10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2003
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

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 incorporation or organization)	(I.R.S. Employer Identification No.)
1515 West 20th Street P.O. Box 612787 DFW International Airport, Texas	75261
(Address of principal executive offices)	(Zip Code)

(972) 456-2200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.000001 per share

Series A Preferred Stock Purchase Rights

      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 þ          No o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes o          No þ

      The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $0.9 million. (For purposes of determination of the above stated amount, only directors, executive officers and 10% or greater stockholders have been deemed affiliates).

      Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes þ          No o

      At March 13, 2004, there were 43,612,306 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

      Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders have been incorporated by reference into Part III of this annual report on Form 10-K.

KITTY HAWK, INC.

2003 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		3
Item 2.	Properties		15
Item 3.	Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		15
Item 4A.	Executive Officers of the Registrant		16
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		17
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		41
Item 8.	Consolidated Financial Statements and Supplementary Data		41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		41
Item 9A.	Controls and Procedures		41
PART III
Item 10.	Directors and Executive Officers of the Registrant		43
Item 11.	Executive Compensation		43
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		43
Item 13.	Certain Relationships and Related Transactions		43
Item 14.	Principal Accounting Fees and Services		43
PART IV
Item 15.	Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K		44
Signatures			47
Index to Consolidated Financial Statements and Supplementary Data			F-1
Certificate of Designation, Preferences and Rights
Amended and Restated Aircraft Use Agreement
Employment and Severance Agreement Amendment
Term Sheet
Credit and Security Agreement
Consent of Grant Thornton LLP
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification Pursuant to Section 906

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Glossary of Selected Aviation Industry Terms

      The following are definitions of terms commonly used in the aviation industry and this annual report:

      “ACMI” means providing air transportation service consisting of the aircraft, crew, maintenance and insurance on a contractual basis, for 30 days or longer.

      “Ad-hoc charter” means providing air transportation service consisting of the aircraft, crew, maintenance and insurance on an on-demand basis or on a contractual basis for less than 30 days. Ad-hoc charters may also include other costs to operate the aircraft, including fuel and aircraft handling charges.

      “Aircraft” means an airframe and attached aircraft engines.

      “Airframe” means the structure of an aircraft, including the fuselage, wings, stabilizers, flight control surfaces and landing gear, but excluding the aircraft engines.

      “Block hour” means the time that an aircraft begins moving under its own power at its origination airport to the time it comes to rest at its destination airport.

      “C-check” means a thorough inspection and overhaul of an airframe and its components, not including aircraft engines, to ensure the airframe is airworthy. A “light C-check” is generally performed every 3,000 flight hours and a “heavy C-check” is generally performed every 14,000 flight hours.

      “Engine overhaul” means a heavy shop visit, which includes disassembly, inspection, repair or replacement of worn and life-limited parts, reassembly and testing of an aircraft engine.

      “Flight hour” means the portion of aircraft operation time commencing at takeoff and ending at landing.

      “Heavy maintenance” means with respect to an airframe, a light C-check or heavy C-check, or with respect to an aircraft engine, an engine overhaul.

      “Rotable part” means an aircraft part that can be repaired and reinstalled on an aircraft.

      “Yield” means revenue expressed on a per chargeable weight pound carried basis in our expedited scheduled freight system. Revenue includes the price charged for our service plus any fuel or security surcharges.

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PART I

ITEM 1. BUSINESS

General

      Through our wholly-owned subsidiary Kitty Hawk Cargo, Inc., we operate a major independent city-to-city expedited scheduled freight network among 52 cities in the continental U.S. and selected cities in Canada providing next-morning and two-day delivery service. In addition, we have business alliances that allow us to provide freight service to 17 cities in Alaska and Hawaii. We also seek business alliances to expand our expedited scheduled freight network beyond North America.

      As an independent freight network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients. As a result, we primarily provide freight services to freight forwarders and logistics companies who either transport the freight to and from our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services. On occasion, for an additional fee, we arrange for the initial pick up of freight from shippers as well as the final delivery to recipients. In November 2003, on a test basis, we began offering an airport-to-door delivery option to a limited number of our customers by contracting with local cartage agents in major metropolitan areas of the continental U.S. We began offering this service to all of our customers during March 2004.

      We use aircraft and trucks to transport freight on scheduled routes between the cities in our independent freight network and our hub in Fort Wayne, Indiana. The majority of our freight is large, heavyweight and/or oversized. We also carry small package freight and other freight that cannot be transported readily in other freight systems or on passenger aircraft. In 2003, we generated approximately 96% of our revenue from expedited scheduled freight services.

      Through our wholly-owned subsidiary Kitty Hawk Aircargo, Inc., we also provide air freight transportation services in North America using owned or leased Boeing 727-200 cargo aircraft. We primarily provide these services to our expedited scheduled freight business and on occasion provide these services to third parties on an ad-hoc charter basis as well as through short to medium-term ACMI contracts. On occasion, we supplement our air lift capacity by chartering cargo aircraft from third parties.

      We were incorporated on October 20, 1994, as a Delaware corporation. Kitty Hawk Aircargo was incorporated on January 11, 1989, as a Texas corporation, and Kitty Hawk Cargo was incorporated on April 13, 1999, as a Delaware corporation. Our principal executive offices are located at 1515 West 20th Street, P.O. Box 612787, DFW International Airport, Texas 75261, and our main telephone number is (972) 456-2200. Other than providing certain services to our wholly-owned subsidiaries, including strategic planning, treasury and accounting functions, human resource management and legal support, Kitty Hawk, Inc. currently does not have any operations separate and apart from those conducted by its subsidiaries. In addition, we continually evaluate businesses and other opportunities, whether or not related to our current businesses, for investment, acquisition and strategic alliances to enhance shareholder value.

      Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports are made available free of charge through the Company Information section of our Internet website, http://www.khcargo.com, as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on or linked to our website does not constitute part of this Form 10-K.

Recent Developments

      New Credit Facility. On March 22, 2004, we entered into a revolving credit facility with Wells Fargo Business Credit, Inc., or WFB. The revolving credit facility, or the Credit Facility, provides for borrowings of up to $10.0 million, subject to a borrowing base calculation, and is secured by substantially all of our assets, other than airframes, aircraft engines and aviation parts. In addition, at the same time, we terminated our $5.0 million receivables purchase facility with KBK Financial, Inc. under which there was no outstanding balance and repaid our $1.8 million outstanding debt balance with 1st Source Bank. See

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“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility” for more information about the Credit Facility.

      Amendment to Aircraft and Engine Use Agreement. We entered into an amendment to our Aircraft and Engine Use Agreement with the Kitty Hawk Collateral Liquidating Trust, or the Trust, as of January 1, 2004. The amendment primarily extends, with certain minimum usage commitments, the lease terms for 11 Boeing 727-200 cargo airframes from September 30, 2004 to dates ranging from December 31, 2004 to December 31, 2006 and extends the use of 29 aircraft engines from September 30, 2004 until the aircraft engines reach the earlier of the estimated time of their next heavy maintenance event or December 31, 2007. In addition, we have the option, at our discretion in October 2004, to further extend the leases on two of these airframes from December 31, 2004 up to December 31, 2007 and on two more of these airframes from December 31, 2004 up to June 30, 2008. See “— Aircraft Fleet — Aircraft and Engine Use Agreement” for more information about this amended agreement.

      EGL Arbitration. In July 2002, we filed a demand for binding arbitration against EGL, Inc. d/b/a Eagle Global Logistics, or EGL, with the American Arbitration Association to resolve our claim to collect for freight transportation services rendered to EGL in the amount of approximately $3.7 million plus attorneys’ fees. On August 18, 2003, the arbitrators ruled in our favor, awarding us $3.7 million and denying all of EGL’s counterclaims. The award is being paid pursuant to a mutually agreeable payment schedule. To date, EGL has paid us $2.5 million of the $3.7 million. The remaining $1.2 million is scheduled to be paid in two quarterly installments of $0.5 million in June and September 2004, with the balance due in December 2004. The remaining payments owed to us are secured by a letter of credit which expires in December 2004.

      Stockholder Rights Plan. In January 2004, we adopted a stockholder rights plan, or the Rights Plan, under which each share of common stock is accompanied by one preferred share purchase right, or a Right. Each Right entitles the holder to purchase 1/1000th of a share of Series A Preferred Stock for $10.00, subject to adjustment. In general, the Rights will not become exercisable or transferable apart from the shares of common stock with which they were issued unless a person or group of affiliated or associated persons becomes the beneficial owner of, or commences a tender offer that would result in beneficial ownership of, 15% or more of the outstanding shares of common stock (any such person or group of persons being referred to as an Acquiring Person). Thereafter, under certain circumstances, each Right (other than any Rights that are or were beneficially owned by an Acquiring Person, which Rights will be void) could become exercisable to purchase a number of shares of common stock having a market value equal to two times the $10.00 purchase price. The Rights will expire in January 2014, unless we redeem them earlier at a redemption price of $0.001 per Right, subject to adjustment. As of March 1, 2004, we had two stockholders, Resurgence Asset Management, L.L.C. and Everest Capital Limited, each of which beneficially owned more than 15% of our common stock. We exempted them and their subsequent transferees from triggering the Rights Plan in limited circumstances.

Bankruptcy Reorganization

      Proceedings under Chapter 11 of the Bankruptcy Code. On or about May 1, 2000, we and all nine of our subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division. On August 5, 2002, the bankruptcy court entered an order confirming our final joint plan of reorganization. We emerged from bankruptcy on September 30, 2002. In January 2003, the bankruptcy court approved amendments to our plan of reorganization and entered an order confirming our amended plan of reorganization.

      Effects of the Plan of Reorganization. Our plan of reorganization had the following effects, among others:

•  Corporate Reorganization under Chapter 11 Bankruptcy Proceedings. We and our two subsidiaries, Kitty Hawk Aircargo and Kitty Hawk Cargo, emerged from bankruptcy on September 30, 2002. Prior to this date, our seven other subsidiaries that filed for bankruptcy were merged with and consolidated into us pursuant to the plan of reorganization.

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•  New Board of Directors and Chief Executive Officer. As of October 1, 2002, James R. Craig, Gerald L. Gitner, Tamir “Thomas” Hacker, Myron Kaplan, John Malloy, Robert Peiser and Tilmon J. Reeves were appointed to our board of directors. In November 2002, Messrs. Craig and Reeves resigned from our board of directors, Robert W. Zoller, Jr. was elected Chief Executive Officer and appointed to our board of directors, and Mr. Gitner was appointed Non-Executive Chairman of the Board. John Malloy, a managing director of Everest Capital Limited, one of our largest stockholders and one of the beneficiaries of the Trust, resigned from our Board of Directors effective February 1, 2004 to focus more time on his other business pursuits.

•  Amended and Restated Certificate of Incorporation. On September 30, 2002, we filed our Second Amended and Restated Certificate of Incorporation authorizing the issuance of up to 65,000,000 shares of capital stock, consisting of 3,000,000 shares of new preferred stock, par value $0.01 per share, and 62,000,000 shares of new common stock (CUSIP No. 498326 20 6), par value $0.01 per share. On February 6, 2003, we filed an amendment to our Second Amended and Restated Certificate of Incorporation to reduce the par value of our common stock to $0.000001 per share.

•  Cancellation of Old Common Stock, Senior Notes and General Unsecured Claims. All of our previously issued common stock (CUSIP No. 498326 10 7) and 9.95% Senior Secured Notes were cancelled as of September 30, 2002. In addition, as of September 30, 2002, the claims of our former general unsecured trade creditors were cancelled. Holders of our previously issued common stock received no consideration in connection with the cancellation of their shares of common stock. Holders of our former 9.95% Senior Secured Notes received cash, common stock and warrants in connection with the cancellation of their notes, and our former general unsecured trade creditors will receive common stock in satisfaction of their claims.

•  Issuance of New Common Stock and Warrants. In March 2003, in return for debt forgiveness, settlements and other compromises, we issued common stock and warrants to acquire common stock to our former creditors in the following amounts:

				Shares of
		Shares of		Common Stock
		Common Stock		Represented by
Creditor		Issued		Warrants
Holders of our former 9.95% Senior Secured Notes			28,244,655		12,255,315
Trusts for the benefit of our former general unsecured trade creditors			7,000,000		—
An affiliate of Pegasus Aviation, Inc.			2,500,000		—
	Total		37,744,655		12,255,315

The warrants have an exercise price of $0.000001 per share, a term of 10 years and are exercisable only by a citizen of the U.S. as defined in 49 U.S.C. § 40102(a)(15). The 7,000,000 shares of common stock to be issued to our former general unsecured trade creditors were issued initially to two trusts. These trusts will hold the shares for the benefit of our former general unsecured trade creditors and will distribute the shares once all claims are allowed or dismissed.

•  Aircraft and Engine Use Agreement. On September 30, 2002, we entered into a two year Aircraft and Engine Use Agreement with the Trust to make 12 Boeing 727-200 cargo airframes and 33 aircraft engines available for operation by Kitty Hawk Aircargo. These airframes and aircraft engines had been pledged as collateral to secure our former 9.95% Senior Secured Notes. The holders of our former 9.95% Senior Secured Notes formed the Trust to manage these airframes and aircraft engines. We amended this agreement effective January 1, 2004 primarily to extend the lease terms on 11 airframes and 29 aircraft engines. See “— Aircraft Fleet — Aircraft and Engine Use Agreement” for more information about this amended agreement.

•  Aircraft Leases and Purchases. On October 1, 2002, Kitty Hawk Aircargo entered into four operating leases for Boeing 727-200 cargo aircraft with affiliates of Pegasus Aviation, Inc., or

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Pegasus Aviation. Each of these leases expire in May 2004. In addition, in June 2002 and December 2002, Kitty Hawk Aircargo purchased two Boeing 727-200 cargo aircraft from affiliates of Pegasus Aviation. Each of the six aircraft were previously leased and operated by us. See “— Aircraft Fleet — Aircraft Leases” for more information about these leases.

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Registration Rights Agreement. We entered into a registration rights agreement with each of Everest Capital Limited, Resurgence Asset Management, L.L.C. and Stockton LLC, who received significant amounts of our common stock under the plan of reorganization. Everest Capital Limited and Resurgence Asset Management also received significant amounts of warrants to purchase our common stock under the plan of reorganization. The registration rights agreement provides them with demand and piggy-back registration rights for our common stock. The registration rights are currently exercisable.

Industry Overview

      The U.S. freight transportation industry is extremely large and encompasses a broad range of transportation modes and service levels. Much of the freight shipped in the U.S. is transported on an expedited or “time-definite” basis. Expedited freight transit times vary from a few hours or overnight to as long as two, three or four days. Expedited freight includes freight of varying sizes and weights, from as small as envelopes to heavy weight or oversized freight requiring dedicated aircraft or trucks.

      In the expedited freight segment, there is generally an inverse relationship between cost per pound transported and transit time. As a result, shippers typically pay the highest cost per pound for the quickest transit times. As transit times increase, the cost per pound transported generally decreases.

      The expedited freight market is generally served by:

•  cargo airlines that provide charter or on-demand services, as opposed to medium and long-term air freight transportation services;

•  cargo airlines that contract with freight forwarders and airlines to provide medium and long-term air freight transportation services;

•  package delivery companies that provide express door-to-door service;

•  freight carriers that provide scheduled door-to-door freight delivery services using networks similar to our expedited scheduled freight network;

•  trucking companies that utilize all-truck networks generally offering two, three and four day services door-to-door or city-to-city on a common-carrier less-than-truckload basis; and

•  trucking companies that utilize trucks on a single-haul truck-load basis.

      We generally compete in the inter-city, heavy weight expedited freight segment of the U.S. freight transportation industry. This segment of the industry is highly competitive and very fragmented. The ability to effectively compete in this segment depends on price, frequency of service, cargo capacity, ability to track freight, extent of geographic coverage and reliability.

      A number of expedited freight transportation companies, including us, provide a combination of delivery services. Specifically, our expedited scheduled freight business provides regularly scheduled freight delivery services between various cities, and our cargo airline on occasion provides ad-hoc charters or ACMI services to customers needing air lift for a specified period of time.

      The demand for expedited freight services in the U.S. is primarily influenced by the health of the U.S. economy, which is cyclical in nature. Domestic durable goods manufacturing and corporate capital expenditures in the U.S. have a significant impact on the amount of freight that is transported on an expedited basis.

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      We believe the activity level of the following domestic industries, listed in decreasing order of influence, have the most significant impact on demand for our expedited scheduled freight services:

•  automotive;

•  electronics;

•  telecom and related infrastructure equipment;

•  apparel; and

•  other durable goods and equipment.

      In 2003, we believe the U.S. air freight transportation market was negatively impacted by the war in Iraq and the general downturn in the world economy, particularly in the U.S. We believe the U.S. air freight transportation market could improve in 2004 if the U.S. economy strengthens, particularly in the manufacturing sectors.

Expedited Scheduled Freight Services

      General. We operate a major independent city-to-city expedited scheduled freight network that provides time-definite transportation of predominantly heavy weight freight to and from 52 cities in the continental U.S. and selected cities in Canada through a hub and spoke network. In addition, we have business alliances that allow us to provide freight services to 17 cities in Alaska and Hawaii. We also seek business alliances to expand our expedited scheduled freight network beyond North America. Most of the freight in our network is transported from its city of origination to our hub and sorting facility in Fort Wayne, Indiana before being routed by aircraft or truck to its destination city.

      The sorting facility in Fort Wayne, Indiana is a 239,000 square foot facility constructed to meet the specific requirements of our expedited scheduled freight service and was completed in June 1999. We believe the sorting facility is capable of handling well over 2.0 million pounds on a given operational night, or about three times as much freight as we handled on an average operational night in 2003 and 2002.

      Our expedited scheduled freight service currently transports freight by aircraft to and from airports located in 24 cities. In addition, we contract with third parties to provide ground transportation to 28 other cities at which we receive and deliver freight at scheduled times. We also have business alliances to provide air service to 17 additional cities in Alaska and Hawaii. We contract with third parties to provide ground handling and storage services at all of the cities we serve, with the exception of Fort Wayne, Indiana which is operated by our employees. We continually evaluate the cities in our expedited scheduled freight network and add and remove cities as circumstances warrant.

      In general, we transport the following types of freight:

•  heavy weight freight that cannot be readily handled by a person;

•  hazardous materials that cannot be transported on passenger aircraft;

•  dimensionally oversized freight that cannot fit in passenger aircraft cargo holds;

•  freight requiring special handling or that must be attended in flight;

•  small packages; and

•  live animals.

      Our expedited scheduled freight service caters primarily to freight forwarders and logistics companies that typically arrange transportation from the shipper to our cargo facility in the city of origin and from our cargo facility in the city of destination to the recipient. We offer our customers two levels of delivery services, including overnight or next-day morning and second-day morning delivery to our cargo facility in the city of destination. Freight received each evening is available at our cargo facility in the city of destination on the morning specified by our customer, Tuesday through Saturday, throughout the year. In

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November 2003, we contracted with local cartage agents in major metropolitan areas in the continental U.S. to offer an airport-to-door delivery service on a test basis to a limited number of our customers. We began offering this service to all of our customers in March 2004. In 2003, we generated $127.4 million of revenue, or 96.2% of our total revenue, from expedited scheduled freight services.

      Customers. We currently have over 550 active freight forwarder and logistics company customers. In 2003, our top 25 customers accounted for over 72% of our expedited scheduled freight revenue, and our top five customers accounted for over 38% of our expedited scheduled freight revenue.

      The following table lists each customer that accounted for at least 5% of our expedited scheduled freight revenue in 2003 and the percentage of our expedited scheduled freight revenue derived from those customers in 2003 and 2002.

	2003					2002
			Percentage of					Percentage of
			Expedited Scheduled					Expedited Scheduled
Customer	Revenue		Freight Revenue			Revenue		Freight Revenue
	(Dollars in thousands)
Pilot Air Freight, Inc.	$	16,610		13.0	%	$	13,734		11.8	%
Eagle Global Logistics, Inc.(1)		11,192		8.8			7,849		6.8
AIT Freight Systems, Inc.		10,350		8.1			11,253		9.7

(1)  The revenue from Eagle Global Logistics, Inc. does not include approximately $3.0 million of income generated from our EGL, Inc. arbitration award. See “— Recent Developments — EGL Arbitration.”

      We generally maintain a close operating relationship with our most significant customers. We offer our customers discount programs based upon volume of freight shipped in our network and timely payment of invoices. Each of our significant customers participate in this discount program. We have no material minimum shipping contracts with our customers, including our most significant customers. As a result, our customers generally book expedited scheduled freight services with us on an as-needed basis.

      As part of our strategic planning activities for our expedited scheduled freight services network, we periodically meet with our customers to determine their projected needs for expedited freight services and the geographic areas where they need service. We use this information to determine if our service levels, service areas and capacity are adequate to meet the demands of our customers.

      Competition. We generally compete with regional delivery firms, commercial passenger airlines that provide freight service on their scheduled flights, trucking companies for deliveries of less than 1,000 mile distances and integrated freight transportation companies, such as FedEx and United Parcel Service. Many of our competitors have substantially larger freight networks, serve significantly more cities, and have considerably more freight system capacity, capital and financial resources than we do.

Air Freight Transportation Services

      General. Currently, Kitty Hawk Aircargo primarily provides air freight transportation services for our expedited scheduled freight business. In addition, Kitty Hawk Aircargo provides ACMI and ad-hoc charter transportation services for a limited number of customers. During 2003, we generated $3.4 million in revenue from ACMI contracts and $1.5 million in revenue from ad-hoc charters. By offering ACMI and ad-hoc charter services in addition to our expedited freight services, we are able to improve the utilization of our aircraft fleet and generate additional revenue.

      ACMI Contracts. Our ACMI contracts with third parties typically require us to provide the aircraft, crew, maintenance and insurance. In a typical ACMI contract, our customers are responsible for substantially all aircraft operating expenses, other than ACMI expenses, including fuel, fuel servicing, airport freight handling, landing and parking fees, ground handling expenses and aircraft push-back costs. Our ACMI contracts have a term of 30 days or more and generally provide for a minimum monthly

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revenue guarantee. In general, ACMI contracts are terminable upon 30 days’ prior written notice or if we fail to meet certain minimum performance levels.

      Ad-hoc Charters. The terms of our ad-hoc charter contracts vary from an ACMI-type arrangement to us being responsible for substantially all aircraft operating costs, including fuel, fuel servicing, airport freight handling, landing and parking fees, ground handling expenses and aircraft push-back costs. Our ad-hoc charter arrangements and contracts have terms of less than 30 days and may provide for a minimum daily revenue guarantee.

      In December 2002, we entered into a one-year ACMI contract to provide BAX Global with three Boeing 727-200 cargo aircraft. The parties agreed to terminate this contract in May 2003 due to lower than expected freight volumes in March and April 2003.

Aircraft Fleet

      Owned Aircraft. At February 29, 2004, we owned 11 Boeing 727-200 cargo aircraft of which seven were operating in revenue service. Of the remaining four, we temporarily parked three aircraft which require heavy maintenance and permanently parked one aircraft that we deemed uneconomical to return to revenue service. We expect to place two of these temporarily parked aircraft back into revenue service during the second quarter of 2004. As of March 15, 2004, we do not expect to return the third temporarily parked aircraft to revenue service during 2004.

      Aircraft and Engine Use Agreement. In September 2002, we entered into an Aircraft and Engine Use Agreement with the Trust. As of February 29, 2004, the beneficiaries of the Trust beneficially owned at least 45% of our common stock, consisting of 18,412,050 shares of our outstanding common stock and warrants to purchase 6,860,258 shares of our common stock. In addition, John M. Malloy, a former member of our board of directors, is a managing director of Everest Capital Limited, which is one of our largest stockholders and one of the beneficiaries of the Trust.

      The Aircraft and Engine Use Agreement makes 12 Boeing 727-200 airframes and 33 aircraft engines available to us for operation by Kitty Hawk Aircargo. The Aircraft and Engine Use Agreement requires us to pay for a minimum use of the airframes and aircraft engines, regardless of our actual usage. Since the inception of this agreement, we have used and currently project to use these airframes and aircraft engines more than these monthly minimums require. During 2003, we paid the Trust $5.9 million for the use of airframes and engines under this arrangement. In addition, the Trust reimbursed us $2.6 million for heavy maintenance costs which we paid on behalf of the Trust in accordance with the agreement.

      At March 15, 2004, we were operating 11 of these Boeing 727-200 cargo aircraft in revenue service. Under the terms of a settlement with the U.S. Postal Service, one of the 12 aircraft is currently unavailable for revenue service despite being economically viable to operate. We do not currently anticipate using this aircraft in revenue service in the future. Under the terms of the Aircraft and Engine Use Agreement governing this aircraft, we pay only the storage, ground risk insurance and incidental costs for this aircraft unless we operate it in revenue service.

      We entered into an amendment to the Aircraft and Engine Use Agreement effective January 1, 2004. The amendment extends, with certain minimum usage commitments, the lease terms for 11 Boeing 727-200 cargo airframes we are currently operating from September 30, 2004 to the following dates:

Number of Airframes	New Expiration Date
5	December 31, 2004
1	September 30, 2005
1	December 31, 2005
1	March 31, 2006
1	June 30, 2006
2	December 31, 2006

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      The amendment also extends the use of 29 aircraft engines from September 30, 2004 until the aircraft engines reach the earlier of the estimated time of their next heavy maintenance event or December 31, 2007. In addition, we have the option, at our discretion in October 2004, to further extend the leases on four of the five airframes whose leases now expire on December 31, 2004. For two of these airframes, the leases may be further extended up to December 31, 2007. For the other two of these airframes, the leases may be further extended up to June 30, 2008.

      Pursuant to these extension options, we will be required to meet minimum block hour flown guarantees for both the engines and airframes and will be required to share the costs of heavy maintenance events and compliance with airworthiness directives for installation of Traffic Collision Avoidance System, Enhanced Ground Proximity Warning System/ Terrain Avoidance Warning System and Reduced Vertical Separation Minimums equipment. The Trust will contribute a specified dollar amount towards these maintenance events and airworthiness directives. At this time, we anticipate that our portion of these maintenance events and airworthiness directives for each of these four option aircraft will cost us between $250,000 and $500,000 per airframe. In the event we exercise these options, the majority of the costs will be incurred in 2005.

      Aircraft Leases. In October 2002, we entered into four new operating leases for Boeing 727-200 cargo aircraft with affiliates of Pegasus Aviation with monthly lease rates ranging from $65,000 to $85,000. Each of these leases expires in May 2004. In addition to lease payments, we make monthly maintenance reserve payments in an amount determined by the flight hours or cycles of utilization during the previous month. When the leases expire, we must return each aircraft to the lessor with the same number of available flight hours or cycles on the airframe, engines, landing gear and auxiliary power units until the next scheduled maintenance event as were available at the time we originally took delivery of each of the aircraft. Each of the airframes had just undergone light or heavy maintenance when we originally took delivery of them. Under the leases, instead of performing heavy maintenance on each of the airframes prior to returning them, we may instead pay the lessor $750,000 per airframe. The $750,000 payment will be reduced by the amount of maintenance reserves paid to the lessor under the leases.

      Future Aircraft Needs. We currently anticipate that we will need 18 operational aircraft through 2004 to meet our projected needs for our expedited scheduled freight service business. While some owned and leased aircraft will require heavy maintenance during 2004, we believe that the combined pool of owned and leased aircraft available to us will provide us with enough aircraft to meet our projected aircraft needs in 2004.

      In the event our current Boeing 727-200 cargo aircraft fleet is not adequate to meet our aircraft demands, we may need to use financing arrangements, lease contracts or other operational agreements to replace or supplement our air lift capacity. Currently, we believe that a sufficient number of Boeing 727-200 cargo aircraft are available if such a need arises. Replacing our Boeing 727-200 cargo aircraft with other Boeing 727-200 cargo aircraft or another aircraft type may result in higher lease costs, operating costs and cash requirements than what we are currently experiencing. Without adequate aircraft at an economically viable cost, we may not be able to continue to operate our businesses or generate operating income or profits.

      We are in discussions with various aircraft lessors and we are currently evaluating the number and type of aircraft in our fleet and may add or remove aircraft or add new types of aircraft as circumstances warrant.

      2003 Aircraft Acquisitions. In December 2000, we amended an operating lease for one Boeing 727-200 cargo aircraft with an affiliate of Wren Equipment Finance Limited. This lease had an expiration date of December 2003. In August 2003, we purchased this aircraft from the lessor for $1.3 million as part of a settlement of the lease return conditions.

      In November 2003, we purchased two Boeing 727-200 cargo airframes together with five aircraft engines from Transamerica Aviation LLC for $600,000.

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Flight Operations and Control

      Our aircraft operations are coordinated by our personnel at our headquarters at the Dallas/ Fort Worth International Airport. Our dispatch and flight operations personnel plan and control our flight operations, including aircraft dispatching, flight tracking and crew scheduling. In addition, our personnel provide varying amounts of logistical support necessary for operating into airports served by our flights.

      To enhance the reliability of our service, it is our policy to have available at least one operational spare aircraft at all times. The spare aircraft can be dispatched on short notice to most locations we serve when a substitute aircraft is needed. Maintaining one or more operational spare aircraft allows us to better ensure the availability of aircraft for our expedited scheduled freight operations and to provide our ACMI and ad-hoc charter customers with high dispatch reliability.

Maintenance

      We perform line maintenance with our own employees, contract employees and third party contractors. Heavy airframe maintenance and aircraft engine overhauls are provided by third party FAA approved FAR Part 145 repair stations. Maintenance performed by third parties is overseen by us. We do not have any long-term maintenance contracts for our airframes or aircraft engines.

Training and Safety

      We believe that high quality personnel, intensive training programs and quality assurance are keys to our success and operating at the highest level of safety and regulatory compliance. As a result, we hire experienced flight crews and maintenance personnel and ensure that both receive ongoing training through educational workshops, enhanced training curriculums, on the job training and, in the case of pilots, extensive simulator use. In March 2004, the FAA awarded us a third consecutive Certificate of Excellence — Diamond Award because the majority of our eligible mechanics received aviation maintenance technician awards from the FAA for 2003. The Diamond Award is the highest award given to aviation maintenance technicians and airlines by the FAA and recognizes individuals as well as airlines for their efforts in training. We have an ongoing safety program that employs an industry standard database to track safety performance. Additionally, we have a FAA-designated Director of Safety as well as active safety committees throughout our company. Open facsimile and phone lines are available for employees to report safety problems, which are entered into the database and monitored for any recurrence. Direct communication between flight crews, maintenance and management is available at all times through our dispatch system.

Sales and Marketing

      Our current marketing focus is on users of air freight transportation services. We use different sales and marketing approaches to meet the unique needs of different users within our target market and to achieve our goal of maintaining long-term relationships with our customers. We promote our business through trade specific publications and trade shows, but do not engage in mass media advertising. We believe that retaining existing customers is as equally important as generating new customers and is a direct result of customer satisfaction. We continue to upgrade our database, information software and tracking systems to maintain high quality service.

      We use account managers with geographic sales responsibilities to reach all of our current and prospective customers. Each account manager is responsible for educating current and prospective customers about our service capabilities, ensuring quality service and determining how we can best serve the customer. Some account managers are also responsible for large national accounts that would not necessarily be best served by multiple regional account managers.

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Employees

      General. At February 29, 2004, we employed 619 full-time and part-time employees. Of this total, 76 employees were involved in management, sales, marketing, general and administrative functions, 304 employees were involved in our Fort Wayne, Indiana hub operations and 239 employees were involved in maintenance and flight operations, including 138 flight crew members. Other than our flight crew members, our employees are not currently represented by labor unions or subject to collective bargaining agreements. We believe we have good relationships with our employees.

      Airline Pilots Association International. The pilots of Kitty Hawk Aircargo were represented by the Kitty Hawk Pilots Association, or KPA. On October 16, 2003, the KPA ratified a merger agreement to merge with the Airline Pilots Association International, or ALPA, a national union representing airline pilots. The merger agreement was also ratified by the Executive Committee of ALPA on October 21, 2003. The merger became effective on January 1, 2004.

      On October 17, 2003, the KPA ratified its first Collective Bargaining Agreement with Kitty Hawk Aircargo. The agreement covers all flight crew members of Kitty Hawk Aircargo with respect to compensation, benefits, scheduling, grievances, seniority, and furlough and has a ten year term. The agreement provides that no pilot who is actively employed and on the payroll of Kitty Hawk Aircargo on the date of implementation of the agreement shall be furloughed during the term of the agreement, except in certain limited circumstances. The agreement also provides that at the third and sixth anniversaries of the agreement, Kitty Hawk Aircargo and the KPA each have a right to designate any two sections of the agreement for renegotiation, which may include compensation and benefits. If after 60 days Kitty Hawk Aircargo and the KPA are unsuccessful in their negotiations of these sections, the agreement provides that each party will submit their best and final position to final offer or “baseball-style” binding arbitration. The agreement was fully implemented on December 1, 2003. Kitty Hawk Aircargo does not anticipate that the agreement will have a material adverse affect on its costs or operations.

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 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.

      Our business includes operations that require the use, storage and disposal of certain chemicals in small quantities. These chemicals are classified as “hazardous materials” under, and their use, storage and disposal are regulated by, various federal, state and local environmental protection laws. These laws generally require us to eliminate or mitigate the impact of these substances on the environment. In response to these requirements, we have upgraded facilities and implemented programs to detect and minimize contamination. Due to the small quantities of chemicals used and the current programs in place, we do not anticipate any material environmental liabilities or significant capital expenditures will be incurred in the future related to these operations to comply or remain in compliance with existing environmental regulations. As a result, we do not have any reserves for environmental liabilities.

      In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly clean up such contaminated property, 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. Most of these leases require us to indemnify the lessor for any environmental contamination caused by us.

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      Currently, we are not aware of any material environmental contamination for which we are liable for the cost of removal or cleanup that we believe would have a material adverse effect on our business. In part because of the highly industrialized nature of many of the locations at which we currently operate or previously operated, there can be no assurance that all environmental contamination has been discovered for which we may be held partially or fully responsible.

Government Regulation

      General. We are subject to Title 49 of the United States Code, formerly the Federal Aviation Act of 1958, under which the DOT and the FAA exercise regulatory authority over air carriers. In addition, we are subject to regulation by various other federal, state, local and foreign authorities, including the Department of Homeland Security, through the Transportation Security Administration, or TSA, the Department of Defense and the Environmental Protection Agency. For example, the Transportation Security Administration has adopted recent regulations requiring the security screening of cargo and has recently been granted authority to levy civil penalties for security violations of their regulations. The DOT, Department of Homeland Security, TSA 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.

      Safety, Training and Maintenance Regulations. Virtually every aspect of our cargo airline is subject to extensive regulation by the FAA, 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 can impose civil monetary penalties in the event of non-compliance.

      Periodically, the FAA focuses on particular aspects of air carrier operations occasioned as a result of a major incident. These types of inspections and regulations often impose additional burdens on air carriers and increase their operating costs. We cannot predict when we will be subject to such inspections or regulations, nor the impact of such inspections or regulations.

      Other regulations promulgated by state and federal Occupational Safety and Health Administrations, dealing with the health and safety of our employees, impact our operations. This extensive regulatory framework, coupled with federal, state and local environmental laws, imposes significant compliance burdens and risks that substantially affect our operational costs.

      Hazardous Materials Regulations. The FAA exercises regulatory jurisdiction over transporting hazardous materials. We frequently 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.

      Other FAA Regulations. All of our aircraft are subject to FAA directives issued at any time, including directives issued under the FAA’s “Aging Aircraft” program, or directives 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. In addition, the FAA may mandate installation of additional equipment on our aircraft, the cost of which may be substantial. For example, we will have to install collision avoidance systems on our aircraft by December 2004 and will be required to reinforce cockpit doors. Apart from these aircraft related regulations, the FAA may adopt regulations involving other aspects of our air carrier operations, such as training, cargo loading, ground facilities and communications.

      Department of Homeland Security; Transportation Security. As a result of the passage of the Aviation and Transportation Security Act, the Congress created the Transportation Security Administration, or TSA. By law, the TSA is directed to adopt regulations for the screening of cargo transported on cargo aircraft. The TSA implemented various new regulations during 2003 involving the security screening

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of cargo. At this time, the implementation of these new regulations has not materially adversely affected our ability to process cargo or materially increased our operating costs. However, the TSA could adopt additional security and screening requirements that could have an impact on our ability to efficiently process cargo or otherwise materially increase our operating costs.

      The Department of Homeland Security has also taken over many departments and functions that regulate various aspects of our business, such as the U.S. Customs Service, and has formed a Border and Transportation Directorate. The Department of Homeland Security’s oversight of these operations and functions may affect us in ways that cannot be predicted at this time.

      Stock Ownership by Non-U.S. Citizens. Under current federal law, our cargo airline could cease to be eligible to operate as a cargo airline if more than 25% of our voting stock were owned or controlled by non-U.S. citizens. Moreover, in order to hold an air carrier certificate, our president and two-thirds of our directors and officers must be U.S. citizens.

      All of our directors and officers are U.S. citizens. Our Second Amended and Restated Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22.5% of the votes voting on or consenting to any matter, and our Second Amended and Restated 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 revenue 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 revenue service in amounts that we believe are consistent with industry standards. All-risk aircraft hull and war risk insurance is maintained for all aircraft in revenue service. This all-risk hull insurance is subject to substantial deductibles at levels that we believe are common in the industry. We maintain only ground risk insurance on aircraft that are not in revenue service. We maintain minimum cargo liability insurance if not provided by our customers under contracts. In the aggregate, we currently believe that we will be able to renew our insurance policies at comparable premium levels and with the same levels of coverage as we have experienced in the past.

      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. We also maintain business interruption insurance if an aircraft is damaged. 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 providers of ground handling services and operators of chartered aircraft and trucks used in our expedited scheduled freight network through, among other things, the obtaining of certificates of insurance.

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ITEM 2. PROPERTIES

      Our facilities generally consist of office space, crew lounge, hangars, sorting facilities, maintenance facilities and warehouse and storage space. All of our major operating facilities are constructed on property leased from airport owners. As a result, the improvements to these facilities 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. and Canada. These agreements generally relate to our use of airport facilities, but may also include leases or licenses to use ramp areas and hangar and maintenance space. In addition, at March 15, 2004, we owned 11 Boeing 727-200 cargo aircraft, various aircraft engines and various ground handling and sorting equipment.

      The following is a summary of our major operating facilities:

				Owned/
Location	Use of Space	Square Feet		Leased
Dallas/Fort Worth International Airport, Texas	Company headquarters and maintenance facility		43,400		Owned	(1)
Dallas/Fort Worth International Airport, Texas	Offices and warehouse		48,000		Leased
Fort Wayne, Indiana	Office and sorting facilities		239,000		Leased

(1)  We own the building and improvements and lease the land from the airport.

ITEM 3. LEGAL PROCEEDINGS

      General Motors. General Motors and Delphi Automotive were sued in Wayne County, Michigan by a number of air charter carriers in connection with air transportation services we arranged with them on behalf of General Motors and Delphi Automotive and for which the air charter carriers were not paid as a result of our bankruptcy. The air charter carriers are seeking to recover approximately $4.6 million from General Motors and Delphi Automotive. General Motors has named us as a third party defendant in the litigation and is seeking indemnification of up to $4.6 million against us. The parties have agreed that the indemnification claim will be heard in the bankruptcy court in Fort Worth, Texas and that we will be dismissed from the litigation in Wayne County, Michigan. While we cannot predict the outcome of this claim at this time, we believe this claim should have been discharged when our plan of reorganization was confirmed by the bankruptcy court. We will vigorously defend against General Motors’ allegations. No amounts have been accrued for this contingency.

      Other. We are also subject to various legal proceedings and other claims which have arisen in the ordinary course of business. While the outcome of such legal proceedings and other claims cannot be predicted with certainty, our management does not believe that the outcome of any of these matters will have a material adverse effect on our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      We did not submit any matter to our stockholders during the fourth quarter of 2003.

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ITEM 4A.     EXECUTIVE OFFICERS OF THE REGISTRANT

      Our executive officers are as follows:

Name	Age		Position(s)
Robert W. Zoller, Jr.		57	Chief Executive Officer, President and Director
Randy S. Leiser		45	Vice President and Chief Financial Officer
Steven E. Markhoff		37	Vice President Strategic Planning, General Counsel and Corporate Secretary
Toby J. Skaar		38	Vice President and General Manager of Kitty Hawk Cargo, Inc.
Jessica L. Wilson		35	Chief Accounting Officer

      Robert W. Zoller, Jr. has served as a member of our board of directors and as our Chief Executive Officer and President since November 2002. From April 2002 until November 2002, Mr. Zoller was a founder and active principal of International Management Solutions, LLC, a strategic planning and corporate turn-around consulting practice. Mr. Zoller served as President and Chief Operating Officer of Hawaiian Airlines, Inc. from December 1999 to April 2002. Mr. Zoller served as Senior Vice President Maintenance and Engineering for AirTran Airways, Inc. from March 1996 to December 1999, Vice President Operations for American Airlines/ AMR Eagle from September 1987 to March 1996, and Director of Flight Operations for Pacific Southwest Airlines, Inc. from July 1979 to September 1987. Mr. Zoller held accounting and financial planning management positions with General Dynamics, Inc. from July 1977 to July 1979 and NCR, Inc. from July 1975 to July 1977. In March 2003, Hawaiian Airlines filed for Chapter 11 protection under the U.S. bankruptcy code.

      Randy S. Leiser has been our Vice President and Chief Financial Officer since January 21, 2004. Prior to joining us, from March 2002 to January 2004, Mr. Leiser served as a financial advisor to Mesa Airline Group. From November 2001 to January 2002, Mr. Leiser was Vice President and Treasurer of Atlas Air, Inc., an ACMI cargo airline. From June 1992 to September 2001, Mr. Leiser served in a variety of senior finance positions with American Airlines, Inc., including Managing Director of Corporate Financial Planning, Managing Director of Corporate Development and Vice President of Finance and Chief Financial Officer of American Airline’s cargo division. From June 1987 to June 1992, Mr. Leiser was Vice President of Corporate Finance with Wertheim Schroeder, a New York investment bank. From May 1984 to June 1987, Mr. Leiser served in various staff financial management positions for American Airlines, Inc. and, from June 1981 to August 1982, Mr. Leiser was an auditor with Ernst & Young LLP.

      Steven E. Markhoff has been our Vice President Strategic Planning, General Counsel and Corporate Secretary since July 2003. Mr. Markhoff was elected Corporate Secretary in March 2003. Prior to joining us as an employee, from April 2002 until July 2003, Mr. Markhoff was a founder and active principal of International Management Solutions, LLC, a strategic planning and corporate turn-around consulting practice. From November 1999 to March 2002, Mr. Markhoff served as Vice President Acquisitions for Hawaiian Airlines, Inc. Mr. Markhoff served as General Counsel and Corporate Secretary of Mesa Air Group, Inc. from July 1998 to October 1999. Mr. Markhoff served in various positions at Kiwi International Airlines, Inc. from February 1997 to July 1998 including General Counsel and Corporate Secretary. From April 1995 to January 1997, Mr. Markhoff served as General Counsel of ValuJet Airlines, Inc. In March 2003, Hawaiian Airlines filed for Chapter 11 protection under the U.S. bankruptcy code.

      Toby J. Skaar has been the Vice President and Chief Operating Officer of Kitty Hawk Cargo since January 15, 2004. Prior to holding this position, Mr. Skaar served as Kitty Hawk Cargo’s Vice President and General Manager beginning in April 1999. Mr. Skaar served as Vice President and Chief Operating Officer of Kitty Hawk Charters, Inc. from 1990 to April 1999. Mr. Skaar has been in the freight industry for approximately 20 years.

      Jessica L. Wilson has served as our Chief Accounting Officer since August 2000. From August 1997 to July 2000, Ms. Wilson served as our Corporate Controller. From October 1990 to August 1997, Ms. Wilson was an auditor with Ernst & Young LLP, our primary accounting firm prior to April 2000. Ms. Wilson is a certified public accountant licensed in the State of Texas.

      Generally, our executive officers are elected annually by our board of directors. Our executive officers may be removed at any time by our board.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      At March 15, 2004, there were approximately 754 holders of record and beneficial owners of our common stock.

      Our common stock trades on the OTC Bulletin Board under the symbol “KTHK.OB”. The bid quotation for our common stock on the OTC Bulletin Board as of March 23, 2004 was $1.70. The following table sets forth the high and low bid quotations for our common stock on the OTC Bulletin Board market for the periods listed below, based on quotations provided to us by Citigroup. Prior to September 23, 2003, no established trading market for our common stock existed.

		High		Low
Fiscal Year 2003
	Third Quarter	$	0.59	$	0.50
	Fourth Quarter		1.38		0.59

      The bid prices set forth above represent inter-dealer prices, without retail markup, markdowns or commissions and may not represent actual transactions.

      We did not pay any cash dividends on our common stock in 2003 or 2002. 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 declared or paid at any time in the future.

ITEM 6. SELECTED FINANCIAL DATA

      The following table summarizes selected financial information that has been derived from our audited consolidated financial statements. You should read the information set forth below in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K.

      We emerged from bankruptcy on September 30, 2002 and implemented Fresh Start Accounting. In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to reflect their respective estimated fair values as of September 30, 2002. Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002. However, for purposes of this discussion, the successor results for the three months ended December 31, 2002 have been combined with the predecessor results for the nine months ended September 30, 2002. The numbers in the following table are in thousands, except per share data, average yield per chargeable weight — pounds moved, fuel — average cost per gallon and revenue block hours flown.

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									Successor			Predecessor
			Successor
									Three Months			Nine Months
			Year Ended			Year Ended			Ended			Ended			Year Ended December 31,
			December 31,			December 31,			December 31,			September 30,
			2003			2002			2002			2002			2001			2000			1999
Results of Operations
	Revenue:
		Scheduled freight	$	127,412		$	116,279		$	31,482		$	84,797		$	135,052		$	170,255		$	127,868
		Other(1)		4,992			5,524			2,994			2,530			112,437			196,578			240,149
		Services provided to discontinued operations(2)		—			—			—			—			—			—			23,007
		Total revenue		132,404			121,803			34,476			87,327			247,489			366,833			391,024
	Cost of revenue:
		Operating expenses		122,209			117,401			29,658			87,743			247,390			331,518			233,399
		Asset impairment(3)		—			—			—			—			86,316			14,812			—
		Services provided from discontinued operations(4)		—			—			—			—			—			—			112,744
		Total cost of revenue		122,209			117,401			29,658			87,743			333,706			346,330			346,143
	Gross profit (loss)			10,195			4,402			4,818			(416	)		(86,217	)		20,503			44,881
	General and administrative expenses			9,377			8,064			2,140			5,924			11,819			23,181			19,518
	Operating profit (loss) from continuing operations			818			(3,662	)		2,678			(6,340	)		(98,036	)		(2,678	)		25,363
	Other (income) expense:
		Interest expense(5)		423			2,287			154			2,133			7,051			12,751			9,754
		Reorganization expenses		—			39,629			—			39,629			42,676			17,111			—
		Other (income) expense(6)		(3,746	)		(30,701	)		(139	)		(30,562	)		(14	)		2,310			(11,706	)
		Total interest and other (income) expense		(3,323	)		11,215			15			11,200			49,713			32,172			(1,952	)
	Income (loss) from continuing operations before income taxes			4,141			(14,877	)		2,663			(17,540	)		(147,749	)		(34,850	)		27,315
	Income tax expense (benefit)			1,511			—			—			—			—			(11,661	)		2,403
	Income (loss) from continuing operations			2,630			(14,877	)		2,663			(17,540	)		(147,749	)		(23,189	)		24,912
	Loss from discontinued operations(3)(7)			—			(40,831	)		—			(40,831	)		(20,173	)		(334,131	)		(15,059	)
	Net income (loss) before extraordinary item			2,630			(55,708	)		2,663			(58,371	)		(167,922	)		(357,320	)		9,853
	Extraordinary item(8)			—			378,068			—			378,068			—			—			—
	Net income (loss)		$	2,630		$	322,360		$	2,663		$	319,697		$	(167,922	)	$	(357,320	)	$	9,853
Earnings (Loss) Per Share Data
	Continuing operations(9)		$	0.05		$	—		$	0.05		$	(1.02	)	$	(8.62	)	$	(1.35	)	$	1.46
	Discontinued operations(3)(7)(9)		$	—		$	—		$	—		$	(2.39	)	$	(1.18	)	$	(19.51	)	$	(0.88	)
	Extraordinary item(8)(9)		$	—		$	—		$	—		$	22.07		$	—		$	—		$	—
	Net earnings (loss) per share(9)		$	0.05		$	—		$	0.05		$	18.66		$	(9.80	)	$	(20.86	)	$	0.58
	Weighted average common stock outstanding(9)			50,136			—			50,000			17,133			17,133			17,129			17,021
Operating Data
	Chargeable weight — pounds moved(10)			152,756			149,588			38,992			110,596			175,954			227,176			191,094
	Average yield per chargeable weight — pounds moved(11)		$	0.8341		$	0.7773		$	0.8074		$	0.7667		$	0.7675		$	0.7494		$	0.6691
	Fuel — average cost per gallon(12)		$	1.0325		$	0.8977		$	0.9946		$	0.8653		$	0.9606		$	1.0520		$	0.6770
	Revenue block hours flown(13)			20,882			22,674			6,221			16,453			39,103			62,430			58,818
Financial Condition
	Cash and cash equivalents		$	15,729		$	10,353		$	10,353		$	4,610		$	13,472		$	14,117		$	14,964
	Total assets			47,110			47,259			47,259			47,354			171,606			442,941			922,016
	Notes payable and long-term obligations(14)			3,689			4,978			4,978			5,819			6,580			9,226			459,823
	Liabilities subject to compromise(14)			—			—			—			—			465,161			539,448			—
	Stockholders’ equity (deficit)(14)		$	23,604		$	19,263		$	19,263		$	16,600		$	(319,697	)	$	(151,775	)	$	205,117

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(1)	Other revenue is primarily generated by Kitty Hawk Aircargo for services provided through ACMI and ad-hoc charters, air freight services and management of peak season operations for the U.S. Postal Service. Also included is revenue generated from freight handling services provided to third parties other than the U.S. Postal Service. Subsequent to December 31, 2001, revenue from the U.S. Postal Service is not a significant component of our revenue.
(2)	Services provided to discontinued operations represents revenue earned by our continuing operations in service to any of our discontinued operations. This is necessary to conform 1999 results of operations to the current presentation.
(3)	Asset impairment is the non-cash expense associated with writing down the value of our long-lived assets (mainly airframes, aircraft engines and rotable parts) in connection with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(4)	Services provided from discontinued operations represents cost for services rendered by our discontinued operations to our continuing operations. This is necessary to conform 1999 results of operations to the current presentation.
(5)	Excludes interest expense of $32.7 million in 1999, which was allocated to discontinued operations.
(6)	Other (income) expense is mainly generated through gains or losses on the disposal of property and equipment, interest income and other settlements. In 2003, we recognized income of $3.0 million related to our EGL, Inc. arbitration award. In 2002, we recognized income of $29.4 million related to a settlement of claims against the U.S. Postal Service.
(7)	Loss from discontinued operations is the net operating results of operations that ceased or were disposed of during our bankruptcy proceedings and include the operations of our former wide-body cargo airline, the non-continental U.S. operations of our expedited scheduled freight network, our former air logistics service provider, our former small aircraft maintenance operation and our former subsidiary which developed an aircraft maintenance inventory and records software system.
(8)	The extraordinary item in 2002 represents the gain from the extinguishment of debt net of the reorganization equity value distributed, or to be distributed, to our former creditors pursuant to our plan of reorganization.
(9)	No earnings per share data is presented for the year ended December 31, 2002 because the three months ended December 31, 2002 and the nine months ended September 30, 2002 are not comparable due to the cancellation of our common stock and the application of Fresh Start Accounting at September 30, 2002. For this reason, these two periods may not be combined and used for year-over-year earnings per share comparisons. In 2002, the weighted average common stock outstanding for the predecessor period reflects the shares of common stock outstanding at September 30, 2002, which were cancelled under our plan of reorganization. In 2002, the weighted average common stock outstanding for the successor period reflects the shares of common stock and warrants to acquire common stock to be issued under our plan of reorganization, which are deemed to be issued and outstanding as of October 1, 2002 for purposes of this calculation. In addition, because the warrants have a nominal exercise price, the shares of common stock underlying the

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warrants are also deemed to be outstanding for the presentation of the weighted average common stock outstanding for the successor period.

(10)	Chargeable weight — pounds moved is the greater of the actual weight of or the minimum deemed weight based on the dimensions of the items transported in our expedited scheduled freight network.
(11)	Average yield — chargeable weight — pounds moved is a calculation of our scheduled freight revenue divided by the chargeable weight — pounds moved in the expedited scheduled freight network.
(12)	Fuel — average cost per gallon is the average cost per gallon of delivering jet fuel into our aircraft, including the cost per gallon of the jet fuel, transportation fees to get the jet fuel to the airport, taxes, airport fees and costs associated with fueling the aircraft.
(13)	Revenue block hours flown are the block hours flown by Kitty Hawk Aircargo for the expedited scheduled freight network, for customers on an ACMI or ad-hoc charter basis and, prior to December 31, 2001, for contracts with the U.S. Postal Service.
(14)	The variances result from our bankruptcy proceedings during which a significant amount of our outstanding notes payable and long-term obligations were cancelled and converted into shares or the right to receive shares of our new common stock or warrants to acquire shares of our new common stock and from the write-off of the stockholders’ deficit that had accumulated through September 30, 2002 in connection with our Fresh Start Accounting adjustments.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

      Kitty Hawk is a holding company and currently operates through its two wholly-owned subsidiaries, Kitty Hawk Cargo and Kitty Hawk Aircargo.

      Through Kitty Hawk Cargo, we currently operate a major independent city-to-city expedited scheduled freight network in the continental U.S. and selected cities in Canada providing next-morning and two-day freight service. In addition, we have business alliances that allow us to provide freight services to Alaska and Hawaii. As an independent freight network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients. As a result, we primarily provide freight services to freight forwarders and logistics companies who either transport the freight to and from our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services. In November 2003, on a test basis, we began offering an airport-to-door delivery option to a limited number of our customers by contracting with local cartage agents in major metropolitan areas of the continental U.S. We began offering this service to all of our customers during March 2004. On occasion, for an additional fee, we arrange for the initial pick up of freight from shippers as well as the final delivery to recipients. For the year ended December 31, 2003, we generated approximately 96% of our revenue from our expedited scheduled freight network.

      Kitty Hawk Aircargo, our cargo airline, provides air freight transportation services for Kitty Hawk Cargo’s expedited scheduled freight network. In addition, Kitty Hawk Aircargo provides ACMI and ad-hoc charters for a variety of customers when its aircraft are not being used in our expedited scheduled freight network. By providing ACMI and ad-hoc charters, Kitty Hawk Aircargo is able to improve the utilization of its aircraft and generate additional revenue when its aircraft would otherwise be idle.

      Our expedited scheduled freight business relies on customers who need time-definite delivery on an as-needed basis. Because the freight is shipped on an as-needed basis, we do not have long-term contracts with our customers. Without long-term customer contracts, the overall demand for our expedited freight services is primarily influenced by the health of the U.S. economy, which is cyclical in nature. In addition, we believe that most of the freight transported in our network relates to the automotive, electronics, telecom and related infrastructure equipment, apparel and other durable goods and equipment industries. These industries tend to be seasonal in nature and, as a result, our business is also seasonal with the third and fourth quarters being the strongest revenue quarters. Because of the foregoing factors, the amount of freight shipped in our expedited scheduled freight network can fluctuate significantly. In addition, our expedited freight services network is experiencing increased competition from integrated carriers and trucking networks that provide lower cost second- and third-day alternatives to our overnight freight services.

      Our expedited scheduled freight network and cargo airline also have large fixed costs which cannot be easily reduced in the short term. Therefore, we typically have seasonal working capital needs in the first and second quarters of the year. To the extent that our expedited freight business is both seasonal and tied to the economic trends of the consumer and manufacturing sectors of the U.S. economy, we may incur additional working capital needs during the third and fourth quarters of the year to the extent that our revenues do not allow us to cover our relatively high fixed costs.

      During 2003, we have focused on reducing both our fixed and variable costs. We have also focused on maintaining the efficiency and reliability of our network resulting in an on time delivery performance of 99.6% and a scheduled cargo delivery completion rate of 99.9% in 2003 to our customers.

      One of our most significant and variable costs is the cost of jet fuel. Because our network bears the cost of increases in jet fuel costs, we seek to recapture the increase in jet fuel costs through increasing our prices to our customers and/or through temporary fuel surcharges. We record these fuel surcharges in our scheduled freight revenue. Historically, we have been able to largely offset the rising costs of jet fuel through these fuel surcharges and/or by raising our prices to our customers. However, if we are unable due to competitive pressures or other reasons to raise our fuel surcharge and/or our prices, we may be forced to absorb increases in jet fuel costs, which could negatively affect our results of operations.

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      During 2003, we purchased jet fuel from various suppliers at then current market prices. We do not currently have any short or long-term contracts for jet fuel, nor do we currently have any agreements to hedge against changes in the price of jet fuel. From time to time, we review the price and availability of jet fuel. If we have the opportunity and ability to enter into supply contracts for jet fuel or arrangements to hedge against changes in jet fuel prices, we may enter into such agreements or arrangements. In 2003, we did not have any fuel supply contracts or fuel hedge arrangements. During 2003, our jet fuel averaged $1.03 per gallon and we used between 2.1 million and 2.8 million gallons of jet fuel per month, depending on the mix of aircraft employed in our network and the amount of freight shipped. At current levels of operations in our expedited scheduled freight business, each $.01 change in the price per gallon of jet fuel results in a change in our annual fuel cost of approximately $290,000. The following table shows our total jet fuel expense and as a percentage of total operating expenses of our expedited scheduled freight network during 2003, 2002 and 2001.

					Jet Fuel Expense
					as a Percentage of
	Total Cost		Average Cost		Scheduled Freight
Year	(In millions)		(per gallon)		Operating Expenses
2003	$	30.8	$	1.03		25.5	%
2002		26.8		0.90		23.6
2001		35.1		0.96		20.8

      At March 15, 2004, we had $11.3 million of cash on hand. We believe that our cash flow from operations and cash on hand will be sufficient to meet our anticipated cash requirements for the remainder of 2004. To supplement this liquidity, we entered into a new $10.0 million revolving credit facility with Wells Fargo Business Credit in March 2004, replacing our $5.0 million receivables purchase facility. In addition to our normal operating cash requirements, we believe our cash requirements for 2004 include, but are not limited to, seasonal working capital requirements, projected capital expenditures, heavy aircraft maintenance events, investments in information technology, meeting our lease return conditions with Pegasus Aviation and future investments in aircraft. In addition, the TSA may adopt additional regulations regarding stringent cargo security screening procedures which may have a material impact on our costs and cash flow. Additionally, the TSA has been granted authority to levy civil penalties and fines.

      We are in discussions with various aircraft lessors and we are evaluating the number and type of aircraft in our fleet and may add or remove aircraft or add new types of aircraft as circumstances warrant. Replacing our Boeing 727-200 cargo aircraft with other Boeing 727-200 cargo aircraft or another aircraft type may result in higher lease costs, operating costs and cash requirements than what we are currently experiencing. If we decide to replace some or all of our Boeing 727-200 cargo aircraft with a different aircraft type, we may experience significant cash integration costs in 2004 and beyond for training, maintenance spares, lease deposits and other related integration expenses. We are unable to quantify the amount or timing of these costs at this time. In addition, should we decide to replace some or all of our Boeing 727-200 cargo aircraft with another aircraft type, we may be required to writedown our existing aircraft parts inventory if it is determined to be in excess of our then current needs. See “Critical Accounting Policies — Aircraft Parts Inventory Accounting.”

      We emerged from bankruptcy on September 30, 2002 and adopted Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”, or Fresh Start Accounting. In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to reflect their respective estimated fair values as of September 30, 2002. Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002. However, for purposes of this discussion, the successor results for the three months ended December 31, 2002 have been combined with the predecessor results for the nine months ended September 30, 2002 and then compared to the successor results for the fiscal year ended December 31, 2003 and the predecessor results for the fiscal year ended December 31, 2001. Differences between periods due to Fresh Start Accounting are explained when necessary.

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Explanation of Statement of Operations Items

      Revenue. Scheduled freight revenue is generated from freight transportation services provided by our expedited scheduled freight network. Other revenue includes:

•  Postal contracts revenue, which is generated from ACMI contracts with the U.S. Postal Service, ground handling and sorting services related thereto and management of peak season operations. Subsequent to December 31, 2001, this is not a significant component of our revenue;

•  ACMI revenue, which is generated from contracts with third parties by our cargo airline under which we generally provide the aircraft, crew, maintenance and insurance, known as ACMI, on short to medium-term contacts; and

•  Miscellaneous revenue, which is generated from ad-hoc charters provided by our cargo airline, maintenance revenue and freight handling services provided for third parties, other than the U.S. Postal Service.

      Cost of Revenue. Included in our cost of revenue are the following major categories:

•  Flight Expense, which consists of costs related to the flight operations of our cargo airline, including:

o flight crew member wages, benefits, training and travel;

o operating lease expense for leased aircraft operated and flown by Kitty Hawk Aircargo;

o insurance costs related to aircraft operated and flown by Kitty Hawk Aircargo; and

o flight operations and airline management costs, including associated wages and benefits.

•  Transportation Expense, which consists of costs related to the physical movement of freight between our cargo facilities and which is not otherwise classified as flight expense, including:

o third party aircraft charter expense;

o aircraft ground operating costs, such as landing and parking fees charged by airports and cost of deicing aircraft;

o trucking expenses for cities in our expedited scheduled freight network that are not served by our aircraft; and

o pickup and/or final delivery expenses as directed by customers.

•  Fuel, which consists of the all-inclusive cost of all jet fuel consumed in our expedited scheduled freight network and on ad-hoc charters that include jet fuel in the charter service, and the cost of all taxes, fees and surcharges necessary to deliver the jet fuel into the aircraft.

•  Maintenance Expense, which consists of costs to maintain airframes and aircraft engines operated by our cargo airline, including:

o wages and benefits for maintenance, records and maintenance management personnel;

o costs for contract mechanics at cargo facility outstations;

o costs of aircraft parts and supplies; and

o accruals for certain light C-checks and certain heavy shop visits for engines. See “— Critical Accounting Policies — Airframe and Aircraft Engine Maintenance.”

•  Freight Handling Expense, which consists of costs to handle the loading and unloading of freight on aircraft and trucks operating within our expedited scheduled freight network, including:

o wages and benefits for our Fort Wayne, Indiana hub sort and ramp operations personnel;

o contract services to warehouse, load and unload aircraft principally at cargo facility outstations; and

o wages and benefits for our outstation cargo facility personnel and field operations managers.

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•  Depreciation and Amortization, which consists of depreciation and amortization expenses for our owned airframes and aircraft engines and freight-handling equipment.

•  Asset Impairment, which consists of recognizing the lost value of assets in our on-going operations under Statement of Financial Accounting Standards No. 144 — “Accounting for the Impairment or Disposal of Long-Lived Assets” which requires current period recognition of the reduction in the value of an asset that can no longer reasonably be expected to generate adequate net cash flows to recover its value or are no longer of such utility as to be utilized over the originally expected life.

•  Operating Overhead, which consists of direct overhead costs related to operating our expedited scheduled freight network and cargo airline, including:

o wages and benefits for operational managers and customer service personnel of Kitty Hawk Cargo;

o expedited scheduled freight network sales and marketing expenses;

o rent and utilities;

o bad debt expense; and

o general operational office expenses.

      General and Administrative Expenses. General and administrative expenses consist of salaries, benefits and expenses for executive management (other than operational management of Kitty Hawk Aircargo and Kitty Hawk Cargo), information technology, human resources, accounting, finance, legal and corporate communications personnel. In addition, costs for strategic planning, financial planning and asset acquisitions are included in general and administrative expenses. Also included are legal and professional fees and consulting fees.

      Discontinued Operations. Loss from discontinued operations is the net operating results of operations that ceased or were disposed of during our bankruptcy proceedings and include the operations of our former wide-body cargo airline, the non-continental U.S. operations of our expedited scheduled freight network, our former air logistics service provider, our former small aircraft maintenance operation and our former subsidiary which developed an aircraft maintenance inventory and records software system.

Critical Accounting Policies and Estimates

      Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires us to use estimates and assumptions to determine the value of our assets and certain liabilities and the amount of certain expenses. We base these estimates and assumptions upon the best information available to us at the time we make the estimates or assumptions. Our estimates and assumptions could change materially as conditions within and beyond our control change. As a result, our actual results could differ materially from our estimates. The most significant accounting policies include:

•  reserves related to airframe and aircraft engine maintenance;

•  allowance for doubtful accounts;

•  reserves related to aircraft lease return conditions;

•  accounting for aircraft parts inventory; and

•  our valuation of assets pursuant to Fresh Start Accounting.

      The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary for determining the value of related assets, liabilities or expenses. A full description of all of our significant accounting policies is included in note 2 to our consolidated financial statements included elsewhere in this annual report on Form 10-K.

      Airframe and Aircraft Engine Maintenance Reserves. To keep our aircraft in airworthy condition, we must perform scheduled heavy airframe and aircraft engine maintenance. Accounting guidelines allow us to either spread the cost of this maintenance over the period of time that elapses between these

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maintenance events by accruing maintenance reserves prior to incurring the actual maintenance event or to capitalize the maintenance event as it occurs and amortize the capitalized cost over the estimated useful life of the asset.

      Upon emerging from bankruptcy on September 30, 2002, we determined that in light of declining fair market values for Boeing 727-200 cargo aircraft and the general availability of replacement cargo aircraft that we would plan to permanently retire some of our owned airframes and aircraft engines at their next scheduled heavy maintenance event rather than performing the scheduled heavy maintenance event. As a result, we were not required to, and did not, establish maintenance reserves for those airframes and aircraft engines.

      However, we did establish airframe maintenance reserves for light C-checks for those owned airframes we did not plan to retire which were either in revenue service at September 30, 2002 or which we had intention as of September 30, 2002 to reintroduce into revenue service. We also established aircraft engine heavy shop visit maintenance reserves for those owned Pratt Whitney JT8D-9A aircraft engines which were in serviceable condition and available for revenue service as of September 30, 2002. As a result, on September 30, 2002, we established $4.4 million of maintenance reserves on three owned airframes and 37 owned aircraft engines.

      For our airframes and aircraft engines for which we did establish maintenance reserves at September 30, 2002, we increase our airframe and aircraft engine reserve balances by a rate which reflects the expected cost of the next heavy scheduled maintenance event divided by the expected incremental flight hours of use of the airframe and aircraft engine before its next heavy maintenance event. We reduce our airframe and aircraft engine reserves for the actual cost of completing the airframe or aircraft engine maintenance event when it occurs. We currently accrue reserves of up to $850,000 per airframe for light C-checks and $315,000 per aircraft engine for heavy shop visits which approximates our historical costs and quotes from vendors. In the event we perform a heavy C-check, we capitalize the costs and amortize the capitalized costs over the expected useful life of the airframe.

      During 2003, we accrued $1.1 million of maintenance reserves for light C-checks and heavy shop visits for our owned airframes and aircraft engines. At December 31, 2003, we maintained maintenance reserves of $5.9 million on three owned airframes and 33 owned aircraft engines. During 2003, we did not perform any scheduled heavy maintenance on our owned airframes or aircraft engines. Therefore, the reserves were not reduced and we did not capitalize any maintenance costs.

      At least on an annual basis, we review our future airframe and aircraft engine maintenance reserve accrual rates based on our recent cost experience to complete airframe and heavy aircraft engine maintenance events and we adjust the year-end airframe and aircraft engine reserve balances to reflect current aircraft fleet composition plans. To the extent our aircraft fleet composition plans change from prior plans and the change affects airframes and aircraft engines for which airframe and aircraft engine reserves have been established, we may realize a significant change in the amount of airframe and aircraft engine maintenance reserves required at that time. A change in the amount of airframe and engine maintenance reserves would result in either an increase in reported maintenance expense if the reserve requirement increased or a reduction in maintenance expense if the reserve requirement decreased. In addition, if the cost of airframe or heavy aircraft engine maintenance events increase, we may be required to increase our maintenance reserves. Any changes in our maintenance reserves could be material to our results of operations.

      For airframes and engines we acquired after September 30, 2002, or for airframes and engines owned as of September 30, 2002 that we did not intend as of September 30, 2002 to reintroduce into revenue service but which are subsequently reintroduced, the actual cost of scheduled airframe maintenance and heavy shop visits on aircraft engines will be capitalized and amortized over the expected life of the airframe or aircraft engine until the next heavy maintenance event. We base our estimate of the expected life of the airframe or aircraft engine until the next heavy maintenance event on our historical experience. If we use the airframe or aircraft engine more than expected or if the airframe or aircraft engine suffers a premature failure, we may be required to accelerate the write-off of these capitalized maintenance costs.

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Any write-offs could be material to our results of operations. During 2003, we did not perform any light C-checks, heavy C-checks or heavy shop visits for airframes and aircraft engines which met this criteria.

      We also maintain separate maintenance reserves for our leased airframes and engines for which we are required to comply with lease return conditions in the applicable lease. At September 30, 2002, the leased aircraft reserve was $3.6 million for five airframes and 15 aircraft engines. During 2003, we performed one light C-check in the amount of $700,000 and one aircraft engine heavy shop visit for $134,000. During 2003, we purchased one of the leased aircraft and used $750,000 of the light C-check reserve to offset the $900,000 spent on the heavy C-check for this airframe. Because the leases expire in May 2004, any balances that remained in the scheduled maintenance reserves for leased airframes and aircraft engines at December 31, 2003 were reclassified to lease return condition reserves. See “— Lease Return Condition Reserves.”

      Allowance for Doubtful Accounts. We extend credit to our customers based upon an evaluation of several factors including:

•  the amount of credit requested relative to the existing or anticipated amount of customer revenue;

•  the customer’s financial condition (when we obtain it); and

•  the customer’s actual payment history, including resolution of disputed invoices.

      In some cases, we extend open credit to customers that refuse to make financial disclosure to us, but that have an extended history of timely payments to us and low levels of disputed invoices. We do not typically require our customers to post a deposit or supply collateral.

      We keep an allowance for doubtful accounts reserve as an offset to our accounts receivable in the event a customer’s balance cannot be collected. This reserve is based on current market conditions, periodic reviews of customer credit worthiness and an analysis of the amount of our total customer receivable balance that we expect is not collectable.

      If we determine that a customer’s balance cannot be collected, we write-off the receivable against the allowance for doubtful accounts reserve. Once a customer account is written-off, the customer is typically not allowed to have any open credit with us. Since emerging from bankruptcy, our allowance for doubtful accounts reserve has consistently been within our expectations.

      During 2003, we charged off uncollectible accounts in the amount of $0.3 million. As of December 31, 2003, we have a significant concentration of credit risk as approximately 57% of our outstanding accounts receivable were from 10 customers and 16% of our outstanding accounts receivable was attributable to one customer. A payment default by one of these customers could have a material adverse effect on our results of operations.

      Lease Return Condition Reserves. When we lease aircraft that we operate, the leases generally require us to return the aircraft to the lessor with the same number of hours to the next scheduled heavy maintenance event for the airframe and aircraft engines as when we began leasing the aircraft or to make specified cash payments to the lessor in lieu thereof. We accrue lease return condition reserves based on our estimated cash outlay to meet the contractual lease return conditions at the end of the lease term. We base the lease return condition reserve on our estimate of the following factors:

•  the number of hours we expect to operate the aircraft prior to returning it to the lessor;

•  the expected amount of maintenance reserves we expect to pay to the lessor during the lease; and

•  the cost to meet the return conditions in the lease.

      If our estimate turns out to be different than the actual cost to comply with the return conditions, we will be required to either take a charge or a credit to maintenance expense for the difference. We review the estimates underlying the lease return condition reserves on a quarterly basis and adjust the reserves for material differences, of which none have occurred since we emerged from bankruptcy. In May 2004, we expect to return four aircraft subject to lease return conditions. As of December 31, 2003, we maintained lease return reserves of $2.5 million to meet our estimated lease return conditions. We do not currently

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expect a material difference between the actual cost of complying with the return conditions and our reserves.

      Aircraft Parts Inventory Accounting. We have a stock of aircraft parts and supplies that we use to perform certain maintenance on our fleet of owned and leased Boeing 727-200 cargo aircraft. At December 31, 2003, the balance of our aircraft parts and supplies inventory was $5.4 million. This balance is based upon the sum of the estimated fair values of the aircraft parts and supplies inventory established during our Fresh Start Accounting adjustments at September 30, 2002, the average cost of the items acquired or repaired since September 30, 2002, and the value of items added to inventory from retired aircraft since September 30, 2002, less the average cost of parts and supplies removed from inventory to be used in aircraft maintenance. As of December 31, 2003, we did not have an aircraft parts and supplies inventory valuation reserve.

      We currently treat all owned aircraft parts as inventory, rather than as property and equipment, and thus we do not use the rotable parts pooling concept for treatment of parts as fixed assets. We do this because the majority of our fleet is leased or operated under an Aircraft and Engine Use Agreement. These agreements generally require us to maintain the aircraft in an airworthy condition, which requires us to periodically install parts and supplies on the airframe or aircraft engines. Because the parts and supplies become a permanent fixture to the leased airframe or aircraft engine, installing the part effectively transfers ownership of the part from us to the lessor.

      As a part of our Fresh Start Accounting adjustments, we estimated the opening value of these aircraft parts and supplies based on then recent purchases of similar parts and supplies, quotes from vendors or then recent costs incurred to repair similar parts. At September 30, 2002, we established an opening value of aircraft parts and supplies of $5.8 million. During 2003, we added parts and supplies to inventory at the cost incurred to purchase, or the cost incurred to repair some removed parts that we chose to repair. In addition, during 2003, we removed some economically viable parts and supplies from our retired aircraft and assigned a pro-rata share of the net book value of the retired aircraft to the parts added to inventory.

      Because parts can be added to inventory at either the cost to repair such a part or the pro-rata share of the net book value of the retired aircraft, the cost of parts added to inventory may be less than market value. Because we have limited availability of some aircraft parts and supplies, we may need to acquire additional parts in the future at then fair market values which could result in an increase in maintenance expense in the future which, in turn, could have a material impact on our financial results.

      As parts and supplies are used on an airframe or aircraft engine during routine line maintenance, the average cost associated with the part or supply item is charged to maintenance expense. If the parts or supplies are being used during a light C-check or an engine heavy shop visit, the average cost of the part or supply item is charged to the maintenance reserve for that airframe or aircraft engine or capitalized depending on the status of the airframe or aircraft engine. If the parts or supplies are being used during a heavy C-check, the average cost of the part or supply item is capitalized.

      Upon emerging from bankruptcy on September 30, 2002, we did not separately identify the amount of aircraft parts and supplies inventory required to continue to operate our fleet of Boeing 727-200 cargo aircraft and the amount which could be deemed excess at that time. As of December 31, 2003, we have not completed that analysis. Furthermore, the amount of aircraft parts and supplies inventory necessary to operate our Boeing 727-200 fleet is dependent upon the number of Boeing 727-200 cargo aircraft that we continue to operate. To the extent our aircraft fleet composition plans change in the future which results in a reduction in the number of Boeing 727-200 cargo aircraft that we operate, this fleet plan modification could result in a reduction in the amount of aircraft parts and supplies inventory we need to maintain our current fleet of this aircraft type. If we conclude we have excess aircraft parts and supplies inventory than our current or anticipated future needs, we may be required to writedown the value of our aircraft parts and supplies inventory. Any such writedown could have a material impact on our financial results.

      At September 30, 2002, we had a substantial amount of aircraft parts and supplies inventory and, as a result, we have not had to acquire much additional inventory to satisfy our operating requirements. Because we did not acquire a broad assortment of additional parts and supplies inventory to meet our

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operating requirements, we do not have recent quotes from vendors for many of our aircraft parts and supplies with which to update the market value of our aircraft parts and supplies inventory. If we determine that the quantity of parts on hand are in excess of our current needs and the fair market value of our aircraft inventory has declined from the values established at the time of our Fresh Start Accounting adjustments as of September 30, 2002, this revaluation of the aircraft parts inventory could result in a writedown in the value of our aircraft parts and supplies. Any such writedown could have a material impact on our financial results.

      Valuations Pursuant to Fresh Start Accounting. When we exited bankruptcy on September 30, 2002, we adopted the provisions of Statement of Position 90-7 entitled, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”, or Fresh Start Accounting. Under Fresh Start Accounting, we recorded adjustments to our assets, liabilities and stockholders’ equity because:

•  the fair market value of our assets after September 30, 2002 were less than the total of the post-petition liabilities and allowed claims which were converted into shares of our new common stock; and

•  the holders of our previously issued voting stock did not receive 50% or more of our new voting stock under our plan of reorganization.

      Under Fresh Start Accounting, all of our assets and liabilities were adjusted to their estimated fair market value as of September 30, 2002. We determined the fair market values through a combination of appraisals done by third parties, our management’s best estimate of value based on current knowledge of the industry and sales transactions for similar assets which had occurred over the twelve months prior to our emergence from bankruptcy.

      We also hired financial advisors to determine the estimated reorganization equity value of our company as of September 30, 2002. The financial advisors based their valuation on two customary methods: a discounted cash flows method using our projected operating results and a comparable company analysis method. The results of their valuation determined that the fair market value of our reorganized company was between $12.9 million and $16.6 million.

      The fair market value of our net assets exceeded the high end of the estimated reorganization equity value by $2.9 million. As a result, we further reduced the value of our property and equipment and certain other assets on a proportionate basis by $2.9 million.

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Results of Operations

      The following table presents, for the years indicated, our consolidated statement of operations data expressed as a percentage of total revenue:

			Year Ended December 31,
			2003			2002			2001
Revenue:
	Scheduled freight			96.2	%		95.5	%		54.6	%
	Other			3.8			4.5			45.4
		Total revenue		100.0			100.0			100.0
Cost of revenue:
	Operating expenses			92.3			96.4			100.0
	Asset impairment			—			—			34.8
		Total cost of revenue		92.3			96.4			134.8
Gross profit (loss)				7.7			3.6			(34.8	)
General and administrative expenses				7.1			6.6			4.8
Operating income (loss) from continuing operations				0.6			(3.0	)		(39.6	)
Other (income) expense:
	Interest expense			0.3			1.9			2.8
	Reorganization expense			—			32.5			17.3
	Other (income) expense			(2.8	)		(25.2	)		—
		Total interest and other (income) expense		(2.5	)		9.2			20.1
Profit (loss) from continuing operations before income taxes				3.1			(12.2	)		(59.7	)
Income tax expense				1.1			—			—
Profit (loss) from continuing operations before discontinued operations and extraordinary item				2.0			(12.2	)		(59.7	)
Loss from discontinued operations				—			(33.5	)		(8.2	)
Extraordinary item				—			310.4			—
Net profit (loss)				2.0	%		264.7	%		(67.9	)%

Year ended December 31, 2003 compared to the year ended December 31, 2002

Revenue

      General. The following table presents, for the years indicated, the components of our revenue in dollars and as a percentage of our total revenue and the percentage change from year-to-year:

			2003					2002
					Percentage					Percentage			Percentage Change
					of Total					of Total			from
			Revenue		Revenue			Revenue		Revenue			2002 to 2003
			(Dollars in thousands)
Scheduled freight			$	127,412		96.2	%	$	116,279		95.5	%		9.6	%
Other:
	Postal contracts			—		—			920		0.7			(100.0	)
	ACMI			3,375		2.6			945		0.8			257.1
	Miscellaneous			1,617		1.2			3,659		3.0			(55.8	)
		Total revenue	$	132,404		100.0	%	$	121,803		100.0	%		8.7	%

      Scheduled Freight. For the year ended December 31, 2003, the $11.1 million increase in our scheduled freight revenue was due to an increase of 7.3% in our average yield and a 2.1% increase in our chargeable weight from the year ended December 31, 2002. Our yield increase was primarily due to a

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124% increase in the fuel surcharge revenue to mitigate the increases in our fuel expense, and to a lesser extent, a better product and geographic mix of next-morning freight. Our chargeable weight increase was primarily due to a strengthening economy toward the end of 2003 offset in part by the economic slowdown earlier in the year which we believe was due to uncertainties stemming from the war in Iraq.

      Postal Contracts. In 2002, our postal contract revenue was generated by a limited amount of peak season ad-hoc flying for the U.S. Postal Service in December. During 2003, we did not perform any ad-hoc services for the U.S. Postal Service.

      ACMI. During the first five months of 2003, we generated $3.4 million of revenue from a one-year ACMI contract we entered into in December 2002 to provide BAX Global with three Boeing 727-200 cargo aircraft. This contract was cancelled by mutual agreement effective May 31, 2003. The cancellation was principally due to lower than expected freight volumes during March and April of 2003. During 2002, we generated ACMI revenue by providing one Boeing 727-200 cargo aircraft to a third party over a four month period.

      Miscellaneous. For the year ended December 31, 2003, our miscellaneous revenue decreased $2.0 million. The 2003 revenue resulted from flying ad-hoc charter services for several customers which generated $1.5 million of revenue and from maintenance work on an aircraft operated by us, but owned by the Kitty Hawk Collateral Liquidating Trust, on which we were not obligated to perform maintenance under our Aircraft and Engine Use Agreement. Our miscellaneous revenue for the year ended December 31, 2002 included generating $1.1 million of aircraft ground handling revenue for customers at one of our company operated outstations, which ceased in July 2002 when we contracted with a third party to provide our aircraft ground handing services at this same outstation and from flying ad-hoc charter services which generated $2.3 million of revenue.

Cost of Revenue

      General. The following table presents, for the years indicated, the components of our cost of revenue in dollars and as a percentage of total revenue and the percentage change from year-to-year:

		2003					2002
				Percentage					Percentage			Percent Change
		Cost of		of Total			Cost of		of Total			from
		Revenue		Revenue			Revenue		Revenue			2002 to 2003
		(Dollars in thousands)
Flight expense		$	26,111		19.7	%	$	28,905		23.7	%		(9.7	)%
Transportation expense			16,915		12.8			8,841		7.3			91.3
Fuel			30,849		23.3			26,794		22.0			15.1
Maintenance expense			11,048		8.3			14,158		11.6			(21.9	)
Freight handling expense			24,717		18.7			23,166		19.0			6.7
Depreciation and amortization			3,835		2.9			5,438		4.5			(29.5	)
Operating overhead			8,734		6.6			10,099		8.3			(13.5	)
	Total cost of revenue	$	122,209		92.3	%	$	117,401		96.4	%		4.1	%

      Flight Expense. For the year ended December 31, 2003, flight expense decreased $2.8 million or 9.7% from the year ended December 31, 2002. This decrease was primarily a result of reducing aircraft lease expense by $1.6 million, savings of $0.7 million from the renewal of our aircraft liability insurance and a 7.9% reduction in revenue block hours flown by our owned and leased aircraft. Aircraft lease expense decreased in 2003 compared to 2002 due to a variety of factors including the renegotiation of our aircraft lease agreements through our bankruptcy proceedings, the purchase of a previously leased aircraft in August 2003 and a change in the utilization of our aircraft. Aircraft liability insurance decreased as a result of reduced market values for our owned and leased aircraft fleet and lower insurance rates.

      The reduction of 7.9% in revenue block hours flown was due to our cargo airline flying 2,063 fewer hours for the scheduled freight network and 228 fewer hours for the U.S. Postal Service. These reductions were offset by flying a combined 500 more hours for our ACMI and ad-hoc charter customers during 2003

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as compared to 2002. The reduction in the hours flown by the cargo airline on behalf of the scheduled freight network was a result of chartering larger third party cargo aircraft in place of our Boeing 727-200 cargo aircraft due to higher demands for our freight services at various times of the year. The expenses related to chartering these aircraft is included in transportation expense versus flight expense.

      Transportation Expense. For the year ended December 31, 2003, transportation expense increased $8.1 million, or 91.3%, from the year ended December 31, 2002. Of this increase, $7.5 million is due to chartering additional third party cargo aircraft which were flown in the scheduled freight network. In December 2002, we signed a one-year agreement with an affiliate of BAX Global to charter two Douglas DC-8 cargo aircraft. This contract was cancelled by mutual agreement effective May 31, 2003. These chartered aircraft allowed us to carry higher freight volumes at a more economical rate per hour as compared to four Boeing 727-200 cargo aircraft. However, due to lower than expected demand during March and April 2003, the freight volumes did not justify the continued charter of these two Douglas DC-8 cargo aircraft. During the fourth quarter of 2003, we chartered one Airbus A-300 cargo aircraft from another party to provide additional capacity due to higher freight volumes from the west coast. The use of these chartered aircraft caused transportation expense to increase as a percent of total revenue as costs were shifted from flight expense.

      Fuel. For the year ended December 31, 2003, fuel expense increased $4.1 million, or 15.1%, as compared to the year ended December 31, 2002. Fuel expense is comprised of two elements: our average cost per gallon and the number of gallons used by the aircraft. Our average cost per gallon of fuel increased $0.13, or 15.0%, for the year ended December 31, 2003 as compared to the year ended December 31, 2002 which we believe was offset entirely by the fuel surcharge included in scheduled freight revenue. The number of gallons used for the year ended December 31, 2003 decreased 106,000 gallons, or 0.3%, as compared to the year ended December 31, 2002. The decrease in fuel consumption is primarily due to a jet fuel conservation program which was implemented in March 2003. To mitigate the increase in our average cost per gallon of jet fuel, we continue to assess a fuel surcharge.

      Maintenance Expense. For the year ended December 31, 2003, maintenance expense decreased $3.1 million, or 21.9% as compared to the year ended December 31, 2002. This is partially due to flying 7.9% fewer revenue block hours during 2003, accruing $1.3 million fewer maintenance reserves for heavy airframe and aircraft engine maintenance events and expensing $1.1 million less in aircraft parts and supplies due to reducing the cost basis our inventory and supplies under, and switching to inventory accounting from rotable parts pooling accounting in connection with, Fresh Start Accounting. We have also achieved additional savings in our third party aircraft maintenance costs as a result of rate negotiations and performing work with our own employees, as well as using spare parts from our retired aircraft.

      Freight Handling Expense. For the year ended December 31, 2003, freight handling expense increased $1.6 million, or 6.7%, as compared to the year ended December 31, 2002. Chargeable weight handled increased 2.1% in 2003 compared to 2002. The increase in freight handling expense compared to the increase in chargeable weight handled was primarily due to outsourcing the remaining four company operated outstations. As a result of closing the company operated outstations, costs previously included in operating overhead, such as rent and utilities, are now included in freight handling expense. This increase is partially offset by more favorable rates achieved from renegotiating several of the existing third party freight handling contracts.

      Depreciation and Amortization. For the year ended December 31, 2003, depreciation and amortization expense decreased $1.6 million as compared to the year ended December 31, 2002 primarily due to the adoption of Fresh Start Accounting, which reduced our overall property and equipment net book value.

      Operating Overhead. For the year ended December 31, 2003, operating overhead decreased $1.3 million as compared to the year ended December 31, 2002. The decrease is primarily due to the elimination of certain costs that are now included in third party freight handling contracts and are reported as freight handling expense and a reduction in our bad debt expense for 2003 as compared to 2002.

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Gross Profit

      For the year ended December 31, 2003, we recognized gross profit of $10.2 million, which was an improvement of $5.8 million as compared to the year ended December 31, 2002. The improvement was due to reduced expenses as a percent of total revenue in our operations resulting in part from several cost containment initiatives implemented early in 2003, and improved revenue in our expedited scheduled freight business as a result of higher yields and higher chargeable weight handled.

General and Administrative Expense

      General and administrative expense increased $1.3 million, or 16.3%, for the year ended December 31, 2003 as compared to the year ended December 31, 2002. The increase is primarily due to professional fees related to our flight crew member collective bargaining negotiations, various other legal matters, trailing bankruptcy expenses related to the unsecured trade creditors claims resolution, Sarbanes-Oxley compliance costs and expenses for filing periodic and other reports under the Securities Exchange Act of 1934.

Interest Expense

      Interest expense declined by $1.9 million, or 81.5%, for the year ended December 31, 2003 as compared to the year ended December 31, 2002. During 2003, we reduced our outstanding debt by $2.6 million. Additionally, during 2002, we incurred $1.7 million of interest expense prior to our emergence from Chapter 11 on our outstanding revolving credit facility and on the $28 million payment to the Kitty Hawk Collateral Liquidating Trust upon the effective date of our plan of reorganization.

Reorganization Expense

      Reorganization expense decreased from $39.6 million to zero for the year ended December 31, 2003 due to our emergence from bankruptcy on September 30, 2002.

Other (Income) Expense

      Other income decreased $27.0 million for the year ended December 31, 2003 as compared to the year ended December 31, 2002. Other income for the year ended December 31, 2003 was primarily due to the $3.0 million recovery in September 2003 related to a dispute with EGL, Inc. which is non-recurring. Other income for the year ended December 31, 2002 was primarily due to $29.6 million of contract settlement income recognized in August 2002 related to a settlement with the U.S. Postal Service.

Income Tax Benefit

      For the year ended December 31, 2003, we recognized tax expense of $1.5 million. However, due to the tax attributes that were set up in our Fresh Start Accounting, we do not owe any cash taxes. The offset to our tax expense is an increase to our Additional Paid in Capital. We recognized no tax expense on our income for the year ended December 31, 2002 because of a corresponding reduction in our valuation allowance related to the decrease in our tax attributes as required in our emergence from bankruptcy.

      Due to historical operating losses and the potential for future limitations on the utilization of our tax attributes, we have recorded a valuation allowance against remaining tax attributes because it is unclear how much, if any, tax benefit we will realize prior to expiration of the remaining tax attributes. Therefore, currently there is no net asset value for the remaining tax attributes reflected in our current consolidated financial statements. Any future realization of our tax attributes existing at September 30, 2002 will result in tax expense and an increase in Additional Capital, with a corresponding reduction in cash taxes payable.

Loss from Discontinued Operations

      For the year ended December 31, 2003, we had no loss from our discontinued operations. For the year ended December 31, 2002, our loss from discontinued operations was $40.8 million. These losses were attributable to sales of aircraft at less than their carrying value and other charges taken in connection with the Fresh Start Accounting adjustments.

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Extraordinary Item

      At September 30, 2002, pursuant to Fresh Start Accounting, upon emergence from bankruptcy, liabilities subject to compromise in the amount of $394.7 million were exchanged for the right to receive new common stock or warrants to acquire new common stock as part of the discharge of debt under our plan of reorganization. After subtracting the reorganization value of $16.6 million which we distributed as common stock or warrants to acquire common stock, we recognized an extraordinary gain from extinguishment of debt of $378.1 million.

Year ended December 31, 2002 compared to the year ended December 31, 2001

Revenue

      General. The following table presents, for the years indicated, the components of our revenue in dollars and as a percentage of our total revenue and the percentage change from year-to-year:

			2002					2001
					Percentage					Percentage			Percentage
					of Total					of Total			Change from
			Revenue		Revenue			Revenue		Revenue			2001 to 2002
			(Dollars in thousands)
Scheduled freight			$	116,279		95.5	%	$	135,052		54.6	%		(13.9	)%
Other:
	Postal contracts			920		0.7			85,368		34.5			(98.9	)
	ACMI			945		0.8			25,844		10.4			(85.7	)
	Miscellaneous			3,659		3.0			1,225		0.5			198.7
		Total revenue	$	121,803		100.0	%	$	247,489		100.0	%		(50.8	)%

      Scheduled Freight. In 2002, the reduction in our scheduled freight revenue was primarily due to lower freight levels in our expedited scheduled freight network, which we believe resulted from the general economic downturn in the U.S. In addition, our 2001 scheduled freight revenue includes approximately $17 million from combining our expedited scheduled freight network operations with those of a customer during June, July and August, which did not recur in 2002.

      Postal Contracts. In 2002, the reduction in our postal contract revenue was caused by the loss of the W-Net contract in August 2001 and the U.S. Postal Service’s decision not to renew our C-Net contract in September 2002.

      ACMI. In 2002, the reduction in our ACMI revenue was primarily due to the expiration of our ACMI contract with BAX Global in December 2001. The loss of ACMI revenue from BAX Global was offset to a limited degree by other short-term ACMI contract flying in the last half of 2002 for other freight networks.

      Miscellaneous. The increase of $2.4 million in our miscellaneous revenue for the year ended December 31, 2002 as compared to the year ended December 31, 2001 was generated from flying ad-hoc charter services which generated $2.3 million of revenue.

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Cost of Revenue

      General. The following table presents, for the years indicated, the components of our cost of revenue in dollars and as a percentage of total revenue and the percentage change from year-to-year:

		2002					2001
				Percentage					Percentage			Percent Change
		Cost of		of Total			Cost of		of Total			from
		Revenue		Revenue			Revenue		Revenue			2001 to 2002
		(Dollars in thousands)
Flight expense		$	28,905		23.7	%	$	44,915		18.1	%		(35.6	)%
Transportation expense			8,841		7.3			44,322		17.9			(80.1	)
Fuel			26,794		22.0			35,055		14.2			(23.6	)
Maintenance expense			14,158		11.6			40,451		16.3			(65.0	)
Freight handling expense			23,166		19.0			40,231		16.3			(42.4	)
Depreciation and amortization			5,438		4.5			26,026		10.5			(79.1	)
Asset impairment			—		—			86,316		34.9			(100.0	)
Operating overhead			10,099		8.3			16,390		6.6			(38.4	)
	Total cost of revenue	$	117,401		96.4	%	$	333,706		134.8	%		(64.8	)%

      Flight Expense. In 2002, flight expense declined in absolute dollars as a result of flying 16,429, or 42.0%, fewer block hours in 2002 as compared to 2001. We operated fewer block hours primarily due to lower freight levels in our expedited scheduled freight network, the loss of the W-Net contract and the U.S. Postal Service’s decision not to renew our C-Net contract.

      As a percentage of our total revenue, flight expense increased to 23.7% in 2002 from 18.1% in 2001. This increase is principally due to the transfer of 12 Boeing 727-200 cargo aircraft to the Kitty Hawk Collateral Liquidating Trust in October 2001. As a result of the transfer, we were required to make payments to the trust for our use of these aircraft in 2002. We were not required to make these payments during the first ten months of 2001.

      Transportation Expense. In 2002, transportation expense declined in absolute dollars due to the U.S. Postal Service’s decision not to renew the C-Net contract. Because we did not manage the C-Net operations in 2002, we were not required to charter aircraft to fulfill our obligations under the C-Net contract. In 2001, we chartered a number of aircraft to fulfill our obligations under the C-Net contract. In addition, 2001 transportation expenses were increased as a result of combining our expedited scheduled freight network operations with those of a customer during June, July and August, which did not recur in 2002.

      In 2002, virtually all of our transportation expense was incurred by our expedited scheduled freight network. Because our expedited scheduled freight network is generally less dependent on third party transportation providers than our other businesses, transportation expense also declined as a percentage of revenue in 2002 as compared to 2001.

      Fuel. In 2002, fuel expense declined in absolute dollars due to reductions in the average cost per gallon of jet fuel and due to lower jet fuel consumption in 2002 as compared to 2001. In 2002, the average cost of jet fuel declined by $0.06 per gallon as compared to 2001, which reduced our year-over-year fuel expense by approximately $1.9 million. Also, in 2002, we consumed 4.3 million fewer gallons of jet fuel in our expedited scheduled freight network due to lower freight levels, which reduced our year-over-year fuel expense by approximately $4.2 million. In addition, our 2002 fuel expense was reduced by the loss of one charter contract in August 2001 which required us to supply jet fuel. The loss of this contract reduced our year-over-year fuel expense by approximately $2.2 million.

      As a percentage of revenue, fuel expense increased to 22.0% in 2002 from 14.2% in 2001, as most of our revenue in 2002 was generated by our expedited scheduled freight business which includes jet fuel as a cost of revenue. By contrast, in 2001 and prior years, a significant amount of our revenue was generated by operations that did not include jet fuel as a cost of revenue because jet fuel was reimbursed by the customers.

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      Maintenance Expense. In 2002, maintenance expense declined in absolute dollars and as a percentage of revenue due to a number of factors. First, we operated our aircraft 16,429, or 42.0%, fewer block hours in 2002 as compared to 2001, which resulted in lower actual maintenance expense. Second, the transfer of 12 Boeing 727-200 cargo aircraft to the Kitty Hawk Collateral Liquidating Trust in October 2001 reduced our maintenance expense because we do not have the responsibility for heavy maintenance under the Aircraft and Engine Use Agreement with the trust. Finally, in the third quarter of 2001, we determined that in light of declining fair market values for our Boeing 727-200 cargo aircraft and the general availability of replacement cargo aircraft, it made economic sense for us to permanently retire some of our airframes and aircraft engines at their next scheduled heavy maintenance event, rather than performing the scheduled maintenance. As a result, we were no longer required to record maintenance reserves for these airframes and aircraft engines, which further reduced our maintenance expense in 2002.

      Freight Handling Expense. In 2002, freight handling expense declined in absolute dollars primarily due to the termination of the W-Net contract, which accounted for approximately $14.7 million of the reduction. The remaining reduction of approximately $2.3 million was due to carrying 26.4 million fewer chargeable weight pounds in our expedited scheduled freight network in 2002 as compared to 2001.

      As a percentage of revenue, freight handling expense increased to 19.0% in 2002 as compared to 16.3% in 2001 due to changes in our revenue mix among our operations. In 2002, we generated most of our revenue from our expedited scheduled freight network, which generally has higher freight handling expenses than our other operations. In 2001, we generated significant revenues from our C-Net contract which had a relatively low freight handling expenses and from our ACMI contract with BAX Global, which had no freight handling expenses.

      Depreciation and Amortization. In 2002, depreciation and amortization expenses declined in absolute dollars and as a percentage of revenue primarily due to having 12 fewer owned aircraft in 2002 as compared to 2001 and $86.3 million of asset impairment charges at the end of 2001, which significantly reduced the basis of our depreciable assets in 2002.

      Asset Impairment. In 2002, we did not record any writedowns for asset impairments. In 2001, we recorded a $86.3 million writedown in the value of our assets. This writedown was triggered by the decline in the fair market value of the assets of our continuing operations resulting from events outside of our control and the downturn in the U.S. economy.

      Operating Overhead. In 2002, operating overhead declined in absolute dollars due to the reduction in the scope of our operations in 2002 as compared to 2001. As a percentage of revenue, operating overhead increased to 8.3% in 2002 from 6.6% in 2001. The increase was primarily due to the change in our revenue mix in 2002 as compared to 2001. In 2002, we generated most of our revenue from our expedited scheduled freight business, which requires more direct sales costs, operational management and facilities costs than that required by the U.S. Postal Service contracts and ACMI contracts which constituted a significant portion of our revenue in 2001.

Gross Profit

      In 2002, gross profit increased by $90.6 million as compared to 2001 primarily due to the $86.3 million asset impairment in 2001, which did not recur in 2002.

General and Administrative Expense

      General and administrative expense declined by $3.8 million, or 31.8%, in 2002 as compared to 2001. We have aggressively reduced general and administrative expense as our operations have been reduced.

Interest Expense and Other (Income) Expense

      Interest expense declined by $4.8 million, or 67.6%, in 2002 as compared to 2001. This is due to our repaying $65.6 million of secured debt during the last half of 2001 and the first half of 2002. Reorganization expense decreased $3.0 million, or 7.1%, in 2002 as compared to 2001. This is due to approximately $3.8 million of higher claims settlement expense due to the confirmation of our plan of reorganization which is offset by a $6.8 million reduction in professional fee expenses related to our

35

bankruptcy proceedings in 2002 as compared to 2001. Other income increased by $30.7 million in 2002 as compared to 2001 due to $29.4 million of gain recognized a settlement with the U.S. Postal Service.

Income Tax Benefit

      We recognized no tax expense on our income in 2002 because of a reduction in our valuation allowance. We recognized no tax benefit on our loss in 2001 because we increased our valuation allowance related to our deferred tax assets that resulted from our loss.

Loss from Discontinued Operations

      In 2002, our loss from discontinued operations increased by $20.7 million, or 102.4%, as compared to 2001. In 2002, the losses were attributable to sales of aircraft at less than their carrying value and other charges taken in connection with the Fresh Start Accounting adjustments. In 2001, the losses were attributable to the December 2001 sale of our air logistics business and a writedown due to further asset impairment related to the grounded aircraft.

Extraordinary Item

      At September 30, 2002, pursuant to Fresh Start Accounting, upon emergence from bankruptcy, liabilities subject to compromise in the amount of $394.7 million were exchanged for the right to receive new common stock or warrants to acquire new common stock as part of the discharge of debt under our plan of reorganization. After subtracting the reorganization value of $16.6 million which we distributed as common stock or warrants to acquire common stock, we recognized an extraordinary gain from extinguishment of debt of $378.1 million.

Tax Attributes and Valuation Allowance

      Based on our filed U.S. federal income tax returns, and our estimates of the cancellation of debt resulting from our plan of reorganization, we estimate that we had tax attributes of approximately $16.6 million as of December 31, 2003. To the extent that we can use these remaining tax attributes, they will provide a tax benefit to us when we have U.S. taxable income in the future. If certain substantial changes in our ownership occur, there could be an annual limitation on the amount of the tax attributes that are available to us.

      Due to historical operating losses and the potential for future limitations on the utilization of our tax attributes, we have recorded a valuation allowance against our estimated remaining tax attributes because it is unclear how much, if any, tax benefit we will realize. Therefore, currently there is no net asset value for the remaining tax attributes reflected in our current consolidated financial statements.

Liquidity and Capital Resources

      General. Currently, our primary source of liquidity is our cash flow from operations. In addition, we may supplement our liquidity by accessing our $10.0 million Credit Facility with WFB.

      At December 31, 2003, cash and cash equivalents were $15.7 million as compared to $10.3 million at December 31, 2002. The increase in cash of $5.4 million is a result of generating $8.5 million of cash flow from operations, including collecting $2.0 million from EGL, Inc. This increase in cash was offset by a net $0.7 million used in investing activities which included $3.0 million for the acquisition of operating assets offset by $2.3 million of proceeds from the sale of idle assets, including $1.1 million for the sale of a building complex in Michigan. In addition, we used a net $2.6 million to service our outstanding debt during 2003, offset by $0.2 million generated from the exercise of outstanding stock options and warrants to acquire stock.

      At December 31, 2003, our net working capital was comparable to that at December 31, 2002 at $18.7 million compared to $18.4 million.

      We anticipate our capital expenditures for 2004 will be approximately $6.1 million, including $2.5 million related to heavy airframe maintenance and heavy shop visits for aircraft engines, $1.7 million related to complying with airworthiness directives on our fleet of Boeing 727-200 cargo aircraft and

36

$1.9 million to upgrade our information technology systems. We anticipate spending $2.8 million to perform heavy airframe maintenance and heavy shop visits for aircraft engines which are accrued for in our maintenance reserves. In addition, we anticipate $2.5 million of cash outlays related to meeting the lease return conditions on four leased airframes and 12 aircraft engines. We believe our current assets, cash flows from operations and availability under our Credit Facility are sufficient to meet our anticipated normal working capital and operating needs for the next 12 months as well as support our anticipated capital expenditures requirements.

      Credit Facility. On March 22, 2004, we entered into a $10.0 million revolving credit facility with Wells Fargo Business Credit, Inc., or WFB. Unless earlier terminated, the Credit Facility matures on March 22, 2007 and automatically renews for successive one-year periods thereafter unless terminated by us or WFB by giving the other party 90 days written notice prior to the maturity date. The Credit Facility bears interest at an annual rate equal to WFB’s prime rate plus a margin of 1.0%. The Credit Facility is secured by substantially all of our receivables and personal property, other than airframes, aircraft engines and aviation parts. In connection with entering into the Credit Facility, we terminated our $5.0 million receivables purchase facility with KBK Financial under which there was no outstanding balance and we repaid our $1.8 million outstanding debt balance with 1st Source Bank.

      Availability under the Credit Facility is subject to a borrowing base equal to the lesser of $10.0 million and 85% of eligible receivables. WFB may reject any receivable deemed ineligible in the exercise of its business judgment. On March 22, 2004, we had $1.8 million borrowed under the Credit Facility, a borrowing base of $10.0 million and $8.2 million of availability.

      Each year, we will pay an unused line fee of 0.375% of the daily unused amount under the Credit Facility. In addition, we must pay to WFB a minimum of $8,500 per month in interest. We will incur additional fees if the Credit Facility is terminated by WFB upon default or if we terminate the Credit Facility prior to its termination date or reduce the maximum availability under the Credit Facility. These fees are $200,000 during the first year of the Credit Facility, $100,000 during the second year of the Credit Facility and $50,000 during the third year of the Credit Facility. Finally, we may utilize the Credit Facility to issue letters of credit in the aggregate amount of up to $5.0 million. We incur a fee computed at an annual rate of 2.0% of the face amount of each letter of credit issued under the Credit Facility.

      The Credit Facility provides for specified events of default that allow WFB to terminate the Credit Facility and accelerate any payments due by us. Significant events of defaults include:

•  default in payment obligations and breach of covenants by us;

•  a future voluntary or involuntary bankruptcy filing for us;

•  any change of control of Kitty Hawk, Inc., as discussed below;

•  the rendering of a judgment or arbitration award in excess of $150,000 that remains unsatisfied, unstayed or not appealed after 30 days;

•  default under any other material indebtedness, including leases; and

•  any material adverse change in our business or any change that WFB believes, in good faith, would impair our ability to meet our payment obligations or materially perform under the Credit Facility.

      For purposes of the Credit Facility, a change of control of Kitty Hawk, Inc. is deemed to occur if:

•  during any consecutive two-year period, individuals who at the beginning of such period constituted our board of directors (together with any new directors whose election to such board of directors, or whose nomination for election by our stockholders, was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of our board of directors then in office; or

•  any person or “group” is or becomes the “beneficial owner” (as those terms are defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934), directly or indirectly, of more than 51% of the voting power of all classes of our voting stock.

37

      We are required to meet the following financial and operating covenants under the Credit Facility. Each year, the Credit Facility requires us to have minimum net income (loss) less non-cash items for each period in the following amount:

Period	Net Income (Loss)
January 1 - March 31	$	(1,800,000	)
January 1 - June 30	$	(1,300,000	)
January 1 - September 30	$	(350,000	)
January 1 - December 31	$	600,000

      In addition, each year, the Credit Facility requires us to have minimum book net worth, adjusted for non-cash items for each period in the following amount:

Period	Book Net Worth
January 1 - March 31	$1,800,000 less than the book net worth at December 31st of the prior year
January 1 - June 30	$1,300,000 less than the book net worth at December 31st of the prior year
January 1 - September 30	$350,000 less than the book net worth at December 31st of the prior year
January 1 - December 31	$600,000 more than the book net worth at December 31st of the prior year

      In addition, each year, the Credit Facility requires us to not exceed a monthly net loss less non-cash items for each month in the following periods in the following amounts:

Period	Net Loss
January 1 - March 31	$	(1,100,000	)
April 1 - June 30	$	(500,000	)
July 1 - September 30	$	(300,000	)
October 1 - December 31	$	(100,000	)

      In addition, the Credit Facility prohibits us from incurring or contracting to incur capital expenditures exceeding $6.0 million in the aggregate through December 31, 2005, with no more than $4.0 million being unfinanced and $2.0 million in the aggregate during each fiscal year thereafter, with no more than $1.0 million being unfinanced. This limitation on capital expenditures does not include capitalized maintenance on our aircraft. Further, without the consent of WFB, we cannot commit to enter into or enter into any aircraft operating lease if, after giving effect to such lease, the ratio of our EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) plus unrestricted liquid assets to the sum of capital expenditures and aircraft rent is not at least 1.0 to 1.0.

      Receivables Purchase Facility. In October 2002, we entered into an account transfer and purchase agreement with KBK Financial for a $5.0 million receivables purchase facility as part of our plan of reorganization. At December 31, 2003, we had no funds advanced under this facility. This facility was terminated in March 2004.

      1^st Source Bank Note. In November 2000, we executed a promissory note and entered into a security agreement with 1^st Source Bank to settle lease obligations existing prior to our bankruptcy filing. Under these agreements, 1^st Source Bank advanced to us approximately $8.5 million. The promissory note was guaranteed by us and was secured by two Boeing 727-200 airframes and five aircraft engines. At December 31, 2003, we owed 1^st Source Bank approximately $2.3 million under this note and the collateral had a carrying value of substantially less than the amount owed. We repaid the outstanding balance of approximately $1.8 million on March 22, 2004 and all liens were released.

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Contractual Obligations

      The following table sets forth our contractual obligations at December 31, 2003, for the periods shown (dollars in thousands):

			Within
Contractual Obligations	Total		1 Year		2-3 Years		4-5 Years		Thereafter
Debt	$	2,382	$	2,348	$	34	$	—	$	—
Non-aircraft operating leases		38,683		2,898		5,670		4,814		25,301
Aircraft operating leases and use agreements		4,640		4,220		420		—		—
Estimated lease return conditions		2,459		2,459		—		—		—
Purchase commitments(1)		—		—		—		—		—
Total contractual cash obligations	$	48,164	$	11,925	$	6,124	$	4,814	$	25,301

(1)  Excludes purchase orders entered into in the ordinary course of business.

Seasonality of Results and Operating Leverage

      The following table reflects selected unaudited quarterly operating results. 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. Our 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.

	Predecessor									Successor
	March 31,			June 30,			September 30,			December 31,		March 31,			June 30,			September 30,		December 31,
Quarter Ended:	2002			2002			2002			2002		2003			2003			2003		2003
	Unaudited
	(In thousands, except per share data)
Total revenue	$	25,087		$	30,595		$	31,645		$	34,476	$	30,984		$	31,272		$	33,625	$	36,523
Gross profit (loss) from continuing operations		(4,048	)		2,007			1,625			4,818		(1,667	)		1,028			4,797		6,037
Operating income (loss)		(4,570	)		1,604			(3,374	)		2,678		(4,352	)		(1,327	)		2,678		3,819
Income (loss) from continuing operations	$	(9,129	)	$	(1,552	)	$	(6,859	)	$	2,663	$	(3,987	)	$	(1,392	)	$	5,790	$	3,730
Basic net income (loss) from continuing operations per share(1)	$	(0.53	)	$	(0.09	)	$	(0.40	)	$	0.05	$	(0.08	)	$	(0.03	)	$	0.12	$	0.04
Diluted net income (loss) from continuing operations per share(1)	$	(0.53	)	$	(0.09	)	$	(0.40	)	$	0.05	$	(0.08	)	$	(0.03	)	$	0.11	$	0.04

(1)  During March 2003, 37.7 million shares of common stock were issued in accordance with the plan of reorganization. For the purpose of calculating basic and diluted net income from continuing operations per share for the quarters ended December 31, 2002 and March 31, 2003, the shares of common stock and warrants to acquire common stock to be issued under the plan of reorganization are deemed to be outstanding as of October 1, 2002. In addition, because the warrants have a nominal exercise price, the shares of common stock underlying the warrants are also deemed to be outstanding for periods subsequent to September 30, 2002.

      Our current business is seasonal in nature. In a typical year, we experience improving revenue with each passing quarter, beginning with the first quarter. In 2002 and for the first quarter of 2003, we experienced normal seasonal trends in our expedited scheduled freight business. However, during the second quarter of 2003, we did not experience normal seasonal trends in the scheduled freight business. We believe the lower than normal seasonal trend in the second quarter of 2003 was due to, among other things, the war in Iraq that had a dampening effect on the demand for U.S. domestic expedited freight shipments, increased competition in the expedited heavy freight market and a shift to use less expensive alternatives such as long-haul truck services. As a result, we reduced our capacity in the scheduled freight

39

network by reducing the utilization of chartered aircraft, and increased the utilization of our cargo airline in the scheduled freight network.

      In the third quarter of 2003, we experienced slightly better than normal seasonal trends, somewhat reversing the weak second quarter of 2003. We believe this is in part due to inventories for retail consumer goods, especially electronics, having been managed down to exceptionally low levels in the second quarter of 2003, thus requiring additional expedited freight services to meet current demand. Additionally, we believe we have benefited from what appears to be a general strengthening in the U.S. domestic economy coupled with normal seasonal demand from the automotive and other core industries. We generally experienced normal seasonal trends in the fourth quarter of 2003.

      We currently derive substantially all of our revenue from our expedited scheduled freight business. This business has significant operating costs that are fixed and cannot be materially reduced in the short-term if the expedited scheduled freight business does not generate expected levels of revenue. Once revenue reaches the break-even point in a given period, each additional dollar of revenue contributes a relatively high percentage to operating income. However, if revenue does not reach the break-even point in a given period, the operations will sustain losses, which could be significant depending on the amount of the deficit. We have, and will continue to have, capital requirements for the requisite periodic and major overhaul maintenance checks for our fleet and for debt service. We also have seasonal working capital needs, because we generate higher revenue in the third and fourth calendar quarters and lower revenue in the first calendar quarter. Funding requirements have historically been met through internally generated funds, bank borrowings, aircraft and other asset sales and from public and private offerings of equity and debt securities. From time to time, we have entered into sale/leaseback transactions to acquire aircraft and may do so in the future.

Factors That May Affect Future Results and Market Price of Stock

      This annual report on Form 10-K contains “forward-looking statements” concerning our business, operations and financial performance and condition. When we use the words “estimates,” “expects,” “forecasts,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions, we intend to identify forward-looking statements.

      We have based our forward-looking statements on our current assumptions and expectations about future events. We have expressed our assumptions and expectations in good faith, and we believe there is a reasonable basis for them. However, we cannot assure you that our assumptions or expectations will prove to be accurate.

      A number of risks and uncertainties could cause our actual results to differ materially from the forward-looking statements contained in this annual report on Form 10-K. Important factors that could cause our actual results to differ materially from the forward-looking statements are set forth in this annual report on Form 10-K. These risks, uncertainties and other important factors include, among others:

•  loss of key suppliers, significant customers or key management personnel;

•  increased competition;

•  limited operating flexibility due to the terms of our Credit Facility and our limited capital resources and liquidity;

•  financial costs and operating limitations imposed by the unionization of our workforce;

•  payment defaults by our customers;

•  writedowns of the value of our parts, airframes or aircraft engines;

•  changes in the cost of airframe or aircraft engine maintenance and in our maintenance reserves;

•  changes in economic conditions;

•  changes in the cost and availability of jet fuel;

•  changes in the cost and availability of ground handling and storage services;

•  changes in the cost and availability of aircraft or replacement parts;

40

•  changes in our business strategy or development plans;

•  changes in government regulation and policies;

•  foreign political instability and acts of war or terrorism; and

•  adverse litigation judgments or awards.

      The impact of any terrorist activities or international conflicts on the U.S. and global economies in general, or the transportation industry in particular, could have a material adverse effect on our business and liquidity. Other factors may cause our actual results to differ materially from the forward-looking statements contained in this annual report on Form 10-K. These forward-looking statements speak only as of the date of this annual report on Form 10-K and, except as required by law, we do not undertake any obligation to publicly update or revise our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      At December 31, 2003, we had outstanding debt of $2.4 million, substantially all of which is short-term debt with an average interest rate of 8.9%. This debt was repaid in March 2004.

      We have exposure to changing interest rates on our Credit Facility. The Credit Facility contains a variable interest rate equal to WFB’s prime rate plus a margin of 1.0%. At March 25, 2004, we had approximately $1.8 million outstanding on the Credit Facility with an interest rate of 5.0%. Based on our outstanding balance under the Credit Facility, a hypothetical 10% increase in interest rates would not result in a material increase in our annual interest expense. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

      Our exposure to changing interest rates on invested cash is minimal because we invest our cash in a U.S. Treasury backed money-market fund. At December 31, 2003, approximately $14.5 million of our cash was invested.

      We have not undertaken any actions to cover interest rate market risk and are not a party to any interest rate market risk management activities.

      Jet fuel is a significant cost of operating aircraft. We do not have any agreements with jet fuel suppliers assuring the availability or price stability of jet fuel. We also do not participate in any open market hedging activities related to jet fuel.

      At current levels of operations in our expedited scheduled freight business, each $.01 change in the price per gallon of jet fuel results in a change in our annual fuel cost of $290,000.

      We do 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 annual report on Form 10-K. See “Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.”

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      None.

ITEM 9A. CONTROLS AND PROCEDURES

      Evaluation of Disclosure Controls and Procedures. The term “disclosure controls and procedures” is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing of this annual report, and they have concluded that as of that date, our

41

disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

      Changes in Internal Controls. We maintain a system of internal controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation by our Chief Executive Officer and our Chief Financial Officer, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information regarding our directors required by Item 10 is incorporated by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders. The information regarding our executive officers required by Item 10 is submitted as a separate section of this annual report on Form 10-K. See “Item 4A: Executive Officers of the Registrant.”

      We have adopted a code of conduct applicable to all of our employees, which is a “code of ethics” as defined by applicable rules of the Securities and Exchange Commission. The code of ethics is publicly available through the Company Information section of our Internet website, http://www.khcargo.com. If we make any amendments to this code other than technical, administrative, or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of our code of ethics to our chief executive officer, chief financial officer or controller, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our website or in a report on Form 8-K filed with the Securities and Exchange Commission.

ITEM 11. EXECUTIVE COMPENSATION

      The information required by Item 11 is incorporated by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

      The information required by Item 403 of Regulation S-K is incorporated by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders under the caption “Securities Ownership of Certain Beneficial Owners and Management.”

      The following table provides certain information as of December 31, 2003, with respect to shares of our common stock that may be issued under the Kitty Hawk 2003 Long Term Equity Incentive Plan.

					Number of
					Securities
					Remaining Available
	Number of		Weighted-		for Future Issuance
	Securities to be		Average Exercise		Under Equity
	Issued upon		Price of		Compensation Plans
	Exercise of		Outstanding		(Excluding
	Outstanding		Options,		Securities Reflected
	Options, Warrants		Warrants and		in the First
Plan Category	and Rights		Rights		Column)
Equity compensation plans approved by security holders		4,460,000	$	0.30		1,465,000
Equity compensation plans not approved by security holders		—		—		—
Total		4,460,000	$	0.30		1,465,000

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by Item 13 is incorporated by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

      The information required by Item 14 is incorporated by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders.

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PART IV

ITEM 15. 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 Certified Public Accountants		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity (Deficit)		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

2. Financial Statement Schedules

      No financial statement schedules are filed as part of this annual report on Form 10-K either because the required information is included in the financial statements, including the notes thereto, or such schedules are not required.

3. Exhibits

      The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.

Exhibit
Number			Description
	2	.1	Debtors’ Final Joint Plan of Reorganization, dated August 2, 2002 (Exhibit 2.2 to the Kitty Hawk Inc.’s Form 8-K dated August 20, 2002, and incorporated herein by reference).
	2	.2	Order Confirming Debtors’ Final Joint Plan of Reorganization, dated August 5, 2002 (Exhibit 2.1 to Kitty Hawk, Inc.’s Form 8-K dated August 20, 2002, and incorporated herein by reference).
	2	.3	Order Granting Debtors’ Motion to Modify Debtors’ Final Joint Plan of Reorganization, dated September 26, 2002 (Exhibit 2.3 to Kitty Hawk, Inc.’s Form 10-K dated March 28, 2003, and incorporated herein by reference).
	2	.4	Order Modifying Debtors’ Final Joint Plan of Reorganization, dated September 26, 2002 (Exhibit 99.1 to Kitty Hawk, Inc.’s Form 8-K dated February 7, 2003, and incorporated herein by reference).
	3	.1	Second Amended and Restated Certificate of Incorporation of Kitty Hawk, Inc. (Exhibit 99.1 to Kitty Hawk, Inc.’s Form 8-K dated October 1, 2002, and incorporated herein by reference).
	3	.2	Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of Kitty Hawk, Inc., dated February 6, 2003 (Exhibit 3.2 to Kitty Hawk, Inc.’s amended Registration Statement on Form 8-A/A dated March 12, 2003, and incorporated herein by reference).
	3	.3	Second Amended and Restated Bylaws of Kitty Hawk, Inc., dated October 31, 2003 (Exhibit 3.3 to Kitty Hawk, Inc.’s amended Registration Statement on Form 8-A/A dated November 12, 2003, and incorporated herein by reference).
	4	.1*	Certificate of Designation, Preferences and Rights of Series A Preferred Stock, par value $0.01 per share, of Kitty Hawk, Inc., filed as of January 28, 2004.
	4	.2	Specimen Common Stock Certificate (Exhibit 3.4 to Kitty Hawk, Inc.’s amended Registration Statement on Form 8-A/A dated March 12, 2003, and incorporated herein by reference).
	10	.1*	Amended and Restated Aircraft and Engine Use Agreement, dated as of January 1, 2004, by and between Kitty Hawk Aircargo, Inc. and the Kitty Hawk Collateral Liquidating Trust (Confidential treatment has been requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the SEC).

44

Exhibit
Number			Description
	10	.2	Ground Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. (Exhibit 10.30 to Kitty Hawk’s Form 10-K dated March 31, 1999, and is incorporated herein by reference).
	10	.3	Building Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. (Exhibit 10.31 to Kitty Hawk’s Form 10-K dated March 31, 1999, and is incorporated herein by reference).
	10	.4	Registration Rights Agreement dated December 15, 2002, by and among Kitty Hawk, Inc., Everest Capital Limited, Resurgence Asset Management, L.L.C. and Stockton LLC (Exhibit 10.7 to Kitty Hawk, Inc.’s Form 10-K dated March 28, 2003, and incorporated herein by reference).
	10	.5	Agreement between Kitty Hawk Aircargo, Inc. and Flight Deck Crewmembers in the service of Kitty Hawk Aircargo, Inc. as represented by The Kitty Hawk Aircargo Pilots Association (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 10-Q dated November 12, 2003, and incorporated herein by reference).
	10	.6†	Employment and Severance Agreement dated as of October 3, 2002, by and between Kitty Hawk, Inc. and Jack Andrew “Drew‘ Keith (Exhibit 10.8 to Kitty Hawk, Inc.’s Form 10-K dated March 28, 2003, and incorporated herein by reference).
	10	.7*†	Employment and Severance Agreement Amendment; Notice of Termination, Resignation, and Other Severance Related Agreements dated February 18, 2004, by and between Kitty Hawk, Inc. and Jack Andrew “Drew” Keith.
	10	.8†	Employment and Severance Agreement dated as of October 3, 2002, by and between Kitty Hawk, Inc. and Toby J. Skaar (Exhibit 10.10 to Kitty Hawk, Inc.’s Form 10-K dated March 28, 2003, and incorporated herein by reference).
	10	.9†	Kitty Hawk, Inc. 401(k) Savings Plan (Exhibit 10.43 to Kitty Hawk, Inc.’s previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and is incorporated herein by reference).
	10	.10†	Term Sheet dated October 29, 2002, between Kitty Hawk, Inc. and Robert W. Zoller, Jr. (Exhibit 10.14 to Kitty Hawk, Inc.’s Form 10-K dated March 28, 2003, and incorporated herein by reference).
	10	.11†	Offer of Employment dated June 1, 2003, between Kitty Hawk, Inc. and Steven E. Markhoff (Exhibit 10.2 to Kitty Hawk, Inc.’s Form 10-Q dated November 12, 2003, and incorporated herein by reference).
	10	.12*†	Term Sheet dated January 20, 2004, between Kitty Hawk, Inc. and Randy S. Leiser.
	10	.13*	Credit and Security Agreement, dated March 22, 2004, by and between Kitty Hawk, Inc. and Wells Fargo Business Credit, Inc. (Does not include the schedules and exhibits to this exhibit. Schedules and exhibits will be provided to the SEC upon request).
	10	.14	Rights Agreement, dated January 21, 2004, by and between Kitty Hawk, Inc. and American Stock Transfer and Trust Company (Exhibit 1 to Kitty Hawk, Inc.’s Registration Statement on Form 8-A dated January 26, 2004, and incorporated herein by reference).
	10	.15†	Kitty Hawk 2003 Long Term Equity Incentive Plan, dated as of July 29, 2003 (Exhibit 4.5 to Kitty Hawk, Inc.’s Registration Statement on Form S-8 dated September 24, 2003, and incorporated herein by reference).
	21	.1	Subsidiaries of the Registrant (Exhibit 21.1 to Kitty Hawk, Inc.’s Form 10-K dated March 28, 2003, and incorporated herein by reference).
	23	.1*	Consent of Grant Thornton LLP.
	31	.1*	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2*	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1*	Certification Pursuant Executive Officer to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

45

*  Each document marked with an asterisk is filed herewith.

†  Each document marked with a dagger constitutes a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K

      On October 10, 2003, we filed a Current Report on Form 8-K to report the settlement of our dispute with EGL, Inc. d/b/a Eagle Global Logistics.

      On October 20, 2003, we filed a Current Report on Form 8-K to report that our wholly-owned subsidiary, Kitty Hawk Aircargo, and the Kitty Hawk Pilots Association, which represents the pilots and flight engineers employed by Kitty Hawk Aircargo, ratified a 10-year collective bargaining labor agreement.

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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 26th day of March, 2004.

KITTY HAWK, INC.

By:  /s/ ROBERT W. ZOLLER, JR.

Robert W. Zoller, Jr.

Chief Executive Officer and President

      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 26th day of March, 2004.

Name	Capacities
/s/ ROBERT W. ZOLLER, JR. Robert W. Zoller, Jr.	Chief Executive Officer, President and Director (Principal Executive Officer)
/s/ RANDY S. LEISER Randy S. Leiser	Chief Financial Officer (Principal Financial Officer)
/s/ JESSICA L. WILSON Jessica L. Wilson	Chief Accounting Officer (Principal Accounting Officer)
/s/ GERALD L. GITNER Gerald L. Gitner	Non-Executive Chairman of the Board of Directors and Director
/s/ TAMIR HACKER Tamir Hacker	Director
/s/ MYRON KAPLAN Myron Kaplan	Director
/s/ ROBERT A. PEISER Robert A. Peiser	Director

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KITTY HAWK, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Certified Public Accountants		F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002		F-3
Consolidated Statements of Operations for the year ended December 31, 2003, the three months ended December 31, 2002, the nine months ended September 30, 2002 and the year ended December 31, 2001		F-4
Consolidated Statements of Stockholders’ Equity (Deficit) for the year ended December 31, 2003, the three months ended December 31, 2002, the nine months ended September 30, 2002 and the year ended December 31, 2001		F-5
Consolidated Statements of Cash Flows for the year ended December 31, 2003, the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the year ended December 31, 2001		F-6
Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Kitty Hawk, Inc. and Subsidiaries

      We have audited the accompanying consolidated balance sheets of Kitty Hawk, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2003, the three months ended December 31, 2002, the nine months ended September 30, 2002 and the year ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated 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 as of December 31, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for the year ended December 31, 2003, the three months ended December 31, 2002, the nine months ended September 30, 2002 and the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in Note 3, effective September 30, 2002, the Company was reorganized under a plan confirmed by the United States Bankruptcy Court and adopted a new basis of accounting whereby all remaining assets and liabilities were adjusted to their estimated fair values. Accordingly, the consolidated financial statements for periods subsequent to the reorganization are not comparable to the consolidated financial statements presented for prior periods.

GRANT THORNTON LLP

Dallas, Texas

March 24, 2004

F-2

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

				December 31,
				2003		2002
				(In thousands,
				except share data)
ASSETS
Current assets:
	Cash and cash equivalents			$	15,729	$	10,353
	Restricted cash and short-term investments				579		593
	Trade accounts receivable, net of allowance for doubtful accounts of $0.5 million and $0.5 million, respectively				11,539		11,460
	Assets held for sale				114		1,862
	Inventory and aircraft supplies				5,441		6,014
	Deposits and prepaid expenses				1,135		1,698
	Prepaid fuel				1,122		967
	Settlement receivable				1,765		—
	Other current assets, net				143		1,280
		Total current assets			37,567		34,227
Property and equipment, net					9,058		12,153
Other assets, net					485		879
		Total assets		$	47,110	$	47,259
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Current liabilities:
		Accounts payable — trade		$	2,880	$	2,339
		Accrued wages			761		2,628
		Other accrued expenses			5,519		4,956
		Other taxes payable			2,270		1,646
		Current portion of accrued maintenance reserves			2,617		1,580
		Current portion of lease return provisions			2,459		—
		Current maturities of long-term debt			2,348		2,640
			Total current liabilities		18,854		15,789
		Long-term debt			34		2,338
		Accrued maintenance reserves			3,311		6,230
		Lease return provisions			—		2,299
		Other long-term liabilities			1,307		1,340
			Total liabilities		23,506		27,996
	Commitments and contingencies				—		—
	Stockholders’ equity:
		Preferred stock, $0.01 par value at December 31, 2003 and 2002, respectively: Authorized shares — 3,000,000 at December 31, 2003 and 2002, respectively; none issued			—		—
		Common stock, $0.000001 and $0.01 par value at December 31, 2003 and 2002, respectively: Authorized shares — 62,000,000 at December 31, 2003 and 2002, respectively; issued and outstanding — 40,760,084 and none at December 31, 2003 and 2002, respectively			—		—
		Additional capital			18,311		16,600
		Retained earnings			5,293		2,663
			Total stockholders’ equity		23,604		19,263
			Total liabilities and stockholders’ equity	$	47,110	$	47,259

The accompanying notes are an integral part of these financial statements.

F-3

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

			Successor						Predecessor
						Three Months			Nine Months
			Year Ended			Ended			Ended			Year Ended
			December 31,			December 31,			September 30,			December 31,
			2003			2002			2002			2001
			(In thousands, except share and per share data)
Revenue:
	Scheduled freight		$	127,412		$	31,482		$	84,797		$	135,052
	Postal contracts			—			920			—			85,368
	ACMI			3,375			759			186			25,844
	Miscellaneous			1,617			1,315			2,344			1,225
		Total revenue		132,404			34,476			87,327			247,489
Cost of revenue:
	Flight expense			26,111			7,542			21,363			44,915
	Transportation expense			16,915			2,361			6,480			44,322
	Fuel expense			30,849			7,424			19,370			35,055
	Maintenance expense			11,048			3,466			10,692			40,451
	Freight handling expense			24,717			5,715			17,451			40,231
	Depreciation and amortization			3,835			938			4,500			26,026
	Asset impairment			—			—			—			86,316
	Operating overhead expense			8,734			2,212			7,887			16,390
		Total cost of revenue		122,209			29,658			87,743			333,706
Gross profit (loss)				10,195			4,818			(416	)		(86,217	)
General and administrative expense				9,377			2,140			5,924			11,819
Operating income (loss)				818			2,678			(6,340	)		(98,036	)
Other (income) expense:
	Interest expense			423			154			2,133			7,051
	Reorganization expenses			—			—			39,629			42,676
	Income from contract settlement			—			—			(29,443	)		—
	Other, net			(3,746	)		(139	)		(1,119	)		(14	)
Income (loss) from continuing operations before income taxes				4,141			2,663			(17,540	)		(147,749	)
Income tax expense				1,511			—			—			—
Income (loss) from continuing operations				2,630			2,663			(17,540	)		(147,749	)
Discontinued operations:
	Loss from discontinued operations, net of taxes			—			—			(40,831	)		(20,173	)
Income (loss) before extraordinary item				2,630			2,663			(58,371	)		(167,922	)
Extraordinary item, net				—			—			378,068			—
Net income (loss)			$	2,630		$	2,663		$	319,697		$	(167,922	)
Basic net income (loss) per share:
	Continuing operations		$	0.05		$	0.05		$	(1.02	)	$	(8.62	)
	Discontinued operations		$	—		$	—		$	(2.39	)	$	(1.18	)
	Extraordinary item, net		$	—		$	—		$	22.07		$	—
		Total basic net income (loss) per share	$	0.05		$	0.05		$	18.66		$	(9.80	)
Weighted average common shares outstanding				50,135,763			49,999,970			17,132,566			17,132,566
Diluted net income (loss) per share:
	Continuing operations		$	0.05		$	0.05		$	(1.02	)	$	(8.62	)
	Discontinued operations		$	—		$	—		$	(2.39	)	$	(1.18	)
	Extraordinary item, net		$	—		$	—		$	22.07		$	—
		Total diluted net income (loss) per share	$	0.05		$	0.05		$	18.66		$	(9.80	)
Weighted average common shares outstanding				51,822,879			49,999,970			17,132,566			17,132,566

The accompanying notes are an integral part of these financial statements.

F-4

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

	Common Stock
	Number of			Number of									Retained
	Unrestricted			Restricted						Additional			Earnings
	Shares			Shares			Amount			Capital			(Deficit)			Total
	(In thousands, except share data)
Predecessor Company:
Balance at December 31, 1999		17,059,518			—		$	171		$	134,231		$	70,715		$	205,117
Shares issued in connection with Employee Stock Purchase Plan		72,472			—			1			423			—			424
Shares issued to Board of Directors		576			—			—			4			—			4
Net loss		—			—			—			—			(357,320	)		(357,320	)
Balance at December 31, 2000		17,132,566			—			172			134,658			(286,605	)		(151,775	)
Net loss		—			—			—			—			(167,922	)		(167,922	)
Balance at December 31, 2001		17,132,566			—			172			134,658			(454,527	)		(319,697	)
Net income		—			—			—			—			319,697			319,697
Elimination of prior equity		(17,132,566	)		—			(172	)		(134,658	)		134,830			—
Balance at September 30, 2002		—			—		$	—		$	—		$	—		$	—
Successor Company:
Establish reorganization value at September 30, 2002		—			—		$	—		$	16,600		$	—		$	16,600
Net income		—			—			—			—			2,663			2,663
Balance at December 31, 2002		—			—			—			16,600			2,663			19,263
Net income		—			—			—			—			2,630			2,630
Tax expense allocated to Additional Capital related to bankruptcy		—			—			—			1,511			—			1,511
Issue common stock		37,744,655			—			—			—			—			—
Compensation expense associated with stock option grants		—			—			—			28			—			28
Issue common stock related to exercise of stock options		412,500			162,500			—			172			—			172
Issue common stock related to exercise of warrants to acquire stock		2,440,429			—			—			—			—			—
Vesting of restricted shares		25,000			(25,000	)		—			—			—			—
Balance at December 31, 2003		40,622,584			137,500		$	—		$	18,311		$	5,293		$	23,604

The accompanying notes are an integral part of these financial statements.

F-5

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Successor						Predecessor
							Three Months			Nine Months
				Year Ended			Ended			Ended			Year Ended
				December 31,			December 31,			September 30,			December 31,
				2003			2002			2002			2001
				(In thousands)
Operating activities:
	Net income (loss)			$	2,630		$	2,663		$	319,697		$	(167,922	)
	Add: Loss from discontinued operations				—			—			40,831			20,173
	Income (loss) from continuing operations				2,630			2,663			360,528			(147,749	)
	Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
		Depreciation and amortization expense			3,742			1,021			6,041			27,500
		(Gain) loss on disposal of property and equipment			604			(75	)		147			1,470
		Tax expense allocated to Additional Capital related to bankruptcy			1,511			—			—			—
		Gain of extinguishment of debt			—			—			(378,068	)		—
		Reorganization expense			—			—			39,629			30,847
		Compensation expense related to stock options			28			—			—			—
		Asset impairment			—			—			—			86,316
		Deferred taxes						—			—			—
		Provision for doubtful accounts			6			—			419			2,547
		Changes in operating assets and liabilities:
			Trade accounts receivable		32			2,697			25,658			38,806
			Settlement receivable		(996	)		—			—			—
			Inventory and aircraft supplies		475			(255	)		(259	)		(120	)
			Prepaid expenses and other		953			1,252			3,303			2,973
			Accounts payable and accrued expenses		90			(1,115	)		1,512			(23,495	)
			Accrued maintenance reserves		(585	)		283			(217	)		5,449
Net cash provided by operating activities					8,490			6,471			58,693			24,544
Investing activities:
	Proceeds from sale of assets				2,279			143			461			5,974
	Redemption of (establish) restricted cash				14			290			827			(1,024	)
	Buyout of aircraft lease				(1,300	)		—			—			—
	Capital expenditures				(1,683	)		(319	)		(1,845	)		(1,668	)
Net cash provided by (used in) investing activities					(690	)		114			(557	)		3,282
Financing activities:
	Proceeds from issuance of debt				440			55			—			—
	Payments on liabilities subject to compromise				—			—			(67,366	)		(43,088	)
	Issue common stock				172			—			—			—
	Repayments of long-term debt				(3,036	)		(897	)		(2,261	)		(2,646	)
Net cash used in financing activities					(2,424	)		(842	)		(69,627	)		(45,734	)
Cash provided by (used in) continuing operations					5,376			5,743			(11,491	)		(17,908	)
Cash provided by (used in) discontinued operations					—			—			2,629			17,263
Net increase (decrease) in cash and cash equivalents					5,376			5,743			(8,862	)		(645	)
Cash and cash equivalents at beginning of period					10,353			4,610			13,472			14,117
Cash and cash equivalents at end of period					15,729			10,353			4,610			13,472
Income taxes paid				$	386		$	—		$	10		$	—
Interest paid				$	423		$	154		$	2,363		$	7,404

The accompanying notes are an integral part of these financial statements.

F-6

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Operations

      Kitty Hawk, Inc. is a holding company and does not currently have any independent operations. The Company provides air freight services utilizing its two operating subsidiaries: (i) an expedited scheduled freight network (Kitty Hawk Cargo) and (ii) an all-cargo Boeing 727-200 cargo airline (Kitty Hawk Aircargo). Kitty Hawk Cargo operates a major independent city-to-city expedited freight network among 52 cities in the continental U.S. and selected cities in Canada providing next-morning and two-day delivery service through its hub in Fort Wayne, Indiana utilizing the aircraft of the Company’s cargo airline, third party aircraft when needed, and third party trucking services. The Company also has business alliances that allow it to provide freight services to 17 cities in Alaska and Hawaii. In addition to the services provided to the Company’s expedited scheduled freight network, the cargo airline provides ACMI services (supplying the aircraft, crew, maintenance and insurance for the customer) on short to medium-term contracts and ad-hoc charter services.

2. Summary of Significant Accounting Policies

Principles of Consolidation

      As of and for the year ended December 31, 2003 and the three months ended December 31, 2002, the consolidated financial statements include the accounts of Kitty Hawk, Inc. and its wholly-owned subsidiaries, Kitty Hawk Aircargo and Kitty Hawk Cargo. For periods prior to October 1, 2002, the consolidated financial statements include the accounts of Kitty Hawk, Inc. and its nine wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassification

      Certain balances from prior periods have been reclassified to conform to the current year presentation.

Fresh Start Accounting

      The Company emerged from bankruptcy on September 30, 2002, at which time it adopted the provisions of Statement of Position 90-7 entitled, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“Fresh Start Accounting”). As a result, all assets and liabilities were restated to reflect their respective fair values. The consolidated financial statements after emergence are those of a new reporting entity (the “Successor”) and are not comparable to the financial statements of the pre-emergence company (the “Predecessor”). (See Note 3)

Use of Estimates

      The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments and incorporates any changes in such estimates and judgments into the accounting records underlying the Company’s consolidated financial statements. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates include the allowance for doubtful accounts, allowance for excess inventory, maintenance reserves and lease return reserves. Actual results may differ from these estimates.

Cash and Cash Equivalents

      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

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Cash and Short-Term Investments

      At December 31, 2003 and 2002, restricted cash and short-term investments consist primarily of certificates of deposit that collateralize the Company’s corporate credit card program and outstanding letters of credit issued to various trade vendors.

Allowance for Doubtful Accounts and Concentration of Credit Risk

      Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all of the Company’s receivables are due from customers in North America.

      The Company extends credit to its customers based upon its evaluation of the following factors: (i) the customer’s financial condition, (ii) the amount of credit the customer requests and (iii) the customer’s actual payment history (which includes disputed invoice resolution). In some cases, the Company extends open credit to customers that refuse to make financial disclosure, but have an extended history of timely payment and low levels of disputed invoices. The Company does not typically require its customers to post a deposit or supply collateral. The Company’s allowance for doubtful accounts is based on current market conditions and periodic reviews of customer credit worthiness. Credit losses from continuing operations have consistently been within management’s expectations.

      The activity in the Company’s allowance for doubtful accounts is as follows:

			Additions
	Balance at the									Balance at the
	Beginning of		Charged to							End of the
Description	the Period(1)		Expense(1)		Recoveries(1)		Deductions(1)			Period(1)
	(In thousands)
Year ended December 31, 2001	$	3,842	$	2,547	$	500	$	(3,696	)	$	3,193
Nine months ended September 30, 2002		3,193		381		353		(1,742	)		2,185
Three months ended December 31, 2002		2,185		—		—		(1,693	)		492
Year ended December 31, 2003	$	492	$	6	$	273	$	(232	)	$	539

(1)  Amounts include only the activity related to the Company’s continuing operations.

Assets Held for Sale

      Assets held for sale at December 31, 2003 are comprised of one Boeing 727 cargo aircraft and several Pratt & Whitney JT8D aircraft engines. These assets have been recorded at values approximating their current fair value, less the estimated costs to dispose of the assets. These assets are not currently being used by the Company. The Company is actively marketing these assets. Assets held for sale at December 31, 2002 included an office building complex which was sold in July 2003.

Inventory and Aircraft Supplies

      Inventory and aircraft supplies consist of rotable aircraft parts, expendable parts and consumable supplies. These assets were valued at their approximate fair market value pursuant to the provisions of Fresh Start Accounting on September 30, 2002 (see Note 3). As inventory is acquired or repaired, it is added to inventory at the cost to acquire the parts and supplies or to repair the parts. As inventory is used in maintenance operations, it is expensed at the average carrying costs of that part or supply.

Property and Equipment

      The Company’s property and equipment was adjusted to its current fair market value pursuant to the provisions of Fresh Start Accounting (see Note 3) on September 30, 2002. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (taking into consideration for

F-8

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

airframes and aircraft engines the next scheduled major maintenance event), with estimated residual values of up to $50,000 for Pratt & Whitney JT8D engines.

      Estimated useful lives are as follows:

Airframes and engines	1 - 4 years
Machinery and equipment	3 - 7 years
Buildings and leasehold improvements	5 - 15 years

      Expenditures for additions, improvements, aircraft modifications and heavy C-check maintenance costs are capitalized. Routine maintenance and repairs are expensed when incurred. The Company maintains maintenance reserves for Company owned airframes and aircraft engines which, at September 30, 2002, the Company intended to maintain in revenue service or return to revenue service. These maintenance reserves for periodic airframe maintenance (light C-checks) and engine heavy shop visits are accrued based on the hours flown. For owned airframes and aircraft engines acquired after September 30, 2002 or which were originally identified as not returning to revenue service and are returned to revenue service, any light C-checks or engine heavy shop visits will be capitalized and amortized to the next scheduled maintenance event. For airframes and engines that are leased from third parties, reserves for periodic maintenance events are only recorded in the event the lease return conditions require a maintenance event to be performed prior to the expiration of the lease (See Note 10).

      The activity in the reserves related to airframe and engine heavy maintenance and lease return conditions is as follows:

	Balance at the								Balance at the
	Beginning of			Charged to					End of the
	the Period			Expense		Deductions			Period
Three months ended December 31, 2002	$	9,827	(1)	$	642	$	(360	)	$	10,109
Year ended December 31, 2003	$	10,109		$	606	$	(2,328	)	$	8,387

(1)  Balance established on September 30, 2002 as a result of Fresh Start Accounting (See Note 3).

Accounting for Impairment of Long-Lived Assets

      The Company evaluates all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted net cash flows they will generate.

Income Taxes

      The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, deferred income tax assets and liabilities are calculated based on the difference between the financial statement and tax basis of assets and liabilities as measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities. An allowance against deferred tax assets is recorded in whole or in part when it is more likely than not that such tax benefits will not be realized. (See Note 9).

Balance Sheet Financial Instruments: Fair Values

      The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of long-term debt approximates carrying value as the interest rates charged on such debt approximates current market rates available to the Company.

F-9

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

      Scheduled freight revenue, net of discounts offered, is recognized upon completion of delivery. Postal, ACMI and ad-hoc charter revenue is recognized when the service is completed.

Earnings Per Share

      Predecessor: Basic earnings per share, for the periods presented in these financial statements prior to October 1, 2002, are based upon the weighted average number of common shares outstanding during each period. There were no dilutive shares outstanding during the periods presented. All predecessor shares were cancelled in conjunction with the Company’s emergence from bankruptcy (See Note 3).

      Successor: Pursuant to the Plan of Reorganization (See Note 3), in March 2003, the Company issued common shares and warrants to purchase common shares to its former creditors. Because the exercise price of the warrants is nominal, such warrants are treated as outstanding common shares for purposes of calculating earnings per share. These shares are deemed to be outstanding as of October 1, 2002.

      A reconciliation of the shares used in the per share computation are as follows:

	Successor				Predecessor
			Three Months		Nine Months
	Year Ended		Ended		Ended		Year Ended
	December 31,		December 31,		September 30,		December 31,
	2003		2002		2002		2001
Weighted average shares outstanding — basic		50,135,763		49,999,970		17,132,566		17,132,566
Effect of dilutive securities		1,687,116		—		—		—
Weighted average shares outstanding — diluted		51,822,879		49,999,970		17,132,566		17,132,566

Stock Options

      In conjunction with the Company’s bankruptcy proceedings, all of the Company’s stock-based compensation plans were cancelled as of September 30, 2002. In September 2003, the Company’s stockholders approved the Kitty Hawk 2003 Long Term Equity Incentive Plan (“the Plan”). These options are accounted for under the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations (See Note 16).

      The Company is required to disclose the pro forma effect of accounting for stock options using the fair value recognition provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation” and SFAS Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. The Company uses the Black-Scholes option pricing model to calculate the fair value of options. The following weighted average assumptions have been used in determining the fair value of the options granted:

	Successor					Predecessor
				Three Months		Nine Months
	Year Ended			Ended		Ended		Year Ended
	December 31,			December 31,		September 30,		December 31,
	2003			2002		2002		2001
Risk free interest rate		4.684			—		—		—
Expected life (years)		7			—		—		—
Volatility		50	%		—		—		—
Dividend yield		0	%		—		—		—

F-10

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Some of these assumptions are judgmental and highly sensitive in the determination of pro forma compensation expense. The following table illustrates the effect on net income and earnings per share if the Company had applied fair value accounting.

		Successor				Predecessor
				Three Months		Nine Months
		Year Ended		Ended		Ended			Year Ended
		December 31,		December 31,		September 30,			December 31,
		2003		2002		2002			2001
		(In thousands, except per share data)
Net income (loss), as reported		$	2,630	$	2,663	$	319,697		$	(167,922	)
Add: Total stock-based employee compensation expense determined under the intrinsic method for all awards, net of related tax effects			28		—		—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			288		—		—			—
Pro forma net income (loss)		$	2,370	$	2,663	$	319,697		$	(167,922	)
Basic earnings (loss) per share:
	Continuing operations — as reported	$	0.05	$	0.05	$	(1.02	)	$	(8.62	)
	Continuing operations — pro forma	$	0.05	$	0.05	$	(1.02	)	$	(8.62	)
	Discontinued operations — as reported	$	—	$	—	$	(2.39	)	$	(1.18	)
	Discontinued operations — pro forma	$	—	$	—	$	(2.39	)	$	(1.18	)
	Extraordinary item, net — as reported	$	—	$	—	$	22.07		$	—
	Extraordinary item, net — pro forma	$	—	$	—	$	22.07		$	—
	Total basic earnings per share — as reported	$	0.05	$	0.05	$	18.66		$	(9.80	)
	Total basic earnings per share — pro forma	$	0.05	$	0.05	$	18.66		$	(9.80	)
Diluted earnings (loss) per share:
	Continuing operations — as reported	$	0.05	$	0.05	$	(1.02	)	$	(8.62	)
	Continuing operations — pro forma	$	0.05	$	0.05	$	(1.02	)	$	(8.62	)
	Discontinued operations — as reported	$	—	$	—	$	(2.39	)	$	(1.18	)
	Discontinued operations — pro forma	$	—	$	—	$	(2.39	)	$	(1.18	)
	Extraordinary item, net — as reported	$	—	$	—	$	22.07		$	—
	Extraordinary item, net — pro forma	$	—	$	—	$	22.07		$	—
	Total diluted earnings per share — as reported	$	0.05	$	0.05	$	18.66		$	(9.80	)
	Total diluted earnings (loss) per share — pro forma	$	0.05	$	0.05	$	18.66		$	(9.80	)

3. Bankruptcy Proceedings and Fresh Start Accounting

      On or about May 1, 2000 (the “Petition Date”), Kitty Hawk, Inc. and all nine of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”). On

F-11

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

August 5, 2002, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Debtors’ Final Joint Plan of Reorganization (the “Plan of Reorganization”). On September 30, 2002, the Plan of Reorganization became effective (the “Effective Date”). In January 2003, the Bankruptcy Court approved amendments to our Plan of Reorganization and entered an order confirming our amended Plan of Reorganization.

      Kitty Hawk, Inc. and its two wholly-owned subsidiaries, Kitty Hawk Cargo, Inc. (hereafter “Cargo”) and Kitty Hawk Aircargo, Inc. (hereafter “Aircargo”), emerged from bankruptcy on the Effective Date. Prior to the Effective Date, the seven other subsidiaries of Kitty Hawk, Inc. that filed for bankruptcy were merged with and consolidated into Kitty Hawk, Inc. pursuant to the Plan of Reorganization. As a result, Kitty Hawk, Inc., Cargo and Aircargo are the surviving corporate entities pursuant to the Plan of Reorganization.

      Pursuant to the Plan of Reorganization, all of Kitty Hawk, Inc.’s previously issued common stock and 9.95% Senior Secured Notes due 2004 (the “Senior Notes”) were cancelled as of the Effective Date. Holders of Kitty Hawk, Inc.’s previously issued and outstanding common stock received no consideration in connection with the cancellation of their shares of common stock.

      On or about the Effective Date, in addition to payment of certain administrative claims arising from the Company’s bankruptcy proceedings, the Company delivered $29.1 million to HSBC Bank USA, as successor Trustee and Collateral Trustee (the “Trustee”), for the benefit of the owners of its Senior Notes (the “Noteholders”). The Plan of Reorganization provides for the Company’s former general unsecured trade creditors to receive only shares of common stock in exchange for their claims. The Plan of Reorganization also provided for Aircargo to purchase from affiliates of Pegasus Aviation, Inc. (“Pegasus”) two aircraft and related engines and to continue to lease four aircraft and related engines from affiliates of Pegasus under modified operating leases as a settlement of Pegasus’ claims (see Note 8). The purchase of these aircraft and related engines from Pegasus occurred in 2002.

      Because none of the New Stock was issued as of December 31, 2002, the consolidated financial statements at December 31, 2002 reflect no common stock as being issued or outstanding. In March 2003, in return for debt forgiveness, settlements and other compromises, which were settled in September 2002, the Company issued New Stock and warrants to purchase New Stock to the Company’s former creditors in the following amounts:

				Shares of
		Shares of		New Stock
		New Stock		Represented
Creditor		Issued		by Warrants
Holders of the Company’s former Senior Notes			28,244,655		12,255,315
Trusts for the benefit of the Company’s former general unsecured trade creditors			7,000,000		—
An affiliate of Pegasus Aviation, Inc.			2,500,000		—
	Total		37,744,655		12,255,315

      The warrants have an exercise price of $0.000001 per share, a term of 10 years and are exercisable only by a citizen of the U.S. as defined in 49 U.S.C. § 40102(a)(15). The 7,000,000 shares of New Stock to be issued to the Company’s former general unsecured trade creditors were issued initially to two trusts. These trusts will hold the shares for the benefit of the Company’s former general unsecured trade creditors and will distribute the shares once all claims are allowed or dismissed.

      Under Fresh Start Accounting, the Company recorded certain adjustments to its assets, liabilities and stockholders’ equity because (i) the estimated fair market value of the Company’s assets after the Effective Date were less than the total of the post-petition liabilities and allowed claims which will be converted to New Stock and (ii) the holders of the Company’s pre-Effective Date voting stock did not

F-12

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

receive 50% or more of the voting stock in reorganized Kitty Hawk under the Plan of Reorganization. Under Fresh Start Accounting, all of the assets and liabilities of the Company were adjusted to their estimated fair market value on the Effective Date. Fair market values were determined through a combination of third party appraisals, internal sources and transactions related to the Company’s assets which have occurred within the twelve months prior to the Effective Date.

      In connection with the reorganization of the Company, the Company engaged financial advisors to determine the estimated reorganization equity value of reorganized Kitty Hawk as of September 30, 2002. The financial advisors based their valuation on two customary methods: the discounted cash flow method using the Company’s projected operating results and a comparable company analysis method. The results of their valuation determined that the fair market value of reorganized Kitty Hawk ranged between $12.9 million and $16.6 million.

      The estimated fair market value of the Company’s net assets exceeded the estimated reorganization equity value by $2.9 million. As a result, the value of property and equipment and certain other assets were reduced on a proportionate basis. The following table illustrates the result of the Fresh Start Accounting adjustments:

			Fresh Start Accounting Adjustments
			Pre-Emergence										Reorganized
			September 30,				Effective Date			Fresh Start			Balance Sheet of
			2002		Extinguishment		Payments and			Accounting			September 30,
			(Unaudited)		of Debt		Adjustments			Adjustments			2002
			(In thousands)
Current assets
	Cash and cash equivalents		$	36,083	$	—	$	(31,473	)(a)	$	—		$	4,610
	Restricted cash and short-term investments			1,969		—		—			—			1,969
	Trade accounts receivable, net			14,403		—		—			—			14,403
	Assets held for sale			5,160		—		—			(3,283	)(c)		1,877
	Inventory and aircraft supplies			2,577		—		—			3,182	(c)		5,759
	Prepaid expenses			3,680		—		—			—			3,680
	Other current assets, net			1,704		—		—			(668	)(c)		1,036
		Total current assets		65,576		—		(31,473	)		(769	)		33,334
Property and equipment, net				13,001		—		—			(81	)(c)		12,920
Other assets, net				3,918		—		—			(2,818	)(c)		1,100
		Total assets	$	82,495	$	—	$	(31,473	)	$	(3,668	)	$	47,354

F-13

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

			Fresh Start Accounting Adjustments
			Pre-Emergence												Reorganized
			September 30,						Effective Date			Fresh Start			Balance Sheet of
			2002			Extinguishment			Payments and			Accounting			September 30,
			(Unaudited)			of Debt			Adjustments			Adjustments			2002
			(In thousands)
Current liabilities
	Accounts payable — trade		$	2,100		$	—		$	—		$	—		$	2,100
	Accrued wages			2,635			—			—			—			2,635
	Other accrued expenses			6,548			—			—			917	(c)		7,465
	Accrued professional fees			1,183			—			—			—			1,183
	Other taxes payable			459			—			—			—			459
	Accrued maintenance reserves			8,305			—			—			(777	)(c)		7,528
	Current maturities of long-term debt			2,937			—			—			—			2,937
		Total current liabilities		24,167			—			—			140			24,307
Long-term debt				2,882			—			—			—			2,882
Liabilities subject to compromise				426,141			(394,668	)(e)		(31,473	)(a)		—			—
Lease return provisions				2,299			—			—			—			2,299
Other long-term liabilities				1,851			—			—			(585	)(c)		1,266
Commitments and contingencies
Stockholders’ equity (deficit):				—			—			—			—			—
	Preferred stock			—			—			—			—			—
	Common stock			171			—			—			(171	)(b)		—
	Additional capital			134,657			16,600	(e)		—			(134,657	)(b)		16,600
	Retained deficit			(509,673	)		378,068	(e)		—			131,605	(c, d)		—
		Total stockholders’ equity (deficit)		(374,845	)		394,668			—			(3,223	)		16,600
		Total liabilities and stockholders’ equity	$	82,495		$	—		$	(31,473	)	$	(3,668	)	$	47,354

(a)	Payments made on September 30, 2002 in accordance with the Plan of Reorganization.
(b)	All shares of common stock which were outstanding as of September 30, 2002 were cancelled in accordance with the Plan of Reorganization.
(c)	These assets and liabilities were adjusted to their fair market value as of September 30, 2002.
(d)	The retained deficit was eliminated due to the adoption of Fresh Start Accounting.
(e)	Gain of extinguishment of debt is calculated as follows (amounts in thousands):

Liabilities subject to compromise	$	394,668
Less reorganization value		16,600
Gain of extinguishment of debt	$	378,068

F-14

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Liabilities Subject to Compromise and Reorganization Expense

      As part of Fresh Start Accounting, liabilities subject to compromise for continuing and discontinued operations in the amount of $394.7 million were exchanged for the right to receive New Stock as part of the discharge of debt in the bankruptcy. These liabilities are identified below: (amounts in thousands)

		September 30,
		2002
Trade accounts payable and accrued expenses		$	98,799
Senior notes, including accrued interest			277,251
Other long-term debt			18,618
	Total	$	394,668

      In accordance with SOP 90-7, the Predecessor company recorded all expenses incurred as a result of the Chapter 11 cases as reorganization items. The table below summarizes these items:

		Nine Months
		Ended		Year Ended
		September 30,		December 31,
		2002		2001
		(In thousands)
Professional fees		$	5,001	$	11,812
Return of lienholder aircraft, net			—		25,259
Return of leased aircraft, net			—		5,605
Bankruptcy settlement expenses			34,628		—
	Total	$	39,629	$	42,676

5. Discontinued Operations

      During the three years ended December 31, 2003, the Company has undergone a significant number of changes in its operations as it initially entered and prepared to emerge from bankruptcy. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the operations that ceased, or were disposed of, in the last three years have been presented as discontinued operations and include the operations of the Company’s wide-body cargo airline, the non-continental U.S. operations of its expedited scheduled freight network and its air logistics service provider (including a small aircraft maintenance operation). The results of these operations and the related assets and liabilities of these operations have been segregated in the accompanying consolidated financial statements for the year ended December 31, 2001 and the nine months ended September 30, 2002.

      On May 1, 2000, the Company ceased operations of its wide-body air cargo airline and the non-continental U.S. operations of its expedited scheduled freight network. The property and equipment and other assets (inventory and aircraft supplies, airline operating certificates, etc.) related to these operations were taken out of service and either sold in a series of auctions, sold in individual transactions, or title was relinquished to parties with a secured interest in the assets.

      In December 2001, the Company sold the property and equipment, inventory and aircraft supplies and airline operating certificate of its air logistics service provider and its related small aircraft maintenance operation for $8 million cash and a $500,000 note receivable.

      Any assets of the discontinued operations which were not sold or otherwise disposed of as of August 31, 2002 became property of the Company when its subsidiaries were merged into it prior to the Effective Date and are included in the December 31, 2003 and 2002 balance sheets as continuing operations. These assets are comprised mainly of accounts receivable, various deposits and an office building complex in Michigan (which was subsequently sold in July 2003) and are not revenue producing.

F-15

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Any residual liabilities associated with these operations were treated in accordance with the Company’s Plan of Reorganization.

      In 2001, the Company recognized an asset impairment charge related to the aircraft of the wide-body operations. These assets were taken out of service on May 1, 2000 and efforts to dispose of these assets generated significantly less cash than their net book value. The assets were written down to management’s best estimate of the then fair market value.

      A summary of the Company’s discontinued operations is as follows:

	Predecessor
	Nine Months
	Ended			Year Ended
	September 30,			December 31,
	2002			2001
	(In thousands)
Revenue	$	949		$	19,535
Operating expenses		686			21,190
Asset impairment		32,683			9,100
Interest expense		—			—
Other expense		8,411			3,919
Loss on asset disposal		—			5,499
Loss before taxes		(40,831	)		(20,173	)
Income tax benefit		—			—
Loss from discontinued operations	$	(40,831	)	$	(20,173	)

6. Property and Equipment

      Property and equipment owned by the Company consisted of the following:

		December 31,
		2003			2002
		(In thousands)
Airframes and engines		$	9,056		$	8,372
Machinery and equipment			1,403			1,608
Buildings and leasehold improvements			1,914			1,906
Software			324			251
Other			1,018			1,037
	Total property and equipment		13,715			13,174
Less: Accumulated depreciation			(4,657	)		(1,021	)
	Net property and equipment	$	9,058		$	12,153

7. Asset Impairment

      The Company recorded impairment charges for continuing operations of $86.3 million for the year ended December 31, 2001. Throughout the bankruptcy proceedings, the Company encountered several triggering events which dictated that the Company review its long-lived assets for impairment. In January 2001, the Company received notification that the U.S. Postal Service would be canceling its existing contract with the Company as it entered into a long-term contract with a package delivery company to provide a similar service (See Note 11). The Company flew Boeing 727-200 cargo aircraft for its U.S. Postal Service contracts and the contract cancellation, coupled with the general downturn in the U.S. economy, caused the Company to review this fleet type and its supporting inventory for impairment.

F-16

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

This review dictated that a writedown of the aircraft and inventory was needed based on then current market values.

8. Long-Term Debt, Aircraft Purchase Agreements and Other Financing Arrangements

      Long-term debt, aircraft purchase agreements and other financing arrangements consisted of the following:

		December 31,
		2003		2002
		(In thousands)
1st Source Bank aircraft acquisition loan		$	2,322	$	4,431
Aircraft purchase agreements			—		513
Other			60		34
	Total debt		2,382		4,978
Less current portion			2,348		2,640
	Total long-term debt	$	34	$	2,338

      Pursuant to agreements reached with 1^st Source Bank (“1^st Source”) in November 2000 in settlement of lease obligations arising prior to the Company’s bankruptcy filing, Aircargo owed 1^st Source $2.3 million as of December 31, 2003, pursuant to a promissory note and a security agreement (collectively, the “1^st Source Note”). The 1^st Source Note is guaranteed by Kitty Hawk, Inc. and is secured by two Boeing 727-200 cargo aircraft, including five engines (collectively, the “1^st Source Collateral”). As of December 31, 2003, the 1^st Source Collateral had a carrying value of $136,000. The 1^st Source Note bears interest at a fixed rate of 8.9% per annum, provides for monthly principal and interest payments of $202,000, will fully amortize the debt obligation over its life, and matures in February 2005.

      The 1^st Source Note requires that Aircargo maintain the 1^st Source Collateral and keep it airworthy. There are no minimum collateral value or financial covenant requirements in the 1^st Source Note. In March 2004, the Company repaid the entire outstanding balance on the 1^st Source Note.

      In connection with the terms of the Plan of Reorganization, on June 30, 2002, Aircargo entered into Aircraft Purchase Agreements with affiliates of Pegasus to purchase two Boeing 727-200 cargo aircraft, which Aircargo was leasing under capital lease arrangements at the time. The purchase obligations were contingent upon the Company successfully exiting bankruptcy. Pursuant to the Aircraft Purchase Agreements, Aircargo would purchase each aircraft for an amount equal to $750,000, minus the monthly lease payments made since May 1, 2002 on each aircraft under the capital leases. Aircargo purchased one Boeing 727 on October 1, 2002, and executed a promissory note with a principal sum of $382,474 bearing interest at a fixed rate of 8.0% per annum and providing for monthly principal and interest payments of approximately $65,000. The promissory note matured on April 1, 2003. Aircargo consummated the purchase of the second Boeing 727 on December 17, 2002, and executed a promissory note with a principal sum of $256,673 bearing interest at a fixed rate of 8.0% per annum and providing for monthly principal and interest payments of approximately $65,000, which is equal to the monthly lease payment. The promissory note also matured on April 1, 2003.

      In support of the Company’s Plan of Reorganization, on July 3, 2002, the Company signed a commitment letter with KBK Financial, Inc. (“KBK”). The commitment letter provided for a $5.0 million receivables purchase facility (the “Facility”). The commitment originally expired September 1, 2002; however, prior to September 30, 2002, the commitment was extended through October 31, 2002. On October 31, 2002, the agreements pursuant to the commitment letter with KBK became effective. The Facility can be terminated by either party with thirty days’ prior written notice.

F-17

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Facility advances funds to the Company at a rate of 85% of the invoice amount upon KBK’s purchase of the Company’s current invoices offered for sale to KBK. Any invoices of the Company are available for sale to KBK under the Facility. Invoices may be offered on a daily basis, and the number of invoices offered is not limited. KBK can accept or reject offered invoices and is not obligated to purchase any invoices. KBK exercises control over the Company’s incoming lockbox receipts in order to ensure that the cash received on its purchased invoices is collected. KBK also has liens on the Company’s inventory, equipment (excluding airframes and engines), accounts, accounts and contract rights, contracts, drafts, acceptances, documents, instruments, chattel paper, deposit accounts and general intangibles, to secure any unpaid obligations of the Company.

      The Facility’s pricing incorporates both fixed discount and variable rate pricing components. The fixed discount is 0.6% of the invoice amount and is payable at the time of funding. The variable rate is KBK’s base rate, plus 2.00% per annum and is payable based on the number of days from the sale of the invoice to KBK through and including the third business day after the invoice is collected. At no time will the variable rate be less than 6.75%.

      The Facility has no financial covenants tied to the Company’s operating performance. As of December 31, 2003 or 2002, the Company had no amounts outstanding under this facility. In March 2004, the Company terminated this facility in accordance with the agreement.

      On March 22, 2004, the Company entered into a revolving credit facility with Wells Fargo Business Credit, Inc., or WFB. The revolving credit facility, or the Credit Facility, provides for borrowings of up to $10.0 million, subject to a borrowing base calculation, and is secured by substantially all of the Company’s assets, other than airframes, aircraft engines and aviation parts. The Company is required to meet certain financial and operating covenants under this Credit Facility.

      Maturities of long-term debt are as follows:

Year		December 31, 2003
		(In thousands)
2004		$	2,348
2005			34
	Total	$	2,382

9. Income Taxes

      The provision for income taxes for continuing operations consists of the following:

			Successor				Predecessor
					Three Months		Nine Months
			Year Ended		Ended		Ended		Year Ended
			December 31,		December 31,		September 30,		December 31,
			2003		2002		2002		2001
			(In thousands)
Current income tax provision			$	—	$	—	$	—	$	—
Deferred income tax:
	Federal			1,355		—		—		—
	State			156		—		—		—
		Total deferred income tax		1,511		—		—		—
		Total income tax expense	$	1,511	$	—	$	—	$	—

F-18

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The differences between the provision for income taxes for continuing operations and the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes are as follows:

		Successor						Predecessor
					Three Months			Nine Months
		Year Ended			Ended			Ended			Year Ended
		December 31,			December 31,			September 30,			December 31,
		2003			2002			2002			2001
		(In thousands)
Federal income tax (benefit) at statutory rate		$	1,408		$	905		$	(5,964	)	$	(50,234	)
State income taxes, net of federal benefit			104			63			(417	)		(3,516	)
Non-deductible expenses, principally meals			19			44			119			287
Change in valuation allowance for U.S. federal and state taxes			(1,531	)		(1,012	)		6,262			53,463
Tax expense allocated to Additional Capital related to bankruptcy			1,511			—			—			—
	Total	$	1,511		$	—		$	—		$	—

      Deferred tax assets were as follows:

			December 31,
			2003			2002
			(In thousands)
Deferred tax assets:
	Maintenance reserves		$	3,062		$	3,690
	Accounts receivable			4,650			4,878
	Property and equipment			4,239			6,324
	Net operating loss carryforward			1,245			—
	Alternative minimum tax credits			2,464			2,464
	Accrued expenses			977			812
		Gross deferred tax asset		16,637			18,168
Valuation allowance				(16,637	)		(18,168	)
		Net deferred tax asset	$	—		$	—

      The Company has recorded a valuation allowance to the extent it is more likely than not that a tax benefit will not be realized prior to expiration of the carryforward periods. As a result of the Company incurring significant operating losses, there can be no assurance of profitability.

      At December 31, 2003, the Company had net operating losses of approximately $3.4 million available to offset future taxable income, resulting in a deferred tax asset of approximately $1.2 million at December 31, 2003. These losses expire in 2023. Alternative minimum tax credits can be used to reduce certain taxes that may be payable in the future and have no expiration date. None of the temporary deductible differences comprising the deferred tax asset balance are limited; however, any future change in control as defined by the Internal Revenue Code, would result in a limitation on the use of these deductions.

10. Aircraft Commitments

      In connection with the terms of the Company’s Plan of Reorganization, on October 1, 2002, Aircargo entered into four new operating leases for Boeing 727-200 cargo aircraft in with affiliates of Pegasus with

F-19

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

monthly rental rates ranging from $65,000 to $85,000. Under the leases, in addition to rental payments, Aircargo is also required to pay each month maintenance reserves on the airframes, engines, landing gear and auxiliary power units, with the amount determined based on flight hours or cycles of utilization during the immediately preceding month. Each of the leases expires in May 2004.

      Upon the expiration of the leases, each aircraft must be returned to the lessor with the same number of available flight hours or cycles on the airframe, engines, landing gear and auxiliary power units until the next scheduled maintenance event as were available at the time Aircargo originally took delivery of each of the aircraft. When Aircargo originally took delivery, each of the aircraft had just undergone a light or heavy “C” check maintenance event. Under the leases, in lieu of performing a light or heavy “C” check on each of the aircraft prior to returning them to the lessor, Aircargo may instead pay the lessor $750,000 per airframe. The $750,000 will be reduced by the amount of airframe reserves paid to the lessor under the leases.

      On September 30, 2002, in connection with the terms of the Company’s Plan of Reorganization, Aircargo entered into an Aircraft and Engine Use Agreement (the “Trust Agreement”) with the Kitty Hawk Collateral Liquidating Trust (the “Trust”). The Trust Agreement expires September 30, 2004. The Trust owns certain aircraft and engines that were previously owned by the Company and were pledged to secure repayment of the Senior Notes. Pursuant to an agreed court order, the Trustee for the Senior Notes repossessed the pledged aircraft and related engines in October 2001, although the aircraft and engines have remained on Aircargo’s FAR Part 121 operating certificate. Despite the repossession, Aircargo continued to operate the aircraft and engines under a bankruptcy court approved aircraft use arrangement and there was no interruption to the Company’s operations. Aircargo now operates the aircraft and engines under the Trust Agreement.

      The Trust Agreement makes twelve Boeing 727-200 cargo aircraft and thirty-three engines (collectively the “Trust Aircraft”) available to Aircargo for operation on Aircargo’s FAR Part 121 operating certificate. The Trust Agreement provides for Aircargo to pay for a minimum use of the Trust Aircraft equivalent to an aggregate of 450 block hours per month. The Company does not foresee an instance in which the Company would pay minimum block hour usage above what is actually utilized because the monthly minimum use requirements and payment obligation may be reduced if certain of the Trust Aircraft are unavailable for use. As of December 31, 2003, ten of the twelve Trust Aircraft are available for use by Aircargo and are airworthy. Two of these Trust Aircraft are not available for use by Aircargo as a result of the settlement agreement Aircargo reached with the United States Postal Service (the “U.S. Postal Service”) (See Note 11). The unavailability of these two aircraft does not affect the minimum use requirements or payment obligation.

      The Trust Agreement requires that Aircargo provide line and routine maintenance and maintain adequate insurance on the Trust Aircraft. In the event new regulations are introduced that require new equipment be installed, modifications be made, or additional maintenance be performed on the Trust Aircraft, Aircargo’s obligation to perform the required maintenance is limited to a maximum of $50,000 per airframe or engine. The Trust is responsible for the cost of any heavy airframe maintenance and engine heavy shop visit, but may choose not to complete such maintenance or overhaul work, thereby taking the airframe or engine out of service. Therefore, over time, fewer Trust Aircraft may be available for use by Aircargo.

      We entered into an amendment to the Trust Agreement effective January 1, 2004. This amendment primarily extends, with certain minimum usage commitments, the lease terms for 11 Boeing 727-200 cargo airframes from September 30, 2004 to dates ranging from December 31, 2004 to December 31, 2006 and extends the use of 29 aircraft engines from September 30, 2004 until the aircraft engines reach the earlier of the estimated time of the next heavy maintenance event or December 31, 2007. In addition, the Company has the option in October 2004, to further extend the leases on two of these airframes from

F-20

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2004 up to December 31, 2007 and on two more of these airframes from December 31, 2004 up to June 30, 2008.

      In September 2003, the Company entered into an agreement to lease four Pratt Whitney JT8D-15 engines for a period of three years. The lease provides for monthly minimum lease payments of 100 hours at $50 per hour for each engine.

      The minimum future rental costs for the Company’s airframes and engines were as follows:

		December 31,
Year		2003
		(In thousands)
2004		$	4,220
2005			240
2006			180
	Total	$	4,640

11. Non-Aircraft Commitments and Contingencies

      In June 1999, the Company moved the hub for its scheduled freight operations from Terre Haute, Indiana to Fort Wayne, Indiana and entered into a twenty-five year operating lease for a 239,000 square foot facility with a monthly lease rate of $168,775. As part of the Company’s bankruptcy proceedings, the lease agreement was modified to allow the deferral of (i) the full monthly lease rate for 6 months beginning January 1, 2002 and (ii) 50% of the monthly lease rate for one year beginning July 1, 2002. The deferred rent is being repaid over a 48 month period beginning July 5, 2003 and bears interest at 5% per annum from July 5, 2003. As of December 31, 2003, the Company has recorded $1.8 million for future repayment of the deferred rent. Also in June 1999, the Company entered into a twenty-five year ground lease with the Fort Wayne-Allen County Airport Authority to lease ramp space with a monthly lease rate of $14,700, which is subject to annual adjustments based on adjustments in the U.S. Consumer Price Index. There were no rent concessions associated with this lease.

      The Company also leases office buildings, airport aprons, cargo storage and related facilities under noncancelable operating leases which expire on various dates through December 2007. In addition, the Company periodically leases other facilities and equipment under month-to-month lease agreements.

      The minimum rental costs for the Company’s facilities and equipment (excluding airframes and engines) were as follows:

		December 31,
Year		2003
		(In thousands)
2004		$	2,898
2005			2,822
2006			2,848
2007			2,594
2008			2,220
Thereafter			25,301
	Total	$	38,683

      Directives and Service Bulletins (“Directives”) issued by the Federal Aviation Administration, or FAA, including those issued under the FAA’s “Aging Aircraft” program, are issued on an ad-hoc basis and may cause the Company’s owned or leased aircraft and engines to be subject to extensive 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

F-21

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

time and the cost of complying with such Directives cannot currently be estimated, but could be substantial.

      In August 1999, Aircargo entered into Contract Number W-Net-99-01 (hereafter “the W-Net Contract”) with the U.S. Postal Service, which had a term of six years. The W-Net Contract required the Company to provide ACMI, ground-handling, mail sorting and related services in a hub and spoke system for the western continental United States through a hub at a de-commissioned U.S. Air Force base in Sacramento, California. The Company began operations under the W-Net Contract on August 28, 1999. The type and amount of operations required by the W-Net Contract caused the Company to enter into a number of aircraft leases and obtain equipment in order to provide the W-Net Contract services and continue to meet the Company’s other operational and contractual requirements. A number of Company owned aircraft and engines were designated in the contract as available to provide the required W-Net Contract services. The W-Net Contract was amended a number of times over its life.

      In January 2001, the U.S. Postal Service announced that it had reached an agreement with a package delivery company as a “sole source provider” to provide the U.S. Postal Service with airlift for its Express and Priority Mail products, as well as general mail carrying capabilities. The U.S. Postal Service subsequently elected to terminate the W-Net Contract for convenience effective August 27, 2001. The W-Net Contract contained a “Termination for Convenience” clause that provided for a method of establishing the obligations of the U.S. Postal Service to the Company in the event the U.S. Postal Service unilaterally elected to terminate the contract without cause prior to the W-Net Contract’s scheduled expiration date. The Company prepared detailed estimates based upon the Termination for Convenience clause and submitted those to the U.S. Postal Service subsequent to the termination of operations under the W-Net Contract. The Company and the U.S. Postal Service entered into a negotiated settlement (the “T for C Settlement”) on January 29, 2002 that, among other things, (i) settled all claims of the Company against the U.S. Postal Service and all obligations of the U.S. Postal Service to the Company arising from the Termination for Convenience of the W-Net Contract and (ii) provided for the U.S. Postal Service to pay the Company an aggregate of $30.9 million, which was received by the Company in 2002 resulting in other income of $29.4 million.

      The T for C Settlement contains conditions that affect the Company’s future operations relative to some assets the Company owns or could operate under the Trust Agreement. A significant component of the T for C Settlement was the aircraft and engine book values that would have been amortized over the remaining four years of the W-Net Contract had the U.S. Postal Service not elected to unilaterally terminate the W-Net Contract. As a result, the Company may continue to own and sell certain aircraft and engines that were designated in the W-Net Contract (the “W-Net Aircraft”), but may not use the W-Net Aircraft in revenue service. Further, if the Company sells a W-Net Aircraft for more than the projected book value established in the T for C Settlement, the excess proceeds are payable to the U.S. Postal Service. Given the current market conditions, the Company does not expect to sell W-Net Aircraft for more than the projected book value. The W-Net Aircraft that are owned by the Company are classified as assets held for sale in the accompanying consolidated financial statements.

      In July 2002, the Company filed a demand for binding arbitration against EGL, Inc. d/b/a Eagle Global Logistics (“EGL”) with the American Arbitration Association to resolve its claim to collect for freight transportation services rendered to EGL in the amount of approximately $3.7 million plus attorneys’ fees. On August 18, 2003, the arbitrators ruled in favor of Kitty Hawk, awarding Kitty Hawk $3.7 million. On September 8, 2003, EGL timely filed a motion to modify and correct the award, which was denied by the arbitrators on September 23, 2003. The award is to be paid pursuant to a mutually agreeable payment schedule. During 2003, EGL paid Kitty Hawk $2.0 million. The remaining $1.7 million is scheduled to be paid in three quarterly installments of $0.5 million in March, June and September 2004, with the balance due in December 2004. The remaining payments owed to Kitty Hawk are secured by a letter of credit which expires in December 2004.

F-22

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      General Motors and Delphi Automotive were sued in Wayne County, Michigan by a number of air charter carriers in connection with air transportation services the Company arranged with them on behalf of General Motors and Delphi Automotive and for which the air charter carriers were not paid as a result of the Company’s bankruptcy. The air charter carriers are seeking to recover approximately $4.6 million from General Motors and Delphi Automotive. General Motors has named the Company as a third party defendant in the litigation and is seeking indemnification of up to $4.6 million against the Company. The parties have agreed that the indemnification claim will be heard in the Bankruptcy Court and that the Company will be dismissed from the litigation in Wayne County, Michigan. The Company believes this claim should have been discharged when the Plan of Reorganization was confirmed by the Bankruptcy Court. No amounts have been accrued for this contingency.

      In the normal course of business, the Company is a party to various legal proceedings and other claims. While the outcome of these proceedings and other claims cannot be predicted with certainty, management does not believe these matters will have a material adverse affect on the Company’s financial condition or results of operations.

12. Related Party Transactions

      The Company has agreements with Pegasus and the Trust to lease or use aircraft and engines (see Note 10). Under the Plan of Reorganization, Pegasus received approximately 5.0% of New Stock on a fully-diluted basis and the beneficiaries of the Trust received approximately 81.0% of New Stock on a fully-diluted basis in the form of shares of New Stock or warrants to acquire New Stock. As of December 31, 2003, the Company owed the Trust approximately $0.4 million for aircraft usage in December 2003. A member of the Company’s Board of Directors was also the managing director of a beneficiary of the Trust until February 1, 2004.

      For the year ended December 31, 2003 and the three months ended December 31, 2002, the Company paid approximately $10.3 million and $3.4 million related to various agreements with Pegasus and the Trust for use of aircraft and engines and for required payments of maintenance reserves. In addition, the Trust reimbursed the Company $2.6 million for heavy maintenance events paid on behalf of the Trust under the agreement.

      The Company has a registration rights agreement dated as of December 15, 2002, with Everest Capital Limited, Resurgence Asset Management L.L.C. and Stockton, LLC. Under this agreement, the Company granted each of Everest Capital, Resurgence Asset Management and Stockton, and certain of their subsequent transferees, the right to make one written demand on the Company on or after February 2, 2003 to file a registration statement under the Securities Act of 1933 (the “Securities Act”), covering some or all of the shares of common stock they received in connection with the Company’s plan of reorganization. The Company’s obligation to file a registration statement under the registration rights agreement is limited to offerings that will result in aggregate gross proceeds of at least $2.0 million, and the Company is not required to register these securities for sale as a “shelf-registration” under Rule 415 of the Securities Act.

      Everest Capital, Resurgence Asset Management and Stockton, and certain of their subsequent transferees, may also require the Company to include their shares of common stock in a registration statement under the Securities Act filed to sell securities for the Company or another holder of the Company’s securities. If the Company files a registration statement in connection with a business combination or an employee benefit plan, the Company is not required to include the resale of their shares on the registration statement.

      The Company will bear virtually all of the expenses associated with registering the shares of common stock subject to the registration rights agreement. The Company’s obligations under the registration rights agreement will cease when the shares subject to the registration rights agreement have been sold pursuant

F-23

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to a registration statement or Rule 144 of the Securities Act or cease to be outstanding or subject to transfer restrictions.

13. Employee Compensation Plans and Arrangements

      The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code which covers all employees meeting minimum service requirements. Under the plan, during 2003, employees could voluntarily contribute up to the maximum limit of $12,000. The Company provides discretionary matching contributions of 25% of the employees’ contribution up to 20% of the employees’ salary. During 2003, 2002 and 2001, Company contributions amounted to $0.3 million, $0.3 million and $0.6 million, respectively. Employee contributions are remitted as they are collected.

14. Collective Bargaining Agreements

      The pilots of Aircargo, the Company’s air cargo subsidiary, were represented by the Kitty Hawk Pilots Association International (“KPA”). On October 16, 2003, the KPA ratified a Merger Agreement to merge with the Airline Pilots Association International (“ALPA”), a national union representing airline pilots. The merger agreement was also ratified by the Executive Committee of ALPA on October 21, 2003. The merger became effective on January 1, 2004.

      On October 17, 2003, the KPA ratified its first Collective Bargaining Agreement with Aircargo. The agreement covers all flight crew members of Aircargo with respect to compensation, benefits, scheduling, grievances, seniority, and furlough and has a ten year term. The agreement was implemented on December 1, 2003. As of December 31, 2003, approximately 77.8% of Aircargo’s flight crew members were members of the KPA, which represented approximately 16.7% of the Company’s total number of employees. Aircargo does not anticipate that the agreement will have a material adverse affect on its costs or operations.

15. Significant Customers

      The Company provided scheduled freight services to five customers who accounted for 38.0%, 40.0%, 35.1% and 31.9% of its scheduled freight revenue for the year ended December 31, 2003, the three months ended December 31, 2002, the nine months ended September 30, 2002, and the year ended December 31, 2001, respectively. The Company had receivables from these customers that comprised approximately 40.2% and 26.0% of the Company’s outstanding accounts receivable balance as of December 31, 2003 and 2002, respectively. Historically, this level of concentration of risk is typical for the on-going operations of the Company. Of these customers, one is secured by a letter of credit covering up to $1.2 million of valid open account invoices. The Company does not intend to permit total outstanding receivables for this customer to exceed $1.2 million, and as of December 31, 2003, this customer owed the Company $0.9 million. The letter of credit expires March 31, 2004.

      Aircargo provided ACMI services to one customer who accounted for 100.0%, 0.0%, 0.0% and 100.0% of its ACMI revenue for the year ended December 31, 2003, the three months ended December 31, 2002, the nine months ended September 30, 2002, and the year ended December 31, 2001, respectively. The Company had receivables from this customer that comprised approximately 0.0% and 1.3% of the Company’s outstanding accounts receivable balance as of December 31, 2003 and 2002, respectively.

16. Stock Options

      In September 2003, the Company’s stockholders approved the Kitty Hawk 2003 Long Term Equity Incentive Plan (“the Plan”), which provides for the issuance of up to 6,500,000 shares of common stock. The options granted generally have an exercise price equal to the quoted market price of the stock on the date of grant. The options vest over periods of 36 to 48 months. The options expire ten years from the date of grant, subject to earlier forfeiture provisions.

F-24

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarized the stock option activity under the Plan for 2003:

								Weighted
		Available for			Options			Average
		Grant			Outstanding			Exercise Price
Outstanding at January 1, 2003:			—			—			—
	Authorized for grant		6,500,000			—			—
	Granted (weighted average fair value of $0.31)		(5,035,000	)		5,035,000		$	0.30
	Exercised		—			(575,000	)	$	0.30
	Canceled		—			—			—
Outstanding at December 31, 2003:			1,465,000			4,460,000		$	0.30

      The following table summarizes information about the stock options outstanding at December 31, 2003:

			Weighted		Weighted
	Number of		Average		Average		Number of		Weighted
	Options		Remaining		Exercise		Options		Average
Exercise Prices	Outstanding		Life (Years)		Price		Exercisable		Exercise Price
$0.30		4,450,000		9.58	$	0.30		887,500	$	0.30
$1.105		10,000		10.00	$	1.105		—		—
		4,460,000		9.58	$	0.30		887,500	$	0.30

17. Business Segment Data

      The Company’s current continuing operations are comprised of two segments — an expedited scheduled freight network and a cargo airline. The cargo airline supports the expedited scheduled freight network by transporting cargo in its fleet of Boeing 727-200 cargo aircraft and when needed, air lift is supplemented by chartering third party aircraft, usually Douglas DC-8 or Airbus A-300 cargo aircraft. Each segment’s respective financial performance is detailed below. Each segment is currently evaluated on financial performance at the operating income line.

      The column labeled “other” consists of corporate activities. Business assets are owned by or allocated to each of the business segments. Assets included in the column labeled “other” include cash, allowance

F-25

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for doubtful accounts and the corporate headquarters building. The accounting policies of each segment are the same as those reported in Note 2.

		Scheduled
		Freight			Cargo									Consolidated
		Network			Airline			Other			Eliminations			Balance
		(In thousands)
Successor:
	Year ended December 31, 2003:
	Revenue from external customers	$	127,412		$	4,992		$	—		$	—		$	132,404
	Revenue from intersegment operations		—			38,914			—			(38,914	)		—
	Depreciation and amortization		351			3,484			—			—			3,835
	Operating income (loss)		604			814			(600	)		—			818
	Interest expense		45			14			364			—			423
	Other (income) expense		(3,208	)		(33	)		(505	)		—			(3,746	)
	Income before taxes		3,767			833			(459	)		—			4,141
	Total assets	$	11,828		$	15,526		$	19,756		$	—		$	47,110
	Three months ended December 31, 2002:
	Revenue from external customers	$	31,482		$	2,994		$	—		$	—		$	34,476
	Revenue from intersegment operations		—			10,487			—			(10,487	)		—
	Depreciation and amortization		86			852			—			—			938
	Operating income (loss)		1,811			1,102			(235	)		—			2,678
	Interest expense		9			16			129			—			154
	Other (income) expense		(111	)		10			(38	)		—			(139	)
	Income before taxes		1,913			1,076			(326	)		—			2,663
	Total assets	$	6,278		$	20,155		$	20,826		$	—		$	47,259
Predecessor:
	Nine months ended September 30, 2002:
	Revenue from external customers	$	84,797		$	2,530		$	—		$	—		$	87,327
	Revenue from intersegment operations		—			36,096			—			(36,096	)		—
	Depreciation and amortization		489			4,011			—			—			4,500
	Operating income (loss)		(6,120	)		373			(593	)		—			(6,340	)
	Interest expense		—			42			2,091			—			2,133
	Other (income) expense		3,336			475			5,256			—			9,067
	Loss before taxes		(9,456	)		(144	)		(7,940	)		—			(17,540	)
	Year ended December 31, 2001:
	Revenue from external customers	$	135,052		$	112,437		$	—		$	—		$	247,489
	Revenue from intersegment operations		—			52,857			—			(52,857	)		—
	Depreciation and amortization		622			25,404			—			—			26,026
	Operating income (loss)		(27,903	)		(69,306	)		(1,211	)		384			(98,036	)
	Interest expense		3,702			3,349			—			—			7,051
	Other (income) expense		7,796			35,584			(718	)		—			42,662
	Loss before taxes		(39,401	)		(108,239	)		(493	)		384			(147,749	)

F-26

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18. Quarterly Financial Information (Unaudited)

      The following table reflects selected quarterly operating results, which have not been audited. 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. Our 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.

	Predecessor									Successor
	March 31,			June 30,			September 30,			December 31,		March 31,			June 30,			September 30,		December 31,
Quarter Ended:	2002			2002			2002			2002		2003			2003			2003		2003
	Unaudited
	(In thousands, except per share data)
Total revenue	$	25,087		$	30,595		$	31,645		$	34,476	$	30,984		$	31,272		$	33,625	$	36,523
Gross profit (loss) from continuing operations		(4,048	)		2,007			1,625			4,818		(1,667	)		1,028			4,797		6,037
Operating income (loss)		(4,570	)		1,604			(3,374	)		2,678		(4,352	)		(1,327	)		2,678		3,819
Income (loss) from continuing operations	$	(9,129	)	$	(1,552	)	$	(6,859	)	$	2,663	$	(3,987	)	$	(1,392	)	$	5,790	$	3,730
Basic net income (loss) from continuing operations per share	$	(0.53	)	$	(0.09	)	$	(0.40	)	$	0.05	$	(0.08	)	$	(0.03	)	$	0.12	$	0.04
Diluted net income (loss) from continuing operations per share(1)	$	(0.53	)	$	(0.09	)	$	(0.40	)	$	0.05	$	(0.08	)	$	(0.03	)	$	0.11	$	0.04

(1)  During March 2003, 37.7 million shares of common stock were issued in accordance with the plan of reorganization. For the purpose of calculating basic and diluted net income from continuing operations per share for the quarters ended December 31, 2002 and March 31, 2003, the shares of common stock and warrants to acquire common stock to be issued under the plan of reorganization are deemed to be outstanding as of October 1, 2002. In addition, because the warrants have a nominal exercise price, the shares of common stock underlying the warrants are also deemed to be outstanding for periods subsequent to September 30, 2002.

19. Subsequent Events

      In January 2004, the Company adopted a stockholder rights plan (the “Rights Plan”), under which each share of common stock is accompanied by one preferred share purchase right (a “Right”). Each Right entitles the holder to purchase 1/1000th of a share of Series A Preferred Stock for $10.00. In general, the Rights will not become exercisable or transferable apart from the shares of common stock with which they were issued unless a person or group of affiliated or associated persons becomes the beneficial owner of, or commences a tender offer that would result in beneficial ownership of, 15% or more of the outstanding shares of common stock (any such person or group of persons being referred to as an “Acquiring Person”). Thereafter, under certain circumstances, each Right (other than any Rights that are or were beneficially owned by an Acquiring Person, which Rights will be void) could become exercisable to purchase a number of shares of common stock having a market value equal to two times the $10.00 purchase price, subject to adjustment. The Rights will expire in January 2014, unless the Company redeems them earlier at a redemption price of $0.001 per Right, subject to adjustment. As of March 1, 2004, the Company had two stockholders, Resurgence Asset Management, L.L.C. and Everest Capital Limited, that beneficially owned more than 15% of the Company’s common stock. The Company exempted them and their subsequent transferees from triggering the Rights Plan in limited circumstances.

F-27 EX-4.1 3 d13914exv4w1.txt CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS EXHIBIT 4.1 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A PREFERRED STOCK OF KITTY HAWK, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware I, Steven E. Markhoff, Secretary of Kitty Hawk, Inc. (the "CORPORATION"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "GCL"), in accordance with the provisions of Section 103 of the GCL, DO HEREBY CERTIFY That pursuant to the authority conferred upon the Board of Directors (the "BOARD") by the Second Amended and Restated Certificate of Incorporation of the Corporation, as amended, the said Board on January 21, 2004, adopted the following resolutions creating a series of 120,000 shares of Preferred Stock, par value $.01 per share, designated as Series A Preferred Stock: RESOLVED, that, pursuant to the authority vested in the Board in accordance with the provisions of its Second Amended and Restated Certificate of Incorporation, as amended, the Board does hereby create, authorize and provide for the issuance upon the exercise of the Corporation's Preferred Stock Purchase Rights, of a series of Preferred Stock of the Corporation, and does hereby fix and state that the designations, amounts, powers, preferences and relative and other special rights and the qualifications, limitations or restrictions thereof are as follows: Series A Preferred Stock Section 1. Designation and Amount. The shares of such series shall be designated as Series A Preferred Stock and the number of shares constituting such series shall be 120,000. Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock in preference to the holders of Common Stock, par value $0.000001 per share (the "COMMON STOCK"), and of any other stock of the Corporation ranking junior to the Series A Preferred Stock with respect to dividends shall be entitled to receive, when, as and if declared by the Board out of funds legally available for that purpose, quarterly dividends payable in cash on the 1st day of March, June, September and December (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $0.001 or (b) subject to the provision for adjustment hereinafter set forth, one thousand (1,000) times the aggregate per share amount of all cash dividends, and one thousand (1,000) times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time after January 21, 2004 (the "RIGHTS DECLARATION DATE") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.001 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than sixty (60) days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to one thousand (1,000) votes which each share of Common Stock is entitled to vote. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. Except as otherwise provided herein or by law, the holders of the shares of Series A Preferred Stock shall not be entitled to vote as a separate class on any matters submitted to a vote of the stockholders. (C) Except as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to, the Series A Preferred Stock; (ii) declare or pay dividends on, or make any other distributions on, any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such shares upon such terms as the Board, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of Common Stock or of shares of any other stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received an amount equal to the greater of (i) $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment and (ii) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock (the "SERIES A LIQUIDATION PREFERENCE") or (2) to the holders of shares of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock, securities, cash or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to one thousand (1,000) times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (ii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. Redemption. The outstanding shares of Series A Preferred Stock may be redeemed at the option of the Board as a whole, but not in part, at any time, or from to time to time, at a cash price per share equal to one hundred five percent (105%) of (i) the product of the Adjustment Number (as such term is hereinafter defined) times the Average Market Value (as such term is hereinafter defined) of the Common Stock, plus (ii) all dividends which on the redemption date have accrued on the shares to be redeemed and have not been paid, or declared and a sum sufficient for the payment thereof set apart, without interest. The "Adjustment Number" is one thousand (1,000) (as appropriately adjusted as set forth in the last sentence of Section 6 to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock). The "Average Market Value" is the average of the closing sale prices of the Common Stock during the thirty (30) day period immediately preceding the date before the redemption date on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the Composite Tape for American Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed, or, if such stock is not listed on any such exchange, the average of the closing sale prices with respect to a share of Common Stock during such thirty (30) day period, as quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value of the Common Stock as determined by the Board in good faith. Section 9. Ranking. The Series A Preferred Stock shall rank (a) senior to all Common Stock and (b) junior to all other series of preferred stock with respect to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Second Amended and Restated Certificate of Incorporation of the Corporation, as amended, shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Preferred Stock, voting separately as a class. Section 11. Fractional Shares. At the Corporation's sole discretion, Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. ******** IN WITNESS WHEREOF, I have executed and subscribed this Certificate of Designation and do affirm the foregoing as true as of January 26, 2004. /s/ Steven E. Markhoff ------------------------------- Steven E. Markhoff, Secretary EX-10.1 4 d13914exv10w1.txt AMENDED AND RESTATED AIRCRAFT USE AGREEMENT EXHIBIT 10.1 AMENDED AND RESTATED AIRCRAFT AND ENGINE USE AGREEMENT This Amended and Restated Aircraft Use Agreement (this "Agreement"), is made as of the 1st day of January, 2004, by and between Kitty Hawk Aircargo, Inc. ("Aircargo") and the Kitty Hawk Collateral Liquidating Trust, by Langdon Asset Management, Inc., its Trust Manager (the "Trust"). A. Aircargo and the Trust entered into that certain Aircraft and Engine Use Agreement dated as of September 30, 2002 (the "Original Agreement"). B. Aircargo and the Trust have determined to amend and restate the Original Agreement in its entirety as set forth herein. C. In consideration of the foregoing premises (which constitute an integral part of this Agreement) and the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Utilization of Airframes. Until the latest date shown on Schedule A, Aircargo shall use the airframes identified on Schedule A (the "Airframes") collectively, in total, a minimum of ***** block hours ("Block Hours") per month (the "Minimum Airframe Usage"). Each Airframe shall be available for use by Aircargo for purposes of this Agreement until the date set forth opposite such Airframe on Schedule A (for each Airframe, the "Available to Date"). Notwithstanding the foregoing, if for any reason during any month fewer than four (4) heavy weight Airframes (the four current heavy weight Airframes being N278US, N279US, N281KH and N284KH, and, collectively, the "Heavy Weight Airframes") are available for Aircargo's use, the Minimum Airframe Usage for such month will be reduced by ***** Block Hours for each of the four (4) heavy weight Airframes not available for Aircargo's use. For purposes of determining the Minimum Airframe Usage requirement in any month, the Available to Dates of Airframes N278US and N279US set forth on Schedule A shall apply regardless of whether Aircargo elects an Airframe Extension Option (as defined below) with respect to such Airframes. In the event that any Airframe is not available for use by Aircargo during any part of a month prior to the Available to Date applicable to such Airframe, the Minimum Airframe Usage requirement for such month shall be reduced by the number of Block Hours attributable to such Airframe prorated for such part of the month for which such Airframe is unavailable based on a thirty-day month. 2. Rates for Airframes. The Block Hour rate for utilization of each of the Airframes shall be as follows:

Airframe Rate per Block Hour - -------- ------------------- N278US $***** N279US $***** N281KH $***** N284KH $*****

Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****"

Airframe Rate per Block Hour - -------- ------------------- N69739 $***** N69740 $***** N854AA $***** N855AA $***** N252US $***** N6809 $***** N6827 $***** N6833 $*****

3. Modifications to Airframes. The Airframes shall be modified as provided below. Such modifications shall be completed prior to the date required by the rules and regulations of the Federal Aviation Administration: a. TCAS (traffic collision avoidance system) Avionics: For any Airframe requiring the installation of TCAS avionics prior to the Available to Date applicable to such Airframe, Aircargo will pay for the installation of such TCAS avionics and the costs for the wiring of such Airframe to accommodate the installation of the TCAS avionics. The Trust will reimburse up to $***** of the costs incurred by Aircargo related to the installation of the TCAS avionics for any such Airframe, including costs related to the acquisition and installation of the TCAS avionics computer processor (the "Computer Processor"), upon the receipt by the Trust of written demand for such reimbursement from Aircargo. The Trust shall own the Computer Processor following the installation of the TCAS avionics. In the event that Aircargo uses any Airframe upon which TCAS avionics has been installed for less than ***** Block Hours following the installation of the TCAS avionics and prior to the Available to Date applicable to such Airframe, Aircargo will, upon the receipt by Aircargo of written demand notice from the Trust, reimburse the Trust the lesser of: (i) ***** percent (*****%) of the actual cost of the Computer Processor or (ii) $*****. If the Trust makes such demand and Aircargo pays the Trust accordingly, ownership of the TCAS avionics will transfer to Aircargo. The TCAS avionics shall include the Computer Processor, two (2) IVSI's, two (2) antennas, a Mode S transponder, Radar Indication and related Control Head. b. RVSM (reduced vertical separation): For any Airframe for which Aircargo requires the installation of an RVSM system prior to the Available to Date applicable to such Airframe, the Trust will pay for the installation of the RVSM system upon thirty (30) days written notice of demand by Aircargo to install the RVSM system on such Airframe; provided, however, that the Trust may, within a reasonable time, except as it pertains to an Airframe upon which Aircargo has elected an Airframe Extension Option (as defined below), in its sole discretion, elect not to install an RVSM system, at which time Aircargo may elect to retire and remove the Airframe from Schedule A to this Agreement. The cost of the parts of the RVSM system for which the Trust will be obligated will not exceed $***** per Airframe. c. EGPWS/TAWS (enhanced ground proximity warning): For any Airframe requiring the installation of an EGPWS/TAWS system prior to the Available to Date applicable to such Airframe, the Trust will pay for the installation of the EGPWS/TAWS system upon thirty 2 Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" (30) days written notice of demand by Aircargo to install the EGPWS/TAWS system on such Airframe; provided, however, that the Trust may, within a reasonable time, except as it pertains to an Airframe upon which Aircargo has elected an Airframe Extension Option, in its sole discretion, elect not to install an EGPWS/TAWS system at which time Aircargo may elect to retire and remove the Airframe from Schedule A to this Agreement. The cost of the parts of the EGPWS/TAWS system for which the Trust will be obligated will not exceed $***** per Airframe. 4. Aircraft Extension Option. a. Aircargo may elect, in its sole discretion, to extend the Available to Date of any or all of Airframes N278US, N279US, N69739 and N69740 by delivering written notice of such election to the Trust at any time prior to November 1, 2004 ("Airframe Extension Option"). In the event that any such notice of election is delivered by Aircargo to the Trust, Aircargo shall specify in such notice whether Aircargo elects "Option A-Long Term Extension Option" ("Option A Election") or "Option B-Short Term Extension Option" ("Option B Election") for any Airframe for which such Airframe Extension Option is permitted; provided, however, that for Airframe N278US no Option B Election shall be permitted. In the event that an Option A Election or an Option B Election is made for any Airframe for which an Airframe Extension Option is permitted, such election shall be governed by the terms of such Airframe Extension Option set forth on Schedule B to this Agreement. For purposes of any Airframe Extension Option listed on Schedule B, the terms "Heavy C check commitment" and "Light C check commitment" shall refer to the maximum amount that the Trust shall be obligated to pay for maintenance under such Airframe Extension Option. The Trust's obligation with respect to the installation of a 9-G Bulkhead on Airframe N69740 shall not exceed $*****. b. In the event that Aircargo elects an Airframe Extension Option with respect to any Airframe pursuant to Section 4(a) above and the Trust fulfills its obligation to perform the Heavy C check commitment or Light C check commitment maintenance applicable to such Airframe Extension Option, Aircargo shall pay to the Trust an amount equal to the rate per Block Hour applicable to such Airframe multiplied by the number of actual Block Hours that such Airframe was used by Aircargo in the manner provided in Section 6 of this Agreement. Upon the expiration of the Extended Available to Date applicable to any Airframe Extension Option, Aircargo shall make an additional payment to the Trust if the total number of Block Hours that Aircargo used the relevant Airframe prior to the Extended Available to Date is less than the minimum Block Hours commitment applicable to such Airframe Extension Option. Such payment shall be made within thirty (30) days after the Extended Available to Date for such Airframe Extension Option. The payment shall be in an amount equal to the Block Hour rate applicable to such Airframe multiplied by the number of Block Hours by which the minimum Block Hours commitment exceeds the actual total Block Hours such Airframe was used by Aircargo prior to the Extended Available to Date. 5. Transfer of Engines and Rates for Engines. a. Aircargo and the Trust agree and affirm that on September 15, 2003, each party transferred certain engines that each such party owned for certain engines owned by the 3 Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" other party. Aircargo and the Trust further agree and affirm that the transfer of such engines from each party to the other constituted a transfer of all ownership rights in the transferred engines to the other party, effective as of September 15, 2003, and that each party will transfer all documents of title or other documents or instruments evidencing ownership of the transferred engines to the other party no later than February 27, 2004. The engines so transferred are set forth on Schedule C to this Agreement. Aircargo and the Trust agree that this Agreement shall serve as a bill of sale for such engine transfers. To the extent that any Aircargo engine that was transferred to the Trust was subject to a lien in favor of a secured creditor prior to September 15, 2003, the Trust affirms that such lien shall remain in place until satisfied. Schedule D to this Agreement sets forth the engines owned by the Trust as of December 3, 2003 (the "Engines"), and sets forth the Block Hour rate that Aircargo will pay for the use of each of the Engines from January 1, 2004 to December 31, 2007 (the Available to Date of such Engines) regardless of whether such Engines are installed on one of the Airframes, on an Aircargo airframe or on the airframe of a third party. In the event that Aircargo does not elect an Airframe Extension Option prior to November 1, 2004 for any of the Airframes identified in Schedule B to this Agreement, the Trust or Aircargo may remove up to three Engines from Schedule D of the type corresponding to such Airframe from Schedule A as follows:

NUMBER OF ENGINES AIRFRAME ENGINE TYPE AVAILABLE FOR REMOVAL - --------------------------------------------------------------- N278US JT8D-15 3 - --------------------------------------------------------------- N279US JT8D-15 3 - --------------------------------------------------------------- N69739 JT8D-9A 3 - --------------------------------------------------------------- N69740 JT8D-9A 3 - ---------------------------------------------------------------

b. Prior to December 31, 2007, Aircargo will use the Engines collectively, in total and on a pooled basis, for a minimum of ***** percent (*****%) of the expected Block Hour life of the Engines set forth on Schedule D ("Minimum Engine Block Hours"). Aircargo shall pay to the Trust an amount equal to the rate per Block Hour applicable to each Engine multiplied by the actual number of Block Hours that such Engine was used by Aircargo in the manner provided in Section 6 below. In the event that the total actual number of Block Hours used for all Engines between January 1, 2004 and December 31, 2007 do not exceed the Minimum Engine Block Hours, within thirty (30) days after December 31, 2007, Aircargo shall pay to the Trust an amount equal to the Weighted Average Engine Block Hour Rate (as provided on Schedule D to this Agreement) multiplied by the number of hours by which the Minimum Engine Block Hours exceeds the total actual Engine Block Hours used by Aircargo. In the event that any Engine is removed from Schedule D to this Agreement in the manner provided in Section 9 below, the Minimum Engine Block Hours shall be reduced by the expected Block Hour life attributable to such removed engine as provided on Schedule D. 6. Monthly Payments. a. On or about the 10th day of each month after January 2004, Aircargo will provide to the Trust a schedule of the number of Block Hours that each Airframe and each Engine was used in the immediately preceding month and will pay to the Trust an amount equal to the applicable Block Hour rate for each Airframe and each Engine multiplied by the actual 4 Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" number of Block Hours that each such Airframe and each such Engine was used in the immediately preceding month. b. If for any month Aircargo fails to achieve the Minimum Airframe Usage, then on the date that payment for actual usage for the month is required under Section 6(a) above, Aircargo shall pay to the Trust an amount equal to $***** multiplied by the number of Block Hours by which the Minimum Airframe Usage exceeds the total actual number of Block Hours that the Airframes were used in the immediately preceding month. 7. Maintenance. Aircargo will perform line maintenance of the Airframes and Engines in accordance with Aircargo's current maintenance program. Airframe maintenance shall be limited to "A" checks, "B" checks and Aircargo's responsibility for repairs or incidental replacement of parts and rotables shall not exceed $***** per Airframe for any such check or other event. If such repair or incidental replacement of parts and rotables should exceed $***** and the Trust elects not to pay the excess above $***** or a mutually agreed upon amount of the excess above $*****, then that Airframe, at Aircargo's option, can be deemed not available for Aircargo's use. . In the event that an Engine requires more than $***** in Engine maintenance in order to remain in serviceable condition and the Trust elects not to pay the excess above $***** or a mutually agreed upon amount of the excess above $*****, then Aircargo may elect to perform such maintenance at its own cost by electing to buy such Engine from the Trust at a core value of $***** for 9A Engines and $***** for -15 Engines. Aircargo shall be required to make any repairs, replacements or improvements to any Airframe that are necessary as the result of an Airworthiness Directive or Service Bulletin or similar requirement issued by any regulating body, such amount not to exceed $***** per Airframe subject to cost sharing with the Trust as reflected in Section 3, Section 4 and Schedule B. If such repair, replacements or improvements to any Airframe that are necessary as a result of an Airworthiness Directive or Service Bulletin or similar requirement issued by an regulating body exceeds $***** other than those items subject to cost sharing with the Trust as reflected in Section 3 and Section 4 and Schedule B, and the Trust elects not to pay the excess above $***** or a mutually agreed upon amount of the excess above $*****, then the Airframe, at Aircargo's option, can be deemed not available for Aircargo's use. 8. Insurance. Aircargo shall cause the Airframes and Engines to be covered by hull and liability insurance in accordance with Aircargo's current fleet plan insurance program. Policies relating to such insurance shall show the Trust as a loss payee and an additional insured; provided, however, that, for any Airframe removed from Schedule A and for any Engines mounted on such Airframe, Aircargo's obligation to insure the Airframe and such Engines shall terminate upon the Trust's receipt of the Deliverables (as defined below). Following the execution of this Agreement, each Airframe identified on Schedule A shall be insured by Aircargo in an amount equal to that set forth opposite such Airframe on Schedule E to this Agreement. 9. Removal of Engines and Airframes. In the event the Trust or Aircargo elects to remove an Engine from Schedule D to this Agreement for any reason, the Trust or Aircargo shall deliver written notice of removal of such Engine from Schedule D at least sixty (60) days prior to 5 Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" the removal of such Engine. An Engine removed from Schedule D shall be referred to as a "Terminated Engine." Within sixty (60) days of the receipt of such notice, Aircargo shall deliver, other than in cases where Aircargo has elected to buy an Engine as described under Section 7, physical possession of the Terminated Engine to a place within the United States designated by the Trust, and shall deliver for such Terminated Engine: (i) a current certificate of airworthiness and (ii) all technical records, including, but not limited to, current maintenance and operations records (all of the foregoing, for any Terminated Engine, the "Deliverables"). In the event that Aircargo proposes to deliver to the Trust free and clear title to an engine that is not owned by the Trust in lieu of a Terminated Engine, Aircargo shall convey an engine of similar type and condition (determined by a comparison of engine disc profiles and limiters) to the Trust. The Trust shall pay the cost of all shipping and other expenses required for the delivery of such Terminated Engine to the Trust; provided, however, that Aircargo shall remove the Engine from any Airframe at its own expense. In the event that any Airframes are removed from Schedule A pursuant to the terms of this Agreement, the same procedure for the removal of Terminated Engines shall apply to the removal of such Airframes. 10. Operation of Aircraft. Aircargo may operate the Airframes and Engines in such types of service as Aircargo deems appropriate; provided, however, that Aircargo shall not "Dry Lease" any of the Airframes or Engines. 11. Force Majeure. In the event that, through no action or inaction on the part of Aircargo, Aircargo's fleet of 727 airframes or JT8D engines (regardless of whether such airframes or engines are owned by Aircargo or by the Trust) become unavailable for operation for service, the Minimum Airframe Usage, Minimum Engine Usage and Block Hour commitment under any Airframe Extension Option will be modified in the following manner: a. If Aircargo's fleet of 727 airframes or JT8D engines become unavailable for a period of 180 days or less (a "Temporary Period"), then the Available To Date of all Airframes and Engines will be extended by a number of days equal to the length of the Temporary Period and Aircargo will continue to be obligated to perform its obligations under the Agreement. b. If Aircargo's fleet of 727 airframes or JT8D engines become unavailable for a period exceeding 180 days (a "Permanent Period"), then Aircargo's obligations under the Minimum Airframe Usage, the Minimum Engine Usage and any elected Airframe Extension Option will be terminated and Aircargo shall be obligated only to pay any outstanding amounts due to the Trust related to actual Airframe or actual Engine usage prior to the date of the event causing the unavailability of such airframes or engines. c. Upon the occurrence of an event causing either a Temporary Period or a Permanent Period of unavailability, all payments under this Agreement shall be suspended following payment by Aircargo for the actual Block Hour usage of any Airframes or Engines during the month in which such event occurs. If such event causes a Temporary Period, then payments shall resume pursuant to the terms of this Agreement at such time as either or both of Aircargo's fleet of 727 airframes or JT8D engines again become available for use. 6 Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" KITTY HAWK AIRCARGO, INC. KITTY HAWK COLLATERAL LIQUIDATING TRUST /s/ ROBERT W. ZOLLER, JR. /s/ GLEN LANGDON - ------------------------- --------------------------- By: By: Langdon Asset Management, Inc. as Trust Manager Title: Glen Langdon, President Title: President 7 Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" SCHEDULE A

AIRFRAMES AVAILABLE TO DATE: - --------- ------------------ N278US December 31, 2004 N279US December 31, 2004 N281KH December 31, 2006 N284KH March 31, 2006 (1) N69739 December 31, 2004 N69740 December 31, 2004 N854AA December 31, 2006 N855AA September 30, 2004 N6827 September 30, 2005 N252US December 31, 2005 N6833 June 30, 2006 N6809 December 31, 2004

(1)This Airframe will require a C check during the second quarter of 2004 and such C check will be governed in accordance with the terms of the Original Agreement. Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" SCHEDULE B AIRFRAME N278US: OPTION A - LONG TERM EXTENSION OPTION - -------------------------------------------------------------------------------------- Trust Heavy C check commitment: $***** - -------------------------------------------------------------------------------------- Extended Available to date: December 31, 2007 - -------------------------------------------------------------------------------------- Trust TCAS avionics commitment: $***** - -------------------------------------------------------------------------------------- Trust RVSM costs commitment: Cost of parts up to $***** - -------------------------------------------------------------------------------------- Trust TAWS cost commitment: Costs of parts up to $***** - -------------------------------------------------------------------------------------- Trust 9G Bulkhead cost commitment: N/A - -------------------------------------------------------------------------------------- Aircargo minimum Block Hours commitment: ***** - -------------------------------------------------------------------------------------- Note: there is no Short Term Extension Option available for N278US. AIRFRAME N279US: - --------------------------------------------------------------------------------------- OPTION A - LONG TERM EXTENSION OPTION - --------------------------------------------------------------------------------------- Trust Heavy C check commitment: $***** - --------------------------------------------------------------------------------------- Extended Available to date: December 31, 2007 - --------------------------------------------------------------------------------------- Trust TCAS avionics commitment: $***** - --------------------------------------------------------------------------------------- Trust RVSM costs commitment: Cost of parts up to $***** - --------------------------------------------------------------------------------------- Trust TAWS cost commitment: Costs of parts up to $***** - ---------------------------------------------------------------------------------------- Trust 9G Bulkhead cost commitment: N/A - --------------------------------------------------------------------------------------- Aircargo minimum Block Hours commitment: ***** - --------------------------------------------------------------------------------------- OPTION B - SHORT TERM EXTENSION OPTION - --------------------------------------------------------------------------------------- Trust Light C check commitment: $***** - --------------------------------------------------------------------------------------- Extended Available to date: December 31, 2006 - --------------------------------------------------------------------------------------- Trust TCAS avionics commitment: $***** - ---------------------------------------------------------------------------------------- Trust RVSM cost commitment: Cost of parts up to $***** - --------------------------------------------------------------------------------------- Trust TAWS cost commitment: Costs of parts up to $***** - --------------------------------------------------------------------------------------- Trust 9G Bulkhead cost commitment: N/A - --------------------------------------------------------------------------------------- Aircargo minimum Block Hours commitment: ***** - --------------------------------------------------------------------------------------- AIRFRAME N69739: OPTION A - LONG TERM EXTENSION OPTION - --------------------------------------------------------------------------------------- Trust Light C check commitment: $***** - --------------------------------------------------------------------------------------- Extended Available to date: June 30, 2008 - --------------------------------------------------------------------------------------- Trust TCAS avionics commitment: $***** - --------------------------------------------------------------------------------------- Trust RVSM cost commitment: Cost of parts up to $***** - --------------------------------------------------------------------------------------- Trust TAWS cost commitment: Costs of parts up to $***** - --------------------------------------------------------------------------------------- Trust 9G Bulkhead cost commitment: N/A - --------------------------------------------------------------------------------------- Aircargo minimum Block Hours commitment: ***** - --------------------------------------------------------------------------------------- Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" OPTION B - SHORT TERM EXTENSION OPTION - --------------------------------------------------------------------------------------- Trust Light C check commitment: $***** - --------------------------------------------------------------------------------------- Extended Available to date: June 30, 2007 - --------------------------------------------------------------------------------------- Trust TCAS avionics commitment: $***** - --------------------------------------------------------------------------------------- Trust RVSM cost commitment: Cost of parts up to $***** - --------------------------------------------------------------------------------------- Trust TAWS cost commitment: Costs of parts up to $***** - --------------------------------------------------------------------------------------- Trust 9G Bulkhead cost commitment: N/A - --------------------------------------------------------------------------------------- Aircargo minimum Block Hours commitment: ***** - --------------------------------------------------------------------------------------- AIRFRAME N69740: OPTION A - LONG TERM EXTENSION OPTION - --------------------------------------------------------------------------------------- Trust Light C check commitment: $***** - --------------------------------------------------------------------------------------- Extended Available to date: June 30, 2008 - --------------------------------------------------------------------------------------- Trust TCAS avionics commitment: $***** - --------------------------------------------------------------------------------------- Trust RVSM cost commitment: Cost of parts up to $***** - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Trust TAWS cost commitment: Costs of parts up to $***** - --------------------------------------------------------------------------------------- Trust 9G Bulkhead cost commitment: $***** - --------------------------------------------------------------------------------------- Aircargo minimum Block Hours commitment: ***** - --------------------------------------------------------------------------------------- OPTION B - SHORT TERM EXTENSION OPTION - --------------------------------------------------------------------------------------- Trust Light C check commitment: $***** - --------------------------------------------------------------------------------------- Extended Available to date: June 30, 2007 - --------------------------------------------------------------------------------------- Trust TCAS avionics commitment: $***** - --------------------------------------------------------------------------------------- Trust RVSM cost commitment: Cost of parts up to $***** - --------------------------------------------------------------------------------------- Trust TAWS cost commitment: Costs of parts up to $***** - --------------------------------------------------------------------------------------- Trust 9G Bulkhead cost commitment: $***** - --------------------------------------------------------------------------------------- Aircargo minimum Block Hours commitment: ***** - --------------------------------------------------------------------------------------- Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" SCHEDULE C

NO. TRUST ENGINE TRANSFERRED AIRCARGO ENGINE TRANSFERRED --- ------------------------ --------------------------- 1 695270 655968 2 687662 674498 8 657394 696629 11 700579 707329 (9A) 17 665294 665348 18 665899 665230 20 648989 665676 23 656066 648784 24 665591 653365 27 653835 654158 35 654677 653897 36 654422 653619

Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" SCHEDULE D Engines Owned by the Trust as of December 31, 2003

AMENDED FLIGHT BLOCK BLOCK COST/REV ENGINE HOUR HOUR LIMITER HOUR (BH LIFE S/N LIFE LIFE LIMITER TYPE REMAINING RATE * RATE) 1 648784-7B 7B 988 1,197 T-1 CYCLE 912 ***** ***** 2 649583-7B 7B Unserviceable unserviceable C-7 DATE 19 ***** Unservicable 3 653365-7B 7B 2,967 3,595 C-12 DATE 47 ***** ***** 4 653619-7B 7B 1,199 1,453 C-8 DATE 19 ***** ***** 5 653897-7B 7B 821 994 C-5 DATE 13 ***** ***** 6 654305-7B 7B 307 372 C-3 CYCLE 321 ***** ***** 7 654368-7B 7B 455 551 T-4 CYCLE 449 ***** ***** 8 654792-7B 7B 421 510 C-5 CYCLE 420 ***** ***** 9 654914-7B 7B 789 956 C-9 CYCLE 739 ***** ***** 10 657315-7B 7B 649 787 C-6 CYCLE 618 ***** ***** 11 657666-7B 7B 698 845 T-4 CYCLE 660 ***** ***** 12 649269-9A 9A 2,504 3,002 C-11 DATE 38 ***** ***** 13 665188-9A 9A 2,372 2,844 C-7 DATE 36 ***** ***** 14 665356-9A 9A 864 1,036 C-11 HOURS 930 ***** ***** 15 665676-9A 9A 3,163 3,792 C-7 DATE 48 ***** ***** 16 666031-9A 9A 3,163 3,792 C-8 DATE 48 ***** ***** 17 687788-9A 9A 1,977 2,370 C-8 DATE 31 ***** ***** 18 655968-15 15 5,133 5,760 C-11 DATE 46 ***** ***** 19 657070-15 15 2,798 3,141 C-4 HOURS 2,910 ***** ***** 20 674498-15 15 1,674 1,878 C-12 DATE 15 ***** ***** 21 685501-15 15 1,785 2,004 C-7 DATE 16 ***** ***** 22 687659-15 15 3,347 3,757 C-9 DATE 30 ***** ***** 23 687698-15 15 5,246 5,888 C-3 CYCLE 2,545 ***** ***** 24 688689-15 15 4,686 5,259 C-7 DATE 42 ***** ***** 25 696499-15A 15A 5,428 6,000 T-1 HOURS 5,428 ***** ***** 26 696629-15 15 2,120 2,379 C-11 DATE 19 ***** ***** 27 700377-15 15 4,408 4,947 T-1 CYCLE 2,147 ***** ***** 28 700451-15 15 1,932 2,169 T-1 HOURS 2,044 ***** ***** 29 700522-15 15 1,243 1,395 C-3 HOURS 1,243 ***** ***** 30 702952-15 15 1,562 1,753 C-8 DATE 14 ***** ***** 64,702 74,425 $ ***** Postal Engines, NO FLY 654158-7B 7B C-9 DATE ***** 654979-7B 7B C-10 DATE ***** 665452-9A 9A T-2 HOURS 1,881 *****

Actual 2003 Flight hour (*****) & Block hour (*****) data = BH/FH Conversion factor (average) ***** *****. MINIMUM ENGINE BLOCK HOURS ***** Pool rate: *****% WEIGHTED AVERAGE ENGINE BLOCK HOUR RATE: $ ***** (TOTAL COST/TOTAL BH's) ENGINE TYPE AVERAGES

AVG BLK HR AVG FLT HR AVG CYC BLK HR / FLT HR FLT HR/CYC MONTH MONTH MONTH RATIO RATIIO ----- ----- ----- ----- ------ JT8D-7B ***** ***** ***** ***** ***** JT8D-9A ***** ***** ***** ***** ***** JT8D-15 ***** ***** ***** ***** *****

NOTES - Postal Engines per Settlement Agreement - Postal Engines per Settlement Agreement approved to fly. Engine time limited to 48 months (1.1.03 - 12.31.07) Engine hours limited to 48 month estimate Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" SCHEDULE E

AIRFRAMES AVAILABLE TO DATE: - --------- ------------------ N278US $***** N279US $***** N281KH $***** N284KH $***** N69739 $***** N69740 $***** N854AA $***** N855AA $***** N6827 $***** N252US $***** N6833 $***** N6809 $*****

Confidential Treatment has been requested by Kitty Hawk, Inc. for certain portions of this document. Confidential portions have been filed separately with the Securities and Exchange Commission. Omitted portions are indicated in this agreement with "*****" EX-10.7 5 d13914exv10w7.txt EMPLOYMENT AND SEVERANCE AGREEMENT AMENDMENT EXHIBIT 10.7 EMPLOYMENT AND SEVERANCE AGREEMENT AMENDMENT; NOTICE OF TERMINATION, RESIGNATION, AND OTHER SEVERANCE RELATED AGREEMENTS RECITATIONS The parties to this EMPLOYMENT AND SEVERANCE AGREEMENT AMENDMENT; NOTICE OF TERMINATION, RESIGNATION, AND OTHER SEVERANCE RELATED AGREEMENTS (this "Severance Agreement") are Kitty Hawk, Inc. ("Kitty Hawk" or the "Company") and Jack Andrew "Drew" Keith ("Keith", "Drew Keith", or "Participant"). Whereas, Kitty Hawk and Keith are parties to the EMPLOYMENT AND SEVERANCE AGREEMENT (the "Agreement") dated effective October 3, 2002, a copy of which is attached as Exhibit A; and Whereas, Kitty Hawk and Keith are parties to the INCENTIVE STOCK OPTION AGREEMENT - KITTY HAWK 2003 LONG TERM EQUITY INCENTIVE PLAN (the "Stock Option") having a Date of Grant of July 30, 2003, a copy of which is attached as Exhibit B; and, Whereas, capitalized terms used herein will have the meaning ascribed to them in the Agreement or the Stock Option unless otherwise defined herein; and, Whereas, unless specifically modified, amended or provided for in this Severance Agreement, the benefits, rights and obligations of the parties will continue to be governed by the Agreement and the Stock Option; and, Whereas, the Agreement and the Stock Option will continue to survive as amended by this Severance Agreement; and, Whereas, in order to minimize the disruption to Kitty Hawk's ongoing business and provide for a smooth transition of Keith's corporate responsibilities to a successor, Kitty Hawk and Keith have reached certain other agreements regarding Keith's severance of employment from Kitty Hawk as set-forth herein; Now; therefore, in consideration of the mutually acceptable terms and conditions herein, Kitty Hawk and Keith agree as follows: Keith's Initials /s/ DK Kitty Hawk's CEO Initials /S/ RWZ Page 1 of 5 EMPLOYMENT AND SEVERANCE AGREEMENT AMENDMENT 3.6 TERMINATION. The written notice requirement to terminate the Agreement is amended to require 60 days in lieu of 30 days. NOTICE OF TERMINATION Kitty Hawk hereby terminates Keith's employment without material breach effective December 31, 2003 pursuant to 3.6 TERMINATION., B. of the Agreement. Keith hereby waives written notice as required pursuant to 6.3 NOTICES. of the Agreement. RESIGNATION Pursuant to notice of Termination given herein by Kitty Hawk, the amendments to the Agreement as provided herein, and the other agreements reached in this Severance Agreement, Keith resigns all positions he holds within Kitty Hawk, Aircargo, and Cargo effective December 31, 2003 as provided in 3.6 TERMINATION., B. of the Agreement. Kitty Hawk hereby waives its right, if any, to a separate letter of resignation as contemplated in 3.6 TERMINATION., B. of the Agreement. OTHER SEVERANCE RELATED AGREEMENTS CONSULTANT PERIOD: from January 1, 2004 through February 29, 2004 Keith will be available to the Company as a full-time (or as needed) consultant and will assist Kitty Hawk as directed by Kitty Hawk's President and CEO. As compensation for this Consultant Period, Keith will receive all of the compensation, benefits and rights afforded him as provided in the Agreement, as amended herein, for the 60-day notice period. The 60-day notice period provided in the Agreement, as amended herein, and this Consultant Period are coterminous. During this Consultant Period, Keith will adhere to and be subject to the Kitty Hawk Team Member Guide (a copy of which has previously been provided to Keith). STOCK OPTION: as additional consideration, Kitty Hawk agrees to provide that Participant's Termination of Service (whereby Drew Keith is the Participant to the Stock Option as defined therein) as it pertains to the Stock Option, will be 6 p.m. on June 1, 2004 in lieu of an earlier date certain as provided in the Stock Option absent this Severance Agreement. UNUSED VACATION: for the avoidance of doubt, Keith will be paid on or before February 29, 2004 for any earned but unused vacation as of December 31, 2003. Keith's Initials /s/ DK ------------ Kitty Hawk's CEO Initials /s/ RWZ ------------ Page 2 of 5 SEVERANCE AGREEMENT TERM: the term of this Severance Agreement will be January 1, 2004 through 6 p.m. June 1, 2004. KEITH'S ADDITIONAL CONSIDERATION TO KITTY HAWK: in return for the additional consideration provided to Keith in this Severance Agreement, Keith agrees to and states: 1. Keith will not bring, continue or maintain any legal proceedings of any nature whatsoever against the Company before any court, administrative agency, arbitrator or any other tribunal or forum by reason any such claims, demands, liabilities and/or causes of action, arising out of, relating to or resulting from Keith's employment or termination from employment (except for a claim of willful breach of the Agreement, the Stock Option or this Severance Agreement), and that if any agency or court assumes jurisdiction of any complaint, claim, or action against the Company on Keith's behalf, Keith will direct that agency or court to withdraw from or dismiss the matter with prejudice, unless it is a claim for willful breach of the Agreement, the Stock Option or this Severance Agreement. 2. While Keith understands that Keith has had the following obligations since Keith began his employment with the Company, Keith confirms that he shall not disclose any of the Company's trade secrets or other confidential, proprietary or restricted information and shall not make use of such trade secrets or confidential, proprietary or restricted information in any fashion at any time. 3. Keith further agrees and promises that during the term of this Severance Agreement and for period of one (1) year from June 1, 2004 he will not influence or attempt to influence customers or suppliers of the Company or any of its present or future subsidiaries or affiliates, either directly or indirectly, to divert their business to any individual, partnership, firm, corporation or other entity then in competition with the business of the Company, or any subsidiary or affiliate of the Company. 4. Keith further agrees not to knowingly make any unsubstantiated statements that defame or disparage the Company or its products, services, officers, Team Members (as defined in the Team Member Guide), advisors or other business contacts. Keith shall not represent, suggest, or hold himself out as being currently associated or affiliated with the Company in any way. Keith shall not make contact with or engage in communications about the Company or its operations with the media, current or former Team Members of the Company, or current or former customers of the Company, provided, however, that if Keith is contacted by the media, current or former Team Members of the Company, current or former customers of the Company, the general public, or any other individual or entity, Keith shall not suggest or imply that Keith is privy to current information about the Company, and shall not comment about the current or prospective operations of the Company. Keith acknowledges and agrees that any breach of this non-defamation provision shall entitle the Company to immediately terminate payment of the additional Keith's Initials /s/ DK ------------ Kitty Hawk's CEO Initials /s/ RWZ ------------ Page 3 of 5 consideration provided to Keith as described in this Severance Agreement, and to sue Keith for breach of this Agreement for the immediate recovery of any damages caused by such breach and to prevent further statements that defame the Company or any of its products. services, officers, Team Members, advisors or other business contacts. ADDITIONAL PROVISIONS: Kitty Hawk and Keith further agree and so state: 1. This Severance Agreement does not constitute an admission of any kind by the Company or Keith, but simply an agreement which offers certain additional consideration to which Keith would not otherwise be entitled in return for Keith agreeing to the terms of and signing this Severance Agreement. Keith further understands and agrees that if Keith breaches a material term or condition of this Severance Agreement, Keith will automatically forfeit all of the additional consideration provided to him in this Severance Agreement. If Keith violates this Severance Agreement after receiving any additional consideration as provided herein, Keith agrees that Keith will forfeit and/or immediately return the additional consideration to the Company. In any action brought to enforce any provisions of the Agreement, the Stock Option, or this Severance Agreement, in addition to any other relief granted, the prevailing party shall recover its reasonable costs of enforcement including, but without limitations to costs and reasonable attorney fees incurred. 2. The Company agrees not to make any unsubstantiated statements that defame Keith. The Company shall not make contact with or engage in communications about Kieth with (i) the media, current or former Team Members of the Company, or (ii) current or former advisors or business contacts of the Company. The Company acknowledges and agrees that any breach of this non-defamation provision shall entitle Keith to sue the Company for breach of this Severance Agreement and seek immediate recovery of any damages caused by such breach and to prevent the Company from further statements that defame Keith or any of Keith's products, services, or future employer. 3. Keith acknowledges and agrees that Keith has been advised that this Severance Agreement is a final and binding legal document, and that Keith has had sufficient time and opportunity to consult with an attorney and/or tax consultant of his own choosing before signing this Severance Agreement, and that in signing this Severance Agreement, Keith has acted voluntarily of his own free will and has not relied upon any representation made by the Company or any of its agents, Team Members or representatives regarding the subject matter or effect of this Severance Agreement. Keith further agrees not to voluntarily make the terms and conditions or the circumstances surrounding this Severance Agreement known to anyone other than the attorney and/or tax consultant from whom Keith receives counseling, as referred above, and his spouse. However, before disclosing such information to these individuals, Keith will obtain their agreement not to disclose such information. If any Keith's Initials /s/ DK -------------- Kitty Hawk's CEO Initials /s/ RWZ -------------- Page 4 of 5 provision of this Severance Agreement is breached by Keith, Keith understands that Keith will be required to return to the Company the additional consideration given to him pursuant to this Severance Agreement. 4. Keith understands that if Keith elects to revoke this Severance Agreement, Keith understands that Keith will not be entitled to the additional consideration described in this Severance Agreement. 5. Keith acknowledges and agrees that all applicable requirements of state law governing or affecting the validity of compromises, settlements and releases are specifically incorporated herein as fully as if set forth at length. 6. Keith also understands that if Keith signs this Severance Agreement, Keith will then have seven (7) days to revoke it, in writing, if Keith so chooses. However, if Keith elects to revoke this Severance Agreement, Keith understands that Keith will not be entitled to the additional consideration provided in this Severance Agreement. Keith realizes this Severance Agreement is not effective or enforceable until the seven (7) day period expires. KEITH IS ENTERING INTO THIS SEVERANCE AGREEMENT FREELY AND VOLUNTARILY AND KEITH IS SATISFIED THAT KEITH HAS BEEN GIVEN SUFFICIENT OPPORTUNITY TO CONSIDER IT. KEITH HAS CAREFULLY READ AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS SEVERANCE AGREEMENT. KEITH UNDERSTANDS THAT THIS SEVERANCE AGREEMENT, TAKEN TOGETHER WITH THE AGREEMENT AND STOCK OPTION, SET FORTH THE ENTIRE AGREEMENT BETWEEN KEITH AND THE COMPANY. KEITH REPRESENTS THAT NO OTHER STATEMENTS, PROMISES, OR COMMITMENTS OF ANY KIND, WRITTEN OR ORAL, HAVE BEEN MADE TO KEITH BY THE COMPANY TO CAUSE KEITH TO ACCEPT THIS SEVERANCE AGREEMENT. KEITH ACKNOWLEDGES ACCEPTANCE OF THIS SEVERANCE AGREEMENT BY SIGNATURE BELOW: /s/ Jack Andrew "Drew" Keith 2/18/2004 - ------------------------------------------- ----------- Jack Andrew "Drew" Keith Date Agreed to and accepted on behalf of Kitty Hawk, Inc.: /s/ Bob Zoller, President and CEO 2/17/2004 - ------------------------------------------ ----------- Bob Zoller, President and CEO Date Keith's Initials /s/ DK -------------- Kitty Hawk's CEO Initials /s/ RWZ -------------- Page 5 of 5 EX-10.12 6 d13914exv10w12.txt TERM SHEET EXHIBIT 10.12 TERM SHEET RANDY S. LEISER CHIEF FINANCIAL OFFICER KITTY HAWK, INC. JANUARY 20, 2004 Position: Vice President & Chief Financial Officer Responsibilities: As outlined in the Position and Candidate Specifications document provided to you earlier in this search process. Types of projects to be assigned over the first year (examples only): (a) S-1 (b) Exchange Listing (c) Network Global Expansion (interline and freight forwarder relationships) (d) Develop financial and operations analysis capability (e) Companywide IT Development (if desired) (f) Route Profitability and Yield Management Enhancements (g) Truck Network Expansion Project (h) Mergers and Acquisition Analysis Commitment: The role of Chief Financial Officer is a full-time one and requires the best efforts and total professional commitment of its incumbent. You will be expected to apply yourself to this role on a dedicated business, without interference from other professional activities. This implies that you should: - Complete any outstanding commitments outside Kitty Hawk you may have as soon as possible and advise the CEO of what those are; and - Not take on any new commitments outside Kitty Hawk without the prior approval of the CEO. Reporting to: President & Chief Executive Officer Location: Dallas, Texas You will participate in evaluating any potential relocation of the corporate headquarters for the company, should relocation be considered. Termination: Should you be terminated without cause, you would be provided six months' base salary. Base Salary: $185,000, payable in biweekly installments. Your salary will be reviewed in June 2004 and, if your performance in the role is satisfactory or better, the base salary will be adjusted to $200,000 and then subject to annual review thereafter. Incentive Compensation Kitty Hawk will be introducing a new (Cash and Equity) incentive compensation program for its top leadership team. As the CFO, you will participate in a process over the near-term, with help of professional compensation consultants, to develop and secure Board approval for the new incentive compensation program. Your own incentive compensation will be governed by this new program. You will be awarded an incoming stock option grant, subject to a monthly vesting schedule, with the specific amount to be consistent with other officers of the company and to be approved by the Compensation Committee of the board. Employment Benefits: Standard Kitty Hawk Inc. executive level benefits (to be provided by Kitty Hawk under separate cover) Start Date: As soon as possible but no later than February 2, 2004 Conditions: Satisfactory background check and educational verification Satisfactory medical examination or recent medical report Maintaining this agreement in confidence until mutually agreed upon to communicate it more broadly. Acceptance of offer by January 22, 2004 Additionally, you will be expected to sign various agreements related to (a) non-competition, (b) non-disparagement, and (c) confidentiality (non-release) of proprietary information. SPENCERSTUART Accepted: /s/ Randy S. Lesier 1-21-04 - ------------------------- ------------------------------ Randy S. Leiser Date KITTY HAWK, INC. /s/ ROBERT W. ZOLLER, JR. - ------------------------- ROBERT W. ZOLLER, JR. PRESIDENT AND CEO EX-10.13 7 d13914exv10w13.txt CREDIT AND SECURITY AGREEMENT EXHIBIT 10.13 ================================================================================ CREDIT AND SECURITY AGREEMENT BY AND BETWEEN KITTY HAWK, INC. AND WELLS FARGO BUSINESS CREDIT, INC. - -------------------------------------------------------------------------------- MARCH 22, 2004 ================================================================================ TABLE OF CONTENTS

PAGE ---- ARTICLE I DEFINITIONS........................................................................................ 1 Section 1.1 Definitions........................................................................ 1 Section 1.2 Other Definitional Terms; Rules of Interpretation.................................. 11 ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY............................................................ 11 Section 2.1 Revolving Advances................................................................. 11 Section 2.2 Procedures for Requesting Advances................................................. 12 Section 2.3 Increased Costs; Capital Adequacy; Funding Exceptions.............................. 12 Section 2.4 Letters of Credit.................................................................. 13 Section 2.5 Special Account.................................................................... 14 Section 2.6 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement...... 14 Section 2.7 Obligations Absolute............................................................... 15 Section 2.8 Interest; Additional Amounts; Default Interest; Participations; Clearance Days; Usury.............................................................................. 16 Section 2.9 Fees............................................................................... 18 Section 2.10 Time for Interest Payments; Payment on Non-Banking Days; Computation of Interest and Fees........................................................................... 20 Section 2.11 Lockbox; Collateral Account; Application of Payments............................... 21 Section 2.12 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the Borrower........................................................... 21 Section 2.13 Mandatory Prepayment............................................................... 21 Section 2.14 Revolving Advances to Pay Obligations.............................................. 21 Section 2.15 Use of Proceeds.................................................................... 22 Section 2.16 Liability Records.................................................................. 22 Section 2.17 Renewal............................................................................ 22 Section 2.18 Guarantor Collateral Accounts...................................................... 22 ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF............................................................... 23 Section 3.1 Grant of Security Interest......................................................... 23 Section 3.2 Notification of Account Debtors and Other Obligors................................. 23 Section 3.3 Assignment of Insurance............................................................ 23 Section 3.4 Occupancy.......................................................................... 24 Section 3.5 License............................................................................ 24 Section 3.6 Financing Statement................................................................ 24 Section 3.7 Setoff............................................................................. 25 Section 3.8 Collateral......................................................................... 25 ARTICLE IV CONDITIONS OF LENDING.............................................................................. 26 Section 4.1 Conditions Precedent to the Initial Revolving Advance and Letter of Credit......... 26 Section 4.2 Conditions Precedent to All Advances and Letters of Credit......................... 28

TABLE OF CONTENTS (CONTINUED)

PAGE ---- ARTICLE V REPRESENTATIONS AND WARRANTIES.................................................................. 28 Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Federal Employer Identification Number............................... 28 Section 5.2 Capitalization.................................................................. 29 Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements................. 29 Section 5.4 Legal Agreements................................................................ 29 Section 5.5 Subsidiaries.................................................................... 29 Section 5.6 Financial Condition; No Adverse Change.......................................... 29 Section 5.7 Litigation...................................................................... 29 Section 5.8 Regulation U.................................................................... 30 Section 5.9 Taxes........................................................................... 30 Section 5.10 Titles and Liens................................................................ 30 Section 5.11 Intellectual Property Rights.................................................... 30 Section 5.12 Plans........................................................................... 31 Section 5.13 Default......................................................................... 32 Section 5.14 Environmental Matters........................................................... 32 Section 5.15 Submissions to Lender........................................................... 32 Section 5.16 Financing Statements............................................................ 32 Section 5.17 Rights to Payment............................................................... 33 Section 5.18 Financial Solvency.............................................................. 33 ARTICLE VI COVENANTS....................................................................................... 33 Section 6.1 Reporting Requirements.......................................................... 33 Section 6.2 Financial Covenants............................................................. 37 Section 6.3 Permitted Liens; Financing Statements........................................... 39 Section 6.4 Indebtedness.................................................................... 39 Section 6.5 Guaranties...................................................................... 40 Section 6.6 Investments and Subsidiaries.................................................... 40 Section 6.7 Dividends and Distributions..................................................... 41 Section 6.8 Salaries........................................................................ 41 Section 6.9 Books and Records; Inspection and Examination................................... 41 Section 6.10 Account Verification............................................................ 41 Section 6.11 Compliance with Laws............................................................ 41 Section 6.12 Payment of Taxes and Other Claims............................................... 42 Section 6.13 Maintenance of Properties....................................................... 42 Section 6.14 Insurance....................................................................... 42 Section 6.15 Preservation of Existence....................................................... 43 Section 6.16 Delivery of Instruments, etc.................................................... 43 Section 6.17 Sale or Transfer of Assets; Suspension of Business Operations................... 43 Section 6.18 Consolidation and Merger; Asset Acquisitions.................................... 43

TABLE OF CONTENTS (CONTINUED)

PAGE ---- Section 6.19 Sale and Leaseback.............................................................. 43 Section 6.20 Restrictions on Nature of Business.............................................. 43 Section 6.21 Accounting...................................................................... 44 Section 6.22 Discounts, etc.................................................................. 44 Section 6.23 Plans........................................................................... 44 Section 6.24 Place of Business; Name......................................................... 44 Section 6.25 Constituent Documents; S Corporation Status..................................... 44 Section 6.26 Performance by the Lender....................................................... 44 Section 6.27 [omitted intentionally]......................................................... 45 Section 6.28 Debt Payments................................................................... 45 Section 6.29 Transactions with Affiliates.................................................... 45 ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES.......................................................... 45 Section 7.1 Events of Default............................................................... 45 Section 7.2 Rights and Remedies............................................................. 47 Section 7.3 Certain Notices................................................................. 48 ARTICLE VIII MISCELLANEOUS................................................................................... 49 Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws............................ 49 Section 8.2 Amendments, Etc................................................................. 49 Section 8.3 Addresses for Notices; Requests for Accounting.................................. 49 Section 8.4 Further Documents............................................................... 49 Section 8.5 Costs and Expenses.............................................................. 50 Section 8.6 Indemnity....................................................................... 50 Section 8.7 Participants.................................................................... 51 Section 8.8 Execution in Counterparts; Telefacsimile Execution.............................. 51 Section 8.9 Retention of Borrower's Records................................................. 51 Section 8.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information.......... 51 Section 8.11 Severability of Provisions...................................................... 52 Section 8.12 Headings........................................................................ 52 Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial........................ 52 Section 8.14 Non-Application of Chapter 346 of the Texas Finance Code........................ 52 Section 8.15 Entire Agreement................................................................ 52

CREDIT AND SECURITY AGREEMENT Dated as of March 22, 2004 KITTY HAWK, INC., a Delaware corporation (the "Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided, the following terms shall have the meanings assigned to them in this Section or in the Section referenced after such term: "Accounts" means all of a Person's accounts, as such term is defined in the UCC, including each and every right of such Person to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by such Person or by some other person who subsequently transfers such person's interest to such Person, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all Liens) which such Person may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Advance" means a Revolving Advance. "Affiliate" or "Affiliates" means Kitty Hawk Aircargo, Kitty Hawk Cargo, and any other Person (other than an individual) controlled by, controlling or under common control with the Borrower, including any Subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Credit and Security Agreement, as the same may be amended, modified, supplemented or restated from time to time. "Aircraft" means aircraft, airframes, engines and related parts that the Borrower and its Subsidiaries own or hold pursuant to operating leases. "Availability" means the difference of (i) the Borrowing Base and (ii) the sum of (A) the outstanding principal balance of the Revolving Note and (B) the L/C Amount. "Banking Day" means a day on which the Federal Reserve Bank of New York is open for business. "Base Rate" means the rate of interest publicly announced from time to time by Wells Fargo at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for loans making reference thereto. "Book Net Worth" means the aggregate of the common and preferred stockholders' equity in the Borrower, determined in accordance with GAAP. "Borrowing Base" means at any time the lesser of: (a) the Maximum Line; or (b) subject to reduction from time to time in the Lender's sole discretion based on changes to Dilution, up to 85% of Eligible Accounts (provided that Dilution is four percent (4%) or less). "Capital Expenditures" means for a period, any expenditure of money during such period for the purchase or construction of assets, or for improvements or additions thereto, which are capitalized on the Borrower's balance sheet, or for the lease, purchase or other acquisition of any capital asset, or for the lease of any other asset whether payable currently or in the future; excluding, however, Aircraft maintenance capital expenditures in the ordinary course of business and operating leases of Aircraft. "Change of Control" means the occurrence of any of the following events: (a) any Person or "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a Person will be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 51% of the voting power of all classes of voting stock of the Borrower. (b) during any consecutive two-year period, individuals who at the beginning of such period constituted the board of Directors of the Borrower (together with any new Directors whose election to such board of Directors, or whose nomination for election by the owners of the Borrower, was approved by a vote of 66-2/3% of the Directors then still in office who were either Directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of Directors of the Borrower then in office. "Collateral" means all of the Borrower's personal property and assets, whether now owned or hereafter acquired, including Accounts, chattel paper, deposit accounts, documents, Equipment (other than Aircraft), fixtures, General Intangibles (excluding CREDIT AND SECURITY AGREEMENT - PAGE 2 licenses and permits referred-to in the last sentence of this definition), goods, instruments, Inventory, Investment Property (other than the stock issued by Kitty Hawk Aircargo, Kitty Hawk Cargo and any other wholly-owned Subsidiary of the Borrower), letter-of-credit rights, letters of credit, and all sums on deposit in any Collateral Account, and any items in any Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) in the case of all goods, all accessions; (iii) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any goods; (iv) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; (v) all collateral subject to the Lien of any Security Document; (vi) any money, or other assets of the Borrower that now or hereafter come into the possession, custody, or control of the Lender; (vii) all sums on deposit in the Special Account; and (viii) proceeds of any and all of the foregoing. (For avoidance of doubt, any Department of Transportation, Federal Aviation Administration and other governmental licenses and permits which by their nature are not freely assignable or transferable are not included as Collateral.) "Collateral Account" means each "Lender Account" as defined in any Lockbox and Collection Account Agreement. "Commitment" means the Lender's commitment to make Advances to, and to cause the Issuer to issue Letters of Credit for the account of, the Borrower pursuant to Article II. "Constituent Documents" means with respect to any Person, as applicable, such Person's certificate of incorporation, articles of incorporation, by-laws, certificate of formation, articles of organization, limited liability company agreement, management agreement, operating agreement, shareholder agreement, partnership agreement or similar document or agreement governing such Person's existence, organization or management or concerning disposition of ownership interests of such Person or voting rights among such Person's owners. "Contribution and Indemnification Agreement" means the Contribution and Indemnification Agreement executed by each Loan Party and the Lender, dated as of even date herewith, as the same may be amended, modified, supplemented or restated from time to time. "Credit Facility" means the credit facility being made available to the Borrower by the Lender under Article II. "Debt" means of a Person as of a given date, all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet for such Person and shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. CREDIT AND SECURITY AGREEMENT - PAGE 3 "Default Period" means any period of time beginning on the day an Event of Default occurs and ending on the date the Lender notifies the Borrower in writing that such Event of Default has been cured or waived. "Default Rate" means an annual interest rate equal to three percent (3%) over the Floating Rate, which interest rate shall change when and as the Floating Rate changes. "Dilution" means the gross amount of all returns, allowances, discounts, credits, writeoffs, and similar items relating to Accounts (but excluding any non-diluting items) computed as a percentage of gross sales, calculated on a three month rolling average, as determined by the Lender in its discretion during routine or special collateral audits. "Director" means a director if the Borrower is a corporation, a manager if the Borrower is a limited liability company, or a general partner if the Borrower is a partnership. "Dollars" or "$" means lawful currency of the United States of America. "EBITDAR" means, at each date of determination, the sum of (i) pretax earnings from continuing operations, (ii) Interest Expense and (iii) depreciation, depletion, and amortization of tangible and intangible assets, before (a) special extraordinary gains, (b) minority interests, and (c) miscellaneous gains and losses, in each case for such period, computed and calculated in accordance with GAAP, and (iv) Rent for the trailing four fiscal quarters. "ERISA" means the Employee Retirement Income Security Act of 1974 as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is a member of a group which includes the Borrower and which is treated as a single employer under Section 414 of the IRC. "Eligible Accounts" means all of the Borrower's and each Guarantor's unpaid Accounts arising from the sale or lease of goods or the performance of services by Borrower or such Guarantor, net of any credits, but excluding any such Accounts having any of the following characteristics: (i) That portion of Accounts unpaid 90 days or more after the invoice date; (ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer, including progress billings, and that portion of Accounts for which an invoice has not been sent to the applicable account debtor; CREDIT AND SECURITY AGREEMENT - PAGE 4 (iv) Accounts constituting (A) proceeds of copyrightable material unless such copyrightable material shall have been registered with the United States Copyright Office, or (B) proceeds of patentable inventions unless such patentable inventions have been registered with the United States Patent and Trademark Office; (v) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower or the applicable Guarantor has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); (vi) Accounts owed by an account debtor located outside the United States which are not (A) backed by a bank letter of credit naming the Lender as beneficiary or assigned to the Lender, in the Lender's possession or control, and with respect to which a control agreement concerning the letter-of-credit rights is in effect, and acceptable to the Lender in all respects, in its sole discretion, or (B) covered by a foreign receivables insurance policy acceptable to the Lender in its sole discretion; (vii) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (viii) Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of the Borrower or the Guarantors; (ix) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any Lien in favor of any Person other than the Lender; (x) That portion of Accounts that has been restructured, extended, amended or modified; (xi) That portion of Accounts that constitutes advertising, finance charges, or service charges; (xii) Accounts owed by an account debtor, regardless of whether otherwise eligible, to the extent that the balance of such Accounts exceeds 20% of the aggregate amount of all Eligible Accounts; (xiii) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 25% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (x) above; and (xiv) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in the exercise of its business judgment. CREDIT AND SECURITY AGREEMENT - PAGE 5 "Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. "Equipment" means all of a Person's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by such Person. For avoidance of doubt, Aircraft are not included in the definition of "Equipment". "Event of Default" has the meaning specified in Section 7.1. "Financial Covenants" means the covenants set forth in Section 6.2. "Floating Rate" means a fluctuating annual interest rate which shall from day to day be the lesser of (a) the Maximum Rate or (b) an annual interest rate equal to the sum of the Base Rate plus one percent (1.0%), which interest rate shall change when and as the Base Rate changes. "Funding Date" has the meaning given in Section 2.1. "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section 5.6. "General Intangibles" means all of a Person's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including all present and future Intellectual Property Rights, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use a Person's name, and the goodwill of such Person's business. For avoidance of doubt, the term "General Intangibles" shall not include the excluded property referred-to in the definition of "Collateral". "Guarantor" means each of Kitty Hawk Aircargo, Kitty Hawk Cargo, and any Person now or hereafter guaranteeing the Obligations. "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. "IRC" means the Internal Revenue Code of 1986, as amended from time to time. "Infringe," when used with respect to Intellectual Property Rights, means any infringement or other violation of Intellectual Property Rights. CREDIT AND SECURITY AGREEMENT - PAGE 6 "Intellectual Property Rights" means all actual or prospective rights arising in connection with any intellectual property or other proprietary rights, including all rights arising in connection with copyrights, patents, service marks, trade dress, trade secrets, trademarks, trade names or mask works. "Interest Expense" means, at each date of determination, the Borrower's total consolidated gross interest expense (excluding interest income), and shall in any event include (i) interest expensed (whether or not paid) on all Debt, (ii) the amortization of debt discounts, (iii) the amortization of all fees payable in connection with the incurrence of Debt to the extent included in interest expense, and (iv) the portion of any capitalized lease obligation allocable to interest expense, for the trailing four fiscal quarters. "Inventory" means all of a Person's inventory, as such term is defined in the UCC (excluding Aircraft), whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Investment Property" means all of a Person's investment property, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and U.S. Government securities. "Issuer" means the issuer of any Letter of Credit. "Kitty Hawk Aircargo" means Kitty Hawk Aircargo, Inc., a Texas corporation. "Kitty Hawk Cargo" means Kitty Hawk Cargo, Inc., a Delaware corporation. "L/C Amount" means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. "L/C Application" means an application and agreement for letters of credit in a form acceptable to the Issuer and the Lender. "Letter of Credit" has the meaning specified in Section 2.4. "Licensed Intellectual Property" has the meaning given in Section 5.11(c). "Lien" means any security interest, mortgage, deed of trust, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device, including the interest of each lessor under any capitalized lease and the interest of any bondsman under any payment or performance bond, in, of or on any assets or properties of a Person, whether now owned or hereafter acquired and whether arising by agreement or operation of law. CREDIT AND SECURITY AGREEMENT - PAGE 7 "Liquid Assets" means Dollars and investment grade commercial paper. "Loan Documents" means this Agreement, the Note, the Security Documents and any L/C Application. "Loan Party" means the Borrower or a Guarantor, or both. "Lockbox" has the meaning given in the Lockbox and Collection Account Agreements. "Lockbox and Collection Account Agreement" means a Lockbox and Collection Account Agreement by and among the applicable Loan Party, Wells Fargo, and the Lender, as the same may be amended, modified or restated from time to time. "Maturity Date" has the meaning given in Section 2.17. "Maximum Line" means $10,000,000.00 unless said amount is reduced pursuant to Section 2.12, in which event it means such lower amount. "Maximum Rate" means the maximum lawful rate of interest which may be contracted for, charged, taken, received or reserved by Lender in accordance with the applicable laws of the State of Texas (or applicable United States federal law to the extent that such law permits Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law), taking into account all charges made in connection with the transaction evidenced by the Loan Documents. If such maximum rate of interest changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, from time to time as of the effective date of each change in such Maximum Rate. To the extent, if any, that Chapter 303 of the Texas Finance Code, as amended, establishes the Maximum Rate, the Maximum Rate shall be the "weekly ceiling" as defined therein. "Monthly Period" means each month when (1) Availability plus the Borrower's Liquid Assets held in accounts with Wells Fargo or Wells Fargo Investments in which the Lender has a Lien is greater than $7,500,000, (2) no Default exists and (3) collateral audits are satisfactory to the Lender. "Multiemployer Plan" means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate contributes or is obligated to contribute. "Net Income" means after-tax net income from continuing operations as determined in accordance with GAAP, excluding, however, the effect of non-cash items. "Non-Excluded Taxes" means any Taxes other than income and franchise Taxes imposed with respect to the Lender by the United States of America and the State of Texas. CREDIT AND SECURITY AGREEMENT - PAGE 8 "Note" means the Revolving Note, as the same may be amended, modified, supplemented or restated from time to time. "Obligation of Reimbursement" has the meaning given in Section 2.6(a). "Obligations" means the Note, the Obligation of Reimbursement and each and every other debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including all indebtedness of the Borrower arising under any Credit Document or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. "Officer" means with respect to the Borrower, an officer if the Borrower is a corporation, a manager if the Borrower is a limited liability company, or a partner if the Borrower is a partnership. "Original Maturity Date" means March 22, 2007. "Other Taxes" means any and all stamp, documentary or similar Taxes, or any other excise or property Taxes or similar levies that arise on account of any payment made or required to be made under any Loan Document or from the execution, delivery, registration, recording or enforcement of any Loan Document. "Owned Intellectual Property" has the meaning given in Section 5.11(a). "Owner" means with respect to the Borrower, each Person having legal or beneficial title to an ownership interest in the Borrower or a right to acquire such an interest. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) maintained for employees of the Borrower or any ERISA Affiliate and covered by Title IV of ERISA. "Permitted Lien" has the meaning given in Section 6.3(a). "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) maintained for employees of the Borrower or any ERISA Affiliate. CREDIT AND SECURITY AGREEMENT - PAGE 9 "Premises" means all premises where the Borrower conducts its business and has any rights of possession, including the premises legally described in Exhibit C attached hereto. "Rent" means, with respect to the Borrower and its Subsidiaries, all payments for rent and additional rent under all operating leases of Aircraft with a term of one year or more. "Reportable Event" means a reportable event (as defined in Section 4043 of ERISA), other than an event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the Pension Benefit Guaranty Corporation. "Revolving Advance" has the meaning given in Section 2.1. "Revolving Note" means the Borrower's revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit A hereto, as the same may be amended, modified, supplemented or restated from time to time. "Security Agreement" means a Security Agreement executed by each Guarantor in favor of the Lender as of even date herewith as the same may be amended, modified or restated from time to time. "Security Documents" means this Agreement, the Lockbox and Collection Account Agreements, the Trademark Security Agreements, any guaranty, the Security Agreements, the Contribution and Indemnification Agreement, any control agreements or other documents executed in relation to the Borrower's or any Guarantor's deposit accounts or Investment Property, and any other document delivered to the Lender from time to time to secure the Obligations. "Security Interest" has the meaning given in Section 3.1. "Special Account" means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Section 2.5. "Subordination Agreement" means any other subordination agreement with respect to Debt of the Borrower accepted by Lender from time to time. "Subordinated Debt" means any Debt of the Borrower subject to a Subordination Agreement. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of Directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. CREDIT AND SECURITY AGREEMENT - PAGE 10 "Taxes" means all income, stamp or other taxes, duties, levies, imposts, charges, assessments, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any governmental authority, and all interest, penalties or similar liabilities with respect thereto. "Termination Date" means the earliest of (i) the Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the date the Lender demands payment of the Obligations while an Event of Default continues. "Trademark Security Agreement" means a separate Trademark Security Agreement executed by each of the Borrower, Kitty Hawk Aircargo, and Kitty Hawk Cargo, in favor of the Lender as the same may be amended, modified, supplemented, or restated from time to time. "UCC" means the Uniform Commercial Code as in effect in the state designated in Section 8.13 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. "Wells Fargo" means Wells Fargo Bank, National Association. Section 1.2 Other Definitional Terms; Rules of Interpretation. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. All terms defined in the UCC and not otherwise defined herein have the meanings assigned to them in the UCC. References to Articles, Sections, subsections, Exhibits, Schedules and the like, are to Articles, Sections and subsections of, or Exhibits or Schedules attached to, this Agreement unless otherwise expressly provided. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or". Defined terms include in the singular number the plural and in the plural number the singular. Reference to any agreement (including the Loan Documents), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof (and, if applicable, in accordance with the terms hereof and the other Loan Documents), except where otherwise explicitly provided, and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor. Reference to any law, rule, regulation, order, decree, requirement, policy, guideline, directive or interpretation means as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect on the determination date, including rules and regulations promulgated thereunder. ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY Section 2.1 Revolving Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrower from time to time from the date all CREDIT AND SECURITY AGREEMENT - PAGE 11 of the conditions set forth in Section 4.1 are satisfied (the "Funding Date") to the Termination Date (the "Revolving Advances"). The Lender shall have no obligation to make a Revolving Advance to the extent the amount of the requested Revolving Advance exceeds Availability. The Borrower's obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral. Within the limits set forth in this Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.12 and reborrow. Section 2.2 Procedures for Requesting Advances. The Borrower shall comply with the following procedures in requesting Revolving Advances: (a) TIME FOR REQUESTS. The Borrower shall request each Advance not later than 11:00 a.m., Dallas, Texas time on the Banking Day which is the date the Advance is to be made. Each such request shall be effective upon receipt by the Lender, shall be in writing or by telephone or telecopy transmission, to be confirmed in writing by the Borrower if so requested by the Lender shall be by the chief executive officer, chief financial officer or chief accounting officer of the Borrower, as reflected on the latest incumbency certification received by the Lender. The Borrower shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so. Any request for an Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. (b) DISBURSEMENT. Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Advance by crediting the same to the Borrower's demand deposit account maintained with Wells Fargo unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Section 2.3 Increased Costs; Capital Adequacy; Funding Exceptions. If the Lender determines at any time that its Return has been reduced as a result of any Rule Change, the Lender may so notify the Borrower and may, on a nondiscriminatory basis vis a vis other similarly situated borrowers, require the Borrower, beginning fifteen (15) days after such notice, to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this Section 2.3: (i) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender, including rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (ii) "L/C Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender, including those that impose taxes, duties or other similar charges, CREDIT AND SECURITY AGREEMENT - PAGE 12 or mandate reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit. (iii) "Related Lender" includes (but is not limited to) the Lender, any parent of the Lender, any assignee of any interest of the Lender hereunder and any participant in the Credit Facility. (iv) "Return" for any period means the percentage determined by dividing (i) the sum of interest and ongoing fees earned by the Lender under this Agreement during such period, by (ii) the average capital such Lender is required to maintain during such period as a result of its being a party to this Agreement, as determined by such Lender based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules and L/C Rules then in effect, costs of issuing or maintaining any Advance or Letter of Credit and amounts received or receivable under this Agreement or the Note with respect to any Advance or Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (v) "Rule Change" means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, or any change in the interpretation or administration thereof by any governmental or regulatory authority, that affects not only the Lender but also similarly situated institutions, but the term does not include any changes that at the Funding Date are scheduled to take place under the existing Capital Adequacy Rules or L/C Rules or any increases in the capital that the Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of that Lender's financial condition. The initial notice sent by the Lender shall be sent as promptly as practicable after such Lender learns that its Return has been reduced, shall include a demand for payment of the amount necessary to restore such Lender's Return for the quarter in which the notice is sent, and shall state in reasonable detail the cause for the reduction in its Return and its calculation of the amount of such reduction. Thereafter, such Lender may send a new notice during each calendar quarter setting forth the calculation of the reduced Return for that quarter and including a demand for payment of the amount necessary to restore its Return for that quarter. The Lender's calculation in any such notice shall be conclusive and binding absent demonstrable error. Section 2.4 Letters of Credit. (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to cause an Issuer to issue, from the Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a "Letter of Credit") for the Borrower's account by guaranteeing payment of the Borrower's obligations or being a co-applicant. The Lender shall have no obligation to cause an Issuer to issue any Letter of Credit if the face amount of the Letter CREDIT AND SECURITY AGREEMENT - PAGE 13 of Credit to be issued would exceed the lesser of: (i) $5,000,000.00 less the L/C Amount, or (ii) Availability. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into between the Borrower and the Lender for the benefit of the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) No Letter of Credit shall be issued with an expiry date later than the Termination Date in effect as of the date of issuance. (c) Any request to cause an Issuer to issue a Letter of Credit shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the date of the request. Section 2.5. Special Account. If the Credit Facility is terminated for any reason while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the L/C Amount. The Special Account shall be an interest bearing account maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. The Lender may apply amounts on deposit in the Special Account at any time or from time to time to the Obligations in the Lender's sole discretion. The Borrower may not withdraw any amounts on deposit in the Special Account as long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrower when the Lender is required to release its security interest in the Special Account under applicable law. Section 2.6 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement. The Borrower acknowledges that the Lender, as co-applicant, will be liable to the Issuer for reimbursement of any and all draws under Letters of Credit and for all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrower shall pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower shall pay to the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw and the applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrower's obligation to pay all such amounts is herein referred to as the "Obligation of Reimbursement"). CREDIT AND SECURITY AGREEMENT - PAGE 14 (b) Whenever a draft is submitted under a Letter of Credit, the Borrower authorizes the Lender to make a Revolving Advance in the amount of the Obligation of Reimbursement and to apply the proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in accordance with and be treated in all other respects as a Revolving Advance hereunder. (c) If a draft is submitted under a Letter of Credit when the Borrower is unable, because a Default Period exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date of the draft until payment in full at the Default Rate. Notwithstanding the Borrower's inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon. (d) The Borrower's obligation to pay any Revolving Advance made under this Section 2.6, shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.8. Section 2.7 Obligations Absolute. The Borrower's obligations arising under Section 2.6 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of Section 2.6, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by or on behalf of the Issuer under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or CREDIT AND SECURITY AGREEMENT - PAGE 15 (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. Section 2.8 Interest; Additional Amounts; Default Interest; Participations; Clearance Days; Usury. (a) NOTE. Except as set forth in Sections 2.8(c) and (f), the outstanding principal balance of the Note shall bear interest at the Floating Rate. (b) ADDITIONAL AMOUNTS. In addition to the interest otherwise provided for in this Agreement, but in all events subject to Section 2.8(f), during the term of this Agreement, an additional commitment fee shall accrue on a pro-rata basis each month and the Borrower, except as otherwise provided herein, shall pay to the Lender on the first day of each month of each year commencing April 1, 2004, such additional commitment fee in an amount equal to the difference, if any, between the lesser of (1) the Maximum Rate applied to the outstanding principal of the Obligations and (2) the positive difference between (x) $8,500.00 and (y) the amount of (i) fees under Section 2.9(c) plus (ii) interest calculated under Sections 2.8(a), 2.8(c), 2.8(d), 2.8(e) and 2.8(f) for such calendar month, but only to the extent that such additional commitment fee payments do not cause interest on the Obligations to exceed the Maximum Rate. On the Termination Date, such additional commitment fee shall be due and payable and shall be calculated as a pro rata amount of $8,500.00 based upon the number of days that have elapsed since the beginning of the month less the amount of (1) fees under Section 2.9(c) plus (2) interest calculated under Sections 2.8(a), 2.8(c), 2.8(d), 2.8(e) and 2.8(f), but only to the extent that such additional commitment fee payments do not cause interest on the Obligations to exceed the Maximum Rate. (c) DEFAULT INTEREST RATE. Upon notice to the Borrower from the Lender from time to time, but subject to Section 2.8(f) hereof, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective as of the first day of the fiscal month during which any Default Period begins through the last day of such Default Period. The Lender's election to charge the Default Rate shall be in its sole discretion and shall not be a waiver of any of its other rights and remedies. The Lender's election to charge interest at the Default Rate for less than the entire period during which the Default Rate may be charged shall not be a waiver of its right to later charge the Default Rate for the entire such period. (d) CLEARANCE DAYS. Notwithstanding Section 2.11(b)(ii), interest at the interest rate applicable under this Section 2.8 shall accrue on the amount of all payments (even if in the form of immediately available federal funds) for two (2) Banking Days for clearance. (e) PARTICIPATIONS. If any Person shall acquire a participation in the Advances or the Obligation of Reimbursement, the Borrower shall be obligated to the Lender to pay the full amount of all interest calculated under this Section 2.8, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than that calculated under CREDIT AND SECURITY AGREEMENT - PAGE 16 this Section 2.8, or otherwise elects to accept less than its pro rata share of such fees, charges and other amounts due under this Agreement. (f) USURY. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Notwithstanding anything to the contrary contained in any Loan Document, all agreements which either now are or which shall become agreements between the Borrower and the Lender are hereby limited so that in no contingency or event whatsoever shall the total liability for payments in the nature of interest, additional interest and other charges exceed the applicable limits imposed by any applicable usury laws. If any payments in the nature of interest, additional interest and other charges made under any Loan Document are held to be in excess of the limits imposed by any applicable usury laws, it is agreed that any such amount held to be in excess shall be considered payment of principal hereunder, and the indebtedness evidenced hereby shall be reduced by such amount so that the total liability for payments in the nature of interest, additional interest and other charges shall not exceed the applicable limits imposed by any applicable usury laws, in compliance with the desires of the Borrower and the Lender. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law: (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, pro rate, allocate, and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Obligations. This provision shall never be superseded or waived and shall control every other provision of the Loan Documents and all agreements between the Borrower and the Lender, or their successors and assigns. (g) TAXES. The Borrower covenants and agrees as follows with respect to Taxes: (i) Any and all payments under each Loan Document shall be made without setoff, counterclaim or other defense, and free and clear of, and without deduction or withholding for or on account of, any Taxes, except to the extent that any such deduction or withholding is required by law. In the event that any Taxes are required by law to be deducted or withheld from any payment required to be made by the Borrower or any Guarantor to or on behalf of Lender under any Loan Document, then: A. if such Taxes are Non-Excluded Taxes, the amount of such payment shall be increased as may be necessary so that such payment is made, after withholding or deduction for or on account of such Taxes, in an amount that is not less than the amount provided for in such Loan Document; and B. as applicable, the Borrower or the Guarantor shall withhold the full amount of such Taxes from such payment (as increased pursuant CREDIT AND SECURITY AGREEMENT - PAGE 17 to clause (a)(i)) and shall pay such amount to the governmental authority imposing such Taxes in accordance with applicable law. (ii) In addition, the Borrower shall pay all Other Taxes imposed to the relevant governmental authority imposing such Other Taxes in accordance with applicable law. (iii) Upon request of the Lender, the Borrower shall furnish to the Lender a copy of an official receipt (or a certified copy thereof) evidencing the payment of such Taxes or Other Taxes. (iv) As contemplated in Section 8.6 hereof, the Borrower shall indemnify Lender for any Non-Excluded Taxes and Other Taxes levied, imposed or assessed on (and whether or not paid directly by) the Lender whether or not such Non-Excluded Taxes or Other Taxes are correctly or legally asserted by the relevant governmental authority. Promptly upon having knowledge that any such Non-Excluded Taxes or Other Taxes have been levied, imposed or assessed, and promptly upon notice thereof by the Lender, the Borrower shall pay such Non-Excluded Taxes or Other Taxes directly to the relevant governmental authority (provided, however, that the Lender shall not be under any obligation to provide any such notice to the Borrower). In addition, the Borrower shall indemnify the Lender for any incremental Taxes that may become payable by the Lender as a result of any failure of the Borrower or the Guarantor to pay any Taxes otherwise required to be paid under clause (a) or (b) when due to the appropriate governmental authority or to deliver to the Lender, pursuant to clause (c), documentation evidencing the payment of Non-Excluded Taxes or Other Taxes. With respect to indemnification for Non-Excluded Taxes and Other Taxes actually paid by the Lender or the indemnification provided in the immediately preceding sentence, such indemnification shall be made within 30 days after the date the Lender makes written demand therefor. The Borrower acknowledges that any payment made to the Lender or to any governmental authority in respect of the indemnification obligations provided in this clause shall constitute a payment in respect of which the provisions of clause (a) and this clause shall apply. (v) In the event the Borrower or the Guarantor makes a payment under clause (a), (b) or (d) and the Lender thereafter recovers, through refund, direct payment, tax credit or otherwise, the amount in respect of which the payment was made, then the Lender shall reimburse the Person making such payment to the extent of the Lender's recovery, but not to exceed the amount of the applicable payment. Section 2.9 Fees. (a) ORIGINATION FEE. The Borrower shall pay the Lender a fully earned and non-refundable origination fee of $50,000, due and payable upon the execution of this Agreement. CREDIT AND SECURITY AGREEMENT - PAGE 18 (b) AUDIT FEES. The Borrower shall pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by or on behalf of the Lender of any Collateral or the Borrower's operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $800.00 per day per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection. Such audits shall be limited to four times a year absent the existence of a Default Period. (c) LETTER OF CREDIT FEES. The Borrower shall pay to the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of two percent (2.00%), of the aggregate amount that may then be drawn under it assuming compliance with all conditions for drawing (the "Aggregate Face Amount"), from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; provided, however that during Default Periods, in the Lender's sole discretion and without waiving any of its other rights and remedies, such fee shall increase to five percent (5.00%) of the Aggregate Face Amount. The foregoing fee shall be in addition to any and all fees, commissions and charges of the Issuer (other than the annual fee for issuing the Letter of Credit) with respect to or in connection with such Letter of Credit. (d) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower shall pay to the Lender, on written demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally. (e) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is terminated (i) by the Lender during a Default Period that begins before a Maturity Date, (ii) by the Borrower (A) as of a date other than a Maturity Date or (B) as of a Maturity Date but without the Lender having received written notice of such termination at least 90 days before such Maturity Date, or if the Borrower reduces the Maximum Line, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction of the Maximum Line, as the case may be) as follows: (A) two percent (2%) if the termination or reduction occurs on or before the first anniversary of the Funding Date; (B) one percent (1%) if the termination or reduction occurs after the first anniversary of the Funding Date but on or before the second anniversary of the Funding Date; and (C) one-half of one percent (0.5%) if the termination or reduction occurs after the second anniversary of the Funding Date. (f) WAIVER OF TERMINATION FEES. The Borrower will not be required to pay the termination fees otherwise due under subsection (e) if such termination is made because of refinancing by an affiliate of Wells Fargo. (g) UNUSED LINE FEE. For purposes of this Section 2.9, "Unused Amount" means the Maximum Line reduced by any outstanding Advances and the aggregate CREDIT AND SECURITY AGREEMENT - PAGE 19 undrawn amount of all outstanding Letters of Credit. The Borrower agrees to pay to the Lender an unused line fee at the rate of three-eighths of one percent (0.375%) per annum on the daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month and on the Termination Date. (h) OTHER FEES. The Lender may from time to time, upon five (5) days prior notice to the Borrower during a Default Period, charge additional reasonable fees for Revolving Advances made and Letters of Credit issued in excess of Availability, for late delivery of reports, in lieu of imposing interest at the Default Rate, and for other reasons. The Borrower's request for an Advance or the issuance of a Letter of Credit at any time after such notice is given and such five (5) day period has elapsed shall constitute the Borrower's agreement to pay the reasonable fees described in such notice. Section 2.10 Time for Interest Payments; Payment on Non-Banking Days; Computation of Interest and Fees. (a) TIME FOR INTEREST PAYMENTS. Interest accruing on Floating Rate Advances shall be due and payable in arrears on the last day of each month and on the Termination Date. (b) PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. (c) COMPUTATION OF INTEREST AND FEES. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Section 2.11 Lockbox; Collateral Account; Application of Payments. (a) LOCKBOX AND COLLATERAL ACCOUNT. (i) The Borrower shall instruct all account debtors to pay all Accounts directly to the Lockbox. If, notwithstanding such instructions, the Borrower receives any payments on Accounts, the Borrower shall deposit such payments into the Collateral Account. The Borrower shall also deposit all other cash proceeds of Collateral directly to the Collateral Account. Until so deposited, the Borrower shall hold all such payments and cash proceeds in trust for and as the property of the Lender and shall not commingle such property with any of its other funds or property. All deposits in the Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. (ii) All items deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrower will immediately pay the Lender, or, for items deposited in the Collateral Account, the CREDIT AND SECURITY AGREEMENT - PAGE 20 bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrower's commercial account or other account. The Borrower shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrower. (b) APPLICATION OF PAYMENTS. (i) The Borrower may, from time to time, in accordance with the Lockbox and Collection Account Agreement, cause funds in the Collateral Account to be transferred to the Lender's general account for payment of the Obligations. Except as provided in the preceding sentence, amounts deposited in the Collateral Account shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. (ii) All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations upon receipt by the Lender. Funds received from the Collateral Account shall be deemed to be immediately available. The Lender may hold all payments not constituting immediately available funds for one (1) additional Banking Day before applying them to the Obligations. Section 2.12 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the Borrower. Except as otherwise provided herein, the Borrower may prepay the Advances in whole at any time or from time to time in part without penalty. The Borrower may terminate the Credit Facility or reduce the Maximum Line at any time if it (i) gives the Lender at least 30 days' prior written notice and (ii) pays the Lender termination or Maximum Line reduction fees in accordance with Section 2.9(e). Any reduction in the Maximum Line must be in an amount of not less than $500,000.00 or an integral multiple thereof. If the Borrower reduces the Maximum Line to zero, all Obligations shall be immediately due and payable. Subject to termination of the Credit Facility and payment and performance of all Obligations, the Lender shall, at the Borrower's expense, release or terminate the Security Interest and the Security Documents to which the Borrower is entitled by law. Section 2.13 Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.13 or under Section 2.12 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine. Section 2.14 Revolving Advances to Pay Obligations. Notwithstanding anything in Section 2.1, the Lender may, in its discretion at any time or from time to time, without the Borrower's request and even if the conditions set forth in Section 4.2 would not be satisfied, CREDIT AND SECURITY AGREEMENT - PAGE 21 make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable. Section 2.15 Use of Proceeds. The Borrower shall use the proceeds of Advances and each Letter of Credit for ordinary working capital purposes and for repayment of outstanding indebtedness to KBK Financial, Inc. and 1st Source Bank. Section 2.16 Liability Records. The Lender may maintain from time to time, at its discretion, records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. Upon the Lender's demand, the Borrower will admit and certify in writing the exact principal balance of the Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless the Borrower gives the Lender specific written notice of exception within 30 days after receipt. Section 2.17.........Renewal. Unless terminated (a) by the Lender (i) by giving written notice to the Borrower no less than ninety (90) days prior to the Maturity Date or (ii) in accordance with Section 7.2, or (b) by the Borrower (i) by giving written notice to the Lender no less than ninety (90) days prior to the Maturity Date or (ii) in accordance with Section 2.12, the Credit Facility shall remain in effect until the Original Maturity Date, and, thereafter, shall automatically renew for successive one-year periods. "Maturity Date" shall initially mean the Original Maturity Date; provided, however, that if at any time the Credit Facility has been automatically renewed, "Maturity Date" shall mean the one-year anniversary of the date that was formerly the Maturity Date. Section 2.18 Guarantor Collateral Accounts. (a) GUARANTOR COLLATERAL ACCOUNT. (i) The Borrower shall cause each Guarantor to instruct all account debtors to pay all Accounts directly to the Lockbox. If, notwithstanding such instructions, the Guarantor receives any payments on Accounts, the Borrower shall cause the Guarantor to deposit such payments into the Collateral Account. Until so deposited, the Borrower shall cause the Guarantor to agree to hold all such payments and cash proceeds in trust for and as the property of the Lender and not commingle such property with any of the Guarantor's other funds or property. All deposits in the Collateral Account shall constitute Collateral and proceeds of Collateral and shall not constitute payment of the Obligations. (ii) All items deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrower shall cause the Guarantor to immediately pay the Lender, or, for items deposited in the Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Guarantor's commercial account or other account. The Guarantor shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Guarantor. CREDIT AND SECURITY AGREEMENT - PAGE 22 (b) APPLICATION OF PAYMENTS. (i) The Guarantor may, from time to time, cause funds in the Collateral Account to be transferred to the Lender's general account for payment of the Obligations. Except as provided in the preceding sentence, amounts deposited in the Collateral Account shall not be subject to withdrawal by the Guarantor, except after full payment and discharge of all Obligations. (i) All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations upon receipt by the Lender. Funds received from the Collateral Account will be applied when available. ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF Section 3.1 Grant of Security Interest. The Borrower hereby pledges, assigns and grants to the Lender a lien and security interest (collectively referred to as the "Security Interest") in the Collateral, as security for the payment and performance of the Obligations. Upon request by the Lender, the Borrower will grant the Lender a security interest in all commercial tort claims it may have against any Person. Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any time during the existence of a Default Period notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. Section 3.3 Assignment of Insurance. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral (which, for avoidance of doubt, excludes Aircraft and cargo transported for third Persons) or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. With respect to Collateral, at any time, whether or not a Default Period exists, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks CREDIT AND SECURITY AGREEMENT - PAGE 23 and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4 Occupancy. (a) The Borrower hereby irrevocably grants to the Lender the right to take nonexclusive possession of the Premises at any time during a Default Period. Such right of possession shall be sufficient for the Lender to access the Collateral and all records pertaining thereto and to enforce its rights with respect to such Collateral without interference from the Borrower or any other Person. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Credit Facility, and (ii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4. Section 3.5 License. Without limiting the generality of any other Security Document, the Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all Intellectual Property Rights of the Borrower for the purpose of: (a) completing the manufacture of any in-process materials during any Default Period so that such materials become saleable Inventory, all in accordance with the same quality standards previously adopted by the Borrower for its own manufacturing and subject to the Borrower's reasonable exercise of quality control; and (b) selling, leasing or otherwise disposing of any or all Collateral during any Default Period. Section 3.6 Financing Statement. The Borrower authorizes the Lender to file from time to time where permitted by law, such financing statements against Collateral described as "all personal property (excluding Aircraft and stock issued by Kitty Hawk Aircargo, Inc., a Texas corporation, and Kitty Hawk Cargo, Inc., a Delaware corporation)" or describing specific items of Collateral including commercial tort claims as the Lender deems necessary or useful to perfect the Security Interest. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and CREDIT AND SECURITY AGREEMENT - PAGE 24 may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, the following information is set forth: Name and address of Debtor: Kitty Hawk, Inc. 1515 W. 20th Street P. O. Box 612787 DFW Airport, Texas 75261 Federal Employer Identification No. 75-2564006 Organizational Identification No. (DE) 2445463 Name and address of Secured Party: Wells Fargo Business Credit, Inc. 4975 Preston Park Blvd., Suite 280 Plano, Texas 75093 Federal Employer Identification No. 41-1237652 Section 3.7 Setoff. The Lender may at any time or from time to time during a Default Period, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. Section 3.8 Collateral. (a) This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. The Lender has no obligation to clean-up or otherwise prepare the Collateral for sale. The Borrower waives any right it may have to require the Lender to pursue any third person for any of the Obligations. (b) Within 45 days of obtaining verification of registration of any trademarks with the United States Patent and Trademark Office, the Borrower will, and will cause each Guarantor to, execute and deliver to the Lender Trademark Security Agreements. Within 60 days of the date of this Agreement, the Borrower will, and will cause each Guarantor to, deliver landlord's disclaimers and consents (or other subordination agreements) satisfactory to the Lender in its CREDIT AND SECURITY AGREEMENT - PAGE 25 sole discretion covering the Premises leased at the Dallas-Fort Worth International Airport and the Fort Wayne Indiana Airport. ARTICLE IV CONDITIONS OF LENDING Section 4.1 Conditions Precedent to the Initial Revolving Advance and Letter of Credit. The Lender's obligation to make the initial Advance hereunder or to cause any Letters of Credit to be issued shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by the Borrower. (b) The Note, properly executed by the Borrower. (c) A true and correct copy of any and all leases pursuant to which a Loan Party is leasing the Premises. (d) A true and correct copy of any and all mortgages pursuant to which a Loan Party has mortgaged the Premises, together with a mortgagee's disclaimer and consent with respect to each such mortgage. (e) A true and correct copy of any and all agreements pursuant to which Collateral is in the possession of any Person other than such Loan Party, together with, in the case of any goods held by such Person for resale, (i) a consignee's acknowledgment and waiver of Liens, (ii) UCC financing statements sufficient to protect such Loan Party's and the Lender's interests in such goods, and (iii) UCC searches showing that no other secured party has filed a financing statement against such Person and covering property similar to such Loan Party's other than such Loan Party, or if there exists any such secured party, evidence that each such secured party has received notice from such Loan Party and the Lender sufficient to protect the Borrower's and the Lender's interests in such Collateral from any claim by such secured party. (f) An acknowledgment and waiver of Liens from each warehouse in which a Loan Party is storing Inventory. (g) A true and correct copy of any and all agreements pursuant to which Collateral is in the possession of any Person other than such Loan Party, together with, (i) an acknowledgment and waiver of Liens from each subcontractor who has possession of such Loan Party's goods from time to time, (ii) UCC financing statements sufficient to protect such Loan Party's and the Lender's interests in such goods, and (iii) UCC searches showing that no other secured party has filed a financing statement covering such Person's property other than such Loan Party, or if there exists any such secured party, evidence that each such secured party has received notice from such Loan Party and the Lender sufficient to protect such Loan Party's and the Lender's interests in such Collateral from any claim by such secured party. CREDIT AND SECURITY AGREEMENT - PAGE 26 (h) The Lockbox and Collection Account Agreements, properly executed by Wells Fargo Bank and each Loan Party party to such Lockbox and Collection Account Agreement. (i) Control agreements, properly executed by each Loan Party and each bank at which such Loan Party maintains deposit or investment accounts. (j) Current searches of appropriate filing offices showing that (i) no Liens have been filed and remain in effect against any Loan Party except Permitted Liens or Liens held by Persons who have agreed in writing that upon receipt of proceeds of the initial Advances, they will satisfy, release or terminate such Liens in a manner satisfactory to the Lender, and (ii) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (k) A certificate of the Secretary or Assistant Secretary of each Loan Party certifying that attached to such certificate are (i) the resolutions of such Loan Party's Directors and, if required, Owners, authorizing the execution, delivery and performance of the Loan Documents, (ii) true, correct and complete copies of such Loan Party's Constituent Documents, and (iii) examples of the signatures of such Loan Party's Officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including with respect to the Borrower, Advance requests on the Borrower's behalf. (l) A current certificate issued by the Secretary of State of the jurisdiction of organization of each Loan Party, certifying that such Loan Party is in compliance with all applicable organizational requirements of such state. (m) Evidence that each Loan Party is duly licensed or qualified to transact business in Indiana and Texas. (n) A certificate of an Officer of the Borrower confirming, in his corporate capacity, the representations and warranties set forth in Article V. (o) An opinion of counsel to the Loan Parties addressed to the Lender. (p) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (q) Payment of the fees and commissions due under Section 2.9 through the date of the initial Advance or Letter of Credit and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 8.5, including all legal expenses incurred through the date of this Agreement. (r) Evidence that after making the initial Revolving Advance, satisfying all obligations owed to prior lenders, satisfying all trade payables older than 60 days from invoice date, book overdrafts and closing costs, Availability, plus the Borrower's Liquid CREDIT AND SECURITY AGREEMENT - PAGE 27 Assets held in accounts with Wells Fargo or Wells Fargo Investments in which the Lender has a perfected, first priority Lien, shall be not less than $12,500,000. (s) A guaranty, properly executed by each Guarantor a party thereto pursuant to which the Guarantor unconditionally guarantees the Obligations. (t) The Security Agreements, properly executed by each Guarantor party thereto. (u) The Contribution and Indemnification Agreement properly executed by the Loan Parties and the Lender. (v) Such other documents as the Lender in its sole discretion may require. Section 4.2 Conditions Precedent to All Advances and Letters of Credit. The Lender's obligation to make each Advance and to cause each Letter of Credit to be issued shall be subject to the further conditions precedent that: (a) the representations and warranties contained in Article V are correct on and as of the date of such Advance or issuance of a Letter of Credit as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance or issuance of a Letter of Credit which constitutes a Default or an Event of Default. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender as follows: Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Federal Employer Identification Number. The Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. The Borrower has all requisite power and authority to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. During its existence, the Borrower has done business solely under the names set forth in Schedule 5.1. The Borrower's chief executive office and principal place of business is located at the address set forth in Schedule 5.1 and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations listed in Schedule 5.1. The Borrower's federal employer identification number is correctly set forth in Section 3.6. CREDIT AND SECURITY AGREEMENT - PAGE 28 Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and complete list of all ownership interests of the Borrower and rights to acquire ownership interests including the beneficial owner, number of interests and percentage interests on a fully diluted basis (to the extent such information is readily available from public information filed with the Securities and Exchange Commission), and an organizational chart showing the ownership structure of all Subsidiaries of the Borrower. Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the Borrower's Owners; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; (iii) violate any provision of any law, rule or regulation (including Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Borrower's Constituent Documents; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 5.4 Legal Agreements. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. Section 5.5 Subsidiaries. Except for the Guarantors, the Borrower has no Subsidiaries. Section 5.6 Financial Condition; No Adverse Change. The Borrower has furnished to the Lender its audited consolidated and consolidating financial statements for its fiscal year ended December 31, 2002, and unaudited consolidated and consolidating financial statements for the fiscal-year-to-date period ended November 30, 2003, and those statements fairly present the Borrower's and its Subsidiaries' financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with GAAP. Since the date of the most recent financial statements, there has been no material adverse change in the Borrower's or its Subsidiaries' business, properties or condition (financial or otherwise). Section 5.7 Litigation. Except as set forth on Schedule 5.7, there are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, CREDIT AND SECURITY AGREEMENT - PAGE 29 would have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Affiliates. Section 5.8 Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 5.9 Taxes. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them, except certain taxes relating to periods prior to the Borrower's emergence from bankruptcy that have been fully reserved-for in accordance with GAAP. The Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the Officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due, except certain taxes relating to periods prior to the Borrower's emergence from bankruptcy that have been fully reserved-for in accordance with GAAP. Section 5.10 Titles and Liens. The Borrower has good title to all Collateral free and clear of all Liens other than Permitted Liens. No financing statement naming the Borrower as debtor is on file in any office except to perfect only Permitted Liens. Section 5.11 Intellectual Property Rights. (a) OWNED INTELLECTUAL PROPERTY. Schedule 5.11 is a complete list of all patents, applications for patents, trademarks, applications for trademarks, service marks, applications for service marks, mask works, trade dress and copyrights for which the Borrower is the registered owner (the "Owned Intellectual Property"). Except as disclosed on Schedule 5.11, (i) the Borrower owns the Owned Intellectual Property free and clear of all restrictions (including covenants not to sue a third party), court orders, injunctions, decrees, writs or Liens, whether by written agreement or otherwise, (ii) no Person other than the Borrower owns or has been granted any right in the Owned Intellectual Property, (iii) all Owned Intellectual Property is valid, subsisting and enforceable and (iv) the Borrower has taken all commercially reasonable action necessary to maintain and protect the Owned Intellectual Property. (b) AGREEMENTS WITH EMPLOYEES AND CONTRACTORS. The Borrower has entered into a legally enforceable agreement with each of its employees and subcontractors obligating each such Person to assign to the Borrower, without any additional compensation, any Intellectual Property Rights created, discovered or invented by such Person in the course of such Person's employment or engagement with the Borrower (except to the extent prohibited by law), and further requiring such Person to cooperate with the Borrower, without any additional compensation, in connection with securing and enforcing any Intellectual Property Rights therein; PROVIDED, HOWEVER, that the foregoing CREDIT AND SECURITY AGREEMENT - PAGE 30 shall not apply with respect to employees and subcontractors whose job descriptions are of the type such that no such assignments are reasonably foreseeable. (c) INTELLECTUAL PROPERTY RIGHTS LICENSED FROM OTHERS. Schedule 5.11 is a complete list of all agreements under which the Borrower has licensed Intellectual Property Rights from another Person ("Licensed Intellectual Property") other than readily available, non-negotiated licenses of computer software and other intellectual property used solely for performing accounting, word processing and similar administrative tasks ("Off-the-shelf Software") and a summary of any ongoing payments the Borrower is obligated to make with respect thereto. Except as disclosed on Schedule 5.11 and in written agreements copies of which have been given to the Lender, the Borrower's licenses to use the Licensed Intellectual Property are free and clear of all restrictions, Liens, court orders, injunctions, decrees, or writs, whether by written agreement or otherwise. Except as disclosed on Schedule 5.11, the Borrower is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any Intellectual Property Rights. (d) OTHER INTELLECTUAL PROPERTY NEEDED FOR BUSINESS. Except for Off-the-shelf Software and as disclosed on Schedule 5.11, the Owned Intellectual Property and the Licensed Intellectual Property constitute all Intellectual Property Rights used or necessary to conduct the Borrower's business as it is presently conducted or as the Borrower reasonably foresees conducting it. (e) INFRINGEMENT. Except as disclosed on Schedule 5.11, the Borrower has no knowledge of, and has not received any written claim or notice alleging, any Infringement of another Person's Intellectual Property Rights (including any written claim that the Borrower must license or refrain from using the Intellectual Property Rights of any third party) nor, to the Borrower's knowledge, is there any threatened claim or any reasonable basis for any such claim. Section 5.12 Plans. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrower nor any ERISA Affiliate (i) maintains or has maintained any Pension Plan, (ii) contributes or has contributed to any Multiemployer Plan or (iii) provides or has provided post-retirement medical or insurance benefits with respect to employees or former employees (other than benefits required under Section 601 of ERISA, Section 4980B of the IRC or applicable state law). Neither the Borrower nor any ERISA Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA, the IRC or applicable state law with respect to any Plan. No Reportable Event exists in connection with any Pension Plan. Each Plan which is intended to qualify under the IRC is so qualified, and no fact or circumstance exists which may have an adverse effect on the Plan's tax-qualified status. Neither the Borrower nor any ERISA Affiliate has (i) any accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the IRC) under any Plan, whether or not waived, (ii) any liability under Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal, reorganization or other event under any Multiemployer Plan or (iii) any liability or knowledge of any facts or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of CREDIT AND SECURITY AGREEMENT - PAGE 31 Labor or any participant in connection with any Plan (other than routine claims for benefits under the Plan). Section 5.13 Default. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the Borrower's financial condition, properties, or operations. Section 5.14 Environmental Matters. (a) To the Borrower's best knowledge, the Borrower has not handled or disposed of Hazardous Substances in such a manner as to create any material liability under any Environmental Law. (b) There are not and (to the Borrower's knowledge) there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the Borrower, alleging material liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending. (c) To the Borrower's best knowledge, the Borrower's businesses are and have in the past always been conducted in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within 12 months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (d) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. Section 5.15 Submissions to Lender. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is, in the case of information delivered prior to the Funding Date, and will be on the date of submission, in the case of subsequent information, (i) true and correct in all material respects, (ii) does not omit any material fact necessary to make such information not misleading and, (iii) as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 5.16 Financing Statements. The Borrower has authorized the filing of financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral which is capable of being perfected by filing financing statements. None of the Collateral is or CREDIT AND SECURITY AGREEMENT - PAGE 32 will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.17 Rights to Payment. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral is (or, in the case of all future Collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. Section 5.18 Financial Solvency. Both before and immediately after giving effect to all of the transactions contemplated in the Loan Documents, none of the Borrower or its Affiliates: (a) was or will be insolvent, as that term is used and defined in Section 101(32) of the United States Bankruptcy Code and Section 2 of the Uniform Fraudulent Transfer Act; (b) has unreasonably small capital (as such phrase is used in the solvency and bankruptcy contexts only) or is engaged or about to engage in a business or a transaction for which any remaining assets of the Borrower or such Affiliate are unreasonably small; (c) by executing, delivering or performing its obligations under the Loan Documents to which it is a party or by taking any action with respect thereto, intends to, nor believes that it will, incur debts beyond its ability to pay them as they mature; (d) by executing, delivering or performing its obligations under the Loan Documents to which it is a party or by taking any action with respect thereto, intends to hinder, delay or defraud either its present or future creditors; and (e) at this time contemplates filing a petition in bankruptcy or for an arrangement or reorganization or similar proceeding under any law any jurisdiction, nor, to the best knowledge of the Borrower, is the subject of any actual, pending or threatened bankruptcy, insolvency or similar proceedings under any law of any jurisdiction. ARTICLE VI COVENANTS So long as the Obligations shall remain unpaid, or (if there are no outstanding Obligations) the Credit Facility shall remain in effect, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) ANNUAL FINANCIAL STATEMENTS. To the extent the Borrower is not a public reporting company or has not timely filed its Form 10-K with the Securities Exchange CREDIT AND SECURITY AGREEMENT - PAGE 33 Commission, as soon as available, and in any event within 120 days after the end of each fiscal year of the Borrower, the Borrower will deliver, or cause to be delivered, to the Lender, the Borrower's audited financial statements with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender, which annual financial statements shall include the Borrower's balance sheet as at the end of such fiscal year and the related statements of the Borrower's income, retained earnings and cash flows for the fiscal year then ended, prepared on a consolidating and consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the Financial Covenants; and (iii) a certificate of the Borrower's chief financial officer stating that such financial statements have been prepared in accordance with GAAP, fairly represent the Borrower's financial position and the results of its operations, and whether or not such officer has knowledge of the occurrence of any Default or Event of Default and, if so, stating in reasonable detail the facts with respect thereto. (b) MONTHLY FINANCIAL STATEMENTS. As soon as available and in any event within 25 days after the end of each month, the Borrower will deliver to the Lender an unaudited/internal balance sheet and statements of income and retained earnings of the Borrower as at the end of and for such month and for the year to date period then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments; and accompanied by a certificate of the Borrower's chief financial Officer, substantially in the form of Exhibit B hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments and fairly represent the Borrower's financial position and the results of its operations, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the Financial Covenants. (c) COLLATERAL REPORTS. Within three (3) Banking Days after the end of each week if a Monthly Period is not in effect and within 15 days after the end of each month if a Monthly Period is in effect, the Borrower will deliver to the Lender agings of the Borrower's accounts receivable and its accounts payable, an inventory certification report, and a calculation of the Borrower's Accounts and Eligible Accounts, and Inventory as at the end of such month or week as applicable. Daily reporting may be required while a Default exists. (d) PROJECTIONS. At least 30 days before the beginning of each fiscal year of the Borrower, the Borrower will deliver to the Lender the projected balance sheets and CREDIT AND SECURITY AGREEMENT - PAGE 34 income statements for each month of such year, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal financial planning purposes (provided that such projections may be more conservative than the projections used to plan management performance goals or objectives), together with a statement of underlying assumptions and such supporting schedules and information as the Lender may reasonably require. (e) LITIGATION. Immediately after the commencement thereof, the Borrower will deliver to the Lender notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower (i) of the type described in Section 5.14(c) or (ii) which seek a monetary recovery against the Borrower in excess of $150,000.00. (f) DEFAULTS. As promptly as practicable (but in any event not later than five Banking Days) after an Officer of the Borrower obtains knowledge of the occurrence of any Default or Event of Default, the Borrower will deliver to the Lender notice of such occurrence, together with a detailed statement by a responsible Officer of the Borrower of the steps being taken by the Borrower to cure the effect thereof. (g) PLANS. As soon as possible, and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Pension Plan has occurred, the Borrower will deliver to the Lender a statement of the Borrower's chief financial Officer setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation. As soon as possible, and in any event within 10 days after the Borrower fails to make any quarterly contribution required with respect to any Pension Plan under Section 412(m) of the IRC, the Borrower will deliver to the Lender a statement of the Borrower's chief financial Officer setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation. As soon as possible, and in any event with 10 days after the Borrower knows or has reason to know that it has or is reasonably expected to have any liability under Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal, reorganization or other event under any Multiemployer Plan, the Borrower will deliver to the Lender a statement of the Borrower's chief financial Officer setting forth details as to such liability and the action which Borrower proposes to take with respect thereto. (h) DISPUTES. Within five (5) Banking Days of knowledge thereof, the Borrower will deliver to the Lender notice of (i) any material disputes or claims by the Borrower's customers in excess of $150,000.00; (ii) credit memos; (iii) any goods returned to or recovered by the Borrower. (i) OFFICERS AND DIRECTORS. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of any change in the persons constituting (i) the Borrower's Officers with the position of Vice President or above or irrespective of title, CREDIT AND SECURITY AGREEMENT - PAGE 35 who have significant management, operational or executive responsibilities, and (ii) Directors. (j) COLLATERAL. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of any material loss of or material damage to any Collateral or of any substantial adverse change in any Collateral or the prospect of payment thereof. (k) COMMERCIAL TORT CLAIMS. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of any commercial tort claims in excess of $150,000.00 it may bring against any person, including the name and address of each defendant, a summary of the facts, an estimate of the Borrower's damages, copies of any complaint or demand letter submitted by the Borrower, and such other information as the Lender may request. (l) INTELLECTUAL PROPERTY. (i) The Borrower will give the Lender 30 days prior written notice of its intent to acquire material Intellectual Property Rights; except for transfers permitted under Section 6.17, the Borrower will give the Lender 30 days prior written notice of its intent to dispose of material Intellectual Property Rights; and upon request, shall provide the Lender with copies of all applicable documents and agreements. (ii) Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of (A) any Infringement of its Intellectual Property Rights by others, (B) claims that the Borrower is Infringing another Person's Intellectual Property Rights and (C) any threatened cancellation, termination or material limitation of its Intellectual Property Rights. (iii) Promptly upon receipt, the Borrower will give the Lender copies of all registrations and filings with respect to its Intellectual Property Rights. (m) REPORTS TO OWNERS. Promptly upon their distribution, the Borrower will deliver to the Lender copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its Owners. (n) SEC FILINGS. Promptly after the sending or filing thereof, the Borrower will notify the Lender of all special, and irregular reports, which the Borrower shall file with the Securities and Exchange Commission ("SEC") or any national securities exchange, if any, and to the extent not available on the internet shall provide copies of all reports filed with the SEC to the Lender. (o) TAX RETURNS. As soon as available and in any event by not later 5 days after they are filed, copies of the federal tax returns and all schedules thereto of the Borrower and the Guarantors. Upon the request of the Lender made during a Default Period, copies of the Borrower's state tax returns and schedules. CREDIT AND SECURITY AGREEMENT - PAGE 36 (p) VIOLATIONS OF LAW. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of the Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect the Borrower's business or its financial condition. (q) OWNERSHIP OF PREMISES. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of a change in ownership of the Premises or any parcel thereof. (r) OPERATING LEASES. Promptly upon execution thereof, the Borrower will deliver to the Lender true and correct copies of each Aircraft operating lease and commitment therefor. (s) OTHER REPORTS. From time to time, with reasonable promptness, the Borrower will deliver to the Lender any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. Section 6.2 Financial Covenants. (a) MINIMUM YEAR-TO-DATE NET INCOME. The Borrower will achieve as at the end of each period described below, Net Income of not less than the amount set forth below: (i) From January 1, through the fiscal quarter ending March 31 of each year during the term hereof, Net Income of not less than a loss $1,800,000 (i.e., the Borrower may not lose more than $1,800,000 as at the end of such period); (ii) From January 1, through the fiscal quarter ending June 30 of each year during the term hereof, Net Income of not less than a loss $1,300,000 (i.e., the Borrower may not lose more than $1,300,000 as at the end of such period); (iii) From January 1, through the fiscal quarter ending September 30 of each year during the term hereof, Net Income of not less than a loss $350,000 (i.e., the Borrower may not lose more than $350,000 as at the end of such period); and (iv) From January 1, through the fiscal quarter ending December 31 of each year during the term hereof, Net Income of not less than $600,000 (i.e., the Borrower must have a minimum Net Income of $600,000 as at the end of such period). (b) MINIMUM BOOK NET WORTH. The Borrower will maintain, during each period described below, its Book Net Worth, determined as at the end of such period, at an amount not less than the amount set forth below: CREDIT AND SECURITY AGREEMENT - PAGE 37 (i) From January 1, through the fiscal quarter ending March 31 of each year during the term hereof, Book Net Worth of not less than $1,800,000 less than its Book Net Worth as of the end of the prior fiscal year adjusted for non-cash items; (ii) From January 1, through the fiscal quarter ending June 30 of each year during the term hereof, Book Net Worth of not less than $1,300,000 less than its Book Net Worth as of the end of the prior fiscal year adjusted for non-cash items; (iii) From January 1, through the fiscal quarter ending September 30 of each year during the term hereof, Book Net Worth of not less than $350,000 less than its Book Net Worth as of the end of the prior fiscal year adjusted for non-cash items; and (iv) From January 1, through the fiscal quarter ending December 31 of each year during the term hereof, Book Net Worth of not less than $600,000 more than its Book Net Worth as of the end of the prior fiscal year adjusted for non-cash items. (c) MONTHLY LOSS LIMIT. The Borrower will achieve for each month as at the end of such month Net Income of not less than the amount set forth below: (i) For each month end during the fiscal quarter ending March 31 of each year during the term hereof, Net Income of not less than a loss of $1,100,000 (i.e., the Borrower may not lose more than $1,100,000 per month during such period); (ii) For each month end during the fiscal quarter ending June 30 of each year during the term hereof, Net Income of not less than a loss of $500,000 (i.e., the Borrower may not lose more than $500,000 per month during such period); (iii) For each month end during the fiscal quarter ending September 30 of each year during the term hereof, Net Income of not less than a loss of $300,000 (i.e., the Borrower may not lose more than $300,000 per month during such period); and (iv) For each month end during the fiscal quarter ending December 31 of each year during the term hereof, Net Income of not less than a loss $100,000 (i.e., the Borrower may not lose more than $100,000 per month during such period). (d) CAPITAL EXPENDITURES. Neither the Borrower nor any Guarantor will incur or contract to incur Capital Expenditures of more than (i) $4,000,000 in the aggregate during the fiscal year ending December 31, 2004, with no more than $3,000,000 being unfinanced, and (ii) $2,000,000 in the aggregate during each fiscal year thereafter, with no more than $1,000,000 being unfinanced. Notwithstanding the foregoing, if the CREDIT AND SECURITY AGREEMENT - PAGE 38 Borrower and Guarantors incur or contract to incur Capital Expenditures in an aggregate amount not exceeding the amounts set forth in clause (i), any unused portion may be carried forward for use in the subsequent fiscal year ending December 31, 2005, provided further that in no event shall Capital Expenditures combined for the two fiscal years ending December 31, 2004 and December 31, 2005 exceed $6,000,000 in the aggregate with no more than $4,000,000 being unfinanced. (e) AIRCRAFT OPERATING LEASES. Without the consent of the Lender, neither the Borrower nor any of its Subsidiaries will enter into any Aircraft operating lease or commitment therefor if, at the time of execution, the ratio of EBITDAR plus unrestricted Liquid Assets to Capital Expenditures plus Rent (in each case measured for the same periods as EBITDAR) is not at least 1.0 to 1.0. Section 6.3 Permitted Liens; Financing Statements. (a) The Borrower will not create, incur or suffer to exist any Lien upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; excluding, however, from the operation of the foregoing, the following (collectively, "Permitted Liens"): (i) in the case of any of the Borrower's property which is not Collateral, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted; (ii) Liens in existence on the date hereof and listed in Schedule 6.3 hereto, securing indebtedness for borrowed money permitted under Section 6.4; (iii) the Security Interest and Liens created by the Security Documents; and (iv) purchase money Liens relating to the acquisition of machinery and equipment of the Borrower not exceeding the lesser of cost or fair market value thereof and so long as no Default Period is then in existence and none would exist immediately after such acquisition. (b) The Borrower will not amend any financing statements in favor of the Lender except as permitted by law. Any authorization by the Lender to any Person to amend financing statements in favor of the Lender shall be in writing. Section 6.4 Indebtedness. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on the Borrower's behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) Indebtedness and letters of credit arising hereunder; CREDIT AND SECURITY AGREEMENT - PAGE 39 (b) indebtedness of the Borrower in existence on the date hereof and listed in Schedule 6.4 hereto; (c) indebtedness relating to Permitted Liens; (d) indebtedness for unsecured trade accounts payable in the ordinary course of business; and (e) customer advances and deposits obtained in the ordinary course of business and deposited in the Collateral Accounts. For avoidance of doubt, Aircraft operating leases are not prohibited by this Section 6.4. Section 6.5 Guaranties. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in respect of indebtedness permitted under Section 6.4 or otherwise, in existence on the date hereof and listed in Schedule 6.4 hereto; and (c) guaranties of obligations of Subsidiaries of the Borrower so long as such guaranty is not a guaranty of indebtedness prohibited by Section 6.4. Section 6.6 Investments and Subsidiaries. The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including any partnership or joint venture, except: (a) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (b) travel advances or loans to the Borrower's Officers and employees not exceeding at any one time an aggregate of $10,000; (c) advances in the form of progress payments, prepaid rent not exceeding three (3) months or security deposits; CREDIT AND SECURITY AGREEMENT - PAGE 40 (d) current investments in the Subsidiaries in existence on the date hereof and listed in Schedule 5.5 hereto; (e) deposit accounts in insured financial institutions satisfactory to the Lender and with respect to which there are control agreements in favor of the Lender; and (f) promissory notes of Account debtors taken to avoid a loss on, or help ensure collection of, past due, doubtful, restructured or extended Accounts. Section 6.7 Dividends and Distributions. The Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Section 6.8 Salaries. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the aggregate salary, bonus, commissions, consultant fees or other compensation of any Director, Owner Officer or any member of their families by more than 15% in any one year for any individual unless approved by the Borrower's Board of Directors. Section 6.9 Books and Records; Inspection and Examination. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all company and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its Directors, Officers, employees or agents. The Borrower hereby irrevocably authorizes all accountants and third parties to disclose and deliver to Lender, at the Borrower's expense, all financial information, books and records, work papers, management reports and other information in their possession regarding the Borrower. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral or any other property of the Borrower at any time during ordinary business hours. Absent a Default, the Lender will give 24 hours notice of each such inspection. Section 6.10 Account Verification. The Lender may at any time and from time to time send or require the Borrower to send requests for verification of accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time telephone account debtors and other obligors to verify accounts, but in no event shall such verification disclose that request is other than from an account verification service and it shall not indicate that the request is from a lender to or creditor of the Borrower. Section 6.11 Compliance with Laws. (a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that CREDIT AND SECURITY AGREEMENT - PAGE 41 others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. (b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not knowingly generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any material liability or obligation under the common law of any jurisdiction or any Environmental Law. Section 6.12 Payment of Taxes and Other Claims. The Borrower will pay or discharge, or cause to be paid and discharged, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon any properties of the Borrower; PROVIDED, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. Section 6.13 Maintenance of Properties. (a) The Borrower will keep and maintain the Collateral and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.13 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the Borrower's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. The Borrower will take all commercially reasonable steps necessary to protect and maintain its Intellectual Property Rights. (b) The Borrower will defend the Collateral against all Liens, claims or demands of all Persons (other than the Lender) claiming the Collateral or any interest therein. The Borrower will keep all Collateral free and clear of all Liens except Permitted Liens. The Borrower will take all commercially reasonable steps necessary to prosecute any Person Infringing its Intellectual Property Rights and to defend itself against any Person accusing it of Infringing any Person's Intellectual Property Rights. Section 6.14 Insurance. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times maintain business interruption insurance including coverage for force majeure and keep all tangible Collateral CREDIT AND SECURITY AGREEMENT - PAGE 42 insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable with respect to the Collateral to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 6.15 Preservation of Existence. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.16 Delivery of Instruments, etc. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel paper constituting Collateral, duly endorsed or assigned by the Borrower. Section 6.17 Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations. The Borrower will not transfer any part of its ownership interest in any Intellectual Property Rights and will not permit any agreement under which it has licensed Licensed Intellectual Property to lapse, except that the Borrower may transfer such rights or permit such agreements to lapse if it shall have reasonably determined that the applicable Intellectual Property Rights are no longer useful in its business. If the Borrower transfers any Intellectual Property Rights for value, the Borrower will pay over the proceeds to the Lender for application to the Obligations. The Borrower will not license any other Person to use any of the Borrower's Intellectual Property Rights, except that the Borrower may grant licenses in the ordinary course of its business in connection with sales of Inventory or provision of services to its customers. Section 6.18 Consolidation and Merger; Asset Acquisitions. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person without the prior written consent of the Lender, which consent shall not be unreasonably withheld. Section 6.19 Sale and Leaseback. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred, other than sale and leaseback transactions of Aircraft. Section 6.20 Restrictions on Nature of Business. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not CREDIT AND SECURITY AGREEMENT - PAGE 43 purchase, lease or otherwise acquire assets not related to its business without the prior written consent of the Lender, which consent shall not be unreasonably withheld. Section 6.21 Accounting. The Borrower will not adopt any material change in accounting principles other than as required by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year without the prior written consent of the Lender, which consent shall not be unreasonably withheld. Section 6.22 Discounts, etc. After notice from the Lender during any Default Period, the Borrower will not, except in the ordinary course of business consistent with past practices before the commencement of a Default Period, grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold, and the Borrower will not, except in the ordinary course of business consistent with past practices before the commencement of a Default Period, at any time modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower. Section 6.23 Plans. Unless disclosed to the Lender pursuant to Section 5.12, neither the Borrower nor any ERISA Affiliate will (i) adopt, create, assume or become a party to any Pension Plan, (ii) incur any obligation to contribute to any Multiemployer Plan, (iii) incur any obligation to provide post-retirement medical or insurance benefits with respect to employees or former employees (other than benefits required by law) or (iv) amend any Plan in a manner that would materially increase its funding obligations. Section 6.24 Place of Business; Name. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location without giving the Lender thirty (30) days prior written notice. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name or jurisdiction of organization without the prior written consent of the Lender, which consent shall not be unreasonably withheld. Section 6.25 Constituent Documents; S Corporation Status. The Borrower will not amend its Constituent Documents. The Borrower will not become an S Corporation. Section 6.26 Performance by the Lender. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article VI or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in Sections 6.12 and 6.14, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including the payment of taxes, the satisfaction of Liens, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the CREDIT AND SECURITY AGREEMENT - PAGE 44 amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Default Rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 6.26. Section 6.27 [omitted intentionally] Section 6.28 Debt Payments. The Borrower shall not pay any principal, interest or fees on any Debt owed to an Affiliate (other than to the Kitty Hawk Collateral Liquidating Trust and Pegasus Aviation) or any subordinated lender except as may be otherwise permitted by this Agreement or any Subordination Agreement. Section 6.29 Transactions with Affiliates. The Borrower shall not, and shall not permit any of its Subsidiaries to, at any time engage in any transaction with an Affiliate or employee, nor make an assignment or other transfer of any of its assets or properties to any Affiliate or employee, unless such transaction is (i) otherwise permitted under this Agreement, (ii) in the ordinary course of business of the Borrower and the relevant Subsidiary of the Borrower, as the case may be, and (iii) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate or employee. Section 6.30 Delivery of Certain Certificates. Within 60 days from the date of this Agreement, the Borrower shall deliver to the Lender evidence that each Loan Party is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES Section 7.1 Events of Default. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of any Obligations when they become due and payable; (b) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement and, in the case of Section 6.1(d), (e), (k), (l) and (q) such default shall continue for a period of seven (7) Banking Days; CREDIT AND SECURITY AGREEMENT - PAGE 45 (c) Any Change of Control shall occur; (d) Any Financial Covenant shall become inapplicable due to the lapse of time and the failure to amend any such covenant to cover future periods; (e) The Borrower shall be or become insolvent; or the Borrower or the Guarantor shall admit in writing its or his inability to pay its or his debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any Guarantor shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or him or for all or any substantial part of its or his property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or such Guarantor, as the case may be; or the Borrower or any Guarantor shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it or him under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any such Guarantor; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any Guarantor; (f) A petition shall be filed by or against the Borrower or any Guarantor under the United States Bankruptcy Code naming the Borrower or such Guarantor as debtor; (g) Any representation or warranty made by the Borrower in this Agreement, by any Guarantor in any guaranty delivered to the Lender, or by the Borrower (or any of its Officers) or any Guarantor in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any such guaranty shall prove to have been incorrect in any material respect when deemed to be effective; (h) The rendering against the Borrower of an arbitration award, final judgment, decree or order for the payment of money in excess of $150,000.00 and the continuance of such arbitration award, judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution or the posting of a bond pending appeal, the effect of which is to stay execution during such appeal; (i) A default under any bond, debenture, note or other evidence of material indebtedness of the Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any material lease or other contract, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument, lease or contract; (j) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Pension Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Pension Plan, shall CREDIT AND SECURITY AGREEMENT - PAGE 46 have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Pension Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Pension Plan or to appoint a trustee to administer any Pension Plan; or the Borrower or any ERISA Affiliate shall have filed for a distress termination of any Pension Plan under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have failed to make any quarterly contribution required with respect to any Pension Plan under Section 412(m) of the IRC, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a Lien on the Borrower's assets in favor of the Pension Plan; or any withdrawal, partial withdrawal, reorganization or other event occurs with respect to a Multiemployer Plan which results or could reasonably be expected to result in a material liability of the Borrower to the Multiemployer Plan under Title IV of ERISA. (k) An event of default shall occur under any Security Document; (l) The Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell or attempt to sell all or substantially all of its assets, without the Lender's prior written consent; (m) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; (n) Any Guarantor or person signing a support agreement in favor of the Lender shall repudiate, purport to revoke or fail to perform his or its obligations under his or its guaranty or support agreement in favor of the Lender, any individual Guarantor shall die or any other Guarantor shall cease to exist; (o) The Borrower shall take or participate in any action which would be prohibited under the provisions of any Subordination Agreement or make any payment on the Subordinated Debt that any Person was not entitled to receive under the provisions of the Subordination Agreement; (p) Any event or circumstance with respect to the Borrower shall occur such that the Lender shall believe in good faith that the prospect of payment of the Obligations or the material performance by the Borrower under the Loan Documents is impaired or any material adverse change in the business or financial condition of the Borrower shall occur; or (q) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender shall occur. Section 7.2 Rights and Remedies. During any Default Period, the Lender may exercise any or all of the following rights and remedies: CREDIT AND SECURITY AGREEMENT - PAGE 47 (a) the Lender may, by notice to the Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) the Lender may, by notice to the Borrower, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, acceleration, notice of dishonor, protest notice of intent to accelerate, notice of acceleration, or further notice of any kind, all of which the Borrower hereby expressly waives; (c) the Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower to the payment of the Obligations; (d) the Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral (with or without giving any warranties as to the Collateral, title to the Collateral or similar warranties), and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (e) the Lender may make demand upon the Borrower and, forthwith upon such demand, the Borrower will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to Section 2.13 an amount equal to the aggregate maximum amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder; (f) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (g) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (e) or (f) of Section 7.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. If the Lender sells any of the Collateral on credit, the Obligations will be reduced only to the extent of payments actually received. If the purchaser fails to pay for the Collateral, the Lender may resell the Collateral and shall apply any proceeds actually received to the Obligations. Section 7.3 Certain Notices. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 8.3) at least ten calendar days before the date of intended disposition or other action. CREDIT AND SECURITY AGREEMENT - PAGE 48 ARTICLE VIII MISCELLANEOUS Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. The Lender may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and such compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. Section 8.2 Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 8.3 Addresses for Notices; Requests for Accounting. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below next to its signature or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender. All requests under Section 9-210 of the UCC (i) shall be made in a writing signed by a person authorized under Section 2.2(b), (ii) shall be personally delivered, sent by registered or certified mail, return receipt requested, or by overnight courier of national reputation (iii) shall be deemed to be sent when received by the Lender and (iv) shall otherwise comply with the requirements of Section 9-210. The Borrower requests that the Lender respond to all such requests which on their face appear to come from an authorized individual and releases the Lender from any liability for so responding. The Borrower shall pay Lender the maximum amount allowed by law for responding to such requests. Section 8.4 Further Documents. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements, control agreements and other agreements and writings that the CREDIT AND SECURITY AGREEMENT - PAGE 49 Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Section 8.5 Costs and Expenses. The Borrower shall pay on demand all costs and expenses, including reasonable attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letter of Credit and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. Section 8.6 Indemnity. IN ADDITION TO THE PAYMENT OF EXPENSES PURSUANT TO SECTION 8.5, THE BORROWER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS THE LENDER, AND ANY OF ITS PARTICIPANTS, PARENT CORPORATIONS, SUBSIDIARY CORPORATIONS, AFFILIATED CORPORATIONS, SUCCESSOR CORPORATIONS, AND ALL PRESENT AND FUTURE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS OF THE FOREGOING (THE "INDEMNITEES") FROM AND AGAINST ANY OF THE FOLLOWING (COLLECTIVELY, "INDEMNIFIED LIABILITIES"): (i) ANY AND ALL TRANSFER TAXES, DOCUMENTARY TAXES, ASSESSMENTS OR CHARGES MADE BY ANY GOVERNMENTAL AUTHORITY BY REASON OF THE EXECUTION AND DELIVERY OF THE LOAN DOCUMENTS OR THE MAKING OF THE ADVANCES; (ii) ANY CLAIMS, LOSS OR DAMAGE TO WHICH ANY INDEMNITEE MAY BE SUBJECTED IF ANY REPRESENTATION OR WARRANTY CONTAINED IN SECTION 5.14 PROVES TO BE INCORRECT IN ANY RESPECT OR AS A RESULT OF ANY VIOLATION OF THE COVENANT CONTAINED IN SECTION 6.11(B); AND (iii) ANY AND ALL OTHER LIABILITIES, LOSSES, DAMAGES, PENALTIES, JUDGMENTS, SUITS, CLAIMS, COSTS AND EXPENSES OF ANY KIND OR NATURE WHATSOEVER (INCLUDING THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL) IN CONNECTION WITH THE FOREGOING AND ANY OTHER INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDINGS, WHETHER OR NOT SUCH INDEMNITEE SHALL BE DESIGNATED A PARTY THERETO, WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY SUCH INDEMNITEE, IN ANY MANNER RELATED TO OR ARISING OUT OF OR IN CONNECTION WITH THE CREDIT AND SECURITY AGREEMENT - PAGE 50 MAKING OF THE ADVANCES AND THE LOAN DOCUMENTS OR THE USE OR INTENDED USE OF THE PROCEEDS OF THE ADVANCES, EXCLUDING, HOWEVER, ANY INDEMNIFIED LIABILITIES ARISING AS A RESULT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY SUCH INDEMNITEES. IF ANY INVESTIGATIVE, JUDICIAL OR ADMINISTRATIVE PROCEEDING ARISING FROM ANY OF THE FOREGOING IS BROUGHT AGAINST ANY INDEMNITEE, UPON SUCH INDEMNITEE'S REQUEST, THE BORROWER, OR COUNSEL DESIGNATED BY THE BORROWER AND SATISFACTORY TO THE INDEMNITEE, WILL RESIST AND DEFEND SUCH ACTION, SUIT OR PROCEEDING TO THE EXTENT AND IN THE MANNER DIRECTED BY THE INDEMNITEE, AT THE BORROWER'S SOLE COSTS AND EXPENSE. EACH INDEMNITEE WILL USE ITS BEST EFFORTS TO COOPERATE IN THE DEFENSE OF ANY SUCH ACTION, SUIT OR PROCEEDING. IF THE FOREGOING UNDERTAKING TO INDEMNIFY, DEFEND AND HOLD HARMLESS MAY BE HELD TO BE UNENFORCEABLE BECAUSE IT VIOLATES ANY LAW OR PUBLIC POLICY, THE BORROWER SHALL NEVERTHELESS MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. THE BORROWER'S OBLIGATION UNDER THIS SECTION 8.6 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT AND THE DISCHARGE OF THE BORROWER'S OTHER OBLIGATIONS HEREUNDER. Section 8.7 Participants. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns. Section 8.8 Execution in Counterparts; Telefacsimile Execution. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. Section 8.9 Retention of Borrower's Records. The Lender shall have no obligation to maintain any electronic records or any documents, schedules, invoices, agings, or other papers delivered to the Lender by the Borrower or in connection with the Loan Documents for more than four months after receipt by the Lender. Section 8.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower CREDIT AND SECURITY AGREEMENT - PAGE 51 shall not have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. To the extent permitted by law, the Borrower waives and will not assert against any assignee any claims, defenses or set-offs which the Borrower could assert against the Lender in connection with this Agreement, any Loan Document, or any other agreement the Lender and the Borrower. This Agreement shall also bind all Persons who become a party to this Agreement as a borrower. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding the Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Wells Fargo & Company, and all direct and indirect subsidiaries of Wells Fargo & Company, may exchange any and all information they may have in their possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such exchange of such information. Section 8.11 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 8.12 Headings. Article, Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Texas. The parties hereto hereby (i) consent to the personal jurisdiction of the state and federal courts located in the State of Texas in connection with any controversy related to this Agreement; (ii) waive any argument that venue in any such forum is not convenient, (iii) agree that any litigation initiated by the Lender or the Borrower in connection with this Agreement or the other Loan Documents may be venued in either the State or Federal courts located in Dallas County, Texas; and (iv) agree that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Section 8.14 Non-Application of Chapter 346 of the Texas Finance Code. The provisions of Chapter 346 of the Texas Finance Code (Vernon's Texas Finance Code Ann.) are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Loan Documents or to the transactions contemplated hereby. Section 8.15 Entire Agreement. THIS AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES REGARDING THE SUBJECT MATTER HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [Remainder of Page Intentionally Left Blank. Signature Page Follows.] CREDIT AND SECURITY AGREEMENT - PAGE 52 THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. Kitty Hawk, Inc. KITTY HAWK, INC. 1515 West 20th Street P. O. Box 612787 DFW Airport, Texas 75261 Telephone: (972) 456-2200 By: /s/ RANDY LEISER Telecopier: (972) 456-2350 --------------------------- Attention: Randy Leiser Randy Leiser e-mail: rleiser@kha.com Vice President and Chief Financial Officer Wells Fargo Business Credit, Inc WELLS FARGO BUSINESS CREDIT, INC. 4975 Preston Park Blvd., Suite 280 Plano, Texas 75093 Telephone: (972) 599-5346 Telecopier: (972) 867-7838 By: /s/ JOSEPH M. SAMMONS Attention: Joseph Sammons --------------------------- e-mail: joseph.m.sammons@wellsfargo.com Joseph M. Sammons Vice President CREDIT AND SECURITY AGREEMENT - PAGE 53 TABLE OF EXHIBITS AND SCHEDULES Exhibit A Form of Revolving Note Exhibit B Compliance Certificate Exhibit C Premises Schedule 5.1 Trade Names, Chief Executive Office, Principal Place of Business, and Locations of Collateral Schedule 5.2 Capitalization and Organizational Chart Schedule 5.5 Subsidiaries Schedule 5.7 Litigation Schedule 5.11 Intellectual Property Disclosures Schedule 6.3 Permitted Liens Schedule 6.4 Permitted Indebtedness and Guaranties EX-23.1 8 d13914exv23w1.htm CONSENT OF GRANT THORNTON LLP

Exhibit 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated March 24, 2004, accompanying the consolidated financial statements included in the Annual Report of Kitty Hawk, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2003. We hereby consent to the incorporation by reference of said report in the Registration Statement of Kitty Hawk, Inc. on Form S-8 (File No. 333-109084, effective September 24, 2003).

GRANT THORNTON LLP

Dallas, Texas
March 24, 2004

EX-4.1

                                                                     EXHIBIT 4.1

                                 CERTIFICATE OF
                     DESIGNATION, PREFERENCES AND RIGHTS OF
                            SERIES A PREFERRED STOCK
                                       OF
                                KITTY HAWK, INC.

         Pursuant to Section 151 of the General Corporation Law of the State of
Delaware

         I, Steven E. Markhoff, Secretary of Kitty Hawk, Inc. (the
"CORPORATION"), a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "GCL"), in accordance with the
provisions of Section 103 of the GCL, DO HEREBY CERTIFY

         That pursuant to the authority conferred upon the Board of Directors
(the "BOARD") by the Second Amended and Restated Certificate of Incorporation of
the Corporation, as amended, the said Board on January 21, 2004, adopted the
following resolutions creating a series of 120,000 shares of Preferred Stock,
par value $.01 per share, designated as Series A Preferred Stock:

         RESOLVED, that, pursuant to the authority vested in the Board in
accordance with the provisions of its Second Amended and Restated Certificate of
Incorporation, as amended, the Board does hereby create, authorize and provide
for the issuance upon the exercise of the Corporation's Preferred Stock Purchase
Rights, of a series of Preferred Stock of the Corporation, and does hereby fix
and state that the designations, amounts, powers, preferences and relative and
other special rights and the qualifications, limitations or restrictions thereof
are as follows:

Series A Preferred Stock

         Section 1. Designation and Amount. The shares of such series shall be
designated as Series A Preferred Stock and the number of shares constituting
such series shall be 120,000.

         Section 2. Dividends and Distributions.

                  (A)      Subject to the prior and superior rights of the
holders of any shares of any series of Preferred Stock ranking prior and
superior to the shares of Series A Preferred Stock with respect to dividends,
the holders of shares of Series A Preferred Stock in preference to the holders
of Common Stock, par value $0.000001 per share (the "COMMON STOCK"), and of any
other stock of the Corporation ranking junior to the Series A Preferred Stock
with respect to dividends shall be entitled to receive, when, as and if declared
by the Board out of funds legally available for that purpose, quarterly
dividends payable in cash on the 1st day of March, June, September and December
(each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT
DATE"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a)
$0.001 or (b) subject to the provision for adjustment hereinafter set forth, one
thousand (1,000) times the aggregate per share amount of all cash dividends, and
one thousand (1,000) times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions other than a dividend payable in
shares of



Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event the Corporation
shall at any time after January 21, 2004 (the "RIGHTS DECLARATION DATE") (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount to
which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

                  (B)      The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $0.001 per share on
the Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.

                  (C)      Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
may fix a record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than sixty (60) days prior
to the date fixed for the payment thereof.

         Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:

                  (A)      Subject to the provision for adjustment hereinafter
set forth, each share of Series A Preferred Stock shall entitle the holder
thereof to one thousand (1,000) votes which each share of Common Stock is
entitled to vote. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of



Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

                  (B)      Except as otherwise provided herein or by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation. Except as otherwise provided herein or by
law, the holders of the shares of Series A Preferred Stock shall not be entitled
to vote as a separate class on any matters submitted to a vote of the
stockholders.

                  (C)      Except as set forth herein, holders of Series A
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.

         Section 4. Certain Restrictions.

                  (A)      Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:

                           (i)      declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to, the Series A Preferred Stock;

                           (ii)     declare or pay dividends on, or make any
other distributions on, any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;

                           (iii)    redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or

                           (iv)     purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred



Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board) to all holders of such shares upon such
terms as the Board, after consideration of the respective annual dividend rates
and other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.

                  (B)      The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.

         Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board, subject to the
conditions and restrictions on issuance set forth herein.

         Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of Common Stock or of shares of
any other stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock unless, prior
thereto, the holders of shares of Series A Preferred Stock shall have received
an amount equal to the greater of (i) $1,000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment and (ii) an aggregate amount per share, subject to
the provision for adjustment hereinafter set forth, equal to 1,000 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock (the "SERIES A LIQUIDATION PREFERENCE") or (2) to the holders of shares of
stock ranking on a parity upon liquidation, dissolution or winding up with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the proviso
in clause (1) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.

         Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock,
securities, cash or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share (subject to the provision for adjustment
hereinafter set



forth) equal to one thousand (1,000) times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (ii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change of shares
of Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.

         Section 8. Redemption. The outstanding shares of Series A Preferred
Stock may be redeemed at the option of the Board as a whole, but not in part, at
any time, or from to time to time, at a cash price per share equal to one
hundred five percent (105%) of (i) the product of the Adjustment Number (as such
term is hereinafter defined) times the Average Market Value (as such term is
hereinafter defined) of the Common Stock, plus (ii) all dividends which on the
redemption date have accrued on the shares to be redeemed and have not been
paid, or declared and a sum sufficient for the payment thereof set apart,
without interest. The "Adjustment Number" is one thousand (1,000) (as
appropriately adjusted as set forth in the last sentence of Section 6 to reflect
such events as stock splits, stock dividends and recapitalizations with respect
to the Common Stock). The "Average Market Value" is the average of the closing
sale prices of the Common Stock during the thirty (30) day period immediately
preceding the date before the redemption date on the New York Stock Exchange,
or, if such stock is not listed on such Exchange, on the Composite Tape for
American Stock Exchange Listed Stocks, or, if such stock is not quoted on the
Composite Tape, on the principal United States securities exchange registered
under the Securities Exchange Act of 1934, as amended, on which such stock is
listed, or, if such stock is not listed on any such exchange, the average of the
closing sale prices with respect to a share of Common Stock during such thirty
(30) day period, as quoted on the National Association of Securities Dealers,
Inc. Automated Quotations System or any system then in use, or if no such
quotations are available, the fair market value of the Common Stock as
determined by the Board in good faith.

         Section 9. Ranking. The Series A Preferred Stock shall rank (a) senior
to all Common Stock and (b) junior to all other series of preferred stock with
respect to the payment of dividends and the distribution of assets, unless the
terms of any such series shall provide otherwise.

         Section 10. Amendment. The Second Amended and Restated Certificate of
Incorporation of the Corporation, as amended, shall not be further amended in
any manner which would materially alter or change the powers, preferences or
special rights of the Series A Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of a majority or more of the
outstanding shares of Series A Preferred Stock, voting separately as a class.



         Section 11. Fractional Shares. At the Corporation's sole discretion,
Series A Preferred Stock may be issued in fractions of a share which shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series A Preferred Stock.

                                    ********



         IN WITNESS WHEREOF, I have executed and subscribed this Certificate of
Designation and do affirm the foregoing as true as of January 26, 2004.

                                                 /s/ Steven E. Markhoff
                                                 -------------------------------
                                                 Steven E. Markhoff, Secretary

EX-10.1

                                                                    EXHIBIT 10.1

             AMENDED AND RESTATED AIRCRAFT AND ENGINE USE AGREEMENT

         This Amended and Restated Aircraft Use Agreement (this "Agreement"), is
made as of the 1st day of January, 2004, by and between Kitty Hawk Aircargo,
Inc. ("Aircargo") and the Kitty Hawk Collateral Liquidating Trust, by Langdon
Asset Management, Inc., its Trust Manager (the "Trust").

         A.       Aircargo and the Trust entered into that certain Aircraft and
Engine Use Agreement dated as of September 30, 2002 (the "Original Agreement").

         B.       Aircargo and the Trust have determined to amend and restate
the Original Agreement in its entirety as set forth herein.

         C.       In consideration of the foregoing premises (which constitute
an integral part of this Agreement) and the mutual covenants hereinafter set
forth, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

         1.       Utilization of Airframes. Until the latest date shown on
Schedule A, Aircargo shall use the airframes identified on Schedule A (the
"Airframes") collectively, in total, a minimum of ***** block hours ("Block
Hours") per month (the "Minimum Airframe Usage"). Each Airframe shall be
available for use by Aircargo for purposes of this Agreement until the date set
forth opposite such Airframe on Schedule A (for each Airframe, the "Available to
Date"). Notwithstanding the foregoing, if for any reason during any month fewer
than four (4) heavy weight Airframes (the four current heavy weight Airframes
being N278US, N279US, N281KH and N284KH, and, collectively, the "Heavy Weight
Airframes") are available for Aircargo's use, the Minimum Airframe Usage for
such month will be reduced by ***** Block Hours for each of the four (4) heavy
weight Airframes not available for Aircargo's use. For purposes of determining
the Minimum Airframe Usage requirement in any month, the Available to Dates of
Airframes N278US and N279US set forth on Schedule A shall apply regardless of
whether Aircargo elects an Airframe Extension Option (as defined below) with
respect to such Airframes. In the event that any Airframe is not available for
use by Aircargo during any part of a month prior to the Available to Date
applicable to such Airframe, the Minimum Airframe Usage requirement for such
month shall be reduced by the number of Block Hours attributable to such
Airframe prorated for such part of the month for which such Airframe is
unavailable based on a thirty-day month.

         2.       Rates for Airframes. The Block Hour rate for utilization of
each of the Airframes shall be as follows:



Airframe                 Rate per Block Hour
- --------                 -------------------
                      
N278US                         $*****

N279US                         $*****

N281KH                         $*****

N284KH                         $*****


         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"





Airframe      Rate per Block Hour
- --------      -------------------
           
N69739              $*****

N69740              $*****

N854AA              $*****

N855AA              $*****

N252US              $*****

N6809               $*****

N6827               $*****

N6833               $*****


         3.       Modifications to Airframes. The Airframes shall be modified as
provided below. Such modifications shall be completed prior to the date required
by the rules and regulations of the Federal Aviation Administration:

                  a.       TCAS (traffic collision avoidance system) Avionics:
For any Airframe requiring the installation of TCAS avionics prior to the
Available to Date applicable to such Airframe, Aircargo will pay for the
installation of such TCAS avionics and the costs for the wiring of such Airframe
to accommodate the installation of the TCAS avionics. The Trust will reimburse
up to $***** of the costs incurred by Aircargo related to the installation of
the TCAS avionics for any such Airframe, including costs related to the
acquisition and installation of the TCAS avionics computer processor (the
"Computer Processor"), upon the receipt by the Trust of written demand for such
reimbursement from Aircargo. The Trust shall own the Computer Processor
following the installation of the TCAS avionics. In the event that Aircargo uses
any Airframe upon which TCAS avionics has been installed for less than *****
Block Hours following the installation of the TCAS avionics and prior to the
Available to Date applicable to such Airframe, Aircargo will, upon the receipt
by Aircargo of written demand notice from the Trust, reimburse the Trust the
lesser of: (i) ***** percent (*****%) of the actual cost of the Computer
Processor or (ii) $*****. If the Trust makes such demand and Aircargo pays the
Trust accordingly, ownership of the TCAS avionics will transfer to Aircargo. The
TCAS avionics shall include the Computer Processor, two (2) IVSI's, two (2)
antennas, a Mode S transponder, Radar Indication and related Control Head.

                  b.       RVSM (reduced vertical separation): For any Airframe
for which Aircargo requires the installation of an RVSM system prior to the
Available to Date applicable to such Airframe, the Trust will pay for the
installation of the RVSM system upon thirty (30) days written notice of demand
by Aircargo to install the RVSM system on such Airframe; provided, however, that
the Trust may, within a reasonable time, except as it pertains to an Airframe
upon which Aircargo has elected an Airframe Extension Option (as defined below),
in its sole discretion, elect not to install an RVSM system, at which time
Aircargo may elect to retire and remove the Airframe from Schedule A to this
Agreement. The cost of the parts of the RVSM system for which the Trust will be
obligated will not exceed $***** per Airframe.

                  c.       EGPWS/TAWS (enhanced ground proximity warning): For
any Airframe requiring the installation of an EGPWS/TAWS system prior to the
Available to Date applicable to such Airframe, the Trust will pay for the
installation of the EGPWS/TAWS system upon thirty

                                       2

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



(30) days written notice of demand by Aircargo to install the EGPWS/TAWS system
on such Airframe; provided, however, that the Trust may, within a reasonable
time, except as it pertains to an Airframe upon which Aircargo has elected an
Airframe Extension Option, in its sole discretion, elect not to install an
EGPWS/TAWS system at which time Aircargo may elect to retire and remove the
Airframe from Schedule A to this Agreement. The cost of the parts of the
EGPWS/TAWS system for which the Trust will be obligated will not exceed $*****
per Airframe.

         4.       Aircraft Extension Option.

                  a.       Aircargo may elect, in its sole discretion, to extend
the Available to Date of any or all of Airframes N278US, N279US, N69739 and
N69740 by delivering written notice of such election to the Trust at any time
prior to November 1, 2004 ("Airframe Extension Option"). In the event that any
such notice of election is delivered by Aircargo to the Trust, Aircargo shall
specify in such notice whether Aircargo elects "Option A-Long Term Extension
Option" ("Option A Election") or "Option B-Short Term Extension Option" ("Option
B Election") for any Airframe for which such Airframe Extension Option is
permitted; provided, however, that for Airframe N278US no Option B Election
shall be permitted. In the event that an Option A Election or an Option B
Election is made for any Airframe for which an Airframe Extension Option is
permitted, such election shall be governed by the terms of such Airframe
Extension Option set forth on Schedule B to this Agreement. For purposes of any
Airframe Extension Option listed on Schedule B, the terms "Heavy C check
commitment" and "Light C check commitment" shall refer to the maximum amount
that the Trust shall be obligated to pay for maintenance under such Airframe
Extension Option. The Trust's obligation with respect to the installation of a
9-G Bulkhead on Airframe N69740 shall not exceed $*****.

                  b.       In the event that Aircargo elects an Airframe
Extension Option with respect to any Airframe pursuant to Section 4(a) above and
the Trust fulfills its obligation to perform the Heavy C check commitment or
Light C check commitment maintenance applicable to such Airframe Extension
Option, Aircargo shall pay to the Trust an amount equal to the rate per Block
Hour applicable to such Airframe multiplied by the number of actual Block Hours
that such Airframe was used by Aircargo in the manner provided in Section 6 of
this Agreement. Upon the expiration of the Extended Available to Date applicable
to any Airframe Extension Option, Aircargo shall make an additional payment to
the Trust if the total number of Block Hours that Aircargo used the relevant
Airframe prior to the Extended Available to Date is less than the minimum Block
Hours commitment applicable to such Airframe Extension Option. Such payment
shall be made within thirty (30) days after the Extended Available to Date for
such Airframe Extension Option. The payment shall be in an amount equal to the
Block Hour rate applicable to such Airframe multiplied by the number of Block
Hours by which the minimum Block Hours commitment exceeds the actual total Block
Hours such Airframe was used by Aircargo prior to the Extended Available to
Date.

         5.       Transfer of Engines and Rates for Engines.

                  a.       Aircargo and the Trust agree and affirm that on
September 15, 2003, each party transferred certain engines that each such party
owned for certain engines owned by the

                                       3

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



other party. Aircargo and the Trust further agree and affirm that the transfer
of such engines from each party to the other constituted a transfer of all
ownership rights in the transferred engines to the other party, effective as of
September 15, 2003, and that each party will transfer all documents of title or
other documents or instruments evidencing ownership of the transferred engines
to the other party no later than February 27, 2004. The engines so transferred
are set forth on Schedule C to this Agreement. Aircargo and the Trust agree that
this Agreement shall serve as a bill of sale for such engine transfers. To the
extent that any Aircargo engine that was transferred to the Trust was subject to
a lien in favor of a secured creditor prior to September 15, 2003, the Trust
affirms that such lien shall remain in place until satisfied. Schedule D to this
Agreement sets forth the engines owned by the Trust as of December 3, 2003 (the
"Engines"), and sets forth the Block Hour rate that Aircargo will pay for the
use of each of the Engines from January 1, 2004 to December 31, 2007 (the
Available to Date of such Engines) regardless of whether such Engines are
installed on one of the Airframes, on an Aircargo airframe or on the airframe of
a third party. In the event that Aircargo does not elect an Airframe Extension
Option prior to November 1, 2004 for any of the Airframes identified in Schedule
B to this Agreement, the Trust or Aircargo may remove up to three Engines from
Schedule D of the type corresponding to such Airframe from Schedule A as
follows:



                                           NUMBER OF ENGINES
AIRFRAME             ENGINE TYPE          AVAILABLE FOR REMOVAL
- ---------------------------------------------------------------
                                    
 N278US                JT8D-15                     3
- ---------------------------------------------------------------
 N279US                JT8D-15                     3
- ---------------------------------------------------------------
 N69739                JT8D-9A                     3
- ---------------------------------------------------------------
 N69740                JT8D-9A                     3
- ---------------------------------------------------------------


                  b.       Prior to December 31, 2007, Aircargo will use the
Engines collectively, in total and on a pooled basis, for a minimum of *****
percent (*****%) of the expected Block Hour life of the Engines set forth on
Schedule D ("Minimum Engine Block Hours"). Aircargo shall pay to the Trust an
amount equal to the rate per Block Hour applicable to each Engine multiplied by
the actual number of Block Hours that such Engine was used by Aircargo in the
manner provided in Section 6 below. In the event that the total actual number of
Block Hours used for all Engines between January 1, 2004 and December 31, 2007
do not exceed the Minimum Engine Block Hours, within thirty (30) days after
December 31, 2007, Aircargo shall pay to the Trust an amount equal to the
Weighted Average Engine Block Hour Rate (as provided on Schedule D to this
Agreement) multiplied by the number of hours by which the Minimum Engine Block
Hours exceeds the total actual Engine Block Hours used by Aircargo. In the event
that any Engine is removed from Schedule D to this Agreement in the manner
provided in Section 9 below, the Minimum Engine Block Hours shall be reduced by
the expected Block Hour life attributable to such removed engine as provided on
Schedule D.

         6.       Monthly Payments.

                  a.       On or about the 10th day of each month after January
2004, Aircargo will provide to the Trust a schedule of the number of Block Hours
that each Airframe and each Engine was used in the immediately preceding month
and will pay to the Trust an amount equal to the applicable Block Hour rate for
each Airframe and each Engine multiplied by the actual

                                       4

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



number of Block Hours that each such Airframe and each such Engine was used in
the immediately preceding month.

                  b.       If for any month Aircargo fails to achieve the
Minimum Airframe Usage, then on the date that payment for actual usage for the
month is required under Section 6(a) above, Aircargo shall pay to the Trust an
amount equal to $***** multiplied by the number of Block Hours by which the
Minimum Airframe Usage exceeds the total actual number of Block Hours that the
Airframes were used in the immediately preceding month.

         7.       Maintenance. Aircargo will perform line maintenance of the
Airframes and Engines in accordance with Aircargo's current maintenance program.
Airframe maintenance shall be limited to "A" checks, "B" checks and Aircargo's
responsibility for repairs or incidental replacement of parts and rotables shall
not exceed $***** per Airframe for any such check or other event. If such repair
or incidental replacement of parts and rotables should exceed $***** and the
Trust elects not to pay the excess above $***** or a mutually agreed upon amount
of the excess above $*****, then that Airframe, at Aircargo's option, can be
deemed not available for Aircargo's use. . In the event that an Engine requires
more than $***** in Engine maintenance in order to remain in serviceable
condition and the Trust elects not to pay the excess above $***** or a mutually
agreed upon amount of the excess above $*****, then Aircargo may elect to
perform such maintenance at its own cost by electing to buy such Engine from the
Trust at a core value of $***** for 9A Engines and $***** for -15 Engines.

Aircargo shall be required to make any repairs, replacements or improvements to
any Airframe that are necessary as the result of an Airworthiness Directive or
Service Bulletin or similar requirement issued by any regulating body, such
amount not to exceed $***** per Airframe subject to cost sharing with the Trust
as reflected in Section 3, Section 4 and Schedule B. If such repair,
replacements or improvements to any Airframe that are necessary as a result of
an Airworthiness Directive or Service Bulletin or similar requirement issued by
an regulating body exceeds $***** other than those items subject to cost sharing
with the Trust as reflected in Section 3 and Section 4 and Schedule B, and the
Trust elects not to pay the excess above $***** or a mutually agreed upon amount
of the excess above $*****, then the Airframe, at Aircargo's option, can be
deemed not available for Aircargo's use.

         8.       Insurance. Aircargo shall cause the Airframes and Engines to
be covered by hull and liability insurance in accordance with Aircargo's current
fleet plan insurance program. Policies relating to such insurance shall show the
Trust as a loss payee and an additional insured; provided, however, that, for
any Airframe removed from Schedule A and for any Engines mounted on such
Airframe, Aircargo's obligation to insure the Airframe and such Engines shall
terminate upon the Trust's receipt of the Deliverables (as defined below).
Following the execution of this Agreement, each Airframe identified on Schedule
A shall be insured by Aircargo in an amount equal to that set forth opposite
such Airframe on Schedule E to this Agreement.

         9.       Removal of Engines and Airframes. In the event the Trust or
Aircargo elects to remove an Engine from Schedule D to this Agreement for any
reason, the Trust or Aircargo shall deliver written notice of removal of such
Engine from Schedule D at least sixty (60) days prior to

                                       5

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



the removal of such Engine. An Engine removed from Schedule D shall be referred
to as a "Terminated Engine." Within sixty (60) days of the receipt of such
notice, Aircargo shall deliver, other than in cases where Aircargo has elected
to buy an Engine as described under Section 7, physical possession of the
Terminated Engine to a place within the United States designated by the Trust,
and shall deliver for such Terminated Engine: (i) a current certificate of
airworthiness and (ii) all technical records, including, but not limited to,
current maintenance and operations records (all of the foregoing, for any
Terminated Engine, the "Deliverables"). In the event that Aircargo proposes to
deliver to the Trust free and clear title to an engine that is not owned by the
Trust in lieu of a Terminated Engine, Aircargo shall convey an engine of similar
type and condition (determined by a comparison of engine disc profiles and
limiters) to the Trust. The Trust shall pay the cost of all shipping and other
expenses required for the delivery of such Terminated Engine to the Trust;
provided, however, that Aircargo shall remove the Engine from any Airframe at
its own expense. In the event that any Airframes are removed from Schedule A
pursuant to the terms of this Agreement, the same procedure for the removal of
Terminated Engines shall apply to the removal of such Airframes.

         10.      Operation of Aircraft. Aircargo may operate the Airframes and
Engines in such types of service as Aircargo deems appropriate; provided,
however, that Aircargo shall not "Dry Lease" any of the Airframes or Engines.

         11.      Force Majeure. In the event that, through no action or
inaction on the part of Aircargo, Aircargo's fleet of 727 airframes or JT8D
engines (regardless of whether such airframes or engines are owned by Aircargo
or by the Trust) become unavailable for operation for service, the Minimum
Airframe Usage, Minimum Engine Usage and Block Hour commitment under any
Airframe Extension Option will be modified in the following manner:

                  a.       If Aircargo's fleet of 727 airframes or JT8D engines
become unavailable for a period of 180 days or less (a "Temporary Period"), then
the Available To Date of all Airframes and Engines will be extended by a number
of days equal to the length of the Temporary Period and Aircargo will continue
to be obligated to perform its obligations under the Agreement.

                  b.       If Aircargo's fleet of 727 airframes or JT8D engines
become unavailable for a period exceeding 180 days (a "Permanent Period"), then
Aircargo's obligations under the Minimum Airframe Usage, the Minimum Engine
Usage and any elected Airframe Extension Option will be terminated and Aircargo
shall be obligated only to pay any outstanding amounts due to the Trust related
to actual Airframe or actual Engine usage prior to the date of the event causing
the unavailability of such airframes or engines.

                  c.       Upon the occurrence of an event causing either a
Temporary Period or a Permanent Period of unavailability, all payments under
this Agreement shall be suspended following payment by Aircargo for the actual
Block Hour usage of any Airframes or Engines during the month in which such
event occurs. If such event causes a Temporary Period, then payments shall
resume pursuant to the terms of this Agreement at such time as either or both of
Aircargo's fleet of 727 airframes or JT8D engines again become available for
use.

                                       6

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



KITTY HAWK AIRCARGO, INC.                KITTY HAWK COLLATERAL LIQUIDATING TRUST

/s/ ROBERT W. ZOLLER, JR.                /s/ GLEN LANGDON
- -------------------------                ---------------------------
By:                                      By: Langdon Asset Management, Inc.
                                         as Trust Manager
                                         Title: Glen Langdon, President

Title: President

                                       7

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



                                   SCHEDULE A



AIRFRAMES                                              AVAILABLE TO DATE:
- ---------                                              ------------------
                                                   
N278US                                                December 31, 2004

N279US                                                December 31, 2004

N281KH                                                December 31, 2006

N284KH                                                March 31, 2006 (1)

N69739                                                December 31, 2004

N69740                                                December 31, 2004

N854AA                                                December 31, 2006

N855AA                                                September 30, 2004

N6827                                                 September 30, 2005

N252US                                                December 31, 2005

N6833                                                 June 30, 2006

N6809                                                 December 31, 2004


(1)This Airframe will require a C check during the second quarter of 2004 and
such C check will be governed in accordance with the terms of the Original
Agreement.

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



                                   SCHEDULE B

AIRFRAME N278US:

                                                        
OPTION A - LONG TERM EXTENSION OPTION
- --------------------------------------------------------------------------------------
Trust Heavy C check commitment:                                                 $*****
- --------------------------------------------------------------------------------------
Extended Available to date:                                          December 31, 2007
- --------------------------------------------------------------------------------------
Trust TCAS avionics commitment:                                                 $*****
- --------------------------------------------------------------------------------------
Trust RVSM costs commitment:                               Cost of parts up to  $*****
- --------------------------------------------------------------------------------------
Trust TAWS cost commitment:                                Costs of parts up to $*****
- --------------------------------------------------------------------------------------
Trust 9G Bulkhead cost commitment:                                                 N/A
- --------------------------------------------------------------------------------------
Aircargo minimum Block Hours commitment:                                         *****
- --------------------------------------------------------------------------------------



Note:  there is no Short Term Extension Option available for N278US.

                                                         
AIRFRAME N279US:
- ---------------------------------------------------------------------------------------
OPTION A - LONG TERM EXTENSION OPTION
- ---------------------------------------------------------------------------------------
Trust Heavy C check commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Extended Available to date:                                           December 31, 2007
- ---------------------------------------------------------------------------------------
Trust TCAS avionics commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Trust RVSM costs commitment:                                 Cost of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust TAWS cost commitment:                                 Costs of parts up to $*****
- ----------------------------------------------------------------------------------------
Trust 9G Bulkhead cost commitment:                                                  N/A
- ---------------------------------------------------------------------------------------
Aircargo minimum Block Hours commitment:                                          *****
- ---------------------------------------------------------------------------------------
OPTION B - SHORT TERM EXTENSION OPTION
- ---------------------------------------------------------------------------------------
Trust Light C check commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Extended Available to date:                                           December 31, 2006
- ---------------------------------------------------------------------------------------
Trust TCAS avionics commitment:                                                  $*****
- ----------------------------------------------------------------------------------------
Trust RVSM cost commitment:                                  Cost of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust TAWS cost commitment:                                 Costs of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust 9G Bulkhead cost commitment:                                                  N/A
- ---------------------------------------------------------------------------------------
Aircargo minimum Block Hours commitment:                                          *****
- ---------------------------------------------------------------------------------------



AIRFRAME N69739:

                                                         
OPTION A - LONG TERM EXTENSION OPTION

- ---------------------------------------------------------------------------------------
Trust Light C check commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Extended Available to date:                                               June 30, 2008
- ---------------------------------------------------------------------------------------
Trust TCAS avionics commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Trust RVSM cost commitment:                                  Cost of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust TAWS cost commitment:                                 Costs of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust 9G Bulkhead cost commitment:                                                  N/A
- ---------------------------------------------------------------------------------------
Aircargo minimum Block Hours commitment:                                          *****
- ---------------------------------------------------------------------------------------



         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



                                                         
OPTION B - SHORT TERM EXTENSION OPTION
- ---------------------------------------------------------------------------------------
Trust Light C check commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Extended Available to date:                                               June 30, 2007
- ---------------------------------------------------------------------------------------
Trust TCAS avionics commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Trust RVSM cost commitment:                                  Cost of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust TAWS cost commitment:                                 Costs of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust 9G Bulkhead cost commitment:                                                  N/A
- ---------------------------------------------------------------------------------------
Aircargo minimum Block Hours commitment:                                          *****
- ---------------------------------------------------------------------------------------



AIRFRAME N69740:

                                                         
OPTION A - LONG TERM EXTENSION OPTION
- ---------------------------------------------------------------------------------------
Trust Light C check commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Extended Available to date:                                               June 30, 2008
- ---------------------------------------------------------------------------------------
Trust TCAS avionics commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Trust RVSM cost commitment:                                  Cost of parts up to $*****
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Trust TAWS cost commitment:                                 Costs of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust 9G Bulkhead cost commitment:                                               $*****
- ---------------------------------------------------------------------------------------
Aircargo minimum Block Hours commitment:                                          *****
- ---------------------------------------------------------------------------------------
OPTION B - SHORT TERM EXTENSION OPTION
- ---------------------------------------------------------------------------------------
Trust Light C check commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Extended Available to date:                                               June 30, 2007
- ---------------------------------------------------------------------------------------
Trust TCAS avionics commitment:                                                  $*****
- ---------------------------------------------------------------------------------------
Trust RVSM cost commitment:                                  Cost of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust TAWS cost commitment:                                 Costs of parts up to $*****
- ---------------------------------------------------------------------------------------
Trust 9G Bulkhead cost commitment:                                               $*****
- ---------------------------------------------------------------------------------------
Aircargo minimum Block Hours commitment:                                          *****
- ---------------------------------------------------------------------------------------



         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



                                   SCHEDULE C



 NO.                  TRUST ENGINE TRANSFERRED                             AIRCARGO ENGINE TRANSFERRED
 ---                  ------------------------                             ---------------------------
                                                                     
 1                            695270                                                655968

 2                            687662                                                674498

 8                            657394                                                696629

 11                           700579                                                707329 (9A)

 17                           665294                                                665348

 18                           665899                                                665230

 20                           648989                                                665676

 23                           656066                                                648784

 24                           665591                                                653365

 27                           653835                                                654158

 35                           654677                                                653897

 36                           654422                                                653619


         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"



                                   SCHEDULE D
               Engines Owned by the Trust as of December 31, 2003



                                                                                                              AMENDED
                                            FLIGHT          BLOCK                                              BLOCK      COST/REV
                     ENGINE                  HOUR           HOUR                      LIMITER                  HOUR       (BH LIFE
                      S/N                    LIFE           LIFE              LIMITER  TYPE        REMAINING   RATE        * RATE)
                                                                                             

1                   648784-7B       7B       988            1,197               T-1    CYCLE           912     *****        *****
2                   649583-7B       7B   Unserviceable  unserviceable           C-7    DATE             19     *****    Unservicable
3                   653365-7B       7B     2,967            3,595               C-12   DATE             47     *****        *****
4                   653619-7B       7B     1,199            1,453               C-8    DATE             19     *****        *****
5                   653897-7B       7B       821              994               C-5    DATE             13     *****        *****
6                   654305-7B       7B       307              372               C-3    CYCLE           321     *****        *****
7                   654368-7B       7B       455              551               T-4    CYCLE           449     *****        *****
8                   654792-7B       7B       421              510               C-5    CYCLE           420     *****        *****
9                   654914-7B       7B       789              956               C-9    CYCLE           739     *****        *****
10                  657315-7B       7B       649              787               C-6    CYCLE           618     *****        *****
11                  657666-7B       7B       698              845               T-4    CYCLE           660     *****        *****
12                  649269-9A       9A     2,504            3,002               C-11   DATE             38     *****        *****
13                  665188-9A       9A     2,372            2,844               C-7    DATE             36     *****        *****
14                  665356-9A       9A       864            1,036               C-11   HOURS           930     *****        *****
15                  665676-9A       9A     3,163            3,792               C-7    DATE             48     *****        *****
16                  666031-9A       9A     3,163            3,792               C-8    DATE             48     *****        *****
17                  687788-9A       9A     1,977            2,370               C-8    DATE             31     *****        *****
18                  655968-15       15     5,133            5,760               C-11   DATE             46     *****        *****
19                  657070-15       15     2,798            3,141               C-4    HOURS         2,910     *****        *****
20                  674498-15       15     1,674            1,878               C-12   DATE             15     *****        *****
21                  685501-15       15     1,785            2,004               C-7    DATE             16     *****        *****
22                  687659-15       15     3,347            3,757               C-9    DATE             30     *****        *****
23                  687698-15       15     5,246            5,888               C-3    CYCLE         2,545     *****        *****
24                  688689-15       15     4,686            5,259               C-7    DATE             42     *****        *****
25                  696499-15A      15A    5,428            6,000               T-1    HOURS         5,428     *****        *****
26                  696629-15       15     2,120            2,379               C-11   DATE             19     *****        *****
27                  700377-15       15     4,408            4,947               T-1    CYCLE         2,147     *****        *****
28                  700451-15       15     1,932            2,169               T-1    HOURS         2,044     *****        *****
29                  700522-15       15     1,243            1,395               C-3    HOURS         1,243     *****        *****
30                  702952-15       15     1,562            1,753               C-8    DATE             14     *****        *****
                                          64,702           74,425                                                      $    *****

Postal Engines, NO FLY

                    654158-7B       7B                                          C-9    DATE                    *****
                    654979-7B       7B                                          C-10   DATE                    *****
                    665452-9A       9A                                          T-2    HOURS         1,881     *****


                                               
                                                     Actual 2003 Flight hour (*****) & Block hour (*****) data =
        BH/FH Conversion factor (average)   *****    *****.

        MINIMUM ENGINE BLOCK HOURS          *****     Pool rate:               *****%

WEIGHTED AVERAGE ENGINE BLOCK HOUR RATE:  $ *****    (TOTAL COST/TOTAL BH's)



ENGINE TYPE AVERAGES



                     AVG BLK HR          AVG FLT HR            AVG CYC     BLK HR / FLT HR    FLT HR/CYC
                       MONTH               MONTH                MONTH          RATIO             RATIIO
                       -----               -----                -----          -----             ------
                                                                               
JT8D-7B                 *****               *****                *****         *****             *****
JT8D-9A                 *****               *****                *****         *****             *****
JT8D-15                 *****               *****                *****         *****             *****


NOTES
                   - Postal Engines per Settlement Agreement

                   - Postal Engines per Settlement Agreement approved to fly.

                   Engine time limited to 48 months (1.1.03 - 12.31.07)

                   Engine hours limited to 48 month estimate

         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"




                                   SCHEDULE E



AIRFRAMES                                              AVAILABLE TO DATE:
- ---------                                              ------------------
                                                    
 N278US                                                      $*****

 N279US                                                      $*****

 N281KH                                                      $*****

 N284KH                                                      $*****

 N69739                                                      $*****

 N69740                                                      $*****

 N854AA                                                      $*****

 N855AA                                                      $*****

  N6827                                                      $*****

 N252US                                                      $*****

 N6833                                                       $*****

 N6809                                                       $*****


         Confidential Treatment has been requested by Kitty Hawk, Inc. for
         certain portions of this document. Confidential portions have been
         filed separately with the Securities and Exchange Commission. Omitted
         portions are indicated in this agreement with "*****"

EX-10.7

                                                                    EXHIBIT 10.7

                  EMPLOYMENT AND SEVERANCE AGREEMENT AMENDMENT;
                     NOTICE OF TERMINATION, RESIGNATION, AND
                       OTHER SEVERANCE RELATED AGREEMENTS

                                   RECITATIONS

The parties to this EMPLOYMENT AND SEVERANCE AGREEMENT AMENDMENT; NOTICE OF
TERMINATION, RESIGNATION, AND OTHER SEVERANCE RELATED AGREEMENTS (this
"Severance Agreement") are Kitty Hawk, Inc. ("Kitty Hawk" or the "Company") and
Jack Andrew "Drew" Keith ("Keith", "Drew Keith", or "Participant").

Whereas, Kitty Hawk and Keith are parties to the EMPLOYMENT AND SEVERANCE
AGREEMENT (the "Agreement") dated effective October 3, 2002, a copy of which is
attached as Exhibit A; and

Whereas, Kitty Hawk and Keith are parties to the INCENTIVE STOCK OPTION
AGREEMENT - KITTY HAWK 2003 LONG TERM EQUITY INCENTIVE PLAN (the "Stock Option")
having a Date of Grant of July 30, 2003, a copy of which is attached as Exhibit
B; and,

Whereas, capitalized terms used herein will have the meaning ascribed to them in
the Agreement or the Stock Option unless otherwise defined herein; and,

Whereas, unless specifically modified, amended or provided for in this Severance
Agreement, the benefits, rights and obligations of the parties will continue to
be governed by the Agreement and the Stock Option; and,

Whereas, the Agreement and the Stock Option will continue to survive as amended
by this Severance Agreement; and,

Whereas, in order to minimize the disruption to Kitty Hawk's ongoing business
and provide for a smooth transition of Keith's corporate responsibilities to a
successor, Kitty Hawk and Keith have reached certain other agreements regarding
Keith's severance of employment from Kitty Hawk as set-forth herein;

Now; therefore, in consideration of the mutually acceptable terms and conditions
herein, Kitty Hawk and Keith agree as follows:

                                  Keith's Initials             /s/ DK

                                  Kitty Hawk's CEO Initials    /S/ RWZ

                                  Page 1 of 5



                  EMPLOYMENT AND SEVERANCE AGREEMENT AMENDMENT

3.6 TERMINATION. The written notice requirement to terminate the Agreement is
amended to require 60 days in lieu of 30 days.

                              NOTICE OF TERMINATION

Kitty Hawk hereby terminates Keith's employment without material breach
effective December 31, 2003 pursuant to 3.6 TERMINATION., B. of the Agreement.
Keith hereby waives written notice as required pursuant to 6.3 NOTICES. of the
Agreement.

                                   RESIGNATION

Pursuant to notice of Termination given herein by Kitty Hawk, the amendments to
the Agreement as provided herein, and the other agreements reached in this
Severance Agreement, Keith resigns all positions he holds within Kitty Hawk,
Aircargo, and Cargo effective December 31, 2003 as provided in 3.6 TERMINATION.,
B. of the Agreement. Kitty Hawk hereby waives its right, if any, to a separate
letter of resignation as contemplated in 3.6 TERMINATION., B. of the Agreement.

                       OTHER SEVERANCE RELATED AGREEMENTS

CONSULTANT PERIOD: from January 1, 2004 through February 29, 2004 Keith will be
available to the Company as a full-time (or as needed) consultant and will
assist Kitty Hawk as directed by Kitty Hawk's President and CEO. As compensation
for this Consultant Period, Keith will receive all of the compensation, benefits
and rights afforded him as provided in the Agreement, as amended herein, for the
60-day notice period. The 60-day notice period provided in the Agreement, as
amended herein, and this Consultant Period are coterminous. During this
Consultant Period, Keith will adhere to and be subject to the Kitty Hawk Team
Member Guide (a copy of which has previously been provided to Keith).

STOCK OPTION: as additional consideration, Kitty Hawk agrees to provide that
Participant's Termination of Service (whereby Drew Keith is the Participant to
the Stock Option as defined therein) as it pertains to the Stock Option, will be
6 p.m. on June 1, 2004 in lieu of an earlier date certain as provided in the
Stock Option absent this Severance Agreement.

UNUSED VACATION: for the avoidance of doubt, Keith will be paid on or before
February 29, 2004 for any earned but unused vacation as of December 31, 2003.

                                  Keith's Initials             /s/ DK
                                                               ------------

                                  Kitty Hawk's CEO Initials    /s/ RWZ
                                                               ------------

                                  Page 2 of 5




SEVERANCE AGREEMENT TERM: the term of this Severance Agreement will be January
1, 2004 through 6 p.m. June 1, 2004.

KEITH'S ADDITIONAL CONSIDERATION TO KITTY HAWK: in return for the additional
consideration provided to Keith in this Severance Agreement, Keith agrees to and
states:

1.       Keith will not bring, continue or maintain any legal proceedings of any
         nature whatsoever against the Company before any court, administrative
         agency, arbitrator or any other tribunal or forum by reason any such
         claims, demands, liabilities and/or causes of action, arising out of,
         relating to or resulting from Keith's employment or termination from
         employment (except for a claim of willful breach of the Agreement, the
         Stock Option or this Severance Agreement), and that if any agency or
         court assumes jurisdiction of any complaint, claim, or action against
         the Company on Keith's behalf, Keith will direct that agency or court
         to withdraw from or dismiss the matter with prejudice, unless it is a
         claim for willful breach of the Agreement, the Stock Option or this
         Severance Agreement.

2.       While Keith understands that Keith has had the following obligations
         since Keith began his employment with the Company, Keith confirms that
         he shall not disclose any of the Company's trade secrets or other
         confidential, proprietary or restricted information and shall not make
         use of such trade secrets or confidential, proprietary or restricted
         information in any fashion at any time.

3.       Keith further agrees and promises that during the term of this
         Severance Agreement and for period of one (1) year from June 1, 2004 he
         will not influence or attempt to influence customers or suppliers of
         the Company or any of its present or future subsidiaries or affiliates,
         either directly or indirectly, to divert their business to any
         individual, partnership, firm, corporation or other entity then in
         competition with the business of the Company, or any subsidiary or
         affiliate of the Company.

4.       Keith further agrees not to knowingly make any unsubstantiated
         statements that defame or disparage the Company or its products,
         services, officers, Team Members (as defined in the Team Member Guide),
         advisors or other business contacts. Keith shall not represent,
         suggest, or hold himself out as being currently associated or
         affiliated with the Company in any way. Keith shall not make contact
         with or engage in communications about the Company or its operations
         with the media, current or former Team Members of the Company, or
         current or former customers of the Company, provided, however, that if
         Keith is contacted by the media, current or former Team Members of the
         Company, current or former customers of the Company, the general
         public, or any other individual or entity, Keith shall not suggest or
         imply that Keith is privy to current information about the Company, and
         shall not comment about the current or prospective operations of the
         Company. Keith acknowledges and agrees that any breach of this
         non-defamation provision shall entitle the Company to immediately
         terminate payment of the additional

                                  Keith's Initials             /s/ DK
                                                               ------------

                                  Kitty Hawk's CEO Initials    /s/ RWZ
                                                               ------------

                                  Page 3 of 5



         consideration provided to Keith as described in this Severance
         Agreement, and to sue Keith for breach of this Agreement for the
         immediate recovery of any damages caused by such breach and to prevent
         further statements that defame the Company or any of its products.
         services, officers, Team Members, advisors or other business contacts.


ADDITIONAL PROVISIONS: Kitty Hawk and Keith further agree and so state:

1.       This Severance Agreement does not constitute an admission of any kind
         by the Company or Keith, but simply an agreement which offers certain
         additional consideration to which Keith would not otherwise be entitled
         in return for Keith agreeing to the terms of and signing this Severance
         Agreement. Keith further understands and agrees that if Keith breaches
         a material term or condition of this Severance Agreement, Keith will
         automatically forfeit all of the additional consideration provided to
         him in this Severance Agreement. If Keith violates this Severance
         Agreement after receiving any additional consideration as provided
         herein, Keith agrees that Keith will forfeit and/or immediately return
         the additional consideration to the Company. In any action brought to
         enforce any provisions of the Agreement, the Stock Option, or this
         Severance Agreement, in addition to any other relief granted, the
         prevailing party shall recover its reasonable costs of enforcement
         including, but without limitations to costs and reasonable attorney
         fees incurred.

2.       The Company agrees not to make any unsubstantiated statements that
         defame Keith. The Company shall not make contact with or engage in
         communications about Kieth with (i) the media, current or former Team
         Members of the Company, or (ii) current or former advisors or business
         contacts of the Company. The Company acknowledges and agrees that any
         breach of this non-defamation provision shall entitle Keith to sue the
         Company for breach of this Severance Agreement and seek immediate
         recovery of any damages caused by such breach and to prevent the
         Company from further statements that defame Keith or any of Keith's
         products, services, or future employer.

3.       Keith acknowledges and agrees that Keith has been advised that this
         Severance Agreement is a final and binding legal document, and that
         Keith has had sufficient time and opportunity to consult with an
         attorney and/or tax consultant of his own choosing before signing this
         Severance Agreement, and that in signing this Severance Agreement,
         Keith has acted voluntarily of his own free will and has not relied
         upon any representation made by the Company or any of its agents, Team
         Members or representatives regarding the subject matter or effect of
         this Severance Agreement. Keith further agrees not to voluntarily make
         the terms and conditions or the circumstances surrounding this
         Severance Agreement known to anyone other than the attorney and/or tax
         consultant from whom Keith receives counseling, as referred above, and
         his spouse. However, before disclosing such information to these
         individuals, Keith will obtain their agreement not to disclose such
         information. If any

                                  Keith's Initials             /s/ DK
                                                               --------------

                                  Kitty Hawk's CEO Initials    /s/ RWZ
                                                               --------------

                                  Page 4 of 5



         provision of this Severance Agreement is breached by Keith, Keith
         understands that Keith will be required to return to the Company the
         additional consideration given to him pursuant to this Severance
         Agreement.

4.       Keith understands that if Keith elects to revoke this Severance
         Agreement, Keith understands that Keith will not be entitled to the
         additional consideration described in this Severance Agreement.

5.       Keith acknowledges and agrees that all applicable requirements of state
         law governing or affecting the validity of compromises, settlements and
         releases are specifically incorporated herein as fully as if set forth
         at length.

6.       Keith also understands that if Keith signs this Severance Agreement,
         Keith will then have seven (7) days to revoke it, in writing, if Keith
         so chooses. However, if Keith elects to revoke this Severance
         Agreement, Keith understands that Keith will not be entitled to the
         additional consideration provided in this Severance Agreement. Keith
         realizes this Severance Agreement is not effective or enforceable until
         the seven (7) day period expires.

KEITH IS ENTERING INTO THIS SEVERANCE AGREEMENT FREELY AND VOLUNTARILY AND KEITH
IS SATISFIED THAT KEITH HAS BEEN GIVEN SUFFICIENT OPPORTUNITY TO CONSIDER IT.
KEITH HAS CAREFULLY READ AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS SEVERANCE
AGREEMENT. KEITH UNDERSTANDS THAT THIS SEVERANCE AGREEMENT, TAKEN TOGETHER WITH
THE AGREEMENT AND STOCK OPTION, SET FORTH THE ENTIRE AGREEMENT BETWEEN KEITH AND
THE COMPANY. KEITH REPRESENTS THAT NO OTHER STATEMENTS, PROMISES, OR COMMITMENTS
OF ANY KIND, WRITTEN OR ORAL, HAVE BEEN MADE TO KEITH BY THE COMPANY TO CAUSE
KEITH TO ACCEPT THIS SEVERANCE AGREEMENT. KEITH ACKNOWLEDGES ACCEPTANCE OF THIS
SEVERANCE AGREEMENT BY SIGNATURE BELOW:

/s/ Jack Andrew "Drew" Keith                                         2/18/2004
- -------------------------------------------                          -----------
Jack Andrew "Drew" Keith                                             Date

Agreed to and accepted on behalf of Kitty Hawk, Inc.:

/s/ Bob Zoller, President and CEO                                    2/17/2004
- ------------------------------------------                           -----------
Bob Zoller, President and CEO                                        Date

                                  Keith's Initials             /s/ DK
                                                               --------------

                                  Kitty Hawk's CEO Initials    /s/ RWZ
                                                               --------------

                                  Page 5 of 5

EX-10.12

                                                                   EXHIBIT 10.12

                                   TERM SHEET
                                 RANDY S. LEISER

                             CHIEF FINANCIAL OFFICER
                                KITTY HAWK, INC.

                                JANUARY 20, 2004

Position:                                 Vice President & Chief Financial
                                          Officer

Responsibilities:                         As outlined in the Position and
                                          Candidate Specifications document
                                          provided to you earlier in this search
                                          process.

                                          Types of projects to be assigned over
                                          the first year (examples only):

                                          (a)        S-1

                                          (b)        Exchange Listing

                                          (c)        Network Global Expansion
                                                     (interline and freight
                                                     forwarder relationships)

                                          (d)        Develop financial and
                                                     operations analysis
                                                     capability

                                          (e)        Companywide IT Development
                                                     (if desired)

                                          (f)        Route Profitability and
                                                     Yield Management
                                                     Enhancements

                                          (g)        Truck Network Expansion
                                                     Project

                                          (h)        Mergers and Acquisition
                                                     Analysis

Commitment:                               The role of Chief Financial Officer is
                                          a full-time one and requires the best
                                          efforts and total professional
                                          commitment of its incumbent. You will
                                          be expected to apply yourself to this
                                          role on a dedicated business, without
                                          interference from other professional
                                          activities. This implies that you
                                          should:

                                           - Complete any outstanding
                                             commitments outside Kitty Hawk you
                                             may have as soon as possible and
                                             advise the CEO of what those are;
                                             and

                                           - Not take on any new commitments
                                             outside Kitty Hawk without the
                                             prior approval of the CEO.

Reporting to:                             President & Chief Executive Officer



Location:                                 Dallas, Texas

                                          You will participate in evaluating any
                                          potential relocation of the corporate
                                          headquarters for the company, should
                                          relocation be considered.

Termination:                              Should you be terminated without
                                          cause, you would be provided six
                                          months' base salary.

Base Salary:                              $185,000, payable in biweekly
                                          installments. Your salary will be
                                          reviewed in June 2004 and, if your
                                          performance in the role is
                                          satisfactory or better, the base
                                          salary will be adjusted to $200,000
                                          and then subject to annual review
                                          thereafter.

Incentive Compensation                    Kitty Hawk will be introducing a new
(Cash and Equity)                         incentive compensation program for
                                          its top leadership team. As the CFO,
                                          you will participate in a process over
                                          the near-term, with help of
                                          professional compensation consultants,
                                          to develop and secure Board approval
                                          for the new incentive compensation
                                          program. Your own incentive
                                          compensation will be governed by this
                                          new program.

                                          You will be awarded an incoming stock
                                          option grant, subject to a monthly
                                          vesting schedule, with the specific
                                          amount to be consistent with other
                                          officers of the company and to be
                                          approved by the Compensation Committee
                                          of the board.

Employment Benefits:                      Standard Kitty Hawk Inc. executive
                                          level benefits (to be provided by
                                          Kitty Hawk under separate cover)

Start Date:                               As soon as possible but no later than
                                          February 2, 2004

Conditions:                               Satisfactory background check and
                                          educational verification Satisfactory
                                          medical examination or recent medical
                                          report Maintaining this agreement in
                                          confidence until mutually agreed upon
                                          to communicate it more broadly.
                                          Acceptance of offer by January 22,
                                          2004

                                          Additionally, you will be expected to
                                          sign various agreements related to (a)
                                          non-competition, (b)
                                          non-disparagement, and (c)
                                          confidentiality (non-release) of
                                          proprietary information.



SPENCERSTUART

Accepted:

/s/ Randy S. Lesier                               1-21-04
- -------------------------                         ------------------------------
Randy S. Leiser                                   Date


KITTY HAWK, INC.

/s/ ROBERT W. ZOLLER, JR.
- -------------------------
ROBERT W. ZOLLER, JR.
PRESIDENT AND CEO

EX-10.13

                                                                   EXHIBIT 10.13

================================================================================

                          CREDIT AND SECURITY AGREEMENT

                                 BY AND BETWEEN

                                KITTY HAWK, INC.

                                       AND

                        WELLS FARGO BUSINESS CREDIT, INC.

- --------------------------------------------------------------------------------

                                 MARCH 22, 2004

================================================================================



                                TABLE OF CONTENTS



                                                                                                                                PAGE
                                                                                                                                ----
                                                                                                                             
ARTICLE I                 DEFINITIONS........................................................................................      1
           Section 1.1                    Definitions........................................................................      1
           Section 1.2                    Other Definitional Terms; Rules of Interpretation..................................     11

ARTICLE II                AMOUNT AND TERMS OF THE CREDIT FACILITY............................................................     11
           Section 2.1                    Revolving Advances.................................................................     11
           Section 2.2                    Procedures for Requesting Advances.................................................     12
           Section 2.3                    Increased Costs; Capital Adequacy; Funding Exceptions..............................     12
           Section 2.4                    Letters of Credit..................................................................     13
           Section 2.5                    Special Account....................................................................     14
           Section 2.6                    Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement......     14
           Section 2.7                    Obligations Absolute...............................................................     15
           Section 2.8                    Interest; Additional Amounts; Default Interest; Participations; Clearance Days;
                                          Usury..............................................................................     16
           Section 2.9                    Fees...............................................................................     18
           Section 2.10                   Time for Interest Payments; Payment on Non-Banking Days; Computation of Interest
                                          and Fees...........................................................................     20
           Section 2.11                   Lockbox; Collateral Account; Application of Payments...............................     21
           Section 2.12                   Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit
                                          Facility by the Borrower...........................................................     21
           Section 2.13                   Mandatory Prepayment...............................................................     21
           Section 2.14                   Revolving Advances to Pay Obligations..............................................     21
           Section 2.15                   Use of Proceeds....................................................................     22
           Section 2.16                   Liability Records..................................................................     22
           Section 2.17                   Renewal............................................................................     22
           Section 2.18                   Guarantor Collateral Accounts......................................................     22

ARTICLE III               SECURITY INTEREST; OCCUPANCY; SETOFF...............................................................     23
           Section 3.1                    Grant of Security Interest.........................................................     23
           Section 3.2                    Notification of Account Debtors and Other Obligors.................................     23
           Section 3.3                    Assignment of Insurance............................................................     23
           Section 3.4                    Occupancy..........................................................................     24
           Section 3.5                    License............................................................................     24
           Section 3.6                    Financing Statement................................................................     24
           Section 3.7                    Setoff.............................................................................     25
           Section 3.8                    Collateral.........................................................................     25

ARTICLE IV                CONDITIONS OF LENDING..............................................................................     26
           Section 4.1                    Conditions Precedent to the Initial Revolving Advance and Letter of Credit.........     26
           Section 4.2                    Conditions Precedent to All Advances and Letters of Credit.........................     28




                                TABLE OF CONTENTS
                                   (CONTINUED)



                                                                                                                               PAGE
                                                                                                                               ----
                                                                                                                            
ARTICLE V                 REPRESENTATIONS AND WARRANTIES..................................................................      28
           Section 5.1                    Existence and Power; Name; Chief Executive Office; Inventory and Equipment
                                          Locations; Federal Employer Identification Number...............................      28
           Section 5.2                    Capitalization..................................................................      29
           Section 5.3                    Authorization of Borrowing; No Conflict as to Law or Agreements.................      29
           Section 5.4                    Legal Agreements................................................................      29
           Section 5.5                    Subsidiaries....................................................................      29
           Section 5.6                    Financial Condition; No Adverse Change..........................................      29
           Section 5.7                    Litigation......................................................................      29
           Section 5.8                    Regulation U....................................................................      30
           Section 5.9                    Taxes...........................................................................      30
           Section 5.10                   Titles and Liens................................................................      30
           Section 5.11                   Intellectual Property Rights....................................................      30
           Section 5.12                   Plans...........................................................................      31
           Section 5.13                   Default.........................................................................      32
           Section 5.14                   Environmental Matters...........................................................      32
           Section 5.15                   Submissions to Lender...........................................................      32
           Section 5.16                   Financing Statements............................................................      32
           Section 5.17                   Rights to Payment...............................................................      33
           Section 5.18                   Financial Solvency..............................................................      33

ARTICLE VI                COVENANTS.......................................................................................      33
           Section 6.1                    Reporting Requirements..........................................................      33
           Section 6.2                    Financial Covenants.............................................................      37
           Section 6.3                    Permitted Liens; Financing Statements...........................................      39
           Section 6.4                    Indebtedness....................................................................      39
           Section 6.5                    Guaranties......................................................................      40
           Section 6.6                    Investments and Subsidiaries....................................................      40
           Section 6.7                    Dividends and Distributions.....................................................      41
           Section 6.8                    Salaries........................................................................      41
           Section 6.9                    Books and Records; Inspection and Examination...................................      41
           Section 6.10                   Account Verification............................................................      41
           Section 6.11                   Compliance with Laws............................................................      41
           Section 6.12                   Payment of Taxes and Other Claims...............................................      42
           Section 6.13                   Maintenance of Properties.......................................................      42
           Section 6.14                   Insurance.......................................................................      42
           Section 6.15                   Preservation of Existence.......................................................      43
           Section 6.16                   Delivery of Instruments, etc....................................................      43
           Section 6.17                   Sale or Transfer of Assets; Suspension of Business Operations...................      43
           Section 6.18                   Consolidation and Merger; Asset Acquisitions....................................      43




                                TABLE OF CONTENTS
                                   (CONTINUED)



                                                                                                                               PAGE
                                                                                                                               ----
                                                                                                                            
           Section 6.19                   Sale and Leaseback..............................................................      43
           Section 6.20                   Restrictions on Nature of Business..............................................      43
           Section 6.21                   Accounting......................................................................      44
           Section 6.22                   Discounts, etc..................................................................      44
           Section 6.23                   Plans...........................................................................      44
           Section 6.24                   Place of Business; Name.........................................................      44
           Section 6.25                   Constituent Documents; S Corporation Status.....................................      44
           Section 6.26                   Performance by the Lender.......................................................      44
           Section 6.27                   [omitted intentionally].........................................................      45
           Section 6.28                   Debt Payments...................................................................      45
           Section 6.29                   Transactions with Affiliates....................................................      45

ARTICLE VII               EVENTS OF DEFAULT, RIGHTS AND REMEDIES..........................................................      45
           Section 7.1                    Events of Default...............................................................      45
           Section 7.2                    Rights and Remedies.............................................................      47
           Section 7.3                    Certain Notices.................................................................      48

ARTICLE VIII              MISCELLANEOUS...................................................................................      49
           Section 8.1                    No Waiver; Cumulative Remedies; Compliance with Laws............................      49
           Section 8.2                    Amendments, Etc.................................................................      49
           Section 8.3                    Addresses for Notices; Requests for Accounting..................................      49
           Section 8.4                    Further Documents...............................................................      49
           Section 8.5                    Costs and Expenses..............................................................      50
           Section 8.6                    Indemnity.......................................................................      50
           Section 8.7                    Participants....................................................................      51
           Section 8.8                    Execution in Counterparts; Telefacsimile Execution..............................      51
           Section 8.9                    Retention of Borrower's Records.................................................      51
           Section 8.10                   Binding Effect; Assignment; Complete Agreement; Exchanging Information..........      51
           Section 8.11                   Severability of Provisions......................................................      52
           Section 8.12                   Headings........................................................................      52
           Section 8.13                   Governing Law; Jurisdiction, Venue; Waiver of Jury Trial........................      52
           Section 8.14                   Non-Application of Chapter 346 of the Texas Finance Code........................      52
           Section 8.15                   Entire Agreement................................................................      52




                          CREDIT AND SECURITY AGREEMENT

                           Dated as of March 22, 2004

         KITTY HAWK, INC., a Delaware corporation (the "Borrower"), and WELLS
FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby
agree as follows:

                                   ARTICLE I

                                   DEFINITIONS

         Section 1.1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided, the following terms shall have the meanings
assigned to them in this Section or in the Section referenced after such term:

                  "Accounts" means all of a Person's accounts, as such term is
         defined in the UCC, including each and every right of such Person to
         the payment of money, whether such right to payment now exists or
         hereafter arises, whether such right to payment arises out of a sale,
         lease or other disposition of goods or other property, out of a
         rendering of services, out of a loan, out of the overpayment of taxes
         or other liabilities, or otherwise arises under any contract or
         agreement, whether such right to payment is created, generated or
         earned by such Person or by some other person who subsequently
         transfers such person's interest to such Person, whether such right to
         payment is or is not already earned by performance, and howsoever such
         right to payment may be evidenced, together with all other rights and
         interests (including all Liens) which such Person may at any time have
         by law or agreement against any account debtor or other obligor
         obligated to make any such payment or against any property of such
         account debtor or other obligor; all including but not limited to all
         present and future accounts, contract rights, loans and obligations
         receivable, chattel papers, bonds, notes and other debt instruments,
         tax refunds and rights to payment in the nature of general intangibles.

                  "Advance" means a Revolving Advance.

                  "Affiliate" or "Affiliates" means Kitty Hawk Aircargo, Kitty
         Hawk Cargo, and any other Person (other than an individual) controlled
         by, controlling or under common control with the Borrower, including
         any Subsidiary of the Borrower. For purposes of this definition,
         "control," when used with respect to any specified Person, means the
         power to direct the management and policies of such Person, directly or
         indirectly, whether through the ownership of voting securities, by
         contract or otherwise.

                  "Agreement" means this Credit and Security Agreement, as the
         same may be amended, modified, supplemented or restated from time to
         time.

                  "Aircraft" means aircraft, airframes, engines and related
         parts that the Borrower and its Subsidiaries own or hold pursuant to
         operating leases.

                  "Availability" means the difference of (i) the Borrowing Base
         and (ii) the sum of (A) the outstanding principal balance of the
         Revolving Note and (B) the L/C Amount.



                  "Banking Day" means a day on which the Federal Reserve Bank of
         New York is open for business.

                  "Base Rate" means the rate of interest publicly announced from
         time to time by Wells Fargo at its principal office in San Francisco as
         its "prime rate", with the understanding that the "prime rate" is one
         of Wells Fargo's base rates (not necessarily the lowest of such rates)
         and serves as the basis upon which effective rates of interest are
         calculated for loans making reference thereto.

                  "Book Net Worth" means the aggregate of the common and
         preferred stockholders' equity in the Borrower, determined in
         accordance with GAAP.

                  "Borrowing Base" means at any time the lesser of:

                  (a)      the Maximum Line; or

                  (b)      subject to reduction from time to time in the
         Lender's sole discretion based on changes to Dilution, up to 85% of
         Eligible Accounts (provided that Dilution is four percent (4%) or
         less).

                  "Capital Expenditures" means for a period, any expenditure of
         money during such period for the purchase or construction of assets, or
         for improvements or additions thereto, which are capitalized on the
         Borrower's balance sheet, or for the lease, purchase or other
         acquisition of any capital asset, or for the lease of any other asset
         whether payable currently or in the future; excluding, however,
         Aircraft maintenance capital expenditures in the ordinary course of
         business and operating leases of Aircraft.

                  "Change of Control" means the occurrence of any of the
         following events:

                  (a)      any Person or "group" (as such term is used in
         Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or
         becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
         under the Securities Exchange Act of 1934, except that a Person will be
         deemed to have "beneficial ownership" of all securities that such
         Person has the right to acquire, whether such right is exercisable
         immediately or only after the passage of time), directly or indirectly,
         of more than 51% of the voting power of all classes of voting stock of
         the Borrower.

                  (b)      during any consecutive two-year period, individuals
         who at the beginning of such period constituted the board of Directors
         of the Borrower (together with any new Directors whose election to such
         board of Directors, or whose nomination for election by the owners of
         the Borrower, was approved by a vote of 66-2/3% of the Directors then
         still in office who were either Directors at the beginning of such
         period or whose election or nomination for election was previously so
         approved) cease for any reason to constitute a majority of the board of
         Directors of the Borrower then in office.

                  "Collateral" means all of the Borrower's personal property and
         assets, whether now owned or hereafter acquired, including Accounts,
         chattel paper, deposit accounts, documents, Equipment (other than
         Aircraft), fixtures, General Intangibles (excluding

CREDIT AND SECURITY AGREEMENT - PAGE 2



         licenses and permits referred-to in the last sentence of this
         definition), goods, instruments, Inventory, Investment Property (other
         than the stock issued by Kitty Hawk Aircargo, Kitty Hawk Cargo and any
         other wholly-owned Subsidiary of the Borrower), letter-of-credit
         rights, letters of credit, and all sums on deposit in any Collateral
         Account, and any items in any Lockbox; together with (i) all
         substitutions and replacements for and products of any of the
         foregoing; (ii) in the case of all goods, all accessions; (iii) all
         accessories, attachments, parts, equipment and repairs now or hereafter
         attached or affixed to or used in connection with any goods; (iv) all
         warehouse receipts, bills of lading and other documents of title now or
         hereafter covering such goods; (v) all collateral subject to the Lien
         of any Security Document; (vi) any money, or other assets of the
         Borrower that now or hereafter come into the possession, custody, or
         control of the Lender; (vii) all sums on deposit in the Special
         Account; and (viii) proceeds of any and all of the foregoing. (For
         avoidance of doubt, any Department of Transportation, Federal Aviation
         Administration and other governmental licenses and permits which by
         their nature are not freely assignable or transferable are not included
         as Collateral.)

                  "Collateral Account" means each "Lender Account" as defined in
         any Lockbox and Collection Account Agreement.

                  "Commitment" means the Lender's commitment to make Advances
         to, and to cause the Issuer to issue Letters of Credit for the account
         of, the Borrower pursuant to Article II.

                  "Constituent Documents" means with respect to any Person, as
         applicable, such Person's certificate of incorporation, articles of
         incorporation, by-laws, certificate of formation, articles of
         organization, limited liability company agreement, management
         agreement, operating agreement, shareholder agreement, partnership
         agreement or similar document or agreement governing such Person's
         existence, organization or management or concerning disposition of
         ownership interests of such Person or voting rights among such Person's
         owners.

                  "Contribution and Indemnification Agreement" means the
         Contribution and Indemnification Agreement executed by each Loan Party
         and the Lender, dated as of even date herewith, as the same may be
         amended, modified, supplemented or restated from time to time.

                  "Credit Facility" means the credit facility being made
         available to the Borrower by the Lender under Article II.

                  "Debt" means of a Person as of a given date, all items of
         indebtedness or liability which in accordance with GAAP would be
         included in determining total liabilities as shown on the liabilities
         side of a balance sheet for such Person and shall also include the
         aggregate payments required to be made by such Person at any time under
         any lease that is considered a capitalized lease under GAAP.

                  "Default" means an event that, with giving of notice or
         passage of time or both, would constitute an Event of Default.

CREDIT AND SECURITY AGREEMENT - PAGE 3



                  "Default Period" means any period of time beginning on the day
         an Event of Default occurs and ending on the date the Lender notifies
         the Borrower in writing that such Event of Default has been cured or
         waived.

                  "Default Rate" means an annual interest rate equal to three
         percent (3%) over the Floating Rate, which interest rate shall change
         when and as the Floating Rate changes.

                  "Dilution" means the gross amount of all returns, allowances,
         discounts, credits, writeoffs, and similar items relating to Accounts
         (but excluding any non-diluting items) computed as a percentage of
         gross sales, calculated on a three month rolling average, as determined
         by the Lender in its discretion during routine or special collateral
         audits.

                  "Director" means a director if the Borrower is a corporation,
         a manager if the Borrower is a limited liability company, or a general
         partner if the Borrower is a partnership.

                  "Dollars" or "$" means lawful currency of the United States of
         America.

                  "EBITDAR" means, at each date of determination, the sum of (i)
         pretax earnings from continuing operations, (ii) Interest Expense and
         (iii) depreciation, depletion, and amortization of tangible and
         intangible assets, before (a) special extraordinary gains, (b) minority
         interests, and (c) miscellaneous gains and losses, in each case for
         such period, computed and calculated in accordance with GAAP, and (iv)
         Rent for the trailing four fiscal quarters.

                  "ERISA" means the Employee Retirement Income Security Act of
         1974 as amended from time to time.

                  "ERISA Affiliate" means any trade or business (whether or not
         incorporated) that is a member of a group which includes the Borrower
         and which is treated as a single employer under Section 414 of the IRC.

                  "Eligible Accounts" means all of the Borrower's and each
         Guarantor's unpaid Accounts arising from the sale or lease of goods or
         the performance of services by Borrower or such Guarantor, net of any
         credits, but excluding any such Accounts having any of the following
         characteristics:

                           (i)      That portion of Accounts unpaid 90 days or
                  more after the invoice date;

                           (ii)     That portion of Accounts that is disputed or
                  subject to a claim of offset or a contra account;

                           (iii)    That portion of Accounts not yet earned by
                  the final delivery of goods or rendition of services, as
                  applicable, by the Borrower to the customer, including
                  progress billings, and that portion of Accounts for which an
                  invoice has not been sent to the applicable account debtor;

CREDIT AND SECURITY AGREEMENT - PAGE 4



                           (iv)     Accounts constituting (A) proceeds of
                  copyrightable material unless such copyrightable material
                  shall have been registered with the United States Copyright
                  Office, or (B) proceeds of patentable inventions unless such
                  patentable inventions have been registered with the United
                  States Patent and Trademark Office;

                           (v)      Accounts owed by any unit of government,
                  whether foreign or domestic (provided, however, that there
                  shall be included in Eligible Accounts that portion of
                  Accounts owed by such units of government for which the
                  Borrower or the applicable Guarantor has provided evidence
                  satisfactory to the Lender that (A) the Lender has a first
                  priority perfected security interest and (B) such Accounts may
                  be enforced by the Lender directly against such unit of
                  government under all applicable laws);

                           (vi)     Accounts owed by an account debtor located
                  outside the United States which are not (A) backed by a bank
                  letter of credit naming the Lender as beneficiary or assigned
                  to the Lender, in the Lender's possession or control, and with
                  respect to which a control agreement concerning the
                  letter-of-credit rights is in effect, and acceptable to the
                  Lender in all respects, in its sole discretion, or (B) covered
                  by a foreign receivables insurance policy acceptable to the
                  Lender in its sole discretion;

                           (vii)    Accounts owed by an account debtor that is
                  insolvent, the subject of bankruptcy proceedings or has gone
                  out of business;

                           (viii)   Accounts owed by an Owner, Subsidiary,
                  Affiliate, Officer or employee of the Borrower or the
                  Guarantors;

                           (ix)     Accounts not subject to a duly perfected
                  security interest in the Lender's favor or which are subject
                  to any Lien in favor of any Person other than the Lender;

                           (x)      That portion of Accounts that has been
                  restructured, extended, amended or modified;

                           (xi)     That portion of Accounts that constitutes
                  advertising, finance charges, or service charges;

                           (xii)    Accounts owed by an account debtor,
                  regardless of whether otherwise eligible, to the extent that
                  the balance of such Accounts exceeds 20% of the aggregate
                  amount of all Eligible Accounts;

                           (xiii)   Accounts owed by an account debtor,
                  regardless of whether otherwise eligible, if 25% or more of
                  the total amount due under Accounts from such debtor is
                  ineligible under clauses (i), (ii) or (x) above; and

                           (xiv)    Accounts, or portions thereof, otherwise
                  deemed ineligible by the Lender in the exercise of its
                  business judgment.

CREDIT AND SECURITY AGREEMENT - PAGE 5



                  "Environmental Law" means any federal, state, local or other
         governmental statute, regulation, law or ordinance dealing with the
         protection of human health and the environment.

                  "Equipment" means all of a Person's equipment, as such term is
         defined in the UCC, whether now owned or hereafter acquired, including
         but not limited to all present and future machinery, vehicles,
         furniture, fixtures, manufacturing equipment, shop equipment, office
         and recordkeeping equipment, parts, tools, supplies, and including
         specifically the goods described in any equipment schedule or list
         herewith or hereafter furnished to the Lender by such Person. For
         avoidance of doubt, Aircraft are not included in the definition of
         "Equipment".

                  "Event of Default" has the meaning specified in Section 7.1.

                  "Financial Covenants" means the covenants set forth in Section
         6.2.

                  "Floating Rate" means a fluctuating annual interest rate which
         shall from day to day be the lesser of (a) the Maximum Rate or (b) an
         annual interest rate equal to the sum of the Base Rate plus one percent
         (1.0%), which interest rate shall change when and as the Base Rate
         changes.

                  "Funding Date" has the meaning given in Section 2.1.

                  "GAAP" means generally accepted accounting principles, applied
         on a basis consistent with the accounting practices applied in the
         financial statements described in Section 5.6.

                  "General Intangibles" means all of a Person's general
         intangibles, as such term is defined in the UCC, whether now owned or
         hereafter acquired, including all present and future Intellectual
         Property Rights, customer or supplier lists and contracts, manuals,
         operating instructions, permits, franchises, the right to use a
         Person's name, and the goodwill of such Person's business. For
         avoidance of doubt, the term "General Intangibles" shall not include
         the excluded property referred-to in the definition of "Collateral".

                  "Guarantor" means each of Kitty Hawk Aircargo, Kitty Hawk
         Cargo, and any Person now or hereafter guaranteeing the Obligations.

                  "Hazardous Substances" means pollutants, contaminants,
         hazardous substances, hazardous wastes, petroleum and fractions
         thereof, and all other chemicals, wastes, substances and materials
         listed in, regulated by or identified in any Environmental Law.

                  "IRC" means the Internal Revenue Code of 1986, as amended from
         time to time.

                  "Infringe," when used with respect to Intellectual Property
         Rights, means any infringement or other violation of Intellectual
         Property Rights.

CREDIT AND SECURITY AGREEMENT - PAGE 6



                  "Intellectual Property Rights" means all actual or prospective
         rights arising in connection with any intellectual property or other
         proprietary rights, including all rights arising in connection with
         copyrights, patents, service marks, trade dress, trade secrets,
         trademarks, trade names or mask works.

                  "Interest Expense" means, at each date of determination, the
         Borrower's total consolidated gross interest expense (excluding
         interest income), and shall in any event include (i) interest expensed
         (whether or not paid) on all Debt, (ii) the amortization of debt
         discounts, (iii) the amortization of all fees payable in connection
         with the incurrence of Debt to the extent included in interest expense,
         and (iv) the portion of any capitalized lease obligation allocable to
         interest expense, for the trailing four fiscal quarters.

                  "Inventory" means all of a Person's inventory, as such term is
         defined in the UCC (excluding Aircraft), whether now owned or hereafter
         acquired, whether consisting of whole goods, spare parts or components,
         supplies or materials, whether acquired, held or furnished for sale,
         for lease or under service contracts or for manufacture or processing,
         and wherever located.

                  "Investment Property" means all of a Person's investment
         property, as such term is defined in the UCC, whether now owned or
         hereafter acquired, including but not limited to all securities,
         security entitlements, securities accounts, commodity contracts,
         commodity accounts, stocks, bonds, mutual fund shares, money market
         shares and U.S. Government securities.

                  "Issuer" means the issuer of any Letter of Credit.

                  "Kitty Hawk Aircargo" means Kitty Hawk Aircargo, Inc., a Texas
         corporation.

                  "Kitty Hawk Cargo" means Kitty Hawk Cargo, Inc., a Delaware
         corporation.

                  "L/C Amount" means the sum of (i) the aggregate face amount of
         any issued and outstanding Letters of Credit and (ii) the unpaid amount
         of the Obligation of Reimbursement.

                  "L/C Application" means an application and agreement for
         letters of credit in a form acceptable to the Issuer and the Lender.

                  "Letter of Credit" has the meaning specified in Section 2.4.

                  "Licensed Intellectual Property" has the meaning given in
         Section 5.11(c).

                  "Lien" means any security interest, mortgage, deed of trust,
         pledge, lien, charge, encumbrance, title retention agreement or
         analogous instrument or device, including the interest of each lessor
         under any capitalized lease and the interest of any bondsman under any
         payment or performance bond, in, of or on any assets or properties of a
         Person, whether now owned or hereafter acquired and whether arising by
         agreement or operation of law.

CREDIT AND SECURITY AGREEMENT - PAGE 7



                  "Liquid Assets" means Dollars and investment grade commercial
         paper.

                  "Loan Documents" means this Agreement, the Note, the Security
         Documents and any L/C Application.

                  "Loan Party" means the Borrower or a Guarantor, or both.

                  "Lockbox" has the meaning given in the Lockbox and Collection
         Account Agreements.

                  "Lockbox and Collection Account Agreement" means a Lockbox and
         Collection Account Agreement by and among the applicable Loan Party,
         Wells Fargo, and the Lender, as the same may be amended, modified or
         restated from time to time.

                  "Maturity Date" has the meaning given in Section 2.17.

                  "Maximum Line" means $10,000,000.00 unless said amount is
         reduced pursuant to Section 2.12, in which event it means such lower
         amount.

                  "Maximum Rate" means the maximum lawful rate of interest which
         may be contracted for, charged, taken, received or reserved by Lender
         in accordance with the applicable laws of the State of Texas (or
         applicable United States federal law to the extent that such law
         permits Lender to contract for, charge, take, receive or reserve a
         greater amount of interest than under Texas law), taking into account
         all charges made in connection with the transaction evidenced by the
         Loan Documents. If such maximum rate of interest changes after the date
         hereof, the Maximum Rate shall be automatically increased or decreased,
         as the case may be, from time to time as of the effective date of each
         change in such Maximum Rate. To the extent, if any, that Chapter 303 of
         the Texas Finance Code, as amended, establishes the Maximum Rate, the
         Maximum Rate shall be the "weekly ceiling" as defined therein.

                  "Monthly Period" means each month when (1) Availability plus
         the Borrower's Liquid Assets held in accounts with Wells Fargo or Wells
         Fargo Investments in which the Lender has a Lien is greater than
         $7,500,000, (2) no Default exists and (3) collateral audits are
         satisfactory to the Lender.

                  "Multiemployer Plan" means a multiemployer plan (as defined in
         Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA
         Affiliate contributes or is obligated to contribute.

                  "Net Income" means after-tax net income from continuing
         operations as determined in accordance with GAAP, excluding, however,
         the effect of non-cash items.

                  "Non-Excluded Taxes" means any Taxes other than income and
         franchise Taxes imposed with respect to the Lender by the United States
         of America and the State of Texas.

CREDIT AND SECURITY AGREEMENT - PAGE 8



                  "Note" means the Revolving Note, as the same may be amended,
         modified, supplemented or restated from time to time.

                  "Obligation of Reimbursement" has the meaning given in Section
         2.6(a).

                  "Obligations" means the Note, the Obligation of Reimbursement
         and each and every other debt, liability and obligation of every type
         and description which the Borrower may now or at any time hereafter owe
         to the Lender, whether such debt, liability or obligation now exists or
         is hereafter created or incurred, whether it arises in a transaction
         involving the Lender alone or in a transaction involving other
         creditors of the Borrower, and whether it is direct or indirect, due or
         to become due, absolute or contingent, primary or secondary, liquidated
         or unliquidated, or sole, joint, several or joint and several, and
         including all indebtedness of the Borrower arising under any Credit
         Document or guaranty between the Borrower and the Lender, whether now
         in effect or hereafter entered into.

                  "Officer" means with respect to the Borrower, an officer if
         the Borrower is a corporation, a manager if the Borrower is a limited
         liability company, or a partner if the Borrower is a partnership.

                  "Original Maturity Date" means March 22, 2007.

                  "Other Taxes" means any and all stamp, documentary or similar
         Taxes, or any other excise or property Taxes or similar levies that
         arise on account of any payment made or required to be made under any
         Loan Document or from the execution, delivery, registration, recording
         or enforcement of any Loan Document.

                  "Owned Intellectual Property" has the meaning given in Section
         5.11(a).

                  "Owner" means with respect to the Borrower, each Person having
         legal or beneficial title to an ownership interest in the Borrower or a
         right to acquire such an interest.

                  "Pension Plan" means a pension plan (as defined in Section
         3(2) of ERISA) maintained for employees of the Borrower or any ERISA
         Affiliate and covered by Title IV of ERISA.

                  "Permitted Lien" has the meaning given in Section 6.3(a).

                  "Person" means any individual, corporation, partnership, joint
         venture, limited liability company, association, joint-stock company,
         trust, unincorporated organization or government or any agency or
         political subdivision thereof.

                  "Plan" means an employee benefit plan (as defined in Section
         3(3) of ERISA) maintained for employees of the Borrower or any ERISA
         Affiliate.

CREDIT AND SECURITY AGREEMENT - PAGE 9



                  "Premises" means all premises where the Borrower conducts its
         business and has any rights of possession, including the premises
         legally described in Exhibit C attached hereto.

                  "Rent" means, with respect to the Borrower and its
         Subsidiaries, all payments for rent and additional rent under all
         operating leases of Aircraft with a term of one year or more.

                  "Reportable Event" means a reportable event (as defined in
         Section 4043 of ERISA), other than an event for which the 30-day notice
         requirement under ERISA has been waived in regulations issued by the
         Pension Benefit Guaranty Corporation.

                  "Revolving Advance" has the meaning given in Section 2.1.

                  "Revolving Note" means the Borrower's revolving promissory
         note, payable to the order of the Lender in substantially the form of
         Exhibit A hereto, as the same may be amended, modified, supplemented or
         restated from time to time.

                  "Security Agreement" means a Security Agreement executed by
         each Guarantor in favor of the Lender as of even date herewith as the
         same may be amended, modified or restated from time to time.

                  "Security Documents" means this Agreement, the Lockbox and
         Collection Account Agreements, the Trademark Security Agreements, any
         guaranty, the Security Agreements, the Contribution and Indemnification
         Agreement, any control agreements or other documents executed in
         relation to the Borrower's or any Guarantor's deposit accounts or
         Investment Property, and any other document delivered to the Lender
         from time to time to secure the Obligations.

                  "Security Interest" has the meaning given in Section 3.1.

                  "Special Account" means a specified cash collateral account
         maintained by a financial institution acceptable to the Lender in
         connection with Letters of Credit, as contemplated by Section 2.5.

                  "Subordination Agreement" means any other subordination
         agreement with respect to Debt of the Borrower accepted by Lender from
         time to time.

                  "Subordinated Debt" means any Debt of the Borrower subject to
         a Subordination Agreement.

                  "Subsidiary" means any corporation of which more than 50% of
         the outstanding shares of capital stock having general voting power
         under ordinary circumstances to elect a majority of the board of
         Directors of such corporation, irrespective of whether or not at the
         time stock of any other class or classes shall have or might have
         voting power by reason of the happening of any contingency, is at the
         time directly or indirectly owned by the Borrower, by the Borrower and
         one or more other Subsidiaries, or by one or more other Subsidiaries.

CREDIT AND SECURITY AGREEMENT - PAGE 10



                  "Taxes" means all income, stamp or other taxes, duties,
         levies, imposts, charges, assessments, fees, deductions or
         withholdings, now or hereafter imposed, levied, collected, withheld or
         assessed by any governmental authority, and all interest, penalties or
         similar liabilities with respect thereto.

                  "Termination Date" means the earliest of (i) the Maturity
         Date, (ii) the date the Borrower terminates the Credit Facility, or
         (iii) the date the Lender demands payment of the Obligations while an
         Event of Default continues.

                  "Trademark Security Agreement" means a separate Trademark
         Security Agreement executed by each of the Borrower, Kitty Hawk
         Aircargo, and Kitty Hawk Cargo, in favor of the Lender as the same may
         be amended, modified, supplemented, or restated from time to time.

                  "UCC" means the Uniform Commercial Code as in effect in the
         state designated in Section 8.13 as the state whose laws shall govern
         this Agreement, or in any other state whose laws are held to govern
         this Agreement or any portion hereof.

                  "Wells Fargo" means Wells Fargo Bank, National Association.

         Section 1.2 Other Definitional Terms; Rules of Interpretation. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. All accounting terms not otherwise
defined herein have the meanings assigned to them in accordance with GAAP. All
terms defined in the UCC and not otherwise defined herein have the meanings
assigned to them in the UCC. References to Articles, Sections, subsections,
Exhibits, Schedules and the like, are to Articles, Sections and subsections of,
or Exhibits or Schedules attached to, this Agreement unless otherwise expressly
provided. The words "include", "includes" and "including" shall be deemed to be
followed by the phrase "without limitation". Unless the context in which used
herein otherwise clearly requires, "or" has the inclusive meaning represented by
the phrase "and/or". Defined terms include in the singular number the plural and
in the plural number the singular. Reference to any agreement (including the
Loan Documents), document or instrument means such agreement, document or
instrument as amended or modified and in effect from time to time in accordance
with the terms thereof (and, if applicable, in accordance with the terms hereof
and the other Loan Documents), except where otherwise explicitly provided, and
reference to any promissory note includes any promissory note which is an
extension or renewal thereof or a substitute or replacement therefor. Reference
to any law, rule, regulation, order, decree, requirement, policy, guideline,
directive or interpretation means as amended, modified, codified, replaced or
reenacted, in whole or in part, and in effect on the determination date,
including rules and regulations promulgated thereunder.

                                   ARTICLE II

                     AMOUNT AND TERMS OF THE CREDIT FACILITY

         Section 2.1 Revolving Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the Borrower
from time to time from the date all

CREDIT AND SECURITY AGREEMENT - PAGE 11



of the conditions set forth in Section 4.1 are satisfied (the "Funding Date") to
the Termination Date (the "Revolving Advances"). The Lender shall have no
obligation to make a Revolving Advance to the extent the amount of the requested
Revolving Advance exceeds Availability. The Borrower's obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be secured
by the Collateral. Within the limits set forth in this Section 2.1, the Borrower
may borrow, prepay pursuant to Section 2.12 and reborrow.

         Section 2.2 Procedures for Requesting Advances. The Borrower shall
comply with the following procedures in requesting Revolving Advances:

                  (a)      TIME FOR REQUESTS. The Borrower shall request each
         Advance not later than 11:00 a.m., Dallas, Texas time on the Banking
         Day which is the date the Advance is to be made. Each such request
         shall be effective upon receipt by the Lender, shall be in writing or
         by telephone or telecopy transmission, to be confirmed in writing by
         the Borrower if so requested by the Lender shall be by the chief
         executive officer, chief financial officer or chief accounting officer
         of the Borrower, as reflected on the latest incumbency certification
         received by the Lender. The Borrower shall repay all Advances even if
         the Lender does not receive such confirmation and even if the person
         requesting an Advance was not in fact authorized to do so. Any request
         for an Advance, whether written or telephonic, shall be deemed to be a
         representation by the Borrower that the conditions set forth in Section
         4.2 have been satisfied as of the time of the request.

                  (b)      DISBURSEMENT. Upon fulfillment of the applicable
         conditions set forth in Article IV, the Lender shall disburse the
         proceeds of the requested Advance by crediting the same to the
         Borrower's demand deposit account maintained with Wells Fargo unless
         the Lender and the Borrower shall agree in writing to another manner of
         disbursement.

         Section 2.3 Increased Costs; Capital Adequacy; Funding Exceptions. If
the Lender determines at any time that its Return has been reduced as a result
of any Rule Change, the Lender may so notify the Borrower and may, on a
nondiscriminatory basis vis a vis other similarly situated borrowers, require
the Borrower, beginning fifteen (15) days after such notice, to pay it the
amount necessary to restore its Return to what it would have been had there been
no Rule Change. For purposes of this Section 2.3:

                           (i)      "Capital Adequacy Rule" means any law, rule,
                  regulation, guideline, directive, requirement or request
                  regarding capital adequacy, or the interpretation or
                  administration thereof by any governmental or regulatory
                  authority, central bank or comparable agency, whether or not
                  having the force of law, that applies to any Related Lender,
                  including rules requiring financial institutions to maintain
                  total capital in amounts based upon percentages of outstanding
                  loans, binding loan commitments and letters of credit.

                           (ii)     "L/C Rule" means any law, rule, regulation,
                  guideline, directive, requirement or request regarding letters
                  of credit, or the interpretation or administration thereof by
                  any governmental or regulatory authority, central bank or
                  comparable agency, whether or not having the force of law,
                  that applies to any Related Lender, including those that
                  impose taxes, duties or other similar charges,

CREDIT AND SECURITY AGREEMENT - PAGE 12



                  or mandate reserves, special deposits or similar requirements
                  against assets of, deposits with or for the account of, or
                  credit extended by any Related Lender, on letters of credit.

                           (iii)    "Related Lender" includes (but is not
                  limited to) the Lender, any parent of the Lender, any assignee
                  of any interest of the Lender hereunder and any participant in
                  the Credit Facility.

                           (iv)     "Return" for any period means the percentage
                  determined by dividing (i) the sum of interest and ongoing
                  fees earned by the Lender under this Agreement during such
                  period, by (ii) the average capital such Lender is required to
                  maintain during such period as a result of its being a party
                  to this Agreement, as determined by such Lender based upon its
                  total capital requirements and a reasonable attribution
                  formula that takes account of the Capital Adequacy Rules and
                  L/C Rules then in effect, costs of issuing or maintaining any
                  Advance or Letter of Credit and amounts received or receivable
                  under this Agreement or the Note with respect to any Advance
                  or Letter of Credit. Return may be calculated for each
                  calendar quarter and for the shorter period between the end of
                  a calendar quarter and the date of termination in whole of
                  this Agreement.

                           (v)      "Rule Change" means any change in any
                  Capital Adequacy Rule or L/C Rule occurring after the date of
                  this Agreement, or any change in the interpretation or
                  administration thereof by any governmental or regulatory
                  authority, that affects not only the Lender but also similarly
                  situated institutions, but the term does not include any
                  changes that at the Funding Date are scheduled to take place
                  under the existing Capital Adequacy Rules or L/C Rules or any
                  increases in the capital that the Lender is required to
                  maintain to the extent that the increases are required due to
                  a regulatory authority's assessment of that Lender's financial
                  condition.

The initial notice sent by the Lender shall be sent as promptly as practicable
after such Lender learns that its Return has been reduced, shall include a
demand for payment of the amount necessary to restore such Lender's Return for
the quarter in which the notice is sent, and shall state in reasonable detail
the cause for the reduction in its Return and its calculation of the amount of
such reduction. Thereafter, such Lender may send a new notice during each
calendar quarter setting forth the calculation of the reduced Return for that
quarter and including a demand for payment of the amount necessary to restore
its Return for that quarter. The Lender's calculation in any such notice shall
be conclusive and binding absent demonstrable error.

         Section 2.4 Letters of Credit.

                  (a)      The Lender agrees, on the terms and subject to the
         conditions herein set forth, to cause an Issuer to issue, from the
         Funding Date to the Termination Date, one or more irrevocable standby
         or documentary letters of credit (each, a "Letter of Credit") for the
         Borrower's account by guaranteeing payment of the Borrower's
         obligations or being a co-applicant. The Lender shall have no
         obligation to cause an Issuer to issue any Letter of Credit if the face
         amount of the Letter

CREDIT AND SECURITY AGREEMENT - PAGE 13



         of Credit to be issued would exceed the lesser of:

                           (i)      $5,000,000.00 less the L/C Amount, or

                           (ii)     Availability.

           Each Letter of Credit, if any, shall be issued pursuant to a separate
           L/C Application entered into between the Borrower and the Lender for
           the benefit of the Issuer, completed in a manner satisfactory to the
           Lender and the Issuer. The terms and conditions set forth in each
           such L/C Application shall supplement the terms and conditions
           hereof, but if the terms of any such L/C Application and the terms of
           this Agreement are inconsistent, the terms hereof shall control.

                  (b)      No Letter of Credit shall be issued with an expiry
         date later than the Termination Date in effect as of the date of
         issuance.

                  (c)      Any request to cause an Issuer to issue a Letter of
         Credit shall be deemed to be a representation by the Borrower that the
         conditions set forth in Section 4.2 have been satisfied as of the date
         of the request.

         Section 2.5. Special Account. If the Credit Facility is terminated for
any reason while any Letter of Credit is outstanding, the Borrower shall
thereupon pay the Lender in immediately available funds for deposit in the
Special Account an amount equal to the L/C Amount. The Special Account shall be
an interest bearing account maintained for the Lender by any financial
institution acceptable to the Lender. Any interest earned on amounts deposited
in the Special Account shall be credited to the Special Account. The Lender may
apply amounts on deposit in the Special Account at any time or from time to time
to the Obligations in the Lender's sole discretion. The Borrower may not
withdraw any amounts on deposit in the Special Account as long as the Lender
maintains a security interest therein. The Lender agrees to transfer any balance
in the Special Account to the Borrower when the Lender is required to release
its security interest in the Special Account under applicable law.

         Section 2.6 Payment of Amounts Drawn Under Letters of Credit;
Obligation of Reimbursement. The Borrower acknowledges that the Lender, as
co-applicant, will be liable to the Issuer for reimbursement of any and all
draws under Letters of Credit and for all other amounts required to be paid
under the applicable L/C Application. Accordingly, the Borrower shall pay to the
Lender any and all amounts required to be paid under the applicable L/C
Application, when and as required to be paid thereby, and the amounts designated
below, when and as designated:

                  (a)      The Borrower shall pay to the Lender on the day a
         draft is honored under any Letter of Credit a sum equal to all amounts
         drawn under such Letter of Credit plus any and all reasonable charges
         and expenses that the Issuer or the Lender may pay or incur relative to
         such draw and the applicable L/C Application, plus interest on all such
         amounts, charges and expenses as set forth below (the Borrower's
         obligation to pay all such amounts is herein referred to as the
         "Obligation of Reimbursement").

CREDIT AND SECURITY AGREEMENT - PAGE 14



                  (b)      Whenever a draft is submitted under a Letter of
         Credit, the Borrower authorizes the Lender to make a Revolving Advance
         in the amount of the Obligation of Reimbursement and to apply the
         proceeds of such Revolving Advance thereto. Such Revolving Advance
         shall be repayable in accordance with and be treated in all other
         respects as a Revolving Advance hereunder.

                  (c)      If a draft is submitted under a Letter of Credit when
         the Borrower is unable, because a Default Period exists or for any
         other reason, to obtain a Revolving Advance to pay the Obligation of
         Reimbursement, the Borrower shall pay to the Lender on demand and in
         immediately available funds, the amount of the Obligation of
         Reimbursement together with interest, accrued from the date of the
         draft until payment in full at the Default Rate. Notwithstanding the
         Borrower's inability to obtain a Revolving Advance for any reason, the
         Lender is irrevocably authorized, in its sole discretion, to make a
         Revolving Advance in an amount sufficient to discharge the Obligation
         of Reimbursement and all accrued but unpaid interest thereon.

                  (d)      The Borrower's obligation to pay any Revolving
         Advance made under this Section 2.6, shall be evidenced by the
         Revolving Note and shall bear interest as provided in Section 2.8.

         Section 2.7 Obligations Absolute. The Borrower's obligations arising
under Section 2.6 shall be absolute, unconditional and irrevocable, and shall be
paid strictly in accordance with the terms of Section 2.6, under all
circumstances whatsoever, including (without limitation) the following
circumstances:

                  (a)      any lack of validity or enforceability of any Letter
         of Credit or any other agreement or instrument relating to any Letter
         of Credit (collectively the "Related Documents");

                  (b)      any amendment or waiver of or any consent to
         departure from all or any of the Related Documents;

                  (c)      the existence of any claim, setoff, defense or other
         right which the Borrower may have at any time, against any beneficiary
         or any transferee of any Letter of Credit (or any persons or entities
         for whom any such beneficiary or any such transferee may be acting), or
         other person or entity, whether in connection with this Agreement, the
         transactions contemplated herein or in the Related Documents or any
         unrelated transactions;

                  (d)      any statement or any other document presented under
         any Letter of Credit proving to be forged, fraudulent, invalid or
         insufficient in any respect or any statement therein being untrue or
         inaccurate in any respect whatsoever;

                  (e)      payment by or on behalf of the Issuer under any
         Letter of Credit against presentation of a draft or certificate which
         does not strictly comply with the terms of such Letter of Credit; or

CREDIT AND SECURITY AGREEMENT - PAGE 15



                  (f)      any other circumstance or happening whatsoever,
         whether or not similar to any of the foregoing.

         Section 2.8 Interest; Additional Amounts; Default Interest;
Participations; Clearance Days; Usury.

                  (a)      NOTE. Except as set forth in Sections 2.8(c) and (f),
         the outstanding principal balance of the Note shall bear interest at
         the Floating Rate.

                  (b)      ADDITIONAL AMOUNTS. In addition to the interest
         otherwise provided for in this Agreement, but in all events subject to
         Section 2.8(f), during the term of this Agreement, an additional
         commitment fee shall accrue on a pro-rata basis each month and the
         Borrower, except as otherwise provided herein, shall pay to the Lender
         on the first day of each month of each year commencing April 1, 2004,
         such additional commitment fee in an amount equal to the difference, if
         any, between the lesser of (1) the Maximum Rate applied to the
         outstanding principal of the Obligations and (2) the positive
         difference between (x) $8,500.00 and (y) the amount of (i) fees under
         Section 2.9(c) plus (ii) interest calculated under Sections 2.8(a),
         2.8(c), 2.8(d), 2.8(e) and 2.8(f) for such calendar month, but only to
         the extent that such additional commitment fee payments do not cause
         interest on the Obligations to exceed the Maximum Rate. On the
         Termination Date, such additional commitment fee shall be due and
         payable and shall be calculated as a pro rata amount of $8,500.00 based
         upon the number of days that have elapsed since the beginning of the
         month less the amount of (1) fees under Section 2.9(c) plus (2)
         interest calculated under Sections 2.8(a), 2.8(c), 2.8(d), 2.8(e) and
         2.8(f), but only to the extent that such additional commitment fee
         payments do not cause interest on the Obligations to exceed the Maximum
         Rate.

                  (c)      DEFAULT INTEREST RATE. Upon notice to the Borrower
         from the Lender from time to time, but subject to Section 2.8(f)
         hereof, the principal of the Advances outstanding from time to time
         shall bear interest at the Default Rate, effective as of the first day
         of the fiscal month during which any Default Period begins through the
         last day of such Default Period. The Lender's election to charge the
         Default Rate shall be in its sole discretion and shall not be a waiver
         of any of its other rights and remedies. The Lender's election to
         charge interest at the Default Rate for less than the entire period
         during which the Default Rate may be charged shall not be a waiver of
         its right to later charge the Default Rate for the entire such period.

                  (d)      CLEARANCE DAYS. Notwithstanding Section 2.11(b)(ii),
         interest at the interest rate applicable under this Section 2.8 shall
         accrue on the amount of all payments (even if in the form of
         immediately available federal funds) for two (2) Banking Days for
         clearance.

                  (e)      PARTICIPATIONS. If any Person shall acquire a
         participation in the Advances or the Obligation of Reimbursement, the
         Borrower shall be obligated to the Lender to pay the full amount of all
         interest calculated under this Section 2.8, along with all other fees,
         charges and other amounts due under this Agreement, regardless if such
         Person elects to accept interest with respect to its participation at a
         lower rate than that calculated under

CREDIT AND SECURITY AGREEMENT - PAGE 16



         this Section 2.8, or otherwise elects to accept less than its pro rata
         share of such fees, charges and other amounts due under this Agreement.

                  (f)      USURY. In any event no rate change shall be put into
         effect which would result in a rate greater than the highest rate
         permitted by law. Notwithstanding anything to the contrary contained in
         any Loan Document, all agreements which either now are or which shall
         become agreements between the Borrower and the Lender are hereby
         limited so that in no contingency or event whatsoever shall the total
         liability for payments in the nature of interest, additional interest
         and other charges exceed the applicable limits imposed by any
         applicable usury laws. If any payments in the nature of interest,
         additional interest and other charges made under any Loan Document are
         held to be in excess of the limits imposed by any applicable usury
         laws, it is agreed that any such amount held to be in excess shall be
         considered payment of principal hereunder, and the indebtedness
         evidenced hereby shall be reduced by such amount so that the total
         liability for payments in the nature of interest, additional interest
         and other charges shall not exceed the applicable limits imposed by any
         applicable usury laws, in compliance with the desires of the Borrower
         and the Lender. In determining whether or not the interest paid or
         payable under any specific contingency exceeds interest calculated at
         the Maximum Rate, Borrower and Lender shall, to the maximum extent
         permitted under applicable law: (a) characterize any non-principal
         payment as an expense, fee, or premium rather than as interest, (b)
         exclude voluntary prepayments and the effects thereof, and (c)
         amortize, pro rate, allocate, and spread, in equal parts, the total
         amount of interest throughout the entire contemplated term of the
         Obligations. This provision shall never be superseded or waived and
         shall control every other provision of the Loan Documents and all
         agreements between the Borrower and the Lender, or their successors and
         assigns.

                  (g)      TAXES. The Borrower covenants and agrees as follows
         with respect to Taxes:

                           (i)      Any and all payments under each Loan
                  Document shall be made without setoff, counterclaim or other
                  defense, and free and clear of, and without deduction or
                  withholding for or on account of, any Taxes, except to the
                  extent that any such deduction or withholding is required by
                  law. In the event that any Taxes are required by law to be
                  deducted or withheld from any payment required to be made by
                  the Borrower or any Guarantor to or on behalf of Lender under
                  any Loan Document, then:

                                    A.       if such Taxes are Non-Excluded
                           Taxes, the amount of such payment shall be increased
                           as may be necessary so that such payment is made,
                           after withholding or deduction for or on account of
                           such Taxes, in an amount that is not less than the
                           amount provided for in such Loan Document; and

                                    B.       as applicable, the Borrower or the
                           Guarantor shall withhold the full amount of such
                           Taxes from such payment (as increased pursuant

CREDIT AND SECURITY AGREEMENT - PAGE 17



                           to clause (a)(i)) and shall pay such amount to the
                           governmental authority imposing such Taxes in
                           accordance with applicable law.

                           (ii)     In addition, the Borrower shall pay all
                  Other Taxes imposed to the relevant governmental authority
                  imposing such Other Taxes in accordance with applicable law.

                           (iii)    Upon request of the Lender, the Borrower
                  shall furnish to the Lender a copy of an official receipt (or
                  a certified copy thereof) evidencing the payment of such Taxes
                  or Other Taxes.

                           (iv)     As contemplated in Section 8.6 hereof, the
                  Borrower shall indemnify Lender for any Non-Excluded Taxes and
                  Other Taxes levied, imposed or assessed on (and whether or not
                  paid directly by) the Lender whether or not such Non-Excluded
                  Taxes or Other Taxes are correctly or legally asserted by the
                  relevant governmental authority. Promptly upon having
                  knowledge that any such Non-Excluded Taxes or Other Taxes have
                  been levied, imposed or assessed, and promptly upon notice
                  thereof by the Lender, the Borrower shall pay such
                  Non-Excluded Taxes or Other Taxes directly to the relevant
                  governmental authority (provided, however, that the Lender
                  shall not be under any obligation to provide any such notice
                  to the Borrower). In addition, the Borrower shall indemnify
                  the Lender for any incremental Taxes that may become payable
                  by the Lender as a result of any failure of the Borrower or
                  the Guarantor to pay any Taxes otherwise required to be paid
                  under clause (a) or (b) when due to the appropriate
                  governmental authority or to deliver to the Lender, pursuant
                  to clause (c), documentation evidencing the payment of
                  Non-Excluded Taxes or Other Taxes. With respect to
                  indemnification for Non-Excluded Taxes and Other Taxes
                  actually paid by the Lender or the indemnification provided in
                  the immediately preceding sentence, such indemnification shall
                  be made within 30 days after the date the Lender makes written
                  demand therefor. The Borrower acknowledges that any payment
                  made to the Lender or to any governmental authority in respect
                  of the indemnification obligations provided in this clause
                  shall constitute a payment in respect of which the provisions
                  of clause (a) and this clause shall apply.

                           (v)      In the event the Borrower or the Guarantor
                  makes a payment under clause (a), (b) or (d) and the Lender
                  thereafter recovers, through refund, direct payment, tax
                  credit or otherwise, the amount in respect of which the
                  payment was made, then the Lender shall reimburse the Person
                  making such payment to the extent of the Lender's recovery,
                  but not to exceed the amount of the applicable payment.

         Section 2.9 Fees.

                  (a)      ORIGINATION FEE. The Borrower shall pay the Lender a
         fully earned and non-refundable origination fee of $50,000, due and
         payable upon the execution of this Agreement.

CREDIT AND SECURITY AGREEMENT - PAGE 18



                  (b)      AUDIT FEES. The Borrower shall pay the Lender, on
         demand, audit fees in connection with any audits or inspections
         conducted by or on behalf of the Lender of any Collateral or the
         Borrower's operations or business at the rates established from time to
         time by the Lender as its audit fees (which fees are currently $800.00
         per day per auditor), together with all actual out-of-pocket costs and
         expenses incurred in conducting any such audit or inspection. Such
         audits shall be limited to four times a year absent the existence of a
         Default Period.

                  (c)      LETTER OF CREDIT FEES. The Borrower shall pay to the
         Lender a fee with respect to each Letter of Credit, if any, accruing on
         a daily basis and computed at the annual rate of two percent (2.00%),
         of the aggregate amount that may then be drawn under it assuming
         compliance with all conditions for drawing (the "Aggregate Face
         Amount"), from and including the date of issuance of such Letter of
         Credit until such date as such Letter of Credit shall terminate by its
         terms or be returned to the Lender, due and payable monthly in arrears
         on the first day of each month and on the Termination Date; provided,
         however that during Default Periods, in the Lender's sole discretion
         and without waiving any of its other rights and remedies, such fee
         shall increase to five percent (5.00%) of the Aggregate Face Amount.
         The foregoing fee shall be in addition to any and all fees, commissions
         and charges of the Issuer (other than the annual fee for issuing the
         Letter of Credit) with respect to or in connection with such Letter of
         Credit.

                  (d)      LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower
         shall pay to the Lender, on written demand, the administrative fees
         charged by the Issuer in connection with the honoring of drafts under
         any Letter of Credit, amendments thereto, transfers thereof and all
         other activity with respect to the Letters of Credit at the
         then-current rates published by the Issuer for such services rendered
         on behalf of customers of the Issuer generally.

                  (e)      TERMINATION AND LINE REDUCTION FEES. If the Credit
         Facility is terminated (i) by the Lender during a Default Period that
         begins before a Maturity Date, (ii) by the Borrower (A) as of a date
         other than a Maturity Date or (B) as of a Maturity Date but without the
         Lender having received written notice of such termination at least 90
         days before such Maturity Date, or if the Borrower reduces the Maximum
         Line, the Borrower shall pay to the Lender a fee in an amount equal to
         a percentage of the Maximum Line (or the reduction of the Maximum Line,
         as the case may be) as follows: (A) two percent (2%) if the termination
         or reduction occurs on or before the first anniversary of the Funding
         Date; (B) one percent (1%) if the termination or reduction occurs after
         the first anniversary of the Funding Date but on or before the second
         anniversary of the Funding Date; and (C) one-half of one percent (0.5%)
         if the termination or reduction occurs after the second anniversary of
         the Funding Date.

                  (f)      WAIVER OF TERMINATION FEES. The Borrower will not be
         required to pay the termination fees otherwise due under subsection (e)
         if such termination is made because of refinancing by an affiliate of
         Wells Fargo.

                  (g)      UNUSED LINE FEE. For purposes of this Section 2.9,
         "Unused Amount" means the Maximum Line reduced by any outstanding
         Advances and the aggregate

CREDIT AND SECURITY AGREEMENT - PAGE 19



         undrawn amount of all outstanding Letters of Credit. The Borrower
         agrees to pay to the Lender an unused line fee at the rate of
         three-eighths of one percent (0.375%) per annum on the daily Unused
         Amount from the date of this Agreement to and including the Termination
         Date, due and payable monthly in arrears on the first day of the month
         and on the Termination Date.

                  (h)      OTHER FEES. The Lender may from time to time, upon
         five (5) days prior notice to the Borrower during a Default Period,
         charge additional reasonable fees for Revolving Advances made and
         Letters of Credit issued in excess of Availability, for late delivery
         of reports, in lieu of imposing interest at the Default Rate, and for
         other reasons. The Borrower's request for an Advance or the issuance of
         a Letter of Credit at any time after such notice is given and such five
         (5) day period has elapsed shall constitute the Borrower's agreement to
         pay the reasonable fees described in such notice.

         Section 2.10 Time for Interest Payments; Payment on Non-Banking Days;
Computation of Interest and Fees.

                  (a)      TIME FOR INTEREST PAYMENTS. Interest accruing on
         Floating Rate Advances shall be due and payable in arrears on the last
         day of each month and on the Termination Date.

                  (b)      PAYMENT ON NON-BANKING DAYS. Whenever any payment to
         be made hereunder shall be stated to be due on a day which is not a
         Banking Day, such payment may be made on the next succeeding Banking
         Day, and such extension of time shall in such case be included in the
         computation of interest on the Advances or the fees hereunder, as the
         case may be.

                  (c)      COMPUTATION OF INTEREST AND FEES. Interest accruing
         on the outstanding principal balance of the Advances and fees hereunder
         outstanding from time to time shall be computed on the basis of actual
         number of days elapsed in a year of 360 days.

         Section 2.11 Lockbox; Collateral Account; Application of Payments.

                  (a)      LOCKBOX AND COLLATERAL ACCOUNT.

                           (i)      The Borrower shall instruct all account
                  debtors to pay all Accounts directly to the Lockbox. If,
                  notwithstanding such instructions, the Borrower receives any
                  payments on Accounts, the Borrower shall deposit such payments
                  into the Collateral Account. The Borrower shall also deposit
                  all other cash proceeds of Collateral directly to the
                  Collateral Account. Until so deposited, the Borrower shall
                  hold all such payments and cash proceeds in trust for and as
                  the property of the Lender and shall not commingle such
                  property with any of its other funds or property. All deposits
                  in the Collateral Account shall constitute proceeds of
                  Collateral and shall not constitute payment of the
                  Obligations.

                           (ii)     All items deposited in the Collateral
                  Account shall be subject to final payment. If any such item is
                  returned uncollected, the Borrower will immediately pay the
                  Lender, or, for items deposited in the Collateral Account, the

CREDIT AND SECURITY AGREEMENT - PAGE 20



                  bank maintaining such account, the amount of that item, or
                  such bank at its discretion may charge any uncollected item to
                  the Borrower's commercial account or other account. The
                  Borrower shall be liable as an endorser on all items deposited
                  in the Collateral Account, whether or not in fact endorsed by
                  the Borrower.

                  (b)      APPLICATION OF PAYMENTS.

                           (i)      The Borrower may, from time to time, in
                  accordance with the Lockbox and Collection Account Agreement,
                  cause funds in the Collateral Account to be transferred to the
                  Lender's general account for payment of the Obligations.
                  Except as provided in the preceding sentence, amounts
                  deposited in the Collateral Account shall not be subject to
                  withdrawal by the Borrower, except after full payment and
                  discharge of all Obligations.

                           (ii)     All payments to the Lender shall be made in
                  immediately available funds and shall be applied to the
                  Obligations upon receipt by the Lender. Funds received from
                  the Collateral Account shall be deemed to be immediately
                  available. The Lender may hold all payments not constituting
                  immediately available funds for one (1) additional Banking Day
                  before applying them to the Obligations.

         Section 2.12 Voluntary Prepayment; Reduction of the Maximum Line;
Termination of the Credit Facility by the Borrower. Except as otherwise provided
herein, the Borrower may prepay the Advances in whole at any time or from time
to time in part without penalty. The Borrower may terminate the Credit Facility
or reduce the Maximum Line at any time if it (i) gives the Lender at least 30
days' prior written notice and (ii) pays the Lender termination or Maximum Line
reduction fees in accordance with Section 2.9(e). Any reduction in the Maximum
Line must be in an amount of not less than $500,000.00 or an integral multiple
thereof. If the Borrower reduces the Maximum Line to zero, all Obligations shall
be immediately due and payable. Subject to termination of the Credit Facility
and payment and performance of all Obligations, the Lender shall, at the
Borrower's expense, release or terminate the Security Interest and the Security
Documents to which the Borrower is entitled by law.

         Section 2.13 Mandatory Prepayment. Without notice or demand, if the sum
of the outstanding principal balance of the Revolving Advances plus the L/C
Amount shall at any time exceed the Borrowing Base, the Borrower shall (i)
first, immediately prepay the Revolving Advances to the extent necessary to
eliminate such excess; and (ii) if prepayment in full of the Revolving Advances
is insufficient to eliminate such excess, pay to the Lender in immediately
available funds for deposit in the Special Account an amount equal to the
remaining excess. Any payment received by the Lender under this Section 2.13 or
under Section 2.12 may be applied to the Obligations, in such order and in such
amounts as the Lender, in its discretion, may from time to time determine.

         Section 2.14 Revolving Advances to Pay Obligations. Notwithstanding
anything in Section 2.1, the Lender may, in its discretion at any time or from
time to time, without the Borrower's request and even if the conditions set
forth in Section 4.2 would not be satisfied,

CREDIT AND SECURITY AGREEMENT - PAGE 21



make a Revolving Advance in an amount equal to the portion of the Obligations
from time to time due and payable.

         Section 2.15 Use of Proceeds. The Borrower shall use the proceeds of
Advances and each Letter of Credit for ordinary working capital purposes and for
repayment of outstanding indebtedness to KBK Financial, Inc. and 1st Source
Bank.

         Section 2.16 Liability Records. The Lender may maintain from time to
time, at its discretion, records as to the Obligations. All entries made on any
such record shall be presumed correct until the Borrower establishes the
contrary. Upon the Lender's demand, the Borrower will admit and certify in
writing the exact principal balance of the Obligations that the Borrower then
asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within 30 days after
receipt. Section 2.17.........Renewal. Unless terminated (a) by the Lender (i)
by giving written notice to the Borrower no less than ninety (90) days prior to
the Maturity Date or (ii) in accordance with Section 7.2, or (b) by the Borrower
(i) by giving written notice to the Lender no less than ninety (90) days prior
to the Maturity Date or (ii) in accordance with Section 2.12, the Credit
Facility shall remain in effect until the Original Maturity Date, and,
thereafter, shall automatically renew for successive one-year periods. "Maturity
Date" shall initially mean the Original Maturity Date; provided, however, that
if at any time the Credit Facility has been automatically renewed, "Maturity
Date" shall mean the one-year anniversary of the date that was formerly the
Maturity Date.

         Section 2.18 Guarantor Collateral Accounts.

                  (a)      GUARANTOR COLLATERAL ACCOUNT.

                           (i)      The Borrower shall cause each Guarantor to
                  instruct all account debtors to pay all Accounts directly to
                  the Lockbox. If, notwithstanding such instructions, the
                  Guarantor receives any payments on Accounts, the Borrower
                  shall cause the Guarantor to deposit such payments into the
                  Collateral Account. Until so deposited, the Borrower shall
                  cause the Guarantor to agree to hold all such payments and
                  cash proceeds in trust for and as the property of the Lender
                  and not commingle such property with any of the Guarantor's
                  other funds or property. All deposits in the Collateral
                  Account shall constitute Collateral and proceeds of Collateral
                  and shall not constitute payment of the Obligations.

                           (ii)     All items deposited in the Collateral
                  Account shall be subject to final payment. If any such item is
                  returned uncollected, the Borrower shall cause the Guarantor
                  to immediately pay the Lender, or, for items deposited in the
                  Collateral Account, the bank maintaining such account, the
                  amount of that item, or such bank at its discretion may charge
                  any uncollected item to the Guarantor's commercial account or
                  other account. The Guarantor shall be liable as an endorser on
                  all items deposited in the Collateral Account, whether or not
                  in fact endorsed by the Guarantor.

CREDIT AND SECURITY AGREEMENT - PAGE 22



                  (b)      APPLICATION OF PAYMENTS. (i) The Guarantor may, from
         time to time, cause funds in the Collateral Account to be transferred
         to the Lender's general account for payment of the Obligations. Except
         as provided in the preceding sentence, amounts deposited in the
         Collateral Account shall not be subject to withdrawal by the Guarantor,
         except after full payment and discharge of all Obligations.

                           (i)      All payments to the Lender shall be made in
                  immediately available funds and shall be applied to the
                  Obligations upon receipt by the Lender. Funds received from
                  the Collateral Account will be applied when available.

                                  ARTICLE III

                      SECURITY INTEREST; OCCUPANCY; SETOFF

         Section 3.1 Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender a lien and security interest (collectively
referred to as the "Security Interest") in the Collateral, as security for the
payment and performance of the Obligations. Upon request by the Lender, the
Borrower will grant the Lender a security interest in all commercial tort claims
it may have against any Person.

         Section 3.2 Notification of Account Debtors and Other Obligors. The
Lender may at any time during the existence of a Default Period notify any
account debtor or other person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.

         Section 3.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including proceeds of insurance and refunds of
unearned premiums) due or to become due under, and all other rights of the
Borrower with respect to, any and all policies of insurance now or at any time
hereafter covering the Collateral (which, for avoidance of doubt, excludes
Aircraft and cargo transported for third Persons) or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. With respect to Collateral, at any time, whether or not a Default Period
exists, the Lender may (but need not), in the Lender's name or in the Borrower's
name, execute and deliver proof of claim, receive all such monies, endorse
checks

CREDIT AND SECURITY AGREEMENT - PAGE 23



and other instruments representing payment of such monies, and adjust,
litigate, compromise or release any claim against the issuer of any such policy.

         Section 3.4 Occupancy.

                  (a)      The Borrower hereby irrevocably grants to the Lender
         the right to take nonexclusive possession of the Premises at any time
         during a Default Period. Such right of possession shall be sufficient
         for the Lender to access the Collateral and all records pertaining
         thereto and to enforce its rights with respect to such Collateral
         without interference from the Borrower or any other Person.

                  (b)      The Lender may use the Premises only to hold,
         process, manufacture, sell, use, store, liquidate, realize upon or
         otherwise dispose of goods that are Collateral and for other purposes
         that the Lender may in good faith deem to be related or incidental
         purposes.

                  (c)      The Lender's right to hold the Premises shall cease
         and terminate upon the earlier of (i) payment in full and discharge of
         all Obligations and termination of the Credit Facility, and (ii) final
         sale or disposition of all goods constituting Collateral and delivery
         of all such goods to purchasers.

                  (d)      The Lender shall not be obligated to pay or account
         for any rent or other compensation for the possession, occupancy or use
         of any of the Premises; provided, however, that if the Lender does pay
         or account for any rent or other compensation for the possession,
         occupancy or use of any of the Premises, the Borrower shall reimburse
         the Lender promptly for the full amount thereof. In addition, the
         Borrower will pay, or reimburse the Lender for, all taxes, fees,
         duties, imposts, charges and expenses at any time incurred by or
         imposed upon the Lender by reason of the execution, delivery,
         existence, recordation, performance or enforcement of this Agreement or
         the provisions of this Section 3.4.

         Section 3.5 License. Without limiting the generality of any other
Security Document, the Borrower hereby grants to the Lender a non-exclusive,
worldwide and royalty-free license to use or otherwise exploit all Intellectual
Property Rights of the Borrower for the purpose of: (a) completing the
manufacture of any in-process materials during any Default Period so that such
materials become saleable Inventory, all in accordance with the same quality
standards previously adopted by the Borrower for its own manufacturing and
subject to the Borrower's reasonable exercise of quality control; and (b)
selling, leasing or otherwise disposing of any or all Collateral during any
Default Period.

         Section 3.6 Financing Statement. The Borrower authorizes the Lender to
file from time to time where permitted by law, such financing statements against
Collateral described as "all personal property (excluding Aircraft and stock
issued by Kitty Hawk Aircargo, Inc., a Texas corporation, and Kitty Hawk Cargo,
Inc., a Delaware corporation)" or describing specific items of Collateral
including commercial tort claims as the Lender deems necessary or useful to
perfect the Security Interest. A carbon, photographic or other reproduction of
this Agreement or of any financing statements signed by the Borrower is
sufficient as a financing statement and

CREDIT AND SECURITY AGREEMENT - PAGE 24



may be filed as a financing statement in any state to perfect the security
interests granted hereby. For this purpose, the following information is set
forth:

           Name and address of Debtor:

           Kitty Hawk, Inc.
           1515 W. 20th Street
           P. O. Box 612787
           DFW Airport, Texas  75261
           Federal Employer Identification No. 75-2564006
           Organizational Identification No. (DE) 2445463

           Name and address of Secured Party:

           Wells Fargo Business Credit, Inc.
           4975 Preston Park Blvd., Suite 280
           Plano, Texas 75093
           Federal Employer Identification No. 41-1237652

         Section 3.7 Setoff. The Lender may at any time or from time to time
during a Default Period, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any Obligation, whether or not due. In addition,
each other Person holding a participating interest in any Obligations shall have
the right to appropriate or setoff any deposit or other liability then owed by
such Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating interest.

         Section 3.8 Collateral. (a) This Agreement does not contemplate a sale
of accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application. The Lender has no obligation to clean-up or otherwise prepare the
Collateral for sale. The Borrower waives any right it may have to require the
Lender to pursue any third person for any of the Obligations.

         (b)      Within 45 days of obtaining verification of registration of
any trademarks with the United States Patent and Trademark Office, the Borrower
will, and will cause each Guarantor to, execute and deliver to the Lender
Trademark Security Agreements. Within 60 days of the date of this Agreement, the
Borrower will, and will cause each Guarantor to, deliver landlord's disclaimers
and consents (or other subordination agreements) satisfactory to the Lender in
its

CREDIT AND SECURITY AGREEMENT - PAGE 25



sole discretion covering the Premises leased at the Dallas-Fort Worth
International Airport and the Fort Wayne Indiana Airport.

                                   ARTICLE IV

                              CONDITIONS OF LENDING

         Section 4.1 Conditions Precedent to the Initial Revolving Advance and
Letter of Credit. The Lender's obligation to make the initial Advance hereunder
or to cause any Letters of Credit to be issued shall be subject to the condition
precedent that the Lender shall have received all of the following, each in form
and substance satisfactory to the Lender:

                  (a)      This Agreement, properly executed by the Borrower.

                  (b)      The Note, properly executed by the Borrower.

                  (c)      A true and correct copy of any and all leases
         pursuant to which a Loan Party is leasing the Premises.

                  (d)      A true and correct copy of any and all mortgages
         pursuant to which a Loan Party has mortgaged the Premises, together
         with a mortgagee's disclaimer and consent with respect to each such
         mortgage.

                  (e)      A true and correct copy of any and all agreements
         pursuant to which Collateral is in the possession of any Person other
         than such Loan Party, together with, in the case of any goods held by
         such Person for resale, (i) a consignee's acknowledgment and waiver of
         Liens, (ii) UCC financing statements sufficient to protect such Loan
         Party's and the Lender's interests in such goods, and (iii) UCC
         searches showing that no other secured party has filed a financing
         statement against such Person and covering property similar to such
         Loan Party's other than such Loan Party, or if there exists any such
         secured party, evidence that each such secured party has received
         notice from such Loan Party and the Lender sufficient to protect the
         Borrower's and the Lender's interests in such Collateral from any claim
         by such secured party.

                  (f)      An acknowledgment and waiver of Liens from each
         warehouse in which a Loan Party is storing Inventory.

                  (g)      A true and correct copy of any and all agreements
         pursuant to which Collateral is in the possession of any Person other
         than such Loan Party, together with, (i) an acknowledgment and waiver
         of Liens from each subcontractor who has possession of such Loan
         Party's goods from time to time, (ii) UCC financing statements
         sufficient to protect such Loan Party's and the Lender's interests in
         such goods, and (iii) UCC searches showing that no other secured party
         has filed a financing statement covering such Person's property other
         than such Loan Party, or if there exists any such secured party,
         evidence that each such secured party has received notice from such
         Loan Party and the Lender sufficient to protect such Loan Party's and
         the Lender's interests in such Collateral from any claim by such
         secured party.

CREDIT AND SECURITY AGREEMENT - PAGE 26



                  (h)      The Lockbox and Collection Account Agreements,
         properly executed by Wells Fargo Bank and each Loan Party party to such
         Lockbox and Collection Account Agreement.

                  (i)      Control agreements, properly executed by each Loan
         Party and each bank at which such Loan Party maintains deposit or
         investment accounts.

                  (j)      Current searches of appropriate filing offices
         showing that (i) no Liens have been filed and remain in effect against
         any Loan Party except Permitted Liens or Liens held by Persons who have
         agreed in writing that upon receipt of proceeds of the initial
         Advances, they will satisfy, release or terminate such Liens in a
         manner satisfactory to the Lender, and (ii) the Lender has duly filed
         all financing statements necessary to perfect the Security Interest, to
         the extent the Security Interest is capable of being perfected by
         filing.

                  (k)      A certificate of the Secretary or Assistant Secretary
         of each Loan Party certifying that attached to such certificate are (i)
         the resolutions of such Loan Party's Directors and, if required,
         Owners, authorizing the execution, delivery and performance of the Loan
         Documents, (ii) true, correct and complete copies of such Loan Party's
         Constituent Documents, and (iii) examples of the signatures of such
         Loan Party's Officers or agents authorized to execute and deliver the
         Loan Documents and other instruments, agreements and certificates,
         including with respect to the Borrower, Advance requests on the
         Borrower's behalf.

                  (l)      A current certificate issued by the Secretary of
         State of the jurisdiction of organization of each Loan Party,
         certifying that such Loan Party is in compliance with all applicable
         organizational requirements of such state.

                  (m)      Evidence that each Loan Party is duly licensed or
         qualified to transact business in Indiana and Texas.

                  (n)      A certificate of an Officer of the Borrower
         confirming, in his corporate capacity, the representations and
         warranties set forth in Article V.

                  (o)      An opinion of counsel to the Loan Parties addressed
         to the Lender.

                  (p)      Certificates of the insurance required hereunder,
         with all hazard insurance containing a lender's loss payable
         endorsement in the Lender's favor and with all liability insurance
         naming the Lender as an additional insured.

                  (q)      Payment of the fees and commissions due under Section
         2.9 through the date of the initial Advance or Letter of Credit and
         expenses incurred by the Lender through such date and required to be
         paid by the Borrower under Section 8.5, including all legal expenses
         incurred through the date of this Agreement.

                  (r)      Evidence that after making the initial Revolving
         Advance, satisfying all obligations owed to prior lenders, satisfying
         all trade payables older than 60 days from invoice date, book
         overdrafts and closing costs, Availability, plus the Borrower's Liquid

CREDIT AND SECURITY AGREEMENT - PAGE 27



         Assets held in accounts with Wells Fargo or Wells Fargo Investments in
         which the Lender has a perfected, first priority Lien, shall be not
         less than $12,500,000.

                  (s)      A guaranty, properly executed by each Guarantor a
         party thereto pursuant to which the Guarantor unconditionally
         guarantees the Obligations.

                  (t)      The Security Agreements, properly executed by each
         Guarantor party thereto.

                  (u)      The Contribution and Indemnification Agreement
         properly executed by the Loan Parties and the Lender.

                  (v)      Such other documents as the Lender in its sole
         discretion may require.

         Section 4.2 Conditions Precedent to All Advances and Letters of Credit.
The Lender's obligation to make each Advance and to cause each Letter of Credit
to be issued shall be subject to the further conditions precedent that:

                  (a)      the representations and warranties contained in
         Article V are correct on and as of the date of such Advance or issuance
         of a Letter of Credit as though made on and as of such date, except to
         the extent that such representations and warranties relate solely to an
         earlier date; and

                  (b)      no event has occurred and is continuing, or would
         result from such Advance or issuance of a Letter of Credit which
         constitutes a Default or an Event of Default.

                                   ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

           The Borrower represents and warrants to the Lender as follows:

         Section 5.1 Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Federal Employer Identification Number. The
Borrower is a corporation, duly organized, validly existing and in good standing
under the laws of the State of Delaware and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property owned
or leased or the nature of the business transacted by it makes such licensing or
qualification necessary. The Borrower has all requisite power and authority to
conduct its business, to own its properties and to execute and deliver, and to
perform all of its obligations under, the Loan Documents. During its existence,
the Borrower has done business solely under the names set forth in Schedule 5.1.
The Borrower's chief executive office and principal place of business is located
at the address set forth in Schedule 5.1 and all of the Borrower's records
relating to its business or the Collateral are kept at that location. All
Inventory and Equipment is located at that location or at one of the other
locations listed in Schedule 5.1. The Borrower's federal employer identification
number is correctly set forth in Section 3.6.

CREDIT AND SECURITY AGREEMENT - PAGE 28



         Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and
complete list of all ownership interests of the Borrower and rights to acquire
ownership interests including the beneficial owner, number of interests and
percentage interests on a fully diluted basis (to the extent such information is
readily available from public information filed with the Securities and Exchange
Commission), and an organizational chart showing the ownership structure of all
Subsidiaries of the Borrower.

         Section 5.3 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's Owners; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including Regulation X of the
Board of Governors of the Federal Reserve System) or of any order, writ,
injunction or decree presently in effect having applicability to the Borrower or
of the Borrower's Constituent Documents; (iv) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Borrower is a party
or by which it or its properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any Lien (other than the Security
Interest) upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.

         Section 5.4 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.

         Section 5.5 Subsidiaries. Except for the Guarantors, the Borrower has
no Subsidiaries.

         Section 5.6 Financial Condition; No Adverse Change. The Borrower has
furnished to the Lender its audited consolidated and consolidating financial
statements for its fiscal year ended December 31, 2002, and unaudited
consolidated and consolidating financial statements for the fiscal-year-to-date
period ended November 30, 2003, and those statements fairly present the
Borrower's and its Subsidiaries' financial condition on the dates thereof and
the results of its operations and cash flows for the periods then ended and were
prepared in accordance with GAAP. Since the date of the most recent financial
statements, there has been no material adverse change in the Borrower's or its
Subsidiaries' business, properties or condition (financial or otherwise).

         Section 5.7 Litigation. Except as set forth on Schedule 5.7, there are
no actions, suits or proceedings pending or, to the Borrower's knowledge,
threatened against or affecting the Borrower or any of its Affiliates or the
properties of the Borrower or any of its Affiliates before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower or any of
its Affiliates,

CREDIT AND SECURITY AGREEMENT - PAGE 29



would have a material adverse effect on the financial condition, properties or
operations of the Borrower or any of its Affiliates.

         Section 5.8 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.

         Section 5.9 Taxes. The Borrower and its Affiliates have paid or caused
to be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them, except certain taxes relating to
periods prior to the Borrower's emergence from bankruptcy that have been fully
reserved-for in accordance with GAAP. The Borrower and its Affiliates have filed
all federal, state and local tax returns which to the knowledge of the Officers
of the Borrower or any Affiliate, as the case may be, are required to be filed,
and the Borrower and its Affiliates have paid or caused to be paid to the
respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due,
except certain taxes relating to periods prior to the Borrower's emergence from
bankruptcy that have been fully reserved-for in accordance with GAAP.

         Section 5.10 Titles and Liens. The Borrower has good title to all
Collateral free and clear of all Liens other than Permitted Liens. No financing
statement naming the Borrower as debtor is on file in any office except to
perfect only Permitted Liens.

         Section 5.11 Intellectual Property Rights.

                  (a)      OWNED INTELLECTUAL PROPERTY. Schedule 5.11 is a
         complete list of all patents, applications for patents, trademarks,
         applications for trademarks, service marks, applications for service
         marks, mask works, trade dress and copyrights for which the Borrower is
         the registered owner (the "Owned Intellectual Property"). Except as
         disclosed on Schedule 5.11, (i) the Borrower owns the Owned
         Intellectual Property free and clear of all restrictions (including
         covenants not to sue a third party), court orders, injunctions,
         decrees, writs or Liens, whether by written agreement or otherwise,
         (ii) no Person other than the Borrower owns or has been granted any
         right in the Owned Intellectual Property, (iii) all Owned Intellectual
         Property is valid, subsisting and enforceable and (iv) the Borrower has
         taken all commercially reasonable action necessary to maintain and
         protect the Owned Intellectual Property.

                  (b)      AGREEMENTS WITH EMPLOYEES AND CONTRACTORS. The
         Borrower has entered into a legally enforceable agreement with each of
         its employees and subcontractors obligating each such Person to assign
         to the Borrower, without any additional compensation, any Intellectual
         Property Rights created, discovered or invented by such Person in the
         course of such Person's employment or engagement with the Borrower
         (except to the extent prohibited by law), and further requiring such
         Person to cooperate with the Borrower, without any additional
         compensation, in connection with securing and enforcing any
         Intellectual Property Rights therein; PROVIDED, HOWEVER, that the
         foregoing

CREDIT AND SECURITY AGREEMENT - PAGE 30



         shall not apply with respect to employees and subcontractors whose job
         descriptions are of the type such that no such assignments are
         reasonably foreseeable.

                  (c)      INTELLECTUAL PROPERTY RIGHTS LICENSED FROM OTHERS.
         Schedule 5.11 is a complete list of all agreements under which the
         Borrower has licensed Intellectual Property Rights from another Person
         ("Licensed Intellectual Property") other than readily available,
         non-negotiated licenses of computer software and other intellectual
         property used solely for performing accounting, word processing and
         similar administrative tasks ("Off-the-shelf Software") and a summary
         of any ongoing payments the Borrower is obligated to make with respect
         thereto. Except as disclosed on Schedule 5.11 and in written agreements
         copies of which have been given to the Lender, the Borrower's licenses
         to use the Licensed Intellectual Property are free and clear of all
         restrictions, Liens, court orders, injunctions, decrees, or writs,
         whether by written agreement or otherwise. Except as disclosed on
         Schedule 5.11, the Borrower is not obligated or under any liability
         whatsoever to make any payments of a material nature by way of
         royalties, fees or otherwise to any owner of, licensor of, or other
         claimant to, any Intellectual Property Rights.

                  (d)      OTHER INTELLECTUAL PROPERTY NEEDED FOR BUSINESS.
         Except for Off-the-shelf Software and as disclosed on Schedule 5.11,
         the Owned Intellectual Property and the Licensed Intellectual Property
         constitute all Intellectual Property Rights used or necessary to
         conduct the Borrower's business as it is presently conducted or as the
         Borrower reasonably foresees conducting it.

                  (e)      INFRINGEMENT. Except as disclosed on Schedule 5.11,
         the Borrower has no knowledge of, and has not received any written
         claim or notice alleging, any Infringement of another Person's
         Intellectual Property Rights (including any written claim that the
         Borrower must license or refrain from using the Intellectual Property
         Rights of any third party) nor, to the Borrower's knowledge, is there
         any threatened claim or any reasonable basis for any such claim.

         Section 5.12 Plans. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any ERISA Affiliate (i) maintains
or has maintained any Pension Plan, (ii) contributes or has contributed to any
Multiemployer Plan or (iii) provides or has provided post-retirement medical or
insurance benefits with respect to employees or former employees (other than
benefits required under Section 601 of ERISA, Section 4980B of the IRC or
applicable state law). Neither the Borrower nor any ERISA Affiliate has received
any notice or has any knowledge to the effect that it is not in full compliance
with any of the requirements of ERISA, the IRC or applicable state law with
respect to any Plan. No Reportable Event exists in connection with any Pension
Plan. Each Plan which is intended to qualify under the IRC is so qualified, and
no fact or circumstance exists which may have an adverse effect on the Plan's
tax-qualified status. Neither the Borrower nor any ERISA Affiliate has (i) any
accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the IRC) under any Plan, whether or not waived, (ii) any liability under
Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan or (iii) any
liability or knowledge of any facts or circumstances which could result in any
liability to the Pension Benefit Guaranty Corporation, the Internal Revenue
Service, the Department of

CREDIT AND SECURITY AGREEMENT - PAGE 31



Labor or any participant in connection with any Plan (other than routine claims
for benefits under the Plan).

         Section 5.13 Default. The Borrower is in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on the Borrower's financial condition,
properties, or operations.

         Section 5.14 Environmental Matters.

                  (a)      To the Borrower's best knowledge, the Borrower has
         not handled or disposed of Hazardous Substances in such a manner as to
         create any material liability under any Environmental Law.

                  (b)      There are not and (to the Borrower's knowledge) there
         never have been any requests, claims, notices, investigations, demands,
         administrative proceedings, hearings or litigation, relating in any way
         to the Premises or the Borrower, alleging material liability under,
         violation of, or noncompliance with any Environmental Law or any
         license, permit or other authorization issued pursuant thereto. To the
         Borrower's best knowledge, no such matter is threatened or impending.

                  (c)      To the Borrower's best knowledge, the Borrower's
         businesses are and have in the past always been conducted in accordance
         with all Environmental Laws and all licenses, permits and other
         authorizations required pursuant to any Environmental Law and necessary
         for the lawful and efficient operation of such businesses are in the
         Borrower's possession and are in full force and effect. No permit
         required under any Environmental Law is scheduled to expire within 12
         months and there is no threat that any such permit will be withdrawn,
         terminated, limited or materially changed.

                  (d)      To the Borrower's best knowledge, the Premises are
         not and never have been listed on the National Priorities List, the
         Comprehensive Environmental Response, Compensation and Liability
         Information System or any similar federal, state or local list,
         schedule, log, inventory or database.

         Section 5.15 Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is, in the case
of information delivered prior to the Funding Date, and will be on the date of
submission, in the case of subsequent information, (i) true and correct in all
material respects, (ii) does not omit any material fact necessary to make such
information not misleading and, (iii) as to projections, valuations or proforma
financial statements, present a good faith opinion as to such projections,
valuations and proforma condition and results.

         Section 5.16 Financing Statements. The Borrower has authorized the
filing of financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral which
is capable of being perfected by filing financing statements. None of the
Collateral is or

CREDIT AND SECURITY AGREEMENT - PAGE 32



will become a fixture on real estate, unless a sufficient fixture filing is in
effect with respect thereto.

         Section 5.17 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral is (or, in the case of all future Collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.

         Section 5.18 Financial Solvency. Both before and immediately after
giving effect to all of the transactions contemplated in the Loan Documents,
none of the Borrower or its Affiliates:

                  (a)      was or will be insolvent, as that term is used and
         defined in Section 101(32) of the United States Bankruptcy Code and
         Section 2 of the Uniform Fraudulent Transfer Act;

                  (b)      has unreasonably small capital (as such phrase is
         used in the solvency and bankruptcy contexts only) or is engaged or
         about to engage in a business or a transaction for which any remaining
         assets of the Borrower or such Affiliate are unreasonably small;

                  (c)      by executing, delivering or performing its
         obligations under the Loan Documents to which it is a party or by
         taking any action with respect thereto, intends to, nor believes that
         it will, incur debts beyond its ability to pay them as they mature;

                  (d)      by executing, delivering or performing its
         obligations under the Loan Documents to which it is a party or by
         taking any action with respect thereto, intends to hinder, delay or
         defraud either its present or future creditors; and

                  (e)      at this time contemplates filing a petition in
         bankruptcy or for an arrangement or reorganization or similar
         proceeding under any law any jurisdiction, nor, to the best knowledge
         of the Borrower, is the subject of any actual, pending or threatened
         bankruptcy, insolvency or similar proceedings under any law of any
         jurisdiction.

                                   ARTICLE VI

                                    COVENANTS

          So long as the Obligations shall remain unpaid, or (if there are no
outstanding Obligations) the Credit Facility shall remain in effect, the
Borrower will comply with the following requirements, unless the Lender shall
otherwise consent in writing:

         Section 6.1 Reporting Requirements. The Borrower will deliver, or cause
to be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:

                  (a)      ANNUAL FINANCIAL STATEMENTS. To the extent the
         Borrower is not a public reporting company or has not timely filed its
         Form 10-K with the Securities Exchange

CREDIT AND SECURITY AGREEMENT - PAGE 33



         Commission, as soon as available, and in any event within 120 days
         after the end of each fiscal year of the Borrower, the Borrower will
         deliver, or cause to be delivered, to the Lender, the Borrower's
         audited financial statements with the unqualified opinion of
         independent certified public accountants selected by the Borrower and
         acceptable to the Lender, which annual financial statements shall
         include the Borrower's balance sheet as at the end of such fiscal year
         and the related statements of the Borrower's income, retained earnings
         and cash flows for the fiscal year then ended, prepared on a
         consolidating and consolidated basis to include any Affiliates, all in
         reasonable detail and prepared in accordance with GAAP, together with
         (i) copies of all management letters prepared by such accountants; (ii)
         a report signed by such accountants stating that in making the
         investigations necessary for said opinion they obtained no knowledge,
         except as specifically stated, of any Default or Event of Default and
         all relevant facts in reasonable detail to evidence, and the
         computations as to, whether or not the Borrower is in compliance with
         the Financial Covenants; and (iii) a certificate of the Borrower's
         chief financial officer stating that such financial statements have
         been prepared in accordance with GAAP, fairly represent the Borrower's
         financial position and the results of its operations, and whether or
         not such officer has knowledge of the occurrence of any Default or
         Event of Default and, if so, stating in reasonable detail the facts
         with respect thereto.

                  (b)      MONTHLY FINANCIAL STATEMENTS. As soon as available
         and in any event within 25 days after the end of each month, the
         Borrower will deliver to the Lender an unaudited/internal balance sheet
         and statements of income and retained earnings of the Borrower as at
         the end of and for such month and for the year to date period then
         ended, prepared, if the Lender so requests, on a consolidating and
         consolidated basis to include any Affiliates, in reasonable detail and
         stating in comparative form the figures for the corresponding date and
         periods in the previous year, all prepared in accordance with GAAP,
         subject to year-end audit adjustments; and accompanied by a certificate
         of the Borrower's chief financial Officer, substantially in the form of
         Exhibit B hereto stating (i) that such financial statements have been
         prepared in accordance with GAAP, subject to year-end audit adjustments
         and fairly represent the Borrower's financial position and the results
         of its operations, (ii) whether or not such officer has knowledge of
         the occurrence of any Default or Event of Default not theretofore
         reported and remedied and, if so, stating in reasonable detail the
         facts with respect thereto, and (iii) all relevant facts in reasonable
         detail to evidence, and the computations as to, whether or not the
         Borrower is in compliance with the Financial Covenants.

                  (c)      COLLATERAL REPORTS. Within three (3) Banking Days
         after the end of each week if a Monthly Period is not in effect and
         within 15 days after the end of each month if a Monthly Period is in
         effect, the Borrower will deliver to the Lender agings of the
         Borrower's accounts receivable and its accounts payable, an inventory
         certification report, and a calculation of the Borrower's Accounts and
         Eligible Accounts, and Inventory as at the end of such month or week as
         applicable. Daily reporting may be required while a Default exists.

                  (d)      PROJECTIONS. At least 30 days before the beginning of
         each fiscal year of the Borrower, the Borrower will deliver to the
         Lender the projected balance sheets and

CREDIT AND SECURITY AGREEMENT - PAGE 34



         income statements for each month of such year, each in reasonable
         detail, representing the Borrower's good faith projections and
         certified by the Borrower's chief financial officer as being the most
         accurate projections available and identical to the projections used by
         the Borrower for internal financial planning purposes (provided that
         such projections may be more conservative than the projections used to
         plan management performance goals or objectives), together with a
         statement of underlying assumptions and such supporting schedules and
         information as the Lender may reasonably require.

                  (e)      LITIGATION. Immediately after the commencement
         thereof, the Borrower will deliver to the Lender notice in writing of
         all litigation and of all proceedings before any governmental or
         regulatory agency affecting the Borrower (i) of the type described in
         Section 5.14(c) or (ii) which seek a monetary recovery against the
         Borrower in excess of $150,000.00.

                  (f)      DEFAULTS. As promptly as practicable (but in any
         event not later than five Banking Days) after an Officer of the
         Borrower obtains knowledge of the occurrence of any Default or Event of
         Default, the Borrower will deliver to the Lender notice of such
         occurrence, together with a detailed statement by a responsible Officer
         of the Borrower of the steps being taken by the Borrower to cure the
         effect thereof.

                  (g)      PLANS. As soon as possible, and in any event within
         30 days after the Borrower knows or has reason to know that any
         Reportable Event with respect to any Pension Plan has occurred, the
         Borrower will deliver to the Lender a statement of the Borrower's chief
         financial Officer setting forth details as to such Reportable Event and
         the action which the Borrower proposes to take with respect thereto,
         together with a copy of the notice of such Reportable Event to the
         Pension Benefit Guaranty Corporation. As soon as possible, and in any
         event within 10 days after the Borrower fails to make any quarterly
         contribution required with respect to any Pension Plan under Section
         412(m) of the IRC, the Borrower will deliver to the Lender a statement
         of the Borrower's chief financial Officer setting forth details as to
         such failure and the action which the Borrower proposes to take with
         respect thereto, together with a copy of any notice of such failure
         required to be provided to the Pension Benefit Guaranty Corporation. As
         soon as possible, and in any event with 10 days after the Borrower
         knows or has reason to know that it has or is reasonably expected to
         have any liability under Section 4201 or 4243 of ERISA for any
         withdrawal, partial withdrawal, reorganization or other event under any
         Multiemployer Plan, the Borrower will deliver to the Lender a statement
         of the Borrower's chief financial Officer setting forth details as to
         such liability and the action which Borrower proposes to take with
         respect thereto.

                  (h)      DISPUTES. Within five (5) Banking Days of knowledge
         thereof, the Borrower will deliver to the Lender notice of (i) any
         material disputes or claims by the Borrower's customers in excess of
         $150,000.00; (ii) credit memos; (iii) any goods returned to or
         recovered by the Borrower.

                  (i)      OFFICERS AND DIRECTORS. Promptly upon knowledge
         thereof, the Borrower will deliver to the Lender notice of any change
         in the persons constituting (i) the Borrower's Officers with the
         position of Vice President or above or irrespective of title,

CREDIT AND SECURITY AGREEMENT - PAGE 35



         who have significant management, operational or executive
         responsibilities, and (ii) Directors.

                  (j)      COLLATERAL. Promptly upon knowledge thereof, the
         Borrower will deliver to the Lender notice of any material loss of or
         material damage to any Collateral or of any substantial adverse change
         in any Collateral or the prospect of payment thereof.

                  (k)      COMMERCIAL TORT CLAIMS. Promptly upon knowledge
         thereof, the Borrower will deliver to the Lender notice of any
         commercial tort claims in excess of $150,000.00 it may bring against
         any person, including the name and address of each defendant, a summary
         of the facts, an estimate of the Borrower's damages, copies of any
         complaint or demand letter submitted by the Borrower, and such other
         information as the Lender may request.

                  (l)      INTELLECTUAL PROPERTY.

                           (i)      The Borrower will give the Lender 30 days
                  prior written notice of its intent to acquire material
                  Intellectual Property Rights; except for transfers permitted
                  under Section 6.17, the Borrower will give the Lender 30 days
                  prior written notice of its intent to dispose of material
                  Intellectual Property Rights; and upon request, shall provide
                  the Lender with copies of all applicable documents and
                  agreements.

                           (ii)     Promptly upon knowledge thereof, the
                  Borrower will deliver to the Lender notice of (A) any
                  Infringement of its Intellectual Property Rights by others,
                  (B) claims that the Borrower is Infringing another Person's
                  Intellectual Property Rights and (C) any threatened
                  cancellation, termination or material limitation of its
                  Intellectual Property Rights.

                           (iii)    Promptly upon receipt, the Borrower will
                  give the Lender copies of all registrations and filings with
                  respect to its Intellectual Property Rights.

                  (m)      REPORTS TO OWNERS. Promptly upon their distribution,
         the Borrower will deliver to the Lender copies of all financial
         statements, reports and proxy statements which the Borrower shall have
         sent to its Owners.

                  (n)      SEC FILINGS. Promptly after the sending or filing
         thereof, the Borrower will notify the Lender of all special, and
         irregular reports, which the Borrower shall file with the Securities
         and Exchange Commission ("SEC") or any national securities exchange, if
         any, and to the extent not available on the internet shall provide
         copies of all reports filed with the SEC to the Lender.

                  (o)      TAX RETURNS. As soon as available and in any event by
         not later 5 days after they are filed, copies of the federal tax
         returns and all schedules thereto of the Borrower and the Guarantors.
         Upon the request of the Lender made during a Default Period, copies of
         the Borrower's state tax returns and schedules.

CREDIT AND SECURITY AGREEMENT - PAGE 36



                  (p)      VIOLATIONS OF LAW. Promptly upon knowledge thereof,
         the Borrower will deliver to the Lender notice of the Borrower's
         violation of any law, rule or regulation, the non-compliance with which
         could materially and adversely affect the Borrower's business or its
         financial condition.

                  (q)      OWNERSHIP OF PREMISES. Promptly upon knowledge
         thereof, the Borrower will deliver to the Lender notice of a change in
         ownership of the Premises or any parcel thereof.

                  (r)      OPERATING LEASES. Promptly upon execution thereof,
         the Borrower will deliver to the Lender true and correct copies of each
         Aircraft operating lease and commitment therefor.

                  (s)      OTHER REPORTS. From time to time, with reasonable
         promptness, the Borrower will deliver to the Lender any and all
         receivables schedules, collection reports, deposit records, equipment
         schedules, copies of invoices to account debtors, shipment documents
         and delivery receipts for goods sold, and such other material, reports,
         records or information as the Lender may request.

         Section 6.2 Financial Covenants.

                  (a)      MINIMUM YEAR-TO-DATE NET INCOME. The Borrower will
         achieve as at the end of each period described below, Net Income of not
         less than the amount set forth below:

                           (i)      From January 1, through the fiscal quarter
                  ending March 31 of each year during the term hereof, Net
                  Income of not less than a loss $1,800,000 (i.e., the Borrower
                  may not lose more than $1,800,000 as at the end of such
                  period);

                           (ii)     From January 1, through the fiscal quarter
                  ending June 30 of each year during the term hereof, Net Income
                  of not less than a loss $1,300,000 (i.e., the Borrower may not
                  lose more than $1,300,000 as at the end of such period);

                           (iii)    From January 1, through the fiscal quarter
                  ending September 30 of each year during the term hereof, Net
                  Income of not less than a loss $350,000 (i.e., the Borrower
                  may not lose more than $350,000 as at the end of such period);
                  and

                           (iv)     From January 1, through the fiscal quarter
                  ending December 31 of each year during the term hereof, Net
                  Income of not less than $600,000 (i.e., the Borrower must have
                  a minimum Net Income of $600,000 as at the end of such
                  period).

                  (b)      MINIMUM BOOK NET WORTH. The Borrower will maintain,
         during each period described below, its Book Net Worth, determined as
         at the end of such period, at an amount not less than the amount set
         forth below:

CREDIT AND SECURITY AGREEMENT - PAGE 37



                           (i)      From January 1, through the fiscal quarter
                  ending March 31 of each year during the term hereof, Book Net
                  Worth of not less than $1,800,000 less than its Book Net Worth
                  as of the end of the prior fiscal year adjusted for non-cash
                  items;

                           (ii)     From January 1, through the fiscal quarter
                  ending June 30 of each year during the term hereof, Book Net
                  Worth of not less than $1,300,000 less than its Book Net Worth
                  as of the end of the prior fiscal year adjusted for non-cash
                  items;

                           (iii)    From January 1, through the fiscal quarter
                  ending September 30 of each year during the term hereof, Book
                  Net Worth of not less than $350,000 less than its Book Net
                  Worth as of the end of the prior fiscal year adjusted for
                  non-cash items; and

                           (iv)     From January 1, through the fiscal quarter
                  ending December 31 of each year during the term hereof, Book
                  Net Worth of not less than $600,000 more than its Book Net
                  Worth as of the end of the prior fiscal year adjusted for
                  non-cash items.

                  (c)      MONTHLY LOSS LIMIT. The Borrower will achieve for
         each month as at the end of such month Net Income of not less than the
         amount set forth below:

                           (i)      For each month end during the fiscal quarter
                  ending March 31 of each year during the term hereof, Net
                  Income of not less than a loss of $1,100,000 (i.e., the
                  Borrower may not lose more than $1,100,000 per month during
                  such period);

                           (ii)     For each month end during the fiscal quarter
                  ending June 30 of each year during the term hereof, Net Income
                  of not less than a loss of $500,000 (i.e., the Borrower may
                  not lose more than $500,000 per month during such period);

                           (iii)    For each month end during the fiscal quarter
                  ending September 30 of each year during the term hereof, Net
                  Income of not less than a loss of $300,000 (i.e., the Borrower
                  may not lose more than $300,000 per month during such period);
                  and

                           (iv)     For each month end during the fiscal quarter
                  ending December 31 of each year during the term hereof, Net
                  Income of not less than a loss $100,000 (i.e., the Borrower
                  may not lose more than $100,000 per month during such period).

                  (d)      CAPITAL EXPENDITURES. Neither the Borrower nor any
         Guarantor will incur or contract to incur Capital Expenditures of more
         than (i) $4,000,000 in the aggregate during the fiscal year ending
         December 31, 2004, with no more than $3,000,000 being unfinanced, and
         (ii) $2,000,000 in the aggregate during each fiscal year thereafter,
         with no more than $1,000,000 being unfinanced. Notwithstanding the
         foregoing, if the

CREDIT AND SECURITY AGREEMENT - PAGE 38



         Borrower and Guarantors incur or contract to incur Capital Expenditures
         in an aggregate amount not exceeding the amounts set forth in clause
         (i), any unused portion may be carried forward for use in the
         subsequent fiscal year ending December 31, 2005, provided further that
         in no event shall Capital Expenditures combined for the two fiscal
         years ending December 31, 2004 and December 31, 2005 exceed $6,000,000
         in the aggregate with no more than $4,000,000 being unfinanced.

                  (e)      AIRCRAFT OPERATING LEASES. Without the consent of the
         Lender, neither the Borrower nor any of its Subsidiaries will enter
         into any Aircraft operating lease or commitment therefor if, at the
         time of execution, the ratio of EBITDAR plus unrestricted Liquid Assets
         to Capital Expenditures plus Rent (in each case measured for the same
         periods as EBITDAR) is not at least 1.0 to 1.0.

         Section 6.3 Permitted Liens; Financing Statements.

                  (a)      The Borrower will not create, incur or suffer to
         exist any Lien upon or of any of its assets, now owned or hereafter
         acquired, to secure any indebtedness; excluding, however, from the
         operation of the foregoing, the following (collectively, "Permitted
         Liens"):

                           (i)      in the case of any of the Borrower's
                  property which is not Collateral, covenants, restrictions,
                  rights, easements and minor irregularities in title which do
                  not materially interfere with the Borrower's business or
                  operations as presently conducted;

                           (ii)     Liens in existence on the date hereof and
                  listed in Schedule 6.3 hereto, securing indebtedness for
                  borrowed money permitted under Section 6.4;

                           (iii)    the Security Interest and Liens created by
                  the Security Documents; and

                           (iv)     purchase money Liens relating to the
                  acquisition of machinery and equipment of the Borrower not
                  exceeding the lesser of cost or fair market value thereof and
                  so long as no Default Period is then in existence and none
                  would exist immediately after such acquisition.

                  (b)      The Borrower will not amend any financing statements
         in favor of the Lender except as permitted by law. Any authorization by
         the Lender to any Person to amend financing statements in favor of the
         Lender shall be in writing.

         Section 6.4 Indebtedness. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
the Borrower's behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:

                  (a)      Indebtedness and letters of credit arising hereunder;

CREDIT AND SECURITY AGREEMENT - PAGE 39



                  (b)      indebtedness of the Borrower in existence on the date
         hereof and listed in Schedule 6.4 hereto;

                  (c)      indebtedness relating to Permitted Liens;

                  (d)      indebtedness for unsecured trade accounts payable in
         the ordinary course of business; and

                  (e)      customer advances and deposits obtained in the
         ordinary course of business and deposited in the Collateral Accounts.

For avoidance of doubt, Aircraft operating leases are not prohibited by this
Section 6.4.

         Section 6.5 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:

                  (a)      the endorsement of negotiable instruments by the
         Borrower for deposit or collection or similar transactions in the
         ordinary course of business;

                  (b)      guaranties, endorsements and other direct or
         contingent liabilities in connection with the obligations of other
         Persons in respect of indebtedness permitted under Section 6.4 or
         otherwise, in existence on the date hereof and listed in Schedule 6.4
         hereto; and

                  (c)      guaranties of obligations of Subsidiaries of the
         Borrower so long as such guaranty is not a guaranty of indebtedness
         prohibited by Section 6.4.

         Section 6.6 Investments and Subsidiaries. The Borrower will not
purchase or hold beneficially any stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other Person, including
any partnership or joint venture, except:

                  (a)      investments in direct obligations of the United
         States of America or any agency or instrumentality thereof whose
         obligations constitute full faith and credit obligations of the United
         States of America having a maturity of one year or less, commercial
         paper issued by U.S. corporations rated "A-1" or "A-2" by Standard &
         Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or
         certificates of deposit or bankers' acceptances having a maturity of
         one year or less issued by members of the Federal Reserve System having
         deposits in excess of $100,000,000 (which certificates of deposit or
         bankers' acceptances are fully insured by the Federal Deposit Insurance
         Corporation);

                  (b)      travel advances or loans to the Borrower's Officers
         and employees not exceeding at any one time an aggregate of $10,000;

                  (c)      advances in the form of progress payments, prepaid
         rent not exceeding three (3) months or security deposits;

CREDIT AND SECURITY AGREEMENT - PAGE 40



                  (d)      current investments in the Subsidiaries in existence
         on the date hereof and listed in Schedule 5.5 hereto;

                  (e)      deposit accounts in insured financial institutions
         satisfactory to the Lender and with respect to which there are control
         agreements in favor of the Lender; and

                  (f)      promissory notes of Account debtors taken to avoid a
         loss on, or help ensure collection of, past due, doubtful, restructured
         or extended Accounts.

         Section 6.7 Dividends and Distributions. The Borrower will not declare
or pay any dividends (other than dividends payable solely in stock of the
Borrower) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly.

         Section 6.8 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the aggregate salary, bonus, commissions, consultant
fees or other compensation of any Director, Owner Officer or any member of their
families by more than 15% in any one year for any individual unless approved by
the Borrower's Board of Directors.

         Section 6.9 Books and Records; Inspection and Examination. The Borrower
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to the business and financial condition and such other
matters as the Lender may from time to time request in which true and complete
entries will be made in accordance with GAAP and, upon the Lender's request,
will permit any officer, employee, attorney or accountant for the Lender to
audit, review, make extracts from or copy any and all company and financial
books and records of the Borrower at all times during ordinary business hours,
to send and discuss with account debtors and other obligors requests for
verification of amounts owed to the Borrower, and to discuss the Borrower's
affairs with any of its Directors, Officers, employees or agents. The Borrower
hereby irrevocably authorizes all accountants and third parties to disclose and
deliver to Lender, at the Borrower's expense, all financial information, books
and records, work papers, management reports and other information in their
possession regarding the Borrower. The Borrower will permit the Lender, or its
employees, accountants, attorneys or agents, to examine and inspect any
Collateral or any other property of the Borrower at any time during ordinary
business hours. Absent a Default, the Lender will give 24 hours notice of each
such inspection.

         Section 6.10 Account Verification. The Lender may at any time and from
time to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts, but in no event shall such verification
disclose that request is other than from an account verification service and it
shall not indicate that the request is from a lender to or creditor of the
Borrower.

         Section 6.11 Compliance with Laws.

                  (a)      The Borrower will (i) comply with the requirements of
         applicable laws and regulations, the non-compliance with which would
         materially and adversely affect its business or its financial condition
         and (ii) use and keep the Collateral, and require that

CREDIT AND SECURITY AGREEMENT - PAGE 41



         others use and keep the Collateral, only for lawful purposes, without
         violation of any federal, state or local law, statute or ordinance.

                  (b)      Without limiting the foregoing undertakings, the
         Borrower specifically agrees that it will comply with all applicable
         Environmental Laws and obtain and comply with all permits, licenses and
         similar approvals required by any Environmental Laws, and will not
         knowingly generate, use, transport, treat, store or dispose of any
         Hazardous Substances in such a manner as to create any material
         liability or obligation under the common law of any jurisdiction or any
         Environmental Law.

         Section 6.12 Payment of Taxes and Other Claims. The Borrower will pay
or discharge, or cause to be paid and discharged, when due, (a) all taxes,
assessments and governmental charges levied or imposed upon it or upon its
income or profits, upon any properties belonging to it (including the
Collateral) or upon or against the creation, perfection or continuance of the
Security Interest, prior to the date on which penalties attach thereto, (b) all
federal, state and local taxes required to be withheld by it, and (c) all lawful
claims for labor, materials and supplies which, if unpaid, might by law become a
Lien upon any properties of the Borrower; PROVIDED, that the Borrower shall not
be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.

         Section 6.13 Maintenance of Properties.

                  (a)      The Borrower will keep and maintain the Collateral
         and all of its other properties necessary or useful in its business in
         good condition, repair and working order (normal wear and tear
         excepted) and will from time to time replace or repair any worn,
         defective or broken parts; provided, however, that nothing in this
         Section 6.13 shall prevent the Borrower from discontinuing the
         operation and maintenance of any of its properties if such
         discontinuance is, in the Borrower's judgment, desirable in the conduct
         of the Borrower's business and not disadvantageous in any material
         respect to the Lender. The Borrower will take all commercially
         reasonable steps necessary to protect and maintain its Intellectual
         Property Rights.

                  (b)      The Borrower will defend the Collateral against all
         Liens, claims or demands of all Persons (other than the Lender)
         claiming the Collateral or any interest therein. The Borrower will keep
         all Collateral free and clear of all Liens except Permitted Liens. The
         Borrower will take all commercially reasonable steps necessary to
         prosecute any Person Infringing its Intellectual Property Rights and to
         defend itself against any Person accusing it of Infringing any Person's
         Intellectual Property Rights.

         Section 6.14 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
maintain business interruption insurance including coverage for force majeure
and keep all tangible Collateral

CREDIT AND SECURITY AGREEMENT - PAGE 42



insured against risks of fire (including so-called extended coverage), theft,
collision (for Collateral consisting of motor vehicles) and such other risks and
in such amounts as the Lender may reasonably request, with any loss payable with
respect to the Collateral to the Lender to the extent of its interest, and all
policies of such insurance shall contain a lender's loss payable endorsement for
the Lender's benefit. All policies of liability insurance required hereunder
shall name the Lender as an additional insured.

         Section 6.15 Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.

         Section 6.16 Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel paper constituting Collateral, duly endorsed or assigned
by the Borrower.

         Section 6.17 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not transfer any part
of its ownership interest in any Intellectual Property Rights and will not
permit any agreement under which it has licensed Licensed Intellectual Property
to lapse, except that the Borrower may transfer such rights or permit such
agreements to lapse if it shall have reasonably determined that the applicable
Intellectual Property Rights are no longer useful in its business. If the
Borrower transfers any Intellectual Property Rights for value, the Borrower will
pay over the proceeds to the Lender for application to the Obligations. The
Borrower will not license any other Person to use any of the Borrower's
Intellectual Property Rights, except that the Borrower may grant licenses in the
ordinary course of its business in connection with sales of Inventory or
provision of services to its customers.

         Section 6.18 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person without the prior written consent of the Lender, which consent shall not
be unreasonably withheld.

         Section 6.19 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred, other than sale and leaseback transactions of Aircraft.

         Section 6.20 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not

CREDIT AND SECURITY AGREEMENT - PAGE 43



purchase, lease or otherwise acquire assets not related to its business without
the prior written consent of the Lender, which consent shall not be unreasonably
withheld.

         Section 6.21 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by GAAP. The Borrower
will not adopt, permit or consent to any change in its fiscal year without the
prior written consent of the Lender, which consent shall not be unreasonably
withheld.

         Section 6.22 Discounts, etc. After notice from the Lender during any
Default Period, the Borrower will not, except in the ordinary course of business
consistent with past practices before the commencement of a Default Period,
grant any discount, credit or allowance to any customer of the Borrower or
accept any return of goods sold, and the Borrower will not, except in the
ordinary course of business consistent with past practices before the
commencement of a Default Period, at any time modify, amend, subordinate, cancel
or terminate the obligation of any account debtor or other obligor of the
Borrower.

         Section 6.23 Plans. Unless disclosed to the Lender pursuant to Section
5.12, neither the Borrower nor any ERISA Affiliate will (i) adopt, create,
assume or become a party to any Pension Plan, (ii) incur any obligation to
contribute to any Multiemployer Plan, (iii) incur any obligation to provide
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required by law) or (iv) amend any Plan in
a manner that would materially increase its funding obligations.

         Section 6.24 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location without giving the Lender thirty (30) days
prior written notice. The Borrower will not permit any tangible Collateral or
any records pertaining to the Collateral to be located in any state or area in
which, in the event of such location, a financing statement covering such
Collateral would be required to be, but has not in fact been, filed in order to
perfect the Security Interest. The Borrower will not change its name or
jurisdiction of organization without the prior written consent of the Lender,
which consent shall not be unreasonably withheld.

         Section 6.25 Constituent Documents; S Corporation Status. The Borrower
will not amend its Constituent Documents. The Borrower will not become an S
Corporation.

         Section 6.26 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.12 and 6.14,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including the payment of taxes, the satisfaction of Liens, the performance of
obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and the Borrower
shall thereupon pay to the Lender on demand the

CREDIT AND SECURITY AGREEMENT - PAGE 44



amount of all monies expended and all costs and expenses (including reasonable
attorneys' fees and legal expenses) incurred by the Lender in connection with or
as a result of the performance or observance of such agreements or the taking of
such action by the Lender, together with interest thereon from the date expended
or incurred at the Default Rate. To facilitate the Lender's performance or
observance of such covenants of the Borrower, the Borrower hereby irrevocably
appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this Section
6.26.

         Section 6.27 [omitted intentionally]

         Section 6.28 Debt Payments. The Borrower shall not pay any principal,
interest or fees on any Debt owed to an Affiliate (other than to the Kitty Hawk
Collateral Liquidating Trust and Pegasus Aviation) or any subordinated lender
except as may be otherwise permitted by this Agreement or any Subordination
Agreement.

         Section 6.29 Transactions with Affiliates. The Borrower shall not, and
shall not permit any of its Subsidiaries to, at any time engage in any
transaction with an Affiliate or employee, nor make an assignment or other
transfer of any of its assets or properties to any Affiliate or employee, unless
such transaction is (i) otherwise permitted under this Agreement, (ii) in the
ordinary course of business of the Borrower and the relevant Subsidiary of the
Borrower, as the case may be, and (iii) upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary, as the case may be, than it would
obtain in a comparable arm's length transaction with a Person which is not an
Affiliate or employee.

         Section 6.30 Delivery of Certain Certificates. Within 60 days from the
date of this Agreement, the Borrower shall deliver to the Lender evidence that
each Loan Party is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary.

                                  ARTICLE VII

                     EVENTS OF DEFAULT, RIGHTS AND REMEDIES

         Section 7.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:

                  (a)      Default in the payment of any Obligations when they
         become due and payable;

                  (b)      Default in the performance, or breach, of any
         covenant or agreement of the Borrower contained in this Agreement and,
         in the case of Section 6.1(d), (e), (k), (l) and (q) such default shall
         continue for a period of seven (7) Banking Days;

CREDIT AND SECURITY AGREEMENT - PAGE 45



                  (c)      Any Change of Control shall occur;

                  (d)      Any Financial Covenant shall become inapplicable due
         to the lapse of time and the failure to amend any such covenant to
         cover future periods;

                  (e)      The Borrower shall be or become insolvent; or the
         Borrower or the Guarantor shall admit in writing its or his inability
         to pay its or his debts as they mature, or make an assignment for the
         benefit of creditors; or the Borrower or any Guarantor shall apply for
         or consent to the appointment of any receiver, trustee, or similar
         officer for it or him or for all or any substantial part of its or his
         property; or such receiver, trustee or similar officer shall be
         appointed without the application or consent of the Borrower or such
         Guarantor, as the case may be; or the Borrower or any Guarantor shall
         institute (by petition, application, answer, consent or otherwise) any
         bankruptcy, insolvency, reorganization, arrangement, readjustment of
         debt, dissolution, liquidation or similar proceeding relating to it or
         him under the laws of any jurisdiction; or any such proceeding shall be
         instituted (by petition, application or otherwise) against the Borrower
         or any such Guarantor; or any judgment, writ, warrant of attachment or
         execution or similar process shall be issued or levied against a
         substantial part of the property of the Borrower or any Guarantor;

                  (f)      A petition shall be filed by or against the Borrower
         or any Guarantor under the United States Bankruptcy Code naming the
         Borrower or such Guarantor as debtor;

                  (g)      Any representation or warranty made by the Borrower
         in this Agreement, by any Guarantor in any guaranty delivered to the
         Lender, or by the Borrower (or any of its Officers) or any Guarantor in
         any agreement, certificate, instrument or financial statement or other
         statement contemplated by or made or delivered pursuant to or in
         connection with this Agreement or any such guaranty shall prove to have
         been incorrect in any material respect when deemed to be effective;

                  (h)      The rendering against the Borrower of an arbitration
         award, final judgment, decree or order for the payment of money in
         excess of $150,000.00 and the continuance of such arbitration award,
         judgment, decree or order unsatisfied and in effect for any period of
         30 consecutive days without a stay of execution or the posting of a
         bond pending appeal, the effect of which is to stay execution during
         such appeal;

                  (i)      A default under any bond, debenture, note or other
         evidence of material indebtedness of the Borrower owed to any Person
         other than the Lender, or under any indenture or other instrument under
         which any such evidence of indebtedness has been issued or by which it
         is governed, or under any material lease or other contract, and the
         expiration of the applicable period of grace, if any, specified in such
         evidence of indebtedness, indenture, other instrument, lease or
         contract;

                  (j)      Any Reportable Event, which the Lender determines in
         good faith might constitute grounds for the termination of any Pension
         Plan or for the appointment by the appropriate United States District
         Court of a trustee to administer any Pension Plan, shall

CREDIT AND SECURITY AGREEMENT - PAGE 46



         have occurred and be continuing 30 days after written notice to such
         effect shall have been given to the Borrower by the Lender; or a
         trustee shall have been appointed by an appropriate United States
         District Court to administer any Pension Plan; or the Pension Benefit
         Guaranty Corporation shall have instituted proceedings to terminate any
         Pension Plan or to appoint a trustee to administer any Pension Plan; or
         the Borrower or any ERISA Affiliate shall have filed for a distress
         termination of any Pension Plan under Title IV of ERISA; or the
         Borrower or any ERISA Affiliate shall have failed to make any quarterly
         contribution required with respect to any Pension Plan under Section
         412(m) of the IRC, which the Lender determines in good faith may by
         itself, or in combination with any such failures that the Lender may
         determine are likely to occur in the future, result in the imposition
         of a Lien on the Borrower's assets in favor of the Pension Plan; or any
         withdrawal, partial withdrawal, reorganization or other event occurs
         with respect to a Multiemployer Plan which results or could reasonably
         be expected to result in a material liability of the Borrower to the
         Multiemployer Plan under Title IV of ERISA.

                  (k)      An event of default shall occur under any Security
         Document;

                  (l)      The Borrower shall liquidate, dissolve, terminate or
         suspend its business operations or otherwise fail to operate its
         business in the ordinary course, or sell or attempt to sell all or
         substantially all of its assets, without the Lender's prior written
         consent;

                  (m)      Default in the payment of any amount owed by the
         Borrower to the Lender other than any indebtedness arising hereunder;

                  (n)      Any Guarantor or person signing a support agreement
         in favor of the Lender shall repudiate, purport to revoke or fail to
         perform his or its obligations under his or its guaranty or support
         agreement in favor of the Lender, any individual Guarantor shall die or
         any other Guarantor shall cease to exist;

                  (o)      The Borrower shall take or participate in any action
         which would be prohibited under the provisions of any Subordination
         Agreement or make any payment on the Subordinated Debt that any Person
         was not entitled to receive under the provisions of the Subordination
         Agreement;

                  (p)      Any event or circumstance with respect to the
         Borrower shall occur such that the Lender shall believe in good faith
         that the prospect of payment of the Obligations or the material
         performance by the Borrower under the Loan Documents is impaired or any
         material adverse change in the business or financial condition of the
         Borrower shall occur; or

                  (q)      Any breach, default or event of default by or
         attributable to any Affiliate under any agreement between such
         Affiliate and the Lender shall occur.

         Section 7.2 Rights and Remedies. During any Default Period, the Lender
may exercise any or all of the following rights and remedies:

CREDIT AND SECURITY AGREEMENT - PAGE 47



                  (a)      the Lender may, by notice to the Borrower, declare
         the Commitment to be terminated, whereupon the same shall forthwith
         terminate;

                  (b)      the Lender may, by notice to the Borrower, declare
         the Obligations to be forthwith due and payable, whereupon all
         Obligations shall become and be forthwith due and payable, without
         presentment, acceleration, notice of dishonor, protest notice of intent
         to accelerate, notice of acceleration, or further notice of any kind,
         all of which the Borrower hereby expressly waives;

                  (c)      the Lender may, without notice to the Borrower and
         without further action, apply any and all money owing by the Lender to
         the Borrower to the payment of the Obligations;

                  (d)      the Lender may exercise and enforce any and all
         rights and remedies available upon default to a secured party under the
         UCC, including the right to take possession of Collateral, or any
         evidence thereof, proceeding without judicial process or by judicial
         process (without a prior hearing or notice thereof, which the Borrower
         hereby expressly waives) and the right to sell, lease or otherwise
         dispose of any or all of the Collateral (with or without giving any
         warranties as to the Collateral, title to the Collateral or similar
         warranties), and, in connection therewith, the Borrower will on demand
         assemble the Collateral and make it available to the Lender at a place
         to be designated by the Lender which is reasonably convenient to both
         parties;

                  (e)      the Lender may make demand upon the Borrower and,
         forthwith upon such demand, the Borrower will pay to the Lender in
         immediately available funds for deposit in the Special Account pursuant
         to Section 2.13 an amount equal to the aggregate maximum amount
         available to be drawn under all Letters of Credit then outstanding,
         assuming compliance with all conditions for drawing thereunder;

                  (f)      the Lender may exercise and enforce its rights and
         remedies under the Loan Documents; and

                  (g)      the Lender may exercise any other rights and remedies
         available to it by law or agreement.

Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 7.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind. If the Lender sells any of the Collateral on credit, the
Obligations will be reduced only to the extent of payments actually received. If
the purchaser fails to pay for the Collateral, the Lender may resell the
Collateral and shall apply any proceeds actually received to the Obligations.

         Section 7.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 8.3) at least ten calendar days before
the date of intended disposition or other action.

CREDIT AND SECURITY AGREEMENT - PAGE 48



                                  ARTICLE VIII

                                  MISCELLANEOUS

         Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws. No
failure or delay by the Lender in exercising any right, power or remedy under
the Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy
under the Loan Documents. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law. The Lender may
comply with any applicable state or federal law requirements in connection with
a disposition of the Collateral and such compliance will not be considered
adversely to affect the commercial reasonableness of any sale of the Collateral.

         Section 8.2 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.

         Section 8.3 Addresses for Notices; Requests for Accounting. Except as
otherwise expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below next to its
signature or, as to each party, at such other address or telecopier number as
may hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender. All requests under Section 9-210 of the
UCC (i) shall be made in a writing signed by a person authorized under Section
2.2(b), (ii) shall be personally delivered, sent by registered or certified
mail, return receipt requested, or by overnight courier of national reputation
(iii) shall be deemed to be sent when received by the Lender and (iv) shall
otherwise comply with the requirements of Section 9-210. The Borrower requests
that the Lender respond to all such requests which on their face appear to come
from an authorized individual and releases the Lender from any liability for so
responding. The Borrower shall pay Lender the maximum amount allowed by law for
responding to such requests.

         Section 8.4 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements, control agreements and
other agreements and writings that the

CREDIT AND SECURITY AGREEMENT - PAGE 49



Lender may reasonably request in order to secure, protect, perfect or enforce
the Security Interest or the Lender's rights under the Loan Documents (but any
failure to request or assure that the Borrower executes, delivers or endorses
any such item shall not affect or impair the validity, sufficiency or
enforceability of the Loan Documents and the Security Interest, regardless of
whether any such item was or was not executed, delivered or endorsed in a
similar context or on a prior occasion).

         Section 8.5 Costs and Expenses. The Borrower shall pay on demand all
costs and expenses, including reasonable attorneys' fees, incurred by the Lender
in connection with the Obligations, this Agreement, the Loan Documents, any
Letter of Credit and any other document or agreement related hereto or thereto,
and the transactions contemplated hereby, including all such costs, expenses and
fees incurred in connection with the negotiation, preparation, execution,
amendment, administration, performance, collection and enforcement of the
Obligations and all such documents and agreements and the creation, perfection,
protection, satisfaction, foreclosure or enforcement of the Security Interest.

         Section 8.6 Indemnity. IN ADDITION TO THE PAYMENT OF EXPENSES PURSUANT
TO SECTION 8.5, THE BORROWER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS THE
LENDER, AND ANY OF ITS PARTICIPANTS, PARENT CORPORATIONS, SUBSIDIARY
CORPORATIONS, AFFILIATED CORPORATIONS, SUCCESSOR CORPORATIONS, AND ALL PRESENT
AND FUTURE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS OF THE FOREGOING
(THE "INDEMNITEES") FROM AND AGAINST ANY OF THE FOLLOWING (COLLECTIVELY,
"INDEMNIFIED LIABILITIES"):

                           (i)      ANY AND ALL TRANSFER TAXES, DOCUMENTARY
                  TAXES, ASSESSMENTS OR CHARGES MADE BY ANY GOVERNMENTAL
                  AUTHORITY BY REASON OF THE EXECUTION AND DELIVERY OF THE LOAN
                  DOCUMENTS OR THE MAKING OF THE ADVANCES;

                           (ii)     ANY CLAIMS, LOSS OR DAMAGE TO WHICH ANY
                  INDEMNITEE MAY BE SUBJECTED IF ANY REPRESENTATION OR WARRANTY
                  CONTAINED IN SECTION 5.14 PROVES TO BE INCORRECT IN ANY
                  RESPECT OR AS A RESULT OF ANY VIOLATION OF THE COVENANT
                  CONTAINED IN SECTION 6.11(B); AND

                           (iii)    ANY AND ALL OTHER LIABILITIES, LOSSES,
                  DAMAGES, PENALTIES, JUDGMENTS, SUITS, CLAIMS, COSTS AND
                  EXPENSES OF ANY KIND OR NATURE WHATSOEVER (INCLUDING THE
                  REASONABLE FEES AND DISBURSEMENTS OF COUNSEL) IN CONNECTION
                  WITH THE FOREGOING AND ANY OTHER INVESTIGATIVE, ADMINISTRATIVE
                  OR JUDICIAL PROCEEDINGS, WHETHER OR NOT SUCH INDEMNITEE SHALL
                  BE DESIGNATED A PARTY THERETO, WHICH MAY BE IMPOSED ON,
                  INCURRED BY OR ASSERTED AGAINST ANY SUCH INDEMNITEE, IN ANY
                  MANNER RELATED TO OR ARISING OUT OF OR IN CONNECTION WITH THE

CREDIT AND SECURITY AGREEMENT - PAGE 50



                  MAKING OF THE ADVANCES AND THE LOAN DOCUMENTS OR THE USE OR
                  INTENDED USE OF THE PROCEEDS OF THE ADVANCES,

EXCLUDING, HOWEVER, ANY INDEMNIFIED LIABILITIES ARISING AS A RESULT OF THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY SUCH INDEMNITEES.

IF ANY INVESTIGATIVE, JUDICIAL OR ADMINISTRATIVE PROCEEDING ARISING FROM ANY OF
THE FOREGOING IS BROUGHT AGAINST ANY INDEMNITEE, UPON SUCH INDEMNITEE'S REQUEST,
THE BORROWER, OR COUNSEL DESIGNATED BY THE BORROWER AND SATISFACTORY TO THE
INDEMNITEE, WILL RESIST AND DEFEND SUCH ACTION, SUIT OR PROCEEDING TO THE EXTENT
AND IN THE MANNER DIRECTED BY THE INDEMNITEE, AT THE BORROWER'S SOLE COSTS AND
EXPENSE. EACH INDEMNITEE WILL USE ITS BEST EFFORTS TO COOPERATE IN THE DEFENSE
OF ANY SUCH ACTION, SUIT OR PROCEEDING. IF THE FOREGOING UNDERTAKING TO
INDEMNIFY, DEFEND AND HOLD HARMLESS MAY BE HELD TO BE UNENFORCEABLE BECAUSE IT
VIOLATES ANY LAW OR PUBLIC POLICY, THE BORROWER SHALL NEVERTHELESS MAKE THE
MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED
LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. THE BORROWER'S OBLIGATION
UNDER THIS SECTION 8.6 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT AND THE
DISCHARGE OF THE BORROWER'S OTHER OBLIGATIONS HEREUNDER.

         Section 8.7 Participants. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender's participants, successors or assigns.

         Section 8.8 Execution in Counterparts; Telefacsimile Execution. This
Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument. Delivery of an executed counterpart of this
Agreement by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver an
original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.

         Section 8.9 Retention of Borrower's Records. The Lender shall have no
obligation to maintain any electronic records or any documents, schedules,
invoices, agings, or other papers delivered to the Lender by the Borrower or in
connection with the Loan Documents for more than four months after receipt by
the Lender.

         Section 8.10 Binding Effect; Assignment; Complete Agreement; Exchanging
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower

CREDIT AND SECURITY AGREEMENT - PAGE 51



shall not have the right to assign its rights thereunder or any interest therein
without the Lender's prior written consent. To the extent permitted by law, the
Borrower waives and will not assert against any assignee any claims, defenses or
set-offs which the Borrower could assert against the Lender in connection with
this Agreement, any Loan Document, or any other agreement the Lender and the
Borrower. This Agreement shall also bind all Persons who become a party to this
Agreement as a borrower. This Agreement, together with the Loan Documents,
comprises the complete and integrated agreement of the parties on the subject
matter hereof and supersedes all prior agreements, written or oral, on the
subject matter hereof. Without limiting the Lender's right to share information
regarding the Borrower and its Affiliates with the Lender's participants,
accountants, lawyers and other advisors, the Lender, Wells Fargo & Company, and
all direct and indirect subsidiaries of Wells Fargo & Company, may exchange any
and all information they may have in their possession regarding the Borrower and
its Affiliates, and the Borrower waives any right of confidentiality it may have
with respect to such exchange of such information.

         Section 8.11 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.

         Section 8.12 Headings. Article, Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.

         Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Texas. The parties
hereto hereby (i) consent to the personal jurisdiction of the state and federal
courts located in the State of Texas in connection with any controversy related
to this Agreement; (ii) waive any argument that venue in any such forum is not
convenient, (iii) agree that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents may be
venued in either the State or Federal courts located in Dallas County, Texas;
and (iv) agree that a final judgment in any such suit, action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law.

         Section 8.14 Non-Application of Chapter 346 of the Texas Finance Code.
The provisions of Chapter 346 of the Texas Finance Code (Vernon's Texas Finance
Code Ann.) are specifically declared by the parties hereto not to be applicable
to this Agreement or any of the other Loan Documents or to the transactions
contemplated hereby.

         Section 8.15 Entire Agreement. THIS AGREEMENT, TOGETHER WITH THE OTHER
LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES REGARDING THE
SUBJECT MATTER HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

      [Remainder of Page Intentionally Left Blank. Signature Page Follows.]

CREDIT AND SECURITY AGREEMENT - PAGE 52


THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

           IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.

Kitty Hawk, Inc.                               KITTY HAWK, INC.
1515 West 20th Street
P. O. Box 612787 DFW Airport, Texas 75261
Telephone: (972) 456-2200                      By: /s/ RANDY LEISER
Telecopier: (972) 456-2350                         ---------------------------
Attention: Randy Leiser                            Randy Leiser
e-mail: rleiser@kha.com                            Vice President and
                                                   Chief Financial Officer

Wells Fargo Business Credit, Inc               WELLS FARGO BUSINESS CREDIT, INC.
4975 Preston Park Blvd., Suite 280
Plano, Texas 75093
Telephone: (972) 599-5346
Telecopier: (972) 867-7838                     By: /s/ JOSEPH M. SAMMONS
Attention: Joseph Sammons                          ---------------------------
e-mail: joseph.m.sammons@wellsfargo.com            Joseph M. Sammons
                                                   Vice President
CREDIT AND SECURITY AGREEMENT - PAGE 53



                        TABLE OF EXHIBITS AND SCHEDULES

Exhibit A              Form of Revolving Note

Exhibit B              Compliance Certificate

Exhibit C              Premises

Schedule 5.1           Trade Names, Chief Executive Office, Principal Place
                       of Business, and Locations of Collateral

Schedule 5.2           Capitalization and Organizational Chart

Schedule 5.5           Subsidiaries

Schedule 5.7           Litigation

Schedule 5.11          Intellectual Property Disclosures

Schedule 6.3           Permitted Liens

Schedule 6.4           Permitted Indebtedness and Guaranties

EX-23.1

exv23w1

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

   I, Robert W. Zoller, Jr., certify that:

1.	I have reviewed this annual report on Form 10-K of Kitty Hawk, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 26, 2004
	By:	/s/ ROBERT W. ZOLLER, JR.
		Robert W. Zoller, Jr.
		Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

   I, Randy S. Leiser, certify that:

1.	I have reviewed this annual report on Form 10-K of Kitty Hawk, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 26, 2004
	By:	/s/ RANDY S. LEISER
		Randy S. Leiser
		Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Kitty Hawk, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:

     The annual report on Form 10-K for the year ended December 31, 2003 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-K.

Date: March 26, 2004
	By:	/s/ ROBERT W. ZOLLER, JR.
		Robert W. Zoller, Jr.
		Chief Executive Officer and President

Date: March 26, 2004
	By:	/s/ RANDY S. LEISER
		Randy S. Leiser
		Vice President and Chief Financial Officer

     The foregoing certification is being furnished as an exhibit to the Form 10-K pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-K for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.