing by the Company or any Guarantor not to be, in full force and effect or enforceable in accordance with its terms. REMEDIES If an Event of Default (other than an Event of Default specified in clause (g) or (h) above that occurs with respect to the Company) or a Collateral Access Event occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of Notes, then outstanding, by written notice (a "Notice of Default or Collateral Access Event") to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued interest on such Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by the Company or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (g) or (h) above occurs with respect to the Company, the principal of, premium, if any, and accrued interest on any Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Indenture provides that upon receipt of a Notice of Default or Collateral Access Event, the Trustee shall exercise such remedies available to it under applicable law, including any remedies of a secured party under applicable law or otherwise provided in the Indenture. The Holders of at least a majority in principal amount of outstanding Notes by written notice to the Company and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. For information as to the waiver of defaults, see "-- Modification and Waiver." The Holders of at least a majority in aggregate principal amount of outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving 120 122 of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Notes. A Holder may not pursue any remedy with respect to the Indenture or Notes unless: (i) the Holder gives the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60 day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request. However, such limitations do not apply to the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in any Notes, which right shall not be impaired or affected without the consent of the Holder. The Indenture will require certain officers of the Company to certify, on or before a date not more than 90 days after the end of each fiscal year, that a review has been conducted of the activities of the Company and its Restricted Subsidiaries and the Company's and its Restricted Subsidiaries' performance under the Indenture and whether a Default, an Event of Default or a Collateral Assess Event has occurred and, if there has been a Default, an Event of Default or a Collateral Access Event, specifying each such default or event and the nature and status thereof. The Company and the Guarantors will also be obligated to notify the Trustee of any default or defaults in the performance of any covenants or agreements under the Indenture. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company will not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into the Company unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of the Company on all of the Notes and under the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis the Company, or any Person becoming the successor obligor of Notes, as the case may be, could Incur at least $1.00 of Indebtedness under the first paragraph of the "Limitation on Indebtedness" covenant; provided that this clause (iii) shall not apply to a consolidation, merger or sale of all (but not less than all) of the assets of the Company if all Liens and Indebtedness of the Company or any Person becoming the successor obligor of Notes, as the case may be, and its Restricted Subsidiaries outstanding immediately after such transaction would, if Incurred at such time, have been permitted to be Incurred (and all such Liens and Indebtedness, other than Liens or Indebtedness of the Company and its Restricted Subsidiaries outstanding immediately prior to the transaction, shall be deemed to have been Incurred) for all purposes of the Indenture; and (iv) the Company delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (iii), if applicable) and Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture complies with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with. DEFEASANCE Defeasance and Discharge. The Indenture will provide that the Company and the Guarantors will be deemed to have paid and will be discharged from any and all obligations in respect of any Notes on the 123rd day after the deposit referred to below, and the provisions of the Indenture will no longer be in effect with respect to any Notes (except for, among other matters, certain obligations to register the transfer or exchange of Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) the Company or the Guarantors has deposited with the 121 123 Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on any Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and Notes, (B) the Company has delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law after the Closing Date such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound and (D) if at such time Notes are listed on a national securities exchange, the Company has delivered to the Trustee an Opinion of Counsel to the effect that such Notes will not be delisted as a result of such deposit, defeasance and discharge, provided that if simultaneously with the deposit of the money and/or U.S. Government Obligations referred to in (A) above, the Company or any Guarantor has caused an irrevocable, transferrable, standby letter of credit to be issued by a bank with capital and surplus exceeding the principal amount of Notes then outstanding, expiring not earlier than 180 days from its issuance, in favor of the Trustee which permits the Trustee to draw an amount equal to the principal, premium, if any, and accrued interest on Notes through the expiry date of the letter of credit, then the Company and the Guarantors will be deemed to have paid and discharged any and all obligations in respect of Notes on the date of the deposit and issuance of the letter of credit. Defeasance of Certain Covenants and Certain Events of Default. The Indenture further will provide that the provisions of the Indenture will no longer be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets" and all the covenants described herein under "Covenants," clause (c) under "Events of Default" with respect to such clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of Default" with respect to such other covenants and clauses (e) and (f) under "Events of Default" shall be deemed not to be Events of Default upon, among other things, the deposit with the Trustee, in trust, of money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on any Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and Notes, the satisfaction of the provisions described in clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the Company to the Trustee of an Opinion of Counsel to the effect that, among other things, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain covenants and Events of Default and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. Defeasance and Certain Other Events of Default. In the event the Company exercises its option to omit compliance with certain covenants and provisions of the Indenture with respect to Notes as described in the immediately preceding paragraph and any Notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on such Notes at the time of their Stated 122 124 Maturity but may not be sufficient to pay amounts due on Notes at the time of the acceleration resulting from such Event of Default. However, the Company will remain liable for such payments. MODIFICATION AND WAIVER Modifications and amendments of the Indenture may be made by the Company, the Guarantors and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the outstanding Notes; provided, however, that no such modification or amendment may, without the consent of each Holder affected thereby, (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note, (ii) reduce the principal amount of, or premium, if any, or interest on, any Note, (iii) change the place or currency of payment of principal of, or premium, if any, or interest on, any Note, (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Note, (v) reduce the above stated percentage of outstanding Notes the consent of whose Holders is necessary to modify or amend the Indenture, (vi) waive (a) a default in the payment of principal of, premium, if any, or interest on the Notes or (b) a Collateral Access Event, (vii) reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults or (viii) modify the provisions of the Indenture relating to the Lien created thereunder or the distribution of principal, interest or premium or other monies received or realized by the Trustee from the Collateral. NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR EMPLOYEES The Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture, or in any Notes or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Company or of any successor Person thereof. Each Holder, by accepting Notes, waives and releases all such liability. CONCERNING THE TRUSTEE The Indenture provides that, except during the continuance of a Default, the Trustee will not be liable, except for the performance of such duties as are specifically set forth in such Indenture. If an Event of Default has occurred and is continuing, the Trustee will use the same degree of care and skill in its exercise of the rights and powers vested in it under the Indenture as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The Indenture and provisions of the Trust Indenture Act of 1939, as amended, incorporated by reference therein contain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided that if it acquires any conflicting interest, it must eliminate such conflict or resign. For purposes of meeting the legal requirements of any jurisdictions in which any part of the Collateral may at the time be located, the Trustee will have the power to appoint a co-trustee or separate trustee of all or any part of the Collateral. To the extent permitted by law, all rights, powers, duties and obligations conferred or imposed upon the Trustee will be conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee will be incompetent or unqualified to perform certain acts, singly upon such separate trustee or co-trustee who shall exercise and perform such rights, powers, duties and obligations solely at the direction of the Trustee. BOOK-ENTRY; DELIVERY AND FORM The certificates representing the Old Notes were issued, and certificates representing the New Notes will be issued, in fully registered form without interest coupons. 123 125 Old Notes sold in reliance on Rule 144A were represented by, and the New Notes initially will be, issued in two permanent global Notes in definitive, fully registered form without interest coupons (each a "Restricted Global Note") and the Old Notes were, and the New Notes will be, deposited with the Trustee, as custodian for DTC. Restricted Global Notes are registered in the name of a nominee of DTC. Each Restricted Global Note (and any Old Notes issued for exchange therefor) are subject to certain restrictions on transfer set forth therein as described under "Transfer Restrictions." Ownership of beneficial interests in a Restricted Global Note are limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in a Restricted Global Note are shown on, and the transfer of that ownership may be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Qualified institutional buyers may hold their interests in a Restricted Global Note directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. So long as DTC, or its nominee, is the registered owner or holder of a Restricted Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of Notes represented by such Restricted Global Note for all purposes under the Indenture and Notes. No beneficial owner of an interest in a Restricted Global Note will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture. Payments of the principal of, and interest on, a Restricted Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Company, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Restricted Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Restricted Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Restricted Global Note as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Restricted Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. The Company expects that DTC will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a Restricted Global Note is credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC will exchange the applicable Restricted Global Note for Certificated Notes, which it will distribute to its participants and which may be legended as set forth under the heading "Transfer Restrictions." The Company understands that: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear 124 126 through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC is expected to follow the foregoing procedures in order to facilitate transfers of interests in a Restricted Global Note among participants of DTC they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee will have any responsibility for the performance by DTC or its respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. If DTC is at any time unwilling or unable to continue as a depositary for the Restricted Global Notes and a successor depositary is not appointed by the Company within 90 days, the Company will issue Certificated Notes, which may bear the legend referred to under "Transfer Restrictions," in exchange for the Restricted Global Notes. Holders of an interest in a Restricted Global Note may receive Certificated Notes, which may bear the legend referred to under "Transfer Restrictions," in accordance with the DTC's rules and procedures in addition to those provided for under the Indenture. DESCRIPTION OF OTHER INDEBTEDNESS The Term Loan was incurred to refinance the indebtedness incurred in September 1997 to finance the acquisition of 16 Boeing 727s from the Kalitta Companies. The Term Loan matures in November 2002 and is 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 accrues at LIBOR plus 3% or a Base Rate plus 1.5%, subject to reduction. The Base Rate is WFB's Prime Rate or the Federal Funds Rate plus .5%. The Term Loan is secured by accounts receivable, all spare parts (including rotables), inventory, intangibles and contract rights, cash, the 16 Boeing 727s and related engines acquired from the Kalitta Companies prior to the Merger, the stock of each of the Company's subsidiaries and the Company's 60% interest in AIC. In addition, the New Credit Facility and Term Loan are guaranteed by each of the Company's subsidiaries (other than AIC). As of January 31, 1998, there was an outstanding balance of approximately $45.9 million under the Term Loan. The Company also has a New Credit Facility with WFB, individually and as agent for various lenders, which provides the Company with up to $100 million in revolving loans (subject to a current borrowing base limitation of approximately $28.7 million) and is secured by the same collateral as the Term Loan. The facility bears interest at LIBOR plus 2.75% or a Base Rate plus 1.25%, 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 are subject to a borrowing base limitation based on eligible inventory and accounts receivable and mature in November 2002. The borrowing base limitations will be adjusted in March 1998 and each month thereafter until maturity. As of January 31, 1998, there was no outstanding balance under the New Credit Facility. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS In the opinion of Haynes and Boone, LLP, special counsel to the Company, the following discussion describes the material federal income tax consequences expected to result to holders whose Old Notes are exchanged for New Notes in the Exchange Offer. Such opinion is based upon current provisions of the Internal Revenue Code of 1986, as amended, applicable Treasury regulations, judicial authority and administrative rulings and practice. There can be no assurance that the Internal Revenue Service (the "Service") will not take a contrary view, and no ruling from the Service has been or will be sought with respect to the Exchange Offer. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conclusions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to holders. Certain holders of Old Notes (including insurance companies, tax exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. EACH HOLDER OF OLD NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING 125 127 OLD NOTES FOR NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS. The exchange of Old Notes for New Notes will be treated as a "non-event" for federal income tax purposes because the New Notes will not be considered to differ materially in kind or extent from the Old Notes. As a result, no material federal income tax consequences will result to holders exchanging Old Notes for New Notes. PLAN OF DISTRIBUTION Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, the Company believes that, with the exceptions set forth below, New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any person receiving such New Notes, whether or not such person is the holder (other than any such holder or such other person which is an "affiliate" of the Company or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act; provided that the New Notes are acquired in the ordinary course of business of the holder or such other person and neither the holder nor such other person is engaging or intends to engage in a distribution of the New Notes or has an arrangement or understanding with any person to participate in the distribution of such New Notes. The Company, however, has not sought, and does not intend to seek, its own no-action letter and there can be no assurance that the Commission's staff would make a similar determination with respect to the Exchange Offer. Any holder who tenders in the Exchange Offer for the purpose of participating in a distribution of the New Notes cannot rely on this interpretation by the Commission's staff and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Each broker-dealer that holds Old Notes that were acquired by that broker-dealer as a result of market-making activities or other trading activities may exchange such Old Notes pursuant to the Exchange Offer; provided however, such broker-dealer may be deemed to be an "underwriter" within the meaning of the Securities Act and must, therefore, deliver a prospectus meeting the requirements of the Securities Act in connection with its initial resale of each New Note received in the Exchange Offer. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes in such circumstances. Neither the Company nor the Guarantors will receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes, or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices, or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such New Notes. Because any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act, any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. By acknowledging that it will deliver, and by delivering, a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal for such period of time as such persons must comply with such requirements in order to resell the New Notes. The Company and the Guarantors have agreed to pay certain expenses relating to their performance under the Registration Rights Agreement, including the costs of providing this Prospectus, and to indemnify the holders of Notes against certain liabilities, including liabilities under the Securities Act. 126 128 LEGAL MATTERS The validity of the New Notes offered hereby, U.S. federal tax effects relating to the Exchange Offer and certain other legal matters will be passed upon for the Company by Haynes and Boone, LLP, Dallas, Texas. 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 and incorporated by reference in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and incorporated herein by reference. Such financial statements are, and audited financial statements to be included in subsequently filed documents will be, incorporated herein in reliance upon the reports of Ernst & Young LLP pertaining to such financial statements (to the extent covered by consents filed with the Securities and Exchange Commission) 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 and the related financial statement schedule, included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere and incorporated herein by reference (which reports express an unqualified opinion and include 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). The statements of certain assets sold of AIA for the years ended December 31, 1996 and 1995, and the related statements of revenues and direct expenses for the years ended December 31, 1996 and 1995 incorporated by reference from Kitty Hawk, Inc.'s Amendment No. 1 to Form 8-K dated November 6, 1997 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report incorporated herein by reference. Such reports have been so included and so incorporated in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The Appraised Market Value of the Collateral represented by Boeing 747s and Boeing 727s included herein is based upon appraisals from Pro-Tech in reliance upon its report and upon the authority of such firm as experts in valuing Boeing 747s and Boeing 727s. The Appraised Market Value of the Collateral represented by Lockheed L-1011s included herein is based upon appraisals from GRA in reliance upon its report and upon the authority of such firm as experts in valuing Lockheed L-1011s. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 under the Securities Act with respect to the New Notes offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. For further information with respect to the Company and the New Notes offered hereby, reference is made to the Registration Statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof. 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 Registration Statement (and the exhibits and schedules thereto) as well as 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 127 129 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 the appraisal reports referenced under "Description of Notes," may be obtained from the Company at 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas 75261, (972) 456-2200. The Company's Common Stock is quoted on the Nasdaq National Market and the Registration Statement (and the exhibits and schedules thereto) as well as 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. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Pursuant to the Indenture, the Company has agreed that whether or not the Company is then required to file reports with the Commission, the Company will file all such reports and other information that the Company would be required to file if it were subject to Section 13 or 15 of the Exchange Act. In addition, the Company shall supply the Trustee and each holder of Notes or shall supply to the Trustee for forwarding to each such holder of Notes, without cost to such holder of Notes, copies of such reports and other information. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which have been filed by the Company with the Commission pursuant to the Exchange Act, are hereby incorporated by reference in this Prospectus: (i) the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996; (ii) the Company's Transition Report on Form 10-K for the transition period from September 1, 1996 to December 31, 1996; (iii) the Company's Amendment to its Transition Report on Form 10-K/A filed with the Commission on April 7, 1997; (iv) the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1996; (v) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997; (vi) the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997; (vii) the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997; (viii) the Company's Form 8-K dated December 4, 1996; (ix) the Company's Form 8-K dated September 17, 1997; (x) the Company's Amendment No. 1 to its Form 8-K dated November 6, 1997 and (xi) the Company's Form 8-K dated November 19, 1997. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus shall be deemed to be incorporated by reference herein. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed superseded or modified for purposes of this Prospectus to the extent that a statement contained herein (or in any other subsequently filed document which also is incorporated by reference herein) modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, on the written or oral request of any such person, a copy of any and all of the documents incorporated by reference herein (other than exhibits to such documents which are not specifically incorporated by reference in such documents). Requests for such copies should be directed to the Company at 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas 75261, (972) 456-2200. 128 130 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 September 30, 1997 (unaudited).......................................... F-17 Condensed Consolidated Statements of Operations for the nine month periods ended September 30, 1996 and 1997 (unaudited)............................................... F-18 Condensed Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1997 (unaudited)............................................... F-19 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 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-24 Combined Balance Sheets at December 31, 1995 and 1996 and September 30, 1997 (unaudited)............................ F-25 Combined Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the nine month periods ended September 30, 1996 and 1997 (unaudited)..... F-26 Combined Statements of Stockholder's Equity for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited)...................... F-27 Combined Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine month periods ended September 30, 1996 and 1997 (unaudited)..... F-28 Notes to Combined Financial Statements...................... F-30
F-1 131 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-2 132 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-3 133 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-4 134 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-5 135 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-6 136 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-7 137 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-8 138 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-9 139 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, AUGUST 31, DECEMBER 31, 1995 1996 1996 ----------- ----------- ------------ (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-10 140 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 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-11 141 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-12 142 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-13 143 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-14 144 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-15 145 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)
YEAR ENDED DECEMBER 31, 1996 ----------------- Revenues: Air freight carrier....................................... $ 55,504 Air logistics............................................. 77,168 -------- Total revenues.................................... 132,672 -------- Costs of revenues: Air freight carrier....................................... 40,860 Air logistics............................................. 67,938 -------- Total costs of revenues........................... 108,798 -------- Gross profit................................................ 23,874 General and administrative expenses......................... 8,943 Non-qualified employee profit sharing expense............... 1,243 Stock option grants to executives........................... 4,231 -------- Operating income............................................ 9,457 Other income (expense): Interest expense.......................................... (2,062) Loss on asset disposal.................................... (589) Other, net................................................ 880 -------- Income (loss) before income taxes........................... 7,686 Income taxes (benefit)...................................... 3,038 -------- Net income (loss)........................................... $ 4,648 ======== Net income (loss) per share................................. $ 0.55 ======== Net income, adjusted for non-recurring items................ $ 8,278 ======== Net income per share, adjusted for non-recurring items...... $ 0.98 ======== Weighted average common and common equivalent shares outstanding............................................... 8,477 ========
F-16 146 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS
SEPTEMBER 30, 1997 ------------- Current assets Cash and cash equivalents................................. $ 2,403,480 Trade accounts receivable................................. 21,644,727 Deferred income taxes..................................... 107,564 Inventory and aircraft supplies........................... 5,587,548 Prepaid expenses and other assets......................... 2,825,072 Deposits on aircraft...................................... 3,875,316 ------------ Total current assets.............................. 36,443,707 ------------ Property and equipment Aircraft.................................................. 144,649,024 Aircraft work-in-progress................................. 8,178,161 Machinery and equipment................................... 5,122,368 Leasehold improvements.................................... 3,053,624 Building.................................................. 1,770,000 Furniture and fixtures.................................... 173,899 Transportation equipment.................................. 417,247 ------------ 163,364,323 Less: accumulated depreciation and amortization........... (23,007,382) ------------ Net property and equipment........................ 140,356,941 ------------ Total assets...................................... $176,800,648 ============ Current liabilities Accounts payable.......................................... $ 8,522,412 Accrued expenses.......................................... 13,226,661 Income taxes payable...................................... 2,892,856 Accrued maintenance reserves.............................. 3,326,009 Current maturities of long-term debt...................... 8,373,261 ------------ Total current liabilities......................... 36,341,199 Long-term debt.............................................. 72,673,469 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...................................... 33,260,862 Less common stock in treasury, -- 217,710 shares at September 30, 1997 and December 31, 1996.............. (2,076,302) ------------ Total stockholders' equity........................ 65,241,080 ------------ Total liabilities and stockholders' equity........ $176,800,648 ============
See accompanying notes. F-17 147 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1996 1997 ------------ ----------- Revenues: Air freight carrier....................................... $ 39,615,267 $55,789,112 Air logistics............................................. 43,144,127 45,878,185 ------------ ----------- Total revenues.................................... 82,759,394 101,667,297 ------------ ----------- Costs of revenues: Air freight carrier....................................... 29,688,049 38,075,855 Air logistics............................................. 39,139,436 42,037,740 ------------ ----------- Total costs of revenues........................... 68,827,485 80,113,595 ------------ ----------- Gross profit................................................ 13,931,909 21,553,702 General and administrative expenses......................... 6,877,198 7,550,059 Non-qualified employee profit sharing expense............... 446,928 1,161,261 Stock option grants to executives........................... 4,230,954 -- ------------ ----------- Operating income............................................ 2,376,829 12,842,382 Other income (expense): Interest expense.......................................... (1,530,003) (1,809,076) Loss on asset disposal.................................... (589,049) -- Other, net................................................ 262,584 579,300 ------------ ----------- Income before income taxes.................................. 520,361 11,612,606 Income taxes................................................ 268,912 4,645,042 ------------ ----------- Net income.................................................. $ 251,449 $ 6,967,564 ============ =========== Net income per share........................................ $ 0.03 $ 0.67 ============ =========== Weighted average common and common equivalent shares outstanding............................................... 7,891,431 10,451,807 ============ ===========
See accompanying notes. F-18 148 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............. -- -- -- 6,967,564 -- 6,967,564 ---------- -------- ----------- ----------- ----------- ----------- Balance at September 30, 1997............. 10,669,517 $106,695 $33,949,825 $33,260,862 $(2,076,302) $65,241,080 ========== ======== =========== =========== =========== ===========
See accompanying notes. F-19 149 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1996 1997 -------------- -------------- Operating activities: Net income................................................ $ 251,449 $ 6,967,564 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 4,301,437 7,617,367 Deferred income taxes..................................... 998,963 -- Stock option grants to executives......................... 4,230,954 -- Changes in operating assets and liabilities: Trade accounts receivable................................. 26,916,983 16,183,291 Inventory and aircraft supplies........................... (2,074,509) (2,797,566) Prepaid expenses and other................................ 3,761,048 (1,681,083) Deposits on aircraft...................................... -- 1,563,312 Accounts payable and accrued expenses..................... (16,862,704) (10,772,828) Accrued maintenance reserves.............................. (2,017,806) 366,119 Income taxes payable...................................... 125,059 952,852 ------------ ------------ Net cash provided by operating activities................... 19,630,874 18,399,028 Investing activities: Capital expenditures........................................ (31,367,208) (99,575,465) ------------ ------------ Financing activities: Proceeds from issuance of long-term debt.................... 17,392,032 59,104,130 Repayments of long-term debt................................ (3,038,212) (2,825,740) Additional costs relating to initial public offering........ -- (18,875) Tax benefit of stock option grants to executives............ 404,570 -- Acquisition of treasury shares.............................. (2,076,302) -- Proceeds from issuance of common stock...................... 4,430 -- ------------ ------------ Net cash provided by financing activities................... 12,686,518 56,259,515 ------------ ------------ Net increase (decrease) in cash and cash equivalents........ 950,184 (24,916,922) Cash and cash equivalents at beginning of period............ 3,355,293 27,320,402 ------------ ------------ Cash and cash equivalents at end of period.................. $ 4,305,477 $ 2,403,480 ============ ============
See accompanying notes. F-20 150 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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 1996 have been included in the calculation of weighted average common and common equivalent shares through their date of exercise for the nine month period ended September 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. INTEREST RATE RISK MANAGEMENT The Company has entered into an interest rate swap contract to effectively convert a portion of a floating rate obligation to a fixed rate obligation. This agreement involves the exchange of amounts based on a fixed interest rate to amounts based on floating interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the obligation. The related amount payable to or receivable from counterparties is included in current liabilities or assets. The fair value of the swap agreement is not recognized in the financial statements. Gains and losses on a termination of the interest rate swap agreement, should they occur, will be deferred as an adjustment to the carrying amount of the outstanding obligation and amortized as an adjustment to interest expense related to the obligation over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment. 4. 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 F-21 151 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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. 5. 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. 6. ACQUISITION OF AIRCRAFT AND MERGER 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 3,000,000 share common stock offering (of which Kitty Hawk will sell 2,200,000 shares, not including up to 450,000 additional shares for which Kitty Hawk has granted the underwriters a 30 day option to purchase) and F-22 152 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 substantially all of 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 providing for such loan. The loan bears interest at a Eurodollar rate plus 1.5% to 2% based upon a debt-to-cash flow ratio of the Company plus an additional 1% beginning in 1999 and 1.5% beginning in 2000, with maturity on June 30, 2001. F-23 153 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 Service, 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 12 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 12. 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-24 154 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES COMBINED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997 ASSETS
DECEMBER 31, --------------------------- SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- (UNAUDITED) CURRENT ASSETS: Cash...................................................... $ 1,091,960 $ 2,324,353 $ 3,282,142 Restricted cash........................................... 795,030 14,036,924 Accounts receivable, net (Notes 1 and 3).................. 88,273,823 67,081,125 64,908,684 Accounts receivable -- related parties.................... 4,390,261 2,960,778 1,254,798 Expendable parts and supplies............................. 12,330,854 20,742,140 24,624,354 Aircraft held for resale (Note 4)......................... 6,593,069 6,117,266 5,346,453 Deposits, prepaid expenses and other assets............... 4,914,056 8,018,273 7,326,008 Prepaid fuel.............................................. 4,080,373 5,828,047 6,999,565 Notes receivable, current................................. 186,085 186,085 100,804 ------------ ------------ ------------ Total current assets.................................... 121,860,481 114,053,097 127,879,732 PROPERTY AND EQUIPMENT: Land and improvements..................................... 228,678 228,678 228,678 Building and leasehold improvements (Note 4).............. 9,347,825 12,752,356 14,363,228 Rotable parts (Note 3).................................... 14,560,287 16,779,386 17,661,392 Equipment (Note 3)........................................ 19,685,442 23,677,640 26,317,512 Aircraft (Note 3)......................................... 264,266,383 320,276,140 303,778,995 ------------ ------------ ------------ Total............................................... 308,088,615 373,714,200 362,349,805 Less accumulated depreciation............................. 81,246,881 109,707,512 113,883,560 ------------ ------------ ------------ Net................................................. 226,841,734 264,006,688 248,466,245 Aircraft in modification (Note 3)......................... 25,557,078 988,541 21,925,586 Construction in progress.................................. 3,152,560 923,150 1,427,361 ------------ ------------ ------------ Total property and equipment, net................... 255,551,372 265,918,379 271,819,192 NOTES RECEIVABLE, LESS CURRENT PORTION...................... 184,968 131,805 -- RECEIVABLE FROM AFFILIATED COMPANY.......................... -- -- 777,284 ------------ ------------ ------------ TOTAL ASSETS (Notes 3 and 4)................................ $377,596,821 $380,103,281 $400,476,208 ============ ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable: Trade (Note 1).......................................... $ 62,125,228 $ 46,070,230 $ 49,898,805 Related parties......................................... 4,421,143 77,450 121 Accrued liabilities....................................... 20,342,988 24,172,883 22,969,507 Deferred gain on sale of aircraft (Note 12)............... -- -- 30,255,291 Deferred revenue.......................................... -- 795,030 3,036,924 Notes payable to bank, reclassified as current (Note 3)... -- 47,105,413 55,434,351 Long term debt, reclassified as current (Note 4).......... -- 155,910,954 104,623,812 Notes payable to bank (Note 3)............................ 12,226,496 1,024,035 2,994,849 Current maturities of long-term debt (Note 4)............. 42,444,612 34,310,440 91,739,507 ------------ ------------ ------------ Total current liabilities........................... 141,560,467 309,466,435 360,953,167 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................................... 307,360,952 309,466,435 361,253,629 COMMITMENTS AND CONTINGENCIES (Notes 6 and 9) MINORITY INTEREST IN AMERICAN INTERNATIONAL CARGO........... 3,944,070 3,551,735 3,572,437 STOCKHOLDER'S 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 17,757,985 ------------ ------------ ------------ Total stockholder's equity.......................... 66,291,799 67,085,111 35,650,142 ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $377,596,821 $380,103,281 $400,476,208 ============ ============ ============
See notes to combined financial statements. F-25 155 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
DECEMBER 31, SEPTEMBER 30, ------------------------------------------ --------------------------- 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues (Note 9): Air transportation services..... $298,080,850 $359,404,248 $388,192,479 $275,211,481 $302,344,768 Maintenance and other........... 7,448,982 14,278,793 36,348,245 25,801,347 23,299,368 ------------ ------------ ------------ ------------ ------------ Total revenues........... 305,529,832 373,683,041 424,540,724 301,012,828 325,644,136 Operating Costs and Expenses: Flight.......................... 115,613,706 168,774,779 150,255,587 107,006,096 126,207,639 Maintenance..................... 64,722,079 103,388,710 115,081,955 81,561,290 107,432,257 Fuel............................ 57,361,888 54,538,321 82,717,539 58,433,493 55,094,783 Depreciation.................... 13,809,281 20,971,405 32,091,119 23,958,549 26,467,600 Selling, general and administrative................ 13,272,361 21,676,079 21,889,355 15,353,022 17,847,884 Provision for doubtful accounts...................... 2,231,485 1,862,283 1,010,663 2,386,059 1,633,958 ------------ ------------ ------------ ------------ ------------ Total cost and expenses............... 267,010,800 371,211,577 403,046,218 288,698,509 334,684,121 ------------ ------------ ------------ ------------ ------------ Income (Loss) from Operations..... 38,519,032 2,471,464 21,494,506 12,314,319 (9,039,985) Other Income (Expense): Interest expense, net........... (8,007,389) (14,748,611) (21,632,389) (15,755,315) (19,740,204) Gain on disposition of property and equipment, net............ 3,389,881 11,707,673 130,934 425,742 624,395 Gain on contract settlement..... -- -- 1,123,200 1,123,200 -- Gain on insurance reimbursement................. -- 8,147,878 -- -- 542,302 Merger related costs............ -- -- -- -- (1,269,100) Net, miscellaneous.............. (550,000) (110) 13,116 13,214 -- ------------ ------------ ------------ ------------ ------------ Total other (expense) income................. (5,167,508) 5,106,830 (20,365,139) (14,193,159) (19,842,607) ------------ ------------ ------------ ------------ ------------ Income (Loss) Before Minority Interest in American International Cargo............. 33,351,524 7,578,294 1,129,367 (1,878,840) (28,882,592) Minority Interest in American International Cargo............. (2,758,372) (3,092,513) (1,146,019) (907,730) (1,858,958) ------------ ------------ ------------ ------------ ------------ Net Income (Loss)................. $ 30,593,152 $ 4,485,781 $ (16,652) $ (2,786,570) $(30,741,550) ============ ============ ============ ============ ============ Unaudited Pro forma Data (Note 1): Income (loss) before provision for income taxes.............. $ 30,593,152 $ 4,485,781 $ (16,652) $ (2,786,570) $(30,741,550) Provision for income taxes...... 11,625,398 1,704,597 -- -- -- ------------ ------------ ------------ ------------ ------------ Pro forma net income (loss)....... $ 18,967,754 $ 2,781,184 $ (16,652) $ (2,786,570) $(30,741,550) ============ ============ ============ ============ ============
See notes to combined financial statements. F-26 156 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 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, September 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)................ -- (693,419) Net loss (unaudited)......... -- (30,741,550) ----------- ------------ Balance, September 30, 1997 (Unaudited).................. $17,839,157 $ 17,757,985 =========== ============
See notes to combined financial statements. F-27 157 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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
DECEMBER 31, SEPTEMBER 30, ------------------------------------------ --------------------------- 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss).............................. $ 30,593,152 $ 4,485,781 $ (16,652) $ (2,786,570) $(30,741,550) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation................................. 13,809,281 20,971,405 32,091,119 23,958,549 26,467,600 Provision for doubtful accounts.............. 2,231,485 1,862,283 1,010,663 2,386,059 1,633,958 Gain (loss) on disposition of property and equipment.................................. (3,389,881) (11,707,673) (130,934) (425,742) (624,395) Minority interest in American International Cargo...................................... 2,758,372 3,093,262 1,143,637 907,730 1,858,958 Changes in assets and liabilities which provided (used) cash: Restricted cash............................ -- -- -- -- (11,000,000) Accounts receivable........................ (20,725,807) (17,819,263) 21,611,518 33,008,115 2,819,463 Expendable parts and supplies.............. (4,454,286) (3,470,152) (7,034,678) (3,987,431) (4,118,881) Deposits, prepaid expenses and other assets................................... (1,845,978) (3,740,088) (3,972,997) (3,327,352) (1,466,394) Aircraft held for resale................... (6,975,000) 21,754,521 (1,702,354) (440,061) (1,261,293) Accounts payable........................... 17,099,346 26,128,641 (20,398,691) (21,757,622) 4,543,332 Accrued liabilities........................ 4,742,342 7,956,796 3,829,895 140,188 (1,203,376) ------------ ------------ ------------ ------------ ------------ Total adjustments........................ 3,249,874 45,029,732 26,447,178 30,462,433 17,648,972 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities............................. 33,843,026 49,515,513 26,430,526 27,675,863 (13,092,578) Cash flows from investing activities: Purchase of property and equipment............. (77,831,613) (153,719,347) (53,413,262) (43,597,858) (54,508,576) Proceeds from disposition of property and equipment.................................... 5,250,000 33,603,329 11,008,725 10,145,798 55,127,500 Collections on note receivable................. 139,620 119,324 53,163 53,163 -- Issuance of notes receivable to affiliated company...................................... -- -- -- -- (777,284) Disposal of Grand Holdings, Inc., net of cash......................................... -- (948,818) -- -- -- Acquisition of Grand-Holdings, Inc. net of cash acquired..................................... (97,077) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities............................. (72,539,070) (120,945,512) (42,351,374) (33,398,897) (158,360) Cash flows from financing activities: Repayments of notes and long-term debt......... (21,997,617) (36,899,953) (52,117,964) (53,307,078) (63,198,575) Borrowings under notes and long-term debt agreements................................... 74,466,207 119,952,548 70,097,213 61,295,530 79,640,259 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 3,759,903 -- Distributions to American International Cargo minority stockholder......................... (1,367,328) (2,106,000) (1,535,972) (1,540,000) (1,840,000) Distributions to stockholder................... (8,830,125) (13,730,711) (2,966,524) (2,580,655) (693,419) ------------ ------------ ------------ ------------ ------------ Net cash provided by financing activities............................. 42,271,137 67,785,986 17,153,241 7,968,162 14,208,727 ------------ ------------ ------------ ------------ ------------ Increase (decrease) in cash...................... 3,575,093 (3,644,013) 1,232,393 2,245,128 957,789 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 $ 3,337,088 $ 3,282,142 ============ ============ ============ ============ ============ Supplemental disclosure of cash flow information -- Cash paid during the period for interest....................................... $ 7,677,452 $ 16,334,750 $ 21,806,688 $ 13,688,820 $ 18,916,308 ============ ============ ============ ============ ============
F-28 158 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 $2,241,894 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. In 1997 (unaudited), the Companies transferred assets with a net book value of $635,774 from property and equipment to assets held for resale. In 1997 (unaudited), the Companies netted $217,086 due under notes receivable with outstanding liabilities. In 1997 (unaudited), the Companies deferred a gain of $30,255,291 on the sale of 16 Boeing 727 aircraft to Kitty Hawk. See notes to combined financial statements. F-29 159 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 Statements -- The combined financial statements as of and for the nine months ended September 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. In addition, at September 30, 1997, $11 million was held in escrow for the modification of a Boeing 747 aircraft (unaudited). 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 $3,381,000 for the nine months ended September 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-30 160 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 $1,016,667 for the nine months ended September 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 $5,430,166 at September 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 nine months ended September 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 nine months ended September 30, 1996 was $668,000, $1,692,000, $562,000 and $533,000, respectively. No interest cost was capitalized for the nine months ended September 30, 1997 (unaudited). F-31 161 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, ------------------------- SEPTEMBER 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 $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 2,994,849 ----------- ----------- ----------- Total....................................... $12,226,496 $ 1,024,035 $ 2,994,849 =========== =========== ===========
F-32 162 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------------- SEPTEMBER 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 September 30, 1997 (unaudited), the credit available was $4,521,537 and $1,410,137, 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 $55,434,351 =========== =========== =========== 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% 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 September 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 to 1 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-33 163 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, SEPTEMBER 30, --------------------------- ------------- 1995 1996 1997 ------------ ------------ ------------- (UNAUDITED) Various notes payable with interest rates ranging from 7.49% to 12%. 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 $231,792,981. 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 $196,363,319 Less: Current maturities of long-term debt............. 37,608,059 31,568,769 88,072,920 Outstanding debt on aircraft held for resale..... 4,836,553 2,741,671 3,666,587 ------------ ------------ ------------ Total.................................... 42,444,612 34,310,440 91,739,507 ------------ ------------ ------------ Net long-term debt, reclassified as current........ -- 155,910,954 104,623,812 ------------ ------------ ------------ 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 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 September 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-34 164 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, SEPTEMBER 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, $7,576,000 and $6,094,000, for the years ended December 31, 1994, 1995 and 1996 and for the nine months ended September 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-35 165 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 $91,771, for the years ended December 31, 1994, 1995 and 1996 and for the nine months ended September 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, SEPTEMBER 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 5,043,643 916,849 Cost of revenues.......... 2,366,288 6,097,447 28,727 28,646 121,511 Sale of DC8............... -- 5,200,000 -- -- -- Transactions and balances with an affiliated company: Receivable from affiliated company................... -- -- -- -- 777,284 Rental expense............ -- -- -- -- 266,342 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 1,206,529 898,209 315,934 Promotional expenses...... 2,602,038 3,643,611 3,096,724 2,128,292 2,344,562
F-36 166 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 $3,155,512, at December 31, 1995 and 1996 and September 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-37 167 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%, 15% and 7% of combined revenues for the years ended December 31, 1994, 1995, 1996 and for the nine months ended September 30, 1996 and 1997 (unaudited), respectively. Accounts receivable from these customers were approximately $45,118,000, $12,024,000 and $3,997,000 at December 31, 1995, 1996 and September 30, 1997 (unaudited), respectively. 11. SUPPLEMENTAL GUARANTOR INFORMATION The Companies (with the exception of American International Cargo) and the subsidiaries of Kitty Hawk, Inc. (the "Guarantors"), jointly and severally, will guarantee on a senior basis, the full and prompt performance of the obligations of Kitty Hawk, Inc. under the $340,000,000 aggregate principal amount of senior secured notes of Kitty Hawk, Inc. being registered with the Securities and Exchange Commission (See Note 12). The note guarantees will rank senior in right of payment to any subordinated indebtedness and, except with respect to collateral, pari passu with all existing and future unsubordinated indebtedness of the Guarantors. F-38 168 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING BALANCE SHEETS SEPTEMBER 30, 1997 ASSETS
THE COMPANIES AIC EXCLUDING AIC (NON- (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL ------------- ----------- ------------ ------------ Cash............................... $ 1,591,823 $ 1,690,319 $ -- $ 3,282,142 Restricted cash.................... 14,036,924 -- -- 14,036,924 Accounts receivable, net........... 66,940,231 10,340,885 (11,117,634) 66,163,482 Intercompany receivables........... (9,409,387) 9,909,330 (499,943) -- Expendable parts and supplies...... 24,624,354 -- -- 24,624,354 Other current assets............... 19,717,564 55,266 -- 19,772,830 ------------ ----------- ------------ ------------ Total current assets..... 117,501,509 21,995,800 (11,617,577) 127,879,732 Property & equipment, net.......... 271,252,108 567,084 -- 271,819,192 Investment in AIC.................. 2,654,987 -- (2,654,987) -- Other assets....................... 777,284 -- -- 777,284 ------------ ----------- ------------ ------------ Total Assets............. $392,185,888 $22,562,884 $(14,272,564) $400,476,208 ============ =========== ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable & accrued misc. expenses......................... $ 51,272,195 $ 9,598,116 $(10,971,385) $ 49,898,926 Intercompany payables.............. (20,229) 267,403 (247,174) -- Other current liabilities.......... 25,722,949 682,500 (399,018) 26,006,431 Deferred gain on sale.............. 30,255,291 -- -- 30,255,291 Notes payable and long-term debt, reclassified as current.......... 160,058,163 -- -- 160,058,163 Notes payable and long-term debt, current portion.................. 91,734,356 3,000,000 -- 94,734,356 ------------ ----------- ------------ ------------ Total Current Liabilities............ 359,022,725 13,548,019 (11,617,577) 360,953,167 Other long-term liabilities........ 300,462 -- -- 300,462 ------------ ----------- ------------ ------------ Total liabilities........ 359,323,187 13,548,019 (11,617,577) 361,253,629 Minority interest in AIC........... -- -- 3,572,437 3,572,437 Stockholder's Equity: Common stock..................... 53,000 -- -- 53,000 Net contributions by partners.... -- 4,367,472 (4,367,472) -- Additional paid in capital....... 17,839,157 -- -- 17,839,157 Retained earnings................ 14,970,544 4,647,393 (1,859,952) 17,757,985 ------------ ----------- ------------ ------------ Total Stockholder's Equity................. 32,862,701 9,014,865 (6,227,424) 35,650,142 ------------ ----------- ------------ ------------ Total Liabilities and Stockholder's Equity... $392,185,888 $22,562,884 $(14,272,564) $400,476,208 ============ =========== ============ ============
F-39 169 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING BALANCE SHEETS DECEMBER 31, 1996 ASSETS
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Cash................................ $ 1,193,493 $ 1,130,860 $ -- $ 2,324,353 Restricted cash..................... 795,030 -- -- 795,030 Accounts receivable, net............ 66,500,715 8,729,351 (5,188,163) 70,041,903 Intercompany receivables............ (4,250,701) 6,015,653 (1,764,952) -- Expendable parts and supplies....... 20,742,140 -- -- 20,742,140 Other current assets................ 20,129,750 19,921 -- 20,149,671 ------------ ----------- ------------ ------------ Total Current Assets...... 105,110,427 15,895,785 (6,953,115) 114,053,097 Property & equipment, net........... 265,323,065 595,314 -- 265,918,379 Other assets........................ 131,805 -- -- 131,805 Investment in AIC................... 5,380,033 -- (5,380,033) -- ------------ ----------- ------------ ------------ Total Assets.............. $375,945,330 $16,491,099 $(12,333,148) $380,103,281 ============ =========== ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable & accrued misc. expenses....................... $ 47,154,986 $ 5,189,297 $ (6,196,603) $ 46,147,680 Intercompany payables............. (267,340) 722,951 (455,611) -- Other current liabilities......... 24,680,720 588,095 (300,902) 24,967,913 Notes payable and long-term debt, reclassified as current........ 203,016,367 -- -- 203,016,367 Notes payable and long-term debt, current portion................ 34,310,440 1,024,035 -- 35,334,475 ------------ ----------- ------------ ------------ Total Current Liabilities............. 308,895,173 7,524,378 (6,953,116) 309,466,435 Other long-term liabilities......... -- -- -- -- ------------ ----------- ------------ ------------ Total Liabilities......... 308,895,173 7,524,378 (6,953,116) 309,466,435 Minority interest in AIC............ -- -- 3,551,735 3,551,735 Stockholder's Equity: Common stock...................... 53,000 -- -- 53,000 Net contributions by partners..... -- 6,101,674 (6,101,674) -- Additional paid in capital........ 17,839,157 -- -- 17,839,157 Retained earnings................. 49,158,000 2,865,047 (2,830,093) 49,192,954 ------------ ----------- ------------ ------------ Total Stockholder's Equity.................. 67,050,157 8,966,721 (8,931,767) 67,085,111 ------------ ----------- ------------ ------------ Total Liabilities and Stockholder's Equity.... $375,945,330 $16,491,099 $(12,333,148) $380,103,281 ============ =========== ============ ============
F-40 170 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING BALANCE SHEETS DECEMBER 31, 1995 ASSETS
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Cash................................. $ 457,590 $ 634,370 $ -- $ 1,091,960 Accounts receivable, less allowance.......................... 91,020,864 4,831,150 (3,187,930) 92,664,084 Intercompany receivables............. (9,009,347) 10,967,688 (1,958,341) -- Expendable parts and supplies........ 12,330,854 -- -- 12,330,854 Other current assets................. 15,760,388 13,195 -- 15,773,583 ------------ ----------- ----------- ------------ Total Current Assets....... 110,560,349 16,446,403 (5,146,271) 121,860,481 Property & equipment, net............ 255,074,876 476,496 -- 255,551,372 Investment in AIC.................... 1,367,194 -- (1,367,194) -- Other assets......................... 184,968 -- -- 184,968 ------------ ----------- ----------- ------------ Total Assets............... $367,187,387 $16,922,899 $(6,513,465) $377,596,821 ============ =========== =========== ============ LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable & accrued misc. expenses........................... $ 67,784,061 $ 3,021,562 $(4,259,252) $ 66,546,371 Intercompany payables................ -- 887,019 (887,019) -- Other current liabilities............ 20,048,704 294,284 -- 20,342,988 Notes payable and long-term debt, current portion.................... 51,901,108 2,770,000 -- 51,901,108 ------------ ----------- ----------- ------------ Total Current Liabilities.............. 139,733,873 6,972,865 (5,146,271) 141,560,467 Notes payable and long-term debt, less current portion............... 165,700,485 -- -- 165,700,485 Other long-term liabilities.......... 100,000 -- -- 100,000 ------------ ----------- ----------- ------------ Total Liabilities.......... 305,534,358 6,972,865 (5,146,271) 307,360,952 Minority interest in AIC............. -- -- 3,944,070 3,944,070 Stockholder's Equity: Common stock....................... 53,000 -- -- 53,000 Net contributions by partners...... -- 2,218,754 (2,218,754) -- Additional paid in capital......... 14,062,669 -- -- 14,062,669 Retained earnings.................. 47,537,360 7,731,280 (3,092,510) 52,176,130 ------------ ----------- ----------- ------------ Total Stockholder's Equity................... 61,653,029 9,950,034 (5,311,264) 66,291,799 ------------ ----------- ----------- ------------ Total Liabilities and Stockholder's Equity..... $367,187,387 $16,922,899 $(6,513,465) $377,596,821 ============ =========== =========== ============
F-41 171 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------- ------------ Revenue Air transportation services................. $293,956,055 $47,718,171 $ (39,329,458) $302,344,768 Maintenance & other......... 23,299,368 -- -- 23,299,368 ------------ ----------- ------------- ------------ Total Revenue....... 317,255,423 47,718,171 (39,329,458) 325,644,136 Operating Expense: Flight expense.............. 123,330,585 42,206,512 (39,329,458) 126,207,639 Maintenance expense......... 107,432,257 -- -- 107,432,257 Aircraft fuel expense....... 55,094,783 -- -- 55,094,783 Depreciation expense........ 26,369,556 98,044 -- 26,467,600 SG&A expense................ 16,892,213 955,671 -- 17,847,884 Bad debt expense............ 1,635,977 (2,019) -- 1,633,958 ------------ ----------- ------------- ------------ Total Operating Expense........... 330,755,371 43,258,208 (39,329,458) 334,684,121 ------------ ----------- ------------- ------------ Operating Income (Loss)....... (13,499,948) 4,459,963 -- (9,039,985) Other Income (Expense) Interest expense, net....... (19,927,635) 187,431 -- (19,740,204) Gain (loss) on sale of assets................... 624,395 -- -- 624,395 Gain on insurance reimbursement............ 542,302 -- -- 542,302 Merger related costs........ (1,269,100) -- -- (1,269,100) ------------ ----------- ------------- ------------ Total Other Income (Expense)......... (20,030,038) 187,431 -- (19,842,607) ------------ ----------- ------------- ------------ Income (Loss) Before Minority Interest.................... (33,529,986) 4,647,394 -- (28,882,592) Minority Interest in AIC...... -- -- (1,858,958) (1,858,958) ------------ ----------- ------------- ------------ Net Income (Loss)............. $(33,529,986) $ 4,647,394 $ (1,858,958) $(30,741,550) ============ =========== ============= ============
F-42 172 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Revenue Air transportation services....... $270,924,804 $30,002,226 $(25,715,549) $275,211,481 Maintenance and other............. 25,801,347 -- -- 25,801,347 ------------ ----------- ------------ ------------ Total Revenue............. 296,726,151 30,002,226 (25,715,549) 301,012,828 Operating Expense: Flight expense.................... 105,419,606 27,302,039 (25,715,549) 107,006,096 Maintenance expense............... 81,561,290 -- -- 81,561,290 Aircraft fuel expense............. 58,433,493 -- -- 58,433,493 Depreciation expense.............. 23,897,542 61,007 -- 23,958,549 SG&A expense...................... 14,714,614 638,408 -- 15,353,022 Bad debt expense.................. 2,380,244 5,815 -- 2,386,059 ------------ ----------- ------------ ------------ Total Operating Expense... 286,406,789 28,007,269 (25,715,549) 288,698,509 ------------ ----------- ------------ ------------ Operating Income.................... 10,319,362 1,994,957 -- 12,314,319 Other Income (Expense) Interest expense, net............. (16,029,682) 274,367 -- (15,755,315) Gain (loss) on sale of assets..... 425,742 -- -- 425,742 Gain on contract settlement....... 1,123,200 -- -- 1,123,200 Net, miscellaneous................ 13,214 -- -- 13,214 ------------ ----------- ------------ ------------ Total Other Income (Expense)............... (14,467,526) 274,367 -- (14,193,159) ------------ ----------- ------------ ------------ Income (Loss) Before Minority Interest.......................... (4,148,164) 2,269,324 -- (1,878,840) Minority Interest in AIC............ -- -- (907,730) (907,730) ------------ ----------- ------------ ------------ Net Income (Loss)................... $ (4,148,164) $ 2,269,324 $ (907,730) $ (2,786,570) ============ =========== ============ ============
F-43 173 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Revenue Air transportation services....... $381,473,358 $44,697,848 $(37,978,727) $388,192,479 Maintenance & other............... 36,348,245 -- -- 36,348,245 ------------ ----------- ------------ ------------ Total Revenue............. 417,821,603 44,697,848 (37,978,727) 424,540,724 Operating Expense: Flight expense.................... 147,282,092 40,952,222 (37,978,727) 150,255,587 Maintenance expense............... 115,081,955 -- -- 115,081,955 Aircraft fuel expense............. 82,717,539 -- -- 82,717,539 Depreciation expense.............. 31,970,112 121,007 -- 32,091,119 SG&A expense...................... 20,852,315 1,037,040 -- 21,889,355 Bad debt expense.................. 948,516 62,147 -- 1,010,663 ------------ ----------- ------------ ------------ Total Operating Expense... 398,852,529 42,172,416 (37,978,727) 403,046,218 ------------ ----------- ------------ ------------ Operating Income.................... 18,969,074 2,525,432 -- 21,494,506 Other Income (Expense) Interest expense, net............. (21,972,004) 339,615 -- (21,632,389) Gain (loss) on sale of assets..... 130,934 -- -- 130,934 Gain on contract settlement....... 1,123,200 -- -- 1,123,200 Net, miscellaneous................ 13,116 -- -- 13,116 ------------ ----------- ------------ ------------ Total Other Income (Expense)............... (20,704,754) 339,615 -- (20,365,139) ------------ ----------- ------------ ------------ Income (Loss) Before Minority Interest.......................... (1,735,680) 2,865,047 -- 1,129,367 Minority Interest in AIC............ -- -- (1,146,019) (1,146,019) ------------ ----------- ------------ ------------ Net Income (Loss)................... $ (1,735,680) $ 2,865,047 $ (1,146,019) $ (16,652) ============ =========== ============ ============
F-44 174 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Revenue Air transportation services........... $348,654,226 $36,962,270 $(26,212,248) $359,404,248 Maintenance & other................... 14,278,793 -- -- 14,278,793 ------------ ----------- ------------ ------------ Total Revenue................. 362,933,019 36,962,270 (26,212,248) 373,683,041 Operating Expense: Flight expense........................ 167,501,984 27,485,043 (26,212,248) 168,774,779 Maintenance expense................... 103,119,112 269,598 -- 103,388,710 Aircraft fuel expense................. 54,538,321 -- -- 54,538,321 Depreciation expense.................. 20,860,503 110,902 -- 20,971,405 SG&A expense.......................... 20,152,642 1,523,437 -- 21,676,079 Bad debt expense...................... 1,839,271 23,012 -- 1,862,283 ------------ ----------- ------------ ------------ Total Operating Expense....... 368,011,833 29,411,992 (26,212,248) 371,211,577 ------------ ----------- ------------ ------------ Operating Income (Loss)................. (5,078,814) 7,550,278 -- 2,471,464 Other Income (Expense) Interest expense, net................. (14,950,004) 201,393 -- (14,748,611) Gain (loss) on sale of assets......... 11,728,064 (20,391) -- 11,707,673 Gain on insurance reimbursement....... 8,147,878 -- -- 8,147,878 Net, miscellaneous.................... (110) -- -- (110) ------------ ----------- ------------ ------------ Total Other Income............ 4,925,828 181,002 -- 5,106,830 ------------ ----------- ------------ ------------ Income (Loss) Before Minority Interest.............................. (152,986) 7,731,280 -- 7,578,294 Minority Interest in AIC................ -- -- (3,092,513) (3,092,513) ------------ ----------- ------------ ------------ Net Income (Loss)....................... $ (152,986) $ 7,731,280 $ (3,092,513) $ 4,485,781 ============ =========== ============ ============
F-45 175 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Revenue Air transportation services...... $287,822,938 $31,344,294 $(21,086,382) $298,080,850 Maintenance and other.......... 7,448,982 -- -- 7,448,982 ------------ ----------- ------------ ------------ Total Revenue.......... 295,271,920 31,344,294 (21,086,382) 305,529,832 Operating Expense: Flight expense................. 113,365,324 23,334,764 (21,086,382) 115,613,706 Maintenance expense............ 64,564,123 157,956 -- 64,722,079 Aircraft fuel expense.......... 57,330,926 30,962 -- 57,361,888 Depreciation expense........... 13,739,189 70,092 -- 13,809,281 SG&A expense................... 12,424,454 847,907 -- 13,272,361 Bad debt expense............... 2,225,276 6,209 -- 2,231,485 ------------ ----------- ------------ ------------ Total Operating Expense.............. 263,649,292 24,447,890 (21,086,382) 267,010,800 ------------ ----------- ------------ ------------ Operating Income................. 31,622,628 6,896,404 -- 38,519,032 Other Income (Expense) Interest expense, net.......... (8,007,347) (42) -- (8,007,389) Gain (loss) on sale of assets...................... 3,390,314 (433) -- 3,389,881 Net, miscellaneous............. (550,000) -- -- (550,000) ------------ ----------- ------------ ------------ Total Other Expense.... (5,167,033) (475) -- (5,167,508) ------------ ----------- ------------ ------------ Income Before Minority Interest....................... 26,455,595 6,895,929 -- 33,351,524 Minority Interest in AIC......... -- -- (2,758,372) (2,758,372) ------------ ----------- ------------ ------------ Net Income....................... $ 26,455,595 $ 6,895,929 $ (2,758,372) $ 30,593,152 ============ =========== ============ ============
F-46 176 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Cash (Used in) Provided by Operating Activities.......... $(18,204,844) $ 3,253,308 $ 1,858,958 $(13,092,578) Cash Flows from Investing Activities: Purchase of PP&E.............. (54,438,762) (69,814) -- (54,508,576) Proceeds on sale of PP&E...... 55,127,500 -- -- 55,127,500 Other......................... (777,284) -- -- (777,284) ------------ ----------- ----------- ------------ Net cash used in investing activities.......... (4,530,412) (69,814) (4,618,958) (158,360) Financing Activities: Repayments of notes and long- term debt.................. (63,198,575) -- -- (63,198,575) Borrowings under notes and long-term debt agreements................. 77,664,294 1,975,965 -- 79,640,259 Net repayments under note payable to stockholder..... 300,462 -- -- 300,462 Distributions to stockholder................ (693,419) -- -- (693,419) Net partner contributions/ withdrawals................ -- (4,600,000) 4,600,000 -- Distributions to minority interest stockholder....... -- -- (1,840,000) (1,840,000) ------------ ----------- ----------- ------------ Net cash provided by (used in) financing activities.......... 14,072,762 (2,624,035) 2,760,000 14,208,727 ------------ ----------- ----------- ------------ Increase in Cash................ 398,330 559,459 -- 957,789 ------------ ----------- ----------- ------------ Cash, Beginning of Period....... 1,193,493 1,130,860 -- 2,324,353 ------------ ----------- ----------- ------------ Cash, End of Period............. $ 1,591,823 $ 1,690,319 $ -- $ 3,282,142 ============ =========== =========== ============
F-47 177 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Cash Provided by Operating Activities...................... $ 19,957,588 $ 6,810,545 $ 907,730 $ 27,675,863 Cash Flows from Investing Activities: Purchase of PP&E................ (43,529,439) (68,419) -- (43,597,858) Proceeds on sale of PP&E........ 10,145,798 -- -- 10,145,798 Investment in AIC............... 3,217,730 -- (3,217,730) -- Other........................... 53,163 -- -- 53,163 ------------ ----------- ----------- ------------ Net cash used in investing activities............ (30,112,748) (68,419) (3,217,730) (33,398,897) Financing Activities: Repayments of notes and long-term debt............... (51,012,039) (2,295,039) -- (53,307,078) Borrowings under notes and long- term debt agreements......... 61,295,530 -- -- 61,295,530 Net repayments under note payable to stockholder....... 340,462 -- -- 340,462 Distributions to stockholder.... (2,580,655) -- -- (2,580,655) Contribution of capital by stockholder.................. 3,759,903 -- -- 3,759,903 Net partner contributions/withdrawals.... -- (3,850,000) 3,850,000 -- Distributions to minority interest stockholder......... -- -- (1,540,000) (1,540,000) ------------ ----------- ----------- ------------ Net cash provided by (used in) financing activities............ 11,803,201 (6,145,039) 2,310,000 7,968,162 ------------ ----------- ----------- ------------ Increase in Cash.................. 1,648,041 597,087 -- 2,245,128 Cash, Beginning of Period......... 457,590 634,370 -- 1,091,960 ------------ ----------- ----------- ------------ Cash, End of Period............... $ 2,105,631 $ 1,231,457 $ -- $ 3,337,088 ============ =========== =========== ============
F-48 178 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Cash Provided by Operating Activities... $ 18,952,227 $ 6,332,280 $ 1,146,019 $ 26,430,526 Cash Flows from Investing Activities: Purchase of PP&E...................... (53,173,437) (239,825) -- (53,413,262) Proceeds on sale of PP&E.............. 11,008,725 -- -- 11,008,725 Investment in AIC..................... 3,460,047 -- (3,460,047) -- Other................................. 53,163 -- -- 53,163 ------------ ----------- ----------- ------------ Net cash used in investing activities.................. (38,651,502) (239,825) (3,460,047) (42,351,374) Financing Activities: Repayments of notes and long-term debt............................... (50,371,999) (1,745,965) -- (52,117,964) Borrowings under notes and long-term debt agreements.................... 70,097,213 -- -- 70,097,213 Net repayments under note payable to stockholder........................ (100,000) -- -- (100,000) Distributions to stockholder.......... (2,966,524) -- -- (2,966,524) Contribution of capital by stockholder........................ 3,776,488 -- -- 3,776,488 Net partner contributions/withdrawals.......... -- (3,850,000) 3,850,000 -- Distributions to minority interest stockholder........................ -- -- (1,535,972) (1,535,972) ------------ ----------- ----------- ------------ Net cash provided by (used in) financing activities........ 20,435,178 (5,595,965) 2,314,028 17,153,241 ------------ ----------- ----------- ------------ Increase in Cash........................ 735,903 496,490 -- 1,232,393 Cash, Beginning of Period............... 457,590 634,370 -- 1,091,960 ------------ ----------- ----------- ------------ Cash, End of Period..................... $ 1,193,493 $ 1,130,860 $ -- $ 2,324,353 ============ =========== =========== ============
F-49 179 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------- Cash Provided by Operating Activities...................... $ 44,441,613 $ 11,954,605 $(6,880,705) $ 49,515,513 Cash Flows from Investing Activities: Purchase of PP&E................ (153,410,208) (309,139) -- (153,719,347) Proceeds on sale of PP&E........ 33,603,329 -- -- 33,603,329 Interest bearing advances to related companies............ -- (9,973,218) 9,973,218 -- Investment in AIC............... 6,249,639 -- (6,249,639) -- Disposal of Grand Holdings, Inc., net of cash............ (948,818) -- -- (948,818) Other........................... 119,324 -- -- 119,324 ------------- ------------ ----------- ------------- Net cash used in investing activities............ (114,386,734) (10,282,357) 3,723,579 (120,945,512) Financing Activities: Repayments of notes and long-term debt............... (36,899,953) -- -- (36,899,953) Borrowings under notes and long- term debt agreements......... 117,182,548 2,770,000 -- 119,952,548 Net repayments under note payable to stockholder....... 14,000 -- -- 14,000 Issuance of common stock........ 2,000 -- -- 2,000 Contribution of capital by stockholder.................. 554,102 -- -- 554,102 Distributions to stockholder.... (13,730,711) -- -- (13,730,711) Net partner contributions/ withdrawals.................. -- (5,263,126) 5,263,126 -- Distributions to minority interest stockholder......... -- -- (2,106,000) (2,106,000) ------------- ------------ ----------- ------------- Net cash provided by (used in) financing activities............ 67,121,986 (2,493,126) 3,157,126 67,785,986 ------------- ------------ ----------- ------------- Decrease in Cash.................. (2,823,135) (820,878) -- (3,644,013) Cash, Beginning of Period......... 3,280,725 1,455,248 -- 4,735,973 ------------- ------------ ----------- ------------- Cash, End of Period............... $ 457,590 $ 634,370 $ -- $ 1,091,960 ============= ============ =========== =============
F-50 180 AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED FINANCIAL INFORMATION SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994
THE COMPANIES EXCLUDING AIC AIC (GUARANTORS) (NON-GUARANTOR) ELIMINATIONS TOTAL ------------- --------------- ------------ ------------ Cash Provided by Operating Activities......................... $ 26,751,527 $ 4,664,502 $ 2,426,997 $ 33,843,026 Cash Flows from Investing Activities: Purchase of PP&E................... (77,679,379) (152,234) -- (77,831,613) Proceeds on sale of PP&E........... 5,250,000 -- -- 5,250,000 Interest bearing advances to related companies............... -- (331,375) 331,375 -- Investment in AIC.................. 4,808,544 -- (4,808,544) -- Acquisition of GTAND Holdings, Inc., net of cash acquired...... (97,077) -- -- (97,077) Other.............................. 139,620 -- -- 139,620 ------------ ----------- ----------- ------------ Net cash used in investing activities............... (67,578,292) (483,609) (4,477,169) (72,539,070) Financing Activities: Repayments of notes and long-term debt............................ (21,997,617) -- -- (21,997,617) Borrowings under notes and long-term debt agreements....... 74,466,207 -- -- 74,466,207 Distributions to stockholder....... (8,830,125) -- -- (8,830,125) Net partner contributions/withdrawals....... -- (3,417,500) 3,417,500 -- Distributions to minority interest stockholder..................... -- -- (1,367,328) (1,367,328) ------------ ----------- ----------- ------------ Net cash provided by (used in) financing activities............... 43,638,465 (3,417,500) 2,050,172 42,271,137 ------------ ----------- ----------- ------------ Increase in Cash..................... 2,811,700 763,393 -- 3,575,093 Cash, Beginning of Period............ 469,025 691,855 -- 1,160,880 ------------ ----------- ----------- ------------ Cash, End of Period.................. $ 3,280,725 $ 1,455,248 $ -- $ 4,735,973 ============ =========== =========== ============
12. MANAGEMENT'S PLANS -- SALE OF AIRCRAFT AND 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-51 181 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 3,000,000 share common stock offering (of which Kitty Hawk will sell 2,200,000 shares, not including up to 450,000 additional shares for which Kitty Hawk has granted the underwriters a 30 day option to purchase) 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. At September 30, 1997, the Companies deferred a gain of approximately $30 million (unaudited) in connection with this transaction. This gain will be recognized if the merger is not finalized and the put and call options are not exercised. F-52 182 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. 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. Pursuant to the Merger Agreement, the Company has agreed to indemnify each person who is, has been or becomes prior to November 19, 1997, an officer, director, employee or agent of any of the Kalitta Companies against any losses related to such person's service, as of or prior to November 19, 1997, as an officer, director, employee or agent of any of the Kalitta Companies. 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 advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. II-1 183 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 2.3 -- Amendment No. 2 to the Merger Agreement, dated October 29, 1997, by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad Kalitta, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 2.4* -- Amendment No. 3 to the Merger Agreement, dated November 14, 1997 by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad 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 -- 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. 3.3* -- Amended and Restated Bylaws of Kitty Hawk. 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* -- Stockholders' Agreement dated November 1997 among the Company, M. Tom Christopher and Conrad A. Kalitta. 4.3* -- Specimen Global Note in respect of 9.95% Senior Secured Notes due 2004 (Old Notes). 4.4* -- Indenture, dated November 15, 1997, in regard to 9.95% Senior Secured Notes due 2004 by and among the Company and certain of its subsidiaries and Bank One, N.A. as Trustee and Collateral Trustee. 4.5* -- Registration Rights Agreement, dated November 19, 1997, by and among the Company and certain of its subsidiaries and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Fieldstone FPCG Services, L.P., as Placement Agents. 4.6* -- Placement Agreement, dated November 1997 by and among the Company and certain of its subsidiaries, and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated, and Fieldstone FPCG Services, L.P., as Placement Agents.
II-2 184
4.7* -- First Supplemental Indenture, dated February 5, 1998, in regard to 9.95% Senior Secured Notes due 2004 by and among the Company and certain of its subsidiaries and Bank One, N.A. as Trustee and Collateral Trustee. 5.1* -- Opinion of Haynes and Boone, LLP, regarding legality of the New Notes issued. 5.2* -- Opinion of Haynes and Boone, LLP, as to certain tax matters. 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. 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.
II-3 185
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. 10.19* -- Second Amended and Restated Credit Agreement, dated as of November 19, 1997, by and among the Company (as borrower) and Wells Fargo Bank (Texas), National Association (as agent). 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.21 -- Employment Agreement by and between Conrad A. Kalitta and AIA, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.22 -- Amended and Restated Consulting Agreement by and between Conrad A. Kalitta and AIA, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.23 -- License Agreement (the "License Agreement"), dated May 15, 1995, by and between Roadway Global Air, Inc. ("RGA") and American International Freight ("AIF"), a division of AIA, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference.
II-4 186
10.24 -- Amendment to License Agreement, dated August 14, 1997, by and between RGA and AIF, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.25* -- Escrow and Security Agreement, dated November 19, 1997, between the Company and Bank One, N.A. as Trustee and Collateral Trustee placing the Pledged Securities into escrow. 12.1 -- Statement of computation of ratio of earnings to fixed charges, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 21.1* -- Subsidiaries of the Registrant. 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). 23.4** -- Consent of Pro-Tech Advisors, Inc. 23.5** -- Consent of GRA Aviation Specialists, Inc. 24.1 -- The power of attorney of officers and directors of the Company (found on signature pages). 25.1* -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of Bank One, N.A. 99.1* -- Form of Letter of Transmittal and related documents to be used in conjunction with the Exchange Offer.
- --------------- * Filed herewith. ** 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. ITEM 22. UNDERTAKINGS. Each of the undersigned Registrants hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933 (the "Securities Act"); II-5 187 (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the Form of prospectus filed with the Securities and Exchange Commission pursuant to rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in this Registration Statement when it becomes effective; (iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; (2) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment 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. (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant 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 Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant 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 Registrant 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 Securities Act and will be governed by the final adjudication of such issue. Each of the undersigned Registrants hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act. Each of the undersigned Registrants hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. Each of the undersigned Registrants hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. II-6 188 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 29th day of January, 1998. 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 Registration Statement has been signed by the following persons in the capacities indicated on the 29th day of January, 1998.
NAME: CAPACITIES: ----- ----------- /s/ M. TOM CHRISTOPHER* Chairman of the Board of Directors and Chief - ----------------------------------------------------- Executive Officer M. Tom Christopher /s/ TILMON J. REEVES* President and Director - ----------------------------------------------------- Tilmon J. Reeves /s/ CONRAD A. KALITTA* Vice Chairman and Director - ----------------------------------------------------- Conrad A. Kalitta /s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief - ----------------------------------------------------- Financial Officer (Principal Financial and Richard R. Wadsworth Accounting Officer) and Secretary /s/ PHILIP J. SAUDER* Director - ----------------------------------------------------- Philip J. Sauder /s/ TED J. COONFIELD* Director - ----------------------------------------------------- Ted J. Coonfield /s/ GEORGE W. KELSEY* Director - ----------------------------------------------------- George W. Kelsey /s/ LEWIS S. WHITE* Director - ----------------------------------------------------- Lewis S. White /s/ RICHARD R. WADSWORTH* - ----------------------------------------------------- Richard R. Wadsworth As Attorney-in-Fact for each person indicated
II-7 189 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-4. 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-1 190 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-2 191 INDEX TO EXHIBITS
EXHIBIT NUMBER ITEM ------- ---- 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 2.3 -- Amendment No. 2 to the Merger Agreement, dated October 29, 1997, by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad Kalitta, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 2.4* -- Amendment No. 3 to the Merger Agreement, dated November 14, 1997 by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad 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 -- 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. 3.3* -- Amended and Restated Bylaws of Kitty Hawk. 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* -- Stockholders' Agreement dated November 1997 among the Company, M. Tom Christopher and Conrad A. Kalitta. 4.3* -- Specimen Global Note in respect of 9.95% Senior Secured Notes due 2004 (Old Notes). 4.4* -- Indenture, dated November 15, 1997, in regard to 9.95% Senior Secured Notes due 2004 by and among the Company and certain of its subsidiaries and Bank One, N.A. as Trustee and Collateral Trustee. 4.5* -- Registration Rights Agreement, dated November 19, 1997, by and among the Company and certain of its subsidiaries and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Fieldstone FPCG Services, L.P., as Placement Agents. 4.6* -- Placement Agreement, dated November 1997 by and among the Company and certain of its subsidiaries, and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated, and Fieldstone FPCG Services, L.P., as Placement Agents.
192
EXHIBIT NUMBER ITEM ------- ---- 4.7* -- First Supplemental Indenture, dated February 5, 1998, in regard to 9.95% Senior Secured Notes due 2004 by and among the Company and certain of its subsidiaries and Bank One, N.A. as Trustee and Collateral Trustee. 5.1* -- Opinion of Haynes and Boone, LLP, regarding legality of the New Notes issued. 5.2* -- Opinion of Haynes and Boone, LLP, as to certain tax matters. 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. 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.
193
EXHIBIT NUMBER ITEM ------- ---- 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. 10.19* -- Second Amended and Restated Credit Agreement, dated as of November 19, 1997, by and among the Company (as borrower) and Wells Fargo Bank (Texas), National Association (as agent). 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.21 -- Employment Agreement by and between Conrad A. Kalitta and AIA, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.22 -- Amended and Restated Consulting Agreement by and between Conrad A. Kalitta and AIA, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference.
194
EXHIBIT NUMBER ITEM ------- ---- 10.23 -- License Agreement (the "License Agreement"), dated May 15, 1995, by and between Roadway Global Air, Inc. ("RGA") and American International Freight ("AIF"), a division of AIA, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.24 -- Amendment to License Agreement, dated August 14, 1997, by and between RGA and AIF, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 10.25* -- Escrow and Security Agreement, dated November 19, 1997, between the Company and Bank One, N.A. as Trustee and Collateral Trustee placing the Pledged Securities into escrow. 12.1 -- Statement of computation of ratio of earnings to fixed charges, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 333-36125), which Exhibit is herein incorporated by reference. 21.1* -- Subsidiaries of the Registrant. 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). 23.4** -- Consent of Pro-Tech Advisors, Inc. 23.5** -- Consent of GRA Aviation Specialists, Inc. 24.1 -- The power of attorney of officers and directors of the Company (found on signature pages). 25.1* -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of Bank One, N.A. 99.1* -- Form of Letter of Transmittal and related documents to be used in conjunction with the Exchange Offer.
- --------------- * Filed herewith ** Previously filed EX-2.4 2 AMENDMENT NO. 3 TO MERGER AGREEMENT - 11/14/97 1 EXHIBIT 2.4 AMENDMENT NO. 3 TO AGREEMENT AND PLAN OF MERGER This Amendment No. 3 (the "AMENDMENT") made as of this 14th day of November, 1997, is 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") and amends the Agreement and Plan of Merger, dated September 22, 1997 among the parties hereto (the "AGREEMENT"), as amended by Amendment No. 1 to Agreement and Plan of Merger dated October 23, 1997 among the parties hereto and by Amendment No. 2 to Agreement and Plan of Merger dated October 29, 1997 among the parties hereto. WHEREAS, the parties desire to amend certain terms of the Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants herein contained, the parties hereto agree as follows: 1. Section 6.1.11 of the Agreement shall be amended by deleting the entire section and replacing it with the following: 6.1.11 Financing. Kitty Hawk shall have received (a) net proceeds of at least $37,000,000 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 $328,000,000. 2. Section 6.2.14 of the Agreement shall be amended by deleting the entire section and replacing it with the following: 6.2.14 Financing. Kitty Hawk shall have received (a) net proceeds of at least $37,000,000 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 $328,000,000. 3. The second sentence of Section 5.5.4(b) of the Agreement shall be amended by deleting the entire sentence and replacing it with the following: 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 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. 4. Except as amended, all other terms and provisions in the Agreement shall remain unchanged. 5. This Amendment may be signed in multiple counterparts, all of which together shall be deemed to constitute one amendment to the Agreement. * * * * * 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment, as of the date first written hereinabove. KITTY HAWK, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- KITTY HAWK - AIA, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- KITTY HAWK - AIT, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- KITTY HAWK - FOL, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- KITTY HAWK - KFS, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- - 2 - 3 KITTY HAWK - OK, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- --------------------------------------- M. Tom Christopher AMERICAN INTERNATIONAL AIRWAYS, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- AMERICAN INTERNATIONAL TRAVEL, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- FLIGHT ONE LOGISTICS, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- KALITTA FLYING SERVICES, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- - 3 - 4 O.K. TURBINES, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- --------------------------------------- Conrad Kalitta - 4 - EX-3.3 3 BYLAWS OF KITTY HAWK DATED AS OF OCTOBER 1996 1 EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF KITTY HAWK, INC. A DELAWARE CORPORATION NOVEMBER 18, 1997 2 TABLE OF CONTENTS
Page ARTICLE ONE: OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Registered Office and Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE TWO: MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 Notice of Stockholder Business; Nomination of Director Candidates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.6 Voting List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.7 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.8 Required Vote; Withdrawal of Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.9 Method of Voting; Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.10 Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.11 Conduct of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.12 Inspectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE THREE: DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Number; Qualification; Election; Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.3 Change in Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.4 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.5 Meetings of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.6 First Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.7 Election of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.8 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.9 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.10 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.11 Quorum; Majority Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.12 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.13 Presumption of Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.14 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE FOUR: COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.1 Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.2 Number; Qualification; Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.3 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.4 Committee Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.5 Alternate Members of Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
- i - 3 4.6 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.7 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.8 Quorum; Majority Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.9 Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.10 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.11 Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE FIVE: NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.1 Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE SIX: OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.1 Number; Titles; Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.2 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.3 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.5 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.6 Chairman of the Board and Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . 12 6.7 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.8 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.9 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.10 Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.11 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.12 Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.13 Vice Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE SEVEN: CERTIFICATES AND STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.1 Certificates for Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.2 Replacement of Lost or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . 14 7.3 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.4 Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.5 Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.6 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE EIGHT: MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.1 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.2 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.3 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.4 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.5 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.6 Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.7 Securities of Other Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.8 Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.9 Action Without a Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.10 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
- ii - 4 8.11 Mortgages, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.12 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.13 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.14 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE NINE: GOVERNANCE PROVISIONS DURING THE EFFECTIVE PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 9.1 Definitions Applicable to Article Nine . . . . . . . . . . . . . . . . . . . . . . . . . . 18 9.2 Electing the Initial Effective Period Board . . . . . . . . . . . . . . . . . . . . . . . . 20 9.3 Effective Period Nominating Committees . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.4 Deadlock Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.5 Certain Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 9.6 Amendments to Article Nine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
- iii - 5 AMENDED AND RESTATED BYLAWS OF KITTY HAWK, INC. A DELAWARE CORPORATION PREAMBLE These amended and restated bylaws ("BYLAWS") are subject to, and governed by, the General Corporation Law of the State of Delaware (the "DELAWARE CORPORATION LAW") and the certificate of incorporation ("CERTIFICATE OF INCORPORATION") of Kitty Hawk, Inc., a Delaware corporation (the "CORPORATION"). In the event of a direct conflict between the provisions of these bylaws and the mandatory provisions of the Delaware Corporation Law or the provisions of the Certificate of Incorporation, such provisions of the Delaware Corporation Law or the Certificate of Incorporation, as the case may be, will be controlling. ARTICLE ONE: OFFICES 1.1 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. 1.2 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors of the Corporation (the "BOARD OF DIRECTORS") may from time to time determine or as the business of the Corporation may require. ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.1 Annual Meeting. An annual meeting of stockholders of the Corporation shall be held each calendar year on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. At such meeting, the stockholders shall elect directors and transact such other business as may be properly brought before the meeting. 2.2 Special Meeting. A special meeting of the stockholders may be called by the Board of Directors pursuant to a resolution adopted by a majority of the members of the Classified Directors (as defined in Section 3.2 hereof) then serving, by the Chairman of the Board and Chief Executive Officer, or by any holder or holders of record of at least 25% of the outstanding shares of capital stock of the Corporation then entitled to vote on any matter for which the respective special meeting is being called. A special meeting shall be held on such date and at such time as shall be designated by the person(s) calling the meeting and stated in the notice of the 6 meeting or in a duly executed waiver of notice of such meeting. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting given in accordance with these bylaws or in a duly executed waiver of notice of such meeting. 2.3 Place of Meetings. An annual meeting of stockholders may be held at any place within or without the State of Delaware designated by the Board of Directors. A special meeting of stockholders may be held at any place within or without the State of Delaware designated in the notice of the meeting or a duly executed waiver of notice of such meeting. Meetings of stockholders shall be held at the principal office of the Corporation unless another place is designated for meetings in the manner provided herein. 2.4 Notice. Written or printed notice stating the place, day, and time of each meeting of the stockholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board and Chief Executive Officer, the Secretary, or the officer or person(s) calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is to be sent by mail, it shall be directed to such stockholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. 2.5 Notice of Stockholder Business; Nomination of Director Candidates. (a) At annual meetings of the stockholders, only such business shall be conducted as shall have been brought before the meetings (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors, or (iii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 2.5, who shall be entitled to vote at such meeting, and who complies with the notice procedures set forth in this Section 2.5. (b) Only persons who are nominated in accordance with the procedures set forth in these bylaws shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of - 2 - 7 giving of notice provided for in this Section 2.5, who shall be entitled to vote for the election of directors at the meeting, and who complies with the notice procedures set forth in this Section 2.5. (c) A stockholder must give timely, written notice to the Secretary of the Corporation to nominate directors at an annual meeting pursuant to Section 2.5(b) hereof or to propose business to be brought before an annual or special meeting pursuant to clause (iii) of Section 2.5(a) hereof. To be timely in the case of an annual meeting, a stockholder's notice must be received at the principal executive offices of the Corporation not more than 180 days nor less than 120 days before the first anniversary of the preceding year's annual meeting. To be timely in the case of a special meeting or in the event that the date of the annual meeting is changed by more than 30 days from such anniversary date, a stockholder's notice must be received at the principal executive offices of the Corporation no later than the close of business on the tenth day following the earlier of the day on which notice of the meeting date was mailed or public disclosure of the meeting date was made. For purposes of this Section 2.5(c), "PUBLIC DISCLOSURE" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934. Such stockholder's notice shall set forth (i) with respect to each matter, if any, that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) with respect to each person, if any, whom the stockholder proposes to nominate for election as a director, all information relating to such person (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director) that is required under the Securities Exchange Act of 1934, as amended, (iii) the name and address, as they appear on the Corporation's records, of the stockholder proposing such business or nominating such persons (as the case may be), and the name and address of the beneficial owner, if any, on whose behalf the proposal or nomination is made, (iv) the class and number of shares of capital stock of the Corporation that are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the proposal or nomination is made, and (v) any material interest or relationship that such stockholder of record and/or the beneficial owner, if any, on whose behalf the proposal or nomination is made may respectively have in such business or with such nominee. At the request of the Board of Directors, any person nominated for election as a director shall furnish to the Secretary of the Corporation the information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. - 3 - 8 (d) Notwithstanding anything in these bylaws to the contrary, no business shall be conducted, and no person shall be nominated to serve as a director, at an annual or special meeting of stockholders, except in accordance with the procedures set forth in this Section 2.5. The chairman of the meeting shall, if the facts warrant, determine that business was not properly brought before the meeting, or that a nomination was not made, in accordance with the procedures prescribed by these bylaws and, if he shall so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted and any defective nomination shall be disregarded. A stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 2.5. 2.6 Voting List. At least 10 days before each meeting of stockholders, the Secretary or other officer of the Corporation who has charge of the Corporation's stock ledger, either directly or through another officer appointed by him or through a transfer agent appointed by the Board of Directors, shall prepare a complete list of stockholders entitled to vote thereat, arranged in alphabetical order and showing the address of each stockholder and number of shares of capital stock registered in the name of each stockholder. For a period of 10 days prior to such meeting, such list shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting or a duly executed waiver of notice of such meeting or, if not so specified, at the place where the meeting is to be held and shall be open to examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours. Such list shall be produced at such meeting and kept at the meeting at all times during such meeting and may be inspected by any stockholder who is present. 2.7 Quorum. The holders of a majority of the outstanding shares of capital stock entitled to vote on a matter, present in person or by proxy, shall constitute a quorum at any meeting of stockholders, except as otherwise provided by law, the Certificate of Incorporation, or these bylaws. If a quorum shall not be present, in person or by proxy, at any meeting of stockholders, the stockholders entitled to vote thereat who are present, in person or by proxy (or, if no stockholder entitled to vote is present, any officer of the Corporation), may adjourn the meeting from time to time without notice other than announcement at the meeting (unless the Board of Directors, after such adjournment, fixes a new record date for the adjourned meeting), until a quorum shall be present, in person or by proxy. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted which may have been transacted at the original meeting had a quorum been present; provided that, if the adjournment is for more than 30 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. - 4 - 9 2.8 Required Vote; Withdrawal of Quorum. When a quorum is present at any meeting, the vote of the holders of at least a majority of the outstanding shares of capital stock entitled to vote thereat who are present, in person or by proxy, shall decide any question brought before such meeting, unless the question is one on which, by express provision of law, the Certificate of Incorporation, or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question; provided, however, that the vote of the holders of a plurality of the outstanding shares of capital stock entitled to vote in the election of directors who are present, in person or by proxy, shall be required to effect elections of directors. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2.9 Method of Voting; Proxies. Except as otherwise provided in the Certificate of Incorporation or by law, each outstanding share of capital stock, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Elections of directors need not be by written ballot. At any meeting of stockholders, every stockholder having the right to vote may vote either in person or by a proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after three years from the date of its execution, unless otherwise provided in the proxy. If no date is stated in a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by law. 2.10 Record Date. For the purpose of determining stockholders entitled (a) to notice of or to vote at any meeting of stockholders or any adjournment thereof, (b) to receive payment of any dividend or other distribution or allotment of any rights, or (c) to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, for any such determination of stockholders, such date in any case to be not more than 60 days and not less than 10 days prior to such meeting nor more than 60 days prior to any other action. If no record date is fixed: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. - 5 - 10 (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.11 Conduct of Meeting. The Chairman of the Board and Chief Executive Officer, if such office has been filled, and, if such office has not been filled or if the Chairman of the Board and Chief Executive Officer is absent or otherwise unable to act, the President shall preside at all meetings of stockholders. The Secretary shall keep the records of each meeting of stockholders. In the absence or inability to act of any such officer, such officer's duties shall be performed by the officer given the authority to act for such absent or non-acting officer under these bylaws or by resolution adopted by the Board of Directors, or if no officer has been given such authority, by some person appointed at the meeting. 2.12 Inspectors. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count, and tabulate all votes, ballots, or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request, or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. ARTICLE THREE: DIRECTORS 3.1 Management. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. - 6 - 11 3.2 Number; Qualification; Election; Term. The Board of Directors shall consist of no less than one director (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). Subject to the preceding sentence, the number of directors which shall constitute the whole Board of Directors shall from time to time be fixed and determined by resolution adopted by the Board of Directors. The directors of the Corporation (exclusive of directors who are elected pursuant to the terms of, and serve as representatives of the holders of, any series of preferred stock of the Corporation) shall be referred to herein as "CLASSIFIED DIRECTORS" and shall be divided into three classes, with the first class referred to herein as "CLASS 1," the second class as "CLASS 2," and the third class as "CLASS 3." If the total number of Classified Directors equals a number divisible by three, then the number of directors in each of Class 1, Class 2, and Class 3 shall be that number of directors equal to the total number of directors divided by three. If, however, the total number of Classified Directors equals a number that is not divisible by three, each such class of directors shall consist of that number of directors as nearly equal in number as possible to the total number of directors divided by three, as determined by the Board of Directors in advance of each respective election of directors by holders of shares of capital stock of the Corporation then entitled to vote in such election. The term of office of the initial Class 1 directors shall expire at the 1995 annual meeting of stockholders, the term of office of the initial Class 2 directors shall expire at the 1996 annual meeting of stockholders and the term of office of the initial Class 3 directors shall expire at the 1997 annual meeting of stockholders, with each director to hold office until his successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the 1995 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his successor shall have been duly elected and qualified. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation shall have the right, voting separately by series or by class (excluding holders of common stock), to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies, and other features of such directorships shall be governed by the terms of the Certificate of Incorporation (including any amendment to the Certificate of Incorporation that designates a series of preferred stock), and such directors so elected by the holders of preferred stock shall not be divided into classes pursuant to this Section 3.2 unless expressly provided by the terms of the Certificate of Incorporation. 3.3 Change in Number. No decrease in the number of directors constituting the entire Board of Directors shall have the effect of shortening the term of any incumbent director. - 7 - 12 3.4 Vacancies. Any or all Classified Directors may be removed for cause at any annual or special meeting of stockholders, upon the affirmative vote of the holders of a majority of the outstanding shares of each class of capital stock then entitled to vote in person or by proxy at an election of such Classified Directors, provided that notice of the intention to act upon such matter shall have been given in the notice calling such meeting. Newly created directorships resulting from any increase in the authorized number of directors and any vacancies occurring in the Board of Directors caused by death, resignation, retirement, disqualification, removal or other termination from office of any directors may be filled by the vote of a majority of the directors then in office, though less than a quorum, or by the affirmative vote, at a special meeting of the stockholders called for the purpose of filling such directorship, of the holders of a majority of the outstanding shares of capital stock then entitled to vote in person or by proxy at such meeting. Each successor director so chosen shall hold office until the next election of the class for which such director shall have been chosen and until his respective successor shall have been duly elected and qualified. Any newly created or eliminated directorships resulting from an increase or decrease in the authorized number of directors shall be appointed or allocated by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible. 3.5 Meetings of Directors. The directors may hold their meetings and may have an office and keep the records of the Corporation, except as otherwise provided by law, in such place or places within or without the State of Delaware as the Board of Directors may from time to time determine or as shall be specified in the notice of such meeting or duly executed waiver of notice of such meeting. 3.6 First Meeting. Each newly elected Board of Directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of stockholders, and no notice of such meeting shall be necessary. 3.7 Election of Officers. At the first meeting of the Board of Directors after each annual meeting of stockholders at which a quorum shall be present, the Board of Directors shall elect the officers of the Corporation. 3.8 Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by resolution of the Board of Directors. Notice of such regular meetings shall not be required. 3.9 Special Meetings. Special meetings of the board of directors shall be held whenever called by the Chairman of the Board and Chief Executive Officer, or any director. 3.10 Notice. The Secretary shall give notice of each special meeting to each director at least 24 hours before the meeting. Notice of any such meeting need not - 8 - 13 be given to any director who, either before or after the meeting, submits a signed waiver of notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to him. The purpose of any special meeting shall be specified in the notice or waiver of notice of such meeting. 3.11 Quorum; Majority Vote. At all meetings of the Board of Directors, a majority of the directors fixed in the manner provided in these bylaws shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there is less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. Unless the act of a greater number is required by law, the Certificate of Incorporation, or these bylaws, the act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board of Directors. At any time that the Certificate of Incorporation provides that directors elected by the holders of a class or series of stock shall have more or less than one vote per director on any matter, every reference in these bylaws to a majority or other proportion of directors shall refer to a majority or other proportion of the votes of such directors. 3.12 Procedure. At meetings of the Board of Directors, business shall be transacted in such order as from time to time the Board of Directors may determine. The Chairman of the Board and Chief Executive Officer, if such office has been filled, and, if such office has not been filled or if the Chairman of the Board and Chief Executive Officer is absent or otherwise unable to act, the President shall preside at all meetings of the Board of Directors. In the absence or inability to act of such officers, a chairman shall be chosen by the Board of Directors from among the directors present. The Secretary of the Corporation shall act as the secretary of each meeting of the Board of Directors unless the Board of Directors appoints another person to act as secretary of the meeting. The Board of Directors shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation. 3.13 Presumption of Assent. A director of the Corporation who is present at the meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 3.14 Compensation. The Board of Directors shall have the authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the Board of Directors or any committee thereof; provided, that nothing contained herein shall be construed to preclude any - 9 - 14 director from serving the Corporation in any other capacity or receiving compensation therefor. ARTICLE FOUR: COMMITTEES 4.1 Designation. The Board of Directors may designate one or more committees. 4.2 Number; Qualification; Term. Each committee shall consist of one or more directors appointed by resolution adopted by a majority of the entire Board of Directors. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire Board of Directors. Each committee member shall serve as such until the earliest of (i) the expiration of his term as director, (ii) his resignation as a committee member or as a director, or (iii) his removal as a committee member or as a director. 4.3 Authority. Each committee, to the extent expressly provided in the resolution establishing such committee, shall have and may exercise all of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation except to the extent expressly restricted by law, the Certificate of Incorporation, or these bylaws. 4.4 Committee Changes. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. 4.5 Alternate Members of Committees. The Board of Directors may designate one or more directors as alternate members of any committee. Any such alternate member may replace any absent or disqualified member at any meeting of the committee. If no alternate committee members have been so appointed to a committee or each such alternate committee member is absent or disqualified, the member or members of such committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. 4.6 Regular Meetings. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by the committee and communicated to all members thereof. 4.7 Special Meetings. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least two days before such special meeting. Neither the business to be transacted at, nor the - 10 - 15 purpose of, any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting. 4.8 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the Board of Directors shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the Certificate of Incorporation, or these bylaws. 4.9 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the Board of Directors upon the request of the Board of Directors. The minutes of the proceedings of each committee shall be delivered to the Secretary of the Corporation for placement in the minute books of the Corporation. 4.10 Compensation. Committee members may, by resolution of the Board of Directors, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary. 4.11 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the Board of Directors or any director of any responsibility imposed upon it or such director by law. ARTICLE FIVE: NOTICE 5.1 Method. Whenever by statute, the Certificate of Incorporation, or these bylaws, notice is required to be given to any committee member, director, or stockholder and no provision is made as to how such notice shall be given, personal notice shall not be required and any such notice may be given (a) in writing, by mail, postage prepaid, addressed to such committee member, director, or stockholder at his address as it appears on the books or (in the case of a stockholder) the stock transfer records of the Corporation, or (b) by any other method permitted by law (including but not limited to overnight courier service, telegram, telex, or telefax). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail as aforesaid. Any notice required or permitted to be given by overnight courier service shall be deemed to be delivered and given at the time delivered to such service with all charges prepaid and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex, or telefax shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. - 11 - 16 5.2 Waiver. Whenever any notice is required to be given to any stockholder, director, or committee member of the Corporation by statute, the Certificate of Incorporation, or these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a stockholder, director, or committee member at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE SIX: OFFICERS 6.1 Number; Titles; Term of Office. The officers of the Corporation shall be a Chairman of the Board and Chief Executive Officer, a President, a Secretary, and such other officers as the Board of Directors may from time to time elect or appoint, including one or more Vice Presidents (with each Vice President to have such descriptive title, if any, as the Board of Directors shall determine) and a Treasurer. Each officer shall hold office until his successor shall have been duly elected and shall have qualified, until his death, or until he shall resign or shall have been removed in the manner hereinafter provided. Any two or more offices may be held by the same person. None of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware. 6.2 Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 6.3 Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the Board of Directors. 6.4 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these bylaws. 6.5 Compensation. The compensation, if any, of officers and agents shall be fixed from time to time by the Board of Directors; provided, however, that the Board of Directors may delegate the power to determine the compensation of any officer and agent (other than the officer to whom such power is delegated) to the Chairman of the Board and Chief Executive Officer or the President. 6.6 Chairman of the Board and Chief Executive Officer. The Chairman of the Board and Chief Executive Officer shall be the chief executive officer of the Corporation and, subject to the supervision of the Board of Directors of the - 12 - 17 Corporation, shall have the general management and control of the Corporation and its subsidiaries (including the right to vote the voting securities of the subsidiaries of the Corporation on behalf of the Corporation), shall preside at all meetings of the stockholders and of the Board of Directors and may sign all certificates for shares of capital stock of the Corporation. 6.7 President. The President shall be the chief operating officer of the Corporation and, subject to the supervision of the Chairman of the Board and Chief Executive Officer, he shall have general executive charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. In the absence or inability to act of the Chairman of the Board and Chief Executive Officer, the President shall exercise all of the powers and discharge all of the duties of the Chairman of the Board and Chief Executive Officer. As between the Corporation and third parties, any action taken by the President in the performance of the duties of the Chairman of the Board and Chief Executive Officer shall be conclusive evidence that the Chairman of the Board and Chief Executive Officer is absent or unable to act. The President may sign all certificates for shares of stock of the Corporation. 6.8 Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors, the Chairman of the Board and Chief Executive Officer, or the President, and (in order of their seniority as determined by the Board of Directors or, in the absence of such determination, as determined by the length of time they have held the office of Vice President) shall exercise the powers of the President during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken. 6.9 Treasurer. The Treasurer shall have custody of the Corporation's funds and securities, shall keep full and accurate account of receipts and disbursements, shall deposit all monies and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board and Chief Executive Officer, or the President. 6.10 Assistant Treasurers. Each Assistant Treasurer shall have such powers and duties as may be assigned to him by the Board of Directors, the Chairman of the Board and Chief Executive Officer, or the President. The Assistant Treasurers (in the order of their seniority as determined by the Board of Directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Treasurer) shall exercise the powers of the Treasurer during that officer's absence or inability to act. - 13 - 18 6.11 Secretary. Except as otherwise provided in these bylaws, the Secretary shall keep the minutes of all meetings of the Board of Directors and of the stockholders in books provided for that purpose, and he shall attend to the giving and service of all notices. He may sign with the Chairman of the Board and Chief Executive Officer or the President, in the name of the Corporation, all contracts of the Corporation and affix the seal, if any, of the Corporation thereto. He may sign with the Chairman of the Board and Chief Executive Officer or the President all certificates for shares of stock of the Corporation, and he shall have charge of the certificate books, transfer books, and stock papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection by any director upon application at the office of the Corporation during business hours. He shall in general perform all duties incident to the office of the Secretary, subject to the control of the Board of Directors, the Chairman of the Board and Chief Executive Officer, and the President. 6.12 Assistant Secretaries. Each Assistant Secretary shall have such powers and duties as may be assigned to him by the Board of Directors, the Chairman of the Board and Chief Executive Officer, or the President. The Assistant Secretaries (in the order of their seniority as determined by the Board of Directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Secretary) shall exercise the powers of the Secretary during that officer's absence or inability to act. 6.13 Vice Chairman of the Board. The Vice Chairman of the Board shall have such powers and duties as may be provided herein or assigned to him by the Board of Directors or the Chairman of the Board and Chief Executive Officer. ARTICLE SEVEN: CERTIFICATES AND STOCKHOLDERS 7.1 Certificates for Shares. Certificates for shares of stock of the Corporation shall be in such form as shall be approved by the Board of Directors. The certificates shall be signed by the Chairman of the Board and Chief Executive Officer or the President or a Vice President and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be a facsimile and may be sealed with the seal of the Corporation or a facsimile thereof. If any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed upon, a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and the number of shares. 7.2 Replacement of Lost or Destroyed Certificates. The Corporation may direct a new certificate or certificates to be issued in place of a certificate or - 14 - 19 certificates theretofore issued by the Corporation and alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares to be lost or destroyed. When authorizing such issue of a new certificate or certificates the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed. 7.3 Transfer of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 7.4 Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 7.5 Regulations. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer, and registration or the replacement of certificates for shares of stock of the Corporation. 7.6 Legends. The Board of Directors shall have the power and authority to provide that certificates representing shares of stock bear such legends as the Board of Directors deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.1 Dividends. Subject to provisions of law and the Certificate of Incorporation, dividends may be declared by the Board of Directors at any regular or special meeting and may be paid in cash, in property, or in shares of stock of the Corporation. Such declaration and payment shall be at the discretion of the Board of Directors. - 15 - 20 8.2 Reserves. There may be created by the Board of Directors out of funds of the Corporation legally available therefor such reserve or reserves as the directors from time to time, in their discretion, consider proper to provide for contingencies, to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the Board of Directors shall consider beneficial to the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. 8.3 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders and Board of Directors and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. 8.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors; provided, that if such fiscal year is not fixed by the Board of Directors and the selection of the fiscal year is not expressly deferred by the Board of Directors, the fiscal year shall be the calendar year. 8.5 Seal. The seal of the Corporation shall be such as from time to time may be approved by the Board of Directors. 8.6 Resignations. Any director, committee member, or officer may resign by so stating at any meeting of the Board of Directors or by giving written notice to the Board of Directors, the Chairman of the Board and Chief Executive Officer, the President, or the Secretary. Such resignation shall take effect at the time specified therein or, if no time is specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 8.7 Securities of Other Corporations. The Chairman of the Board and Chief Executive Officer or the President shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. 8.8 Telephone Meetings. Members of the Board of Directors and members of a committee of the Board of Directors may participate in and hold a meeting of such Board of Directors or committee by means of a conference telephone or similar communications equipment by means of which persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting, except where a person participates in - 16 - 21 the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 8.9 Action Without a Meeting. Unless otherwise restricted by the Certificate of Incorporation or by these bylaws, any action required or permitted to be taken at a meeting of the Board of Directors, or of any committee of the Board of Directors, may be taken without a meeting if a consent or consents in writing, setting forth the action so taken, shall be signed by all the directors or all the committee members, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a vote of such directors or committee members, as the case may be, and may be stated as such in any certificate or document filed with the Secretary of State of the State of Delaware or in any certificate delivered to any person. Such consent or consents shall be filed with the minutes of proceedings of the Board or committee, as the case may be. Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 8.10 Invalid Provisions. If any part of these bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative. 8.11 Mortgages, etc. With respect to any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the Board of Directors authorizing such execution expressly state that such attestation is necessary. 8.12 Headings. The headings used in these bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation. 8.13 References. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender should include each other gender where appropriate. - 17 - 22 8.14 Amendments. The Board of Directors may, upon the affirmative vote of at least two-thirds of the Classified Directors then serving, make, adopt, alter, amend, and repeal from time to time these bylaws and make from time to time new bylaws of the Corporation (subject to the right of the stockholders entitled to vote thereon to adopt, alter, amend, and repeal bylaws made by the Board of Directors or to make new bylaws); provided, however, that the stockholders of the Corporation may adopt, alter, amend, or repeal bylaws made by the Board of Directors or make new bylaws solely upon the affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock then entitled to vote thereon. 8.15 Citizenship Requirements of Officers and Directors. Persons who are not U.S. Citizens (as defined in the Certificate of Incorporation) are not qualified to serve as a director or officer of the Corporation. ARTICLE NINE: GOVERNANCE PROVISIONS DURING THE EFFECTIVE PERIOD During the Effective Period (as defined below), the following Bylaws shall be in effect and govern those affairs of the Corporation to which they relate notwithstanding anything in these Bylaws to the contrary. 9.1 Definitions Applicable to Article Nine. As used in this Article Nine, the following terms have the meanings ascribed to them in this Section 9.1. (a) "AIC" shall mean American International Cargo, a co-partnership organized under the laws of the State of Michigan. (b) "BENEFICIALLY OWNED" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended, and the terms "BENEFICIAL OWNER" and "BENEFICIALLY OWNS" have meanings correlative thereto. (c) "CAUSE" shall have the meaning set forth in the Certificate of Incorporation of the Corporation. (d) "CHRISTOPHER" shall mean M. Tom Christopher. (e) "CHRISTOPHER DESIGNEES" shall mean Ted Coonfield, Jim Reeves and any successors thereto selected by the Christopher Nominating Committee. (f) "CHRISTOPHER NOMINATING COMMITTEE" shall have the meaning ascribed to it in Section 9.3. - 18 - 23 (g) "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." (h) "EFFECTIVE PERIOD" shall mean the period commencing at the Effective Time and terminating upon the earlier of (a) 11:59 P.M. on the 36-month anniversary of the Effective Time, (b) the death, Disability or voluntary resignation as a director of the Corporation of either Christopher or Kalitta or (c) the sale of all shares Beneficially Owned by both Christopher and Kalitta. (i) "EFFECTIVE TIME" shall mean the date and time when properly executed certificates of merger, in such form as is required by and executed in accordance with the Michigan Business Corporation Act to effect the merger of Kitty Hawk - AIA, Inc. with and into American International Airways, Inc., Kitty Hawk - AIT, Inc. with and into American International Travel, Inc., Kitty Hawk - FOL, Inc. with and into Flight One Logistics, Inc., Kitty Hawk - KFS, Inc. with and into Kalitta Flying Service, Inc. and Kitty Hawk - OK, Inc. with and into O.K. Turbines, Inc., are duly filed with the Department of Consumer and Industry Services of the State of Michigan or at such later time as the parties to the Merger Agreement shall have provided in such certificates. (j) "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. (k) "JOINT DESIGNEE" shall mean Lewis White and any successors thereto selected by the Joint Nominating Committee. (l) "JOINT NOMINATING COMMITTEE" shall have the meaning ascribed to it in Section 9.3. - 19 - 24 (m) "KALITTA" shall mean Conrad Kalitta. (n) "KALITTA COMPANY" shall mean any of American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc. and O.K. Turbines, Inc. (o) "KALITTA DESIGNEES" shall mean George Kelsey, Phil Sauder and any successors thereto selected by the Kalitta Nominating Committee. (p) "KALITTA NOMINATING COMMITTEE" shall have the meaning ascribed to it in Section 9.3. (q) "MERGER AGREEMENT" shall mean that certain Agreement and Plan of Merger, dated as of September 22, 1997, entered into by and among the Corporation, Kitty Hawk - AIA, Inc., a Michigan corporation, Kitty Hawk - AIT, Inc., a Michigan corporation, Kitty Hawk - FOL, Inc., a Michigan corporation, Kitty Hawk - KFS, Inc., a Michigan corporation, Kitty Hawk - OK, Inc., a Michigan corporation, Christopher, American International Airways, Inc., a Michigan corporation, American International Travel, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, Kalitta Flying Service, Inc., a Michigan corporation, O.K. Turbines, Inc., a Michigan corporation, and Kalitta, as amended by Amendment No. 1 to Agreement and Plan of Merger dated October 23, 1997 among the parties thereto, Amendment No. 2 to Agreement and Plan of Merger dated October 29, 1997 among the parties thereto and Amendment No. 3 to Agreement and Plan of Merger dated November 14, 1997 among the parties thereto. (r) "SUBS" shall mean, collectively, Kitty Hawk - AIA, Inc., Kitty Hawk - AIT, Inc., Kitty Hawk - FOL, Inc., Kitty Hawk - KFS, Inc., and Kitty Hawk - OK, Inc. (s) "SUBSIDIARIES" shall mean Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc. and Skyfreighters, Inc. 9.2 Electing the Initial Effective Period Board. The number of directors comprising the full Board of Directors of the Corporation 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. 9.3 Effective Period Nominating Committees. The Corporation shall have (a) a joint nominating committee (the "JOINT NOMINATING COMMITTEE"), a Christopher nominating committee (the "CHRISTOPHER NOMINATING COMMITTEE") and a Kalitta nominating committee (the "KALITTA NOMINATING COMMITTEE") of the Board of Directors, (b) such Joint Nominating Committee shall consist of Christopher - 20 - 25 and Kalitta for so long as each is a director of the Corporation (c) the Christopher Nominating Committee shall consist of Christopher for so long as he is a director of the Corporation and (d) the Kalitta Nominating Committee shall consist of Kalitta for so long as he is a director of the Corporation. The (i) Joint Nominating Committee shall have the exclusive power on behalf of the Board of Directors to nominate persons for election as directors of the Corporation as a Joint Designee and to fill any vacancy of the Joint Designee on the Board of Directors, (ii) Christopher Nominating Committee shall have the exclusive power on behalf of the Board of Directors of the Corporation to nominate Christopher and persons for election as directors of the Corporation as Christopher Designees and to fill vacancies on the Board of Directors vacated by Christopher Designees, and (iii) 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 Corporation as Kalitta Designees and to fill vacancies on the Board of Directors vacated by the Kalitta Designees. The (a) Joint Nominating Committee, (b) Christopher Nominating Committee and (c) Kalitta Nominating Committee shall nominate (a) Lewis White, (b) Tom Christopher, Ted Coonfield and Jim Reeves and (c) Conrad Kalitta, George Kelsey and Phil Sauder, respectively, for re-election as directors when their terms expire unless such persons are unable or unwilling to serve or if such persons have been removed for Cause. 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 these Bylaws by either member of the Joint Nominating Committee. 9.4 Deadlock Resolution. 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 Corporation 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 Corporation at any time after the tenth (10th) 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 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 AIC, the Corporation, 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 - 21 - 26 Committee may call a meeting of the Joint Nominating Committee to choose another person to serve as a director of the Corporation (in which case all of the provisions of this Section 9.4 shall again apply). 9.5 Certain Officers. (a) Until the first anniversary of the Effective Time, the Chairman of the Board and Chief Executive Officer shall be elected exclusively by the stockholders and shall serve as the Chairman of the Board and Chief Executive Officer of the Corporation and, subject to the supervision of the Board of Directors, shall have the general management and control of the Corporation and its subsidiaries (including the right to vote (except as set forth in Section 9.5(b) of these Bylaws below solely for the one year period commencing with the Effective Time) the voting securities of the subsidiaries of Corporation on behalf of the Corporation). (b) Until the first anniversary of the Effective Time, the Vice Chairman of the Board shall be elected exclusively by the stockholders and shall serve as an officer of the Corporation and shall have the right to vote the voting securities of American International Airways, Inc. solely for the purpose of electing the President of American International Airways, Inc. and against his removal except for cause. (c) The President of American International Airways, Inc. is to report only to the Chairman of the Board and Chief Executive Officer of the Corporation. 9.6 Amendments to Article Nine. During the Effective Period, the provisions of Article Nine of the Bylaws 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 common stock of the Corporation. * * * * * - 22 - 27 The undersigned Secretary of the Corporation hereby certifies that the foregoing bylaws were adopted by unanimous consent of the directors of the Corporation as of November 18, 1997. /s/ RICHARD R. WADSWORTH --------------------------------------- Richard R. Wadsworth, Secretary - 23 - EX-4.2 4 STOCKHOLDERS' AGREEMENT - 11/97 1 EXHIBIT 4.2 STOCKHOLDERS' AGREEMENT STOCKHOLDERS' AGREEMENT, dated as of November 19, 1997 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 22, 1997, as amended (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. "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. 2 "Beneficial Owner" means a "beneficial owner", as defined in Regulation Section 240.13d-3 under the Exchange Act and the terms "Beneficially Owns" and "Beneficially Owned" have meanings correlative thereto. "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 including 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 Exempt Transfer of Common Stock from Kalitta or another Kalitta Stockholder. -2- 3 "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 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, -3- 4 (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. 1.3 Other Definitions. To the extent not otherwise defined herein, capitalized terms have the meanings ascribed to them in the Merger Agreement. -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 in their capacities as stockholders: (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 Chairman of the Board and Chief Executive Officer and Vice Chairman 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 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 Committees. (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 his removal except for cause, (y) for Christopher and each of the nominees of the Christopher Nominating Committee for election as a director of the Company as a Christopher Designee and against their removal except for cause and (z) for Kalitta and each of the nominees of the Kalitta Nominating Committee for election as a director of the Company as a Kalitta Designee and against their removal except for cause and (ii) not vote (or act by written consent with respect to) any shares of Common Stock or other 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 Bylaws have been amended at or prior to the date of this Agreement to provide that 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) The Bylaws have been amended at or prior to the date of this Agreement to provide that 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. The Bylaws have been amended at or prior to the date of this Agreement to provide that 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 American International Cargo, a Michigan co-partnership, 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. The Bylaws have been amended at or prior to the date of this Agreement to provide that 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 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 -8- 9 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 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 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 Chairman of the Board and Chief Executive Officer of the Company. Until the first anniversary of the date of this Agreement, 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 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 Chairman of the Board and 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 -9- 10 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 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 November 19, 1997, 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 -11- 12 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 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 September 22, 1997 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 -12- 13 intended methods of disposition thereof set forth in such registration statement or the expiration of thirty (30) days after such registration statement becomes effective; (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 -13- 14 and, in the case of the accountants' letter, such other financial matters, as such Selling Stockholder may reasonably request; (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: -14- 15 (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 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: -15- 16 (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 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 -16- 17 concerning such Selling Stockholder's specified plan of distribution and other information. 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 -17- 18 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. 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, -18- 19 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 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 -19- 20 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 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 -20- 21 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. (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, -21- 22 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. (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. -22- 23 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. 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 -23- 24 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. -24- 25 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Kitty Hawk, Inc. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Title: Richard R. Wadsworth Its: Senior Vice President /s/ M. TOM CHRISTOPHER -------------------------------------- M. Tom Christopher /s/ CONRAD KALITTA -------------------------------------- Conrad Kalitta -25- 26 Schedule 1 Stockholders
Name and Address Shares of Common Stock ---------------- ---------------------- Conrad Kalitta 4,099,150 2701 N. I-94 Service Drive Ypsilanti, Michigan 48197 Telecopy: (313) 484-3686 M. Tom Christopher 5,948,436 1515 West 20th Street P.O. Box 612787 Dallas/Fort Worth International Airport, Texas 75261 Telecopy: (972) 456-2292
-26- EX-4.3 5 SPECIMEN GLOBAL NOTE - SR. SECURED NOTES DUE 2004 1 EXHIBIT 4.3 Speciman Global Note KITTY HAWK, INC. 9.95% Senior Secured Notes Due 2004 CUSIP: 498326 AA 5 No. _________ $________________ KITTY HAWK, INC., a Delaware corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to Cede & Co., or its registered assigns, the principal sum of __________________________ Dollars ($ __________) on November 15, 2004. Interest Payment Dates: May 15 and November 15, commencing May 15, 1998. Regular Record Dates: May 1 and November 1. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. THIS NOTE WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCES. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON EXEMPTIONS FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d), IF APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO KITTY HAWK, INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF NOTES OF LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS IN THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE. 2 2 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. Date: November 19, 1997 KITTY HAWK, INC. By: -------------------------------- Name: M. Tom Christopher Title: Chairman of the Board and Chief Executive Officer By: -------------------------------- Name: Richard R. Wadsworth Title: Senior Vice President -- Finance, Chief Financial Officer and Secretary (Trustee's Certificate of Authentication) This is one of the 9.95% Senior Secured Notes Due 2004 described in the within mentioned Indenture. BANK ONE, NA, as Trustee By: -------------------------------- John Beacham Trust Officer 3 3 KITTY HAWK, INC. 9.95% Senior Secured Note Due 2004 1. Principal and Interest. The Company will pay the principal of this Note on November 15, 2004. The Company promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate per annum shown above. Interest will be payable semiannually (to the holders of record of the Notes at the close of business on the May 1 or November 1 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing May 15, 1998. If the exchange offer contemplated by Registration-Statement under the Securities Act is not consummated or, if required, a Shelf Registration Statement under the Securities Act with respect to resales of the Notes is not declared effective by the Commission, on or before May 19, 1998, in accordance with the terms of the Registration Rights Agreement dated as of November 19, 1997, between the Company, the Guarantors and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Fieldstone FPCG Services, L.P., then the interest rate per annum accruing on the Notes shall, effective May 19, 1998, be increased by 0.5% per annum, until the exchange offer is completed or such Shelf Registration Statement is declared effective. The Holder of this Note is entitled to the benefits of such Registration Rights Agreement. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from November 19, 1997; provided that, if there is no existing default in the payment of interest and this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate borne by the Notes. 4 4 2. Method of Payment. The Company will pay interest (except defaulted interest) on the principal amount of the Notes as provided above on each May 15 and November 15 to the persons who are Holders (as reflected in the Security Register at the close of business on the May 1 and November 1 immediately preceding the Interest Payment Date), in each case, even if the Note is canceled on registration of transfer, registration of exchange, redemption or repurchase after such record date; provided that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Note to a Paying Agent on or after November 15, 2004. The Company will pay principal, premium, if any, and as provided above, interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company, at its option, may pay principal, premium, if any, and interest by its check payable in such money. It may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. Paying Agent and Registrar. Initially, the Trustee will act as authenticating agent, Paying Agent and Registrar. The Company may change any authenticating agent, Paying Agent or Registrar without notice. The Company, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar. 4. Indenture; Limitations. The Company issued the Notes under an Indenture dated as of November 19, 1997 (the "Indenture"), between the Company, the Guarantors and Bank One, NA, as trustee and collateral trustee (collectively, the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are senior secured obligations of the Company. 5 5 5. Redemption. The Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after November 15, 2001 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing November 15, of the years set forth below:
Redemption Year Price ---- ------------- 2001 104.975% 2002 102.488% 2003 100.000%
In addition, at any time prior to November 15, 2000, the Company may redeem up to 35% of the principal amount of the Notes with the proceeds of one or more Public Equity Offerings, at any time or from time to time, at a Redemption Price (expressed as a percentage of principal amount) of 109.95%, plus accrued and unpaid interest to the Redemption Date (subject to the rights of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date); provided that at least $150 million aggregate principal amount of Notes remains outstanding after each such redemption. Notice of any optional redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at his last address as it appears in the Security Register. Notes in denominations larger than $1,000 may be redeemed in part. On and after the Redemption Date, interest ceases to accrue on Notes or portions of Notes called for redemption, unless the Company defaults in the payment of the Redemption Price. 6. Repurchase upon Change of Control Triggering Event. Upon the occurrence of a Change of Control Triggering Event, the Company must commence, within 30 days of the occurrence of a Change of Control Triggering Event, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. 6 6 Notes in denominations larger than $1,000 may be sold to the Company in part. On and after the Payment Date, interest ceases to accrue on Notes or portions of Notes surrendered for purchase by the Company, unless the Company defaults in the payment of the Change of Control Payment. 7. Denominations; Transfer; Exchange. The Notes are in registered form without coupons in denominations of $1,000 of principal amount and any integral multiple in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption. Also, it need not register the transfer or exchange of any Notes for a period of 15 days before the day of the mailing of a notice of redemption of Notes selected for redemption. 8. Persons Deemed Owners. A Holder shall be treated as the owner of a Note for all purposes. 9. Unclaimed Money. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company at its written request. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 10. Discharge Prior to Redemption or Maturity. The Company or the Guarantors generally will be discharged from the Indenture and the Notes, except in certain circumstances for certain sections thereof, if, among other things, the Company and the Guarantors (A) deposit with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes and (B) deliver (i) an Opinion of Counsel or Internal Revenue Service ruling directed to the Trustee with respect to the tax effects of such deposits and (ii) an Opinion of Counsel 7 7 concerning Investment Company Act of 1940 and United States Bankruptcy Code ramifications of the deposits, (C) in conjunction with such deposits, ensure there is an absence of certain Events of Default and (D) provide an Opinion of Counsel concerning the potential delisting of the Notes from a national securities exchange as a result of the deposits; provided that if simultaneously with the deposit of the money and/or U.S. Government Obligations referred to in (A) above, the Company or any Guarantor has caused an irrevocable, transferable, standby letter of credit to be issued by a bank with capital and surplus exceeding the principal amount of the Notes then outstanding, expiring not earlier than 180 days from its issuance, in favor of the Trustee which permits the Trustee to draw an amount equal to the principal, premium, if any, and accrued interest on the Notes through the expiry date of the letter of credit, then the Company and the Guarantors will be deemed to have paid and discharged any and all obligations in respect of the Notes on the date of the deposit and issuance of the letter of credit. 11. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture, the Escrow and Security Agreement or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture, the Note Guarantees or the Notes to, among other things, cure any ambiguity, defect or inconsistency and make any change that, in the opinion of the Board of Directors of the Company evidenced by a Board resolution, does not materially and adversely affect the rights of any Holder. 12. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries, among other things, to Incur additional Indebtedness, make Restricted Payments, suffer to exist restrictions on the ability of Restricted Subsidiaries to make certain payments to the Company, issue Capital Stock of Restricted Subsidiaries, engage in transactions with Affiliates, suffer to exist or incur Liens, or merge, consolidate or transfer substantially all of its assets. On or before a date not more than 90 days after the end of each fiscal year, the Company shall deliver to the Trustee an Officers' Certificate stating whether or not the signers know of any Default or Event of Default under such restrictive covenants or a Collateral Access Event. 8 8 13. Successor Persons. When a successor person or other entity assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor person will be released from those obligations. 14. Defaults and Remedies. The following events constitute "Events of Default" with respect to the Notes under the Indenture: (a) the Company defaults in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) the Company defaults in the performance or breaches the provisions of Article Five or fails to make or consummate an Offer to Purchase in accordance with Section 4.11 or Section 4.14; (d) the Company or any Guarantor defaults in the performance of or breaches any other covenant or agreement of the Company in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Guarantor or Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Guarantor or Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company, any Guarantor or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or 9 9 similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; (h) the Company, any Guarantor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors; or (i) any Note Guarantee shall cease to be, or shall be asserted in writing by the Company or any Guarantor not to be, in full force and effect or enforceable in accordance with its terms. If an Event of Default, except for certain ones, or a Collateral Access Event, as defined in the Indenture, occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes, then outstanding, may declare all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the Company occurs and is continuing, the Notes automatically become due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 15. Security. The Collateral securing the Notes will consist of (i) nine Boeing 747s (including the Optioned Boeing 747s), eight Lockheed L-1011s and thirteen Boeing 727s, along with the Engines, (ii) all insurance and requisition proceeds and other similar payments with respect to each of the Aircraft, (iii) all monies or securities deposited or required to be deposited with the Trustee, (iv) any purchase agreements and any related documentation to the extent assignable for each Aircraft, (v) all logs, data and records related to the Aircraft, (vi) the Pledged Securities on deposit in the Escrow Account, the Escrow Account and certain related assets, (vii) all rights of any Owner under any Lease relating to any Aircraft, and (viii) all proceeds of the foregoing. The Pledged Securities shall be sufficient to provide for (i) the purchase of the two Optioned Boeing 747s or other Eligible Aircraft and (ii) the conversion of such Aircraft to freighter configuration. 10 10 16. Trustee Dealings with the Company. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for the Company or its Affiliates and may otherwise deal with the Company or its Affiliates as if it were not the Trustee. 17. No Recourse Against Others. No incorporator, stockholder, other officer, director, employee or controlling person of the Company or any Guarantor or of any successor Person thereof shall have any liability for any obligations of the Company under the Notes, the Guarantees, the Escrow and Security Agreement or the Indenture or for any claim based on, or otherwise in respect of or by reason thereof, such obligations or their creation. Each Holder by accepting a Note expressly waives and releases all such liability. The waiver and release are a condition of, and part of the consideration for the issuance of the Notes and the related Guarantees. 18. Guarantees. The Company's obligations under the Notes are irrevocably guaranteed by the Guarantors. 19. Authentication. This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. 20. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to Kitty Hawk, Inc., P.O. Box 612787, 1515 West 20th Street, Dallas/Fort Worth International Airport, TX 75261, Attention: Chief Financial Officer 11 11 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - ----------------------------------------------------------------------------- Please print or typewrite name and address including zip code of assignee - ----------------------------------------------------------------------------- the within Note and all rights thereunder, hereby irrevocably constituting and appointing _________________________________ attorney to transfer said Note on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL NOTES OTHER THAN EXCHANGE NOTES] In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date the shelf registration statement is declared effective or (ii) the end of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933 provided by Rule 144A thereunder. or [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. 12 12 If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.08 of the Indenture shall have been satisfied. Date: ----------------- --------------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933 and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: ----------------- --------------------------------------------------- NOTICE: To be executed by an executive officer 13 13 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to an Offer to Purchase in accordance with the terms of the Indenture, check the Box: [ ] If you wish to have a portion of this Note purchased by the Company pursuant to an Offer to Purchase in accordance with the terms the Indenture, state the amount: $___________________. Date: --------------------------------------------------- Your Signature: ----------------------------------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:(1) ------------------------------------------------------------ - ----------------------------------- (1) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. EX-4.4 6 INDENTURE - 11/14/97 1 EXHIBIT 4.4 [EXECUTION COPY] ================================================================================ KITTY HAWK, INC., as Issuer EACH SUBSIDIARY OF KITTY HAWK, INC. LISTED ON THE SIGNATURE PAGES HEREOF as Guarantors and BANK ONE, NA as Trustee and Collateral Trustee ------------------------- Indenture Dated as of November 15, 1997 ------------------------- $340,000,000 9.95% Senior Secured Notes Due 2004 ================================================================================ 2 [CONFORMED COPY] ================================================================================ KITTY HAWK, INC., as Issuer EACH SUBSIDIARY OF KITTY HAWK, INC. LISTED ON THE SIGNATURE PAGES HEREOF as Guarantors and BANK ONE, NA as Trustee and Collateral Trustee ------------------------- Indenture Dated as of November 15, 1997 ------------------------- $340,000,000 9.95% Senior Secured Notes Due 2004 ================================================================================ 3 CROSS-REFERENCE TABLE
TIA Sections Indenture Sections - ------------ ------------------ Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03; 7.08 Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03 Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . 2.03 Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 7.06; 11.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . 4.15; 7.05; 11.02 (a)(4) . . . . . . . . . . . . . . . . . . . . . . . 4.20; 11.02 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 (c)(1) . . . . . . . . . . . . . . . . . . . . . . . 11.03 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . 11.03 (d) . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 (e) . . . . . . . . . . . . . . . . . . . . . . . . . 4.20; 11.04 Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (e) . . . . . . . . . . . . . . . . . . . . . . . . . 6.12 Section 316(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . 6.06 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . 6.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 9.03 Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 6.09 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . 6.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . 11.01 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
Note: The Cross-Reference Table shall not for any purpose be deemed to be a part of the Indenture. 4 TABLE OF CONTENTS*
Page ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 1.02. Incorporation by Reference of Trust Indenture Act . . . 27 SECTION 1.03. Rules of Construction . . . . . . . . . . . . . . . . . 27 ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.02. Restrictive Legends . . . . . . . . . . . . . . . . . . 29 SECTION 2.03. Execution, Authentication and Denominations . . . . . . 30 SECTION 2.04. Registrar and Paying Agent . . . . . . . . . . . . . . 31 SECTION 2.05. Paying Agent to Hold Money in Trust . . . . . . . . . . 32 SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . 33 SECTION 2.07. Book-Entry Provisions for Global Notes . . . . . . . . 33 SECTION 2.08. Special Transfer Provisions . . . . . . . . . . . . . . 35 SECTION 2.09. Replacement Notes . . . . . . . . . . . . . . . . . . . 37 SECTION 2.10. Outstanding Notes . . . . . . . . . . . . . . . . . . . 38 SECTION 2.11. Temporary Notes . . . . . . . . . . . . . . . . . . . . 39 SECTION 2.12. Cancellation . . . . . . . . . . . . . . . . . . . . . 39 SECTION 2.13. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . 39 SECTION 2.14. Defaulted Interest . . . . . . . . . . . . . . . . . . 39 SECTION 2.15. Record Date . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 2.16 Computation of Interest . . . . . . . . . . . . . . . . 40 ARTICLE THREE REDEMPTION SECTION 3.01. Right of Redemption . . . . . . . . . . . . . . . . . . 40 SECTION 3.02. Notices to Trustee . . . . . . . . . . . . . . . . . . 41 SECTION 3.03. Selection of Notes to Be Redeemed . . . . . . . . . . . 41 SECTION 3.04. Notice of Redemption . . . . . . . . . . . . . . . . . 42 SECTION 3.05. Effect of Notice of Redemption . . . . . . . . . . . . 43 SECTION 3.06. Deposit of Redemption Price . . . . . . . . . . . . . . 43 SECTION 3.07. Payment of Notes Called for Redemption . . . . . . . . 43 SECTION 3.08. Notes Redeemed in Part . . . . . . . . . . . . . . . . 43
- ------------------------- (1) Note: The Table of Contents shall not for any purposes be deemed to be a part of the Indenture. i 5
Page ---- ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes . . . . . . . . . . . . . . . . . . . 43 SECTION 4.02. Maintenance of Office or Agency . . . . . . . . . . . . 44 SECTION 4.03. Limitation on Indebtedness . . . . . . . . . . . . . . 44 SECTION 4.04. Limitation on Restricted Payments . . . . . . . . . . . 47 SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries . . . . . . . . 49 SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries . . . . . . . . . . . . 51 SECTION 4.07. Issuances of Guarantees by New Restricted Subsidiaries . 51 SECTION 4.08. Limitation on Transactions with Shareholders and Affiliates . . . . . . . . . . . . . . . . . . . 51 SECTION 4.09. Limitation on Liens . . . . . . . . . . . . . . . . . . 52 SECTION 4.10. Limitation on Sale-Leaseback Transactions . . . . . . . 53 SECTION 4.11. Limitation on Asset Sales . . . . . . . . . . . . . . . 54 SECTION 4.13. Events of Loss . . . . . . . . . . . . . . . . . . . . 55 SECTION 4.14. Repurchase of Notes upon a Change of Control Triggering Event . . . . . . . . . . . . . . . . 55 SECTION 4.15. Commission Reports and Reports to Holders . . . . . . . 56 SECTION 4.16. Limitation on Collateral Sales; Event of Loss . . . . . 56 SECTION 4.17. Existence . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 4.18. Payment of Taxes and Other Claims . . . . . . . . . . . 57 SECTION 4.19. Maintenance of Properties and Insurance . . . . . . . . 58 SECTION 4.20. Compliance Certificates . . . . . . . . . . . . . . . . 58 SECTION 4.21. Waiver of Stay, Extension or Usury Laws . . . . . . . . 58 ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. When Company May Merge, Etc. . . . . . . . . . . . . . 59 SECTION 5.02. Successor Substituted . . . . . . . . . . . . . . . . . 60 ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . 60 SECTION 6.02. Collateral Access Events . . . . . . . . . . . . . . . 62 SECTION 6.03. Acceleration . . . . . . . . . . . . . . . . . . . . . 63 SECTION 6.04. Other Remedies . . . . . . . . . . . . . . . . . . . . 63 SECTION 6.05. Waiver of Past Defaults . . . . . . . . . . . . . . . . 64 SECTION 6.06. Control by Majority . . . . . . . . . . . . . . . . . . 64 SECTION 6.07. Limitation on Suits . . . . . . . . . . . . . . . . . . 64 SECTION 6.08. Rights of Holders to Receive Payment . . . . . . . . . 65 SECTION 6.09. Collection Suit by Trustee . . . . . . . . . . . . . . 65 SECTION 6.10. Trustee May File Proofs of Claim . . . . . . . . . . . 65
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Page ---- SECTION 6.11. Priorities . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 6.12. Undertaking for Costs . . . . . . . . . . . . . . . . . 66 SECTION 6.13. Restoration of Rights and Remedies . . . . . . . . . . 66 SECTION 6.14. Rights and Remedies Cumulative . . . . . . . . . . . . 67 SECTION 6.15. Delay or Omission Not Waiver . . . . . . . . . . . . . 67 ARTICLE SEVEN TRUSTEE SECTION 7.01. Rights of Trustee . . . . . . . . . . . . . . . . . . . 67 SECTION 7.02. Actions of Trustee . . . . . . . . . . . . . . . . . . 69 SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . . . 70 SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . 70 SECTION 7.05. Notice of Default or Collateral Access Events . . . . . 70 SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . 71 SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . . . 71 SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . . . 72 SECTION 7.09. Successor Trustee by Merger, Etc. . . . . . . . . . . . 73 SECTION 7.10. Eligibility . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 7.11. Money Held in Trust . . . . . . . . . . . . . . . . . . 73 ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. Termination of Company's Obligations . . . . . . . . . 73 SECTION 8.02. Defeasance and Discharge of Indenture . . . . . . . . . 74 SECTION 8.03. Defeasance of Certain Obligations . . . . . . . . . . . 76 SECTION 8.04. Application of Trust Money . . . . . . . . . . . . . . 78 SECTION 8.05. Repayment to Company . . . . . . . . . . . . . . . . . 78 SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . . . . . . . 78 ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . . . 79 SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . . . 79 SECTION 9.03. Revocation and Effect of Consent . . . . . . . . . . . 81 SECTION 9.04. Notation on or Exchange of Notes . . . . . . . . . . . 81 SECTION 9.05. Trustee to Sign Amendments, Etc. . . . . . . . . . . . 81 SECTION 9.06. Conformity with Trust Indenture Act . . . . . . . . . . 82 ARTICLE TEN PLEDGED SECURITIES SECTION 10.01. Security . . . . . . . . . . . . . . . . . . . . . . . 82 SECTION 10.02. Release upon Termination of the Company's Obligations . 83
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Page ---- ARTICLE ELEVEN MISCELLANEOUS SECTION 11.01. Trust Indenture Act of 1939 . . . . . . . . . . . . . 84 SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 11.03. Certificate and Opinion As to Conditions Precedent . . 85 SECTION 11.04. Statements Required in Certificate or Opinion . . . . 85 SECTION 11.05. Acts of Holders . . . . . . . . . . . . . . . . . . . 86 SECTION 11.06. Rules by Trustee, Paying Agent or Registrar . . . . . 87 SECTION 11.07. Payment Date Other Than a Business Day . . . . . . . . 87 SECTION 11.08. Governing Law . . . . . . . . . . . . . . . . . . . . 87 SECTION 11.09. No Adverse Interpretation of Other Agreements . . . . 87 SECTION 11.10. No Recourse Against Others . . . . . . . . . . . . . . 87 SECTION 11.11. Successors . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 11.12. Duplicate Originals . . . . . . . . . . . . . . . . . 88 SECTION 11.13. Separability . . . . . . . . . . . . . . . . . . . . . 88 SECTION 11.14. Table of Contents, Headings, Etc. . . . . . . . . . . 88 ARTICLE TWELVE MEETINGS OF HOLDERS SECTION 12.01. Purposes for Which Meetings May Be Called . . . . . . 88 SECTION 12.02. Manner of Calling Meetings . . . . . . . . . . . . . . 88 SECTION 12.03. Call of Meetings by the Company or Holders . . . . . . 89 SECTION 12.04. Who May Attend and Vote at Meetings . . . . . . . . . 89 SECTION 12.05. Quorum; Action . . . . . . . . . . . . . . . . . . . . 89 SECTION 12.06. Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment . . . 90 SECTION 12.07. Voting at the Meeting and Record to Be Kept . . . . . 91 SECTION 12.08. Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting . . 91 SECTION 12.09. Procedures Not Exclusive . . . . . . . . . . . . . . . 91 ARTICLE THIRTEEN GUARANTEES SECTION 13.01. Guarantees . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 13.02. Severability . . . . . . . . . . . . . . . . . . . . . 93 SECTION 13.03. Limitation of Guarantors' Liability . . . . . . . . . 93 SECTION 13.04. Contribution . . . . . . . . . . . . . . . . . . . . . 93 SECTION 13.05. Subrogation . . . . . . . . . . . . . . . . . . . . . 94 SECTION 13.06. Reinstatement . . . . . . . . . . . . . . . . . . . . 94 SECTION 13.07. Release of a Guarantor . . . . . . . . . . . . . . . . 94 SECTION 13.08. Benefits Acknowledged. . . . . . . . . . . . . . . . . 94
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Page ---- ARTICLE FOURTEEN COVENANTS RELATING TO THE AIRCRAFT SECTION 14.01. Registration of Aircraft. . . . . . . . . . . . . . . 95 SECTION 14.02. Insurance. . . . . . . . . . . . . . . . . . . . . . . 95 SECTION 14.03. Maintenance, Lease and Possession. . . . . . . . . . . 97 SECTION 14.04. Liens. . . . . . . . . . . . . . . . . . . . . . . . . 98 SECTION 14.05. Certain Further Limitations on Leasing or Other Relinquishment of Possession. . . . . . . . . . 98 SECTION 14.06. Trustee's Acknowledgment of Company's Right to Foreign Registration. . . . . . . . . . . . . . . 99 ARTICLE FIFTEEN SECURITY SECTION 15.01. Registration; Replacement and Pooling of Parts; Alterations, Modifications and Additions. 101 SECTION 15.02. [Intentionally Omitted] . . . . . . . . . . . . . . 103 SECTION 15.03. Inspection . . . . . . . . . . . . . . . . . . . . . 103 SECTION 15.04. Requisition for Use . . . . . . . . . . . . . . . . 104 SECTION 15.05. Substitution of Collateral. . . . . . . . . . . . . 104 SECTION 15.06. Release of Collateral. . . . . . . . . . . . . . . . 105 SECTION 15.07. Discontinuance of Proceedings . . . . . . . . . . . 105 SECTION 15.09. Termination of Interest in Collateral . . . . . . . 105
EXHIBIT A Form of Note A-1 EXHIBIT B [Intentionally Omitted] EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors C-1 EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S D-1 SCHEDULE A AIA Aircraft SCHEDULE B-1 Aircraft Leasing Aircraft SCHEDULE B-2 Leases of the Aircraft Leasing Aircraft v 9 INDENTURE, dated as of November 15, 1997, between Kitty Hawk, Inc., a Delaware corporation, as Issuer (the "Company"), each Subsidiary of the Company, other than American International Cargo, but including American International Airways, Inc., a Michigan corporation ("AIA"), Kitty Hawk Aircargo, Inc., a Texas corporation ("Aircargo), and Aircraft Leasing, Inc., a Texas corporation ("Leasing"), each as owners of certain aircraft pledged to secure the obligations hereunder (collectively, the "Guarantors") and Bank One, NA, a national banking association, as trustee and collateral trustee (individually, the "Trustee" and "Collateral Trustee" and, collectively, where the context so requires, the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of up to $340,000,000 aggregate principal amount of the Company's 9.95% Senior Secured Notes Due 2004 (the "Notes") issuable. The Notes will be secured pursuant to the terms of an Escrow and Security Agreement (as defined herein) by certain other assets, including certain Pledged Securities (as defined herein) as provided by Article Ten of this Indenture. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done, and the Company has done all things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee hereunder and duly issued by the Company, the valid obligations of the Company as hereinafter provided. Each Guarantor has duly authorized the guarantee of up to $340,000,000 aggregate principal amount of the Notes (the "Guarantees") and upon the issuance of the Exchange Notes, if any, up to $340,000,000 aggregate principal amount of the Exchange Notes (the "Guarantees"). This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act of 1939, as amended, that are required to be a part of and to govern indentures qualified under the Trust Indenture Act of 1939, as amended. AMERICAN INTERNATIONAL AIRWAYS, INC. GRANTING CLAUSE NOW, THEREFORE, THIS INDENTURE WITNESSETH, for and in consideration of the premises and the purchase of the Notes by the Holders thereof, to secure the prompt payment of the principal of and interest on, and all other amounts due with respect to, all Notes from time to time outstanding under this Indenture and the performance and observance by the Company of all the agreements, covenants and provisions for the benefit of the Holders in this Indenture and the Notes contained, and the prompt payment of any and all amounts from time to time owing under this Indenture by the Company to the Trustee, and for the uses and purposes and subject to the terms and provisions hereof, and in consideration of the premises and the covenants herein contained, and the acceptance of the Notes by the Holders and of the sum of $1 paid to the Company by the Collateral Trustee at or before the delivery hereof, the receipt whereof is hereby acknowledged, AIA has granted, sold, assigned, transferred, conveyed, pledged and confirmed, and does hereby grant, assign, transfer, convey, pledge and confirm, unto the Collateral Trustee and its successors and assigns, for the security and benefit of the Holders and the Trustee as aforesaid, a first priority security interest in all 10 estate, right, title and interest of AIA in, to and under the following described property, rights and privileges (which, collectively, including all property hereafter specifically subjected to the Lien of this Indenture by any agreement supplemental hereto, or otherwise expressly subject to the terms and provisions hereof, shall constitute a portion of the Collateral (as defined herein)), to wit: (i) seven Boeing 747s and eight Lockheed L-1011s, along with the Engines, as specified on Schedule A hereto (collectively, the "AIA Aircraft"); (ii) all insurance and requisition proceeds and other similar payments with respect to each of the AIA Aircraft; (iii) all monies or securities deposited or required to be deposited with the Trustee; (iv) any purchase agreements and any related documentation to the extent assignable for each Aircraft (v) all logs, data and records related to the Aircraft; and (vi) all proceeds of the foregoing, other than accounts. PROVIDED, HOWEVER, that notwithstanding any of the foregoing provisions, so long as no Event of Default shall have occurred and be continuing under this Indenture, (a) the Collateral Trustee shall not take or cause to be taken any action contrary to the Company's right hereunder to quiet enjoyment of the AIA Aircraft and related hush kits, and to possess, use, retain and control the AIA Aircraft and related hush kits and all revenues, income and profits derived therefrom. AIA HABENDUM CLAUSE TO HAVE AND TO HOLD ALL and singular and aforesaid property unto the Collateral Trustee and its successors and assigns, in trust for the benefit and security of the Holders and the Trustee and for the uses and purposes and subject to the terms and provisions set forth in this Indenture; provided, however, that the Lien of this Indenture shall be subject to discharge as provided in Section 8.02. AIA does hereby constitute the Collateral Trustee the true and lawful attorney of AIA, irrevocably, with full power (in the name of AIA or otherwise) to ask, require, demand, receive, compound and give acquittance for any and all monies and claims for monies (in each case including insurance and requisition proceeds) due and to become due under or arising out of the this Indenture and any documents related hereto and all other property which now or hereafter constitutes part of the AIA Collateral, to endorse any checks or other instruments or orders in connection therewith and to file any claims or to take any action or to institute any proceedings which the Collateral Trustee may deem to be necessary or advisable in the premises; providing, however, that the Collateral Trustee shall not exercise any such rights except upon the occurrence of an Event of Default under this Indenture. 2 11 AIA agrees that at any time and from time to time, upon the written request of the Collateral Trustee or the Holder of a majority in principal amount of the Notes outstanding, AIA will promptly and duly execute and deliver or cause to be duly executed and delivered any and all such further instruments and documents as the Collateral Trustee or such Holder of a majority in principal amount of the Notes outstanding may reasonably deem desirable in obtaining the full benefits of the assignment hereunder and the rights and powers granted herein. AIRCRAFT LEASING, INC. GRANTING CLAUSE NOW, THEREFORE, THIS INDENTURE WITNESSETH, for and in consideration of the premises and the purchase of the Notes by the Holders thereof, to secure the prompt payment of the principal of and interest on, and all other amounts due with respect to, all Notes from time to time outstanding under this Indenture and the performance and observance by the Company of all the agreements, covenants and provisions for the benefit of the Holders in this Indenture and the Notes contained, and the prompt payment of any and all amounts from time to time owing under this Indenture by the Company to the Trustee, and for the uses and purposes and subject to the terms and provisions hereof, and in consideration of the premises and the covenants herein contained, and the acceptance of the Notes by the Holders and of the sum of $1 paid to the Company by the Collateral Trustee at or before the delivery hereof, the receipt whereof is hereby acknowledged, Leasing has granted, sold, assigned, transferred, conveyed, pledged and confirmed, and does hereby grant, assign, transfer, convey, pledge and confirm, unto the Collateral Trustee and its successors and assigns, for the security and benefit of the Holders and the Trustee as aforesaid, a first priority security interest in all estate, right, title and interest of Leasing in, to and under the following described property, rights and privileges (which, collectively, including all property hereafter specifically subjected to the Lien of this Indenture by any agreement supplemental hereto, or otherwise expressly subject to the terms and provisions hereof, shall constitute a portion of the Collateral (as defined herein)), to wit: (i) eleven Boeing 727s, along with the Engines, as specified on Schedule B-1 hereto (collectively, the "Leasing Aircraft"); (ii) all insurance and requisition proceeds and other similar payments with respect to each of the Leasing Aircraft; (iii) all monies or securities deposited or required to be deposited with the Trustee; (iv) any purchase agreements and any related documentation to the extent assignable for each Aircraft (v) all logs, data and records related to the Leasing Aircraft; (vi) all Leases of the Leasing Aircraft, including without limitation, those described on Schedule B-2 attached hereto; and 3 12 (vii) all proceeds of the foregoing, other than accounts. PROVIDED, HOWEVER, that notwithstanding any of the foregoing provisions, so long as no Event of Default shall have occurred and be continuing under this Indenture, (a) the Collateral Trustee shall not take or cause to be taken any action contrary to the Company's right hereunder to quiet enjoyment of the Leasing Aircraft and related hush kits, and to possess, use, retain and control the Leasing Aircraft and related hush kits and all revenues, income and profits derived therefrom. LEASING HABENDUM CLAUSE TO HAVE AND TO HOLD ALL and singular and aforesaid property unto the Collateral Trustee and its successors and assigns, in trust for the benefit and security of the Holders and the Trustee and for the uses and purposes and subject to the terms and provisions set forth in this Indenture; provided, however, that the Lien of this Indenture shall be subject to discharge as provided in Section 8.02. Leasing does hereby constitute the Collateral Trustee the true and lawful attorney of Leasing, irrevocably, with full power (in the name of Leasing or otherwise) to ask, require, demand, receive, compound and give acquittance for any and all monies and claims for monies (in each case including insurance and requisition proceeds) due and to become due under or arising out of the this Indenture and any documents related hereto and all other property which now or hereafter constitutes part of the Leasing Collateral, to endorse any checks or other instruments or orders in connection therewith and to file any claims or to take any action or to institute any proceedings which the Collateral Trustee may deem to be necessary or advisable in the premises; providing, however, that the Collateral Trustee shall not exercise any such rights except upon the occurrence of an Event of Default under this Indenture. Leasing agrees that at any time and from time to time, upon the written request of the Collateral Trustee or the Holder of a majority in principal amount of the Notes outstanding, Leasing will promptly and duly execute and deliver or cause to be duly executed and delivered any and all such further instruments and documents as the Collateral Trustee or such Holder of a majority in principal amount of the Notes outstanding may reasonably deem desirable in obtaining the full benefits of the assignment hereunder and the rights and powers granted herein. 4 13 KITY HAWK AIRCARGO, INC. GRANTING CLAUSE NOW, THEREFORE, THIS INDENTURE WITNESSETH, for and in consideration of the premises and the purchase of the Notes by the Holders thereof, to secure the prompt payment of the principal of and interest on, and all other amounts due with respect to, all Notes from time to time outstanding under this Indenture and the performance and observance by the Company of all the agreements, covenants and provisions for the benefit of the Holders in this Indenture and the Notes contained, and the prompt payment of any and all amounts from time to time owing under this Indenture by the Company to the Trustee, and for the uses and purposes and subject to the terms and provisions hereof, and in consideration of the premises and the covenants herein contained, and the acceptance of the Notes by the Holders and of the sum of $1 paid to the Company by the Collateral Trustee at or before the delivery hereof, the receipt whereof is hereby acknowledged, Aircargo has granted, sold, assigned, transferred, conveyed, pledged and confirmed, and does hereby grant, assign, transfer, convey, pledge and confirm, unto the Collateral Trustee and its successors and assigns, for the security and benefit of the Holders and the Trustee as aforesaid, a first priority security interest in all estate, right, title and interest of Aircargo in, to and under the following described property, rights and privileges (which, collectively, including all property hereafter specifically subjected to the Lien of this Indenture by any agreement supplemental hereto, or otherwise expressly subject to the terms and provisions hereof, shall constitute a portion of the Collateral (as defined herein)), to wit: (i) two Boeing 727s, along with the Engines, as specified on Schedule C hereto (collectively, the "Aircargo Aircraft"); (ii) all insurance and requisition proceeds and other similar payments with respect to each of the Aircargo Aircraft; (iii) all monies or securities deposited or required to be deposited with the Trustee; (iv) any purchase agreements and any related documentation to the extent assignable for each Aircraft (v) all logs, data and records related to the Aircargo Aircraft; and (vi) all proceeds of the foregoing, other than accounts. PROVIDED, HOWEVER, that notwithstanding any of the foregoing provisions, so long as no Event of Default shall have occurred and be continuing under this Indenture, (a) the Collateral Trustee shall not take or cause to be taken any action contrary to the Company's right hereunder to quiet enjoyment of the Aircargo Aircraft and related hush kits, and to possess, use, retain and control the Aircargo Aircraft and related hush kits and all revenues, income and profits derived therefrom. 4A 14 AIRCARGO HABENDUM CLAUSE TO HAVE AND TO HOLD ALL and singular and aforesaid property unto the Collateral Trustee and its successors and assigns, in trust for the benefit and security of the Holders and the Trustee and for the uses and purposes and subject to the terms and provisions set forth in this Indenture; provided, however, that the Lien of this Indenture shall be subject to discharge as provided in Section 8.02. Aircargo does hereby constitute the Collateral Trustee the true and lawful attorney of Aircargo, irrevocably, with full power (in the name of Aircargo or otherwise) to ask, require, demand, receive, compound and give acquittance for any and all monies and claims for monies (in each case including insurance and requisition proceeds) due and to become due under or arising out of the this Indenture and any documents related hereto and all other property which now or hereafter constitutes part of the Aircargo Collateral, to endorse any checks or other instruments or orders in connection therewith and to file any claims or to take any action or to institute any proceedings which the Collateral Trustee may deem to be necessary or advisable in the premises; providing, however, that the Collateral Trustee shall not exercise any such rights except upon the occurrence of an Event of Default under this Indenture. Aircargo agrees that at any time and from time to time, upon the written request of the Collateral Trustee or the Holder of a majority in principal amount of the Notes outstanding, Aircargo will promptly and duly execute and deliver or cause to be duly executed and delivered any and all such further instruments and documents as the Collateral Trustee or such Holder of a majority in principal amount of the Notes outstanding may reasonably deem desirable in obtaining the full benefits of the assignment hereunder and the rights and powers granted herein. AND THIS INDENTURE FURTHER WITNESSETH For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, as follows: 4B 15 ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. "ACMI Agreement" means a charter agreement pursuant to which the Company or any Owner supplies aircraft, crew, maintenance and insurance under which the Company or Owner retains operational control and maintains the Aircraft under its operation specifications and, in no event, shall be deemed a lease of the Aircraft. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition by a Restricted Subsidiary and not Incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of such Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Company and its Restricted Subsidiaries for such period determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person that is not a Restricted Subsidiary, except to the extent of the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries by such Person during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 4.04 (and in such case, except to the extent includable pursuant to clause (i) above), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Company or any of its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted (unless such permission could, as determined by the chief financial officer of the Company in good faith, be readily and reasonably obtained) by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except for purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 4.04, any amount paid or accrued as dividends on Preferred Stock of the Company or any Restricted Subsidiary owned by Persons other than the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary losses. "Adjusted Consolidated Net Tangible Assets" means the total amount of assets of the Company and its Restricted Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom (i) all current liabilities of the Company and its 5 16 Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to Section 4.15. "Adjusted Net Assets" has the meaning provided in Section 13.04. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; provided that, with respect to the Company, ownership of Capital Stock representing more than 10% of the voting power of the Company's Capital Stock shall be deemed control. "Agent" means any Registrar, Paying Agent, authenticating agent or co-Registrar appointed as such pursuant to the provisions hereof. "Agent Members" has the meaning provided in Section 2.07(a). "Aircraft" means each of the Airframes together with the Engines relating thereto and hush kits, if any, installed thereon, upon which the Trustee has been granted a security interest and mortgage lien by the Owner thereof pursuant to this Indenture and any Airframes which may from time to time be substituted for such Airframes pursuant to the terms of this Indenture. "Airframes" means each of the nine Boeing 747 Aircraft, eight Lockheed L-1011 Aircraft and thirteen Boeing 727 Aircraft (except Engines or engines from time to time installed on such Aircraft) initially pledged to secure the Company's obligations under this Indenture and the Notes and any Aircraft (except Engines or engines from time to time installed on such Aircraft) which may from time to time be substituted for such Aircraft (except Engines or engines from time to time installed on such Aircraft) pursuant to this Indenture. "Asset Acquisition" means (i) an investment by the Company or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with the Company or any of its Restricted Subsidiaries; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such investment or (ii) an acquisition by the Company or any of its Restricted Subsidiaries of the property and assets of any Person other than the Company or any of its Restricted Subsidiaries that constitute substantially all of a division or line of business of such Person; provided that the property and assets acquired are related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such acquisition. 6 17 "Asset Disposition" means the sale or other disposition, outside the ordinary course of business, by the Company or any of its Restricted Subsidiaries (other than to the Company or another Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary of the Company or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Restricted Subsidiaries. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction) in one transaction or a series of related transactions by the Company or any of its Restricted Subsidiaries to any Person other than the Company or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary (other than director's qualifying shares), (ii) all or substantially all of the property and assets of an operating unit or business of the Company or any of its Restricted Subsidiaries or (iii) any other property and assets of the Company or any of its Restricted Subsidiaries outside the ordinary course of business of the Company or such Restricted Subsidiary and, in each case, that is not governed by Article Five; provided that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current assets, (b) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, to the extent that the consideration received would satisfy clause (B) of Section 4.11, (c) leases of aircraft, including the Aircraft and any engines, including the Engines, pursuant to the provisions of Section 14.03 or similar arrangements, including pooling or interchange arrangements as described therein, (d) sales, transfers or other dispositions of assets that have a fair market value of less than $20.0 million from the Closing Date through the final stated maturity of the Notes, (e) Sales or Events of Loss and (f) sales of collateral which is pledged to secure the New Credit Facility or Term Loan, so long as the proceeds are applied to reduce the aggregate Indebtedness thereunder. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Aviation Act" means the Federal Aviation Act of 1958, as amended, and recodified in Subtitle VII of Title 49 of the United States Code, and applicable regulations thereunder. "Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as amended, or any similar United States federal or state or foreign law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Board of Directors" means the Board of Directors of the Company or any authorized committee of such Board of Directors. "Board Resolution" means a copy of a resolution, certified by the Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. 7 18 "Borrowing Base" shall have the meaning given to such term in the New Credit Facility, as in effect from time to time. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in The City of New York, or in the city of the Corporate Trust Office of the Trustee, are authorized by law to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligations" means the discounted present value of the rental obligations under a Capitalized Lease. "Cash Equivalents" means (i) United States dollars or foreign currency that is readily exchangeable into United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than 12 months from the date of acquisition, (iii) certificates of deposit and Eurodollar time deposits with maturities of 12 months or less from the date of acquisition, bankers' acceptances with maturities not exceeding 12 months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for the underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, and (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing not more than 90 days after the date of acquisition. "Change of Control" means such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock of the Company on a fully diluted basis and such ownership represents a greater percentage of the total voting power of the Voting Stock of the Company, on a fully diluted basis, than is held by the Existing Stockholders on such date or (ii) individuals who on the Closing Date constitute the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by the Company's stockholders was approved by a vote of at least two-thirds of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. 8 19 "Change of Control Triggering Event" means both the occurrence of a Change of Control and a Rating Decline. "Closing Date" means the date on which the Notes are originally issued under this Indenture. "Collateral" means (i) the Aircraft, including Engines, as specified on Schedule S, A, B-1, and C hereto, (ii) all insurance and requisition proceeds and other similar payments with respect to each of the Aircraft, (iii) all monies or securities deposited or required to be deposited with the Trustee, (iv) any purchase agreements and any related documentation to the extent assignable for each Aircraft, (v) all logs, data and records related to the Aircraft, (vi) the Pledged Securities on deposit in the Escrow Account, the Escrow Account and certain related assets, as described in the Escrow and Security Agreement, (vii) all rights of any Owner under any Lease relating to any Aircraft, including those specified on Schedule B-2 hereto, and (viii) all proceeds of the foregoing. other than accounts. The Collateral shall also include the Optioned Aircraft or Eligible Aircraft described in the Escrow and Security Agreement, when acquired by AIA, which AIA will grant a lien and security interest on to the Collateral Trustee upon their acquisition. "Collateral Access Event" means any Collateral Access Event in Section 6.02. "Collateral Trustee" means the Person named as the "Collateral Trustee" in the first paragraph of this Indenture until a successor Collateral Trustee shall have become such pursuant to the applicative provisions of this Indenture, and thereafter "Collateral Trustee" shall mean such Collateral Trustee. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the TIA, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's equity, other than Preferred Stock of such Person, whether now outstanding or issued after the Closing Date, including, without limitation, all series and classes of such common stock. "Common Stock Offering" means the public offering by the Company and certain selling stockholders of 3,000,000 shares of Common Stock of the Company consummated on November 19, 1997. "Company" means the party named as such in this Indenture until a successor replaces it pursuant to Article Five of this Indenture and, thereafter, means the successor. "Company Order" means a written request or order signed in the name of the Company by its Chairman, its President or a Vice President and delivered to the Trustee. 9 20 "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income for such period plus, to the extent such amount was deducted in calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest Expense, (ii) income taxes (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iii) depreciation expense, (iv) amortization expense and (v) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), all as determined on a consolidated basis for the Company and its Restricted Subsidiaries otherwise in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced hereunder) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries. "Consolidated Interest Expense" means, for any period, the aggregate amount of interest in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the Company or any of its Restricted Subsidiaries) and all but the principal component in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Company and its Restricted Subsidiaries during such period; excluding, however, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Notes and the establishment of the New Credit Facility and the Term Loan and the other transactions contemplated by the Transactions and Refinancing, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Company (which shall be as of a date not more than 90 days prior to the date of such computation, and which shall exclude Unrestricted Subsidiaries), less any amounts attributable to Disqualified Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of its Restricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Convention" means the Convention International Recognition of Rights in Aircraft, as amended or recodified from time to time. 10 21 "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at c/o First Chicago Trust Company, 14 Wall Street, 8th Floor, New York, New York 10002, Attention: Corporate Trust and Agency Group. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Depositary" means The Depository Trust Company, its nominees, and their respective successors, until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Depositary" shall mean or include each Person who is then a Depositary hereunder. "Disqualified Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes other than Capital Stock issued to employees; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Section 4.11 and Section 4.14 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to Section 4.11 and Section 4.14. "Eligible Aircraft" means one or more aircraft that would be useful in the Company's business and having a value (or fair value or similar measure) determined by an aircraft appraisal firm of national standing equal to or in excess of the price paid therefor by the Company. "Engines" means for each of the Boeing 747 Airframes, each of the 36 Pratt & Whitney JT9D-7A Engines and each of the 20 JT9D-7J Engines relating thereto, as more specifically described on Schedule A or B-1 hereto, and any engines which may from time to time be substituted for such engines pursuant to this Indenture; and with respect to the Boeing 727 Airframes means each of the 9 Pratt & Whitney JT8D-B Engines, each of the 3 JT8D-15A Engines, each of the 3 JT8D-15/15A Engines, each of the 12 JT8D-15 Engines, each of the 6 JT8D-9A Engines, and each of the 6 JT8D-9A/7B Engines relating thereto, as more specifically described on Schedule A or B-1 hereto, and any engines 11 22 which may from time to time be substituted for such engines pursuant to this Indenture and with respect to the Lockheed L-1011 Airframes, each of the 24 Rolls Royce RB211-524 Engines relating thereto, as more specifically described on Schedule A or B-1 hereto, and any engines which may from time to time be substituted for such Engines pursuant to this Indenture. "Escrow Account" means an account established with the Trustee pursuant to the terms of the Escrow and Security Agreement for the deposit of the Pledged Securities to be purchased by the Company with the net proceeds from the sale of the Notes. "Escrow and Security Agreement" means the Escrow and Security Agreement, dated as of the Closing Date, made by the Company and the Guarantors in favor of the Trustee, governing the disbursement of funds from the Escrow Account and granting a security interest in certain assets, including the Pledged Securities, as such agreement may be amended, restated, supplemented or otherwise modified from time to time. "Event of Default" has the meaning provided in Section 6.01. "Event of Loss" with respect to the Aircraft or Engine means any of the following events: (i) payment of an insurance settlement with respect to such property on the basis of an actual or constructive total loss; (ii) destruction or damage beyond repair; provided that, if it was not clear whether damage constitutes damage beyond repair, an Event of Loss will be deemed to occur when it is determined by the Company that such damage is beyond repair; (iii) theft or disappearance for a period in excess of 120 days, unless the location of the Aircraft is known and the Company is diligently pursuing its recovery; (iv) the condemnation or taking of title to such Aircraft by the United States government or any foreign government or instrumentality or agency thereof; (v) the requisition or taking of use of such Aircraft or airframe by a foreign government or instrumentality or agency for a continuous period of more than six months; (vi) with respect to an Engine only, the requisition for use by any government or the divestiture of title resulting from the installation of such Engine on an airframe leased to the Company or purchased by the Company subject to a conditional sale agreement, in either case, under circumstances where the Trustee's security interest in such Engine is adversely affected thereby; or (vii) "grounding" of such Aircraft for a period of twelve consecutive months (or such shorter period determined by the Company) due to an action by a governmental body, unless prior to and after the expiration of such period, the Company is diligently carrying forward all necessary steps to permit normal use. "Excess Proceeds" has the meaning provided in Section 4.11. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Exchange Notes" means any securities of the Company containing terms substantially identical to the Notes (except that such Exchange Notes shall be registered under the Securities Act) that are issued and exchanged for the Notes pursuant to an exchange offer consummated in accordance with the Registration Rights Agreement. 12 23 "Excluded Restricted Subsidiary" means any Restricted Subsidiary principally engaged in a business similar to that of the Company or any of its Restricted Subsidiaries or any business reasonably related thereto and domiciled outside the United States of America if the issuance of a Guarantee by such Subsidiary would, as determined in good faith in a resolution of the Board of Directors, create a material tax disadvantage or would be illegal under applicable law. "Existing Stockholders" means Mr. M. Tom Christopher, his spouse and children and any trust the sole beneficiaries of which consist of the foregoing persons. "fair market value" means the price that would be paid in an arm's- length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution. "Fraudulent Conveyance Act" means any statute based on or substantially similar to the Uniform Fraudulent Conveyance Act. "Fraudulent Transfer Act" means any statute based on or substantially similar to the Uniform Fraudulent Transfer Act. "Funding Guarantor" has the meaning provided in Section 13.04. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. The numbers used to calculate all ratios and perform all computations contained or referred to in this Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of this Indenture shall be made without giving effect to (A) the amortization of any expenses incurred in connection with the offering of the Notes and (B) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Global Notes" has the meaning provided in Section 2.01. "Guarantee" means, without duplication, any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's- length 13 24 terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantor" means all Restricted Subsidiaries of the Company other than AIC and any Excluded Restricted Subsidiary; provided that, upon the release and discharge of any Guarantor from its Guarantee in accordance with this Indenture, such Guarantor shall cease to be a Guarantor. "Holder" or "Noteholder" means the registered holder of any Note. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto, but excluding obligations with respect to letters of credit (including trade letters of credit) securing obligations (other than obligations described in clause (i) or (ii) above or (v), (vi) or (vii) below) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables and accrued expenses, (v) all Capitalized Lease Obligations, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided that (A) the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such 14 25 Indebtedness less the then remaining unamortized portion of the original issue discount of such Indebtedness as determined in conformity with GAAP, (B) money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to prefund the payment of the interest on such Indebtedness shall be deemed not to be "Indebtedness" and (C) Indebtedness shall not include any liability for federal, state, local or other taxes. "Indenture" means this Indenture as originally executed or as it may be amended or supplemented from time to time by one or more indentures supplemental to this Indenture entered into pursuant to the applicable provisions of this Indenture. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Interest Coverage Ratio" means, on any Transaction Date, the ratio of (i) the aggregate amount of Consolidated EBITDA for the then most recent four fiscal quarters prior to such Transaction Date for which reports have been filed with the Commission pursuant to Section 4.15 (the "Four Quarter Period") to (ii) the aggregate Consolidated Interest Expense during such Four Quarter Period. In making the foregoing calculation, (A) pro forma effect shall be given to any Indebtedness Incurred or repaid during the period (the "Reference Period") commencing on the first day of the Four Quarter Period and ending on the Transaction Date (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such Four Quarter Period unless any portion of such Indebtedness is projected, in the reasonable judgment of the senior management of the Company, to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof), in each case as if such Indebtedness had been Incurred or repaid on the first day of such Reference Period; (B) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the Transaction Date (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months or, if shorter, at least equal to the remaining term of such Indebtedness) had been the applicable rate for the entire period; (C) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions (including giving pro forma effect to the application of proceeds of any Asset Disposition) that occur during such Reference Period as if they had occurred and such proceeds had been received on the first day of such Reference Period; and (D) pro forma effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into the Company or any Restricted Subsidiary during such Reference Period and that would have constituted Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such Reference Period; provided that, to the extent that clause (C) or (D) of this sentence requires that pro forma effect be given to an Asset Acquisition or Asset Disposition, such pro forma calculation shall be based upon the four full fiscal quarters immediately preceding the Transaction 15 26 Date of the Person, or division or line of business of the Person, that is acquired or disposed for which financial information is available. "Interest Payment Date" means each semiannual interest payment date on May 15 and November 15 of each year, commencing May 15, 1998. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, option or future contract or other similar agreement or arrangement, including, without limitation, any fuel hedging or fuel protection agreement. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Company or its Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary, including, without limitation, by reason of any transaction permitted by clause (iii) of Section 4.06; provided that the fair market value of the Investment remaining in any Person that has ceased to be a Restricted Subsidiary shall be deemed not to exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made less the net reduction of such Investments. For purposes of the definition of "Unrestricted Subsidiary" and Section 4.04, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer. "Kalitta Companies" means American International Airways, Inc., a Michigan corporation, Kalitta Flying Service, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, O.K. Turbines, Inc., a Michigan corporation, American International Travel, Inc., a Michigan corporation and American International Cargo, a co-partnership formed under the laws of Michigan. "Lease" means those certain leases (excluding, in all events any ACMI Agreement), specified on Schedule B-2 hereto and any lease by the Owner of the Aircraft pertaining to 16 27 the Aircraft or such other substitute aircraft which becomes Collateral pursuant to the terms hereof, which extends for a period in excess of six months. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to give any security interest), but excluding any operating lease. "Merger" means the mergers of the Kalitta Companies (other than American International Cargo) with and into certain Subsidiaries of Kitty Hawk pursuant to that certain Agreement and Plan of Merger dated September 22, 1997, as amended by Amendment No. 1 dated October 23, 1997 and Amendment No. 2 dated October 29, 1997. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or Cash Equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or Cash Equivalents, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "New Credit Facility" means the $100 million senior secured revolving credit facility with Wells Fargo Bank (Texas), National Association, individually and as agent for 17 28 other lenders, as amended, refinanced or substituted from time to time; provided that Affiliates of the Company cannot constitute the majority of the lenders thereunder. "New York Debtor and Creditor Law" means the New York Debtor and Creditor Law as from time to time in effect. "Noise Regulations" means FAA noise standard regulations primarily promulgated under the Airport Noise and Capacity Act of 1990. "Note Guarantee" means the Guarantee by the Guarantors of the Company's obligations under the Notes and this Indenture and any other Guarantee of such obligations by any Person. "Note Offering" means the offering by the Company of $340,000,000 aggregate principal amount of 9.95% Senior Secured Notes Due 2004 of the Company being issued pursuant to the terms of this Indenture. "Notes" means any of the securities, as defined in the first paragraph of the recitals hereof, that are authenticated and delivered under this Indenture. "Offer to Purchase" means an offer to purchase Notes by the Company from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless the Company defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Company shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes or 18 29 portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Company, Depositary or Paying Agent shall promptly mail or deliver to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Company will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Notes pursuant to an Offer to Purchase. "Officer" means with respect to the Company, the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary. "Officers' Certificate" means a certificate signed on behalf of the Company by an Officer. Each Officers' Certificate (other than certificates provided pursuant to TIA Section 314(a)(4)) shall include the statements provided for in TIA Section 314(e). "Opinion of Counsel" means a written opinion signed by legal counsel who is reasonably acceptable to the Trustee. Such counsel may be an employee of or counsel to the Company or the Trustee. Each such Opinion of Counsel shall include the statements provided for in TIA Section 314(e). Opinions of Counsel may have qualifications customary for similar opinions. "Optioned Boeing 747s" means the two used Boeing 747s which the Company has an option to acquire. "Owner" means either AIA, Leasing or Aircargo, as the case may be, as the registered owner of the Aircraft or such other registered owner of aircraft which is substituted as Collateral pursuant to the provisions hereof. "Parts" means all appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature other than complete Engines or engines which are from time to time incorporated or installed in or attached to the Airframe or any Engine, exclusive of any items leased by the Company from third parties. "Paying Agent" has the meaning provided in Section 2.04, except that, for the purposes of Article Eight, the Paying Agent shall not be the Company or a Subsidiary of the Company or an Affiliate of any of them. The term "Paying Agent" includes any additional Paying Agent. "Permitted Air Carrier" means (i) a United States "air carrier" within the meaning of the Aviation Act or (ii) an air carrier which, among other things, (A) is duly organized and operating pursuant to a license or authorization issued under the laws of any 19 30 Permitted Country and (B) will perform or cause to be performed maintenance or engine preventative maintenance, and inspections for such Aircraft, Airframe or any Engine in accordance with standards which are approved by the aeronautical authority in the country or registration of the Aircraft. "Permitted Aircraft Lease" by any Person means a lease of aircraft owned by such Person to a third party on terms which permit the lessor to reacquire possession of such aircraft, with good and marketable title thereto free and clear of any adverse claim in favor of the lessee, upon a material breach of such lease by the lessee. "Permitted Country" means, with respect to any Aircraft, any country for which (i) an insurer of national or international standing has provided significant insurance coverage for such Aircraft or (ii) the United States government has assumed liability, including, without limitation, a significant portion of the cost of replacing such Aircraft, for operation of such Aircraft within such country. "Permitted Investment" means (i) an Investment in the Company or a Restricted Subsidiary (other than an Excluded Restricted Subsidiary) or a Person which will, upon the making of such Investment, become a Restricted Subsidiary (other than an Excluded Restricted Subsidiary) or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, the Company or a Restricted Subsidiary (other than an Excluded Restricted Subsidiary); provided that such person's primary business is related, ancillary or complementary to the businesses of the Company or its Restricted Subsidiaries on the date of such Investment; (ii) Cash Equivalents and Temporary Cash Investments; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) stock, obligations or securities received in satisfaction of judgments; (v) loans or advances to employees of the Company or any Restricted Subsidiary not to exceed $1 million at any time outstanding; (vi) Investments of up to $25.0 million in Permitted Joint Ventures; and (vii) Investments in Excluded Restricted Subsidiaries the aggregate amount of which does not at any time outstanding exceed 10% of Adjusted Consolidated Net Tangible Assets. "Permitted Joint Ventures" means any Unrestricted Subsidiary or any other Person in which the Company or a Restricted Subsidiary owns an ownership interest, directly or indirectly (other than a Restricted Subsidiary) and whose business is related or ancillary to the business of the Company or any of its Restricted Subsidiaries at the time of determination. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by 20 31 appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred, in accordance with Section 4.03, to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness of, any Person existing at the time such Person becomes, or becomes a part of, any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets acquired; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Company or any Restricted Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits, and other Liens that are within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, future contracts, futures options or similar agreements or arrangements designed solely to protect the Company or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business in 21 32 accordance with the past practices of the Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens to secure Indebtedness incurred pursuant to clause (vii) of the second paragraph of Section 4.03; provided the assets securing such Indebtedness were or are acquired with the proceeds of such Indebtedness; (xix) Liens on or sales of receivables; and (xx) Liens created pursuant to the terms of any aircraft lease or any lease or pooling or interchange arrangement relating to an Engine incurred in compliance with Section 14.03; provided that no such Liens exist with respect to the Collateral except as otherwise permitted pursuant to the terms hereof. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Physical Notes" has the meaning provided in Section 2.01. "Pledged Securities" means the U.S. Government Obligations to be purchased by the Company or any Guarantor (or on their respective behalf) and held in the Escrow Account in accordance with the Escrow and Security Agreement. "principal" of a debt security, including the Notes, means the principal amount due on the Stated Maturity as shown on such debt security. "Private Placement Legend" means the legend initially set forth on the Notes in the form set forth in Section 2.02. "Public Equity Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Rating Agencies" means (i) S&P and (ii) Moody's and (iii) if S&P or Moody's or both shall not make a rating of the Notes publicly available, a nationally recognized United States securities rating agency or agencies, as the case may be, selected by the Company, which shall be substituted for S&P or Moody's or both, as the case may be. "Rating Category" means (i) with respect to S&P, any of the following categories: A, BBB, BB, B, CCC, CC, C and D (or equivalent successor categories); (ii) with respect to Moody's, any of the following categories: A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor categories); and (iii) the equivalent of any such category of S&P or Moody's used by another Rating Agency. In determining whether the rating of the Notes has decreased by one or more gradations, gradations with Rating Categories (+ and -- for S&P; 1, 2 and 3 for Moody's; or equivalent gradations for another Rating Agency) shall be taken into account (e.g., with respect to S&P, a decline in a rating from BB+ to BB, as well as from BB-- to B+, will constitute a decrease of one gradation). 22 33 "Rating Date" means the date which is 90 days prior to the earlier of (x) Change of Control and (y) public notice of the occurrence of a Change of Control or of the intention by the Company or any Person to effect a Change of Control. "Rating Decline" means the decrease (as compared with the Rating Date) by one or more gradations (including gradations within the Rating Categories as well as between Rating Categories) of the rating of the Notes by either Rating Agency on, or within six months after, the date of public notice of the occurrence of a Change of Control or of the intention of the Company or of any Person to effect a Change of Control (which period shall be extended for so long as the rating of the Notes is under publicly announced consideration for possible downgrade by any of the Rating Agencies); provided, however, that in the event the Notes are not rated by two Rating Agencies at the time a Change of Control occurs, a Rating Decline shall be deemed to have occurred. "Redemption Date", when used with respect to any Note to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Note to be redeemed, means the price at which such Note is to be redeemed pursuant to this Indenture. "Refinancings" means the refinancing of substantially all of the currently outstanding indebtedness of the Company and the Kalitta Companies with a portion of the net proceeds of the Notes and the concurrent public offering of Common Stock of the Company and the incurrence of the Term Loan. "Registrar" has the meaning provided in Section 2.04. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of November 19, 1997, between the Company and Morgan Stanley & Co., Incorporated, BT Alex. Brown Incorporated and Fieldstone FPCG Services, L.P., as such agreement may be amended, modified or supplemented from time to time. "Registration Statement" means the Registration Statement pursuant to which the Exchange Notes are offered and exchanged for the Notes. "Regular Record Date" for the interest payable on any Interest Payment Date means the May 1 or November 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Released Indebtedness" means, with respect to any Asset Sale, Indebtedness (i) which is owed by the Company or any Restricted Subsidiary (the "Obligors") prior to such Asset Sale, (ii) which is assumed by the purchaser or any affiliate thereof in connection with such Asset Sale and (iii) with respect to which each such Obligor receives written, unconditional releases from each creditor, no later than the closing date of such Asset Sale. 23 34 "Responsible Officer", when used with respect to the Trustee, means the chairman of the board of directors, the chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers (including any officer within the Corporate Trust and Agency Group (or any successor group) of the Trustee) and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Payments" has the meaning provided in Section 4.04. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act. "Sale" has the meaning provided in Section 4.17. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Security Registrar" has the meaning provided in Section 2.04. "Shelf Registration Statement" has the meaning provided in the Registration Rights Agreement. "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "S&P" means Standard & Poor's Ratings Service and its successors. "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding 24 35 Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or Moody's. "Term Loan" means the $45.9 million term loan with Wells Fargo Bank (Texas), National Association, individually and as agent for other lenders, entered into as of the Closing Date, together with any other loan or credit agreements entered into from time to time with one or more banks or other lenders, for the purpose of refinancing or refunding such Term Loan in an amount not to exceed $45.9 million (plus premiums, accrued interest, fees and expenses). "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbb), as in effect on the date this Indenture was executed, except as provided in Section 9.06. "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transactions" means the Note Offering, the Merger and the Common Stock Offering. 25 36 "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Company or any of its Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Trustee" means the party named as such in the first paragraph of this Indenture until a successor replaces it in accordance with the provisions of Article Seven of this Indenture and thereafter means such successor. "United States Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended and as codified in Title 11 of the United States Code, as amended from time to time hereafter, or any successor federal bankruptcy law. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the Company or such Restricted Subsidiary (or both, if applicable) at the time of such designation, (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04 and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under Section 4.03 and Section 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of this Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof at any time prior to the Stated Maturity of the Notes, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. 26 37 Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law and up to 5% of the Capital Stock of such Subsidiary) by such Person or one or more Wholly Owned Subsidiaries of such Person. SECTION 1.02. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder or a Noteholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by a rule of the Commission and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03. Rules of Construction. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive; 27 38 (iv) words in the singular include the plural, and words in the plural include the singular; (v) provisions apply to successive events and transactions; (vi) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (vii) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth in Section 1.01; and (viii) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated. ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating. The Notes and the Trustee's certificate of authentication shall be substantially in the form annexed hereto as Exhibit A. The Notes may have notations, legends or endorsements required by law, stock exchange agreements to which the Company is subject or usage. The Company shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated the date of its authentication. The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. The Company, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more permanent global Notes in registered form, substantially in the form set forth in Exhibit A (the "Global Notes"), deposited on behalf of the Holders with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Notes offered and sold to Institutional Accredited Investors shall be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in Exhibit A (the "Physical Notes"). The definitive Notes shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted 28 39 by the rules of any securities exchange on which the Notes may be listed, all as determined by the Officers executing such Notes, as evidenced by their execution of such Notes. SECTION 2.02. Restrictive Legends. Unless and until a Note is exchanged for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, each Global Note and each Physical Note shall bear the legend, set forth below on the face thereof: THIS NOTE WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCES. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON EXEMPTIONS FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d), IF APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO KITTY HAWK, INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF NOTES OF LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN 29 40 CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS. Each Global Note, whether or not an Exchange Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS IN THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE. SECTION 2.03. Execution, Authentication and Denominations. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to up to $340 million at any time outstanding, subject to the 30 41 provisions of Section 2.09 hereof. The Notes shall be executed by two Officers of the Company, by facsimile or manual signature, in the name and on behalf of the Company. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee or authenticating agent authenticates the Note, the Note shall be valid nevertheless. A Note shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. Subject to the foregoing, at any time and from time to time after the execution of this Indenture, the Trustee or an authenticating agent shall upon receipt of a Company Order authenticate for issuance of Notes in the aggregate principal amount specified in such Company Order; provided that the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of the Company that it may reasonably request in connection with such authentication of Notes. Such Company Order shall specify the amount of Notes to be authenticated and the date on which the issuance of Notes is to be authenticated. The Trustee may appoint an authenticating agent to authenticate Notes. If the appointment of such authenticating agent is not at the discretion and for the convenience of the Trustee, then such authenticating agent shall be compensated by the Company. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such authenticating agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. Neither the Company nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Note, check, advice of payment or redemption notice, and any such document may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the Company nor the Trustee shall be liable for any inaccuracy in such numbers. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 in principal amount and any integral multiple thereof. SECTION 2.04. Registrar and Paying Agent. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange (the "Registrar"), an office or agency where Notes may be presented for payment (the "Paying Agent") and an office or agency where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served, which shall be in the Borough of Manhattan, The City of New York. The Company shall cause the Registrar to keep a register of the Notes and of their transfer and exchange (the "Security Register"). The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. The Company may have one or 31 42 more co-Registrars and one or more additional Paying Agents. The Company or any of its Subsidiaries or any Affiliate of each may act as Paying Agent or Registrar. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall give prompt written notice to the Trustee of the name and address of any such Agent and any change in the address of such Agent. If the Company fails to maintain a Registrar, Paying Agent and/or agent for service of notices and demands, the Trustee shall act as such Registrar, Paying Agent and/or agent for service of notices and demands. The Company may remove any Agent upon written notice to such Agent and the Trustee; provided that no such removal shall become effective until (i) the acceptance of an appointment by a successor Agent to such Agent as evidenced by an appropriate agency agreement entered into by the Company and such successor Agent and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as such Agent until the appointment of a successor Agent in accordance with clause (i) of this proviso. The Company, any Subsidiary of the Company, or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar, and/or agent for service of notice and demands. The Company initially appoints the Trustee as Registrar, Paying Agent, authenticating agent and agent for service of notice and demands. If, at any time, the Trustee is not the Registrar, the Company shall furnish, or cause to be furnished, to the Trustee at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may reasonably request, the names and addresses of the Holders as they appear in the Security Register. At the option of the Company, payment of interest may be made by check mailed to the address of the Holders as such address appears in the Security Register. The Trustee shall act as the Paying Agent for any Offer to Purchase. SECTION 2.05. Paying Agent to Hold Money in Trust. Not later than each due date of the principal, premium, if any, and interest on any Notes, the Company shall deposit with the Paying Agent money in immediately available funds sufficient to pay such principal, premium, if any, and interest so becoming due. The Company shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest on the Notes (whether such money has been paid to it by the Company or any other obligor on the Notes), and such Paying Agent shall promptly notify the Trustee of any default by the Company (or any other obligor on the Notes) in making any such payment. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed, and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. Upon doing so, the Paying Agent shall have no further liability for the money so paid over to the Trustee. If the Company or any Subsidiary of the Company or any Affiliate of any of them acts as Paying Agent, it will, on or before each due date of any principal of, premium, if any, or interest on the Notes, segregate and hold in a separate trust fund for 32 43 the benefit of the Holders a sum of money sufficient to pay such principal, premium, if any, or interest so becoming due until such sum of money shall be paid to such Holders or otherwise disposed of as provided in this Indenture, and will promptly notify the Trustee of its action or failure to act. SECTION 2.06. Transfer and Exchange. The Notes are issuable only in registered form. A Holder may transfer a Note by written application to the Registrar stating the name of the proposed transferee and otherwise complying with the terms of this Indenture. No such transfer shall be effected until, and such transferee shall succeed to the rights of a Holder only upon, final acceptance and registration of the transfer by the Registrar in the Security Register. Prior to the registration of any transfer by a Holder as provided herein, the Company, the Trustee, and any agent of the Company shall treat the person in whose name the Note is registered as the owner thereof for all purposes whether or not the Note shall be overdue, and neither the Company, the Trustee, nor any such agent shall be affected by notice to the contrary. Furthermore, any Holder of a Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interests in such Global Note may be effected only through a book entry system maintained by the Holder of such Global Note (or its agent) and that ownership of a beneficial interest in the Note shall be required to be reflected in a book entry. When Notes are presented to the Registrar or a co-Registrar with a request to register the transfer or to exchange them for an equal principal amount of Notes of other authorized denominations (including an exchange of Notes for Exchange Notes), the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided that no exchanges of Notes for Exchange Notes shall occur until a Registration Statement shall have been declared effective by the Commission (confirmed in an Officers' Certificate delivered to the Trustee) and that any Notes that are exchanged for Exchange Notes shall be cancelled by the Trustee. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Notes at the Registrar's request. No service charge shall be made for any registration of transfer or exchange or redemption of the Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or other similar governmental charge payable upon exchanges pursuant to Section 2.11, 3.08 or 9.04). The Registrar shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes selected for redemption under Section 3.03 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 2.07. Book-Entry Provisions for Global Notes. (a) The Global Notes initially shall (i) be registered in the name of the Depositary for such Global Notes or the nominee of such Depositary, (ii) be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 2.02. 33 44 Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Note, and the Depositary may be treated by the Company, the Guarantors, the Trustee and any agent of the Company, the Guarantors or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Guarantors, the Trustee or any agent of the Company, the Guarantors or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note. (b) Transfers of a Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. In addition, Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the Global Notes if (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for the Global Notes and a successor depositary is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a request to the foregoing effect from the Depositary. (c) Any beneficial interest in the Global Notes that is transferred to a person who takes delivery in the form of an interest in another Global Note will, upon transfer, cease to be an interest in such Global Note and become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest. (d) In connection with any transfer of a beneficial interest in a Global Note to beneficial owners, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Global Notes in an amount equal to the principal amount of the beneficial interest in such Global Notes to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of like tenor and amount. (e) In connection with the transfer of the entire Global Note to beneficial owners pursuant to paragraph (b) of this Section, the Global Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the Global Note, an equal aggregate principal amount of Physical Notes of authorized denominations. (f) Any Physical Note delivered in exchange for an interest in the Global Note pursuant to this Section shall, except as otherwise provided by paragraph (e) of Section 34 45 2.08, bear the legend regarding transfer restrictions applicable to the Physical Note set forth in Section 2.02. (g) The registered holder of a Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. (h) Beneficial owners of interests in a Global Note may receive Physical Notes (which shall bear the Private Placement Legend if required by Section 2.02) in accordance with the procedures of the Depositary. In connection with the execution, authentication and delivery of such Physical Notes, the Registrar shall reflect on its books and records a decrease in the principal amount of the relevant Global Note equal to the principal amount of such Physical Notes and the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Notes having an equal aggregate principal amount. (i) The registered Holder of a Physical Note may exchange such Note for a beneficial interest in the Global Note in accordance with the procedures of the Depositary; provided that such Holder has certified to the Registrar that it is a QIB or such Note has been exchanged for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement. In connection with such exchange, the Registrar shall reflect on its books and records an increase in the principal amount of the relevant Global Note equal to the principal amount of such Physical Note and the Trustee shall cancel the Physical Notes so exchanged. SECTION 2.08. Special Transfer Provisions. Unless and until a Note is exchanged for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, the following provisions shall apply: (a) Transfers to Non-QIB Institutional Accredited Investors. The following provisions shall apply with respect to the registration of any proposed transfer of a Note to any Institutional Accredited Investor which is not a QIB (excluding Non-U.S. Persons): (i) The Registrar shall register the transfer of any Note, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the time period referred to in Rule 144(k) under the Securities Act as in effect with respect to such transfer or (y) the proposed transferee has delivered to the Registrar (A) a certificate substantially in the form of Exhibit C hereto and (B) if the aggregate principal amount of the Notes being transferred is less than $250,000 at the time of such transfer, an opinion of counsel acceptable to the Company that such transfer is in compliance with the Securities Act. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books 35 46 and records the date and a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of like tenor and amount. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Physical Note or an interest in a Global Note prior to the removal of the Private Placement Legend to a QIB (excluding Non-U.S. Persons): (i) If the Note to be transferred consists of (x) Physical Notes the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A or (y) an interest in the Global Notes, the transfer of such interest may be effected only through the book entry system maintained by the Depositary. (ii) If the proposed transferee is an Agent Member, and the Note to be transferred consists of Physical Notes, upon receipt by the Registrar of the documents referred to in clause (i) and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Notes in an amount equal to the principal amount of the Physical Notes, to be transferred, and the Trustee shall cancel the Physical Notes so transferred. (c) Transfers to Non-U.S. Persons at Any Time. The following provisions shall apply with respect to any transfer of a Note to a Non-U.S. Person: (i) The Registrar shall register any proposed transfer to any Non-U.S. Person if the Note to be transferred is a Physical Note or an interest in the Global Note only upon receipt of a certificate substantially in the form of Exhibit D from the proposed transferor; (ii) (a) If the proposed Transferor is an Agent Member holding a beneficial interest in a Global Note, upon receipt by the Registrar of (x) the documents required by paragraph (i) and (y) instructions in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books 36 47 and records the date and a decrease in the principal amount of such Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred and the Company shall execute, and the Trustee shall authenticate and deliver one or more Physical Notes of like tenor and amount. (d) Private Placement Legend. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless either (i) the circumstances contemplated by paragraph (a)(i)(x) of this Section 2.08 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (e) General. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall not register a transfer of any Note unless such transfer complies with the restrictions on transfer of such Note set forth in this Indenture. In connection with any transfer of Notes, each Holder agrees by its acceptance of the Notes to furnish the Registrar or the Company such certifications, legal opinions or other information as either of them may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act; provided that the Registrar shall not be required to determine (but may conclusively rely on a determination made by the Company with respect to) the sufficiency of any such certifications, legal opinions or other information. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.07 or this Section 2.08. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 2.09. Replacement Notes. If a mutilated Note is surrendered to the Trustee or if the Holder claims and provides evidence to the Trustee's reasonable satisfaction that the Note has been lost, destroyed or wrongfully taken, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall issue and the Trustee shall authenticate a replacement Note of like tenor and principal amount; provided that the requirements of this Section 2.09 are met. If required by the Trustee or the Company, an indemnity bond must be furnished that is sufficient in the judgment of both the Trustee and the Company to protect the Company, the Trustee or any Agent from any loss that any of them may suffer if a Note is replaced. The Company may charge such Holder for the expenses of the Company and the Trustee in replacing a Note. In case any such mutilated, lost, destroyed or wrongfully taken Note has become or is about to become due and payable, the 37 48 Company in its discretion may pay such Note instead of issuing a new Note in replacement thereof. Every replacement Note is an additional obligation of the Company and shall be entitled to the benefits of this Indenture. The provisions of this Section 2.09 are exclusive and shall preclude (to the extent lawful) all other rights and remedies against the Company and the Trustee with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully taken Notes. SECTION 2.10. Outstanding Notes. Notes outstanding at any time are all Notes that have been authenticated by the Trustee (i) except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.10 as not outstanding and (ii) except to the extent of any reduction in the principal amount of any Global Note made by the Trustee in accordance with the provisions hereof. If a Note is replaced pursuant to Section 2.09, it ceases to be outstanding unless and until the Trustee and the Company receive proof satisfactory to each of them that the replaced Note is held by a bona fide purchaser. If the Paying Agent (other than the Company or an Affiliate of the Company) holds on a Redemption Date or the Stated Maturity of the Notes money sufficient to pay Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them shall cease to accrue. Notes, or portions thereof, for the payment or redemption of which moneys or U.S. Government Obligations (as provided for in Article Eight) in the necessary amount shall have been deposited in trust with the Trustee or with any Paying Agent (other than the Company) or shall have been set aside, segregated and held in trust by the Company for the Holders of such Notes (if the Company shall act as its own Paying Agent), on and after that time shall cease to be outstanding and, in the case of redemption, interest on such Notes shall cease to accrue, provided that if such Notes, or portions thereof, are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided, or provision satisfactory to the Trustee shall have been made for giving such notice. A Note does not cease to be outstanding because the Company or one of its Affiliates holds such Note, provided, however, that, in determining whether the Holders of the requisite principal amount of the outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee has actual knowledge to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with 38 49 respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes. SECTION 2.11. Temporary Notes. Until definitive Notes are ready for delivery, the Company may prepare and execute and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have insertions, substitutions, omissions and other variations determined to be appropriate by the Officers executing the temporary Notes, as evidenced by their execution of such temporary Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.12. Cancellation. The Company at any time may deliver, or cause to be delivered, Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee (and no one else) shall cancel all Notes surrendered for transfer, exchange, payment, replacement or cancellation and shall destroy them in accordance with its normal procedure (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all cancelled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that it has redeemed or paid or that have been delivered to the Trustee for cancellation. SECTION 2.13. CUSIP Numbers. The Company in issuing the Notes may use "CUSIP," "CINS" and "ISIN" numbers (if then generally in use), and the Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in notices of redemption or exchange as a convenience to Holders; provided that any such notice shall state that no representation is made as to the correctness of such CUSIP, CINS or ISIN numbers either as printed on the Notes or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Notes; and provided, further, that failure to use CUSIP, CINS or ISIN numbers in any notice of redemption or exchange shall not affect the validity or sufficiency of such notice. The Company shall promptly notify the Trustee of any change in CUSIP, CINS or ISIN numbers. SECTION 2.14. Defaulted Interest. If the Company or any of the Guarantors default in a payment of interest on the Notes, they shall pay, or shall deposit with the Paying Agent money in immediately available funds sufficient to pay the defaulted interest, plus (to the extent lawful) interest on the defaulted interest, to the Persons who are Holders on a subsequent special record date. A special record date, as used in this Section 2.14 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by the Company for the payment of defaulted interest, 39 50 whether or not such day is a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.15. Record Date. The record date for purposes of determining the identity of Holders of the Notes or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA Section 316(c). SECTION 2.16 Computation of Interest. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. ARTICLE THREE REDEMPTION SECTION 3.01. Right of Redemption. (a) The Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after November 15, 2001 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing November 15, of the years set forth below:
YEAR REDEMPTION PRICE ---- ---------------- 2001 . . . . . . . . . . . . . . . . . . 104.975% 2002 . . . . . . . . . . . . . . . . . . 102.488% 2003 . . . . . . . . . . . . . . . . . . 100.000%
(b) In addition, at any time prior to November 15, 2000, the Company may redeem up to 35% of the principal amount of the Notes with the proceeds of one or more Public Equity Offerings, at any time or from time to time, at a Redemption Price (expressed as a percentage of principal amount) of 109.95%, plus accrued and unpaid interest to the Redemption Date (subject to the rights of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date); provided that at least $150 million aggregate principal amount of Notes remains outstanding after each such redemption. (c) If more than 90% of the outstanding principal amount of the Notes are tendered pursuant to one or more Offers to Purchase pursuant to the terms hereof, the balance of the Notes will be redeemable, at the Company's option, in whole but not in part, at any time thereafter, upon not less than 30 nor more than 60 days' prior notice 40 51 mailed by first class mail to each Holder's last address as it appears in the Security Register, at a Redemption Price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on a record date that is on or prior to the Redemption Date to receive interest due on the next Interest Payment Date). SECTION 3.02. Notices to Trustee. If the Company elects to redeem Notes pursuant to Section 3.01(a) or (b), it shall notify the Trustee in writing of the Redemption Date, the principal amount at Stated Maturity of Notes to be redeemed and the clause of this Indenture pursuant to which the redemption shall occur. The Company shall give each notice provided for in this Section 3.02 in an Officers' Certificate at least 45 days before the Redemption Date (unless a shorter period shall be satisfactory to the Trustee). If the Company is required to make an Offer to Purchase Notes pursuant to the terms hereof or the Escrow and Security Agreement, it shall furnish to the Trustee, at least 45 days before the scheduled Redemption Date, an Officer's Certificate setting forth the section of the Indenture pursuant to which the Offer to Purchase shall occur, the terms of the offer, the principal amount of Notes to be purchased, the purchase price, the purchase date and a statement to the effect that the Company or one of its Restricted Subsidiaries has effected an Asset Sale and there are Excess Proceeds aggregating more than 10% of Adjusted Consolidated Net Assets or a Change of Control or Event of Loss has occurred, as applicable. SECTION 3.03. Selection of Notes to Be Redeemed. If less than all of the Notes are to be redeemed at any time, the Trustee will select the Notes, or portions thereof, for redemption in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a national securities exchange, on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate; provided that no Note of $1,000 in principal amount or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. The Trustee shall make the selection from the Notes outstanding and not previously called for redemption. Notes in denominations of $1,000 in principal amount at Stated Maturity may only be redeemed in whole. The Trustee may select for redemption portions (equal to $1,000 in principal amount at Stated Maturity or any integral multiple thereof) of Notes that have denominations larger than $1,000 in principal amount at Stated Maturity. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall promptly notify the Company and the Registrar promptly in writing of the Notes or portions of Notes to be called for redemption. 41 52 SECTION 3.04. Notice of Redemption. With respect to any redemption of Notes pursuant to Section 3.01(a) or (b), at least 30 days but not more than 60 days before a Redemption Date the Company shall mail or cause to be mailed, a notice of redemption by first class mail (pursuant to the requirements of Section 11.02) to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the name and address of the Paying Agent; (iv) that Notes called for redemption must be surrendered to the Paying Agent in order to collect the Redemption Price; (v) that, unless the Company defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date and the only remaining right of the Holders is to receive payment of the Redemption Price plus accrued and unpaid interest to the Redemption Date upon surrender of the Notes to the Paying Agent; (vi) that, if any Note is being redeemed in part, the portion of the principal amount (equal to $1,000 in principal amount at Stated Maturity or any integral multiple thereof) of such Note to be redeemed and that, on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be reissued; (vii) that, if any Note contains a CUSIP, CINS or ISIN number as provided in Section 2.13, no representation is being made as to the correctness of the CUSIP, CINS or ISIN number either as printed on the Notes or as contained in the notice of redemption and that reliance may be placed only on the other identification numbers printed on the Notes; and (viii) the aggregate principal amount at Stated Maturity of Notes being redeemed. At the Company's request (which request may be revoked by the Company at any time prior to the time at which the Trustee shall have given such notice to the Holders), made in writing to the Trustee, at least 45 days (or such shorter period as shall be satisfactory to the Trustee) before a Redemption Date, the Trustee shall give the notice of redemption in the name and at the expense of the Company. If, however, the Company gives such notice to the Holders, the Company shall concurrently deliver to the Trustee an Officers' Certificate stating that such notice has been given. 42 53 SECTION 3.05. Effect of Notice of Redemption. Once notice of redemption is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender of any Notes to the Paying Agent, such Notes shall be paid at the Redemption Price, plus accrued and unpaid interest to the Redemption Date. Notice of redemption shall be deemed to be given when mailed, whether or not the Holder receives the notice. In any event, failure to give such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of Notes held by Holders to whom such notice was properly given. SECTION 3.06. Deposit of Redemption Price. On or prior to 10:00 a.m. New York City time on any Redemption Date, the Company shall deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, shall segregate and hold in trust as provided in Section 2.05) money in immediately available funds sufficient to pay the Redemption Price of and any accrued and unpaid interest on all Notes to be redeemed on that date, other than Notes or portions thereof called for redemption on that date that have been delivered by the Company to the Trustee for cancellation. SECTION 3.07. Payment of Notes Called for Redemption. If notice of redemption has been given in the manner provided above, the Notes or portion of Notes specified in such notice to be redeemed shall become due and payable on the Redemption Date at the Redemption Price stated therein, together with accrued and unpaid interest to such Redemption Date, and on and after such date (unless the Company shall default in the payment of such Notes at the Redemption Price and accrued and unpaid interest to the Redemption Date, in which case the principal, until paid, shall bear interest from the Redemption Date at the rate prescribed in the Notes), such Notes shall cease to accrue interest. Upon surrender of any Note for redemption in accordance with a notice of redemption, such Note shall be paid and redeemed by the Company at the Redemption Price, together with accrued and unpaid interest to the Redemption Date; provided that installments of interest whose record date is prior to the Redemption Date shall be payable to the Holders registered as such at the close of business on such record date. SECTION 3.08. Notes Redeemed in Part. Upon surrender of any Note that is redeemed in part, the Company shall at its expense issue and execute and the Trustee shall authenticate and deliver for the Holder a new Note equal in principal amount to the unredeemed portion of such surrendered Note. ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes and this Indenture. An installment of principal, premium, if any, or interest shall be considered paid on the date due if the Trustee or Paying Agent (other than the Company, a Subsidiary of the Company, or any Affiliate of any of them) holds as 43 54 of 10:00 A.M. New York City time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay the installment. If the Company or any Subsidiary of the Company or any Affiliate of any of them, acts as Paying Agent, an installment of principal, premium, if any, or interest shall be considered paid on the due date if the entity acting as Paying Agent complies with the last sentence of Section 2.05. As provided in Section 6.10, upon any bankruptcy or reorganization procedure relative to the Company, the Trustee shall serve as the Paying Agent and conversion agent, if any, for the Notes. The Company shall pay interest on overdue principal, premium, if any, and interest on overdue installments of interest, to the extent lawful, at the rate per annum specified in the Notes. SECTION 4.02. Maintenance of Office or Agency. The Company shall maintain an office or agency (which may be an office of the Trustee or Registrar) where Notes may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 11.02. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Corporate Trust Office of the Trustee as such office of the Company in accordance with Section 2.04. SECTION 4.03. Limitation on Indebtedness. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the Notes, the Guarantees and Indebtedness existing on the Closing Date); provided that the Company and any Restricted Subsidiary may Incur Indebtedness if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Interest Coverage Ratio would be at least 2.25:1 in the case of an Incurrence during the period ending on the second anniversary of the Closing Date and 2.75:1 in the case of any subsequent Incurrence. Notwithstanding the foregoing, the Company and any Restricted Subsidiary (except as specified below), may Incur each and all of the following: (i) Indebtedness of the Company or any Guarantor outstanding at any time in an aggregate principal amount not to exceed the greater of (A) $100 44 55 million, less any amount of such Indebtedness permanently repaid as provided under Section 4.11 and (B) the Borrowing Base; (ii) Indebtedness owed (A) to the Company evidenced by an unsubordinated promissory note or (B) to any Restricted Subsidiary; provided that any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, then outstanding Indebtedness (other than Indebtedness Incurred under clause (i), (ii), (iv), (vi) or (viii) of this paragraph) and any refinancing thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that Indebtedness the proceeds of which are used to refinance or refund the Notes or Indebtedness that is pari passu with, or subordinated in right of payment to, the Notes shall only be permitted under this clause (iii) if (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes and (C) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided, further, that in no event may Indebtedness of the Company be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that such agreements (a) are designed solely to protect the Company or its Restricted Subsidiaries against fluctuations in foreign currency exchange rates, fuel rates, or interest rates and (b) do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates, fuel rates, or interest rates or by reason of fees, indemnities and compensation payable thereunder, and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in any case Incurred in 45 56 connection with the disposition of any business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by the Company or any Restricted Subsidiary in connection with such disposition; (v) Indebtedness of the Company, to the extent the net proceeds thereof are promptly (A) used to purchase Notes tendered in an Offer to Purchase made as a result of a Change in Control or (B) deposited to defease the Notes as described under Sections 8.01, 8.02 or 8.03 hereof; (vi) Note Guarantees and Guarantees of Indebtedness of the Company by any Restricted Subsidiary provided the Guarantee of such Indebtedness is permitted by and made in accordance with Section 4.07; (vii) Indebtedness of the Company or any Guarantor Incurred to finance the cost (including the costs of installation) of acquiring aircraft, engines, spare engines, hush kits, spare parts or equipment attached thereto or any other aircraft-related asset used or useful in the business of the Company or any of its Restricted Subsidiaries on the date of such Incurrence (including acquisitions by way of a Capitalized Lease and any acquisitions of the Capital Stock of a Person that becomes a Restricted Subsidiary, to the extent of the fair market value of the aircraft, engines, equipment related thereto and such aircraft-related assets of such Person at the time of such Incurrence); provided that (a) such Indebtedness is created solely for the purpose of financing the costs (including transaction costs and the costs of improvement or construction) of property or assets and is Incurred prior to, at the time of or within 12 months after, the later of the acquisition, the completion of construction or the commencement of full operation of such property or assets, and (b) the principal amount of such Indebtedness does not exceed 100% of such costs; (viii) the Term Loan; and (ix) Indebtedness not to exceed $50.0 million in aggregate principal amount at any one time outstanding. (b) Notwithstanding any other provision of this Section 4.03, the maximum amount of Indebtedness that the Company or a Restricted Subsidiary may Incur pursuant to this Section 4.03 shall not be deemed to be exceeded, with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies. (c) For purposes of determining any particular amount of Indebtedness under this Section 4.03, (1) Guarantees, Liens, letters of credit or other obligations supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (2) any Liens granted pursuant to the equal and ratable provisions referred to in Section 4.09 shall not be treated as Indebtedness. For purposes of 46 57 determining compliance with this Section 4.03, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. SECTION 4.04. Limitation on Restricted Payments. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries held by minority stockholders) held by Persons other than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) the Company or an Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary), (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to the Notes or (iv) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) above being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under the first paragraph of Section 4.03 or (C) the aggregate amount of all Restricted Payments (the amount, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount of such loss) (determined by excluding income resulting from transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter immediately following the Closing Date and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to Section 4.15 plus (2) the aggregate Net Cash Proceeds received by the Company after the Closing Date from the issuance and sale permitted by this Indenture of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Company, including an issuance or sale permitted by this Indenture of Indebtedness of the Company for cash subsequent to the Closing Date upon the conversion of such Indebtedness into Capital Stock (other than Disqualified Stock) of the Company, or from the issuance to a Person who is not a Subsidiary of the Company of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, exclusive of any Disqualified Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated 47 58 Maturity of the Notes) plus (3) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds are included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed, in each case, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person or Unrestricted Subsidiary plus (4) $5 million. The foregoing provision shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Notes including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the second paragraph of part (a) of Section 4.03; (iii) the repurchase, redemption or other acquisition of Capital Stock of the Company or an Unrestricted Subsidiary (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (iv) the making of any principal payment or the repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness of the Company which is subordinated in right of payment to the Notes in exchange for, or out of the proceeds of, a substantially concurrent offering of, shares of the Capital Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (v) payments or distributions, to dissenting stockholders pursuant to applicable law, pursuant to or in connection with a consolidation, merger or transfer of assets that complies with Section 5.01; (vi) Investments acquired in exchange for or out of the proceeds of a substantially concurrent issuance of Capital Stock (other than Disqualified Stock) of the Company; (vii) the repurchase, redemption, retirement, defeasance or other acquisition for value of subordinated Indebtedness of the Company in the event of 48 59 a change of control (to the extent required pursuant to the terms of such Indebtedness when Incurred), if prior thereto or contemporaneously therewith the Company has made or makes an Offer to Purchase the Notes and has repurchased and accepted and paid for all Notes validly tendered and not withdrawn with respect thereto; or (viii) the repurchase, redemption or other acquisition of Capital Stock of the Company issued to employees of the Company or any Restricted Subsidiary, for consideration not to exceed $1.0 million in any 12-month period and $3.0 million in aggregate; provided that, except in the case of clauses (i) and (iii), no Default or Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof and an Investment referred to in clause (vi) thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) and (iv), shall be included in calculating whether the conditions of clause (C) of the first paragraph of this Section 4.04 have been met with respect to any subsequent Restricted Payments. In the event the proceeds of an issuance of Capital Stock of the Company are used for the redemption, repurchase or other acquisition of the Notes, or Indebtedness that is pari passu with the Notes, then the Net Cash Proceeds of such issuance shall be included in clause (C) of the first paragraph of Section 4.04 only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Indebtedness. Any Restricted Payments made other than in cash shall be valued at fair market value. The amount of any Investment "outstanding" at any time shall be deemed to be equal to the amount of such Investment on the date made, less the return of capital to the Company and its Restricted Subsidiaries with respect to such Investment (up to the amount of such Investment on the date made). SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary other than a Guarantor to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Company or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: 49 60 (i) existing on the Closing Date in any agreement, and any extensions, refinancing, renewals or replacements of any such agreement; provided that the encumbrances and restrictions in any such extensions, refinancing, renewals or replacements are no less favorable in any material respect to the Holders, when looked at in the aggregate, than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this Section 4.05, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by this Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction applies only in the event of a payment default or a default with respect to a financial covenant contained in such Indebtedness or agreement, (B) the encumbrance or restriction is not materially more disadvantageous to the Holders of the Notes than is customary in comparable financings (as determined by the Company) and (C) the Company determines that any such encumbrance or restriction will not materially affect the Company's ability to make principal or interest payments on the Notes. Nothing contained in this Section 4.05 shall prevent the Company or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in Section 4.09 or (2) restricting the sale or other disposition of property or assets of the Company or any of its Restricted Subsidiaries that secure 50 61 Indebtedness of the Company or any of its Restricted Subsidiaries, including, without limitation, the Collateral in accordance with the terms hereof. SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries. The Company shall not sell, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Company or a Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales to foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent required by applicable law; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under Section 4.04 if made on the date of such issuance or sale or (iv) issuances or sales of Common Stock of a Restricted Subsidiary if the Net Cash Proceeds thereof are applied in accordance with clause (A) or (B) of Section 4.11. SECTION 4.07. Issuances of Guarantees by New Restricted Subsidiaries. The Company shall provide to the Trustee, on the date that any Person (other than an Excluded Restricted Subsidiary) becomes a Restricted Subsidiary, a supplemental indenture to this Indenture, executed by such new Restricted Subsidiary, providing for a full and unconditional guarantee on a senior basis by such new Restricted Subsidiary of the Company's obligations under the Notes and this Indenture to the same extent as that set forth in this Indenture; provided that, in the case of any new Restricted Subsidiary that becomes a Restricted Subsidiary through the acquisition of a majority of its voting Capital Stock by the Company or any other Restricted Subsidiary, such guarantee may be subordinated to the extent required by the obligations of such new Restricted Subsidiary existing on the date of such acquisition that were not incurred in contemplation of such acquisition. SECTION 4.08. Limitation on Transactions with Shareholders and Affiliates. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any Affiliate of the Company or any Restricted Subsidiary, except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to: (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors or (B) for which the Company or a Restricted Subsidiary delivers to the Trustee a written opinion of a nationally recognized investment 51 62 banking firm stating that the transaction is fair to the Company or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between the Company and any of its Restricted Subsidiaries or solely between Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; (iv) any payments or other transactions pursuant to any tax- sharing agreement between the Company and any other Person with which the Company files a consolidated tax return or with which the Company is part of a consolidated group for tax purposes; (v) any Restricted Payments not prohibited by Section 4.04; (vi) the execution of, and transactions pursuant to, employment agreements entered into in the ordinary course of the Company's or its Restricted Subsidiaries' business that are consistent with the Company's or such Restricted Subsidiaries' past practice; (vii) transactions pursuant to agreements existing on the Closing Date, as in effect on the Closing Date; or (viii) grants of stock options, restricted stock and other non- cash equity incentive compensation. Notwithstanding the foregoing, any transaction covered by the first paragraph of this Section 4.08 and not covered by clauses (ii) through (v) of this paragraph, (a) the aggregate amount of which exceeds $3 million in value, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) above and (b) the aggregate amount of which exceeds $10 million in value, must be determined to be fair in the manner provided for in clause (i)(B) above. SECTION 4.09. Limitation on Liens. Other than the rights of the Trustee under this Indenture, the Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its assets or properties of any character, including, without limitation, the Collateral, without making effective provision for all of the Notes and all other amounts due under this Indenture to be directly secured equally and ratably with (or, if the obligation or liability to be secured by such Lien is subordinated in right of payment to the Notes, prior to) the obligation or liability secured by such Lien. The foregoing limitation does not apply to: (i) Liens granted on the Closing Date on assets whenever acquired, and substitutions and replacements for such Liens; 52 63 (ii) Liens granted after the Closing Date on any assets or Capital Stock of the Company or its Restricted Subsidiaries created in favor of the Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Company or a Restricted Subsidiary to secure Indebtedness owing to the Company or such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under clause (iii) of the second paragraph of Section 4.03; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (v) Liens on any property or assets of a Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary permitted under Section 4.03; (vi) Permitted Liens; (vii) Liens on assets having a fair market value not in excess (on the date any such Lien is incurred) of 20% of Adjusted Consolidated Net Tangible Assets; or (viii) Liens on Capital Stock of Subsidiaries in favor of the lenders incurred under clause (i) of the second paragraph of Section 4.03. SECTION 4.10. Limitation on Sale-Leaseback Transactions. The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any sale-leaseback transaction involving any of its assets or properties whether now owned or hereafter acquired, whereby the Company or a Restricted Subsidiary sells or transfers such assets or properties and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which the Company or such Restricted Subsidiary, as the case may be, intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred. The foregoing restriction does not apply to any sale-leaseback transaction if: (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between the Company and any Restricted Subsidiary or solely between Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12 months after the sale or transfer of any assets or properties is completed, applies an amount not 53 64 less than the net proceeds received from such sale in accordance with clause (A) or (B) of subsection (ii) of Section 4.11. SECTION 4.11. Limitation on Asset Sales. The Company shall not, and shall not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Company or such Restricted Subsidiary (including the amount of any Released Indebtedness) is at least equal to the fair market value of the assets sold or disposed of; and (ii) at least 75% of the consideration received (excluding the amount of any Released Indebtedness) consists of cash or Cash Equivalents or Temporary Cash Investments. In the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of the Company and its Subsidiaries has been filed with the Commission pursuant to Section 4.15), then the Company shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the Company, or any Restricted Subsidiary providing a Note Guarantee or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this Section 4.11. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (ii) above and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this Section 4.11 totals at least 10% of Adjusted Consolidated Net Tangible Assets, the Company must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued interest (if any) to the Payment 54 65 Date. If the aggregate principal amount of Notes tendered pursuant to an Offer to Purchase pursuant to this covenant is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. Upon completion of such Offer to Purchase, the amount of Excess Proceeds shall be reset at zero. SECTION 4.12 [Left Blank] SECTION 4.13. Events of Loss. If an Event of Loss occurs with respect to an Aircraft, the Company shall either make an Offer to Purchase a pro rata portion of the Notes or the Company shall subject a replacement aircraft to the Lien on the Collateral pursuant to this Indenture. In the event the Company elects to replace an Aircraft, it must do so within 365 days of the Event of Loss with an aircraft having a value at least equal to, and in as good operating condition and repair and as airworthy as, the Aircraft subject to the Event of Loss, assuming such Aircraft was in the condition and repair required by this Indenture immediately prior to the occurrence of the Event of Loss, all as determined by the chief financial officer of the Company in good faith. In the event the Company elects not to replace such Aircraft, the Company is required to make an Offer to Purchase, not later than 365 days after the occurrence of such Event of Loss, a pro rata amount (based on the ratio borne by the initial appraised value of such Aircraft to the initial aggregate appraised value) of the outstanding principal amount of the Notes at 100% of the principal amount thereof together with accrued and unpaid interest thereon. In the event of an Event of Loss with respect to the Aircraft for which no initial appraisal was conducted, the "initial appraised value" for the purpose of the prior sentence will be determined, in good faith, by the chief financial officer of the Company, as evidenced by an Officer's Certificate delivered to the Trustee. Upon such payment, the Lien on the Collateral pursuant to this Indenture with respect to such Aircraft shall terminate and be released and the Trustee shall execute and deliver to the Company any and all such documentation necessary or required to evidence same. If an Event of Loss occurs with respect to an Engine alone, the Company shall replace such Engine with another engine suitable for installation and use on the Aircraft with respect to which such Engine was used, as determined by the chief financial officer of the Company in good faith, as evidenced by an Officer's Certificate delivered to the Trustee. SECTION 4.14. Repurchase of Notes upon a Change of Control Triggering Event. Upon the occurrence of a Change of Control Triggering Event, the Company must commence, within 30 days of the occurrence of a Change of Control Triggering Event, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. The Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company, and purchases all Notes 55 66 validly tendered and not withdrawn under such Change of Control Offer, in accordance with the terms hereof. The Change of Control provisions described above will be applicable whether or not any other provisions of this Indenture are also applicable. SECTION 4.15. Commission Reports and Reports to Holders. At all times, whether or not the Company is then required to file reports with the Commission, the Company shall file with the Commission all such reports and other information as it would be required to file with the Commission by Section 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were subject thereto. The Company shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. In addition, at all times prior to the consummation of an exchange offer pursuant to the effectiveness of a Registration Statement or a Shelf Registration Statement, upon the request of any Holder or any prospective purchaser of the Notes designated by a Holder, the Company shall supply to such Holder or such prospective purchaser the information required under Rule 144A under the Securities Act. SECTION 4.16. Limitation on Collateral Sales; Event of Loss. Neither Company nor any Owner will transfer, convey, sell, lease or otherwise dispose of (other than by lease, in compliance with Section 14.03 hereof) (a "Sale") any Aircraft or Engine unless (i) the Owner thereof receives (x) consideration, consisting solely of cash, at the time of such Sale at least equal to the fair market value of the Aircraft or Engine disposed of (determined by the chief financial officer of the Company in good faith, as evidenced by an Officer's Certificate delivered to the Trustee) or (y) an Aircraft or Engine having a value at least equal to, and in as good operating condition and repair and as airworthy as, the Aircraft or Engine subject to the Sale, assuming such Aircraft or Engine, as the case may be, was in the condition and repair required by this Indenture immediately prior to such Sale (determined by the chief financial officer of the Company in good faith, as evidenced by an Officer's Certificate delivered to the Trustee). If any Owner consummates a Sale for cash, or if an Event of Loss occurs, with respect to any Aircraft or Engine, the Trustee will receive and hold, and if received by the Owner, the Owner will pay over to the Trustee, the proceeds of such Sale or Event of Loss. The Owner may, within 365 days after such Sale or Event of Loss, subject to the Lien created pursuant to this Indenture, substitute an Aircraft or Engine, having a value at least equal to, and in as good operating condition and repair and as airworthy as, the Aircraft or Engine subject to the Sale or Event of Loss, assuming such Aircraft or Engine was in the condition and repair required by this Indenture immediately prior to the occurrence of such Sale or Event of Loss (determined by the chief financial officer of the Company in good faith, as evidenced by an Officer's Certificate delivered to the Trustee), and the Trustee shall, upon receipt of evidence of such substitution pursuant to an Officer's Certificate and receipt of documentation in the reasonable judgment of the Trustee necessary or required for the creation of a Lien, in favor of the Holders, on such substitute Collateral, pay to the Owner the proceeds of such Sale or Event of Loss and any related additional amounts held by it. In the event the Company elects not to replace such Aircraft (or in the event such Aircraft or Engine is not replaced within 365 days after such Sale or Event of Loss), the Trustee 56 67 shall refund to the Owner, and the Company shall be required to apply, an amount equal to the proceeds received from such Sale or Event of Loss to make an Offer to Purchase Notes in accordance with Section 4.13; provided that with respect to the proceeds of any Sale or Event of Loss with respect to an Aircraft, in no event shall any Owner be required to so apply, and the Owner shall be permitted to retain, amounts, if any, in excess of the initial appraised value of such Aircraft. Notwithstanding the foregoing, if the Owner consummates a Sale, or an Event of Loss occurs, with respect to an Engine alone, the Owner must replace such Engine with another engine suitable for installation and use on the Aircraft, and having a value at least equal to and in as good operating condition as, the Engine subject to the Sale or Event of Loss, assuming such Engine was of the value and in the condition and repair required by this Indenture immediately prior to the occurrence of such Sale or Event of Loss (as determined by the chief financial officer of the Company in good faith). Any cash received in connection with a Sale or an Event of Loss shall be held by the Trustee and invested as directed by the Company in Cash Equivalents or Temporary Cash Investments until applied in accordance with this covenant. Upon payment to the Trustee of the proceeds from the Sale or an Event of Loss with respect to an Aircraft as required by this Section 4.16, the Lien created pursuant to this Indenture with respect to such Aircraft (but not the proceeds with respect thereto) shall terminate and be released and the Trustee shall execute and deliver to the Company all such documentation necessary or required to evidence such. SECTION 4.17. Existence. Subject to Articles Four and Five of this Indenture, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its existence and the existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of the Company and each such Subsidiary as each shall be amended from time to time and the rights (whether pursuant to charter, partnership certificate, agreement, statute or otherwise), licenses and franchises of the Company and each such Subsidiary; provided that the Company shall not be required to preserve any such right, license or franchise, or the existence of any Restricted Subsidiary, if the maintenance or preservation thereof is no longer desirable in the conduct of the business of the Company or any of its Restricted Subsidiaries; and provided further that any Restricted Subsidiary may consolidate with, merge into, or sell, convey, transfer, lease or otherwise dispose of all or part of its property and assets to the Company or any Wholly Owned Restricted Subsidiary. SECTION 4.18. Payment of Taxes and Other Claims. The Company shall pay or discharge and shall cause each of its Restricted Subsidiaries to pay or discharge, or cause to be paid or discharged, before the same shall become delinquent (i) all material taxes, assessments and governmental charges levied or imposed upon (a) the Company or any such Restricted Subsidiary, (b) the income or profits of any such Restricted Subsidiary which is a corporation or (c) the property of the Company or any such Restricted Subsidiary and (ii) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a lien upon the property of the Company or any such Restricted Subsidiary; provided that the Company shall not be required to pay or discharge, or cause to be paid or discharged, any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings. 57 68 SECTION 4.19. Maintenance of Properties and Insurance. The Company shall cause all properties used or useful in the conduct of its business or the business of any Restricted Subsidiary and material to the Company and its Restricted Subsidiaries taken as a whole, to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided that nothing in this Section 4.19 shall prevent the Company or any such Restricted Subsidiary from discontinuing the use, operation or maintenance of any of such properties or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors or the board of directors of such Restricted Subsidiary having managerial responsibility for any such property, desirable in the conduct of the business of the Company or such Restricted Subsidiary. Without limiting or increasing the Company's obligations pursuant to Section 4.12 hereof, the Company shall provide or cause to be provided, for itself and its Restricted Subsidiaries, insurance (including appropriate self- insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and owning like properties, including, but not limited to, products liability insurance and public liability insurance, with reputable insurers or with the government of the United States of America, or an agency or instrumentality thereof, in such amounts, with such deductibles and by such methods as the Company in good faith shall determine to be reasonable and appropriate in the circumstances. SECTION 4.20. Compliance Certificates. (a) The Company and each Guarantor shall deliver to the Trustee, on or before a date not more than 90 days after the end of each fiscal year, an Officers' Certificate stating whether or not the signers know of any Default, Event of Default or a Collateral Access Event that occurred during such fiscal year. In the case of the Officers' Certificate delivered within 90 days of the end of the Company's fiscal year, such certificate shall comply with the applicable provisions of the TIA. If any of the signers of the Officers' Certificate have knowledge of such a Default, Event of Default or a Collateral Access Event, the certificate shall describe any such Default, Event of Default or a Collateral Access Event and its status. The first certificate to be delivered pursuant to this Section 4.20(a) shall be for the first fiscal year beginning after the execution of this Indenture. (b) The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default, Event of Default or a Collateral Access Event, an Officers' Certificate specifying such Default, Event of Default or a Collateral Access Event and what action the Company is taking or proposes to take with respect thereto. SECTION 4.21. Waiver of Stay, Extension or Usury Laws. Each of the Company, the Guarantors and any other obligor on the Notes covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any 58 69 usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and each of the Company, the Guarantors and any other obligor on the Notes (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. When Company May Merge, Etc. The Company shall not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into the Company unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of the Company on all of the Notes and under this Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis the Company, or any Person becoming the successor obligor of the Notes, as the case may be, could Incur at least $1.00 of Indebtedness under the first paragraph of Section 4.03; provided that this clause (iii) shall not apply to a consolidation, merger or sale of all (but not less than all) of the assets of the Company if all Liens and Indebtedness of the Company or any Person becoming the successor obligor of the Notes, as the case may be, and its Restricted Subsidiaries outstanding immediately after such transaction would, if Incurred at such time, have been permitted to be Incurred (and all such Liens and Indebtedness, other than Liens or Indebtedness of the Company and its Restricted Subsidiaries outstanding immediately prior to the transaction, shall be deemed to have been Incurred) for all purposes of this Indenture; and (iv) the Company delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iii), if applicable) and Opinion of Counsel, in each case stating that such consolidation, 59 70 merger or transfer and such supplemental indenture complies with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with. SECTION 5.02. Successor Substituted. Upon any consolidation or merger, or any sale, conveyance, transfer or other disposition of all or substantially all of the property and assets of the Company in accordance with Section 5.01, the successor Person formed by such consolidation or into which the Company is merged or to which such sale, conveyance, transfer or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company; provided that the Company shall not be released from the obligation to pay the principal of and interest on the Notes. ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default. An "Event of Default" shall occur with respect to the Notes if: (a) the Company defaults in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) the Company defaults in the performance or breaches the provisions of Article Five or fails to make or consummate an Offer to Purchase in accordance with Section 4.11, Section 4.13 or Section 4.14 hereof; (d) the Company or any Guarantor defaults in the performance of or breaches any other covenant or agreement of the Company in this Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Guarantor or Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been 60 71 rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Guarantor or Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company, any Guarantor or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; (h) the Company, any Guarantor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors; or (i) any Note Guarantee shall cease to be, or shall be asserted in writing by the Company or any Guarantor not to be, in full force and effect or enforceable in accordance with its terms. If the last day of the period referred to in clause (b), (d), (e), (f) or (g) of the immediately preceding paragraph is not a Business Day, then the first Business Day following such day shall be deemed to be the last day of the period referred to in such clauses. Any "day" will be deemed to end as of 11:59 p.m., New York City time. 61 72 SECTION 6.02. Collateral Access Events. A "Collateral Access Event" shall occur with respect to the Notes if: (a) the Company fails to make a payment of principal or any payment of interest, or premium when due, and the continuation of such failure unremedied for 15 days; (b) The Company fails to procure and maintain property and liability insurance in accordance with the provisions of this Indenture and the continuation of such failure, in the case of maintenance of such insurance, until the earlier of (i) 60 days after notice to the Company or the Trustee that such insurance is subject to lapse or cancellation or (ii) the date such lapse or cancellation is effective as to the Trustee; (c) The Company or any Owner operates the Aircraft after receipt of notice that the insurance required by this Indenture has been canceled; (d) the Company fails to perform any covenants contained in this Indenture and such failure continues for a period of 60 days after notice to the Company by the Trustee or by Holders of 25% of outstanding Notes under this Indenture, unless such failure is curable and the Company is diligently proceeding to correct such failure and shall in fact correct such failure within 180 days after delivery of such notice; (e) any representation or warranty made by the Company in this Indenture, if any, or in any document or certificate furnished to the Trustee or the Holders under this Indenture, shall be incorrect in any material respect as of the date made and shall be material at the time of determination and shall not have been remedied within 60 days after notice has been given to the Company by the Trustee or Holders of 25% of outstanding Notes under this Indenture; (f) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company, any Guarantor or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; and (g) the Company, any Guarantor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, 62 73 sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors. If the last day of the period referred to in clause (b), (d), (e) or (f) of the immediately preceding paragraph is not a Business Day, then the first Business Day following such day shall be deemed to be the last day of the period referred to in such clauses. Any "day" will be deemed to end as of 11:59 p.m., New York City time. SECTION 6.03. Acceleration. If an Event of Default (other than an Event of Default specified in clause (g) or (h) of Section 6.01 that occurs with respect to the Company) or a Collateral Access Event (other than a Collateral Access Event specified in clause (f) or (g) of Section 6.02) occurs and is continuing under this Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes, then outstanding, by written notice (a "Notice of Default or Collateral Access Event") to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) of Section 6.01 or clause (c) of Section 6.02 has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to such clause (e) or (c) shall be remedied or cured by the Company or, with respect to clause (c) of Section 6.01 only, by the Company or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness, within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (g) or (h) of Section 6.01 or a Collateral Access Event specified in clause (f) or (g) of Section 6.02 occurs with respect to the Company, the principal of, premium, if any, and accrued interest on the Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after such a declaration of acceleration, but before a judgment or decree for the payment of the money due has been obtained by the Trustee, the Holders of at least a majority in aggregate principal amount of the outstanding Notes by written notice to the Company and to the Trustee may waive all past Defaults and rescind and annul such declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. SECTION 6.04. Other Remedies. Upon receipt of a Notice of Default or Collateral Access Event, the Trustee shall exercise such remedies available to it under applicable law, including any remedies of a secured party under applicable law or otherwise provided in this Indenture to collect the payment of principal of, premium, if any, or interest on the 63 74 Notes or to enforce the performance of any provision of the Notes, the Escrow and Security Agreement or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. SECTION 6.05. Waiver of Past Defaults. The Holders of at least a majority in aggregate principal amount of then outstanding Notes (including pursuant to consents obtained pursuant to a purchase, tender or exchange offer of Notes), by notice to the Trustee, may waive an existing Default, Event of Default or a Collateral Access Event and its consequences, except a Default in the payment of principal of, premium, if any, or interest on any Note as specified in clause (a) or (b) of Section 6.01 (including in connection with an Offer to Purchase) or in respect of a covenant or provision of this Indenture or any Guarantee which cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default or Collateral Access Event arising therefrom shall be deemed to have been cured, for every purpose of this Indenture and the Guarantees; but no such waiver shall extend to any subsequent or other Default, Event of Default or Collateral Access Event or impair any right consequent thereto. SECTION 6.06. Control by Majority. The Holders of at least a majority in aggregate principal amount of the outstanding Notes, by notice to the Trustee, may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided that the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders not joining in the giving of such direction; and provided further that the Trustee may take any other action it deems proper that is not inconsistent with any directions received from Holders of Notes pursuant to this Section 6.06. SECTION 6.07. Limitation on Suits. A Holder may not institute any proceeding, judicial or otherwise, with respect to this Indenture, the Notes or the Note Guarantees, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Holder has previously given to the Trustee written notice of a continuing Event of Default or Collateral Access Event; (ii) the Holders of at least 25% in aggregate principal amount of outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default or Collateral Access Event in its own name as Trustee hereunder; (iii) such Holder or Holders have offered to the Trustee indemnity satisfactory to the Trustee against any costs, liabilities or expenses to be incurred in compliance with such request; 64 75 (iv) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes have not given the Trustee a direction that is inconsistent with such written request. For purposes of Section 6.06 of this Indenture and this Section 6.07, the Trustee shall comply with TIA Section 316(a) in making any determination of whether the Holders of the required aggregate principal amount of outstanding Notes have concurred in any request or direction of the Trustee to pursue any remedy available to the Trustee or the Holders with respect to this Indenture or the Notes or otherwise under the law. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. SECTION 6.08. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of the principal amount of, premium, if any, or interest on such Holder's Note on or after the respective due dates expressed on such Note (including in a notice with respect to an Offer to Purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.09. Collection Suit by Trustee. If an Event of Default in payment of principal, premium or interest specified in clause (a) or (b) of Section 6.01 or a Collateral Access Event in clause (a) of Section 6.02 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company, any Guarantor (in accordance with the applicable Note Guarantee) or any other obligor of the Notes for the whole amount of principal, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal, premium, if any, and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate specified in the Notes, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.10. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor of the Notes, including any Guarantor), its creditors or its property and shall be entitled and empowered to collect and receive any monies, securities or other property payable or deliverable upon conversion or exchange of the Notes or upon any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar 65 76 official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to empower the Trustee to authorize or consent to, or accept or adopt on behalf of any Holder, any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.11. Priorities. If the Trustee collects any money pursuant to this Article Six, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.07, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders for amounts then due and unpaid for principal amount of, premium, if any, and accrued interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal, premium, if any, and accrued interest, respectively; and Third: to the Company or any other obligors of the Notes or as a court of competent jurisdiction may direct. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Holders pursuant to this Section 6.11. SECTION 6.12. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.12 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.08 of this Indenture, or a suit by Holders of more than 10% in principal amount of the outstanding Notes. SECTION 6.13. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Company, the Trustee and the Holders shall continue as though no such proceeding had been instituted. 66 77 SECTION 6.14. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully taken Notes in Section 2.09, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.15. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default or any Collateral Access Event shall impair any such right or remedy or constitute a waiver of any such Event of Default or any Collateral Access Event or an acquiescence therein. Every right and remedy given by this Article Six or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. ARTICLE SEVEN TRUSTEE SECTION 7.01. Rights of Trustee. (i) Except during the continuance of an Event of Default or a Collateral Access Event, (a) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; (b) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth and correctness of the statements and certificates or opinions furnished to it and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; and (c) for purposes of meeting the legal requirements of any jurisdictions in which any part of the Collateral may at the time be located, the Trustee will have the power to appoint a co-trustee or separate trustee of all or any part of the Collateral. To the extent permitted by law, all rights, powers, duties and obligations conferred or imposed upon the Trustee will be conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co- trustee jointly, or, in any jurisdiction in which the Trustee will be incompetent or unqualified to perform certain acts, singly upon such separate trustee or co-trustee who shall exercise and perform such rights, powers, duties and obligations solely at the direction of the Trustee. 67 78 (ii) In case an Event of Default or a Collateral Access Event has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (iii) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (a) this Subsection shall not be construed to limit the effect of Subsection (i) of this Section; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the outstanding Notes, relating to the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Notes. (iv) Subject to TIA Sections 315(a) through (d): (a) the Trustee may rely upon any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document; (b) before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Section 11.04. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion; (c) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction; (d) the Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers; provided that the Trustee's conduct does not constitute negligence or bad faith; (e) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it 68 79 shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it; (f) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed), may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (g) the Trustee may consult with counsel and the advice of such counsel or any opinion of counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (h) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (i) the Trustee may execute any of the trusts or powers hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (j) the Trustee may conclusively rely as to the identity and addresses of Holders and other matters contained therein on the register of the Notes maintained by the Registrar pursuant to Section 2.04 hereof and shall not be affected by notice to the contrary; and (k) unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. SECTION 7.02. Actions of Trustee. The Trustee may, and upon the request of a majority of the Holders shall, take such actions (including the giving of direction or notice) as are permitted or required to be taken by the Trustee under this Indenture including, but not limited to, the following: (i) sending notice of a Collateral Access Event (which, if required by this Indenture, shall specify the applicable section of this Indenture under which any such event arises); 69 80 (ii) sending a Notice of Default or Collateral Access Event pursuant to Section 6.03 of this Indenture; and (iii) exercising any or all remedies under this Indenture; provided, however, that without the consent of each Holder, the Trustee will not take any action which, pursuant to Section 9.01 hereof, expressly requires the consent of each Holder affected thereby. SECTION 7.03. Individual Rights of Trustee. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to TIA Sections 310(b) and 311. SECTION 7.04. Trustee's Disclaimer. The Trustee (i) shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, (ii) shall not be accountable for the Company's use of the proceeds from the Notes, (iii) shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and (iv) shall not be responsible for any statement in the Notes other than its certificate of authentication. SECTION 7.05. Notice of Default or Collateral Access Events. If any Default, Event of Default or Collateral Access Event occurs and is continuing and if such Default, Event of Default or Collateral Access Event is known to a Responsible Officer of the Trustee, the Trustee shall mail to each Holder in the manner and to the extent provided in TIA Section 313(c) notice of the Default, Event of Default or Collateral Access Event within 45 days after it occurs, unless such Default, Event of Default or Collateral Access Event has been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of, premium, if any, or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. The Trustee shall not be deemed to have knowledge of any Default, Event of Default or Collateral Access Event except (i) a default described in Section 6.01(a) or (b) so long as the Trustee is the Paying Agent or (ii) any Default, Event of Default or Collateral Access Event of which the Trustee shall have received written notification or a Responsible Officer charged with the administration of this Indenture shall have obtained actual knowledge, and such notification shall not be deemed to include receipt of information obtained in any report or other reports and documents furnished under Section 4.20 of this Indenture which reports and documents the Trustee shall have no duty to examine. 70 81 SECTION 7.06. Reports by Trustee to Holders. Within 60 days after each May 15, beginning with May 15, 1998, the Trustee shall mail to each Holder as provided in TIA Section 313(c) a brief report dated as of such May 15, if required by TIA Section 313(a). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the Commission and each stock exchange on which the Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange or of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Company shall pay to the Trustee such compensation as shall be agreed upon in writing for its services hereunder. The compensation of the Trustee shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, expenses and advances incurred or made by it in addition to compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee (including its agents, officers, directors and employees) for, and hold it harmless against, any loss or liability or expense incurred by it without negligence or bad faith on its part in connection with the acceptance or administration of this Indenture and its duties under this Indenture and the Notes, including the costs and expenses of defending itself against any claim or liability and of complying with any process served upon it or any of its officers in connection with the exercise or performance of any of its powers or duties under this Indenture and the Notes. The Trustee shall notify the Company promptly of any claim asserted against the Trustee for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay reasonable fees and expenses of such counsel. The Company need not pay for any settlements made without its consent; provided that such consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnity against any loss or liability incurred by the Trustee through negligence or bad faith. The Trustee shall have a claim prior to the Notes on all money or property held or collected by the Trustee, in its capacity as Trustee, for any amount owing it pursuant to this Section 7.07, except money or property held in trust to pay principal of, premium, if any, and interest on particular Notes. If the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in clause (g) or (h) of Section 6.01 or a Collateral Access Event specified in clauses (g) and (h) of Section 6.02, the expenses and the compensation for the services (including the reasonable fees and expenses of its agents and counsel) will be intended to constitute expenses of administration under Title 11 of the United States Bankruptcy Code or any applicable federal or state law for the relief of debtors. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the 71 82 Trustee under this Section 7.07 out of the estate in any such proceeding, shall be denied for any reason, other than solely because of the misconduct of the Trustee or its Agents, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. The provisions of this Section 7.07 shall survive the termination of this Indenture. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign by so notifying the Company in writing at least 30 days prior to the date of the proposed resignation. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Trustee in writing and may appoint a successor Trustee with the consent of the Company. The Company may remove the Trustee if: (i) the Trustee fails to comply with Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of acting. If the Trustee resigns or is removed, or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in aggregate principal amount of the outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If the successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after the delivery of such written acceptance, subject to the lien provided in Section 7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, (ii) the resignation or removal of the retiring Trustee shall become effective and (iii) the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. 72 83 If the Trustee fails to comply with Section 7.10, any Holder who satisfies the requirements of TIA Section 310(b) may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect provided in this Section. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligation under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee with the same effect as if the successor Trustee had been named as the Trustee herein. SECTION 7.10. Eligibility. Any Trustee serving hereunder shall be a bank or trust company, within or without the state, which is authorized by law to perform all of the duties imposed upon it hereby and which either (i) has a reported capital and surplus aggregating at least $25 million or (ii) is a wholly owned subsidiary of a bank, a trust company or a bank holding company having a reported capital and surplus aggregating at least $25 million, and shall at all times satisfy the requirements of TIA Section 310(a)(1). SECTION 7.11. Money Held in Trust. The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law and except for money held in trust under Article Eight of this Indenture. ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. Termination of Company's Obligations. Except as otherwise provided in this Section 8.01, the Company and the Guarantors may terminate their obligations under the Notes, the Note Guarantees and this Indenture and obtain a release of the Collateral if: (i) all Notes previously authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or Notes that are paid pursuant to Section 4.01 or Notes for whose payment money or securities have theretofore been held in trust and thereafter repaid to the Company, as provided in Section 8.05) have been delivered to the Trustee for cancellation and the Company or the Guarantors have paid all sums payable by them hereunder; or 73 84 (ii) (A) the Notes have become due and payable, mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption, (B) the Company or any Guarantor irrevocably deposits in trust with the Trustee during such one-year period, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds solely for the benefit of the Holders for that purpose, money or U.S. Government Obligations sufficient (in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee), without consideration of any reinvestment of any interest thereon, to pay, through the payment of principal and interest in accordance with their terms not later than one day prior to the relevant due date, principal, premium, if any, and interest on the Notes to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, (C) no Default, Event of Default or Collateral Access Event with respect to the Notes shall have occurred and be continuing on the date of such deposit, (D) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound and (E) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with; provided that, if simultaneously with the deposit of the money and/or U.S. Government Obligations referred to in (B) above, the Company or any Guarantor has caused an irrevocable, transferrable, standby letter of credit to be issued by a bank with capital and surplus exceeding the principal amount of the Notes then outstanding, expiring not earlier than 180 days from its issuance, in favor of the Trustee which permits the Trustee to draw an amount equal to the principal, premium, if any, and accrued interest on the Notes through the expiry date of the letter of credit, then the Company and the Guarantors will be deemed to have paid and discharged any and all obligations in respect of the Notes on the date of the deposit and issuance of the letter of credit, and the Collateral shall be deemed released. With respect to the foregoing clause (i), the Company's obligations under Section 7.07 shall survive. With respect to the foregoing clause (ii), the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.07, 8.04, 8.05 and 8.06 shall survive. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture except for those surviving obligations specified above. SECTION 8.02. Defeasance and Discharge of Indenture. The Company and the Guarantors will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes and the Note Guarantees and the Collateral shall be deemed released on the 123rd day after the date of the deposit referred to in clause (A) of this Section 8.02, and the provisions of this Indenture will no longer be in effect with 74 85 respect to the Notes, the Collateral and the Note Guarantees, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same, except as to (i) rights of registration of transfer and exchange, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to receive payments of principal thereof and interest thereon, (iv) the Company's obligations under Section 4.02, (v) the rights, obligations and immunities of the Trustee hereunder and (vi) the rights of the Holders as beneficiaries of this Indenture with respect to the property so deposited with the Trustee payable to all or any of them; provided that the following conditions shall have been satisfied: (A) the Company or the Guarantors have deposited with the Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of this Indenture and the Notes; (B) the Company has delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this Section 8.02 and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law after the Closing Date such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law; (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (D) if at such time the Notes are listed on a national securities exchange, the Company has delivered to the Trustee an Opinion of Counsel to the effect that the Notes will not be delisted as a result of such deposit, defeasance and discharge; and 75 86 (E) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02 have been complied with; provided that, if simultaneously with the deposit of the money and/or U.S. Government Obligations referred to in (A) above, the Company or any Guarantor has caused an irrevocable, transferrable, standby letter of credit to be issued by a bank with capital and surplus exceeding the principal amount of the Notes then outstanding, expiring not earlier than 180 days from its issuance, in favor of the Trustee which permits the Trustee to draw an amount equal to the principal, premium, if any, and accrued interest on the Notes through the expiry date of the letter of credit, then the Company and the Guarantors will be deemed to have paid and discharged any and all obligations in respect of the Notes on the date of the deposit and issuance of the letter of credit. Notwithstanding the foregoing, prior to the end of the 123-day period referred to in clause (B)(ii) of this Section 8.02, none of the Company's obligations under this Indenture shall be discharged. Subsequent to the end of such 123-day period with respect to this Section 8.02, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.09, 2.14, 4.01, 4.02, 7.06, 7.07, 8.04, 8.05 and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.06, 8.05 and 8.06 shall survive. If and when a ruling from the Internal Revenue Service or an Opinion of Counsel referred to in clause (B)(i) of this Section 8.02 is able to be provided specifically without regard to, and not in reliance upon, the continuance of the Company's obligations under Section 4.01, then the Company's obligations under such Section 4.01 shall cease upon delivery to the Trustee of such ruling or Opinion of Counsel and compliance with the other conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture except for those surviving obligations in the immediately preceding paragraph. SECTION 8.03. Defeasance of Certain Obligations. The Company may omit to comply with any term, provision or condition set forth in clauses (iii) and (iv) of Section 5.01, all the covenants under Article Four (excluding Sections 4.01 and 4.02) and Article Fourteen hereof, and clause (c) of Section 6.01, and such clauses (iii) and (iv) of Section 5.01, clause (d) of Section 6.01, and such other covenants and clauses (e) and (f) of Section 6.01 shall be deemed not to be Events of Default, in each case with respect to the Notes, if: (i) the Company has deposited with the Trustee in trust, money and/or U.S. Government Obligations that, through the payment of interest and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (i), money in an amount sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the 76 87 Trustee to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of this Indenture and the Notes and shall have irrevocably instructed the Trustee to apply such money to the payment of such principal, premium and interest; (ii) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; it being understood that after such 123-day period the Collateral shall be released; (iii) the Company has delivered to the Trustee an Opinion of Counsel to the effect that (A) the creation of the defeasance trust does not violate the Investment Company Act of 1940, (B) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and Events of Default and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred and (C) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Company under either such statute, and either (I) the trust funds will no longer remain the property of the Company (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (II) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, (a) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute, (b) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding and (c) no property, rights in property or other interests granted to the Trustee or the Holders in exchange for, or with respect to, such trust funds will be subject to any prior rights of holders of other Indebtedness of the Company or any of its Subsidiaries; (iv) at such time the Notes are listed on a national securities exchange, the Company has delivered to the Trustee an Opinion of Counsel to the effect that 77 88 the Notes will not be delisted as a result of such deposit, defeasance and discharge; and (v) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.03 have been complied with; provided that, if simultaneously with the deposit of the money and/or U.S. Government Obligations referred to in (i) above, the Company or any Guarantor has caused an irrevocable, transferrable, standby letter of credit to be issued by a bank with capital and surplus exceeding the principal amount of the Notes then outstanding, expiring not earlier than 180 days from its issuance, in favor of the Trustee which permits the Trustee to draw an amount equal to the principal, premium, if any, and accrued interest on the Notes through the expiry date of the letter of credit, then the Company and the Guarantors will be deemed to have paid and discharged any and all obligations in respect of the Notes on the date of the deposit and issuance of the letter of credit; and the Collateral shall be deemed released. SECTION 8.04. Application of Trust Money. Subject to Sections 8.05 and 8.06, the Trustee or Paying Agent shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the case may be, and shall apply the deposited money and the money from U.S. Government Obligations in accordance with the Notes and this Indenture to the payment of principal of, premium, if any, and interest on the Notes; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.05. Repayment to Company. Subject to Sections 7.07, 8.01, 8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to the Company upon request set forth in an Officers' Certificate any excess money held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for two years; provided that the Trustee or such Paying Agent before being required to make any payment may cause to be published at the expense of the Company once in a newspaper of general circulation in the City of New York, or mail to each Holder entitled to such money at such Holder's address (as set forth in the Security Register) notice that such money remains unclaimed and that after a date specified therein (which shall be at least 30 days from the date of such publication or mailing) any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal proceeding or by reason of any order or 78 89 judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or 8.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be; provided that, if the Company has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders. The Company and the Guarantors, when authorized by a resolution of its Board of Directors and the Trustee may amend or supplement this Indenture, the Escrow and Security Agreement, the Registration Rights Agreement, the Note Guarantees or the Notes without notice to or the consent of any Holder: (1) to cure any ambiguity, defect or inconsistency; (2) to comply with Article Five; (3) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee; (5) to provide for uncertificated Notes in addition to or in place of certificated Notes; (6) to add one or more subsidiary guarantees on the terms required by this Indenture; or (7) to make any change that, in the opinion of the Board of Directors of the Company evidenced by a Board Resolution, does not materially and adversely affect the rights of any Holder. SECTION 9.02. With Consent of Holders. Subject to Sections 6.05 and 6.08 and without prior notice to the Holders, the Company and the Guarantors, when authorized by its Board of Directors (as evidenced by a Board Resolution), and the Trustee may amend this Indenture, the Notes or the Escrow and Security Agreement with the written consent of the Holders of not less than a majority in principal amount of the Notes then outstanding, and the Holders of not less than a majority in principal amount of the Notes 79 90 then outstanding by written notice to the Trustee may waive future compliance by the Company with any provision of this Indenture, the Notes or the Escrow and Security Agreement. Notwithstanding the provisions of this Section 9.02, without the consent of each Holder affected, an amendment or waiver, including a waiver pursuant to Section 6.05, may not: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note; (ii) reduce the principal of, or premium, if any, or interest on, any Note or adversely affect any right of repayment at the option of any Holder; (iii) change the place or currency of payment of principal of, or premium, if any, or interest on, any Note; (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Note; (v) reduce the above-stated percentage of outstanding Notes the consent of whose Holders is necessary to modify or amend this Indenture; (vi) waive (a) a default in the payment of principal of, premium, if any, or interest on the Notes or (b) a Collateral Access Event; (vii) reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of this Indenture or for waiver of certain defaults; (viii) modify Article Ten, the Escrow and Security Agreement or the Registration Rights Agreement in a manner that adversely affects the rights of any Holder in any material respect or the distribution of principal, interest or premium or other monies received or realized by the Trustee from the Collateral; or (ix) modify any of the provisions of this Section 9.02, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly 80 91 describing the amendment, supplement or waiver. The Company will mail supplemental indentures to Holders upon request. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. SECTION 9.03. Revocation and Effect of Consent. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the Note of the consenting Holder, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to its Note or portion of its Note. Such revocation shall be effective only if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver shall become effective on receipt by the Trustee of written consents from the Holders of the requisite percentage principal amount of the outstanding Notes. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then, notwithstanding the last two sentences of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies) and only those persons shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder unless it is of the type described in any of clauses (i) through (v) of Section 9.02. In case of an amendment or waiver of the type described in clauses (i) through (v) of Section 9.02, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder of a Note that evidences the same indebtedness as the Note of the consenting Holder. SECTION 9.04. Notation on or Exchange of Notes. If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require the Holder to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder and the Trustee may place an appropriate notation on any Note thereafter authenticated. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.05. Trustee to Sign Amendments, Etc. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture. Subject to the preceding sentence, the Trustee shall sign such amendment, supplement or waiver if the same does 81 92 not adversely affect the rights of the Trustee. The Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.06. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the TIA as then in effect. ARTICLE TEN PLEDGED SECURITIES SECTION 10.01. Security. (a) On the Closing Date, the Company shall grant to the Trustee on behalf of the Holders an additional security interest in certain of the Collateral pursuant to the terms of the Escrow and Security Agreement of even date herewith. (b) On the Closing Date, the Company shall (i) enter into the Escrow and Security Agreement and comply with the terms and provisions thereof and (ii) purchase $56 million of Pledged Securities to be pledged to the Trustee as security for the benefit of the Holders. The Pledged Securities shall be pledged by the Company to the Trustee for the benefit of the Holders and shall be held by the Trustee in the Escrow Account pending disposition pursuant to the Escrow and Security Agreement. (c) Each Holder, by its acceptance of a Note, consents and agrees to the terms of the Escrow and Security Agreement (including, without limitation, the provisions providing for foreclosure and release of the Pledged Securities) as the same may be in effect or may be amended from time to time in accordance with its terms, and authorizes and directs the Trustee to enter into the Escrow and Security Agreement and to perform its respective obligations and exercise its respective rights thereunder in accordance therewith. The Company shall do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Escrow and Security Agreement, to assure and confirm to the Trustee the security interest in the Pledged Securities contemplated hereby, by the Escrow and Security Agreement or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured hereby, according to the intent and purposes herein expressed. The Company shall take, or shall cause to be taken, upon request of the Trustee, any and all actions reasonably required to cause the Escrow and Security Agreement to create and maintain, as security for the obligations of the Company under this Indenture and the Notes, valid and enforceable first priority liens in and on all the Pledged Securities, in favor of the Trustee, superior to and prior to the rights of third Persons and subject to no other Liens. (d) The Collateral as now or hereafter constituted shall be held for the equal and ratable benefit of the Holders without preference, priority or distinction of any thereof over any other by reason of difference in time of issuance, sale or otherwise, as security for the Notes. 82 93 (e) The release of any Pledged Securities pursuant to the Escrow and Security Agreement shall not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Pledged Securities are released pursuant to this Indenture and the Escrow and Security Agreement. (f) The Trustee may, in its sole discretion and without the consent of the Holders, on behalf of the Holders, take all actions it deems necessary or appropriate in order to (i) enforce any of the terms of the Escrow and Security Agreement and (ii) collect and receive any and all amounts payable in respect of the obligations of the Company thereunder. The Trustee shall have power to institute and to maintain such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Pledged Securities (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders or of the Trustee). (g) Notwithstanding anything herein to the contrary, the Company shall not be obligated to comply with the provisions of TIA Section 314(b) or (d) in connection with the release of the Pledged Securities until such time as it is legally required that the Indenture be qualified under the TIA. After such time, to the extent applicable, the Company shall cause TIA Section 314(d) relating to the release of property or securities from the Lien and security interest of the Escrow and Security Agreement and relating to the substitution therefor of any property or securities to be subjected to the Lien and security interest of the Escrow and Security Agreement to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an officer of the Company, except in cases where TIA Section 314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected by the Company. After such time, the Company shall also cause TIA Section 314(b), relating to opinions of counsel regarding the Lien under the Escrow and Security Agreement, to be complied with. The Trustee may, to the extent permitted by Sections 7.01 and 7.02 hereof, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such instruments. SECTION 10.02. Release upon Termination of the Company's Obligations. In the event that this Indenture shall be satisfied and discharged in accordance with Section 8.02, the Trustee shall, on behalf of the Holders, disclaim and give up any and all rights it has in or to the Collateral and the Trustee shall not be deemed to hold the Collateral for the benefit of the Holders. 83 94 ARTICLE ELEVEN MISCELLANEOUS SECTION 11.01. Trust Indenture Act of 1939. This Indenture is subject to the provisions of the TIA that are required to be a part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 11.02. Notices. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery addressed as follows: if to the Company: Kitty Hawk, Inc. P.O. Box 612787 1515 West 20th Street Dallas/Fort Worth International Airport, Texas 75261 Telecopier No.: (972) 456-2303 Attention: Chief Financial Officer with a copy to: (which shall not constitute notice) Haynes and Boone, LLP 901 Main Street Dallas, Texas 75202 Telecopier No.: (214) 651-5940 Attention: Janice V. Sharry if to the Trustee: Bank One, NA 100 E. Broad Street 8th Floor Columbus, Ohio 43215 Telecopier No.: (614) 248-5195 Attention: Corporate Trust and Agency Group The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. 84 95 Any notice or communication to a Holder shall be mailed by first class mail (certified or registered, return receipt requested) to its address shown on the register kept by the Registrar and shall be sufficiently given to such Holder if so mailed or delivered within the time presented. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. Except for a notice to the Trustee, which is deemed given only when received, and except as otherwise provided in this Indenture, if a notice or communication is mailed in the manner provided in this Section 11.02, it is duly given, whether or not the addressee receives it. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.03. Certificate and Opinion As to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (i) an Officers' Certificate reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (ii) an Opinion of Counsel reasonably satisfactory to the Trustee stating that, in the opinion of such Counsel, all such conditions precedent have been complied with. SECTION 11.04. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that the person making such certificate or opinion has read such covenant or condition; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (iii) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with, and such other opinions as the Trustee may reasonably request; provided, however, that, with respect to matters 85 96 of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 11.05. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The ownership of Notes shall be proved by the Security Register. (c) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Note shall bind every future Holder of the same Note or the Holder of every Note issued upon the transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Note. (d) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver of other act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of such Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), any such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not more than 30 days prior to the first solicitation of Holders generally in connection therewith and no later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for purposes of determining whether Holders of the requisite proportion of Notes then outstanding have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other act, and for this purpose the Notes then outstanding shall be computed as of such record date; provided that no such request, demand, authorization, direction, notice, consent, waiver or other act by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. 86 97 SECTION 11.06. Rules by Trustee, Paying Agent or Registrar. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 11.07. Payment Date Other Than a Business Day. If an Interest Payment Date, Redemption Date, Payment Date for an Offer to Purchase, Stated Maturity or date of maturity of any Note shall not be a Business Day at any place of payment, then payment of principal of, premium, if any, or interest on such Note, as the case may be, need not be made on such date, but may be made on the next succeeding Business Day at such place of payment with the same force and effect as if made on the Interest Payment Date, Payment Date for an Offer to Purchase, or Redemption Date, or at the Stated Maturity or date of maturity of such Note; provided that no interest shall accrue for the period from and after such Interest Payment Date, Payment Date for an Offer to Purchase, Redemption Date, Stated Maturity or date of maturity, as the case may be. SECTION 11.08. Governing Law. This Indenture and the Notes shall be governed by the laws of the State of New York. The Trustee, the Company and the Holders agree to submit to the jurisdiction of the courts of the County of New York in any action or proceeding arising out of or relating to this Indenture, the Note Guarantees or the Notes. SECTION 11.09. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any Subsidiary of the Company, except the Escrow and Security Agreement and the Registration Rights Agreement. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 11.10. No Recourse Against Others. No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company or any Guarantor contained in this Indenture or in any of the Notes, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator or against any past, present or future partner, shareholder, other equityholder, officer, director, employee or controlling person, as such, of the Company or any Guarantor or of any successor Person, either directly or through the Company or any successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes and the Note Guarantees. SECTION 11.11. Successors. All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. 87 98 SECTION 11.12. Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.13. Separability. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.14. Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. ARTICLE TWELVE MEETINGS OF HOLDERS SECTION 12.01. Purposes for Which Meetings May Be Called. A meeting of Holders may be called at any time and from time to time pursuant to the provisions of this Article Twelve for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to waive or to consent to the waiving of any Default, Event of Default or Collateral Access Event hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article Six; (b) to remove the Trustee or appoint a successor Trustee pursuant to the provisions of Article Seven; (c) to consent to an amendment, supplement or waiver pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture, or authorized or permitted by law. SECTION 12.02. Manner of Calling Meetings. The Trustee may at any time call a meeting of Holders to take any action specified in Section 12.01, to be held at such time and at such place in The City of New York, New York or elsewhere as the Trustee will determine. Notice of every meeting of Holders, setting forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, will be mailed by the Trustee, first-class postage prepaid, to the Company and to the Holders at their last addresses as they will appear on the registration books of the Registrar not less than 10 nor more than 60 days prior to the date fixed for a meeting. 88 99 Any meeting of Holders will be valid without notice if the Holders of all outstanding Notes are present in Person or by proxy, or if notice is waived before or after the meeting by the Holders of all outstanding Notes, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. SECTION 12.03. Call of Meetings by the Company or Holders. In case at any time the Company, pursuant to a Board Resolution, or the Holders of not less than 10% in aggregate principal amount of the outstanding Notes will have requested the Trustee to call a meeting of Holders to take any action specified in Section 12.01, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee will not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or the Holders of Notes in the amount above specified may determine the time and place in The City of New York, New York or elsewhere for such meeting and may call such meeting for the purpose of taking such action, by mailing or causing to be mailed notice thereof as provided in Section 12.02, or by causing notice thereof to be published at least once in each of two successive calendar weeks (on any Business Day during such week) in a newspaper or newspapers printed in the English language, customarily published at least five days a week of a general circulation in The City of New York, State of New York, the first such publication to be not less than 10 nor more than 60 days prior to the date fixed for the meeting. SECTION 12.04. Who May Attend and Vote at Meetings. To be entitled to vote at any meeting of Holders, a Person will (i) be a registered Holder of one or more Notes, or (ii) be a Person appointed by an instrument in writing as proxy for the registered Holder or Holders of Notes. The only Persons who will be entitled to be present or to speak at any meeting of Holders will be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and their counsel. SECTION 12.05. Quorum; Action. The Persons entitled to vote a majority in principal amount of the outstanding Notes shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Notes, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 12.02, except that such notice need be given only once and not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage of the principal amount of the outstanding Notes which shall constitute a quorum. Subject to the foregoing, at the reconvening of any meeting adjourned for a lack of a quorum, the Persons entitled to vote 25% in principal amount of the outstanding Notes 89 100 at the time shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. At a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid, any action or matter, except as otherwise specified herein, shall be effectively passed and decided if passed or decided by the Persons entitled to vote not less than a majority in principal amount of outstanding Notes represented and voting at such meeting. Any action or matter passed or decision taken at any meeting of Holders of Notes duly held in accordance with this Section 12.05 shall be binding on all the Holders of Notes, whether or not present or represented at the meeting. SECTION 12.06. Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment. Notwithstanding any other provision of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any action by or any meeting of Holders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, and submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it will think appropriate. Such regulations may fix a record date and time for determining the Holders of record of Notes entitled to vote at such meeting, in which case those and only those Persons who are Holders of Notes at the record date and time so fixed, or their proxies, will be entitled to vote at such meeting whether or not they will be such Holders at the time of the meeting. The Trustee will, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting will have been called by the Company or by Holders as provided in Section 12.03, in which case the Company or the Holders calling the meeting, as the case may be, will in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting will be elected by vote of the Holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote. At any meeting each Holder or proxy will, subject to the provisions of Section 12.04 hereof, be entitled to one vote for each $1,000 principal amount of Notes held or represented by him or her; provided, however, that no vote will be cast or counted at any meeting in respect of any Notes challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman may adjourn any such meeting if he is unable to determine whether any Holder or proxy will be entitled to vote at such meeting. The chairman of the meeting will have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Holders. Any meeting of Holders duly called pursuant to the provisions of Section 12.02 or Section 12.03 may be adjourned from time to time by vote of the Holders of a majority in aggregate principal amount of the Notes represented at the meeting and entitled to vote, and the meeting may be held as so adjourned without further notice. 90 101 SECTION 12.07. Voting at the Meeting and Record to Be Kept. The vote upon any resolution submitted to any meeting of Holders will be by written ballots on which will be subscribed the signatures of the Holders of Notes or/of their representatives by proxy and the principal amount of the Notes voted by the ballot. The permanent chairman of the meeting will appoint two inspectors of votes, who will count all votes cast at the meeting for or against any resolution and will make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders will be prepared by the secretary of the meeting and there will be attached to such record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts, setting forth a copy of the notice of the meeting and showing that such notice was mailed as provided in Section 12.02. The record will be signed and verified by the affidavits of the permanent chairman and the secretary of the meeting and one of the duplicates will be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified will be conclusive evidence of the matters therein stated. SECTION 12.08. Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting. Nothing contained in this Article Twelve will be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Holders under any of the provisions of this Indenture or of the Notes. SECTION 12.09. Procedures Not Exclusive. The procedures set forth in this Article Twelve are not exclusive and the rights and obligations of the Company, the Trustee and the Holders under other Articles of this Indenture (including, without limitation, Articles Six, Seven, Eight and Nine) will in no way be limited by the provisions of this Article Twelve. ARTICLE THIRTEEN GUARANTEES SECTION 13.01. Guarantees. Each Guarantor hereby jointly and severally, absolutely, unconditionally and irrevocably guarantees the Notes and obligations of the Company hereunder and thereunder, and guarantees to each Holder of a Note authenticated and delivered by the Trustee, and to the Trustee on behalf of such Holder, that: (a) the principal of (and premium, if any) and interest on the Notes will be paid in full when due, whether at Stated Maturity, by acceleration or otherwise (including, without limitation, the amount that would become due but for the operation of the automatic stay under Section 362(a) of 91 102 the Bankruptcy Law), together with interest on the overdue principal, if any, and interest on any overdue interest, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or of any such other obligations, the same will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise, subject, however, in the case of clauses (a) and (b) above, to the limitations set forth in Section 13.04 hereof. Each Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Guarantor hereby waives (to the extent permitted by law) the benefits of diligence, presentment, demand for payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company or any other Person, protest, notice and all demands whatsoever and covenants that the Note Guarantee of such Guarantor will not be discharged as to any Note except by complete performance of the obligations contained in such Note. Each of the Guarantors hereby agrees that, in the event of a default in payment of principal (or premium, if any) or interest on such Note, whether at its Stated Maturity, by acceleration, purchase or otherwise, legal proceedings may be instituted by the Trustee on behalf of, or by, the Holder of such Note, subject to the terms and conditions set forth in this Indenture, directly against each of the Guarantors to enforce such Guarantor's Note Guarantee without first proceeding against the Company or any other Guarantor. Each Guarantor agrees that if, after the occurrence and during the continuance of an Event of Default or Collateral Access Event, the Trustee or any of the Holders are prevented by applicable law from exercising their respective rights to accelerate the maturity of the Notes, to collect interest on the Notes, or to enforce or exercise any other right or remedy with respect to the Notes, such Guarantor will pay to the Trustee for the account of the Holders, upon demand therefor, the amount that would otherwise have been due and payable had such rights and remedies been permitted to be exercised by the Trustee or any of the Holders. If any Holder or the Trustee is required by any court or otherwise to return to the Company or any Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or any Guarantor, any amount paid by any of them to the Trustee or such Holder, the Note Guarantee of each of the Guarantors, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor further agrees that, as between each Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six hereof for the purposes of the Note Guarantee of such Guarantor, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any 92 103 acceleration of such obligations as provided in Article Six hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by each Guarantor for the purpose of the Note Guarantee of such Guarantor. SECTION 13.02. Severability. In case any provision of any Note Guarantee shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 13.03. Limitation of Guarantors' Liability. Each Guarantor and, by its acceptance of a Note, each Holder confirms that it is the intention of all such parties that the guarantee by each such Guarantor pursuant to its Note Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law or the provisions of its local law relating to fraudulent transfer or conveyance. To effectuate the foregoing intention, the Holders and each such Guarantor hereby irrevocably agree that the maximum liability of each Guarantor will be $1.00 less than the lesser of (a) the amount which would render the Note Guarantee voidable under either Section 548 or 544(b) of the Bankruptcy Code, (b) the amount permitting avoidance of the Note Guarantee as a fraudulent transfer under any applicable Fraudulent Transfer Act or similar law and (c) the amount permitting the Note Guarantee to be set aside as a fraudulent conveyance under any applicable Fraudulent Conveyance Act or similar law. In addition, if the execution and delivery and/or incurrence evidenced by the Note Guarantee constitutes a "distribution" under the Michigan Business Corporation Act (the "MCBA"), the maximum liability under the Note Guarantee with respect to such Guarantor shall be limited to $1.00 less than the maximum liability which such Guarantor is permitted to incur under Section 345 of the MCBA. SECTION 13.04. Contribution. In order to provide for just and equitable contribution among the Guarantors, the Guarantors agree, inter se, that in the event any payment or distribution is made by any Guarantor (a "Funding Guarantor") under a Note Guarantee, such Funding Guarantor shall be entitled to a contribution from all other Guarantors in a pro rata amount based on the Adjusted Net Assets (as defined below) of each Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company's obligations with respect to the Notes or any other Guarantor's obligations with respect to the Guarantee of such Guarantor. "Adjusted Net Assets" of such Guarantor at any date shall mean the lesser of (x) the amount by which the fair value of the property of such Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the Guarantee of such Guarantor at such date and (y) the amount by which the present fair salable value of the assets of such Guarantor at such date exceeds the 93 104 amount that will be required to pay the probable liability of such Guarantor on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), excluding debt in respect of the Guarantee of such Guarantor, as they become absolute and matured. SECTION 13.05. Subrogation. Each Guarantor shall be subrogated to all rights of Holders against the Company in respect of any amounts paid by any Guarantor pursuant to the provisions of Section 13.01; provided, however, that, if an Event of Default or Collateral Access Event has occurred and is continuing, the rights of any Guarantor to enforce or receive any payments arising out of, or based upon, such right of subrogation shall be subordinated to the rights of the Trustee and any Holder until all amounts then due and payable by the Company under this Indenture or the Notes shall have been paid in full. SECTION 13.06. Reinstatement. Each Guarantor hereby agrees (and each Person who becomes a Guarantor shall be deemed to agree) that the Guarantee provided for in Section 13.01 shall continue to be effective or be reinstated, as the case may be, if at any time, payment, or any part thereof, of any obligations or interest thereon is rescinded or must otherwise be restored by a Holder to the Company upon the bankruptcy or insolvency of the Company or any Guarantor. SECTION 13.07. Release of a Guarantor. (a) The Note Guarantee issued by any Guarantor under this Indenture shall be automatically and unconditionally released and discharged (i) upon any sale, exchange or transfer to any Person not an Affiliate of the Company or a Restricted Subsidiary of all of the Company's and its Subsidiaries' Capital Stock in, or all or substantially all the assets of, such Guarantor (which sale, exchange or transfer is not prohibited by this Indenture). (b) Concurrently with the defeasance and discharge of the Notes under Section 8.02, the Guarantors shall be released from all their obligations under their Note Guarantees under this Article Thirteen. SECTION 13.08. Benefits Acknowledged. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that its Note Guarantee and waivers pursuant to its Note Guarantee are knowingly made in contemplation of such benefits. 94 105 ARTICLE FOURTEEN COVENANTS RELATING TO THE AIRCRAFT SECTION 14.01. Registration of Aircraft. (a) The Company shall keep the Aircraft registered under the provisions of the Aviation Act, and record this Indenture at the FAA registry and, if applicable, the aircraft registry of other aeronautics authorities. (b) The operation of the Aircraft by the Company (or by any lessee of the Company) shall be geographically limited to Permitted Countries. SECTION 14.02. Insurance. (a) The Company will, at its expense, maintain or cause to be maintained all-risk aircraft hull insurance covering the Aircraft, and, to the extent available at reasonable cost, all-risk property damage insurance covering the Engines and parts, including while temporarily removed from an Aircraft pending replacement, at all times in an amount not less than the sum of (i) the aggregate outstanding principal amount of the Notes and (ii) the scheduled amount of interest payable on the Notes on the next interest payment date. During any period when an Aircraft is on the ground and not in operation, the Company may carry or cause to be carried, in lieu of the insurance required by the previous sentence, insurance otherwise conforming with the provisions of said sentence except that the scope of the risks covered and the type of insurance shall be the same as are from time to time applicable to aircraft owned or leased by the Company of the same type as such Aircraft similarly on the ground and not in operation, provided that in all cases full amounts shall not be less than that described in the immediately preceding sentence. (b) All policies covering loss of or damage to an Aircraft shall be made payable to the Trustee for any loss in excess of $5 million. With respect to the Collateral, the Company may maintain customary deductibles. With respect to all other aircraft owned by the Company or any Restricted Subsidiary, the Company shall insure such aircraft in a manner consistent with past practice. (c) The Company shall, at its expense, maintain or cause to be maintained comprehensive airline liability (including, without limitation, passenger, contractual, bodily injury and property damage liability) insurance (exclusive of manufacturer's product liability insurance) and cargo liability insurance with respect to each Aircraft (i) in amounts that are not less than the comprehensive airline liability insurance as is from time to time normally applicable to aircraft owned and operated by the Company of the same type as such Aircraft and (ii) of the types and covering the same risks as are from time to time applicable to aircraft owned or operated by the Company of the same type as such Aircraft and which is maintained in effect with insurers of recognized responsibility. During any period when an Aircraft is on the ground and not in operation, the Company may carry or cause to be carried, in lieu of the insurance required by the previous sentence, insurance otherwise conforming with the provisions of said sentence except that 95 106 the amounts of coverage shall not be required to exceed the amounts of comprehensive airline liability insurance, and the scope of risks covered and type of insurance shall be the same, as are from time to time in effect with respect to aircraft owned or leased by the Company of the same type as such Aircraft similarly on the ground and not in operation. (d) The Company may self-insure a portion of the risks described in subsections (a) through (c) above by means of deductible or premium adjustment provisions subject to the same limitations described above for insurance for risks of loss or damage to such Aircraft. The Company shall be permitted a deductible per occurrence not in excess of the prevailing standard market deductible for similar aircraft. (e) The Trustee shall be named as additional insured parties under all liability insurance policies required with respect to the Aircraft. The insurance policies will provide that, in respect of the interest of the Trustee, the insurance shall not be invalidated by any action or inaction of the Company and shall insure the interest of the Trustee as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by the Company. (f) If and to the extent that the Company or a lessee operates an Aircraft (A) on routes where it maintains war risk insurance in effect with respect to other similar equipment, or (B) on routes other than routes within or between the United States, Canada, Mexico, Bermuda and islands other than Cuba in the Caribbean Basin where the custom in the industry is to carry war risk insurance, the Company or such lessee shall maintain such insurance with respect to the Aircraft in an amount not less than the lesser of the aggregate unpaid principal of, together with accrued interest on, a ratable portion of the Notes (based on the initial appraised value of such Aircraft) and the amount of such insurance customarily carried by corporations engaged in the same or similar business similarly situated with the Company and with respect to similar equipment on similar routes; provided that, if the requirement to maintain war risk insurance arises solely by reason of clause (A) of this sentence, such insurance shall be maintained in an amount not less than that maintained by the Company or such lessee on other similar aircraft in its fleet. Unless an Aircraft is operated or used under a contract with the United States government pursuant to which the United States government assumes liability for damage to or loss of such Aircraft and to other property or persons, the Company may not operate or locate any Aircraft outside the United States and Canada (i) in any war zone or recognized or, in the Company's reasonable judgment, threatened area of hostilities, unless such Aircraft is fully covered by war risk insurance, or (ii) in any area excluded from the insurance coverage required under this Section 14.02. (g) Insurance proceeds, if any, held from time to time by the Trustee with respect to any Aircraft, prior to the distribution thereof, shall be invested and reinvested by the Trustee at the direction of the Company (except after the occurrence and during the continuance of a Collateral Access Event) in Cash Equivalents or Temporary Cash Investments. The net amount of any loss resulting from any such investments will be paid by the Company. 96 107 SECTION 14.03. Maintenance, Lease and Possession. (a) The Company shall or shall cause each Aircraft to be, at its expense or at the expense of the Owner), maintained, serviced, and repaired so as to keep each Aircraft in as good operating condition as on the Closing Date, ordinary wear and tear excepted, and shall cause the airworthiness certification thereof to be maintained in good standing at all times (other than during temporary periods of repair, maintenance, modification, storage or grounding) under the Aviation Act, including compliance with all then applicable and effective Noise Regulations and FAA Directives; provided that in the event the Company or any Owner leases any of its Aircraft in accordance with the terms of this Indenture to a Permitted Air Carrier organized and operating under the laws of a Permitted Country, such lease shall provide that the lessee shall (i) throughout the terms of such lease, inspect, service, repair, overhaul, and test the Aircraft in compliance with such lessee's maintenance program as approved by the applicable governmental authority and maintain the airworthiness certification of such Aircraft in such Permitted Country in good standing throughout the term of the lease; and (ii) return the Aircraft at the end of the term of the lease in an operating condition sufficient to qualify for a United States standard FAA certificate of airworthiness, including compliance with all then applicable and effective Noise Regulation and FAA Service Bulletins and Directives. Notwithstanding the foregoing, if a FAA Service Bulletin, Directive or the Noise Regulations requires the Owner to maintain a specified portion of its fleet in a given condition, the Owner must maintain such portion of the Aircraft in such condition. The Company shall be obligated, at its expense, to replace, or cause to be replaced, all parts (other than severable parts added at the option of the Company or any Restricted Subsidiary and obsolete or unsuitable parts that the Company is permitted to remove to the extent described below) that may from time to time be incorporated or installed in or attached to any aircraft and that may become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or rendered permanently unfit for use. The Company or any Owner shall have the right to make (or cause to be made) such alterations and modifications in and additions to (including removal of parts from) each Aircraft as the Company or any Owner deems desirable; provided that no such alteration, modification, addition, or removal shall materially diminish the value, utility, or condition of such Aircraft in the service in which it is operated by the Company or any Restricted Subsidiary or impair the airworthiness thereof. (b) The Company or any Owner may: (i) sell, lease or transfer any Aircraft or Engine to any Restricted Subsidiary (other than any Excluded Restricted Subsidiary), or to the Company, and (ii) lease any Aircraft or Engine to a Permitted Air Carrier; provided that the Trustee shall have received one or more Opinion of Counsel to the effect that, among other things, the Lien pursuant to this Indenture continues to be perfected and in full force and effect, this Indenture continues to be enforceable against the parties thereto, and the Trustee maintains its right to repossession thereunder, in each case pursuant to applicable law. (c) Subject to certain limitations, the Company or any Restricted Subsidiary (and any permitted lessee) may (i) transfer possession of any Aircraft pursuant to "wet 97 108 lease" or similar arrangements, in each case whereby the Company or any Restricted Subsidiary (or such permitted lessee) maintains operational control of the Aircraft, (ii) transfer possession of any Aircraft or Engine, other than by lease, to the United States Government and transfers of possession in connection with maintenance or modifications, (iii) transfer possession of any Engine and any parts from time to time installed on any Aircraft or Engine, other than by lease, through transfers in connection with interchange and pooling arrangements with certified "air carriers" within the meaning of the Aviation Act, and transfers of possession to FAA licensed repair stations, or (iv) install one or more of the Engines on airframes owned, mortgaged, leased, or subject to conditional purchase by, the Company or any Restricted Subsidiary (or any such permitted lessee); provided that such Engines shall not become subject to any Lien other than the Lien securing the Notes under this Indenture notwithstanding the installation thereof on such airframe, and (iv) enter into any ACMI Agreement. If any Aircraft is leased or the possession is otherwise transferred, such Aircraft will remain subject to the Lien under this Indenture. Other than pursuant to a "wet lease" or similar arrangement, no lease of any Aircraft shall be for a term in excess of five years beyond the maturity of the Notes. If the lease is for a period in excess of six months, the Owner shall grant to the Trustee, for the equal and ratable benefit of the Holders of the Notes, a security interest in such lease and if the lease if for a period in excess of two years, shall deliver an Opinion of Counsel to the Trustee stating (subject to customary qualifications) that such security interest has been created and perfected under the law of the United States or a state of the United States; provided that at all times, other than when an Event of Default has occurred and is continuing, the Company or any Affiliate (x) shall be entitled to receive and retain all payments made pursuant to the lease; and (y) shall be entitled to exercise (to the exclusion of the Trustee) all rights and remedies of the "lessor" under the lease and grant such consents, waivers and enter into such amendments to the lease as are consistent with the provisions of this Indenture as the Company may determine appropriate in its sole discretion. Nothing permitted herein shall be deemed an "Asset Sale." SECTION 14.04. Liens. The Aircraft shall be maintained by the Company free of any Liens, other than the rights of the Trustee under this Indenture and Permitted Liens. SECTION 14.05. Certain Further Limitations on Leasing or Other Relinquishment of Possession. Notwithstanding anything to the contrary in Section 1103: (a) The rights of any person that receives possession of the Aircraft in accordance with Section 14.03 shall be subject and subordinate to all the terms of this Indenture, and to the Trustee's rights, powers and remedies hereunder; and (b) The Company shall ensure that no sublease, delivery, transfer or relinquishment permitted under Section 14.03 shall affect the United States 98 109 registration of the Aircraft, unless made in accordance with the provisions of Section 14.06. SECTION 14.06. Trustee's Acknowledgment of Company's Right to Foreign Registration. The Trustee hereby agrees: (a) that the Company, or any subsequent lessee of the Aircraft, shall be entitled, at its own expense, to register any Aircraft or cause any Aircraft to be registered, in the Permitted Countries subject to the following conditions: (i) no Event of Default or Collateral Access Event shall have occurred and be continuing at the time of such registration; (ii) such proposed change of registration is made in connection with a Permitted Aircraft Lease to a Permitted Air Carrier; (iii) such country is a Permitted Country with which the United States maintains normal diplomatic relations at the time of such registration; and (iv) prior to any such change in the jurisdiction of registry, the Trustee shall have received an Opinion of Counsel (subject to customary exceptions) reasonably satisfactory to the Trustee addressed to each such party to the effect that: (A) after giving effect to such change in registration, such Permitted Country would recognize the Company's right of ownership and repossession; (B) after giving effect to such change in registration, the right of repossession by the Trustee upon the exercise of remedies is valid under the laws of such Permitted Country; (C) the obligations of the Company, and the rights and remedies of the Trustee, under this Indenture in connection with such change in registration are valid, binding and enforceable under the laws of such Permitted Country (or the laws of the country to which the laws of such Permitted Country would refer as the applicable governing law); (D) after giving effect to such change in registration, the Lien of the Indenture on the Trustee's right, title and interest in and to the Aircraft shall be a valid and duly perfected first priority security interest and all filing, recording or other action necessary to protect the same shall have been accomplished 99 110 or, if such opinion cannot be given at the time of such proposed change in registration because such change in registration is not yet effective, (1) the opinion shall detail what filing, recording or other action is necessary and (2) the Trustee shall have received a certificate from the Company that all possible preparations to accomplish such filing, recording and other action shall have been done, and such filing, recording and other action shall be accomplished and a supplemental opinion to that effect shall be delivered to the Trustee on or prior to the effective date of such change in registration; (E) it is not necessary, solely as a consequence of such change in registration and without giving effect to any other activity of the Trustee, as the case may be, for the Trustee to qualify to do business in such Permitted Country as a result of such reregistration in order to exercise any rights or remedies with respect to the Aircraft pursuant to the lease; and (F) unless the Company or the lessee shall have agreed to provide insurance covering the risk of requisition of use of the Aircraft by the government of such Permitted Country (so long as the Aircraft is registered under the laws of such Permitted Country), the laws of such Permitted Country require fair compensation by the government of such Permitted Country payable in currency freely convertible into United States dollars and freely removable from such Permitted Country (without license or permit, unless the Company, prior to such proposed reregistration, has obtained such license or permit) for the taking or requisition by such government of such use. (b) In addition, as a condition precedent to any change in registration, the Company shall have given to the Trustee assurances reasonably satisfactory to it: (i) to the effect that the provisions of Sections 14.01 and 14.03 shall be complied with after giving effect to such change of registration; and (ii) of the payment by the Company of all reasonable out-of-pocket expenses of the Trustee in connection with such change of registry, including, without limitation (A) the reasonable fees and disbursements of counsel to the Company and the Trustee, (B) any filing or recording fees, taxes or similar payments incurred in connection with the change of registration of the Aircraft and the creation and perfection of the security interest therein in favor of Trustee for the benefit of Holders, and (C) all costs and expenses incurred in connection with any filings necessary to 100 111 continue in the United States the perfection of the security interest in the Aircraft in favor of the Trustee for the benefit of Holders. (c) The Trustee shall cooperate in, and shall execute and deliver such documents as may be reasonably required to effectuate a lease of an Aircraft or Engine in accordance with the foregoing. ARTICLE FIFTEEN SECURITY SECTION 15.01. Registration; Replacement and Pooling of Parts; Alterations, Modifications and Additions. (a) The Company will be required, except under certain circumstances, to record, or maintain the recordation of, this Indenture, among other documents, with respect to the Collateral under the Aviation Act or the Uniform Commercial Code, as applicable. Such recordation of this Indenture with respect to such Collateral will give the Trustee a first priority perfected security interest in the related Collateral, no matter where located. (b) Except as otherwise provided in Section 4.16 and the proviso to the third sentence of paragraph (e) of this Section 15.01, the Company (and its permitted lessee), at its own cost and expense, will, so long as such Airframe or Engine is subject to the Lien of this Indenture promptly replace (or cause to be replaced) all Parts that may from time to time become worn out, obsolete, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In the ordinary course of maintenance, service, repair, overhaul or testing, the Company (or its permitted lessee), at its own cost and expense, may remove any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, that the Company, at its own cost and expense, shall, except as otherwise provided in Section 4.16 or the proviso to the third sentence of paragraph (e) of this Section 15.01, replace such Parts as promptly as practicable with replacement Parts or temporary replacement parts as provided in paragraph (d) of this Section 15.01. All replacement Parts shall be free and clear of all Liens except for Permitted Liens and shall be in as good operating condition as, and shall have a value and utility at least equal to, the Parts replaced assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof. (c) Except as otherwise provided in the proviso to the third sentence of paragraph (e) of this Section 15.01, any Part at any time removed from an Airframe or Engine shall remain subject to the Lien of this Indenture, no matter where located, until such time as such Part shall be replaced by a Part that has been incorporated or installed in or attached to such Airframe or Engine and that meets the requirements for replacement Parts specified in paragraph (b) of this Section. Immediately upon any replacement Part becoming incorporated or installed in or attached to such Airframe or Engine as provided in paragraph (b) of this Section, without further act, (i) the replaced 101 112 Part shall thereupon be free and clear of all rights of the Trustee and shall no longer be deemed a Part hereunder, and (ii) such replacement Part shall become subject to this Indenture and be deemed part of such Airframe or Engine, as the case may be, for all purposes hereof to the same extent as the Parts originally incorporated or installed in or attached to such Airframe or Engine. (d) Any Part removed from an Airframe or Engine as provided in paragraph (b) of this Section may be subjected by the Company (or any permitted lessee) to a pooling or parts leasing agreement or arrangement of a type customary in the airline industry entered into in the ordinary course of the Company's (or any permitted lessee's) business with any air carrier; provided that the part replacing such removed Part shall be incorporated or installed in or attached to such Airframe or Engine in accordance with paragraphs (b) and (c) of this Section as promptly as practicable after the removal of such removed Part. In addition, any temporary replacement part when incorporated or installed in or attached to an Airframe or any Engine in accordance with paragraph (b) of this Section may be owned by another airline or vendor as customary in the U.S. airline industry, subject to a pooling or parts leasing arrangement; provided, however, that the Company (or any permitted lessee), at its expense within a commercially reasonable time, either (i) causes such temporary replacement part to become subject to the Lien of this Indenture, free and clear of all Liens except Permitted Liens, at which time such temporary replacement part shall become a Part or (ii) replaces such temporary replacement part by incorporating or installing in or attaching to such Airframe or Engine a further replacement Part owned by the Company (or any permitted lessee) free and clear of all Liens except Permitted Liens and which shall become subject to the Lien of this Indenture in accordance with paragraph (c) of this Section. (e) The Company (and any permitted lessee), at its own expense, shall make alterations and modifications in and additions to each Airframe and Engine as may be required to be made from time to time by applicable law regardless of upon whom such requirements are, by their terms, nominally imposed; provided, however, that the Company (and any permitted lessee) may, in good faith, contest the validity or application of any such standard in any reasonable manner which does not materially adversely affect the Lien of this Indenture. In addition, the Company, at its own expense, may from time to time make or cause to be made such alterations and modifications in and additions to any Airframe or Engine as the Company (or any permitted lessee) may deem desirable in the proper conduct of its business (including, without limitation, removal of Parts); provided, however, that no such alteration, modification or addition diminishes, in the Company's reasonable judgment, the value, utility, condition, airworthiness or remaining useful life of such Airframe or Engine below the value, utility, condition, airworthiness or remaining useful life thereof immediately prior to such alteration, modification or addition, assuming such Airframe or Engine was then in the condition required to be maintained by the terms of this Indenture, except that the value (but not the utility, condition, airworthiness or remaining useful life) of any Aircraft may be reduced by the value of Parts which the Company (or any permitted lessee) deems obsolete or no longer suitable or appropriate for use in such Aircraft which shall have been removed and not replaced, if the aggregate value of all such obsolete or unsuitable Parts removed from such Aircraft and not replaced shall not exceed $500,000. All Parts incorporated or 102 113 installed in or attached or added to any Airframe or Engine as the result of any alteration, modification or addition effected by the Company (or any permitted lessee) shall be free and clear of any Liens except Permitted Liens and become subject to the Lien of this Indenture; provided, however, that the Company (or any permitted lessee) may, at any time so long as an Airframe or Engine is subject to the Lien of this Indenture, remove any such Part from such Airframe or Engine if (i) such Part is in addition to, and not in replacement of or in substitution for, any Part originally incorporated or installed in or attached to such Airframe or Engine at the time of delivery thereof hereunder or any Part in replacement of, or in substitution for, any such original Part, (ii) such Part is not required to be incorporated or installed in or attached or added to such Airframe or Engine pursuant to the terms of Section 14.03 or the first sentence of this paragraph (e) and (iii) such Part can be removed from such Airframe or Engine without diminishing or impairing the value, condition, utility, airworthiness or remaining useful life which such Airframe or Engine would have had at the time of removal had such alteration, modification or addition not been effected by the Company (or any permitted lessee), assuming the Aircraft was otherwise maintained in the condition required by this Indenture. Upon the removal by the Company (or any permitted lessee) of any such Part as above provided, title thereto shall, without further act, be free and clear of all rights of the Trustee and such Part shall no longer be deemed a Part hereunder. SECTION 15.02. [Left Blank] SECTION 15.03. Inspection. At all reasonable times so long as an Aircraft is subject to the Lien of this Indenture, upon at least 15 days' prior notice to the Company and at a time and place reasonably acceptable to the Company, the Trustee or its authorized representative may at its own expense and risk conduct a visual walk-around inspection of such Aircraft and any Engine and may inspect the books, logs and records of the Company relating to the operation and maintenance thereof; provided, however, that (a) any such inspection shall be subject to the safety, security and workplace rules applicable at the location where such inspection is conducted and any applicable governmental rules or regulations, (b) in the case of an inspection during a maintenance visit, such inspection shall not in any respect interfere with the normal conduct of such maintenance visit or extend the time required for such maintenance visit or, in any event, at any time interfere with the use or operation of any Airframe or Engine or with the normal conduct of the Company's or a permitted lessee's business, and (c) the Company shall not be required to undertake or incur any additional liabilities in connection with any such inspection. All information obtained in connection with any such inspection shall be held confidential by the Trustee and shall not be furnished or disclosed by it to anyone other than its bank examiners, regulators, auditors, accountants, agents and legal counsel, and except as may be required by an order of any court or administrative agency or by any statute, rule, regulation or order of any governmental authority or as may be necessary to enforce the terms of this Indenture. The Trustee shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. No 103 114 inspection under this Section shall relieve the Company of any of its obligations under this Indenture. SECTION 15.04. Requisition for Use. In the event of a requisition for use by any government of any Airframe and the Engines, if any, or engines installed on such Airframe while such Airframe is subject to the Lien of this Indenture, the Company shall promptly notify the Trustee of such requisition and all of the Company obligations under this Indenture shall continue to the same extent as if such requisition had not occurred except to the extent that the performance or observance of any obligation by the Company shall have been prevented or delayed by such requisition; provided, however, that the Company's obligations under this Section 15.04 with respect to the occurrence of an Event of Loss, for the payment of money and under Sections 4.12 and 14.02 shall not be reduced or delayed by such requisition. Any payments received by the Trustee or the Company from such government with respect to such requisition of use shall be paid over to, or retained by, the Company. In the event of an Event of Loss of an Aircraft or Engine resulting from the requisition for use by a government of such Aircraft or Engine, the Company will replace such Aircraft or Engine hereunder by complying with the terms of Section 4.16 and any payments received by the Trustee or the Company from such government with respect to such requisition shall be paid over to, or retained by, the Company. SECTION 15.05. Substitution of Collateral. Upon the request of any Owner of any Aircraft or Engine to release such Aircraft or Engine from the Lien pursuant to the Indenture, the Trustee shall be required to immediately release such Aircraft or Engine from such Lien upon fulfillment of the following conditions: (i) the Owner delivers a written request to the Trustee, requesting such release and specifically describing the Aircraft or Engine so to be released and the replacement Aircraft or replacement Engine therefor; (ii) the replacement Aircraft or replacement Engine has a value at least equal to, and in as good operating condition and repair and as airworthy as the Aircraft or Engine subject to the substitution (determined by the chief financial officer of the Company in good faith); (iii) the Owner delivers to the Trustee a supplemental indenture subjecting the replacement Aircraft or replacement Engine to the Lien pursuant to the Indenture; (iv) the Owner delivers an opinion of counsel that the Trustee has a valid, perfected, first priority security interest in the replacement Aircraft or replacement Engine; and (v) the replacement Aircraft or replacement Engine otherwise complies with the terms and provisions of the Indenture. Notwithstanding the foregoing, with respect to any substitution of Collateral, or any series of related substitutions of Collateral, where the initial appraised value of such Collateral exceeds $25.0 million, the Company shall be required to obtain one or more appraisals from an aircraft appraisal firm of national standing. Such appraisal(s) must indicate that the value (or fair value or similar measure) of the replacement Collateral is at least equal to the value (or fair value or similar measure) of the Collateral which is being replaced. 104 115 SECTION 15.06. Release of Collateral. (a) If at any time, or from time to time, the aggregate principal amount of the Notes outstanding is less than $340.0 million, and no Event of Default has occurred and is continuing, the Company shall be entitled to release a portion of the Collateral, so long as the aggregate value of the Collateral so released does not exceed the aggregate principal amount of Notes which are no longer outstanding (in the good faith opinion of the chief financial officer of the Company as evidenced by a written certificate of such chief financial officer). (b) The Company shall be entitled to substitute additional Collateral in connection with any such release (in accordance with Section 15.05) if the aggregate value of Collateral released exceeds the aggregate principal amount of Notes which are no longer outstanding. Upon delivery of a certificate regarding such good faith opinion the Trustee shall immediately execute and deliver all releases and certificates necessary or desirable to release such Collateral from the Lien of the Indenture. Notwithstanding the foregoing, in the event of any release of Collateral, or any series of related releases of Collateral, where the initial appraised value of such Collateral exceeds $10.0 million, the Company shall be required to obtain one or more appraisals from an aircraft appraisal firm of national standing. Such appraisal(s) must indicate that the aggregate value (or fair value or similar measure) of the Collateral released. SECTION 15.07. Discontinuance of Proceedings. In case the Trustee shall have instituted any proceeding to enforce any right, power or remedy under this Indenture by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Person instituting such proceeding, then and in every such case the Company, the Trustee shall, subject to any determination in such proceedings, be restored to their former positions and rights hereunder with respect to the Collateral, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been instituted. SECTION 15.09. Termination of Interest in Collateral. A Holder shall not, as such, have any further interest in, or other right with respect to, the Collateral when and if the principal amount of, and interest on, and other amounts due under all Securities held by such Holder and all other sums due to such Holder under this Indenture shall have been paid in full. 105 116 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. KITTY HAWK, INC., as Issuer By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Senior Vice President-Finance KITTY HAWK CHARTERS, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Vice President AIRCRAFT LEASING, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: President KITTY HAWK AIRCARGO, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Vice President 117 AMERICAN INTERNATIONAL AIRWAYS, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Vice President KALITTA FLYING SERVICE, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Vice President FLIGHT ONE LOGISTICS, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Vice President O.K. TURBINES, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Vice President AMERICAN INTERNATIONAL TRAVEL, INC. By: /s/ Richard R. Wadsworth -------------------------------------------- Name: Richard R. Wadsworth Title: Vice President 118 BANK ONE, NA, as Trustee By: /s/ John Beacham -------------------------------------------- Name: John Beacham Title: Trust Officer 119 EXHIBIT A [FACE OF NOTE] KITTY HAWK, INC. 9.95% Senior Secured Notes Due 2004 [CUSIP][__________] No. $_________ KITTY HAWK, INC., a Delaware corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to _____________, or its registered assigns, the principal sum of ____________ ($____) on November 15, 2004. Interest Payment Dates: May 15 and November 15, commencing May 15, 1998. Regular Record Dates: May 1 and November 1. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. 120 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. Date: November 19, 1997 KITTY HAWK, INC. By: ------------------------------------- Name: Title: By: ------------------------------------- Name: Title: (Trustee's Certificate of Authentication) This is one of the 9.95% Senior Secured Notes due 2004 described in the within mentioned Indenture. BANK ONE, NA, as Trustee By: ------------------------------------ Trust Officer A-2 121 [REVERSE SIDE OF NOTE] KITTY HAWK, INC. 9.95% Senior Secured Note Due 2004 1. Principal and Interest. The Company will pay the principal of this Note on November 15, 2004. The Company promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate per annum shown above. Interest will be payable semiannually (to the holders of record of the Notes at the close of business on the May 1 or November 1 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing May 15, 1998. If the exchange offer contemplated by the Registration Statement under the Securities Act is not consummated or, if required, a Shelf Registration Statement under the Securities Act with respect to resales of the Notes is not declared effective by the Commission, on or before May 19, 1998 in accordance with the terms of the Registration Rights Agreement dated as of November 19, 1997 between the Company, the Guarantors and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Fieldstone FPCG Services, L.P., then the interest rate per annum accruing on the Notes shall, effective May 19, 1998, be increased by 0.5% from 9.95% per annum, payable in cash semiannually, in arrears, on each May 15 and November 15, commencing November 15, 1998, until the exchange offer is completed or such Shelf Registration Statement is declared effective. The Holder of this Note is entitled to the benefits of such Registration Rights Agreement. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from November 19, 1997; provided that, if there is no existing default in the payment of interest and this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate borne by the Notes. A-3 122 2. Method of Payment. The Company will pay interest (except defaulted interest) on the principal amount of the Notes as provided above on each May 15 and November 15 to the persons who are Holders (as reflected in the Security Register at the close of business on the May 1 and November 1 immediately preceding the Interest Payment Date), in each case, even if the Note is canceled on registration of transfer, registration of exchange, redemption or repurchase after such record date; provided that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Note to a Paying Agent on or after November 15, 2004. The Company will pay principal, premium, if any, and as provided above, interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company, at its option, may pay principal, premium, if any, and interest by its check payable in such money. It may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. Paying Agent and Registrar. Initially, the Trustee will act as authenticating agent, Paying Agent and Registrar. The Company may change any authenticating agent, Paying Agent or Registrar without notice. The Company, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar. 4. Indenture; Limitations. The Company issued the Notes under an Indenture dated as of November 19, 1997 (the "Indenture"), between the Company, the Guarantors and Bank One, NA, as trustee and collateral trustee (collectively, the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are senior secured obligations of the Company. A-4 123 5. Redemption. The Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after November 15, 2001 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing November 15, of the years set forth below:
Redemption Year Price ---- ------------- 2001 . . . . . . . . . . . . . . . 104.975% 2002 . . . . . . . . . . . . . . . 102.488% 2003 . . . . . . . . . . . . . . . 100.000%
In addition, at any time prior to November 15, 2000, the Company may redeem up to 35% of the principal amount of the Notes with the proceeds of one or more Public Equity Offerings, at any time or from time to time, at a Redemption Price (expressed as a percentage of principal amount) of 109.95%, plus accrued and unpaid interest to the Redemption Date (subject to the rights of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date); provided that at least $150 million aggregate principal amount of Notes remains outstanding after each such redemption. Notice of any optional redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at his last address as it appears in the Security Register. Notes in denominations larger than $1,000 may be redeemed in part. On and after the Redemption Date, interest ceases to accrue on Notes or portions of Notes called for redemption, unless the Company defaults in the payment of the Redemption Price. 6. Repurchase upon Change of Control Triggering Event. Upon the occurrence of a Change of Control Triggering Event, the Company must commence, within 30 days of the occurrence of a Change of Control Triggering Event, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. A-5 124 A notice of such Change of Control will be mailed within 30 days after any Change of Control occurs to each Holder at his last address as it appears in the Security Register. Notes in denominations larger than $1,000 may be sold to the Company in part. On and after the Payment Date, interest ceases to accrue on Notes or portions of Notes surrendered for purchase by the Company, unless the Company defaults in the payment of the Change of Control Payment. 7. Denominations; Transfer; Exchange. The Notes are in registered form without coupons in denominations of $1,000 of principal amount and any integral multiple in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption. Also, it need not register the transfer or exchange of any Notes for a period of 15 days before the day of the mailing of a notice of redemption of Notes selected for redemption. 8. Persons Deemed Owners. A Holder shall be treated as the owner of a Note for all purposes. 9. Unclaimed Money. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company at its written request. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. A-6 125 10. Discharge Prior to Redemption or Maturity. The Company or the Guarantors generally will be discharged from the Indenture and the Notes, except in certain circumstances for certain sections thereof, if, among other things, the Company and the Guarantors (A) deposit with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes and (B) deliver (i) an Opinion of Counsel or Internal Revenue Service ruling directed to the Trustee with respect to the tax effects of such deposits and (ii) an Opinion of Counsel concerning Investment Company Act of 1940 and United States Bankruptcy Code ramifications of the deposits, (C) in conjunction with such deposits, ensure there is an absence of certain Events of Default and (D) provide an Opinion of Counsel concerning the potential delisting of the Notes from a national securities exchange as a result of the deposits; provided that if simultaneously with the deposit of the money and/or U.S. Government Obligations referred to in (A) above, the Company or any Guarantor has caused an irrevocable, transferable, standby letter of credit to be issued by a bank with capital and surplus exceeding the principal amount of the Notes then outstanding, expiring not earlier than 180 days from its issuance, in favor of the Trustee which permits the Trustee to draw an amount equal to the principal, premium, if any, and accrued interest on the Notes through the expiry date of the letter of credit, then the Company and the Guarantors will be deemed to have paid and discharged any and all obligations in respect of the Notes on the date of the deposit and issuance of the letter of credit. 11. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency and make any change that, in the opinion of the Board of Directors of the Company evidenced by a Board resolution, does not materially and adversely affect the rights of any Holder. 12. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries, among other things, to Incur additional Indebtedness, make Restricted Payments, suffer to exist restrictions on the ability of Restricted Subsidiaries to make certain payments to the Company, issue Capital Stock of Restricted Subsidiaries, engage in transactions with Affiliates, suffer to exist or incur Liens, or merge, consolidate or transfer substantially all of its assets. On or before a date not more than 90 days after the end of each fiscal year, the Company A-7 126 shall deliver to the Trustee an Officers' Certificate stating whether or not the signers know of any Default or Event of Default under such restrictive covenants or a Collateral Access Event. 13. Successor Persons. When a successor person or other entity assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor person will be released from those obligations. 14. Defaults and Remedies. The following events constitute "Event of Default" with respect to the Notes under the Indenture: (a) the Company defaults in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) the Company defaults in the performance or breaches the provisions of Article Five or fails to make or consummate an Offer to Purchase in accordance with Section 4.11 or Section 4.14; (d) the Company or any Guarantor defaults in the performance of or breaches any other covenant or agreement of the Company in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Guarantor or Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Guarantor or Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company, any Guarantor or any Significant Subsidiary in an involuntary case under any applicable A-8 127 bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; (h) the Company, any Guarantor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors; or (i) any Note Guarantee shall cease to be, or shall be asserted in writing by the Company or any Guarantor not to be, in full force and effect or enforceable in accordance with its terms. If an Event of Default, except for certain ones, or a Collateral Access Event, as defined in the Indenture, occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes, then outstanding may declare all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the Company occurs and is continuing, the Notes automatically become due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 15. Security. The Collateral securing the Notes will consist of (i) nine Boeing 747s (including the Optioned Boeing 747s), eight Lockheed L-1011s and thirteen Boeing 727s, along with the Engines, (ii) all insurance and requisition proceeds and other similar payments with respect to each of the Aircraft, (iii) all monies or securities deposited or required to be deposited with the Trustee, (iv) any purchase agreements and any related documentation to the extent assignable for each Aircraft, (v) all logs, data and records related to the Aircraft, (vii) the Pledged Securities on deposit in the Escrow Account, the Escrow Account and certain related assets, (vii) all rights of any Owner under any Lease relating to any Aircraft and (viii) all proceeds of the foregoing. The Pledged Securities shall be sufficient to provide for (i) the purchase of the two Optioned Boeing 747s or other Eligible Aircraft and (ii) the conversion of such Aircraft to freighter configuration. A-9 128 16. Trustee Dealings with the Company. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for the Company or its Affiliates and may otherwise deal with the Company or its Affiliates as if it were not the Trustee. 17. No Recourse Against Others. No incorporator, stockholder, other officer, director, employee or controlling person as such, of the Company or any Guarantor or of any successor Person thereof shall have any liability for any obligations of the Company under the Notes, the Guarantees, the Escrow and Security Agreement or the Indenture or for any claim based on, or otherwise in respect of or by reason of, such obligations or their creation. Each Holder by accepting a Note expressly waives and releases all such liability. The waiver and release are a condition of, and part of the consideration for the issuance of the Notes and the related Guarantees. 18. Guarantees. The Company's obligations under the Notes are irrevocably guaranteed by the Guarantors. 19. Authentication. This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. 20. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to Kitty Hawk, Inc., P.O. Box 612787, 1515 West 20th Street, Dallas/Fort Worth International Airport, TX 75261, Attention: Chief Financial Officer. A-10 129 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. ________________________________________________________________________________ Please print or typewrite name and address including zip code of assignee ________________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing ____________________________________________________________________ attorney to transfer said Note on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL NOTES OTHER THAN EXCHANGE NOTES In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date the shelf registration statement is declared effective or (ii) the end of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933 provided by Rule 144A thereunder. or [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. A-11 130 If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.08 of the Indenture shall have been satisfied. Date: -------------- --------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933 and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: --------------------- ----------------------------------------------- NOTICE: To be executed by an executive officer A-12 131 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to an Offer to Purchase in accordance with the terms of the Indenture, check the Box: [ ] If you wish to have a portion of this Note purchased by the Company pursuant to an Offer to Purchase in accordance with the terms of the Indenture, state the amount: $___________________. Date: ----------------- Your Signature: --------------------------------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: * ------------------------------ - ------------------------- * The Holders signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an eligible guarantor institution as defined by Rule 17Ad-15 under the Exchange Act. A-13 132 EXHIBIT B [Intentionally Omitted] 133 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors _______________________, ____ Bank One, NA 100 E. Broad Street, 8th Floor Columbus, Ohio 43215 Attention: Corporate Trust and Agency Group Re: Kitty Hawk, Inc. (the "Company") 9.95% Senior Secured Notes due 2004 (the "Notes") Dear Sirs: In connection with our proposed purchase of $__________________ aggregate principal amount of the Notes, we confirm that: 1. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture dated as of November 15, 1997 (the "Indenture"), relating to the Notes, and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933 (the "Securities Act"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (A) to the Company or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you and to the Company a signed letter substantially in the form of this letter, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act, or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 134 3. We understand that, on any proposed resale of any Notes, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: ---------------------------------- Authorized Signature C-2 135 EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S _____________________, ____ Bank One, NA 100 E. Broad Street, 8th Floor Columbus, Ohio 43215 Attention: Corporate Trust and Agency Group Re: Kitty Hawk, Inc. (the "Company") 9.95% Senior Secured Notes due 2004 (the "Notes") Dear Sirs: In connection with our proposed sale of U.S.$__________________ aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933 and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; (3) no directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the U.S. Securities Act of 1933. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any 136 administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ------------------------------------------ Authorized Signature D-2 EX-4.5 7 REGISTRATION RIGHTS AGREEMENT - 11/19/97 1 EXHIBIT 4.5 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT Dated November 19, 1997 between KITTY HAWK, INC., Issuer, KITTY HAWK CHARTER, INC., AIRCRAFT LEASING, INC., KITTY HAWK AIRCARGO, INC., AMERICAN INTERNATIONAL AIRWAYS, INC., KALITTA FLYING SERVICES, INC., FLIGHT ONE LOGISTICS, INC., O.K. TURBINES, INC. AND AMERICAN INTERNATIONAL TRAVEL, INC. Subsidiary Guarantors and MORGAN STANLEY & CO. INCORPORATED BT ALEX. BROWN INCORPORATED FIELDSTONE FPCG SERVICES, L.P., Placement Agents - -------------------------------------------------------------------------------- 2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into November 19, 1997, between Kitty Hawk, Inc, a Delaware corporation (the "Company"), Kitty Hawk Charter, Inc., a Texas corporation, Aircraft Leasing, Inc., a Texas corporation, Kitty Hawk Aircargo, Inc., a Texas corporation, American International Airways, Inc., a Michigan corporation, Kalitta Flying Services, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, O.K. Turbines, Inc., a Michigan corporation and American International Travel, Inc., a Michigan corporation (collectively, the "Subsidiary Guarantors") and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Fieldstone FPCG Services, L.P. (the "Placement Agents"). This Agreement is made pursuant to the Placement Agreement dated November 13, 1997, between the Company, the Subsidiary Guarantors, the Kalitta Companies (as defined in the Placement Agreement), M. Tom Christopher, Tilmon J. Reeves, Richard R. Wadsworth, Conrad Kalitta and the Placement Agents (the "Placement Agreement"), which provides for the sale by the Company and the Subsidiary Guarantors to the Placement Agents of an aggregate of $340 million principal amount of the Company's 9.95% Senior Secured Notes due 2004 (the "Securities"). The obligations of the Company under the Securities and the Indenture will be guaranteed by the Subsidiary Guarantors pursuant to the terms of the Indenture (the "Subsidiary Guarantees"). The Trustee and the Placement Agents and their direct and indirect transferees will have a first priority security interest in the Collateral (as defined in the Indenture). In order to induce the Placement Agents to enter into the Placement Agreement, the Company and the Subsidiary Guarantors have agreed to provide to the Placement Agents and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Placement Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 Act" shall mean the Securities Act of 1933, as amended from time to time. 3 2 "1934 Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Business Day" shall mean any day except a Saturday, Sunday or other day in the City of New York, or in the city of the corporate trust office of the Trustee on which banks are authorized to close. "Closing Date" shall mean the Closing Date as defined in the Placement Agreement. "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Exchange Offer" shall mean the exchange offer by the Company of Exchange Securities for Registrable Securities pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the 1933 Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Securities" shall mean securities issued by the Company under the Indenture containing terms identical to the Securities (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Securities or, if no such interest has been paid, from the date of issuance and (ii) the interest rate per annum on the Exchange Securities shall be the rate initially payable on the Securities) and to be offered to Holders of Securities in exchange for Securities pursuant to the Exchange Offer. "Holder" shall mean the Placement Agents, for so long as it owns any Registrable Securities, and each of their respective successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture; provided that for purposes of Sections 4 and 5 of this Agreement, the term "Holder" shall include Participating Broker-Dealers (as defined in Section 4(a)). 4 3 "Indenture" shall mean the Indenture relating to the Securities dated as of November 19, 1997 between the Company, the Subsidiary Guarantors and Bank One, N.A., as trustee, and as the same may be amended from time to time in accordance with the terms thereof. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Securities; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by (i) for purposes of Section 6(b) hereof, the Company or any of its affiliates (as such term is defined in Rule 405 under the 1933 Act) and (ii) for all other purposes hereof, the Company and its subsidiaries shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Placement Agents" shall have the meaning set forth in the preamble. "Placement Agreement" shall have the meaning set forth in the preamble. "Prospectus" shall mean the prospectus included in a Registration Statement at the same time such Registration Statement is declared effective, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, and in each case including all material incorporated by reference therein. "Registrable Securities" shall mean the Securities and the Subsidiary Guarantees; provided, however, that the Securities and the Subsidiary Guarantees shall cease to be Registrable Securities upon the earliest of (i) when a Registration Statement with respect to such Securities and the Subsidiary Guarantees shall have been declared effective under the 1933 Act and such Securities and the Subsidiary Guarantees shall have been disposed of pursuant to such Registration Statement, (ii) when such Securities and the Subsidiary Guarantees have been sold to the public 5 4 pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the 1933 Act, (iii) when such Securities and the Subsidiary Guarantees shall have ceased to be outstanding or (iv) the date on which such Securities and such Subsidiary Guarantees are exchanged in the Exchange Offer. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company and the Subsidiary Guarantors with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all reasonable fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities), (iii) all reasonable expenses of any Persons in preparing or assisting in preparing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all reasonable fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (v) the reasonable fees and disbursements of the Trustee and its counsel, (vi) the fees and disbursements of counsel for the Company and the Subsidiary Guarantors and, in the case of a Shelf Registration Statement, the reasonable fees and disbursements of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Placement Agents) and (vii) the reasonable fees and disbursements of the independent public accountants of the Company and the Subsidiary Guarantors, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Registration Statement" shall mean any registration statement of the Company that covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. 6 5 "SEC" shall mean the Securities and Exchange Commission. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company and the Subsidiary Guarantors pursuant to the provisions of Section 2(b) of this Agreement which covers all of the Registrable Securities (but no other securities unless approved by the Holders of a majority of the Registrable Securities covered by such Shelf Registration Statement) on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Subsidiary Guarantees" shall have the meaning set forth in the preamble. "Subsidiary Guarantors" shall have the meaning set forth in the preamble and shall include the Subsidiary Guarantors' successors. "Trustee" shall mean the trustee with respect to the Securities under the Indenture. "Underwritten Registration" or "Underwritten Offering" shall mean a registration in which Registrable Securities are sold to an Underwriter (as hereinafter defined) for reoffering to the public. 2. Registration Under the 1933 Act. (a) To the extent not prohibited by any applicable law or applicable interpretation of the SEC or its staff, the Company and the Subsidiary Guarantors shall use their reasonable best efforts to cause to be filed an Exchange Offer Registration Statement covering the offer by the Company and the Subsidiary Guarantors to the Holders to exchange all of the Registrable Securities for Exchange Securities and to have such Registration Statement remain effective until the closing of the Exchange Offer. The Exchange Securities will be issued under the Indenture. The Company and the Subsidiary Guarantors shall use their reasonable best efforts to commence the Exchange Offer promptly after the Exchange Offer Registration Statement has been declared effective by the SEC 7 6 and use their reasonable best efforts to have the Exchange Offer consummated not later than 120 days after such effective date. If the Company and the Subsidiary Guarantors effect the Exchange Offer, the Company and the Subsidiary Guarantors will be entitled to close the Exchange Offer twenty Business Days after the commencement thereof provided that the Company and the Subsidiary Guarantors have accepted all the Notes validly tendered in accordance with the terms of the Exchange Offer. The Company and the Subsidiary Guarantors shall commence the Exchange Offer by mailing the related exchange offer Prospectus and accompanying documents to each Holder stating, in addition to such other disclosures as are required by applicable law: (i) that the Exchange Offer is being made pursuant to this Registration Rights Agreement and that all Registrable Securities validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange (which dates extend for a period of at least 20 Business Days from the date such notice is mailed) (the "Exchange Dates"); (iii) that any Registrable Security not tendered will remain outstanding and continue to accrue interest from the last interest payment date on which interest was paid on the Notes surrendered in exchange therefore or, if no interest has been paid on the Notes, from the date of original issue of the Notes, but will not retain any rights under this Registration Rights Agreement; (iv) that Holders electing to have a Registrable Security exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Security, together with the enclosed letters of transmittal, to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice prior to the close of business on the last Exchange Date; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange and a statement that such Holder is withdrawing his election to have such Securities exchanged. 8 7 As soon as practicable after the last Exchange Date, the Company and the Subsidiary Guarantors shall: (i) accept for exchange Registrable Securities or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer; and (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities or portions thereof so accepted for exchange by the Company and the Subsidiary Guarantors and issue, and cause the Trustee to promptly authenticate and mail to each Holder, an Exchange Security equal in principal amount to the principal amount of the Registrable Securities surrendered by such Holder. The Company and the Subsidiary Guarantors shall use their reasonable best efforts to complete the Exchange Offer as provided above and shall comply in all material respects with the applicable requirements of the 1933 Act, the 1934 Act and other applicable laws and regulations in connection with the Exchange Offer. Except as set forth in the immediately succeeding sentence or as customary in similar transactions, the Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the SEC or its staff. As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Registerable Securities shall furnish, upon the request of the Company but prior to consummation of the Exchange Offer, a written representation to the Company and the Subsidiary Guarantors (which may be contained in the letter of transmittal contemplated by the Exchange Offer) to the effect that (i) it is not an affiliate of the Company, (ii) it is not engaged in, does not intend to engage in, and has no arrangement or understanding with any person to participate in, and has no arrangement or understanding with any person to participate in, a distribution of the Exchange Securities to be issued in the Exchange Offer and (iii) it is acquiring the Exchange Securities in the ordinary course of its business. The Company shall inform the Placement Agents of the names and addresses of the Holders to whom the Exchange Offer is made, and the Placement Agents shall have the right, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer. (b) In the event that (i) the Company determines that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be consummated as soon as practicable after the last Exchange Date because it would violate applicable law or the applicable interpretations of the SEC or its staff, or (ii) the Exchange Offer is not for any other reason consummated by May 19, 1998, the Company shall use its reasonable best efforts 9 8 to cause to be filed as soon as practicable after such determination or date, as the case may be, a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities and to have such Shelf Registration Statement declared effective by the SEC. The Company and the Subsidiary Guarantors agree to use their reasonable best efforts to keep the Shelf Registration Statement continuously effective until the second anniversary of the Closing Date or such shorter period that will terminate when all of the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Company and the Subsidiary Guarantors further agree to supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company and the Subsidiary Guarantor, for such Shelf Registration Statement or by the 1933 Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder with respect to information relating to such Holder, and to use its reasonable best efforts to cause any such amendment to become effective and such Shelf Registration Statement to become usable as soon as thereafter practicable. The Company and the Subsidiary Guarantors agree to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) The Company and the Subsidiary Guarantors shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or Section 2(b). Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective until it has been declared effective by the SEC; provided, however, that, if, after it has been declared effective, the offering of Registrable Securities pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. (e) Without limiting the remedies available to the Placement Agents and the Holders, the Company and the Subsidiary Guarantors acknowledge that any failure by the Company and the Subsidiary Guarantors to comply with their obligations under Section 2(a) and Section 2(b) hereof may 10 9 result in material irreparable injury to the Placement Agents or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Placement Agents or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Subsidiary Guarantors' obligations under Section 2(a) and Section 2(b) hereof. (f) No Holder of Registerable Securities may include any of its Registerable Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company, in writing, such information specified in item 507 of Regulation S-K under the 1933 Act and such other information as the Company may reasonably request for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. Each Holder as to which any Shelf Registration Statement is being declared effective agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (g) If the Exchange Offer is not consummated or, if required, a Shelf Registration Statement under the Securities Act with respect to resales of the Notes is not declared effective by the Commission, on or before May 19, 1998, in accordance with the terms of this Agreement, then the interest rate per annum accruing on the Notes shall, effective May 19, 1998, be increased by 0.5% from 9.95% per annum, payable in cash semiannually, in arrears, on each May 15 and November 15, commencing November 15, 1998, until the Exchange Offer is completed or such Shelf Registration Statement is declared effective. The foregoing shall constitute liquidated damages for failure to have consummated the Exchange Offer or, if required, caused such Shelf Registration Statement to have been declared effective by May 19, 1998. 3. Registration Procedures. In connection with the obligations of the Company and the Subsidiary Guarantors' with respect to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the Company and the Subsidiary Guarantors shall as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement on the appropriate form under the 1933 Act, which form (x) shall be selected by the Company and the Subsidiary Guarantors' and (y) shall, in the case of a Shelf Registration, be available for the re-sale of the Registrable Securities by the selling Holders thereof and (z) shall comply as to form in all material 11 10 respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and use their reasonable best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) use their reasonable best efforts to prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to keep each Prospectus current during the period described under Section 4(3) and Rule 174 under the 1933 Act that is applicable to transactions by brokers or dealers with respect to the Registrable Notes or Exchange Notes; (c) in the case of a Shelf Registration, subject to any confidentiality requirements, furnish to each Holder of Registrable Securities, to counsel for the Placement Agents, to counsel for the Holders and to each Underwriter of an Underwritten Offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or Underwriter may reasonably request, in order to facilitate the public re-sale or other disposition of the Registrable Securities; and the Company consents, subject to the provisions of this Agreement, to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling holders of Registrable Securities and any such Underwriters in connection with the offering and re-sale of the Registrable Securities covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law; (d) use their reasonable best efforts to register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with such Holders in connection with any filings required to be made with the National Association of Securities Dealers, Inc. and to do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that neither the Company nor the Subsidiary Guarantors shall be 12 11 required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject; (e) in the case of a Shelf Registration, use all reasonable efforts to notify each Holder of Registrable Securities, counsel for the Holders and counsel for the Placement Agents promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when a Registration Statement has become effective and when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company or the Subsidiary Guarantors contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects or if the Company receives any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading and (vi) of any determination by the Company and the Subsidiary Guarantors that a post-effective amendment to a Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide prompt notice to each Holder of the withdrawal of any such order; (g) in the case of a Shelf Registration, take reasonable measures to furnish to each Holder of Registrable Securities, without charge, at least one conformed copy of each Registration Statement and any post-effective 13 12 amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless a Holder so requests in writing); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least two business days prior to the closing of any sale of Registrable Securities; (i) in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) hereof, use their reasonable best efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company agrees to notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and the Holders hereby agree to suspend use of the Prospectus until the Company and the Subsidiary Guarantors have amended or supplemented the Prospectus to correct such misstatement or omission; provided, however, that not withstanding anything herein to the contrary, the Company shall not be required to prepare and file such documents if such misstatement or omission or the event which caused such misstatement or omission no longer exists; (j) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such of the representatives of the Company and the Subsidiary Guarantors as shall be reasonably requested by the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) available for discussion of such document, and shall not at any 14 13 time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall object, except for any amendment or supplement or document (a copy of which has been previously furnished to the Placement Agents and their counsel and, in the case of a Shelf Registration Statement, the Holders and their counsel) which counsel to the Company and the Subsidiary Guarantors shall advise the Company and the Subsidiary Guarantors, in the form of a written legal opinion, is required in order to comply with applicable law; the Placement Agents agree that, if they receive timely notice and drafts under this clause (j), they will not unreasonably object to any such filing; (k) obtain a CUSIP number for all Exchange Securities not later than the first Exchange Date of the Exchange Offer; (l) to the extent required, cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use their reasonable best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (m) in the case of a Shelf Registration, use their reasonable best efforts to make available for inspection by a representative of the Holders of the Registrable Securities, any Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all financial and other records, pertinent documents and properties of the Company and the Subsidiary Guarantors, and cause the respective officers, directors and employees of the Company and the Subsidiary Guarantors to supply all information reasonably requested by 15 14 any such representative, Underwriter, attorney or accountant in connection with a Shelf Registration Statement; (n) in the case of a Shelf Registration, use their reasonable best efforts to cause all Registrable Securities to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company are then listed if requested by the Majority Holders, to the extent such Registrable Securities satisfy applicable listing requirements; (o) if reasonably requested by any Holder of Registrable Securities covered by a Registration Statement, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information with respect to such Holder as such Holder reasonably requests to be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company has received notification of the matters to be incorporated in such filing; and (p) in the case of a Shelf Registration, enter into such customary agreements and take all such other actions in connection therewith (including those requested by the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities including, but not limited to, an Underwritten Offering and in such connection, (i) to the extent possible, make such representations and warranties to the Holders and any Underwriters of such Registrable Securities with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the Holders and such Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of Registrable Securities, covering the matters customarily covered in opinions requested in underwritten offerings, (iii) obtain "cold comfort" letters from the independent certified public accountants of the Company (and, if necessary, any other certified public accountant of any subsidiary of the Company, or of any business acquired by the Company for which financial statements and financial data are or are required to be included in the Registration Statement) addressed to each selling Holder and Underwriter of Registrable Securities, such 16 15 letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings, subject to receipt of appropriate documentation as contemplated by SAS No. 72 and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the Registrable Securities being sold or the Underwriters, and which are customarily delivered in underwritten offerings, to evidence the continued validity of the representations and warranties of the Company made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement. In the case of a Shelf Registration Statement, the Company may require each Holder of Registrable Securities to furnish to the Company such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company may from time to time reasonably request in writing. No Holder may participate in any Underwritten Offering hereunder unless such Holder (a) agrees to sell such Holder's Registerable Securities on the basis provided in customary underwriting agreements entered into in connection therewith, and (b) completes and executes all reasonable questionnaires, powers of attorney, and other documents required under the terms of such underwriting agreements. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. If the Company shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Registration Statement, the Company shall extend the period during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions. The Company may give any such notice only for four non-consecutive 30 day periods during any 365 day period. 17 16 By acquiring a Registrable Security each Holder agrees that, upon receipt of any notice from the Company or the Subsidiary Guarantors of the existence of any fact or event of the kind described in Section 3(e) hereof, such Holder shall (i) keep the fact of such notice confidential and (ii) refrain from selling or offering for sale Registrable Securities pursuant to a Registration Statement until such Holder's receipt of copies of a supplemented or amended Prospectus, as contemplated by Section 3(i) hereof, or until it receives advice, in writing, from the Company or the Subsidiary Guarantors that the use of any Prospectus may be resumed and has received copies of any additional or supplemental filings that are incorporated by reference therein. If so directed by the Company or the Subsidiary Guarantors, each Holder shall deliver to the Company or the Subsidiary Guarantors (at the expense of the Company or the Subsidiary Guarantors) all copies, other than permanent file copies then in such Holder's possession, of any Prospectus covering such Registrable Securities that was current at the time of receipt of such notice. The Company and the Subsidiary Guarantors shall have no obligation to keep a Prospectus or any supplements or amendments thereto usable or to give notice that such documents are not usable by a particular Holder to the extent such documents are not usable by such Holder because information with respect to such Holder is not included therein because such Holder has not provided such information to the Company and the Subsidiary Guarantors in accordance with the provisions of this Agreement. The Holders of Registrable Securities covered by a Shelf Registration Statement who desire to do so may sell such Registrable Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers (the "Underwriters") that will administer the offering will be selected by the Majority Holders of the Registrable Securities included in such offering, subject to the right of the Company to reasonably object to such selections up to three times. 4. Participation of Broker-Dealers in Exchange Offer. (a) The SEC or its staff has taken the position that any broker-dealer that receives Exchange Securities for its own account in the Exchange Offer in exchange for Securities that were acquired by such broker-dealer for its own account as a result of market-making or other trading activities (a "Participating Broker-Dealer"), may be deemed to be an "underwriter" within the meaning of the 1933 Act and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities. 18 17 The Company and the Subsidiary Guarantors understands that it is the SEC or its staff's current position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Securities, without naming the Participating Broker-Dealers or specifying the amount of Exchange Securities owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the 1933 Act in connection with resales of Exchange Securities for their own accounts, so long as the Prospectus otherwise meets the requirements of the 1933 Act. (b) In light of the above and subject to any change in SEC policy prior to the effectiveness of the Exchange Offer Registration Statement, the Company and the Subsidiary Guarantors agree that the provisions of this Agreement as they relate to a Shelf Registration shall also apply to an Exchange Offer Registration to the extent, and with such reasonable modifications thereto as may be, reasonably requested by the Placement Agents or by one or more Participating Broker-Dealers, in each case as provided in clause (ii) below, in order to expedite or facilitate the disposition of any Exchange Securities by Participating Broker-Dealers consistent with the positions of the Staff recited in Section 4(a) above; provided that: (i) the Company and the Subsidiary Guarantors shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement, as would otherwise be contemplated by Section 3(i), for a period exceeding 180 days after the last Exchange Date (as such period may be extended pursuant to the penultimate paragraph of Section 3 of this Agreement) and Participating Broker-Dealers shall not be authorized by the Company to deliver and shall not deliver such Prospectus after such period in connection with the resales contemplated by this Section 4; and (ii) the application of the Shelf Registration procedures set forth in Section 3 of this Agreement to an Exchange Offer Registration, to the extent not required by the positions of the SEC or its staff or the 1933 Act and the rules and regulations thereunder, will be in conformity with the reasonable request to the Company by the Placement Agents or with the reasonable request in writing to the Company by one or more broker-dealers who certify to the Placement Agents and the Company in writing that they anticipate that they will be Participating Broker-Dealers; and provided further that, in connection with such application of the Shelf Registration procedures set forth in Section 3 to an Exchange Offer Registration, the 19 18 Company shall be obligated (x) to deal only with one entity representing the Participating Broker-Dealers, which shall be the Placement Agents unless it elects not to act as such representative, (y) to pay the fees and expenses of only one counsel representing the Participating Broker-Dealers, which shall be counsel to the Placement Agents unless such counsel elects not to so act and (z) to cause to be delivered only one, if any, "cold comfort" letter with respect to the Prospectus in the form existing on the last Exchange Date and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (i) above; provided, further that in no event shall the provisions applicable to Underwritten Offerings apply to the Exchange Offer Registration. (c) The Placement Agents shall have no liability to the Company or any Holder with respect to any request that it may make pursuant to Section 4(b) above. 5. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless the Placement Agents, each Holder and each person, if any, who controls the Placement Agents or any Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under common control with, or is controlled by, the Placement Agents or any Holder, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by the Placement Agents, any Holder or any such controlling or affiliated person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the 1933 Act, including all documents incorporated therein by reference, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or caused by any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Placement Agents or any Holder furnished to the Company in writing by the Placement Agents or any selling Holder expressly for use in any Registration 20 19 Statement or Prospectus, or amendment or supplement thereto; provided that the foregoing indemnity agreement with respect to any Prospectus shall not inure to the benefit of any Holder from whom the person asserting any such losses, claims, damages or liabilities purchased Registrable Securities, or any person controlling or affiliated with such Holder, if a copy of the Prospectus (as then amended or supplemented if the Company or Subsidiary Guarantor shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Holder to such person at or prior to the written confirmation of the sale of the Registrable Securities to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. In connection with any Underwritten Offering permitted by Section 3, the Company will also indemnify the Underwriters, if any, selling brokers, dealers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in connection with any Registration Statement. In any case where indemnification is sought against the Company and the Subsidiary Guarantors under this Section 5(a), the parties seeking indemnification shall promptly notify the Company and Subsidiary Guarantors in writing of any claims under this Section 5(a). (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Subsidiary Guarantors, the Placement Agents and the other selling Holders, and each of their respective directors, officers who sign the Registration Statement and each Person, if any, who controls the Company, the Subsidiary Guarantors, the Placement Agents and any other selling Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company to the Placement Agents and the Holders, but only with reference to information relating to such Holder furnished to the Company in writing by such Holder expressly for use in any Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). In claims brought under this Section 5(b), parties seeking indemnification shall have the same rights as parties seeking indemnification under Section 5(a) and parties against whom indemnification is sought under this Section 5(b) shall have the same rights as parties against whom indemnification is sought in Section 5(a). (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the 21 20 indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Placement Agents and all persons, if any, who control the Placement Agents within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Holders and all persons, if any, who control any Holders within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In such case involving the Placement Agents and persons who control the Placement Agents, such firm shall be designated in writing by the Placement Agents. In such case involving the Holders and such persons who control Holders, such firm shall be designated in writing by the Majority Holders. In all other cases, such firm shall be designated by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party for such fees and expenses of counsel in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified 22 21 party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in paragraph (a) or paragraph (b) of this Section 5 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the Holders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Holders' respective obligations to contribute pursuant to this Section 5(d) are several in proportion to the respective number of Registrable Securities of such Holder that were registered pursuant to a Registration Statement. (e) The Company, the Subsidiary Guarantors, and any other Persons with indemnity rights under this Agreement, including each Holder, agree that it would not be just or equitable if contribution pursuant to this Section 5 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, no Holder shall be required to indemnify or contribute any amount in excess of the amount by which the total price at which Registrable Securities were sold by such Holder exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be 23 22 entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Placement Agents, any Holder or any person controlling the Placement Agents or any Holder, or by or on behalf of the Company, its officers or directors or any person controlling the Company, (iii) acceptance of any of the Exchange Securities and (iv) any sale of Registrable Securities pursuant to a Shelf Registration Statement. 6. Miscellaneous. (a) No Inconsistent Agreements. Neither the Company nor the Subsidiary Guarantors have entered into, nor on or after the date of this Agreement, will the Company or Subsidiary Guarantors enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's or the Subsidiary Guarantors's other issued and outstanding securities under any such agreements. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Subsidiary Guarantors has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; provided, however, that with respect to Section 5 hereof, no amendment, modification, supplement, waiver or consents shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail (registered or certified, return receipt requested), telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with 24 23 respect to the Placement Agents, the address set forth in the Placement Agreement; and (ii) if to the Company or the Subsidiary Guarantors, initially at the Company's address set forth in the Placement Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c), with a copy to Haynes and Boone, LLP, 3100 Nations Bank Plaza, 901 Main Street, Dallas, Texas 75202-3789, Attention: Janice Sharry. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee, at the address specified in the Indenture. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Placement Agreement. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such person shall be entitled to receive the benefits hereof. The Placement Agents (in their capacity as Placement Agents) shall have no liability or obligation to the Company with respect to any failure by a Holder to comply with, or any breach by any Holder of, any of the obligations of such Holder under this Agreement. (e) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company and the Subsidiary Guarantors, on the one hand, and the Placement Agents, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of any Holder hereunder. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which 25 24 when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement and the Indenture are intended by the parties as a final expression of their agreement and are intended to be the complete and exclusive statement of the agreement and understanding of the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and in the Indenture with respect to the registration rights granted with respect to the Registerable Securities. This Agreement and the Indenture supersede all prior agreements and understandings between the parties with respect to such subject matter. 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. KITTY HAWK, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Senior Vice President -- Finance KITTY HAWK CHARTER, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Senior Vice President AIRCRAFT LEASING, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth President KITTY HAWK AIRCARGO, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Vice President AMERICAN INTERNATIONAL AIRWAYS By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Senior Vice President 27 26 KALITTA FLYING SERVICES, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Vice President FLIGHT ONE LOGISTICS, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Vice President O.K. TURBINES, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Vice President AMERICAN INTERNATIONAL TRAVEL, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Vice President 28 Confirmed and accepted as of the date first above written: MORGAN STANLEY & CO. INCORPORATED BT ALEX. BROWN INCORPORATED FIELDSTONE FPCG SERVICES, L.P. By MORGAN STANLEY & CO. INCORPORATED By ILLEGIBLE -------------------------------------- Name: ------------------------ Title: ----------------------- EX-4.6 8 PLACEMENT AGREEMENT - 11/97 1 EXHIBIT 4.6 EXECUTION COPY KITTY HAWK, INC. PLACEMENT AGREEMENT November 13, 1997 Morgan Stanley & Co. Incorporated, for itself and the other several Placement Agents named in Schedule I hereto 1585 Broadway New York, New York 10036-8293 Dear Sirs: Kitty Hawk, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to you (the "Manager") and the other several purchasers named in Schedule I hereto (collectively with the Manager, the "Placement Agents") $340.0 million principal amount of its 9.95% Senior Secured Notes due 2004 (the "Securities") to be issued pursuant to the provisions of an Indenture to be dated as of November 19, 1997 (the "Indenture") among the Company, the Guarantors (as defined below) and Bank One, NA, as trustee (the "Trustee"). Pursuant to the Indenture, the obligations of the Company under the Indenture and the Securities will be guaranteed, jointly and severally, by each subsidiary of the Company other than American International Cargo, a partnership formed under the laws of Michigan ("AIC") as of the Closing Date (as defined below), (collectively, the "Guarantors"). The Placement Agents and their direct and indirect transferees will have a first priority security in the Collateral (as defined in the Indenture) pursuant to the Indenture and the Escrow and Security Agreement. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indenture. The Securities will be offered without being registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on exemptions therefrom. The Placement Agents and their direct and indirect transferees will be entitled to the benefits of a Registration Rights Agreement, to be dated the Closing Date and to be substantially in the form attached hereto as Annex A. In connection with the sale of the Securities, the Company has prepared a preliminary offering memorandum (the "Preliminary Memorandum") and will prepare a final offering memorandum (the "Final Memorandum" and, with the Preliminary Memorandum, each a "Memorandum") setting forth or including a description of the terms of the Securities, the terms of the offering and a description of the Company and its business. As used herein, the 2 term "Final Memorandum" shall mean the Final Memorandum in the form first used to confirm sales of Securities hereunder. 1. Representations and Warranties. Reference is made to the Agreement and Plan of Merger (the "Merger Agreement"), dated September 22, 1997, as amended on October 23, 1997 and October 29, 1997, among American International Airways, Inc., a Michigan corporation, Kalitta Flying Service, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, O.K. Turbines, Inc., a Michigan corporation, and American International Travel, Inc., a Michigan corporation (together with AIC, collectively, the "Kalitta Companies"), Conrad Kalitta, the Company, certain subsidiaries of the company formed for the sole purpose of effecting the Merger (as defined below) and M. Tom Christopher. Pursuant to the Merger Agreement, each of the Kalitta Companies will be merged (collectively, the "Merger") with and into certain subsidiaries of the Company. As a result of the Merger, each of the Kalitta Companies other than AIC will become a wholly owned subsidiary of the Company and AIC will become a subsidiary of the Company. (a) The Company represents and warrants to, and agrees with, you that as of the date hereof: (i) The Preliminary Memorandum as of the date thereof and the Final Memorandum as of the date thereof and on the Closing Date do not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this Section 1(a)(i) do not apply to statements or omissions in either Memorandum based upon information furnished in writing by you expressly for use therein. (ii) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (iii) Each subsidiary of the Company as of the date hereof is listed on Schedule II hereto. The subsidiaries on such schedule denoted thereon with an asterisk will be Guarantors and each such denoted Guarantor has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its 3 3 ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. As of the Closing Date, the Company will own all of the outstanding shares of capital stock of each of the Guarantors free and clear of any and all claims, liens, pledges or other encumbrances, other than liens granted to Wells Fargo Bank (Texas), National Association as referenced in the Final Memorandum. (iv) This Agreement has been duly authorized, executed and delivered by the Company. (v) The Securities have been duly authorized and, when each is executed, authenticated and delivered to and paid for by the Placement Agents in accordance with the terms of this Agreement and the Indenture, will be valid and binding obligations of the Company and the Guarantors enforceable against the Company and each such Guarantor, as the case may be, in accordance with their terms, subject to the effect of any applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers) or reorganization, moratorium or similar laws affecting creditors' rights generally and to the effect of general principles of equity, including without limitation, concepts of materiality, good faith and fair dealing (regardless of whether enforcement is considered in a proceeding in equity or at law). (vi) The Indenture (including the first priority security interest in certain of the Collateral granted thereunder to the Trustee for the benefit of any Holders of the Securities and the guarantee of the obligations of the Company by the Guarantors included therein), the Escrow and Security Agreement, the Merger Agreement and the Registration Rights Agreement have each been duly authorized, executed and delivered by, and, assuming due authorization, execution and delivery by the other parties thereto, are valid and binding agreements of, the Company, enforceable against the Company in accordance with their terms, subject to the effect of any applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and to the effect of general principles of equity, including without limitation, concepts of materiality, good faith and fair dealing (regardless of whether enforcement is considered in a proceeding in equity or at law). (vii) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement, the Escrow and Security Agreement and the Securities will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any agreement or other instrument binding upon the Company or any of its subsidiaries or any judgment, order or decree of any 4 4 governmental body, agency or court having jurisdiction over the Company or any of its subsidiaries, and, with respect to the Merger Agreement, other than as contemplated therein, no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement, the Escrow and Security Agreement or the Securities (except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities and the shares of common stock to be issued to Mr. Kalitta pursuant to the Merger Agreement and except for any such failure to receive such consent, approval, authorization, order or qualification that, singly or in the aggregate, would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger). (viii) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger, from that set forth in the Final Memorandum. (ix) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries as of the date hereof is a party or to which any of the properties of the Company or any of its subsidiaries as of the date hereof is subject other than proceedings accurately described in all material respects in the Final Memorandum and proceedings that would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger, or on the power or ability of the Company to perform its obligations under this Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement, the Escrow and Security Agreement or the Securities or to consummate the transactions contemplated by the Final Memorandum, or on the power or ability of the Guarantors that are currently subsidiaries of the Company to perform their obligations under the Indenture, the Registration Rights Agreement or the Securities, or on the power or ability of Kitty Hawk-AIA, Inc., Kitty Hawk-KFS, Inc., Kitty Hawk-FOL, Inc., Kitty Hawk-O.K., Inc. or Kitty Hawk-AIT, Inc. (each, an "Acquisition Sub" and collectively, the "Acquisition Subs") to perform their obligations under the Merger Agreement. (x) Neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act, an "Affiliate") of the Company has directly, or through any agent, (A) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Securities in a manner that would require the registration under the Securities Act of the Securities or (B) engaged in any form of general 5 5 solicitation or general advertising in connection with the offering of the Securities (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (xi) The Company is not and, immediately after the Transactions and the Refinancings (each as defined in the Final Memorandum), will not be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (xii) Assuming the accuracy of the representations and warranties of the Placement Agents as set forth herein and without giving effect to the terms of the Registration Rights Agreement, it is not necessary in connection with the offer, sale and delivery of the Securities to the Placement Agents in the manner contemplated by this Agreement to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended. (xiii) The Company and its subsidiaries as of the date hereof are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (xiv) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92- 198, Laws of Florida). (xv) Subject to the limitations on enforceability of the Note Guarantees as set forth in the Indenture, each of the Guarantors is, and immediately after the Closing (as defined below) will be, Solvent. As used herein, the term "Solvent" means, with respect to each Guarantor, on a particular date, that on such date (A) the fair market value of the assets of such Guarantor is greater than the total amount of liabilities (including contingent liabilities) of such Guarantor, (B) the present fair salable value of the assets of such Guarantor is greater than the amount that will be required to pay the probable liabilities of such Guarantor on its debts as they become absolute and matured, (C) such Guarantor is able to realize upon its assets and pay its debts and other liabilities, 6 6 including contingent obligations, as they mature and (D) such Guarantor does not have an unreasonably small capital. (xvi) Upon filing of the Indenture at the Federal Aviation Administration ("FAA") registry and the filing of certain UCC-1s in the States of Michigan and Texas with the respective Secretaries of State, the grant of a security interest in the Collateral to the Trustee (other than that granted pursuant to the Escrow and Security Agreement) for the benefit of any Holders of the Securities will constitute a first priority security interest in the Collateral (other than that granted pursuant to the Escrow and Security Agreement), enforceable as against all creditors of the Company or all creditors of any subsidiary thereof following the Merger, subject to certain limitations on enforceability as set forth in the Indenture. Such filings will occur substantially contemporaneously with or prior to the Closing Date. (xvii) Upon the transfer to the Trustee of the Pledged Securities, the acquisition by the Trustee of a security entitlement with respect thereto, the maintenance of the Pledged Securities in a securities account in accordance with the terms of the Escrow and Security Agreement, and the filing of financing statements with the offices of the Texas Secretary of State, the New York Secretary of State and the New York County Recorder, the pledge of and grant of a security interest in the Pledged Securities and the Escrow Account to the Trustee for the benefit of any Holders of the Securities will constitute a first priority perfected security interest in such Pledged Securities and the Escrow Account. (xviii) Other than the permanent approval of the Department of Transportation (the "DOT") required to transfer the Kalitta Companies foreign operating authority to the Company, each of the Company and its subsidiaries as of the date thereof has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including the FAA and all non-U.S. regulatory authorities), all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in each Memorandum, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (xix) Each of the Company and each Acquisition Sub has properly taken all corporate actions and obtained all consents of stockholders necessary to approve the Merger. The Merger will occur substantially contemporaneously with the closing hereunder. 7 7 (xx) The Company's Registration Statement on Form S-1 (the "Registration Statement"), filed with the Securities and Exchange Commission (the "Commission") on September 22, 1997, with respect to 3,000,000 shares of common stock, par value $ .01 per share (the "Common Stock") of the Company, as amended has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (xxi) No event of default has occurred or will occur prior to the Closing Date under any material agreement to which the Company or any of its subsidiaries is a party on a pro forma basis after giving effect to the Transactions and the Refinancings. (xxii) The pro forma financial statements and other pro forma financial information included in each Memorandum present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (xxiii) The statements set forth in the Final Memorandum under the caption "Description of the Notes" insofar as they purport to constitute a summary of the terms of the Securities or the Indenture are accurate and complete in all material respects. (xxiv) The Merger Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, each of the Acquisition Subs, enforceable in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and to the effect of general principles of equity, including without limitation, concepts of materiality, good faith and fair dealing (regardless of whether enforcement is considered in a proceeding in equity or at law). (xxv) The execution and delivery by each of the Acquisition Subs of, and the performance by each of the Acquisition Subs of its obligations under, the Merger Agreement will not contravene any provision of applicable law or the certificate or articles of incorporation or by-laws of such Acquisition Sub or any agreement or other instrument binding upon such Acquisition Sub or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Acquisition Sub, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by any of the Acquisition Subs of its obligations under Merger Agreement, except for any such failure to receive such consent, approval, authorization, order or qualification that, singly or in the aggregate, would not 8 8 have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (b) Each of the Kalitta Companies (other than AIC) represents and warrants to, and agrees with, you that as of the date hereof: (i) The Preliminary Memorandum as of the date thereof and the Final Memorandum as of the date thereof and on the Closing Date, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, not misleading, in each case to the extent related to the Kalitta Companies, except that the representations and warranties set forth in this Section 1(b)(i) do not apply to statements or omissions in either Memorandum based upon information relating to any Placement Agent furnished in writing to the Company by you expressly for use therein. (ii) Each of the Kalitta Companies (other than AIC) has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (iii) AIC has been duly formed and exists as a co-partnership under the laws of the State of Michigan, has the requisite partnership power and authority to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (iv) The Kalitta Companies have no subsidiaries. (v) This Agreement has been duly authorized, executed and delivered by each of the Kalitta Companies (other than AIC). 9 9 (vi) The Merger Agreement has been duly authorized, executed and delivered by each of the Kalitta Companies (other than AIC), and assuming due authorization, execution and delivery by, and binding effect upon the other parties thereto, is a valid and binding agreement of, each of the Kalitta Companies (other than AIC), enforceable against each of the Kalitta Companies (other than AIC) in accordance with its terms subject to the effect of any applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and to the effect of general principles of equity, including without limitation, concepts of materiality, good faith and fair dealing (regardless of whether enforcement is considered in a proceeding in equity or at law). (vii) The execution and delivery by each of the Kalitta Companies (other than AIC) of, and the performance by each of the Kalitta Companies (other than AIC) of its obligations under, this Agreement, the Merger Agreement and the Indenture and the performance by the Kalitta Companies (other than AIC) of their obligations under the Securities will not contravene any provision of applicable law or the articles of incorporation or by-laws of any of the Kalitta Companies (other than AIC) or any agreement or other instrument binding upon any of the Kalitta Companies (other than AIC) or any judgment, order or decree of any governmental body, agency or court having jurisdiction over any of the Kalitta Companies (other than AIC), and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by each of the Kalitta Companies (other than AIC) of its obligations under this Agreement, the Merger Agreement, the Indenture or the Securities (except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities and the shares of common stock to be issued to Mr. Kalitta pursuant to the Merger Agreement and except for any such failure to receive such consent, approval, authorization, order or qualification that, singly or in the aggregate, would not have a material adverse effect to the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger). (viii) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Kalitta Companies, taken as a whole, from that set forth in the Final Memorandum. (ix) There are no legal or governmental proceedings pending or, to the knowledge of the Kalitta Companies, threatened to which any of the Kalitta Companies is a party or to which any of the properties of any of the Kalitta Companies is subject other than proceedings accurately described in all material respects in the Final Memorandum and proceedings that would not have a material adverse effect on the Kalitta Companies or on the power or ability of any of the Kalitta Companies (other than AIC) to perform its 10 10 obligations under this Agreement, the Indenture, the Securities, the Escrow and Security Agreement or the Merger Agreement or to consummate the transactions contemplated by the Final Memorandum. (x) Each of the Kalitta Companies is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct its respective business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (xi) Each of the Kalitta Companies has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and have made all declarations and filings with, all federal, state, local and other governmental authorities (including the FAA and all non-U.S. regulatory authorities), all self- regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in each Memorandum, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger and the Refinancings. (xii) Each of the Kalitta Companies (other than AIC) has properly taken all actions, corporate and otherwise, and obtained all consents of stockholders or partners, as the case may be, necessary to approve the Merger. The Merger will occur substantially contemporaneously with the closing hereunder. (xiii) No event of default has occurred or will occur prior to the Closing Date under any material agreement to which any of the Kalitta Companies is a party, on a pro forma basis after giving effect to the Transactions and Refinancings. (xiv) Neither the Kalitta Companies nor any affiliate of the Kalitta Companies has directly, or through any agent, (A) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Securities in a manner that would require the registration under the Securities Act of the Securities or (B) engaged in any form of general solicitation or general advertising in connection with the offering of the Securities (as those terms are used in Regulation D under the Securities Act) or in any 11 11 manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (c) The Guarantors each represent and warrant to, and agree with, you that as of the date hereof: (i) This Agreement has been duly authorized, executed and delivered by each Guarantor. (ii) The Indenture (including the first priority security interest in certain of the Collateral granted thereunder to the Trustee and any Holders of the Securities and the guarantee of the obligations of the Company by the Guarantors included therein), the Merger Agreement and the Registration Rights Agreement have each been duly authorized, executed and delivered by, and are valid and binding agreements of, each such Guarantor, enforceable in accordance with their terms, subject to the effect of any applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and to the effect of general principles of equity, including without limitation, concepts of materiality, good faith and fair dealing (regardless of whether enforcement is considered in a proceeding in equity or at law). (iii) The execution and delivery by each Guarantor of, and the performance by each of the Guarantors of its obligations under, this Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement and the Escrow and Security Agreement and the performance by each of the Guarantors of its obligations under the Securities will not contravene any provision of applicable law or the certificate or articles of incorporation or by-laws of any Guarantor or any agreement or other instrument binding upon any Guarantor or any of its subsidiaries or any judgment, order or decree of any governmental body, agency or court having jurisdiction over any Guarantor, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by each Guarantor of its obligations under this Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement or the Securities (except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities and the shares of common stock to be issued to Mr. Kalitta pursuant to the Merger Agreement and except for any such failure to receive consent, approval, authorization, order or qualification that, singly or in the aggregate, would not have a material adverse effect to the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger). 12 12 (iv) It is not necessary in connection with the offer, sale and delivery of the Securities to the Placement Agents in the manner contemplated by this Agreement to qualify the Indenture under the Trust Indenture Act of 1939, as amended. (v) Subject to the limitations on enforceability of the Note Guarantees as set forth in the Indenture, each of the Guarantors is, and immediately after the Closing will be, Solvent. (d) The Company and each of its subsidiaries that owns any Collateral and each of the Kalitta Companies that owns any Collateral represents and warrants to, and agrees with, you that as of the date hereof: (i) The Company and each such subsidiary that owns any Collateral and each of the Kalitta Companies that owns any Collateral has good and marketable title to such Collateral which is owned by it; each of the Aircraft owned by the Company or any of its subsidiaries or any of the Kalitta Companies that is included in the Collateral is duly registered in the name of the Company or one of its subsidiaries or one of the Kalitta Companies pursuant to and in accordance with the Federal Aviation Act of 1958, as amended (the "Aviation Act"), and title to such Aircraft is vested in the Company or such subsidiary or one of the Kalitta Companies; in each case title to such Aircraft is held by the Company or one of its subsidiaries or the Kalitta Companies, as the case may be, free and clear of all liens, encumbrances and defects, except (x) those that arise by operation by law and will be discharged in accordance with customary practices, (y) those that are described in the Final Memorandum and (z) those that do not materially affect the value of such Aircraft and do not interfere with the use made and proposed to be made of such Aircraft by the Company and its subsidiaries or the Kalitta Companies, as the case may be. (ii) Upon filing of the Indenture at the FAA registry and the filing of certain UCC-1s in the States of Michigan and Texas with the respective Secretaries of State, the grant of a security interest in the Collateral to the Trustee (other than that granted pursuant to the Escrow and Security Agreement) for the benefit of any Holders of the Securities will constitute a first priority security interest in the Collateral (other than that granted pursuant to the Escrow and Security Agreement), enforceable as against all creditors of the Company or all creditors of any subsidiary thereof following the Merger, subject to certain limitations on enforceability as set forth in the Indenture. Such filings will occur substantially contemporaneously with or prior to the Closing Date. 2. Offering. You have advised the Company that the Placement Agents will make an offering of the Securities purchased by the Placement Agents hereunder on the terms set forth in the Final Memorandum as soon as practicable after this Agreement is entered into as in your judgment is advisable. 13 13 3. Purchase and Delivery. The Company hereby agrees to sell to the several Placement Agents, and the Placement Agents, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agree, severally and not jointly, to purchase from the Company the respective principal amount of Securities set forth in Schedule I hereto opposite their names at a purchase price of 97% of the principal amount thereof. Payment for the Securities shall be made against delivery of the Securities at a closing (the "Closing") to be held at the office of Haynes and Boone, LLP, 3100 Nations Bank Plaza, 901 Main Street, Dallas, Texas, at 10:00 A.M., local time, on November 19, 1997 or at such other time on the same or such other date, not later than December 19, 1997 as shall be designated in writing by you. The time and date of such payment are herein referred to as the Closing Date. Payment for the Securities shall be made by wire transfer of immediately available funds to the respective bank accounts designated in writing by the Company. One or more certificates for the Securities shall be in definitive form and registered in such names and in such denominations as you shall request in writing not less than two full business days prior to the Closing Date. The certificates evidencing the Securities shall be delivered to you on the Closing Date for the respective accounts of the several Placement Agents, with any transfer taxes payable in connection with the transfer of the Securities to the Placement Agents duly paid. 4. Conditions to Closing. (a) The obligations of the Company, each of the Guarantors and each of the Kalitta Companies, and the several obligations of the Placement Agents hereunder are subject to the condition that (i) the Registration Statement shall have become effective not later than the date hereof, (ii) the Merger shall occur substantially contemporaneously with the Closing hereunder and (iii) the closing of the offering by the Company and certain selling stockholders named in the Registration Statement on Form S-1 of approximately 3,000,000 shares of Common Stock shall occur substantially contemporaneously with the Closing hereunder. (b) The several obligations of the Placement Agents under this Agreement to purchase the Securities will be subject to the following conditions: (i) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, (A) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded the Securities by any "nationally recognized 14 14 statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (B) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations, of the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger, from that set forth in the Final Memorandum that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Final Memorandum. For the purposes hereof, it is agreed that (i) the loss of the operating certificate of any of the Company, its subsidiaries or the Kalitta Companies, (ii) any regulatory order to materially curtail or otherwise materially limit the use of any of the aircraft of the Company or its subsidiaries or the Kalitta Companies (other than pursuant to an existing Notice of Proposed Rule Making issued by the FAA, the DOT, the National Transportation Safety Board ("NTSB") or any other regulatory authority) or (iii) any accident (as defined in the regulations of the NTSB) of a material nature involving any aircraft (other than turbo-prop or piston aircraft) operated by the Company, its subsidiaries or the Kalitta Companies would constitute a material and adverse change in the condition of Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger. (ii) You shall have received on the Closing Date certificates, dated the Closing Date and signed by (i) an executive officer of the Company (solely in his capacity as such) (ii) an executive officer of each of the Guarantors (solely in his capacity as such) and (iii) an executive officer of each of the Kalitta Companies (other than AIC) (solely in his capacity as such) to the effect that the representations and warranties of the Company, the Guarantors and the Kalitta Companies (other than AIC), respectively, contained in this Agreement are true and correct as of the Closing Date and that the Company, the Guarantors and the Kalitta Companies (other than AIC), respectively, have each complied with all of the agreements and satisfied all of the conditions on their part to be performed or satisfied hereunder by it on or before the Closing Date. The officer signing and delivering such certificates of the Company, the Kalitta Companies (other than AIC) and the Guarantors may rely upon the best of his knowledge as to proceedings threatened and such certificates will be expressly so qualified. (iii) You shall have received on the Closing Date an opinion of Haynes and Boone, LLP, independent counsel for the Company, dated the Closing Date, to the effect set forth in Exhibit A. 15 15 (iv) You shall have received on the Closing Date opinions of Burke, Wright & Keiffer, P.C., counsel for the Company, dated the Closing Date, to the effect set forth in Exhibit B. (v) You shall have received on the Closing Date an opinion of Miller, Canfield, Paddock & Stone, P.L.C., independent special counsel for the Kalitta Companies, dated the Closing Date, to the effect set forth in Exhibit C. (vi) You shall have received on the Closing Date an opinion of Kelsey Law Offices, P.C., independent counsel for the Kalitta Companies, dated the Closing Date, to the effect set forth in Exhibit D. (vii) You shall have received on the Closing Date an opinion of Shearman & Sterling, counsel for the Placement Agents, dated the Closing Date, in form and substance reasonably satisfactory to you covering (i) due authorization, execution and delivery of this Agreement, the Escrow and Security Agreement, the Merger Agreement and the Registration Rights Agreement, (ii) the validity of the Securities, (iii) the accuracy of certain legal summaries in the Final Memorandum and (iv) the private placement of the Securities. You shall have received from Shearman & Sterling a letter, in form and substance reasonably satisfactory to you, commenting on the adequacy of the disclosure contained in the Memorandum. (viii) You shall have received on each of the date hereof and the Closing Date a letter, dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Ernst & Young LLP, the Company's independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements, and certain other financial information including pro forma financial statements contained in the Memorandum. (ix) You shall have received on each of the date hereof and the Closing Date a letter, dated the date hereof of the Closing Date, as the case may be, in form and substance satisfactory to you, from Deloitte & Touche, LLP, the Kalitta Companies' independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters in the respect to the financial statements and certain other financial information, other than the pro forma financial statements contained in the Memorandum. 5. Covenants of the Company. In further consideration of the agreements of the Placement Agents contained in this Agreement, the Company and the Guarantors covenant as follows: 16 16 (a) To furnish to you, without charge, during the period mentioned in paragraph (c) below, as many copies of the Final Memorandum, any documents incorporated by reference therein and any supplements and amendments thereto as you shall reasonably request. (b) Before amending or supplementing either Memorandum, to furnish to you a copy of each such proposed amendment or supplement and not to use any such proposed amendment or supplement to which you reasonably object in writing. (c) If, during such period after the date hereof and prior to the date on which all of the Securities shall have been sold by the Placement Agents, any event shall occur or condition exist as a result of which it is necessary in your judgment to amend or supplement the Final Memorandum in order to make the statements therein, in the light of the circumstances when such Memorandum is delivered to a purchaser, not misleading, or if, with the reasonable opinion of counsel to the Placement Agents it is necessary to amend or supplement such Memorandum to comply with applicable law, forthwith to prepare and furnish, at its own expense, to the Placement Agents, either amendments or supplements to such Memorandum so that the statements in such Memorandum as so amended or supplemented will not, in the light of the circumstances when such Memorandum is delivered to a purchaser, be misleading or so that such Memorandum, as so amended or supplemented, will comply with applicable law. (d) To endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) Whether or not any sale of such Securities is consummated, to pay all expenses incident to the performance of its obligations under this Agreement, including: (i) the preparation of each Memorandum and all amendments and supplements thereto, (ii) the preparation, issuance and delivery of the Securities, (iii) the fees and disbursements of the Company's counsel and accountants and the Trustee and its counsel, (iv) the qualification of such Securities under securities or Blue Sky laws in accordance with the provisions of Section 5(d), including filing fees and the fees and disbursements of counsel for the Placement Agents in connection therewith and in connection with the preparation of any Blue Sky or legal investment memoranda, (v) the printing and delivery to the Placement Agents in quantities as hereinabove stated of copies of the Memorandum and any amendments or supplements thereto, (vi) any fees charged by rating agencies for the rating of such Securities, (vii) all reasonable document production charges and expenses of counsel to the Placement Agents (but not including their fees for professional services) in connection with the preparation of this Agreement, (viii) the fees and expenses, if any, incurred in connection with the admission of such Securities for trading in PORTAL and the Luxembourg Stock Exchange, (ix) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in 17 17 connection with the marketing of the Securities, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expense of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, and (x) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. (f) Neither the Company nor any Affiliate will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) which could be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities. (g) Not to solicit any offer to buy or offer or sell the Securities by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (h) While any of the Securities remain outstanding, to make available, upon request, to any seller of such Securities the information specified in Rule 144A(d)(4) under the Securities Act, unless the Company and the Guarantors are then subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (i) None of the Company, the Guarantors, their Affiliates or any person acting on behalf of any of them (other than the Placement Agents) will engage in any directed selling efforts (as that term is defined in Regulation S) with respect to the Securities, and the Company and its Affiliates and each person acting on its or their behalf (other than the Placement Agents) will comply with the offering restrictions of Regulation S. (j) To use their reasonable best efforts to permit the Securities to be (i) designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in the PORTAL Market and (ii) listed on the Luxembourg Stock Exchange. 6. Representations and Warranties of the Placement Agent; Offering of Securities; Restrictions on Transfer. (a) Each Placement Agent, severally and not jointly, represents and warrants to the Company, each of the Guarantors and each of the Kalitta Companies that such Placement Agent is a qualified institutional buyer as defined in Rule 144A under the Securities Act (a "QIB"). Each Placement Agent, severally and not jointly, agrees with 18 18 the Company that (i) it will not solicit offers for, or offer or sell, such Securities by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act and (ii) it will solicit offers for such Securities only from, and will offer such Securities only to, persons that it reasonably believes to be (A) in the case of offers inside the United States, (x) QIBs or (y) other institutional accredited investors (as defined in Rule 501(a) (1), (2), (3) or (7) under the Securities Act) ("institutional accredited investors") that, prior to their purchase of the Securities, deliver to such Placement Agent a letter containing the representations and agreements set forth in Annex A to the Memorandum and (B) in the case of offers outside the United States, to persons other than U.S. persons ("foreign purchasers", which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust)) that, in each case, in purchasing such Securities are deemed to have represented and agreed as provided in the Final Memorandum under the caption "Transfer Restrictions." (b) Each Placement Agent, severally and not jointly, represents, warrants, and agrees with respect to offers and sales outside the United States that: (i) it understands that no action has been or will be taken in any jurisdiction by the Company that would permit a public offering of the Securities, or possession or distribution of either Memorandum or any other offering or publicity material relating to the Securities, in any country or jurisdiction where action for that purpose is required; (ii) such Placement Agent will comply with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers Securities or has in its possession or distributes either Memorandum or any such other material, in all cases at its own expense; (iii) the Securities have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act; (iv) such Placement Agent has (A) not offered or sold and will not offer or sell any Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 (the "Regulations"); (B) complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Regulations with respect to anything done by it in relation to the Securities in, from or otherwise involving the United Kingdom; and (C) 19 19 only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the Securities if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom such document may otherwise lawfully be issued or passed on; and (v) such Placement Agent understands that the Securities have not been and will not be registered under the Securities and Exchange Law of Japan, and represents that it has not offered or sold, and agrees that it will not offer or sell, any Securities, directly or indirectly in Japan or to any resident of Japan except (A) pursuant to an exemption from the registration requirements of the Securities and Exchange Law of Japan and (B) in compliance with any other applicable requirements of Japanese law. 7. Indemnification and Contribution. (a) The Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless each Placement Agent, and each person, if any, who controls such Placement Agent within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under common control with, or is controlled by, such Placement Agent, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Placement Agent or any such controlling of affiliated person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in either Memorandum (as amended or supplemented if the Company and the Guarantors shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished to the Company in writing by such Placement Agent through you expressly for use therein; provided, however, that the indemnification contained in this paragraph with respect to any Preliminary Memorandum shall not inure to the benefit of a Placement Agent (or to the benefit of any director or officer of such Placement Agent or any person controlling or under common control with such Placement Agent) on account of any such loss, claim, damage, liability or expense arising from the sale of the Securities by such Placement Agent to any person if a copy of the Final Memorandum shall not have been delivered or sent to such person at or prior to the written confirmation of such sale, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Preliminary Memorandum was corrected in the Final Memorandum. (b) Each Placement Agent agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, their directors and officers, and each person, if any, who controls the Company and the Guarantors within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing 20 20 indemnity from the Company and the Guarantors to such Placement Agent, but only with reference to information relating to such Placement Agent furnished to the Company and the Guarantors in writing by such Placement Agent through you expressly for use in either Memorandum or any amendments or supplements thereto. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or (b) above, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Morgan Stanley & Co. Incorporated in the case of parties indemnified pursuant to paragraph (a) above and by the Company and the Guarantors in the case of parties indemnified pursuant to paragraph (b) above. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 21 21 (d) To the extent the indemnification provided for in paragraph (a) or (b) of this Section 7 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Placement Agents, on the other hand, from the offering of such Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Guarantors on the one hand and the Placement Agents on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors on the one hand and the Placement Agents on the other hand in connection with the offering of such Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of such Securities (before deducting expenses) received by the Company and the Guarantors and the total discounts and commissions received by the Placement Agents in respect thereof bear to the aggregate offering price of such Securities. The relative fault of the Company and the Guarantors on the one hand and of the Placement Agents on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Guarantors on the one hand or by the Placement Agents on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Placement Agents' respective obligations to contribute pursuant to this Section 7 are several in proportion to the respective principal amount of Securities they have purchased hereunder, and not joint. (e) The Company, each of the Guarantors and each of the Placement Agents agree that it would not be just or equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Placement Agents were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, no Placement Agent shall be required to contribute any amount in excess of the amount by which the total price at which the Securities resold by it in the initial placement of such Securities were offered to investors exceeds the amount of any damages that such Placement Agent has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from 22 22 any person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution provisions contained in this Section 7 and the representations and warranties of the Company and the Guarantors contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Placement Agents or any person controlling the Placement Agents or by or on behalf of the Company, its officers or directors or any person controlling the Company or the Guarantors, their officers or directors or any Person controlling the Guarantors and (iii) acceptance of and payment for any of the Securities. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. You hereby confirm to the Company that the last full paragraph of text on the front cover page of the Final Memorandum and the statements under the caption "Private Placement" is the only information that has been furnished to the Company by you expressly for use in the Final Memorandum. 8. Termination. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Luxembourg Stock Exchange, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities, (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your reasonable judgment, is material and adverse or (v) (A) the Company or any of its subsidiaries or any of the Kalitta Companies (1) loses its FAA operating certificate, or (2) receives any regulatory order which materially curtails or otherwise materially limits the use of any of the aircraft of the Company or its subsidiaries or the Kalitta Companies (other than pursuant to an existing Notice of Proposed Rule Making issued by the FAA, the DOT, the NTSB or any other regulatory authority), or (B) there shall occur any accident (as defined in the regulations of the NTSB) of a material nature involving any aircraft (other than turbo-prop or piston aircraft) operated by the Company, its subsidiaries or the Kalitta Companies and (b) in the case of any of the events specified in clauses (a)(i) through (v), such event singly or together with any other such event makes it, in your reasonable judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Final Memorandum. 9. Miscellaneous. If, on the Closing Date, any one or more of the Placement Agents shall fail or refuse to purchase Securities that it or they have agreed to purchase hereunder on such date, and the aggregate principal amount of Securities which such defaulting Placement Agent or Placement Agents agreed but failed or refused to purchase is not more than 23 23 one-tenth of the aggregate principal amount of Securities to be purchased on such date, the other Placement Agents shall be obligated severally in the proportions that the principal amount of Securities set forth opposite their respective names in Schedule I bears to the aggregate principal amount of Securities set forth opposite the names of all such non- defaulting Placement Agents, or in such other proportions as you may specify, to purchase the Securities which such defaulting Placement Agent or Placement Agents agreed but failed or refused to purchase on such date; provided that in no event shall the principal amount of Securities that any Placement Agent has agreed to purchase pursuant to Section 3 be increased pursuant to this Section 9 by an amount in excess of one-ninth of such principal amount of Securities without the written consent of such Placement Agent. If, on the Closing Date, any Placement Agent or Placement Agents shall fail or refuse to purchase Securities which it or they have agreed to purchase hereunder on such date and the aggregate principal amount of Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Securities to be purchased on such date and arrangements satisfactory to you and the Company for the purchase of such Securities are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Placement Agent or of the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Final Memorandum or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Placement Agent from liability in respect of any default of such Placement Agent under this Agreement. 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. If this Agreement shall be terminated by the Placement Agents, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Placement Agents or such Placement Agents as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Placement Agents in connection with this Agreement or the offering contemplated hereunder. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. 24 Please confirm your agreement to the foregoing by signing in the space provided below for that purpose and returning to us a copy hereof, whereupon this Agreement shall constitute a binding agreement between us. Very truly yours, KITTY HAWK, INC. By: ---------------------------------- KITTY HAWK CHARTER, INC. By: ---------------------------------- AIRCRAFT LEASING, INC. By: ---------------------------------- KITTY HAWK AIRCARGO, INC. By: ---------------------------------- AMERICAN INTERNATIONAL AIRWAYS, INC. By: ---------------------------------- 25 KALITTA FLYING SERVICE, INC. By: ---------------------------------- FLIGHT ONE LOGISTICS, INC. By: ---------------------------------- O.K. TURBINES, INC. By: ---------------------------------- AMERICAN INTERNATIONAL TRAVEL, INC. By: ---------------------------------- 26 Agreed, November 19, 1997 Morgan Stanley & Co. Incorporated Acting severally on behalf of itself and the several Placement Agents named herein. By Morgan Stanley & Co. Incorporated By: ----------------------------- 27 SCHEDULE I
Principal Amount of Securities Placement Agent to Be Purchased --------------- --------------------- Morgan Stanley & Co. Incorporated $204,000,000 BT Alex. Brown Incorporated $102,000,000 Fieldstone FPCG Services, L.P. $ 34,000,000 ------------ Total . . . . . . . . . . . $340,000,000 ============
28 SCHEDULE II
Ownership State of Subsidiary Percentage Incorporation - ---------- ---------- ------------- Kitty Hawk Charter, Inc.* 100% Texas Aircraft Leasing, Inc.* 100% Texas Kitty Hawk Aircargo, Inc.* 100% Texas Kitty Hawk - AIA, Inc. 100% Michigan Kitty Hawk - KFS, Inc. 100% Michigan Kitty Hawk - FOL, Inc. 100% Michigan Kitty Hawk - O.K., Inc. 100% Michigan Kitty Hawk - AIT, Inc. 100% Michigan
29 EXHIBIT A [To be provided by H&B] Include H&B statement regarding good standing certificates of Aircraft Leasing, Inc. 30 EXHIBIT B [Jim Craig] Opinion of Counsel for the Company The opinion of the counsel for the Company to be delivered pursuant to Section 4(iv) of the Placement Agreement shall be to the effect that: (A) to the best of such counsel's knowledge, the execution and delivery by the Company of, and the performance by the Company of its obligations under, the Placement Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement, the Escrow and Security Agreement and the Securities will not contravene any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary (except for any such contravention that, singly or in the aggregate, would not have a material adverse effect to the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger), and, with respect to the Merger Agreement, other than as contemplated by the Merger Agreement, no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under the Placement Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement, the Escrow and Security Agreement or the Securities (except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities by the Placement Agents and the shares of common stock to be issued to Mr. Kalitta pursuant to the Merger Agreement and except for such failure to receive such consent, approval, authorization, order or qualification that, singly or in the aggregate, would not have a material adverse effect to the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger); (B) to the best of such counsel's knowledge, the execution and delivery by each of the Guarantors (other than the Kalitta Companies) of, and the performance by each such Guarantor of its obligations under, the Placement Agreement, the Escrow and Security Agreement, the Indenture and the Registration Rights Agreement and the performance by each such Guarantor of its obligations under the Securities will not contravene any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Guarantor (except for any such contravention that, singly or in the aggregate, would not have a material adverse effect to the Company and its subsidiaries, taken as a whole, after giving pro forma effect to the Merger), and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Guarantor or its subsidiaries of its obligations under the Placement Agreement, the Indenture, the Registration Rights Agreement or the Securities, (except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities by B-1 31 the Placement Agents and the shares of common stock to be issued to Mr. Kalitta pursuant to the Merger Agreement and except for such failure to such receive consent, approval, authorization, order or qualification that, singly or in the aggregate, would not have a material adverse effect to the Company and its subsidiaries, taken as a whole after giving pro forma effect to the Merger); (C) such counsel does not know of any legal or governmental proceeding pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject other than proceedings accurately described in all material respects in the Final Memorandum and proceedings that such counsel believes are not likely to have a material adverse effect on the Company and its subsidiaries, taken as a whole after giving pro forma effect to the Merger, or on the power or ability of the Company to perform its obligations under the Placement Agreement, the Indenture, the Merger Agreement, the Registration Rights Agreement, the Escrow and Security Agreement or the Securities or to consummate the transactions contemplated by the Final Memorandum, or on the power or ability of the Guarantors (other than the Kalitta Companies) to perform their obligations under the Placement Agreement, the Indenture, the Registration Rights Agreement or the Securities; (D) Upon filing of the Indenture at the Federal Aviation Administration ("FAA") registry and the filing of certain UCC-1s in the States of Michigan and Texas, the grant of a security interest in the Collateral (other than the Pledged Securities and the Escrow Account) for the benefit of any Holders of the Securities will constitute a first priority security interest in the Collateral (other than the Pledged Securities and the Escrow Account), enforceable as against all creditors of the Company and all creditors of any subsidiary thereof, subject to certain limitations on enforceability as set forth in the Indenture; and (E) (i) The Indenture is in due form for recording in accordance with the Aviation Act, and (ii) assuming that the Indenture is properly recorded in accordance with the Aviation Act, the Lien of the Indenture creates for the benefit of the Trustee a valid first priority security interest in the Aircraft in the United States. B-2 32 EXHIBIT C [Miller, Canfield] Opinion of Special Counsel for the Kalitta Companies The opinion of the special counsel for the Kalitta Companies to be delivered pursuant to Section 4(v) of the Placement Agreement shall be to the effect that: (A) each of the Kalitta Companies (other than AIC) is duly incorporated, validly existing as a corporation under the laws of the State of Michigan and has the requisite corporate power and authority to own its property and to conduct its business as described in the Final Memorandum (references herein to the Final Memorandum being taken to mean the same, as amended or supplemented); (B) the Placement Agreement has been duly authorized, executed and delivered by each of the Kalitta Companies (other than AIC); (C) the Merger Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, each of the Kalitta Companies (other than AIC), enforceable in accordance with its terms except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration, if applicable, and the availability of equitable remedies may be limited by equitable principles of general applicability; (D) the execution and delivery by each of the Kalitta Companies (other than AIC) of, and the performance by each of the Kalitta Companies (other than AIC) of its obligations under, the Placement Agreement, the Merger Agreement and the Indenture and the performance by the Kalitta Companies (other than AIC) of their obligations under the Securities will not contravene its articles of incorporation or by-laws; and (E) the Kalitta Companies have properly taken all actions, corporate and otherwise, and obtained all consents of stockholders, necessary to approve the Merger; the Merger will be effective upon the filing of certificates of merger with the Department of Consumer and Industry Services of the State of Michigan in accordance with the terms and provisions of the Merger Agreement. Miller, Canfield, Paddock & Stone, P.L.C. shall confirm in its opinion letter that it has received certificates of good standing dated not earlier than five days prior to the Closing Date for the Company from the State of Michigan, which certificates shall be attached as an exhibit to such opinion. C-1 33 Subject to the qualification that such counsel has not undertaken in its opinion to independently determine or otherwise verify, and does not assume any responsibility for, the accuracy or completeness of the statements in the Final Memorandum, and based solely upon the participation of such counsel in various meetings at which representatives of each of Kitty Hawk, the Kalitta Companies and the Placement Agents and their respective counsel and independent accountants were at various times present, nothing has come to the attention of such counsel that has caused it to believe that anything contained in the Final Memorandum relating to the Kalitta Companies and their respective businesses and assets, as of the date of the Final Memorandum and as of the Closing Date, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein to make the statements therein relating to the Kalitta Companies, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and the other financial or statistical data included in the Final Memorandum). In rendering such opinions, such counsel may make qualifications and assumptions customary to the transactions contemplated by this Agreement, including, without limitation, that such opinions shall be limited exclusively and in all respects to the federal laws of the United States of America and the laws of the State of Michigan (but not including the laws of the any of the political subdivisions thereof), and shall not be deemed to be opinions with respect to the laws of any other state or foreign jurisdiction; because the Merger Agreement and the Placement Agreement are by their terms governed respectively by the laws of the States of Texas and New York, for purposes of its opinions, such counsel may assume that the internal substantive laws of the State of Michigan govern the Merger Agreement and the Placement Agreement rather than the laws of the States of Texas and New York, and need not express any opinion as to what law will actually govern the Merger Agreement or the Placement Agreement. C-2 34 EXHIBIT D [Kelsey] Opinion of Counsel for the Kalitta Companies The opinion of the counsel for the Kalitta Companies to be delivered pursuant to Section 4(vi) of the Placement Agreement shall be to the effect that: (A) the execution and delivery by each of the Kalitta Companies (other than AIC) of, and the performance by each of the Kalitta Companies (other than AIC) of its obligations under, the Placement Agreement, the Merger Agreement, the Registration Rights Agreement and the Indenture and the performance by the Kalitta Companies of their obligations under the Securities will not contravene (i) to such counsel's knowledge, any agreement or other instrument binding upon any of the Kalitta Companies that is material to the Kalitta Companies, taken as a whole, or (ii) to such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over any of the Kalitta Companies (other than AIC), and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by any of the Kalitta Companies (other than AIC) or its subsidiaries of their obligations under the Placement Agreement, the Merger Agreement, the Indenture, the Registration Rights Agreement or the Securities; and (B) such counsel does not know of any legal or governmental proceedings pending or threatened to which any of the Kalitta Companies is a party or to which any of the properties of any of the Kalitta Companies is subject other than proceedings fairly summarized in all material respects in the Final Memorandum and proceedings which such counsel believes are not likely to have a material adverse effect on the Kalitta Companies, taken as a whole, or on the power or ability of any of the Kalitta Companies to perform their obligations under the Placement Agreement, the Indenture, the Registration Rights Agreement, the Securities or the Merger Agreement or to consummate the transactions contemplated by the Final Memorandum. Kelsey Law Offices, P.C. shall also confirm that, to its knowledge (based solely upon the investigation described in such opinion letter), the description in the Final Memorandum under the caption "Business--Legal Proceedings" constitutes a fair summary in all material respects of such proceedings insofar as they relate to the Kalitta Companies. EX-4.7 9 1ST SUPPLEMENTAL INDENTURE DATED FEBRUARY 5, 1998 1 ================================================================================ Exhibit 4.7 KITTY HAWK, INC., As Issuer KITTY HAWK AIRCARGO, INC. KITTY HAWK CHARTERS, INC. AIRCRAFT LEASING, INC. AMERICAN INTERNATIONAL AIRWAYS, INC. AMERICAN INTERNATIONAL TRAVEL, INC. KALITTA FLYING SERVICE, INC. O.K. TURBINES, INC. FLIGHT ONE LOGISTICS, INC. As Guarantors AND BANK ONE, NA As Trustee and Collateral Trustee ------------------------------ FIRST SUPPLEMENTAL INDENTURE Dated as of February 5, 1998 to INDENTURE Dated as of November 15, 1997 ------------------------------ $340,000,000 9.95% Senior Secured Notes Due 2004 ================================================================================ 2 FIRST SUPPLEMENTAL INDENTURE, dated as of February 5, 1998, among KITTY HAWK, INC., a Delaware corporation (the "Company"), as Issuer, KITTY HAWK AIRCARGO, INC., a Texas corporation, KITTY HAWK CHARTERS, INC., a Texas corporation, AIRCRAFT LEASING, INC., a Texas corporation, AMERICAN INTERNATIONAL AIRWAYS, INC., a Michigan corporation ("AIA"), AMERICAN INTERNATIONAL TRAVEL, INC., a Michigan corporation, KALITTA FLYING SERVICE, INC., a Michigan corporation, O.K. TURBINES, INC., a Michigan corporation, FLIGHT ONE LOGISTICS, INC., a Michigan corporation, as Guarantors (collectively, the "Guarantors"), and BANK ONE, NA, as Trustee (the "Trustee"). W I T N E S S E T H: WHEREAS, the Company and the Guarantors have heretofore executed and delivered to the Trustee a certain indenture, dated as of November 15, 1997, which was recorded by the FAA on December 8, 1997 and assigned Conveyance No. T055950 (the "Indenture"), pursuant to which $340,000,000 aggregate principal amount of 9.95% Senior Secured Notes Due 2004 (collectively, the "Notes") were issued by the Company and unconditionally guaranteed by the Guarantors; and WHEREAS the Company and the Guarantors desire and have requested the Trustee to join with it in the execution and delivery of this First Supplemental Indenture for the purpose of furnishing additional collateral to secure the Company's and the Guarantor's obligations under the Indenture; and WHEREAS, Section 9.01 of the Indenture provides that a supplemental indenture may be entered into among the Company, the Guarantor, and the Trustee without the consent of holders of Notes for certain purposes; and WHEREAS, the Company has furnished the Trustee with an Officer's Certificate complying with the requirements of Sections 11.03 and 11.04 of the Indenture; and WHEREAS, the Company has furnished the Trustee with an Opinion of Counsel complying with the requirements of Sections 9.05, 11.03 and 11.04 of the Indenture; and WHEREAS, all things necessary to make this First Supplemental Indenture a valid agreement of the Company and the Guarantors and the Trustee and a valid amendment of and supplement to the Indenture have been done; AMERICAN INTERNATIONAL AIRWAYS, INC. GRANTING CLAUSE NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH, for and in consideration of the premises and the purchase of the Notes by the Holders thereof, to secure the prompt payment of the principal of and interest on, and all other amounts due with respect to, all Notes from time to time outstanding under the Indenture and the performance and observance by the Company of all the agreements, covenants and provisions for the benefit of the Holders in the Indenture and the Notes contained, and the prompt payment of any and all amounts from time to time owing under the Indenture by the Company to the Trustee, and for the uses and purposes and subject to the terms and provisions hereof, and in consideration of the premises and the covenants herein contained, and the acceptance of the Notes by the Holders and of the - 2 - 3 sum of $1 paid to the Company by the Collateral Trustee at or before the delivery hereof, the receipt whereof is hereby acknowledged, AIA has granted, sold, assigned, transferred, conveyed, pledged and confirmed, and does hereby grant, assign, transfer, convey, pledge and confirm, unto the Collateral Trustee and its successors and assigns, for the security and benefit of the Holders and the Trustee as aforesaid, a first priority security interest in all estate, right, title and interest of AIA in, to and under the following described property, rights and privileges (which, collectively, including all property hereafter specifically subjected to the Lien of the Indenture and this First Supplemental Indenture by any agreement supplemental hereto or thereto, or otherwise expressly subject to the terms and provisions hereof or thereof, shall constitute a portion of the Collateral, to wit: (i) two Boeing 747s, along with their engines, as specified on Schedule A hereto (collectively, known, herein and in the Indenture, as the "Optioned Boeing 747s"); (ii) all insurance and requisition proceeds and other similar payments with respect to each of the Optioned Boeing 747s; (iii) all monies or securities deposited or required to be deposited with the Trustee; (iv) any purchase agreements and any related documentation to the extent assignable for each Optioned Boeing 747; and (v) all logs, data and records related to the Optioned Boeing 747s; and (vi) all proceeds of the foregoing, other than accounts; and (vii) all rights of AIA under any Lease relating to the Optioned Boeing 747s. PROVIDED, HOWEVER, that notwithstanding any of the foregoing provisions, so long as no Event of Default shall have occurred and be continuing under the Indenture, (a) the Collateral Trustee shall not take or cause to be taken any action contrary to the Company's right hereunder to quiet enjoyment of the Optioned Boeing 747s and related hush kits, and to possess, use, retain and control the Optioned Boeing 747s and related hush kits and all revenues, income and profits derived therefrom. AIA HABENDUM CLAUSE TO HAVE AND TO HOLD ALL and singular and aforesaid property unto the Collateral Trustee and its successors and assigns, in trust for the benefit and security of the Holders and the Trustee and for the uses and purposes and subject to the terms and provisions set forth in the Indenture; provided, however, that the Lien of this First Supplemental Indenture and the Indenture shall be subject to discharge as provided in Section 8.02 of the Indenture. AIA does hereby constitute the Collateral Trustee the true and lawful attorney of AIA, irrevocably, with full power (in the name of AIA or otherwise) to ask, require, - 3 - 4 demand, receive, compound and give acquittance for any and all monies and claims for monies (in each case including insurance and requisition proceeds) due and to become due under or arising out of the Indenture and this First Supplemental Indenture and any documents related hereto and all other property which now or hereafter constitutes part of the Optioned Boeing 747s, to endorse any checks or other instruments or orders in connection therewith and to file any claims or to take any action or to institute any proceedings which the Collateral Trustee may deem to be necessary or advisable in the premises; providing, however, that the Collateral Trustee shall not exercise any such rights except upon the occurrence of an Event of Default under the Indenture. AIA agrees that at any time and from time to time, upon the written request of the Collateral Trustee or the Holder of a majority in principal amount of the Notes outstanding, AIA will promptly and duly execute and deliver or cause to be duly executed and delivered any and all such further instruments and documents as the Collateral Trustee or such Holder of a majority in principal amount of the Notes outstanding may reasonably deem desirable in obtaining the full benefits of the assignment hereunder and the rights and powers granted herein. ARTICLE TWO Section 2.01 Defined Terms. All terms used in this First Supplemental Indenture not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. Section 2.02 Execution in Counterparts. This First Supplemental Indenture may be executed in any number of counterparts. Each such counterpart shall be an original, but such counterparts shall together constitute one and the same instrument. Section 2.03 Confirmation of Indenture. Except as amended and supplemented hereby, all of the provisions of the Indenture shall remain and continue in full force and effect and are hereby confirmed in all respects. * * * * * - 4 - 5 IN WITNESS WHEREOF, the Company and each of the Guarantors has caused this First Supplemental Indenture to be duly executed and the Trustee has caused this First Supplemental Indenture to be duly executed, all as of the day and year first above written. KITTY HAWK, INC., as Issuer By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Senior Vice President-Finance KITTY HAWK CHARTERS, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Vice President AIRCRAFT LEASING, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: President KITTY HAWK AIRCARGO, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Vice President AMERICAN INTERNATIONAL AIRWAYS, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Vice President - 5 - 6 KALITTA FLYING SERVICE, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Vice President FLIGHT ONE LOGISTICS, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Vice President O.K. TURBINES, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Vice President AMERICAN INTERNATIONAL TRAVEL, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------------- Name: Richard R. Wadsworth Title: Vice President BANK ONE, NA, as Trustee and Collateral Trustee By: /s/ JON BEACHAM ------------------------------------------- Name: Jon Beacham Title: Trust Officer - 6 - 7 SCHEDULE A -6- 8 Schedule A
- ------------------------------------------------------------------------------------------------------------------------------------ Airframe Manufacturer and Serial Number U.S. Reg. No. Engine Manufacturer and Serial Numbers Model Model - ------------------------------------------------------------------------------------------------------------------------------------ Boeing 747-2B4B 21098 N203AE Pratt Whitney JT9D- 689475, 689461, 689497, 689460 7JCN - ------------------------------------------------------------------------------------------------------------------------------------ Boeing 747-2B4B 21099 N204AE Pratt Whitney JT9D- 689522, 689477, 689458, 689478 7JCN - ------------------------------------------------------------------------------------------------------------------------------------
Engines have 750 or more rated takeoff horsepower. - 7 - EX-5.1 10 OPINION OF HAYNES AND BOONE LLP 1 EXHIBIT 5.1 [HAYNES AND BOONE, LLP LETTERHEAD] February 3, 1998 Kitty Hawk, Inc. Kitty Hawk Aircargo, Inc. Kitty Hawk Charters, Inc. Aircraft Leasing, Inc. American International Airways, Inc. American International Travel, Inc. O.K. Turbines, Inc. Flight One Logistics, Inc. Kalitta Flying Services, Inc. P.O. Box 612787 1515 West 20th Street D/FW International Airport, Texas 75261 Re: Registration Statement on Form S-4; $340,000,000 Aggregate Principal Amount of 9.95% Senior Secured Notes due 2004 and the Guarantees thereof Ladies and Gentlemen: We have acted as special counsel for Kitty Hawk, Inc., a Delaware corporation (the "Company"), and Kitty Hawk Aircargo, Inc., a Texas corporation, Kitty Hawk Charters, Inc., a Texas corporation, Aircraft Leasing, Inc., a Texas corporation, American International Airways, Inc., a Michigan corporation, American International Travel, Inc., a Michigan corporation, O.K. Turbines, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, and Kalitta Flying Services, Inc., a Michigan corporation (the "Guarantors"), in connection with the proposed issuance by the Company of $340,000,000 aggregate principal amount of 9.95% Senior Secured Notes due 2004 (the "Notes") and the guarantees thereof by the Guarantors (the "Guarantees") in exchange for an equivalent amount of the Company's outstanding 9.95% Senior Secured Notes due 2004 (the "Old Notes"), which are also guaranteed by the Guarantors. The terms of the offer to exchange are described in the Registration Statement on Form S-4 (the "Registration Statement") filed with the Securities and Exchange Commission for the registration of the Notes and the Guarantees under the Securities Act of 1933, as amended (the "Act"). The Old Notes have been, and the Notes will be, issued pursuant to an indenture (the "Indenture") dated as of November 15, 1997, among the Company, the Guarantors and Bank One, NA, as Trustee and Collateral Trustee (the "Trustee"). In connection with the foregoing, we have examined the Indenture, the Registration Statement and such corporate records and instruments of the Company and the Guarantors as we have deemed necessary or appropriate for purposes of this opinion. We are opining herein as to the effect on the proposed issuance of the Notes and the Guarantees of the federal laws of the United States, the laws of the State of Texas, the laws of the State of New York and the general corporate law of the State of Delaware. 2 Kitty Hawk, Inc. Kitty Hawk Aircargo, Inc. Kitty Hawk Charters, Inc. Aircraft Leasing, Inc. American International Airways, Inc. American International Travel, Inc. O.K. Turbines, Inc. Flight One Logistics, Inc. Kalitta Flying Services, Inc. February 3, 1998 Page 2 Specific Limitations and Qualifications on Opinions Regarding Enforceability of the Notes and Guarantees The enforceability of the Notes and the Guarantees are subject to (a) the effects of (i) applicable bankruptcy, insolvency, reorganization, moratorium, rearrangement, liquidation, conservatorship or similar laws of general application now or hereafter in effect relating to or affecting the rights or remedies of creditors generally, (ii) general equity principles (regardless of whether enforcement is sought in a proceeding in equity or law), and (iii) statutory provisions of the federal Bankruptcy Code and the Uniform Fraudulent Conveyance Act as adopted by the State of New York (and related court decisions) pertaining to the voidability of preferential or fraudulent transfers, conveyances and obligations, (b) the rights of the United States under the Federal Tax Lien Act of 1966, as amended, (c) the application of a standard of "good faith" such as that defined in Section 1.203 of the Uniform Commercial Code as adopted in the State of New York (the "Code") and (d) any limitations on rights to indemnity and contribution as may be imposed by federal and state securities laws or the policies underlying them; provided, however, that we note that any limitations referred to in clauses (a)(ii), and (c) imposed by such laws on the enforceability of the Notes and the Guarantees will not prevent the holders thereof from the ultimate realization of the practical benefits of such instruments, except for the economic consequences of any judicial, administrative or other procedural delay that may result from such laws. We express no opinion as to the enforceability of provisions of the Notes or the Guarantees to the extent that such provisions: (i) state that any party's failure or delay in exercising rights, powers, privileges or remedies under the Notes or the Guarantees, as the case may be, shall not operate as a waiver thereof; (ii) purport to preclude the amendment, waiver, release or discharge of obligations except by an instrument in writing; (iii) purport to indemnify any person for (A) such person's violations of federal or state securities laws or environmental laws, or (B) any obligation to the extent such obligation arises from or is a result of such person's own negligence; (iv) purport to establish or satisfy certain factual standards or conditions; (v) purport to sever unenforceable provisions from the Notes or the Guarantees, to the extent that the enforcement of remaining provisions would frustrate the fundamental intent of the parties to such instruments; (vi) restrict access to legal or equitable remedies; or (vii) purport to waive any claim arising out of, or in any way related to, the Notes or the Guarantees. We advise you that the inclusion of such provisions in the Notes or the Guarantees does not render void or invalidate the obligations and liabilities of the Company under other provisions of such instruments. We express no opinion as to: (i) whether a court would grant specific performance or any other equitable remedy with respect to enforcement of any provision contained in the Notes or the Guarantees; or (ii) the enforceability of any provision contained in the Indenture relating to the appointment of a receiver, to the 3 Kitty Hawk, Inc. Kitty Hawk Aircargo, Inc. Kitty Hawk Charters, Inc. Aircraft Leasing, Inc. American International Airways, Inc. American International Travel, Inc. O.K. Turbines, Inc. Flight One Logistics, Inc. Kalitta Flying Services, Inc. February 3, 1998 Page 3 extent that appointment of a receiver is governed by applicable statutory requirements, and to the extent that such provision may not be in compliance with such requirements. We express no opinion as to the enforceability of those provisions of the Guarantees that state or mean that the Guarantees shall not be impaired, adversely affected or released by any of the following: (i) any action taken by any holder of the Notes in bad faith, for the purpose of or with the effect of, impairing any of the Guarantors' rights of subrogation, reimbursement, contribution, indemnity or exoneration against the Company, any other guarantor or collateral for the obligations guaranteed; or (ii) a legal determination that the obligations guaranteed are void as a result of illegality. Based upon the foregoing and subject to the qualifications stated herein, it is our opinion that, when (i) the Registration Statement has been declared effective under the Act, (ii) the Old Notes have been validly exchanged by the Company, and (iii) the Notes and the Guarantees have been executed and delivered by the Company and the Guarantors and authenticated by the Trustee, all in accordance with the terms of the Indenture and the Registration Statement, the Notes and the Guarantees will constitute valid and binding obligations of the Company and the Guarantors, respectively, enforceable against the Company and the Guarantors in accordance with their terms. To the extent that the obligations of the Company or the Guarantors under the Indenture may be dependent upon such matters, we assume for purposes of this opinion that the Trustee is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; that the Trustee is duly qualified to engage in the activities contemplated by the Indenture; that the Indenture has been duly authorized, executed and delivered by the Trustee and constitutes the legally valid and binding obligation of the Trustee, enforceable against the Trustee in accordance with its terms; that the Trustee is in compliance, generally and with respect to acting as a trustee under the Indenture, with all applicable laws and regulations; and that the Trustee has the requisite organizational and legal power and authority to perform its obligations under the Indenture. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm contained therein under the headings "Legal Matters." Very truly yours, /s/ HAYNES AND BOONE, LLP Haynes and Boone, LLP EX-5.2 11 OPINION OF HAYNES AND BOONE LLP 1 EXHIBIT 5.2 [HAYNES & BOONE, LLP LETTERHEAD] February 3, 1998 Kitty Hawk, Inc. Kitty Hawk Aircargo, Inc. Kitty Hawk Charters, Inc. Aircraft Leasing, Inc. American International Airways, Inc. American International Travel, Inc. O.K. Turbines, Inc. Flight One Logistics, Inc. Kalitta Flying Services, Inc. P.O. Box 612787 1515 West 20th Street D/FW International Airport, Texas 75261 Re: Offer by Kitty Hawk, Inc., Kitty Hawk Aircargo, Inc., a Texas corporation, Kitty Hawk Charters, Inc., a Texas corporation, Aircraft Leasing, Inc., a Texas corporation, American International Airways, Inc., a Michigan corporation, American International Travel, Inc., a Michigan corporation, O.K. Turbines, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, and Kalitta Flying Services, Inc., a Michigan corporation, to exchange 9.95% Senior Secured Notes Due 2004 and the Guarantees thereof for any and all of 9.95% Senior Secured Notes Due 2004 and the Guarantees thereof Ladies and Gentlemen: We have acted as special counsel to Kitty Hawk, Inc. (the "COMPANY") and its subsidiaries, Kitty Hawk Aircargo, Inc., a Texas corporation, Kitty Hawk Charters, Inc., a Texas corporation, Aircraft Leasing, Inc., a Texas corporation, American International Airways, Inc., a Michigan corporation, American International Travel, Inc., a Michigan corporation, O.K. Turbines, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, and Kalitta Flying Services, Inc., a Michigan corporation (the "GUARANTORS"), in connection with the offer (the "EXCHANGE OFFER") to exchange the 9.95% Senior Secured Notes Due 2004 and the Guarantees thereof (the "EXCHANGE NOTES") for any and all outstanding 9.95% Senior Secured Notes Due 2004 and the Guarantees thereof (the "PRIVATE NOTES"). You have requested our opinion as to certain United States federal income tax consequences of the Exchange Offer. In preparing our opinion, we have reviewed and relied upon the Company's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on December 31, 1997 (the "REGISTRATION STATEMENT"), and such other documents as we deemed necessary. On the basis of the foregoing, it is our opinion that the exchange of the Private Notes for Exchange Notes pursuant to the Exchange Offer will not be treated as an "exchange" for United States federal income tax purposes and therefore, is not a taxable transaction for such purposes. 2 Kitty Hawk, Inc. Kitty Hawk Aircargo, Inc. Kitty Hawk Charters, Inc. Aircraft Leasing, Inc. American International Airways, Inc. American International Travel, Inc. O.K. Turbines, Inc. Flight One Logistics, Inc. Kalitta Flying Services, Inc. February 3, 1998 Page 2 The opinion set forth above is based upon the applicable provisions of the Internal Revenue Code of 1986, as amended, the Treasury Regulations promulgated or proposed thereunder, current positions of the Internal Revenue Service (the "IRS") contained in published revenue rulings, revenue procedures, and announcements, existing judicial decisions, and other applicable authorities. No tax rulings have been or will be sought from the IRS with respect to any of the matters discussed herein. Unlike a ruling from the IRS, opinions of counsel are not binding on the IRS. Hence, no assurance can be given that the opinion stated in this letter will not be successfully challenged by the IRS. We express no opinion concerning any U.S. federal income tax consequences of the Exchange Offer except as expressly set forth above. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm and the summarization of this opinion under the section titled "Certain U.S. Federal Income Tax Considerations" in the Registration Statement. Very truly yours, /s/ HAYNES AND BOONE, LLP Haynes and Boone, LLP EX-10.19 12 AMENDED & RESTATED CREDIT AGMT DATED AS OF 8/14/96 1 EXHIBIT 10.19 SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 19, 1997 among KITTY HAWK, INC. as Borrower and KITTY HAWK AIRCARGO, INC. AIRCRAFT LEASING, INC. KITTY HAWK CHARTERS, INC. SKYFREIGHTERS CORPORATION AMERICAN INTERNATIONAL AIRWAYS, INC. AMERICAN INTERNATIONAL TRAVEL, INC. FLIGHT ONE LOGISTICS, INC. KALITTA FLYING SERVICE, INC. and O. K. TURBINES, INC. as Guarantors and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION as Agent and THE LENDERS NAMED HEREIN $100,000,000 REVOLVING CREDIT LOANS FACILITY and $45,900,000 TERM LOANS FACILITY 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 - Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2 Other Definitional Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 1.3 Accounting Terms and Determinations. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 1.4 Financial Covenants and Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE 2 - Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 2.1 Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 2.2 The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.3 Repayment of Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.4 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.5 Borrowing Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 2.6 Optional Prepayments, Conversions and Continuations of Loans . . . . . . . . . . . . . . 38 Section 2.7 Mandatory Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 2.8 Minimum Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 2.9 Certain Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 2.10 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.11 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.12 Computations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 2.13 Termination or Reduction of Commitments. . . . . . . . . . . . . . . . . . . . . . . . 41 Section 2.14 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE 3 - Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 3.1 Method of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 3.2 Pro Rata Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 3.3 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 3.4 Non-Receipt of Funds by Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 3.5 Withholding Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 3.6 Withholding Tax Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 3.7 Reinstatement of Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE 4 - Yield Protection and Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.1 Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.2 Limitation on Types of Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.3 Illegality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.4 Treatment of Affected Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.5 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.6 Capital Adequacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.7 Additional Interest on Eurodollar Loans. . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.8 Mitigation of Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page i 3 ARTICLE 5 - Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 5.1 Collateral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 5.2 Guaranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 5.3 New AIA Aircraft Related Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 5.4 New Subsidiaries; New Issuances of Capital Stock. . . . . . . . . . . . . . . . . . . . . 54 Section 5.5 Release of Certain Collateral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 5.6 Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.7 Title Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ARTICLE 6 - Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 6.1 Initial Extension of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 6.2 All Extensions of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 6.3 Closing Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE 7 - Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.1 Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.2 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.3 Corporate Action; No Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.4 Operation of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.5 Litigation and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.6 Rights in Properties; Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.7 Enforceability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.8 Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.9 Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.11 Margin Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.12 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.13 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.14 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.15 Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.16 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.17 Investment Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.18 Public Utility Holding Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.19 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.20 Labor Disputes and Acts of God. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.21 Material Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.22 Outstanding Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.23 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.24 Employee Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.25 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.26 Common Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.27 Related Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.28 Purchase Money Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page ii 4 ARTICLE 8 - Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 8.1 Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 8.2 Maintenance of Existence; Conduct of Business. . . . . . . . . . . . . . . . . . . . . . 74 Section 8.3 Maintenance of Properties; Hush Kits. . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 8.4 Taxes and Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 8.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 8.6 Inspection Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.7 Keeping Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.8 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.9 Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.10 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.11 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 8.12 Aircraft Registration, Maintenance, Operation, Insignia. . . . . . . . . . . . . . . . 79 Section 8.13 Replacement of Parts; Alterations, Modifications and Additions . . . . . . . . . . . . . 80 Section 8.14 Ownership of Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 8.15 Collateral Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 ARTICLE 9 - Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 9.1 Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 9.2 Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 9.3 Mergers, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 9.4 Restricted Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 9.5 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 9.6 Limitation on Issuance of Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . 84 Section 9.7 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 9.8 Disposition of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 9.9 Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 9.10 Environmental Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 9.11 Certain Encumbrances or Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 9.12 Management Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 9.13 Modification of Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 9.14 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 9.15 Territorial Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 9.16 Sale and Leaseback. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 ARTICLE 10 - Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Section 10.1 Maximum Funded Debt to Adjusted EBITDA Ratio. . . . . . . . . . . . . . . . . . . . . . . 88 Section 10.2 Minimum Net Worth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Section 10.3 Minimum Cash Flow Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Section 10.4 Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 ARTICLE 11 - Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 11.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 11.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Section 11.3 Performance by Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page iii 5 Section 11.4 Cash Collateral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 ARTICLE 12 - Agency and Intercreditor Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Section 12.1 Appointment, Powers and Immunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Section 12.2 Rights of Agent as a Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Section 12.3 Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Section 12.4 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Section 12.5 Independent Credit Decisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 12.6 Several Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 12.7 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 12.8 Beneficiaries of Article 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 ARTICLE 13 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 13.1 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 13.2 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 13.3 Limitation of Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Section 13.4 No Duty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Section 13.5 No Fiduciary Relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Section 13.6 Equitable Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Section 13.7 No Waiver; Cumulative Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Section 13.8 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Section 13.9 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Section 13.10 ENTIRE AGREEMENT; AMENDMENT AND RESTATEMENT; WAIVER OF CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Section 13.11 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.12 Maximum Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.13 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Section 13.14 GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Section 13.15 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Section 13.16 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Section 13.17 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Section 13.18 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Section 13.19 Independence of Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Section 13.20 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Section 13.21 Approvals and Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Section 13.22 Joint and Several Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Section 13.23 AGREEMENT FOR BINDING ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 105
SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page iv 6 INDEX TO EXHIBITS
Exhibit Description of Exhibit ------- ---------------------- A Assignment and Acceptance B Borrowing Base Report C Revolving Credit Loans Note D Term Loans Note E Notice of Borrowing, Conversion, Continuation or Prepayment F Arbitration Program
INDEX TO SCHEDULES
Schedule Description of Schedule -------- ----------------------- 1.1(a) AIA Aircraft Release Amounts 1.1(b) Approved Foreign Account Debtors 1.1(c) Existing Liens and Existing Debt 2.14 Existing Letters of Credit 6.1 Debt to be Paid at Closing 7.5 Litigation 7.9 Debt 7.10 Taxes 7.12 ERISA Matters 7.14 Capitalization 7.21 Material Contracts 7.24 Employee Matters 7.25 Insurance 9.5 Investments 9.12 Consulting Fees
SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page v 7 SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT ("Agreement"), dated as of November 19, 1997, is among KITTY HAWK, INC., a Delaware corporation ("Kitty Hawk"), KITTY HAWK AIRCARGO, INC., a Texas corporation ("Aircargo"), AIRCRAFT LEASING, INC., a Texas corporation ("Leasing"), KITTY HAWK CHARTERS, INC., a Texas corporation ("Charters"), SKYFREIGHTERS CORPORATION, a Texas corporation ("Skyfreighters"), 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"), WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association ("Wells Fargo"), and each of the lending institutions which may from time to time become a party hereto and any successor or assignee thereof (individually, a "Lender" and, collectively, "Lenders"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association, as agent for itself and the other Lenders (in such capacity, together with its successors and assigns in such capacity, "Agent"). RECITALS: A. Kitty Hawk, Aircargo, Leasing, Charters, Skyfreighters, Wells Fargo (individually and as agent) and Bank One are parties to that certain Amended and Restated Credit Agreement dated as of August 14, 1996, as amended by that certain (i) letter agreement dated as of August 14, 1996, (ii) letter agreement dated as of June 1, 1997, and (iii) First Amendment (as amended, the "Prior Credit Agreement"), which Prior Credit Agreement, among other things, provided for a $60,900,000 revolving credit loans facility, a $12,744,000.45 term loans A facility, a $11,225,000 term loans B facility, and a $10,000,000 term loans C facility. The First Amendment provided for, among other things, the AIA Fleet Advance (in the amount of $45,900,000) to Kitty Hawk under the revolving credit loans facility provided under the Prior Credit Agreement to finance Aircargo's purchase of 16 aircraft from AIA. B. The credit facilities provided under the Prior Credit Agreement are secured by Liens affecting various airframes and engines owned by Aircargo and Leasing and other personal property of Kitty Hawk, Aircargo, Leasing, Charters and Skyfreighters. C. Kitty Hawk is, concurrently herewith, acquiring all of the issued and outstanding Capital Stock of each of AIA, AIT, FOL, KFS and OK pursuant to that certain Agreement and Plan of Merger dated as of September 22, 1997, among Kitty Hawk, Kitty Hawk - AIA, Inc., Kitty Hawk - AIT, Inc., Kitty Hawk - FOL, Inc., Kitty Hawk - KFS, Inc., Kitty Hawk - OK, Inc., M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad Kalitta (as amended, the "Merger Agreement"). D. Kitty Hawk is, concurrently herewith, issuing up to an additional 3,000,000 shares of its common stock pursuant to a registered public offering (the "Common Stock Offering"). SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 1 8 E. Kitty Hawk is, concurrently herewith, issuing up to $340,000,000 in principal amount of its 9.95% Senior Secured Notes Due 2004 (the "Senior Notes") pursuant to an offering that is not registered under the Securities Act of 1933, as amended (the "Note Offering"). F. The Common Stock Offering and the Note Offering are conditioned on (i) the concurrent consummation of the Merger and (ii) the execution and delivery of this Agreement. G. A portion of the proceeds of the Common Stock Offering and the Note Offering are, concurrently herewith, being used (i) to pay the cash portion of the purchase price payable by Kitty Hawk pursuant to the Merger Agreement, (ii) to pay a portion of the indebtedness owed by Kitty Hawk, Leasing and/or other Kitty Hawk Companies under the Prior Credit Agreement, and (iii) to pay a portion of the indebtedness owed by the Kalitta Companies under their outstanding credit facilities. H. Bank One is, substantially concurrently herewith but immediately prior hereto, assigning all of its interest in the outstanding loans (including the AIA Fleet Advance) under the Prior Credit Agreement to Wells Fargo. I. The parties hereto desire to amend and restate the Prior Credit Agreement, among other things, (i) to reflect the payment of certain indebtedness owed by Kitty Hawk, Leasing and/or other Kitty Hawk Companies under the Prior Credit Agreement, (ii) to refinance the AIA Fleet Advance with the Term Loans, and (iii) to provide for a $100,000,000 revolving credit facility to refinance and replace the revolving credit facility provided under the Prior Credit Agreement and to provide working capital for the Companies. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Definitions Section 1.1 Definitions. As used in this Agreement, the following terms have the following meanings: "ACMI Agreement" means a charter agreement pursuant to which Aircargo or any other Company supplies aircraft, crew, maintenance and insurance and as to which a Company (a) retains operational control of such aircraft and (b) maintains such aircraft on its operations specifications. An ACMI Agreement is not included within the term "lease" as such term is used in this Agreement. "Additional Costs" has the meaning specified in Section 4.1. "Adjusted EBITDA" means, for any period, without duplication, the sum of the following for Kitty Hawk and its Subsidiaries for such period, each determined on a consolidated basis in accordance with GAAP: (a) Net Income, plus (b) Interest Expense, plus (c) income and franchise SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 2 9 taxes to the extent deducted in determining Net Income, plus (d) depreciation and amortization, minus (e) extraordinary gains to the extent included in determining Net Income, plus (f) extraordinary losses to the extent deducted in determining Net Income (provided, however, that no more than $3,000,000 of integration costs or expenses directly attributable to the Merger during each of 1997 and 1998 shall be included for purposes of this clause (f)); provided, however, that, for purposes of determining Adjusted EBITDA of the Kalitta Companies prior to consummation of the Merger, such Adjusted EBITDA shall be restated utilizing the accounting principles used in the calculation of Adjusted EBITDA for Kitty Hawk and its Subsidiaries. "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of one percent determined by Agent (which determination shall be conclusive in the absence of manifest error) to be equal to (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period divided by (b) one minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Advance Rate" means a specific percentage for each of Eligible Receivables and Eligible Parts, which percentage is to be determined by Agent in its sole discretion in connection with the determination of the initial Borrowing Base Report in accordance with Section 2.1(a), equal to (a) for Eligible Receivables, a minimum of 65% and a maximum of 80% and (b) for Eligible Parts, a minimum of 20% and a maximum of 40%. Once such specific percentage has been determined by Agent for each of Eligible Receivables and Eligible Parts, such percentage shall not thereafter be changed without the agreement of Borrower, Agent and Required Lenders. "Affiliate" means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such first Person, (b) that directly or indirectly beneficially owns or holds five percent or more of any class of voting Capital Stock of such first Person, or (c) five percent or more of the voting Capital Stock of which is directly or indirectly beneficially owned or held by such first Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall Agent or any Lender be deemed an Affiliate of Kitty Hawk or any its Subsidiaries. "Agent" has the meaning specified in the introductory paragraph of this Agreement. "Agent's Letter" means that certain letter agreement dated November 5, 1997 between Wells Fargo and Kitty Hawk, accepted and agreed to by Kitty Hawk as of November 6, 1997, relating to certain fees payable by Kitty Hawk in connection with this Agreement. "Aggregate Loan Percentage" means, as to any Lender, the percentage equivalent of a fraction, (a) the numerator of which is the sum of (i) the outstanding Revolving Credit Loans Commitment (or, if such Commitment has terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and Letter of Credit Liabilities) of such Lender, plus (ii) the outstanding Term Loans of such Lender, and (b) the denominator of which is the sum of (i) the outstanding Revolving Credit Loans Commitments (or, if such Commitments have terminated or SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 3 10 expired, the aggregate outstanding principal amount of the Revolving Credit Loans and Letter of Credit Liabilities) of all Lenders, plus (ii) the outstanding Term Loans of all Lenders. "Agreement" means this Agreement and any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements hereof. "AIA" means as specified in the introductory paragraph of this Agreement. "AIC" means American International Cargo, a Michigan copartnership. "AIA Acquisition Agreement" means that certain Agreement for Sale and Purchase of AIA 727 Fleet dated as of July 31, 1997, among AIA, KFS, Conrad Kalitta, Aircargo and Kitty Hawk. "AIA Aircraft" means Aircraft O, Aircraft P, Aircraft Q, Aircraft R, Aircraft S, Aircraft T, Aircraft U, Aircraft V, Aircraft W, Aircraft X, Aircraft Y, Aircraft Z, Aircraft AA, Aircraft AB, Aircraft AC and Aircraft AD. The term "AIA Aircraft" shall also mean and refer to any replacement aircraft which is required or permitted, under this Agreement or an Aircraft Mortgage, to replace an AIA Aircraft as Collateral and with respect to which the Companies comply with each of the applicable requirements contained in this Agreement and the applicable Aircraft Mortgage. "AIA Aircraft Release Amount" means, with respect to each particular AIA Aircraft as of the date of determination, an amount determined by Agent in good faith equal to (a) the amount for such AIA Aircraft set forth under the heading "Initial AIA Aircraft Release Amount" on Schedule 1.1 hereto, minus (b) the product of (i) the aggregate amount of principal of the Term Loans repaid subsequent to the Closing Date multiplied by (ii) the percentage for such AIA Aircraft set forth under the heading "Percentage Allocation" on Schedule 1.1. "AIA Fleet Advance" means the loans in the aggregate amount of $45,900,000 made, on or about September 17, 1997, by the Prior Lenders to Kitty Hawk under the Prior Credit Agreement to finance the purchase by Aircargo of the AIA Aircraft pursuant to the AIA Acquisition Agreement. "Aircargo" means as specified in the introductory paragraph of this Agreement. "Aircraft O" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N719CK (formerly N6806), Manufacturer's Serial No. 19481, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 649038, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 654584, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665195. "Aircraft P means, collectively, (i) one Boeing 727-251 airframe, United States Aircraft Registration Number N255US, Manufacturer's Serial No. 19974, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 4 11 No. 665401, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 649240, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665357. "Aircraft Q" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N856AA, Manufacturer's Serial No. 20997, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 653766, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665228, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666119. "Aircraft R" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N858AA, Manufacturer's Serial No. 21085, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666095, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666098, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666059. "Aircraft S" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N6831, Manufacturer's Serial No. 20184, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666253, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665419, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 654979. "Aircraft T" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N6834, Manufacturer's Serial No. 20187, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666123, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666354, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 654076. "Aircraft U" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N6808, Manufacturer's Serial No. 19483, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666034, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665214, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665280. "Aircraft V" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N6811, Manufacturer's Serial No. 19486, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666031, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666125, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 654009. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 5 12 "Aircraft W" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N6816, Manufacturer's Serial No. 19491, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665188, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665232, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665190. "Aircraft X" means, collectively, (i) one Boeing 727-23 airframe, United States Aircraft Registration Number N1908, Manufacturer's Serial No. 19183, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-7B Engine, Manufacturer's Serial No. 654427, (iii) one Pratt & Whitney JT8D-7B Engine, Manufacturer's Serial No. 654417, and (iv) one Pratt & Whitney JT8D-7B Engine, Manufacturer's Serial No. 654365. "Aircraft Y" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N729CK (formerly N6807), Manufacturer's Serial No. 19482, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 649269, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665955, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665452. "Aircraft Z" means, collectively, (i) one Boeing 727-22C airframe, United States Aircraft Registration Number N727CK, Manufacturer's Serial No. 19195, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666035, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666109, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 654884. "Aircraft AA" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N720CK (formerly N6812), Manufacturer's Serial No. 19487, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665365, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665248, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666137. "Aircraft AB" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N722CK (formerly N6810), Manufacturer's Serial No. 19485, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665466, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 649124, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665160. "Aircraft AC" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N723CK (formerly N6838), Manufacturer's Serial No. 20191, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 6 13 avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665348, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665395, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665464. "Aircraft AD" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N706CA (formerly N6821), Manufacturer's Serial No. 19496, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666153, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666346, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666196. "Aircraft Mortgages" means (a) the Amended and Restated Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents executed by Aircargo dated the Closing Date, (b) any Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents at any time executed pursuant to Article 5 hereof, evidencing or creating a Lien as security for the Obligations in form and substance reasonably satisfactory to Agent, and (c) any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements thereof. "Airframes" means those certain airframes identified in the definitions of Aircraft O, Aircraft P, Aircraft Q, Aircraft R, Aircraft S, Aircraft T, Aircraft U, Aircraft V, Aircraft W, Aircraft X, Aircraft Y, Aircraft Z, Aircraft AA, Aircraft AB, Aircraft AC and Aircraft AD, together with any and all parts, appliances, components, instruments, accessories, accessions, attachments, equipment or avionics (including, without limitation, communications, radar, navigation systems or other electronic equipment) installed in, appurtenant to or delivered with or in respect of such airframes. The term "Airframes" shall also mean and refer to any replacement airframe which is required or permitted, under this Agreement or an Aircraft Mortgage, to replace an Airframe as Collateral and with respect to which the Companies comply with each of the applicable requirements contained in this Agreement and the applicable Aircraft Mortgage. "AIT" means as specified in the introductory paragraph of this Agreement. "Applicable Base Rate Margin" means, for the period commencing with the Closing Date and thereafter, the rate per annum set forth in the table below that corresponds to the ratio of Funded Debt to Adjusted EBITDA for the four fiscal quarters of Kitty Hawk and its Subsidiaries on a consolidated basis then most recently ended: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 7 14
- -------------------------------------------------------------------------------- Applicable Funded Debt to Adjusted EBITDA Ratio Base Rate Margin - -------------------------------------------------------------------------------- Greater than 4.25 to 1.00 1.25% - -------------------------------------------------------------------------------- Greater than 4.00 to 1.00, but equal to or less than 4.25 to 1.00 1.00% - -------------------------------------------------------------------------------- Greater than 3.50 to 1.00, but equal to or less than 4.00 to 1.00 0.75% - -------------------------------------------------------------------------------- Greater than 3.00 to 1.00, but equal to or less than 3.50 to 1.00 0.50% - -------------------------------------------------------------------------------- Greater than 2.50 to 1.00, but equal to or less than 3.00 to 1.00 0.25% - -------------------------------------------------------------------------------- Greater than 2.00 to 1.00, but equal to or less than 2.50 to 1.00 0.00% - -------------------------------------------------------------------------------- Equal to or less than 2.00 to 1.00 0.00% - --------------------------------------------------------------------------------
For purposes hereof and notwithstanding the preceding sentence, the Applicable Base Rate Margin for the period from the Closing Date to May 19, 1998 shall be deemed to be 1.25% for Revolving Credit Loans and 1.50% for Term Loans and shall thereafter be calculated on each Calculation Date based upon the preceding table and the financial statements delivered by Kitty Hawk pursuant to Section 8.1(b) and the certificate delivered by Kitty Hawk pursuant to Section 8.1(c); provided, that if Kitty Hawk fails to deliver to Agent such financial statements or certificate at least five Business Days before the relevant Calculation Date, the Applicable Base Rate Margin shall be deemed to be 1.25% for Revolving Credit Loans and 1.50% for Term Loans until five Business Days after such statements and certificate are delivered by Kitty Hawk to Agent, after which the Applicable Base Rate Margin shall be determined as otherwise provided herein. "Applicable Commitment Fee Rate" means, for the period commencing with the Closing Date and thereafter, the rate per annum set forth in the table below that corresponds to the ratio of Funded Debt to Adjusted EBITDA for the four fiscal quarters of Kitty Hawk and its Subsidiaries on a consolidated basis then most recently ended: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 8 15
- -------------------------------------------------------------------------------- Applicable Funded Debt to Adjusted EBITDA Ratio Commitment Fee Rate - -------------------------------------------------------------------------------- Greater than 4.25 to 1.00 0.50% - -------------------------------------------------------------------------------- Greater than 4.00 to 1.00, but equal to or less than 4.25 to 1.00 0.50% - -------------------------------------------------------------------------------- Greater than 3.50 to 1.00, but equal to or less than 4.00 to 1.00 0.50% - -------------------------------------------------------------------------------- Greater than 3.00 to 1.00, but equal to or less than 3.50 to 1.00 0.375% - -------------------------------------------------------------------------------- Greater than 2.50 to 1.00, but equal to or less than 3.00 to 1.00 0.375% - -------------------------------------------------------------------------------- Greater than 2.00 to 1.00, but equal to or less than 2.50 to 1.00 0.375% - -------------------------------------------------------------------------------- Equal to or less than 2.00 to 1.00 0.250% - --------------------------------------------------------------------------------
For purposes hereof and notwithstanding the preceding sentence, the Applicable Commitment Fee Rate for the period from the Closing Date to May 19, 1998 shall be deemed to be 0.50% and shall thereafter be calculated on each Calculation Date based upon the preceding table and the financial statements delivered by Kitty Hawk pursuant to Section 8.1(b) and the certificate delivered by Kitty Hawk pursuant to Section 8.1(c); provided, that if Kitty Hawk fails to deliver to Agent such financial statements or certificate at least five Business Days before the relevant Calculation Date, the Applicable Commitment Fee Rate shall be deemed to be 0.50% until five Business Days after such statements and certificate are delivered by Kitty Hawk to Agent, after which the Applicable Commitment Fee Rate shall be determined as otherwise provided herein. "Applicable Eurodollar Margin" means, for the period commencing with the Closing Date and thereafter, the rate per annum set forth in the table below that corresponds to the ratio of Funded Debt to Adjusted EBITDA for the four fiscal quarters of Kitty Hawk and its Subsidiaries on a consolidated basis then most recently ended: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 9 16
- -------------------------------------------------------------------------------- Applicable Funded Debt to Adjusted EBITDA Ratio Eurodollar Margin - -------------------------------------------------------------------------------- Greater than 4.25 to 1.00 2.75% - -------------------------------------------------------------------------------- Greater than 4.00 to 1.00, but equal to or less than 4.25 to 1.00 2.50% - -------------------------------------------------------------------------------- Greater than 3.50 to 1.00, but equal to or less than 4.00 to 1.00 2.25% - -------------------------------------------------------------------------------- Greater than 3.00 to 1.00, but equal to or less than 3.50 to 1.00 2.00% - -------------------------------------------------------------------------------- Greater than 2.50 to 1.00, but equal to or less than 3.00 to 1.00 1.75% - -------------------------------------------------------------------------------- Greater than 2.00 to 1.00, but equal to or less than 2.50 to 1.00 1.50% - -------------------------------------------------------------------------------- Equal to or less than 2.00 to 1.00 1.25% - --------------------------------------------------------------------------------
For purposes hereof and notwithstanding the preceding sentence, the Applicable Eurodollar Margin for the period from the Closing Date to May 19, 1998 shall be deemed to be 2.75% for Revolving Credit Loans and 3.00% for Term Loans and shall thereafter be calculated on each Calculation Date based upon the preceding table and the financial statements delivered by Kitty Hawk pursuant to Section 8.1(b) and the certificate delivered by Kitty Hawk pursuant to Section 8.1(c); provided, that if Kitty Hawk fails to deliver to Agent such financial statements or certificate at least five Business Days before the relevant Calculation Date, the Applicable Eurodollar Margin shall be deemed to be 2.75% for Revolving Credit Loans and 3.00% for Term Loans until five Business Days after such statements and certificate are delivered by Kitty Hawk to Agent, after which the Applicable Eurodollar Margin shall be determined as otherwise provided herein. "Applicable Lending Office" means for each Lender and each Type of Loan, the lending office of such Lender (or of an Affiliate of such Lender) designated for such Type of Loan below its name on the signature pages hereof (or, with respect to a Lender that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it) or such other office of such Lender (or an Affiliate of such Lender) as such Lender may from time to time specify to Agent as the office by which its Loans of such Type are to be made and maintained. "Applicable Rate" means: (a) during the period that any Loan is a Base Rate Loan, the Base Rate plus the Applicable Base Rate Margin; and (b) during the period that any Loan is a Eurodollar Loan, the Eurodollar Rate plus the Applicable Eurodollar Margin. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 10 17 "Asset Disposition" means the disposition of any or all of the Property (other than the grant of a Lien as security) of any Company, whether by sale, lease, transfer, assignment, condemnation or otherwise, but excluding (a) any involuntary disposition resulting from casualty damage to Property, (b) any disposition of Parts, any disposition of engines which do not constitute Collateral and any disposition of other equipment which does not constitute Collateral, in each case in the ordinary course of business, and (c) any disposition of Property which constitutes collateral securing, and permitted to secure in accordance with this Agreement, the Debt evidenced by the Senior Notes. "Assignee" has the meaning specified in Section 13.8(b). "Assigning Lender" has the meaning specified in Section 13.8(b). "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and its Assignee and accepted by Agent pursuant to Section 13.8(e), in substantially the form of Exhibit A hereto. "Bank One" means Bank One, Texas, N.A., a national banking association. "Bank One Interest Rate Protection Agreement" means that certain ISDA Master Agreement dated as of December 19, 1995, between Bank One and Leasing, as it may be amended, modified, supplemented or restated at any time and from time to time, and all Confirmations (as defined therein) issued pursuant thereto, including, without limitation, the two Confirmations dated December 18, 1995. "Bankruptcy Code" has the meaning specified in Section 11.1(e). "Base Rate" means, at any time, the higher of (a) the Prime Rate then in effect or (b) the sum of (i) the Federal Funds Rate then in effect plus (ii) one-half of one percent (0.50%). "Base Rate Loans" means any Loans that bear interest at rates based upon the Base Rate. "Basle Accord" means the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, supplemented and otherwise modified and in effect from time to time, or any replacement thereof. "Borrowing Base" means, (a) prior to the earlier to occur of the date of delivery of the initial Borrowing Base Report in accordance with Section 2.1(a) or January 19, 1998, 65% of Eligible Receivables and (b) at any date of determination thereafter (commencing with the earlier to occur of the date of delivery of the initial Borrowing Base Report in accordance with Section 2.1(a) or January 19, 1998) an amount equal to the sum of (i) the Advance Rate of Eligible Receivables plus (ii) the lesser of the Advance Rate of Eligible Parts or $20,000,000. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 11 18 "Borrowing Base Report" means a report in substantially the form of Exhibit B attached hereto and completed and certified by a Responsible Officer of Kitty Hawk certifying as to the Borrowing Base. "Business Day" means (a) any day on which commercial banks are not authorized or required to close in Dallas, Texas, or San Francisco, California, and (b) with respect to all borrowings, payments, Conversions, Continuations, Interest Periods and notices in connection with Eurodollar Loans, any day which is a Business Day described in clause (a) above and which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Calculation Date" means the date occurring each quarter during the term of this Agreement which is 15 days after the date on which quarterly financial statements of Kitty Hawk and its Subsidiaries are required by Section 8.1(b) to be delivered to Agent. "Capital Expenditures" means, for any period, expenditures (including Capital Lease Obligations incurred) made by Kitty Hawk and its Subsidiaries to acquire or construct fixed assets, plant or equipment (including renewals, improvements or replacements, but excluding repairs) during such period and which, in accordance with GAAP, are classified as capital expenditures. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal Property, which obligations are required to be classified or accounted for as a capital lease on a balance sheet of such Person under GAAP. For purposes of this Agreement, the amount of such Capital Lease Obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Capital Stock" means corporate stock and any and all shares, partnership interests, limited partnership interests, limited liability company interests, membership interests, equity interests, participations, rights or other equivalents (however designated) of corporate stock or any of the foregoing issued by any entity (whether a corporation, a partnership or another entity). "Change of Control" means any of the following events: (a) Kitty Hawk shall at any time fail to own, legally and beneficially, 100% of the outstanding Capital Stock of any of the Operating Subsidiaries other than AIC; (b) M. Tom Christopher or a successor reasonably acceptable to Required Lenders shall at any time fail to own, legally and beneficially, at least ten percent (10%) of the outstanding voting Capital Stock of Kitty Hawk; (c) after the consummation of a Public Offering, any Person or two or more Persons (other than the Permitted Holders) acting as a group (as defined in Section 13d-3 of the Securities Exchange Act of 1934) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 25% or more of the outstanding shares of voting Capital Stock of Kitty Hawk; (d) individuals who, as of the Closing Date, constitute the Board of Directors of Kitty Hawk (the "Kitty Hawk Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of Kitty Hawk, provided, however, that any individual becoming a director of Kitty Hawk subsequent to the Closing Date whose election or nomination for election by Kitty Hawk's shareholders was approved by a vote of at least a majority of the directors then comprising SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 12 19 the Kitty Hawk Incumbent Board shall be considered as though such individual were a member of the Kitty Hawk Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934) or other actual or threatened solicitation of proxies or contest by or on behalf of a Person other than the Board of Directors of Kitty Hawk; or (e) M. Tom Christopher or a successor reasonably acceptable to Required Lenders shall at any time cease to be chief executive officer of Kitty Hawk. "Charters" means as specified in the introductory paragraph of this Agreement. "Closing Date" means November 19, 1997, the date of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. "Collateral" means all Property of any nature whatsoever upon which a Lien is created or purported to be created as security for the Obligations or any portion thereof. "Commitment Percentage" means, as to any Lender and as to any of its Commitments (as may be applicable based upon the context in which such term is used), the percentage equivalent of a fraction, the numerator of which is the amount of the applicable outstanding Commitment of such Lender (or, if such Commitment has terminated or expired, the aggregate outstanding principal amount of the Loans and Letter of Credit Liabilities (with respect to the Revolving Credit Loans Commitment) of such Lender made or issued, respectively, pursuant to such Commitment) and the denominator of which is the aggregate amount of such applicable outstanding Commitments of all Lenders (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of the Loans and Letter of Credit Liabilities (with respect to the Revolving Credit Loans Commitments) of all Lenders made or issued, respectively, pursuant to such Commitments), as adjusted from time to time in accordance with Section 13.8. "Commitments" means the Revolving Credit Loans Commitments and the Term Loans Commitments. "Common Stock Offering" means as specified in Recital D. "Company" means any Kitty Hawk Company and any Kalitta Company, and "Companies" means any one or more of such Persons. "Continue", "Continuation" and "Continued" shall refer to the continuation pursuant to Section 2.6 of any Eurodollar Loan as a Eurodollar Loan from one Interest Period to the next Interest Period. "Contract Rate" has the meaning specified in Section 13.12(a). SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 13 20 "Convert", "Conversion" and "Converted" shall refer to a conversion pursuant to Section 2.6 or Article 4 of one Type of Loan into another Type of Loan. "Current Date" means a date occurring no more than 30 days prior to the Closing Date or such earlier date which is reasonably acceptable to Agent. "Debt" means as to any Person at any time (without duplication): (a) all indebtedness, liabilities and obligations of such Person for borrowed money; (b) all indebtedness, liabilities and obligations of such Person evidenced by bonds, notes, debentures or other similar instruments; (c) all indebtedness, liabilities and obligations of such Person to pay the deferred purchase price of Property or performed services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than 90 days; (d) all Capital Lease Obligations of such Person; (e) all Debt of others Guaranteed by such Person; (f) all indebtedness, liabilities and obligations secured by a Lien existing on Property owned by such Person, whether or not the indebtedness, liabilities or obligations secured thereby have been assumed by such Person or are non-recourse to such Person (exclusive of operating leases as to which such Person is lessee); (g) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments; (h) all indebtedness, liabilities and obligations of such Person to redeem or retire shares of Capital Stock of such Person; (i) all liabilities and obligations (exclusive of liabilities and obligations which are not yet due) of such Person in connection with any interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more counterparties providing for the transfer or mitigation of interest rate risks either generally or under specified contingencies; and (j) all indebtedness, liabilities and obligations of such Person in respect of unfunded vested benefits under any Plan. "Default" means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default. "Default Rate" means, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount payable by Kitty Hawk or any other Company under this Agreement or any other Loan Document which is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the sum of two percent plus the Applicable Rate as in effect from time to time. "Deposit Account" means a deposit account maintained by Kitty Hawk with a bank selected by Kitty Hawk and reasonably acceptable to Agent. "Dollars" and "$" mean lawful money of the U. S. "Eligible Assignee" means (a) any Affiliate of a Lender or (b) any commercial bank, savings and loan association, savings bank, finance company, insurance company, pension fund, mutual fund or other financial institution (whether a corporation, partnership or other entity) approved by Agent and, prior to the occurrence and continuation of a Default, approved by Kitty Hawk, which approval by Kitty Hawk shall not be unreasonably withheld, conditioned or delayed; provided, however, that, prior to the occurrence and continuation of a Default, Kitty Hawk shall not be obligated to approve, SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 14 21 as an Eligible Assignee, any potential Lender which would be entitled to receive additional payments from Kitty Hawk in accordance with Section 3.5(a) or indemnification from Kitty Hawk in accordance with Section 3.5(b). "Eligible Parts" means, at any date of determination, the value of all Parts then owned by, and in the possession of, Aircargo, Leasing, AIA, KFS or OK and held for use in the ordinary course of business, in which Agent has a perfected, first priority Lien pursuant to the Security Documents as security for payment and performance of the Obligations, valued at an amount determined by Agent in good faith not to exceed fair market value. Eligible Parts shall not include (i) Parts with respect to which a claim exists disputing any such Company's title to or right to possession of such Parts, (ii) Parts that are not in good condition or do not comply with any Governmental Requirement with respect to manufacture, use or sale, (iii) Parts that are located outside of the U.S., (iv) Parts produced in violation of the Fair Labor Standards Act, (v) Parts that are evidenced by a negotiable or non-negotiable document of title, and (vi) Parts that have become obsolete or have been damaged or are not usable in their present state for the use for which they were manufactured or purchased. "Eligible Receivables" means, at any date of determination, without duplication, the aggregate of each Receivable of any Company created in the ordinary course of business which satisfies each of the following requirements or conditions: (a) Such Receivable complies with all applicable Governmental Requirements, including, without limitation, usury laws, the Federal Truth in Lending Act and Regulation Z of the Board of Governors of the Federal Reserve System; (b) Such Receivable, at the date of issuance of its invoice, was payable not more than 30 days after the original date of issuance of the invoice therefor; (c) Such Receivable has not been outstanding for more than 30 days past the date upon which the invoice is payable; (d) Such Receivable was created in connection with the performance of services by such Company in the ordinary course of business and such services have been completed; (e) Such Receivable represents a legal, valid and binding payment obligation of the account debtor enforceable in accordance with its terms and arising from an enforceable contract, the performance of which contract, insofar as it relates to such Receivable, has been completed by such Company; (f) Such Company has good and indefeasible title to such Receivable, Agent holds a perfected first priority Lien on such Receivable pursuant to the Security Documents as security for payment and performance of the Obligations; (g) Such Receivable does not arise out of a contract with, or an order from, an account debtor that, by its terms (other than terms which are invalid under applicable law), SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 15 22 prohibits or makes void or unenforceable the grant of a security interest to Agent in and to such Receivable; (h) The amount of such Receivable included in Eligible Receivables is not subject to any setoff, counterclaim, defense, dispute, recoupment or adjustment other than normal discounts for prompt payment; provided, however, that only the portion of such Receivable affected by such setoff, counterclaim, defense, dispute, recoupment or adjustment shall be excluded by virtue of this clause (h); (i) The account debtor with respect to such Receivable is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due or suffered a receiver or trustee to be appointed for any of its assets or affairs; provided, however, that this exclusion shall not apply to the extent that such Receivable is the subject of a valid order, in form and substance satisfactory to Agent in its sole discretion, issued by a bankruptcy court with jurisdiction over the account debtor's assets which provides adequate protection for the payment of such Receivable or Agent is otherwise satisfied as to such adequate protection with respect to such Receivable; (j) Such Receivable is not evidenced by chattel paper or instruments (including, without limitation, leases of aircraft securing the Debt evidenced by the Senior Notes) unless the Lien on such chattel paper or instrument is a perfected first priority Lien on such chattel paper or instrument in favor of Agent pursuant to the Security Documents; (k) The account debtor has not notified such Company of any dispute concerning, or claimed nonconformity of, any of the services relating to such Receivable; provided, however, that only the portion of such Receivable affected by such dispute or nonconformity shall be excluded by virtue of this clause (k); (l) Such Receivable is not owed by an Affiliate of such Company; (m) Such Receivable is payable in Dollars by the account debtor; (n) The account debtor with respect to such Receivable is not domiciled in or organized under the laws of any country other than the U.S., unless such Receivable has been approved by Agent for inclusion in the Borrowing Base (subject to the other requirements contained in this definition); for purposes of this clause (n), Receivables owed by any Person identified on Schedule 1.1(b) are approved by Agent for such inclusion; (o) Such Receivable is not owed by an account debtor as to which more than twenty percent (20%) of the aggregate balances then outstanding on Receivables owed by such account debtor thereon and/or its Affiliates to any one or more of the Companies are more than 30 days past due from the date upon which such invoice is payable; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 16 23 (p) The account debtor with respect to such Receivable is not the U.S. or any department, agency or instrumentality thereof, unless, with respect to the Lien on such Receivable in favor of the Lender, the Federal Assignment of Claims Act of 1940, as amended, shall have been complied with; (q) The account debtor with respect to such Receivable is not located in New Jersey, Minnesota, West Virginia or any other state denying creditors access to its courts in the absence of a notice of business activities report or other similar filing, unless such Company has either qualified as a foreign corporation authorized to transact business in such state or has filed a notice of business activities report or similar appropriate filing with the applicable state agency for the then current year; and (r) Such Receivable is not owed by an account debtor as to which the aggregate of all Receivables owing by such account debtor or an Affiliate of such account debtor exceeds twenty-five percent (25%) of the aggregate of all Receivables at such date, provided that an amount of Receivables owing by such account debtor that do not exceed twenty-five percent (25%) of the aggregate of all Receivables at such date shall not be excluded pursuant to this clause (r). The amount of the Eligible Receivables owed by an account debtor to each Company shall be net of, and shall be reduced by (if and to the extent not already so reduced by virtue of the preceding clauses of this definition), the amount of all contra accounts, reserves, credits, rebates and (subject to the proviso below) other indebtedness or obligations owed by such Company to such account debtor; provided, however, that the existence of any such other indebtedness or obligations owed by such Company to such account debtor shall not, in and of itself, reduce the amount of Eligible Receivables owed by such account debtor by the amount of such other indebtedness or obligations (for purposes of this sentence or clause (i) preceding of this definition) except to the extent that such other indebtedness or obligations are then due. "Engines" means those certain aircraft engines identified in the definitions of Aircraft A, Aircraft O, Aircraft P, Aircraft Q, Aircraft R, Aircraft S, Aircraft T, Aircraft U, Aircraft V, Aircraft W, Aircraft X, Aircraft Y, Aircraft Z, Aircraft AA, Aircraft AB, Aircraft AC and Aircraft AD, together with any and all parts, appliances, components, accessories, accessions, attachments or equipment (collectively, "such equipment") installed on, appurtenant to, or delivered with or in respect of such engines prior to the time when such equipment is replaced by replacement equipment in accordance with this Agreement. The term "Engines" shall also mean and refer to any replacement aircraft engine which is required or permitted, under this Agreement or an Aircraft Mortgage, to be installed upon the Airframes and with respect to which the Companies comply with each of the applicable requirements contained in this Agreement and the applicable Aircraft Mortgage. "Environmental Law" means any federal, state, local or foreign law, statute, code or ordinance, principle of common law, rule or regulation, as well as any Permit, order, decree, judgment or injunction issued, promulgated, approved or entered thereunder, relating to pollution or the protection, cleanup or restoration of the environment or natural resources, or to the public health or SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 17 24 safety, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, discharge or disposal of Hazardous Materials, including, without limitation as to U.S. laws, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986, 99-499, 100 Stat. 1613, the Resource Conservation and Recovery Act of 1976, 42 U. S. C. Section 6901 et seq., the Occupational Safety and Health Act, 29 U S.C. Section 651 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U. S. C. Section 1251 et seq., the Emergency Planning and Community Right to Know Act, 42 U. S. C. Section 11001 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 136 et seq., and the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and any state or local counterparts. "Environmental Liabilities" means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability or criminal, penal or civil statute, including, without limitation, any Environmental Law, Permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment. "Equity Issuance" means any issuance by Kitty Hawk of any Capital Stock of Kitty Hawk. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of a group of entities, organizations or employers of which Kitty Hawk or any of its Subsidiaries is also a member and which is treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the Code. "Eurodollar Loans" means Loans the interest rate of which are determined on the basis of the rates referred to in the definition of "Eurodollar Rate" and "Adjusted Eurodollar Rate" in this Section 1.1. "Eurodollar Rate" means, for any Eurodollar Loan, for any Interest Period therefor, the average rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) at which Dollar deposits are offered to the Reference Lender at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of such Interest Period by two or more (as the Reference Lender may determine) leading banks in the London interbank market in immediately available funds, which deposits have a term comparable to such Interest Period and are in an amount comparable to the principal amount of the Eurodollar Loan made by the Reference Lender to which such Interest Period relates, and which rate shall be determined by the Reference Lender in good faith based upon its standard procedures therefor in effect from time to time. Subject to the proviso contained in the immediately preceding sentence, if the Reference Lender is not SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 18 25 participating in any Eurodollar Loans during any Interest Period therefor (whether as a result of Section 4.4 or for any other reason), the Eurodollar Rate and the Adjusted Eurodollar Rate for such Loans for such Interest Period shall be determined by reference to the amount of the Loans which the Reference Lender would have made had it been participating in such Loans. "Event of Default" has the meaning specified in Section 11.1. "Excess Insurance Proceeds" means any and all proceeds of any Insurance Recovery which Kitty Hawk or any of its Subsidiaries (as applicable) (a) has elected to not apply to the repair, construction or replacement of the Collateral affected or to the purchase of other, similar Property for use in its business or (b) has not both (i) elected to apply to the repair, construction or replacement of the Collateral affected or to the purchase of other, similar Property for use in its business within 90 days of the event giving rise to the Insurance Recovery and (ii) actually applied to such repair, construction, replacement or purchase commencing within 180 days after the receipt of such proceeds by Kitty Hawk or any of its Subsidiaries or Agent and continuing in a reasonably prompt and diligent fashion thereafter. "FAA" means the United States Federal Aviation Administration (or any successor or replacement Governmental Authority having the same or similar authority and responsibilities). "Federal Aviation Act" means the Federal Aviation Act of 1958, now primarily codified in Title 49 of the United States Code, as amended. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest one- sixteenth of one percent 1/16 of 1%)) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day provided, that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published on such next succeeding Business Day, the Federal Funds Rate for any day shall be the average rate charged to the Reference Lender on such day on such transactions as determined by Agent. "First Amendment" means that certain First Amendment to Credit Agreement dated as of September 17, 1997, among Kitty Hawk, Leasing, Aircargo, Charters, Skyfreighters, Wells Fargo, Bank One and Agent. "FOL" means as specified in the introductory paragraph of this Agreement. "Foreign Subsidiary" means any Subsidiary of Kitty Hawk which is organized and existing under the laws of a foreign country (or political subdivision thereof). "Free Cash Flow" means the remainder of (a) Adjusted EBITDA, minus (b) the sum of (i) Capital Expenditures, plus (ii) income, franchise and other taxes paid or payable in cash or cash SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 19 26 equivalents, plus (iii) dividends and other distributions with respect to any form of Capital Stock paid or payable, plus (iv) the amount paid or payable for purchases of Capital Stock as treasury shares or interests; provided, however, that, for purposes of determining Free Cash Flow as such term is used in Section 10.3 for each fiscal quarter ending during fiscal year 1998 only, Capital Expenditures shall be calculated by subtracting therefrom the aggregate cash balances of Kitty Hawk and its Subsidiaries as of December 31, 1997 not to exceed the amount of such Capital Expenditures. "Funded Debt" means, at any particular time without duplication, (a) all Debt of Kitty Hawk and its Subsidiaries which matures by its terms, or is renewable at the option of Kitty Hawk or any of its Subsidiaries, to a date more than one year after the original creation of such Debt, (b) all other Debt which would be classified as "funded indebtedness" or "long-term indebtedness" on a consolidated balance sheet of Kitty Hawk and its Subsidiaries as of such date in accordance with GAAP, (c) all Debt of Kitty Hawk and its Subsidiaries for borrowed money (including, without limitation, the Loans, the Senior Notes and the Subordinated Debt), (d) all Capital Lease Obligations of Kitty Hawk and its Subsidiaries, and (e) the sum of the aggregate undrawn face amount of all outstanding letters of credit (including, without limitation, the Letters of Credit) and all unreimbursed drawings thereunder for which Kitty Hawk or any of its Subsidiaries is an account party or otherwise liable. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Governmental Authority" means any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government. "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, Permit, certificate, license, authorization or other directive or requirement of any federal, state, county, municipal, parish, or other Governmental Authority or any department, commission, board, court, agency or any other instrumentality of any of them. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any indebtedness, liability or obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other indebtedness, liability or obligation as to the payment thereof or to protect the obligee against loss in respect thereof (in whole SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 20 27 or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum anticipated liability in respect thereof (assuming such Person is required to perform thereunder). "Guaranties" means the guaranty agreements executed by the Companies (other than Kitty Hawk) or any Subsidiary of Kitty Hawk, dated the Closing Date (or such other date as any Company or such Subsidiary may execute such guaranty agreement), guaranteeing payment and performance of the Obligations in form and substance reasonably satisfactory to Agent, and any other guaranty agreement at any time executed pursuant to Article 5 hereof, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Guarantor" means any Person which executes a Guaranty. "Hazardous Material" means any substance, product, liquid, waste, pollutant, chemical, contaminant, insecticide, pesticide, gaseous or solid matter, organic or inorganic matter, fuel, micro-organisms, ray, odor, radiation, energy, vector, plasma, constituent or material which (a) is or becomes listed, regulated or addressed under any Environmental Law or (b) is, or is deemed to be, alone or in any combination, hazardous, hazardous waste, toxic, a pollutant, a deleterious substance, a contaminant or a source of pollution or contamination under any Environmental Law, including, without limitation, asbestos, petroleum, underground storage tanks (whether empty or containing any substance) and polychlorinated biphenyls. "Hush Kit" means a Stage 3 noise reduction kit for installation on the engine of any aircraft. "Indenture" means that certain Indenture, dated as of November 15, 1997, among Kitty Hawk, each Subsidiary of Kitty Hawk other than AIC and Bank One, NA, as Trustee (as amended from time to time except as may be otherwise stated herein) relating to the Senior Notes. "Insurance Recovery" means, with respect to any Collateral and any single occurrence or related occurrences with respect thereto, the receipt or constructive receipt by any Company, or the payment by an insurance company to Agent, of proceeds of any such Collateral or casualty insurance. "Interest Expense" means, for any period, and in accordance with GAAP, all interest on Debt of the Companies (or other applicable Person) paid or accrued during such period, including the interest portion of payments under Capital Lease Obligations. "Interest Period" means, with respect to any Eurodollar Loan, each period commencing on the date such Loan is made or Converted from a Base Rate Loan or, in the case of each subsequent, successive Interest Period applicable to a Eurodollar Loan, the last day of the next preceding Interest Period with respect to such Loan, and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as Kitty Hawk may select as provided in Section 2.9, except that each such Interest Period which commences on the last Business Day of a calendar month SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 21 28 (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day or, if such succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day; (b) any Interest Period which would otherwise extend beyond an applicable Maturity Date shall end on such Maturity Date; (c) no more than five Interest Periods for Eurodollar Loans shall be in effect at the same time for the Revolving Credit Loans and no more than two Interest Periods for Eurodollar Loans shall be in effect at the same time for the Term Loans; (d) no Interest Period for any Eurodollar Loan shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loans would otherwise be a shorter period, such Loans shall not be available hereunder; and (e) no Interest Period for the Term Loans may commence before and end after any principal repayment date unless, after giving effect thereto, the aggregate principal amount of the Eurodollar Loans having Interest Periods that end after such principal payment date shall be equal to or less than the amount of the Term Loans scheduled to be outstanding hereunder after such principal payment date. "Investments" has the meaning specified in Section 9.5. "Issuing Bank" means Wells Fargo or such other Lender which is a commercial bank as Kitty Hawk and Agent may mutually designate from time to time which agrees to be the issuer of a Letter of Credit. "Kalitta Companies" means AIA, AIT, FOL, KFS and OK, and "Kalitta Company" means any of such corporations. "KFS" means as specified in the introductory paragraph of this Agreement. "Kitty Hawk" means as specified in the introductory paragraph of this Agreement. "Kitty Hawk Aircraft" means, collectively, AIA Aircraft and Non-Collateral Aircraft. "Kitty Hawk Companies" means, collectively, Kitty Hawk, Aircargo, Charters, Leasing and Skyfreighters, and "Kitty Hawk Company" means any of such corporations. "Leasing" means as specified in the introductory paragraph of this Agreement. "Lender" and "Lenders" means as specified in the introductory paragraph of this Agreement, and includes, without limitation unless otherwise provided herein, any Lender in its status as an Issuing Bank. "Letter of Credit" means any standby letter of credit issued by the Issuing Bank for the account of Kitty Hawk pursuant to this Agreement. "Letter of Credit Agreement" means, with respect to each Letter of Credit to be issued by the Issuing Bank therefor, the letter of credit application and reimbursement agreement which such SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 22 29 Issuing Bank requires to be executed by Kitty Hawk in connection with the issuance of such Letter of Credit. "Letter of Credit Liabilities" means, at any time, the aggregate undrawn face amounts of all outstanding Letters of Credit and all unreimbursed drawings under Letters of Credit. "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law or otherwise. "Loans" means the Revolving Credit Loans and the Term Loans, and "Loan" means any of the Revolving Credit Loans or the Term Loans. "Loan Documents" means this Agreement, the Notes, the Security Documents, the Letters of Credit, the Letter of Credit Agreements and any and all other promissory notes, chattel mortgages, deeds of trust, security agreements, assignments, financing statements, guaranties and other agreements, documents, instruments and certificates now or hereafter executed and/or delivered pursuant to or in connection with any of the foregoing and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Material Adverse Effect" means the occurrence of any event or the existence of any condition that has materially and adversely affected, or is reasonably expected (given the totality of circumstances then existing) to have a material adverse effect on: (a) the Properties, business, operations, financial condition or performance, cash flow, liabilities or capitalization of Kitty Hawk or any of its Subsidiaries; (b) the ability of Kitty Hawk or any of its Subsidiaries to pay and perform when due its Obligations under any Loan Document to which it is a party; (c) the value or condition of the AIA Aircraft taken as a whole; or (d) the validity or enforceability of (i) any of the Loan Documents, (ii) any Lien created or purported to be created by any of the Loan Documents or the required priority of any such Lien, or (iii) the rights and remedies of Agent or Lenders under any of the Loan Documents. "Material Contracts" means, as to any Person, any supply, purchase, service, employment, tax, indemnity, shareholder or other agreement or contract which is deemed to be a material contract of such Person as provided in Regulation S-K promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, and any and all amendments, modifications, supplements, renewals or restatements thereof. "Maturity Date" means the Revolving Credit Loans Maturity Date or the Term Loans Maturity Date, as the case may be. "Maximum Rate" means, with respect to any Lender, the maximum non-usurious interest rate, if any, that any time or from time to time may be contracted for, taken, reserved, charged or received with respect to the particular Obligations as to which such rate is to be determined, payable to such Lender pursuant to this Agreement or any other Loan Document, under laws applicable to such SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 23 30 Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable laws now allow. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to Kitty Hawk or any other Company at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the weekly ceiling described in, and computed in accordance with, Article 5069, Vernon's Texas Civil Statutes, as amended and in effect from time to time, or any successor or replacement statute; provided, however, that, to the extent permitted by applicable law, Agent shall have the right to change the applicable rate ceiling from time to time in accordance with applicable law. "Merger" means the mergers of Wholly-Owned Subsidiaries of Kitty Hawk with and into AIA, AIT, FOL, KFS and OK in accordance with the Merger Agreement and pursuant to which AIA, AIT, FOL, KFS and OK are the surviving entities. "Merger Agreement" means as specified in Recital C. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by or are required from any Company or any ERISA Affiliate since 1974 and which is covered by Title IV of ERISA. "Net Income" means, for any period, the net income (or loss) of the Companies (or other applicable Person) for such period, determined on a consolidated basis in accordance with GAAP. "Net Proceeds" means, with respect to any Asset Disposition, (a) the gross amount of cash received by Kitty Hawk or any of its Subsidiaries from such Asset Disposition, minus (b) the amount, if any, of all taxes paid or payable by Kitty Hawk or any of its Subsidiaries directly resulting from such Asset Disposition (including the amount, if any, estimated by Kitty Hawk in good faith at the time of such Asset Disposition for taxes payable by Kitty Hawk or any of its Subsidiaries on or measured by net income or gain resulting from such Asset Disposition), minus (c) the reasonable out-of-pocket costs and expenses incurred by Kitty Hawk or such Subsidiary in connection with such Asset Disposition (including reasonable brokerage fees paid to a Person other than an Affiliate of Kitty Hawk) excluding any fees or expenses paid to an Affiliate of Kitty Hawk, minus (d) amounts applied to the repayment of Debt (other than the Obligations) secured by any Permitted Lien (if any) on the Property subject to the Asset Disposition. "Net Proceeds" with respect to any Asset Disposition shall also include proceeds (after deducting any amounts specified in clauses (b), (c) and (d) of the preceding sentence) of insurance with respect to any actual or constructive loss of Property, an agreed or compromised loss of Property or the taking of any Property under the power of eminent domain and condemnation awards and awards in lieu of condemnation for the taking of Property under the power of eminent domain, except such proceeds and awards as are released to and used by Kitty Hawk or any of its Subsidiaries in accordance with Section 8.5. "Net Proceeds" means, with respect to any Equity Issuance, (i) the gross amount of cash or cash equivalents plus the gross value of all other consideration received from such Equity Issuance, exclusive of the proceeds of sales of SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 24 31 Capital Stock of Kitty Hawk to employees or directors of Kitty Hawk or its Subsidiaries in connection with the provision of compensation or benefits to such employees or directors for their activities as such, minus (ii) the out-of-pocket costs and expenses incurred by Kitty Hawk in connection with such Equity Issuance (including any underwriting fees paid to a Person) excluding any fees or expenses paid to an Affiliate of Kitty Hawk which are in excess of those that would be paid or payable in connection with an arms' length transaction with a Person who is not an Affiliate of Kitty Hawk. "Net Worth" means, at any particular time, all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of Kitty Hawk and its Subsidiaries; provided, however, there shall be excluded therefrom any amount at which shares of Capital Stock of Kitty Hawk appear as an asset on Kitty Hawk's balance sheet. "Non-Collateral Aircraft" means (a) any and all aircraft, engines, propellers, appliances and Parts hereafter owned by Kitty Hawk or any of its Subsidiaries that (i) are not subject to any Lien in favor of Agent securing any Obligation and (ii) are not required to be subject to such a Lien in accordance with this Agreement or any other Loan Document, and (b) all products and proceeds thereof other than accounts (including, without limitation, Receivables), chattel paper, general intangibles and other personal property referred to in Section 5.1. "Note Offering" means as specified in Recital E. "Notes" means the Revolving Credit Loans Notes and the Term Loans Notes and any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements thereof and all substitutions therefor (including promissory notes issued by Kitty Hawk pursuant to Section 13.8), and "Note" means any one of such promissory notes. "Obligations" means any and all (a) indebtedness, liabilities and obligations of Kitty Hawk and its Subsidiaries, or any of them, to Agent, the Issuing Bank and Lenders, or any of them, evidenced by and/or arising pursuant to any of the Loan Documents (including, without limitation, the Guaranties), now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, including, without limitation, (i) the obligations of Kitty Hawk and its Subsidiaries, or any of them, to repay the Loans and the Reimbursement Obligations, to pay interest on the Loans and the Reimbursement Obligations (including, without limitation, interest accruing after any, if any, bankruptcy, insolvency, reorganization or similar filing) and to pay all fees, indemnities, costs and expenses (including attorneys' fees and expenses) provided for in the Loan Documents and (ii) the indebtedness constituting the Loans, the Reimbursement Obligations and interest accrued thereon and such fees, indemnities, costs and expenses, and (b) liabilities and obligations of Kitty Hawk and its Subsidiaries, or any of them, under any interest rate swap, cap or collar agreement or similar arrangement between Kitty Hawk or any of its Subsidiaries and another Person providing for the transfer or mitigation of interest rate risks approved by Agent and Required Lenders as being a part of the "Obligations" hereunder. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 25 32 "Offering Memorandum" means that certain Offering Memorandum issued November 19, 1997, by Kitty Hawk relating to the Senior Notes. "OK" means as specified in the introductory paragraph of this Agreement. "Operating Lease" means, with respect to any Person, any lease, rental or other agreement for the use by that Person of any Property which is not a Capital Lease Obligation. "Operating Lease Expense" means, with respect to any Person, means all payments of such Person with respect to any Operating Lease. "Operating Subsidiaries" means, collectively, Aircargo, Leasing, Charters, AIA, AIT, FOL, KFS, OK, AIC and any other Subsidiary of Kitty Hawk that is an operating company, and "Operating Subsidiary" means any of such corporations. "Outstanding Revolving Credit" means, at any particular time, the sum of (a) the aggregate outstanding principal amount of the Revolving Credit Loans, plus (b) all Letter of Credit Liabilities. "Parts" means all parts, appliances (including, without limitation, communication equipment and other equipment capable of being used, or intended to be used, in operating or controlling aircraft in flight), components, instruments, appurtenances, accessories, furnishings, instruments and other equipment of whatever nature (other than completed engines) which may be from time to time, or are suitable for, attachment to, installation in or other incorporation in an airframe or engine, in each case prior to the time of such attachment, installation or other incorporation. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Payor" means as specified in Section 3.4. "Pension Plan" means an employee pension benefit plan as defined in Section 3(2) of ERISA (including a Multiemployer Plan) which is subject to the funding requirements under Section 302 of ERISA or Section 412 of the Code, in whole or in part, and which is maintained or contributed to currently or at any time within the six years immediately preceding the Closing Date or, in the case of a Multiemployer Plan, at any time since September 2, 1974, by Kitty Hawk or any of its Subsidiaries or ERISA Affiliates for employees of Kitty Hawk or any of its Subsidiaries or ERISA Affiliates. "Peril" means as specified in Section 8.5(a). "Permit" means any permit, certificate, approval, order, license or other authorization. "Permitted Holders" means (a) the officers and directors of the Companies as of the Closing Date, (b) all other individuals who own Capital Stock of Kitty Hawk on the Closing Date, and (c) any spouse, parent, sibling, child or grandchild of any of the aforesaid individuals (in each case, whether SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 26 33 such relationship arises from birth, adoption or through marriage) or any trust established for the benefit of any such individuals or any spouse, parent, sibling, child or grandchild of any such individuals (in each case whether such relationship arises from birth, adoption or through marriage). "Permitted Liens" means: (a) Liens in favor of Agent (for the benefit of Agent and Lenders) securing the Obligations pursuant to the Loan Documents; (b) Liens in favor of the Trustee securing the Debt evidenced by the Senior Notes, which Liens are required to be granted in accordance with the Indenture (including Section 15.05 of the Indenture), as the Indenture is in effect as of the Closing Date (or may thereafter be amended with the prior written consent of Agent and Required Lenders, which consent of Agent and Required Lenders shall not be deemed given by Section 9.13); (c) Liens for taxes, assessments or other governmental charges which (i) are not delinquent or (ii) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established in accordance with GAAP; (d) Eurocontrol Liens, landing fee Liens, Liens of mechanics, materialmen and artisans and other similar statutory Liens, which Liens (in each case) secure obligations incurred in the ordinary course of business, which (i) are not yet due or (ii) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established in accordance with GAAP; (e) Purchase-money Liens on any Property hereafter acquired or the assumption after the Closing Date of any Lien on Property existing at the time of such acquisition (and not created in contemplation of such acquisition), or a Lien incurred after the Closing Date in connection with any conditional sale or other title retention agreement or Capital Lease Obligation; provided that: (i) any Property subject to the foregoing is acquired by Kitty Hawk or any of its Subsidiaries in the ordinary course of its respective business and the Lien on the Property attaches concurrently or within 90 days after the acquisition thereof; (ii) the Debt secured by any Lien so created, assumed or existing shall not exceed the lesser of the cost or fair market value at the time of acquisition of the Property covered thereby; (iii) each such Lien shall attach only to the Property so acquired and the proceeds thereof; and SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 27 34 (iv) the Debt secured by all such Liens shall not exceed $75,000,000 at any time outstanding in the aggregate; (f) Liens existing as of the Closing Date and identified on Schedule 1.1(c); and (g) Any extension, renewal or replacement of any of the foregoing, provided that Liens permitted hereunder shall not be extended or spread to cover any additional indebtedness or Property; provided, however, that (i) none of the Liens referred to in clauses (b) or (f) preceding may attach or relate to any Collateral, (ii) none of the Liens referred to in clause (e) preceding may attach or relate to any AIA Aircraft, Receivables or Parts, (iii) none of the Permitted Liens that attach or relate to any Collateral may have a priority equal to or greater than the priority of the Permitted Liens referred to in clause (a) preceding, and (iv) none of the Permitted Liens, except those referred to in clause (a) preceding, may attach or relate to any Capital Stock issued by any Subsidiary of Kitty Hawk. "Person" means any individual, corporation, trust, association, company, partnership, joint venture, limited liability company, Governmental Authority, or other entity. "Plan" means any employee benefit plan as defined in Section 3(3) of ERISA established or maintained or contributed to by any Company or any ERISA Affiliate, including any Pension Plan. "Prime Rate" means, at any time, the rate of interest per annum then most recently announced within Wells Fargo, at the principal office of its affiliated bank in San Francisco, California, as its highest commercial prime rate then in effect, which rate (a) is one of its base rates and serves as the basis upon which effective rates of interest are calculated for loans making reference thereto, (b) may not be the lowest rate of interest charged by Wells Fargo to its commercial borrowers, and (c) is evidenced by the recording thereof after such announcement in such internal publication or publications as Wells Fargo may designate from time to time. Each change in any interest rate provided for herein based upon the Prime Rate resulting from a change in the Prime Rate shall take effect at the time such change is announced within Wells Fargo and without notice to Kitty Hawk or any of its Subsidiaries at the time of such change in the Prime Rate. "Principal Office" means the principal office of Agent in Dallas, Texas, presently located at 1445 Ross Avenue, Dallas, Texas 75202. "Prior Credit Agreement" means as specified in Recital A. "Prior Lenders" means Wells Fargo and Bank One in their capacities as lenders under the Prior Credit Agreement. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 28 35 "Pro Forma Balance Sheet" means the pro forma balance sheet of Kitty Hawk and its consolidated Subsidiaries dated as of September 30, 1997 after giving effect to the initial Loans under this Agreement and the Related Transactions. "Projections" means the financial projections of Kitty Hawk and its Subsidiaries dated as of the Closing Date and delivered to Agent. "Property" means, unless the context otherwise requires, property of all kinds, real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto), whether owned or acquired on or after the Closing Date. "Public Offering" means a public offering of any Capital Stock of Kitty Hawk. "Quarterly Payment Date" means the last day of each March, June, September and December of each year, commencing December 31, 1997. "Receivables" means, as at any date of determination thereof, each and every "account" as such term is defined in the UCC and includes, without limitation, the unpaid portion of the obligation, as stated on the respective invoice, or, if there is no invoice, other writing, of a customer of any Company in respect of goods sold and shipped or services rendered by a Company. "Reference Lender" means Wells Fargo. "Register" has the meaning specified in Section 13.8(d). "Registration Statement" means that certain Amendment No. 3 to Form S-1, Registration No. 333-36125, filed with the SEC on November 12, 1997, relating to the Common Stock Offering. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to any Lender, any change after the Closing Date in any U.S. federal or state, or any foreign, laws or regulations (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of lenders including such Lender of or under any U.S. federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "Reimbursement Obligations" means the obligation of Kitty Hawk to reimburse the Issuing Bank for any drawing under a Letter of Credit. "Related Transactions" means, collectively, (a) the Merger, (b) the Common Stock Offering, (c) the Note Offering, and (d) the execution, delivery and performance of the Related Transactions Documents. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 29 36 "Related Transactions Documents" means, collectively, (a) the Merger Agreement, (b) the Registration Statement, (c) the Offering Memorandum, (d) the Indenture, and (e) all other agreements, documents, instruments and certificates executed and/or delivered pursuant to or in connection with the Related Transactions. "Release" means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, discharge, disposal, disbursement, leaching or migration of Hazardous Materials into the indoor or outdoor environment or into or out of Property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water or ground water. "Remedial Action" means all actions required to (a) clean up, remove, respond to, treat or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform studies and investigations on the extent and nature of any actual or suspected contamination, the remedy or remedies to be used or health effects or risks of such contamination, or (d) perform post-remedial monitoring, care or remedy of a contaminated site. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Required Lenders" means, at any date of determination, Lenders having in the aggregate at least 66 2/3% (in Dollar amount as to any one or more of the following) of the sum of (a) the aggregate outstanding Revolving Credit Loans Commitments (or, if such Revolving Credit Loans Commitments have terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and Letter of Credit Liabilities), plus (b) the aggregate outstanding principal amount of the Term Loans. "Required Payment" means as specified in Section 3.4. "Reserve Requirement" means, for any Eurodollar Loan of any Lender for any Interest Period therefor, the maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under any regulations of the Board of Governors of the Federal Reserve System (or any successor) by such Lender for deposits exceeding $1,000,000 against "Eurocurrency Liabilities" as such term is used in Regulation D. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such Lenders by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the Eurodollar Rate or the Adjusted Eurodollar Rate is to be determined or (b) any category of extensions of credit or other assets which include Eurodollar Loans. "Responsible Officer" means, as to Kitty Hawk or any of its Subsidiaries, the chief financial officer, chief operating officer or chief executive officer of such Person. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 30 37 "Restricted Payment" means (a) any dividend or other distribution (whether in cash, Property or obligations), direct or indirect, on account of (or the setting apart of money for a sinking or other analogous fund for) any shares of any class of Capital Stock of Kitty Hawk or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (b) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of Kitty Hawk or any of its Subsidiaries now or hereafter outstanding; (c) any payment or prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, purchase, retirement or defeasance of, or payment with respect to, any Subordinated Debt; (d) any loan, advance or payment to any officer, director or shareholder of Kitty Hawk or any of its Subsidiaries (other than as may be made in the ordinary course of business to Kitty Hawk as a shareholder), exclusive of reasonable compensation paid to officers or directors paid in the ordinary course of business; and (e) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of Kitty Hawk or any of its Subsidiaries now or hereafter outstanding. "Revolving Credit Loans" means as specified in Section 2.1(a). "Revolving Credit Loans Commitment" means, as to any Lender, the obligation of such Lender, in accordance with this Agreement, to make or continue Revolving Credit Loans and to incur or participate in Letter of Credit Liabilities hereunder in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereto under the heading "Revolving Credit Loans Commitment" or, if such Lender is a party to an Assignment and Acceptance, the amount of the "Revolving Credit Loans Commitment" set forth in the most recent Assignment and Acceptance of such Lender, as the same may be reduced or terminated pursuant to Section 2.13 or 11.2, and "Revolving Credit Loans Commitments" means such obligations of all Lenders. As of the Closing Date, the aggregate principal amount of the Revolving Credit Loans Commitments is $100,000,000. "Revolving Credit Loans Lender" means, as of any date of determination, each Lender which has a Revolving Credit Loans Commitment or (if such Commitment has terminated or expired) which is the holder of (or is owed by Kitty Hawk any Debt evidenced by) any of the Revolving Credit Loans Notes. "Revolving Credit Loans Maturity Date" means November 19, 2002. "Revolving Credit Loans Notes" means the promissory notes, in the form of Exhibit C hereto, made by Kitty Hawk evidencing the Revolving Credit Loans. "SEC" means the Securities and Exchange Commission, or any successor agency thereto. "Securities" means any and all securities and other equity rights or ownership interests of any type or character in any Person which is not a natural Person, including, without limitation, (a) Capital Stock or other equity rights, bonds, notes or other instruments convertible into Capital Stock or other SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 31 38 equity interests, (b) options, warrants or other rights to acquire Capital Stock or other equity interests, and (c) partnership and joint venture interests. "Security Agreements" means (a) security agreements, pledge agreements and other agreements, documents or instruments executed by the Companies and any Subsidiaries of Kitty Hawk dated the Closing Date (or such other date as any Company or such Subsidiary may execute such Security Agreement), (b) any such agreement, document or instrument at any time executed pursuant to Article 5 hereof, evidencing or creating a Lien on the Collateral as security for the Obligations and in form and substance reasonably satisfactory to Agent, and (c) any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements thereof. "Security Documents" means the Guaranties, Aircraft Mortgages and the Security Agreements, as they may be amended, modified, supplemented, renewed, extended, restated or replaced from time to time, and any and all other agreements, deeds of trust, mortgages, chattel mortgages, security agreements, pledges, guaranties, assignments of proceeds, assignments of income, assignments of contract rights, assignments of partnership interests, assignments of royalty interests, assignments of performance or other collateral assignments, completion or surety bonds, standby agreements, subordination agreements, undertakings and other agreements, documents, instruments and financing statements now or hereafter executed and/or delivered by Kitty Hawk or any of its Subsidiaries in connection with or as security or assurance for the payment or performance of the Obligations or any part thereof. "Senior Notes" means as specified in Recital E. "Skyfreighters" means as specified in the introductory paragraph of this Agreement. "Solvent" means, with respect to any Person as of the date of any determination, that on such date (a) the fair value of the Property of such Person (both at fair valuation and at present fair saleable value) is greater than the total liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's Property would constitute unreasonably small capital after giving due consideration to current and anticipated future capital requirements and current and anticipated future business conduct and the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, such liabilities shall be computed at the amount which, in light of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subordinated Debt" means any and all Debt of Kitty Hawk or any of its Subsidiaries which is subordinate in right of payment to the payment of the Obligations or any portion thereof. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 32 39 "Subsidiary" means, with respect to any Person, any corporation or other entity of which at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such corporation or entity (irrespective of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries. "Term Loans" means as specified in Section 2.1(b). "Term Loans Commitment" means, as to any Lender, the obligation of such Lender to make or continue Term Loans hereunder in an aggregate principal amount up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereto under the heading "Term Loans Commitment", as the same may be terminated pursuant to Section 11.2, and "Term Loans Commitments" means such obligations of all Lenders. As of the Closing Date, the aggregate principal amount of the Term Loans Commitments is $45,900,000. "Term Loans Lenders" means, as of any date of determination, each Lender which has a Term Loans Commitment or (if such Commitment has terminated or expired) which is the holder of (or is owed by Kitty Hawk any Debt evidenced by) any of the Term Loans Notes. "Term Loans Maturity Date" means November 19, 2002. "Term Loans Notes" means the promissory notes made by Kitty Hawk evidencing the Term Loans, in the form of Exhibit D hereto. "Title Company" means Federal Aviation Title and Guaranty Company, Oklahoma City, Oklahoma. "Trustee" means Bank One, NA, as Trustee under the Indenture, and any successor trustee thereunder. "Type" means any type of Loan (i.e., Base Rate Loan or Eurodollar Loan). "UCC" means the Uniform Commercial Code as in effect in the State of Texas and/or any other jurisdiction, the laws of which may be applicable to or in connection with the creation, perfection or priority of any Lien on any Property created pursuant to any Security Document. "U.S." means the United States of America. "Wells Fargo" means as specified in the introductory paragraph of this Agreement. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 33 40 "Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary of such Person all of whose outstanding Capital Stock is owned by such Person and/or one or more of its Wholly-Owned Subsidiaries. Section 1.2 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof", "herein" and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article, Section and Recital references pertain to this Agreement. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC. Section 1.3 Accounting Terms and Determinations. (a) All accounting terms not specifically defined herein shall be construed in accordance with GAAP (subject to year end adjustments, if applicable) consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a). All financial information delivered to Agent pursuant to Section 8.1 shall be prepared in accordance with GAAP (subject to year end adjustments, if applicable) applied on a basis consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a) or in accordance with Section 8.7. (b) Kitty Hawk shall deliver to Agent and Lenders, at the same time as the delivery of any annual or quarterly financial statement under Section 8.1, (i) a description, in reasonable detail, of any material variation between the application of GAAP employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) preceding and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in this Agreement (including Article 10 hereof), neither Kitty Hawk nor any of its Subsidiaries will change the last day of its fiscal year from December 31st or the last days of its first three fiscal quarters from March 31st, June 30th and September 30th, respectively. Section 1.4 Financial Covenants and Reporting. The financial covenants contained in Article 10 shall be calculated on a consolidated basis for Kitty Hawk and its Subsidiaries. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 34 41 ARTICLE 2 Loans Section 2.1 Commitments. (a) Revolving Credit Loans. Subject to the terms and conditions of this Agreement (including, without limitation, Section 2.13), each Revolving Credit Loans Lender severally agrees to make one or more revolving credit loans to Kitty Hawk from time to time from and including the Closing Date to but excluding the Revolving Credit Loans Maturity Date in an aggregate principal amount outstanding not to exceed the positive remainder of (i) the amount of such Lender's Revolving Credit Loans Commitment as then in effect, minus (ii) such Lender's Commitment Percentage of the Letter of Credit Liabilities then outstanding (such revolving credit loans referred to in this Section 2.1(a) now or hereafter made by Lenders to Kitty Hawk from and including and after the Closing Date are hereinafter collectively called the "Revolving Credit Loans"); provided, however, that the Outstanding Revolving Credit shall not at any time exceed the Borrowing Base then most recently determined. Subject to the foregoing limitations and the other terms and conditions of this Agreement, Kitty Hawk may borrow, repay and reborrow the Revolving Credit Loans hereunder prior to the Revolving Credit Loans Maturity Date. The Borrowing Base shall be determined in good faith by Agent as of the Closing Date and shall be redetermined in good faith by Agent monthly thereafter within five Business Days after the delivery, or the required date of delivery, of the Borrowing Base Report to be delivered in accordance with Section 8.1(e), subject to Agent's right to redetermine the Borrowing Base in accordance with the immediately succeeding sentence; provided, however, that, until the earlier to occur of delivery of the initial Borrowing Base Report in accordance with Section 8.1(e) or January 19, 1998, the Borrowing Base shall be deemed to be 65% of Eligible Receivables (as determined in good faith by Agent) and the Borrowing Base thereafter shall be calculated based upon the applicable Advance Rate for Eligible Receivables and Eligible Parts. In addition, the Borrowing Base may be redetermined at any time and from time to time by Agent in good faith upon the occurrence and during the continuation of a Default. (b) Term Loans. Subject to the terms and conditions of this Agreement, each Term Loans Lender severally agrees to make a term loan to Kitty Hawk in a single disbursement on the Closing Date in an amount equal to such Lender's Term Loans Commitment (such term loans referred to in this Section 2.1(b) made by the Term Loans Lenders to Kitty Hawk are hereinafter collectively called the "Term Loans"). The Term Loans Commitments shall terminate upon the making of the Term Loans. Kitty Hawk agrees to borrow the Term Loans on the Closing Date for the purpose of refinancing the AIA Fleet Advance as specified in the first sentence of Section 2.10(b). (c) Continuation and Conversion of Loans. Subject to the terms of this Agreement, Kitty Hawk may borrow the Loans as Base Rate Loans or Eurodollar Loans and, until the respective Maturity Date thereof, Kitty Hawk may Continue Eurodollar Loans or Convert Loans of one Type into Loans of the other Type. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 35 42 (d) Lending Offices. Loans of each Type made by each Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. Section 2.2 The Notes. The Revolving Credit Loans made by each Revolving Credit Loans Lender shall be evidenced by a single promissory note of Kitty Hawk in substantially the form of Exhibit C hereto, dated the Closing Date, payable to the order of such Lender in a principal amount equal to its Revolving Credit Loans Commitment as originally in effect, and otherwise duly completed. The Term Loans made by each Term Loans Lender shall be evidenced by a single promissory note of Kitty Hawk in substantially the form of Exhibit D hereto, dated the Closing Date, payable to the order of such Lender in a principal amount equal to its Term Loans Commitment as originally in effect, and otherwise duly completed. Each Lender is hereby authorized by Kitty Hawk to endorse on the schedule (or a continuation thereof) attached to each Note of such Lender, to the extent applicable, the date, amount and Type of and the Interest Period for each Loan made by such Lender to Kitty Hawk and the amount of each payment or prepayment of principal of such Loan received by such Lender, provided that any failure by such Lender to make any such endorsement shall not affect the obligations of Kitty Hawk or any other Company under such Note or this Agreement in respect of such Loan. Section 2.3 Repayment of Loans. (a) Kitty Hawk shall pay to Agent for the account of the Revolving Credit Loans Lenders the entire outstanding principal of the Revolving Credit Loans (and the entire outstanding principal of the Revolving Credit Loans shall be due and payable in full) on the Revolving Credit Loans Maturity Date. (b) Kitty Hawk shall pay to Agent for the account of the Term Loans Lenders the entire outstanding principal of the Term Loans (and the entire outstanding principal of the Term Loans shall be due and payable in full) in 16 installments, commencing on March 31, 1999 and continuing on each Quarterly Payment Date thereafter through and including September 30, 2002 and ending on the Term Loans Maturity Date, each of which installments, other than the final installment due on the Term Loans Maturity Date, shall be in the amount of $2,250,000 and the final of which installments (due on the Term Loans Maturity Date) shall be in the amount equal to the then unpaid principal amount of the Term Loans. Section 2.4 Interest. (a) Interest Rate. Kitty Hawk shall pay to Agent for the account of each applicable Lender interest on the unpaid principal amount of each Loan made by such Lender to Kitty Hawk for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 36 43 (i) during the periods any such Loan is a Base Rate Loan, the lesser of (A) the Base Rate plus the Applicable Base Rate Margin or (B) the Maximum Rate; and (ii) during the periods any such Loan is a Eurodollar Loan, the lesser of (A) the Eurodollar Rate plus the Applicable Eurodollar Margin or (B) the Maximum Rate. (b) Payment Dates. Accrued interest on the Loans shall be due and payable as follows: (i) in the case of Base Rate Loans, on each Quarterly Payment Date; (ii) in the case of each Eurodollar Loan, on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months, at three-month intervals after the first day of such Interest Period; (iii) upon the payment or prepayment (whether mandatory or optional) of any Loan or the Conversion of any Loan to a Loan of the other Type (but only on the principal amount so paid, prepaid or Converted); and (iv) on the Maturity Date for such Loan. (c) Default Interest. Notwithstanding the foregoing, Kitty Hawk shall pay to Agent for the account of each applicable Lender interest at the applicable Default Rate (i) at all times during which any Event of Default has occurred and is continuing, on any principal of any Loan or Reimbursement Obligation outstanding and (ii) on any principal of any Loan or any Reimbursement Obligation outstanding and (to the fullest extent permitted by law) any other amount payable by Kitty Hawk or any other Company under this Agreement or any other Loan Document to or for the account of such Lender, which is not paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Interest payable at the Default Rate shall be payable from time to time on demand by Agent. Section 2.5 Borrowing Procedure. Kitty Hawk shall give Agent notice of each borrowing of Loans hereunder in accordance with Section 2.9. Not later than 10:00 a.m. (San Francisco, California time) on the date specified for each borrowing hereunder, each Lender will make available the amount of the Loan to be made by it on such date to Agent, at the Applicable Lending Office of Agent, in immediately available funds, for the account of Kitty Hawk. The amount so received by Agent shall, subject to the terms and conditions of this Agreement, be made available to Kitty Hawk promptly by wire transfer of immediately available funds to the applicable Deposit Account; provided, however, that the Term Loans shall be automatically applied by Agent to refinance the existing indebtedness referred to in Section 2.10(b); and provided, further, however, that the Term Loans shall be deemed to have been automatically advanced under this Agreement for and on behalf of Kitty Hawk in accordance with this Agreement if and when Agent determines that all conditions precedent SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 37 44 set forth in Section 6.1 have been complied with to the satisfaction of Agent and/or have been waived by Agent and, upon execution of this Agreement by Kitty Hawk, Agent's determination regarding such automatic advancement shall be deemed conclusive. Section 2.6 Optional Prepayments, Conversions and Continuations of Loans. Subject to Section 2.7, Kitty Hawk shall have the right from time to time to prepay the principal of the Loans, to Convert all or part of a Loan of one Type into a Loan of another Type or to Continue Eurodollar Loans; provided that: (a) Kitty Hawk shall give Agent notice of each such prepayment, Conversion or Continuation as provided in Section 2.9, (b) Eurodollar Loans may only be Converted on the last day of the Interest Period, (c) except for Conversions of Eurodollar Loans into Base Rate Loans, no Conversions or Continuations shall be made while a Default has occurred and is continuing, and (d) optional prepayments of the Term Loans shall be applied pro rata to the then remaining installments of principal of the Term Loans. Section 2.7 Mandatory Prepayments. (a) Insurance Recovery. Kitty Hawk shall, within two Business Days after any Insurance Recovery results in any Excess Insurance Proceeds, pay (or cause to be paid) to Agent an aggregate amount equal to such Excess Insurance Proceeds. The proceeds of any Excess Insurance Proceeds shall be applied first to the Term Loans and, after the Term Loans are paid in full, then to the Revolving Credit Loans. (b) Asset Dispositions. Kitty Hawk shall (i) concurrently with any Asset Disposition of any Collateral, pay to Agent an aggregate amount equal to 100% of the Net Proceeds resulting from such Asset Disposition of such Collateral and (ii) concurrently with any Asset Disposition of any other Property, pay to Agent an aggregate amount equal to 100% of the Net Proceeds resulting from such Asset Disposition of other Property if and to the extent the aggregate of Net Proceeds from Asset Dispositions of all such other Property exceeds $15,000,000 during the fiscal year in which such Asset Disposition occurs. The proceeds of each such Asset Disposition referred to in this Section 2.7(b) shall be applied first to the Term Loans and, after the Term Loans are paid in full, then to the Revolving Credit Loans. Nothing contained in this Section 2.7 shall be construed to authorize or permit the sale or other disposition of any Collateral other than in compliance with Section 9.8(a). (c) Equity Issuances. Kitty Hawk shall, concurrently with the consummation of each Equity Issuance after the Closing Date, pay to Agent an aggregate amount equal to 50% of the Net Proceeds of such Equity Issuance; provided, however, that Net Proceeds of any such Equity Issuance which are, substantially concurrently with such Equity Issuance, used by Kitty Hawk to pay all or any portion of the purchase price payable with respect to any asset acquisition or stock acquisition permitted in accordance with Section 9.3 shall be excluded for purposes of this Section 2.7(c). (d) Revolving Credit Loans. If at any time the Outstanding Revolving Credit exceeds an amount equal to the lesser of the Revolving Credit Loans Commitments then in effect or the Borrowing Base then most recently determined or redetermined, within one SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 38 45 Business Day after the occurrence thereof Kitty Hawk shall pay to Agent the amount of such excess as a prepayment of the Revolving Credit Loans. (e) Application of Mandatory Prepayments. All prepayments pursuant to subsections (a), (b) and (c) preceding, if and to the extent the same are required to be applied to the Term Loans in accordance with such subsections, shall be applied pro rata to the then remaining installments of principal of the Term Loans. Section 2.8 Minimum Amounts. Except for Conversions pursuant to Article 4, each borrowing and each Conversion of principal of the Revolving Credit Loans shall be in an amount at least equal to (a) $5,000,000 or an integral multiple of $1,000,000 in excess thereof with respect to Eurodollar Loans or (b) $500,000 or an integral multiple of $100,000 in excess thereof with respect to Base Rate Loans (borrowings, prepayments or Conversions of or into Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder shall be deemed separate borrowings, prepayments and Conversions for purposes of the foregoing, one for each Type or Interest Period). Furthermore, all optional prepayments of principal of the Term Loans shall be in an amount equal to $5,000,000 or an integral multiple of $1,000,000 in excess thereof. Section 2.9 Certain Notices. Notices by Kitty Hawk to Agent of terminations or reductions of Commitments, of borrowings, Conversions, Continuations and prepayments of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by Agent not later than 8:00 a.m. (San Francisco, California time) on the Business Day prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below:
- -------------------------------------------------------------------------------- Number of Notice Business Days Prior - -------------------------------------------------------------------------------- Terminations or Reductions of Commitments 5 - -------------------------------------------------------------------------------- Borrowings of Revolving Credit Loans as Base Rate Loans 1 - -------------------------------------------------------------------------------- Borrowings of Revolving Credit Loans as Eurodollar Loans 3 - -------------------------------------------------------------------------------- Conversions or Continuations of Loans 3 - -------------------------------------------------------------------------------- Prepayments of Revolving Credit Loans which are Base Rate Loans 1 - -------------------------------------------------------------------------------- Prepayments of Revolving Credit Loans which are Eurodollar Loans 3 - -------------------------------------------------------------------------------- Prepayments of Term Loans 3 - --------------------------------------------------------------------------------
Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or prepayment shall specify the Loans to be borrowed, Converted, Continued or prepaid and the amount (subject to Section 2.8 hereof) and Type of the Loans to be borrowed, Converted, Continued or prepaid (and, SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 39 46 in the case of a Conversion, the Type of Loans to result from such Conversion) and the date of borrowing, Conversion, Continuation or prepayment (which shall be a Business Day). Notices of borrowings, Conversions, Continuations or prepayments shall be in the form of Exhibit E hereto, appropriately completed as applicable. Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. Agent shall promptly notify Lenders of the contents of each such notice. In the event that Kitty Hawk fails to select the Type of Loan, or the duration of any Interest Period for any Eurodollar Loan, within the time period and otherwise as provided in this Section 2.9, such Loan (if outstanding as Eurodollar Loan) will be automatically Converted into a Base Rate Loan on the last day of the preceding Interest Period for such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not then outstanding) will be made as, a Base Rate Loan. Kitty Hawk may not borrow any Eurodollar Loans, Convert any Loans into Eurodollar Loans or Continue any Loans as Eurodollar Loans if the interest rate for such Eurodollar Loans would exceed the Maximum Rate. Section 2.10 Use of Proceeds. (a) Kitty Hawk agrees with Agent and Lenders that (i) the proceeds of the Revolving Credit Loans to be made on and after the Closing Date shall be used by Kitty Hawk and its Wholly-Owned Subsidiaries which are Guarantors and Operating Subsidiaries for working capital and general corporate purposes and (ii) the Letters of Credit requested to be issued pursuant to this Agreement shall be used for insurance and contract performance by Kitty Hawk and its Wholly-Owned Subsidiaries which are Guarantors and Operating Subsidiaries and for other purposes approved by Agent. (b) Kitty Hawk and Aircargo agree with Agent and Lenders that the proceeds of the Term Loans shall be used by Kitty Hawk to pay in full $45,900,000 of existing Debt representing the AIA Fleet Advance owed by Kitty Hawk to Wells Fargo under the Prior Credit Agreement, and Kitty Hawk and Aircargo hereby irrevocably request that Agent deliver all of such proceeds to Wells Fargo (as agent under the Prior Credit Agreement) to pay such indebtedness (and Wells Fargo agrees to apply such proceeds to pay such indebtedness). Kitty Hawk, Aircargo, Agent and Lenders agree that, as of the Closing Date, the aggregate outstanding principal amount of the Debt representing the AIA Fleet Advance under the Prior Credit Agreement is $45,900,000. (c) None of the proceeds of any Loan have been or will be used to acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended, or to purchase or carry any margin stock (within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System). Section 2.11 Fees. (a) Kitty Hawk agrees to pay to Agent for the account of each Revolving Credit Loans Lender a commitment fee in the amount equal to the product of (i) the daily average unused or unfunded amount of such Lender's Revolving Credit Loans Commitment, for the period from and including the Closing Date to and including the Revolving Credit Loans SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 40 47 Maturity Date, multiplied by (ii) the Applicable Commitment Fee Rate per annum based on a 360 day year and the actual number of days elapsed, which accrued commitment fees shall be payable in arrears on each Quarterly Payment Date and on the Revolving Credit Loans Maturity Date. (b) Kitty Hawk agrees to pay to Agent for the account of Wells Fargo an up-front fee in the amount set forth in the Agent's Letter, which fee shall be payable in such amounts and on such dates as are specified therein (or, if the date for payment of any amount thereof is not specified therein, on the Closing Date). (c) Kitty Hawk agrees to pay to Agent, for its own account, an annual agency fee in the amount set forth in the Agent's Letter, which fee shall be payable in such amounts and on such dates as specified therein. Section 2.12 Computations. Interest and fees payable by Kitty Hawk hereunder and under the other Loan Documents on all Loans shall be computed on the basis of a year of 360 days (with respect to Eurodollar Loans) or 365 or 366 days, as the case may be (with respect to Base Rate Loans) and the actual number of days elapsed (including the first day but excluding the last day) occurring in the period for which payable unless, in the case of interest, such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Section 2.13 Termination or Reduction of Commitments. (a) Notwithstanding anything to the contrary contained in this Agreement, the Revolving Credit Loans Commitments shall automatically terminate at 8:00 a.m. (San Francisco, California time) on the Revolving Loans Commitments Maturity Date and the Term Loans Commitments shall automatically terminate upon the making of the Term Loans on the Closing Date. (b) Kitty Hawk shall have the right to terminate or reduce in part the unused portion of the Revolving Credit Loans Commitments at any time and from time to time, provided that (i) it shall give notice of each such termination or reduction as provided in Section 2.9 and (ii) each partial reduction shall be in an aggregate amount at least equal to $5,000,000 or an integral multiple of $100,000 in excess thereof. The Revolving Credit Loans Commitments may not be reinstated after they have been terminated or increased after they have been reduced. Section 2.14 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Kitty Hawk may utilize the Revolving Credit Loans Commitments by requesting that the Issuing Bank issue Letters of Credit; provided, that the aggregate amount of outstanding Letter of Credit Liabilities shall not at any time exceed $20,000,000 and no Letter of Credit shall be issued if, after giving effect to the issuance thereof, the Outstanding Revolving Credit would exceed the Borrowing SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 41 48 Base then most recently determined. Upon the date of issue of each Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Revolving Credit Loans Lender, and each Revolving Credit Loans Lender shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation to the extent of such Revolving Credit Loans Lender's Commitment Percentage of the Revolving Credit Loans Commitments. (b) Kitty Hawk shall give the Issuing Bank (with a copy to Agent) at least five Business Days prior notice (effective upon receipt and irrevocable unless appropriately revoked sufficiently prior to issuance of the Letter of Credit) specifying the date of each Letter of Credit and the nature of the transactions to be supported thereby. Upon receipt of such notice and confirmation by the Issuing Bank with Agent that such Letter of Credit may be issued in compliance with this Agreement, the Issuing Bank shall promptly notify Agent of the contents thereof and of each such Lender's Commitment Percentage of the amount of the proposed Letter of Credit, and Agent shall promptly thereupon notify the Revolving Credit Loans Lenders of such information. In addition, the Issuing Bank shall promptly deliver to the Agent a photocopy of such Letter of Credit. Each Letter of Credit shall have an expiration date that does not exceed one year from the date of issuance and that does not extend beyond the Revolving Credit Loans Maturity Date, shall be payable in Dollars, shall support a transaction entered into in the ordinary course of business of Kitty Hawk or its Wholly-Owned Subsidiaries which are Guarantors and Operating Subsidiaries, shall be satisfactory in form and substance to the Issuing Bank, and shall be issued pursuant to such agreements, documents and instruments (including a Letter of Credit Agreement) as the Issuing Bank may reasonably require, none of which shall be inconsistent with this Section 2.14. Each Letter of Credit shall (i) provide for the payment of drafts presented for, on or thereunder by the beneficiary in accordance with the terms thereof, when such drafts are accompanied by the documents (if any) described in the Letter of Credit and (ii) to the extent not inconsistent with the terms hereof or any applicable Letter of Credit Agreement, be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (together with any subsequent revision thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Bank, the "UCP"), and shall, as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the laws of the State of Texas. (c) Kitty Hawk agrees to pay to Agent for the account of each Lender, in arrears on each Quarterly Payment Date (beginning on December 31, 1997) and on the expiration date of each Letter of Credit, a nonrefundable letter of credit fee with respect to each Letter of Credit issued in an amount equal to the Applicable Eurodollar Margin (as in effect from time to time) per annum of the daily average face amount of the Letter of Credit in effect during the period then ended. Agent agrees to pay to each Lender, promptly after receiving any payment of such Letter of Credit fees, such Lender's Commitment Percentage of such fees. Kitty Hawk agrees to pay to Issuing Bank for its own account, concurrently with the issuance of each Letter of Credit, a nonrefundable letter of credit fee with respect to each Letter of Credit issued by the Issuing Bank in an amount equal to one-quarter of one percent SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 42 49 (0.25%) of the face amount of the Letter of Credit issued. In addition to the foregoing fees, Kitty Hawk shall pay or reimburse the Issuing Bank for such normal and customary costs and expenses, including, without limitation, administrative, issuance, amendment, payment and negotiation charges, as are incurred or charged by the Issuing Bank in issuing, effecting payment under, amending or otherwise administering any Letter of Credit. (d) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment or other drawing under such Letter of Credit, the Issuing Bank shall promptly notify Kitty Hawk and each Revolving Credit Loans Lender as to the amount to be paid as a result of such demand or drawing and the respective payment date. If at any time the Issuing Bank shall make a payment to a beneficiary of a Letter of Credit pursuant to a drawing under such Letter of Credit, each Revolving Credit Loans Lender will pay to the Issuing Bank, immediately upon the Issuing Bank's demand at any time commencing after such payment until reimbursement therefor in full by Kitty Hawk, an amount equal to such Lender's Commitment Percentage of such payment, together with interest on such amount for each day from the date of such payment to the date of payment by such Lender of such amount at a rate of interest per annum equal to the Federal Funds Rate. (e) Kitty Hawk shall be irrevocably and unconditionally obligated to immediately reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. The Issuing Bank will pay to each Revolving Credit Loans Lender such Revolving Credit Loans Lender's Commitment Percentage of all amounts received from or on behalf of Kitty Hawk for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Revolving Credit Loans Lender has made payment to the Issuing Bank in respect of such Letter of Credit pursuant to subsection (d) above. Outstanding Reimbursement Obligations shall bear interest at the Default Rate and such interest shall be payable on demand. (f) The Reimbursement Obligations of Kitty Hawk under this Agreement and the other Loan Documents shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the other Loan Documents under all circumstances whatsoever, including, without limitation, the following circumstances: (i) Any lack of validity or enforceability of any Letter of Credit or any other Loan Document; (ii) Any amendment or waiver of or any consent to departure from any Loan Document; (iii) The existence of any claim, setoff, counterclaim, defense or other right which Kitty Hawk or any of its Subsidiaries or other Person may have at any time against any beneficiary of any Letter of Credit, Agent, the Issuing Bank, Lenders or SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 43 50 any other Person, whether in connection with this Agreement or any other Loan Document or any unrelated transaction; (iv) Any statement, draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) Payment by the Issuing Bank under any Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, provided, that such payment shall not have constituted gross negligence or willful misconduct of the Issuing Bank; and (vi) Any other circumstance whatsoever, whether or not similar to any of the foregoing, provided that such other circumstance or event shall not have been the result of the gross negligence or willful misconduct of the Issuing Bank. (g) Kitty Hawk assumes all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to its use of such Letter of Credit. Neither Agent, the Issuing Bank, Lenders nor any of their respective officers or directors shall have any responsibility or liability to Kitty Hawk or any other Person for: (a) the failure of any draft to bear any reference or adequate reference to any Letter of Credit, or the failure of any documents to accompany any draft at negotiation, or the failure of any Person to surrender or to take up any Letter of Credit or to send documents apart from drafts as required by the terms of any Letter of Credit, or the failure of any Person to note the amount of any instrument on any Letter of Credit, (b) errors, omissions, interruptions or delays in transmission or delivery of any messages, (c) the validity, sufficiency or genuineness of any draft or other document, or any endorsement(s) thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent or forged or any statement therein is untrue or inaccurate in any respect, (d) the payment by the Issuing Bank to the beneficiary of any Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Letter of Credit, or (e) any other circumstance whatsoever in making or failing to make any payment under a Letter of Credit; provided, however, that, notwithstanding the foregoing, Kitty Hawk shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to Kitty Hawk, to the extent of any direct, but not indirect or consequential, damages suffered by Kitty Hawk which Kitty Hawk proves in a final nonappealable judgment were caused by (i) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit complied with the terms thereof or (ii) the Issuing Bank's willful failure to pay under any Letter of Credit after presentation to it of documents strictly complying with the terms and conditions of such Letter of Credit. The Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 44 51 (h) All letters of credit issued pursuant to the Prior Credit Agreement which are outstanding as of the Closing Date shall be deemed to be Letters of Credit issued pursuant to this Agreement, which outstanding Letters of Credit are described in Schedule 2.14. ARTICLE 3 Payments Section 3.1 Method of Payment. All payments of principal, interest, fees and other amounts to be made by Kitty Hawk or any Guarantor under this Agreement or any other Loan Document shall be made via wire transfer of funds to Agent c/o Wells Fargo Bank, NA, San Francisco, California, ABA # 1210-00248, for Account No. 4518-151709, Reference: Kitty Hawk, for the account of each Lender's Applicable Lending Office in Dollars and in immediately available funds, without setoff, deduction or counterclaim, not later than 11:00 a.m. (Dallas, Texas time) on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Kitty Hawk or such Guarantor shall, at the time of making each such payment, specify to Agent the sums payable by such Person under this Agreement or the other Loan Document to which each such payment is to be applied (and in the event that such Person fails to so specify, or if an Event of Default has occurred and is continuing or if a Default would exist after the making of such payment, Agent may apply such payment to such Person's Loans, Reimbursement Obligations and other Obligations in such order and manner as Agent may elect, subject to Section 3.2). Upon the occurrence and during the continuation of an Event of Default, all proceeds of any Collateral and all other funds of Kitty Hawk or any Guarantor in the possession of Agent or any Lender may be applied by Agent to the Obligations in such order and manner as Agent may elect, subject to the provisions of Section 3.2 and 12.8. Notwithstanding the foregoing, however, but subject to and except as otherwise provided in Section 12.8, if an Event of Default has occurred and is continuing, Agent and Lenders agree among themselves that all such payments, proceeds and funds, shall be applied (or, in the case of Letter of Credit Liabilities consisting of the undrawn face amount of Letters of Credit, held by Agent as cash collateral for application against) pro rata to the Outstanding Revolving Credit and to the outstanding principal amount of the Term Loans (based upon (a) the Outstanding Revolving Credit and (b) the outstanding principal amount of the Term Loans, in each case as a percentage of the sum of the Outstanding Revolving Credit plus the aggregate outstanding principal amount of the Term Loans). Each payment received by Agent under this Agreement or any other Loan Document for the account of a Lender shall be paid promptly to such Lender, in immediately available funds, for the account of such Lender's Applicable Lending Office. Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and commitment fee, as the case may be. Section 3.2 Pro Rata Treatment. Except to the extent otherwise provided in this Agreement: (a) each Loan shall be made by Lenders under Section 2.1, each payment of commitment fees under Section 2.11(a) shall be made for the account of Lenders, and each termination or reduction of the Commitments under Section 2.13 shall be applied to the appropriate Commitments SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 45 52 of the applicable Lenders, pro rata according to the respective unused Commitments; (b) the making, Conversion and Continuation of Loans of a particular Type (other than Conversions provided for by Section 4.4) shall be made pro rata among Lenders holding Loans of such Type according to the amounts of their respective appropriate Commitments; (c) each payment and prepayment by Kitty Hawk of principal of or interest on Loans of a particular Type shall be made to Agent for the account of Lenders holding Loans of such Type pro rata in accordance with the respective unpaid principal amounts of such Loans held by such Lenders; (d) Interest Periods for Loans of a particular Type shall be allocated among Lenders holding Loans of such Type pro rata according to the respective principal amounts held by such Lenders; and (e) Lenders (other than the Issuing Bank) shall purchase participations in the Letters of Credit pro rata in accordance with their respective Commitment Percentages of the Revolving Credit Loans Commitments. Section 3.3 Sharing of Payments, Etc. Subject to Section 12.8, if a Lender shall obtain payment of any principal of or interest on any of the Obligations due to such Lender hereunder through the exercise of any right of setoff, banker's lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Lenders participations in the Obligations held by other Lenders in such amounts, and make such adjustments from time to time, as shall be equitable to the end that all Lenders shall share pro rata in accordance with the unpaid principal and interest on the Obligations then due to each of them. To such end, all Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if all or any portion of such excess payment is thereafter rescinded or must otherwise be restored. Each of Kitty Hawk and its Subsidiaries agrees, to the fullest extent it may effectively do so under applicable law, that any Lender so purchasing a participation in the Obligations by the other Lenders may exercise all rights of setoff, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Obligations in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness, liability or obligation of Kitty Hawk or any of its Subsidiaries. Section 3.4 Non-Receipt of Funds by Agent. Unless Agent shall have been notified by a Lender or Kitty Hawk ("Payor") prior to the date on which such Lender is to make payment to Agent of the proceeds of a Loan to be made by it hereunder or Kitty Hawk is to make a payment to Agent for the account of one or more of Lenders, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that Payor does not intend to make the Required Payment to Agent, Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if Payor has not in fact made the Required Payment to Agent, the recipient of such payment shall, on demand, pay to Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was so made available by Agent until the date Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such period. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 46 53 Section 3.5 Withholding Taxes. (a) All payments by Kitty Hawk of principal of and interest on the Loans and the Letter of Credit Liabilities and of all fees and other amounts payable under the Loan Documents shall be made free and clear of, and without deduction by reason of, any present or future taxes, levies, duties, imposts, assessments or other charges levied or imposed by any Governmental Authority (other than any taxes imposed on the overall net income of Agent or any Lender or any lending office of Agent or such Lender by any jurisdiction in which Agent or such Lender or any such lending office is located). If any such taxes, levies, duties, imposts, assessments or other charges are so levied or imposed, Kitty Hawk will (i) make additional payments in such amounts so that every net payment of principal of and interest on the Loans and the Letter of Credit Liabilities and of all other amounts payable by it under the Loan Documents, after withholding or deduction for or on account of any such present or future taxes, levies, duties, imposts, assessments or other charges (including any tax imposed on or measured by net income of a Lender attributable to payments made to or on behalf of a Lender pursuant to this Section 3.5 and any penalties or interest attributable to such payments), will not be less than the amount provided for herein or therein absent such withholding or deduction (provided that Kitty Hawk shall not have any obligation to pay such additional amounts to any Lender to the extent that such taxes, levies, duties, imposts, assessments or other charges are levied or imposed by reason of the failure of such Lender to comply with the provisions of Section 3.6), (ii) make such withholding or deduction and (iii) remit the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law. Without limiting the generality of the foregoing, Kitty Hawk will, upon written request of any Lender, reimburse each such Lender for the amount of (A) such taxes, levies, duties, imports, assessments or other charges so levied or imposed by any Governmental Authority and paid by such Lender as a result of payments made by Kitty Hawk under or with respect to the Loans other than such taxes, levies, duties, imports, assessments and other charges previously withheld or deducted by Kitty Hawk which have previously resulted in the payment of the required additional amount to Lender, and (B) such taxes, levies, duties, assessments and other charges so levied or imposed with respect to any Lender reimbursement under the foregoing clause (A), so that the net amount received by such Lender (net of payments made under or with respect to the Loans and the Letter of Credit Liabilities) after such reimbursement will not be less than the net amount such Lender would have received if such taxes, levies, duties, assessments and other charges on such reimbursement had not been levied or imposed. Kitty Hawk shall furnish promptly to Agent for distribution to each affected Lender, as the case may be, upon request of such Lender, official receipts evidencing any such payment, withholding or reduction. (b) Kitty Hawk will indemnify Agent and each Lender (without duplication) against, and reimburse Agent and each Lender for, all present and future taxes, levies, duties, imposts, assessments or other charges (including interest and penalties) levied or collected (whether or not legally or correctly imposed, assessed, levied or collected), excluding, however, any taxes imposed on the overall net income of Agent or such Lender or any lending office of Agent or such Lender by any jurisdiction in which Agent or such Lender or any such lending office is located, on or in respect of this Agreement, any of the Loan Documents or SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 47 54 the Obligations or any portion thereof ("reimbursable taxes"). Any such indemnification shall be on an after- tax basis, taking into account any such reimbursable taxes imposed on the amounts paid as indemnity. (c) If and to the extent actually known by such Lender, each Lender will use reasonable efforts to notify Kitty Hawk and Agent, in a reasonably prompt fashion after such assignment is made, of any assignment of the Commitments or the Loans by such Lender to an Eligible Assignee which is subject to a withholding tax that will impose any payment obligation upon Kitty Hawk pursuant to this Section 3.5. Each Lender will use reasonable efforts to notify Kitty Hawk and Agent of any amounts to be paid by Kitty Hawk pursuant to this Section 3.5 in a reasonably prompt fashion after such Lender becomes aware of the circumstances which require the payment of such amounts by Kitty Hawk. Kitty Hawk shall not be obligated to pay any amounts to a Lender pursuant to this Section 3.5 which accrued more than 90 days prior to the date upon which such Lender initially notified Kitty Hawk of the general circumstances which require such payment. Section 3.6 Withholding Tax Exemption. Each Lender that is not incorporated or otherwise formed under the laws of the U.S. or a state thereof agrees that it will, prior to or on or about the Closing Date or the date upon which it becomes a party to this Agreement, deliver to Kitty Hawk and Agent two duly completed copies of U.S. Internal Revenue Service Form 1001, 4224 or W-8, as appropriate, certifying in any case that such Lender is entitled to receive payments from Kitty Hawk under any Loan Document without deduction or withholding of any U.S. federal income taxes. Each Lender which so delivers a Form 1001, 4224 or W-8 further undertakes to deliver to Kitty Hawk and Agent two additional copies of such form (or a successor form) on or before the date such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by Kitty Hawk or Agent, in each case certifying that such Lender is entitled to receive payments from Kitty Hawk under any Loan Document without deduction or withholding of any U.S. federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises Kitty Hawk and Agent that it is not capable of receiving such payments without any deduction or withholding of U.S. federal income tax. Section 3.7 Reinstatement of Obligations. Notwithstanding anything to the contrary contained in this Agreement or any other Loan Document, if the payment of any amount of principal of or interest with respect to the Loans, the Reimbursement Obligations or any other amount of the Obligations, or any portion thereof, is rescinded, voided or must otherwise be refunded by Agent, any Lender or Issuing Bank upon the insolvency, bankruptcy or reorganization of Kitty Hawk or any of its Subsidiaries or otherwise for any reason whatsoever, then each of (a) the Obligations, (b) the Loan Documents (including, without limitation, this Agreement, the Notes and the Security Documents), (c) the indebtedness, liabilities and obligations of Kitty Hawk and its Subsidiaries under the Loan Documents, and (d) all Liens for the benefit of Agent and Lenders created under or evidenced by the Loan Documents, will be automatically reinstated and become automatically effective and in full force SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 48 55 and effect, all to the extent that and as though such payment so rescinded, voided or otherwise refunded had never been made. ARTICLE 4 Yield Protection and Illegality Section 4.1 Additional Costs. (a) Kitty Hawk shall pay directly to each Lender from time to time, within ten days after the request of such Lender, the costs incurred by such Lender which such Lender reasonably determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any of such Loans, or any reduction in any amount receivable by such Lender hereunder in respect of any such Loans or obligations (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change occurring after the Closing Date which: (i) changes the basis of taxation of any amounts payable to such Lender under this Agreement or its Notes in respect of any of such Loans (other than income taxes and franchise taxes attributable to net income of such Lender or its Applicable Lending Office for any of such Loans by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); (ii) imposes or modifies any reserve, special deposit, minimum capital, capital ratio or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (including any of such Loans or any deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof, but excluding the Reserve Requirement to the extent it is included in the calculation of the Adjusted Eurodollar Rate); or (iii) imposes any other condition affecting this Agreement or the Notes or any of such extensions of credit or liabilities or commitments. Each applicable Lender will notify Kitty Hawk (with a copy to Agent) of any event occurring after the Closing Date which will entitle such Lender to compensation pursuant to this Section 4.1(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and (if so requested by Kitty Hawk) will, if and to the extent that it is reasonably feasible for such Lender to do so given administrative and other considerations, designate a different Applicable Lending Office for the Eurodollar Loans of such Lender if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable opinion of such Lender, violate any law, rule or regulation or be in any way disadvantageous to such Lender. Each applicable Lender will furnish Kitty Hawk with a certificate setting forth the basis and the amount of each request of such Lender for compensation under this Section 4.1(a). If any Lender requests compensation from Kitty SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 49 56 Hawk under this Section 4.1(a), Kitty Hawk may, by notice to such Lender (with a copy to Agent), suspend the obligation of such Lender to make or Continue making, or Convert Base Rate Loans into, Eurodollar Loans until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (b) Without limiting the effect of the foregoing provisions of this Section 4.1, in the event that, by reason of any Regulatory Change, any Lender either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender which includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Lender so elects by notice to Kitty Hawk (with a copy to Agent), the obligation of such Lender to make or Continue making, or Convert Base Rate Loans into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (c) Determinations and allocations by any Lender for purposes of this Section 4.1 of the effect of any Regulatory Change on its costs of maintaining its obligation to make Loans or issue Letters of Credit or of making or maintaining Loans or issuing Letters of Credit or on amounts receivable by it in respect of Loans or Letters of Credit, and of the additional amounts required to compensate such Lender in respect of any Additional Costs, shall be conclusive in the absence of manifest error, provided that such determinations and allocations are made on a reasonable basis. Section 4.2 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if with respect to any Eurodollar Loans for any Interest Period therefor: (a) Agent determines (which determination shall be made reasonably and in good faith and shall be conclusive absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof are not being provided in the relative amounts or for the relative maturities for purposes of determining the rate of interest for such Loans as provided in this Agreement; or (b) any Lender determines (which determination shall be in good faith and shall be conclusive absent manifest error) and notifies Agent that the relevant rates of interest referred to in the definition of "Eurodollar Rate" or "Adjusted Eurodollar Rate" in Section 1.1 hereof on the basis of which the rate of interest for such Loans for such Interest Period is to be determined do not accurately reflect the cost to such Lender of making or maintaining such Loans for such Interest Period; then Agent shall give Kitty Hawk prompt notice thereof and, so long as such condition remains in effect, such Lender shall be under no obligation to make Eurodollar Loans or to Convert Base Rate Loans into Eurodollar Loans and Kitty Hawk shall, on the last day(s) of the then current Interest SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 50 57 Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into Base Rate Loans in accordance with the terms of this Agreement. Section 4.3 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to (a) honor its obligation to make Eurodollar Loans or (b) maintain Eurodollar Loans, then such Lender shall promptly notify Kitty Hawk thereof (with a copy to Agent) and such Lender's obligation to make or maintain Eurodollar Loans and to Convert Base Rate Loans into Eurodollar Loans hereunder shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 4.4 hereof shall be applicable). Section 4.4 Treatment of Affected Loans. If the obligation of any Lender to make or Continue, or to Convert Base Rate Loans into, Eurodollar Loans is suspended pursuant to Section 4.1 or 4.3 hereof, such Lender's Eurodollar Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for the Eurodollar Loans (or, in the case of a Conversion required by Section 4.1(b) or 4.3 hereof, on such earlier date as such Lender may specify to Kitty Hawk (with a copy to Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to such Conversion no longer exist: (a) To the extent that such Lender's Eurodollar Loans have been so Converted, all payments and prepayments of principal which would otherwise be applied to such Lender's Eurodollar Loans shall be applied instead to its Base Rate Loans; and (b) All Loans which would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made as or Converted into Base Rate Loans and all Loans of such Lender which would otherwise be Converted into Eurodollar Loans shall be Converted instead into (or shall remain as) Base Rate Loans. If such Lender gives notice to Kitty Hawk (with a copy to Agent) that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to the Conversion of such Lender's Eurodollar Loans pursuant to this Section 4.4 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans are outstanding, such Lender's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by Lenders holding Eurodollar Loans and by such Lender are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. Section 4.5 Compensation. Kitty Hawk shall pay to Agent for the account of each Lender, promptly upon the request of such Lender through Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense incurred by it as a result of: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 51 58 (a) any payment, prepayment or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the outstanding Loans pursuant to Section 11.2) on a date other than the last day of an Interest Period for such Loan; or (b) any failure by Kitty Hawk for any reason (including, without limitation, the failure of any conditions precedent specified in Article 6 to be satisfied) to borrow, Convert or prepay a Eurodollar Loan on the date for such borrowing, Conversion or prepayment specified in the relevant notice of borrowing, prepayment or Conversion under this Agreement. The loss (as opposed to cost or expense) to be compensated under clause (a) of this Section 4.5 shall not exceed an amount equal to the excess, if any, of (i) the amount of interest which otherwise would have accrued on the principal amount so paid, prepaid or Converted to the last day of the Interest Period at the applicable rate for such Eurodollar Loan over (ii) the cost to the applicable Lender of the interest component of such Eurodollar Loan which otherwise would have accrued. Section 4.6 Capital Adequacy. If, after the Closing Date, any Lender shall have determined that the adoption or implementation of any applicable law, rule or regulation regarding capital adequacy (excluding any law, rule or regulation in existence as of the Closing Date which implements the Basle Accord as it exists as of the Closing Date but including any other law, rule or regulation implementing the Basle Accord), or any change therein, or any change in the interpretation or administration thereof by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or compliance by such Lender (or its parent) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any central bank or other Governmental Authority (excluding any guideline or other requirement in existence as of the Closing Date which implements the Basle Accord as it exists as of the Closing Date but including any other guideline or other requirement implementing the Basle Accord), has or would have the effect of reducing the rate of return on such Lender's (or its parent's) capital as a consequence of its obligations hereunder or the transactions contemplated hereby to a level below that which such Lender (or its parent) could have achieved but for such adoption, implementation, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within ten Business Days after demand by such Lender (with a copy to Agent), Kitty Hawk shall pay to such Lender such additional amount or amounts as will compensate such Lender (or its parent) for such reduction. A certificate of such Lender claiming compensation under this Section 4.6 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error, provided that the determination thereof is made on a reasonable basis. In determining such amount or amounts, such Lender may use any reasonable averaging and attribution methods. Section 4.7 Additional Interest on Eurodollar Loans. Kitty Hawk shall pay, directly to Agent for the account of each Lender from time to time, additional interest on the unpaid principal amount of each Eurodollar Loan held by such Lender, from the date of the making of such Eurodollar Loan until such principal amount is paid in full, at an interest rate per annum determined by such Lender in good faith equal to the positive remainder (if any) of (a) the Adjusted Eurodollar Rate applicable to such Eurodollar Loan minus (b) the Eurodollar Rate applicable to such Eurodollar Loan. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 52 59 Each payment of additional interest pursuant to this Section 4.7 shall be payable by Kitty Hawk on each date upon which interest is payable on such Eurodollar Loan pursuant to Section 2.4(b); provided, however, that Kitty Hawk shall not be obligated to make any such payment of additional interest until the first Business Day after the date when Kitty Hawk has been informed (i) that such Lender is subject to a Reserve Requirement and (ii) of the amount of such Reserve Requirement (after which time Kitty Hawk shall be obligated to make all such payments of additional interest, including, without limitation, such payment of additional interest that otherwise would have been payable by Kitty Hawk on or prior to such time had Kitty Hawk been earlier informed). Section 4.8 Mitigation of Additional Costs. It is the general intent of the parties hereto that, with respect to the matters referred to in Sections 3.5, 4.1(a) and 4.6, Kitty Hawk shall not be discriminated against by any Lender relative to such Lender's general practice with respect to borrowers of comparable credits extended by such Lender under comparable circumstances. Accordingly, for purposes of Sections 3.5, 4.1(a) and 4.6, each Lender agrees to use reasonable efforts to ensure that Kitty Hawk is not requested to pay increased costs of a kind or type which are not also generally requested to be paid by borrowers of comparable credits extended by such Lender under comparable circumstances. In connection with any request that Kitty Hawk pay increased costs pursuant to Section 3.5, 4.1(a) or 4.6, the Lender requesting such payment shall deliver to Kitty Hawk and Agent information in reasonable detail specifying the events giving rise to such increased costs, the basis for determining and allocating such increased costs and a good faith estimate (if and to the extent feasible) of the amounts of such particular increased costs which may be incurred in the future. ARTICLE 5 Security Section 5.1 Collateral. To secure the full and complete payment and performance of the Obligations, each of Kitty Hawk and its Subsidiaries, other than AIC, shall, on or before the Closing Date, grant to Agent for the benefit of Agent and Lenders a perfected, first priority Lien on all of its right, title and interest in and to the following Property and all products and proceeds thereof, whether now owned or hereafter acquired, pursuant to the Security Documents as more specifically provided in the Security Documents, all of which Collateral shall secure payment and performance of all of the Obligations: (a) all Capital Stock of each of the Subsidiaries of Kitty Hawk other than AIC and other than Foreign Subsidiaries, and 65% of the shares of each class of Capital Stock of each of the Foreign Subsidiaries of Kitty Hawk; (b) all AIA Aircraft and all engines, appliances and spare parts installed in or appurtenant to any such AIA Aircraft; and (c) all accounts (including, without limitation, Receivables), Parts (including, without limitation, rotable spare parts), inventory, chattel paper and general intangibles SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 53 60 (including, without limitation, contract rights) and other personal Property specified in the Security Agreements. Kitty Hawk and its Subsidiaries covenant to Agent and Lenders that none of the Capital Stock to be pledged in accordance with this Section 5.1 shall be subject to any transfer restriction, shareholders' agreement or other restriction except for such restrictions under applicable securities laws and such restrictions, if any, as may be reasonably acceptable to Agent. In connection with and in addition to the foregoing, Kitty Hawk and its Subsidiaries shall execute and/or deliver such further agreements, documents and instruments (including, without limitation, stock certificates, stock powers and financing statements) as Agent may reasonably request in order for it to obtain and maintain the perfected, first priority Liens to be granted in accordance with this Section 5.1. Section 5.2 Guaranties. Each of the Subsidiaries of Kitty Hawk, other than AIC, in existence on the Closing Date shall guarantee the payment and performance of the Obligations pursuant to the applicable Guaranty. Section 5.3 New AIA Aircraft Related Collateral. Kitty Hawk and its Subsidiaries shall, promptly (and, in any event within ten Business Days) after any request made by Agent after the acquisition of any equipment or enhancement to any AIA Aircraft, execute, acknowledge and deliver to Agent, in favor of Agent for the benefit of Agent and Lenders, such agreements, documents and instruments, including, without limitation, Aircraft Mortgages or Security Agreements or amendments or modifications to Aircraft Mortgages or Security Agreements, covering such acquired equipment or enhancements as may reasonably be requested by Agent, together with evidence reasonably satisfactory to Agent and its counsel of Agent's valid, first priority Lien on the equipment and enhancements acquired as security for the payment and performance of the Obligations. Section 5.4 New Subsidiaries; New Issuances of Capital Stock. Contemporaneously with the creation or acquisition of any Subsidiary of Kitty Hawk, Kitty Hawk or the Subsidiary of Kitty Hawk which owns such new Subsidiary (as applicable) shall, and (with respect to clauses (b) and (c) below) shall cause each such new Subsidiary to: (a) grant or cause to be granted to Agent a perfected, first priority Lien in (i) all Capital Stock or other ownership interests in or indebtedness of such Subsidiary, other than a Foreign Subsidiary, owned by Kitty Hawk or any Subsidiary of Kitty Hawk (to the extent such Capital Stock or other ownership interests or indebtedness are already not so pledged to Agent) and (ii) 65% of the shares of each class of Capital Stock of each of the Foreign Subsidiaries of Kitty Hawk, in each case as security for the payment and performance of the Obligations; (b) Guarantee the payment and performance of the Obligations by executing and delivering to Agent an appropriate Guaranty; provided, however, that no Foreign Subsidiary shall be required to execute and deliver any such Guaranty; and (c) execute and deliver to Agent an appropriate Security Agreement and such other Security Documents as Agent may reasonably request to grant to Agent, for the benefit SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 54 61 of Agent and Lenders, a perfected, first priority Lien on all Property of such Subsidiary of the type described in clause (c) of Section 5.1 as security for the payment and performance of the Obligations; provided, however, that no Foreign Subsidiary shall be required to execute and delivery any such Security Agreement or other Security Document or grant any such Lien. Contemporaneously with the issuance of any additional Capital Stock of any of the Subsidiaries of Kitty Hawk after the Closing Date, Kitty Hawk (as applicable) shall, and shall cause each of its Subsidiaries (as applicable) to, grant or cause to be granted to Agent, for the benefit of Agent and Lenders, a perfected, first priority Lien in all Capital Stock or other ownership interests in such Subsidiary (or, if such Subsidiary is a Foreign Subsidiary, in 65% of the shares of each class of Capital Stock) owned by Kitty Hawk or any Subsidiary of Kitty Hawk (to the extent such Capital Stock or other ownership interests were not previously pledged to Agent) as security for the payment and performance of the Obligations. Kitty Hawk and its Subsidiaries covenant to Agent and Lenders that none of the Capital Stock to be pledged in accordance with this Section 5.4 shall be subject to any transfer restriction, shareholders' agreement or other restriction except for such restrictions under applicable securities laws and such restrictions, if any, as may be reasonably acceptable to Agent. In connection with and in addition to the foregoing, Kitty Hawk and its Subsidiaries shall execute and/or deliver such further agreements, documents and instruments (including, without limitation, stock certificates, stock powers and financing statements) as Agent may reasonably request in order for it to obtain and maintain the perfected, first priority Liens to be granted in accordance with this Section 5.4. Section 5.5 Release of Certain Collateral. (a) Single Aircraft Release. Agent and Lenders agree that, upon five Business Days prior written request from Kitty Hawk and if (but only if) Kitty Hawk prepays the applicable outstanding principal amount of the Term Loans by an aggregate amount equal to the AIA Aircraft Release Amount attributable to a particular AIA Aircraft, Agent shall (at Kitty Hawk's expense) release its Lien on such AIA Aircraft; provided, however, that, in the event that Agent requests such an appraisal in connection with such request for a release made at any time after November 19, 1999, and such request is not made by Kitty Hawk in connection with a casualty loss of such AIA Aircraft, Agent shall have no obligation to release its Lien on such AIA Aircraft unless Agent shall have received a then current appraisal of all AIA Aircraft that will remain subject to Agent's Lien under the Aircraft Mortgages after giving effect to such requested release (the "Remaining AIA Aircraft"), which appraisal must be in form, substance and content reasonably satisfactory to Agent and must be performed by an appraiser reasonably satisfactory to Agent and must show that, after giving effect to such prepayment, the aggregate outstanding principal amount of the Term Loans will be less than or equal to 80% of the appraised value of the Remaining AIA Aircraft; and provided, further, however, that Agent shall have no obligation to release its Lien on such AIA Aircraft if a Default shall have occurred and be continuing. Furthermore, and notwithstanding anything to the contrary contained herein, Agent shall not be required to execute any document effectuating any release of a Lien on terms which, in Agent's reasonable judgment, would expose Agent to liability or create any obligation not reimbursed by Kitty Hawk or entail any warranty by Agent (other than that Agent holds the Lien and enforceably releases SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 55 62 it) or would, in any manner, discharge, affect or impair any of the Obligations or any of Agent's Liens on any Collateral not required to be so released or any proceeds thereof. (b) Mandatory Engine Release. Agent and Lenders agree that, upon five Business Days prior written request from Kitty Hawk, Agent shall (at Kitty Hawk's expense) release its Lien on a particular Engine if (but only if) (i) Aircargo grants to Agent, for the benefit of Agent and Lenders as security for the payment and performance of the Obligations, a perfected, first priority Lien on a replacement Engine having a fair market value, as determined by Agent in good faith, equal to or greater than the fair market value of such Engine to be released (which value shall be evidenced by an appraisal if Agent so requests) pursuant to an Aircraft Mortgage, and (ii) such Lien referred to in clause (i) preceding is insured by a mortgagee's policy of title insurance in form and substance reasonably satisfactory to Agent. (c) Optional Engine Release. Agent may, but shall not at any time be obligated to, in its discretion from time to time and without the consent of any Lender or Lenders, release Agent's Liens securing the Obligations on engines which constitute a part of the AIA Aircraft but which have been detached from the AIA Aircraft for overhaul or maintenance; provided, however, that (i) no such release may occur prior to January 1, 1999, (ii) no more than six engines may be so released during calendar year 1999, no more than 12 engines may be released during calendar years 1999 and 2000, no more than 18 engines may be released during calendar years 1999, 2000 and 2001 and no more than 24 engines may be released during calendar years 1999, 2000, 2001 and 2002, in each case in the aggregate for all such years, and (iii) Agent may, in its discretion, impose any one or more conditions to any such release, including, without limitation, the condition that Agent be granted perfected, first priority Liens securing the Obligations on substitute engines. Section 5.6 Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, without notice to Kitty Hawk or any of its Subsidiaries or any other Person (any such notice being hereby expressly waived by Kitty Hawk and its Subsidiaries), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of Kitty Hawk or any of its Subsidiaries against any and all of the Obligations of Kitty Hawk or any of its Subsidiaries now or hereafter existing under this Agreement, any of such Lender's Notes or any other Loan Document, irrespective of whether or not Agent or such Lender shall have made any demand under this Agreement, any of such Lender's Notes or any such other Loan Document and although such Obligations may be unmatured. Each Lender agrees promptly to notify Kitty Hawk (with a copy to Agent) after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights and remedies of each Lender hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have. Section 5.7 Title Insurance. Aircargo shall (at its sole cost and expense) purchase and maintain owner and mortgagee policies of title insurance (or, if acceptable to Required Lenders, amendments or endorsements to existing polices of title insurance) insuring that Aircargo has SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 56 63 indefeasible title to each of the AIA Aircraft and that Agent, for the benefit of Agent and Lenders, holds a perfected, first priority Lien on each of the AIA Aircraft pursuant to the Loan Documents as security for the payment and performance of the Obligations. The mortgagee policy of title insurance in favor of Agent shall be in the amount of $45,900,000 and shall be issued by the Title Company or another title insurance company reasonably acceptable to Agent and shall contain such terms and provisions as are reasonably acceptable to Agent. ARTICLE 6 Conditions Precedent Section 6.1 Initial Extension of Credit. The obligation of each Lender to make its initial Loan under this Agreement and the obligation of the Issuing Bank to issue the initial Letter of Credit under this Agreement are subject to the conditions precedent that Agent shall have received, on or before the Closing Date, all of the following in form and substance reasonably satisfactory to Agent and, in the case of actions to be taken, evidence that the following required actions have been taken to the satisfaction of Agent: (a) Resolutions. Resolutions of the Board of Directors of each Company certified by its Secretary or an Assistant Secretary which authorize the execution, delivery and performance by such Company of the Loan Documents to which it is or is to be a party (including, without limitation, with respect to Aircargo, resolutions which authorize the Aircraft Mortgages and the other Security Documents relating to the AIA Aircraft); (b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of each Company certifying the name of each officer or other representative of such Company (i) who is authorized to sign the Loan Documents to which such Company is or is to be a party (including any certificates contemplated therein), together with specimen signatures of each such officer or other representative, and (ii) who will, until replaced by other officers or representatives duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with the Loan Documents and the transactions contemplated thereby; (c) Articles or Certificates of Incorporation, etc. The articles or certificates of incorporation, certificate of formation, certificate of limited partnership, partnership agreement or other applicable constitutional document of each Company certified by the Secretary of State or other applicable Governmental Authority of the jurisdiction of incorporation or organization of such Company and dated as of a Current Date; (d) Bylaws. The bylaws of each Company certified by the Secretary or an Assistant Secretary of such Company; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 57 64 (e) Governmental Certificates. Certificates of appropriate officials confirming (i) the existence and good standing, status or compliance, as applicable, of each Company in its respective jurisdiction of incorporation or organization and any and all jurisdictions where such Company is qualified to do business as a foreign corporation or other entity, each such certificate to be dated as of a Current Date, (ii) that Aircargo is an air carrier certified by the FAA and qualifies in all respects as a citizen of the U.S. as defined in the Federal Aviation Act, (iii) that Aircargo is the registered owner of each of the AIA Aircraft pursuant to proper registrations under the Federal Aviation Act, and (iv) that each of the AIA Aircraft is airworthy as evidenced by a valid, current Certificate of Airworthiness issued by the FAA with respect to such AIA Aircraft; (f) Revolving Credit Loans Notes. The Revolving Credit Loans Notes duly completed and executed by Kitty Hawk; (g) Term Loans Notes. The Term Loans Notes duly completed and executed by Kitty Hawk; (h) Guaranties. A Guaranty executed by each of the Companies other than Kitty Hawk; (i) Security Documents. The Security Documents executed by each of the Companies, including, without limitation, Security Agreements executed by each of the Companies and Aircraft Mortgages executed by Aircargo; (j) Stock Certificates. The stock certificates representing all of the issued and outstanding Capital Stock of each of the Companies, other than Kitty Hawk, in each case accompanied by appropriate instruments of transfer or stock powers signed in blank (as appropriate); (k) Insurance Policies. Copies of all insurance policies required by this Agreement and the other Loan Documents, together with loss payable endorsements naming Agent as loss payee under all such casualty insurance policies and Agent as an additional insured party under all such liability policies; (l) Financing Statements. Financing statements and all other requisite filing documents executed by the Companies necessary to perfect the Liens created pursuant to the Security Documents; (m) Title and Lien Searches. (i) Title and Lien searches performed by the Title Company confirming that (A) each of the AIA Aircraft is duly registered with the FAA in the name of Aircargo, (B) Agent, for the benefit of Agent and Lenders, has a perfected, first priority Lien in the AIA Aircraft as security for the payment and performance of the Obligations; (ii) a policy of title insurance (or amendments or endorsements thereto) for each of the AIA Aircraft with Agent as named insured as required pursuant to Section 5.7; and (iii) Lien searches in the names of each of the Companies (and in all names under which each SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 58 65 such Person has done business within the last five years and in all names of Persons who previously owned any of the material Properties constituting Collateral as Agent may reasonably require) in each state where each such Person maintains an office or has Property, showing no financing statements or other Lien instruments of record except for Permitted Liens and Liens not otherwise prohibited by Section 9.2; (n) Consents. Copies of all material consents necessary for the execution, delivery and performance by each of the Companies of the Loan Documents to which it is a party, including, without limitation, any consents or waivers to the grant of a Lien in the Collateral or execution of a Guaranty, which consents shall be certified by a Responsible Officer of the applicable Company as true and correct copies of such consents as of the Closing Date; (o) Permits. If and to the extent required by Agent, copies of all material Permits affecting each Company in connection with its businesses or any of the Properties owned or leased by it, and evidence reasonably satisfactory to Agent that such Permits are in full force and effect; (p) Payment of Fees and Expenses. Kitty Hawk shall have paid to Agent the up-front fee and agency fee referred to in Section 2.11 that are payable on or before the Closing Date and, to the extent required by Agent, Kitty Hawk shall have paid all fees, costs and expenses of or incurred by Agent and its counsel referred to in Section 13.1 to the extent billed on or before the Closing Date and payable pursuant to this Agreement; (q) Regulatory Approvals. Evidence reasonably satisfactory to Agent that all filings, consents or approvals with or of Governmental Authorities necessary to consummate each of (i) the Merger, (ii) the Common Stock Offering, (iii) the Note Offering, and (iv) the transactions contemplated by this Agreement and the other Loan Documents, have been made and obtained, as applicable (including, without limitation, all approvals or filings (if any) required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the lapse of all waiting periods with respect thereto); (r) Compliance with Laws. As of the Closing Date, each Company shall have complied with all Governmental Requirements necessary to consummate each of (i) the Merger, (ii) the Common Stock Offering, (iii) the Note Offering, and (iv) the transactions contemplated by this Agreement and the other Loan Documents; (s) No Prohibitions. No Governmental Requirement shall prohibit the consummation of the transactions contemplated by each of (i) the Merger, (ii) the Common Stock Offering, (iii) the Note Offering, and (iv) this Agreement or any other Loan Document, and no order, judgment or decree of any Governmental Authority or arbitrator shall, and no litigation or other proceeding shall be pending or threatened which would, enjoin, prohibit, restrain or otherwise adversely affect the consummation of any of such transactions or otherwise have a Material Adverse Effect; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 59 66 (t) No Material Adverse Change. As of the Closing Date, no material adverse change shall have occurred with respect to the financial condition, results of operations, business, operations, capitalization, liabilities or prospects of Kitty Hawk or any of its Subsidiaries since June 30, 1997; (u) Disbursement Instructions. On or before the Closing Date, written instructions to Agent from Kitty Hawk regarding the disbursement of the proceeds of the Loans on the Closing Date, which instructions shall include the request that the proceeds of the Term Loans to be advanced on the Closing Date shall be disbursed to Wells Fargo (as agent under the Prior Credit Agreement) in payment of the AIA Fleet Advance in accordance with Section 2.10(b); (v) Financial Statements. Copies of each of the financial statements referred to in Section 7.2; (w) Opinions of Counsel. Favorable opinions of counsel for Kitty Hawk and its Subsidiaries relating to (i) the Loan Documents and the transactions contemplated thereby, (ii) the Related Transactions Documents and the Related Transactions contemplated thereby, (iii) Kitty Hawk and its Subsidiaries, and (iv) such other matters as Agent may reasonably request; (x) Appraisals. A current appraisal of each of the AIA Aircraft, which appraisals must be in form, substance and content reasonably satisfactory to Agent and must be performed by an independent appraiser or appraisers reasonably satisfactory to Agent and must show that the aggregate appraised value of the AIA Aircraft is $63,200,000 or more (which Agent acknowledges has been received); (y) Consummation of Merger. The Merger shall have been consummated in accordance with the Merger Agreement, a true and correct copy of which Merger Agreement and certificate of merger therefor issued by the Secretary of State of Michigan shall have been delivered to Agent, and the aggregate purchase price paid or payable by Kitty Hawk and its Subsidiaries in connection with the Merger shall not exceed any of the following (individually or in the aggregate): (i) the assumption and/or repayment of an aggregate amount in excess of $305,000,000 of indebtedness of any Kalitta Company or any of its Affiliates; (ii) $20,000,000 in cash or cash equivalents paid or payable in connection with Kitty Hawk's acquisition of the Capital Stock of KFS; and (iii) 4,099,000 of shares of common stock of Kitty Hawk issued in connection with Kitty Hawk's acquisition of the Capital Stock of the Kalitta Companies other than KFS; (z) Consummation of Common Stock Offering. The Common Stock Offering shall have been consummated as (in all material respects) described in the Registration Statement, a true and correct copy of which shall have been delivered to Agent, and, in connection therewith, Kitty Hawk shall have received gross proceeds of $40,000,000 or more; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 60 67 (aa) Consummation of Note Offering. The Note Offering shall have been consummated in accordance with the Indenture, a true and correct copy of which shall have been delivered to Agent, and as (in all material respects) described in the Offering Memorandum and, in connection therewith, Kitty Hawk shall have received gross proceeds of $325,000,000 or more; (bb) Minimum Adjusted EBITDA. For the 9 month period ended September 30, 1997, Kitty Hawk and its Subsidiaries and the Kalitta Companies (without duplication) shall have combined Adjusted EBITDA of $47,000,000 or more; (cc) Environmental Reports. Agent shall have received environmental reports pertaining to the real Properties of Kitty Hawk and its Subsidiaries which evidence that, to the satisfaction of Agent, there do not exist any material environmental liabilities; (dd) Solvency Certificate. A Solvency Certificate (together with the Pro Forma and Projections referred to therein) executed by the chief financial officer of each of the Companies which evidences that each of the Companies (including the Kalitta Companies), both immediately prior to and immediately after giving effect to the Related Transactions, is Solvent. (ee) Maximum Funded Debt; Payment of Existing Debt; Minimum Cash. As of the Closing Date (and after giving effect to the consummation of the Related Transactions and the use of proceeds of the Common Stock Offering and the Notes Offering), (i) Funded Debt of Kitty Hawk and its Subsidiaries (including the Kalitta Companies) shall not exceed $400,000,000; (ii) the Debt of Kitty Hawk and its Subsidiaries identified on Schedule 6.1 shall have been paid in full with the proceeds of the Common Stock Offering, the Note Offering and/or the proceeds of the initial Loans to be advanced under this Agreement; and (iii) Kitty Hawk and its Subsidiaries shall have cash of $40,000,000 or more; (ff) Payment of Amounts owed under the Prior Credit Agreement. Kitty Hawk or Leasing (as applicable), i.e., whichever is the primary obligor with respect to such indebtedness under the Prior Credit Agreement, shall have paid to Wells Fargo (as agent under the Prior Credit Agreement) all accrued interest, fees, costs and expenses and other amounts payable by it under the Prior Credit Agreement; (gg) Letters of Credit. With respect to the issuance of a Letter of Credit, the Letter of Credit Agreement in the form required by the Issuing Bank with respect thereto executed by Kitty Hawk; and (hh) Bank One Interest Rate Protection Agreement. The Bank One Interest Rate Protection Agreement shall have been terminated. Kitty Hawk shall deliver, or cause to be delivered, to Agent sufficient counterparts of each agreement, document or instrument to be received by Agent under this Section 6.1 to permit Agent to distribute a copy of the same to each of Lenders. After the request of Kitty Hawk, Agent shall inform Kitty SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 61 68 Hawk in writing as to the status of satisfaction of the conditions precedent set forth in this Section 6.1. Section 6.2 All Extensions of Credit. The obligation of each Lender to make any Loan (including the initial Loans) under this Agreement and the obligation of the Issuing Bank to issue any Letter of Credit (including the initial Letter of Credit) under this Agreement are subject to the satisfaction of each of the conditions precedent set forth in Section 6.1 and each of the following additional conditions precedent: (a) No Default or Material Adverse Effect. No Default shall have occurred and be continuing or would result from such Loan or Letter of Credit, and no Material Adverse Effect shall have occurred since June 30, 1997; (b) Representations and Warranties. All of the representations and warranties of the Companies contained in Article 7 hereof and in the other Loan Documents shall be true and correct on and as of the date of such Loan or Letter of Credit with the same force and effect as if such representations and warranties had been made on and as of such date; (c) Borrowing Base. After giving effect to such Loan and/or Letter of Credit requested to be made and/or issued, respectively, the Outstanding Revolving Credit shall not exceed the Borrowing Base then in effect; and (d) Additional Documentation. Agent shall have received such additional approvals, opinions, agreements, documents, instruments and certificates as Agent may reasonably request. Each notice of borrowing or request for the issuance of a Letter of Credit by Kitty Hawk hereunder shall constitute a representation and warranty by Kitty Hawk that the conditions precedent set forth in Sections 6.2(a) and (b) have been satisfied (both as of the date of such notice and, unless Kitty Hawk otherwise notifies Agent prior to the date of such borrowing or Letter of Credit, as of the date of such borrowing or Letter of Credit). Section 6.3 Closing Certificates. The Companies shall, concurrently with the Closing Date, execute and deliver to Agent a Closing Certificate in form and substance reasonably satisfactory to Agent certifying as to the satisfaction of each of the conditions precedent set forth in Section 6.1 and 6.2 which are required to be satisfied on or before the Closing Date. ARTICLE 7 Representations and Warranties Each of the Companies jointly and severally represents and warrants to Agent and Lenders that the following statements are, and after giving effect to the funding of the initial Loans on the Closing Date will be, true, correct and complete: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 62 69 Section 7.1 Corporate Existence. Each of Kitty Hawk and its Subsidiaries (a) is a corporation or, with respect to AIC, a partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority to own its Properties and carry on its business as now being or as proposed to be conducted, and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a Material Adverse Effect. Each of Kitty Hawk and its Subsidiaries has the power, authority and legal right to execute, deliver and perform its obligations under the Loan Documents and the Related Transaction Documents to which it is or may become a party. Section 7.2 Financial Statements. (a) Kitty Hawk has delivered to Agent and Lenders (i) audited consolidated and consolidating financial statements of Kitty Hawk and its Subsidiaries as of and for the fiscal years ended August 31, 1995 and August 31, 1996, and for the four month period ended December 31, 1996, (ii) unaudited interim financial statements of Kitty Hawk and its Subsidiaries as of and for the periods ended March 31, 1997, (iii) audited consolidated and consolidating financial statements of AIA and its Subsidiaries as of and for the fiscal year ended December 31, 1996, and (iv) unaudited interim financial statements of AIA and its Subsidiaries as of and for the period ended June 30, 1997. Such financial statements are complete, true and correct, have been prepared in accordance with GAAP and fairly and accurately present, on a consolidated and consolidating (where applicable) basis, the financial condition of Kitty Hawk and its consolidated Subsidiaries or AIA and its consolidated Subsidiaries (as applicable) as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither Kitty Hawk nor any of its Subsidiaries, nor AIA or any of its Subsidiaries, has any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments except as referred to or reflected in such financial statements. There has not been, as of the Closing Date, any material adverse change in the business, condition (financial or otherwise), operations, prospects or Properties of any Company since the effective dates of the most recent applicable financial statements referred to in this Section 7.2. (b) The Pro Forma Balance Sheet was prepared by Kitty Hawk on a basis substantially consistent with the financial statements referred to in Section 7.2(a), with only such adjustments thereto as would be required in accordance with GAAP. Neither Kitty Hawk nor any of its Subsidiaries has any contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or unanticipated losses from any unfavorable commitments except as referred to or reflected in the Pro Forma. (c) The Projections were prepared by Kitty Hawk on a basis substantially consistent with the financial statements referred to in Section 7.2(a). The Projections represent, as of the Closing Date, the good faith estimate of Kitty Hawk and its senior management concerning the probable financial condition and performance of Kitty Hawk and its Subsidiaries based on assumptions believed to be reasonable at the time made. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 63 70 Section 7.3 Corporate Action; No Breach. The execution, delivery and performance by each Company of the Loan Documents and the Related Transaction Documents to which it is or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite corporate or other entity action on the part of each Company and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) the articles or certificates of incorporation or bylaws of any Company, (ii) any Governmental Requirement or any order, writ, injunction or decree of any Governmental Authority or arbitrator, or (iii) any agreement, document or instrument to which any Company is a party or by which any Company or any of its Property is bound or subject, or (b) constitute a default under any such agreement, document or instrument, or result in the creation or imposition of any Lien (except a Lien in favor of Agent for and on behalf of Lenders under the Security Documents as provided in Article 5) upon any of the revenues or Property of any Company. Section 7.4 Operation of Business. Each of Kitty Hawk and its Subsidiaries possesses all Permits, franchises, licenses, patents, copyrights, trademarks, tradenames and authorizations or rights thereto necessary or appropriate to conduct its business substantially as now conducted and as presently proposed to be conducted. None of such Persons is in violation of any valid rights of others with respect to any of the foregoing. Section 7.5 Litigation and Judgments. Except as disclosed on Schedule 7.5 hereto, there is no action, suit, investigation or proceeding before or by any Governmental Authority or arbitrator pending or, to the knowledge of any Company, threatened against or affecting Kitty Hawk or any of its Subsidiaries that could, if adversely determined, reasonably be expected to have a Material Adverse Effect. There are no outstanding judgments against any Company. No Company has received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed to any liability or disadvantage that could reasonably be expected to have a Material Adverse Effect. Section 7.6 Rights in Properties; Liens. Aircargo is the true and lawful owner of each of the AIA Aircraft and is the registered owner of each of the AIA Aircraft pursuant to proper registrations under the Federal Aviation Act. Aircargo is an air carrier certified by the FAA and qualifies in all respects as a citizen of the U.S. as defined in the Federal Aviation Act. Each of the AIA Aircraft, other than Aircraft AD, is in freight configuration and, as of the Closing Date, 14 of the AIA Aircraft are subject to an ACMI Agreement which is in full force and effect. None of the AIA Aircraft is subject to a true lease which constitutes an interest in such aircraft which is recordable with the FAA. None of the Companies owns any material Parts other than Aircargo, Leasing, AIA, KFS and OK, and, as of the Closing Date, no material portion of the Parts owned by such Companies, other than Parts in transit for installation or Parts in the process of being refurbished, are located at other than the addresses specified in the Security Agreement executed by such Company. None of the Properties or leasehold interests (excluding Non-Collateral Aircraft) of any Kitty Hawk or any of its Subsidiaries is subject to any Lien, except Permitted Liens. Section 7.7 Enforceability. The Loan Documents have been duly and validly executed and delivered by each of the Companies that is a party thereto as of the Closing Date, and such Loan SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 64 71 Documents constitute the legal, valid and binding obligations of the Companies, enforceable against the Companies in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights and general principles of equity. Section 7.8 Approvals. No authorization, approval or consent of, and no filing or registration with or notice to, any Governmental Authority or third party is or will be necessary for the execution, delivery or performance by any Company of any of the Loan Documents to which it is or will be a party or for the validity or enforceability thereof, except for such consents, approvals and filings as have been (or will have been as of the Closing Date) validly obtained or made and are in full force and effect. None of Kitty Hawk or any of its Subsidiaries has failed to obtain any material governmental consent, approval, license, Permit, franchise or other governmental authorization necessary for the ownership or use of any of its Properties or the conduct of its business. Section 7.9 Debt. As of the Closing Date, neither Kitty Hawk nor any of its Subsidiaries has any Debt except for (a) the Obligations, (b) the Senior Notes, and (c) the Debt disclosed on Schedule 7.9 hereto. Section 7.10 Taxes. Except as disclosed on Schedule 7.10 hereto, Kitty Hawk and its Subsidiaries have filed all tax returns (federal, state and local) required to be filed, including all income, franchise, employment, Property and sales tax returns, and have paid all of their respective liabilities for taxes, assessments, governmental charges and other levies that are due and payable. No Company is aware of any pending investigation of Kitty Hawk or any of its Subsidiaries by any taxing authority or of any pending but unassessed tax liability of Kitty Hawk or any of its Subsidiaries. No tax Liens have been filed and, except as disclosed on Schedule 7.10, no claims are being asserted against Kitty Hawk or any of its Subsidiaries with respect to any taxes. Except as disclosed on Schedule 7.10 hereto, as of the Closing Date, none of the income tax returns of Kitty Hawk or any of its Subsidiaries is under audit. The charges, accruals and reserves on the books of Kitty Hawk and its Subsidiaries in respect of taxes or other governmental charges are in accordance with GAAP. Section 7.11 Margin Securities. Neither Kitty Hawk nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Section 7.12 ERISA. Neither any Company nor any ERISA Affiliate maintains or contributes to, or has any obligation under, any Pension Plan other than the Pension Plans identified on Schedule 7.12. Each Plan of each Company is in compliance in all material respects with all applicable provisions of ERISA and the Code. Neither a Reportable Event nor a Prohibited Transaction has occurred within the last 60 months with respect to any Plan. No notice of intent to terminate a Pension Plan has been filed, nor has any Pension Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Pension Plan, nor has the PBGC instituted any such proceedings. Neither SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 65 72 any Company nor any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan. Each Company and each ERISA Affiliate has met its minimum funding requirements under ERISA and the Code with respect to all of its Plans subject to such requirements, and, as of the Closing Date, except as specified on Schedule 7.12, the present value of all vested benefits under each funded Plan (exclusive of any Multiemployer Plan) do not and will not exceed the fair market value of all such Plan assets allocable to such benefits, as determined on the most recent valuation date of such Plan and in accordance with ERISA. Neither any Company nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. No litigation is pending or threatened concerning or involving any Plan. There are no unfunded or unreserved liabilities (on either a going-concern basis or a wind-up basis) relating to any Plan that could, individually or in the aggregate, have a Material Adverse Effect if such Company were required to fund or reserve such liability in full. As of the Closing Date, no funding waivers have been or will have been requested or granted under Section 412 of the Code with respect to any Plan. As of the Closing Date, no unfunded or unreserved liability for benefits under any Plan exceed $100,000, with respect to any Plan, or $100,000 in the aggregate with respect to all such Plans or Plans (exclusive of any Multiemployer Plans) on either a going-concern basis or a wind-up basis. Section 7.13 Disclosure. No written statement, information, report, representation or warranty made by any Company in any Loan Document or furnished to Agent or any Lender by any Company in connection with the Loan Documents or any transaction contemplated hereby or thereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to any Company which has had a Material Adverse Effect or which could reasonably be expected to have a Material Adverse Effect. Section 7.14 Capitalization. (a) On and as of the Closing Date, the number and class of the authorized Capital Stock, the par value per share and the number of shares issued and outstanding with respect to the Capital Stock of each of the Subsidiaries of Kitty Hawk is as set forth on Schedule 7.14. Kitty Hawk owns all of the issued and outstanding Capital Stock each of its Subsidiaries other than AIC, and AIA owns 60% of the partnership interests of AIC. (b) On and as of the Closing Date, Kitty Hawk has no Subsidiaries other than Aircargo, Leasing, Charters, Skyfreighters (an inactive Texas corporation), AIA, AIT, FOL, KFS, OK and AIC. (c) All of the issued and outstanding Capital Stock of each of the Subsidiaries of Kitty Hawk has been validly issued and is fully paid and nonassessable, and there are no outstanding subscriptions, options, warrants, calls or rights (including preemptive rights) to acquire, and no outstanding securities or instruments convertible into, Capital Stock of any Subsidiary of Kitty Hawk. Section 7.15 Agreements. Neither Kitty Hawk nor any of its Subsidiaries is a party to any indenture, loan, credit agreement, stock purchase agreement or any lease or other agreement, SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 66 73 document or instrument, or subject to any charter or corporate restriction, that could reasonably be expected to have a Material Adverse Effect. Neither Kitty Hawk nor any of its Subsidiaries is in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, document or instrument material to its business to which it is a party. Section 7.16 Compliance with Laws. Neither Kitty Hawk nor any of its Subsidiaries is in violation in any material respect of any Governmental Requirement. Section 7.17 Investment Company Act. Neither Kitty Hawk nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 7.18 Public Utility Holding Company Act. Neither Kitty Hawk nor any of its Subsidiaries is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.19 Environmental Matters. (a) Except for instances of noncompliance with or exceptions to any of the following representations and warranties that could not have, individually or in the aggregate, a Material Adverse Effect: (i) Each of Kitty Hawk and its Subsidiaries and all of its Properties and operations is in full compliance with all Environmental Laws. No Company is aware of, or has received any written notice of, any past, present or future conditions, events, activities, practices or incidents which may interfere with or prevent the compliance or continued compliance by Kitty Hawk or any of its Subsidiaries with all Environmental Laws; (ii) Each of Kitty Hawk and its Subsidiaries has obtained all Permits that are required under applicable Environmental Laws, and all such Permits are in good standing and all such Persons are in compliance with all of the terms and conditions thereof; (iii) No Hazardous Materials exist on, about or within or have been (to the knowledge of any Company) or are being used, generated, stored, transported, disposed of on or Released from any of the Properties of Kitty Hawk or any of its Subsidiaries except in compliance with applicable Environmental Laws. The use which each of Kitty Hawk and its Subsidiaries makes and intends to make of its respective Properties will not result in the use, generation, storage, transportation, accumulation, disposal or Release of any Hazardous Material on, in or from any of its Properties except in compliance with applicable Environmental Laws; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 67 74 (iv) Neither Kitty Hawk nor any of its Subsidiaries nor any of its currently or previously owned or leased Properties or operations are subject to any outstanding or, to the knowledge of any Company, threatened order from or agreement with any Governmental Authority or other Person or subject to any judicial or administrative proceeding with respect to (A) any failure to comply with Environmental Laws, (B) any Remedial Action, or (C) any Environmental Liabilities; (v) There are no conditions or circumstances associated with the currently or previously owned or leased Properties or operations of Kitty Hawk or any of its Subsidiaries that could reasonably be expected to give rise to any Environmental Liabilities or claims resulting in any Environmental Liabilities. Neither Kitty Hawk nor any of its Subsidiaries is subject to, or has received written notice of, any claim from any Person alleging that it is or will be subject to any Environmental Liabilities; (vi) No Property of Kitty Hawk or any of its Subsidiaries is a treatment facility (except for the recycling of Hazardous Materials generated on-site and the treatment of liquid wastes subject to the Clean Water Act or for temporary storage of Hazardous Materials generated on-site prior to their disposal off-site) or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., regulations thereunder or any comparable provision of state law. Each of Kitty Hawk and its Subsidiaries is in compliance with all applicable financial responsibility requirements of all Environmental Laws; and (vii) Neither Kitty Hawk nor any of its Subsidiaries has failed to file any notice required under applicable Environmental Law reporting a Release. (b) No Lien arising under any Environmental Law that could have, individually or in the aggregate, a Material Adverse Effect has attached to any Property or revenues of Kitty Hawk or any of its Subsidiaries. Section 7.20 Labor Disputes and Acts of God. Neither the business nor the Properties of Kitty Hawk or any of its Subsidiaries are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance) that is having or could have a Material Adverse Effect. Section 7.21 Material Contracts. Attached hereto as Schedule 7.21 is a complete list, as of the Closing Date, of all Material Contracts of Kitty Hawk or any of its Subsidiaries, other than the Loan Documents. All of the Material Contracts are in full force and effect and neither Kitty Hawk nor any of its Subsidiaries is in default under any Material Contract and no other Person that is a party thereto is, to the knowledge of any Company, in default under any of the Material Contracts. None of the Material Contracts prohibit the transactions contemplated under the Loan Documents. Section 7.22 Outstanding Securities. As of the Closing Date, all outstanding securities (as defined in the Securities Act of 1933, as amended, or any successor thereto, and the rules and SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 68 75 regulations of the Securities and Exchange Commission thereunder) of each of Kitty Hawk and its Subsidiaries have been offered, issued, sold and delivered in compliance with all applicable Governmental Requirements. Section 7.23 Solvency. Each of Kitty Hawk and the Operating Subsidiaries, as a separate entity, is Solvent, both before and after giving effect to the Loans. Section 7.24 Employee Matters. Except as set forth on Schedule 7.24, as of the Closing Date (a) neither Kitty Hawk nor any of its Subsidiaries is subject to any collective bargaining agreement, and (b) no petition for certification or union election is pending with respect to the employees of Kitty Hawk or any of its Subsidiaries, and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of Kitty Hawk or any of its Subsidiaries. There are no strikes, slowdowns, work stoppages or controversies pending or, to the knowledge of the Companies, threatened against Kitty Hawk or any of its Subsidiaries which could have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 7.24, as of the Closing Date, neither Kitty Hawk nor any of its Subsidiaries is subject to an employment contract with any executive officer or director of a Company. Section 7.25 Insurance. Schedule 7.25 sets forth an accurate summary description of all policies of insurance (including, without limitation, the coverage and deductibles thereunder, the limits of such insurance and the issuers of such insurance) that will be in effect as of the Closing Date for Kitty Hawk and its Subsidiaries. To the extent such policies have not been replaced, no notice of cancellation has been received for such policies and Kitty Hawk and its Subsidiaries are in compliance with all of the terms and conditions of such policies. Section 7.26 Common Enterprise. Each of Kitty Hawk and its Subsidiaries is a member of an affiliated group, and Kitty Hawk and its Subsidiaries are collectively engaged in a common enterprise with one another. Each of Kitty Hawk and the Operating Subsidiaries expects to derive substantial benefit (and may reasonably be expected to derive substantial benefit), directly and indirectly, from all Loans and Letters of Credit contemplated by this Agreement, both in its separate capacity and as a member of an affiliated and integrated group. Each of Kitty Hawk and the Operating Subsidiaries will receive reasonably equivalent value in exchange for the Collateral and Guaranties being provided by it as security for the payment and performance of the Obligations. Section 7.27 Related Transactions. (a) All representations and warranties made by Kitty Hawk and its Subsidiaries in the Related Transactions Documents are true and correct in all material respects on and as of each date made or deemed made and as of the Closing Date; provided, however, that, with respect to the representations and warranties of the Kalitta Companies contained in the Merger Agreement, such representations and warranties are, to the knowledge of Kitty Hawk, true and correct in all material respects only to the extent necessary to avoid a claim of indemnity by any Kitty Hawk Company under the indemnification provisions of the Merger Agreement. No rights of cancellation or rescission and, to the knowledge of Kitty Hawk and its Subsidiaries, no defaults or defenses exist with respect to any of the Related Transactions SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 69 76 Documents. Kitty Hawk has delivered to Agent complete and correct copies of all Related Transactions Documents, including all schedules and exhibits thereto. The Related Transactions Documents set forth the entire agreement and understanding of the parties thereto relating to the subject matter thereof, and there are no other agreements, arrangements or understandings, written or oral, relating to the matters covered thereby. (b) As of the Closing Date, all conditions precedent to the Related Transactions pursuant to the Related Transactions Documents have been fulfilled in all material respects or (with the prior written consent of Agent) waived, the Related Transactions Documents have not been amended or otherwise modified in any material respect (except as permitted by this Agreement), and there has not been any breach of any material term or condition contained in the Related Transactions Documents. After giving effect to the consummation of the Merger, Kitty Hawk has acquired all issued and outstanding Capital Stock of each of the Kalitta Companies free and clear of any Liens, except the Liens securing the Obligations in favor of Agent. In connection with the Merger, neither Kitty Hawk nor any of its Subsidiaries has assumed or will assume any liabilities other than those required to be assumed by Kitty Hawk and its Subsidiaries in accordance with the express terms and provisions of the Merger Agreement. All approvals, authorizations, consents, licenses, exemptions of, filings or registrations with any Governmental Authority or other Person required in connection with the Related Transactions have been obtained (including, without limitation, notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976) and all waiting periods (if any) relating thereto have lapsed. Section 7.28 Purchase Money Security Interest. The Aircraft Mortgage executed by Aircargo dated the Closing Date evidences and continues or creates a purchase-money equipment security interest (as such phrase is used in Section 1110(a) of the Bankruptcy Code) in each of the AIA Aircraft to the extent that such security interest secures the Term Loans, and Agent (for and on behalf of Agent and Lenders) has the benefits provided by Section 1110(a) of the Bankruptcy Code to the extent of such purchase-money equipment security interest. ARTICLE 8 Affirmative Covenants Each of the Companies jointly and severally covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder or any Letter of Credit remains outstanding, it will perform and observe, or cause to be performed and observed, the following covenants: Section 8.1 Reporting Requirements. Kitty Hawk will furnish to Agent and each Lender: (a) Annual Financial Statements. As soon as available, and in any event within 90 days after the end of each fiscal year of Kitty Hawk, beginning with the fiscal year ending December 31, 1997: (i) a copy of the annual audit report of Kitty Hawk and its Subsidiaries SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 70 77 for such fiscal year containing, on a consolidated basis, a balance sheet and statements of income, shareholders' equity and sources and uses of cash as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited and certified by Ernst & Young or other independent certified public accountants of recognized standing reasonably acceptable to Agent and containing no qualification thereto except as may be reasonably acceptable to Agent, to the effect that such report has been prepared in accordance with GAAP; (ii) consolidating schedules with respect to the balance sheet, statement of income, shareholders' equity and sources and uses of cash for each of Kitty Hawk and its Subsidiaries; and (iii) a copy of Kitty Hawk's Form 10- K annual report filed or to be filed with the SEC; (b) Quarterly Financial Statements. As soon as available, and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of Kitty Hawk, beginning with the fiscal quarter ending March 31, 1998, (i) an unaudited financial report of Kitty Hawk and its Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended containing, on a consolidated basis, balance sheets and statements of income, shareholders' equity and sources and uses of cash, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail certified by a Responsible Officer of Kitty Hawk to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments) the financial condition and results of operations of Kitty Hawk and its Subsidiaries, on a consolidated and consolidating basis, at the date and for the periods indicated therein, and (ii) a copy of Kitty Hawk's Form 10-Q quarterly report filed or to be filed with the SEC; (c) Compliance Certificate. Concurrently with the delivery of each of the financial statements referred to in Sections 7.1(a) and 7.1(b), a certificate of a Responsible Officer of Kitty Hawk (i) stating that, to the best of such officer's knowledge, no Default has occurred and is continuing or, if a Default has occurred and is continuing, stating the nature thereof and the action that has been taken and is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with Sections 10.1, 10.2, 10.3, 10.4 and 10.5. (d) Applicable Margin and Commitment Fee Rate Certificate. Concurrently with the delivery of the financial statements referred to in Section 8.1(b), a certificate of a Responsible Officer of Kitty Hawk showing in reasonable detail the calculation of the Applicable Base Rate Margin, the Applicable Commitment Fee Rate and the Applicable Eurodollar Margin as of the next Calculation Date; (e) Borrowing Base Report. Within 30 days after the end of each calendar month, commencing with the month of January 1998, a Borrowing Base Report certified by a Responsible Officer of Kitty Hawk, together with information regarding the aging of accounts and Parts reports as Agent may reasonably request from time to time; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 71 78 (f) Management Letters. Promptly upon receipt thereof, a copy of any management or comment letter submitted to Kitty Hawk or any of its Subsidiaries by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects, or Properties of Kitty Hawk or any of its Subsidiaries; (g) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any Governmental Authority or arbitrator affecting Kitty Hawk or any of its Subsidiaries which, if determined adversely to Kitty Hawk or such Subsidiary, could reasonably be expected to have a Material Adverse Effect; (h) Notice of Default. As soon as possible and in any event within 5 days after the occurrence of each Default, a written notice setting forth the details of such Default and the action that Kitty Hawk and its Subsidiaries have taken and propose to take with respect thereto; (i) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which Kitty Hawk or any of its Subsidiaries or ERISA Affiliates files with or receives from the PBGC or the U.S. Department of Labor under ERISA, and as soon as possible and in any event within five days after such Person knows or has reason to know that any Pension Plan is insolvent, or that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or Multiemployer Plan, or that the PBGC or Kitty Hawk or any of its Subsidiaries or ERISA Affiliates has instituted or will institute proceedings under ERISA to terminate or withdraw from or reorganize any Pension Plan, a certificate of a Responsible Officer of Kitty Hawk setting forth the details as to such insolvency, withdrawal, Reportable Event, Prohibited Transaction or termination and the action that Kitty Hawk and its Subsidiaries have taken and propose to take with respect thereto; (j) Reports to Other Creditors. Promptly after the furnishing thereof, copies of each written statement or report required to be furnished by Kitty Hawk or any of its Subsidiaries to any other party pursuant to or in connection with the terms of any indenture (including the Indenture), loan, or credit or similar agreement and not otherwise required to be furnished to Agent pursuant to this Section 8.1; (k) Notice of Material Adverse Effect. As soon as possible and in any event within five days after the occurrence thereof, written notice of any event, circumstance or other matter that could reasonably be expected to have a Material Adverse Effect; (l) Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by Kitty Hawk or any of its Subsidiaries to its stockholders generally and one copy of each regular, periodic or special report, registration statement or prospectus filed by Kitty Hawk or any of its Subsidiaries with any securities exchange or the SEC, and of all press releases and other statements made by Kitty Hawk or any of its Subsidiaries to the public containing material developments in its business; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 72 79 (m) Notice of New Subsidiaries. Concurrently with the delivery of each of the financial statements referred to in Sections 8.1(a) and 8.1(b), notice of the creation or acquisition of any Subsidiary of Kitty Hawk after the Closing Date and subsequent to the last delivery of such information; (n) Appraisals. From time to time upon the request of Agent, appraisals of the AIA Aircraft reasonably satisfactory in form and substance to Agent, which appraisals shall be at the expense of Kitty Hawk except if and to the extent that such appraisals are required by Agent on more than one occasion during any fiscal year of Kitty Hawk; (o) Insurance. Within 60 days prior to the end of each fiscal year of Kitty Hawk, a report in form and substance reasonably satisfactory to Agent summarizing all material insurance coverage maintained by Kitty Hawk and its Subsidiaries as of the date of such report and all material insurance coverage planned to be maintained by such Persons in the subsequent fiscal year; (p) Plan Information. From time to time, as reasonably requested by Agent or any Lender, such books, records and other documents relating to any Pension Plan as Agent or any Lender shall specify; prior to any termination, partial termination or merger of a Pension Plan covering employees of Kitty Hawk or any of its Subsidiaries or ERISA Affiliates, or a transfer of assets of a Pension Plan covering employees of Kitty Hawk or any of its Subsidiaries or ERISA Affiliates, written notification thereof; promptly upon Kitty Hawk's or any of its Subsidiaries' receipt thereof, a copy of any determination letter or advisory opinion regarding any Pension Plan received from any Governmental Authority and any amendment or modification thereto as may be necessary as a condition to obtaining a favorable determination letter or advisory opinion; and promptly upon the occurrence thereof, written notification of any action requested by any Governmental Authority to be taken as a condition to any such determination letter or advisory opinion; (q) Environmental Assessments and Notices. Promptly after the receipt thereof, a copy of each environmental assessment (including any analysis relating thereto) prepared with respect to any real Property of Kitty Hawk or any of its Subsidiaries and each notice sent by any Governmental Authority relating to any failure or alleged failure to comply with any Environmental Law or any liability with respect thereto; (r) Annual Projections. On or before 30 days prior to the end of each fiscal year of Kitty Hawk, financial projections, prepared in reasonable detail, for Kitty Hawk and its Subsidiaries for the immediately succeeding fiscal year which reflect a good faith estimate of Kitty Hawk and its senior management concerning the probable financial condition and performance of Kitty Hawk and its Subsidiaries for such succeeding fiscal year based on assumptions believed to be reasonable at the time made; and (s) General Information. Promptly, such other information concerning Kitty Hawk or any of its Subsidiaries as Agent may from time to time reasonably request. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 73 80 Section 8.2 Maintenance of Existence; Conduct of Business. Each of Kitty Hawk and its Subsidiaries will preserve and maintain its corporate or other entity existence (except for mergers of Subsidiaries permitted by Section 9.3) and all of its material leases, privileges, licenses, Permits, franchises, qualifications, patents, trademarks, copyrights, intangible Property and rights that are necessary or appropriate in the ordinary conduct of its business (including, without limitation, as to Aircargo and AIA, its Federal Aviation Act Part 121 air carrier operating certificate and, as to KFS and OK, its Federal Aviation Act Part 135 air carrier operating certificate). Each of Kitty Hawk and its Subsidiaries will conduct its business in an orderly and efficient manner in accordance with good business practices. All AIA Aircraft will be maintained as ready and available for regular, uninterrupted revenue generating operation in compliance with all laws and FAA regulations. Section 8.3 Maintenance of Properties; Hush Kits. Aircargo will, at all times, have good and indefeasible title to each of the AIA Aircraft free and clear of any Lien other than the perfected, first priority Liens of Agent for the benefit of Agent and Lenders pursuant to the Loan Documents as security for the Obligations. Each of Kitty Hawk and its Subsidiaries will maintain, keep and preserve all of its material Properties necessary, useful or appropriate in the proper conduct of its business in good repair, working order and condition (ordinary wear and tear excepted) and make all necessary repairs, renewals, replacements, betterments and improvements thereof. All AIA Aircraft maintenance and service will be performed in compliance with all airworthiness directives and mandatory service bulletins and any and all repairs, modifications and conversions of the AIA Aircraft and the installation of Hush Kits shall be done in accordance with any and all FAA specifications and requirements. Kitty Hawk and Aircargo (a) will cause a Hush Kit to be maintained on (and added to if applicable) each of the AIA Aircraft on or before December 31, 1999, or (b) if and to the extent that such a Hush Kit is not added to any such aircraft by such date, will, from time to time within 30 days after any request by Agent and pursuant to an Aircraft Mortgage and other Security Documents reasonably satisfactory to Agent, grant to Agent a perfected, first priority Lien (as security for the Obligations) on other Stage 3 (as so qualifying under the Airport Noise and Capacity Act of 1990 and the regulations promulgated thereunder) Kitty Hawk Aircraft reasonably acceptable to Agent that have an aggregate fair market value at least equal to the value of the AIA Aircraft specified by Agent which does not then have a Hush Kit in exchange for Agent's release of its Lien on such aircraft specified by Agent. In addition, Kitty Hawk and its Subsidiaries will add Hush Kits to the AIA Aircraft that do not presently have a Hush Kit at a rate that is not less than the rate (based upon the absolute number of aircraft as opposed to the number of aircraft as a percentage of the AIA Aircraft and the Non-Collateral Aircraft) at which such Hush Kits are added to the Non-Collateral Aircraft that do not presently have a Hush Kit. Section 8.4 Taxes and Claims. Each of Kitty Hawk and its Subsidiaries will pay or discharge at or before maturity or before becoming delinquent (a) all taxes, levies, assessments and governmental charges imposed on it or its income or profits or any of its Property and (b) all lawful claims for labor, material and supplies, which, if unpaid, might become a Lien upon any of its Property; provided, however, that neither Kitty Hawk nor any of its Subsidiaries will be required to pay or discharge any tax, levy, assessment or governmental charge or claim for labor, material or supplies whose amount, applicability or validity is being contested in good faith by appropriate proceedings being diligently pursued and for which adequate reserves have been established under GAAP. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 74 81 Section 8.5 Insurance. (a) Public Liability and Property Damage Insurance. Each of Kitty Hawk and its Subsidiaries shall carry or cause to be carried with respect to the AIA Aircraft, and with respect to all other Kitty Hawk Aircraft in operation, at their expense, comprehensive airline liability (including, without limitation, passenger, contractual, bodily injury, cargo and property damage liability) insurance (i) in an amount for each such aircraft of not less than (A) except as provided in clause (B) succeeding, $50,000,000 per occurrence combined single limit with respect to each Kitty Hawk Aircraft except, with respect to Boeing model 727 and 747 aircraft and Lockhead model L1011 aircraft, $200,000,000 per occurrence combined single limit and except, with respect to model DC8 and DC9 aircraft and Convair aircraft, $100,000,000 per occurrence combined single limit and (B) with respect to aircraft operated under KFS' or OK's Federal Aviation Act Part 135 air carrier operating certificate, the amount of such insurance that is not less than such insurance as in effect as of the Closing Date for such aircraft or other aircraft of the same type as represented in the written communication dated November 13, 1997, from counsel to Kitty Hawk to Wells Fargo, (ii) of the type and covering the same risks as from time to time are applicable to similar aircraft owned or leased by Kitty Hawk and its Subsidiaries, (iii) of the type customarily carried by U.S. commercial air carriers similarly situated with Kitty Hawk or its Subsidiary (as applicable) and operating similar aircraft and engines and covering risks of the kind customarily insured against by such carriers, and (iv) which is maintained in effect with insurers of recognized reputation and responsibility. (b) Insurance Against Loss or Damage. Each of Kitty Hawk and its Subsidiaries shall maintain or cause to be maintained in effect, at their expense, with insurers of recognized reputation and responsibility, all-risk aircraft hull insurance covering the AIA Aircraft and all-risk property damage insurance covering engines and parts while removed from such aircraft and not replaced by similar components title to which is vested in Aircargo free and clear of all Liens, which insurance shall include, without limitation, except with respect to all-risk property damage insurance and to the extent commercially available, aircraft war risk and governmental confiscation and expropriation and hijacking insurance; provided, that such insurance shall at all times be for an amount not less than the greater of 110% of the aggregate outstanding principal amount of the Term Loans advanced against such aircraft or the amount which, in the judgment of Kitty Hawk, is sufficient to fully insure the fair market value of such aircraft (but shall not be required to exceed such fair market value as of the Closing Date). In addition, each of Kitty Hawk and its Subsidiaries shall maintain or cause to be maintained in effect, at their expense, insurance of the types and in the amounts specified in this Section 8.5(b) preceding covering all other Kitty Hawk Aircraft in operation if and to the extent that such insurance is commercially available; provided, however, that aircraft war risk and governmental confiscation and expropriation and hijacking insurance shall not be required to be maintained with respect to such other Kitty Hawk Aircraft. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 75 82 (c) Adjustment. Except during a period when a Default has occurred and is continuing, all losses covered by insurance will be adjusted by Kitty Hawk and its Subsidiaries with the insurers. (d) Application of Insurance Proceeds if no Default. Each of Kitty Hawk and its Subsidiaries will cause each Insurance Recovery relating to the Collateral to be deposited promptly with Agent as security for the Obligations. If no Default shall have occurred and be continuing, the applicable Company may use each such Insurance Recovery to repair, restore or replace the Property that was the subject of such Insurance Recovery. An Insurance Recovery will only be released to a Company pursuant to this Section 8.5(d) upon delivery by such Company to Agent of evidence reasonably satisfactory to Agent of the expenditure of amounts in repair, restoration or replacement of the Property that was the subject of the Insurance Recovery or the purchase of other, similar Property for use in the Company's business in which Agent, for the benefit of Agent and Lenders, shall have a perfected, first priority Lien as security for the Obligations. Each of Kitty Hawk and its Subsidiaries will promptly pay all Excess Insurance Proceeds to Agent for application against the Obligations in accordance with Section 2.7(a). (e) Application of Insurance Proceeds if a Default. If a Default shall have occurred and be continuing, each of Kitty Hawk and its Subsidiaries will cause all proceeds of insurance paid on account of the loss of or damage to any Collateral and all awards of compensation for any Collateral taken by condemnation or eminent domain to be paid directly to Agent to be applied against or held as security for the Obligations, at the election of the Required Lenders. (f) Certificates. Kitty Hawk shall furnish, or cause to be furnished, to Agent, on or before the Closing Date and concurrently with the renewal of each insurance policy (but in no event less frequently than once each calendar year commencing in 1997), a certificate signed by an authorized representative of the insureds (the "Insurance Broker"), describing in reasonable detail the hull and liability insurance (and property insurance for detached engines and parts) then carried and maintained with respect to the AIA Aircraft and stating the opinion of such Insurance Broker that (i) such insurance complies with the terms hereof and (ii) that such insurance provides coverages against risks that are customarily insured against by U.S. air carriers, and that such coverages are in substantially similar forms, are of such types and have limits within the range of limits as are customarily carried by U.S. carriers. Kitty Hawk shall cause such Insurance Brokers to agree to advise Agent in writing of any default in the payment of any premium and of any other act or omission on the part of Kitty Hawk or any of its Subsidiaries of which it has knowledge and which might invalidate or render unenforceable, in whole or in part, any insurance on the AIA Aircraft, and to advise Agent in writing at least 30 days (except a maximum of 7 days with respect to war risk coverages) prior to the cancellation (but not scheduled expiration if renewed prior thereto) or material adverse change of any insurance maintained pursuant to this Section 8.5. Kitty Hawk shall also cause such Insurance Brokers to agree to deliver to Agent, at or before the expiration of any insurance policy referenced in a previously delivered certificate of insurance, a new certificate substantially in the form delivered on the Closing Date except for changes SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 76 83 in the coverage consistent with the terms hereof. If Kitty Hawk or any of its Subsidiaries fails to maintain or cause to be maintained insurance as herein provided, the Required Lenders may at their sole option, but shall be under no duty to, provide such insurance and, in such event, Kitty Hawk and its Subsidiaries shall, upon demand, reimburse the Required Lenders for the costs thereof; provided, however, that no exercise by the Required Lenders of said option shall affect the provisions of this Agreement, including the provisions that failure by Kitty Hawk or any of its Subsidiaries to maintain the prescribed insurance shall constitute an Event of Default. (g) Deductibles. Kitty Hawk and its Subsidiaries shall have the right to self-insure to the extent of any applicable mandatory minimum per aircraft (or, if applicable, per annum or other period) hull or liability insurance deductible imposed by the aircraft hull or liability insurer. (h) Terms of Insurance Policies. Any policies of insurance carried in accordance with this Sections 8.5 covering the AIA Aircraft, and any policies taken out in substitution or replacement for any such policies, (i) shall name Agent, for and on behalf of each of the Lenders, and the Lenders as additional insured, with respect to liability policies, and Agent, for and on behalf of each of the Lenders as loss payee, with respect to casualty policies (but without imposing on any such party liability to pay premiums with respect to such insurance), (ii) may provide for self-insurance to the extent permitted in Section 8.5(g), (iii) shall provide that, if the insurers cancel such insurance for any reason whatever or if the same is allowed to lapse for non-payment of premium or if any material change is made in the insurance which adversely affects the interest of Agent, such lapse, cancellation or change shall not be effective as to Agent for 30 days (except a maximum of seven days with respect to war risk coverages in accordance with standard industry practice) after receipt by Agent of written notice by such insurers of such lapse, cancellation or change, (iv) shall provide that the interests of Agent and the Lenders in such policies shall not be invalidated by any action or inaction of Kitty Hawk or any of its Subsidiaries or any other Person having possession and shall insure the interests of Agent and the Lenders, as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Kitty Hawk or any of its Subsidiaries or by any such Person having possession, (v) shall be primary without any right of contribution from any other insurance which is carried by Agent or the Lenders, (vi) shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured, (vii) shall waive any right of the insurers to set-off or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of Agent, and (viii) shall provide that, in the event of loss involving the AIA Aircraft, Agent shall be sole loss payee for the account of all interests. (i) Additional Insurance Requirements. Kitty Hawk and its Subsidiaries will, in connection with the ownership and operation of all Kitty Hawk Aircraft, maintain such insurance as is required to be maintained in accordance with the Indenture. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 77 84 Section 8.6 Inspection Rights. At any reasonable time and from time to time, each of Kitty Hawk and its Subsidiaries will permit representatives and agents of Agent and each Lender to examine, copy and make extracts from its books and records (including, without limitation, for the purpose of verifying the Borrowing Base), to visit and inspect its Properties and to discuss its business, operations and financial condition with its officers and independent certified public accountants. Each of Kitty Hawk and its Subsidiaries will authorize their accountants in writing (with a copy to Agent) to comply with this Section 8.6. Section 8.7 Keeping Books and Records. Each of Kitty Hawk and its Subsidiaries will maintain appropriate books of record and account in accordance with GAAP consistently applied in which true, full and correct entries will be made of all their respective dealings and business affairs. If any changes in accounting principles from those used in the preparation of the financial statements referenced in Section 8.1 are hereafter required or permitted by GAAP and are adopted by Kitty Hawk or any of its Subsidiaries with the concurrence of its independent certified public accountants and such changes in GAAP result in a change in the method of calculation or the interpretation of any of the financial covenants, standards or terms found in Section 8.1 or Article 10 or any other provision of this Agreement, then Kitty Hawk and its Subsidiaries and the Required Lenders agree to amend any such affected terms and provisions so as to reflect such changes in GAAP with the result that the criteria for evaluating the financial condition of Kitty Hawk and its Subsidiaries shall be the same after such changes in GAAP as if such changes in GAAP had not been made; provided that, until any necessary amendments have been made, the certificate required to be delivered under Section 8.1(c) hereof demonstrating compliance with Article 10 shall include calculations setting forth the adjustments from the relevant items as shown in the current financial statements based on the changes to GAAP to the corresponding items based on GAAP as used in the financial statements referenced in Section 7.2(a), in order to demonstrate how such financial covenant compliance was derived from the current financial statements. All airframe and engine logs for the AIA Aircraft and other Kitty Hawk Aircraft will be correct, complete and accurate. Section 8.8 Compliance with Laws. Each of Kitty Hawk and its Subsidiaries will comply in all material respects with all applicable Governmental Requirements. Section 8.9 Compliance with Agreements. Each of Kitty Hawk and its Subsidiaries will comply in all material respects with all material agreements, contracts, documents and instruments binding on it or affecting its Properties or business. Section 8.10 Further Assurances. Each of Kitty Hawk and its Subsidiaries will execute and deliver such further agreements, documents and instruments and take such further action as may be requested by Agent to carry out the provisions and purposes of this Agreement and the other Loan Documents, to evidence the Obligations and to create, preserve, maintain and perfect the Liens of Agent for the benefit of itself and Lenders in and to the Collateral and the required priority of such Liens. Without limiting the generality of the foregoing, each of Kitty Hawk and its Subsidiaries will use all reasonable efforts to obtain agreements (e.g., landlord and mortgagee consents and waivers) of the owners of the leased real properties and the lenders of such owners, in form and substance reasonably satisfactory to Agent, as Agent may request from time to time. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 78 85 Section 8.11 ERISA. Each of Kitty Hawk and its Subsidiaries will, and will cause each of its ERISA Affiliates to, comply with all minimum funding requirements and all other material requirements of ERISA so as not to give rise to any liability thereunder. Section 8.12 Aircraft Registration, Maintenance, Operation, Insignia. (a) Registration and Maintenance. Each of Kitty Hawk and its Subsidiaries, at their own cost and expense, shall: (i) cause the AIA Aircraft to be duly registered in the name of Aircargo and to remain duly registered in the name of Aircargo under the Federal Aviation Act; (ii) maintain, service, repair and overhaul each of the AIA Aircraft (A) so as to keep such aircraft in good operating condition and so as to keep the such aircraft in such condition as may be necessary to enable the airworthiness certification for such aircraft to be maintained in good standing at all times under the Federal Aviation Act, (B) so as to comply with all airworthiness directives (at the time and to the extent applicable to Kitty Hawk and its Subsidiaries or other operators of such aircraft), manufacturer manuals and mandatory service bulletins and all applicable insurance policies, and (C) in substantially the same manner as Kitty Hawk and its Subsidiaries maintain, service, repair or overhaul similar aircraft and without in any way discriminating against such aircraft (or in such other manner as shall have been approved by Required Lenders in writing); (iii) maintain or cause to be maintained all records, logs and other materials required to be maintained in respect of the AIA Aircraft by the Federal Aviation Act or any applicable Government Authority; and (iv) continuously cause the AIA Aircraft to remain in normal revenue generating operation (subject to maintenance requirements in the ordinary course of business). (b) Insignia. On or before March 31, 1998, Kitty Hawk and Aircargo agree to affix and maintain (or cause to be affixed and maintained), conspicuously displayed, on the cockpit bulkhead of each AIA Aircraft and on each engine, a nameplate (or, with respect to engines, a stencil) bearing the inscription: Mortgaged To Wells Fargo Bank (Texas), National Association (as Agent for itself and other Lenders) (such nameplate to be replaced, if necessary, with a nameplate reflecting the name of any successor mortgagee). Kitty Hawk and its Subsidiaries shall not allow the name of any Person to be placed on any AIA Aircraft as a designation that might be interpreted as a claim SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 79 86 of ownership; provided, that nothing herein shall prohibit Kitty Hawk and its Subsidiaries from placing its or its vendee's customary colors and insignia on the AIA Aircraft. Section 8.13 Replacement of Parts; Alterations, Modifications and Additions. (a) Replacement of Parts. Each of Kitty Hawk and its Subsidiaries shall, at their own cost and expense, promptly replace or cause to be replaced all parts for any AIA Aircraft which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair, obsolete or permanently rendered unfit for use for any reason whatsoever. All replacement parts shall be owned by a Company free and clear of all Liens (other than Liens in favor of Agent securing the Obligations) and shall be in as good an operating condition as, and shall have a value at least equal to, the parts replaced, assuming such replaced parts were in the condition and repair required to be maintained by the terms hereof. All parts at any time removed from the AIA Aircraft shall remain the property of a Company and remain subject to the Lien of the Loan Documents, no matter where located, until such time as such parts shall be replaced by parts which are free and clear of all Liens and have become subject to the Lien of the Loan Documents. (b) Alterations, Modifications and Additions. Each of Kitty Hawk and its Subsidiaries shall, at their own expense, make (or cause to be made) such alterations and modifications in and additions to the AIA Aircraft as may be required to meet the applicable standards of the FAA and to maintain the standard certificate of airworthiness for such aircraft. In addition, Kitty Hawk and its Subsidiaries may, at their own expense, from time to time make such alterations and modifications in and additions to the AIA Aircraft as they may deem desirable in the proper conduct of their business; provided, that no such alteration, modification or addition impairs the condition or airworthiness of any such AIA Aircraft or diminishes the value below the value thereof immediately prior to such alteration, modification or addition assuming any such AIA Aircraft were then in the condition required to be maintained by the terms of the Loan Documents. All parts incorporated or installed in or attached or added to the AIA Aircraft as the result of any such alteration, modification or addition (the "Additional Parts") shall, without further act, become subject to the Lien of the Loan Documents. Kitty Hawk and its Subsidiaries may, at their own expense at any time, so long as no Default shall have occurred and be continuing, remove or suffer to be removed any Additional Part, provided that such Additional Part: (i) is in addition to, and not in replacement of or substitution for, (A) any part originally incorporated or installed in or attached to such aircraft upon the cargo conversion of and installation of Hush Kits on such aircraft, or (B) any part in replacement of or substitution for any such part; (ii) is not required to be incorporated or installed in or attached or added to such aircraft pursuant to the terms hereof or under any contract; and SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 80 87 (iii) can be removed from such aircraft without impairing the condition or airworthiness or diminishing the value of such aircraft which such aircraft would have had at such time had such alteration, modification or addition not occurred. Upon the removal thereof as provided above, such Additional Part shall no longer be deemed subject to the Lien of the Loan Documents. Section 8.14 Ownership of Subsidiaries. Kitty Hawk shall at all times own all issued and outstanding Capital Stock of each of the Operating Subsidiaries and Skyfreighters. Section 8.15 Collateral Audit. Kitty Hawk and its Subsidiaries will cooperate fully with Agent to allow Agent to promptly complete a collateral audit of the accounts and Parts of the Companies and to facilitate determinations of the Borrowing Base at any time and from time to time in accordance with this Agreement. ARTICLE 9 Negative Covenants Each of the Companies jointly and severally covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder or any Letter of Credit remains outstanding, it will perform and observe, or cause to be performed and observed, the following covenants: Section 9.1 Debt. Neither Kitty Hawk nor any of its Subsidiaries will, without the prior written consent of Required Lenders, incur, create, assume or permit to exist any Debt, except: (a) Debt of Kitty Hawk and its Subsidiaries to Agent and Lenders pursuant to the Loan Documents; (b) Debt of Kitty Hawk and its Subsidiaries in an aggregate principal amount not to exceed $340,000,000 evidenced by the Senior Notes; (c) Debt (in addition to the Debt referred to in clauses (a) and (b) preceding) incurred in the ordinary course of business (including, without limitation, Debt incurred to finance the acquisition of additional aircraft) not to exceed $75,000,000 in aggregate principal amount at any time outstanding; (d) Debt owed by Operating Subsidiaries, other than AIC, of Kitty Hawk to Kitty Hawk or other Operating Subsidiaries, other than AIC, in connection with advancement of funds to such Subsidiaries, other than AIC, for working capital purposes in the ordinary course of business, which Debt shall be unsecured and, if evidenced by promissory notes or similar instruments, such promissory notes or similar instruments shall be pledged and delivered to Agent, together with appropriate endorsements thereto, for and on behalf of SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 81 88 Agent and Lenders as security for the payment and performance of the Obligations pursuant to pledge agreements in form and substance reasonably satisfactory to Agent; and (e) the existing Debt specified in Schedule 1.1(c), which Debt shall not exceed the principal amounts thereof specified in such Schedule. Section 9.2 Limitation on Liens. Neither Kitty Hawk nor any of its Subsidiaries will incur, create, assume or permit to exist any Lien upon any Property (including, without limitation, the Collateral) except Permitted Liens. Neither Kitty Hawk nor any of its Subsidiaries will incur, create, assume or permit to exist any Lien upon any Capital Stock issued by any Subsidiary of Kitty Hawk other than Permitted Liens in favor of Agent (for the benefit of Agent and Lenders) securing the payment and performance of Obligations pursuant to the Loan Documents. Section 9.3 Mergers, Etc. Neither Kitty Hawk nor any of its Subsidiaries will, without the prior written consent of the Required Lenders, (a) become a party to a merger or consolidation, (b) wind-up, dissolve or liquidate itself, (c) form, purchase or acquire a Subsidiary, or (d) purchase or acquire all or a material or substantial part of the business or Properties of any Person; provided, however, that any Subsidiary of Kitty Hawk may merge with and into Kitty Hawk or any Operating Subsidiary if (but only if) (i) the surviving entity in such merger is Kitty Hawk or a Wholly-Owned Subsidiary of Kitty Hawk, (ii) if an Operating Subsidiary is a party to such merger, the surviving entity in such merger is Kitty Hawk or an Operating Subsidiary, (iii) at the time of such merger, each entity that is a party thereto is Solvent, and (iv) the parties to such merger execute and deliver to Agent such agreements, documents and instruments as Agent may reasonably request in order to ensure that the Loan Documents and the Liens in the Collateral in favor of Agent are not affected by such merger; and provided, further, however, that Kitty Hawk or a Operating Subsidiary may acquire the business or Properties of any Person pursuant to an asset acquisition or stock acquisition if and to the extent that the business or Properties acquired are used in the present lines of business of Kitty Hawk and the Operating Subsidiaries if (but only if) (A) both immediately prior to and after giving pro forma effect to such acquisition, the ratio of Funded Debt to Adjusted EBITDA for the four fiscal quarters of Kitty Hawk then most recently ended is less than 3.00 to 1.00 (assuming that such acquisition had been consummated as of the beginning of such four fiscal quarter period), and (B) the aggregate amount paid or payable by Kitty Hawk or any of its Subsidiaries in connection with all such asset acquisitions and stock acquisitions and in connection with all Investments made in any Person as permitted in accordance with Section 9.5(g) shall not exceed $75,000,000 during any fiscal year of Kitty Hawk. Section 9.4 Restricted Payments. Neither Kitty Hawk nor any of its Subsidiaries will make or permit to be made any Restricted Payments, except: (a) subject to the subordination provisions relating thereto, Kitty Hawk and its Subsidiaries may make regularly scheduled payments (as opposed to prepayments) of principal and accrued interest on any Subordinated Debt permitted to be incurred in accordance with Section 9.1; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 82 89 (b) Subsidiaries of Kitty Hawk other than the Operating Subsidiaries may declare and pay dividends to Kitty Hawk to the extent permitted by applicable law; (c) the Operating Subsidiaries may declare and pay dividends to Kitty Hawk to the extent permitted by applicable law and consistent with prudent business practices; and (d) purchases by Kitty Hawk of shares of Capital Stock of Kitty Hawk from employees of Kitty Hawk and its Subsidiaries upon the termination of the employment of such employees, provided that the amount paid therefor shall not exceed the fair market value of such shares to be purchased and shall not exceed $500,000 in the aggregate during any fiscal year; and provided, however, that no Restricted Payments may be made pursuant to any of clauses (a) or (d) preceding if a Default exists at the time of such Restricted Payment or would result therefrom. Section 9.5 Investments. Neither Kitty Hawk nor any of its Subsidiaries will make or permit to be made or remain outstanding any advance, loan or extension of credit (except an advance, loan or extension of credit to customers and suppliers in the ordinary course of business not to exceed $5,000,000 in aggregate amount at any time outstanding) or any capital contribution to or investment in any Person, or purchase or own any stock, bonds, notes, debentures or other securities of any Person, or be or become a joint venturer with or partner of any Person (all such transactions being herein called "Investments"), except: (a) Investments in obligations or securities received in settlement of debts (created in the ordinary course of business) owing to Kitty Hawk or any of its Subsidiaries; (b) existing Investments identified on Schedule 9.5 hereto; (c) Investments in securities issued or guaranteed by the U.S. with maturities of one year or less from the date of acquisition; (d) Investments in certificates of deposit and Eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any Lender or with any domestic commercial bank having capital and surplus in excess of $500,000,000; (e) Investments in repurchase obligations with a term of not more than seven days for securities of the types described in clause (c) preceding with any Lender or with any domestic commercial bank having capital and surplus in excess of $500,000,000; (f) Investments in commercial paper of a domestic issuer rated A-1 or better or P-1 or better by Standard & Poor's Corporation or Moody's Investors Services, Inc., respectively, maturing not more than six months from the date of acquisition; SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 83 90 (g) Investments by Kitty Hawk in its Operating Subsidiaries existing on the Closing Date and, if a Default does not exist at the time of such Investment or would not result therefrom, additional Investments by Kitty Hawk in its Operating Subsidiaries, other than AIC, made after the Closing Date; (h) Investments consisting of Debt permitted in accordance with Section 9.1(d); and (i) Investments resulting from and consisting of stock acquisitions permitted in accordance with Section 9.3. Without limiting the generality of the foregoing, neither Kitty Hawk nor any Operating Subsidiary will, except as may be expressly permitted by the preceding clauses (a) through (h), make any Investment in (i) Skyfreighters (except for the Investment of Kitty Hawk in Skyfreighters made prior to the Closing Date), (ii) any other Subsidiary other than an Operating Subsidiary in existence as of the Closing Date, or (iii) any other entity. Section 9.6 Limitation on Issuance of Capital Stock. No Subsidiary of Kitty Hawk will at any time issue, sell, assign or otherwise dispose of (a) any of its Capital Stock, (b) any securities exchangeable for or convertible into or carrying any rights to acquire any of its Capital Stock, or (c) any option, warrant or other right to acquire any of its Capital Stock; provided, however, that, if and to the extent not otherwise prohibited by this Agreement or the other Loan Documents, a Operating Subsidiary may issue additional shares of its Capital Stock to Kitty Hawk. Section 9.7 Transactions with Affiliates. Neither Kitty Hawk nor any of its Subsidiaries will enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any of its Affiliates except in the ordinary course of and pursuant to the reasonable requirements of its business and upon fair and reasonable terms no less favorable to it than would be obtained in a comparable arms-length transaction with a Person not an Affiliate of Kitty Hawk or its Subsidiaries; provided, however, that the following transactions shall be exempt from the requirements of this Section 9.7: (a) transactions in the ordinary course of business between or among Kitty Hawk and its Wholly- Owned Subsidiaries which are Guarantors; (b) ACMI Agreements between Aircargo and AIC and between AIA and AIC, in each case existing as of the Closing Date which are consistent with past practices; (c) the sale of the personal property assets of the Kalitta Companies used in their promotional drag racing assets to another entity for $350,000 as provided in Section 5.2.8 of the Merger Agreement, and the promotional undertakings of the Kalitta Companies relating thereto, all pursuant to and as provided in that certain Racing Entity Purchase Agreement to be entered into among AIA, as seller, and such entity, a true and correct copy of which agreement is attached as Exhibit 5.2.8 to the Merger Agreement; and SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 84 91 (d) that certain Corporate Offices Lease between AIA, as tenant, and Kalitta LLC, as landlord, dated February 25, 1997, as such agreement may be amended in accordance with the Merger Agreement. Section 9.8 Disposition of Property. Neither Kitty Hawk nor any of its Subsidiaries will sell, lease, assign, transfer or otherwise dispose of any of its Property, except: (a) subject to Section 2.7(b), dispositions of Property, other than Collateral, in the ordinary course of business or consistent with prudent business practices; and (b) with respect to AIA Aircraft, ACMI Agreements affecting such AIA Aircraft entered into in the ordinary course of business for fair consideration, none of which ACMI Agreements shall constitute a lease or other interest in such aircraft which is recordable with the FAA or shall include a grant to any Person of any option to purchase the AIA Aircraft or any portion thereof. Section 9.9 Lines of Business. Neither Kitty Hawk nor any of its Subsidiaries will (a) engage in any scheduled airline passenger service, or in any material line or lines of business activity other than the businesses in which it is engaged on the Closing Date and lines of business reasonably related thereto or (b) discontinue any material line or lines of business in which it is engaged on the Closing Date. Each of Kitty Hawk and its Subsidiaries acknowledges and agrees that (i) each of the ACMI Agreements is subject and subordinate to the Aircraft Mortgages and this Agreement and that all indebtedness, liabilities and obligations of Kitty Hawk and its Subsidiaries under the Aircraft Mortgages and this Agreement shall be deemed to be incorporated into each of the ACMI Agreements as if independently stated therein, and (ii) it shall not, without the prior written consent of Required Lenders, permit any lease or sublease of any of the AIA Aircraft while it is, or is required to be, subject to a Lien in accordance with this Agreement or the other Loan Documents, except an ACMI Agreement relating to such aircraft with a customer of Kitty Hawk or its Subsidiaries under which such aircraft remains listed on Aircargo's operations specifications and Aircargo remains fully responsible for maintenance and operation of such aircraft. Section 9.10 Environmental Protection. Neither Kitty Hawk nor any of its Subsidiaries will (a) use (or permit any tenant to use) any of its Properties for the handling, processing, storage, transportation or disposal of any Hazardous Material except in compliance with applicable Environmental Laws, (b) generate any Hazardous Material except in compliance with applicable Environmental Laws, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material in violation of any Environmental Law, or (d) otherwise conduct any activity or use any of its Properties in any manner, that violates or is likely to violate any Environmental Law or create any Environmental Liabilities for which Kitty Hawk or any of its Subsidiaries would be responsible, except for circumstances or events described in clauses (a) through (d) preceding that could not, individually or in the aggregate, have a Material Adverse Effect. Section 9.11 Certain Encumbrances or Restrictions. Except as provided in the Indenture (as the Indenture is in effect as of the Closing Date or may be thereafter amended with the prior written consent of Agent and Required Lenders, which consent shall not be deemed given by SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 85 92 Section 9.13) and as may be expressly permitted or required by the Loan Documents, neither Kitty Hawk nor any of its Subsidiaries will create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction of any kind on the ability of (a) any Subsidiary of Kitty Hawk to pay dividends or make any other distribution to Kitty Hawk or any of its Subsidiaries in respect of the Capital Stock of any such Subsidiary or with respect to any other interest or participation in, or measured by, its profits, (b) any Subsidiary of Kitty Hawk to pay any indebtedness owed to Kitty Hawk or any of its Subsidiaries, (c) any Subsidiary of Kitty Hawk to make any loan or advance to Kitty Hawk or any of its Subsidiaries, (d) any Subsidiary of Kitty Hawk to sell, lease or transfer any of its Property to Kitty Hawk or any of its Subsidiaries, or (e) Kitty Hawk or any of its Subsidiaries to Guarantee, or grant any Lien to secure, payment or performance of the Obligations or any portion thereof. Section 9.12 Management Fees. Except for the consulting fees payable pursuant to the consulting agreements specified on Schedule 9.12 hereto (as in effect as of the Closing Date or as thereafter amended with the prior written consent of Agent and Required Lenders), neither Kitty Hawk nor any of its Subsidiaries will pay any management, consulting or similar fees (excluding directors' fees and regular professional fees for services rendered) to any Affiliate of Kitty Hawk or any of its Subsidiaries or to any director, officer or employee of Kitty Hawk or any of its Subsidiaries or any Affiliate of any such Person. Section 9.13 Modification of Other Agreements. Neither Kitty Hawk nor any of its Subsidiaries will consent to or implement any termination, amendment, modification, supplement or waiver of (a) the Merger Agreement, (b) any Subordinated Debt or any agreement, document or instrument evidencing or governing such Debt, (c) the certificate or articles of incorporation or bylaws (or analogous constitutional documents) of Kitty Hawk or any of its Subsidiaries, (d) any ACMI Agreement to which any of the AIA Aircraft is subject, or (e) any Material Contract to which it is a party or any Permit which it possesses, in each case unless such termination, amendment, modification, supplement or waiver could not be materially adverse to Kitty Hawk or any of its Subsidiaries or Agent or any Lender. In addition, Kitty Hawk shall not consent to or implement any termination, amendment, modification, supplement or waiver of the Indenture which would (i) increase the principal amount of the Senior Notes or any other Debt evidenced or governed by the Indenture, (ii) shorten the maturity of, or any date for the payment of any principal of or interest on, the Senior Notes or any such other Debt, (iii) increase the rate of interest on or with respect to the Senior Notes or any such other Debt, (iv) amend or modify the payment terms of the Senior Notes or any such other Debt, (v) increase any cost, fee or expense payable by Kitty Hawk or any of its Subsidiaries in connection with the Indenture, (vi) provide any additional Collateral or security for payment or collection of the Senior Notes or any such other Debt (other than replacement and substitute collateral as contemplated by the Indenture), or (vii) be materially adverse to Kitty Hawk or any of its Subsidiaries or Agent or any Lender. Furthermore, Kitty Hawk shall not make or otherwise permit to occur any prepayment (whether by redemption, repurchase or otherwise) of the Debt evidenced by the Senior Notes except for (A) mandatory prepayments required by Sections 4.11, 4.13 and 4.16 of the Indenture and (B) optional redemptions in accordance with Section 3.01(b) of the Indenture. Section 9.14 ERISA. Neither Kitty Hawk nor any of its Subsidiaries will: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 86 93 (a) allow, or take (or permit any ERISA Affiliate to take) any action which would cause, any unfunded or unreserved liability for benefits under any Plan (exclusive of any Multiemployer Plan) to exist or to be created that exceeds $500,000 with respect to any such Plan or $1,000,000 with respect to all such Plans in the aggregate on either a going concern or a wind-up basis; or (b) with respect to any Multiemployer Plan, allow, or take (or permit any ERISA Affiliate to take) any action which would cause, any unfunded or unreserved liability for benefits under any Multiemployer Plan to exist or to be created, either individually as to any such Plan or in the aggregate as to all such Plans, that could, upon any partial or complete withdrawal from or termination of any such Multiemployer Plan or Plans, have a Material Adverse Effect. Section 9.15 Territorial Restrictions. Neither Kitty Hawk nor any of its Subsidiaries will: (a) use, repair, maintain, overhaul or operate any Kitty Hawk Aircraft (including, without limitation, the AIA Aircraft), or permit any other Person to use, repair, maintain, overhaul or operate any Kitty Hawk Aircraft, in violation of any applicable law or any applicable rule, regulation, treaty, order or certification of any government or Governmental Authority (domestic or foreign), or in violation of any airworthiness certificate, license or registration issued by any such authority; or (b) operate or permit any other Person to operate a Kitty Hawk Aircraft (including, without limitation, the AIA Aircraft), while it is, or is required to be, subject to a Lien in favor of Agent in accordance with this Agreement or the other Loan Documents, to or in any area (i) excluded from coverage by any insurance policy or policies required to be carried or maintained by the terms of this Agreement, unless with U.S. governmental indemnity or with other insurance or governmental indemnity reasonably acceptable to Agent and (ii) in the event that such aircraft is not covered by aircraft war risk and governmental confiscation and expropriation and hijacking insurance, unless the Geneva Convention on the International Recognition of Rights in Aircraft shall be in effect in such jurisdictions in which such area lies and any agreements, documents or instruments evidencing Agent's Lien in and to such aircraft as Agent may reasonably require have been executed by the appropriate Persons and appropriately filed in such jurisdictions. Section 9.16 Sale and Leaseback. Neither Kitty Hawk nor any of its Subsidiaries will enter into any arrangement with any Person pursuant to which it leases from such Person real or personal Property that has been or is to be sold or transferred, directly or indirectly, by it to such Person. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 87 94 ARTICLE 10 Financial Covenants Each of the Companies jointly and severally covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder or any Letter of Credit remains outstanding, it will perform and observe, or cause to be performed and observed, the following covenants: Section 10.1 Maximum Funded Debt to Adjusted EBITDA Ratio. Kitty Hawk and its Subsidiaries will not permit the ratio, calculated as of the end of each fiscal quarter of Kitty Hawk commencing with the fiscal quarter ending December 31, 1997, of (a) Funded Debt to (b) Adjusted EBITDA for the four fiscal quarters of Kitty Hawk then ended, to be greater than the ratio set forth below for the applicable fiscal quarter end:
- -------------------------------------------------------------------------------- Fiscal Quarter Ending Maximum Ratio - -------------------------------------------------------------------------------- December 31, 1997 through and including June 30, 1998 4.50 to 1.00 - -------------------------------------------------------------------------------- September 30, 1998 through and including December 31, 1998 3.75 to 1.00 - -------------------------------------------------------------------------------- March 31, 1999 through and including December 31, 2000 3.00 to 1.00 - -------------------------------------------------------------------------------- March 31, 2001 and each fiscal quarter ending thereafter 2.50 to 1.00 - --------------------------------------------------------------------------------
Section 10.2 Minimum Net Worth. Kitty Hawk and its Subsidiaries will at all times maintain Net Worth in an amount equal to not less than the sum of (a) $160,000,000, plus (b) 75% of Net Income, if positive, for each fiscal quarter ending after the Closing Date (i.e., exclusive of any negative Net Income for any such fiscal quarter) determined on a cumulative basis for all such fiscal quarters during which such Net Income is positive, plus (c) 100% of the Net Proceeds of each Equity Issuance which occurs after the Closing Date. Section 10.3 Minimum Cash Flow Coverage Ratio. Kitty Hawk and its Subsidiaries will not permit the ratio, calculated as of the end of each fiscal quarter of Kitty Hawk commencing with the fiscal quarter ending March 31, 1998, of (a) Free Cash Flow to (b) the sum of (i) Interest Expense, plus (ii) Capital Lease Obligations, plus (iii) the aggregate amount of all scheduled payments of Funded Debt which are due within one year or less after the date of determination, in each case for the four fiscal quarters of Kitty Hawk then ended, to be less than 1.25 to 1.00 or, with respect to the determination of such ratio for each of the fiscal quarters ending during fiscal years 1998 and 1999, to be less than 1.10 to 1.00; provided, however, that, for each of the first three fiscal quarters of 1998, such ratio shall be determined based upon the number of fiscal quarters during fiscal year 1998 then ended. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 88 95 Section 10.4 Capital Expenditures. Kitty Hawk and its Subsidiaries will not permit the aggregate of Capital Expenditures during fiscal year 1998 to exceed $92,000,000. ARTICLE 11 Default Section 11.1 Events of Default. Each of the following shall be deemed an "Event of Default": (a) Kitty Hawk or any of its Subsidiaries shall fail to pay, repay or prepay when due (i) any amount of principal or interest owing to Agent or any Lender pursuant to this Agreement or any other Loan Document, or (ii) any fee, expense or other amount or other Obligation (other than principal or interest as referred to in clause (i) preceding owing to Agent or any Lender pursuant to this Agreement or any other Loan Document within three Business Days after the due date thereof. (b) Any representation or warranty made or deemed made by Kitty Hawk or any of its Subsidiaries in this Agreement or any other Loan Document or in any certificate, report, notice or financial statement furnished at any time in connection with this Agreement or any other Loan Document shall be false, misleading or erroneous in any material respect when made or deemed to have been made. (c) Kitty Hawk or any of its Subsidiaries shall fail to perform, observe or comply with any covenant, agreement or term contained in Sections 5.1, 5.2, 8.1(h), 8.1(k), 8.1(m), 8.1(o), 8.2 (other than the last two sentences of Section 8.2), clause (i) of 8.12(a), 8.14 or Article 9 of this Agreement; or Kitty Hawk or any of its Subsidiaries shall fail to perform, observe or comply with any other covenant, agreement or term contained in this Agreement or any other Loan Document (other than covenants to pay the Obligations) and such failure is not remedied or waived within the earlier to occur of 20 days after such failure commenced or, if a different grace period is expressly made applicable in such other Loan Document, such applicable grade period. (d) Any of Kitty Hawk or any Operating Subsidiary ceases to be Solvent or shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due. (e) Kitty Hawk or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of itself or of all or any substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the U. S. Bankruptcy Code (11 U.S.C. Section 101, et seq.) (as now or hereafter in effect, the "Bankruptcy Code"), (iv) institute any proceeding or file a petition seeking to take advantage SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 89 96 of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, winding-up or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate or other action for the purpose of effecting any of the foregoing. (f) A proceeding or case shall be commenced, without the application, approval or consent of Kitty Hawk and its Subsidiaries in any court of competent jurisdiction, seeking as to any such Person (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of all or any substantial part of its Property, or (iii) similar relief under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against Kitty Hawk or any of its Subsidiaries shall be entered in an involuntary case under the Bankruptcy Code. (g) Kitty Hawk or any of its Subsidiaries shall fail to discharge within a period of 30 days after the commencement thereof any attachment, sequestration, forfeiture or similar proceeding or proceedings involving an aggregate amount in excess of $250,000 against any of its Properties. (h) A final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate shall be rendered by a court or courts against Kitty Hawk and its Subsidiaries or any of them on claims not covered by insurance or as to which the insurance carrier has denied responsibility and the same shall not be discharged, or a stay of execution thereof shall not be procured, within five days from the date of entry thereof and Kitty Hawk and its Subsidiaries or any of them shall not, within said period of five days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. (i) Kitty Hawk or any of its Subsidiaries shall fail to pay when due any principal of or interest on any Debt (other than the Obligations) having (either individually or in the aggregate) a principal amount of at least $500,000, or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred (and shall not have been waived or otherwise cured) that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment; provided, however, that prepayment of the Debt evidenced by the Senior Notes which is permitted to be prepaid in accordance with Section 9.13 shall not constitute an Event of Default. (j) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 90 97 contested or challenged by Kitty Hawk or any of its Subsidiaries or any of its shareholders, or Kitty Hawk or any of its Subsidiaries shall deny that it has any further liability or obligation under any of the Loan Documents, or any Lien created by the Loan Documents shall for any reason cease to be a valid, first priority perfected Lien (except for Permitted Liens, if any, which are permitted by the Loan Documents to have priority over the Liens in favor of Agent) upon any of the Collateral purported to be covered thereby. (k) Any of the following events shall occur or exist with respect to Kitty Hawk or any of its Subsidiaries or ERISA Affiliates: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Pension Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Pension Plan or the termination of any Pension Plan; (iv) any event or circumstance that could reasonably be expected to constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Pension Plan, or the institution by the PBGC of any such proceedings; (v) any "accumulated funding deficiency" (as defined in Section 406 of ERISA or Section 412 of the Code), whether or not waived, shall exist with respect to any Plan; or (vi) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Plan or the reorganization, insolvency or termination of any Pension Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of Required Lenders subject Kitty Hawk or any of its Subsidiaries or ERISA Affiliates to any tax, penalty or other liability to a Plan, a Multiemployer Plan, the PBGC or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed $1,000,000. (l) The occurrence of a Change of Control. (m) The occurrence of a default or event of default (no matter how used or defined) under any Subordinated Debt or any agreement, document or instrument creating or evidencing such Debt, unless (i) such default has been waived, cured or consented to in accordance with such agreement, document or instrument, (ii) such default is not a payment default, (iii) the maturity of the Debt affected thereby has not been accelerated, and (iv) such waiver or consent is not made in connection with any amendment or modification of any such agreement, document or instrument or in connection with any payment to the holders of any such Debt. (n) If, at any time, any event or circumstance shall occur which gives any holder of any Subordinated Debt the right to request or require Kitty Hawk or any of its Subsidiaries to redeem, purchase or prepay any such Debt. (o) The occurrence of an "Event of Default" or a "Collateral Access Event" as such terms are defined in the Indenture. Section 11.2 Remedies. If any Event of Default shall occur and be continuing, Agent may, and, if directed by the Required Lenders, Agent shall, do any one or more of the following: SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 91 98 (a) Acceleration. Declare all outstanding principal of and accrued and unpaid interest on the Loans and Reimbursement Obligations and all other amounts payable by Kitty Hawk or any of its Subsidiaries under the Loan Documents immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived; (b) Termination of Commitments. Terminate the Commitments (including, without limitation, any obligation of Issuing Bank to issue Letters of Credit) without notice to Kitty Hawk or any of its Subsidiaries; (c) Judgment. Reduce any claim to judgment; (d) Foreclosure. Foreclose or otherwise enforce any Lien granted to Agent for the benefit of Agent and Lenders to secure payment and performance of the Obligations in accordance with the terms of the Loan Documents; or (e) Rights. Exercise any and all rights and remedies afforded by the laws of the State of Texas or any other jurisdiction, by any of the Loan Documents, by equity or otherwise; provided, however, that upon the occurrence of an Event of Default under Section 11.1(e) or Section 11.1(f), the Commitments of all of Lenders (including, without limitation, any obligation of Issuing Bank to issue Letters of Credit) shall immediately and automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Loans and all other amounts payable under the Loan Documents shall thereupon become immediately and automatically due and payable, all without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived. Section 11.3 Performance by Agent. If Kitty Hawk or any of its Subsidiaries shall fail to perform any covenant or agreement in accordance with the terms of the Loan Documents, Agent may, at the direction of the Required Lenders, perform or attempt to perform such covenant or agreement on behalf of such Person. In such event, Kitty Hawk shall, at the request of Agent, promptly pay any amount expended by Agent or Lenders in connection with such performance or attempted performance to Agent at the Principal Office, together with interest thereon at the applicable Default Rate from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that neither Agent nor any Lender shall have any liability or responsibility for the performance of any obligation of Kitty Hawk or any of its Subsidiaries under this Agreement or any of the other Loan Documents. Section 11.4 Cash Collateral. If an Event of Default shall have occurred and be continuing, Kitty Hawk shall, if requested by Agent or Required Lenders, pledge to Agent as security for the Obligations an amount in immediately available funds equal to the then outstanding Letter of Credit Liabilities, such funds to be held in a cash collateral account satisfactory to Agent without any right of withdrawal by Kitty Hawk or any of its Subsidiaries. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 92 99 ARTICLE 12 Agency and Intercreditor Provisions Section 12.1 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Neither Agent nor any of its Affiliates, officers, directors, employees, attorneys or agents shall be liable for any action taken or omitted to be taken by any of them hereunder or otherwise in connection with this Agreement or any of the other Loan Documents except for its or their own gross negligence or willful misconduct. Without limiting the generality of the preceding sentence, Agent (a) may treat the payee of any Note as the holder thereof until Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to Agent, (b) shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Lender, (c) shall not be required to initiate any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Lenders, (d) shall not be responsible to Lenders for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Person to perform any of its obligations hereunder or thereunder, (e) may consult with legal counsel (including counsel for Kitty Hawk or any of its Subsidiaries), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts, and (f) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing reasonably believed by it to be genuine and signed or sent by the proper party or parties. As to any matters not expressly provided for by this Agreement, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Lenders, and such instructions of the Required Lenders and any action taken or failure to act pursuant thereto shall be binding on all of Lenders; provided, however, that Agent shall not be required to take any action which exposes Agent to liability or which is contrary to this Agreement or any other Loan Document or applicable law. Section 12.2 Rights of Agent as a Lender. With respect to its Commitments, the Loans made by it and the Notes and Letters of Credit issued to or by it, Wells Fargo (and any successor acting as Agent) in its capacity as a Lender or Issuing Bank hereunder shall have the same rights and powers hereunder as any other Lender or Issuing Bank and may exercise the same as though it were not acting as Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include Agent in its individual capacity. Agent and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, act as trustee under indentures of, provide merchant banking services to, own securities of, and generally engage in any kind of banking, SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 93 100 trust or other business with, Kitty Hawk and its Subsidiaries or any of their Affiliates and any other Person who may do business with or own securities of Kitty Hawk or any of its Subsidiaries or Affiliates, all as if it were not acting as Agent and without any duty to account therefor to Lenders. Section 12.3 Defaults. Agent shall not be deemed to have knowledge or notice of the occurrence of a Default (other than the non-payment of principal of or interest on the Loans or Reimbursement Obligations or of commitment fees) unless Agent has received notice from a Lender or Kitty Hawk specifying such Default and stating that such notice is a "notice of default". In the event that Agent receives such a notice of the occurrence of a Default, Agent shall give prompt notice thereof to Lenders (and shall give each Lender prompt notice of each such non-payment). Agent shall (subject to Section 12.1) take such action with respect to such Default as shall be directed by the Required Lenders, provided that unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall seem advisable and in the best interest of Lenders. Section 12.4 INDEMNIFICATION. EACH LENDER HEREBY AGREES TO INDEMNIFY AGENT FROM AND HOLD AGENT HARMLESS AGAINST (TO THE EXTENT NOT REIMBURSED UNDER SECTIONS 13.1 AND 13.2, BUT WITHOUT LIMITING THE OBLIGATIONS OF KITTY HAWK OR ANY OF ITS SUBSIDIARIES UNDER SECTIONS 13.1 AND 13.2), RATABLY IN ACCORDANCE WITH ITS PRO RATA SHARE (CALCULATED ON THE BASIS OF THE AGGREGATE LOAN PERCENTAGES), ANY AND ALL LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES) AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (BUT EXCLUDING NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF AGENT'S DUTIES AS AGENT HEREUNDER) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY AGENT UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED, FURTHER, THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE EXTENT CAUSED BY AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF LENDERS THAT AGENT SHALL BE INDEMNIFIED HEREUNDER FROM AND HELD HARMLESS AGAINST ALL OF SUCH LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES) AND DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF AGENT (EXCEPT TO THE EXTENT THE SAME ARE CAUSED BY AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT). WITHOUT LIMITING ANY OTHER PROVISION OF THIS SECTION 12.4, EACH LENDER AGREES TO REIMBURSE AGENT PROMPTLY UPON DEMAND FOR ITS SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 94 101 PRO RATA SHARE (CALCULATED ON THE BASIS OF THE AGGREGATE LOAN PERCENTAGES) OF ANY AND ALL OUT-OF-POCKET EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES) INCURRED BY AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, TO THE EXTENT THAT AGENT IS NOT PROMPTLY REIMBURSED FOR SUCH EXPENSES BY KITTY HAWK OR ANY OF ITS SUBSIDIARIES. Section 12.5 Independent Credit Decisions. Each Lender agrees that it has independently and without reliance on Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Kitty Hawk and its Subsidiaries and its own decision to enter into this Agreement and that it will, independently and without reliance upon Agent or any other Lender, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. Agent shall not be required to keep itself informed as to the performance or observance by Kitty Hawk or any of its Subsidiaries of this Agreement or any other Loan Document or to inspect the Properties or books of Kitty Hawk or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to Lenders by Agent hereunder or under the other Loan Documents, Agent shall not have any duty or responsibility to provide any Lender with any credit or other financial information concerning the affairs, financial condition or business of Kitty Hawk or any of its Subsidiaries (or any of their Affiliates) which may come into the possession of Agent or any of its Affiliates. Section 12.6 Several Commitments. The Commitments and other obligations of Lenders under this Agreement are several. The default by any Lender in making a Loan in accordance with its Commitment shall not relieve the other Lenders of their obligations under this Agreement. In the event of any default by any Lender in making any Loan, each nondefaulting Lender shall be obligated to make its Loan but shall not be obligated to advance the amount which the defaulting Lender was required to advance hereunder. In no event shall any Lender be required to advance an amount or amounts with respect to any of the Loans which would in the aggregate exceed such Lender's Commitment with respect to such Loans. No Lender shall be responsible for any act or omission of any other Lender. Section 12.7 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving notice thereof to Lenders and Kitty Hawk. Upon any such resignation, the Required Lenders will have the right to appoint another Lender as a successor Agent; provided, however, that, prior to the occurrence and continuation of a Default, the identify of such successor Agent shall be approved by Kitty Hawk, which approval shall not be unreasonably withheld, conditioned or delayed. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the U.S. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 95 102 or any state thereof or of a foreign country if acting through its U.S. branch and having combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges, immunities and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any Agent's resignation as Agent, the provisions of this Article 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was Agent. Each Agent (including each successor Agent) agrees that, so long as it is acting as Agent under this Agreement, it shall be a Lender under this Agreement. Section 12.8 Beneficiaries of Article 12. Notwithstanding anything to the contrary contained in this Agreement, each of Kitty Hawk and its Subsidiaries acknowledges and agrees that the terms and provisions of this Article 12 other than Section 12.6 are intended solely for the benefit of Agent and Lenders and that neither Kitty Hawk nor any of its Subsidiaries is a beneficiary of any of such terms or provisions or may enforce any of such terms or provisions against Agent or any Lender. ARTICLE 13 Miscellaneous Section 13.1 Expenses. Whether or not the transactions contemplated hereby are consummated, Kitty Hawk hereby agrees, on demand, to pay or reimburse Agent and each of Lenders for paying: (a) all reasonable out-of-pocket costs and expenses of Agent in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents, and any and all waivers, amendments, modifications, renewals, extensions and supplements thereof and thereto, and the syndication of the Commitments and the Loans, including, without limitation, the reasonable fees and expenses of legal counsel for Agent, (b) all out-of-pocket costs and expenses of Agent and Lenders in connection with any Default, the exercise of any right or remedy and the enforcement of this Agreement or any other Loan Document or any term or provision hereof or thereof, including, without limitation, the fees and expenses of all legal counsel for Agent and/or any Lender (unless, with respect to legal counsel of any Lender other than Wells Fargo, Agent has not approved of the payment by Kitty Hawk of the fees and expenses of such counsel), (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents, (d) all costs, expenses, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by this Agreement or any other Loan Document, and (e) all out-of-pocket costs and expenses incurred by Agent in connection with due diligence, computer services, copying, appraisals, environmental audits, collateral audits, field exams, insurance, consultants and search reports. Section 13.2 INDEMNIFICATION. EACH OF KITTY HAWK AND ITS SUBSIDIARIES HEREBY JOINTLY AND SEVERALLY AGREES TO INDEMNIFY AGENT AND EACH LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 96 103 FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' AND CONSULTANTS' FEES AND EXPENSES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) THE RELATED TRANSACTIONS, (D) ANY BREACH BY KITTY HAWK OR ANY OF ITS SUBSIDIARIES OF ANY REPRESENTATION, WARRANTY, COVENANT OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (E) THE USE OR PROPOSED USE OF ANY LOAN OR LETTER OF CREDIT, (F) ANY AND ALL TAXES, LEVEES, DEDUCTIONS AND CHARGES IMPOSED ON AGENT, ISSUING BANK OR ANY LENDER IN RESPECT OF ANY LOAN OR LETTER OF CREDIT (EXCLUSIVE OF INCOME AND FRANCHISE TAXES ATTRIBUTABLE TO NET INCOME), (G) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN OR AFFECTING ANY OF THE PROPERTIES OF KITTY HAWK OR ANY OF ITS SUBSIDIARIES, EXCEPT TO THE EXTENT THAT THE LOSS, DAMAGE OR CLAIM IS THE DIRECT RESULT OF AN INTENTIONAL AND AFFIRMATIVE ACT BY THE PERSON TO BE INDEMNIFIED THAT CONSTITUTES GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH PERSON, OR (H) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING; BUT EXCLUDING ANY OF THE FOREGOING TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION 13.2 SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES AND EXPENSES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON. THE OBLIGATIONS OF EACH OF KITTY HAWK AND ITS SUBSIDIARIES UNDER THIS SECTION 13.2 SHALL SURVIVE THE REPAYMENT OF THE LOANS AND OTHER OBLIGATIONS AND TERMINATION OF THE COMMITMENTS. Section 13.3 Limitation of Liability. None of Agent, any Issuing Bank, any Lender or any Affiliate, officer, director, employee, attorney or agent thereof shall be liable for any error of judgment or act done in good faith, or be otherwise liable or responsible under any circumstances whatsoever (including such Person's negligence), except for such Person's gross negligence or willful misconduct. None of Agent, any Issuing Bank, any Lender or any Affiliate, officer, director, SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 97 104 employee, attorney or agent thereof shall have any liability with respect to, and each of Kitty Hawk and its Subsidiaries hereby waives, releases and agrees not to sue any of them upon, any claim for any special, indirect, incidental or consequential damages suffered or incurred by Kitty Hawk or any of its Subsidiaries in connection with, arising out of or in any way related to this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Each of Kitty Hawk and its Subsidiaries hereby waives, releases and agrees not to sue Agent, any Issuing Bank or any Lender or any of their respective Affiliates, officers, directors, employees, attorneys or agents for exemplary or punitive damages in respect of any claim in connection with, arising out of or in any way related to this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section 13.4 No Duty. All attorneys, accountants, appraisers and other professional Persons and consultants retained by Agent and Lenders shall have the right to act exclusively in the interest of Agent and Lenders and shall have no duty of disclosure, duty of loyalty, duty of care or other duty or obligation of any type or nature whatsoever to Kitty Hawk or any of its Subsidiaries or any of their shareholders or any other Person. Section 13.5 No Fiduciary Relationship. The relationship between each of Kitty Hawk and its Subsidiaries, on the one hand, and Agent and each Issuing Bank and Lender, on the other hand, is solely that of debtor and creditor, and neither Agent, any Issuing Bank nor any Lender has any fiduciary or other special relationship with Kitty Hawk or any of its Subsidiaries, and no term or condition of any of the Loan Documents shall be construed so as to deem any such relationship to be other than that of debtor and creditor. No joint venture or partnership is created by this Agreement between or among Agent or any Issuing Bank or any Lender or between or among Kitty Hawk or any of its Subsidiaries and Agent or any Issuing Bank or any Lender. Section 13.6 Equitable Relief. Each of Kitty Hawk and its Subsidiaries recognizes that, in the event it fails to pay, perform, observe or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to Agent and Lenders. Each of Kitty Hawk and its Subsidiaries therefore agrees that Agent and Lenders, if Agent or Lenders so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Section 13.7 No Waiver; Cumulative Remedies. No failure on the part of Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 98 105 Section 13.8 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither Kitty Hawk nor any of its Subsidiaries may assign or transfer any of its rights or obligations under this Agreement or any other Loan Document without the prior written consent of Agent and Lenders. Any Lender may sell participations in all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitments and the Loans owing to it and the Letters of Credit issued by it); provided, however, that (i) such Lender's obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitments) shall remain unchanged, (ii) such Lender shall remain solely responsible to Kitty Hawk for the performance of such obligations, (iii) such Lender shall remain the holder of its Notes for all purposes of this Agreement, and (iv) Kitty Hawk shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. (b) Each of Kitty Hawk and its Subsidiaries and each of Lenders agree that any Lender (the "Assigning Lender") may at any time assign to one or more Eligible Assignees all, or a proportionate part of all, of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitments and Loans and Letters of Credit) (each an "Assignee"); provided, however, that (i) each such assignment may be of a varying percentage of the Assigning Lender's rights and obligations under this Agreement and the other Loan Documents and may relate to some but not all of such rights and/or obligations, (ii) except in the case of an assignment of all of a Lender's rights and obligations under this Agreement and the other Loan Documents, the amount of the Commitments and Loans and Letters of Credit of the Assigning Lender being assigned pursuant to each assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than an aggregate amount equal to $5,000,000 calculated based upon the sum of the Revolving Credit Loans Commitment assigned (or, if such Commitment has terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and face amount of outstanding Letters of Credit assigned) plus the aggregate outstanding principal amount of the Term Loans assigned, and (iii) the parties to each such assignment shall execute and deliver to Agent for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with the Notes subject to such assignment, and a processing and recordation fee of $2,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof or such other date as may be approved by Agent, (1) the Assignee thereunder shall be a party hereto as a "Lender" and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and under the Loan Documents, and (2) the Assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a Lender's rights and obligations under the Loan Documents, such Lender shall cease to be a party SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 99 106 thereto, provided that such Lender's rights under Article 4, Section 13.1 and Section 13.2 accrued through the date of assignment shall continue). (c) By executing and delivering an Assignment and Acceptance, the Assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such Assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition or results of operations of Kitty Hawk or any of its Subsidiaries or the performance or observance by Kitty Hawk or any of its Subsidiaries of its obligations under the Loan Documents; (iii) such Assignee confirms that it has received a copy of the other Loan Documents, together with copies of the financial statements referred to in Section 7.2 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such Assignee will, independently and without reliance upon Agent or such Assigning Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such Assignee confirms that it is an Eligible Assignee; (vi) such Assignee appoints and authorizes Agent to take such action as agent on its behalf and exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) such Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. (d) Agent shall maintain at its Principal Office a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of Lenders and the Commitments of, and principal amount of the Loans owing to and Letters of Credit issued by, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Kitty Hawk, Agent and Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes under the Loan Documents. The Register shall be available for inspection by Kitty Hawk or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an Assigning Lender and Assignee representing that it is an Eligible Assignee, together with the Notes subject to such assignment, Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt written notice thereof to Kitty Hawk. Within five Business Days after its receipt of such notice, Kitty Hawk, at its expense, shall execute and deliver to Agent in exchange for each SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 100 107 surrendered Note evidencing particular Loans, a new Note evidencing such Loans payable to the order of such Eligible Assignee in an amount equal to such Loans assigned to it and, if the Assigning Lender has retained any Loans, a new Note evidencing such Loans payable to the order of the Assigning Lender in the amount of such Loans retained by it (each such promissory note shall constitute a "Note" for purposes of the Loan Documents). Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibits C and/or D hereto, as applicable. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.8, disclose to the Assignee or participant or proposed Assignee or participant any information relating to Kitty Hawk or any of its Subsidiaries furnished to such Lender by or on behalf of Kitty Hawk or any of its Subsidiaries; provided that each such actual or proposed Assignee or participant shall agree to be bound by the provisions of Section 13.20. (g) Any Lender may assign and pledge all or any of the Notes held by it to any Federal Reserve Bank or the U.S. Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by the Federal Reserve System and/or Federal Reserve Bank; provided, however, that any payment made by Kitty Hawk for the benefit of such assigning and/or pledging Lender in accordance with the terms of the Loan Documents shall satisfy Kitty Hawk's obligations under the Loan Documents in respect thereof to the extent of such payment. No such assignment and/or pledge shall release the assigning and/or pledging Lender from its obligations hereunder. Section 13.9 Survival. All representations and warranties made or deemed made in this Agreement or any other Loan Document or in any document, statement or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents and the making of the Loans, and no investigation by Agent or any Lender or any closing shall affect the representations and warranties or the right of Agent or any Lender to rely upon them. Without prejudice to the survival of any other obligation of each of Kitty Hawk and its Subsidiaries hereunder, the obligations of each of Kitty Hawk and its Subsidiaries under Article 4 and Sections 13.1 and 13.2 shall survive repayment of the Loans, the Reimbursement Obligations and the other Obligations. Section 13.10 ENTIRE AGREEMENT; AMENDMENT AND RESTATEMENT; WAIVER OF CLAIMS. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, TERM SHEETS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. This Agreement amends and restates in its entirety (but does SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 101 108 not extinguish the indebtedness, liabilities or obligations evidenced by or outstanding under) the Prior Credit Agreement. The execution of this Agreement and the other Loan Documents executed in connection herewith does not extinguish the indebtedness, liabilities or obligations evidenced by or outstanding under the Prior Credit Agreement, nor does such execution constitute a novation with respect to any such indebtedness, liabilities or obligations. Each of Kitty Hawk and its Subsidiaries represents and warrants to Agent and Lenders that, as of the Closing Date, there are no claims or offsets against, or defenses or counterclaims to, its indebtedness, liabilities and obligations under the Prior Credit Agreement or the promissory notes or the other "Loan Documents" as defined therein. TO INDUCE AGENT AND LENDERS TO ENTER INTO THIS AGREEMENT, EACH OF KITTY HAWK AND ITS SUBSIDIARIES WAIVES ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE HEREOF AND RELATING TO ANY OF THE PRIOR CREDIT AGREEMENT OR SUCH "LOAN DOCUMENTS" OR THE TRANSACTIONS CONTEMPLATED THEREBY. Section 13.11 Amendments. No amendment or waiver of any term or provision of this Agreement, the Notes or any other Loan Document to which Kitty Hawk or any of its Subsidiaries is a party, nor any consent to any departure by Kitty Hawk or any of its Subsidiaries therefrom, shall in any event be effective unless the same shall be agreed or consented to by Required Lenders and Kitty Hawk in writing, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver or consent shall, unless in writing and signed by all of Lenders and Kitty Hawk, do any of the following: (a) increase the Commitments of Lenders or subject Lenders to any additional obligations; (b) reduce the principal of, or interest on, the Loans or any fees or other amounts payable hereunder; (c) postpone any date fixed for any payment (including, without limitation, any mandatory prepayment) of principal of, or interest on, the Loans or any fees or other amounts payable hereunder; (d) waive any of the conditions precedent specified in Article 6; (e) change the Commitment Percentages or the Aggregate Loan Percentages or the aggregate unpaid principal amount of the Loans, the Reimbursement Obligations or other Obligations or the number or interests of Lenders which shall be required for Lenders or any of them to take any action under this Agreement; (f) change any provision contained in Section 3.2, Section 3.3 or this Section 13.11 or modify the definition of "Required Lenders" contained in Section 1.1; or (g) except as expressly authorized by this Agreement, release any Collateral from any of the Liens created by the Security Documents or release any guaranty of all or any portion of the Obligations. Notwithstanding anything to the contrary contained in this Section 13.11, no amendment, waiver or consent shall be made with respect to Article 12 hereof without the prior written consent of Agent and Agent and Lenders may, without the agreement of Kitty Hawk, amend the terms and provisions of Article 12 other than Section 12.6. Section 13.12 Maximum Interest Rate. (a) No interest rate specified in this Agreement or any other Loan Document shall at any time exceed the Maximum Rate. If at any time the interest rate (the "Contract Rate") for any Obligation shall exceed the Maximum Rate, thereby causing the interest accruing on such Obligation to be limited to the Maximum Rate, then any subsequent reduction in the Contract Rate for such Obligation shall not reduce the rate of interest on such Obligation SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 102 109 below the Maximum Rate until the aggregate amount of interest accrued on such Obligation equals the aggregate amount of interest which would have accrued on such Obligation if the Contract Rate for such Obligation had at all times been in effect. (b) Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, none of the terms and provisions of this Agreement or the other Loan Documents shall ever be construed to create a contract or obligation to pay interest at a rate in excess of the Maximum Rate, and neither Agent nor any Lender shall ever charge, receive, take, collect, reserve or apply, as interest on the Obligations, any amount in excess of the Maximum Rate. The parties hereto agree that any interest, charge, fee, expense or other obligation provided for in this Agreement or in the other Loan Documents which constitutes interest under applicable law shall be, ipso facto and under any and all circumstances, limited or reduced to an amount equal to the lesser of (i) the amount of such interest, charge, fee, expense or other obligation that would be payable in the absence of this Section 13.12(b) or (ii) an amount, which when added to all other interest payable under this Agreement and the other Loan Documents, equals the Maximum Rate. If, notwithstanding the foregoing, Agent or any Lender ever contracts for, charges, receives, takes, collects, reserves or applies as interest any amount in excess of the Maximum Rate, such amount which would be deemed excessive interest shall be deemed a partial payment or prepayment of principal of the Obligations and treated hereunder as such, and if the Obligations, or applicable portions thereof, are paid in full, any remaining excess shall promptly be paid to Kitty Hawk. In determining whether the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, Kitty Hawk and its Subsidiaries, Agent and Lenders shall, to the maximum extent permitted by applicable law, (i) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the Obligations, or applicable portions thereof, so that the interest rate does not exceed the Maximum Rate at any time during the term of the Obligations; provided that, if the unpaid principal balance is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, Agent and/or Lenders, as appropriate, shall refund to Kitty Hawk the amount of such excess and, in such event, Agent and Lenders shall not be subject to any penalties provided by any laws for contracting for, charging, receiving, taking, collecting, reserving or applying interest in excess of the Maximum Rate. (c) Pursuant to Chapter 346 of the Finance Code of the State of Texas, as amended, each of Kitty Hawk and its Subsidiaries agrees that such Chapter 346 (which regulates certain revolving credit loan accounts and revolving tri-party accounts) shall not govern or in any manner apply to the Obligations. Section 13.13 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which Kitty Hawk or any of its Subsidiaries is a party shall be given or made by telecopy or in writing and telecopied, mailed by certified mail return receipt requested or delivered to the intended recipient at the "Address for Notices" specified below its name on the SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 103 110 signature pages hereof (or, with respect to a Lender that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it); or, as to any party, at such other address as shall be designated by such party in a notice to each other party given in accordance with this Section 13.13. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid; provided, however, that notices to Agent shall be deemed given when received by Agent. Section 13.14 GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. EXCEPT AS MAY BE EXPRESSLY STATED TO THE CONTRARY IN CERTAIN LOAN DOCUMENTS, THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES) AND APPLICABLE LAWS OF THE U.S. EACH OF KITTY HAWK AND ITS SUBSIDIARIES HEREBY SUBMITS TO THE NON- EXCLUSIVE JURISDICTION OF EACH OF (1) THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, AND (2) ANY TEXAS STATE COURT SITTING IN DALLAS COUNTY, TEXAS, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH OF KITTY HAWK AND ITS SUBSIDIARIES HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH PERSON AT ITS ADDRESS SET FORTH UNDERNEATH ITS SIGNATURE HERETO. EACH OF KITTY HAWK AND ITS SUBSIDIARIES HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORM. Section 13.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13.16 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section 13.17 Headings. The headings, captions and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 13.18 Construction. Each of Kitty Hawk and its Subsidiaries, Agent and each Lender acknowledges that it has had the benefit of legal counsel of its own choice and has been afforded an SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 104 111 opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the parties hereto. Section 13.19 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists. Section 13.20 Confidentiality. Each Lender agrees to exercise its best efforts to keep any information delivered or made available by Kitty Hawk or any of its Subsidiaries to it which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by such Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Lender from disclosing such information (a) to any other Lender, (b) to any Person if reasonably incidental to the administration of the Loans, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority having jurisdiction over such Lender, (e) which has been publicly disclosed, (f) in connection with any litigation to which Agent, any Lender or their respective Affiliates may be a party, (g) to the extent reasonably required in connection with the exercise of any right or remedy under the Loan Documents, (h) to such Lender's legal counsel, independent auditors and affiliates, and (i) to any actual or proposed participant or Assignee of all or part of its rights hereunder, so long as such actual or proposed participant or Assignee agrees to be bound by the provisions of this Section 13.20. Section 13.21 Approvals and Consent. Except as may be expressly provided to the contrary in this Agreement or in the other Loan Documents (as applicable), in any instance under this Agreement of the other Loan Documents where the approval, consent or exercise of judgment of Agent or any Lender is requested or required, (a) the granting or denial of such approval or consent and the exercise of such judgment shall be within the sole discretion of Agent or such Lender, respectively, and Agent and such Lender shall not, for any reason or to any extent, be required to grant such approval or consent or to exercise such judgment in any particular manner, regardless of the reasonableness of the request or the action or judgment of Agent or such Lender, and (b) no approval or consent of Agent or any Lender shall in any event be effective unless the same shall be in writing and the same shall be effective only in the specific instance and for the specific purpose for which given. Section 13.22 Joint and Several Obligations. Each and every representation, warranty, covenant or agreement of Kitty Hawk and its Subsidiaries (or any two or more of them) contained herein shall be, and shall be deemed to be, the joint and several representation, warranty, covenant and agreement of each such Person. Section 13.23 AGREEMENT FOR BINDING ARBITRATION. EACH OF THE PARTIES HERETO AGREES TO BE BOUND BY THE TERMS AND PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF WELLS FARGO, WHICH SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 105 112 ARBITRATION PROGRAM IS ATTACHED HERETO AS EXHIBIT F. ALL DISPUTES AMONG THE PARTIES HERETO SHALL BE RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF ANY PARTY HERETO. [The remainder of this page intentionally left blank.] SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 106 113 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. KITTY HAWK: KITTY HAWK, INC. By: /s/ M. TOM CHRISTOPHER ---------------------------------------- Name: M. Tom Christopher Title: Chairman of the Board of Directors and Chief Executive Officer AIRCARGO: KITTY HAWK AIRCARGO, INC. By: /s/ TILMON J. REEVES ---------------------------------------- Name: Tilmon J. Reeves Title: President LEASING: AIRCRAFT LEASING, INC. By: /s/ RICHARD R. WADSWORTH, JR. ---------------------------------------- Name: Richard R. Wadsworth, Jr. Title: President SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 107 114 CHARTERS: KITTY HAWK CHARTERS, INC. By: /s/ M. TOM CHRISTOPHER ---------------------------------------- Name: M. Tom Christopher Title: President SKYFREIGHTERS: SKYFREIGHTERS CORPORATION By: /s/ M. TOM CHRISTOPHER ---------------------------------------- Name: M. Tom Christopher Title: President AIA: AMERICAN INTERNATIONAL AIRWAYS, INC. By: /s/ RICHARD R. WADSWORTH, JR. ---------------------------------------- Name: Richard R. Wadsworth, Jr. Title: Vice President AIT: AMERICAN INTERNATIONAL TRAVEL, INC. By: /s/ RICHARD R. WADSWORTH, JR. ---------------------------------------- Name: Richard R. Wadsworth, Jr. Title: Vice President SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 108 115 FOL: FLIGHT ONE LOGISTICS, INC. By: /s/ RICHARD R. WADSWORTH, JR. ---------------------------------------- Name: Richard R. Wadsworth, Jr. Title: Vice President KFS: KALITTA FLYING SERVICE, INC. By: /s/ RICHARD R. WADSWORTH, JR. ---------------------------------------- Name: Richard R. Wadsworth, Jr. Title: Vice President OK: O. K. TURBINES, INC. By: /s/ RICHARD R. WADSWORTH, JR. ---------------------------------------- Name: Richard R. Wadsworth, Jr. Title: Vice President SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 109 116 Address for Notices to Kitty Hawk and each of its Subsidiaries: Kitty Hawk, Inc., Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc., Skyfreighters Corporation, American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc. and O. K. Turbines, Inc. (as applicable) P.O. Box 612787 Dallas, Texas 75261 Attention: Mr. M. Tom Christopher 1515 W. 20th Street DFW Airport, Texas 75261 Fax No.: (214) 456-2210 Telephone No.: (214) 456-2220 SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 110 117 AGENT AND A LENDER: COMMITMENTS: WELLS FARGO BANK (TEXAS) NATIONAL Revolving Credit Loans ASSOCIATION Commitment: $100,000,000 By: /s/ DREW KEITH ----------------------------- Term Loans Name: Drew Keith Commitment: $45,900,000 Title: Vice President Address for Notices: Wells Fargo Bank (Texas), National Association 1445 Ross Avenue, Suite 300 Dallas, Texas 75202 Attention: Drew Keith Fax No.: (214) 855-1340 Telephone No.: (214) 740-0099 Lending Office for Base Rate Loans: Wells Fargo Bank, NA Commercial Bank Loan Center Agency Dept. 2840 201 3rd Street, 8th Floor San Francisco, CA 94103 Attention: Manager Fax No.: (415) 512-9408 Telephone No.: (415) 477-5227 Lending Office for Eurodollar Loans: Wells Fargo Bank, NA Commercial Bank Loan Center Agency Dept. 2840 201 3rd Street, 8th Floor San Francisco, CA 94103 Attention: Manager Fax No.: (415) 512-9408 Telephone No.: (415) 477-5227 SECOND AMENDED AND RESTATED CREDIT AGREEMENT - Page 111 118 EXHIBIT A ASSIGNMENT AND ACCEPTANCE 119 ASSIGNMENT AND ACCEPTANCE Date:_____, 19__ Reference is made to that certain Second Amended and Restated Credit Agreement, dated as of November 19, 1997 (as the same may be amended and in effect from time to time, the "Credit Agreement") among Kitty Hawk, Inc., Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc., Skyfreighters Corporation, American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc., 0.K. Turbines, Inc., the lenders named therein ("Lenders") and Wells Fargo Bank (Texas), National Association, as agent for the Lenders (in such capacity, "Agent"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. This Assignment and Acceptance is being executed pursuant to Section 13.8 of the Credit Agreement. _____________________ ("Assignor and ____________________ ("Assignee") agree as follows: 1. Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor, the following interests in and to Assignor's rights and obligations under the Credit Agreement and the other Loan Documents as of the Effective Date (as defined below): (a) a % interest in the Revolving Credit Loans Commitments (which percentage interest represents a $ commitment with respect to the aggregate Revolving Credit Loans Commitments of $ ); and/or (b) a % interest in the aggregate outstanding principal amount of the Term Loans (which percentage interest represents a $ interest in the $ aggregate principal amount of the Term Loans presently outstanding). After giving effect to this Assignment and Acceptance, the Revolving Credit Loans Commitment of Assignor will be $ , and the outstanding principal amount of Assignor's interest in the Term Loans will be $ . 2. Assignor (i) represents that, as of the date hereof and immediately prior to giving effect to this Assignment and Acceptance, (A) its Revolving Credit Loans Commitment is $ and the outstanding principal balance of its Revolving Credit Loans is $ , (B) the outstanding principal balance of its Term Loans is $ , and (C) its pro rata share of the Letters of Credit outstanding under its Revolving Credit Loans Commitment is $ , (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other Loan Document, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest ASSIGNMENT AND ACCEPTANCE - Page 1 120 is free and clear of any adverse claim, (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition or results of operations of any Company or the performance or observance by any Company of any of its obligations under the Credit Agreement or any other Loan Document, and (iv) attaches the assigned Notes held by Assignor and requests that Agent exchange such Notes for a new [Revolving Credit Loans and/or Term Loans Note] payable to the order of (A) Assignee in an amount equal to (1) in the case of the Revolving Credit Loans Note, the amount of Assignor's Revolving Credit Loans Commitment assumed by Assignee hereunder, and (2) in the case of the Term Loans Note, the principal amount of the Term Loans assigned to Assignee pursuant hereto, and (B) Assignor in an amount equal to (1) in the case of the Revolving Credit Loans Note, the amount of the Revolving Credit Loans commitment retained by Assignor, and (2) in the case of the Term Loans Note, the principal amount of the Term Loans retained by Assignor.(1) 3. Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance, (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 8.1 thereof, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance, (iii) agrees that it will, independently and without reliance upon Agent, Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement and other Loan Documents, (iv) confirms that it is an Eligible Assignee, (v) appoints and authorizes Agent to take such action on Assignee's behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto, (vi) agrees that it will perform in accordance with their terms all obligations which by the terms of the Credit Agreement and the other Loan Documents are required to be performed by it as a Lender, (vii) agrees that it will keep confidential all information with respect to the Companies furnished to it by any Company or Assignor marked as being confidential (other than information generally available to the public) in accordance with Section 13.20 of the Credit Agreement, and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to Assignee's exemption from United States withholding taxes with respect to all payments to be made to Assignee under the Credit Agreement, or certificate as to Assignee's exemption from United States withholding taxes with respect to all payments to be made to Assignee under the Credit Agreement, or such other documents as are necessary to indicate that all such payments are subject to such tax at a rate reduced by an applicable tax treaty.(2) - ------------------------- (1) If this Assignment and Acceptance does not relate to all of the Loans, this language is to be revised accordingly. (2) If Assignee is organized under the laws of a jurisdiction outside the United States. ASSIGNMENT AND ACCEPTANCE - Page 2 121 4. The effective date for this Assignment and Acceptance shall be ____ , ___ (the "Effective Date").(3) Following the execution of this Assignment and Acceptance, it will be delivered to Agent for acceptance and recording by Agent. 5. Upon such acceptance and recording, from and after the Effective Date, (i) Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, shall have the rights and obligations of a Lender thereunder and under the other Loan Documents and (ii) Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement and the other Loan Documents. 6. Upon such acceptance and recording, from and after the Effective Date, Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest, fees and other amounts) to Assignee. Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES) AND APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. 8. Assignee's address for notices and Applicable Lending Office for purpose of the Credit Agreement (until such address or office are subsequently changed in accordance with the Credit Agreement) are specified below its name on the signature pages of this Assignment and Acceptance. [NAME OF ASSIGNOR] By: ------------------------- Name: ----------------------- Title: ---------------------- - ------------------------- (3) Such date shall be at least five (5) Business Days after the execution of this Assignment and Acceptance and delivery thereof to Agent, unless otherwise agreed by Agent. ASSIGNMENT AND ACCEPTANCE - Page 3 122 [NAME OF ASSIGNEE] By: ----------------------------------- Name --------------------------------- Title: -------------------------------- Address for Notices: -------------------------------------- -------------------------------------- -------------------------------------- Fax No. (_) --------------------------- Telephone No. (___) ------------------- Attention: ---------------------------- Lending Office for Prime Rate Loans: -------------------------------------- -------------------------------------- -------------------------------------- Lending Office for Eurodollar Loans: -------------------------------------- -------------------------------------- -------------------------------------- ACCEPTED BY: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as Agent By: ----------------------------------- Name --------------------------------- Title: -------------------------------- KITTY HAWK, INC.(1) By: ----------------------------------- Name --------------------------------- Title: -------------------------------- Date: --------------------------------- - ------------------------- (1) Applicable only prior to the occurrence and continuation of a Default. ASSIGNMENT AND ACCEPTANCE - Page 4 123 EXHIBIT B BORROWING BASE REPORT 124 BORROWING BASE REPORT TO: Wells Fargo Bank (Texas), National Association 1445 Ross Avenue, Suite 300 Dallas, Texas 75202 Attention: Drew Keith Ladies/Gentlemen: This Borrowing Base Report ("Report") for the month ending ____, 19 __, is executed and delivered by Kitty Hawk, Inc. ("Borrower") pursuant to that certain Second Amended and Restated Credit Agreement, dated as of November 19, 1997 (as the same may be amended and in effect from time to time, the "Agreement"), among Borrower, Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc., Skyfreighters Corporation, American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc., 0. K. Turbines, Inc., the lenders named therein ("Lenders") and Wells Fargo Bank (Texas), National Association, as agent for Lenders (in such capacity, "Agent"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Agreement. Borrower hereby represents and warrants to Agent that all information contained herein is true, correct and complete, and that the Eligible Receivables and Eligible Parts referred to below represent the Eligible Receivables and Eligible Parts that qualify for purposes of determining the Borrowing Base under the Agreement. Borrower further represents and warrants to Agent that (a) attached hereto as Schedule 1 is a list of Eligible Receivables for the month ending _____, _____, showing all Eligible Receivables aged in thirty-day intervals, (b) attached hereto as Schedule 2 is a calculation showing the amounts of all Receivables and showing the amounts of all exclusions therefrom for purposes of calculating Eligible Receivables (set forth separately for each entity and for each exclusion specified in clauses (a) through (r) of the definition of Eligible Receivables and for any exclusion resulting from the last paragraph of such definition) and (c) attached hereto as Schedule 3 is a calculation showing the amounts of all Eligible Parts showing the amounts of all exclusions therefrom for purposes of calculating Eligible Parts (set forth separately for each entity and for each exclusion specified in clauses (i) through (vi) of the definition of Eligible Parts). CALCULATION OF BORROWING BASE Receivables: 1. Eligible Receivables . . . . . . . . . . . . . . . . . . $_______ Parts: 2. Eligible Parts . . . . . . . . . . . . . . . . . . . . . . $_______ BORROWING BASE REPORT - Page 1 125 Borrowing Base: 3. __% of line 1(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ 4. __% of line 2(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ 5. Borrowing Base (line 3 plus line 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ 6. Revolving Loans Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000,000 7. Outstanding principal amount of Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ 8. Outstanding Letter of Credit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ 9. Outstanding Revolving Credit (line 7 plus line 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ 10. Availability under Revolving Loans Commitment (the lesser of line 5 or line 6, minus line 9) . . . . . . . . . $___________
Borrower further represents and warrants to Agent that the representations and warranties contained in Article 7 of the Agreement are true and correct on and as of the date of this Borrowing Base Report as if made on and as of the date hereof, and that no Default or Event of Default has occurred and is continuing. Date: -------------------- KITTY HAWK, INC. By: ----------------------------- Name: --------------------------- Title: -------------------------- - ------------------------- (1) The percentages referred to in line 3 and line 4 are to be determined by Agent in accordance with the Agreement. BORROWING BASE REPORT - Page 2 126 SCHEDULE 1 ELIGIBLE RECEIVABLES SCHEDULE 1 - ELIGIBLE RECEIVABLES AGING SCHEDULE 127 SCHEDULE 2 RECEIVABLES AND EXCLUSIONS SCHEDULE 2 - RECEIVABLES OF THE BORROWER AND ITS WHOLLY-OWNED SUBSIDIARIES 128 SCHEDULE 3 ELIGIBLE PARTS SCHEDULE 3 - INVENTORY OF THE BORROWER AND ITS WHOLLY-OWNED SUBSIDIARIES 129 EXHIBIT C REVOLVING CREDIT LOANS NOTE 130 REVOLVING CREDIT LOANS NOTE $____________ Dallas, Texas November 19, 1997 FOR VALUE RECEIVED, the undersigned, KITTY HAWK, INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order of ___________ ("Lender"), in accordance with the instructions for payment to Agent specified in Section 3.1 of the Credit Agreement and for the account of the Applicable Lending Office of Lender, in lawful money of the United States of America and in immediately available funds, the principal amount of ______________ and NO/100 Dollars ($________________) or such lesser amount as shall equal the aggregate unpaid principal amount of the Revolving Credit Loans (hereinafter "Loans") made by Lender (or its predecessor in interest) to Borrower under the Credit Agreement referred to below, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. Borrower hereby authorizes Lender to endorse in its records the amount and Type of Loans made to Borrower by Lender (or its predecessor in interest) and all Continuations, Conversions and payments of principal in respect of such Loans, which endorsements shall, in the absence of manifest error and in the absence of disagreement between Lender and Agent as to such amount, be conclusive as to the outstanding principal amount of all such Loans; provided, however, that the failure to make such notation with respect to any such Loans or payment shall not limit or otherwise affect the obligations of Borrower under the Credit Agreement or this Note. This Note is one of the Revolving Credit Loans Notes referred to in the Second Amended and Restated Credit Agreement dated as of November 19, 1997, among Borrower, Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc., Skyfreighters Corporation, American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc., OK Turbines, Inc., Wells Fargo Bank (Texas), National Association, as Agent, and the Lenders named therein (such agreement, as the same may be amended, modified or supplemented from time to time, being referred to herein as the "Credit Agreement"), and evidences Loans made by Lender (or its predecessor in interest) thereunder. The Credit Agreement, among other things, contains provisions limiting the amount of interest that may be charged on this Note, for acceleration of the maturity of this Note upon the happening of certain stated events and for prepayments of Loans prior to the maturity of this Note upon the terms and conditions specified in the Credit Agreement. Capitalized terms used in this Note and not otherwise defined herein have the respective meanings assigned to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES) AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. REVOLVING CREDIT LOANS NOTE - Page 1 131 Each of Borrower and each surety, Guarantor, endorser and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. This Note, in part, is issued in amendment and restatement of, but not in extinguishment of the indebtedness evidenced by, (a) that certain Revolving Credit Loans Note, dated September 17, 1997, in the original principal amount of $30,450,000 made by Borrower payable to the order of Wells Fargo Bank (Texas), National Association and (b) that certain Revolving Credit Loans Note, dated September 17, 1997, in the original principal amount of $30,450,000 made by Borrower payable to the order of Bank One, Texas, N.A. KITTY HAWK, INC. By: ----------------------------- Name: --------------------------- Title: -------------------------- REVOLVING CREDIT LOANS NOTE - Page 2 132 EXHIBIT D TERM LOANS NOTE 133 TERM LOANS NOTE $_____________ Dallas, Texas November 19, 1997 FOR VALUE RECEIVED, the undersigned, KITTY HAWK, INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order of _____________ ("Lender"), in accordance with the instructions for payment to Agent specified in Section 3.1 of the Credit Agreement and for the account of the Applicable Lending Office of Lender, in lawful money of the United States of America and in immediately available funds, the principal amount of ____________ Dollars ($____________) on the dates and in the principal amounts provided in the Credit Agreement referred to below, and to pay interest on the unpaid principal amount of each of the Term Loans (hereinafter "Loans") made by Lender (or its predecessor in interest) to Borrower under the Credit Agreement, at such office, in like money and funds, for the period commencing on the date of such Loans until such Loans shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. Borrower hereby authorizes Lender to endorse in its records the amount and Type of Loans made to Borrower by Lender (or its predecessor in interest) and all Continuations, Conversions and payments of principal in respect of such Loans, which endorsements shall, in the absence of manifest error and in the absence of disagreement between Lender and Agent as to such amount, be conclusive as to the outstanding principal amount of all such Loans; provided, however, that the failure to make such notation with respect to any such Loans or payment shall not limit or otherwise affect the obligations of Borrower under the Credit Agreement or this Note. This Note is one of the Term Loans Notes referred to in the Second Amended and Restated Credit Agreement dated as of November 19, 1997, among Borrower, Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc., Skyfreighters Corporation, American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc., OK Turbines, Inc., Wells Fargo Bank (Texas), National Association, as Agent, and the Lenders named therein (such agreement, as the same may be amended, modified or supplemented from time to time, being referred to herein as the "Credit Agreement"), and evidences Loans made by Lender (or its predecessor in interest) thereunder. The Credit Agreement, among other things, contains provisions limiting the amount of interest that may be charged on this Note, for acceleration of the maturity of this Note upon the happening of certain stated events and for prepayments of Loans prior to the maturity of this Note upon the terms and conditions specified in the Credit Agreement. Capitalized terms used in this Note and not otherwise defined herein have the respective meanings assigned to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES) AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. TERM LOANS NOTE - Page 1 134 Each of Borrower and each surety, Guarantor, endorser and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. This Note, in part, is issued in amendment and restatement of, but not in extinguishment of the indebtedness evidenced by, (a) that certain Revolving Credit Loans Note, dated September 17, 1997, in the original principal amount of $30,450,000 made by Borrower payable to the order of Wells Fargo Bank (Texas), National Association and (b) that certain Revolving Credit Loans Note, dated September 17, 1997, in the original principal amount of $30,450,000 made by Borrower payable to the order of Bank One, Texas, N.A. KITTY HAWK, INC. By: ----------------------------- Name: --------------------------- Title: -------------------------- TERM LOANS NOTE - Page 2 135 EXHIBIT E NOTICE OF BORROWING, CONVERSION, CONTINUATION OR PREPAYMENT 136 NOTICE OF BORROWING, CONVERSION, CONTINUATION OR PREPAYMENT Date:_________, ____ Wells Fargo Bank (Texas), National Association, as Agent 1445 Ross Avenue, Suite 300 Dallas, Texas 75202 Attention: Mr. Drew Keith Reference is made to that certain Second Amended and Restated Credit Agreement, dated as of November 19, 1997 (as the same may be amended and in effect from time to time, the "Credit Agreement"), among Kitty Hawk, Inc. ("Borrower"), Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk Charters, Inc., Skyfreighters Corporation, American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc., 0. K. Turbines, Inc., the lenders named therein ("Lenders") and Wells Fargo Bank (Texas), National Association, as agent for Lenders (in such capacity, "Agent"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. Borrower hereby gives this Notice, irrevocably, pursuant to Section 2.9 of the Credit Agreement. Borrower hereby notifies you of the following (check and/or complete the applicable item):(1) _____ (a) New Loan. (i) Borrower requests Revolving Credit Loans in the amount of $ on __________, _____. (ii) The Revolving Credit Loans will be of the following Type: [Base Rate Loan] [Eurodollar Loan]. (iii) If the Revolving Credit Loans will be a Eurodollar Loan, the Interest Period will be _____ months. _____ (b) [Conversion] [Continuation] of Loan (i) Revolving Credit Loans: (A) Borrower requests a [Conversion] [Continuation] of a Revolving Credit Loan in the amount of $ on __________, ______. - ------------------------- (1) Borrower shall also be required to provide the additional information (if any) required by the Credit Agreement. NOTICE OF BORROWINGS, CONVERSIONS, CONTINUATIONS OR PREPAYMENTS - Page 1 137 (B) The Type of Revolving Credit Loans to be [Converted] [Continued] will be a [Base Rate Loan] [Eurodollar Loan]. (C) The Revolving Credit Loans resulting from the [Conversion] [Continuation] will be a [Base Rate Loan] [Eurodollar Loan]. (D) If the Revolving Credit Loans resulting from the [Conversion] [Continuation] will be a Eurodollar Loan, the Interest Period for such Loan will be ______ month[s]. (ii) Term Loans: (A) Borrower requests a [Conversion] [Continuation] of the Term Loans in the amount of $ ____________ on __________,___________. (B) The Type of Term Loans to be [Converted] [Continued] ill be a [Base Rate Loan] [Eurodollar Loan]. (C) The Term Loans resulting from the [Conversion] [Continuation] will be a [Base Rate Loan] [Eurodollar Loan]. (D) If the Term Loans resulting from the [Conversion] [Continuation] will be a Eurodollar Loan, the Interest Period for such Loan will be _______ month[s]. _____ (c) Prepayment: (i) Revolving Credit Loans: (A) Borrower will make a prepayment of the principal of the Revolving Credit Loans in the amount of $ on , . (B) The Revolving Credit Loans to be prepaid will be of the following Type: [Base Rate Loan] [Eurodollar Loan]. (C) If the Revolving Credit Loans to be prepaid is a Eurodollar Loan, it has an Interest Period of _____ month[s] that will end on __________, _____. (ii) Term Loans: (A) Borrower will make a prepayment of the principal of the Term Loans in the amount of $ _____ on , . (B) The Term Loans to be prepaid will be of the following Type: [Base Rate Loan] [Eurodollar Loan]. NOTICE OF BORROWINGS, CONVERSIONS, CONTINUATIONS OR PREPAYMENTS - Page 2 138 (C) If the Term Loans to be prepaid is a Eurodollar Loan, it has an Interest Period of _____ month[s] that will end on __________,_____. KITTY HAWK, INC. By: ----------------------------- Name: --------------------------- Title: -------------------------- NOTICE OF BORROWINGS, CONVERSIONS, CONTINUATIONS OR PREPAYMENTS - Page 3 139 EXHIBIT F ARBITRATION PROGRAM 140 ARBITRATION PROGRAM (a) Binding Arbitration. Upon the demand of any party, whether made before or after the institution of any judicial proceeding, any Dispute (as defined below) shall be resolved by binding arbitration in accordance with the terms of this Arbitration Program. A "Dispute" shall include any action, dispute, claim or controversy of any kind (e.g., whether in contract or in tort, statutory or common law, legal or equitable or otherwise) now existing or hereafter arising between the parties in any way arising out of, pertaining to or in connection with (1) any agreement, document or instrument to which this Arbitration Program is attached or in which it is referred to or any related agreements, documents or instruments (the "Documents"), (2) all past, present or future loans, notes, instruments, drafts, credits, accounts, deposit accounts, safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods or services or other transactions, contracts or agreements of any kind whatsoever, (3) any past, present or future incidents, omissions, acts, errors, practices or occurrences causing injury to either party whereby the other party or its agents, employees or representatives may be liable, in whole or in part, or (4) any other aspect of the past, present or future relationships of the parties including any agency, independent contractor or employment relationship but excluding claims for workers' compensation and unemployment benefits ("Relationship"). Any party to this Arbitration Program may, by summary proceedings (e.g., a plea in abatement or motion to stay further proceedings), bring any action in court to compel arbitration of any Disputes. Any party who fails or refuses to submit to binding arbitration following a lawful demand by the opposing party shall bear all costs and expenses incurred by the opposing party in compelling arbitration of any Dispute. The parties agree that by engaging in activities with or involving each other as described above, they are participating in transactions involving interstate commerce. (b) Governing Rules. All Disputes between the parties submitted to arbitration shall be resolved by binding arbitration administered by the American Arbitration Association (the "AAA") in accordance with, and in the following order of priority: (1) the terms of this Arbitration Program, (2) the Commercial Arbitration Rules of the AAA, (3) the Federal Arbitration Act (Title 9 of the United States Code) and (4) to the extent the foregoing are inapplicable, unenforceable or invalid, the laws of the State of Texas. The validity and enforceability of this Arbitration Program shall be determined in accordance with this same order of priority. In the event of any inconsistency between this Arbitration Program and such rules and statutes, this Arbitration Program shall control. Judgment upon any award rendered hereunder may be entered in any court having jurisdiction; provided, however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or Texas Banking Code art. 342-609. (c) No Waiver; Preservation of Remedies; Multiple Parties. No provision of, nor the exercise of any rights under, this Arbitration Program shall limit the right of any party, during any Dispute, to seek, use and employ ancillary or preliminary remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing or proceeding under forcible entry and detainer for possession of any real or personal property, and any such action shall not be deemed an election of remedies. Such rights shall include, without limitation, rights and remedies relating to (1) foreclosing against any real or personal property collateral or other security by the exercise of power of sale under a deed of trust, mortgage or other security agreement or instrument, or applicable law, (2) exercising self-help remedies (including setoff rights) or (3) obtaining provisional or ancillary remedies such as injunctive relief, sequestration, attachment, garnishment or the appointment of a 141 receiver from a court having jurisdiction. Such rights can be exercised at any time except to the extent such action is contrary to a final award or decision in any arbitration proceeding. The institution and maintenance of an action for judicial relief or pursuit of provisional or ancillary remedies or exercise of self-help remedies shall not constitute a waiver of the right of any party, including the plaintiff, to submit the Dispute to arbitration, nor render inapplicable the compulsory arbitration provisions hereof. In Disputes involving indebtedness or other monetary obligations, each party agrees that the other party may proceed against all liable persons, jointly or severally, or against one or more of them, less than all, without impairing rights against other liable persons. Nor shall a party be required to join the principal obligor or any other liable persons (e.g., sureties or guarantors) in any proceeding against a particular person. A party may release or settle with one or more liable persons as the party deems fit without releasing or impairing rights to proceed against any persons not so released. (d) Statute of Limitations. All statutes of limitation applicable to any Dispute shall apply to any proceeding in accordance with this Arbitration Program. (e) Arbitrator Powers and Qualifications; Award; Modification or Vacation of Award. Arbitrators are empowered to resolve Disputes by summary rulings substantially similar to summary judgments and motions to dismiss. Arbitrators shall resolve all Disputes in accordance with the applicable substantive law. Any arbitrator selected shall be required to be a practicing attorney licensed to practice law in the State of Texas and shall be required to be experienced and knowledgeable in the substantive laws applicable to the subject matter of the Dispute. With respect to a Dispute in which the claims or amounts in controversy do not exceed $1,000,000, a single arbitrator shall be chosen and shall resolve the Dispute. In such case, the arbitrator shall be required to make specific, written findings of fact, and shall have authority to render an award up to but not to exceed $1,000,000, including all damages of any kind whatsoever, including costs, fees and expenses. A Dispute involving claims or amounts in controversy exceeding $1,000,000, shall be decided by a majority vote of a panel of three arbitrators (an "Arbitration Panel"), the determination of any two of the three arbitrators constituting the determination of the Arbitration Panel, provided, however, that all three Arbitrators on the Arbitration Panel must actively participate in all hearings and deliberations. Arbitrators, including any Arbitration Panel, may grant any remedy or relief deemed just and equitable and within the scope of this Arbitration Program and may also grant such ancillary relief as is necessary to make effective any award. Arbitration Panels shall be required to make specific, written findings of fact and conclusions of law, and in such proceedings before an Arbitration Panel only, the parties shall have the additional right to seek vacation or modification of any award of an Arbitration Panel that is based in whole, or in part, on an incorrect or erroneous ruling of law by appeal to a Federal or State Court of Appeals, following the entry of judgment on the award in Federal or State District Court, as appropriate. For these purposes, the award and judgment entered by the Federal or State District Court shall be considered to be the same as the award and judgment of the Arbitration Panel. All requirements applicable to appeals from any Federal or State District Court judgment shall be applicable to appeals from judgments entered on decisions rendered by Arbitration Panels. The Appellate Courts shall have the power and authority to vacate or modify an award based upon a determination that there has been an incorrect or erroneous ruling of law. The Appellate Court shall also have the power to reverse and/or remand the decision of an Arbitration Panel. Subject to the foregoing, the determination of an Arbitrator or 142 Arbitration Panel shall be binding on all parties and shall not be subject to further review or appeal except as otherwise allowed by applicable law. (f) Other Matters and Miscellaneous. To the maximum extent practicable, the AAA, the Arbitrator (or the Arbitration Panel, as appropriate) and the parties shall take any action necessary to require that an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Arbitration proceedings hereunder shall be conducted at one of the following locations in the State of Texas agreed to in writing by the parties or, in the absence of such agreement, selected by the AAA: (1) Austin; (2) Dallas; (3) Fort Worth; (4) Houston; or (5) San Antonio. Arbitrators shall be empowered to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure and applicable law. With respect to any Dispute, each party agrees that all discovery activities shall be expressly limited to matters directly relevant to the Dispute and any Arbitrator, Arbitration Panel and the AAA shall be required to fully enforce this requirement. This Arbitration Program constitutes the entire agreement of the parties with respect to its subject matter and supersedes all prior discussions, arrangements, negotiations and other communications on dispute resolution. The provisions of this Arbitration Program shall survive any termination, amendment or expiration of the Documents or the Relationship, unless the parties otherwise expressly agree in writing. To the extent permitted by applicable law, Arbitrators, including any Arbitration Panel, shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees and arbitrators' fees) to the prevailing party. This Arbitration Program may be amended, changed or modified only by the express provisions of a writing which specifically refers to this Arbitration Program and which is signed by all the parties hereto. If any term, covenant, condition or provision of this Arbitration Program is found to be unlawful, invalid or unenforceable, such illegality, or invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Arbitration Program, and all such remaining parts hereof shall be valid and enforceable and have full force and effect as if the illegal, invalid or unenforceable part had not been included. The captions or headings in this Arbitration Program are for convenience of reference only and are not intended to constitute any part of the body or text of this Arbitration Program. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential, except for disclosures of information required in the ordinary course of business of the parties or by applicable law or regulation. To the maximum extent permitted by law, this Arbitration Program modifies and supersedes any and all prior agreements for arbitration between the parties. 143 SCHEDULE 1.1(a) AIA AIRCRAFT RELEASE AMOUNTS 144 SCHEDULE 1.1(a) AIA AIRCRAFT RELEASE AMOUNTS
================================================================================ Appraised Initial AIA Aircraft Percentage AIA Aircraft Value Release Amount Allocation ================================================================================ 1. Aircraft O 719CK $ 4,100,000 $ 2,974,301 6.4800% - -------------------------------------------------------------------------------- 2. Aircraft P 255US $ 5,800,000 $ 4,207,548 9.1668% - -------------------------------------------------------------------------------- 3. Aircraft Q 856AA $ 4,800,000 $ 3,482,109 7.5863% - -------------------------------------------------------------------------------- 4. Aircraft R 858AA $ 4,644,000 $ 3,368,940 7.3397% - -------------------------------------------------------------------------------- 5. Aircraft S 6831 $ 3,800,000 $ 2,756,670 6.0058% - -------------------------------------------------------------------------------- 6. Aircraft T 6834 $ 3,700,000 $ 2,684,126 5.8478% - -------------------------------------------------------------------------------- 7. Aircraft U 6808 $ 3,300,000 $ 2,393,950 5.2156% - -------------------------------------------------------------------------------- 8. Aircraft V 6811 $ 4,000,000 $ 2,901,757 6.3219% - -------------------------------------------------------------------------------- 9. Aircraft W 6816 $ 3,600,000 $ 2,611,582 5.6897% - -------------------------------------------------------------------------------- 10. Aircraft X 1908 $ 1,828,000 $ 1,326,103 2.8891% - -------------------------------------------------------------------------------- 11. Aircraft Y 729CK $ 3,800,000 $ 2,756,670 6.0058% - -------------------------------------------------------------------------------- 12. Aircraft Z 727CK $ 2,400,000 $ 1,741,054 3.7931% - -------------------------------------------------------------------------------- 13. Aircraft AA 720CK $ 3,700,000 $ 2,684,126 5.8478% - -------------------------------------------------------------------------------- 14. Aircraft AB 722CK $ 5,400,000 $ 3,917,373 8.5346% - -------------------------------------------------------------------------------- 15. Aircraft AC 723CK $ 6,000,000 $ 4,352,636 9.4829% - -------------------------------------------------------------------------------- 16. Aircraft AD 706CA $ 2,400,000 $ 1,741,054 3.7931% - -------------------------------------------------------------------------------- Total: $63,272,000 $45,900,000 100.0000% ================================================================================
145 SCHEDULE 1.1 (b) APPROVED FOREIGN ACCOUNT DEBTORS 146 Schedule 1.1(b) Approved Foreign Account Debtors None. Schedule 1.1(b) - Approved Foreign Account Debtors Lone Page 147 SCHEDULE 1.1(c) EXISTING LIENS AND EXISTING DEBT 148 SCHEDULE 1.1(c) Section 9.1(e) Existing Debt and Permitted Liens (f)
Principal Holder Description Balance Liens ------ ----------- ------- ----- 1. Iosco County EDC Business loan note $ 613,250 Security interest in for renovation and airplane hangar sublease expansion of airplane and furniture, fixtures and equipment in the hangar 2. GE Capital Equipment loan 2,680,198 Security interest in ground handling equipment 3. GE Capital Aircraft loan 428,024 Aircraft mortgage on Lear N500JS aircraft and engines 4. Michigan Nat'l Equipment loan 740,048 Security interest in Bank ground handling equipment 5. Concord Equipment loan 213,490 Security interest in ground handling equipment 6. Imperial Insurance premium 699,100 Policy claim financing 7. First Source Aircraft loan 2,669,904 Aircraft mortgage on DC-8 aircraft N801MG and engines 8. First Source Aircraft loan 1,950,844 Aircraft mortgage on DC-9 aircraft N112PS ----------- and engines Total $9,994,858
SCHEDULE 1.1(C) - EXISTING DEBT AND PERMITTED LIENS Lone Page 149 SCHEDULE 2.14 EXISTING LETTERS OF CREDIT 150 SCHEDULE 2.14 EXISTING LETTERS OF CREDIT
- -------------------------------------------------------------------------------------- Letter of Face Account Credit No. Amount Issuer Party Beneficiary Expires - -------------------------------------------------------------------------------------- 285536 $ 500,000.00 Wells Fargo Aircargo Air Transport 12-1-97 International - -------------------------------------------------------------------------------------- 241386 $ 25,000.00 Wells Fargo Aircargo Exxon 2-15-98 - -------------------------------------------------------------------------------------- 281229 $ 945,000.00 Wells Fargo Aircargo Atlas Air Inc. 1-7-98 - -------------------------------------------------------------------------------------- 286204 $1,303,200.00 Wells Fargo Kitty Hawk Comerica Bank 11-17-98 - --------------------------------------------------------------------------------------
151 SCHEDULE 6.1 DEBT TO BE PAID AT CLOSING 152 SCHEDULE 6.1 Debt to be Paid at Closing All existing debt of Kitty Hawk and its Subsidiaries will be paid at closing except for current accounts payable and debt described in Section 9.1 (d), if any; the debt of Kitty Hawk and its Subsidiaries to Agent and Lenders pursuant to the Loan Documents, under Section 9.1(a); the debt of Kitty Hawk and its Subsidiaries evidenced by the Senior Notes, under Section 9.1(b); and the existing debt described in Section 9.1(e) and identified in Schedule 1.1(c). SCHEDULE 6.1 - DEBT TO BE PAID AT CLOSING Lone Page 153 SCHEDULE 7.5 LITIGATION 154 SCHEDULE 7.5 Litigation Reasonably Likely to Have a Material Adverse Effect None. SCHEDULE 7.5 - LITIGATION REASONABLY LIKELY TO HAVE Lone Page MATERIAL ADVERSE EFFECT 155 SCHEDULE 7.9 DEBT 156 SCHEDULE 7.9 Debt at Closing Debt of Kitty Hawk and its Subsidiaries at closing, other than current accounts payable, will be only that described in Subsections 9.1(a),(b),(d) and (e). SCHEDULE 7.9 - DEBT AT CLOSING Lone Page 157 SCHEDULE 7.10 TAXES 158 SCHEDULE 7.10 Taxes None. SCHEDULE 7.10 - TAXES Lone Page 159 SCHEDULE 7.12 ERISA MATTERS 160 SCHEDULE 7.12 ERISA Matters Neither Kitty Hawk nor any of its Subsidiaries maintains or has any obligation to contribute to any defined benefit pension plan. SCHEDULE 7.12 - ERISA MATTERS Lone Page 161 SCHEDULE 7.14 CAPITALIZATION 162 SCHEDULE 7.14 Capitalization On the Closing Date, the number and class of the authorized Capital Stock, the par value per share, and the number of shares issued and outstanding of the Capital Stock of Kitty Hawk's Subsidiaries, are: Kitty Hawk Aircargo, Inc.: 1,000 shares of $1 par value common stock are authorized. 1,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. Kitty Hawk Leasing, Inc.: 100,000 shares of $1 par value common stock are authorized. 1,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. Kitty Hawk Charters, Inc.: 10,000 shares of $1 par value common stock are authorized. 1,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. Skyfreighters Corporation: 1,000,000 shares of $1 par value common stock are authorized. 1,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. American International Airways, Inc.: 50,000 shares of $1 par value common stock are authorized. 25,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. American International Travel, Inc.: 50,000 shares of $1 par value common stock are authorized. 1,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. Flight One Logistics, Inc.: 50,000 shares of $1 par value common stock are authorized. 1,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. Kalitta Flying Service, Inc.: 50,000 shares of $1 par value common stock are authorized. 25,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. O.K. Turbines, Inc.: 50,000 shares of $1 par value common stock are authorized. 1,000 shares are issued and outstanding, all of which are held by Kitty Hawk, Inc. SCHEDULE 7.14- CAPITALIZATION Lone Page 163 SCHEDULE 7.21 MATERIAL CONTRACTS 164 SCHEDULE 7.21 Material Contracts The Material Contracts of Kitty Hawk and its Subsidiaries are listed as items 1.1, items 2.1 through 2.3, item 4.2, and items 10.1 through 10.25 in the Index to Exhibits of Kitty Hawk's Form S-1 Registration Statement under the Securities Act of 1933, as filed with the Securities and Exchange Commission in November 1997. A copy of that Index is attached to and incorporated into this Schedule 7.21. SCHEDULE 7.21 - MATERIAL CONTRACTS Lone Page 165 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. 2.3*** - Amendment No. 2 to the Merger Agreement, dated October 29 1997, by and among Kitty Hawk and certain of its subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK and Conrad 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 - 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. 3.3 - Bylaws of Kitty Hawk, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of October 1996, which exhibit is incorporated herein by reference. 3.4 - Amendment No. 1 to Bylaws of Kitty Hawk, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of October 1996, 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.
166
EXHIBIT NUMBER ITEM - ------- ---- 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.
167
EXHIBIT NUMBER ITEM - ------- ---- 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 (the "Credit Agreement"), dated as of August 14, 1996, by and among the Company, Wells Fargo Bank (Texas), National Association ("WFB") and Bank One, Texas, N.A. ("BOT"), 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* - Amended and Restated Consulting Agreement by and between Conrad A. Kalitta and AIA. 10.23***- First Amendment to the Credit Agreement, dated September 17, 1997, by and among the Company, WFB and BOT. 10.24* - License Agreement (the "License Agreement"), dated May 15, 1995, by and between Roadway Global Air, Inc. ("RGA") and American International Freight ("AIF"), a division of AIA. 10.25* - Amendment to License Agreement, dated August 14, 1997, by and between RGA and AIR 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. 168 SCHEDULE 7.24 EMPLOYEE MATTERS 169 SCHEDULE 7.24 Employee Matters American International Airways, Inc. ("AIA"), one of Kitty Hawk's Subsidiaries, is subject to a collective bargaining agreement, dated July 20, 1995, with the pilots, co-pilots and flight engineers employed by AIA, who are represented by The International Brotherhood of Teamsters - Airline Division. Neither Kitty Hawk nor any of its Subsidiaries is subject to any other collective bargaining agreement, and there is no petition for certification or union election pending with respect to any other employees of Kitty Hawk or its Subsidiaries. Neither Kitty Hawk nor any of its Subsidiaries is subject to an employment contract with any executive officer or director except: 1. those employment agreements by Kitty Hawk with Tom Christopher, Richard Wadsworth, and Tilmon J. Reeves that are listed as items 10.9, 10.10, and 10.11 in the Index to Exhibits (the "Index") of Kitty Hawk's Form S-1 Registration Statement under the Securities Act of 1933, as filed with the Securities and Exchange Commission in November 1997, a copy of which is attached to and incorporated into Schedule 7.21; 2. the employment agreement by AIA with Conrad A. Kalitta that is listed as item 10.21 in the Index; 3. certain severance and noncompetition agreements that may be effective as of the Closing Date between AIA and David Ahles, William Gray, Michael Hartley, M. Hutchinson, Douglas Kalitta, Michael Maraone, Jane Phifer, R. Pickett, Vince Puccia and Donald Schilling, in accordance with Section 7.3(a) of the Merger Agreement among Kitty Hawk, AIA and others; and 4. certain consulting agreements described in Schedule 9.12. SCHEDULE 7.24 - EMPLOYEE MATTERS Lone Page 170 SCHEDULE 7.25 INSURANCE 171 SCHEDULE 7.25 Insurance Kitty Hawk and its Subsidiaries maintain the insurance coverage that is reasonably required with prudent risk management to conduct their business. That insurance is placed by The Aviation Agency, Inc., and is with coverage, deductibles, limits and insurers consistent with prior practice by Kitty Hawk. Aviation-related aircraft casualty and liability coverage complies with the requirements of Section 8.5, as evidenced by a certificate of The Aviation Agency, Inc. that has been supplied to the Agent in connection with closing under this Agreement. SCHEDULE 7.25 - INSURANCE Lone Page 172 SCHEDULE 9.5 INVESTMENTS 173 SCHEDULE 9.5 Investments None. SCHEDULE 9.5 - INVESTMENTS Lone Page 174 SCHEDULE 9.12 CONSULTING FEES 175 SCHEDULE 9.12 Consulting Fees Consulting fees are payable by AIA under a written consulting agreement with Conrad A. Kalitta, dated October 23, 1997, in connection with certain litigation in the United States District Court for the Northern District of California captioned American International Airways, Inc. v. GATX Capital Corporation, et al, No. C-97-0378 WHO, under which among other things a significant portion of any recovery might be paid to Mr. Kalitta; Consulting fees are payable by Conrad A. Kalitta to Donald L. Schilling, George W. Kelsey, Douglas A. Kalitta under written consulting agreements, each dated October 23, 1997, for services to Mr. Kalitta in connection with the Merger pursuant to the Merger Agreement. Neither Kitty Hawk nor any of its Subsidiaries has any material obligations under any of those consulting agreements. Various members of Kitty Hawk's board of directors from time to time provide and will continue to provide professional services to Kitty Hawk and its Subsidiaries, at regular professional fees for services rendered. SCHEDULE 9.12 - CONSULTING FEES Lone Page EX-10.25 13 ESCROW & SECURITY AGREEMENT 1 EXHIBIT 10.25 ESCROW AND SECURITY AGREEMENT This ESCROW AND SECURITY AGREEMENT (this "Escrow Agreement") is made and entered into as of November 19, 1997 between KITTY HAWK, INC., a Delaware corporation (the "Issuer") and BANK ONE, N.A., as Trustee and Collateral Trustee (the "Trustee") for the holders (the "Holders") of the Notes (as defined herein) issued by the Issuer under the Indenture referred to below. All capitalized terms used herein which are not specifically defined shall have the meanings assigned thereto in the Indenture. W I T N E S S E T H WHEREAS, pursuant to the Indenture (the "Indenture") dated as of November 15, 1997, among the Issuer, each Subsidiary of the Issuer (other than AIC), as a Guarantor (each, a "Guarantor") and the Trustee, the Issuer is issuing $340,000,000 aggregate principal amount of 9.95% Senior Secured Notes due November 15, 2004 (the "Notes"); WHEREAS, pursuant to the Indenture, the Issuer is required to (i) purchase or cause the purchase of Pledged Securities (as defined herein) as detailed on Schedule I hereto to provide for (a) the purchase of the two Optioned Boeing 747s or other Eligible Aircraft and (b) the conversion of such aircraft to freighter configuration and (ii) place such Pledged Securities (or cause them to be placed) in an account held by the Trustee for the benefit of Holders of the Notes; and WHEREAS, to secure the obligations of the Issuer and the Guarantors under the Notes (the "Obligations") and fund its commitment to purchase the two Optioned Boeing 747s or other Eligible Aircraft and convert such aircraft to freighter configuration, the Issuer has agreed to (i) pledge to the Trustee for its benefit and the ratable benefit of the Holders of the Notes, a security interest in the Pledged Securities, the Escrow Account and certain related items, as specified herein and (ii) execute and deliver this Escrow and Security Agreement (the "Escrow Agreement") in order to specify the terms of such pledge which secures the payment and performance by the Issuer of the Obligations and provide for the escrow of such Pledged Securities in accordance with the terms hereof. Unless otherwise defined herein or in the Indenture, terms used in Articles 8 or 9 of the Uniform Commercial Code ("UCC") as in effect in the State of New York are used herein as therein defined. 2 2 AGREEMENT NOW, THEREFORE, in consideration of the mutual promises herein contained and contained in the Indenture, and in order to induce the Holders of the Notes to purchase the Notes, the Issuer hereby agrees with the Trustee, for the benefit of the Trustee and for the ratable benefit of the Holders of the Notes, as follows: SECTION 1. Pledge and Grant of Security Interest. The Issuer hereby pledges to the Trustee for its benefit and for the ratable benefit of the Holders of the Notes, and grants to the Trustee for its benefit and for the ratable benefit of the Holders of the Notes, a continuing first priority security interest in and to all of the Issuer's right, title and interest in, to and under the following (hereinafter collectively referred to as the "Collateral"), whether characterized as investment property, general intangibles or otherwise: (a) the United States Treasury securities identified in Annex 1 to Exhibit A to this Escrow Agreement (the "Pledged Securities"), (b) any and all applicable security entitlements with respect to the Pledged Securities, (c) the Bank One, N.A. account in the name of "Bank One, N.A., as Trustee for the benefit of the holders of the 9.95% Senior Secured Notes due 2004 of Kitty Hawk, Inc. Escrow Account", Administrative Account No. 6802026999 (the "Escrow Account") established and maintained by the Trustee pursuant to this Escrow Agreement, (d) any and all related securities accounts in which security entitlements with respect to the Pledged Securities are held, and (e) all proceeds of any and all of the foregoing Collateral (including, without limitation, proceeds that constitute property of the types described in clauses (a) - (d) of this Section 1) and, to the extent not otherwise included, all cash. The Issuer in its discretion may from time to time in writing delivered to the Trustee direct the Trustee to sell any Pledged Securities. Upon receipt of net proceeds with respect to any sale of the Pledged Securities, the Issuer shall be entitled to re-invest such net proceeds in any other U.S. Government Obligations subject to the provisions hereof; provided that the Trustee and Holders shall receive a continuing perfected first priority security interest therein until the release of any of such Collateral or any portion thereof from time to time pursuant to Section 4 hereof. SECTION 2. Security for Obligation. This Escrow Agreement and the pledge of Collateral hereunder secures, in conjunction with the Collateral specified in the Indenture, the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of the Obligations. SECTION 3. Delivery of Collateral; Escrow Account; Interest. (a) The Pledged Securities shall be pledged and transferred to or acquired by the Company or the Trustee in the name of the Trustee and the Trustee shall become the holder of a security entitlement to the Pledged Securities, through action by the Federal Reserve Bank of New York ("FRBNY") or another securities intermediary, as confirmed (in writing or electronically or otherwise in accordance with standard industry practice) to the Trustee by FRBNY or such other securities intermediary (i) indicating by book- entry that the Pledged Securities or a security entitlement 3 3 thereto has been credited to the Trustee's account, or (ii) acquiring the Pledged Securities or a security entitlement thereto for the Trustee and accepting the same for credit to a securities account of the Trustee. (b) Prior to or concurrently with the execution and delivery hereof and prior to the transfer to or acquisition by the Company or the Trustee of the Pledged Securities on behalf of the Holders (or acquisition by the Trustee of any security entitlement thereto), as provided in subsection (a) of this Section 3, the Trustee shall establish the Escrow Account on its books as an account segregated from all other custodial or collateral accounts at its office at 100 E. Broad Street, 8th Floor, Columbus, Ohio 43215. Upon transfer to or the acquisition of the Pledged Securities by the Company or the Trustee (or the Trustee's acquisition of a security entitlement thereto), as confirmed by FRBNY or another securities intermediary, the Trustee shall make appropriate book entries indicating that the Pledged Securities and/or such security entitlement have been credited to and are held in the Escrow Account. Subject to the other terms and conditions of this Escrow Agreement, all funds or other property held by the Trustee pursuant to this Escrow Agreement shall be held in the Escrow Account subject (except as expressly provided in Sections 4 hereof) to the exclusive dominion and control of the Trustee and exclusively for the benefit of the Trustee and for the ratable benefit of the Holders of the Notes and segregated from all other funds or other property otherwise held by the Trustee. (c) All Collateral shall be retained in the Escrow Account pending disbursement pursuant to the terms hereof. (d) Concurrently with the execution and delivery of this Escrow Agreement, the Trustee is delivering to the Issuer a duly executed certificate, in the form of Exhibit A hereto, of an officer of the Trustee, confirming the Trustee's establishment and maintenance of the Escrow Account and its receipt and holding of the Pledged Securities or a security entitlement thereto and the crediting of the Pledged Securities or such security entitlement to the Escrow Account, all in accordance with this Escrow Agreement. (e) Concurrently with the execution and delivery of this Escrow Agreement, the Issuer is delivering to the Trustee copies of financing statements, which have been submitted for filing on the Closing Date (as defined in the Indenture) under the UCC of the States of Texas and New York, covering the Collateral described in this Escrow Agreement. SECTION 4. Disbursements. (a) Concurrent with or immediately prior to the closing of the purchase of one or more Optioned Boeing 747s or other Eligible Aircraft, the Issuer may, pursuant to written instructions given by the Issuer to the Trustee in the form attached hereto as Exhibit B (an "Issuer Order") given from time to time, direct the Trustee to release an amount from the Escrow Account for the purchase of such aircraft, not to exceed the purchase price therefor or to be paid by and/or on behalf of the Issuer or a subsidiary of Issuer. Upon receipt of an Issuer Order, the Trustee shall sell Pledged Securities in an amount necessary 4 4 to deliver funds to the Issuer in such amount and release to the Issuer or Issuer's Designee such amount from the Escrow Account in accordance with the Issuer Order. (b) Subsequent to the closing of the purchase of one or more Optioned Boeing 747s or other Eligible Aircraft or immediately prior thereto, the Issuer may, from time to time, direct the Trustee in writing in the form attached hereto as Exhibit C (an "Issuer Reconfiguration Order") to release an amount from the Escrow Account sufficient to pay for any portion of the conversion of such aircraft to freighter configuration. Upon receipt of the Issuer Reconfiguration Order, the Trustee shall sell Pledged Securities in an amount necessary to deliver funds to the Issuer in such amount and release to the Issuer or Issuer's Designee the amount from the Escrow Account specified therein as provided for therein. (c) If the Issuer makes any payment or portion of a payment (other than interest payments with respect to the Notes) for which the Collateral is security from a source of funds other than the Escrow Account ("Issuer Funds"), the Issuer may, after payment in full of such payment, direct the Trustee in writing in the form attached hereto as Exhibit D (an "Other Release Order") to release to the Issuer or to another party at the direction of the Issuer (the "Issuer's Designee") from the Escrow Account in an amount less than or equal to the amount of Issuer Funds applied to such payment. Upon receipt by the Trustee of such Other Release Order, the Trustee shall sell Pledged Securities in an amount necessary to deliver funds to the Issuer in such amount and pay over to the Issuer or the Issuer's Designee, as the case may be, the requested amount from the Escrow Account as soon as practicable. (d) To the extent Pledged Securities are sold to distribute funds or cash is otherwise distributed to the Company in accordance with the terms hereof, the security interest in the Collateral evidenced by this Escrow Agreement and held in the Escrow Account will automatically terminate and be of no further force and effect and the Collateral shall promptly be paid over and transferred to the Issuer, except to the extent of a sale of Pledged Securities provided for in Section I hereof. Furthermore, upon the release of any Collateral from the Escrow Account in accordance with the terms of this Escrow Agreement, whether upon release of Collateral to Holders as payment of the Obligations or otherwise, the security interest evidenced by this Escrow Agreement in such released Collateral will automatically terminate and be of no further force and effect and the Trustee shall execute and deliver to the Issuer or file any and all documentation necessary or required to evidence same. (e) On the date that is 18 months after the Closing Date (the "Valuation Date"), the chief financial officer of the Issuer shall in good faith determine the value of the assets remaining in the Escrow Account, which shall be evidenced by delivery of an Officers' Certificate to the Trustee. If the value of such assets (as so determined) exceeds $5,000,000 the Issuer shall make an Offer to Purchase Notes having a principal amount equal to such value (as so determined). On the Business Day immediately prior to the expiration date of such Offer to Purchase, the Trustee shall release all assets then held in the Escrow Account to the Issuer, which assets, to the 5 5 extent necessary, will be used to consummate such Offer to Purchase or, if not needed for such purpose, may be used by the Issuer for general corporate purposes. If the value of the assets in the Escrow Account on the Valuation Date (as so determined) is equal to or less than $5,000,000, the Trustee will promptly release all assets then held in the Escrow Account (whether cash, proceeds from the sale of Pledged Securities or Pledged Securities) to the Issuer and release and discharge any security interest in the Collateral. The Issuer will be entitled to liquidate such assets and use such assets for general corporate purposes. Any Offer to Purchase hereunder shall be consummated in accordance with the terms of the Indenture and for all purposes of the Indenture shall be treated identically to an Offer to Purchase for an Asset Sale or upon the occurrence of a Change of Control Triggering Event. (f) Nothing contained in this Escrow Agreement shall (i) afford the Issuer any right to issue entitlement orders with respect to any security entitlement to the Pledged Securities or any securities account in which any such security entitlement may be carried, or otherwise afford the Issuer control of any such security entitlement or (ii) otherwise give rise to any rights of the Issuer with respect to the Pledged Securities, any security entitlement thereto or any securities account in which any such security entitlement may be carried, other than the Issuer's rights under this Escrow Agreement as the beneficial owner of Collateral pledged to and subject to the exclusive dominion and control (except as expressly provided in this Sections 4) of the Trustee in its capacity as such (and not as a securities intermediary). The Issuer acknowledges, confirms and agrees that the Trustee is an entitlement holder of the security entitlements to the Pledged Securities solely as Trustee for the Holders of the Notes and not as a securities intermediary. SECTION 5. Representations and Warranties. The Issuer hereby represents and warrants that: (a) The execution and delivery by the Issuer of, and the performance by the Issuer of its obligations under, this Escrow Agreement will not contravene any provision of applicable law or the Certificate of Incorporation of the Issuer or any material agreement or other material instrument binding upon the Issuer or any of its subsidiaries or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Issuer or any of its subsidiaries, or result in the creation or imposition of any lien on any assets of the Issuer, except for the security interests granted under this Escrow Agreement; no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required (i) for the performance by the Issuer of its obligations under this Escrow Agreement, (ii) for the pledge by the Issuer of the Collateral pursuant to this Escrow Agreement or (iii) except for any such consents, approvals, authorizations or orders required to be obtained by the Trustee (or the Holders) for reasons other than the consummation of this transaction, for the exercise by the Trustee of the rights provided for in this Escrow Agreement or the remedies in respect of the Collateral pursuant to this Escrow Agreement. 6 6 (b) The Issuer is the beneficial owner of the Collateral, free and clear of any Lien or claims of any person or entity (except for the security interests granted under this Escrow Agreement). No financing statement covering the Issuer's interest in the Pledged Securities is on file in any public office, other than the financing statements filed pursuant to this Escrow Agreement. (c) This Escrow Agreement has been duly authorized, validly executed and delivered by the Issuer and constitutes a valid and binding agreement of the Issuer, enforceable against the Issuer in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, fraudulent conveyance, preference, reorganization, moratorium or similar laws now or hereafter in effect relating to or affecting creditors' rights or remedies generally, (ii) the availability of equitable remedies may be limited by equitable principles of general applicability, (iii) the exculpation provisions and rights to indemnification hereunder may be limited by U.S. federal and state securities laws and public policy considerations and (iv) the waiver of rights and defenses contained in Section 11(b), Section 14.11 and Section 14.15 hereof may be limited by applicable law. (d) Upon the transfer to or acquisition by the Trustee of the Pledged Securities and the acquisition by the Trustee of any security entitlement relating thereto, in accordance with Section 3, the pledge of and grant of a security interest in the Collateral securing the payment of the Obligations for the benefit of the Trustee and the Holders of the Notes will constitute a perfected security interest in such Collateral with first priority against all creditors of the Issuer (and any persons purporting to purchase any of the Collateral from the Issuer). (e) There are no legal or governmental proceedings pending or, to the best of the Issuer's knowledge, threatened to which the Issuer or any of its subsidiaries is a party or to which any of the properties of the Issuer or any such subsidiary is subject that would materially adversely affect the power or ability of the Issuer to perform its obligations under this Escrow Agreement or to consummate the transactions contemplated hereby. (f) The pledge of the Collateral pursuant to this Escrow Agreement is not prohibited by law or governmental regulation (including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System) applicable to the Issuer. (g) No Event of Default exists. SECTION 6. Further Assurances. The Issuer will, promptly upon request by the Trustee, execute and deliver or cause to be executed and delivered, or use its reasonable best 7 7 efforts to procure, all assignments, instruments and other documents, all in form and substance reasonably satisfactory to the Trustee, deliver any instruments to the Trustee and take any other actions that are necessary or, in the reasonable opinion of the Trustee, desirable to perfect, continue the perfection of, or protect the first priority of the Trustee's security interest in and to the Collateral, to protect the Collateral against the rights, claims, or interests of third persons (other than any such rights, claims or interests created by or arising through the Trustee) or to effect the purposes of this Escrow Agreement including those contemplated by the Final Offering Memorandum dated November 14, 1997 relating to the Notes. The Issuer also hereby authorizes the Trustee to file any financing or continuation statements in the United States with respect to the Collateral without the signature of the Issuer (to the extent permitted by applicable law). The Issuer will promptly pay all reasonable costs incurred in connection with any of the foregoing within 45 days of receipt of an invoice therefor. The Issuer also agrees, whether or not requested by the Trustee, to take all actions that are necessary to perfect or continue the perfection of, or to protect the first priority of, the Trustee's security interest in and to the Collateral, including the filing of all necessary financing and continuation statements, and to protect the Collateral against the rights, claims or interests of third persons (other than any such rights, claims or interests created by or arising through the Trustee). SECTION 7. Covenants. The Issuer covenants and agrees with the Trustee and the Holders of the Notes that from and after the date of this Escrow Agreement until the earlier of payment in full in cash of the Obligations: (a) that (i) it will not (and will not purport to) sell or otherwise dispose of, or grant any option or warrant with respect to, any of the Collateral or its beneficial interest therein, and (ii) it will not create or permit to exist any Lien or other adverse interest in or with respect to its beneficial interest in any of the Collateral (except for the security interests granted under this Escrow Agreement); and (b) that it will not (i) enter into any agreement or understanding that restricts or inhibits or purports to restrict or inhibit the Trustee's rights or remedies hereunder, including, without limitation, the trustee's right to sell or otherwise dispose of the Collateral or (ii) fail to pay or discharge any tax, assessment or levy of any nature with respect to its beneficial interest in the Collateral not later than five days prior to the date of any proposed sale under any judgment, writ or warrant of attachment with respect to such beneficial interest. SECTION 8. Power of Attorney. In addition to all of the powers granted to the Trustee pursuant to the Indenture, the Issuer hereby appoints and constitutes the Trustee as the Issuer's attorney-in-fact (with full power of substitution) to exercise to the fullest extent permitted by law all of the following powers upon and at any time after the occurrence and during the continuance of an Event of Default: (a) collection of proceeds of any Collateral; (b) conveyance of any item of Collateral to any purchaser thereof; (c) giving of any notices or 8 8 recording of any Liens under Section 6 hereof; and (d) paying or discharging taxes or Liens levied or placed upon the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by the Trustee in its sole reasonable discretion, and such payments made by the Trustee to become part of the Obligations of the Issuer to the Trustee, due and payable immediately upon demand. The Trustee's authority under this Section 8 shall include, without limitation, the authority to endorse and negotiate any checks or instruments representing proceeds of Collateral in the name of the Issuer, execute and give receipt for any certificate of ownership or any document constituting Collateral, transfer title to any item of Collateral, sign the Issuer's name on all financing statements (to the extent permitted by applicable law) or any other documents deemed necessary or appropriate by the Trustee to preserve, protect or perfect the security interest in the Collateral and to file the same, prepare, file and sign the Issuer's name on any notice of Lien, and to take any other actions arising from or incident to the powers granted to the Trustee in this Escrow Agreement. This power of attorney is coupled with an interest and is irrevocable by the Issuer. SECTION 9. No Assumption of Duties; Reasonable Care. The rights and powers granted to the Trustee hereunder are being granted in order to preserve and protect the security interest of the Trustee and the Holders of the Notes in and to the Collateral granted hereby and shall not be interpreted to, and shall not impose any duties on the Trustee in connection therewith other than those expressly provided herein, in the Indenture or imposed under applicable law. Except as provided by applicable law or by the Indenture, the Trustee shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Trustee accords similar property held by the Trustee for similar accounts, it being understood that the Trustee in its capacity as such shall not have any responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities or other matters relative to any Collateral, whether or not the Trustee has or is deemed to have knowledge of such matters, (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral or (c) investing or reinvesting any of the Collateral or any loss on any investment. The Trustee may reasonably rely on the written instructions of the Issuer without any further investigation on its part. Furthermore, the Trustee assumes no responsibility for the validity of the Pledged Securities nor the sufficiency of such Pledged Securities to cover the payment of the Obligations. SECTION 10. Indemnity. The Issuer shall indemnify, hold harmless and defend the Trustee and its directors, officers, agents and employees, from and against any and all claims, actions, obligations, liabilities and expenses, including reasonable defense costs, reasonable investigative fees and costs, and reasonable legal fees and damages arising from the Trustee's performance as Trustee under this Escrow Agreement, except to the extent that such claim, action, obligation, liability or expense is directly attributable to the bad faith, gross negligence or wilful misconduct of such indemnified person. 9 9 SECTION 11. Remedies Upon Event of Default. If any Event of Default under the Indenture or default hereunder (any such Event of Default or default being referred to in this Escrow Agreement as an "Event of Default") shall have occurred and be continuing: (a) The Trustee and the Holders of the Notes shall have, in addition to all other rights given by law or by this Escrow Agreement or the Indenture, all of the rights and remedies with respect to the Collateral of a secured party under the UCC in effect in the State of New York at that time. In addition, with respect to any Collateral that shall then be in or shall thereafter come into the possession or custody of the Trustee, the Trustee may sell or cause the same to be sold at any broker's board or at public or private sale, in one or more sales or lots, at such price or prices as the Trustee may deem best, for cash or on credit or for future delivery, without assumption of any credit risk. The purchaser of any or all Collateral so sold shall thereafter hold the same absolutely, free from any claim, encumbrance or right of any kind whatsoever created by or through the Issuer. Unless any of the Collateral threatens, in the reasonable judgment of the Trustee, to decline speedily in value or is or becomes of a type sold on a recognized market, the Trustee will give the Issuer reasonable notice of the time and place of any public sale thereof, or of the time after which any private sale or other intended disposition is to be made. Any requirements of reasonable notice shall be met if such notice is mailed to the Issuer as provided in Section 14.1 hereof at least ten (10) days before the time of the sale or disposition. The Trustee or any Holder of Notes may, in its own name or in the name of a designee or nominee, buy any of the Collateral at any public sale and, if permitted by applicable law, at any private sale. All expenses (including court costs and reasonable attorneys' fees, expenses and disbursements) of, or incident to, the enforcement of any of the provisions hereof shall be recoverable from the proceeds of the sale or other disposition of the Collateral. (b) The Issuer further agrees to use its reasonable best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Collateral pursuant to this Section 11 valid and binding and in compliance with any and all other applicable requirements of law. The Issuer further agrees that a breach of any of the covenants contained in this Section 11 will cause irreparable injury to the Trustee and the Holders of the Notes, that the Trustee and the Holders of the Notes have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 11 shall be specifically enforceable against the Issuer, and the Issuer hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred. SECTION 12. Expenses. Except as otherwise provided for herein, the Issuer will upon demand pay to the Trustee the amount of any and all reasonable expenses, including, without limitation, the reasonable fees, expenses and disbursements of its counsel, experts and 10 10 agents retained by the Trustee, that the Trustee may incur in connection with (a) the review, negotiation and administration of this Escrow Agreement, (b) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (c) the exercise or enforcement of any of the rights of the Trustee and the Holders of the Notes hereunder or (d) the failure by the Issuer to perform or observe any of the provisions hereof. SECTION 13. Security Interest Absolute. All rights of the Trustee and the Holders of the Notes and security interests hereunder, and all obligations of the Issuer hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of the Indenture or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Indenture; (c) any exchange, surrender, release or non-perfection of any Liens on any other collateral for all or any of the Obligations; or (d) to the extent permitted by applicable law, any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Issuer in respect of the Obligations or of this Escrow Agreement. SECTION 14. Miscellaneous Provisions. Section 14.1. Notices. Any notice or communication given hereunder shall be sufficiently given if in writing and delivered in person or mailed by first class mail, commercial courier service or telecopier communication, addressed as follows: if to the Issuer: Kitty Hawk, Inc. P.O. Box 612787 1515 West 20th Street DFW International Airport, TX 75261 Fax: (972) 456-2303 Attention: Richard R. Wadsworth 11 11 with copy to: Haynes and Boone, LLP 901 Main Street Dallas, TX 75202 Fax: (214) 651-5940 Attention: Janice V. Sharry, Esq. if to the Trustee: Bank One, N.A. 100 E. Broad Street, 8th Floor Columbus, Ohio 43215 Fax: (614) 248-5195 Attention: Corporate Trust Department Section 14.2. No Adverse Interpretation of Other Agreements. This Escrow Agreement may not be used to interpret another pledge, security or debt agreement of the Issuer. No such pledge, security or debt agreement (other than the Indenture) may be used to interpret this Escrow Agreement. Section 14.3. Severability. The provisions of this Escrow Agreement are severable, and if any clause or provision shall be held invalid, illegal or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect in that jurisdiction only such clause or provision, or part thereof, and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision of this Escrow Agreement in any jurisdiction. Section 14.4. Headings. The headings in this Escrow Agreement have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. Section 14.5. Counterpart Originals. This Escrow Agreement may be signed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same agreement. Section 14.6. No Third Party Beneficiaries. Nothing in this Escrow Agreement, express or implied, shall give the Holders of the Notes, any Placement Agent with respect to the Notes or any person, other than the parties hereto and their permitted successors hereunder, any benefit or any legal or equitable right, remedy or claim under this Escrow Agreement. 12 12 Section 14.7. Amendments, Waivers and Consents. Any amendment or waiver of any provision of this Escrow Agreement and any consent to any departure by the Issuer from any provision of this Escrow Agreement shall be effective only if made or duly given in compliance with all of the terms and provisions of the Indenture, and neither the Trustee nor any Holder of Notes shall be deemed, by any act, delay, indulgence, omission or otherwise, to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. Failure of the Trustee or any Holder of Notes to exercise, or delay in exercising, any right, power or privilege hereunder shall not preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Trustee or any Holder of Notes of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy that the Trustee or such Holder of Notes would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. Section 14.8. Entireties; Interpretation of Agreement. The Escrow Agreement and Indenture shall constitute the entire agreement of the parties hereto with respect to the subject matter hereof; provided, that to the extent a term or provision of this Escrow Agreement conflicts with the Indenture, the Indenture shall control with respect to the subject matter of such term or provision. Acceptance of or acquiescence in a course of performance rendered under this Escrow Agreement shall not be relevant to determine the meaning of this Escrow Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. Section 14.9. Continuing Security Interest; Termination. (a) This Escrow Agreement shall create a continuing security interest in and to the Collateral and shall, unless otherwise provided in this Escrow Agreement, remain in full force and effect until the payment in full in cash of the Obligations. This Escrow Agreement shall be binding upon the Issuer, its transferees, successors and assigns, and shall inure, together with the rights and remedies of the Trustee hereunder, to the benefit of the Trustee, the Holders of the Notes and their respective successors, transferees and assigns. (b) This Escrow Agreement (other than Issuer's obligations under Sections 10 and 12) shall terminate upon the earlier of (i) the payment in full in cash of the Obligations, (ii) the release of all funds and provided for herein in accordance with the terms hereof and (iii) on any date on which, as a result of releases provided for in Section 4 hereof, less than $5.0 million is held in the Escrow Account. At such time, the Trustee shall, pursuant to an Issuer Order, reassign and redeliver to the Issuer all of the Collateral hereunder that has not been sold, disposed of, retained or applied by the Trustee in accordance with the terms of this Escrow Agreement and the Indenture and take all actions that are necessary to release the security interest created by this Escrow Agreement in and to the Collateral, including the execution and delivery of all termination statements necessary to terminate any financing or continuation 13 13 statements filed with respect to the Collateral. Such reassignment and redelivery shall be without warranty by or recourse to the Trustee in its capacity as such, except as to the absence of any Liens on the Collateral created by or arising through the Trustee, and shall be at the reasonable expense of the Issuer. Section 14.10. Survival of Representations and Covenants. All representations, warranties and covenants of the Issuer contained herein shall survive the execution and delivery of this Escrow Agreement, and shall terminate only upon the termination of this Escrow Agreement. Section 14.11. Waivers. The Issuer waives presentment and demand for payment of any of the Obligations, protest and notice of dishonor or default with respect to the Obligations, and all other notices to which the Issuer might otherwise be entitled, except as otherwise expressly provided herein or in the Indenture. Section 14.12. Authority of the Trustee. (a) The Trustee shall have and be entitled to exercise all powers hereunder that are specifically granted to the Trustee by the terms hereof and the Indenture, together with such powers as are reasonably incident thereto. The Trustee may perform any of its duties hereunder or in connection with the Collateral referenced herein by or through agents or employees and shall be entitled to retain counsel and to act in reliance upon the advice of counsel concerning all such matters. Except as otherwise expressly provided in this Escrow Agreement or the Indenture, neither the Trustee nor any director, officer, employee, attorney or agent of the Trustee shall be liable to the Issuer for any action taken or omitted to be taken by the Trustee, in its capacity as Trustee, hereunder, except for its own bad faith, gross negligence or willful misconduct, and the Trustee shall not be responsible for the validity, effectiveness or sufficiency hereof or of any document or security furnished pursuant hereto. The Trustee and its directors, officers, employees, attorneys and agents shall be entitled to rely on any communication, instrument or document believed by it or them to be genuine and correct and to have been signed or sent by the proper person or persons. (b) The Issuer acknowledges that the rights and responsibilities of the Trustee under this Escrow Agreement with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Escrow Agreement shall, as between the Trustee and the Holders of the Notes, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and the Issuer, the Trustee shall be conclusively presumed to be acting as agent for the Holders of the Notes with full and valid authority so to act or refrain from acting, and the Issuer shall not be obligated or entitled to make any inquiry respecting such authority. Section 14.13. Rights of Holders of the Notes. No Holder of Notes shall have any independent rights hereunder other than those rights granted to individual Holders of the 14 14 Notes pursuant to the Indenture; provided that nothing in this subsection shall limit any rights granted to the Trustee under the Notes or the Indenture. SECTION 14.14. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; WAIVER OF DAMAGES. (A) THIS ESCROW AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED UNDER THE LAWS OF THE STATE OF NEW YORK, EXCEPT WITH RESPECT TO THE PERFECTION OF THE SECURITY INTEREST CREATED HEREBY WHICH SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS TO THE EXTENT APPLICABLE. NOTWITHSTANDING THE FOREGOING: THE MATTERS IDENTIFIED IN 31 C.F.R. PART 357, 61 FED. REG. 43626 (AUG. 23, 1996) SHALL BE GOVERNED SOLELY BY THE LAWS SPECIFIED THEREIN. (B) THE ISSUER AGREES THAT THE TRUSTEE SHALL, IN ITS CAPACITY AS TRUSTEE OR IN THE NAME AND ON BEHALF OF ANY HOLDER OF NOTES, HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE ISSUER OR THE COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH (AND HAVING PERSONAL OR IN REM JURISDICTION OVER THE ISSUER OR THE COLLATERAL, AS THE CASE MAY BE) TO ENABLE THE TRUSTEE TO REALIZE ON SUCH COLLATERAL, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE TRUSTEE. THE ISSUER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN THE COUNTY OF NEW YORK ONCE THE TRUSTEE HAS COMMENCED A PROCEEDING DESCRIBED IN THIS PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS. (C) THE ISSUER AGREES THAT NEITHER ANY HOLDER OF NOTES NOR (EXCEPT AS OTHERWISE PROVIDED IN THIS ESCROW AGREEMENT OR THE INDENTURE) THE TRUSTEE IN ITS CAPACITY AS TRUSTEE SHALL HAVE ANY LIABILITY TO THE ISSUER (WHETHER ARISING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES SUFFERED BY THE ISSUER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THE TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY THIS ESCROW AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF THE TRUSTEE OR SUCH HOLDERS OF NOTES, AS THE CASE MAY BE, CONSTITUTING BAD FAITH, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. (D) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE ISSUER WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE TRUSTEE OR ANY HOLDER OF NOTES IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO ENFORCE ANY JUDGMENT OR OTHER COURT 15 15 ORDER PERTAINING TO THIS ESCROW AGREEMENT, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER OR PRELIMINARY OR PERMANENT INJUNCTION, THIS ESCROW AGREEMENT. 16 IN WITNESS WHEREOF, the Issuer and the Trustee have each caused this Escrow Agreement to be duly executed and delivered as of the date first above written. Issuer: KITTY HAWK, INC. By: /s/ RICHARD R. WADSWORTH ---------------------------------- Name: Title: Trustee: BANK ONE, N.A., as Trustee By: /s/ JON BEACHAM ---------------------------------- Name: Title: 17 EXHIBIT A BANK ONE, N.A. OFFICER'S CERTIFICATE Pursuant to Section 3(d) of the Escrow and Security Agreement (the "Escrow Agreement") dated as of November 19, 1997 between Kitty Hawk, Inc. (the "Issuer") and Bank One, N.A. as Trustee (the "Trustee") for the holders of the Issuer's 9.95% Senior Secured Notes due 2004, the undersigned officer of the Trustee, on behalf of the Trustee, makes the following certifications to the Issuer. Capitalized terms used and not defined in this Officer's Certificate have the meanings set forth or referred to in the Escrow Agreement. 1. Substantially contemporaneously with the execution and delivery of this Officer's Certificate, the Trustee has established a securities account in the name of "Bank One, N.A., as Trustee for the benefit of the holders of the 9.95% Senior Secured Notes due 2004 of Kitty Hawk, Inc. Escrow Account", Administrative Account No. ___________ with respect to which the Trustee is the entitlement holder and through which the Trustee has acquired a security entitlement to the United States Treasury securities identified in Annex 1 to this Officer's Certificate (the "Pledged Securities") and has made appropriate book entries in its records establishing that the Pledged Securities and the Trustee's securities entitlement thereto have been credited to and are held in the Bank One, N.A. Administrative Account No. __________ entitled "Bank One, N.A., as Trustee for the benefit of the holders of the 9.95% Senior Secured Notes due 2004 of Kitty Hawk, Inc. Escrow Account" (the "Escrow Account"). 2. The Trustee has established and maintained and will maintain the Escrow Account and all securities entitlements and other positions carried in the Escrow Account solely in its capacity as Trustee and has not asserted and will not assert any claim to or interest in the Escrow Account or any such securities entitlements or other positions except in such capacity. 3. The Trustee has acquired its security entitlement to the Pledged Securities for value and without notice to an officer of the Trustee of any adverse claim thereto. Without limiting the generality of the foregoing, the Pledged Securities are not and the Trustee's security entitlement to the Pledged Securities is not, to the Trustee's knowledge, subject to any lien granted by the Trustee in favor of any securities intermediary (including, without limitation, the Federal Reserve Bank of New York) through which the Trustee derives its security entitlement to the Pledged Securities. 4. The Trustee has not caused or permitted the Pledged Securities or its security entitlement thereto to become subject to any Lien created by or arising through the Trustee. 18 2 IN WITNESS WHEREOF, the undersigned officer has executed this Officer's Certificate on behalf of Bank One, N.A. as Trustee this 19th day of November, 1997. Bank One, N.A., as Trustee By: ---------------------------------- Name: Title: - --------------------------- 19 EXHIBIT B Issue Order [Date] Bank One, N.A., as Trustee 100 E. Broad Street, 8th Floor Columbus, Ohio 43215 Attention: Corporate Trust Department Kitty Hawk Escrow Release Dear Sir or Madam: Pursuant to Section 4(a) of the Escrow and Security Agreement between Bank One, N.A. and Kitty Hawk, Inc. dated November 19, 1997 (the "Escrow Agreement") you are hereby directed to release $_____________. You are directed to transfer such funds to the account of ___________ [name of recipient], account number _____________, at __________ [name of financial institution]. You are directed to wire transfer such funds no later than __________ [time] on _________ [date] upon telephone instructions of _____________ [name of releasing individual]. Capitalized terms used herein have the meanings ascribed thereto in the Escrow Agreement. Kitty Hawk, Inc. certifies that such funds will be used to pay the purchase price of or reimburse it for prior payment of the purchase price of one or more of the Optioned Boeing 747s or other Eligible Aircraft. Kitty Hawk, Inc. By: Title: 20 EXHIBIT C Issuer Reconfiguration Order [Date] Bank One, N.A., as Trustee 100 E. Broad Street, 8th Floor Columbus, Ohio 43215 Attention: Corporate Trust Department Kitty Hawk Escrow Release Dear Sir or Madam: Pursuant to Section 4(b) of the Escrow and Security Agreement between Bank One, N.A. and Kitty Hawk, Inc. dated November 19, 1997 (the "Escrow Agreement") you are hereby directed to release $_____________. You are directed to transfer such funds to the account of ___________ [name of recipient], account number _____________, at __________ [name of financial institution]. You are directed to wire transfer such funds no later than __________ [time] on _________ [date] upon telephone instructions of _____________ [name of releasing individual]. Capitalized terms used herein have the meanings ascribed thereto in the Escrow Agreement. Kitty Hawk, Inc. certifies that such funds will be used to pay the price of or reimburse it for prior payment of the price of [a portion of]/[all of] the reconfiguration of one or more Optioned Boeing 747s or other Eligible Aircraft. Kitty Hawk, Inc. By: Title: 21 EXHIBIT D Other Release Order [Date] Bank One, N.A., as Trustee 100 E. Broad Street, 8th Floor Columbus, Ohio 43215 Attention: Corporate Trust Department Kitty Hawk Escrow Release Dear Sir or Madam: Pursuant to Section 4(c) of the Escrow and Security Agreement between Bank One, N.A. and Kitty Hawk, Inc. dated November 19, 1997 (the "Escrow Agreement") you are hereby directed to release $_____________. You are directed to transfer such funds to the account of ___________ [name of recipient], account number _____________, at __________ [name of financial institution]. You are directed to wire transfer such funds no later than __________ [time] on _________ [date] upon telephone instructions of _____________ [name of releasing individual]. Capitalized terms used herein have the meanings ascribed thereto in the Escrow Agreement. Kitty Hawk, Inc. certifies that it is entitled to such funds as a result of a payment by it of a payment for which the Collateral is security from Issuer Funds. Kitty Hawk, Inc. By: Title: 22 Schedule I $42 million U.S. Treasury Bill maturing January 8, 1998 $14 million U.S. Treasury Bill maturing May 14, 1998 EX-21.1 14 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 SUBSIDIARIES OF REGISTRANT Aircraft Leasing, Inc., a Texas corporation American International Airways, Inc., a Michigan corporation American International Travel, Inc., a Michigan corporation Flight One Logistics, Inc., a Michigan corporation Kalitta Flying Service, Inc., a Michigan corporation Kitty Hawk Aircargo, Inc., a Texas corporation Kitty Hawk Charters, Inc., a Texas corporation O.K. Turbines, Inc., a Michigan corporation EX-23.1 15 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-4 No. 333-43645) and related Prospectus of Kitty Hawk, Inc. for the registration of $340,000,000 of its 9.95% Senior Secured Notes due 2004. We also consent to the incorporation by reference therein of our report dated October 31, 1996, with respect to the consolidated financial statements of Kitty Hawk, Inc. included in its Annual Report (Form 10-K) for the year ended August 31, 1996, and our report dated February 7, 1997, with respect to the consolidated financial statements of Kitty Hawk, Inc. included in its Transition Report (Form 10-K) and its Transition Report, as amended (Form 10-K/A) for the four months ended December 31, 1996, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Dallas, Texas January 30, 1998 EX-23.2 16 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of American International Airways, Inc. and Related Companies Ypsilanti, Michigan We consent to the use in this Amendment No. 1 to Registration Statement No. 333-43645 of Kitty Hawk, Inc. on Form S-4 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, our report dated October 16, 1997 relating to the financial statement schedule of the Companies appearing elsewhere in this Registration Statement and to our report relating to the statements of certain assets sold of AIA dated September 29, 1997 appearing in Amendment No. 1 to Form 8K of Kitty Hawk, Inc. dated November 6, 1997 incorporated herein by reference. We also consent to the reference to us under the heading "Experts" in such Prospectus. Ann Arbor, Michigan February 3, 1998 EX-25.1 17 FORM T-1 STATEMENT OF ELIGIBILITY OF TRUSTEE 1 EXHIBIT 25.1 Registration No. 33-60067 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE BANK ONE, N.A. F/K/A BANK ONE, COLUMBUS, N.A. Not Applicable 31-4148768 (State of Incorporation (I.R.S. Employer if not a national bank) Identification No.) 100 East Broad Street, Columbus, Ohio 43271-0181 (Address of trustee's principal executive offices) (Zip Code) Jon Beacham c/o Bank One Trust Company, NA 100 East Broad Street Columbus, Ohio 43271-0181 (614) 248-6229 (Name, address and telephone number of agent for service) KITTY HAWK, INC. (Exact name of obligor as specified in its charter) Delaware 75-2564006 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1515 West 20th Street 75261 Dallas/Fort Worth International Airport, Texas (Zip Code) (Address of principal executive office) 9.95% SENIOR SECURED NOTES DUE 2004 (Title of the Indenture securities) 2 GENERAL 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Comptroller of the Currency, Washington, D.C. Federal Reserve Bank of Cleveland, Cleveland, Ohio Federal Deposit Insurance Corporation, Washington, D.C. The Board of Governors of the Federal Reserve System, Washington, D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee. 16. LIST OF EXHIBITS LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY AND QUALIFICATION. (EXHIBITS IDENTIFIED IN PARENTHESES, ON FILE WITH THE COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS EXHIBITS HERETO.) Exhibit 1 - A copy of the Articles of Association of the trustee as now in effect. Exhibit 2 - A copy of the Certificate of Authority of the trustee to commence business, see Exhibit 2 to Form T-1, filed in connection with Form S-3 relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003, Securities and Exchange Commission File No. 33-50709. Exhibit 3 - A copy of the Authorization of the trustee to exercise corporate trust powers, see Exhibit 3 to Form T-1, filed in connection with Form S-3 relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003, Securities and Exchange Commission File No. 33-50709. Exhibit 4 - A copy of the Bylaws of the trustee as now in effect. 3 Exhibit 5 - Not applicable. Exhibit 6 - The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended. Exhibit 7 - Report of Condition of the trustee as of the close of business on June 30, 1997, published pursuant to the requirements of the Comptroller of the Company, see Exhibit 7 to Form T-1, filed in connection with Form S-4 relating to National Energy Group, Inc.10 3/4% Senior Notes due 2006, Securities and Exchange Commission File No. 333-38075. Exhibit 8 - Not applicable. Exhibit 9 - Not applicable. Items 3 through 15 are not answered pursuant to General Instruction B which requires responses to Item 1, 2 and 16 only, if the obligor is not in default. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, Bank One, NA, a national banking association organized under the National Banking Act, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in Columbus, Ohio, on January 12, 1998. Bank One, NA By: /s/ Jon Beacham ---------------------------- Jon Beacham Authorized Signer 4 Exhibit 1 BANK ONE, COLUMBUS, NATIONAL ASSOCIATION ARTICLES OF ASSOCIATION For the purpose of organizing an association to carry on the business of banking under the laws of the United States, the following Articles of Association are entered into: FIRST. The title of this Association shall be BANK ONE, COLUMBUS, NATIONAL ASSOCIATION. SECOND. The main office of the Association shall be in Columbus, County of Franklin, State of Ohio. The general business of the Association shall be conducted at its main office and its branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five Directors, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time-to-time by resolution of the shareholders at any annual or special meeting thereof, provided, however, that the Board of Directors, by resolution of a majority thereof, shall be authorized to increase the number of its members by not more than two between regular meetings of the shareholders. Each Director, during the full term of his directorship, shall own, as qualifying shares, the minimum number of shares of either this Association or of its parent bank holding company in accordance with the provisions of applicable law. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. -4- 5 FOURTH. The annual meeting of the shareholders for the election of Directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office of this Association or such other place as the Board of Directors may designate, on the day of each year specified therefor in the By-Laws, but if no election is held on that day, it may be held on any subsequent business day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the Board of Directors. FIFTH. The authorized amount of capital stock of this Association shall be 2,073,750 shares of common stock of the par value of Ten Dollars ($10) each; but said capital stock may be increased or decreased from time-to-time, in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the Association shall have the preemptive or preferential right of subscription to any share of any class of stock of this Association, whether now or hereafter authorized or to any obligations convertible into stock of this Association, issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, may from time-to-time determine and at such price as the Board of Directors may from time-to-time fix. This Association, at any time and from time-to-time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. SIXTH. The Board of Directors shall appoint one of its members President of the Association, who shall be Chairman of the Board, unless the Board appoints another director to be the Chairman. The Board of Directors shall have the power to appoint one or more Vice Presidents and to appoint a Secretary and such other officers and employees as may be required to transact the business of this Association. -5- 6 The Board of Directors shall have the power to define the duties of the officers and employees of this Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of this Association shall be made; to manage and administer the business and affairs of this Association; to make all By-Laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office to any other place within the limits of the City of Columbus, Ohio, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency; and shall have the power to establish or change the location of any branch or branches of this Association to any other location, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The Board of Directors of this Association, or any three or more shareholders owning, in the aggregate, not less than 10 percent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. -6- 7 TENTH. Every person who is or was a Director, officer or employee of the Association or of any other corporation which he served as a Director, officer or employee at the request of the Association as part of his regularly assigned duties may be indemnified by the Association in accordance with the provisions of this paragraph against all liability (including, without limitation, judgments, fines, penalties and settlements) and all reasonable expenses (including, without limitation, attorneys' fees and investigative expenses) that may be incurred or paid by him in connection with any claim, action, suit or proceeding, whether civil, criminal or administrative (all referred to hereafter in this paragraphs as "Claims") or in connection with any appeal relating thereto in which he may become involved as a party or otherwise or with which he may be threatened by reason of his being or having been a Director, officer or employee of the Association or such other corporation, or by reason of any action taken or omitted by him in his capacity as such Director, officer or employee, whether or not he continues to be such at the time such liability or expenses are incurred, provided that nothing contained in this paragraph shall be construed to permit indemnification of any such person who is adjudged guilty of, or liable for, willful misconduct, gross neglect of duty or criminal acts, unless, at the time such indemnification is sought, such indemnification in such instance is permissible under applicable law and regulations, including published rulings of the Comptroller of the Currency or other appropriate supervisory or regulatory authority, and provided further that there shall be no indemnification of directors, officers, or employees against expenses, penalties, or other payments incurred in an administrative proceeding or action instituted by an appropriate regulatory agency which proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to the Association. Every person who may be indemnified under the provisions of this paragraph and who has been wholly successful on the merits with respect to any Claim shall be entitled to indemnification as of right. Except as provided in the preceding sentence, any indemnification under this paragraph shall be at the sole discretion of the Board of Directors and shall be made only if the Board of Directors or the Executive Committee acting by a quorum consisting of -7- 8 Directors who are not parties to such Claim shall find or if independent legal counsel (who may be the regular counsel of the Association) selected by the Board of Directors or Executive Committee whether or not a disinterested quorum exists shall render their opinion that in view of all of the circumstances then surrounding the Claim, such indemnification is equitable and in the best interests of the Association. Among the circumstances to be taken into consideration in arriving at such a finding or opinion is the existence or non-existence of a contract of insurance or indemnity under which the Association would be wholly or partially reimbursed for such indemnification, but the existence or non-existence of such insurance is not the sole circumstance to be considered nor shall it be wholly determinative of whether such indemnification shall be made. In addition to such finding or opinion, no indemnification under this paragraph shall be made unless the Board of Directors or the Executive Committee acting by a quorum consisting of Directors who are not parties to such Claim shall find or if independent legal counsel (who may be the regular counsel of the Association) selected by the Board of Directors or Executive Committee whether or not a disinterested quorum exists shall render their opinion that the Director, officer or employee acted in good faith in what he reasonably believed to be the best interests of the Association or such other corporation and further in the case of any criminal action or proceeding, that the Director, officer or employee reasonably believed his conduct to be lawful. Determination of any Claim by judgment adverse to a Director, officer or employee by settlement with or without Court approval or conviction upon a plea of guilty or of nolocontendere or its equivalent shall not create a presumption that a Director, officer or employee failed to meet the standards of conduct set forth in this paragraph. Expenses incurred with respect to any Claim may be advanced by the Association prior to the final disposition thereof upon receipt of an undertaking satisfactory to the Association by or on behalf of the recipient to repay such amount unless it is ultimately determined that he is entitled to indemnification under this paragraph. The rights of indemnification provided in this paragraph shall be in addition to any rights to which any Director, officer or employee may otherwise be entitled by contract or as a matter of law. -8- 9 Every person who shall act as a Director, officer or employee of this Association shall be conclusively presumed to be doing so in reliance upon the right of indemnification provided for in this paragraph. ELEVENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. -9- 10 Exhibit 4 BY-LAWS OF BANK ONE, COLUMBUS, NATIONAL ASSOCIATION ARTICLE I MEETING OF SHAREHOLDERS SECTION 1.01. ANNUAL MEETING. The regular annual meeting of the Shareholders of the Bank for the election of Directors and for the transaction of such business as may properly come before the meeting shall be held at its main banking house, or other convenient place duly authorized by the Board of Directors, on the third Monday of January of each year, or on the next succeeding banking day, if the day fixed falls on a legal holiday. If from any cause, an election of directors is not made on the day fixed for the regular meeting of shareholders or, in the event of a legal holiday, on the next succeeding banking day, the Board of Directors shall order the election to be held on some subsequent day, as soon thereafter as practicable, according to the provisions of law; and notice thereof shall be given in the manner herein provided for the annual meeting. Notice of such annual meeting shall be given by or under the direction of the Secretary or such other officer as may be designated by the Chief Executive Officer by first-class mail, postage prepaid, to all shareholders of record of the Bank at their respective addresses as shown upon the books of the Bank mailed not less than ten days prior to the date fixed for such meeting. SECTION 1.02. SPECIAL MEETINGS. A special meeting of the shareholders of this Bank may be called at any time by the Board of Directors or by any three or more shareholders owning, in the aggregate, not less than ten percent of the stock of this Bank. The notice of any special meeting of the shareholders called by the Board of Directors, stating the time, place and purpose of the meeting, shall be given by or under the direction of the Secretary, or such other officer as is designated by the Chief Executive Officer, by first-class mail, postage prepaid, to all shareholders of -10- 11 record of the Bank at their respective addresses as shown upon the books of the Bank, mailed not less than ten days prior to the date fixed for such meeting. Any special meeting of shareholders shall be conducted and its proceedings recorded in the manner prescribed in these By-Laws for annual meetings of shareholders. SECTION 1.03. SECRETARY OF SHAREHOLDERS' MEETING. The Board of Directors may designate a person to be the Secretary of the meetings of shareholders. In the absence of a presiding officer, as designated in these By-Laws, the Board of Directors may designate a person to act as the presiding officer. In the event the Board of Directors fails to designate a person to preside at a meeting of shareholders and a Secretary of such meeting, the shareholders present or represented shall elect a person to preside and a person to serve as Secretary of the meeting. The Secretary of the meetings of shareholders shall cause the returns made by the judges and election and other proceedings to be recorded in the minute book of the Bank. The presiding officer shall notify the directors-elect of their election and to meet forthwith for the organization of the new board. The minutes of the meeting shall be signed by the presiding officer and the Secretary designated for the meeting. SECTION 1.04. JUDGES OF ELECTION. The Board of Directors may appoint as many as three shareholders to be judges of the election, who shall hold and conduct the same, and who shall, after the election has been held, notify, in writing over their signatures, the secretary of the shareholders' meeting of the result thereof and the names of the Directors elected; provided, however, that upon failure for any reason of any judge or judges of election, so appointed by the directors, to serve, the presiding officer of the meeting shall appoint other shareholders or their proxies to fill the vacancies. The judges of election at the request of the chairman of the -11- 12 meeting, shall act as tellers of any other vote by ballot taken at such meeting, and shall notify, in writing over their signatures, the secretary of the Board of Directors of the result thereof. SECTION 1.05. PROXIES. In all elections of Directors, each shareholder of record, who is qualified to vote under the provisions of Federal Law, shall have the right to vote the number of shares of record in his name for as many persons as there are Directors to be elected, or to cumulate such shares as provided by Federal Law. In deciding all other questions at meetings of shareholders, each shareholder shall be entitled to one vote on each share of stock of record in his name. Shareholders may vote by proxy duly authorized in writing. All proxies used at the annual meeting shall be secured for that meeting only, or any adjournment thereof, and shall be dated, and if not dated by the shareholder, shall be dated as of the date of receipt thereof. No officer or employee of this Bank may act as proxy. SECTION 1.06. QUORUM. Holders of record of a majority of the shares of the capital stock of the Bank, eligible to be voted, present either in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders, but shareholders present at any meeting and constituting less than a quorum may, without further notice, adjourn the meeting from time to time until a quorum is obtained. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. -12- 13 ARTICLE II DIRECTORS SECTION 2.01. MANAGEMENT OF THE BANK. The business of the Bank shall be managed by the Board of Directors. Each director of the Bank shall be the beneficial owner of a substantial number of shares of BANC ONE CORPORATION and shall be employed either in the position of Chief Executive Officer or active leadership within his or her business, professional or community interest which shall be located within the geographic area in which the Bank operates, or as an executive officer of the Bank. A director shall not be eligible for nomination and re-election as a director of the Bank if such person's executive or leadership position within his or her business, professional or community interests which qualifies such person as a director of Bank terminates. The age of 70 is the mandatory retirement age as a director of the Bank. When a person's eligibility as director of the Bank terminates, whether because of change in share ownership, position, residency or age, within 30 days after such termination, such person shall submit his resignation as a director to be effective at the pleasure of the Board provided, however, that in no event shall such person be nominated or elected as a director. Provided, however, following a person's retirement or resignation as a director because of the age limitations herein set forth with respect to election or re-election as a director, such person may, in special or unusual circumstances, and at the discretion of the Board, be elected by the directors as a Director Emeritus of the Bank for a limited period of time. A Director Emeritus shall have the right to participate in board meetings but shall be without the power to vote and shall be subject to re-election by the Board at its organizational meeting following the Bank's annual meeting of shareholders. SECTION 2.02. QUALIFICATIONS. Each director shall have the qualification prescribed by law. No person elected a director may exercise any of the powers of his office until he has taken the oath of such office. -13- 14 SECTION 2.03. TERM OF OFFICE/VACANCIES. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to his prior death, resignation, or removal from office. Whenever any vacancy shall occur among the directors, the remaining directors shall constitute the directors of the Bank until such vacancy is filled by the remaining directors, and any director so appointed shall hold office for the unexpired term of his or her successor. Notwithstanding the foregoing, each director shall hold office and serve at the pleasure of the Board. SECTION 2.04. ORGANIZATION MEETING. The directors elected by the share- holders shall meet for organization of the new board at the time fixed by the presiding officer of the annual meeting. If at the time fixed for such meeting there is no quorum present, the Directors in attendance may adjourn from time to time until a quorum is obtained. A majority of the number of Directors elected by the shareholders shall constitute a quorum for the transaction of business. SECTION 2.05. REGULAR MEETINGS. The regular meetings of the Board of Directors shall be held on the third Monday of each calendar month excluding March and July, which meeting will be held at 4:00 p.m. When any regular meeting of the Board falls on a holiday, the meeting shall be held on such other day as the Board may previously designate or should the Board fail to so designate, on such day as the Chairman of the Board of President may fix. Whenever a quorum is not present, the directors in attendance shall adjourn the meeting to a time not later than the date fixed by the Bylaws for the next succeeding regular meeting of the Board. SECTION 2.06. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held at the call of the Chairman of the Board or President, or at the request of two or more Directors. Any special meeting may be held at such place in Franklin County, Ohio, and at such time as may be fixed in the call. Written or oral notice shall be given to each Director not later than the day next preceding the day on which special meeting is to be held, which notice may be waived in writing. -14- 15 The presence of a Director at any meeting of the Board shall be deemed a waiver of notice thereof by him. Whenever a quorum is not present the Directors in attendance shall adjourn the special meeting from day to day until a quorum is obtained. SECTION 2.07. QUORUM. A majority of the Directors shall constitute a quorum at any meeting, except when otherwise provided by law; but a lesser number may adjourn any meeting, from time-to-time, and the meeting may be held, as adjourned, without further notice. When, however, less than a quorum as herein defined, but at least one-third and not less than two of the authorized number of Directors are present at a meeting of the Directors, business of the Bank may be transacted and matters before the Board approved or disapproved by the unanimous vote of the Directors present. SECTION 2.08. COMPENSATION. Each member of the Board of Directors shall receive such fees for, and transportation expenses incident to, attendance at Board and Board Committee Meetings and such fees for service as a Director irrespective of meeting attendance as from time to time are fixed by resolution of the Board; provided, however, that payment hereunder shall not be made to a Director for meetings attended and/or Board service which are not for the Bank's sole benefit and which are concurrent and duplicative with meetings attended or board service for an affiliate of the Bank for which the Director receives payment; and provided further, that payment hereunder shall not be made in the case of any Director in the regular employment of the Bank or of one of its affiliates. SECTION 2.09. EXECUTIVE COMMITTEE. There shall be a standing committee of the Board of Directors known as the Executive Committee which shall possess and exercise, when the Board is not in session, all powers of the Board that may lawfully be delegated. The Executive Committee shall also exercise the powers of the Board of Directors in accordance with the Provisions of the "Employees Retirement Plan" and the "Agreement and Declaration of Trust" as the same now -15- 16 exist or may be amended hereafter. The Executive Committee shall consist of not fewer than four board members, including the Chairman of the Board and President of the Bank, one of whom, as hereinafter required by these By-laws, shall be the Chief Executive Officer. The other members of the Committee shall be appointed by the Chairman of the Board or by the President, with the approval of the Board and shall continue as members of the Executive Committee until their successors are appointed, provided, however, that any member of the Executive Committee may be removed by the Board upon a majority vote thereof at any regular or special meeting of the Board. The Chairman or President shall fill any vacancy in the Committee by the appointment of another Director, subject to the approval of the Board of Directors. The regular meetings of the Executive Committee shall be held on a regular basis as scheduled by the Board of Directors. Special meetings of the Executive Committee shall be held at the call of the Chairman or President or any two members thereof at such time or times as may be designated. In the event of the absence of any member or members of the Committee, the presiding member may appoint a member or members of the Board to fill the place or places of such absent member or members to serve during such absence. Not fewer than three members of the Committee must be present at any meeting of the Executive Committee to constitute a quorum, provided, however that with regard to any matters on which the Executive Committee shall vote, a majority of the Committee members present at the meeting at which a vote is to be taken shall not be officers of the Bank and, provided further, that if, at any meeting at which the Chairman of the Board and President are both present, Committee members who are not officers are not in the majority, then the Chairman of the Board or President, which ever of such officers is not also the Chief Executive Officer, shall not be eligible to vote at such meeting and shall not be recognized for purposes of determining if a quorum is present at such meeting. When neither the Chairman of the Board nor President are present, the Committee shall appoint a presiding officer. The Executive Committee shall keep a record of its proceedings and report its proceedings and the action taken by it to the Board of Directors. -16- 17 SECTION 2.10 COMMUNITY REINVESTMENT ACT AND COMPLIANCE POLICY COMMITTEE. There shall be a standing committee of the Board of Directors known as the Community Reinvestment Act and Compliance Policy Committee the duties of which shall be, at least once in each calendar year, to review, develop and recommend policies and programs related to the Bank's Community Reinvestment Act Compliance and regulatory compliance with all existing statutes, rules and regulations affecting the Bank under state and federal law. Such Committee shall provide and promptly make a full report of such review of current Bank policies with regard to Community Reinvestment Act and regulatory compliance in writing to the Board, with recommendations, if any, which may be necessary to correct any unsatisfactory conditions. Such Committee may, in its discretion, in fulfilling its duties, utilize the Community Reinvestment Act officers of the Bank, Banc One Ohio Corporation and Banc One Corporation and may engage outside Community Reinvestment Act experts, as approved by the Board, to review, develop and recommend policies and programs as herein required. The Community Reinvestment Act and regulatory compliance policies and procedures established and the recommendations made shall be consistent with, and shall supplement, the Community Reinvestment Act and regulatory compliance programs, policies and procedures of Banc One Corporation and Banc One Ohio Corporation. The Community Reinvestment Act and Compliance Policy Committee shall consist of not fewer than four board members, one of whom shall be the Chief Executive Officer and a majority of whom are not officers of the Bank. Not fewer than three members of the Committee, a majority of whom are not officers of the Bank, must be present to constitute a quorum. The Chairman of the Board or President of the Bank, whichever is not the Chief Executive Officer, shall be an ex officio member of the Community Reinvestment Act and Compliance Policy Committee. The Community Reinvestment Act and Compliance Policy Committee, whose chairman shall be appointed by the Board, shall keep a record of its proceedings and report its proceedings and the action taken by it to the Board of Directors. -17- 18 SECTION 2.11. TRUST COMMITTEES. There shall be two standing Committees known as the Trust Management Committee and the Trust Examination Committee appointed as hereinafter provided. SECTION 2.12. OTHER COMMITTEES. The Board of Directors may appoint such special committees from time to time as are in its judgment necessary in the interest of the Bank. -18- 19 ARTICLE III OFFICERS, MANAGEMENT STAFF AND EMPLOYEES SECTION 3.01. OFFICERS AND MANAGEMENT STAFF. (a) The officers of the Bank shall include a President, Secretary and Security Officer and may include a Chairman of the Board, one or more Vice Chairmen, one or more Vice Presidents (which may include one or more Executive Vice Presidents and/or Senior Vice Presidents) and one or more Assistant Secretaries, all of whom shall be elected by the Board. All other officers may be elected by the Board or appointed in writing by the Chief Executive Officer. The salaries of all officers elected by the Board shall be fixed by the Board. The Board from time-to-time shall designate the President or Chairman of the Board to serve as the Bank's Chief Executive Officer. (b) The Chairman of the Board, if any, and the President shall be elected by the Board from their own number. The President and Chairman of the Board shall be re-elected by the Board annually at the organizational meeting of the Board of Directors following the Annual Meeting of Shareholders. Such officers as the Board shall elect from their own number shall hold office from the date of their election as officers until the organization meeting of the Board of Directors following the next Annual Meeting of Shareholders, provided, however, that such officers may be relieved of their duties at any time by action of the Board in which event all the powers incident to their office shall immediately terminate. (c) Except as provided in the case of the elected officers who are members of the Board, all officers, whether elected or appointed, shall hold office at the pleasure of the Board. Except as otherwise limited by law or these By-laws, the Board assigns to Chief Executive Officer and/or his -19- 20 designees the authority to appoint and dismiss any elected or appointed officer or other member of the Bank's management staff and other employees of the Bank, as the person in charge of and responsible for any branch office, department, section, operation, function, assignment or duty in the Bank. (d) The management staff of the Bank shall include officers elected by the Board, officers appointed by the Chief Executive Officer, and such other persons in the employment of the Bank who, pursuant to written appointment and authorization by a duly authorized officer of the Bank, perform management functions and have management responsibilities. Any two or more offices may be held by the same person except that no person shall hold the office of Chairman of the Board and/or President and at the same time also hold the office of Secretary. (e) The Chief Executive Officer of the Bank and any other officer of the Bank, to the extent that such officer is authorized in writing by the Chief Executive Officer, may appoint persons other than officers who are in the employment of the Bank to serve in management positions and in connection therewith, the appointing officer may assign such title, salary, responsibilities and functions as are deemed appropriate by him, provided, however, that nothing contained herein shall be construed as placing any limitation on the authority of the Chief Executive Officer as provided in this and other sections of these By-Laws. SECTION 3.02. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Bank shall have general and active management of the business of the Bank and shall see that all orders and resolutions of the Board of Directors are carried into effect. Except as otherwise prescribed or limited by these By-Laws, the Chief Executive Officer shall have full right, authority and power to control all personnel, including elected and appointed officers, of the Bank, to employ or direct the -20- 21 employment of such personnel and officers as he may deem necessary, including the fixing of salaries and the dismissal of them at pleasure, and to define and prescribe the duties and responsibility of all Officers of the Bank, subject to such further limitations and directions as he may from time-to-time deem proper. The Chief Executive Officer shall perform all duties incident to his office and such other and further duties, as may, from time-to-time, be required of him by the Board of Directors or the shareholders. The specification of authority in these By-Laws wherever and to whomever granted shall not be construed to limit in any manner the general powers of delegation granted to the Chief Executive Officer in conducting the business of the Bank. The Chief Executive Officer or, in his absence, the Chairman of the Board or President of the Bank, as designated by the Chief Executive Officer, shall preside at all meetings of shareholders and meetings of the Board. In the absence of the Chief Executive Officer, such officer as is designated by the Chief Executive Officer shall be vested with all the powers and perform all the duties of the Chief Executive Officer as defined by these By-Laws. When designating an officer to serve in his absence, the Chief Executive Officer shall select an officer who is a member of the Board of Directors whenever such officer is available. SECTION 3.03. POWERS OF OFFICERS AND MANAGEMENT STAFF. The Chief Executive Officer, the Chairman of the Board, the President, and those officers so designated and authorized by the Chief Executive Officer are authorized for an on behalf of the Bank, and to the extent permitted by law, to make loans and discounts; to purchase or acquire drafts, notes, stock, bonds, and other securities for investment of funds held by the Bank; to execute and purchase acceptances; to appoint, empower and direct all necessary agents and attorneys; to sign and give any notice required to be given; to demand payment and/or to declare due for any default any debt or obligation due or payable to the Bank upon demand or authorized to be declared due; to foreclose any mortgages, to exercise any option, privilege or election to forfeit, terminate, extend or renew any lease; to authorize and direct any proceedings for the collection of any money or for the enforcement -21- 22 of any right or obligation; to adjust, settle and compromise all claims of every kind and description in favor of or against the Bank, and to give receipts, releases and discharges therefor; to borrow money and in connection therewith to make, execute and deliver notes, bonds or other evidences of indebtedness; to pledge or hypothecate any securities or any stocks, bonds, notes or any property real or personal held or owned by the Bank, or to rediscount any notes or other obligations held or owned by the Bank, to employ or direct the employment of all personnel, including elected and appointed officers, and the dismissal of them at pleasure, and in furtherance of and in addition to the powers hereinabove set forth to do all such acts and to take all such proceedings as in his judgment are necessary and incidental to the operation of the Bank. Other persons in the employment of the Bank, including but not limited to officers and other members of the management staff, may be authorized by the Chief Executive Officer, or by an officer so designated and authorized by the chief Executive Officer, to perform the powers set forth above, subject, however, to such limitations and conditions as are set forth in the authorization given to such persons. SECTION 3.04. SECRETARY. The Secretary or such other officers as may be designated by the Chief Executive Officer shall have supervision and control of the records of the Bank and, subject to the direction of the Chief Executive Officer, shall undertake other duties and functions usually performed by a corporate secretary. Other officers may be designated by the Chief Executive Officer or the Board of Directors as Assistant Secretary to perform the duties of the Secretary. SECTION 3.05. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman of the Board, President, any officer being a member of the Bank's management staff who is also a person in charge of and responsible for any department within the Bank and any other officer to the extent such officer is so designated and authorized by the Chief Executive Officer, the Chairman of the Board, the President, or any other officer who is a member of the Bank's management staff who is in charge of and responsible for any department within -22- 23 the Bank, are hereby authorized on behalf of the Bank to sell, assign, lease, mortgage, transfer, deliver and convey any real or personal property now or hereafter owned by or standing in the name of the Bank or its nominee, or held by this Bank as collateral security, and to execute and deliver such deeds, contracts, leases, assignments, bills of sale, transfers or other papers or documents as may be appropriate in the circumstances; to execute any loan agreement, security agreement, commitment letters and financing statements and other documents on behalf of the Bank as a lender; to execute purchase orders, documents and agreements entered into by the Bank in the ordinary course of business, relating to purchase, sale, exchange or lease of services, tangible personal property, materials and equipment for the use of the Bank; to execute powers of attorney to perform specific or general functions in the name of or on behalf of the Bank; to execute promissory notes or other instruments evidencing debt of the Bank; to execute instruments pledging or releasing securities for public funds, documents submitting public fund bids on behalf of the Bank and public fund contracts; to purchase and acquire any real or personal property including loan portfolios and to execute and deliver such agreements, contracts or other papers or documents as may be appropriate in the circumstances; to execute any indemnity and fidelity bonds, proxies or other papers or documents of like or different character necessary, desirable or incidental to the conduct of its banking business; to execute and deliver settlement agreements or other papers or documents as may be appropriate in connection with a dismissal authorized by Section 3.01(c) of these By-laws; to execute agreements, instruments, documents, contracts or other papers of like or difference character necessary, desirable or incidental to the conduct of its banking business; and to execute and deliver partial releases from and discharges or assignments of mortgages, financing statements and assignments or surrender of insurance policies, now or hereafter held by this Bank. The Chief Executive Officer, Chairman of the Board, President, any officer being a member of the Bank's management staff who is also a person in charge of and responsible for any department within the Bank, and any other officer of the Bank so designated and authorized by the Chief Executive Officer, Chairman of the -23- 24 Board, President or any officer who is a member of the Bank's management staff who is in charge of and responsible for any department within the Bank are authorized for and on behalf of the Bank to sign and issue checks, drafts, and certificates of deposit; to sign and endorse bills of exchange, to sign and countersign foreign and domestic letters of credit, to receive and receipt for payments of principal, interest, dividends, rents, fees and payments of every kind and description paid to the Bank, to sign receipts for property acquired by or entrusted to the Bank, to guarantee the genuineness of signatures on assignments of stocks, bonds or other securities, to sign certifications of checks, to endorse and deliver checks, drafts, warrants, bills, notes, certificates of deposit and acceptances in all business transactions of the Bank. Other persons in the employment of the Bank and of its subsidiaries, including but not limited to officers and other members of the management staff, may be authorized by the Chief Executive Officer, Chairman of the Board, President or by an officer so designated by the Chief Executive Officer, Chairman of the Board, or President to perform the acts and to execute the documents set forth above, subject, however, to such limitations and conditions as are contained in the authorization given to such person. SECTION 3.06. PERFORMANCE BOND. All officers and employees of the Bank shall be bonded for the honest and faithful performance of their duties for such amount as may be prescribed by the Board of Directors. -24- 25 ARTICLE IV TRUST DEPARTMENT SECTION 4.01. TRUST DEPARTMENT. Pursuant to the fiduciary powers granted to this Bank under the provisions of Federal Law and Regulations of the Comptroller of the Currency, there shall be maintained a separate Trust Department of the Bank, which shall be operated in the manner specified herein. SECTION 4.02. TRUST MANAGEMENT COMMITTEE. There shall be a standing Committee known as the Trust Management Committee, consisting of at least five members, a majority of whom shall not be officers of the Bank. The Committee shall consist of the Chairman of the Board who shall be Chairman of the Com- mittee, the President, and at least three other Directors appointed by the Board of Directors and who shall continue as members of the Committee until their successors are appointed. Any vacancy in the Trust Management Committee may be filled by the Board at any regular or special meeting. In the event of the absence of any member or members, such Committee may, in its discretion, appoint members of the Board to fill the place of such absent members to serve during such absence. Three members of the Committee shall constitute a quorum. Any member of the Committee may be removed by the Board by a majority vote at any regular or special meeting of the Board. The Committee shall meet at such times as it may determine or at the call of the Chairman, or President or any two members thereof. The Trust Management Committee, under the general direction of the Board of Directors, shall supervise the policy of the Trust Department which shall be formulated and executed in accordance with Law, Regulations of the Comptroller of the Currency, and sound fiduciary principles. -25- 26 SECTION 4.03. TRUST EXAMINATION COMMITTEE. There shall be a standing Commit- tee known as the Trust Examination Committee, consisting of three directors appointed by the Board of Directors and who shall continue as members of the committee until their successors are appointed. Such members shall not be active officers of the Bank. Two members of the Committee shall constitute a quorum. Any member of the Committee may be removed by the Board by a majority vote at any regular or special meeting of the Board. The Committee shall meet at such times as it may determine or at the call of two members thereof. This Committee shall, at least once during each calendar year and within fifteen months of the last such audit, or at such other time(s) as may be required by Regulations of the Comptroller of the Currency, make suitable audits of the Trust Department or cause suitable audits to be made by auditors responsible only to the Board of Directors, and at such time shall ascertain whether the Department has been administered in accordance with Law, Regula- tions of the Comptroller of the Currency and sound fiduciary principles. The Committee shall promptly make a full report of such audits in writing to the Board of Directors of the Bank, together with a recommendation as to what action, if any, may be necessary to correct any unsatisfactory condition. A report of the audits together with the action taken thereon shall be noted in the Minutes of the Board of Directors and such report shall be a part of the records of this Bank. SECTION 4.04. MANAGEMENT. The Trust Department shall be under the management and supervision of an officer of the Bank or of the trust affiliate of the Bank designated by and subject to the advice and direction of the Chief Executive Officer. Such officer having supervisory responsibility over the Trust Department shall do or cause to be done all things necessary or proper in carrying on the business of the Trust Department in accordance with provi- sions of law and applicable regulations. -26- 27 SECTION 4.05. HOLDING OF PROPERTY. Property held by the Trust Department may be carried in the name of the Bank in its fiduciary capacity, in the name of Bank, or in the name of a nominee or nominees. SECTION 4.06. TRUST INVESTMENTS. Funds held by the Bank in a fiduciary capacity awaiting investment or distribution shall not be held uninvested or undistributed any longer than is reasonable for the proper management of the account and shall be invested in accordance with the instrument establishing a fiduciary relationship and local law. Where such instrument does not specify the character or class of investments to be made and does not vest in the Bank any discretion in the matter, funds held pursuant to such instrument shall be invested in any investment which corporate fiduciaries may invest under local law. The investments of each account in the Trust Department shall be kept separate from the assets of the Bank, and shall be placed in the joint custody or control of not less than two of the officers or employees of the Bank or of the trust affiliate of the Bank designated for the purpose by the Trust Management Committee. SECTION 4.07. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman of the Board, President, any officer of the Trust Department, and such other officers of the trust affiliate of the Bank as are specifically designated and authorized by the Chief Executive Officer, the President, or the officer in charge of the Trust Department, are hereby authorized, on behalf of this Bank, to sell, assign, lease, mortgage, transfer, deliver and convey any real property or personal property and to purchase and acquire any real or personal property and to execute and deliver such agreements, contracts, or other papers and documents as may be appropriate in the circumstances for property now or hereafter owned by or standing in the name of this Bank, or its nominee, in any fiduciary capacity, or in the name of any principal for whom this Bank may now or hereafter be acting under a power of attorney, or as agent and to execute and deliver partial releases from -27- 28 any discharges or assignments or mortgages and assignments or surrender of insurance policies, to execute and deliver deeds, contracts, leases, assignments, bills of sale, transfers or such other papers or documents as may be appropriate in the circumstances for property now or hereafter held by this Bank in any fiduciary capacity or owned by any principal for whom this Bank may now or hereafter be acting under a power of attorney or as agent; to execute and deliver settlement agreements or other papers or documents as may be appropriate in connection with a dismissal authorized by Section 3.01(c) of these By-laws; provided that the signature of any such person shall be attested in each case by any officer of the Trust Department or by any other person who is specifically authorized by the Chief Executive Officer, the President or the officer in charge of the Trust Department. The Chief Executive Officer, Chairman of the Board, President, any officer of the Trust Department and such other officers of the trust affiliate of the Bank as are specifically designated and authorized by the Chief Executive Officer, the President, or the officer in charge of the Trust Department, or any other person or corporation as is specifically authorized by the Chief Executive Officer, the President or the officer in charge of the Trust Department, are hereby authorized on behalf of this Bank, to sign any and all pleadings and papers in probate and other court proceedings, to execute any indemnity and fidelity bonds, trust agreements, proxies or other papers or documents of like or different character necessary, desirable or incidental to the appointment of the Bank in any fiduciary capacity and the conduct of its business in any fiduciary capacity; also to foreclose any mortgage, to execute and deliver receipts for payments of principal, interest, dividends, rents, fees and payments of every kind and description paid to the Bank; to sign receipts for property acquired or entrusted to the Bank; also to sign stock or bond certificates on behalf of this Bank in any fiduciary capacity and on behalf of this Bank as transfer agent or registrar; to guarantee the genuineness of signatures on assignments of stocks, bonds or other securities, and to authenticate bonds, debentures, land or lease trust certificates or other forms of security issued pursuant to any indenture under which this Bank now or hereafter is acting as -28- 29 Trustee. Any such person, as well as such other persons as are specifically authorized by the Chief Executive Officer or the officer in charge of the Trust Department, may sign checks, drafts and orders for the payment of money executed by the Trust Department in the course of its business. SECTION 4.08. VOTING OF STOCK. The Chairman of the Board, President, any officer of the Trust Department, any officer of the trust affiliate of the Bank and such other persons as may be specifically authorized by Resolution of the Trust Management Committee or the Board of Directors, may vote shares of stock of a corporation of record on the books of the issuing company in the name of the Bank or in the name of the Bank as fiduciary, or may grant proxies for the voting of such stock of the granting if same is permitted by the instrument under which the Bank is acting in a fiduciary capacity, or by the law applicable to such fiduciary account. In the case of shares of stock which are held by a nominee of the Bank, such shares may be voted by such person(s) authorized by such nominee. -29- 30 ARTICLE V STOCKS AND STOCK CERTIFICATES SECTION 5.01. STOCK CERTIFICATES. The shares of stock of the Bank shall be evidenced by certificates which shall bear the signature of the Chairman of the Board, the President, or a Vice President (which signature may be engraved, printed or impressed), and shall be signed manually by the Secretary, or any other officer appointed by the Chief Executive Officer for that purpose. In case any such officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such before such certificate is issued, it may be issued by the Bank with the same effect as if such officer had not ceased to be such at the time of its issue. Each such certificate shall bear the corporate seal of the Bank, shall recite on its fact that the stock represented thereby is transferable only upon the books of the Bank properly endorsed and shall recite such other information as is required by law and deemed appropriate by the Board. The corporate seal may be facsimile engraved or printed. SECTION 5.02. STOCK ISSUE AND TRANSFER. The shares of stock of the Bank shall be transferable only upon the stock transfer books of the Bank and except as hereinafter provided, no transfer shall be made or new certificates issued except upon the surrender for cancellation of the certificate or certificates previously issued therefor. In the case of the loss, theft, or destruction of any certificate, a new certificate may be issued in place of such certificate upon the furnishing of any affidavit setting forth the circumstances of such loss, theft, or destruction and indemnity satisfactory to the Chairman of the Board, the President, or a Vice President. The Board of Directors, or the Chief Executive Officer, may authorize the issuance of a new certificate therefor without the furnishing of indemnity. Stock Transfer Books, in which all transfers of stock shall be recorded, shall be provided. -30- 31 The stock transfer books may be closed for a reasonable period and under such conditions as the Board of Directors may at any time determine for any meeting of shareholders, the payment of dividends or any other lawful purpose. In lieu of closing the transfer books, the Board may, in its discretion, fix a record date and hour constituting a reasonable period prior to the day designated for the holding of any meeting of the shareholders or the day appointed for the payment of any dividend or for any other purpose at the time as of which shareholders entitled to notice of and to vote at any such meeting or to receive such dividend or to be treated as shareholders for such other purpose shall be determined, and only shareholders of record at such time shall be entitled to notice of or to vote at such meeting or to receive such dividends or to be treated as shareholders for such other purpose. -31- 32 ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.01. SEAL. The impression made below is an impression of the seal adopted by the Board of Directors of BANK ONE, COLUMBUS, NATIONAL ASSOCIATION. The Seal may be affixed by any officer of the Bank to any document executed by an authorized officer on behalf of the Bank, and any officer may certify any act, proceedings, record, instrument or authority of the Bank. SECTION 6.02. BANKING HOURS. Subject to ratification by the Executive Committee, the Bank and each of its Branches shall be open for business on such days and during such hours as the Chief Executive Officer of the Bank shall, from time to time, prescribe. SECTION 6.03. MINUTE BOOK. The organization papers of this Bank, the Articles of Association, the returns of the judges of elections, the By-Laws and any amendments thereto, the proceedings of all regular and special meetings of the shareholders and of the Board of Directors, and reports of the committees of the Board of Directors shall be recorded in the minute book of the Bank. The minutes of each such meeting shall be signed by the presiding Officer and attested by the secretary of the meetings. SECTION 6.04. AMENDMENT OF BY-LAWS. These By-Laws may be amended by vote of a majority of the Directors. -32- 33 EXHIBIT 6 Securities and Exchange Commission Washington, D.C. 20549 CONSENT The undersigned, designated to act as Trustee under the Indenture for Kitty Hawk, Inc. described in the attached Statement of Eligibility and Qualification, does hereby consent that reports of examinations by Federal, State, Territorial, or District Authorities may be furnished by such authorities to the Commission upon the request of the Commission. This Consent is given pursuant to the provision of Section 321(b) of the Trust Indenture Act of 1939, as amended. Bank One, NA Dated: January 12, 1998 By: /s/ Jon Beacham ----------------------------------- Jon Beacham Authorized Signer -33- EX-99.1 18 FORM OF LETTER OF TRANSMITTAL & RELATED DOCUMENTS 1 Exhibit 99.1 LETTER OF TRANSMITTAL TO TENDER FOR EXCHANGE 9.95% SENIOR SECURED NOTES DUE 2004 CUSIP NO. 498326 AC 1 OF KITTY HAWK, INC. AND THE GUARANTEE THEREOF BY AIRCRAFT LEASING, INC., AMERICAN INTERNATIONAL AIRWAYS, INC., AMERICAN INTERNATIONAL TRAVEL, INC., FLIGHT ONE LOGISTICS, INC., KALITTA FLYING SERVICE, INC., KITTY HAWK AIRCARGO, INC., KITTY HAWK CHARTERS, INC. AND O.K. TURBINES, INC. Pursuant to the Exchange Offer Prospectus dated February , 1998 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH , 1998 (THE "EXPIRATION DATE") UNLESS THE EXCHANGE OFFER IS EXTENDED, IN WHICH CASE THE TERM "EXPIRATION DATE" SHALL MEAN THE LATEST DATE AND TIME TO WHICH THE EXCHANGE OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. The Exchange Agent is: Bank One, N.A. By Overnight Mail or Hand Delivery: By Registered or Certified Mail: Banc One Investment Management Group Banc One Investment Management Group Attn: Corporate Trust Operations Attn: Corporate Trust Operations 235 W. Schrock Road 235 W. Schrock Road Westerville, Ohio 43081-0184 Westerville, Ohio 43271-0184 By Facsimile: Confirm by Telephone: Banc One Investment Management Group (800) 346-5153 Attn: Corporate Trust Operations (614) 248-9987
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. 2 The undersigned acknowledges receipt of the Prospectus dated February , 1998 (the "Prospectus") of Kitty Hawk, Inc. (the "Company") and Aircraft Leasing, Inc., American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc., Kitty Hawk Aircargo, Inc., Kitty Hawk Charters, Inc., and O.K. Turbines, Inc. (collectively, the "Subsidiary Guarantors") and this Letter of Transmittal (the "Letter of Transmittal"), which, together with the Prospectus, constitutes the Company's and the Subsidiary Guarantors' offer (the "Exchange Offer") to exchange $1,000 principal amount of the Company's 9.95% Senior Secured Notes due 2004 and the guarantees thereof (the "New Notes") for each $1,000 principal amount of the Company's outstanding 9.95% Senior Secured Notes due 2004 and the guarantees thereof (the "Old Notes"). Recipients of the Prospectus should read the requirements described in such Prospectus with respect to eligibility to participate in the Exchange Offer. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. The undersigned hereby tenders the Old Notes described in the box entitled "Description of Old Notes" below pursuant to the terms and conditions described in the Prospectus and this Letter of Transmittal. The undersigned is the registered owner of all the Old Notes described and the undersigned represents that it has received from each beneficial owner of Old Notes ("Beneficial Owners") a duly completed and executed form of "Instruction to Registered Holder from Beneficial Owner" accompanying this Letter of Transmittal, instructing the undersigned to take the action described in this Letter of Transmittal. This Letter of Transmittal is to be used only by a holder of Old Notes (i) if certificates representing Old Notes are to be forwarded herewith or (ii) if delivery of Old Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company (the "Depository"), pursuant to the procedures set forth in the section of the Prospectus entitled "The Exchange Offer -- Procedures for Tendering." If delivery of the Old Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at the Depository, tenders of the Old Notes must be effected in accordance with the procedures mandated by the Depository's Automated Tender Offer Program and the procedures set forth in the Prospectus under the caption "The Exchange Offer -- Book-Entry Transfer." The undersigned hereby represents and warrants that the information set forth in the box entitled "Beneficial Owner(s)" is true and correct. Any Beneficial Owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder of Old Notes promptly and instruct such registered holder of Old Notes to tender on behalf of the Beneficial Owner. If such Beneficial Owner wishes to tender on its own behalf, such Beneficial Owner must, prior to completing and executing this Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such Beneficial Owner's name or obtain a properly completed bond power from the registered holder of its Old Notes. The transfer of record ownership may take considerable time. In order to properly complete this Letter of Transmittal, a holder of Old Notes must (i) complete the box entitled "Description of Old Notes," (ii) if appropriate, check and complete the boxes relating to book-entry transfer, guaranteed delivery, Special Issuance Instructions and Special Delivery Instructions, (iii) sign the Letter of Transmittal by completing the box entitled "Sign Here" and (iv) complete the Substitute Form W-9. Each holder of Old Notes should carefully read the detailed instructions below prior to completing the Letter of Transmittal. Holders of Old Notes who desire to tender their Old Notes for exchange and (i) whose Old Notes are not immediately available, (ii) who cannot deliver their Old Notes and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date or (iii) who are unable to complete the procedure for book-entry transfer on a timely basis, must tender the Old Notes pursuant to the guaranteed delivery procedures set forth in the section of the Prospectus entitled "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2 of the Instructions beginning on page 9 hereof. Holders of Old Notes who wish to tender their Old Notes for exchange must, at a minimum, complete columns (1), (2), if applicable (see footnote 1 below), and (3) in the box below entitled "Description of Old Notes" and sign the box on page 8 under the words "Sign Here." If only those columns are completed, such holder of Old Notes will have tendered for exchange all Old Notes listed in column (3) below. If the holder of Old Notes wishes to tender for exchange less than all of such Old Notes, column (4) must be completed in full. In such case, such holder of Old Notes should refer to Instruction 5 on page 10. 2 3 - ---------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES - ---------------------------------------------------------------------------------------------------------------------- (1) (2) (3) (4) PRINCIPAL AMOUNT TENDERED FOR EXCHANGE (ONLY IF NAME(S) AND ADDRESS(ES) OF REGISTERED OLD NOTE DIFFERENT AMOUNT HOLDER(S) OF OLD NOTE(S), EXACTLY AS NAME(S) APPEAR(S) NUMBER(S) FROM COLUMN (3)) ON (ATTACH AGGREGATE (MUST BE IN OLD NOTE CERTIFICATE(S) SIGNED LIST IF PRINCIPAL INTEGRAL MULTIPLES (PLEASE FILL IN, IF BLANK) NECESSARY)(1) AMOUNT OF $1,000)(2) - ---------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
- --------------- 1 Column (2) need not be completed by holders of Old Notes tendering Old Notes for exchange by book-entry transfer. Please check the appropriate box on the next page and provide the requested information. 2 Column (4) need not be completed by holders of Old Notes who wish to tender for exchange the principal amount of Old Notes listed in column (3). Completion of column (4) will indicate that the holder of Old Notes wishes to tender for exchange only the principal amount of Old Notes indicated in column (4). 3 4 [ ] CHECK HERE IF OLD NOTES ARE ENCLOSED HEREWITH. [ ] CHECK HERE IF OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DEPOSITORY AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED) ONLY): Name of Tendering Institution: - -------------------------------------------------------------------------------- Account Number: - -------------------------------------------------------------------------------- Transaction Code Number: - -------------------------------------------------------------------------------- [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY): Name of Registered Holder of Old Note(s): - --------------------------------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: - ------------------------------------------------------------------ Window Ticket Number (if available): - -------------------------------------------------------------------------------- Name of Institution which Guaranteed Delivery: - ----------------------------------------------------------------------- Account Number (if delivered by book-entry transfer): - -------------------------------------------------------------- [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO: Name: - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- ------------------------------------------------------------------------ Number of Additional Copies Desired: --------------- 4 5 =========================================================================================================================== SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 6, 7 AND 8) (SEE INSTRUCTIONS 1, 6, 7 AND 8) To be completed ONLY (i) if the New Notes issued in To be completed ONLY if the New Notes issued in exchange for Old Notes (or if certificates for Old exchange for Old Notes (or if certificates for Old Notes not tendered for exchange for New Notes) are to Notes not tendered for exchange for New Notes) are to be issued in the name of someone other than the be mailed or delivered (i) to someone other than the undersigned or (ii) if Old Notes tendered by undersigned or (ii) to the undersigned at an address book-entry transfer which are not exchanged are to be other than the address shown below the undersigned's returned by credit to an account maintained at the signature. Depository. Mail or deliver to: Issued to: Name Name ------------------------------------------------- ------------------------------------------------- (Please Print) (Please Print) Address Address ------------------------------------------------- ------------------------------------------------- (Include Zip Code) (Include Zip Code) ------------------------------------------------- ------------------------------------------------- (Tax Identification or Social Security No.) (Tax Identification or Social Security No.) Credit Old Notes not exchanged and delivered by book-entry transfer to the Depository account set forth below: ------------------------------------------------- (Account Number) ===========================================================================================================================
- -------------------------------------------------------------------------------- BENEFICIAL OWNER(S) - -------------------------------------------------------------------------------------------------------------------------- State of Principal Residence of Each Beneficial Principal Amount of Old Notes Held for Owner of Old Notes Account of Beneficial Owner(s) - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- ==========================================================================================================================
6 SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Pursuant to the offer by Kitty Hawk, Inc. (the "Company") and Aircraft Leasing, Inc., American International Airways, Inc., American International Travel, Inc., Flight One Logistics, Inc., Kalitta Flying Service, Inc., Kitty Hawk Aircargo, Inc., Kitty Hawk Charters, Inc. and O.K. Turbines, Inc., (collectively the "Subsidiary Guarantors"), upon the terms and subject to the conditions set forth in the Prospectus dated February , 1998 (the "Prospectus") and this Letter of Transmittal (the "Letter of Transmittal"), which, together with the Prospectus, constitutes the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of the Company's 9.95% Senior Secured Notes due 2004 and the guarantees thereof (the "New Notes") for each $1,000 principal amount of its outstanding 9.95% Senior Secured Notes due 2004 and the guarantees thereof (the "Old Notes"), the undersigned hereby tenders to the Company and the Subsidiary Guarantors for exchange the Old Notes indicated above. By executing this Letter of Transmittal and subject to and effective upon acceptance for exchange of the Old Notes tendered for exchange herewith, the undersigned (A) acknowledges and agrees that the Company shall have fully performed all of its obligations under that certain Registration Rights Agreement dated as of November 19, 1997, among the Company, the Subsidiary Guarantors and the Placement Agents (as defined in the Prospectus), except in certain limited circumstances and (B) will have irrevocably sold, assigned and transferred to the Company and the Subsidiary Guarantors, all right, title and interest in, to and under all of the Old Notes tendered for exchange hereby, and hereby appoints Bank One, N.A. (the "Exchange Agent") as the true and lawful agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as agent of the Company and the Subsidiary Guarantors) of such holder of Old Notes with respect to such Old Notes, with full power of substitution, to (i) deliver certificates representing such Old Notes, or transfer ownership of such Old Notes on the account books maintained by The Depository Trust Company (the "Depository") (together, in any such case, with all accompanying evidences of transfer and authenticity), to the Company, (ii) present and deliver such Old Notes for transfer on the books of the Company and (iii) receive all benefits and otherwise exercise all rights and incidents of ownership with respect to such Old Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed to be irrevocable and coupled with an interest. The undersigned hereby represents and warrants that (i) the undersigned has full power and authority to tender, exchange, assign and transfer the Old Notes and (ii) when such Old Notes are accepted for exchange by the Company and the Subsidiary Guarantors, the Company and the Subsidiary Guarantors will acquire good and marketable title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims. The undersigned will, upon receipt, execute and deliver any additional documents deemed by the Exchange Agent, the Company or the Subsidiary Guarantors to be necessary or desirable to complete the exchange, assignment and transfer of the Old Notes tendered for exchange hereby. The undersigned hereby further represents to the Company and the Subsidiary Guarantors that (i) the New Notes to be acquired by the undersigned in exchange for the Old Notes tendered hereby and any beneficial owner(s) of such Old Notes in connection with the Exchange Offer will be acquired by the undersigned and such beneficial owner(s) in the ordinary course of the undersigned's business, (ii) the undersigned (if not a broker-dealer referred to in the last sentence of this paragraph) is not engaging and does not intend to engage in the distribution of the New Notes and has no arrangement or understanding with any person to participate in the distribution of the New Notes, (iii) the undersigned and each beneficial owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"), in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Securities and Exchange Commission (the "Commission") set forth in certain no-action letters, (iv) the undersigned and each beneficial owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the Commission and (v) neither the undersigned nor any beneficial owner is an "affiliate" of the Company or the Subsidiary Guarantors, as defined under Rule 405 under the Securities Act. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market making or 7 other trading activities, it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes received in respect of such Old Notes pursuant to the Exchange Offer; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned acknowledges that, (i) for purposes of the Exchange Offer, the Company and the Subsidiary Guarantors will be deemed to have accepted for exchange, and to have exchanged, validly tendered Old Notes, if, as and when the Company gives oral or written notice thereof to the Exchange Agent. Tenders of Old Notes for exchange may be withdrawn at any time prior to 5:00 p.m. New York City time, on March , 1998 (the "Expiration Date"), and (ii) any Old Notes tendered by the undersigned and not accepted for exchange will be returned to the undersigned at the address set forth above unless otherwise indicated in the box above entitled "Special Delivery Instructions." The undersigned acknowledges that the Company's and the Subsidiary Guarantors' acceptance of Old Notes validly tendered for exchange pursuant to any one of the procedures described in the section of the Prospectus entitled "The Exchange Offer" and in the instructions hereto will constitute a binding agreement among the undersigned, the Company and the Subsidiary Guarantors upon the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated in the box entitled "Special Issuance Instructions," please return any Old Notes not tendered for exchange in the name(s) of the undersigned. Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions," please mail any certificates for Old Notes not tendered or exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s). In the event that either "Special Issuance Instructions" or "Special Delivery Instructions" are completed, please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange in the name(s) of, and return any Old Notes not tendered for exchange or not exchanged to, the person(s) so indicated. The undersigned recognizes that the Company and the Subsidiary Guarantors have no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Old Notes from the name of the holder of Old Note(s) thereof if the Company and the Subsidiary Guarantors do not accept for exchange any of the Old Notes so tendered for exchange or if such transfer would not be in compliance with any transfer restrictions applicable to such Old Note(s). In order to validly tender Old Notes for exchange, holders of Old Notes must complete, execute and deliver this Letter of Transmittal. Except as stated in the Prospectus, all authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as otherwise stated in the Prospectus, this tender for exchange of Old Notes is irrevocable. 8 SIGN HERE - -------------------------------------------------------------------------------- (Signature(s) of Owner(s)) Date: 1998 ------------------------, Must be signed by the registered holder(s) of Old Notes exactly as name(s) appear(s) on certificate(s) representing the Old Notes or on a security position listing or by person(s) authorized to become registered Old Note holder(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information. (See Instruction 6). Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please Print) Capacity (full title): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone No: ( ) ----------------- - --------------------------------------------------------------------- Tax Identification or Social Security No(s): - ------------------------------------------------------------------------ Please complete Substitute Form W-9 GUARANTEE OF SIGNATURE(S) (SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 1) Authorized Signature: - -------------------------------------------------------------------------------- Dated: - -------------------------------------------------------------------------------- Name and Title: - -------------------------------------------------------------------------------- (Please Print) Name of Firm: - -------------------------------------------------------------------------------- 9 INSTRUCTIONS Forming Part of the Terms and Conditions of the Exchange Offer 1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by an institution which is an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, and is a member of one of the following recognized Signature Guarantee Programs (an "Eligible Institution"): a. The Securities Transfer Agents Medallion Program (STAMP) b. The New York Stock Exchange Medallion Signature Program (MSP) c. The Stock Exchange Medallion Program (SEMP) Signatures on this Letter of Transmittal need not be guaranteed (i) if this Letter of Transmittal is signed by the registered holder(s) of the Old Notes tendered herewith and such registered holder(s) have not completed the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii) if such Old Notes are tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION. 2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by holders of Old Notes (i) if certificates are to be forwarded herewith or (ii) if tenders are to be made pursuant to the procedures for tender by book-entry transfer or guaranteed delivery set forth in the section of the Prospectus entitled "The Exchange Offer." Certificates for all physically tendered Old Notes or any confirmation of a book-entry transfer (a "Book-Entry Confirmation"), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth on the cover of this Letter of Transmittal prior to 5:00 p.m., New York City time, on the Expiration Date. Holders of Old Notes who elect to tender Old Notes and (i) whose Old Notes are not immediately available, (ii) who cannot deliver the Letter of Transmittal, Old Notes or other required documents to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date or (iii) who are unable to complete the procedure for book-entry transfer on a timely basis, may have such tender effected if: (a) such tender is made by or through an Eligible Institution, (b) prior to 5:00 p.m., New York City time, on the Expiration Date, the Exchange Agent has received from such Eligible Institution a properly completed and duly executed Letter of Transmittal and Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder of such Old Notes, the certificate number(s) of such Old Notes and the principal amount of Old Notes tendered for exchange, stating that tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery, this Letter of Transmittal (or a manually executed facsimile thereof), properly completed and duly executed, the certificates representing such Old Notes (or a Book-Entry Confirmation), in proper form for transfer, and any other documents required by this Letter of Transmittal, will be deposited by such Eligible Institution with the Exchange Agent, and (c) a properly completed and duly executed Letter of Transmittal (or a manually executed facsimile thereof) with certificates for all tendered Old Notes, or a Book-Entry Confirmation, and any other documents required by this Letter of Transmittal are received by the Exchange Agent within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery. THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER OF OLD NOTES. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. NEITHER THIS LETTER OF TRANSMITTAL NOR ANY OLD NOTES SHOULD BE SENT TO THE COMPANY OR THE SUBSIDIARY GUARANTORS. No alternative, conditional or contingent tenders will be accepted. All tendering holders of Old Notes, by execution of this Letter of Transmittal (or facsimile hereof, if applicable), waive any right to receive notice of the acceptance of their Old Notes for exchange. 10 3. INADEQUATE SPACE. If the space provided in the box entitled "Description of Old Notes" above is inadequate, the certificate numbers and principal amounts of the Old Notes being tendered should be listed on a separate signed schedule affixed hereto. 4. WITHDRAWALS. A tender of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date by delivery of a written notice of withdrawal to the Exchange Agent at the address set forth on the cover of this Letter of Transmittal. To be effective, a notice of withdrawal of Old Notes must (i) specify the name of the person who tendered the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and aggregate principal amount of such Old Notes), (iii) be signed by the holder of Old Notes in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee under the Indenture register the transfer of such Old Notes into the name of the person withdrawing the tender, (iv) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor and (v) be received by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Withdrawals of tenders of Old Notes may not be rescinded, and any Old Notes withdrawn will thereafter be deemed not validly tendered for purposes of the Exchange Offer, and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes may be retendered by following one of the procedures described in the section of the Prospectus entitled "The Exchange Offer -- Procedures for Tendering" at any time prior to 5:00 p.m., New York City time, on the Expiration Date. 5. PARTIAL TENDERS. (Not applicable to holders of Old Notes who tender Old Notes by book-entry transfer). Tenders of Old Notes will be accepted only in integral multiples of $1,000 principal amount. If a tender for exchange is to be made with respect to less than the entire principal amount of any Old Notes, fill in the principal amount of Old Notes which are tendered for exchange in column (4) of the box entitled "Description of Old Notes" on page 3, as more fully described in the footnotes thereto. In case of a partial tender for exchange, a new certificate, in fully registered form, for the remainder of the principal amount of the Old Notes, will be sent to the holder of such Old Notes (unless otherwise indicated in the appropriate box on this Letter of Transmittal) as promptly as practicable after the expiration or termination of the Exchange Offer. 6. SIGNATURES ON THIS LETTER OF TRANSMITTAL, POWERS OF ATTORNEY AND ENDORSEMENTS. (a) The signature(s) of the holder of Old Notes on this Letter of Transmittal must correspond with the name(s) as written on the face of the Old Notes without alteration, enlargement or any change whatsoever. (b) If tendered Old Notes are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. (c) If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal and any necessary or required documents as there are different registrations. (d) When this Letter of Transmittal is signed by the holder of the Old Notes listed and transmitted hereby, no endorsements of Old Notes or separate powers of attorney are required. If, however, Old Notes not tendered or not accepted, are to be issued or returned in the name of a person other than the holder of Old Notes, then the Old Notes transmitted hereby must be endorsed or accompanied by appropriate powers of attorney in a form satisfactory to the Company, in either case signed exactly as the name of the holder of Old Notes appears on the Old Notes. Signatures on such Old Notes or powers of attorney must be guaranteed by an Eligible Institution (unless signed by an Eligible Institution). (e) If this Letter of Transmittal or Old Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and proper evidence satisfactory to the Company of their authority so to act must be submitted. (f) If this Letter of Transmittal is signed by a person other than the registered holder of Old Notes listed, the Old Notes must be endorsed or accompanied by appropriate powers of attorney, in either case signed exactly as the name of 11 the registered holder of Old Notes appears on the certificates. Signatures on such Old Notes or powers of attorney must be guaranteed by an Eligible Institution (unless signed by an Eligible Institution). 7. TRANSFER TAXES. Except as set forth in this Instruction 7, the Company will pay all transfer taxes, if any, applicable to the transfer and exchange of Old Notes pursuant to the Exchange Offer. If issuance of New Notes is to be made to, or Old Notes not tendered for exchange are to be issued or returned in the name of, any person other than the registered holder of the Old Notes tendered, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, and satisfactory evidence of payment of such taxes or exemptions from taxes therefrom is not submitted with this Letter of Transmittal, the amount of any transfer taxes payable on account of any such transfer will be imposed on and payable by the tendering holder of Old Notes prior to the issuance of the New Notes. 8. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If the New Notes, or if any Old Notes not tendered for exchange, are to be issued or sent to someone other than the holder of Old Notes or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. Holders of Old Notes tendering Old Notes by book-entry transfer may request that Old Notes not accepted be credited to such account maintained at the Depository as such holder of Old Notes may designate. 9. IRREGULARITIES. All questions as to the form of documents and the validity, eligibility (including time of receipt), acceptance and withdrawal of Old Notes will be determined by the Company, in its sole discretion, whose determination shall be final and binding. The Company reserves the absolute right to reject any or all tenders for exchange of any particular Old Notes that are not in proper form, or the acceptance of which would, in the opinion of the Company (or its counsel), be unlawful. The Company reserves the absolute right to waive any defect, irregularity or condition of tender for exchange with regard to any particular Old Notes. The Company's interpretation of the terms of, and conditions to, the Exchange Offer (including the instructions herein) will be final and binding. Unless waived, any defects or irregularities in connection with the Exchange Offer must be cured within such time as the Company shall determine. Neither the Company, the Subsidiary Guarantors, the Exchange Agent nor any other person shall be under any duty to give notice of any defects or irregularities in Old Notes tendered for exchange, nor shall any of them incur any liability for failure to give such notice. A tender of Old Notes will not be deemed to have been made until all defects and irregularities with respect to such tender have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 10. WAIVER OF CONDITION. The Company and the Subsidiary Guarantors reserve the absolute right to waive, amend or modify any of the specified conditions described under "The Exchange Offer -- Conditions" in the Prospectus in the case of any Old Notes tendered (except as otherwise provided in the Prospectus). 11. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. If a holder of Old Notes desires to tender Old Notes pursuant to the Exchange Offer, but any of such Old Notes has been mutilated, lost, stolen or destroyed, such holder of Old Notes should contact the Trustee at the address set forth on the cover of this Letter of Transmittal for further instructions. 12. REQUESTS FOR INFORMATION OR ADDITIONAL COPIES. Requests for information or for additional copies of the Prospectus and this Letter of Transmittal may be directed to the Exchange Agent at the address or telephone number set forth on the cover of this Letter of Transmittal. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF, IF APPLICABLE) TOGETHER WITH CERTIFICATES, OR CONFIRMATION OF BOOK-ENTRY OR THE NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. 12 IMPORTANT TAX INFORMATION Under current federal income tax law, a holder of Old Notes whose tendered Old Notes are accepted for exchange may be subject to backup withholding unless the holder provides the Company (as payor), through the Exchange Agent, with either (i) such holder's correct taxpayer identification number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN provided on Substitute Form W-9 is correct (or that such holder of Old Notes is awaiting a TIN) and that (A) the holder of Old Notes has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of a failure to report all interest or dividends or (B) the Internal Revenue Service has notified the holder of Old Notes that he or she is no longer subject to backup withholding or (ii) an adequate basis for exemption from backup withholding. If such holder of Old Notes is an individual, the TIN is such holder's social security number. If the Exchange Agent is not provided with the correct taxpayer identification number, the holder of Old Notes may be subject to certain penalties imposed by the Internal Revenue Service. Certain holders of Old Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. Exempt holders of Old Notes should indicate their exempt status on Substitute Form W-9. A foreign individual may qualify as an exempt recipient by submitting to the Exchange Agent a properly completed Internal Revenue Service Form W-8 (the terms of which the Exchange Agent will provide upon request) signed under penalty of perjury, attesting to the holder's exempt status. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "Guidelines") for additional instructions. If backup withholding applies, the Company is required to withhold 31% of any payment made to the holder of Old Notes or other payee. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. The holder of Old Notes is required to give the Exchange Agent the TIN (e.g., social security number or employer identification number) of the record owner of the Old Notes. If the Old Notes are held in more than one name or are not held in the name of the actual owner, consult the enclosed Guidelines for additional guidance regarding which number to report. 13 - ------------------------------------------------------------------------------------------------------------------------------ PAYER'S NAME: Bank One, N.A. - ------------------------------------------------------------------------------------------------------------------------------ SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT ------------------------------------ RIGHT AND CERTIFY BY SIGNING AND DATING BELOW Social Security Number FORM W-9 OR ------------------------------------ Department of the Treasury Employer Identification Number Internal Revenue Service --------------------------------------------------------------------------------------------- PART 2 -- PART 3 -- PAYER'S REQUEST FOR Certification Under Penalties of Perjury, I certify TAXPAYER IDENTIFICATION that: Awaiting TIN [ ] NUMBER (TIN) (1) The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me); and (2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. --------------------------------------------------------------------------------------------- Certificate instructions -- You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you are subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2). SIGNATURE ------------------------------------------------------- DATE----------- NAME---------------------------------------------------------------------------------- ADDRESS------------------------------------------------------------------------------ CITY------------------------- STATE---------------- ZIP CODE------------------- - ------------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 14 YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECK THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- PAYER'S NAME: BANK ONE, N.A. - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver such an application in the near future. I understand that if I do not provide a taxpayer identification number with sixty (60) days, 31% of all reportable payments made to me thereafter will be withheld until I provide such a number. - ----------------------------------------------------- --------------------------------------- Signature Date
- -------------------------------------------------------------------------------- 15 INSTRUCTION TO REGISTERED HOLDER FROM BENEFICIAL OWNER OF 9.95% SENIOR SECURED NOTES DUE 2004 OF KITTY HAWK, INC. The undersigned hereby acknowledges receipt of the Prospectus dated February , 1998 (the "Prospectus") of Kitty Hawk, Inc., a Delaware corporation (the "Company"), and Aircraft Leasing, Inc., a Texas corporation, American International Airways, Inc., a Michigan corporation, American International Travel, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, Kalitta Flying Service, Inc., a Michigan corporation, Kitty Hawk Aircargo, Inc., a Texas corporation, Kitty Hawk Charters, Inc., a Texas corporation, and O.K. Turbines, Inc., a Michigan corporation, (collectively, the "Subsidiary Guarantors"), and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that together constitute the Company's and the Subsidiary Guarantors' offer (the "Exchange Offer"). Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus. This will instruct you, the registered holder, as to the action to be taken by you relating to the Exchange Offer with respect to the 9.95% Senior Secured Notes due 2004 and the guarantees thereof (the "Old Notes") held by you for the account of the undersigned. The aggregate principal amount of the Old Notes held by you for the account of the undersigned is (fill in amount): $ -------------------------------- of the Old Notes. With respect to the Exchange Offer, the undersigned hereby instructs you (check appropriate box): [ ] To TENDER the following principal amount of Old Notes held by you for the account of the undersigned (insert principal amount of Old Notes to be tendered, if any): $ -------------------------------- of the Old Notes. [ ] NOT to TENDER any principal amount of Old Notes held by you for the account of the undersigned. If the undersigned instructs you to tender the Old Notes held by you for the account of the undersigned, it is understood that you are authorized (a) to make, on behalf of the undersigned (and the undersigned, by its signature below, hereby makes to you), the representations and warranties contained in the Letter of Transmittal that are to be made with respect to the undersigned as a beneficial owner of the Old Notes, including but not limited to the representations that (i) the undersigned's principal residence is in the state of (fill in state) - ---------------------------, (ii) the undersigned is acquiring the New Notes in the ordinary course of the undersigned's business, (iii) the undersigned either (A) is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of New Notes or (B) is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, and acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act of 1933, as amended (the "Securities Act") in connection with any resale of such New Notes received in respect of such Old Notes pursuant to the Exchange Offer; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act, (iv) the undersigned acknowledges that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act, in connection with any resale transaction of the New Notes acquired by such person and cannot rely on the position of the Staff of the Securities and Exchange Commission set forth in certain no-action letters (See the section of the Prospectus entitled "The Exchange Offer -- Purpose and Effect"), (v) the undersigned understands that a secondary resale transaction described in clause (iv) above should be covered by an effective registration statement containing the selling securityholder information required by Item 507 or Item 508, if applicable, of Regulation S-K of the Commission and (vi) the undersigned is not an "affiliate," as defined in Rule 405 under the Securities Act, of the Company or the Subsidiary Guarantors; (b) to agree, on behalf of the undersigned, as set forth in the Letter of Transmittal and (c) to take such other action as necessary under the Prospectus or the Letter of Transmittal to effect the valid tender of the Old Notes. 16 SIGN HERE Name of Beneficial Owner(s) (please print): - ----------------------------------------------------------------------------- Signature(s): - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- Telephone Number: - -------------------------------------------------------------------------------- Taxpayer Identification or Social Security Number: - ---------------------------------------------------------------------- Date: - -------------------------------------------------------------------------------- 17 NOTICE OF GUARANTEED DELIVERY WITH RESPECT TO 9.95% SENIOR SECURED NOTES DUE 2004 CUSIP NO. 498326 AC 1 OF KITTY HAWK, INC. AND THE GUARANTEE THEREOF BY AIRCRAFT LEASING, INC., AMERICAN INTERNATIONAL AIRWAYS, INC., AMERICAN INTERNATIONAL TRAVEL, INC., FLIGHT ONE LOGISTICS, INC., KALITTA FLYING SERVICE, INC., KITTY HAWK AIRCARGO, INC., KITTY HAWK CHARTERS, INC. AND O.K. TURBINES, INC. This form must be used by a holder of 9.95% Senior Secured Notes due 2004 and the guarantees thereof (the "Old Notes") of Kitty Hawk, Inc., a Delaware corporation (the "Company"), and Aircraft Leasing, Inc., a Texas corporation, American International Airways, Inc., a Michigan corporation, American International Travel, Inc., a Michigan corporation, Flight One Logistics, Inc., a Michigan corporation, Kalitta Flying Service, Inc., a Michigan corporation, Kitty Hawk Aircargo, Inc., a Texas corporation, Kitty Hawk Charters, Inc., a Texas corporation, and O.K. Turbines, Inc., a Michigan corporation (collectively the "Subsidiary Guarantors") who wishes to tender Old Notes to the Exchange Agent in exchange for 9.95% Senior Secured Notes due 2004 and the guarantees thereof pursuant to the guaranteed delivery procedures described in the "The Exchange Offer -- Guaranteed Delivery Procedures" of the Prospectus, dated February , 1998 (the "Prospectus"), and in Instruction 2 to the related Letter of Transmittal. Any holder who wishes to tender Old Notes pursuant to such guaranteed delivery procedures must ensure that the Exchange Agent receives this Notice of Guaranteed Delivery prior to the Expiration Date of the Exchange Offer. Capitalized terms not defined herein have the meanings ascribed to them in the Prospectus or the Letter of Transmittal. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). To: Bank One, N.A. (the "Exchange Agent") By Overnight Mail or Hand Delivery: By Registered or Certified Mail: Banc One Investment Management Group Banc One Investment Management Group Attn: Corporate Trust Operations Attn: Corporate Trust Operations 235 W. Schrock Road 235 W. Schrock Road Westerville, Ohio 43081-0184 Westerville, Ohio 43271-0184 By Facsimile: Confirm by Telephone: Banc One Investment Management Group (800) 346-5153 Attn: Corporate Trust Operations (614) 248-9987
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. 18 LADIES AND GENTLEMEN: The undersigned hereby tenders to the Company and the Subsidiary Guarantors, upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of Old Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus and in Instruction 2 of the Letter of Transmittal. The undersigned hereby tenders the Old Notes listed below: - ------------------------------------------------------------------------------------------------------- CERTIFICATE NUMBER(S) (IF KNOWN) OF OLD NOTES OR ACCOUNT NUMBER AT AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- PLEASE SIGN AND COMPLETE Signature of Registered Holders(s) or Date: , 1998 or Authorized Signatory: ------------------------------------ ----------------------- Address: ----------------------------------------------- --------------------------------------- ----------------------------------------------- ----------------------------------------------- Name of Registered Holder(s): Area Code and Telephone No.: ------------------- -------------------- ----------------------------------------------- -----------------------------------------------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Notice of Guaranteed Delivery must be signed by the holder(s) exactly as the name(s) appear(s) on certificates for Old Notes or on a security position listing as the owner of Old Notes, or by person(s) authorized to become holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information. PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Capacity: - -------------------------------------------------------------------------------- Address(es): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 19 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a firm which is a member of a recognized signature guarantee medallion program and is an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees deposit with the Exchange Agent of the Letter of Transmittal (or facsimile thereof), together with the Old Notes tendered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility described in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures" and in the Letter of Transmittal) and any other required documents, all by 5:00 p.m., New York City time, on the third New York Stock Exchange trading day following the date of execution of this Notice of Guaranteed Delivery. Name of Firm: ------------------------------- ---------------------------------------------- Address: Authorized Signature -------------------------------------- Name: ----------------------------------------- - ---------------------------------------------- Area Code and Telephone No.: Title: ------------------ ---------------------------------------- Date: , 1998 -----------------------------------
DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL. 3 20 INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY 1. Delivery of this Notice of Guaranteed Delivery. A properly completed and duly executed copy of this Notice of Guaranteed Delivery and any other documents required by this Notice of Guaranteed Delivery must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. The method of delivery of this Notice of Guaranteed Delivery and any other required documents to the Exchange Agent is at the election and sole risk of the holder, and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. As an alternative to delivery by mail, the holders may wish to consider using an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. For a description of the guaranteed delivery procedures, see Instruction 2 of the Letter of Transmittal. 2. Signatures on this Notice of Guaranteed Delivery. If this Notice of Guaranteed Delivery is signed by the registered holder(s) of the Old Notes referred to herein, the signature must correspond with the name(s) written on the face of the Old Notes without alteration, enlargement or any change whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of the Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Old Notes, the signature must correspond with the name shown on the security position listing as the owner of the Old Notes. If this Notice of Guaranteed Delivery is signed by a person other than the registered holder of any Old Notes listed or a participant of the Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by appropriate bond powers, signed as the name of the registered holder appears on the Old Notes or signed as the name of the participant shown on the Book-Entry Transfer Facility's security position listing. If this Notice of Guaranteed Delivery is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and submit with the Notice of Guaranteed Delivery evidence satisfactory to the Company and the Subsidiary Guarantors of such person's authority to so act. 3. Requests for Assistance or Additional Copies. Questions and requests for assistance and requests for additional copies of the Prospectus may be directed to the Exchange Agent at the address specified in the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offer. 4 -----END PRIVACY-ENHANCED MESSAGE-----