-----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, OYZzrGCvPFRu5CWVFaFaofm9ohvju9gIsoFHT1Z++lfWPLjxWN3gEKOfnA6A00JL 9h8E7KYgI0ge2eLXv0XYKw== 0000950134-99-002303.txt : 19990402 0000950134-99-002303.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950134-99-002303 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KITTY HAWK INC CENTRAL INDEX KEY: 0000932110 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, NONSCHEDULED [4522] IRS NUMBER: 752564006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25202 FILM NUMBER: 99580111 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 10-K405 1 FORM 10-K FOR YEAR END DECEMBER 31, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- COMMISSION FILE NUMBER 0-25202 KITTY HAWK, INC. (Exact name of registrant 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 P.O. BOX 612787 DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261 (972) 456-2200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On March 24, 1999, the aggregate market price of the voting stock held by non-affiliates of the registrant was approximately $52.7 million. (For purposes of determination of the above stated amount, only directors, executive officers and 10% or greater stockholders have been deemed affiliates). On March 24, 1999, there were 16,995,987 outstanding shares of common stock, par value $0.01 per share. DOCUMENTS INCORPORATED BY REFERENCE: Part III -- Portions of the registrant's definitive proxy statement to be issued in conjunction with the registrant's 1999 Annual Meeting of Stockholders to be held on May 28, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 KITTY HAWK, INC. 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I
PAGE ---- Item 1 Business.................................................... 3 Item 2 Properties.................................................. 13 Item 3 Legal Proceedings........................................... 14 Item 4 Submission of Matters to a Vote of Security Holders......... 15 Item 4A Executive Officers of the Registrant........................ 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 16 Item 6. Selected Financial Data..................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 37 Item 8. Financial Statements and Supplementary Data................. 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 37 PART III Item 10. Directors and Executive Officers of the Registrant.......... 38 Item 11. Executive Compensation...................................... 38 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 38 Item 13. Certain Relationships and Related Transactions.............. 38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 38 Signatures.................................................. 44
2 3 FORWARD-LOOKING STATEMENTS In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, which can be identified by the use of forward looking terminology, such as "may," "will," "expect," "could," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those referred to in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS GENERAL We have four main businesses. First, we are a leading U.S. and international provider of air freight carrier services, which means that we transport air freight in airplanes that we charter to third parties. In this business, we charge customers for the use of the entire airplane, regardless of the amount of freight we transport for them, and each airplane flies for only one customer at a time. Second, we are a leading provider of scheduled freight services in the U.S., which means that we transport air freight on scheduled routes, and each airplane generally transports the freight of multiple customers at the same time. In this business, we charge customers by the size and the weight of the freight shipped. Third, we are a leading provider of air logistics services in the U.S., which means that we arrange the delivery of air freight on an expedited basis, whether on our airplanes or those of a third party. Finally, we provide engine overhaul services on JT3 engines used on Douglas DC-8s and JT8 engines used on Boeing 727s, Douglas DC-9s and other aircraft. We also provide engine overhaul services for our fleet of Boeing 727s and Douglas DC-8s and DC-9s and airframe repair services for our fleet of Boeing 727s and Douglas DC-9s. Our principal executive offices are located at 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas 75261, and our main telephone number is (972) 456-2200. We maintain a web site at http://www.kha.com. INDUSTRY OVERVIEW Air Freight Delivery Services. The market for air freight delivery services is served by an industry which is composed of: (1) air freight carriers that contract with "freight-forwarders" to provide them with short-term and long-term contract charters; (2) air freight carriers that provide on-demand charters, as opposed to short-term and long-term charters; (3) air freight carriers that provide scheduled air freight delivery services; and (4) "door-to-door" express package delivery companies such as Federal Express and United Parcel Service. The air freight delivery services industry provides same-day, next-day and/or two-day delivery services. A number of air freight carriers, including us, provide a combination of these services. Specifically, our air freight carrier services business provides on-demand charters and short-term and long-term contract 3 4 charters, and our scheduled freight services business provides regularly scheduled freight delivery services between various airports. Air Logistics Services. Demand for air logistics services is driven by demand for same-day delivery of time sensitive freight. In contrast to the market for next-day and two-day freight delivery services, we believe that the U.S. market 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 we do. AIR FREIGHT CARRIER SERVICES General. We provide air freight carrier services on a contractual basis for a variety of customers, including freight forwarders, other airlines, the U.S. Postal Service and the U.S. Military. In addition, we provide air freight carrier services on an on-demand basis. Kitty Hawk International, Inc. is our wide-body aircraft air freight carrier and Kitty Hawk Aircargo, Inc. is our narrow-body aircraft air freight carrier. ACMI Domestic. The terms of our contract charters vary, but they typically require us to supply aircraft, crew, maintenance and insurance ("ACMI"), while our 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 us to operate specific aircraft and/or provide minimum air freight capacity and generally are terminable if we: (1) fail to meet certain minimum performance levels; (2) otherwise breach the contract; or (3) become subject to other customary events of default. Under our ACMI contracts, we are permitted to utilize and, in fact often do utilize, our aircraft in on-demand service in the periods between ACMI contract flights. ACMI International. We operate ACMI contracts of varying durations in foreign countries as well as between the U.S. and foreign countries. These ACMI contracts provide that we have exclusive operating control and direction over each aircraft we operate. We have operating authority for Brazil, Colombia, Costa Rica and Ecuador. Where we do not have our own operating authority, our foreign-based customers must obtain foreign government authorizations and permits required for us to fly the designated routes. Our international ACMI contracts traditionally have been concentrated in the South and Central American markets. Currently, we operate one Boeing 747 for AeroFloral and one Boeing 747 for Fast Air between the U.S. and various destinations in South America. On-Demand. The aircraft of our air freight carrier business also fly on-demand charters for customers of our air logistics services business. In 1998, approximately 21.5% of the on-demand charters managed by our air logistics services business were flown on the aircraft of our air freight carrier business. On-demand charters flown on the aircraft of our air freight carrier business generate a higher gross margin to us than charters subcontracted to third party carriers. U.S. Postal Service. We have historically performed a variety of services for the U.S. Postal Service, ranging from regularly scheduled delivery throughout the year to special contracts to meet increased demand during the Christmas holiday season. Similar to an ACMI contract, our contracts with the U.S. Postal Service generally allow us to pass-through our fuel costs, landing charges and other variable costs. Accordingly, we are not generally at risk of loss in the event these variable costs increase during the term of these fixed-price arrangements. Since 1993, we have been the prime contractor for the "Christmas Network" established by the U.S. Postal Service. The Christmas Network supplies 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 pursuant to a public bidding process that considers quality of service 4 5 and other factors, including, to a lesser extent, price. The Christmas Network contract is put up for bid each year. Of our total revenues for 1998, the U.S. Postal Service accounted for approximately $120 million or 16.8%. All of this revenue was attributable to air freight carrier services and represented 19.9% of the air freight carrier business' total revenues. BAX Global. BAX Global leases under an ACMI contract 14 of our Boeing 727s for varying terms through March 31, 2003. BAX Global may earlier terminate the contract if, among other reasons, we do not meet certain on-time performance standards or if majority ownership or control of the Company is acquired by a competitor of BAX Global. Of our total revenues in 1998, BAX Global accounted for approximately $71.5 million or 10%. All of this revenue was attributable to air freight carrier services and represented 11.9% of the air freight carrier business' total revenues. U.S. Military. We have historically provided air freight carrier services for the U.S. Military. SCHEDULED FREIGHT SERVICES Domestic. We operate a scheduled airport-to-airport air freight service which provides overnight delivery to and from approximately 46 cities in the U.S. Freight received each evening is delivered the next morning, Tuesday through Friday, throughout the year. The majority of overnight deliveries are routed through our 90,000 square foot sorting center located at the Hulman Regional Airport in Terre Haute, Indiana. In July 1999, we expect to relocate our sorting operation from the Hulman Regional Airport to the Fort Wayne-Allen County Airport in Fort Wayne, Indiana. This new 239,000 square foot sorting facility will permit us to handle more than double 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 "Item 2. Properties." Our overnight operation caters primarily to freight-forwarders and other cargo airlines that either handle ground transport themselves or contract with others to do so. Our competition includes the United Parcel Service, Emery Air Freight and FedEx, as well as commercial passenger airlines that provide freight service on their scheduled flights. Our scheduled freight service currently transports air freight to and from airports located in approximately 22 cities. In addition, we contract with third parties to provide ground transportation between those 22 airports and 24 other airport locations at which we receive and deliver freight at scheduled times. International. We also operate a scheduled airport-to-airport freight service between Los Angeles and Honolulu, among the Hawaiian Islands and once a week through Melbourne, Hong Kong and other Pacific Rim locations. American International Cargo ("AIC"), a general partnership, conducts this operation. As part of a recent litigation settlement, we recently became the sole owner of AIC. See "Item 3. Legal Proceedings -- Litigation Concerning American International Cargo." AIR LOGISTICS SERVICES General. We are a leading provider of same-day air logistics services in the U.S. We arrange the delivery of time sensitive freight utilizing aircraft of third party air freight carriers as well as the aircraft of our air freight carrier business. On-demand air freight charters generally are used when the same day or next-day delivery services of commercial airlines or the next-day delivery services of air freight companies or other service providers cannot meet the customer's delivery deadline. Our air logistics services involve coordinating "door-to-door" transportation by arranging for ground pick-up, loading, air transportation, unloading and ground delivery of the freight. We provide air logistics services 24 hours per day, 365 days per year. Our air logistics services customers historically include companies that are engaged in industries such as automotive, chemical, computer, mail and bulk package delivery, retail merchandising and oil field 5 6 service and equipment. Typically, the premium costs incurred in utilizing on-demand charters to achieve expedited same-day delivery are justified by our 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. Database, Information Software and Tracking Systems. We believe that our database is critical to our air logistics services business arranging on-demand air charters in a timely and reliable manner. We maintain detailed carrier profiles for over 500 air freight carriers that provide on-demand charter service and information concerning ground transportation and aircraft loading companies in North America. We have implemented an Internet system to provide our account managers with real-time updates on available third party on-demand charter aircraft across North America. We believe that this system enables us to meet customer demands more efficiently and quickly. We developed our logistics information system in 1990 to automate access to our database and have frequently revised and improved it. 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, we subscribe to Jeppesen's Flight Planning and Kavouras Meteorological services. The Jeppesen flight planning services integrate airport information such as 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 electronically transmits the automated flight plan to the pilot and the Federal Aviation Administration (the "FAA") contemporaneously. Our HawkEye software system allows our 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, 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. We believe that our computer systems are generally year 2000 compliant. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." MAINTENANCE We are one of the few dedicated air freight carriers in the world with extensive maintenance capabilities. We have extensive maintenance facilities in Oscoda and Ypsilanti, Michigan and Dallas, Texas. Maintenance services at these facilities operate 24 hours per day, seven days per week. We provide comprehensive airframe repairs and engine overhaul services for our fleet of Boeing 727s, Douglas DC-9s and our fleet of small aircraft. In addition, we provide comprehensive engine overhaul services for our fleet of Douglas DC-8s and light maintenance checks on our fleet of Boeing 747s, Lockheed L-1011s and Douglas DC-8s. We also provide third party engine overhauls for JT3 engines used on Douglas DC-8s and JT8 engines used on Boeing 727s, Douglas DC-9s and other aircraft. We have entered into agreements to outsource a majority of our major maintenance on our fleet of Boeing 747s, Lockheed L-1011s and Douglas DC-8s, other than engine overhauls on JT3 engines. AIRCRAFT FLEET We currently own 108 aircraft and lease seven aircraft, not including our undivided one-third interest in four Falcon 20C jet aircraft. Of these aircraft, we operate 102 aircraft in revenue service, including seven Boeing 747s, six Lockheed L-1011s, 16 Douglas DC-8s, 31 Boeing 727s, 5 Douglas DC-9s, 21 Lear jets and eight Beechcraft BE8Ts. For economic reasons, we currently intend to retire all but six of our Douglas DC-8s prior to January 1, 2000. See "-- Government Regulation -- Noise Abatement Regulations." Additional Boeing 747s. During 1998, we acquired two Boeing 747-200s and had them converted to cargo configuration by Boeing. Boeing redelivered the first aircraft to us in October 1998, and it entered revenue service. Boeing redelivered the other aircraft to us in November 1998, and it entered revenue service. 6 7 In July 1998, our Oscoda, Michigan maintenance facility completed the cargo conversion of a Boeing 747-200 that we acquired in September 1997. The FAA approved the cargo conversion, and the aircraft entered revenue service. During the approval process, the FAA determined that the structure that connects the wings to the body of the aircraft had not been modified in certain respects and decided to limit the maximum payload of the aircraft to 200,000 pounds rather than the anticipated 240,000 pounds. The reduction in payload capacity could reduce the hourly revenue rate for the aircraft by as much as 6% from the anticipated hourly revenue rate. The FAA has also asked us to voluntarily reduce the maximum payload of two other Boeing 747-200s that have a similar issue. These two other Boeing 747s were converted to cargo configuration prior to our acquisition of the Kalitta Companies. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors that May Affect Future Results -- Integrating the Kalitta Companies." Former management of the Kalitta Companies did not disclose this issue to our management, who did not know of the issue until the FAA raised it. We currently intend to fix each of these Boeing 747s in the second half of 1999 at a cost not expected to exceed $150,000 per aircraft, not including aircraft downtime. Pending modification of these aircraft, we have decided not to voluntarily reduce the maximum payload of the other two Boeing 747s affected by this problem. Additional Boeing 727s. Recently, we entered into an agreement to lease nine Boeing 727s for a period of seven years each with an option to renew each lease for an additional two year term. We expect three of these aircraft will enter revenue service in 1999 and the other six aircraft will enter revenue service in 2000. The lessor will pay the cost to modify the aircraft to cargo configuration and to bring the aircraft into compliance with Stage 3 of the Noise Regulations. See "-- Government Regulation -- Noise Abatement Regulations." RESTRUCTURING OF KITTY HAWK INTERNATIONAL Recently we changed the name of American International Airways, Inc. ("AIA") to Kitty Hawk International, Inc. Due to continued losses at Kitty Hawk International, we are in the process of restructuring Kitty Hawk International to focus on its core business of air freight transportation in wide-body aircraft. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results -- Continued Losses at Kitty Hawk International." Therefore, we have eliminated our passenger charter division and have parked the two passenger Boeing 747s and two passenger Lockheed L-1011s in that division. We are currently deciding whether to sell the aircraft, convert them to cargo configuration or employ them in other uses. Because all four of these aircraft are collateral under our 9.95% Senior Secured Notes due 2004 (the "Notes"), any sales must be made in compliance with the indenture related to the Notes. Further, we have stopped providing third party airframe repair and engine overhaul services, other than on JT3 engines, which are used on Douglas DC-8s, and JT8 engines, which are used on Boeing 727s, Douglas DC-9s and other aircraft. In addition, we have entered into agreements to outsource a majority of our major maintenance on our fleet of Boeing 747s, Lockheed L-1011s and Douglas DC-8s, other than engine overhauls on JT3 engines. In connection with these changes, we eliminated approximately 450 jobs at Kitty Hawk International in 1998 and intend to eliminate approximately 1,050 additional jobs at Kitty Hawk International in 1999. In addition, we intend to close surplus portions of our Oscoda, Michigan maintenance facility. Further, we intend to reduce Kitty Hawk International's owned and leased operating fleet from 36 aircraft at December 31, 1998 to 19 aircraft at December 31, 1999, consisting of seven Boeing 747s, six Lockheed L-1011s and six Douglas DC-8s. These aircraft numbers do not include our owned and leased Boeing 727s and Douglas DC-9s operated by Kitty Hawk Aircargo, Inc., our air freight carrier that operates narrow-body aircraft, or the small aircraft owned and operated by Kitty Hawk Charters, Inc., our small aircraft operator. 7 8 RESIGNATION OF MR. KALITTA AND SEPARATION AGREEMENT On April 17, 1998, Conrad A. Kalitta resigned from his position as our Vice Chairman and from all other officer and employee positions of the Company, including his position as Chief Executive Officer and President of Kitty Hawk International. Mr. Kalitta joined the Company upon the consummation of our November 1997 acquisition (the "Acquisition") of the Kalitta Companies from Mr. Kalitta. In connection with his resignation, the Company, Mr. Kalitta and certain other affiliated parties entered into a Separation Agreement dated April 17, 1998, which was subsequently amended on June 5, 1998 (as amended, the "Separation Agreement"). Since that time, the parties to the Separation Agreement entered into an Agreement dated January 21, 1999 that modified certain provisions of the Separation Agreement. Under these agreements, the Company, M. Tom Christopher (our Chairman of the Board and Chief Executive Officer) and Mr. Kalitta terminated all voting and other agreements entered into in connection with the Acquisition that ensured Mr. Christopher and Mr. Kalitta certain rights to hold and fill officer and director positions of the Company and its subsidiaries. Pursuant to these agreements, the Company granted Mr. Kalitta certain rights to demand registration ("Demand Registration Rights") of up to 2,900,000 shares of common stock until June 30, 2000. In addition, Mr. Kalitta granted Mr. Christopher the right to vote all shares of common stock owned by Mr. Kalitta until June 30, 2000. Pursuant to the terms of the Separation Agreement, Mr. Kalitta amended his employment agreement with Kitty Hawk International to provide that he will not engage in the air cargo charter management or charter brokerage business, or in the business of ad hoc or scheduled carriage of air freight under FAA Part 121 or Part 135 certificates, within the United States, until April 17, 2001, either directly or indirectly, whether as an employee, agent, consultant, broker, partner, principal, owner, stockholder or otherwise (provided that he shall be permitted to purchase up to a 5% interest in any publicly traded company in any such businesses). Until April 17, 2001, Mr. Kalitta agreed: (1) not to serve as an employee, officer or director of, consultant to, or independent contractor for, Trans Continental Airlines, Inc. ("TransCon") or TransCon's affiliates. TransCon is an air freight carrier owned by Scott Kalitta, Mr. Kalitta's son; (2) to cause his affiliates not to, capitalize, make loans to or otherwise finance TransCon in excess of an aggregate principal amount of $7,500,000 outstanding at any one time; and (3) to cause his affiliates not to, lease more than an aggregate of three aircraft of all types to TransCon at any one time. Under the terms of his amended employment agreement, Mr. Kalitta and any affiliate of Mr. Kalitta may: (1) buy, modify, sell and lease aircraft, aircraft engines and aircraft equipment; (2) deal in or with STCs, except that neither Mr. Kalitta, nor any affiliate of Mr. Kalitta, may use his or such affiliate's STCs to modify Boeing 727 aircraft from passenger to freighter configuration until April 17, 2001. Additionally, until April 17, 1999, without our prior written approval, neither Mr. Kalitta nor any of his affiliates shall, directly or indirectly, employ or contract with any individual employed by Kitty Hawk International or any of its affiliates as of April 17, 1998 or at any time within such one year period. Mr. Kalitta also has agreed to, among other things, repay certain loans owed to us by his affiliates, purchase certain non-airline related assets, pay future legal fees and costs associated with the litigation of certain claims we have against GATX-Airlog Company (in exchange for the receipt of all recoveries from such litigation) and abide by certain customary standstill provisions for a three year period. 8 9 TRAINING AND SAFETY We believe that high quality personnel and intensive training programs are key to our success and the maintenance of a good safety record. As a result, we hire experienced flight crews and maintenance personnel and ensure that both receive ongoing training. We maintain our own Douglas DC-8 simulator in Miami, Florida which we use to train our own pilots and hire out for use by other airlines. We also make use of the training facilities of other major airlines. We have 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 management is available at all times through our dispatch system. SALES AND MARKETING Our marketing focus is on major users of air freight transportation services and other logistics providers. In connection with our emphasis on developing and maintaining long-term relationships with major customers, we employ 31 account managers who are dedicated to major accounts. An account manager is responsible for educating the client about our service capabilities, ensuring quality service and determining how we 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. We do not engage in mass media advertising. We, however, do promote our business through trade specific publications and trade shows. EMPLOYEES General. At March 1, 1999, we employed approximately 3,500 full-time personnel, of which approximately 280 were involved in sales and administrative functions and approximately 3,220 in maintenance and flight operations (including approximately 915 pilots). Collective Bargaining Agreement with Certain Employees. The pilots and flight engineers employed by Kitty Hawk International are members of the International Brotherhood of Teamsters and are employed pursuant to a collective bargaining agreement. We are in the process of renegotiating this collective bargaining agreement with representatives of the Teamsters. These pilots and flight engineers have rejected one proposed new collective bargaining agreement. The pilots and flight engineers subject to the collective bargaining agreement are guaranteed pay based upon a minimum of 60 block hours per month. The collective bargaining 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 us to incur costs to retrain crews as they advance in seniority and progress to new aircraft or crew positions. In addition, we 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 will not authorize a strike and we will not lockout union employees. While we intend to negotiate with the Teamsters in good faith, we cannot assure you that we will be able to enter into a new collective bargaining agreement. In addition, negotiations could result in work stoppages, a substantial increase in salaries or wages, changes in work rules or other changes adverse to our business. Also, we cannot assure you that our non-union cockpit crews will remain non-union. ENVIRONMENTAL Our 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 clean up of hazardous or toxic 9 10 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 clean up 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. We are subject to the regulations of the Environmental Protection Agency and state and local governments regarding air quality and other matters. We lease office space, hangar space, ramp space and unimproved areas at various airport locations throughout the U.S. See "Item 2. Properties." Most of these leases require us to indemnify the lessor for any environmental contamination caused by us. In particular, we lease 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, we will lose our right to continue to use the facility. Moreover, the lease provides that we 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, we may incur significant expense to effect either or both of the required relocation of operations or the required clean-up. Currently, we are not aware of any environmental contamination for which we are liable for the cost of removal or cleanup. Until May 2001, Mr. Kalitta has agreed, subject to certain limitations, to indemnify us against any losses arising from any environmental liability at any of the Kalitta Companies' facilities. In part because of the highly industrialized nature of many of the locations at which we operate, there can be no assurance that we have discovered all environmental contamination for which we may be responsible. GOVERNMENT REGULATION General. We are 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 FAA exercise regulatory authority over air carriers. The DOT and the FAA have the authority to modify, amend, suspend or revoke the authority and licenses issued to us 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. In addition, we are subject to regulation by various other federal, state, local and foreign authorities, including the Department of Defense and the Environmental Protection Agency. Our international operations are governed by air services agreements between the U.S. and foreign countries where we operate. Under some of these 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. air carriers and are subject to approval by the applicable foreign regulators, limiting growth opportunities in such countries. Safety, Training and Maintenance Regulations. Virtually every aspect of our air carrier operations are subject to extensive FAA regulation, including the areas of safety, training and maintenance. To ensure compliance with FAA rules and regulations, the FAA routinely inspects air carrier operations and aircraft and proposes civil monetary penalties in the event of non-compliance. Periodically, the FAA focuses on particular aspects of air carrier operations. For example, after the Valujet accident, the FAA adopted new procedures concerning oversight of contract maintenance, and after the Fine Air crash, the FAA conducted extensive inspections of procedures for loading cargo aircraft. These types of inspections and regulations often impose additional burdens on air carriers and increase their operating costs. We cannot predict when we will be subject to such inspections or regulations, nor the impact of such inspections or regulations. Noise Abatement Regulations. Airline operators must comply with FAA noise control regulations primarily promulgated under the Airport Noise and Capacity Act of 1990 (the "Noise Regulations"). 10 11 Currently, we are in compliance with the Noise Regulations. We own 71 aircraft and lease seven aircraft that are affected by the Noise Regulations, consisting of 11 Boeing 747s (two of which are grounded due to a series of FAA Airworthiness Directives unrelated to the Noise Regulations), eight Lockheed L-1011s, 19 Douglas DC-8s, 35 Boeing 727s and five Douglas DC-9-15Fs (collectively, the "Jet Fleet"). Each aircraft in the Jet Fleet must comply with Stage 3 of the Noise Regulations by January 1, 2000. Any aircraft not complying with Stage 3 of the Noise Regulations on January 1, 2000 may not be operated in the U.S. until it complies with Stage 3 of such regulations. Of the 78 aircraft in the Jet Fleet, 55 aircraft currently comply with Stage 3 of the Noise Regulations or are currently being modified to comply with Stage 3 of such regulations, including all of our Boeing 747s and Lockheed L-1011s. Only six of our 19 Douglas DC-8s comply with Stage 3 of the Noise Regulations. Because we cannot currently justify the cost to bring the 13 remaining Douglas DC-8s into compliance with Stage 3 of the Noise Regulations, we do not intend to modify these 13 Douglas DC-8s to meet Stage 3 of the Noise Regulations. We currently intend to dispose of these 13 Douglas DC-8s. Because these Douglas DC-8s are collateral under one of our debt agreements, any sale of these aircraft must be made in compliance with the debt agreement, which may include repaying a portion of the loan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In addition, eight of our Boeing 727s do not comply with Stage 3 of the Noise Regulations, not including two Boeing 727s currently being modified to comply with Stage 3 of such regulations and one Boeing 727 currently parked. Other than the parked Boeing 727, we currently anticipate modifying our remaining Boeing 727s to comply with Stage 3 of the Noise Regulations by January 1, 2000. We anticipate the aggregate cost of these modifications to be approximately $14.4 million, not including aircraft downtime. In addition, one of our Douglas DC-9-15Fs does not comply with Stage 3 of the Noise Regulations. We currently intend to modify this Douglas DC-9-15F to comply with Stage 3 of the Noise Regulations by January 1, 2000 at a cost of $1.5 million, not including aircraft downtime. Some airport operators have adopted local regulations which, among other things, impose curfews and other noise limiting requirements and other airport operators may do so in the future. Finally, our international operations are affected by noise regulations in foreign countries that may be stricter than those in effect in the U.S. Cargo Door and Floor Modifications Regulations. We currently operate 31 Boeing 727s which were converted from passenger configuration to freighter configuration by installing a large cargo door and various cargo container handling systems. The FAA issued authorizations, called Supplemental Type Certificates ("STCs"), to four companies to convert Boeing 727s from passenger configuration to freighter configuration. All of these 31 Boeing 727s were converted to freighter configuration pursuant to three of the four STCs. The FAA has reevaluated these STCs and has determined that they do not meet FAA standards in several respects. The FAA has issued an Airworthiness Directive (a "Directive") to address the first of its concerns -- the structural strength of the aircraft floor. Other areas of concern relate to the strength of various cargo-handling systems and are expected to be addressed later. Pursuant to the Directive, each operator of Boeing 727 freighter aircraft modified pursuant to any of the four STCs must limit the weight of each cargo container position and adopt other operating restrictions, until the operator can demonstrate that the floor strength meets the FAA's standards. Under the Directive, until we can demonstrate that the floor strength meets the FAA's standards, we must limit the weight of each cargo container position to approximately 4,000 pounds and after June 2001, we must limit the weight of each cargo container position to approximately 3,000 pounds. Currently, the maximum weight of each cargo container position is approximately 8,000 pounds. Most of our Boeing 727s have 12 cargo container positions. To address this problem, during the first half of 1998, we purchased one of these four STCs. Of the 31 Boeing 727s we currently operate, five were converted to cargo configuration pursuant to this STC. As the owner of this STC, we were able to receive authority from the FAA to modify these five Boeing 727s 11 12 to raise the permissible weight of each cargo container position to approximately 6,000 pounds. We expect these modifications to take three to four days to complete and to cost between $25,000 to $50,000 per aircraft, not including aircraft downtime. We expect to perform all of these modifications at our maintenance facilities. We have also applied to the FAA for authority to modify our remaining Boeing 727s to raise the permissible weight per cargo container position to approximately 6,000 pounds. We do not expect this Directive to have a material adverse effect on our business. The FAA is now reviewing the structural integrity of other types of cargo aircraft, including Douglas DC-8s and DC-9s. We are currently working with the FAA and other industry groups to analyze these issues and propose solutions, if any. We do not expect this matter to have a material adverse effect on our business. Aging Aircraft Regulations; Potential Compliance Costs. All of our aircraft are subject to FAA Directives issued at any time under the FAA's "Aging Aircraft" program or issued on an ad hoc basis. These Directives can cause us to conduct extensive examinations and structural inspections of our aircraft and to make modifications to our aircraft to address or prevent problems of corrosion and structural fatigue. For example, the FAA has issued a Directive requiring certain modifications to the engine pylons on all Boeing 747-100s and -200s by March 2000. Three of our Boeing 747s must be modified pursuant to this Directive at an anticipated cost of between $1 million and $1.5 million per aircraft, not including downtime of approximately 45 days per aircraft. We currently intend to modify two of these Boeing 747s in 1999 and the remaining Boeing 747 in 2000. We expect to modify one Boeing 747 during regularly scheduled maintenance to minimize the impact of its downtime and will seek to have the other two aircraft modified during scheduled maintenance to the extent practicable. Hazardous Materials Regulations. The FAA exercises regulatory jurisdiction over transporting hazardous materials. From time to time, we transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility with the air carrier for compliance with these regulations and are primarily responsible for proper packaging and labeling. If we fail to discover any undisclosed hazardous materials or mislabel or otherwise ship hazardous materials, we may suffer possible aircraft damage or liability, as well as, substantial monetary penalties. The FAA has recently increased its monitoring of shipments of hazardous materials. Contraband Risks. Although required to do so, customers may fail to inform us about cargo that must be processed by applicable customs authorities. If we fail to properly process cargo through customs, our aircraft could be seized and/or we may suffer substantial monetary penalties. In addition, some of our aircraft fly to and from countries, such as Colombia, where substantial quantities of illegal drugs are manufactured. In the past, without our prior knowledge, individuals have tried to smuggle illegal drugs into the U.S. on our aircraft. If we fail to discover any illegal drugs or other illegal cargo on our aircraft, the aircraft could be seized and/or we may suffer substantial monetary penalties. Foreign Operations Regulated. Some of our operations are conducted between the U.S. and foreign countries, as well as between two or more points located outside the U.S. As with the certificates and licenses obtained from U.S. authorities, we must comply with all applicable rules and regulations imposed by foreign aeronautical authorities or risk having our foreign operating certificates or licenses revoked, suspended, amended or modified. Stock Ownership by Non-U.S. Citizens. Under current federal aviation law, our air freight carriers could cease to be eligible to operate as air freight carriers if more than 25% of our voting stock 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 must be U.S. citizens. All of our directors and officers are U.S. citizens. Furthermore, the Certificate of Incorporation limits the aggregate voting power of non- 12 13 U.S. persons to 22 1/2% of the votes voting on or consenting to any matter, and our Bylaws do not permit non-U.S. citizens to serve as directors or officers. INSURANCE We are vulnerable to potential losses that 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. We are required by the DOT to carry liability insurance on each of our aircraft and many of our aircraft leases and contracts also require us to carry such insurance. We currently maintain public liability and property damage insurance and aircraft liability insurance for each 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 some small aircraft. We maintain baggage and cargo liability insurance if not provided by our customers under contracts. Although we believe that our insurance coverage is adequate, there can be no assurance that the amount of such coverage will not be changed upon renewal or that we will not be forced to bear substantial losses from accidents. Substantial claims resulting from an accident could have a material adverse effect on our business. We attempt to monitor the amount of liability insurance maintained by the third party carriers utilized in our air logistics business through, among other things, the obtaining of certificates of insurance. ITEM 2. PROPERTIES General. Our facilities consist of office space, hangars, maintenance facilities and warehouse and storage space. Some of our hangar facilities are constructed on property ground leased from airport owners. Accordingly, the hangar improvements revert to the owner when the ground lease expires. We also have various agreements with municipalities and governmental authorities that own and operate airports throughout the U.S. These agreements generally relate to our use of general airport facilities, but may also include leases or licenses to use hangar and maintenance space. In addition, we own a number of aircraft. See "Item 1. Business -- Aircraft Fleet." The following is a summary of our major facilities:
OWNED/ LOCATION USE OF SPACE LEASED - -------- ------------ ------ Dallas/Fort Worth International Company headquarters Owned(1) Airport Dallas/Fort Worth International Offices and warehouse Leased Airport Willow Run Airport, Ypsilanti, MI Office, hangar, maintenance, fuel farm and storage Leased N. I-94 Service Drive, Ypsilanti, MI Office, storage and maintenance Owned Oscoda, MI Office, hangar, maintenance, housing, fuel farm and storage Leased Hulman Regional Airport, Office, hangar and sorting space Terre Haute, IN Leased Los Angeles International Airport Office, hangar and ramp Leased Honolulu International Airport(2) Office and warehouse Leased Miami International Airport Office, hangar, ramp and maintenance Leased
- --------------- (1) We own the building and improvements and lease the land from the Dallas/Fort Worth International Airport. (2) We have constructed a warehouse at the Honolulu International Airport which we lease to AIC. 13 14 New Sorting Facility. We currently lease our 90,000 square foot sorting space at the Hulman Regional Airport in Terre Haute, Indiana. Because of the lack of available expansion space and the limited airport facilities in Terre Haute, we plan to move this sorting center to Fort Wayne, Indiana in July 1999. We have entered into a 20 year lease with the Fort Wayne-Allen County Airport Authority for a 239,000 square foot sorting facility. This new sorting facility will more than double the current sorting capacity of our scheduled freight business, to approximately 2 million pounds per day. A separate area of the facility will be dedicated to serving the U.S. Postal Service. We also lease ramp space, a 30,000 square foot maintenance building for aircraft and ground support equipment maintenance and a 15,000 square foot facility for crew quarters and flight operations. In addition, we have access to a 12,000 foot lighted runway equipped for full instrument approach. Oscoda Base. We sublease our 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 and are subject to earlier termination upon termination of the prime lease between the U.S. Government and the Wurtsmith Authority. Under the subleases, we have access to an 11,800 foot lighted runway equipped for full instrument approach, as well as office, hangar, maintenance and storage space. Until 2011, the Oscoda facility is part of a "renaissance" zone which means that we do not pay real or personal property taxes on our facilities and equipment in Oscoda. In connection with the restructuring of Kitty Hawk International, we are closing surplus portions of our Oscoda facility. ITEM 3. LEGAL PROCEEDINGS Litigation Concerning American International Cargo. As a result of our acquisition of AIA (now Kitty Hawk International), we acquired a 60% interest in AIC. Pacific Aviation Logistics, Inc. ("PAL") owned the remaining 40% interest in AIC and was the managing partner of AIC. Beti Ward, who owns PAL, was the general manager of AIC. AIC operates a scheduled air freight service between Los Angeles, Honolulu and various destinations in the Pacific. AIC does not own any aircraft and currently leases all of its aircraft and facilities from us. In August 1998, we called a partnership meeting to designate AIA as the managing partner of AIC and to replace Ms. Ward as general manager. In response, Ms. Ward and PAL filed suit to prevent these actions and requested the court to dissolve AIC. While these issues were being addressed in court, we reached a settlement with Ms. Ward and PAL. The terms of the settlement are: (1) AIC will pay PAL a $5.4 million cash distribution from PAL's capital account in AIC. (2) We will give Ms. Ward and PAL a promissory note for an additional $2.35 million, payable in three annual installments of $700,000 each and one final payment of $250,000. This promissory note bears interest at a rate of 9.98%, and interest is payable semi-annually. (3) Ms. Ward and PAL will transfer to us all of their interest in AIC and its business. (4) Ms. Ward and PAL will broadly covenant not to compete in the Los Angeles and Honolulu air freight markets for a period of three and one-half years. (5) Ms. Ward and PAL will return approximately $180,000 worth of AIC's property. (6) All the parties will exchange mutual releases, but we will retain the right to pursue audit actions and seek other limited recoveries against Ms. Ward and PAL. As a result of the settlement, we now have full ownership and control of AIC and its business is being conducted without interruption. Currently, we anticipate dissolving AIC and combining its operations with our domestic scheduled freight services business. Routine Litigation. We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be 14 15 predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are:
NAME OFFICES - ---- ------- M. Tom Christopher.................... Chairman of the Board of Directors and Chief Executive Officer James R. Craig........................ Vice President and General Counsel Tilmon J. Reeves...................... President and Chief Operating Officer Richard R. Wadsworth.................. Senior Vice President -- Finance, Chief Financial Officer and Secretary
M. Tom Christopher has served as our Chairman of the Board of Directors and Chief Executive Officer since our 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. James R. Craig has served as our Vice President and General Counsel since April 1, 1998. From October 1994 to November 1997, Mr. Craig served on our Board of Directors. Prior to April 1998, Mr. Craig was of counsel to Burke, Wright & Keiffer, P.C. Prior to his affiliation with Burke, Wright & Keiffer, P.C., Mr. Craig was in private law practice in Dallas since 1971 and in 1989 served as President of Whitehall Development Company, a real estate development firm, of which he is now a director. Tilmon J. Reeves has served as our President since May 1993 and as our Chief Operating Officer from May 1993 to November 1997 and from April 1998 until the present. Mr. Reeves has over 30 years of aviation experience. 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. Richard R. Wadsworth has served as our Senior Vice President -- Finance since October 1992, Chief Financial Officer since September 1994 and Secretary since October 1994. Mr. Wadsworth served on our Board of Directors from October 1994 to November 1997 and from April 1998 to the present. Mr. Wadsworth serves in the class of directors whose terms expire at the 2001 Annual Meeting of Stockholders. MODIFICATION OF REEVES EMPLOYMENT AGREEMENT AND GRANT OF OPTIONS In April 1998, we entered into a Modified and Restated Employment Agreement (the "Employment Agreement") with Mr. Reeves. The Employment Agreement modifies and supercedes Mr. Reeves' prior employment agreement in its entirety. The terms of the Employment Agreement are substantially similar to those of Mr. Reeves' prior employment agreement, except for the following: (1) Mr. Reeves' annual base salary was increased from $115,000 to $400,000. (2) in the event we terminate Mr. Reeves' employment other than as a result of Mr. Reeves' material breach of the Employment Agreement, Mr. Reeves' guaranteed post-termination compensation was increased from one year at 100% of his then-current salary and two additional years at 50% of his then-current salary to five years at 100% of his then-current salary, payable at the time he would have received it absent termination; and (3) Mr. Reeves was granted a non-qualified stock option (the "Old Option") to acquire 400,000 shares of common stock at an exercise price of $16.75 per share. The option vested as to 15 16 100,000 shares on each of April 27, 1999, 2000, 2001 and 2002. However, in general, in the event of our dissolution or liquidation, our reorganization, merger or consolidation where we were not the surviving entity, or our sale of substantially all of our property, the option became immediately exercisable in full. In addition, upon our termination of Mr. Reeves' employment without cause or upon Mr. Reeves' death or disability, the option became immediately exercisable in full. The option terminated on the earlier of December 31, 2005 or the 12 month anniversary of Mr. Reeves' death. In addition, if we terminated Mr. Reeves' employment for cause or if Mr. Reeves voluntarily terminated his employment before reaching age 65, other than for disability, the option terminated immediately. Further, we could have immediately terminated the option if during or after Mr. Reeves' employment, Mr. Reeves directly or indirectly engaged in competition with us or disclosed any of our proprietary and confidential business information in breach or violation of any agreement. The option generally provided for customary anti-dilution protection for Mr. Reeves and granted Mr. Reeves rights to register shares he received under the option at the same time and in the same proportion as Mr. Christopher registered shares of common stock. Neither Messrs. Christopher or Reeves have contractual rights to cause us to register shares of common stock. In February 1999, we replaced the Old Option with a non-qualified stock option (the "New Option") to acquire 400,000 shares of common stock at an exercise price of $16.75 per share. The New Option was granted under the Kitty Hawk, Inc. 1999 Executive Stock Option Plan (the "Option Plan") and is subject to stockholder approval of the Option Plan at the 1999 Annual Meeting of Stockholders. In connection with the grant of the New Option, Mr. Christopher irrevocably agreed to vote all shares of common stock he is entitled to vote in favor of approving the Option Plan at the 1999 Annual Meeting of Stockholders. Mr. Christopher currently has the right to vote approximately 58.2% of the common stock, which is greater than the majority approval required to approve the Option Plan. The terms of the New Option are substantially the same as the terms of the Old Option, except that the New Option vests as to 200,000 shares on February 24, 1999 and an additional 100,000 shares on each of February 24, 2000 and 2001 and fully vests immediately upon a change of control of the Company. In addition, the term of the New Option was extended from December 31, 2005 to February 24, 2009. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market System under the symbol "KTTY". The following table sets forth the range of high and low closing sale prices of the common stock for the periods shown below.
PRICE RANGE --------------- QUARTER ENDED HIGH LOW - ------------- ------ ------ March 31, 1997.............................................. $12.63 $10.00 June 30, 1997............................................... 17.13 11.88 September 30, 1997.......................................... 20.25 15.13 December 31, 1997........................................... 22.75 17.00 March 31, 1998.............................................. 24.25 18.00 June 30, 1998............................................... 21.00 15.00 September 30, 1998.......................................... 19.00 11.50 December 31, 1998........................................... $14.50 $10.00
At March 24, 1999, we had approximately 69 record holders of our common stock. Based upon our last determination of the number of beneficial owners of common stock, we had approximately 3,500 beneficial owners. 16 17 We have never declared or paid any cash dividends on the common stock. We presently intend to retain earnings, if any, for development and growth of our business and do not anticipate paying cash dividends on the common stock in the foreseeable future. Our debt agreements contain significant limitations on our ability to pay dividends. Payment of future dividends, if any, will be at the discretion of our Board of Directors, after taking into account various factors, including our earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations, and there can be no assurance that dividends will be paid. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA On December 4, 1996, the Company changed its fiscal year end from August 31 to December 31. The following table sets forth selected financial and operating data with respect to the Company for each of the fiscal years indicated and for the four months ended December 31, 1995 and 1996. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-K. The selected statement of operations data for the fiscal year ended August 31, 1996, for the four months ended December 31, 1996 and for each of the fiscal years ended December 31, 1997 and 1998 and the selected balance sheet data as of December 31, 1997 and 1998 have been derived from audited consolidated financial statements of the Company appearing elsewhere in this Form 10-K. The selected balance sheet data as of August 31, 1994, 1995 and 1996 and December 31, 1996 have been derived from audited consolidated financial statements of the Company not appearing in this Form 10-K. The selected statement of operations data for the fiscal years ended August 31, 1994 and 1995 has been derived from audited consolidated financial statements of the Company not appearing in this Form 10-K. Operating results for the four months ended December 31, 1995 and 1996 are not necessarily indicative of results that may be expected for a calendar year. In the opinion of management of the Company, the selected statement of operations data for the four months ended December 31, 1995, which are derived from the Company's unaudited consolidated financial statements appearing elsewhere in this Form 10-K, 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. In November 1997, the Company acquired the Kalitta Companies. Accordingly, the results of operations of the Kalitta Companies are included in the financial and operating data from their date of acquisition. Also included in the following table are the Companies' unaudited pro forma consolidated statement of operations data for the fiscal year ended December 31, 1997, giving effect to (i) the November 1997 acquisition of the Kalitta Companies, (ii) the issuance of the Notes, (iii) the incurrence of a $45.9 million term loan and (iv) the September 1997 acquisition of 16 Boeing 727s from the Kalitta Companies, each as if they occurred on January 1, 1997. This information is presented for illustrative purposes only and does not purport to present the Company's results of operations had these transactions occurred on the date indicated, nor are they necessarily indicative of the consolidated results of operations which may be expected to occur in the future. No pro forma adjustments have been applied to reflect (i) revenues or operating costs generated from two Boeing 747s purchased in February 1998 and modified with approximately $56 million of the net proceeds from the sale of the Notes and other internally generated funds or (ii) operating efficiencies or cost savings (other than approximately $1.5 million of insurance savings) resulting from the acquisition of the Kalitta Companies. In addition, pro forma results have not been adjusted to eliminate (i) abnormally high engine maintenance expenses previously incurred in response to certain Directives, (ii) costs previously incurred to add and maintain flight crews in anticipation of increased air freight carrier business which had not yet materialized in part due to delays in acquiring aircraft and (iii) start-up costs previously incurred to establish the Company's wide-body passenger charter business, which was recently terminated. 17 18
FOUR MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------- FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, 1997 ------------------------------ ----------------- PRO 1994 1995 1996 1995 1996 1997 FORMA 1998 -------- -------- -------- ------- ------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Air freight carrier revenues...... $36,563 $47,106 $72,605 $37,437 $43,867 $177,159 $531,551 $602,918 Air logistics revenues............ 71,137 56,604 69,810 32,291 16,119 70,539 70,539 80,757 Maintenance and other............. -- -- -- -- -- 2,145 29,231 31,262 ------- ------- ------- ------- ------- -------- -------- -------- Total revenues.................... 107,700 103,710 142,415 69,728 59,986 249,843 631,321 714,937 Total costs of revenues........... 92,951 85,532 119,489 57,682 47,580 195,691 548,217 598,797 ------- ------- ------- ------- ------- -------- -------- -------- Gross profit...................... 14,749 18,178 22,926 12,046 12,406 54,152 83,104 116,140 General and administrative expenses........................ 6,013 7,832 9,080 2,862 2,725 15,106 38,160 43,037 Non-qualified profit sharing expense......................... 732 1,001 1,170 889 962 2,429 2,429 2,797 Stock option grants to executives...................... -- -- 4,231(1) -- -- -- -- -- ------- ------- ------- ------- ------- -------- -------- -------- Operating income.................. 8,004 9,345 8,445 8,295 8,719 36,617 42,515 70,306 Interest expense.................. (343) (1,185) (1,859) (482) (684) (6,924) (40,084) (40,004) Contract settlement income, net(2).......................... 1,178 -- -- -- -- -- -- -- Other income (expense)............ (432) (601) 291 38 625 1,110 (355) 674 ------- ------- ------- ------- ------- -------- -------- -------- Income (loss) before minority interest and income taxes....... 8,407 7,559 6,877 7,851 8,660 30,803 2,076 30,976 Minority interest................. -- -- -- -- -- (497) (3,036) (3,006) ------- ------- ------- ------- ------- -------- -------- -------- Income (loss) before income taxes........................... 8,407 7,559 6,877 7,851 8,660 30,306 (960) 27,970 Income taxes...................... 3,146 3,143 2,768 3,097 3,367 12,416 -- 11,328 ------- ------- ------- ------- ------- -------- -------- -------- Net income (loss)................. $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293 $ 17,890 $ (960) $ 16,642 ======= ======= ======= ======= ======= ======== ======== ======== Basic and diluted earnings (loss) per share....................... $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55 $ 1.60 $ (0.06) $ 0.99 ======= ======= ======= ======= ======= ======== ======== ======== Weighted average common shares outstanding..................... 7,968 7,968 7,928 7,968 9,610 11,194 16,751 16,855 OTHER FINANCIAL DATA: Capital expenditures.............. $13,876 $17,929 $33,538 $ 175 $13,796 $115,014 $ 24,356 $217,179 Adjusted EBITDA(3)................ $ 9,507 $12,839 $19,840 $10,014 $12,546 $ 53,278 $ 88,314 $126,462 Ratio of adjusted EBITDA to total interest expense................ 27.7x 10.8x 10.7x 20.8x 18.3x 7.7x 2.2x 3.16x Ratio of earnings to fixed charges(4)...................... 20.6x 6.9x 4.4x 15.9x 12.9x 4.4x 1.1x 1.6x OPERATING DATA: Air freight carrier Aircraft owned (at end of period)....................... 15 22 25 22 25 124 124 117 Flight hours(5)................. 11,795 15,183 20,237 6,320 7,670 46,198 127,548 134,577 Air freight charter logistics Number of on-demand charters managed(6).................... 16,713 14,198 19,578 9,356 4,185 15,402 15,402 17,743
AUGUST 31, DECEMBER 31, --------------------------- ------------------------------ 1994 1995 1996 1996 1997 1998 ------- ------- ------- -------- -------- -------- BALANCE SHEET DATA: Working capital (deficit).............................. $ 4,223 $ 1,747 $(6,962) $ 33,519 $117,930 $ 44,958 Total assets........................................... 37,911 47,954 79,827 123,028 836,746 982,585 Total debt............................................. 9,145 16,981 36,912 24,768 404,643 489,751 Stockholders' equity................................... $12,550 $16,966 $23,639 $ 58,292 $174,873 $194,197
- --------------- (1) Results for the fiscal year ended August 31, 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 would have been approximately $6,648 and net income per share would have been $0.84. (2) Reflects sums received in settlement of litigation. (3) Adjusted EBITDA represents net income before minority interest, income tax expense, interest expense, depreciation, amortization and certain items described below. Adjusted EBITDA excludes 18 19 approximately $4,231 from stock options granted to executives in 1996 and approximately $1,178 in contract settlements in fiscal 1994, respectively. 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. (4) In calculating the ratio of earnings to fixed charges, earnings consist of income before minority interest and 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 the Company to represent the interest portion of such payments). (5) As reported by the Company 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. (6) Includes on-demand charters flown by the Company's aircraft. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Acquisition of the Kalitta Companies. On November 19, 1997, the Company acquired all of the outstanding stock of the Kalitta Companies. The results of operations for fiscal year 1997 include the results of operations of the Kalitta Companies for the period November 19, 1997 to December 31, 1997, which is generally the highest volume and most profitable period of the year. Revenues. The Company's revenues are derived from four related businesses (i) an air freight carrier, (ii) a scheduled freight service provider, (iii) an air logistics service provider and (iv) a maintenance operation. Air freight carrier revenues are derived substantially from ACMI contract charters, on-demand charters flown with the Company's aircraft and the Company's passenger charter service. Scheduled freight services revenues are generated through an overnight airport-to-airport air freight service to approximately 46 U.S. cities and an international service between Los Angeles and Honolulu, among the Hawaiian islands and once a week through Melbourne, Hong Kong and other Pacific Rim locations. Revenue for the scheduled freight service is included in the air freight carrier. Air logistics revenues are derived substantially from on-demand air freight charters arranged by the Company for its customers utilizing the flight services of third party air freight carriers. With respect to on-demand charters that are arranged by the Company and flown 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. Maintenance revenue is generated from third party maintenance work performed on engines and airframes. The Company recently eliminated its passenger charter division and parked the four passenger planes in that division. In addition, the Company has stopped providing third party airframe repairs and engine overhaul services, other than on JT3 engines used on Douglas DC-8s and JT8 engines used on Boeing 727s and Douglas DC-9s. See "Item 1. Business -- Restructuring of Kitty Hawk International." The principal factors that have contributed to revenue growth over the past several years have been increases in the size of the Company's fleet from 10 aircraft at December 31, 1993 to 117 aircraft at December 31, 1998, the general U.S. economic expansion since 1992 and 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 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 and operations of the Company's scheduled freight services 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 the Company's aircraft, all related air transportation expenses are allocated to the air freight carrier business and all related cargo ground handling and transportation are allocated to the air logistics business. The principal components of the costs of revenues attributable to maintenance consist of costs related to the provision of third party maintenance services. Under the Company's Amended and Restated Annual Incentive Compensation Plan, the Company awards semiannual cash bonuses to its employees. The aggregate amount of bonuses for the fiscal year ended August 31, 1996, the fiscal years ended December 31, 1997 and 1998 and the four months ended December 31, 1996 have equaled 9.5%, 7.3%, 10% and 10%, respectively, of the Company's income before the deduction of income taxes, stock option grants to executives and the bonuses that were expensed under this plan. The Company's gross margins have been substantially higher in its air freight carrier business (which uses Company aircraft) than in its air logistics business (which principally uses third party aircraft). In 20 21 addition, the air freight carrier business historically has provided a more predictable revenue base. Accordingly, the Company allocates its aircraft to ACMI contracts prior to allocating them to on-demand service. Significant Events Affecting Comparability of Results of Operations. Since September 1, 1995, several events have affected the comparability of results of operations for the fiscal years ended August 31, 1996 and December 31, 1997. In fiscal year 1996, the Company granted Messrs. Reeves and Wadsworth options to purchase 390,707 and 153,567 shares of common stock, respectively, for an exercise price of $0.01 per share that resulted in a charge to earnings of approximately $4,231,000. In 1997, the Company acquired the Kalitta Companies and included their results of operations for the period November 19, 1997 to December 31, 1997 in the Company's results of operations, which increased revenues by approximately $58.9 million, costs of revenues by approximately $49.4 million and income before interest, minority interest and income taxes by approximately $6.5 million. Dependence of Significant Customers. The U.S. Postal Service accounted for revenues of $21.3 million, $44.9 million, $120 million and $26.2 million, or 14.9%, 17.9%, 16.8% and 43.7% of total revenues, for the fiscal year ended August 31, 1996, the years ended December 31, 1997 and 1998 and the four months ended December 31, 1996. BAX Global accounted for revenues of $15.6 million, $44.7 million, $71.5 million and $7.1 million, or 10.9%, 17.9%, 10% and 11.9% of total revenues, for the fiscal year ended August 31, 1996, the years ended December 31, 1997 and 1998 and the four months ended December 31, 1996. Revenues from these two customers are generated by the air freight carrier. Change in Fiscal Year. On December 4, 1996, the Company changed its fiscal year end from August 31 to December 31. RESULTS OF OPERATIONS The following tables set forth, on a comparative basis for the periods indicated, the components of the Company's gross profit and the gross profit margin by revenue type:
FISCAL YEAR FOUR MONTHS ENDED DECEMBER 31, ENDED AUGUST 31, --------------------------------- 1996 1995 1996 ----------------- --------------- --------------- (IN THOUSANDS) AIR FREIGHT CARRIER: Revenues.................................. $72,605 100.0% $37,437 100.0% $43,867 100.0% Costs of revenues......................... 54,648 75.3 27,385 73.1 32,714 74.6 ------- ----- ------- ----- ------- ----- Gross profit.............................. $17,957 24.7% $10,052 26.9% $11,153 25.4% ======= ===== ======= ===== ======= ===== AIR LOGISTICS: Revenues.................................. $69,810 100.0% $32,291 100.0% $16,119 100.0% Costs of revenues......................... 64,841 92.9 30,297 93.8 14,866 92.2 ------- ----- ------- ----- ------- ----- Gross profit.............................. $ 4,969 7.1% $ 1,994 6.2% $ 1,253 7.8% ======= ===== ======= ===== ======= =====
21 22
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1996 1997 1997 PRO FORMA 1998 --------------- ---------------- ---------------- ---------------- (IN THOUSANDS) AIR FREIGHT CARRIER: Revenues.............. $78,793 100.0% $177,159 100.0% $531,551 100.0% $602,918 100.0% Costs of revenues..... 60,378 76.6 127,957 72.2 460,048 86.5 501,825 83.2 ------- ----- -------- ----- -------- ----- -------- ----- Gross profit.......... $18,415 23.4% $ 49,202 27.8% $ 71,503 13.5% $101,093 16.8% ======= ===== ======== ===== ======== ===== ======== ===== AIR LOGISTICS: Revenues.............. $53,879 100.0% $ 70,539 100.0% $ 70,539 100.0% $ 80,757 100.0% Costs of revenues..... 49,008 91.0 65,921 93.5 65,921 93.5 73,862 91.5 ------- ----- -------- ----- -------- ----- -------- ----- Gross profit.......... $ 4,871 9.0% $ 4,618 6.5% $ 4,618 6.5% $ 6,895 8.5% ======= ===== ======== ===== ======== ===== ======== ===== MAINTENANCE AND OTHER: Revenues.............. -- -- $ 2,145 100.0% $ 29,231 100.0% $ 31,262 100.0% Costs of revenues..... -- -- 1,813 85.5 22,248 76.1 23,110 73.9 ------- ----- -------- ----- -------- ----- -------- ----- Gross profit.......... -- -- $ 332 15.5% $ 6,983 23.9% $ 8,152 26.1% ======= ===== ======== ===== ======== ===== ======== =====
The following table presents, for the periods indicated, consolidated income statement data expressed as a percentage of total revenues:
FOUR MONTHS YEAR ENDED DECEMBER 31, FISCAL YEAR ENDED --------------------------------- ENDED DECEMBER 31, AUGUST 31, ------------- 1997 1996 1995 1996 1996 1997 PRO FORMA 1998 ----------- ----- ----- ----- ----- --------- ----- REVENUES: Air freight carrier........................ 51.0% 53.7% 73.1% 59.4% 70.9% 84.2% 84.3% Air logistics.............................. 49.0 46.3 26.9 40.6 28.2 11.2 11.3 Maintenance and other...................... -- -- -- -- 0.9 4.6 4.4 ----- ----- ----- ----- ----- ----- ----- Total revenues............................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total costs of revenues.................... 83.9 82.7 79.3 82.4 78.3 86.8 83.8 ----- ----- ----- ----- ----- ----- ----- Gross profit............................... 16.1 17.3 20.7 17.6 21.7 13.2 16.2 General and administrative expenses........ 6.4 4.1 4.5 6.8 6.0 6.1 6.0 Non-qualified profit sharing expense....... 0.8 1.3 1.6 0.9 0.9 0.4 0.4 Stock option grants to executives.......... 3.0 -- -- 3.2 -- -- -- ----- ----- ----- ----- ----- ----- ----- Operating income........................... 5.9 11.9 14.6 6.7 14.8 6.7 9.8 Interest expense........................... (1.3) (0.7) (1.2) (1.6) (2.8) (6.3) (5.6) Other income (expense)..................... 0.2 0.1 1.0 0.7 0.4 (0.1) 0.1 ----- ----- ----- ----- ----- ----- ----- Income before minority interest and income taxes.................................... 4.8 11.3 14.4 5.8 12.4 0.3 4.3 Minority interest.......................... -- -- -- -- (0.2) (0.5) (0.4) ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes.......... 4.8 11.3 14.4 5.8 12.2 (0.2) 3.9 Income taxes............................... 1.9 4.4 5.6 2.3 5.0 -- 1.6 ----- ----- ----- ----- ----- ----- ----- Net income (loss).......................... 2.9% 6.9% 8.8% 3.5% 7.2% (0.2)% 2.3% ===== ===== ===== ===== ===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE PRO FORMA YEAR ENDED DECEMBER 31, 1997 Due to the impact the acquisition of the Kalitta Companies and related transactions have had on the financial position and results of operations of the Company, management has determined that the historical results of operations for the year ended December 31, 1997 lack meaningful comparability to the results of operations for the year ended December 31, 1998. As a result, the Company has provided a comparison of the pro forma year ended December 31, 1997 to the year ended December 31, 1998, which the Company believes provides the most relevant and useful information to investors. Other than the information 22 23 provided above, no further comparison of the historical results of operations for the year ended December 31, 1997 to the year ended December 31, 1998 is provided herein. Revenues -- Air Freight Carrier. Air freight carrier revenues for 1998 increased to $602.9 million, or 13.4%, from $531.6 million for pro forma 1997. Air freight carrier on-demand, ACMI contract charter, and scheduled freight revenues were $75.5 million, $358.8 million and $166.5 million, or 12.5%, 59.5% and 27.6%, respectively, of total air freight carrier revenues for 1998, as compared to $80.3 million, $283.2 million and $164.1 million, or 15.1%, 53.3% and 30.9%, respectively, of total air freight carrier revenues for pro forma 1997. Revenues from on-demand charters flown by Company aircraft for 1998 decreased 6% as a percent of air freight carrier revenues from pro forma 1997. This was due to aircraft being allocated to ACMI contract charter service rather than on-demand service, consistent with the Company's strategy of using more of its fleet in ACMI business which produces relatively stable revenues. Revenues from the Company's ACMI contracts increased $75.6 million, or 26.7%, during 1998, in part due to a $22.9 million increase in passenger charters from the acquisition of two Boeing 747 passenger aircraft early in 1998 which were subsequently converted to cargo configuration in the fall of 1998. The remaining increase in ACMI contract charter revenue was generated through the addition of three Boeing 727s in August 1998, the conversion of the three Boeing 747 aircraft from passenger to cargo configuration during 1998 (including two of which flew passenger charters for the first half of the year), as well as an overall increase of $12.7 million in the Company's December 1998 ACMI contract with the United States Postal Service (USPS). Scheduled freight service revenue increased $2.5 million, or 1.5%, principally due to higher volumes in the last half of 1998. Prices for the Company's on-demand charters remained relatively constant during this period. The Company implemented selective price increases for its ACMI contract charters and scheduled freight services during 1998. Revenues -- Air Logistics. Air logistics revenues in 1998 increased $10.2 million, or 14.5%, to $80.8 million from $70.5 million in pro forma 1997. The number of on-demand charters managed increased by 2,341 charters, or 15.2%, to 17,743 charters for 1998 from 15,402 charters for pro forma 1997. Prices for the Company's air logistics services have remained relatively constant. Revenues -- Maintenance and other. Maintenance and other revenues in 1998 increased $2 million, or 6.9%, to $31.2 million from $29.2 million in pro forma 1997. The increase was principally due to a large third party project started and completed in 1998. This increase was offset by an overall effort begun in late 1998 to reduce third party maintenance as the Company shifts its efforts to performing maintenance on its own fleet. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues in 1998 increased $41.8 million, or 9.1%, to $501.8 million, from $460 million in pro forma 1997, reflecting increased air freight carrier business. The gross profit margin from the air freight carrier business increased from 13.5% for pro forma 1997 to 16.8% for 1998. The increase in margins was primarily the result of lower maintenance costs resulting from operational efficiencies associated with performing maintenance with internal resources, higher utilization of aircraft during 1998 and lower average fuel prices in 1998 as compared to pro forma 1997. Fuel prices may increase during 1999 due to reduced oil exports by certain countries. Costs of Revenues -- Air Logistics. Air logistics costs of revenues in 1998 increased $7.9 million, or 12%, to $73.9 million, from $66 million in pro forma 1997. The gross profit margin from air logistics increased from 6.5% for pro forma 1997 to 8.5% for 1998. The increased margin is a result of directing a larger percentage of on-demand charters to the Company's aircraft (including aircraft acquired as a result of the Kalitta Companies acquisition) rather than to third party aircraft, which results in a higher gross margin to the Company. Costs of Revenues -- Maintenance and other. Maintenance and other costs of revenues in 1998 increased $861,000, or 3.9%, to $23.1 million, from $22.2 million in pro forma 1997. The gross profit margin increased from 23.9% in pro forma 1997 to 26.1% in 1998 as a result of greater cost efficiencies from third party maintenance. 23 24 General and Administrative Expenses. General and administrative expenses in 1998 increased $4.9 million, or 12.8%, to $43 million from $38.1 million in pro forma 1997. The increase was principally due to an increase in support functions and administrative costs associated with the growth of the Company and the increase in its air freight carrier and air logistics businesses. As a percentage of revenues, general and administrative expenses decreased to 6% in 1998 from 6.1% for pro forma 1997. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense in 1998 increased $368,000, or 15.2%, to $2.8 million from $2.4 million in pro forma 1997, reflecting the increase of net income before taxes for 1998. Operating Income. As a result of the above, operating income in 1998 increased $27.8 million, or 65.4%, to $70.3 million from $42.5 million in pro forma 1997. Operating margin increased to 9.8% in 1998 from 6.7% in pro forma 1997. Income Taxes. The Company's effective tax rate increased to 40.5% in 1998 from 0% in pro forma 1997. The pro forma operating results included no provision for income taxes due to the Company's overall net loss position for the pro forma 1997 operating results. The 1998 effective tax rate is higher than in past years due to an overall increase in non-deductible expenses, principally meals for flight crews. Net Income. As a result of the above, net income in 1998 increased to $16.6 million from a net loss of $960,000 for pro forma 1997. Net income as a percentage of total revenues increased to 2.3% in 1998 from a net loss of (0.2)% for pro forma 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE UNAUDITED YEAR ENDED DECEMBER 31, 1996 Because of the change in year end described above, the following discussion compares the results of operations for the year ended December 31, 1997 to the unaudited 12 month period ended December 31, 1996. The results of operations data for 1996 referred to below, are taken from the Company's unaudited financial statements, which are not separately presented herein, and are presented for comparative purposes only. In the opinion of management, the 1996 results of operations include all adjustments management believes are necessary for a fair presentation. Revenues -- Air Freight Carrier. Air freight carrier revenues increased to $177.2 million, or 124.9%, for 1997 from $78.8 million for 1996, principally due to an increase in fleet size and the acquisition of the Kalitta Companies. Approximately $56.8 million of the increase was due to revenues generated by the Kalitta Companies from November 19, 1997 to December 31, 1997, which is the highest volume and most profitable portion of the year. See "-- Seasonality." The remaining increase of approximately $120.4 million is primarily attributable to the growth in the Company's aircraft fleet from 25 aircraft at December 31, 1996 to 42 aircraft immediately prior to the acquisition of the Kalitta Companies and a $18.5 million revenue increase in the Company's December 1997 ACMI contract with the USPS. Air freight carrier on-demand, ACMI contract charter, and scheduled freight services revenues were $22.9 million, $131.9 million and $19.9 million, or 13%, 74.5% and 11.2%, respectively, of total air freight carrier revenues for 1997, as compared to $15.9 million, $61.1 million and $0, or 20.2%, 77.5% and 0%, respectively, of total air freight carrier revenues for 1996. Revenues from on-demand charters flown by Company aircraft for 1997 decreased 25.8% as a percent of air freight carrier revenues from the prior year due to aircraft being shifted from on-demand to ACMI contract charter service, consistent with the Company'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 during this period. Scheduled freight services began when the Company acquired the Kalitta Companies' scheduled freight operations. Revenues -- Air Logistics. Air logistics revenues increased $16.7 million, or 31%, to $70.5 million in 1997 from $53.8 million in 1996. The increase was primarily due to increased demand 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 during this period. The number 24 25 of on-demand charters managed increased by 995 charters, or 6.9%, to 15,402 charters for 1997 from 14,407 charters for 1996. Revenues -- Maintenance. Maintenance revenues were $2.1 million for 1997. Third party maintenance work began when the Company acquired the Kalitta Companies' maintenance operations. In 1997, the Company performed maintenance on airframes and engines for third parties. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $67.8 million, or 111.9%, to $127.9 million in 1997, from $60.4 million in 1996, reflecting increased costs associated with increased fleet. Maintenance expenses increased $17.2 million, or 150%, to $28.7 million in 1997 from $11.5 million in 1996. Maintenance expenses increased as a percentage of air freight carrier revenues to 16.2% from 14.6%. The increase was primarily attributable to adding the aircraft fleet of the Kalitta Companies which generally have greater maintenance costs as a percentage of revenue. During 1997, the Kalitta Companies accounted for $15.5 million of these maintenance expenses. The gross profit margin from the air freight carrier business increased from 23.4% for 1996 to 27.8% for 1997. The Kalitta Companies and their fleet of aircraft contributed $9.4 million, or 19.1%, of gross profit for 1997 with the remainder of the fleet of the Company contributing $27.2 million, or 80.9%, of gross profit. The increase in margins related to the remainder of the fleet was primarily the result of lower maintenance costs resulting from operational efficiencies associated with increased fleet size, higher utilization of aircraft during 1997 and lower average fuel prices in 1997 as compared to 1996. Fuel prices may increase during 1998 due to reduced oil exports by certain countries. Costs of Revenues -- Air Logistics. Air logistics costs of revenues increased $16.9 million, or 34.5%, to $65.9 million for 1997, from $49 million for 1996. The gross profit margin from air logistics decreased from 9% for 1996 to 6.5% for 1997. The decrease in margin is attributable to the increase in charters using larger aircraft hired from third party carriers which have a higher cost than charters flown in the Company's aircraft. Costs of Revenues -- Maintenance. Maintenance costs of revenues are associated with services provided for third parties on airframe and engine maintenance. Gross margin for December 31, 1997 was 15.5%. No third party maintenance services were provided prior to the acquisition of the Kalitta Companies. General and Administrative Expenses. General and administrative expenses increased $6.2 million, or 68.9%, to $15.1 million for 1997 from $8.9 million for 1996. The acquisition of the Kalitta Companies contributed approximately $3 million to the increase in general and administrative expenses for 1997, representing costs for administrative support after the acquisition of the Kalitta Companies. Excluding the effect of the acquisition of the Kalitta Companies, the Company experienced an increase in general and administrative expenses from $8.9 million for 1996 to $12.2 million for 1997 primarily as a result of an increase in support functions and administrative costs associated with the growth in the aircraft fleet (from 25 aircraft at December 31, 1996 to 42 aircraft at November 18, 1997) and the increased volume of business of the air freight carrier. As a percentage of revenues, general and administrative expenses decreased to 6% in 1997 from 6.7% for 1996. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased $1.2 million, or 95.9%, to $2.4 million for 1997 from $1.2 million for 1996, reflecting the increase of net income before taxes for 1997. Operating Income. As a result of the above, operating income increased $27.7 million, or 312.8%, to $36.6 million for 1997 from $8.9 million for 1996. Operating margin increased to 14.7% for 1997 from 6.7% for 1996. Interest Expense. Interest expense increased to $6.9 million for 1997, as compared to $2.1 million for 1996, an increase of $4.9 million, or 235.8%. The increase is primarily a result of incurring $45.9 million of debt under the Term Loan for the acquisition of 16 Boeing 727 aircraft in September 1997 and issuing the Notes in November 1997 in connection with the acquisition of the Kalitta Companies. Because these borrowings are expected to remain outstanding, interest expense for 1998 will be substantially higher. 25 26 Other Income. Other income increased to $1.1 million for 1997 from $0.9 million for 1996. The increase was primarily due to increased interest income during 1997 from the investment of net proceeds from the Company's initial public offering and of approximately $56 million of net proceeds from the Note Offering. Minority Interest. Minority interest represents the earnings attributable to the 40% interest in AIC owned by a third party, which was approximately $497,000. The results are for the period November 19, 1997 to December 31, 1997, which is generally the highest volume and most profitable portion of the year. See "-- Seasonality." Income Taxes. The Company's effective tax rate increased to 41% for 1997 as compared to 39.4% for 1996. The increase is primarily due to increased state income taxes. Net Income. As a result of the above, net income increased to $17.9 million for 1997, compared to $4.7 million for 1996. Net income as a percentage of total revenues increased to 7.2% for 1997 from 3.5% in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily for the acquisition and modification of aircraft and working capital. 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 in the fourth calendar quarter and lower revenue in the first calendar quarter. Funding requirements have historically been met through internally generated funds, bank borrowings and aircraft sales and from public and private offerings of equity and debt securities. From time to time, the Company has entered into sale/leaseback transactions to acquire aircraft and may do so in the future. In November 1997, the Company issued $340 million of 9.95% Senior Secured Notes, resulting in net proceeds to the Company of approximately $329.1 million. The Notes provide for semi-annual interest payments of approximately $16.9 million on each May 15 and November 15 and mature in November 2004. The Notes are secured by a fleet of 30 aircraft, including nine Boeing 747s, eight Lockheed L-1011s and 13 Boeing 727s. The Notes are guaranteed by all of the Company's subsidiaries, other than AIC. The Company has a $45.9 million outstanding term loan (the "Term Loan"). The Term Loan is due in quarterly installments of $2.25 million commencing in March 1999, with the balance of $12.15 million due upon maturity in September 2002. Except as provided below, interest on the Term Loan accrues at LIBOR plus 3% or a Base Rate plus 1.5%, subject to reduction. The Base Rate is the Prime Rate of Wells Fargo Bank, N.A. ("WFB") or the Federal Funds Rate plus 0.5%. At December 31, 1998, the interest rate on the Term Loan was 8.5%. Except as provided below, the Term Loan is secured by accounts receivable, all spare parts (including rotables), inventory, intangibles and contract rights, cash, 15 Boeing 727s and related engines, the stock of each of the Company's subsidiaries, not including the Company's interest in AIC. The Term Loan is guaranteed by all of the Company's subsidiaries, not including AIC. In addition, to fund ongoing capital requirements, including possible acquisitions, the Company has entered into a Credit Facility with WFB (the "Credit Facility"), individually and as agent for various lenders to provide the Company with up to $100 million in revolving loans (subject to a current borrowing base limitation of approximately $90.2 million, including an increase of $30 million to the borrowing base as a result of an amendment to the Credit Facility (the "Amendment") on December 10, 1998) that is secured by the same collateral as the Term Loan. Except as provided below, the Credit Facility bears interest at LIBOR plus 2.75% or a Base Rate plus 1.25%, subject to adjustment. The Base Rate is WFB's Prime Rate or the Federal Funds Rate plus 0.5%. At December 31, 1998, the interest rate on the Credit Facility was 9.5%. Borrowings under the Credit Facility are subject to borrowing base limitations based on eligible inventory and accounts receivable. The Credit Facility matures in November 2002. As of March 26, 1999, the Company had a balance of approximately $71.9 million outstanding under the Credit 26 27 Facility and available borrowings under the Credit Facility of approximately $18.3 million. Borrowings under the Credit Facility and Term Loan are subject to certain financial covenants. As of December 31, 1998, the Company was in compliance with all financial covenants. In connection with the Amendment, the Company pledged 11 Douglas DC-8-60s and eight Douglas DC-8-50s under the Credit Facility and Term Loan. The Company can request WFB to release its liens on the Douglas DC-8-50 aircraft at any time in connection with a sale of the aircraft for full and fair consideration. With respect to the Douglas DC-8-60 aircraft, the Company can request WFB to release its liens on the Douglas DC-8-60s after first repaying the amount it borrowed, if any, under the Amendment's $30 million increase to the borrowing base. Prior to December 31, 1999, WFB is not obligated to release its liens on the Douglas DC-8-60s except in connection with a sale of the aircraft for full and fair consideration. After December 31, 1999, WFB is not obligated to release its liens on the Douglas DC-8-60s unless the Company meets specified financial criteria. The Amendment's increase in the borrowing base is available through January 1, 2000, subject to earlier termination by the Company (the "Loan Pricing Increase Period"). During the Loan Pricing Increase Period, the interest rate of the Term Loan and the Credit Facility is either the Prime Rate of WFB plus 1.75% or LIBOR plus 3.25%, regardless of financial covenant performance. Upon termination of this borrowing base increase, the interest rates on the Term Loan and Credit Facility revert to those stated above. Capital expenditures were $217.2 million and $115 million for 1998 and 1997, respectively. Capital expenditures for 1998 were primarily for (i) the purchase of two Boeing 747s, (ii) cargo modifications to three Boeing 747s and one Boeing 727, (iii) heavy maintenance checks on four Boeing 727s, (iv) noise abatement modifications for eleven Boeing 727s and one DC-9-15F aircraft, (v) purchase of six JT8D engines, three JT9D engines, one JT3D engine and five GE CJ 610-6 engines, (vi) engine overhauls, (vii) additional office and operational space at Dallas/Fort Worth International Airport and (viii) the purchase of rotable aircraft parts. Capital expenditures for 1997 were primarily for (i) the purchase of 20 Boeing 727 aircraft (including 16 Boeing 727s acquired from the Kalitta Companies), (ii) cargo and noise abatement modifications for three Boeing 727 aircraft and cargo modifications to one Boeing 747 aircraft, (iii) noise abatement equipment purchases for two Douglas DC-9 aircraft, (iv) leasehold improvements to three Boeing 727 aircraft, including a cargo conversion, (v) the purchase of the Company's 40,000 square foot headquarters facility and related ground sublease at Dallas/Fort Worth International Airport, (vi) five major maintenance checks on Boeing 727s, (vii) overhauls on seven JT8D engines and acquisition of 11 JT8D engines and (viii) the purchase of ground service equipment. During 1999, the Company estimates that capital expenditures will aggregate approximately $110 million and that subsequent years capital expenditures will be substantial as well. During 1999, the Company anticipates capital expenditures of approximately $16 million for noise abatement modifications to one Douglas DC-9 and eight Boeing 727 aircraft currently in its fleet. The entire fleet must be Stage 3 compliant by the year 2000. In the event more aircraft are acquired, anticipated capital expenditures for noise abatement modifications could materially increase. See "Item 1. Business -- Government Regulation -- Noise Abatement Regulations." Directives issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis may cause certain of the Company's aircraft to be subject to extensive aircraft examinations and/or structural inspections and modifications to address problems of corrosion and structural fatigue among other things. Directives applicable to the Company's fleet can be issued at any time in the future. The cost of complying with such potential future Directives cannot currently be estimated, but could be substantial. See "Item 1. Business -- Government Regulation -- Aging Aircraft Regulations; Potential Compliance Costs." The Company operates a fleet of 31 Boeing 727s, all of which were previously converted from passenger configuration to cargo 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 27 28 Directive which limits the cargo capacity of these Boeing 727s until certain modifications are made. During 1998, the Company purchased an STC used to modify five of the Company's aircraft to cargo configuration. Recently, the Company received approval from the FAA to modify these five aircraft to increase their cargo capacity. The modifications are expected to take from three to four days to complete and to cost between $25,000 and $50,000 per aircraft, not including aircraft downtime. The Company is currently seeking approval to modify the rest of its Boeing 727 fleet. See "Item 1. Business -- Government Regulation -- Cargo Door and Floor Modifications Regulations." The Company believes that available funds, bank borrowings and cash flows expected to be generated by operations will be sufficient to meet its anticipated cash needs for working capital, debt service and capital expenditures for at least the next 12 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 additional credit facilities. Notwithstanding the foregoing, the Company may sell additional equity or debt securities or obtain additional credit facilities at any time. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. Based on recent assessments, the Company determined that it will be required to modify or replace portions of its software so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing, and implementation. To date, the Company has nearly completed its assessment of all systems that could be significantly affected by the Year 2000. The assessment completed to date indicates that most of the Company's significant information technology systems could be affected. The Company has determined that most of the services it has sold and will continue to sell do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's services. In addition, the Company has plans to gather information about the Year 2000 compliance status of its significant suppliers and subcontractors and will continue to monitor their compliance. With regard to the Company's information technology exposure, to date the Company is approximately 90% complete on the assessment phase and expects to complete software reprogramming and replacement no later than May 31, 1999. Once software is reprogrammed or replaced, the Company will begin testing and implementation. These phases will run concurrently for different systems. Completion of the testing phase for all significant systems is expected by July 31, 1999, with all remediated systems fully tested and implemented by August 31, 1999, with 100% completion targeted for September 30, 1999. The Company is in the process of working with third party vendors to ensure that any of the Company's systems that interface directly with third parties are Year 2000 compliant by May 31, 1999. The Company has launched a program to query its significant suppliers and subcontractors that do not share information systems with the Company ("external agents"). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of 28 29 operations, liquidity, or capital resources although the Company understands that certain fuel refiners may be particularly susceptible to disruption caused by non-compliant embedded chips, and that certain electrical power suppliers may be similarly affected. The Company has no means of ensuring that external agents will be Year 2000 ready. The inability of certain external agents, such as the FAA, fuel refiners and suppliers generally, and electrical power suppliers, to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. The Company will utilize both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for Year 2000 modifications. The total cost of the Year 2000 project is estimated at less than $0.5 million and is being funded through operating cash flows. As of March 31, 1999, the Company has incurred approximately $150,000 related to all phases of the Year 2000 project. The remaining project costs relate to repair of hardware and software and will be expensed as incurred. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. However, it is possible that the Company's or third parties' systems and equipment could fail and result in the reduction or suspension of the Company's operations. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. Disruptions in the economy generally resulting from Year 2000 issues could materially adversely affect the Company. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 program. The Company plans to evaluate the status of completion in May 1999 and determine whether such a plan is necessary. If the Company's expectations or assessments of the impact of the Year 2000 issue prove to be incorrect, the Company's business may be materially affected. SEASONALITY Certain customers of the Company engage in seasonal businesses, especially the U.S. Postal Service and customers in the U.S. automotive industry. As a result, the Company's air logistics business has historically experienced its highest quarterly revenues and profitability during the fourth quarter of the calendar year due to the peak Christmas season activity of the U.S. Postal Service and during the period from June 1 to November 30 when production schedules of the U.S. automotive industry typically increase. Consequently, the Company experiences its lowest quarterly revenue and profitability during the first quarter of the calendar year. FACTORS THAT MAY AFFECT FUTURE RESULTS We operate in a rapidly changing environment that involves numerous risks, some of which are beyond our control. The following discussion highlights some of these risks. Substantial Debt and Interest Payments. In November 1997, we incurred substantial debt through: (1) the issuance of $340 million of 9.95% Senior Secured Notes due 2004; and (2) entering into the Credit Facility, which currently allows us to borrow up to $90.2 million. In addition, we entered into a $45.9 million Term Loan to refinance a $45.9 million loan incurred in September 1997. At December 31, 1998, our total debt was approximately $489.8 million. At December 31, 1998, we had borrowed $86.9 million under the Credit Facility and owed approximately $45.9 million under the Term Loan. In addition to the debt we have outstanding, the indenture pursuant to which the Notes were issued (the "Indenture") permits us to incur substantial amounts of additional debt for certain specified purposes, including to acquire aircraft and aircraft-related assets. 29 30 Our significant debt could have important consequences, including: (1) we may be unable to obtain additional financing in the future; (2) we will have to dedicate a substantial portion of our cash flow to principal and interest payments, which will reduce funds available for other purposes; (3) we may be at a competitive disadvantage to competitors with less debt; (4) we may be unable to adjust rapidly to changing market conditions; and (5) we may be more vulnerable to: (A) downturns in general economic conditions; (B) downturns in our business; and (C) the temporary or permanent loss of business from one or more of our customers. Our ability to make scheduled principal and interest payments or to refinance our debt will depend on our future financial performance, which to a certain extent will be subject to economic, financial, competitive and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow to make principal and interest payments on time and to make necessary capital expenditures. If we cannot do this, we may be required to seek to refinance all or a portion of our debt, to sell assets or to obtain additional financing, any of which we may be unable to do on acceptable terms. Restrictive Covenants. Our existing debt agreements contain a number of significant covenants. These covenants generally limit our ability, among other things, to: (1) pay dividends; (2) incur additional debt, except for certain specified purposes; (3) encumber or sell assets; (4) enter into transactions with stockholders and affiliates; (5) guarantee debt; (6) merge or consolidate with another entity; and (7) transfer or lease all or substantially all of our assets. These covenants also require us to meet certain financial tests. As of the date hereof, we are in compliance with these covenants. Our ability to comply with these covenants in the future will depend on our future financial performance. If we are unable to comply with these covenants, there would be a default under our debt agreements. If the lender did not waive such a default, the default could result in acceleration of our debt and our bankruptcy. Integrating the Kalitta Companies. On November 19, 1997, we acquired five companies (collectively, the "Kalitta Companies"): (1) American International Airways, Inc., which has been renamed Kitty Hawk International, Inc.; (2) American International Travel, Inc.; (3) Flight One Logistics, Inc.; (4) Kalitta Flying Service, Inc., which has been renamed Kitty Hawk Charters, Inc.; and (5) O.K. Turbines, Inc. 30 31 Over the last 16 months, we have been integrating the Kalitta Companies' operations with our pre-acquisition operations. We cannot assure you that we will be able to successfully complete integrating the Kalitta Companies' operations or achieve the goals that motivated us to acquire the Kalitta Companies, either of which could have a material adverse effect on our business and the value of the common stock. Continued Losses at Kitty Hawk International. From the period January 1, 1997 through November 18, 1997, Kitty Hawk International, then owned by Mr. Kalitta under the name American International Airways, Inc., suffered substantial net losses. Although Kitty Hawk International's 1998 financial results improved from its 1997 financial results, Kitty Hawk International still suffered a net loss of $4.8 million in 1998. In an effort to make Kitty Hawk International profitable, we recently have: (1) stopped providing third party airframe repair and engine overhaul services, other than for JT3 and JT8 engines; (2) stopped passenger charters and parked the two Boeing 747s and two Lockheed L-1011s that flew passenger charters pending their disposition, possible cargo conversion or employment in other uses; (3) outsourced the majority of our major maintenance on our Boeing 747, Lockheed L-1011 and Douglas DC-8 aircraft, except for the overhaul of JT3 engines used on Douglas DC-8 aircraft; and (4) eliminated approximately 450 jobs at Kitty Hawk International. In addition, we intend to: (1) eliminate approximately 1,050 additional jobs at Kitty Hawk International; (2) close surplus portions of our Oscoda, Michigan maintenance facility; and (3) reduce Kitty Hawk International's owned and leased operating fleet from 36 aircraft at December 31, 1998 to 19 aircraft at December 31, 1999, consisting of seven Boeing 747s, six Lockheed L-1011s and six Douglas DC-8s. Failure to make Kitty Hawk International profitable could have a material adverse effect on our business and the value of the common stock. Dependence on Significant Customers. Our two largest customers are the U.S. Postal Service and BAX Global. Of our total revenues in 1997, the U.S. Postal Service accounted for $44.9 million, or 17.9%, and BAX Global accounted for $44.7 million, or 17.9%. Of our total revenues in 1998, the U.S. Postal Service accounted for $120 million, or 16.8%, and BAX Global accounted for $71.5 million, or 10%. The U.S. Postal Service awards contracts periodically pursuant to a public bidding process which considers quality of service and other factors, including, to a lesser extent, price. Bids for contracts to provide Christmas season charters generally are submitted in the summer of each year and are typically awarded during the following fall. These contracts are typically for one year or less. Our inability to remain competitive with respect to price and quality of service would have a material adverse effect on our ability to obtain such contracts. Our inability to obtain such contracts in the future would have a material adverse effect on our business and the value of the common stock. Our contracts with the U.S. Postal Service are subject to termination at the convenience of the U.S. Postal Service. BAX Global leases under an ACMI contract 14 of our Boeing 727s for varying terms through March 31, 2003. BAX Global may earlier terminate the contract if, among other reasons, we do not meet specified on-time performance standards or if majority ownership or control of the Company is acquired by a competitor of BAX Global. The loss of this customer, or a reduction in this customer's use of our services, could have a material adverse effect on our business and the value of the common stock. Dependence on Aircraft Availability. Our revenues are dependent on having aircraft available for revenue service. In the past, we have experienced unanticipated FAA Airworthiness Directives that have made aircraft unavailable for revenue service. In the event one or more of our aircraft are out of service 31 32 for an extended period of time, whether due to Directives, accidents or otherwise, we may be forced to lease or purchase replacement aircraft and may be unable to fulfill our obligations under customer contracts. We cannot assure you that if necessary, we could locate suitable replacement aircraft on acceptable terms. We do not maintain business interruption insurance to cover these risks. Loss of revenue from any such business interruption, damages for non-performance under customer contracts or costs to replace aircraft could have a material adverse effect on our business and the value of the common stock. Cyclicality and Seasonality. We provide services to numerous industries and customers that experience significant fluctuations in demand based on economic conditions and other factors beyond our control. Demand for our services could be materially adversely affected by downturns in our customers' businesses. We believe a significant percentage of our 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 our business and the value of the common stock. Certain of our customers engage in seasonal businesses too, especially the U.S. Postal Service and customers in the U.S. automotive industry. As a result, our air carrier business and air freight charter logistics business have historically experienced their highest quarterly revenues and profitability during the last three months of the 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 U.S. automotive industry typically increase. Consequently, we historically experience our lowest quarterly revenue and profitability during the first three months of the year. Dependence on Key Personnel. We believe that our success depends on, and will continue to depend on, the services of: (1) M. Tom Christopher, our founder and our Chairman of the Board of Directors and Chief Executive Officer; (2) Tilmon J. Reeves, our President and Chief Operating Officer; and (3) Richard R. Wadsworth, our Senior Vice President -- Finance, Chief Financial Officer and Secretary. If we lose the services of any of them, and in particular Mr. Christopher, our business and the value of the common stock could be materially adversely affected. Each of Messrs. Christopher, Reeves and Wadsworth have employment agreements with the Company. Employee Relations. The pilots and flight engineers employed by Kitty Hawk International are members of the International Brotherhood of Teamsters and are employed pursuant to a collective bargaining agreement. We are in the process of renegotiating this collective bargaining agreement with representatives of the Teamsters. These pilots and flight engineers have rejected one proposed new collective bargaining agreement. We believe the current collective bargaining agreement's system for scheduling pilots and flight engineers is inefficient, which results in higher costs to us. While we are negotiating to make this scheduling system more efficient, we cannot assure you that we will be successful in these negotiations. Failure to negotiate a more efficient scheduling system could have a material adverse effect on our business and the value of the common stock. While we intend to negotiate with the Teamsters in good faith, we cannot assure you that we will be able to enter into a new collective bargaining agreement. In addition, negotiations could result in work stoppages, a substantial increase in salaries or wages, changes in work rules or other changes adverse to our business. Also, we cannot assure you that our non-union cockpit crews will remain non-union. Unionization of our non-union cockpit crews, work stoppages, increased wages or other labor-related matters could have a material adverse effect on our business and the value of the common stock. 32 33 Dependence on Computer Systems. We utilize a number of computer systems to schedule flights and personnel, track aircraft and freight, bill customers, pay expenses and monitor a variety of our activities, ranging from maintenance and 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 our operations, which could have a material adverse effect on our business and the value of the common stock. While we believe our computer systems are generally year 2000 compliant, the computer systems of the FAA and our customers, suppliers, vendors, bankers, maintenance providers and air logistics service providers may not be year 2000 compliant. Failure of the computer systems of the FAA or one or more of our significant customers, suppliers, vendors or air logistics service providers to correctly record, manipulate or retrieve dates from the year 2000 and beyond could have a material adverse effect on our business and the value of the common stock. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." Certain Anti-Takeover Provisions; Preferred Stock. Our Certificate of Incorporation, as amended, and Bylaws, as amended, include certain provisions that have anti-takeover effects and that could make it more difficult for a third party to acquire control of the Company, even if such change in control would be beneficial to our stockholders. In addition, the Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter and prohibits non-U.S. citizens from serving as directors or officers of the Company. The Certificate of Incorporation allows us to issue up to 1,000,000 shares of preferred stock without stockholder approval. In addition, we could issue preferred stock with voting and conversion rights that could adversely affect the voting power of holders of common stock. The issuance of preferred stock could also result in a series of securities outstanding that would have preferences over the common stock with respect to dividends and in liquidation. Any of the foregoing could have a material adverse effect on the value of the common stock. Effects of a Change of Control. Holders of the Notes have the right to require us to repurchase the Notes upon a Change of Control (as defined in the Indenture) and all debt under the Credit Facility and Term Loan must be repaid upon a Change of Control (as defined in the Credit Facility). Any of the foregoing provisions could have a material adverse effect on our business and the value of the common stock. Government Regulation. We are 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 and the FAA have the authority to modify, amend, suspend or revoke the authority and licenses issued to us 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 our business and the value of the common stock. The adoption of new laws, policies or regulations or changes in the interpretation or application of existing laws, policies or regulations, whether by the FAA, the DOT, the U.S. government or any foreign, state or local government, could have a material adverse effect on our business and the value of the common stock. In addition, we are subject to regulation by various other federal, state, local and foreign authorities, including the Department of Defense and the Environmental Protection Agency. Our international operations are governed by air services agreements between the U.S. and foreign countries where we operate. Under some of these 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. air carriers and are subject to approval by the applicable foreign regulators, limiting growth opportunities in such countries. Safety, Training and Maintenance Regulations. Virtually every aspect of our air carrier operations are subject to extensive FAA regulation, including the areas of safety, training and maintenance. To ensure compliance with FAA rules and regulations, the FAA routinely inspects air carrier operations and aircraft 33 34 and proposes civil monetary penalties in the event of non-compliance. The imposition of civil penalties by the FAA could have a material adverse effect on our business and the value of the common stock. Periodically, the FAA focuses on particular aspects of air carrier operations. For example, after the Valujet accident, the FAA adopted new procedures concerning oversight of contract maintenance, and after the Fine Air crash, the FAA conducted extensive inspections of procedures for loading cargo aircraft. These types of inspections and regulations often impose additional burdens on air carriers and increase their operating costs. We cannot predict when we will be subject to such inspections or regulations, nor the impact of such inspections or regulations. Any such inspections or regulations could have a material adverse effect on our business and the value of the common stock. Aging Aircraft Regulations; Potential Compliance Costs. All of our aircraft are subject to FAA Directives issued at any time under the FAA's "Aging Aircraft" program or issued on an ad hoc basis. These Directives can cause us to conduct extensive examinations and structural inspections of our aircraft and to make modifications to our aircraft to address or prevent problems of corrosion and structural fatigue. Our cost to comply with FAA Directives issued under the Aging Aircraft program cannot currently be estimated, but could be substantial and could have a material adverse effect on our business and the value of the common stock. Hazardous Materials Regulations. The FAA exercises regulatory jurisdiction over transporting hazardous materials. From time to time, we transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility with the air carrier for compliance with these regulations and are primarily responsible for proper packaging and labeling. If we fail to discover any undisclosed hazardous materials or mislabel or otherwise ship hazardous materials, we may suffer possible aircraft damage or liability, as well as, substantial monetary penalties. Any of these events could have a material adverse effect on our business and the value of the common stock. The FAA has recently increased its monitoring of shipments of hazardous materials. Contraband Risks. Although required to do so, customers may fail to inform us about cargo that must be processed by applicable customs authorities. If we fail to properly process cargo through customs, our aircraft could be seized and/or we may suffer substantial monetary penalties. Any of these events could have a material adverse effect on our business and the value of the common stock. In addition, some of our aircraft fly to and from countries, such as Colombia, where substantial quantities of illegal drugs are manufactured. In the past, without our prior knowledge, individuals have tried to smuggle illegal drugs into the U.S. on our aircraft. If we fail to discover any illegal drugs or other illegal cargo on our aircraft, the aircraft could be seized and/or we may suffer substantial monetary penalties. Any of these events could have a material adverse effect on our business and the value of the common stock. Competition. The market for air freight services is highly competitive. Our 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. We believe there are limited barriers to entry into this business and that increased demand may stimulate additional competition. The market for air logistics also has been and is expected to remain highly competitive. Our 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. Our ability to attract and retain business also is affected by whether and to what extent our customers decide to coordinate their own transportation needs. With respect to our contract charter business, it could be adversely affected by the decision of our air carrier customers to acquire additional aircraft or by our non-air carrier customers to acquire and operate their own aircraft. In this regard, many of our competitors and customers have substantially greater financial resources than us. 34 35 Environmental Matters. Our 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 clean up 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 clean up 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 cleaning up contaminated property and the cost of complying with environmental laws could have a material adverse effect on our business and the value of the common stock. Currently, we are not aware of any environmental contamination for which we are liable for the cost of removal or cleanup. Until May 2001, Mr. Kalitta has agreed, subject to certain limitations, to indemnify us against any losses arising from any environmental liability at any of the Kalitta Companies' facilities. In part because of the highly industrialized nature of many of the locations at which we operate, there can be no assurance that we have discovered all environmental contamination for which we may be responsible. Capital Intensive Nature of Aircraft Ownership. Our air freight carrier business is highly capital intensive. In order to expand our air freight carrier business, we intend to purchase new or used jet aircraft. Used jet aircraft typically require certain modifications, including reconfiguring the aircraft from passenger to cargo use and installing equipment to comply with the Noise Regulations. The market for used jet aircraft is volatile and can be adversely affected by limited supply, increased demand and other market factors. We cannot assure you that we will be able to purchase and, if necessary, modify additional aircraft at favorable prices or that we will have or be able to obtain sufficient resources with which to make such purchases and, if necessary, modifications. The capital intensive nature of our business could adversely impact the value of the common stock. In the future, we may acquire domestic and/or international air freight carriers as a means of acquiring used jet aircraft. Such an acquisition would involve substantial risks, including overvaluing the acquired business and inadequately or unsuccessfully integrating the acquired business. In addition, the terms of the Credit Facility and Term Loan restrict our ability to make certain acquisitions. Further, acquisitions can result in increased amortization which would reduce earnings per share in the future. We may finance future acquisitions, if any, by issuing shares of common stock. Any future issuance of common stock may result in substantial dilution to you. Operating Costs. The operation of our air freight carrier business involves considerable operational, maintenance, fuel and personnel costs. Our financial results can be adversely affected by unexpected engine or airframe repairs, compliance with 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 our business and the value of the common stock. Fuel is a significant cost of operating aircraft. 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 and may rise in 1999. We have no agreement with any fuel supplier assuring the availability or price stability of fuel and such agreements are generally not available in the industry. We generally pass on fuel cost increases to our customers under ACMI charter contracts. However, under some of our contracts and in our scheduled operations, we absorb increased fuel costs. Accordingly, the future cost and availability of fuel to us cannot be predicted and substantial price increases in, or the unavailability of adequate supplies of, fuel may have a material adverse effect on our business and the value of the common stock. 35 36 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, general economic downturns could have a material adverse effect on our business and the value of the common stock. Utilization of Aircraft. Our operating results are highly dependent on our ability to effectively utilize our diverse fleet of aircraft. There can be no assurance, however, that operation of any of the various types of aircraft in our fleet will prove to be profitable. Inability to keep our aircraft in revenue service or achieve an acceptable level of aircraft utilization could have a material adverse effect on our business and the value of the common stock. Risk of Accident; Insurance Coverage and Expenses. Our operations involve risks of potential liability against us in the event of aircraft accidents and, in the case of our air ambulance services, for medical malpractice. We are required by the DOT to carry liability insurance on each of our aircraft. We also carry medical liability insurance for our air ambulance business. Although we believe our current insurance coverage is adequate and consistent with current industry practice, we cannot assure you that our coverage will not be changed or that we will not suffer substantial losses and lost revenues from accidents. See "-- Dependence on Aircraft Availability." Substantial claims resulting from an accident in excess of our insurance coverage could have a material adverse effect on our business and the value of the common stock. In addition, any significant increase in our current insurance expense could have a material adverse effect on our business and the value of the common stock. Moreover, any aircraft accident, even if fully insured, could result in Directives or investigations or could cause a public perception that some of our aircraft are less safe or reliable than other aircraft, which could have a material adverse effect on our business and the value of the common stock. International Business Risk. We expect to continue to derive a substantial portion of our 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: (1) potential adverse changes in the diplomatic relations between foreign countries and the U.S.; (2) hostility from local populations directed at a U.S. flag carrier; (3) government policies against foreign-owned businesses; (4) adverse effects of currency exchange controls; (5) restrictions on the withdrawal of foreign investment and earnings; and (6) the risk of expropriation and insurrections that could result in losses against which we are not insured. Our international operations also are subject to economic uncertainties, including risks of renegotiation or modification of existing agreements or arrangements with exchange restrictions and changes in taxation. Any of these events could have a material adverse effect on our business and the value of the common stock. Nearly all of our revenue is in U.S. dollars. However, a meaningful portion of our revenue is from customers whose revenue is not in U.S. dollars. Therefore, any significant devaluation in our customers' currencies relative to the U.S. dollar could adversely effect their ability to pay us in U.S. dollars or to continue to use our services, which could have a material adverse effect on our business and the value of the common stock. 36 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In 1997, the Securities and Exchange Commission issued new rules (Item 305 of Regulation S-K) which require disclosure of material risks, as defined in Item 305, related to market risk sensitive financial instruments. The rules apply to the Company for the first time in 1998. The Company has market risk sensitive instruments related to interest rates. Airline operators are inherently capital intensive. The vast majority of the Company's assets are aircraft, which are long lived. The Company has maintained a B+, B1 or equivalent credit ratings on its Notes with three rating agencies (Standard & Poor's, Moody's and Duff & Phelps). As disclosed in Note 4 to the Consolidated Financial Statements, the Company had outstanding debt of $489.8 million and $404.6 million at December 31, 1998 and 1997, respectively. This debt represents 49.8% and 48.3% of total assets at December 31, 1998 and 1997, respectively. The Company's long-term debt currently has an average maturity of 5.4 years and interest rates averaging 9.7%. At December 31, 1998, the Company operated six aircraft under operating leases at rates that are substantially fixed. As defined in Item 305, leases are not market risk sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below. Commitments related to leases are disclosed in Note 6 to the Consolidated Financial Statements. The Company does not have significant exposure to changing interest rates on its $340 million 9.95% Senior Secured Notes because the interest rate on the Notes is fixed. The interest rates on its Term Loan and Credit Facility are variable with interest rates based on prime plus 1.75% or LIBOR plus 3.25%, and can be locked in for a period of three months. At December 31, 1998, the Company had approximately $45.9 million outstanding under the Term Loan and approximately $86.9 million outstanding under the Credit Facility. Additionally, the Company does not have significant exposure to changing interest rates on invested cash, which was approximately $17 million and $75 million at December 31, 1998 and 1997, respectively. The Company invests its cash mainly in money market accounts. The Company has not undertaken any additional actions to cover interest rate market risk and is not a party to any interest rate market risk management activities. A hypothetical 10% decline in market interest rates over the next year would impact the Company's earnings or cash flow by less than $1 million because the interest rate on the Notes is fixed and its cash investments are short-term. A hypothetical 10% decline in market interest rates over the next year would increase the fair value of the Notes by approximately $15 million. The Company does not purchase or hold any derivative financial instruments for trading purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to Item 8 is submitted as a separate section of this Form 10-K. See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURE None. 37 38 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors required by Item 10 is incorporated by reference from our definitive proxy statement for our 1999 Annual Meeting of Stockholders to be held on May 28, 1999. The information regarding executive officers required by Item 10 is submitted as a separate section of this Form 10-K. See "Item 4A. Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from our definitive proxy statement for our 1999 Annual Meeting of Stockholders to be held on May 28, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from our definitive proxy statement for our 1999 Annual Meeting of Stockholders to be held on May 28, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from our definitive proxy statement for our 1999 Annual Meeting of Stockholders to be held on May 28, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The following financial statements are filed as a part of this report:
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998...................................................... F-3 Consolidated Statements of Income for the years ended August 31, 1996 and December 31, 1997 and 1998 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, 1996 and December 31, 1997 and 1998 and for the four months ended December 31, 1996........... F-5 Consolidated Statements of Cash Flows for the years ended August 31, 1996 and December 31, 1997 and 1998 and for the four months ended December 31, 1995 (unaudited) and 1996...................................................... F-6 Notes to Consolidated Financial Statements.................. F-7
(A) 2. FINANCIAL STATEMENT SCHEDULES No financial statement schedules are filed as part of this Annual Report on Form 10-K because the required information is included in the financial statements, including the notes thereto, or circumstances requiring the inclusion of such schedules are not present. 38 39 (A) 3. EXHIBITS The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.
EXHIBIT NO. EXHIBIT ----------- ------- 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, the Kalitta Companies 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, the Kalitta Companies 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, the Kalitta Companies 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, the Kalitta Companies and Conrad Kalitta, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated 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 -- Stockholders' Agreement dated November 1997 among the Company, M. Tom Christopher and Conrad A. Kalitta, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 4.3 -- Specimen Global Note in respect of 9.95% Senior Secured Notes due 2004, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference.
39 40
EXHIBIT NO. EXHIBIT ----------- ------- 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 4.5 -- 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 10.1** -- Settlement Agreement dated as of August 22, 1994 by and between the Company, Kitty Hawk Aircargo, Inc., Airport Leasing, Inc., 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.
40 41
EXHIBIT NO. EXHIBIT ----------- ------- 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 -- 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. 10.12 -- 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. 10.13 -- 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. 10.14 -- 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. 10.15 -- 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. 10.16 -- 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. 10.17 -- 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. 10.18 -- 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), filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 10.19* -- Third Amended Agreement, dated as of December 10, 1998, 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.
41 42
EXHIBIT NO. EXHIBIT ----------- ------- 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 -- Separation Agreement, dated as of April 17, 1998, by and among the Company, M. Tom Christopher, Conrad A. Kalitta and certain subsidiaries of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.24 -- Amendment No. 1 to Separation Agreement, dated as of June 5, 1998, by and among the Company, M. Tom Christopher, Conrad A. Kalitta and certain subsidiaries of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.25 -- Agreement, dated as of January 21, 1999, by and among the Company, M. Tom Christopher, Conrad A. Kalitta and certain subsidiaries of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.26** -- Modified and Restated Employment Agreement, dated as of April 27, 1998 by and between the Company and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.27** -- Stock Option Agreement, dated as of April 27, 1998, by and between the Company and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.28** -- Non-Qualified Stock Option Agreement, dated as of February 24,1999, by and among the Company, M. Tom Christopher and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.29** -- 1999 Kitty Hawk, Inc. Executive Stock Option Plan, dated as of February 24, 1999, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.30* -- Ground Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. 10.31* -- Building Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. 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-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 23.1* -- Consent of Ernst & Young LLP. 27.1* -- Financial Data Schedule.
42 43 - --------------- * Filed herewith. ** This exhibit is a management contract or compensatory plan or arrangement. (b) REPORTS ON FORM 8-K None. 43 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 1999. KITTY HAWK, INC. By: /s/ RICHARD R. WADSWORTH ---------------------------------- Richard R. Wadsworth Senior Vice President -- Finance, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March, 1999.
NAME CAPACITIES ---- ---------- /s/ M. TOM CHRISTOPHER Chairman of the Board of Directors and Chief - ----------------------------------------------------- Executive Officer M. Tom Christopher /s/ TILMON J. REEVES Chief Operating Officer, President and - ----------------------------------------------------- Director Tilmon J. Reeves /s/ CONRAD A. KALITTA Director - ----------------------------------------------------- Conrad A. Kalitta /s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief - ----------------------------------------------------- Financial Officer, Secretary and Principal Richard R. Wadsworth Financial and Accounting Officer and Director /s/ PHILIP J. SAUDER Director - ----------------------------------------------------- Philip J. Sauder /s/ TED J. COONFIELD Director - ----------------------------------------------------- Ted J. Coonfield /s/ LEWIS S. WHITE Director - ----------------------------------------------------- Lewis S. White
44 45 KITTY HAWK, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998...................................................... F-3 Consolidated Statements of Income for the years ended August 31, 1996 and December 31, 1997 and 1998 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, 1996 and December 31, 1997 and 1998 and for the four months ended December 31, 1996........... F-5 Consolidated Statements of Cash Flows for the years ended August 31, 1996 and December 31, 1997 and 1998 and for the four months ended December 31, 1995 (unaudited) and 1996...................................................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 46 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 December 31, 1997 and 1998 and the related consolidated statements of income, stockholders' equity, and cash flows for the year ended August 31, 1996, for each of the two years in the period ended December 31, 1998 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 December 31, 1997 and 1998 and the consolidated results of their operations and their cash flows for the year ended August 31, 1996, for each of the two years in the period ended December 31, 1998 and for the four months ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas March 26, 1999 F-2 47 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------ Current assets Cash and cash equivalents................................. $ 17,907 $ 15,077 Restricted cash and short-term investments................ 58,629 1,964 Trade accounts receivable, net............................ 122,191 140,014 Deferred income taxes..................................... 15,798 16,088 Inventory and aircraft supplies........................... 34,118 50,135 Prepaid expenses and other current assets................. 25,596 22,871 -------- -------- Total current assets.............................. 274,239 246,149 Property and equipment, net................................. 548,537 720,808 Other assets, net........................................... 13,970 15,628 -------- -------- Total assets...................................... $836,746 $982,585 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 43,647 $ 53,967 Accrued expenses.......................................... 91,128 104,278 Accrued maintenance reserves.............................. 19,139 22,382 Current maturities of long-term debt...................... 2,395 20,564 -------- -------- Total current liabilities......................... 156,309 201,191 Revolving credit facility................................... 10,000 86,900 Long-term debt.............................................. 392,248 382,287 Deferred income taxes....................................... 99,153 113,261 Minority interest........................................... 4,163 4,749 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 -- 16,750,957 and 16,927,942 at December 31, 1997 and 1998, respectively........................ 167 169 Additional capital........................................ 130,523 133,166 Retained earnings......................................... 44,183 60,862 -------- -------- Total stockholders' equity........................ 174,873 194,197 -------- -------- Total liabilities and stockholders' equity........ $836,746 $982,585 ======== ========
See accompanying notes. F-3 48 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOUR MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, ----------------------- --------------------- 1996 1997 1998 1995 1996 ---------- ---------- ---------- ----------- ------- (UNAUDITED) Revenues: Air freight carrier................... $ 72,605 $177,159 $602,918 $37,437 $43,867 Air logistics......................... 69,810 70,539 80,757 32,291 16,119 Maintenance and other................. -- 2,145 31,262 -- -- -------- -------- -------- ------- ------- Total revenues................ 142,415 249,843 714,937 69,728 59,986 Costs of revenues: Air freight carrier................... 54,648 127,957 501,825 27,385 32,714 Air logistics......................... 64,841 65,921 73,862 30,297 14,866 Maintenance and other................. -- 1,813 23,110 -- -- -------- -------- -------- ------- ------- Total costs of revenues....... 119,489 195,691 598,797 57,682 47,580 -------- -------- -------- ------- ------- Gross profit............................ 22,926 54,152 116,140 12,046 12,406 General and administrative expenses..... 9,080 15,106 43,037 2,862 2,725 Non-qualified employee profit sharing expense............................... 1,170 2,429 2,797 889 962 Stock option grants to executives....... 4,231 -- -- -- -- -------- -------- -------- ------- ------- Operating income........................ 8,445 36,617 70,306 8,295 8,719 Other income (expense): Interest expense...................... (1,859) (6,924) (40,004) (482) (684) Other, net............................ 291 1,110 674 38 625 -------- -------- -------- ------- ------- Income before minority interest and income taxes.......................... 6,877 30,803 30,976 7,851 8,660 Minority interest....................... -- (497) (3,006) -- -- -------- -------- -------- ------- ------- Income before income taxes.............. 6,877 30,306 27,970 7,851 8,660 Income taxes............................ 2,768 12,416 11,328 3,097 3,367 -------- -------- -------- ------- ------- Net income.............................. $ 4,109 $ 17,890 $ 16,642 $ 4,754 $ 5,293 ======== ======== ======== ======= ======= Basic and diluted net income per share................................. $ 0.52 $ 1.60 $ 0.99 $ 0.60 $ 0.55 ======== ======== ======== ======= ======= Weighted average common shares outstanding........................... 7,928 11,194 16,855 7,968 9,610 ======== ======== ======== ======= =======
See accompanying notes. F-4 49 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
NUMBER OF COMMON ADDITIONAL RETAINED TREASURY SHARES STOCK CAPITAL EARNINGS STOCK TOTAL ---------- ------ ---------- -------- -------- -------- Balance at August 31, 1995...... 7,423,436 $ 74 $ -- $16,892 $ -- $ 16,966 Stock option grants to executives................. -- -- 4,231 -- -- 4,231 Exercise of employee stock options.................... 544,274 5 -- (1) -- 4 Purchase of treasury stock, 217,710 shares, at cost.... -- -- -- -- (2,076) (2,076) Tax benefit of stock option grants to executives....... -- -- 405 -- -- 405 Net income.................... -- -- -- 4,109 -- 4,109 ---------- ---- -------- ------- ------- -------- Balance at August 31, 1996...... 7,967,710 79 4,636 21,000 (2,076) 23,639 Shares sold in initial public offering................... 2,700,000 27 29,312 -- -- 29,339 Shares issued to employees under the Annual Incentive Compensation Plan.......... 1,807 -- 21 -- -- 21 Net income for the four months ended December 31, 1996.... -- -- -- 5,293 -- 5,293 ---------- ---- -------- ------- ------- -------- Balance at December 31, 1996.... 10,669,517 106 33,969 26,293 (2,076) 58,292 Shares sold in secondary offering, net of expenses................... 2,200,000 22 38,319 -- -- 38,341 Shares issued in connection with acquisition (Note 2)......................... 4,099,150 41 60,309 -- -- 60,350 Retirement of treasury shares..................... (217,710) (2) (2,074) -- 2,076 -- Net income.................... -- -- -- 17,890 -- 17,890 ---------- ---- -------- ------- ------- -------- Balance at December 31, 1997.... 16,750,957 167 130,523 44,183 -- 174,873 Shares issued in connection with acquisition (Note 2)......................... 150,000 1 2,249 37 -- 2,287 Shares issued in connection with the Employee Stock Purchase Plan.............. 20,145 1 282 -- -- 283 Shares issued in connection with the Omnibus Securities Plan....................... 6,840 -- 112 -- -- 112 Net income.................... -- -- -- 16,642 -- 16,642 ---------- ---- -------- ------- ------- -------- Balance at December 31, 1998.... 16,927,942 $169 $133,166 $60,862 $ -- $194,197 ========== ==== ======== ======= ======= ========
See accompanying notes. F-5 50 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED YEAR ENDED FOUR MONTHS ENDED AUGUST 31, DECEMBER 31, DECEMBER 31, ---------- ------------------- ------------------- 1996 1997 1998 1995 1996 ---------- -------- -------- -------- -------- (UNAUDITED) Operating activities: Net income.............................................. $ 4,109 $ 17,890 $ 16,642 $ 4,754 $ 5,293 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization......................... 6,873 15,551 55,482 1,682 3,202 (Gain) loss on disposal of property and equipment..... 589 (1,461) (886) -- -- Deferred income taxes................................. 999 10,208 12,558 -- 172 Minority interest..................................... -- 497 3,006 -- -- Stock option grants to executives..................... 4,231 -- -- -- -- Changes in operating assets and liabilities: Trade accounts receivable........................... (1,228) (20,431) (18,597) (27,955) (23,632) Inventory and aircraft supplies..................... (1,615) (5,196) (15,004) (299) (1,076) Prepaid expenses and other.......................... (887) (3,961) (5,756) (5,854) (4,898) Accounts payable and accrued expenses............... 3,869 3,090 26,300 22,406 20,516 Accrued maintenance reserves........................ 297 5,961 813 281 50 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities..... 17,237 22,148 74,558 (4,985) (373) Investing activities: Purchase of Kalitta Companies, net of cash acquired... -- (315,551) -- -- -- Proceeds from sale of assets.......................... -- 1,817 6,916 -- 18,508 Redemption of restricted cash......................... -- -- 56,847 -- -- Capital expenditures.................................. (33,538) (115,014) (217,179) (175) (13,795) -------- -------- -------- -------- -------- Net cash (used in) provided by investing activities..... (33,538) (428,748) (153,416) (175) 4,713 Financing activities: Proceeds from 9.95% Senior Secured Notes, net......... -- 329,069 -- -- -- Proceeds from issuance of common stock, net........... 5 38,342 -- -- 29,338 Proceeds from issuance of long-term debt, net......... 23,117 50,418 5,880 5,725 1,500 Borrowings on Revolving Credit Facility, net.......... -- 16,230 76,900 -- -- Repayments of debt.................................... (3,187) (36,512) (4,373) (1,011) (13,643) Acquisition of treasury shares........................ (2,076) -- -- -- -- Distributions to minority interest.................... -- (320) (2,420) -- -- Note receivable from shareholder...................... -- (41) 41 -- -- Shares issued under Annual Incentive Compensation Plan................................................ -- -- -- -- 22 Tax benefit of stock option grant to executives....... 405 -- -- -- -- -------- -------- -------- -------- -------- Net cash provided by financing activities............... 18,264 397,186 76,028 4,714 17,217 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.... 1,963 (9,414) (2,830) (446) 21,557 Cash and cash equivalents at beginning of period........ 3,801 27,321 17,907 3,801 5,764 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period.............. $ 5,764 $ 17,907 $ 15,077 $ 3,355 $ 27,321 ======== ======== ======== ======== ========
See accompanying notes. F-6 51 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight services through four related businesses: (i) an air freight carrier, (ii) a scheduled freight service provider, (iii) an air logistics service provider and (iv) a maintenance operation. The air freight carrier provides ACMI services (includes supplying the aircraft, crew, maintenance, and insurance for the customer), passenger and freight charter services. The air logistics service provider arranges the delivery of time sensitive freight utilizing third parties as well as its own fleet of wide-body and narrow-body jet aircraft and small jet and prop aircraft. The scheduled freight service provides an overnight freight service within a network of approximately 46 North American cities and a service between Los Angeles, the Hawaiian islands and several Pacific Rim countries utilizing its own aircraft. The maintenance operation provides engine overhaul services to third parties on JT3 engines used on Douglas DC8s and JT8 engines used on Boeing 727s, Douglas DC9s and other aircraft. Revenues and costs of revenues related to the scheduled freight services and its small aircraft operations are currently reported as a component of the air freight carrier in the accompanying statements of income. The Company has discontinued its passenger charter operations and curtailed its third party maintenance operations. See Notes 14 and 19. In November 1997, the Company acquired the Kalitta Companies (see Note 2). The results of operations of the Kalitta Companies are included in the accompanying financial statements from November 19, 1997, the date of their acquisition by the Company. On December 4, 1996, the Company elected to change its fiscal year end to December 31. Operating results for the four month periods ended December 31, 1996 and 1995 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, which include Kitty Hawk Charters, Inc., Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk International, Inc. (formerly named American International Airways, Inc. ("AIA")), (including its partnership interest in American International Cargo ("AIC"), which at December 31, 1998 was a 60% interest), Flight One Logistics, Inc. ("FOL"), O.K. Turbines, Inc. ("OKT"), American International Travel, Inc. ("AIT") and Longhorn Solutions, Inc. ("LSI"). All significant intercompany accounts and transactions have been eliminated in consolidation. See Note 2. 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. 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. F-7 52 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Restricted Cash and Short-Term Investments At December 31, 1997 and 1998, restricted cash and short-term investments equaled approximately $58.6 million and $2 million, respectively. Of the balance at the end of 1997, $56 million represents a portion of the proceeds from the issuance of $340 million of 9.95% Senior Secured Notes due 2004 (the "Notes") (see Note 4) reserved for the acquisition and subsequent modification of two Boeing 747 aircraft, which were acquired and modified to cargo configuration during 1998 at a cost of approximately $75 million. These two aircraft are pledged to secure the Notes. The remaining $2.6 million at the end of 1997 of and the balance of $2 million at the end of 1998 represents passenger cash deposits held in escrow until charter services are provided. The Company has subsequently discontinued its passenger charter operations. Financial Instruments The fair value of the 9.95% Senior Secured Notes is approximately $333.2 million based on the quoted price at December 31, 1998. Based on floating interest rates provided in the remaining financial instruments, management believes the recorded value of the remaining financial instruments included in the financial statements approximates fair value. Inventory and Aircraft Supplies Inventory and aircraft supplies consist of aircraft parts and supplies and are stated at the lower of cost (using the first-in, first-out or average cost convention) or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, with estimated residual values of up to 10% for aircraft and core values of up to $300,000 for engines. Estimated useful lives are as follows: Aircraft and engines: Boeing 747s............................................... 15-20 years Lockheed L-1011s.......................................... 15 years Douglas DC-8s............................................. 2-10 years Boeing 727s............................................... 10 years Douglas DC-9s............................................. 10 years Other..................................................... 2-10 years Machinery and equipment..................................... 3-12 years Rotable aircraft parts...................................... 7 years Buildings and leasehold improvements........................ 15-30 years
Expenditures for additions, improvements, aircraft modifications, engine overhauls and major maintenance costs are capitalized. Routine maintenance and repairs are charged to expense when incurred. Costs of periodic airframe maintenance (C-checks) are accrued. Major maintenance and engine overhauls are depreciated on a straight line basis to the next scheduled major maintenance or overhaul date. Revenue Recognition Revenues are recognized as services are provided. F-8 53 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk Credit is extended based on an evaluation of a customer's financial condition and, except in the case of passenger charters, the Company does not require a deposit or collateral. The Company's allowance for doubtful accounts is based on current market conditions and continuous evaluation of the customer's credit worthiness and has consistently been within management's expectations. 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. See Note 8. Comprehensive Income In 1997, the FASB issued Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of financial statements. The Company's comprehensive income equals its net income as the Company has no elements of other comprehensive income. Reclassifications Certain amounts from prior years have been reclassified to conform to the current year presentation, including the reclassification of revenues and related costs of revenues for the Company's Christmas work for the United States Postal Service from air logistics to air freight carrier. Pending Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is assessing the impact that the adoption of SFAS 133 will have on its consolidated financial statements. 2. ACQUISITIONS On November 19, 1997, the Company acquired by merger all of the outstanding common stock of AIA, Kalitta Flying Service, Inc., FOL, OKT and AIT (collectively, the "Kalitta Companies") in exchange for 4,099,150 shares of the Company's common stock valued by an independent appraisal at approximately $60.3 million and $20 million in cash. The transaction has been accounted for as a purchase and accordingly the results of operations of the Kalitta Companies are included in the accompanying financial statements from November 19, 1997. See Note 18. Since then, AIA has been renamed Kitty Hawk International, Inc. and Kalitta Flying Service, Inc. has been renamed Kitty Hawk Charters, Inc. In accordance with the merger agreement, $3 million in cash and 650,000 shares of the Company's common stock issued to the former owner of the Kalitta Companies are being held in escrow to secure certain indemnity obligations. Generally the Company cannot bring any indemnification claims after F-9 54 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) May 19, 2000, except the Company may make indemnity claims for certain environmental matters until May 19, 2001. In September 1997, as an interim step to the acquisition of the Kalitta Companies, the Company acquired 16 Boeing 727s from AIA for approximately $51 million cash. Of the $51 million, $45.9 million was financed with a note payable under the Company's existing credit facility. This note payable was subsequently refinanced upon the consummation of the acquisition of the Kalitta Companies. See Note 4. On June 26, 1998, the Company acquired all the outstanding stock of LSI in exchange for 150,000 shares of the Company's common stock, valued at $15 per share, which approximated market value at the date of acquisition. The transaction was accounted for as a purchase and accordingly the results of operations for the year ended December 31, 1998 include the results of operations of LSI from June 26, 1998. LSI has developed and markets an aircraft maintenance software package. No pro forma financial statements are provided for the acquisition of LSI due to the immateriality of the acquisition. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------ (IN THOUSANDS) Aircraft and engines........................................ $498,517 $720,981 Aircraft work in process.................................... 31,576 27,639 Machinery and equipment..................................... 20,619 23,664 Buildings and leasehold improvements........................ 17,417 17,701 Rotable aircraft parts...................................... 7,773 10,058 Construction in progress.................................... 1,986 147 Other....................................................... 758 1,809 -------- -------- 578,646 801,999 Less accumulated depreciation............................... (30,109) (81,191) -------- -------- Net property and equipment........................ $548,537 $720,808 ======== ========
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Long-term debt and Revolving Credit Facility consist of the following:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------ (IN THOUSANDS) 9.95% Senior Secured Notes.................................. $340,000 $340,000 Term Loan................................................... 45,900 45,900 Revolving Credit Facility................................... 10,000 86,900 Other notes payable due in monthly installments with interest rates ranging from 6.6% to 10.5% with maturity dates ranging from 1999 through 2009...................... 8,743 16,951 -------- -------- 404,643 489,751 Less current portion........................................ 2,395 20,564 -------- -------- $402,248 $469,187 ======== ========
F-10 55 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maturities of long-term debt at December 31, 1998 are as follows:
(IN THOUSANDS) 1999.................................................. $ 20,564 2000.................................................. 11,727 2001.................................................. 10,393 2002.................................................. 106,733 2003.................................................. 55 Thereafter............................................ 340,279 -------- $489,751 ========
In connection with the acquisition of the Kalitta Companies in November 1997, the Company privately placed the Notes pursuant to Rule 144A of the Securities Act of 1933. Net proceeds to the Company were $329.1 million. Costs incurred in issuing the Notes are being amortized over seven years. The net proceeds of the Notes, along with the net proceeds of a November 1997 3,000,000 share common stock offering, were used to (i) refinance approximately $33 million of existing Kitty Hawk debt and to pay off approximately $250 million of the Kalitta Companies' pre-acquisition debt, (ii) provide for $56 million of cash to acquire and modify two Boeing 747s and (iii) provide for $20 million of cash to acquire the Kalitta Companies. The balance was used for working capital and expenses incurred in connection with the acquisition. Interest on the Notes is due on May 15 and November 15. The Notes are secured by a fleet of aircraft including nine Boeing 747s, eight Lockheed L-1011s and 13 Boeing 727s. At December 31, 1998 the carrying value of the aircraft securing the Notes is approximately $415 million. Each of the Company's subsidiaries are guarantors of the Notes, excluding the Company's interest in AIC. The Company is in the process of dissolving AIC. Once AIC is dissolved, all of the Company's subsidiaries will be guarantors of the Notes. In March 1998, the Company concluded an exchange offer for the Notes thereby exchanging the Notes for new 9.95% Senior Secured Notes due 2004 (the "New Notes"). The form and terms of the New Notes are identical to the Notes, except the New Notes are registered under the Securities Act of 1933 and therefore do not bear a legend restricting their transfer. The New Notes provide for certain covenants which limit the amount of indebtedness of the Company and its subsidiaries, restrict the payment of dividends, restrict the selling of subsidiary stock and provide for an interest coverage ratio. As of December 31, 1998, the Company was in compliance with all applicable covenants. The New Notes are due in full in November 2004. However, at any time after November 15, 2001, the Company at its option may redeem the New Notes based on a percentage of the principal balance plus accrued and unpaid interest. The redemption rates are: (i) during the 12 month period beginning November 15, 2001, 104.975%, (ii) during the 12 month period beginning November 15, 2002, 102.488% and (iii) during the 12 month period beginning November 15, 2003, 100%. Additionally, any time prior to November 15, 2000, the Company may redeem up to 35% of the original principal amount of the New Notes with the proceeds of one or more public offerings at a redemption price of 109.95% plus accrued and unpaid interest, provided that at least $150 million of aggregate principal amount of the New Notes remains outstanding after each redemption. On November 19, 1997, the Company entered into a credit agreement (the "Credit Agreement") with a bank which provides for a $45.9 million Term Loan (the "Term Loan") and a $100 million Revolving Credit Facility (the "Revolver"). The proceeds of the Term Loan were used to fully refinance a note previously entered into in September 1997, the proceeds of which were used to acquire 16 Boeing 727s from AIA prior to the acquisition of the Kalitta Companies (see Note 2). The Term Loan is F-11 56 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) due in 16 quarterly principal installments of $2.25 million each beginning in March 1999, with the balance due upon maturity in November 2002. Except as provided below, the Term Loan bears interest at the Company's option at either prime plus 0% to 1.5% or LIBOR plus 1.25% to 3% (margins above prime and LIBOR are based on certain financial covenant performance as defined in the Credit Agreement). The applicable rate at December 31, 1998 was 8.5%. Borrowings under the Revolver provide the Company with cash availability for working capital and general corporate purposes. Except as provided below, advances under the Revolver bear interest at the Company's option at either prime plus 0% to 1.25% or LIBOR plus 1.25% to 2.75% (margins above prime and LIBOR are based on certain financial covenant performance as defined in the Credit Agreement). The applicable rate at December 31, 1998 was 9.5%. All principal balances outstanding under the Revolver are due in full upon maturity in November 2002. Balances drawn on the Revolver are subject to certain borrowing base provisions as defined. The borrowing base at December 31, 1998 was $93.9 million (including an increase of $30 million to the borrowing base as a result of an amendment to the Credit Agreement ("the Amendment") on December 10, 1998). Available borrowings as of December 31, 1998 were approximately $6.1 million. In connection with the Amendment, the Company pledged 11 Douglas DC-8-60s and eight Douglas DC-8-50s under the Credit Facility and Term Loan. The Company can request WFB to release its liens on the Douglas DC-8-50 aircraft at any time in connection with a sale of the aircraft for full and fair consideration. With respect to the Douglas DC-8-60 aircraft, the Company can request WFB to release its liens on the Douglas DC-8-60s after first repaying the amount it borrowed, if any, under the Amendment's $30 million increase to the borrowing base. Prior to December 31, 1999, WFB is not obligated to release its liens on the Douglas DC-8-60s except in connection with a sale of the aircraft for full and fair consideration. After December 31, 1999, WFB is not obligated to release its liens on the Douglas DC-8-60s unless the Company meets specified financial criteria. The Amendment's increase in the borrowing base is available through January 1, 2000, or until earlier terminated by the Company ("Loan Pricing Increase Period"). During the Loan Pricing Increase Period, the interest rate of the Term Loan and the Revolver is either prime plus 1.75% or LIBOR plus 3.25%, regardless of financial covenant performance. Upon termination of this borrowing base increase, the interest rates on the Term Loan and the Revolver revert to those stated above. The balances outstanding under the Credit Agreement are secured by 15 Boeing 727s and 19 Douglas DC-8s with a total combined carrying value of approximately $134 million at December 31, 1998, cash, accounts receivable, rotable parts, inventory, intangibles and contract rights of the Company, and the stock of each of the Company's subsidiaries, not including the Company's interest in AIC. Each of the Company's subsidiaries are guarantors on the Credit Agreement, exclusive of AIC. Costs incurred in connection with the Credit Agreement are being amortized over a period of five years. The Credit Agreement allows for up to $20 million of outstanding letters of credit, subject to the borrowing base provisions, as defined. As of December 31, 1998, the Company had approximately $0.9 million of letters of credit outstanding. Borrowings under the Credit Agreement are subject to certain financial covenants, including a funded debt to EBITDA ratio, a minimum debt service coverage ratio and limitations on capital expenditures. As of December 31, 1998, the Company was in compliance with all covenants under the Credit Agreement. The Company made total cash interest payments of $1.8 million, $3.1 million, $40.7 million and $664,000 during fiscal year ended August 31, 1996, the fiscal years ended December 31, 1997 and 1998 and for the four months ended December 31, 1996, respectively. Interest expense capitalized during fiscal years ended December 31, 1997 and 1998, was $325,000 and $3.4 million, respectively. F-12 57 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED YEAR ENDED FOUR MONTHS ENDED AUGUST 31, DECEMBER 31, DECEMBER 31, ---------- ----------------- ----------------- 1996 1997 1998 1996 ---------- ------- ------- ----------------- (IN THOUSANDS) Current income tax provision (benefit): Federal.............................. $1,352 $ 1,340 $ (544) $2,769 State................................ 417 868 (686) 426 ------ ------- ------- ------ Total current income tax provision (benefit)........ 1,769 2,208 (1,230) 3,195 ------ ------- ------- ------ Deferred income tax: Federal.............................. 758 8,076 10,890 141 State................................ 241 2,132 1,668 31 ------ ------- ------- ------ Total deferred income tax.... 999 10,208 12,558 172 ------ ------- ------- ------ $2,768 $12,416 $11,328 $3,367 ====== ======= ======= ======
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:
YEAR ENDED YEAR ENDED FOUR MONTHS ENDED AUGUST 31, DECEMBER 31, DECEMBER 31, ---------- ----------------- ----------------- 1996 1997 1998 1996 ---------- ------- ------- ----------------- (IN THOUSANDS) Income tax computed at statutory rate................................. $2,338 $10,607 $ 9,790 $3,031 State income taxes, net of federal benefit........................... 434 1,968 638 298 Non-deductible expenses, principally meals............................. -- -- 1,244 -- Other, net........................... (4) (159) (344) 38 ------ ------- ------- ------ Total........................ $2,768 $12,416 $11,328 $3,367 ====== ======= ======= ======
The components of the net deferred tax liabilities recognized on the accompanying balance sheets are as follows:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------ (IN THOUSANDS) Deferred tax liabilities: Property and equipment.................................... $(100,183) $(131,890) Other..................................................... (1,541) (9,015) --------- --------- Total deferred tax liabilities.................... (101,724) (140,905) --------- --------- Deferred tax assets: Airframe reserves......................................... 6,974 7,155 Non deductible accruals................................... 9,232 8,749 Net operating loss carryforward........................... 441 24,878 Other..................................................... 1,722 2,950 --------- --------- Total deferred tax assets......................... 18,369 43,732 --------- --------- Net deferred tax liability........................ $ (83,355) $ (97,173) ========= =========
F-13 58 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1998, the Company has approximately $69 million of federal net operating loss carryforwards which begin to expire in 2018. The Company has approximately $1.2 million of state net operating losses as of December 31, 1998. The Company made cash income tax payments of $2.1 million, $3.6 million, $817,000 and $571,000 during fiscal year ended August 31, 1996, the fiscal years ended December 31, 1997 and 1998 and for the four months ended December 31, 1996, respectively. 6. COMMITMENTS AND CONTINGENCIES In December 1996, the Company sold at cost two recently acquired and modified Boeing 727 aircraft to a third party and entered into a 12 month operating lease agreement for such aircraft commencing January 1, 1997. The lease provided for monthly lease payments of approximately $252,000, and five successive one year renewal options. The Company has an option to purchase the aircraft at the end of each year, and guarantees to the lessor certain minimum sale values if the Company elects not to renew the lease or exercise its purchase option. On each of January 1, 1998 and 1999, the Company elected to renew the lease for another year. Lease expense during 1997 and 1998 was approximately $3.03 million for each year. The Company also leases a Boeing 727 aircraft in cargo configuration under a seven year operating lease at a monthly rate of $50,000. The lease expires in 2003. Lease expense during 1997 and 1998 was $450,000 and $600,000, respectively. In August 1998, the Company leased 3 Boeing 727 aircraft in cargo configuration under a six year operating lease at a monthly rate of $184,000. The lease expires in 2004. Lease expense during 1998 was $921,000. The Company also leases office buildings, hangars, cargo storage and related facilities under noncancelable operating leases which expire on various dates through 2011. See also Note 9. In addition, the Company periodically leases aircraft and other equipment under month-to-month lease agreements. Total rent expense during 1997 (including lease expense incurred from the acquisition of the Kalitta Companies from November 19, 1997 through December 31, 1997) and 1998 was approximately $809,000 and $7.7 million, respectively. Minimum annual rentals at December 31, 1998 are as follows:
(IN THOUSANDS) 1999................................................... $ 7,824 2000................................................... 3,990 2001................................................... 3,730 2002................................................... 3,695 2003................................................... 3,702 Thereafter............................................. 5,869 ------- $28,810 =======
The Company currently leases its sorting space for its overnight freight service at the Hulman Regional Airport in Terre Haute, Indiana on a month to month basis until the Company relocates its sorting center to Fort Wayne, Indiana in the summer of 1999. The move to Fort Wayne is due to the lack of available expansion space and the limited airport facilities in Terre Haute. During fiscal years 1997 and 1998, the Company incurred rent expense in Terre Haute of $60,000 and $499,000, respectively. F-14 59 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Airline operators must comply with Federal Aviation Administration noise 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 71 aircraft and leases 6 aircraft which are affected by the Noise Regulations of which 55 are currently in compliance with Stage III noise control standards of the Noise Regulations or are currently being modified to be in compliance with such standards. Any aircraft not in compliance with the Noise Regulations by January 1, 2000 may not be operated in the United States until it complies with such standards. European countries have similar regulations. The Company has elected not to modify 13 of its Douglas DC-8 aircraft to meet the Noise Regulation standards because the estimated cost exceeds the economic benefits of such modifications. These aircraft will be removed from its fleet in the United States before January 1, 2000. The Company currently has eight Boeing 727 aircraft and one Douglas DC-9 aircraft which do not comply with the Noise Regulation standards. The Company intends to modify these aircraft during 1999 at an approximate aggregate cost of $15.9 million, not including aircraft downtime. The Company is currently unaware of any environmental contamination for which the Company is liable for the cost of removal or cleanup. Until May 2001, Conrad A. Kalitta, the former owner of the Kalitta Companies, has agreed, subject to certain limitations, to indemnify the Company against any losses arising from any environmental liability at any of the Kalitta Companies facilities which were acquired in November 1997. Directives issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis may cause certain of the Company's aircraft to be subject to extensive aircraft examinations and/or structural inspections and modifications to address problems of corrosion and structural fatigue, among other things. Directives applicable to the Company's fleet can be issued at any time in the future. The cost of complying with such potential future Directives and Service Bulletins cannot currently be estimated, but could be substantial. The Company operates a fleet of 31 Boeing 727s, all of which were previously converted from passenger configuration to cargo 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 Directive, directed at the structural strength of the aircraft floor, which limits the cargo capacity of these Boeing 727s until certain modifications are made. The weight limitations involve lowering the average capacity of the cargo positions from 8,000 pounds to 4,000 pounds and after June 2001, to 3,000 pounds. To address this problem, during 1998, the Company purchased one of the Supplemental Type Certificates ("STCs") which was used to convert five of the Company's aircraft from passenger to cargo configuration. The Company has received authority from the FAA to modify these five Boeing 727 aircraft to raise the permissible weight of each cargo container position to approximately 6,000 pounds. The modifications will occur in the Company's maintenance facilities and will take approximately three to four days with an anticipated cost between $25,000 and $50,000, not including aircraft downtime. The Company has applied to the FAA for the authority to modify the remaining fleet of Boeing 727 aircraft to raise the permissible weight per cargo container position to approximately 6,000 pounds. These modifications are not expected to have a material adverse effect of the Company's results of operations or financial position. 7. LEGAL PROCEEDINGS In the normal course of business, the Company is a party to various matters of litigation. In the opinion of management, none of these matters will have a material adverse effect on the Company's financial condition or results of operations. F-15 60 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. STOCKHOLDERS' EQUITY During the fiscal year ended August 31, 1996, the Company canceled 245,708 of the options outstanding and granted to an executive a non-qualified 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. Based on an independent appraisal commissioned by the Company, the fair value of the options of $4.2 million is reflected as a charge to earnings in the accompanying statement of income for the year ended August 31, 1996. The Company has an Annual Incentive Compensation Plan (the "Compensation Plan") under which the Compensation Committee awards semi-annual 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, 1998, 198,193 shares were available for distribution under the Compensation Plan. The Company also has an Employee Stock Purchase Plan under which up to 100,000 shares of the Company's common stock are reserved for purchase by Company employees. The Employee Stock Purchase Plan allows eligible employees to authorize the Company to withhold from 1% to 15% of their gross earnings subject to specified limitations. Shares are purchased by participants at the lower of 85 percent of the fair market value per share at the beginning or end of each offering period. During 1998 and in January 1999, 20,145 shares and 68,045 shares, respectively, were issued under the plan, leaving 11,810 shares available under the plan. Additionally, the Company has an Omnibus Securities Plan (the "Omnibus Plan") under which 300,000 shares of its common stock are reserved for issuance to its employees and members of its board of directors. The Omnibus Plan is administered by the Company's Compensation Committee which may grant stock based and non-stock based compensation to the Omnibus Plan participants. In March 1998, 6,840 total shares of common stock were issued to current and former members of the Board of Directors for services performed during 1996 and 1997. During 1998, stock options covering 280,000 shares of common stock were granted to employees and directors with an exercise price equal to the fair value of the common stock on the date of grant. All of the options issued under the Omnibus Plan have a 10 year term and vest over no more than four years. Transactions during 1998 under the Omnibus Plan were as follows:
WEIGHTED OMNIBUS AVERAGE SECURITIES EXERCISE PLAN PRICE ---------- -------- Balance, December 31, 1997.................................. -- -- Granted................................................... 280,000 $11.56 Forfeited................................................. -- -- Expired................................................... -- -- Exercised................................................. -- -- ------- ------ Balance, December 31, 1998.................................. 280,000 $11.56 ======= ======
In accordance with the terms of APB No. 25, the Company records no compensation expense for its stock option awards issued with exercise prices at least equal to the current market value on the date of F-16 61 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) grant. As required by SFAS No. 123, the Company provides the following disclosure of hypothetical values for these awards. The weighted-average grant date value of options granted during 1998 was estimated to be $6.36 under the Omnibus Plan and $6.05 under the Employee Stock Purchase Plan. This value was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 0.67, risk free interest rate of 5.5%, expected life of 4 years (Omnibus Plan) and 6 months (Employee Stock Purchase Plan) and expected dividend yield of 0%. In April 1998, the Company granted its President options to purchase 400,000 shares of common stock outside any of the Company's established plans with an exercise price of $16.75 per share, the market value of the Company's common stock on the date of the grant. In February 1999, the Company canceled these options and granted its President options to purchase 400,000 shares of common stock with an exercise price of $16.75 pursuant to the Kitty Hawk, Inc. 1999 Executive Stock Option Plan. The grant date value of these options was estimated to be $3.39 using the Black-Scholes option pricing model with the following assumptions: expected volatility of .67, risk free interest rate of 5.50%, expected life of 4 years and expected dividend yield of 0%. Had compensation expense been recorded based on these hypothetical values, the Company's 1998 net income would have been $15.5 million, or $.92 per share on a diluted basis. Because options vest over several years and additional option grants are expected, the effects of these hypothetical calculations are not likely to be representative of similar future calculations. Because no options were granted or outstanding during 1997 and the options granted during 1996 were compensatory, no supplemental disclosures under FAS 123 are necessary for 1997 and 1996. Summarized information about stock options outstanding under the Omnibus Plan at December 31, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE - --------------- ------------ ----------- --------- -------------- -------- $10.31 to $11.63..................... 230,000 9.86 years $10.43 7,500 $10.31 $16.75............................... 50,000 9.32 16.75 50,000 16.75 -------- ------ $10.31 to $16.75..................... 280,000 9.76 years $11.56 57,500 $15.91 ======== ======
At December 31, 1998, 13,160 shares were available for future grants under the Omnibus Plan. 9. RELATED PARTY TRANSACTIONS Until February 1997, the Company leased its primary office and maintenance space in Dallas, Texas under an operating lease from a person who was at the time a member of the Company's Board of Directors until August 1997. Rent expense under this lease was, $255,000, $21,000 and $84,000 for the fiscal year ended August 31, 1996, the year ended December 31, 1997 and for the four months ended December 31, 1996, respectively. Under the lease agreement, the Company had 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. In February 1997, the Company exercised its option and purchased the facility and the interest in the ground lease for $1.76 million. As a result of the acquisition of the Kalitta Companies, one of the Company's vendors became a related party as the vendor is owned by a relative of the former owner of the Kalitta Companies. The Kalitta Companies also leased certain aircraft to this vendor as well as provided ground handling services in certain locations. Additionally, the Company used this related company for subcharter flight and lift F-17 62 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) capacity for the Company's overnight scheduled cargo service. Total revenues earned during 1997 (subsequent to the acquisition of the Kalitta Companies) were approximately $379,000 with related accounts receivable of approximately $813,000 as of December 31, 1997. Subsequent to the acquisition of the Kalitta Companies, the Company incurred approximately $1.8 million of expenses with this related party during 1997 and owed approximately $200,000 to this related party at December 31, 1997. In 1998, the Company sold a DC-8 to this company for $1 million. The Company recognized no gain or loss on the transaction. In September 1998, the Company leased 4 JT9 engines from a company owned by the former owner of the Kalitta Companies. The lease expired in January 1999. Total lease expense incurred during 1998 was $834,000. At December 31, 1998, the Company owed $343,000 to the leasing company. Prior to December 31, 1998, the Company leased an office facility from a company owned by the former owner of the Kalitta Companies and two of his relatives. The Company terminated the lease during October 1998. Rent expense incurred from November 19, 1997 through December 31, 1997 and for fiscal year 1998 was $143,000 and $295,000, respectively. In connection with the acquisition of the Kalitta Companies, the Company entered into an agreement to sponsor the racing activities of a racing team owned by the former owner of the Kalitta Companies. The agreement provides for annual payments of up to $2 million for two years and expires in November 1999. 10. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS The Company has three retirement savings plan under Section 401(k) of the Internal Revenue Code which cover substantially all employees meeting minimum service requirements. Under the plans, voluntary contributions are made by employees and the Company provides matching contributions based upon the employees' contribution. The Company incurred $160,000, $308,000, $841,000 and $56,000 in matching contributions related to this plan during fiscal year ended August 31, 1996, the fiscal years ended December 31, 1997 and 1998 and for the four months ended December 31, 1996, respectively. 11. SIGNIFICANT CUSTOMERS The Company provided air logistics services to one customer which accounted for approximately 41%, 18%, 7.7% and 16.8% of its total revenues in the fiscal year ended August 31, 1996, the years ended December 31, 1997 and 1998 and for the four months ended December 31, 1996, respectively. The contract for these services is effective through May 31, 2000; however, such contract may be canceled by either party with 30 days notice. The Company provided air freight carrier services to one customer which accounted for approximately 10.8%, 18%, 10% and 11.9% of its total revenues in the fiscal year ended August 31, 1996, the years ended December 31, 1997 and 1998 and for the four months ended December 31, 1996, respectively. Another air freight carrier customer accounted for approximately 15%, 18%, 16.8% and 44% of the Company's total revenues in the fiscal year ended August 31, 1996, the years ended December 31, 1997 and 1998 and for the four months ended December 31, 1996, respectively. Related accounts receivable from this customer at December 31, 1997 and 1998 were approximately $44.5 million and $68.7 million, respectively. F-18 63 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted net income per share:
FOUR MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, ----------------------- --------------------- 1996 1997 1998 1995 1996 ---------- ---------- ---------- --------- --------- Numerator for basic and diluted net income per share (in thousands)... $ 4,109 $ 17,890 $ 16,642 $ 4,754 $ 5,293 ========= ========== ========== ========= ========= Denominator: Denominator for basic net income per share -- weighted-average shares outstanding....................... 7,927,856 11,193,899 16,846,712.. 7,967,710 9,609,920 Effect of dilutive employee stock options........................... -- -- 7,793 -- -- --------- ---------- ---------- --------- --------- Denominator for diluted net income per share -- adjusted weighted-average shares outstanding....................... 7,927,856 11,193,899 16,854,505.. 7,967,710 9,609,920 ========= ========== ========== ========= ========= Basic net income per share.......... $ 0.52 $ 1.60 $ 0.99 $ 0.60 $ 0.55 ========= ========== ========== ========= ========= Diluted net income per share........ $ 0.52 $ 1.60 $ 0.99 $ 0.60 $ 0.55 ========= ========== ========== ========= =========
The weighted average number of common shares outstanding during the year ended August 31, 1996 includes 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, in accordance with Securities and Exchange Commission Staff Accounting Bulletin 98. The weighted average number of common shares outstanding at December 31, 1998 excludes the effect of options to purchase 460,000 shares of the Company's common stock because their exercise prices were higher than the market price of the common stock. 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. 13. COLLECTIVE BARGAINING AGREEMENTS Approximately 13% of the Company's employees, consisting of pilots and flight engineers are members of the International Brotherhood of Teamsters ("Teamsters") and are employed pursuant to a 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. Although the Company and the Teamsters 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. 14. BUSINESS SEGMENT DATA The Company operates four principal businesses: an air freight carrier, a scheduled freight service provider, an air logistics service provider and a maintenance operation. Each of these is a business segment, with its respective financial performance detailed below. Included in each are intersegment transactions for revenues and costs of revenues which generally approximate market prices. Each business segment is currently evaluated on financial performance at the operating income line. F-19 64 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's air freight carrier provides services to third parties under contractual arrangements where the Company provides the aircraft, crew, maintenance and insurance (ACMI). Additionally, the air freight carrier performs ad hoc charters for the air logistics service provider. The air freight carrier is further divided into a wide-body division (Kitty Hawk International, Inc., formerly AIA) and a narrow-body division (Kitty Hawk Aircargo, Inc.). The air freight carrier also provided passenger charters during fiscal years 1997 and 1998. The Company has recently eliminated its passenger charter division. The Company's scheduled freight service consists of an overnight freight service provider operating in a network of approximately 46 North American cities, as well as a service between Los Angeles, the Hawaiian Islands and several Pacific Rim countries. The Company's air logistics service provider arranges the delivery of time sensitive freight within North America principally the United States. Also included in this segment is the Company's fleet of small jet and prop aircraft. The air logistics service provider utilizes third party aircraft as well as its own fleet of small aircraft and the fleet of the air freight carrier. The Company's maintenance operation provides engine overhauls for third parties as well as for the Company's aircraft. The Company has recently curtailed its third party maintenance operation to provide only engine overhauls on JT3 engines for Douglas DC8s and JT8 engines for Boeing 727s and Douglas DC9s. The Company's maintenance operation also provides airframe repairs for the Company's Boeing 727s and Douglas DC-9s. The other category consists of corporate activities as well as activities of LSI. Business assets are owned by or allocated to each of the business segments. Assets included in other include cash, investment in subsidiaries and deferred income taxes.
ACMI ACMI TOTAL WIDE- NARROW- AIR FREIGHT AIR SCHEDULED INTERSEGMENT CONSOLIDATED BODY BODY CARRIER LOGISTICS FREIGHT OTHER ELIMINATIONS BALANCE -------- -------- ----------- --------- --------- -------- ------------ ------------ FISCAL YEAR ENDED DECEMBER 31, 1998 Revenue from external customers.................. $219,799 $170,298 $390,097 $158,136 $166,533 $ 171 $714,937 Revenue for intersegment operations................. 144,328 36,019 180,347 2,690 1,454 56 $(184,547) -- Depreciation and amortization............... 32,504 18,051 50,555 1,919 544 2,464 55,482 Operating income............. 12,988 33,156 46,144 13,125 14,252 (3,215) 70,306 Interest expense............. (40,004) Other income (expense)....... 674 Income before minority interest and taxes......... $ 30,976 Total assets................. $677,068 $238,369 $915,437 $101,210 $ 30,549 $566,111 $(630,722) $982,585 Total capital expenditures... $159,030 $ 55,016 $214,046 $ 2,253 $ 666 $ 214 $217,179 FISCAL YEAR ENDED DECEMBER 31, 1997 Revenue from external customers.................. $ 27,299 $112,522 $139,821 $ 91,151 $ 18,871 $ -- $249,843 Revenue for intersegment operations................. 20,128 16,205 36,333 1,366 118 -- $ (37,817) -- Depreciation and amortization............... 3,048 11,787 14,835 474 107 135 15,551 Operating income............. 4,493 30,775 35,268 4,410 1,270 (4,331) 36,617 Interest expense............. (6,924) Other income (expense)....... 1,110 Income before minority interest and taxes......... $ 30,803 Total assets................. $490,444 $146,712 $637,156 $ 63,186 $ 28,527 $472,788 $(364,911) $836,746 Total capital expenditures... $ 6,616 $107,856 $114,472 $ 541 $ 1 $ -- $115,014
F-20 65 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACMI ACMI TOTAL WIDE- NARROW- AIR FREIGHT AIR SCHEDULED INTERSEGMENT CONSOLIDATED BODY BODY CARRIER LOGISTICS FREIGHT OTHER ELIMINATIONS BALANCE -------- -------- ----------- --------- --------- -------- ------------ ------------ FISCAL YEAR ENDED AUGUST 31, 1996 Revenue from external customers.................. $ -- $ 51,870 $ 51,870 $ 90,545 $ -- $ -- $142,415 Revenue for intersegment operations................. -- 18,750 18,750 -- -- -- $ (18,750) -- Depreciation and amortization............... -- 6,755 6,755 118 -- -- 6,873 Operating income............. -- 9,497 9,497 4,864 -- (5,916) 8,445 Interest expense............. (1,859) Other income (expense)....... 291 Income before minority interest and taxes......... $ 6,877 Total assets................. $ -- $115,653 $115,653 $ 24,199 $ -- $ 7,050 $ (67,075) $ 79,827 Total capital expenditures... $ -- $ 33,369 $ 33,369 $ 169 $ -- $ -- $ 33,538 FOUR MONTHS ENDED DECEMBER 31, 1996 Revenue from external customers.................. $ -- $ 40,881 $ 40,881 $ 19,105 $ -- $ -- $ 59,986 Revenue for intersegment operations................. -- 2,648 2,648 -- -- -- $ (2,648) -- Depreciation and amortization............... -- 3,138 3,138 64 -- -- 3,202 Operating income............. -- 9,117 9,117 708 -- (1,106) 8,719 Interest expense............. (684) Other income (expense)....... 625 Income before minority interest and taxes......... $ 8,660 Total assets................. $ -- $147,282 $147,282 $ 20,753 $ -- $ 37,597 $ (82,604) $123,028 Total capital expenditures... $ -- $ 13,584 $ 13,584 $ 211 $ -- $ -- $ 13,795 FOUR MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) Revenue from external customers.................. $ -- $ 29,659 $ 29,659 $ 40,069 $ -- $ -- $ 69,728 Revenue for intersegment operations................. -- 7,073 7,073 -- -- -- $ (7,073) -- Depreciation and amortization............... -- 1,637 1,637 45 -- -- 1,682 Operating income............. -- 7,674 7,674 1,738 -- (1,117) 8,295 Interest expense............. (482) Other income (expense)....... 38 Income before minority interest and taxes......... $ 7,851 Total assets................. $ -- $ 80,303 $ 80,303 $ 22,235 $ -- $ 2,203 $ (24,631) $ 80,110 Total capital expenditures... $ -- $ 173 $ 173 $ 2 $ -- $ -- $ 175
The Company does not separately report results of its maintenance operation and related asset information to the Company's chief operating decision maker. Accordingly, financial data for the maintenance operation is included under the ACMI Wide-Body and Air Logistics caption above. Third party maintenance revenue included under the ACMI Wide-Body and Air Logistics captions above amounted to $18.4 million and $12.7 million for the fiscal year ended December 31, 1998, respectively, and $2.1 million and $0 for the fiscal year ended December 31, 1997, respectively. The Company's air freight carrier and scheduled freight services operate internationally. The air logistics service operates mainly in North America, principally the United States. The following table breaks out total revenues earned in North America, principally the United States, and the rest of the F-21 66 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) world, as revenues from no one country, other than the United States, exceeded 10% of the Company's total revenues.
YEARS ENDED DECEMBER 31, FOUR MONTHS YEAR ENDED ------------------- ENDED AUGUST 31, 1996 1997 1998 DECEMBER 31, 1996 --------------- -------- -------- ----------------- (IN THOUSANDS) North America............................ $136,410 $226,591 $555,007 $54,828 Rest of the world........................ 6,005 23,252 159,930 5,158 -------- -------- -------- ------- $142,415 $249,843 $714,937 $59,986 ======== ======== ======== =======
All of the Company's long-lived assets are based in North America. 15. SUPPLEMENTAL GUARANTOR INFORMATION In connection with the issuance of the Notes in November 1997, each of the Company's subsidiaries, with the exception of AIC, (collectively, the "Guarantors") have fully and unconditionally and jointly and severally guaranteed (the "Guarantees") on a senior basis, the full and prompt performance of the Company's obligations under the Notes. The Guarantees are limited to the largest amount that would not render such Guarantees subject to avoidance under any applicable federal or state fraudulent conveyance or similar law. The Guarantees 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. Each of the Guarantors is a wholly-owned subsidiary of the Company. Supplemental financial information is presented for the fiscal years ended December 31, 1997 and 1998. No supplemental financial information is provided for the fiscal year ended August 31, 1996 and the four months ended December 31, 1996 because AIC, the only non-guarantor subsidiary, was not acquired by the Company until November 1997. the outstanding debt of the Company. The Company has not presented separate financial statements and other disclosures concerning the Guarantors because the Company's management believes that such information is not material to investors because the guarantees did not exist until 1997. F-22 67 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) KITTY HAWK, INC. SUPPLEMENTAL CONSOLIDATING BALANCE SHEET CONDENSED FINANCIAL INFORMATION (UNAUDITED) DECEMBER 31, 1997 ASSETS
KITTY HAWK, SUBSIDIARIES AIC INC. EXCLUDING AIC (NON- (PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL ----------- ------------- ---------- ------------ -------- Cash and cash equivalents.......... $ 6,620 $ 10,005 $ 1,282 -- $ 17,907 Restricted cash and short-term investments...................... 56,000 2,629 -- -- 58,629 Trade accounts receivable.......... -- 114,395 9,632 $ (1,836) 122,191 Deferred income taxes.............. -- 15,798 -- -- 15,798 Inventory and aircraft supplies.... -- 34,118 -- -- 34,118 Prepaid expenses and other current assets........................... 646 24,860 90 -- 25,596 -------- -------- ------- --------- -------- Total current assets..... 63,266 201,805 11,004 (1,836) 274,239 Property and equipment, net........ -- 547,976 561 -- 548,537 Intercompany receivable............ 312,553 17,820 (330,373) -- Investment in Guarantors........... 81,879 -- (81,879) -- Investment in AIC.................. -- 6,271 -- (6,271) -- Other assets, net.................. 13,329 641 -- -- 13,970 -------- -------- ------- --------- -------- Total assets............. $471,027 $774,513 $11,565 $(420,359) $836,746 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................... $ 366 $ 44,058 $ 587 $ (1,364) $ 43,647 Accrued expenses................... 4,084 86,946 572 (474) 91,128 Intercompany payable............... 17,820 312,553 -- (330,373) -- Accrued maintenance reserves....... -- 19,139 -- -- 19,139 Current maturities of long-term debt............................. -- 2,395 -- -- 2,395 -------- -------- ------- --------- -------- Total current liabilities............ 22,270 465,091 1,159 (332,211) 156,309 Revolving Credit Facility.......... 10,000 -- -- -- 10,000 Long-term debt..................... 340,000 52,248 -- -- 392,248 Deferred income taxes.............. -- 99,153 -- -- 99,153 -------- -------- ------- --------- -------- Total liabilities........ 372,270 616,492 1,159 (332,211) 657,710 -------- -------- ------- --------- -------- Minority interest in AIC........... -- -- -- 4,163 4,163 Stockholders' equity Preferred stock.................. -- -- -- -- -- Common stock..................... 167 -- -- -- 167 Additional capital............... 130,523 81,879 2,817 (84,696) 130,523 Retained earnings................ (31,933) 76,142 7,589 (7,615) 44,183 -------- -------- ------- --------- -------- Total stockholders' equity................. 98,757 158,021 10,406 (92,311) 174,873 -------- -------- ------- --------- -------- Total liabilities and stockholders' equity... $471,027 $774,513 $11,565 $(420,359) $836,746 ======== ======== ======= ========= ========
F-23 68 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) KITTY HAWK, INC. SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS CONDENSED FINANCIAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1997
KITTY HAWK, SUBSIDIARIES AIC INC. EXCLUDING AIC (NON- (PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL ------------ ------------- ---------- ------------ -------- Revenue Air freight carrier................... $ -- $174,576 $8,234 $(5,651) $177,159 Air logistics......................... -- 70,539 -- -- 70,539 Maintenance........................... -- 2,145 -- -- 2,145 ------- -------- ------ ------- -------- Total revenues................ -- 247,260 8,234 (5,651) 249,843 Costs of revenues Air freight carrier................... -- 126,832 6,776 (5,651) 127,957 Air logistics......................... -- 65,921 -- -- 65,921 Maintenance........................... -- 1,813 1,813 ------- -------- ------ ------- -------- Total costs of revenues....... -- 194,566 6,776 (5,651) 195,691 ------- -------- ------ ------- -------- Gross profit............................ -- 52,694 1,458 -- 54,152 General and administrative expenses..... 1,903 12,969 234 -- 15,106 Non-qualified employee profit sharing expense............................... (444) 2,873 -- -- 2,429 ------- -------- ------ ------- -------- Operating income........................ (1,459) 36,852 1,224 -- 36,617 Other income (expense): Interest expense...................... (3,716) (3,208) -- -- (6,924) Other, net............................ 735 356 19 -- 1,110 ------- -------- ------ ------- -------- Income before minority interest and income taxes.......................... (4,440) 34,000 1,243 -- 30,803 Minority interest in AIC................ -- -- -- (497) (497) ------- -------- ------ ------- -------- Income before income taxes.............. (4,440) 34,000 1,243 (497) 30,306 Income taxes............................ (1,776) 14,192 -- -- 12,416 ------- -------- ------ ------- -------- Net income.............................. $(2,664) $ 19,808 $1,243 $ (497) $ 17,890 ======= ======== ====== ======= ========
F-24 69 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) KITTY HAWK, INC. SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS CONDENSED FINANCIAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1997
KITTY HAWK, SUBSIDIARIES AIC INC. EXCLUDING AIC (NON- (PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL ----------- ------------- ---------- ------------ --------- Cash provided by operating activities........................... $(78,433) $ 99,040 $1,044 $497 $ 22,148 Investing Activities: Purchase of Kalitta Companies, net of cash acquired..................... (315,551) -- -- -- (315,551) Proceeds from sale of assets......... -- 1,811 6 -- 1,817 Investment in AIC.................... -- 977 -- (977) -- Capital expenditures................. -- (115,014) -- -- (115,014) -------- --------- ------ ---- --------- Net cash provided by (used in) investing activities... (315,551) (112,226) 6 (977) (428,748) Financing Activities Proceeds from 9.95% Senior Secured Notes, net........................ 329,069 -- -- -- 329,069 Proceeds from issuance of common stock, net........................ 38,342 -- -- -- 38,342 Proceeds from issuance of long-term debt, net......................... -- 50,418 -- -- 50,418 Borrowings on Revolving Credit facility.......................... 10,000 6,230 -- -- 16,230 Repayments of debt................... -- (36,512) -- -- (36,512) Net partner withdrawals.............. -- -- (800) 800 -- Distributions to minority interest... -- -- -- (320) (320) Note receivable from shareholder..... -- (41) -- -- (41) -------- --------- ------ ---- --------- Net cash provided by (used in) investing activities... 377,411 20,095 (800) 480 397,186 -------- --------- ------ ---- --------- Increase (decrease) in cash............ (16,573) 6,909 250 -- (9,414) Cash and cash equivalents, beginning of period............................... 23,193 3,096 1,032 -- 27,321 -------- --------- ------ ---- --------- Cash and cash equivalents, end of period............................... $ 6,620 $ 10,005 $1,282 $ -- $ 17,907 ======== ========= ====== ==== =========
F-25 70 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) KITTY HAWK, INC. SUPPLEMENTAL CONSOLIDATING BALANCE SHEET CONDENSED FINANCIAL INFORMATION (UNAUDITED) DECEMBER 31, 1998 ASSETS
KITTY HAWK, SUBSIDIARIES AIC INC. EXCLUDING AIC (NON- (PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL ----------- ------------- ---------- ------------ -------- Cash and cash equivalents.......... $ 14,317 $ (4,739) $ 5,499 $ -- $ 15,077 Restricted cash and short-term investments...................... -- 1,964 -- -- 1,964 Trade accounts receivable.......... -- 129,938 10,618 (542) 140,014 Deferred income taxes.............. -- 16,088 -- -- 16,088 Inventory and aircraft supplies.... -- 50,135 -- -- 50,135 Prepaid expenses and other current assets........................... 3,955 18,852 64 -- 22,871 -------- -------- ------- --------- -------- Total current assets..... 18,272 212,238 16,181 (542) 246,149 Property and equipment, net........ 211 719,697 900 -- 720,808 Intercompany receivable............ 425,562 4,261 -- (429,823) -- Investment in Guarantors........... 81,975 -- -- (81,975) -- Investment in AIC.................. -- 8,024 -- (8,024) -- Other assets, net.................. 11,687 3,941 -- -- 15,628 -------- -------- ------- --------- -------- Total assets............. $537,707 $948,161 $17,081 $(520,364) $982,585 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................... $ 528 $ 50,992 $ 2,989 $ (542) $ 53,967 Accrued expenses................... 5,276 98,283 719 -- 104,278 Intercompany payables.............. 4,261 425,562 -- (429,823) -- Accrued maintenance reserves....... -- 22,382 -- -- 22,382 Current maturities of long-term debt............................. -- 20,564 -- -- 20,564 -------- -------- ------- --------- -------- Total current liabilities............ 10,065 617,783 3,708 (430,365) 201,191 Revolving Credit Facility.......... 86,900 -- -- -- 86,900 Long-term debt..................... 340,000 42,287 -- -- 382,287 Deferred income taxes.............. -- 113,261 -- -- 113,261 -------- -------- ------- --------- -------- Total liabilities........ 436,965 773,331 3,708 (430,365) 783,639 Minority interest in AIC........... -- -- -- 4,749 4,749 Stockholders' equity Preferred stock.................. -- -- -- -- -- Common stock..................... 169 -- -- -- 169 Additional capital............... 133,166 81,975 5,857 (87,832) 133,166 Retained earnings................ (32,593) 92,855 7,516 (6,916) 60,862 -------- -------- ------- --------- -------- Total stockholders' equity................. 100,742 174,830 13,373 (94,748) 194,197 -------- -------- ------- --------- -------- Total liabilities and stockholders' equity... $537,707 $948,161 $17,081 $(520,364) $982,585 ======== ======== ======= ========= ========
F-26 71 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) KITTY HAWK, INC. SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS CONDENSED FINANCIAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1998
KITTY HAWK, SUBSIDIARIES AIC INC. EXCLUDING AIC (NON- (PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL ----------- ------------- ---------- ------------ -------- Revenues: Air freight carrier.............. $ -- $579,206 $62,935 $(39,223) $602,918 Air logistics.................... -- 80,757 -- -- 80,757 Maintenance and other............ -- 31,262 -- -- 31,262 ------- -------- ------- -------- -------- Total revenues........... -- 691,225 62,935 (39,223) 714,937 Costs of revenues: Air freight carrier.............. -- 487,068 53,980 (39,223) 501,825 Air logistics.................... -- 73,862 -- -- 73,862 Maintenance and other............ -- 23,110 -- -- 23,110 ------- -------- ------- -------- -------- Total costs of revenues............... -- 584,040 53,980 (39,223) 598,797 ------- -------- ------- -------- -------- Gross profit....................... -- 107,185 8,955 -- 116,140 General and administrative expenses......................... (122) 41,522 1,637 -- 43,037 Non-qualified employee profit sharing expense.................. 2,797 -- -- -- 2,797 ------- -------- ------- -------- -------- Operating income (loss)............ (2,675) 65,663 7,318 -- 70,306 Other income (expense): Interest expense................. 897 (40,901) -- -- (40,004) Other, net....................... 206 270 198 -- 674 ------- -------- ------- -------- -------- Income (loss) before minority interest and income taxes........ (1,572) 25,032 7,516 -- 30,976 Minority interest in AIC........... -- -- -- (3,006) (3,006) ------- -------- ------- -------- -------- Income (loss) before income taxes............................ (1,572) 25,032 7,516 (3,006) 27,970 Income tax expense (benefit)....... (1,374) 12,702 -- -- 11,328 ------- -------- ------- -------- -------- Net income (loss).................. $ (198) $ 12,330 $ 7,516 $ (3,006) $ 16,642 ======= ======== ======= ======== ========
F-27 72 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) KITTY HAWK, INC. SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS CONDENSED FINANCIAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1998
KITTY HAWK, SUBSIDIARIES AIC INC. EXCLUDING AIC (NON- (PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL ----------- ------------- ---------- ------------ --------- Cash provided by (used in) operating activities............ $(124,968) $ 193,276 $ 9,256 $(3,006) $ 74,558 Investing Activities: Capital expenditures............ (215) (216,475) (489) -- (217,179) Redemption of short term investments.................. 55,979 868 -- -- 56,847 Investment in AIC............... -- 124 -- (124) -- Proceeds from sale of assets.... -- 6,916 -- -- 6,916 --------- --------- ------- ------- --------- Net cash provided by (used in) investing activities............ 55,764 (208,567) (489) (124) (153,416) Financing Activities Repayments of debt.............. -- (4,373) -- -- (4,373) Net borrowings.................. 76,900 5,880 -- -- 82,780 Net partner withdrawals......... -- -- (4,550) 4,550 -- Note receivable from shareholder.................. -- 41 -- -- 41 Distributions to minority interest..................... -- (1,000) -- (1,420) (2,420) --------- --------- ------- ------- --------- Net cash provided by (used in) investing activities............ 76,900 548 (4,550) 3,130 76,028 --------- --------- ------- ------- --------- Increase (decrease) in cash....... 7,696 (14,743) 4,217 -- (2,830) Cash and cash equivalents, beginning of period............. 6,620 10,005 1,282 -- 17,907 --------- --------- ------- ------- --------- Cash and cash equivalents, end of period.......................... $ 14,316 $ (4,738) $ 5,499 $ -- $ 15,077 ========= ========= ======= ======= =========
F-28 73 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table reflects 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 and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information shown. The Company's results may 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.
QUARTER ENDED QUARTER ENDED --------------------------------------------------- --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 1998 1998 1998 1998 --------- -------- ------------- ------------ --------- -------- ------------- ------------ Total revenues....... $28,102 $32,366 $41,199 $148,176 $147,353 $155,794 $175,081 $236,709 Gross profit......... 5,355 7,451 8,748 32,598 16,918 26,914 25,413 46,895 Operating income..... 2,571 4,679 5,593 23,774 6,954 17,103 14,414 31,835 Net income (loss).... 1,414 2,561 2,993 10,922 (1,729) 4,364 2,537 11,470 Basic and diluted net income (loss) per share.............. $ 0.14 $ 0.25 $ 0.29 $ 0.82 $ (0.10) $ 0.26 $ 0.15 $ 0.68
17. SUBSEQUENT EVENTS During January 1999, the Company entered into an operating lease agreement to lease nine Boeing 727 aircraft for a period of seven years each. The lessor will pay all costs associated with modifying the aircraft to cargo configuration and to bring the aircraft into compliance with the FAA Noise Regulations. The Company expects to place three of these aircraft into revenue service during 1999 with the remainder placed into revenue service during 2000. The monthly aggregate lease expense for all nine aircraft will be approximately $1 million. As a result of the acquisition of AIA, the Company acquired a 60% interest in the AIC general partnership. Pacific Aviation Logistics ("PAL") owned the remaining 40% interest in AIC and was the managing partner of AIC. Beti Ward, who owned PAL, was the general manager of AIC. AIC operates a scheduled air freight service between Los Angeles, Honolulu and various destinations in the Pacific. AIC does not own any aircraft and currently leases all of its aircraft and facilities from the Company. In August 1998, the Company called a partnership meeting to designate AIA as the managing partner of AIC and to replace Ms. Ward as general manager. In response, Ms. Ward and PAL filed suit to prevent these actions and requested the court to dissolve AIC. While these issues were being addressed in court, the Company reached a settlement with Ms. Ward and PAL. The terms of the settlement are (i) AIC will pay PAL a $5.4 million cash distribution from PAL's capital account in AIC, (ii) the Company will give Ms. Ward and PAL a promissory note for an additional $2.35 million, payable in three annual installments of $700,000 each and one final payment of $250,000 (the note bears interest at 9.98% and is payable semi-annually), (iii) Ms. Ward and PAL will transfer to the Company all of their interest in AIC and its business, (iv) Ms. Ward and PAL will broadly covenant not to compete in the Los Angeles and Honolulu air freight markets for a period of three and one-half years, (v) Ms. Ward and PAL will return approximately $180,000 worth of AIC's property and (vi) all the parties will exchange mutual releases, but the Company will retain the right to pursue audit actions and seek other limited recoveries against Ms. Ward and PAL. As a result of the settlement, the Company now has full ownership and control of AIC and its business in being conducted without interruption. F-29 74 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) The following sets forth the unaudited pro forma consolidated statement of operations for the years ended December 31, 1996 and 1997, in each case giving effect to the acquisition of the Kalitta Companies, the issuance of the Notes, Term Loan, and the acquisition of 16 Boeing 727s from the Kalitta Companies as if each of the transactions had been consummated at the beginning of 1996 and 1997 for each of the respective years. This information is presented for illustrative purposes only and does not purport to present the results of operations of the Company had these transactions occurred on the dates indicated, nor are they necessarily indicative of the consolidated results of operations which may be expected to occur in the future. No pro forma adjustments have been applied to reflect (i) revenues or operating costs expected to be generated from the Boeing 747s purchased during 1998 and modified to cargo configuration with approximately $56 million of the net proceeds from the Notes or (ii) operating efficiencies or cost savings (other than approximately $1.5 million of insurance savings) expected to result from the acquisition of the Kalitta Companies. In addition, pro forma results have not been adjusted to eliminate abnormally high engine maintenance expenses, costs incurred to add and maintain flight crews in anticipation of increased air freight carrier business which had 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, which has recently been discontinued. F-30 75 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Certain reclassifications have been made consistent with the reclassifications on the Company's statement of operations. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 ---------- ---------- (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenues: Air freight carrier....................................... $531,551 $461,795 Air logistics............................................. 70,539 53,638 Maintenance and other..................................... 29,231 36,348 -------- -------- Total revenues.................................... 631,321 551,781 -------- -------- Costs of revenues: Air freight carrier....................................... 460,048 406,131 Air logistics............................................. 65,921 48,820 Maintenance and other..................................... 22,248 22,316 -------- -------- Total costs of revenues........................... 548,217 477,267 -------- -------- Gross profit................................................ 83,104 74,514 General and administrative expenses......................... 38,160 31,843 Stock option grant to executives............................ -- 4,231 Non-qualified employee profit sharing expense............... 2,429 1,243 -------- -------- Operating income............................................ 42,515 37,197 Other income (expense): Interest expense, net..................................... (40,084) (40,859) Other, net................................................ (355) 1,557 -------- -------- Income (loss) before minority interest and income taxes..... 2,076 (2,105) Minority interest........................................... 3,036 1,146 -------- -------- Loss before income taxes.................................... (960) (3,251) Income taxes................................................ -- -- -------- -------- Net loss.................................................... $ (960) $ (3,251) ======== ======== Net loss per common share -- basic and diluted.............. $ (0.06) $ (0.22) ======== ======== Weighted average common shares outstanding.................. 16,751 14,776 ======== ======== Other Pro Forma Information: Adjusted EBITDA(1)........................................ $ 88,314 $ 82,293 ======== ======== Depreciation and amortization............................. $ 45,669 $ 39,308 ======== ======== Capital expenditures...................................... $214,356 $141,635 ======== ========
- --------------- (1) Adjusted EBITDA is calculated as income (loss) before minority interest, income taxes, interest expense and depreciation and amortization. Adjusted EBITDA excludes approximately $4,231 from stock options granted to executives in 1996. F-31 76 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. 1999 REPORTING (UNAUDITED) Subsequent to the acquisition of the Kalitta Companies and pursuant to the integration of these companies into Kitty Hawk, the Company has refined its financial reporting. Throughout this transition and reorganization of common business segments under common management, the Company has developed a corresponding methodology for its financial reporting. Beginning in the first quarter of 1999, the Company expects to report operating results in its statement of income in a manner consistent with the presentation below. Differences in revenue from the prior presentation include the following: (i) revenues from charters performed by the Company's small aircraft will be reported as a component of air logistics revenue instead of the 1998 presentation as air freight carrier revenues, (ii) revenues from the Company's scheduled freight services will be reported separate from air freight carrier revenues, and (iii) charters arranged by the air logistics service provider which are flown in the air freight carrier will no longer be reported as a component of air freight carrier revenues; they will be included in air logistics revenue. Differences in costs of revenues include breaking each component of air logistics, air freight carrier and scheduled freight costs of revenues into their respective components which include flight expense, maintenance expense, aircraft fuel expense, depreciation expense and other expense. The following information is provided for informational purposes only. F-32 77 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED YEAR ENDED --------------------------------------------------- --------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1998 1998 1998 1998 1997 --------- -------- ------------- ------------ ------------ ------------ (PRO FORMA) (UNAUDITED) Revenues: Air freight carrier........ $74,764 $77,445 $85,393 $134,088 $371,690 $314,814 Air logistics.............. 27,690 27,935 39,515 50,312 145,452 122,924 Scheduled freight.......... 36,181 40,497 43,842 46,013 166,533 164,352 Maintenance and other...... 8,718 9,917 6,331 6,296 31,262 29,231 ------- ------- ------- -------- -------- -------- Total revenues..... 147,353 155,794 175,081 236,709 714,937 631,321 Costs of revenues: Flight expense............. 69,558 70,073 80,571 107,568 327,770 281,863 Maintenance expense........ 33,967 30,472 39,406 46,517 150,362 148,527 Aircraft fuel expense...... 16,226 17,033 17,065 19,235 69,559 78,242 Depreciation expense....... 10,684 11,302 12,626 16,441 51,053 39,585 Other...................... -- -- -- 53 53 -- ------- ------- ------- -------- -------- -------- Total costs of revenues......... 130,435 128,880 149,668 189,814 598,797 548,217 Gross profit................. 16,918 26,914 25,413 46,895 116,140 83,104 General and administrative expenses................... 9,434 9,759 10,591 13,253 43,037 38,160 Profit sharing expense....... 530 52 408 1,807 2,797 2,429 ------- ------- ------- -------- -------- -------- Operating income............. 6,954 17,103 14,414 31,835 70,306 42,515 Interest expense............. (9,699) (9,602) (9,581) (11,122) (40,004) (40,084) Other income (expense)....... 675 391 296 (688) 674 (355) ------- ------- ------- -------- -------- -------- Income (loss) before minority interest and taxes................... (2,070) 7,892 5,129 20,025 30,976 2,076 Minority interest............ (812) (619) (1,042) (533) (3,006) (3,036) ------- ------- ------- -------- -------- -------- Income (loss) before taxes... (2,882) 7,273 4,087 19,492 27,970 (960) Income taxes................. (1,153) 2,909 1,550 8,022 11,328 -- ------- ------- ------- -------- -------- -------- Net income (loss)............ $(1,729) $ 4,364 $ 2,537 $ 11,470 $ 16,642 $ (960) ======= ======= ======= ======== ======== ======== Basic and diluted net income (loss) per share........... $ (0.10) $ 0.26 $ 0.15 $ 0.68 $ 0.99 $ (0.06) ======= ======= ======= ======== ======== ======== Weighted average shares outstanding................ 16,759 16,775 16,925 16,940 16,855 16,751 ======= ======= ======= ======== ======== ========
F-33 78 INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT ----------- ------- 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, the Kalitta Companies 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, the Kalitta Companies 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, the Kalitta Companies 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, the Kalitta Companies and Conrad Kalitta, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated 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 -- Stockholders' Agreement dated November 1997 among the Company, M. Tom Christopher and Conrad A. Kalitta, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 4.3 -- Specimen Global Note in respect of 9.95% Senior Secured Notes due 2004, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference.
79
EXHIBIT NO. EXHIBIT ----------- ------- 4.5 -- 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, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 10.1** -- Settlement Agreement dated as of August 22, 1994 by and between the Company, Kitty Hawk Aircargo, Inc., Airport Leasing, Inc., 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.
80
EXHIBIT NO. EXHIBIT ----------- ------- 10.11 -- 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. 10.12 -- 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. 10.13 -- 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. 10.14 -- 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. 10.15 -- 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. 10.16 -- 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. 10.17 -- 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. 10.18 -- 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), filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-4 (Reg. No. 333-43645), which Exhibit is herein incorporated by reference. 10.19* -- Third Amended Agreement, dated as of December 10, 1998, 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.
81
EXHIBIT NO. EXHIBIT ----------- ------- 10.23 -- Separation Agreement, dated as of April 17, 1998, by and among the Company, M. Tom Christopher, Conrad A. Kalitta and certain subsidiaries of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.24 -- Amendment No. 1 to Separation Agreement, dated as of June 5, 1998, by and among the Company, M. Tom Christopher, Conrad A. Kalitta and certain subsidiaries of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.25 -- Agreement, dated as of January 21, 1999, by and among the Company, M. Tom Christopher, Conrad A. Kalitta and certain subsidiaries of the Company, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.26** -- Modified and Restated Employment Agreement, dated as of April 27, 1998 by and between the Company and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.27** -- Stock Option Agreement, dated as of April 27, 1998, by and between the Company and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.28** -- Non-Qualified Stock Option Agreement, dated as of February 24,1999, by and among the Company, M. Tom Christopher and Tilmon J. Reeves, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.29** -- 1999 Kitty Hawk, Inc. Executive Stock Option Plan, dated as of February 24, 1999, filed as an Exhibit to the Registrant's previously filed Registration Statement on Form S-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 10.30* -- Ground Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. 10.31* -- Building Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. 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-3 (Reg. No. 333-74469), which Exhibit is herein incorporated by reference. 23.1* -- Consent of Ernst & Young LLP. 27.1* -- Financial Data Schedule.
- --------------- * Filed herewith. ** This exhibit is a management contract or compensatory plan or arrangement. EX-10.19 2 THIRD AMENDMENT, DATED DECEMBER 10, 1998 1 EXHIBIT 10.19 THIRD AMENDMENT AGREEMENT This THIRD AMENDMENT AGREEMENT (this "Amendment") is made and entered into as of December 10, 1998 by and 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"), 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"), LONGHORN SOLUTIONS, INC., a Texas corporation ("Longhorn"), WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Wells Fargo"), BANK ONE, TEXAS, N.A. ("Bank One"), COMERICA BANK ("Comerica"), HELLER FINANCIAL, INC. ("Heller"), TORONTO DOMINION (TEXAS), INC. ("Toronto Dominion") 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"). R E C I T A L S: A. Pursuant to that certain Second Amended and Restated Credit Agreement dated as of November 19, 1997, by and among Kitty Hawk, Aircargo, Leasing, Charters, Skyfreighters Corporation, AIA, AIT, FOL, KFS, OK, Wells Fargo (as a Lender) and Agent (as amended, the "Credit Agreement"), Wells Fargo and the other Lenders (of which there were then none, other than Wells Fargo) agreed to provide a $100,000,000 Revolving Credit Loans facility to Kitty Hawk (for use by Kitty Hawk and its Subsidiaries) and a $45,900,000 Term Loans facility to Kitty Hawk. B. The Credit Agreement was amended in certain respects pursuant to that certain First Amendment Agreement dated as of January 1, 1998 and that certain Second Amendment Agreement dated as of February 6, 1998. C. Each of Bank One, Comerica, Heller and Toronto Dominion have previously purchased interests in the Loans and have become Lenders under the Credit Agreement. D. The parties to the Credit Agreement desire to further amend the Credit Agreement as provided in this Amendment to, among other things, (i) amend the Borrowing Base and (ii) provide for the grant of security interests in additional aircraft as security for the Obligations. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: THIRD AMENDMENT AGREEMENT - Page 1 2 ARTICLE 1 Definitions Section 1.1 Definitions. Unless otherwise defined in this Amendment, each capitalized term used in this Amendment has the meaning given to such term in the Credit Agreement (as amended by this Amendment). ARTICLE 2 Amendments to Credit Agreement Section 2.1 New Terms and Definitions. The following new terms and definitions thereof are hereby added to Section 1.1 of the Credit Agreement, which terms shall appear in alphabetical order in such Section 1.1: "'AIA Aircraft Appraisal' means an appraisal, dated on or about or after the Third Amendment Date, in form and substance satisfactory to Agent prepared by Pro-Tech Advisors Inc. which sets forth the appraised value of the AIA Aircraft, other than Aircraft X." "'Aircraft AE' means, collectively, (i) one McDonnell Douglas Model #DC- 8-61 airframe, United States Aircraft Registration Number N24UA, Manufacturer's Serial No. 45963, 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 JT3D-3B Engine, Manufacturer's Serial No. 669524, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669663, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645059, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 643331." "'Aircraft AF' means, collectively, (i) one McDonnell Douglas Model #DC- 8-62 airframe, United States Aircraft Registration Number N801MG, Manufacturer's Serial No. 45986, 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 JT3D-3B Engine, Manufacturer's Serial No. 669415, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644533, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669772, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 643562." "'Aircraft AG' means, collectively, (i) one McDonnell Douglas Model #DC- 8-62 airframe, United States Aircraft Registration Number N802MG, Manufacturer's Serial No. 46098, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or THIRD AMENDMENT AGREEMENT - Page 2 3 appurtenant to such airframe, (ii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 671327, (iii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 678966, (iv) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 671140, and (v) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 668044." "'Aircraft AH' means, collectively, (i) one McDonnell Douglas Model #DC- 8-62 airframe, United States Aircraft Registration Number N803CK, Manufacturer's Serial No. 46085, 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 JT3D-7 Engine, Manufacturer's Serial No. 669692, (iii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No 671383, (iv) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 671064, and (v) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 678961." "'Aircraft AI' means, collectively, (i) one McDonnell Douglas Model #DC-8- 63F airframe, United States Aircraft Registration Number N811CK, Manufacturer's Serial No. 46147, 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 JT3D-7 Engine, Manufacturer's Serial No. 678985, (iii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 669723, (iv) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 645304, and (v) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 642467." "'Aircraft AJ' means, collectively, (i) one McDonnell Douglas Model #DC-8- 61 airframe, United States Aircraft Registration Number N812CK, Manufacturer's Serial No. 45890, 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 JT3D-3B Engine, Manufacturer's Serial No. 669498, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644485, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644408, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645300." "'Aircraft AK' means, collectively, (i) one McDonnell Douglas Model #DC- 8-61 airframe, United States Aircraft Registration Number N813CK, Manufacturer's Serial No. 45893, 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 JT3D-3B Engine, Manufacturer's Serial No. 642298, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645184, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 632811, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644949." THIRD AMENDMENT AGREEMENT - Page 3 4 "'Aircraft AL' means, collectively, (i) one McDonnell Douglas Model #DC- 8-63F airframe, United States Aircraft Registration Number N815CK, Manufacturer's Serial No. 46151, 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 JT3D-7 Engine, Manufacturer's Serial No. 678969, (iii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 671217, (iv) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 671326, and (v) one Pratt & Whitney JT3D-7 Engine, Manufacturer's Serial No. 678986." "'Aircraft AM' means, collectively, (i) one McDonnell Douglas Model #DC- 8-61 airframe, United States Aircraft Registration Number N816CK, Manufacturer's Serial No. 45892, 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 JT3D-3B Engine, Manufacturer's Serial No. 669406, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 643688, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645442, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645398." "'Aircraft AN' means, collectively, (i) one McDonnell Douglas Model #DC- 8-61 airframe, United States Aircraft Registration Number N817CK, Manufacturer's Serial No. 45887, 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 JT3D-3B Engine, Manufacturer's Serial No. 642691, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 642387, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644992, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669668." "'Aircraft AO' means, collectively, (i) one McDonnell Douglas Model #DC- 8-62F airframe, United States Aircraft Registration Number N818CK, Manufacturer's Serial No. 45961, 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 JT3D-3B Engine, Manufacturer's Serial No. 667718, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669639, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669221, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669542." "'Aircraft AP' means, collectively, (i) one Douglas Model #DC-8E-55 airframe, United States Aircraft Registration Number N6161C, Manufacturer's Serial No. 45856, 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 JT3D-3B Engine, Manufacturer's Serial THIRD AMENDMENT AGREEMENT - Page 4 5 No. 644999, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 642686, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 642464, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644451." "'Aircraft AQ' means, collectively, (i) one Douglas Model #DC-8F-55 airframe, United States Aircraft Registration Number N6161M, Manufacturer's Serial No. 45762, 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 JT3D-3B Engine, Manufacturer's Serial No. 644852, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645507, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645997, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669356." "'Aircraft AR' means, collectively, (i) one Douglas Model #DC-8F-55 airframe, United States Aircraft Registration Number N801CK, Manufacturer's Serial No. 45816, 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 JT3D-3B Engine, Manufacturer's Serial No. 644561, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645540, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669167, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 678971." "'Aircraft AS' means, collectively, (i) one Douglas Model #DC-8F-54 airframe, United States Aircraft Registration Number N8052U, Manufacturer's Serial No. 46009, 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 JT3D-3B Engine, Manufacturer's Serial No. 643803, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644121, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 643521, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 642507." "'Aircraft AT' means, collectively, (i) one Douglas Model #DC-8-54 airframe, United States Aircraft Registration Number N806CK, Manufacturer's Serial No. 45932, 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 JT3D-3B Engine, Manufacturer's Serial No. 642294, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669286, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669638, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 670988." THIRD AMENDMENT AGREEMENT - Page 5 6 "'Aircraft AU' means, collectively, (i) one Douglas Model #DC-8-55 airframe, United States Aircraft Registration Number N807CK, Manufacturer's Serial No. 45767, 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 JT3D-3B Engine, Manufacturer's Serial No. 643274, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669545, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644898, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669252." "'Aircraft AV' means, collectively, (i) one Douglas Model #DC-8-55 airframe, United States Aircraft Registration Number N809CK, Manufacturer's Serial No. 45803, 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 JT3D-3B Engine, Manufacturer's Serial No. 669494, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 643623, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 645762, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669313." "'Aircraft AW' means, collectively, (i) one Douglas Model #DC-8-52 airframe, United States Aircraft Registration Number N810CK, Manufacturer's Serial No. 45814, 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 JT3D-3B Engine, Manufacturer's Serial No. 645251, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644842, (iv) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 669787, and (v) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No. 644454." "'Aircraft Related Collateral' means the AIA Aircraft, the Sixty Series Aircraft and the Fifty Series Aircraft (other than such aircraft as may have been expressly released from Liens securing the Obligations pursuant to the Loan Documents)." "'Appraised Orderly Liquidation Value of Parts' means the appraised value of the Parts of the Companies pursuant to the Parts Appraisal." "'Appraised Value of the AIA Aircraft' means the appraised value of the AIA Aircraft pursuant to the AIA Aircraft Appraisal." "'Appraised Value of the Sixty Series Aircraft' means $65,620,602.00, the appraised value of the Sixty Series Aircraft pursuant to the Sixty Series Aircraft Appraisal." THIRD AMENDMENT AGREEMENT - Page 6 7 "'Cash Generated Report' means a report in the form of Exhibit G attached hereto which has been appropriately and accurately completed in all respects and executed by Kitty Hawk and as to which the adjustments referred to therein have been approved by Agent." "'Collateral Aircraft' means the AIA Aircraft, the Sixty Series Aircraft and the Fifty Series Aircraft if and to the extent that, at the relevant time of determination, such aircraft are either subject to a Lien in favor of Agent securing any Obligation or are required to be subject to any such Lien in accordance with any Loan Document." "'Fifty Series Aircraft' means Aircraft AP, Aircraft AQ, Aircraft AR, Aircraft AS, Aircraft AT, Aircraft AU, Aircraft AV and Aircraft AW. The term 'Fifty Series Aircraft' shall also mean and refer to any replacement aircraft which is required or permitted, under this Agreement or an Aircraft Mortgage, to replace a Fifty Series 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." "'Increase Termination Date' means the earliest to occur of (a) the date upon which Kitty Hawk notifies the Agent in writing that it elects to terminate the increase in the Borrowing Base attributable to the Sixty Series Aircraft, (b) the date upon which any Lien with respect to any Sixty Series Aircraft is released by Agent, or (c) January 1, 2000." "'Loan Pricing Increase Period' means the period from and after the Third Amendment Date to the Calculation Date immediately succeeding the later to occur of the Increase Termination Date or the date upon which the Sixty Series Aircraft Release Amount has been paid in full." "'Parts Appraisal' means an appraisal, dated on or about or after the Third Amendment Date, in form and substance satisfactory to Agent prepared by MB Valuations of Dallas, Texas which sets forth the orderly liquidation value of the Parts inventory of the Companies." "'Sixty Series Aircraft' means Aircraft AE, Aircraft AF, Aircraft AG, Aircraft AH, Aircraft AI, Aircraft AJ, Aircraft AK, Aircraft AL, Aircraft AM, Aircraft AN and Aircraft AO. The term 'Sixty Series Aircraft' shall also mean and refer to any replacement aircraft which is required or permitted, under this Agreement or an Aircraft Mortgage, to replace a Sixty Series 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." "'Sixty Series Aircraft Appraisal' means the appraisal, dated November 23, 1998, in form and substance satisfactory to Agent and Lenders prepared by Pro-Tech THIRD AMENDMENT AGREEMENT - Page 7 8 Advisors Inc. which sets forth the appraised value of the Sixty Series Aircraft based upon physical and complete record reviews of both airframes and engines." "'Sixty Series Aircraft Release Amount' means, at any time of determination, an amount equal to the portion of the Borrowing Base then in effect which is attributable to clause (c) of the definition of the term "Borrowing Base." "'Third Amendment Agent's Letter' means that certain letter agreement dated December 10, 1998 between Wells Fargo and Kitty Hawk, accepted and agreed to by Kitty Hawk as of December 10, 1998, relating to certain fees payable by Kitty Hawk in connection with the Third Amendment." "'Third Amendment Date' means December 10, 1998." "'Third Amendment Projections' means the financial projections of Kitty Hawk and its Subsidiaries for the fiscal years 1998 through 2002 dated as of November 3, 1998 prepared by Kitty Hawk and delivered to Agent." Section 2.2 Amendments to Certain Definitions. Each of the following terms and definitions thereof contained in Section 1.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "'Advance Rate' means (a) for Eligible Receivables, 80% and (b) for Eligible Parts, 50% (subject to the succeeding proviso); provided, however, that, in the event that the product of (i) 90% multiplied by (ii) the quotient (expressed as a percentage) of the Appraised Orderly Liquidation Value of Parts (calculated with respect to the Eligible Parts only) divided by the Companies' cost of the Eligible Parts appraised pursuant to the Parts Appraisal, is less than 50%, then the Advance Rate for Eligible Parts shall not exceed such product (expressed as a percentage) at any time after January 1, 1999." "'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, Aircraft AD, Aircraft AE, Aircraft AF, Aircraft AG, Aircraft AH, Aircraft AI, Aircraft AJ, Aircraft AK, Aircraft AL, Aircraft AM, Aircraft AN, Aircraft AO, Aircraft AP, Aircraft AQ, Aircraft AR, Aircraft AS, Aircraft AT, Aircraft AU, Aircraft AV and Aircraft AW, 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 THIRD AMENDMENT AGREEMENT - Page 8 9 Companies comply with each of the applicable requirements contained in this Agreement and the applicable Aircraft Mortgage." "'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 under the heading 'Applicable Base Rate Margin' 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, provided, however, that the Applicable Base Rate Margin during the Loan Pricing Increase Period shall be 1.75% per annum as set forth in the table below under the heading 'Applicable Base Rate Margin during Loan Pricing Increase Period':
Applicable Funded Debt Applicable Base Rate Margin to Base Rate during Loan Pricing Adjusted EBITDA Ratio Margin Increase Period --------------------- ------ --------------- Greater than 4.25 to 1.00 1.25% 1.75% Greater than 4.00 to 1.00, but equal to or less than 4.25 to 1.00 1.00% 1.75% Greater than 3.50 to 1.00, but equal to or less than 4.00 to 1.00 0.75% 1.75% Greater than 3.00 to 1.00, but equal to or less than 3.50 to 1.00 0.50% 1.75% Greater than 2.50 to 1.00, but equal to or less than 3.00 to 1.00 0.25% 1.75% Greater than 2.00 to 1.00, but equal to or less than 2.50 to 1.00 0.00% 1.75% Equal to or less than 2.00 to 1.00 0.00% 1.75%
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 (a) 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 and (b) the Applicable Base Rate Margin THIRD AMENDMENT AGREEMENT - Page 9 10 during the Loan Pricing Increase Period shall be as set forth in the preceding sentence." "'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 under the heading 'Applicable Commitment Fee Rate' 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, provided, however, that the Applicable Commitment Fee Rate during the Loan Pricing Increase Period shall be 0.50% per annum as set forth in the table below under the heading 'Applicable Commitment Fee Rate during Loan Pricing Increase Period':
Applicable Funded Debt Applicable Commitment Fee Rate to Commitment during Loan Pricing Adjusted EBITDA Ratio Fee Rate Increase Period --------------------- -------- --------------- Greater than 4.25 to 1.00 0.50% 0.50% Greater than 4.00 to 1.00, but equal to or less than 4.25 to 1.00 0.50% 0.50% Greater than 3.50 to 1.00, but equal to or less than 4.00 to 1.00 0.50% 0.50% Greater than 3.00 to 1.00, but equal to or less than 3.50 to 1.00 0.375% 0.50% Greater than 2.50 to 1.00, but equal to or less than 3.00 to 1.00 0.375% 0.50% Greater than 2.00 to 1.00, but equal to or less than 2.50 to 1.00 0.375% 0.50% Equal to or less than 2.00 to 1.00 0.250% 0.50%
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 (a) 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, and (b) the Applicable Commitment Fee Rate during the Loan Pricing Increase Period shall be as set forth in the preceding sentence." THIRD AMENDMENT AGREEMENT - Page 10 11 "'Applicable Eurodollar Margin' means, for the period commencing with the Closing Date and thereafter, the rate per annum set forth in the table below under the heading 'Applicable Eurodollar Margin' 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, provided, however, that the Applicable Eurodollar Margin during the Loan Pricing Increase Period shall be 3.25% per annum as set forth under the heading 'Applicable Eurodollar Margin during Loan Pricing Increase Period':
Applicable Funded Debt Applicable Eurodollar Margin to Eurodollar during Loan Pricing Adjusted EBITDA Ratio Margin Increase Period --------------------- ------ --------------- Greater than 4.25 to 1.00 2.75% 3.25% Greater than 4.00 to 1.00, but equal to or less than 4.25 to 1.00 2.50% 3.25% Greater than 3.50 to 1.00, but equal to or less than 4.00 to 1.00 2.25% 3.25% Greater than 3.00 to 1.00, but equal to or less than 3.50 to 1.00 2.00% 3.25% Greater than 2.50 to 1.00, but equal to or less than 3.00 to 1.00 1.75% 3.25% Greater than 2.00 to 1.00, but equal to or less than 2.50 to 1.00 1.50% 3.25% Equal to or less than 2.00 to 1.00 1.25% 3.25%
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 (a) 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, and (b) the Applicable Eurodollar Margin during the Loan Pricing Increase Period shall be as set forth in the preceding sentence." THIRD AMENDMENT AGREEMENT - Page 11 12 "'Borrowing Base' means, as of any date of determination in accordance with this Agreement, the sum of (a) the product of the Advance Rate for Eligible Receivables multiplied by the amount of Eligible Receivables, plus (b) the lesser of the product of the Advance Rate for Eligible Parts multiplied by the amount of Eligible Parts or $25,000,000, plus (c) (i) at any time prior to the Increase Termination Date, the lesser of 50% of the Appraised Value of the Sixty Series Aircraft or $30,000,000 and (ii) at any time on or after the Increase Termination Date, zero." "'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 cost in accordance with GAAP. 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." "'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, Aircraft AD, Aircraft AE, Aircraft AF, Aircraft AG, Aircraft AH, Aircraft AI, Aircraft AJ, Aircraft AK, Aircraft AL, Aircraft AM, Aircraft AN, Aircraft AO, Aircraft AP, Aircraft AQ, Aircraft AR, Aircraft AS, Aircraft AT, Aircraft AU, Aircraft AV and Aircraft AW, 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." "'Kitty Hawk Aircraft' means, collectively, the Collateral Aircraft and the Non-Collateral Aircraft." In addition, the term "AIA Aircraft" contained in clause (ii) of the proviso at the end of the definition of the term "Permitted Liens" in Section 1.1 of the Credit Agreement is hereby amended to mean and refer to the "Collateral Aircraft". THIRD AMENDMENT AGREEMENT - Page 12 13 Section 2.3 Amendment to Section 2.7. Section 2.7 of the Credit Agreement is hereby amended as follows: (a) A new clause (e) is hereby added to Section 2.7, which clause (e) shall read in its entirety as follows: "(e) Loan to Value Ratio. If, upon receipt of the AIA Aircraft Appraisal, the quotient (expressed as a percentage) of (i) the aggregate outstanding principal amount of the Term Loans divided by (ii) the Appraised Value of the AIA Aircraft, is greater than 72.63%, then Kitty Hawk shall, within one Business Day thereafter, pay to Agent an amount of the principal of the Term Loans such that, after giving effect to such prepayment, such quotient does not exceed 72.63%." (b) Existing (i.e., prior to giving effect to this Amendment) clause (e) is hereby amended to be clause (f) and to read in its entirety as follows: "(f) Application of Mandatory Prepayments. All prepayments pursuant to clauses (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 clauses, shall be applied pro rata to the then remaining installments of principal of the Term Loans. All prepayments pursuant to clause (e) preceding shall be applied to the then remaining installments of the Term Loans in the inverse order of the maturities of such installments." Section 2.4. Amendment to Section 2.11. A new clause (d) is hereby added to Section 2.11 of the Credit Agreement, which clause (d) shall read in its entirety as follows: "(d) Subject to Section 13.12, Kitty Hawk agrees to pay to Agent on the Third Amendment Date, for the account of each Lender, a restructure fee in an amount equal to the product of (i) 0.0007 multiplied by (ii) the sum of the Revolving Credit Loans Commitment of such Lender plus the outstanding principal amount of the Term Loans owed to such Lender. In addition, Kitty Hawk agrees to pay to Agent on the Third Amendment Date, for its own account, the additional fee set forth in the Third Amendment Agent's Letter." Section 2.5. Amendment to Section 5.1. Section 5.1 of the Credit Agreement is hereby amended to add the following sentence thereto immediately succeeding the first sentence of Section 5.1: "In addition, to secure the full and complete payment and performance of the Obligations, AIA shall, on or before the Third Amendment Date, grant to Agent and Lenders a perfected, first priority Lien on all of its right, title and interest in and to all Sixty Series Aircraft and all Fifty Series Aircraft and all engines, appliances and spare parts installed in or appurtenant to any such Sixty Series Aircraft or Fifty Series Aircraft and all products and proceeds thereof, whether now owned or hereafter acquired, pursuant to additional Aircraft Mortgages; provided, however, that the THIRD AMENDMENT AGREEMENT - Page 13 14 following Liens affecting the following engines shall not be required to be released of record until on or before February 28, 1999 or, if not so released on or before such date and in lieu of such release, AIA shall, on or before February 28, 1999 and to secure the full and complete payment and performance of the Obligations, grant to Agent and Lenders (pursuant to additional Aircraft Mortgages) a perfected, first priority Lien on all of its right, title and interest in and to substitute engines owned by AIA having a value equal to or greater than the value of the following engines:
Engine Manufacturer's Description Serial Number Lien Lienholder ----------- ------------- ---- ---------- 1. Pratt & Whitney 669639 Aircraft Chattel De Nationale JT3D-3B Mortgage and Security Investeringsbank Agreement dated 3/3/93 N.V. recorded as document #AA49895 2. Pratt & Whitney 671217 Security Agreement Electrospace JT3D-7 dated 5/23/90 recorded Systems, Inc., et al. as document #CC000780 3. Pratt & Whitney 671326 Hire Purchase Bail Leasing Limited, JT3D-7 Agreement dated et al. 4/30/90 recorded as document #WW31973 and related documents 4. Pratt & Whitney 642294 Security Agreement Bell Atlantic Tricon JT3D-3B dated 1/22/90 recorded Leasing Corporation as document #G77371 5. Pratt & Whitney 669638 Aircraft Chattel De Natioinale JT3D-3B Mortgage and Security Investeringsbank Agreement dated 3/3/93 N.V. recorded as document #AA49895 6. Pratt & Whitney 643521 Lien Notice dated Deutsche Credit JT3D-3B 12/29/92 recorded as Corporation document #U65100 7. Pratt & Whitney 642507 Security Agreement Bell Atlantic Triton JT3D-3B dated 1/22/90 recorded Leasing Corporation" as document #G77371
Section 2.6 Amendment to Section 5.3. Section 5.3 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Section 5.3 New 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 THIRD AMENDMENT AGREEMENT - Page 14 15 acquisition of any equipment or enhancement to any Aircraft Related Collateral, 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 2.7 Amendment to Section 5.5. A new clause (d) is hereby added to Section 5.5 of the Credit Agreement, which clause (d) shall read in its entirety as follows: "(d) Release Provisions Non-Application to Other Aircraft Related Collateral. The terms and provisions of this Section 5.5 shall not apply to any Sixty Series Aircraft or Fifty Series Aircraft or any engines or Parts forming a part thereof or relating thereto." Section 2.8 Amendment to Section 5.7. Section 5.7 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Section 5.7 Title Insurance. Aircargo (with respect to the AIA Aircraft) and AIA (with respect to the Sixty Series Aircraft) shall (at their 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 and AIA have indefeasible title to each of the AIA Aircraft and the Sixty Series Aircraft, respectively, and that Agent, for the benefit of Agent and Lenders, holds a perfected, first priority Lien on each of the AIA Aircraft and the Sixty Series 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 with respect to the AIA Aircraft and shall be in the amount of $30,000,000 with respect to the Sixty Series Aircraft 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." Section 2.9 Release of Sixty Series Aircraft. A new Section 5.8 is hereby added to the Credit Agreement, which Section shall read in its entirety as follows: "Section 5.8 Release of Sixty Series Aircraft. Agent and Lenders agree that, upon five Business Days prior written request from Kitty Hawk if (but only if) Kitty Hawk, on or before the date of such release, prepays the outstanding principal amount of the Revolving Credit Loans by an aggregate amount equal to the Sixty Series Aircraft Release Amount (calculated with respect to all Sixty Series Aircraft whether or not less than all Sixty Series Aircraft are then proposed to be released), Agent shall (at Kitty Hawk's expense) release its Lien on any one or more of the Sixty Series Aircraft; provided, however, that Agent shall have no obligation to release its Lien on any Sixty Series Aircraft (a) except concurrently with (or thereafter) and in connection with a sale or exchange of such aircraft for full and fair consideration during calendar THIRD AMENDMENT AGREEMENT - Page 15 16 years 1998 or 1999 in accordance with and as permitted by Section 9.8 or (b) after December 31, 1999, unless either (i) the audited financial statements of Kitty Hawk and its Subsidiaries delivered pursuant to Section 8.1 reflect that Adjusted EBITDA of Kitty Hawk and its consolidated Subsidiaries was $149,000,000 or more for the fiscal year ending December 31, 1999 or (ii) the Funded Debt to Adjusted EBITDA ratio of Kitty Hawk and its Subsidiaries for the four fiscal quarters then most recently ended on or after December 31, 1999, as calculated pursuant to Section 10.1, does not exceed 3.00 to 1.00. Notwithstanding the foregoing provisions of this Section 5.8 or anything to the contrary contained herein, Agent shall have no obligation to release its Lien on any Sixty Series 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 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." Section 2.10 Release of Fifty Series Aircraft. A new Section 5.9 is hereby added to the Credit Agreement, which Section shall read in its entirety as follows: "Section 5.9 Release of Fifty Series Aircraft. 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 any one or more of the Fifty Series Aircraft; provided, however, that Agent shall have no obligation to release its Lien on any Fifty Series Aircraft except concurrently with (or thereafter) and in connection with a sale or exchange of such aircraft for full and fair consideration in accordance with and as permitted by Section 9.8. Notwithstanding the foregoing provisions of this Section 5.9 or anything to the contrary contained herein, Agent shall have no obligation to release its Lien on any Fifty Series 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 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." Section 2.11 Third Amendment Projections. Section 7.2 of the Credit Agreement is hereby amended to add a new subsection (d) thereto, which subsection (d) shall read in its entirety as follows: "(d) The Third Amendment Projections were prepared by Kitty Hawk on a basis substantially consistent with the financial statements referred to in Section 7.2(a). The Third Amendment Projections represent, as of the Third Amendment Date, the good faith estimate of Kitty Hawk and its senior management concerning the probable financial condition and THIRD AMENDMENT AGREEMENT - Page 16 17 performance of Kitty Hawk and its Subsidiaries based on assumptions believed to be reasonable at the time made." Section 2.12 Rights in Properties; Liens. Section 7.6 of the Credit Agreement is hereby amended to add the following two sentences to the end of Section 7.6: "AIA is the true and lawful owner of each of the Sixty Series Aircraft and the Fifty Series Aircraft and is the registered owner of each of such aircraft pursuant to proper registrations under the Federal Aviation Act. AIA 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." Section 2.13 Monthly Financial Statements. Section 8.1 of the Credit Agreement is hereby amended to delete the word "and" at the end of clause (r) of Section 8.1, to delete the period at the end of clause (s) of Section 8.1 and to add a semi-colon in lieu thereof and to add the following after clause (s): "(t) Monthly Financial Statements. As soon as available, and in any event within 30 days after the end of each calendar month, beginning with the calendar month ending November 30, 1998, (i) an unaudited financial report of Kitty Hawk and its Subsidiaries as of the end of such month 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 (u) Monthly Cash Generated Reports. As soon as available, and in any event within 30 days after the end of each calendar month, beginning with the calendar month commencing January 1999 and continuing through December 1999, a Cash Generated Report in the form of Exhibit G attached hereto, appropriately and accurately completed in all respects and executed by Kitty Hawk." Section 2.14 Maintenance of Existence; Conduct of Business. The last sentence of Section 8.2 of the Credit Agreement is amended and restated to read in its entirety as follows: "All AIA Aircraft and Sixty Series Aircraft will be maintained as ready and available for regular, uninterrupted revenue generating operation in compliance with all laws and FAA regulations." Section 2.15 Maintenance of Properties; Hush Kits. Section 8.3 of the Credit Agreement is hereby amended such that each reference therein to the term "AIA Aircraft" shall mean and refer to "AIA Aircraft and Sixty Series Aircraft". THIRD AMENDMENT AGREEMENT - Page 17 18 Section 2.16 Insurance. Section 8.5 of the Credit Agreement is hereby amended such that each reference therein to the term "AIA Aircraft" shall mean and refer to "Collateral Aircraft". Section 2.17 Aircraft Registration, Maintenance, Operation, Insignia. Section 8.12 of the Credit Agreement is hereby amended such that each reference therein to the term "AIA Aircraft" shall mean and refer to "AIA Aircraft and Sixty Series Aircraft"; provided, however, that clause (i) of Section 8.12(a) of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "(i) cause the AIA Aircraft and the Sixty Series Aircraft and Fifty Series Aircraft to be duly registered in the name of Aircargo and AIA, respectively, and to remain duly registered in such name under the Federal Aviation Act;". Section 2.18 Replacement of Parts; Alterations, Modifications and Additions. Section 8.13 of the Credit Agreement is hereby amended such that each reference therein to the term "AIA Aircraft" shall mean and refer to "Collateral Aircraft". Section 2.19 Appraisals. A new Section 8.16 is hereby added to the Credit Agreement, which Section 8.16 shall read in its entirety as follows: "Section 8.16 Delivery of Appraisals. Kitty Hawk shall deliver, or cause to be delivered, to Agent the following, all of which must be in form and substance satisfactory to Agent and Required Lenders: (a) on or before the Third Amendment Date, the Sixty Series Aircraft Appraisal; (b) on or before December 28, 1998, the AIA Aircraft Appraisal; and (c) on or before December 31, 1998, the Parts Appraisal. In addition, in the event that Agent or Required Lenders in their sole discretion require any modification, amendment or supplement to any such appraisal, Kitty Hawk shall cause such modification, amendment or supplement to be prepared and delivered to Agent promptly after any request therefor made by Agent to Kitty Hawk. Assuming such appraisals are timely received by Agent, Agent and Lenders shall review the AIA Aircraft Appraisal and the Parts Appraisal by no later than January 15, 1999 and shall inform Kitty Hawk as to whether such appraisals have been approved by Agent and Lenders by such date." Section 2.20 Amendment to Section 9.1. Clause (c) of Section 9.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "(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 THIRD AMENDMENT AGREEMENT - Page 18 19 any time outstanding, provided, however, that no Debt may be incurred pursuant to this clause (c) on or after the Third Amendment Date until the later to occur of the Increase Termination Date or the date upon which the Sixty Series Aircraft Release Amount has been paid in full." Section 2.21 Amendment to Section 9.3. Section 9.3 of the Credit Agreement is hereby amended to delete the period at the end of Section 9.3 and to add a semi-colon in lieu thereof and to add the following new clause to the end of Section 9.3: "and provided, further, however, that AIC may be dissolved and wound-up in accordance with applicable law." Section 2.22 Amendment to Section 9.8. Section 9.8 of the Credit Agreement is hereby amended to delete the word "and" at the end of clause (a), to delete the period at the end of clause (b) and to add a semi-colon in lieu thereof and to add the following new clause (c): "(c) with respect to Sixty Series Aircraft and Fifty Series Aircraft, dispositions of such aircraft for full and fair consideration, provided, however, that the Lien in favor of Agent as security for the Obligations shall not be released in connection with any such disposition except as provided pursuant to Sections 5.8 and 5.9." Section 2.23 Lines of Business. Section 9.9 of the Credit Agreement is hereby amended such that the reference therein to the term "AIA Aircraft" shall mean and refer to "Collateral Aircraft". Section 2.24 Modification of Other Agreements. Section 9.13 of the Credit Agreement is hereby amended such that the reference therein to the term "AIA Aircraft" shall mean and refer to "Collateral Aircraft". Section 2.25 Territorial Restrictions. Section 9.15 of the Credit Agreement is hereby amended such that each reference therein to the term "AIA Aircraft" shall mean and refer to "Collateral Aircraft". Section 2.26 Amendment to Section 10.1. Section 10.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "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: THIRD AMENDMENT AGREEMENT - Page 19 20
Fiscal Quarter Ending Maximum Ratio - --------------------- ------------- December 31, 1997 through and including December 31, 1998 4.25 to 1.00 March 31, 1999 through and including December 31, 1999 4.00 to 1.00 March 31, 2000 through and including June 30, 2000 3.50 to 1.00 September 30, 2000 3.25 to 1.00 December 31, 2000 through and including December 31, 2001 3.00 to 1.00 March 31, 2002 and each fiscal quarter ending thereafter 2.50 to 1.00"
Section 2.27 Amendment to Section 10.3. Section 10.3 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Section 10.3 Minimum Debt Service Coverage. 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) Adjusted EBITDA to (b) the sum of (i) Interest Expense, plus (ii) Capital Lease Obligations, plus (iii) the aggregate amount of all payments of Funded Debt paid by Kitty Hawk or any of its Subsidiaries during the 12-month period ending on the date of determination, in each case for the four fiscal quarters of Kitty Hawk then ended, to be less than 2.00 to 1.00." Section 2.28 Capital Expenditures. Section 10.4 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Section 10.4 Capital Expenditures. Kitty Hawk and its Subsidiaries will not permit the aggregate of Capital Expenditures (a) during fiscal year 1998 to exceed $160,000,000, (b) during fiscal year 1999 to exceed $115,000,000, and (c) during fiscal year 2000 and each fiscal year thereafter to exceed $65,000,000; provided, however, that, for purposes of clause (a) preceding, Capital Expenditures shall exclude the cost of the acquisition of two model 747 aircraft from Middle Eastern Airlines during January or February 1998." THIRD AMENDMENT AGREEMENT - Page 20 21 Section 2.29 Minimum Cash Generated Requirement. A new Section 10.5 is hereby added to the Credit Agreement, which Section 10.5 shall read in its entirety as follows: "Section 10.5 Minimum Cash Generated Requirement. Kitty Hawk and its Subsidiaries will: (a) as of March 31, 1999 and based upon the Cash Generated Report as of March 31, 1999, have 'Total Cash Generated Year-to-Date' (as such term is used and reflected in such report) equal to or greater than 22.8959% of the 'Adjusted Required Cash' (as such term is used and reflected in such report), in each case as reflected in such Cash Generated Report; (b) as of June 30, 1999 and based upon the Cash Generated Report as of June 30, 1999, have 'Total Cash Generated Year-to-Date' (as such term is used and reflected in such report) equal to or greater than 68.6876% of the 'Adjusted Required Cash' (as such term is used and reflected in such report), in each case as reflected in such Cash Generated Report; and (c) as of September 30, 1999 and based upon the Cash Generated Report as of September 30, 1999, have 'Total Cash Generated Year-to-Date' (as such term is used and reflected in such report) equal to or greater than 100% of the 'Adjusted Required Cash' (as such term is used and reflected in such report), in each case as reflected in such Cash Generated Report." Section 2.30 Term Loans to Value Ratio. A new Section 10.6 is hereby added to the Credit Agreement, which Section shall read in its entirety as follows: "Section 10.6 Term Loans to Value Ratio. Kitty Hawk and its Subsidiaries will not, as of September 30, 1999, permit the quotient (expressed as a percentage) of (a) the aggregate outstanding principal amount of the Term Loans divided by (b) the Appraised Value of the AIA Aircraft, to exceed 50%." Section 2.31 Form of Borrowing Base Report. Exhibit B to the Credit Agreement, the form of Borrowing Base Report, is hereby amended and restated to read as set forth in Third Amendment Exhibit A attached hereto. Section 2.32 Form of Cash Generated Report. A new Exhibit G is hereby added to the Credit Agreement, which Exhibit G shall read as set forth in Third Amendment Exhibit B attached hereto. THIRD AMENDMENT AGREEMENT - Page 21 22 ARTICLE 3 Conditions Precedent Section 3.1 Conditions Precedent. Except as provided in Section 3.2, the effectiveness of this Amendment is subject to the satisfaction of each of the following conditions precedent. (a) Agent shall have received all of the following, each dated (unless otherwise indicated) the Third Amendment Date, in form and substance satisfactory to Agent: (i) Amendment Documents. This Amendment, Aircraft Mortgages covering the Sixty Series Aircraft and the Fifty Series Aircraft, UCC-1 financing statements relating to the Aircraft Mortgages, the Sixty Series Aircraft Appraisal, mortgagee policies of title insurance relating to the Sixty Series Aircraft and any other agreement, instrument, document or certificate required by this Amendment or reasonably required by Agent to be executed or delivered by Kitty Hawk or any of its Subsidiaries in connection with this Amendment, in each case duly executed by all parties thereto (the "Amendment Documents"); (ii) Resolutions. Resolutions of the Board of Directors of each of Kitty Hawk and its Subsidiaries certified by the Secretary or an Assistant Secretary of each such Person which authorize the execution, delivery and performance by such Person of this Amendment and the other Amendment Documents to which it is or is to be a party; (iii) Fees, Costs and Expenses. The fees payable by Kitty Hawk on the Third Amendment Date in accordance with Section 2.4 of this Amendment shall have been paid in full by Kitty Hawk, and all fees, costs and expenses (including, without limitation, attorneys' fees and expenses) incurred by Agent incident to this Amendment and the Amendment Documents or required to be paid in accordance with Section 13.1 of the Credit Agreement, to the extent incurred and submitted to Kitty Hawk, shall have been paid in full by Kitty Hawk; and (iv) Additional Information. Such additional agreements, documents, instruments and information as Agent or its legal counsel, Jenkens & Gilchrist, a Professional Corporation, may reasonably request to effect the transactions contemplated hereby. (b) Agent and Lenders shall have approved the Appraised Value of the Sixty Series Aircraft. (c) The representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made again on and as of the date hereof (except to the extent that such representations and warranties were expressly, in the Loan Documents, made only in reference to a specific date). (d) No Default or Event of Default shall have occurred and be continuing (after giving effect to this Amendment). THIRD AMENDMENT AGREEMENT - Page 22 23 (e) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all other agreements, documents and instruments executed and/or delivered pursuant hereto, and all legal matters incident thereto, shall be satisfactory to Agent and its legal counsel, Jenkens & Gilchrist, a Professional Corporation. Section 3.2 Failure of Conditions Precedent. In the event that any of the conditions precedent referred to in Section 3.1 of this Amendment are not fully and timely satisfied on or before December 31, 1998, except as stated in the proviso below, this Amendment (including all terms and provisions hereof) shall be of no force or effect as if this Amendment were never executed; provided, however, that the Aircraft Mortgages granting Liens on the Sixty Series Aircraft and the Fifty Series Aircraft shall be valid, enforceable and of full force and effect whether or not such conditions precedent are satisfied. ARTICLE 4 Miscellaneous Section 4.1 Fees, Costs and Expenses. Kitty Hawk shall pay all reasonable fees, costs and expenses incurred by Agent (including, without limitation, attorneys fees and expenses) in connection with the negotiation, preparation, execution and consummation of this Amendment and the other Amendment Documents and transactions contemplated hereby and thereby. Kitty Hawk shall pay to Agent, on the Third Amendment Date and for the account of Agent and/or Lenders (as applicable), the fees referred to in Section 2.4 of this Amendment. Section 4.2 Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. Section 4.3 Effect of this Amendment. The Credit Agreement, as amended by this Amendment, shall remain in full force and effect except that any reference therein, or in any other Loan Document, to the Credit Agreement shall be deemed to mean and refer to the Credit Agreement as amended by this Amendment. Section 4.4 Counterparts. This Amendment may be executed in one or more counterparts, by means of facsimile or otherwise, each of which shall be deemed an original, but all of which together shall constitute one and the same Amendment. SECTION 4.5 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES) AND APPLICABLE LAWS OF THE UNITED STATES. SECTION 4.6 NO ORAL AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL, ENTIRE AGREEMENT BETWEEN AND AMONG THE PARTIES HERETO, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE THIRD AMENDMENT AGREEMENT - Page 23 24 OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES. Section 4.7 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid, illegal or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision held to be invalid, illegal or unenforceable. Section 4.8 Representations and Warranties. Each of Kitty Hawk and its Subsidiaries hereby represents and warrants to Agent and Lenders that, as of the date of and after giving effect to this Amendment, (a) the execution, delivery and performance of this Amendment and any and all other Amendment Documents executed and/or delivered in connection herewith have been duly authorized by all requisite corporate action on the part of such Person and will not violate such Person's corporate charter or bylaws, (b) the term Loan Documents as defined in the Credit Agreement and as used in any of the Loan Documents includes, without limitation, the Amendment Documents, (c) all representations and warranties set forth in the Credit Agreement and the other Loan Documents are true and correct as if made again on and as of such date (except to the extent that such representations and warranties were expressly therein made only in reference to a specific date), (d) no Default or Event of Default has occurred and is continuing, (e) the Credit Agreement and the other Loan Documents (as amended by this Amendment) are and remain legal, valid, binding and enforceable obligations of Kitty Hawk and its Subsidiaries, and (f) to the best of their knowledge, all indebtedness, liabilities and obligations secured by the Liens affecting the seven engines referred to in the table contained in Section 2.5 of this Amendment have been paid in full. Without limiting the generality of the foregoing, (i) the Liens granted by AIA covering the Sixty Series Aircraft and the Fifty Series Aircraft are permitted pursuant to clause (vii) of Section 4.09 of the Indenture, (ii) the Adjusted Consolidated Net Tangible Assets of Kitty Hawk and its "Restricted Subsidiaries" (as defined in the Indenture) is not less than $700,000,000 as of the Third Amendment Date, and (iii) the fair market value of the Sixty Series Aircraft and the Fifty Series Aircraft does not exceed $80,000,000 as of the Third Amendment Date. Section 4.9 Credit Agreement Remains in Effect; No Waiver. Except as expressly provided herein, all terms and provisions of the Credit Agreement and the other Loan Documents shall remain unchanged and in full force and effect and are hereby ratified and confirmed. No waiver by Agent or any Lender of any Default or Event of Default shall be deemed to be a waiver of any other Default or Event of Default. No delay or omission by Agent or any Lender in exercising any power, right or remedy shall impair such power, right or remedy or be construed as a waiver thereof or an acquiescence therein, and no single or partial exercise of any such power, right or remedy shall preclude other or further exercise thereof or the exercise of any other power, right or remedy under the Credit Agreement, the Loan Documents or otherwise. Section 4.10 Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other Loan Document shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Agent or any THIRD AMENDMENT AGREEMENT - Page 24 25 Lender or any closing shall affect the representations and warranties or the right of Agent and Lenders to rely upon them. Section 4.11 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Agent and Lenders and the Amending Parties and their respective successors and assigns, except that none of the Amending Parties may assign or transfer any of its rights or obligations hereunder without the prior written consent of Agent and Lenders. THIRD AMENDMENT AGREEMENT - Page 25 26 IN WITNESS WHEREOF, the undersigned parties hereto have duly executed this Amendment effective as of the dates first above written. KITTY HAWK: KITTY HAWK, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ AIRCARGO: KITTY HAWK AIRCARGO, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ LEASING: AIRCRAFT LEASING, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ CHARTERS: KITTY HAWK CHARTERS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ AIA: AMERICAN INTERNATIONAL AIRWAYS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ THIRD AMENDMENT AGREEMENT - Page 26 27 AIT: AMERICAN INTERNATIONAL TRAVEL, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ FOL: FLIGHT ONE LOGISTICS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ KFS: KALITTA FLYING SERVICE, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ OK: O. K. TURBINES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ LONGHORN: LONGHORN SOLUTIONS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ THIRD AMENDMENT AGREEMENT - Page 27 28 AGENT AND A LENDER: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as Agent and as a Lender By: --------------------------------- Name: Drew Keith Title: Vice President ADDITIONAL LENDERS: BANK ONE, TEXAS, N.A. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ COMERICA BANK By: --------------------------------- Name: ------------------------------- Title: ------------------------------ HELLER FINANCIAL, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ TORONTO DOMINION (TEXAS), INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ THIRD AMENDMENT AGREEMENT - Page 28 EX-10.30 3 GROUND LEASE, DATED AS OF APRIL 13, 1998 1 EXHIBIT 10.30 FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY GROUND LEASE This Ground Lease, made and entered into as of the 13th day of April, 1998, by and between FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY, an Indiana municipal corporation ("Landlord"), and KITTY HAWK, INC., a Delaware corporation duly admitted to do business in the State of Indiana, ("Tenant"); WITNESSETH THAT, in consideration of the rents, covenants and agreements hereinafter set forth, such parties enter into the following agreement: ARTICLE I DEFINITIONS AND EXHIBITS Section 1.1 Definitions. In addition to the words and terms elsewhere defined in this Lease, the following words and terms as used in this Lease shall have the following meanings unless the context or use indicates another or different meaning or intent and such definitions shall be equally applicable to both the singular and plural forms of any of the words and terms herein defined. "Airport Use and Lease Agreement" shall mean the agreement from time to time in effect between the Landlord and all Signatory Airlines. "Bonds" means the Fort Wayne International Airport Air Trade Center Building Corp. First Mortgage Improvement Bonds, Series 1998. "Building Corp." means the Fort Wayne International Airport Air Trade Center Building Corp. "Buildings" means all of the improvements to be constructed pursuant to Article IV of the Building Lease. "Building Lease" means that certain building lease entered into by and between Landlord and Tenant on even date herewith. "Project" means the American International Freight Central Cargo Hub, consisting in part of aircraft maintenance, cargo sort, and related facilities, the real, personal or real and personal property identified in Exhibit "C" hereto or in or pursuant to any amendments hereto or in the certificate given pursuant to Section 4.3 hereof, or acquired, constructed or installed as replacement or substitution therefor or addition thereto. 1 2 "Operating Agreement" means that certain operating agreement entered into by and between Landlord and Tenant on even date herewith. "Use and Lease Agreement" means that certain use and lease agreement entered into by and between Landlord and Tenant on even date herewith. Section 1.2 Exhibits. The exhibits listed below and attached to this Lease are incorporated herein by this reference: Exhibit "A" Description of the premises herein demised to Tenant. Exhibit "B" Phase I Environmental Site Assessment Report with respect to the Premises to be furnished by the Landlord. Exhibit "C" Description of the Expansion Real Estate, as described in Article III herein. ARTICLE II LEASED PREMISES AND TERM Section 2.1 Leased Premises. Landlord herein leases to Tenant and Tenant hereby rents from Landlord the real property described in Exhibit "A" to this Lease (hereinafter called "the Premises"), under the terms set forth in this Lease. Section 2.2 Lease Term. The term of this Lease (the "Lease Term") shall commence on the earlier of the following dates: (a) The Completion Date as provided for in the Building Lease, or (b) The date upon which the Tenant takes possession of the Premises, which date is hereinafter referred to as the "Commencement Date." Notwithstanding the foregoing, in no event, other than upon the occurrence of an event described in Section 22.6 below, shall the Commencement Date be later than July 1, 1999. The term of this Lease shall cease at the termination of the term of the Building Lease. 2 3 Section 2.3 Possession Prior to Commencement Date. If, by mutual consent of the parties, Tenant takes possession of the Premises prior to the Commencement Date, then during such pre-term period, Tenant shall pay the rent as herein established on a pro-rata basis and such occupancy shall be under all of the terms and conditions of this Lease, but such pre-term occupancy shall not affect the Lease Term as herein otherwise established. ARTICLE III TENANT OPTIONS Section 3.1 Tenant's Option to Expand the Leased Premises. At any time during the first ten (10) years of the initial lease term and so long as Tenant is not in default under the terms of the Ground Lease, the Building Lease, the Operating Agreement, or the Airport Use and Lease Agreement, and subject to the condition that the tenant is then operating an aeronautically related activity on the Real Estate, the Tenant shall have an option to lease an expansion area of real estate which consists of the Northeast one-half (1/2) of Lot A-9, as described in Exhibit "C" attached hereto, to the Fort Wayne International Airport Air Trade Center, consisting of 14 acres, more or less, in order to permit the Tenant to expand their ramp and sort hub facility and to connect with Taxiway Tango when constructed by the Landlord (the "Expansion Real Estate"). The right of the Tenant to exercise the option to lease is conditioned upon the payment by the Tenant to the Landlord of the sum of Six Thousand Seven Hundred Dollars ($6,700) on July 1, 1999, and a like sum on or before the first day of July of each and every year thereafter through July 1, 2009. Any portion of the Expansion Real Estate which is acquired by the Tenant pursuant to this Section 3.1 shall become part of the Premises leased to the Tenant under this Agreement and shall be added to and incorporated as a part of Exhibit "A" hereto. In such event, the Minimum Monthly Rent shall be adjusted, as of the date said notice is received by the Landlord. Said adjustment shall be calculated by dividing the Minimum Monthly Rent at that time by 1,603,704.90. The quotient shall be multiplied by the number of square feet in the Expansion Real Estate. The product will then be added to the Minimum Monthly Rent then in effect to produce the new Minimum Monthly Rent. Such adjusted Minimum Monthly Rent shall then be effective until the next adjustment pursuant to this Section 4.1. Section 3.2 Rights of First Refusal. Tenant shall have the following rights of first refusal: (a) Tenant has made each of the ten (10) payments contemplated by Section 3.1 above, and so long as Tenant is not in default under the terms of the Ground Lease, the Building Lease, the Operating Agreement, or the Airport Use and Lease Agreement, and subject to the condition that the tenant is then operating an 3 4 aeronautically related activity on the Real Estate, Tenant shall have, during the second ten (10) years of the Lease Term, a right of first refusal to lease the Expansion Real Estate. In the event that the Landlord receives a written initial proposal for the lease of the Expansion Real Estate to any third party, the Landlord shall forthwith notify the Tenant of the terms and conditions of such initial proposal to lease and, thereafter for a period of forty-five (45) days, the Tenant shall have the right of first refusal to lease the Expansion Real Estate upon terms and conditions which are mutually acceptable. (b) If Tenant fails to make any of the ten (10) payments contemplated by Section 3.1 above, Tenant shall have, during the first ten (10) years of the Initial Lease Term, a right of first refusal to lease the Expansion Real Estate. In the event that the Landlord receives a written initial proposal for the lease of the Expansion Real Estate to any third party, the Landlord shall forthwith notify the Tenant of the terms and conditions of such initial proposal to lease and, thereafter for a period of forty-five (45) days, the Tenant shall have the right of first refusal to lease the Expansion Real Estate upon terms and conditions which are mutually acceptable. ARTICLE IV RENT AND DEPOSIT Section 4.1 Minimum Rent. Tenant covenants and agrees to pay Landlord, without deduction, abatement or setoff of any nature whatsoever, as rent for the Premises only, the sum of One Hundred Seventy-six Thousand Four Hundred Eight Dollars ($176,408) per year (36.816 acres x 43,560 square feet x .11 per square foot) (hereinafter "Minimum Term Rent"). Minimum Term Rent shall be payable in equal monthly installments of Fourteen Thousand Seven Hundred One Dollars ($14,701) in advance without demand on the first day of each and every calendar month throughout the term of this Lease (hereinafter referred to as "Minimum Monthly Rent"). If the Commencement Date is not the first day of a calendar month, then Tenant shall pay rent at the rate herein established on a pro-rata basis for the number of days' tenancy during such initial month and shall thereafter make rent payments on the first day of each calendar month, with a like adjustment for the final month of the Lease Term, if applicable. The rent shall be payable without relief from valuation and appraisement laws at the office of the Landlord, whose address is stated in Section 22.18. On each anniversary date of the Lease during the Lease Term, the Minimum Monthly Rent shall be adjusted, based upon the adjustment in the Consumer Price Index (All Urban Consumers) or, if there shall be no such Consumer Price Index, then in the successor of the most nearly comparable successor index thereto ("Index Figure") by multiplying the Minimum Monthly Rent by a fraction, the numerator being the Index Figure for the month of December preceding the anniversary date of the Lease, and the denominator being the Index Figure for the month of December preceding the Commencement Date. This figure, as calculated, shall become the 4 5 Minimum Monthly Rent for the Lease Term, subject to additional annual adjustment as described below. Thereafter, on each succeeding anniversary date, the Minimum Monthly Rent shall be adjusted by multiplying the Minimum Monthly Rent by a fraction, the numerator being the Index Figure for the month of December, preceding the current anniversary date, and the denominator being the Index Figure for the month of December preceding the previous anniversary date. Section 4.2 Additional Rent. All amounts required or provided to be paid by Tenant under this Lease other than Minimum Monthly Rent shall be deemed Additional Rent. If Landlord pays any monies or incurs any expense to correct a breach of this Lease by Tenant or to do anything in this Lease required to be done by Tenant, all amounts so paid or incurred shall, upon notice to Tenant, be considered Additional Rent. Also, any amounts which Tenant must pay to Landlord under the Fort Wayne-Allen County Airport Authority Rules and Regulations, as may be amended from time to time, shall become Additional Rent upon notice to Tenant. Additional Rent shall be payable by Tenant under the same terms in this Lease as Minimum Monthly Rent. Additional Rent shall be payable with the first Minimum Monthly Rent installment thereafter becoming due and payable, and may be collected as provided as in the case of Minimum Monthly Rent. Section 4.3 Failure to Pay Rent. It is agreed by Tenant and Landlord that Landlord may terminate the tenancy of Tenant without demand or notice if Tenant fails to pay any Minimum Monthly Rent within thirty (30) days of the date it is due. Minimum Monthly Rent and Additional Rent shall each bear interest from and after thirty (30) days after the due date, until paid, at the rate of Eighteen percent (18%) per annum. ARTICLE V TAXES AND FEES Section 5.1 Real Estate Taxes and User Fees. Tenant shall pay, as Additional Rent, all real property taxes, user fees, and other such charges levied upon its leasehold interests and/or upon the Premises and the Buildings , if any, but Tenant shall pay only such Taxes and Fees which are payable after the Commencement Date of this Lease as provided for above, and it is the intent of the parties hereto that Tenant shall pay only such Taxes and Fees which are payable in the period covered by Tenant's term of possession. All Taxes and Fees shall become Additional Rent at the time Tenant receives notice of such charges from Landlord. 5 6 Section 5.2 Other Taxes. Tenant shall pay, during the Lease Term, all license fees and occupation taxes applicable to the business conducted by Tenant on the Premises, and all taxes on any and all personal property owned by Tenant and located upon the Premises. ARTICLE VI PARKING AREAS, COMMON AREAS AND FACILITIES Section 6.1 Common Areas. All public parking areas, access roads, and facilities furnished, made available or maintained by Landlord in or near the Premises, including (where applicable) truck ways, driveways, loading docks and areas, delivery areas, pedestrian sidewalks, landscaped areas, retaining walls, stairways, lighting facilities, sanitary systems, utility lines, water filtration and treatment facilities, and other areas and improvements provided by Landlord for the general use in common of Tenants and their customers (all of which are hereinafter called "Common Areas") shall at all times be subject to the exclusive control and management of Landlord, and Landlord shall have the right, from time to time, to establish, modify and enforce reasonable rules and regulations with respect to all Common Areas. Section 6.2 Use of Common Areas. Tenant and its business invitees, employees and customers shall have the non-exclusive right, in common with Landlord and all others to whom Landlord has granted or may hereafter grant rights, to use the Common Areas subject to such reasonable regulations as Landlord may from time to time impose in the rights of Landlord set forth above. Landlord may at any time close temporarily any Common Areas to make repairs or changes or for other reasonable purposes. Tenant shall not interfere with Landlord's or other tenants' rights to use any part of the Common Areas. Section 6.3 Landlord's Obligations. Landlord shall keep the common areas in good condition and readily accessible to the Tenant. ARTICLE VII ENVIRONMENTAL COMPLIANCE Tenant makes the following representations and warranties to Landlord regarding compliance with environmental laws: (a) Environmental Laws and Hazardous Substances. For purposes herein, the term "Environmental Law(s)" shall mean any federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any Hazardous Substance, as now or at any time hereafter in effect. For purposes herein, 6 7 the term "Hazardous Substance(s)" shall have the meaning ascribed in and shall include those substances listed under the Comprehensive Environmental Response, Compensation and Liability Act, 41 U.S.C. 9601 et seq. and the regulations promulgated thereunder (as amended from time to time) and the Clean Air Act, 41 U.S.C. 7401 et seq. and the regulations promulgated thereunder (as amended from time to time) and includes oil, waste oil, and used oil as those terms are defined in the Clean Water Act, 33 U.S.C. 1251 et seq. and regulations promulgated thereunder (as amended from time to time) and the Resource, Conservation and Recovery Act, 41 U.S.C. 6901 et seq. and regulations promulgated thereunder (as amended from time to time) and the Oil Pollution Act of 1990, 33 U.S.C. 2701 et seq. and regulations promulgated thereunder (as amended from time to time) and shall include any other pollutant or contaminant designated as such by Congress or the United States Environmental Protection Agency (EPA) or defined by any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect. (b) Compliance with Environmental Laws. The Tenant warrants and represents that (i) Tenant will not violate, in connection with the use, ownership, lease, maintenance or operation of the Premises and the conduct of the business related thereto, any Environmental Laws, (ii) Tenant, its agent, employees, lessees and independent contractors will operate the Premises and will receive, handle, use, store, treat, transport and dispose of all Hazardous Substances in strict and timely compliance with all Environmental Laws. (c) Environmental Permits and Licenses. The Tenant will obtain all necessary environmental permits, licenses and approvals required under any Environmental Law. The Tenant further certifies and represents that Tenant is not in violation of any such permits, licenses and approvals. (d) Notices, Orders and Complaints. If Tenant receives any notice of (i) the happening of any event involving any Hazardous Substances or (ii) any complaint which lists any noncompliance with regard to any environmental, health or safety matter affecting Tenant (an "Environmental Complaint") from any person or entity (including without limitation the EPA), then Tenant shall immediately notify the Landlord orally and in writing of said event and provide the Landlord with copies of any such Environmental Complaint. (e) Right of Mitigation. The Landlord in cooperation with the Tenant shall have the right, but not the obligation and without limitation of the Landlord's rights under this Lease, to enter onto the Premises or to take such other actions as it deems necessary or advisable to assess, investigate, cleanup, remove, resolve, or minimize the impact of, or otherwise deal with, any Hazardous Substances or Environmental Complaint which, in the sole opinion of the Landlord, could result in an order, suit or other action against the Landlord. All reasonable costs and expenses incurred by the Landlord in the exercise of any such rights shall be payable by the Tenant as additional rent upon demand, provided that Tenant shall not be liable for costs or expenses where Tenant is not at fault. 7 8 (f) Indemnification. The Tenant hereby agrees to indemnify the Landlord and hold the Landlord harmless from and against any and all losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorney's fees, claims for damage to the environment, claims for fines or civil penalties, costs of any settlement or judgment and claims of any and every kind whatsoever paid, incurred or suffered by, or asserted against the Landlord by any person or entity or governmental agency for, with respect to, or as a direct or indirect result of, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, or release from the Premises of any Hazardous Substances or arising under any Environmental Law, if caused by or within the control of Tenant, except that the Landlord shall be fully responsible for the condition of the Premises prior to the Commencement Date and shall indemnify and hold the Tenant harmless from any claim against the Tenant arising out of the condition of the Premises prior to the Commencement Date or caused by the Landlord. (g) Agreement to Update. The Tenant shall advise the Landlord in writing as soon as Tenant becomes aware of any condition or circumstance which makes the environmental warranties, representations or certifications contained in this Article VII incomplete or inaccurate. (h) Breach. If any representation or warranty or certification made in this Article VII by the Tenant shall prove untrue or the Tenant shall violate or fail to comply with any of the provisions of this paragraph, a breach of this Lease Agreement shall have occurred and the Landlord shall be entitled to exercise its remedies for breach under this Lease Agreement. (i) Inducement. The Tenant acknowledges that the representations and warranties contained in this Article VII are being relied upon to induce the Landlord to enter into the Lease Agreement with the Tenant. ARTICLE VIII UTILITIES Tenant shall be responsible for the cost of providing any and all utility service to the Premises. Tenant shall be solely responsible for and promptly pay all charges for use or consumption of sewer, gas, electricity, water, and all other utility service on the Premises. ARTICLE IX CONDUCT OF BUSINESS BY TENANT Section 9.1 Use of Premises. The Premises shall be occupied and used by Tenant solely for the purposes of operating the American International Freight Central Cargo Hub, consisting of aircraft maintenance facilities, aircraft hangars, and related facilities and other aeronautical uses, except to the extent as may be permitted pursuant to Section 10.1 of the Building Lease. 8 9 Section 9.2 Operation by Tenant. Tenant covenants and agrees that it will comply with all recorded restrictions, if any, and all laws, recommendations, ordinances, rules, and regulations of governmental, public, private and other authorities and agencies, with respect to the use or occupancy of the Premises, and including but not limited to the Fort Wayne-Allen County Airport Authority Rules and Regulations, as may be amended from time to time, provided, however, that no such Rules and Regulations shall apply specifically to or discriminate specifically against Tenant. Section 9.3 Alteration, Additions and Improvements. Tenant shall not make alterations, additions, or improvements without the prior written consent of the Landlord, which consent shall not be unreasonably withheld. Any alteration, addition or improvement made by the Tenant after such consent shall have been obtained, shall be made strictly in accordance with the plans as approved by Landlord and all applicable building codes and governmental authority regulations. Upon the expiration or other sooner termination of this Lease, unless the Landlord and the Tenant shall otherwise agree, Landlord, at its option, may either require the Tenant to remove the alteration, addition or improvement and to restore the Premises to their original condition or elect to retain the alteration, addition or improvement as its own property. Section 9.4 Representations and Covenants of the Authority. The Authority represents and warrants as follows: (a) It is a duly organized and existing municipal corporation under the laws of the State and is not in default under any of the provisions contained in the laws of the State in any manner which would impair its ability to carry out its obligations hereunder. (b) The Authority has caused to be furnished to Kitty Hawk an acceptable title insurance policy showing the status of title to the Real Property as of the date of acquisition of the Real Property by Building Corp. The Authority and the Building Corp. warrant that the Building Corp. has good title to the Leased Premises and that the Authority has the authority to enter into this Ground Lease. (c) The Authority covenants not to take any action, within its power and control, nor to fail to take any action with respect to the Bonds that would result in the loss of the exclusion from gross income for federal income tax purposes of interest on the Bonds pursuant to Section 103 of the Code. Section 9.5 Operation as a Public Airport. Landlord covenants and agrees that at all times it will operate and maintain the Airport as a public airport consistent with and pursuant to the sponsor's assurances given by the Landlord to the United States Government under the Federal Airport and Airways Act. 9 10 Section 9.6 Ingress and Egress. Tenant shall have the right of ingress to and egress from the Leased Premises for Tenant, its officers, employees, agents, servants, customers, vendors, suppliers, patrons, and invitees over the roadway provided by Landlord serving the Leased Premises. Landlord's roadway shall be used jointly with other tenants on the Airport, and Tenant shall not interfere with the non-exclusive rights and privileges of other persons or firms using said roadway and shall be subject to such weight and use restrictions promulgated in Landlord's rules and regulations. Section 9.7 Quiet Employment. The Building Corporation shall covenant to Landlord and the Landlord covenants that it will not take any action to prevent Tenant, on paying the Rent and Additional Payments and performing the covenants and agreements herein on Tenant's part to be performed, from peaceably and quietly holding and enjoying the Leased Premises for the Lease Term and any extension thereof and that Landlord will, at Tenant's request and the Landlord's expense, defend Tenant's enjoyment and possession of the Leased Premises against all parties or permit Tenant in its own or, to the extent lawful, in Landlord's name, to defend such enjoyment and possession. ARTICLE X CONDITION AND MAINTENANCE OF PREMISES Section 10.1 Condition of Premises on Commencement Date. Landlord shall furnish the Premises in good condition and free of any contamination and Tenant shall have no responsibility for the condition of the Premises prior to the Commencement Date. Landlord has retained a competent specialist to conduct a Phase I Environmental Site Assessment with respect to the Premises. The report of said assessment, when completed, shall be attached hereto as Exhibit "B" and made a part of this Lease (hereinafter the "Phase I Report"). Landlord and Tenant agree that the Phase I Report shall be deemed to be conclusive evidence of the environmental condition of the Premises at the Commencement Date. Upon expiration of the term of this Lease, Landlord shall obtain an environmental site assessment by an independent professional. Tenant shall be responsible for the cost of all mitigation required to return the Premises to the environmental condition which existed at the Commencement Date. This requirement shall be in addition to the terms and conditions contained in Article VII of this Lease. Section 10.2 Maintenance by Tenant. Tenant shall keep the Premises neat, clean and in good order at all times, and shall yield the same back to Landlord upon termination of the Lease, whether such termination shall occur by expiration of the term hereof, or in any other manner whatsoever, in the same condition of repair as 10 11 at the date of the execution hereof. Tenant shall at all times keep the Premises free of derelict aircraft and equipment. Tenant shall not permit any waste or misuse of the Premises. If Tenant fails to perform its obligations hereunder, Landlord without notice may, but shall not be obligated to, perform Tenant's obligations or perform work resulting from Tenant's acts, actions or omissions, and the cost of the same shall be Additional Rent payable with the next installment of Minimum Monthly Rent due hereunder. Section 10.3 Maintenance of Improvements. The maintenance of the Buildings shall be covered by Article V of the Building Lease. Section 10.4 Signs. Awnings and Canopies. All Tenant signs shall conform to the area control ordinances and all other applicable laws, and Tenant will not place or permit on the Premises any sign, awning, canopy, advertising matter, decoration, lettering or other thing of any kind which has not been approved in writing by Landlord, which approvals shall not be unreasonably withheld. ARTICLE XI LIENS Tenant shall exert its best efforts not to suffer any mechanics' or materialmen's lien to be filed against the fee of the Premises or against the Tenant's leasehold interest in the Premises by reason of work, labor, services or materials supplied or claimed to have been supplied to the Tenant or anyone holding the Premises through or under the Tenant. If any such lien shall at any time be filed as aforesaid, and Tenant shall fail to remove same within thirty (30) days thereafter, it shall constitute a default under the provisions of this Lease. However, it shall not be an event of default so long as such lien is being defended in good faith with reasonable diligence by the Tenant, and such defense is, in Landlord's reasonable opinion, likely to be successful. ARTICLE XII WAIVER Section 12.1 Non-Liability and Indemnification. (a) The Tenant, the Landlord and the Building Corp., hereinafter sometimes called "Party" or collectively the Parties", each agree that it shall be responsible for its own acts of carelessness and negligence, and each agree to hold the Tenant, the Landlord and the Building Corp. harmless against any loss or damage to property, or injury to or death of any person, that may be occasioned by or caused by any failure to act whatsoever pertaining to the Leased Premises or the use thereof by the other parties; provided, that the indemnity in this sentence shall be effective only to the extent any loss that may be sustained by the Tenant, the Landlord or the Building Corp. is in excess of the net proceeds received by the Tenant, the Landlord or the Building Corp. from any 11 12 insurance carried with respect to the loss sustained. Each further agree to indemnify and save harmless the Tenant, the Landlord and the Building Corp. against and from any and all cost, liability, expenses and claims arising from any breach or default in the performance of any covenant or agreement to be performed pursuant to the terms of this Lease, or arising from any act or negligence of or failure to act by such Party, or any of its agents, contractors, servants, employees or licensees, or arising from any accident, injury or damage whatsoever caused to any person, firm or corporation occurring during the Lease Term, in or about the Leased Premises, and from and against all costs, liability and expenses incurred in or in connection with any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against the Authority, Building Corp. or Kitty Hawk by reason of any such claim, upon notice from the other Party covenants to resist or defend such action or proceedings at its own expense. Notwithstanding the foregoing, neither Party shall have any obligation to indemnify with respect to the following: (1) Liabilities arising out of damages to employees of any Party, or any third person, if such employee or third person is covered or should have been covered by worker's compensation insurance; (2) Losses occasioned by the negligence or willful misconduct of such Party, such Party's agents or representatives; or (3) Insured losses with respect to which rights of subrogation have been waived. (b) Landlord shall not be responsible or liable to Tenant or to those claiming by, through or under Tenant for any loss or damage to either the person or property of Tenant that may be occasioned by or through the acts or omissions of persons occupying adjacent, connecting or adjoining premises. (c) In case Landlord shall without fault on its part be made a party to any litigation commenced by or against Tenant, then Tenant shall protect and hold Landlord harmless and pay all costs, expenses and reasonable attorneys' fees. Section 12.2 Notwithstanding the foregoing, neither party shall have obligation to indemnify with respect to the following: (a) Liabilities arising out of damages to employees of any party, or any third person, if such employee or third person is covered or should have been covered by worker's compensation insurance; (b) Losses occasioned by the negligence or willful misconduct of such party, such party's agents or representatives; or 12 13 (c) Insured losses with respect to which rights of subrogation have been waived. ARTICLE XIII INSURANCE Section 13.1 Insurance on Improvements. Insurance on Buildings shall be governed by Article XIII of the Building Lease. Section 13.2 Other Insurance. Tenant agrees to carry Public liability insurance on the Premises during the Lease Term, covering the Tenant and naming the Landlord as an additional named insured, with terms and companies satisfactory to Landlord, in accordance with the requirements of the Airport Use and Lease Agreement. Tenant shall provide Landlord a certificate evidencing that said insurance is in full force and effect and stating the terms thereof, on an annual basis. Tenant acknowledges that it shall bear the risk of loss for all of the personal property, including trade fixtures, located on the Premises, as well as the risk of loss associated with business interruption due to casualty to the Premises. Section 13.3 Rental Value Insurance. Tenant shall obtain a rent or rental value insurance policy in amounts as required by the Building Lease. Such policy shall insure against loss of Minimum Monthly Rent during a period in which the Minimum Monthly Rent of Landlord is abated as a result of physical loss or damage to the Buildings on the Premises, however caused, with such exceptions only as are ordinarily required by insurers of buildings or facilities of a similar type. Section 13.4 Mutual Waiver of Subrogation Rights. Landlord and Tenant and all parties claiming under them mutually release and discharge each other from all claims and liabilities arising from or caused by any casualty or hazard covered or required hereunder to be covered in whole or in part by insurance on the Premises or in connection with property on or activities conducted on the Premises, and waive any right of subrogation which might otherwise exist in or accrue to any person on account thereof. Provided, however, that such release shall not operate in any case where the effect is to invalidate or increase the costs of such insurance coverage (provided, that in the case of increased costs, the other party shall have the right, within thirty (30) days following written notice, to pay such increased costs, thereby keeping such release and waiver in full force and effect) . Provided, further, that such mutual waiver shall apply only to the extent of the insurance coverage or the required coverage, whichever is greater. 13 14 ARTICLE XIV DAMAGE AND DESTRUCTION In the event that damage and destruction to the Buildings pursuant to Section 6.1 of the Building Lease results in abatement of rent pursuant to Section 6.4 of the Building Lease, then Minimum Monthly Rent hereunder shall abate to the same extent and under the same terms and conditions as set forth in Section 6.4 of the Building Lease. ARTICLE XV ASSIGNMENTS AND SUBLEASES Kitty Hawk may assign or sublet all or any part of the Leased Premises to American International Airways, Inc. ("AIA"), a subsidiary of Kitty Hawk. Such assignment or sublease shall not release Kitty Hawk from the obligations to perform all of the terms and conditions of the Lease. Thereafter, this Lease may be assigned in whole or in part, and the Leased Premises may be subleased as a whole or in part by AIA or Kitty Hawk only with the prior written consent of the Landlord and Building Corp., which consent will not be unreasonably withheld. The assignment to AIA, consent by the Landlord and Building Corp., or the acceptance of an assignee or subtenant shall not release Kitty Hawk from the further performance by Kitty Hawk of the covenants of this Lease or be construed to relieve Kitty Hawk from obtaining the consent, in writing, of the Landlord and Building Corp. to any further assignment or subletting and Kitty Hawk shall remain primarily liable on this Lease for the entire term hereof and shall not be released from the full and complete performance of all of the terms, conditions and agreements herein contained. ARTICLE XVI DAMAGE, DESTRUCTION AND CONDEMNATION In the event of the damage, destruction or condemnation of the Premises, then all of the terms and conditions of Article VI of the Building Lease shall apply in their entirety to this Lease. ARTICLE XVII EVENTS OF DEFAULT Section 17.1 Events of Default by Tenant. The following events shall be deemed to be events of default by a Tenant under this Lease: (a) Failure of Tenant to pay any rent or other amount within thirty (30) days of the date it is due; 14 15 (b) Failure of Tenant to perform or observe any other of the terms, provisions, conditions and covenants of this Lease, the Building Lease, the Operating Agreement, and/or the Lease and Use Agreement for more than thirty (30) days after written notice of such failure; (c) Tenant's insolvency, bankruptcy, admission in writing of its inability to pay its debts as they mature, assignment for the benefit of creditors, or application for or consent to the appointment of a trustee or receiver for Tenant or for the major part of its property; (d) Appointment of trustee or receiver for Tenant or for the major part of its property and failure to cause said trustee or receiver to be discharged within thirty (30) days after such appointment; (e) Institution of any proceeding for relief under any bankruptcy law, or similar law for the relief of debtors, by or against Tenant, and, if instituted against Tenant or allowed against it or consented to by it, or not dismissed within sixty (60) days after such institution; (f) The levy and execution upon or the attachment by legal process of the leasehold interest of Tenant, or the filing or creation of a lien in respect to such leasehold interest to which the Landlord has not consented in writing and which Tenant does not discharge in thirty (30) days; or Section 17.2 Events of Default by the Landlord. The following shall be "events of default" by the Landlord under this Lease and the terms "event of default" or "default" shall mean, wherever they are used in this Lease, any one or more of the following events: (a) The FAA or other proper Federal Agency shall withdraw its approval from the Airport and restrict the use of the Airport in such a manner as to prevent the use of same by Tenant for its business operations. (b) An order is issued by any court of competent jurisdiction restricting the use of the Airport in such a manner as to prevent the use of same by Tenant for its business operations. (c) The airfield shall be closed by lawful authority restricting the use of the Airport in such a manner as to prevent the use of the same by Tenant for its business operations hereunder. (d) If a court of competent jurisdiction issues an injunction against the Landlord or any successor body to the Landlord preventing or restraining the use of the Airport in its entirety or of any part of the Airport substantially necessary to Tenant for its operations, and if such injunction remains in force for at least ninety (90) days. 15 16 (e) If the Landlord fails to provide and maintain reasonable means for ingress and egress to and from the Leased Premises in accordance with the provisions of this Agreement or fails to fulfill its obligations under Section 9.7 in respect of Tenant's right of quiet enjoyment granted thereby. (f) If by reason of any willful act, willful omission wrongfully done or wrongfully omitted to be done in violation of this Agreement; the Landlord prevents the use of the Leased Premises for the purposes for which the use thereof is authorized by this Agreement. Section 17.3 Remedies of Authority on Default. Upon the occurrence of any such event of default, Landlord may pursue any one or more of the following remedies, as well as any other remedies provided by law, at its sole option, without any notice or demand whatsoever: (a) Landlord may declare immediately due and payable the entire amount of the rent then remaining to be paid under this Lease for the balance of the Lease Term; (b) Landlord may enter upon and take possession of the Premises without terminating this Lease and without relieving Tenant of its obligation to make the monthly payments of rent herein reserved, expel or remove Tenant and any other person who may be occupying said Premises or any part thereof and any personal property or trade fixtures located therein (including changing or alternating the locks and other security devices), and relet the Premises in the name of Landlord or Tenant at any rental readily obtainable and receive the rent therefor. In such event, Tenant shall pay to Landlord, on demand, any deficiency that may arise by reason of such reletting and the expenses, including, but not limited to, realtors' commission, appraisers' fees, and reasonable attorneys' fees, of such reletting, for the residue of the term of this Lease. In no event shall Landlord have a duty to relet the Premises until such time as all other available space owned and controlled by Landlord has been leased. (c) Landlord may forfeit and terminate this Lease forthwith. In the event of such a termination, Tenant shall immediately surrender the Premises to Landlord and if Tenant fails to do so, Landlord may enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, and any personal property or trade fixtures located therein. Pursuit by Landlord of any of the foregoing remedies or any other remedy provided by law shall not constitute a waiver of any rent due to Landlord hereunder or of any damages occurring to Landlord by reason of the violation by Tenant of any of the terms, provisions and covenants of this Lease. In no event shall Tenant be relieved from its obligation to pay rental specified in this Lease by reason of a surrender of possession, termination of this Lease, or in any other manner whatsoever unless specifically agreed to, in writing, by Landlord. Further, any agreement by Tenant as to unconditional payments shall not be construed to prevent Tenant, after complying with the payment 16 17 provision, from pursuing any claim it may have against the Landlord or any other person in such court of law or otherwise as Tenant may deem appropriate. Section 17.4 Remedies of Tenant on Default. Whenever any event of default under Section 17.2 of this Lease shall have happened or be subsisting, any one or more of the following remedial steps may be taken: (a) Tenant may terminate this Lease. (b) Tenant may take whatever action at law or in equity may appear necessary or desirable to pursue in order to enforce performance and observance of any obligation, agreement or covenant of the Authority under this Lease. Provided, however, if before the expiration of 60 days from the date of which an event of default under Section 17.2 of this Lease shall have happened, Landlord shall have cured the event of default, then: (i) Tenant shall waive the event of default and its consequence and shall rescind and annul that declaration, (ii) the Lease, if it has been terminated pursuant to Subparagraph (a) above, shall be reinstated, and (iii) the Lease shall continue in full force and effect. Section 17.5 Tenant's Waiver. Tenant hereby waives demand for rent, demand for possession, notice of forfeiture, notice of termination and any and all other demands or notices required by law. Section 17.6 Arbitration. In the event of any dispute between Tenant and Landlord with respect to the terms and conditions of this Ground Lease, the Building Lease or the operating Agreement, Tenant and Landlord shall first appoint a single representative of each to attempt to reasonably negotiate a settlement of such dispute and make recommendations with respect to such settlement to Tenant and to Landlord. Tenant and Landlord may, if they so desire, submit such issue to mediation. In the event that such dispute continues to be unsettled for forty-five (45) days following the receipt of formal notification by certified mail, return receipt requested, that a dispute subject to arbitration exists, then both Tenant and Landlord shall appoint an independent arbitrator, who shall appoint a third arbitrator, and the matters in dispute shall be submitted to arbitration by this panel of arbitrators in accordance with the commercial arbitration rules then existing by the American Arbitration Association, whose determination, following the exhaustion of all administrative and judicial appeals, shall become final, subject to appeal only on the basis of collusion, fraud, or manifest disregard for the law. The panel of arbitrators shall have the authority to enter equitable and legal orders and interim and final orders. Such arbitration shall occur in Allen County, Indiana, and shall be binding upon the parties, their representatives and assigns, provided, further, that all parties shall be obliged to observe and comply with all the terms of the Ground Lease, the Building Lease and the Operating Agreement, including the obligation to make all rental payments and other payments, until the arbitration process has been completed and becomes binding on all of the parties. 17 18 Notwithstanding the foregoing, no arbitration decision shall affect Kitty Hawk's obligation to pay rent or make other payments to Landlord required by the terms of this Lease. ARTICLE XVIII DEFAULT BY LANDLORD Landlord shall in no event be charged with default in any of its obligations hereunder, either affirmatively or as a defense, unless and until Landlord shall have failed to perform such obligations within sixty (60) days (or such additional time as is reasonably required to correct any such default), after written notice to Landlord and to Fort Wayne National Bank ("Bond Trustees") by Tenant, specifically describing such failure. ARTICLE XIX RIGHTS RESERVED TO LANDLORD Section 19.1 Inspection and Repair. Landlord, and its duly authorized agents, employees and contractors, shall have access to the Premises at all reasonable times for the purposes of inspecting the same and making necessary repairs or replacements as called for hereunder or as the Landlord shall elect to undertake for the safety, preservation, benefit or welfare of the building of which the Premises constitute a part or of other tenants thereof. Section 19.2 Right to Show Premises. Landlord shall have the right to show the Premises to prospective tenants or brokers during the last one hundred eighty (180) days of the term of this Lease, including any renewal terms, at all reasonable times. Section 19.3 Right to Relocate and Grant Easements. Landlord shall have the right to relocate existing utility easements in the Premises, as well as the right to grant new utility easements in the Premises. Tenant's rights in the Premises shall be subordinate to the rights of any grantee(s) of such easements. The location, relocation and placement of all utilities will be made only with the cooperation of the Landlord and Tenant. In the event Landlord requires such a location or relocation, Landlord shall be responsible to repair and restore any damage caused thereby. 18 19 ARTICLE XX HOLDING OVER If Tenant or any party holder under Tenant holds over or occupies the Premises beyond the Lease Term (it being agreed there shall be no such holding over or occupancy without Landlord's written consent), Tenant shall pay Landlord for each day of such holding over a sum equal to twice the Minimum Monthly Rent prorated for the number of days of such holding over, plus any Additional Rent, as set forth in the Lease. If Tenant holds over with Landlord's written consent, Tenant shall occupy the Premises on a tenancy from month to month, and all other terms and provisions of this Lease shall be applicable to such period. ARTICLE XXI QUIET ENJOYMENT If Tenant pays the rents and other amounts herein provided, observes and performs all the covenants, terms and conditions hereof, Tenant shall peaceably and quietly hold and enjoy the Premises for the Lease Term without interruption by Landlord or any person or persons claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE XXII MISCELLANEOUS Section 22.1 Waiver. No waiver by Landlord or Tenant of any breach of any term, covenant, or condition hereof shall be deemed a waiver of the same, or any subsequent breach of the same, or any other term, covenant or condition. The acceptance of rent by Landlord shall not be deemed a waiver of any earlier breach by Tenant of any term, covenant, or condition hereof, regardless of Landlord's knowledge of such breach when such rent is accepted. No covenant, term or condition of this Lease shall be deemed waived by Landlord or Tenant unless waived in writing. Section 22.2 Relationship of Parties. Nothing contained in this Lease shall be construed to create a partnership or joint venture between the Landlord and the Tenant or between the Landlord and any other party, or cause the Landlord to be responsible in any way for the debts or obligations of the Tenant or any other party. Section 22.3 Accord and Satisfaction. Landlord is entitled to accept, receive and cash or deposit any payment made by Tenant for any reason or purpose or in any amount whatsoever, and apply the same at Landlord's option to any obligation of Tenant and the same shall not constitute payment of any amount owed except that to 19 20 which Landlord has applied the same. No endorsement or statement on any check or letter of Tenant shall be deemed an accord and satisfaction or otherwise recognized for any purpose whatsoever. The acceptance of any such check or payment shall be without prejudice to Landlord's right to recover any and all amounts owed by Tenant hereunder, and Landlord's right to pursue any other available remedy. Section 22.4 Attorneys' Fees. Tenant shall pay, as Additional Rent, all of the costs, charges and expenses, including court costs and reasonable attorneys' fees incurred by Landlord in enforcing its rights under this Lease or incurred by Landlord in any litigation, negotiation or transactions relating to, or arising out of, this Lease in which Landlord, without fault, becomes involved or concerned. Section 22.5 Entire Agreement. There are no representations, covenants, warranties, promises, agreements, conditions or undertakings, oral or written, between Landlord and Tenant other than herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless in writing and signed by them. Section 22.6 Force Majeure. If either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure material, failure of power, restrictive governmental laws or regulations (other than those enacted by Landlord), riots, insurrection, war, or other reason of a like nature not the fault of the party delayed in performing work or doing acts required under this Lease, the period for the performance of any such act shall be extended for a period equivalent to the period of such delay, provided, however, that this provision shall not apply to the payment of Minimum Rent or Additional Rent by Tenant. Accordingly, Minimum Rent or Additional Rent shall not abate under this provision. Notwithstanding the foregoing, in the event that Kitty Hawk, shall defease the Bonds in accordance with the Trust Indenture, and any other indebtedness of the Authority which was issued to finance infrastructure and any indebtedness which was issued to refinance or advance refund any such indebtedness, and remediate any environmental cleanup, then the Lease Term shall be extended only upon the mutual agreement of Landlord and Tenant. Section 22.7 Captions and Section Numbers. This Lease shall be construed without reference to titles of articles and sections, which are inserted only for convenience of reference. 20 21 Section 22.8 Number and Gender. The use herein of a singular term shall include the plural and use of the masculine, feminine or neutral gender shall include all others. Section 22.9 Joint and Several Liability. If Tenant is a partnership or other business organization, the members of which are subject to personal liability, the liability of each such member shall be deemed to be joint and several. Section 22.10 Partial Invalidity. If any provision of this Lease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby and each provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. Section 22.11 Recording. The parties agree not to place this Lease of record but each party shall, at the request of the other, execute and acknowledge, so that the same may be recorded, a Short Form Lease or Memorandum of Lease, indicating a lease term, but omitting rent and other terms, and an Agreement specifying the date of commencement and termination of the lease term; provided, however, that the failure to record said Short Form Lease, Memorandum of Lease or Agreement shall not affect to impair the validity and effectiveness of this Lease. Tenant shall pay all costs, taxes, fees and other expenses in connection with or prerequisite to recording. Section 22.12 Successors. This Lease shall inure to the benefit of and be binding upon the Landlord or Tenant and their respective heirs, executors, administrators, successors and such assigns and subtenants as may be permitted hereunder. Section 22.13 Corporate Tenants. Each individual executing this Lease on behalf of a corporation represents and warrants that he has the authority to do so. Section 22.14 Compliance with Federal Law. (a) The Tenant, for himself, his heirs, personal representatives, successors in interest, and assigns, as a part of the consideration hereof, does hereby covenant and agree, as a covenant running with the land, that in the event facilities are constructed, maintained or otherwise operated on the Premises for a purpose for which a United States Department of Transportation program or activity 21 22 is extended or for another purpose involving the provision of similar services or benefits, the Tenant shall maintain and operate such facilities and services in compliance with all other requirements imposed pursuant to 49 C.F.R. Part 21, Nondiscrimination in Federally Assisted Programs of the Department of Transportation, and as said Regulations may be amended. (b) The Tenant, for himself, his personal representatives, successors in interest, and assigns, as a part of the consideration hereof, does hereby covenant and agree, as a covenant running with the land that: (1) No person, on the grounds of race, color, or national origin, shall be excluded from participation in, denied the benefits of, or be otherwise subjected to discrimination in the use of said facilities; (2) That in the construction of any improvements on, over or under such land and the furnishing of services thereon, no person, on the grounds of race, color or national origin shall be excluded from participation in, denied the benefits of, or otherwise be subjected to discrimination; (3) That the Tenant shall use the Premises in compliance with all other requirements imposed by or pursuant to 49 C.F.R. Part 21, Nondiscrimination in Federally Assisted Programs of the Department of Transportation, and as said Regulations may be amended. (c) Tenant assures that it will comply with pertinent statutes, executive orders and such rules as are promulgated to assure that no person shall, on the grounds of race, creed, color, national origin, sex, age, or handicap, be excluded from participating in any activity conducted with or benefitting from Federal assistance. This provision obligates Tenant or its assignee for the period during which Federal assistance is extended to the airport programs, except where Federal assistance is to provide, or is in the form of personal property or real property or interest therein or structures or improvements thereon. In these cases, this provision obligates Tenant or its assignee for the longer of the following periods: (1) The period during which the property is used by Landlord or any transferee for a purpose for which Federal assistance is extended, or for another purpose involving the provision of similar services or benefits; or (2) The period during which Landlord or any transferee retains ownership or possession of the property (d) Tenant shall comply with all laws, orders or regulations of any governmental authority relating to the use and occupancy of the Premises, including, but not limited to, the regulations and rules adopted by Landlord, in its Airport Security Program, the Federal Aviation Administration (and specifically, without limitation, Federal Aviation Regulations, Parts 107 and 139), and any other entity having authority applying to or affecting Baer Field. Any violation by Tenant, its employees, suppliers, guests, business invitees, or agents of any rule or regulation which results in the 22 23 assessment of a fine against Landlord by the Federal Aviation Administration shall be the responsibility of Tenant, and the fine shall be paid by Tenant as additional rent. Section 22.15 Master Lease. It is hereby acknowledged by Tenant that the Landlord does not have legal title to the premises, but, rather, leases the Premises from the Building Corp. (the "Master Lease"). Tenant acknowledges that its right in the premises derives from and is subordinate to the Master Lease. The Master Lease shall require, in the event that the Building Corp. evicts the Landlord from the Leased Premises, this Lease shall continue in full force and effect, so long as Tenant is not in default of this Lease. In such event, Tenant hereby agrees to attorn to and acknowledge the Building Corp. as Landlord. Section 22.16 Right of Flight. Landlord reserves for the use and benefit of the public a right of flight for the passage of aircraft in the air space over-lying the Premises, together with the right to cause in that air space such noise as is inherent in the operation of aircraft using the air space for landing at, taking off from, or operating at Baer Field. Tenant shall not erect or allow the erection or maintenance of any structure or object or permit any growth which violates federal or state law regarding tall structures, including, but not limited to, 14 C.F.R. Part 77 and Ind. Code Section 8-21-10-1, et seq., and any amendments thereto. Section 22.17 Applicable Law. This Lease shall be construed under the laws of the State of Indiana. Section 22.18 Notices. All notices from Tenant to Landlord required or permitted by any provision of this Lease shall be directed to Landlord as follows: Fort Wayne-Allen County Airport Authority Fort Wayne International Airport Lt. Paul Baer Terminal, Suite 209 Fort Wayne, Indiana 46809 Attention: Executive Director of Airports 23 24 All notices from Landlord to Tenant required or permitted hereunder shall be directed as follows: KITTY HAWK, INC. BY: --------------------------- M. Tom Christopher, Chairman of the Board and Chief Executive Officer STATE OF INDIANA ) ) COUNTY OF ALLEN ) Before me, a Notary Public in and for said County and State, personally appeared DANIEL F. WEAVER and KEITH R. SPITLER, the President and Assistant Secretary, respectively, of the Fort Wayne-Allen County Airport Authority Board, who acknowledged the execution of the above and foregoing Ground Lease, for and on behalf of the Fort Wayne-Allen County Airport Authority. WITNESS my hand and Notarial Seal this 13th day of April, 1998. ------------------------------------------- Thomas D. Logan, Notary Public Residing in Allen County, Indiana My Commission Expires: - ----------------------------------- 24 25 STATE OF TEXAS ) ) COUNTY OF ) Before me, a Notary Public in and for said County and State, personally appeared M. TOM CHRISTOPHER, Chairman of the Board and Chief Executive Officer of KITTY HAWK, INC., who acknowledged the execution of the above and foregoing Ground Lease, for and on behalf of said corporation. WITNESS my hand and Notarial Seal this day of April, 1998. --------------------------------- , Notary Public ----------------- Residing in County, Texas --------- My Commission Expires: - ------------------------------------- 25 26 Kitty Hawk, Inc. 1515 West 20th Street P.O. Box 612787 Dallas/Fort Worth International Airport, Texas 75261 Attention: M. Tom Christopher, Chairman of the Board and Chief Executive Officer All notices to be given hereunder by either party shall be written and sent by certified mail, return receipt requested, postage prepaid, addressed to the party intended to be notified at the address set forth above. Either party may, at any time, or from time to time, notify the other in writing of a substitute address or substitute person to whose attention the notice is to be sent for that set forth above, and, thereafter, notices shall be directed to such substituted address or substituted person. Notice given as aforesaid shall be sufficient service thereof and shall be deemed given as of the date received, as evidenced by the return receipt of the registered or certified mail. Section 22.19 Landlord's Consent. In each case under this Lease in which Landlord's consent shall not be unreasonably withheld, Landlord shall notify Tenant of its decision within ninety (90) days if Tenant's request is made under Section 9.3 or Article XV hereunder, and within sixty (60) days if Tenant's request is made under any other provision hereunder. Landlord's consent shall be deemed granted if Landlord has not given written notice of its refusal to grant such consent, setting forth with specificity the bases for such refusal. IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this Lease as of the day and year first above written. FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY BY: ---------------------------- Daniel F. Weaver, President Fort Wayne-Allen County Airport Authority Board ATTEST: - ----------------------------------- Keith R. Spitler Assistant Secretary 26 EX-10.31 4 BUILDING LEASE, DATED AS OF APRIL 13, 1998 1 EXHIBIT 10.31 BUILDING LEASE FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY TO KITTY HAWK, INC. THIS CONTRACT OF LEASE (hereinafter called "Lease") made and entered into as of the 13th day of April, 1998, between FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY, an Indiana municipal corporation, (hereinafter with its successors and assigns as provided by this Lease called ("Authority"), a municipal corporation duly organized and existing under the laws of the State of Indiana, and KITTY HAWK, INC., a corporation duly organized and existing under the laws of the State of Delaware and qualified to do business in the State of Indiana (hereinafter called "Kitty Hawk"). WITNESSETH: WHEREAS, I.C. 8-22-3.6 provides for the leasing of Airport projects to the Airport Authority, under certain terms and conditions provided in said Act, including the provision for the title to the Airport Project leased by the Authority to vest in said Authority at the conclusion of the lease term with the Authority required to make an annual appropriation and a tax levy at a rate to provide sufficient money to pay the rental payments under such lease; and WHEREAS, pursuant to I.C. 8-22-3.6, the Authority has entered into a Lease with the Fort Wayne International Airport Air Trade Center Building Corp., (hereinafter referred to as "Building Corp.") pursuant to which Building Corp. will construct and lease the the Authority the American International Freight Central Cargo Hub, which project the Authority is, in this Lease, leasing to Kitty Hawk. WHEREAS, the plans and specifications referenced to in Section 4.2 of this Lease have been or will hereafter be received and approved by Kitty Hawk and have heretofore been or will be submitted to and approved by such state and local agencies as are designated by law to pass on plans and specifications for such structures; and WHEREAS, Kitty Hawk and the Authority each have full right and lawful authority to enter into this Lease (hereinafter when the context permits, references herein to this Lease shall be deemed to include amendments hereto) and to perform and observe the provisions hereof on their respective parts to be performed and observed. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto covenant, agree and bind themselves as follows: 2 ARTICLE I DEFINITIONS In addition to the words and terms elsewhere defined in this Lease, the following words and terms as used in this Lease shall have the following meanings unless the context or use indicates another or different meaning or intent and such definitions shall be equally applicable to both the singular and plural forms of any of the words and terms herein defined. "Act" means I.C. 8-22-3.6. "Additional Payments" means the amounts required to be paid by the provisions of Section 3.2 hereof. "Administrative Fees" means the sum of $1,000,000, which is included in the Original Purchase Price and which is to be used to pay for additional administrative expenses required for any purpose. "Airport Act" means I.C. 8-22-3, as amended and in effect on the date hereof. "Architect" means R. W. Armstrong & Associates! Inc., who have prepared the plans and specifications for the construction of the Project. "Authorized Kitty Hawk Representative" means the person at the time designated to act on behalf of Kitty Hawk by written certificate furnished to the Authority, containing the specimen signature of such person and signed on behalf of Kitty Hawk by its President or a Vice President or Secretary. Such certificate may designate an alternate or alternates who shall have the same authority, duties and powers as the Authorized Kitty Hawk Representative. "Authorized Authority Representative" means the person at the time designated to act on behalf of the Authority by written certificate furnished to Kitty Hawk, containing the specimen signature of such person and signed on behalf of the Authority by the President or Secretary of the Legislative Authority. Such certificate may designate an alternate or alternates who shall have the same authority, duties and powers as the Authorized Authority Representative. "Bonds" means the Fort Wayne International Airport Air Trade Center Building Corp. First Mortgage Improvement Bonds, Series 1998. "Building Corp." means the Fort Wayne International Airport Air Trade Center Building Corp. "Completion Date" for the Project means the date specified in the certificate of the Authorized Authority Representative to be furnished pursuant to Section 4.3 hereof. "Engineer" means an engineer or engineering firm or an architect or architectural firm qualified to practice the profession of engineering or architecture under the laws of the State and who or which is not a full-time employee of Kitty Hawk or the Authority. "FAA" means the Federal Aviation Administration or its successors. "Ground Lease" means that certain ground lease entered into by and between Authority and Kitty Hawk on even date herewith. "I.C." means the Indiana Code as amended to the date hereof. 2 3 "Indenture" means the Trust Indenture dated as of April 1, 1998, by and between Building Corp. and Trustee, together with any supplements or amendments thereto. "Independent Counsel" means any attorney duly admitted to practice law before the highest court of any state and not a full-time employee of Kitty Hawk or the Authority. "Insurance Consultant" means a recognized independent insurance consultant qualified under the laws of the State and satisfactory to the Authority and Kitty Hawk. "Interest Rate for Advances" means a rate which is three percent (3%) in excess of the interest rate then charged by the Trustee to its most creditworthy commercial borrowers in its lending capacity as a bank. "Lease Purposes" means the construction and equipping of the American International Freight Central Cargo Hub, consisting in part of aircraft maintenance, cargo sort, and related facilities (the "Project") at Fort Wayne International Airport including the site, parking facilities and roadways associated therewith as further described in Exhibit B hereto. "Leased Premises" means the Buildings to be constructed as part of the Project, as further described in Exhibit "B". "Lease Term" means the period commencing on the date of occupation by Kitty Hawk or completion of the Project and ending on the Termination Date. "Legislative Authority" means the Board of Directors of the Authority. "Letter Agreement" means the agreement between Building Corp. and the Authority dated as of May 12, 1997, in the form of a letter acceptable to Kitty Hawk from Building Corp. accepted by the Authority(1) setting forth Building Corp.'s proposal to construct and lease the Project and formulae for reducing Option Price and Rent. "Master Lease" means the lease of the Leased Premises executed by and between the Building Corp. and the Authority, dated July 2, 1997. "Net Proceeds" means the proceeds of the 1998 Bonds and shall include any amounts of such proceeds paid by Building Corp. to the Authority for the acquisition and construction of the Leased Premises. "Notice Address" means: (a) As to the Authority: Fort Wayne-Allen County Airport Authority Room 209, Lt. Paul Baer Terminal Fort Wayne, Indiana 46809 Attention: Executive Director of Airports (b) As to Kitty Hawk: Kitty Hawk, Inc. 1515 West 20th Street P.O. Box 612787 Dallas/Fort Worth International Airport, Texas 75261 Attention: M. Tom Christopher, Chairman of the Board and Chief Executive Officer 3 4 (c) As to Building Corp.: Fort Wayne International Airport Air Trade Center Building Corp. - 701 South Calhoun Street Fort Wayne, Indiana 46802 Attention: O. Roderick Wilson, President (d) As to Trustee: Fort Wayne National Bank 110 West Berry Street Fort Wayne, Indiana 46802 Attention: Teresa Tracey "Original Purchase Price" as shown on Exhibit A hereto means the sum of $33,105,000. "Plans and Specifications" means the plans and specifications for the Project prepared by the Architect and now on file with the Authority, as changed from time to time as in this Lease provided. "Project" means the American International Freight Central Cargo Hub, consisting in part of aircraft maintenance, cargo sort, and related facilities, the real, personal or real and personal property identified in Exhibit C hereto or in or pursuant to any amendments hereto or in the certificate given pursuant to Section 4.3 hereof, or acquired, constructed or installed as replacement or substitution therefor or addition thereto. "Real Property" means the interests in real estate described in Exhibit B hereto, together with any substitutions or additions thereto but less any removals therefrom from time to time as provided for in this Lease. "Rent" means the rent payable pursuant to Section 3.1 hereof and as set forth in Exhibit A hereto. Rent may be reduced in accordance with the terms of the Letter Agreement. Rent, as reduced, shall be set forth in the applicable space in Exhibit A hereto. "Rent Cure Period" means a period of one calendar day commencing with the day on which the Authority, the Building Corp., or their designee gives notice to Kitty Hawk of failure of Kitty Hawk to pay the Rent. "Rental Payment Date" means the fifth day of March, 1999, and the fifth day of every month thereafter; or, if agreed to by the parties, the Completion Date, whichever is later; and each March and September thereafter as set forth on Exhibit A hereto; and for any other part of the Project, such dates as are described in the Amendment to Lease. "Required Property Insurance Coverage" means a policy or policies of insurance against physical loss or damage to the Leased Premises, however caused, with such exceptions only as are ordinarily required by insurers of buildings or facilities of a similar type, in the lesser of (i) an amount equal to 105% of the full replacement cost of the Leased Premises, or (ii) a sum equal to the full amount necessary to fully redeem and repay the Bonds at the next convenient and reasonable call date, plus a sum necessary to fully fund the net interest cost on the Bonds to the next reasonable and convenient call date, and plus a sum reasonably necessary in order to remediate any environmental cleanup costs. In the event that there is any dispute with respect to what constitutes necessary remedial costs, such amount will be arbitrated in accordance with Section 12.8 of this Lease. The full replacement cost of the Leased Premises shall be certified by an Insurance Consultant at Kitty Hawk's expense on or before the effective date of this Lease, and thereafter, if requested by the Authority on or before the first day of January of each year, shall be certified by the Authorized Kitty Hawk Representative at Kitty Hawk's expense and setting forth the method 4 5 or methods by which such replacement cost was determined. If approved by the Authority, such policy or policies may provide for such deductible amounts as are then customary for corporations leasing buildings under leases similar to this Lease. "Required Public Liability Insurance" means such insurance as is required in the Airport Use and Lease Agreement for liability protection for death, bodily injury or property damage resulting from each occurrence, provided, however, the policy or policies of such insurance may provide for such deductible amounts as are then customary for corporations leasing buildings under leases similar to this Lease, and further provided that the minimum amounts of coverage shall be, and any deductible amount may be, increased as recommended by an Insurance Consultant who shall annually, or for such longer interval specified by the Authority and approved by the Authority, review such coverage and-advise Kitty Hawk of increases in the amount of coverage required therein in order to protect adequately the financial position of Kitty Hawk and the Authority. "Required Rental Value Insurance Coverage" means a rent or rental value insurance policy (i) in an amount equal to the ensuing four semiannual Rent payments and (ii) to the extent that the Kitty Hawk, using its best efforts, can obtain such coverage, in an additional amount equal to the expenses, as estimated by the Authority, of operating and maintaining the Leased Premises for a period of two years. Such policy shall insure against loss of Rent and the expenses of the Authority operating and maintaining the Leased Premises during a period in which the Rent of the Authority is abated as a result of physical loss or damage to the Leased Premises, however caused, with such exceptions only as are ordinarily required by insurers of buildings or facilities of a similar type. "State" means the State of Indiana. "Termination Date" means the earlier of (i) the date of termination of this Lease by the Authority and/or Building Corp. pursuant to Section 8.11 hereof, (ii) thirty (30) years from the date of occupation by Kitty Hawk or completion of the Project as may be extended as provided in Section 6.4, or such lesser term as shall be required under Section 142(b) (1) (B) of the Internal Revenue Code which requires that the term of the Lease shall not exceed eighty percent (80%) of the expected life of the facilities financed with the Bonds or (iii) such earlier date as shall be fixed by Kitty Hawk under Article XI of this Lease Agreement. As soon as practical after completion of the Project, Bond Counsel shall calculate the exact Termination Date of the Lease, and such calculation shall be attached to and annexed as a part of this Building Lease Agreement. "Trustee" means Fort Wayne National Bank, Fort Wayne, Indiana, and its successors in trust. "1998 Bonds" means the Fort Wayne International Airport Air Trade Center Building Corp. First Mortgage Improvement Bonds, Series 1998. Any reference herein to the Authority or its Legislative Authority shall include those which succeed to their functions, duties or responsibilities pursuant to or by operation of law or who are lawfully performing their functions. Any reference herein to Building Corp. shall include any individual, corporation, association, partnership or other entity which succeeds to Building Corp.'s rights and obligations under this Lease by reason of conveyance, assignment or other transfer or by operation of law. Any reference to a section or provision of the Constitution of the State or to a section, provision or chapter of the Indiana Code shall include such section or provision or chapter as from time to time amended, modified, revised, supplemented or superseded. ARTICLE II LEASED PREMISES - TERM OF LEASE - PURPOSES Section 2.1. Leased Premises and Possession. The Authority, in consideration of the rents, covenants and agreements herein stated, agrees to and does hereby lease to Kitty Hawk, and Kitty Hawk does hereby lease from the Authority, for the Lease Term subject to the provisions of this Lease, the Leased Premises. 5 6 TO HAVE AND TO HOLD the Leased Premises unto Kitty Hawk for the Lease Term. Possession of the Leased Premises shall be delivered to and accepted by Kitty Hawk on delivery of the 1998 Bonds and Kitty Hawk recognizes and agrees that prior to delivery of Building Corp.'s Certificate pursuant to Section 4.3, construction of the Project will be ongoing. Section 2.2. Use of Leased Premises. Kitty Hawk will use and occupy the Leased Premises for the Lease Purposes except to the extent as may be permitted pursuant to Section 10.1 hereof. Kitty Hawk does not now know of any reason why the Leased Premises will not be so used and occupied by it from receipt of possession to the Termination Date and any extensions and renewals of this Lease and now anticipates that it will be so used and occupied. Failure to use and occupy as aforesaid shall in no way abate or reduce Rent payable under this Lease and shall not be deemed a breach of this Lease in any respect so long as the other agreements and covenants of this Lease are fulfilled and so long as such use is an aeronautical use. ARTICLE III RENT AND ADDITIONAL PAYMENTS Section 3.1. Rent. Kitty Hawk shall pay Rent in advance on each Rental Payment Date in the amount set forth after the applicable Rental Payment Date in Exhibit A hereto; provided, however, that the amount of Rent payable on each Rental Payment Date may be reduced by virtue of the reduction of Rent in accordance with the terms of the Letter Agreement subject to Kitty Hawk's right to review and approve any modification of the Letter Agreement. Kitty Hawk shall be entitled to a credit against the installment of Rent next required to be paid to the extent that moneys in any fund created under the Indenture are available for that purpose. Section 3.2. Additional Payments. Kitty Hawk agrees to make Additional Payments to the Authority and/or Building Corp. as follows: (a) As reimbursement for any and all costs, expenses and liabilities paid by the Authority and/or Building Corp. in satisfaction of any obligation of Kitty Hawk hereunder not performed in accordance with the terms hereof by Kitty Hawk. (b) As reimbursement for or prepayment of expenses paid or to be paid by the Authority and/or Building Corp. and requested by Kitty Hawk or required by this Lease (including, but not limited to, taxes, utility charges, assessments and maintenance expenses) and not otherwise required to be paid by Kitty Hawk under this Lease. (c) As reimbursement for or prepayment of any amounts derived under this Lease or the Master Lease which are paid or to be paid by the Authority and/or Building Corp. to the United States of America pursuant to Section 148 of the Internal Revenue Code of 1986, as amended. The Indenture shall specifically require that Kitty Hawk be provided with Trustee reports relating to investments and expenditures and that Kitty Hawk be apprized of the Authority's investment strategy at the time of the issuance of the Bonds. Section 3.3. Place of Payments. The Rent and any Additional Payments shall be paid directly to Building Corp. at its Notice Address or to any bank or other financial institution designated by the Authority and/or Building Corp. in a notice to Kitty Hawk. Section 3.4. Kitty Hawk's Obligations. The obligations of Kitty Hawk to pay Rent and Additional Payments and to perform and observe the other agreements on its part contained herein shall be absolute and unconditional, except as expressly provided in this Building Lease. For the period of the Lease Term, Kitty Hawk (i) will not suspend or discontinue payment of Rent or Additional Payments pursuant to this Lease, except as provided in this Building Lease, (ii) will 6 7 perform and observe all of its other agreements contained in this Lease, and (iii) except upon exercise of its rights of termination as herein provided in this Building Lease will not terminate this Lease. Nothing contained in this Section shall be construed to release the Authority from the performance of any of the agreements on its part contained in this Lease, and in the event the Authority should fail to perform any such agreement on its part, Kitty Hawk may institute such action against the Authority as Kitty Hawk may deem necessary to compel performance or recover its damages for nonperformance so long as such action shall not impair the agreements on the part of Kitty Hawk contained in the preceding sentence. Kitty Hawk may, however, at its own cost and expense and in its own name or, to the extent lawful, in the name of the Authority, prosecute or defend any action or proceeding or take any other action involving third persons which Kitty Hawk deems reasonably necessary in order-to secure or protect its right of possession, occupancy and use hereunder, and in such event the Authority hereby agrees to cooperate fully with Kitty Hawk, but at Kitty Hawk's expense, and to take all action necessary to effect the substitution of Kitty Hawk for the Authority in any such action or proceeding if Kitty Hawk shall so request. Section 3.5. Prepayment of Rent and Additional Payments. There is expressly reserved to Kitty Hawk the right, and Kitty Hawk is authorized and permitted, at any time it may choose, to prepay without penalty all or any part of the Rent, or any Additional Payments, and the Authority agrees to accept such prepayment of Rent or of any Additional Payments when the same are tendered by Kitty Hawk. All Rent or Additional Payments so prepaid shall be credited on the Rent or Additional Payments, as the case may be, in the order in which they are payable. Section 3.6. Past Due Rent and Additional Pavements. In the event Kitty Hawk should fail to make any Rent payment or pay any Additional Payments, the payment in default shall continue as an obligation of Kitty Hawk until the amount in default shall have been fully paid and during the default period shall bear interest at the Interest Rate for Advances. Section 3.7. Additional Rent. In the event that a change in the use of the Leased Premises occurs by reason of the action of Kitty Hawk, its subsidiaries, or its successors and assigns pursuant to Section 10.1 of the Building Lease and such change in use, in the opinion of bond counsel of nationally recognized standing, results in the loss of the exclusion from income tax purposes of the interest on the Bonds pursuant to Section 103 of the Code, then, in addition to the rent due pursuant to Section 3.1 of this Building Lease, Kitty Hawk shall pay additional rent in advance on each Rental Payment Date, following the receipt of the opinion of such bond counsel, in the amount set forth after the applicable Rental Payment Date set forth in Exhibit A-i hereto. Kitty Hawk shall be entitled to a credit against the installment of Rent next required to be paid to the extent that monies in any fund created under the indenture are available for that purpose. ARTICLE IV CONSTRUCTION Section 4.1. Construction. The Authority agrees to cause the Project to be constructed and equipped on the Real Property as promptly as is feasible in accordance with the Plans and Specifications as developed by Kitty Hawk. The Authority agrees to cause completion of the Project to be diligently prosecuted in accordance with the Plans and Specifications and in such a manner as to conform with all applicable zoning, planning, building, environmental and other regulations of governmental authorities having jurisdiction. Section 4.2. Plans and Specifications. The Plans and Specifications have been developed and approved by Kitty Hawk and are at the date hereof on file with Kitty Hawk and the Authority and may be changed from time to time by mutual agreement of the Building Corp., the Authority and Kitty Hawk, provided that the Plans and Specifications shall not be changed to such an extent that the Lease Purposes are such as are not permitted under the Act or would otherwise permit Kitty Hawk to avoid its agreement under this Lease. The cost of completing the Project shall be the responsibility of the Building Corp. only to the extent of the Budget which is attached to the Memorandum of Understanding of May 12, 1997, which Budget includes a fund for Contingencies 7 8 of One Million Dollars (the "Budget") . To the extent costs of completing the Project exceed the Budget, such costs shall be the responsibility of Kitty Hawk, but only to the extent such costs are pursuant to written change orders authorized in writing by Kitty Hawk. Section 4.3. Completion Date. Completion of the construction and equipping of the Project shall be evidenced to Kitty Hawk by a certificate signed by the Authorized Authority Representative stating that (i) construction and equipping have been substantially completed in accordance with the Plans and Specifications and all costs then due and payable in connection therewith have been paid, (ii) construction and equipping have been substantially accomplished in such a manner as to conform with all applicable zoning, planning, building, environmental and other regulations of all governmental authorities having jurisdiction, and (iii) construction and equipping have been substantially completed to its satisfaction so as to make the Project ready for operation for the Lease Purposes. Said certificate shall also specify the date by which the foregoing three events have occurred. Notwithstanding the foregoing such certificate shall state that it is given without prejudice to any rights against third parties which then exist or may subsequently come into being. Section 4.4. Accounting. Authority covenants that it will cause Building Corp. to keep and maintain a strict accounting of all charges incurred in relation to the items properly included as part of the Administrative Fees. As soon as practical after all settlements in relation to the Project are completed, a copy of said accounting shall be furnished to Kitty Hawk. Should such accounting show total charges relating to said items to be less than the amount of the Administrative Fees, then the next succeeding payment of Rent shall be reduced by the amount of the excess of the Administrative Fees over said items. Section 4.5. Remedies Against Contractors, Subcontractors and Sureties. In the event of default of any contractor or subcontractor under any contract made by Building Corp. in connection with construction and equipping of the Project or in the event of a breach of warranty with respect to any materials, workmanship or performance guaranty in connection with the Project, the Authority and/or Building Corp. will promptly inform Kitty Hawk of the steps the Building Corp. intends to take in connection with any such default, either separately or in conjunction with others, against the contractor or subcontractor so in default and against each such surety for the performance of such contract. If the Authority and/or Building Corp. shall so inform Kitty Hawk, the Authority and/or Building Corp. may, in their own names or, to the extent lawful, in the name of Kitty Hawk, prosecute or defend any action or proceeding or take any other action involving any such contractor, subcontractor or surety that the Authority and/or Building Corp. deems reasonably necessary, and in such event Kitty Hawk hereby agrees to cooperate fully with the Authority and/or Building Corp. and to take all action necessary to effect the substitution of the Authority and/or Building Corp. for Kitty Hawk in any such action or proceeding. Section 4.6. Installation of Kitty Hawk's Own Personal Property. Kitty Hawk may from time to time, in its sole discretion and at its own expense, install personal property including without limitation that which when installed becomes in whole or in part a fixture, on or upon the Leased Premises. All such property so installed by Kitty Hawk shall remain the sole property of Kitty Hawk in which, except to the extent provided in Section 5.3 hereof, the Authority shall have no interest, and may be purchased by Kitty Hawk on conditional sale, installment purchase or lease sale contract, or subject to vendor's lien or security agreement, as security for the unpaid portion of the purchase price thereof; provided no such lien or security interest shall attach to any part of the Leased Premises. Kitty Hawk shall pay as due the purchase price of, and all costs and expenses with respect to, the acquisition and installation of any such personal property installed by it pursuant to this Section. ARTICLE V MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE Section 5.1. Maintenance and Modifications of Leased Premises by Kitty Hawk. Kitty Hawk during the Lease Term shall keep and maintain the Leased Premises including all 8 9 appurtenances thereto and any personal property and fixtures which have become a part of the Leased Premises in good repair and good operating condition at its own cost. Kitty Hawk shall have the privilege of remodeling the Project or making additions, modifications and improvements thereto or to the Real Property, from time to time as it, in its discretion, may deem to be desirable for its uses and purposes, the cost of which remodeling, additions, modifications and improvements shall be paid by Kitty Hawk and, unless the Authority and Kitty Hawk shall otherwise agree in writing, the same shall be the property of the Authority and be included under the terms of this Lease as part of the Leased Premises. Section 5.2. Removal of Portions of the Project. The Authority shall not be under any obligation to renew, repair or replace any inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary portions of the Project. Kitty Hawk shall have the privilege from time to time of substituting personal property or fixtures for any portions of the Project, provided that the personal property or fixtures so substituted shall not impair the character or significance of the Leased Premises as furthering the purposes of the Act. Any such substituted property or fixtures shall, unless the Authority and Kitty Hawk otherwise agree in writing, become the property of the Authority and shall be included under the terms of this Lease, and the replaced portions of the Project shall become the property of the Authority. Section 5.3. Removal of Kitty Hawk's Own Personal Property. Kitty Hawk may at any time while it is not in default under this Lease remove from the Leased Premises any property purchased and installed by it pursuant to Section 4.6 of this Lease and not included as part of the Project. In the event any removal of property pursuant to this Section 5.3 causes damage to any portion of the Leased Premises, Kitty Hawk shall restore the same or repair such damage at its sole expense. Section 5.4. Documents to be Provided. Kitty Hawk shall file with Authority during the first two weeks of the calendar month succeeding each anniversary of the Completion Date, commencing with the month succeeding the first anniversary of the Completion Date, a certificate of the Authorized Kitty Hawk Representative setting forth the description of each item of personal property or fixtures which has become a part of the Leased Premises and of any other additions, remodeling, modification, substitution or improvements to the Leased Premises which have been made during the twelve calendar months preceding the first of the month in which such certificate is filed, if such additions, remodeling, modifications substitutions or improvements during such twelve months have an aggregate cost in excess of $500,000. Kitty Hawk shall execute and deliver such documents (if any) as the Authority may properly request in connection with any action taken by Kitty Hawk in conformity with Section 5.1, 5.2 or 5.3 of this Article. Any action taken by Kitty Hawk pursuant to Sections 5.1, 5.2 or 5.3 of this Article shall not entitle Kitty Hawk to any abatement or diminution of the Rent or Additional Payments payable hereunder Section 5.5. Taxes, Other Governmental Charges and Utility Charges. Kitty Hawk shall pay, as the same respectively become due, all taxes, assessments, whether general or special, and governmental charges of any kind whatsoever that may at any time be lawfully assessed or levied against or on account of or with respect to the Leased Premises or any personal property or fixtures installed or brought by Kitty Hawk therein or thereon and all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Leased Premises; provided, that with respect to taxes, special assessments or other governmental charges that may lawfully be paid in installments over a period of years, Kitty Hawk shall be obligated to pay only such installments as are required to be paid during the Lease Term. Kitty Hawk may, at its expense and in its own name and behalf or, to the extent lawful, in the name and behalf of the Authority and/or Building Corp, in good faith contest any such taxes, 9 10 assessments and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Authority and/or Building Corp. shall notify Kitty Hawk that, in the opinion of Independent Counsel, by nonpayment of any such items the interests of the Authority and/or Building Corp. or Kitty Hawk in the Leased Premises will be materially endangered or the Leased Premises or any part thereof will be subject to loss or forfeiture, in which event such taxes, assessments or charges shall be paid promptly by Kitty Hawk. The Authority will cooperate fully with Kitty Hawk, but at Kitty Hawk's expense, in any such contest. The Authority will also cooperate fully with Kitty Hawk, but at Kitty Hawk's expense, in exempting the Leased Premises from taxation. Section 5.6. Property Insurance. After the commencement date of the Building Lease, Kitty Hawk agrees to insure the Leased Premises in the amount and with the coverage of the Required Property Insurance Coverage by means of policies issued by reputable insurance companies. Kitty Hawk may also insure such property under a blanket insurance policy or policies which cover not only such property but other properties. Section 5.7. Rental Value Insurance. Kitty Hawk agrees to insure, from and after the Completion Date(1) the Leased Premises in the amount and with the coverage at least equal to the Required Rental Value Insurance Coverage by means of a policy or policies issued by reputable insurance companies, notwithstanding the premium costs or in the event at any time such policies are not available, then either (a) such insurance with such limits or amounts or other provisions as then obtainable for corporations of the State leasing buildings under leases similar to this Lease, or (b) a plan, in compliance with the law of the State and satisfactory to the Authority and Building Corp., which provides protection similar to the protection provided herein against the inability of Kitty Hawk to meet liabilities of Kitty Hawk that would otherwise have been satisfied by the proceeds of the rent or rental value insurance. In the case of either clause (a) or (b) of the preceding sentence, the limits, amounts and other provisions of such insurance or plan shall be such as are recommended by a recognized qualified independent Insurance Consultant satisfactory to the Authority and Building Corp. and who shall annually, or for such longer interval specified the Authority and/or Building Corp., review such plan and advise the Authority and Building Corp. of changes required therein in order to adequately protect the financial position of Kitty Hawk, and the Authority and Building Corp. shall be entitled to rely upon such advice to make its determination as to what is obtainable or most nearly provides protection similar to that herein required. Kitty Hawk may also insure such property under a blanket insurance policy or policies which cover not only such property but other properties. After completion of the Project, Kitty Hawk shall be responsible for all insurance obligations required under the terms of this Building Lease. Section 5.8. Additional Provisions Respecting Insurance. Any insurance policy issued pursuant to Sections 5.6 and 5.7 hereof shall be so written or endorsed, and any plan in substitution thereof shall be so written, as to make losses, if any, payable directly to Building Corp. or to such other person or persons as the Authority and/or Building Corp. may designate. Each insurance policy provided for in Sections 5.6, 5.7, and 5.9 hereof shall contain a provision to the effect that the insurance company shall not cancel or substantially modify the same without first giving written notice thereof to the Authority and Building Corp. at least thirty (30) days in advance of such cancellation or substantial modification. Kitty Hawk shall deliver to the Authority evidence of the insurance procured under said Sections by Kitty Hawk and agrees to keep such evidence up to date. Such insurance policies shall be countersigned by an agent of the insurer who is authorized to countersign policies in the State of Indiana, and such policies, together with a certificate of the insurance commissioner certifying that the persons countersigning such policies are duly qualified in the State as resident agents of the insurers on whose behalf they have signed (or a certificate of insurance and proof of payment of premium satisfactory to the Authority and Building Corp.) shall be deposited with the Authority. After completion of the Project, Kitty Hawk shall be responsible for all insurance obligations required under the terms of this Building Lease. Section 5.9. Public Liability Insurance. Kitty Hawk agrees that it will carry Required Public Liability Insurance with reference to the Leased Premises with one or more reputable insurance companies. The Authority and Building Corp. and such other person or persons as the 10 11 Authority and/or Building Corp. may designate shall be named as an additional insured under such policies, as their interests may appear. The insurance provided by this Section 5.9 may be by blanket insurance policy or policies. The proceeds of insurance required by this Section (after payment of expenses incurred in the collection of such proceeds) shall be applied toward extinguishment or satisfaction of the liability with respect to which such insurance proceeds are paid. Section 5.10. Workers' Compensation Coverage. During the period from commencement of construction of the Project until delivery of the certificate of the Authorized Authority Representative to Kitty Hawk pursuant to Section 4.3 hereof, the Authority and/or Building Corp. shall cause each contractor for each contract made by Building Corp. in connection with the construction and equipping of the Project to maintain the workers' compensation coverage required by the applicable laws of the State; and, throughout the Lease Term, Kitty Hawk, the Authority and the Building Corp. shall cause to be maintained the worker's compensation coverage required by the applicable laws of the State or cause the same to be maintained for their respective employees. Such policies shall include a waiver of subrogation. ARTICLE VI DAMAGE, DESTRUCTION AND CONDEMNATION Section 6.1. (a) Damage and Destruction. If the Leased Premises shall be damaged or partially or totally destroyed by fire, flood, windstorm, or other casualty at any time during the Lease Term, (i) all or that portion of the Leased Premises damaged or destroyed shall be promptly repaired, rebuilt or restored with such changes, alterations and modifications (including the substitution and addition of other property) as may be designated by Kitty Hawk and as shall not impair the character and significance of the Leased Premises as furthering the purposes of the Act, and (ii) there shall be applied for such purpose so much as may be necessary of any net proceeds of insurance policies resulting from claims for such losses as well as any additional moneys of Kitty Hawk necessary therefor. In the event that such net proceeds are insufficient to pay in full the costs of such repair, rebuilding or restoration, Kitty Hawk shall complete such repair, rebuilding or restoration and shall provide for payment of the costs of such completion from its own moneys. Section 6.1. (b) Defeasance. In the alternative, in the event that Kitty Hawk, within sixty (60) days, shall deposit sufficient funds, which funds shall include proceeds of any insurance, in order to (1) defease the Bonds in accordance with the Trust Indenture authorizing them, and any other indebtedness of the Authority (in accordance with the terms of any other resolution or indenture authorizing them) which was issued to finance infrastructure and any indebtedness which was issued to refinance or advance refund any such indebtedness, and (2) remediate any environmental cleanup, then the above paragraph shall not be effective. The lease shall terminate in such event. Section 6.2. Eminent Domain. If title to or the temporary use of the Leased Premises, or any part thereof, shall be taken under the exercise of the power of eminent domain by any governmental body or by any person, firm or corporation acting under governmental authority, any net proceeds received from any award made in such eminent domain proceedings (after payment of expenses incurred in such collections) shall be paid to and held by Kitty Hawk. Kitty Hawk and the Authority shall agree as to how proceeds shall be applied in one or both of the following ways: (a) The restoration of the Leases Premises to substantially the same condition as they existed prior to the exercise of said power of eminent domain, or (b) The acquisition, by construction or otherwise, of other improvements suitable for Kitty Hawk's operation on the Leased Premises and which are in furtherance of the purposes of the Act (which improvements shall be deemed a part of the Leased Premises and available for use and occupancy by Kitty Hawk without the payment 11 12 of any Rent other than as herein provided, to the same extent as if such other improvements were specifically described hereby). Any balances of the net proceeds of the award in such eminent domain proceedings not required to be applied for the purposes specified in subsections (a) or (b) above shall, after deducting of expenses and costs, become the property of the Authority subject to the provisions of Section 8.12 hereof. The parties shall cooperate fully in the handling and conduct of any prospective or pending condemnation proceedings with respect to the Leased Premises or any part thereof and Kitty Hawk will to the extent it may lawfully do so permit the Authority to litigate in any such proceedings in its own name or in the name and on behalf of Kitty Hawk, at the Authority's expense. In no event will either the Authority or Kitty Hawk voluntarily settle or consent to the settlement of any prospective or pending condemnation proceedings with respect to the Leased Premises or any part thereof without the written consent of the other party, which consent will not be unreasonably withheld. Section 6.3. Condemnation of Kitty Hawk-Owned Property. Kitty Hawk shall be entitled to the proceeds of any condemnation award or portion thereof made for damages to or takings of its own sole property. Section 6.4. Rent Abatement. In the event that the Leased Premises or a portion thereof are damaged or destroyed or are taken under the exercise of the power of eminent domain, the Rent payable by Kitty Hawk shall (i) be totally abated during that portion of the Lease Term that the Leased Premises are totally unfit for use or occupancy, and (ii) partially abated during that portion of the Lease Term that the Leased Premises are partially unfit for occupancy in the same proportion that the area of the Leased Premises so unfit for use or occupancy bears to the total area of the Leased Premises; provided, however, that Kitty Hawk shall pay an amount equal to the difference between the Rent payable in such year and the proceeds received by the Authority from the rent or rental value insurance required to be maintained by Kitty Hawk under Section 5.7 hereof. In the event that Rent is abated pursuant to this Section, the Lease Term may be extended, at Kitty Hawk's option, for a period of time equal to the period of time during which the Rent is so abated; provided, however, that in no event shall the Lease Term exceed a period of thirty years. Rent payable during such extended period of time shall be reduced by an amount equal to the proceeds of the aforesaid insurance policy actually received by the Authority and by an amount equal to Rent actually paid by Kitty Hawk during the period of abatement of Rent. Alternatively, in the event the Leased Premises are damaged or destroyed, the Authority and Kitty Hawk may agree that Kitty Hawk shall be provided substitute property of equal or acceptable value and the Authority shall exercise its best efforts to provide Kitty Hawk with such suitable alternative. In the event the Leased Premises are taken in their entirety by eminent domain, then, subject to the condition that either: (a) all of the net proceeds received from any award in such eminent domain proceedings (after the payment of expenses incurred in such collection) are applied as payment of rents under Section 3.5, or, in the alternative, (b) the Bonds are defeased under the provisions of Section 6.1(b) of this Article VI, the Building Lease shall be terminable at Kitty Hawk's option. ARTICLE VII MECHANICS AND OTHER LIENS Section 7.1. Mechanics' and Other Liens. The Building Corp. Kitty Hawk and the Authority shall not suffer or permit any mechanics' or other liens to be filed or exist against the 12 13 Leased Premises, nor against Kitty Hawk's leasehold interest in the Leased Premises, nor against any special fund or account provided for in this Lease or the Master Lease or any Rent paid or payable hereunder, by reason of work, labor, services or materials supplied or claimed to have been supplied to, for or in connection with the Leased Premises or to the Authority or Kitty Hawk or anyone holding the Leased Premises or any part thereof through or under Kitty Hawk. If any such liens shall at any time be filed, the Authority or Kitty Hawk, as appropriate, shall within one hundred twenty days after notice of the filing thereof but subject to the right to contest hereinafter set forth, cause the same to be discharged of record by payment, deposit, bond, order of a court of competent jurisdiction or otherwise. Kitty Hawk shall have the right in its or, to the extent lawful, the Authority's name, or both, but at Kitty Hawk's own cost and expense, to contest the validity or the amount of any such lien by appropriate proceedings timely instituted. The Authority will cooperate fully with Kitty Hawk, but at Kitty Hawk's expense, in any such contest (except as any such lien is asserted by the Authority and/or Building Corp. in which event Kitty Hawk shall have the right to contest such lien as if it were the owner of the Leased Premises). If Kitty Hawk shall fail to cause such lien to be discharged, or to contest the validity or amount thereof, within the period aforesaid, then, in addition to any other right or remedy of the Authority, the Authority may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit or by bonding. Any amount paid by the Authority shall be reimbursed by Kitty Hawk on demand, and if not so reimbursed on demand may be treated as Additional Payments as provided in Article III hereof and shall be paid by Kitty Hawk with interest on the amount so paid by the Authority at the Interest Rate for Advances. Notwithstanding any other provisions of this Section 7.1, Kitty Hawk shall not be responsible for the actions or inactions of the Authority or the Building Corp. that may result in any lien described in this Section 7.1. ARTICLE VIII REPRESENTATIONS AND SPECIAL COVENANTS AND CONDITIONS Section 8.1. Representations and Covenants of Kitty Hawk. (a) Kitty Hawk warrants and represents that it is and during the Lease Term will be a duly organized and existing corporation under the laws of the State of Delaware and duly qualified to do business in the State of Indiana, that it is not in default under any of the provisions contained in the laws of the State in any manner which would impair its ability to carry out its obligations hereunder, that it has power to enter into the transactions contemplated by this Lease, that it has been duly authorized to execute this Lease and that it will do all things required of it in order to maintain its existence. (b) Kitty Hawk shall not take any action, within its power or control, nor fail to take any action with respect to the Bonds that would result in the loss of the exclusion from gross income for federal income tax purposes of interest on the bonds pursuant to Section 103 of the Code; provided, however, that no Event of Default shall result by reason of a change in the use of the Leased Premises by Kitty Hawk, its subsidiaries, or its successors and assigns, pursuant to Section 10.1 of this Building Lease. Section 8.2. Representations and Covenants of the Authority. The Authority warrants and represents as follows: (a) It is a duly organized and existing municipal corporation under the laws of the State and is not in default under any of the provisions contained in the laws of the State in any manner which would impair its ability to carry out its obligations hereunder. (b) Construction and equipping shall be completed in accordance with the Plans and Specifications and will be accomplished in such manner as to conform with all 13 14 applicable zoning, planning, building, environmental and other regulations of all governmental authorities having jurisdiction of the Leased Premises. (c) The Authority covenants not to take any action, within its power and control, nor to fail to take any action with respect to the Bonds that would result in the loss of the exclusion from gross income for federal income tax purposes of interest on the Bonds pursuant to Section 103 of the Code. Section 8.3. Maintenance of Kitty Hawk. Kitty Hawk agrees that from the date of delivery of this Lease to the Termination Date there will always be a corporation duly organized and existing under the laws of the State of Delaware and qualified to do business in the State, acting as lessee under this Lease, and the Lessee shall not dissolve or otherwise dispose of all or substantially all of its assets and shall not consolidate with or merge with another entity which would adversely affect the creditworthiness of Kitty Hawk without the expressed written consent of the Airport Authority, which written consent shall not be unreasonably withheld. provided, however, that Kitty Hawk may consolidate with or merge with another entity, so long as Kitty Hawk provides to Landlord a written opinion of Ernst & Young, or a comparable national accounting firm, to the effect that such consolidation or merger will not materially affect Kitty Hawk or the successor entity's ability to perform its obligations under this Lease. The Building Corp. and the Authority shall be notified, in writing, of any change in the identity of Kitty Hawk under the Lease. Section 8.4. Title of Real Property. The Authority has caused to be furnished to Kitty Hawk an acceptable title insurance policy showing the status of title to the Real Property as of the date of acquisition of the Real Property by Building Corp. The Authority and the Building Corp. warrant that the Building Corp. has good title to the Leased Premises and that the Authority has the authority to enter into this Building Lease. It is hereby acknowledged by Tenant that the Landlord does not have legal title to the premises, but, rather, leases the Premises from the Building Corp. (the "Master Lease"). Tenant acknowledges that its right in the premises derives from and is subordinate to the Master Lease. The Master Lease shall require, in the event that the Building Corp. evicts the Landlord from the Leased Premises, this Lease shall continue in full force and effect, so long as Tenant is not in default of this Lease. In such event, Tenant hereby agrees to attorn to and acknowledge the Building Corp. as Landlord. Section 8.5. No Warranty of Suitability. The Authority does not make any warranty, either express or implied, as to the suitability or utilization of the Leased Premises for the Leased Purposes, or that they are or will be suitable for Kitty Hawk's purposes or needs. Kitty Hawk agrees that the Leased Premises as contemplated by the Plans and Specifications are useful to it. Section 8.6. Operation as a Public Airport. The Authority covenants and agrees that at all times it will operate and maintain the Airport as a public airport consistent with and pursuant to the sponsor's assurances given by the Authority to the United States Government under the Federal Airport and Airways Act. Section 8.7. Ingress and Egress. Kitty Hawk shall have the right of ingress to and egress from the Leased Premises for Kitty Hawk, its officers, employees, agents, servants, customers, vendors, suppliers, patrons, and invitees over the roadway provided by the Authority serving the Leased Premises. The Authority's roadway shall be used jointly with other tenants on the Airport, and Kitty Hawk shall not interfere with the rights and privileges of other persons or firms using said roadway and shall be subject to such weight and use restrictions promulgated in the Authority's rules and regulations. Section 8.8. Quiet Enjoyment. The Building Corporation shall covenant to the Authority and the Authority covenants that it will not take any action to prevent Kitty Hawk, on paying the Rent and Additional Payments and performing the covenants and agreements herein on Kitty Hawk's part to be performed, from peaceably and quietly holding and enjoying the Leased Premises for the Lease 14 15 Term and any extension thereof and that the Authority will, at Kitty Hawk's request and the Authority's expense, defend Kitty Hawk's enjoyment and possession of the Leased Premises against all parties or permit Kitty Hawk in its own or, to the extent lawful, in the Authority's name, to defend such enjoyment and possession. Section 8.9. Right of Access. Kitty Hawk agrees that subject to reasonable security and safety regulations and to reasonable requirements as to notice, the Authority and Building Corp., and their duly authorized agents shall have the right at all reasonable times to enter upon the Leased Premises and to examine and inspect the same. Kitty Hawk further agrees that the Authority and Building Corp. and their duly authorized agents shall have such rights of access to the Project as may be reasonably necessary to cause to be completed the construction and equipping provided for herein, and thereafter for the proper maintenance of the Project in the event of failure by Kitty Hawk to perform its obligations. Section 8.10. Indemnity. Kitty Hawk, the Authority and Building Corp., hereinafter sometimes called "Party" or collectively the "Parties", each agrees it they shall be responsible for its own acts of carelessness and negligence, and each agrees that the Authority, Building Corp. and Kitty Hawk shall not be liable for such negligence, and agrees to hold the Authority, Building Corp. and Kitty Hawk harmless against, any loss or damage to property, or any injury to or death of any person, that may be occasioned by any cause or by any failure to act whatsoever pertaining to the Leased Premises or the use thereof by acts of the other Party; provided, that the indemnity in this sentence shall be effective only to the extent of any loss that may be sustained by the Authority, Building Corp. or Kitty Hawk in excess of the net proceeds received by the Authority, Building Corp. or Kitty Hawk from any insurance carried with respect to the loss sustained. Such Party further agrees to indemnify and save harmless the Authority, Building Corp. or Kitty Hawk against and from any and all cost, liability, expenses and claims arising from any breach or default in the performance of any covenant or agreement to be performed pursuant to the terms of this Lease, or arising from any act or negligence of or failure to act by such Party, or any of its agents, contractors, servants, employees or licensees, or arising from any accident, injury or damage whatsoever caused to any person, firm or corporation occurring during the Lease Term, in or about the Leased Premises, and from and against all costs, liability and expenses incurred in or in connection with any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against the Authority, Building Corp. or Kitty Hawk by reason of any such claim, upon notice from one Party, the other Party covenants to resist or defend such action or proceedings at its own expense. Notwithstanding the foregoing, neither Party shall have any obligation to indemnify with respect to the following: (a) Liabilities arising out of damages to employees of any Party, or any third person, if such employee or third person is covered or should have been by worker's compensation insurance; 15 16 (b) Losses occasioned by the negligence or willful misconduct of such Party, such Party's agents or representatives; or (c) Insured losses with respect to which rights of subrogation have been waived. Section 8.11. Termination. Prior to the delivery of any securities secured hereby, this Lease may be terminated immediately by the Authority and/or Building Corp., should any of the following events occur: (a) there exists any final nonappealable order or adjudication which declares the Lease or the Master Lease or any of its terms and conditions invalid or which enjoins the performance of any of the terms and conditions of the Lease or the Master Lease; (b) the Authority shall have failed to authorize agreements to require completion of the aeronautical and land side projects required to be completed by the Authority under Paragraph 2 and 3 of the Memorandum of Understanding between the Authority and Kitty Hawk dated May 12, 1997; or (c) the rental payments which are required under the Lease in order to pay the principal and interest on the Bonds exceed the rental payments set forth on Exhibit "A" to the Lease. Section 8.12. Covenant to Comply with Tax Reform Act of 1986 and to Restrict Use of Funds. If and to the extent such action is within the control of the respective parties, the Authority and Kitty Hawk each covenant to restrict the use of the proceeds realized under this Lease in such manner and to such extent, if any, as may be necessary so that this Lease and any securities including Bonds and participation certificates evidencing proportionate interests in the payments to be made under this Lease will not constitute arbitrage bonds under Section 148 of the Internal Revenue Code of 1986, as amended (the "Code"). The Authorized Kitty Hawk Representative and any officer of the Authority, respectively, and any other appropriate officers shall each give an appropriate certificate for inclusion in the transcript of proceedings for the Lease, setting forth the reasonable expectations of Kitty Hawk and the Authority, respectively, regarding the amount and use of all the proceeds of the Lease, the facts, circumstances and estimates on which they are based, and other facts and circumstances relevant to the tax treatment of the interest component of payments under the Lease. Kitty Hawk and the Authority each covenant that each of them (a) will take or cause to be taken such actions as the Authority or Bond counsel shall instruct which may be required of it for the interest component of payments under the Lease to be and remain excluded from gross income for federal income tax purposes, and (b) will not take or permit to be taken any actions as the Authority or Bond counsel shall instruct which would adversely affect that exclusion, and that the Authority, or persons acting for it, will, and to the extent such actions are within its control, Kitty Hawk will, among other acts of compliance, (i) apply the proceeds of the Lease to the governmental purpose of the Lease, (ii) restrict the yield on investment property acquired with those proceeds, (iii) make timely rebate payments to the federal government, (iv) maintain books and records and make calculations and reports, and (v) refrain from certain uses of proceeds, all in such manner and to the extent necessary to assure such exclusion of that interest under the Code. The Authorized Kitty Hawk Representative and any officer of the Authority, respectively, and other appropriate officers are each hereby authorized and directed to take any and all actions, make calculations and rebate payments, and make or give reports and certifications, as may be appropriate to assure such exclusion of the interest component of payments under the Lease. Section 8.13. Covenant to Supply Financial Information. Kitty Hawk hereby covenants to provide annually, within ninety (90) days of the close of each calendar year during the Lease Term, and when requested in a timely manner, to the Authority, or its assigns, annual financial data, including all tax and other income, receipts and disbursements, budgets, collections and 16 17 delinquencies, and amortization schedules of all bond or lease transactions, and to advise of all matters, actions or causes of action to which Kitty Hawk may or has become obligated and all other pertinent information and changes thereto relative to the financial condition of Kitty Hawk and its continuing ability to. make the Rental Payments due and payable under this Lease. As a condition for obtaining Kitty Hawk's financial information, the Authority agrees that such information is proprietary to Kitty Hawk and that the Authority shall not disclose such information to third parties. Section 8.14. Tax Covenants. Kitty Hawk hereby makes an irrevocable election not to claim depreciation or an investment tax credit with respect to the Special Facilities in accordance with Section 142(b)(1)(B)(i) of the Code, such that the Bonds shall qualify under Section 142(a)(1) of the Code. ARTICLE IX Kitty Hawk shall have the right to approve any releases of the Leased Premises under Article IX of the Master Lease. ARTICLE X ASSIGNMENT, AMENDMENT AND SUBLEASING Section 10.1. Assignment and Subleasing by Kitty Hawk. (a) Kitty Hawk may assign the Building Lease and the Ground Lease (the "Leases") or sublet all or any part of the Leased Premises to any subsidiary of Kitty Hawk without the consent of the Authority. (b) Kitty Hawk may sublet up to ten percent (10%) of the floor space of the Leased Premises for a term not to exceed one (1) year without the consent of the Authority. (c) It is the intention of Kitty Hawk to permanently use the Leased Premises for its presently existing air cargo hub. In the event, however, that Kitty Hawk and all of its subsidiaries, and their successors and assigns, and any transferee to whom Kitty Hawk transfers its scheduled air freight operations (herein collectively called "Kitty Hawk"), should elect to permanently withdraw from the business of conducting scheduled air freight operations within the continental United States and no longer intend to operate an air cargo hub at any location within the continental United States, then Kitty Hawk shall notify the Authority within thirty (30) days of such determination (the "Notification Date"). Kitty Hawk and the Authority thereupon agree to exert a good faith effort to assign the Leases or sublease the Leased Premises to a scheduled air freight operation or to another aeronautically related operation. In the event that no such aeronautically related operation can be found, then no sooner than two (2) years after the commencement date of Leases, or six (6) months from the Notification Date, whichever event last occurs, the Leases may be assigned or the Leased Premises may be subleased as a whole or in part by Kitty Hawk, or the Leased Premises may be used by Kitty Hawk for any lawfully permitted commercial use, so long as the use of the Leased Premises will not interfere with the operation of the Fort Wayne International Airport, violate the terms and conditions of. any applicable federal, state or local law, ordinance or regulation. (d) Notwithstanding the foregoing subparagraph (c), at any time after the Notification Date, Kitty Hawk agrees to assign the Leases or to sublet the Leased Premises to any assignee or sub-lessee designated by the Authority who meets the following qualifications (a "Qualified Assignee") i) Agrees to conduct an aeronautical related activity on the Leased Premises; ii) Agrees to assume and demonstrates a reasonable financial capability to perform and discharge all of the obligations under the Leases; 17 18 iii) Makes a proposal to accept an assignment of the Leases or a sublease of the Leases Premises which is not substantially less advantageous than any financial proposal to accept an assignment of the Leases or to sublet the Leased Premises than any other proposal received by Kitty Hawk and communicated to the Authority; and iv) Proposes an assignment of the Leases or a sublease of the Leased Premises which is not in conflict with any then-existing covenant, agreement or commitment of Kitty Hawk. In order to induce the acceptance of a Qualified Assignee, the Authority agrees to reduce the obligations of Kitty Hawk for the payment of Rent, and Additional Payments due by Kitty Hawk under Article III of the Building Lease to an amount equal to the actual Rent and Additional Payments which are assumed and agreed to be paid by the Qualified Lessee under the terms and conditions of the proposed Assignment or Sublease. (e) Other than as permitted in subparagraphs (a), (b), (c), or (d) the Leases may be assigned in whole or in part, and the Leased Premises may be subleased as a whole or in part by Kitty Hawk or such subsidiary of Kitty Hawk(1) only with the prior written consent of the Authority and Building Corp., which consent will not be unreasonably withheld. (f) Other than to the extent specified in subparagraph (d) the assignment or sublease of all or any part of the Leased Premises, or the use of the Leased Premises for any lawfully permitted commercial use, the consent by the Authority and Building Corp. to the assignment or sublease, or the acceptance of an assignee or subtenant shall not release Kitty Hawk from the further performance by Kitty Hawk of the covenants of the Leases or be construed to relieve Kitty Hawk from obtaining the consent, in writing, of the Authority and Building Corp. to any further assignment or subletting and Kitty Hawk shall remain primarily liable on this Lease for the entire term hereof and shall not be released from the full and complete performance of all of the terms, conditions and agreements herein contained. Section 10.2. Assignment and Mortgaging by the Authority and Building Corp. For the purposes of constructing, erecting and equipping the Project or the financing thereof, the Authority and Building Corp. may mortgage the Leased Premises and assign its rights under and interest in, and pledge any moneys receivable under or pursuant to, this Lease and the Master Lease, respectively, but each such mortgage, assignment or pledge shall be subordinate and subject to this Lease. Section 10.3. Covenants to Bind Successors. Notwithstanding Section 10.1 and 10.2 of this Lease, all successors and assigns of either Kitty Hawk or the Authority shall be bound by all covenants and representations of Kitty Hawk or the Authority, respectively, herein contained and, without limiting the generality of the foregoing, including particularly those contained in Section 8.12 hereof. Section 10.4. Amendment. In order to construct, erect or equip additions to or renovations of the Leased Premises ("Improvements"), Kitty Hawk and the Authority may enter into one or more amendments to the Lease ("Amendment"). Any such Amendment shall be effective only upon delivery to the Trustee of the following: (a) an original counterpart of the Amendment fully executed by the Authority and Kitty Hawk. (b) an opinion of counsel acceptable to the Trustee (who may be Counsel to the Authority) that the Lease and the Amendment will each be valid and binding upon the parties thereto following delivery thereof. (c) an opinion of counsel acceptable to the Trustee that the Amendment will not affect the tax exempt status of any outstanding bonds. 18 19 (d) authorization and approval by all requisite governmental agencies of the plans and specifications of such improvements to the Leased Premises; approval of the legal of ad valorem taxes (pursuant to the Act) in any amount necessary by the State Tax Control Board or its successors to make any payments of Rent required pursuant to the Lease and the Amendment. (e) evidence of the authority of the respective officers of Kitty Hawk and the Authority who execute such Amendment. In such event, the parties shall include revisions to each of the Exhibits of the Lease providing for revised Rent schedules, Purposes, and Leased Premises. The supplemental trust indenture authorizing securities pursuant to said Amendment to raise funds for financing such Improvements shall provide that any Rent Payments due under the Lease as in effect prior to the delivery of the Amendment are not available for payment of any such securities or the interest thereon prior to the delivery of the Authority's Certificate pursuant to Section 4.3 hereof. ARTICLE XI RIGHT OF CANCELLATION After the expiration of the initial twenty (20) years of the Lease Term and so long as Kitty Hawk is not in default under the terms of the Ground Lease, the Building Lease, the Operating Agreement, or the Airport Use and Lease Agreement, Kitty Hawk shall have a one time only right to terminate the Ground Lease, the Building Lease, and the Operating Agreement upon one hundred eighty (180) days written notice to the Airport Authority. No such termination shall, however, be effective unless and until the Bonds shall have been paid in full. ARTICLE XII EVENTS OF DEFAULT AND REMEDIES Section 2.1. Events of Default by Kitty Hawk. The following shall be "events of default" by Kitty Hawk under this Lease and the terms "events of default" or "default" shall mean, whenever they are used in this Lease, any one or more of the following events: (a) Failure by Kitty Hawk to pay the Rent required to be paid hereunder on or prior to the Rental Payment Date and continuing for the Rent Cure Period except as provided in Section 6.4 hereto. (b) Failure by Kitty Hawk to observe and perform any covenant, condition or agreement on its part to be observed or performed under this Lease, other than as referred to in paragraph (a) of this Section, for a period of sixty days after notice of such failure requesting such failure to be remedied, given to Kitty Hawk by the Authority unless the Authority shall agree in writing to an extension of such time prior to its expiration; provided, however, that if and so long as Kitty Hawk is proceeding with due diligence to cure the default such period shall be extended to such period as is required to permit Kitty Hawk's proceeding with due diligence to cure such default. The provisions of paragraph (b) of this Section are subject to the following limitations: If by reason of acts of God; fires; epidemics; landslides; floods; strikes; lockouts or other industrial disturbances; acts of public enemies; acts or orders of any kind of any governmental authority; insurrections; riots; civil disturbances; explosions; Kitty Hawk is unable in whole or in part to carry Out the agreements on its part herein contained, other than the obligations on the part of Kitty Hawk to pay Rent, Additional Payments and taxes and to carry insurance, Kitty Hawk shall not be deemed in default 19 20 during the continuance of such inability. Kitty Hawk shall, however, use its best efforts to remedy with all reasonable dispatch the cause or causes preventing Kitty Hawk from carrying out its agreements; provided, that Kitty Hawk shall in no event be required to settle strikes, lockouts or other disturbances be acceding to the demands of the opposing party or parties when such course is, in the judgment of Kitty Hawk, unfavorable to Kitty Hawk. Section 12.2 Events of Default by the Authority. The following shall be "events of default" by the Authority under this Lease, and the term "events of default" or "default" shall mean, wherever they are used in this Lease, any one or more of the following events: (a) The FAA or other proper Federal Agency shall withdraw its approval from the Airport and restrict the use of the Airport in such a manner as to prevent the use of same by Kitty Hawk for its business operations. (b) An order is issued by any court of competent jurisdiction restricting the use of the Airport in such a manner as to prevent the use of same by Kitty Hawk for its business operations. (c) The airfield shall be closed by lawful authority restricting the use of the Airport in such a manner as to prevent the use of the same by Kitty Hawk for its business operations hereunder. (d) If a court of competent jurisdiction issues an injunction against the Authority or any successor body to the Authority preventing or restraining the use of the Airport in its entirety or of any part of the Airport substantially necessary to Kitty Hawk for its operations, and if such injunction remains in force for at least ninety (90) days. (e) If the Authority fails to provide and maintain reasonable means for ingress and egress to and from the Leased Premises in accordance with the provisions of this Agreement or fails to fulfill its obligations under Section 8.8 in respect of Kitty Hawk's right of quiet enjoyment granted thereby. (f) If by reason of any willful act, willful omission wrongfully done or wrongfully omitted to be done in violation of this Agreement, the Authority prevents the use of the Leased Premises for the purposes for which the use thereof is authorized by this Agreement. Section 12.3. Remedies of the Authority on Default. Whenever any event of default under Section 12.1 of this Lease shall have happened and be subsisting, any one or more of the following remedial steps may be taken: (a) The Authority may reenter and take possession of the Leased Premises without terminating this Lease, sublease the Leased Premises for the account of Kitty Hawk, holding Kitty Hawk liable for costs, if any, not reimbursed to the Authority from the difference between the rent and other amount payable by such subleasing in such subleasing and the Rent, Additional Payments and other amount payable by Kitty Hawk hereunder. 20 21 (b) The Authority may terminate this Lease, exclude Kitty Hawk from possession of the Leased Premises, and lease the Leased Premises to another, but holding Kitty Hawk liable for costs, if any, not reimbursed to the Authority from the proceeds for all Rent and other payments due up to the effective date of such leasing. (c) The Authority may take whatever action at law or in equity may appear necessary or desirable to collect the Rent and Additional Payments then due and thereafter to become due, or to enforce performance and observance of any obligation, agreement or covenant of Kitty Hawk under this Lease. Provided, however, if before the expiration of 120 days from the date of which an event of default under Section 12.1 of this Lease shall have happened, Kitty Hawk shall have cured the event of default and shall have paid all surplus payable hereunder, (including all accrued unpaid Rent, Additional Payments and any and all other costs and expenses incurred by the Authority as a result of the event of default), then, (i) the Authority shall waive the event of default and its consequences and shall rescind and annul that declaration, (ii) the Lease, if it has been terminated pursuant to subparagraph (b) above shall be reinstated, and (iii) Kitty Hawk shall be restored to the use, occupancy and possession of the Lease Premises. Notwithstanding anything contained in this Section 12.2 to the contrary, all subleases or alternate lessees shall be bound by all covenants and representations of Kitty Hawk herein contained and, without limiting the generality of the foregoing, including particularly those contained in Section 8.12 hereof. Section 12.4 Remedies of Kitty Hawk on Default. Whenever any event of default under Section 12.2 of this Lease shall have happened or be subsisting, any one or more of the following remedial steps may be taken: (a) Kitty Hawk may terminate this Lease. (b) Kitty Hawk may take whatever action at law or in equity may appear necessary or desirable to pursue in order to enforce performance and observance of any obligation, agreement or covenant of the Authority under this Lease. Provided, however, if before the expiration of 60 days from the date of which an event of default under Section 12.2 of this Lease shall have happened, the Authority shall have cured the event of default, then: (i) Kitty Hawk shall waive the event of default and its consequence and shall rescind and annul that declaration, (ii) the Lease, if it has been terminated pursuant to Subparagraph (a) above, shall be reinstated, and (iii) the Lease shall continue in full force and effect. Section 12.5. No Remedy Exclusive. No remedy conferred upon or reserved to the Authority or Kitty Hawk by this Lease is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Lease or now and hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Authority or Kitty Hawk to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice other than such notice as may be expressly required herein. Section 12.6. Agreement to Pay Attorneys' Fees and Expenses. In the event Kitty Hawk or the Authority should default under any of the provisions of this Lease and the Authority or Kitty Hawk should employ attorneys or incur other expenses for the collection of Rent or the enforcement of performance or observance of any obligation or agreement on the part of Kitty Hawk or the Authority contained in this Lease, Kitty Hawk or the Authority shall on demand thereof or reimburse the reasonable fees of such attorneys and such other expenses so incurred. 21 22 Section 12.7. No Additional Waiver Implied by One Waiver. In the event any agreement contained in this Lease should be breached by either party, and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. Section 12.8. Waiver of Appraisement. Valuation, Etc. In the event Kitty Hawk or the Authority should default under any of the provisions of this Lease, Kitty Hawk or the Authority agrees to waive the benefit of all appraisement, valuation, stay, extension or redemption laws now or hereafter in force, and all right of appraisement and redemption to which it may be entitled. Section 12.9. Reinstatement. Notwithstanding any termination of this Lease in accordance with the provisions of Section 12.2 hereof, unless and until the Authority shall have entered into a valid and binding agreement providing for the reletting of the Leased Premises, Kitty Hawk may at any time after such termination pay all accrued unpaid Rent plus any costs to the Authority and fully cure all other defaults then capable of being cured. Upon such payment and cure, this Lease shall be fully reinstated, as if it had never been terminated, and Kitty Hawk shall be restored to the use, occupancy and possession of the Leased Premises. Section 12.10. Settlement of Disputes. In the event of any dispute between Kitty Hawk and the Authority with respect to the terms and conditions of this Building Lease, Kitty Hawk and the Authority shall first appoint a single representative of each to attempt to reasonably negotiate a settlement of such dispute and make recommendations with respect to such settlement to Kitty Hawk and to the Authority Kitty Hawk and the Authority may, if they so desire, submit such issue to mediation. In the event that such dispute continues to be unsettled for a period of forty-five (45) days following the receipt of formal notification by certified mail, return receipt requested, that a dispute subject to arbitration exists, then both Kitty Hawk and the Authority shall appoint an independent arbitrator, who shall appoint a third arbitrator, and the matters in dispute shall be submitted to arbitration by this panel of arbitrators in accordance with the commercial arbitration rules then existing by the American Arbitration Association, whose determination, following the exhaustion of all administrative and judicial appeals, shall become final, subject to appeal only on the basis of collusion, fraud or manifest disregard for the law. The panel of arbitrator shall have the authority to enter equitable and legal orders and interim and final orders. Such arbitration shall occur in Allen County, Indiana, and shall be binding upon the parties, their representatives and assigns, provided that all parties shall be obliged to observe and comply with all the terms of the Ground Lease, the Building Lease and the Operating Agreement, including the obligation to make all rental payments and other payments, until the arbitration process has been completed and becomes binding on all of the parties. Notwithstanding the foregoing, no arbitration decision shall affect Kitty Hawk's obligation to pay rent or make other payments to Landlord required by the terms of this Lease. ARTICLE XIII MISCELLANEOUS Section 13.1. Surrender of Leased Premises. In the event Kitty Hawk should default under this Lease and this Lease is terminated or if this Lease is terminated by the Authority pursuant to Section 8.9 hereof, Kitty Hawk agrees to surrender, subject to reinstatement pursuant to Section 12.7 of this Lease, possession of the Leased Premises peaceably and promptly to the Authority in as good condition as prevailed at the time Kitty Hawk was put in full possession thereof, loss by fire and other casualty covered by insurance or by eminent domain, ordinary wear and tear, obsolescence and acts of God excepted. Section 13.2. Notices. All notices, certificates, requests or other communications hereunder shall be sufficiently given and shall be deemed given when mailed by registered or certified mail, postage prepaid, addressed to the appropriate Notice Address return receipt requested. The Authority, the Building Corp. and Kitty Hawk may, by notice given hereunder, designate any 22 23 further and different addresses to which subsequent notices, certificates, requests or other communications shall be sent. Section 13.3. Net Lease. This Lease shall be deemed and construed to be a "net lease," and Kitty Hawk shall pay absolutely net during the Lease Term the Rent, Additional Payments and all other payments required hereunder, free of any deductions, and without abatement, deduction or setoff other than those herein expressly provided. Section 13.4. ______________ This Lease shall be a firm and binding agreement between the Authority and Kitty Hawk and shall be non-applicable. This Lease shall inure to the benefit of and shall be binding upon the Authority, Kitty Hawk and their respective successors and assigns, subject, however, to the specific provisions hereof. Section 13.5. Execution in Counterparts. This Lease may be executed in several counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same Lease. Section 13.6. Construction of Covenants. The Authority has corporate power as required for the purpose of causing the Project to be constructed and erected and leasing the same to Kitty Hawk under the provisions of the Act. All provisions herein contained shall be construed in accordance with the provisions of the Act and to the extent of inconsistencies, if any, between the covenants and agreements in this Lease and the provisions of the Act, the provisions of the Act shall be deemed to be controlling and binding upon the Authority and Kitty Hawk. Section 13.7. Severability. In case any section or provision of this Lease, or any covenant, stipulation, obligation, agreement, act or action or part thereof, made, assumed, entered into or taken thereunder or any application thereof, is for any reason held to be illegal or invalid, such illegality or invalidity shall not affect the remainder thereof or any other section or provision thereof or any other covenant, stipulation, obligation, agreement, act or action, or part thereof, made, assumed, entered into or taken thereunder, which shall be construed and enforced as if such illegal or invalid portion were not contained therein, nor shall such illegality or invalidity of any application thereof affect any legal and valid application thereof, and each such section, provision, covenant, stipulation, obligation, agreement, act or action, or part thereof, shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law. Section 13.8. Letter Agreement. The terms of the Letter Agreement are incorporated herein as if entirely rewritten in this Lease. Section 13.9. Conditions. The captions or heading in this Lease are for convenience only and in no way define, limit or describe the scope or intent of any provisions or sections of this Lease. Section 13.10 Landlord's Consent. In each case under this Lease in which Authority's consent shall not be unreasonably withheld, Authority shall notify Kitty Hawk of its decision within ninety (90) days if Kitty Hawk's request is made under Section 10.1 hereunder, and within sixty (60) days if Kitty Hawk's request is made under any other provision hereunder. Authority's consent shall be deemed granted if Authority has not given written notice of its refusal to grant such consent, setting forth with specificity the bases for such refusal. 23 24 IN WITNESS WHEREOF, the Authority and Kitty Hawk have caused this Lease to be executed in their respective names by their duly authorized officers, all as of the date hereinbefore written. FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY BY: Daniel F. Weaver, President Fort Wayne-Allen County Airport Authority Board ATTEST: Keith R. Spitler Assistant Secretary KITTY HAWK, INC. BY: Chairman of the Board and Chief Executive Officer 25 STATE OF INDIANA ) ) COUNTY OF ALLEN ) Before me, a Notary Public in and for said County and State, personally appeared DANIEL F. WEAVER and KEITH R. SPITLER, the President and Assistant Secretary, respectively, of the Fort Wayne-Allen County Airport Authority Board, who acknowledged the execution of the above and foregoing Building Lease, for and on behalf of the Fort Wayne-Allen County Airport Authority. WITNESS my hand and Notarial Seal this 13th day of April, 1998. ------------------------------------- Thomas D. Logan, Notary Public Residing in Allen County, Indiana My Commission Expires: Thomas D. Logan, Esquire ROTHBERG & LOGAN Suite 2100, 110 West Berry Street Fort Wayne, Indiana 46802 26 STATE OF ) ) COUNTY OF TEXAS ) Before me, a Notary Public in and for said County and State, personally appeared M. TOM CHRISTOPHER, Chairman of the Board and Chief Executive Officer of KITTY HAWK, INC., who acknowledged the execution of the above and foregoing Building Lease, for and on behalf of said corporation. WITNESS my hand and Notarial Seal this day of , 1999. Notary Public Residing in County, Texas Thomas D. Logan, Esquire ROTHBERG & LOGAN Suite 2100, 110 West Berry Street Fort Wayne, Indiana 46802 My Commission Expires: EX-12.1 5 STATEMENT OF COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12.1 KITTY HAWK, INC. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN THOUSANDS)
FISCAL YEAR YEAR FOUR MONTHS ENDED ENDED ENDED AUGUST 31, DECEMBER 31, DECEMBER 31, ----------- -------------------- ------------------- 1996 1997 1998 1995 1996 -------- -------- -------- -------- -------- Earnings Income before income taxes..... $ 6,877 $ 30,803 $ 27,970 $ 7,851 $ 8,660 Add: Fixed charges ............ 1,998 8,971 47,654 528 730 -------- -------- -------- -------- -------- Total .................... $ 8,875 $ 39,774 $ 75,624 $ 8,379 $ 9,390 ======== ======== ======== ======== ======== Fixed charges Interest expense .............. $ 1,859 $ 7,495 $ 40,004 $ 482 $ 684 Add: Interest factor of operating lease expense ..... 139 1,476 4,250 46 46 Capitalized interest .......... -- -- 3,400 -- -- -------- -------- -------- -------- -------- Total .................... $ 1,998 $ 8,971 $ 47,654 $ 528 $ 730 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges .......................... 4.4x 4.4x 1.6x 15.9x 12.9x ======== ======== ======== ======== ========
EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-15667) pertaining to the Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, in the Registration Statement (Form S-8 No. 333-23597) pertaining to the Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan and in the Registration Statement (Form S-8 No. 333-28553) pertaining to the Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan of our report dated March 26, 1999, with respect to the consolidated financial statements of Kitty Hawk, Inc. included in this Annual Report on Form 10-K for the year ended December 31, 1998. /s/ ERNST & YOUNG Dallas, Texas March 30, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 17,041 0 140,014 0 50,135 246,149 801,999 81,191 982,585 201,191 0 0 0 169 194,028 982,582 714,937 714,937 598,797 598,797 2,797 0 40,004 27,970 11,328 16,642 0 0 0 16,642 0.99 0.99
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