-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DWXFqNETvN5ck8iFSqiPiyBFyhiPq6Iay4UO/Fuy+KaBPCFnkuGbhAOYp8QklZJJ BU5ZkisV4wrGo6g7N5JQBQ== 0000950134-96-003582.txt : 19960719 0000950134-96-003582.hdr.sgml : 19960719 ACCESSION NUMBER: 0000950134-96-003582 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19960717 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KITTY HAWK INC CENTRAL INDEX KEY: 0000932110 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, NONSCHEDULED [4522] IRS NUMBER: 752564006 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-08307 FILM NUMBER: 96596029 BUSINESS ADDRESS: STREET 1: 1515 WEST 20TH STREET STREET 2: SECOND FLOOR CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75240 BUSINESS PHONE: 2144562200 MAIL ADDRESS: STREET 1: P O BOX 612787 CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- KITTY HAWK, INC. (Exact name of registrant as specified in its charter) DELAWARE 4522 75-2564006 (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) identification no.)
1515 WEST 20TH STREET P.O. BOX 612787 DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261 (214) 456-2200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- M. TOM CHRISTOPHER CHIEF EXECUTIVE OFFICER 1515 WEST 20TH STREET P.O. BOX 612787 DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261 (214) 456-2200 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies of communications to: MICHAEL M. BOONE STEPHEN A. OPLER GREG R. SAMUEL JOEL J. HUGHEY HAYNES AND BOONE, LLP ALSTON & BIRD 3100 NATIONSBANK PLAZA ONE ATLANTIC CENTER 901 MAIN STREET 1201 WEST PEACHTREE STREET DALLAS, TEXAS 75202-3789 ATLANTA, GEORGIA 30309-3424 (214) 651-5000 (404) 881-7000 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value........ 3,450,000 shares $16.00(2) $55,200,000(2) $19,034.48 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
(1) Includes 450,000 shares that the Underwriters have the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for purposes of calculation of the registration fee, in accordance with Rule 457(a). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 KITTY HAWK, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-1 REGISTRATION STATEMENT (PART I) ITEM NO. AND CAPTION LOCATION IN PROSPECTUS BY CAPTION ---------------------------------------------------- ----------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.................... Forepart of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus........................................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors, and Ratio of Earnings to Fixed Charges......................... Prospectus Summary; The Company; Risk Factors 4. Use of Proceeds..................................... Prospectus Summary; Use of Proceeds; Management's Discussion and Analysis of Financial Condition and Results of Operations 5. Determination of Offering Price..................... Outside Front Cover Page of Prospectus; Underwriting 6. Dilution............................................ Risk Factors; Dilution 7. Selling Security Holders............................ Management; Principal Stockholders and Selling Stockholder; Certain Transactions 8. Plan of Distribution................................ Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered.......... Description of Capital Stock 10. Interests of Named Experts and Counsel.............. * 11. Information with Respect to Registrant.............. Prospectus Summary; The Company; Risk Factors; Use of Proceeds; Dividend Policy; Dilution; Capitalization; Selected Consolidated Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders and Selling Stockholder; Description of Capital Stock; Shares Eligible for Future Sale; Additional Information 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................... *
- --------------- * Such item is inapplicable, or the answer thereto is in the negative and is omitted from the Prospectus. 3 *************************************************************************** * * * Information contained herein is subject to completion or amendment. A * * registration statement relating to these securities has been filed * * with the Securities and Exchange Commission. These securities may not * * be sold nor may offers to buy be accepted prior to the time the * * registration statement becomes effective. This prospectus shall not * * constitute an offer to sell or the solicitation of an offer to buy * * nor shall there be any sale of these securities in any State in which * * such offer, solicitation or sale would be unlawful prior to * * registration or qualification under the securities laws of any such * * State. * * * *************************************************************************** SUBJECT TO COMPLETION, DATED JULY 17, 1996 PROSPECTUS 3,000,000 SHARES [KITTY HAWK, INC. LOGO] KITTY HAWK(R), INC. COMMON STOCK ------------------ Of the 3,000,000 shares offered hereby, 2,700,000 shares are being sold by the Company and 300,000 shares are being sold by a stockholder (the "Selling Stockholder"). See "Principal Stockholders and Selling Stockholder." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholder. Prior to this offering, there has not been a public market for the common stock (the "Common Stock") of the Company. It is currently estimated that the initial public offering price will be between $14.00 and $16.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. Application has been made to have the Common Stock listed on The Nasdaq Stock Market's National Market under the symbol "KTTY." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER Per Share $ $ $ $ - -------------------------------------------------------------------------------------------------- Total(3) $ $ $ $ - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting expenses payable solely by the Company estimated to be $ . (3) The Selling Stockholder has granted the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Selling Stockholder will be $ , $ , and $ , respectively. --------------------- The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1996 at the office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED FIELDSTONE FPCG SERVICES, L.P. , 1996 4 [MAP OF SCHEDULED KITTY HAWK U.S. ROUTES] [MAP OF KITTY HAWK SCHEDULED PACIFIC RIM ROUTES] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus: (i) does not give effect to the exercise of the Underwriters' over-allotment option and (ii) gives effect to the consummation during June 1996 of a 0.2285391 share dividend for each share of Common Stock then outstanding. As used in this Prospectus, the terms "Kitty Hawk" and "Company" refer to Kitty Hawk, Inc., a Delaware corporation, and its subsidiaries and predecessors, unless the context indicates otherwise. A reference to a fiscal year by date refers to the Company's fiscal year ending on August 31 of that calendar year. THE COMPANY Kitty Hawk is one of the leading providers of air freight charter services in the United States, emphasizing highly-reliable, time-sensitive services. The Company's air freight carrier owns 24 aircraft, 16 of which are currently used in scheduled airport-to-airport freight service under contracts primarily with major freight forwarders in North America and the Pacific Rim. These contracts generally require the Company to supply aircraft, crew, maintenance, and insurance ("ACMI") and to meet certain on-time performance standards, while its customers are responsible for substantially all other operating expenses, including fuel. Additionally, Kitty Hawk is the leading provider of same-day air logistics charter services in the United States. Through use of its advanced, proprietary computer software, the Company manages delivery of extremely time-sensitive freight utilizing the on-demand charter services of both third-party air freight carriers and planes from the Company's fleet that are not then committed to ACMI service. The Company's total revenues have increased to $103.7 million in fiscal year 1995 from $33.4 million in fiscal year 1991. During the same period, the Company's owned aircraft fleet grew to 21 aircraft from 9 aircraft. Kitty Hawk has been profitable in every fiscal year since its inception in 1985. Air Freight Carrier. Kitty Hawk believes it operates one of the three largest fleets of Boeing 727-200F (freighter) aircraft dedicated to ACMI contract charters. Under ACMI contracts the air freight carrier operates designated aircraft on scheduled routes typically for either certificated air freight carriers that desire the operational flexibility of supplementing their existing fleet with additional airlift capacity provided by the Company or uncertificated entities that prefer to outsource the air freight carrier function of their operations. The Company believes it met the scheduled departure and/or arrival times (as applicable under the subject ACMI contract) of its ACMI contract charter customers 98.9% of the time during the nine months ended May 31, 1996, not including delays beyond the Company's control. In addition, the Company's air freight carrier flew approximately 8.8% of the on-demand charters managed by the Company in the nine months ended May 31, 1996. By deploying aircraft owned by the air freight carrier not then operating under an ACMI contract to service on-demand charters for its air logistics business, Kitty Hawk is able to moderate fluctuations in its asset utilization and thereby maintain higher utilization rates in its air freight carrier business. During the nine months ended May 31, 1996, the Company's air freight carrier customers included the U.S. Postal Service and air freight companies such as Burlington Air Express, Inc., DHL Airways, Inc., Emery Worldwide Airlines, Inc. and Federal Express Corporation. The Company's air freight carrier business accounted for $9.8 million (56.3%) of the Company's gross profit in the nine months ended May 31, 1996. Air Logistics. Kitty Hawk's expedited, same-day air charter services primarily support the "just-in-time" inventory management systems and emergency repair and replacement part requirements of major industrial companies. Utilizing a proprietary computerized database, the Company coordinates "door-to-door" transportation services by arranging for ground pickup, loading, air transportation, unloading, and ground delivery of freight. On-demand air logistics services are generally used to transport manufacturing and replacement parts and products when expedited, same-day delivery is critical to avoid costly inventory shortages or work stoppages. For the nine months ended May 31, 1996, the time elapsed between the customer's initial estimate of freight availability and the delivery of that freight was typically less than six hours at an average charge per shipment of $5,803. In the nine months ended May 31, 1996, the Company's air logistics business arranged 11,209 on-demand charters for more than 250 customers such as Eagle USA Airfreight Inc., General Motors Corporation ("GM"), International Business Machines Corp., Ryder System, Inc., the U.S. Postal Service, 3 6 and TRW Inc. In the nine months ended May 31, 1996, the Company's air logistics business accounted for $7.6 million (43.7%) of the Company's gross profit. Most Significant Customers. Since 1990, Kitty Hawk has managed virtually all of GM's North American on-demand air freight charters. In the nine months ended May 31, 1996, GM accounted for approximately $42.1 million (39.3%) of the Company's total revenues. Additionally, Kitty Hawk is a significant provider of services to the U.S. Postal Service and Burlington Air Express, Inc. In the nine months ended May 31, 1996, the U.S. Postal Service and Burlington Air Express, Inc. accounted for approximately $21.3 million (19.8%) and approximately $10.0 million (9.3%), respectively of the Company's total revenues. THE FLEET The Company's air freight fleet is comprised of ten Boeing 727-200Fs (including two recently purchased Boeing 727-200 aircraft that are in the process of cargo reconfiguration), five Douglas DC-9-15Fs and nine turbo-prop Convairs. During fiscal year 1997, the Company intends to use the proceeds of the offering to add five Boeing 727-200Fs to its fleet, three of which the Company anticipates will be initially dedicated to ACMI contract charter use and two to on-demand charters, and to repay certain aircraft acquisition and modification indebtedness. With these additional aircraft, the Company believes that its air freight carrier will be able to obtain a greater number of ACMI contract and on-demand charters flown on Company aircraft, which generally produce a higher gross profit margin than charters subcontracted to third-party carriers. COMPETITIVE STRENGTHS Kitty Hawk believes that its principal competitive strengths are its: - Customer Focus. Kitty Hawk's commitment to customer service and satisfaction is a significant factor in its ability to attract and retain customers. In an independent survey of certain of the Company's customers performed by Dun & Bradstreet, Inc. dated May 18, 1995, the Company received an overall rating of 1.00 (on a performance scale of: 1.00 = "Exceeds Expectations" to 5.00 = "Below Expectations"). The Company believes that its profit sharing compensation structure motivates its employees to provide excellent customer service and reduces employee turnover. - Boeing 727-200F Fleet. The Company believes that its fleet of Boeing 727-200Fs enables it to offer its customers a desirable aircraft type for the shipment of freight and to attract and retain customers who desire a single source of Boeing 727-200F aircraft. Kitty Hawk believes the popularity of the 727-200F aircraft stems from its range and payload characteristics, which the Company believes are well suited for flights of up to 2,500 miles that are typical of the intra-American and intra-Asian routes of its integrated freight customers. According to the April 1996 issue of FedEx Aviation Services' Commercial Jet Fleet, more Boeing 727 (-100 and -200) aircraft are currently utilized in freighter configuration than are any other aircraft type. - Advanced Technology. The Company believes that its computerized database, information software, and tracking systems enable it to increase its aircraft utilization and provide better service to customers. These systems enable the Company to provide a level of service which the Company believes is not otherwise currently available in the market for on-demand air logistics. - Economies of Scale. As the leading provider of same-day air logistics charter services in the United States, the Company believes it enjoys significant pricing advantages in arranging third-party air freight charters, which results in lower charges to its customers and increased profitability for Kitty Hawk. BUSINESS STRATEGY The Company's strategy is to continue its rapid growth by: (i) acquiring additional Boeing 727-200F aircraft primarily for its ACMI contract business to meet expected growth in air freight transportation demand in both the North American and Pacific Rim markets, (ii) increasing its focus on marketing to firms reducing inventory and shortening product cycle times through direct air shipments from manufacturer to end user, (iii) continuing to provide high quality service through the ongoing development and enhancement of its computerized database, information software, and tracking systems, and (iv) pursuing the acquisition of domestic and international strategic suppliers of on-demand air and related ground transportation services. 4 7 THE OFFERING Common Stock offered by the Company...................... 2,700,000 shares Common Stock offered by the Selling Stockholder.......... 300,000 shares Common Stock to be outstanding after the offering........ 10,450,000 shares (1) Use of proceeds.......................................... For the acquisition and modification of five additional Boeing 727-200 aircraft and the repayment of indebtedness incurred for the acquisition and modification of two Boeing 727-200 aircraft. Proposed Nasdaq National Market Symbol................... KTTY
- --------------- (1) Does not include: (i) 300,000 shares of Common Stock available for the future grant of stock options under the Company's Omnibus Securities Plan and for matching contributions by the Company under its 401(k) Savings Plan, (ii) 200,000 shares of Common Stock available for issuance under the Company's Annual Incentive Compensation Plan and (iii) 100,000 shares of Common Stock available for issuance under the Company's Employee Stock Purchase Plan. See "Management -- Employee Compensation Plans and Arrangements." 5 8 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
FISCAL YEAR ENDED AUGUST 31, NINE MONTHS ------------------------------------------------- ENDED 1991 1992 1993 1994 1995 MAY 31, 1996 ------- ------- ------- -------- -------- ------------ INCOME STATEMENT DATA: Revenues: Air freight carrier................ $ 6,121 $ 6,760 $12,939 $ 28,285 $ 41,117 $ 37,042 Air logistics...................... 27,260 45,893 52,840 79,415 62,593 70,084 ------- ------- -------- -------- -------- -------- Total revenues....................... 33,381 52,653 65,779 107,700 103,710 107,126 Gross profit......................... 5,281 4,188 10,578 14,749 18,178 17,392 Stock option grant to executive...... -- -- -- -- -- 2,907(1) Operating income..................... 1,454 1,258 5,934 8,004 9,345 6,908 Net income........................... 846 1,013 4,105 5,261 4,416 3,411(1) Net income per share................. $ 0.08 $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.43(1) ======= ======= ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding...... 10,089 8,671 7,968 7,968 7,968 7,968 OPERATING DATA: Air Freight Carrier Revenue aircraft owned (at end of period)......................... 9 11 10 15 21 23 Flight hours flown(2).............. 3,615 3,567 7,030 11,795 15,283 14,168 Number of on-demand charters flown........................... 377 292 752 1,182 1,238 987 Number of ACMI contract charters flown........................... 257 655 1,314 1,734 2,555 2,530 Air Logistics Number of on-demand charters managed(3)...................... 6,137 8,416 8,996 15,531 14,198 11,209
AS OF MAY 31, 1996 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- BALANCE SHEET DATA: Working capital....................................................... $ 4,450 $ 4,450 Total assets.......................................................... 61,977 98,977 Long-term debt, including current maturities.......................... 25,739 25,739 Stockholder's equity.................................................. 23,284 60,284
- --------------- (1) Results for the nine months ended May 31, 1996, lack comparability to prior periods because such period includes one of two nonrecurring grants to an executive officer of stock options that resulted in a charge to earnings of approximately $2,907,000. Had this grant of stock options not occurred, net income for the nine months ended May 31, 1996 would have been $5,141,000 and net income per share would have been $0.65. See "Management -- Employee Compensation Plans and Arrangements." (2) As reported by the Company to the Federal Aviation Administration (the "FAA"). (3) Includes on-demand charters flown by the Company's air freight carrier. (4) Adjusted to reflect the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share and the application by the Company of the estimated net proceeds therefrom. See "Use of Proceeds." 6 9 THE COMPANY The Company conducts its operations primarily through two wholly-owned subsidiaries, Kitty Hawk Aircargo, Inc. and Kitty Hawk Charters, Inc. Kitty Hawk Aircargo, Inc. was formed in 1989 and operates as the Company's air freight carrier. Kitty Hawk Charters, Inc. was formed in 1980 and operates the Company's air logistics business. In 1980, Mr. M. Tom Christopher, the Selling Stockholder, founded Christopher Charters, Inc. which arranged on-demand air charters using third-party air freight carriers. In 1985, Mr. Christopher formed the Company to acquire Kitty Hawk Airways, Inc., an FAA certificated Part 135 (small aircraft) operator and to acquire Christopher Charters, Inc. (whose name was later changed to Kitty Hawk Charters, Inc.). Kitty Hawk Airways, Inc. was an independent on-demand air freight carrier used frequently by Christopher Charters, Inc. The Company obtained FAA Part 121 certification (transport category aircraft) in 1987 through the acquisition of a small independent air freight carrier. Kitty Hawk was reincorporated in Delaware in October 1994. The Company's principal executive offices are located at 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas 75261 and its telephone number is (214) 456-2200. 7 10 RISK FACTORS An investment in the Common Stock involves a high degree of risk. In addition to the other information in this Prospectus, prospective investors should carefully consider the following risk factors relating to the Company and its Common Stock before making an investment. AIRCRAFT OWNERSHIP AND OPERATION Capital Investment. The air freight carrier business is a highly capital-intensive business. The Company's balance sheet as of May 31, 1996, reflected an increase in its ownership of aircraft to $53.0 million from $18.6 million at August 31, 1994, primarily reflecting the acquisition of six Boeing 727-200s, two Douglas DC-9-15Fs, and three turboprop Convairs and related replacement jet engines. Since May 31, 1996, the Company has acquired and will modify two additional aircraft for an estimated cost of approximately $15.0 million. In order to further expand the Company's air freight carrier business, the Company intends to purchase used jet aircraft (including the five Boeing 727-200s the Company intends to purchase with the proceeds of the offering) that typically require certain modifications including reconfiguring the aircraft from passenger to cargo use and installing equipment to comply with noise abatement regulations. The market for used jet aircraft and parts required for such modifications is volatile and can be negatively affected by limited supply, increased demand, and other market factors and recently has experienced significant price increases. Therefore, there can be no assurance that Kitty Hawk will be able to purchase and modify additional aircraft at favorable prices or that the Company will have or be able to obtain sufficient resources with which to make such purchases and modifications. See "Business -- Business Strategy," "Business -- Government Regulation," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Operating Costs. The operation of the Company's air freight carrier business incurs considerable operational, maintenance, fuel, and personnel expenses. In fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, the costs of revenues attributable to the air freight carrier were $8.9 million, $19.5 million, $28.1 million and $27.2 million, respectively, principally reflecting an expansion of the Company's air freight carrier fleet. Kitty Hawk's operation of aircraft requires compliance with maintenance directives and regulations of the FAA. Spare or replacement parts and components may not be readily available in the marketplace. If the Company is unable to obtain necessary parts or components in a timely manner, the Company's air freight carrier business could be adversely affected. In addition, even if such parts or components are available, a shortage of supply could result in an increase in procurement costs that may adversely affect the Company's profitability. Fuel is a cost component in the operation of the Company's aircraft for on-demand services and the aircraft of third-party providers of charter services. Both the cost and availability of fuel are subject to many economic and political factors and events occurring throughout the world and recently the cost of fuel has increased markedly. Kitty Hawk has no agreement with any fuel supplier assuring the availability or price stability of fuel and such agreements are generally not available in the industry. The Company is unable to pass on increased fuel costs to GM without GM's consent, pursuant to the terms of the GM Agreement, and the Company may have similar restrictions with respect to fuel cost increases under other customer agreements in the future. Accordingly, the future cost and availability of fuel to Kitty Hawk cannot be predicted, and substantial price increases in, or the unavailability of adequate supplies of, fuel may have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Maintenance," and "Business -- Government Regulation." DEPENDENCE ON SIGNIFICANT CUSTOMERS Kitty Hawk's largest three customers directly accounted for 68.4% of total revenues in the nine months ended May 31, 1996. General Motors Corporation. Of the Company's total revenues in fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, GM accounted for $36.0 million (54.7%), $67.9 million (63.1%), $48.9 million (47.1%), and $42.1 million (39.3%), respectively. Of the revenues from GM, $32.1 million 8 11 (89.2%), $57.5 million (84.6%), $38.7 million (79.2%), and $34.2 million (81.2%), respectively, were attributable to air logistics primarily in connection with on-demand charters flown by third-party air cargo carriers, and $3.9 million (10.8%), $10.4 million (15.4%), $10.2 million (20.8%), and $7.9 million (18.8%), respectively, were attributable to on-demand charters flown by the Company's air freight carrier. Of the Company's gross profits from air logistics in fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, GM accounted for $2.1 million (32.2%), $3.0 million (50.4%), $1.4 million (27.1%), and $2.8 million (37.1%), respectively. GM accounted for 70.7%, 77.4%, 59.9%, and 59.1% of the total number of on-demand charters that were flown by the air freight carrier in 1993, 1994, and 1995 and in the nine months ended May 31, 1996, respectively. In addition to GM, the Company believes approximately 16.3% of its total revenues in the nine months ended May 31, 1996 were generated from services provided to other participants in the U.S. automotive industry, a substantial portion of which the Company believes were GM suppliers. Kitty Hawk provides on-demand logistics services to GM pursuant to a non-exclusive agreement executed in June 1990 for a term ending May 1997 (the "GM Agreement"). Pursuant to the GM Agreement, the Company is the primary manager of on-demand cargo charters for GM in North America. The GM Agreement limits the Company's utilization of its air freight carrier to a maximum of 30% of the charter revenue or charter volume in the performance of on-demand charters for GM. In the nine months ended May 31, 1996, the air freight carrier accounted for approximately 18.8% of the charter revenue from, and 8.1% of the charter volume of, the GM on-demand charters managed by the Company. These limitations could prevent Kitty Hawk from directing GM on-demand charters to its air freight carrier, thereby precluding the Company from realizing the higher gross profit margins generated by the air freight carrier as compared to charters subcontracted to third-party carriers. In addition, this limitation may restrict the flexibility of Kitty Hawk in shifting aircraft dedicated or expected to be dedicated to ACMI contract charter service to on-demand charter service, which in turn results in a greater dependence by the Company on its ACMI contract charter customers. The GM Agreement also provides that either party may, with or without cause, terminate the agreement following a quarterly review by giving the other party at least 30 days' prior written notice thereof. Therefore, there can be no assurance that the GM Agreement will remain in effect for its scheduled term or that it will be extended beyond May 1997. A change in, or renewal of, the GM Agreement on terms less favorable to the Company could have a material adverse effect on the Company. Kitty Hawk believes GM has attempted (including on at least two occasions issuing system-wide pronouncements to significantly reduce use of expedited transportation, including Kitty Hawk's air logistics services), and in the future will continue to attempt, to reduce its premium transportation expenses including amounts paid to the Company under the GM Agreement. A strike of GM workers at various plants during the third quarter of fiscal 1996 resulted in GM temporarily ceasing to use the Company's air logistics services. Any development that precipitates a reduction in GM's or its suppliers' usage of air freight charters or any decision by GM to terminate or not extend its relationship with the Company could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Relationship with GM." U.S. Postal Service. Of the Company's total revenues in fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, the U.S. Postal Service accounted for $17.3 million (26.3%), $11.1 million (10.3%), $10.0 million (9.7%), and $21.3 million (19.8%), respectively. Of these revenues, $14.3 million (83.0%), $8.3 million (74.5%), $6.0 million (59.6%), and $19.7 million (92.5%), respectively, were attributable to the Company's air logistics business in connection with its management of seasonal Christmas charters flown by third-party air cargo carriers, and $3.0 million (17.0%), $2.8 million (25.5%), $4.0 million (40.4%), and $1.6 million (7.5%), respectively, were attributable to the air freight carrier for ACMI contract charters flown by the Company on designated routes. Of the Company's gross profits from air logistics in fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, the U.S. Postal Service accounted for $4.0 million (61.5%), $2.0 million (33.8%), $1.0 million (18.9%), and $3.8 million (50.0%), respectively. The U.S. Postal Service awards contracts periodically pursuant to a public bidding process which considers quality of service and other factors, including price to a lesser extent. Bids for contracts to provide Christmas season charters generally are submitted in the summer of each year and are typically awarded 9 12 during the following fall. These contracts are typically for one year or less. The inability of Kitty Hawk to remain competitive with respect to price and quality of service would have a material adverse effect on the Company's ability to obtain such contracts. The inability of Kitty Hawk to obtain such contracts in the future (including for the 1996 Christmas season) and replace them with new business could have a material adverse effect on the Company's total revenues and profitability. Kitty Hawk's contracts with the U.S. Postal Service are subject to termination at the convenience of the U.S. Postal Service. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Air Logistics." Burlington Air Express, Inc. Recently, Burlington Air Express, Inc. has developed into a significant customer, accounting for $10.0 million (9.3%) of the Company's total revenues for the nine months ended May 31, 1996. Burlington Air Express, Inc. currently leases under one ACMI contract five of the Company's Boeing 727-200Fs and under a separate ACMI contract three of the Company's Convairs. The Boeing 727-200F ACMI contract is for a term expiring on March 1, 1999, but pursuant to the terms of this contract, either party may terminate upon thirty days' written notice the services of one Boeing 727-200F aircraft immediately and one additional Boeing 727-200F aircraft on or after each of March 1, 1997, March 1, 1998, and September 1, 1998. In addition, Burlington Air Express, Inc. may earlier terminate this contract if, among other reasons, the Company fails to meet certain performance standards. The loss of this customer, or a reduction in this customer's use of the Company's services, could have a material adverse effect on the Company. See "Business -- Air Freight Carrier." CYCLICALITY Kitty Hawk's air logistics services are provided to numerous industries and customers that experience significant fluctuations in demand based on economic conditions and other factors beyond the control of the Company and, therefore, the demand for the Company's services could be materially adversely affected by downturns in the businesses of the Company's customers. Of the Company's total revenues for the nine months ended May 31, 1996, the Company believes approximately 55.5% were generated from services provided to the U.S. automotive industry, which has historically been a cyclical industry. A contraction in the U.S. automotive industry, a prolonged work stoppage or other significant labor dispute involving that industry, or a change in policy reducing the usage of air freight charters in that industry, could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." GOVERNMENT REGULATION The Company's air freight carrier is subject to Title 49 of the United States Code (formerly the Federal Aviation Act of 1958, as amended), under which the Department of Transportation ("DOT") and the FAA exercise regulatory authority over air carriers. The DOT regulates the economic aspects of the airline industry, while the FAA regulates air safety and flight operations. The DOT is primarily responsible for regulating economic issues affecting air service, including, among other things, air carrier certification and fitness, insurance, consumer protection, unfair methods of competition and transportation of hazardous materials. The FAA is primarily responsible for regulating air safety and flight operations, including, among other things, airworthiness requirements for each type of aircraft the Company's air freight carrier operates, pilot and crew certification, aircraft maintenance and operational standards, noise abatement, airport slots and other safety-related factors. The Company's operations are subject to routine, and periodically more intensive, inspections and oversight by the FAA. Following a review of safety procedures at ValuJet, Inc., the FAA on June 19, 1996, announced it would propose changes to the FAA's and air carriers' oversight of contract maintenance and training procedures which, if implemented, would result in higher scrutiny of such maintenance and training procedures and could result in the Company incurring increased maintenance costs for its contract maintenance. See "Business -- Maintenance." Because the Company conducts operations for the U.S. military, it is also subject to inspections by the Department of Defense (the "DOD"). The Company's air 10 13 freight carrier is also subject to regulation by the DOD in connection with operations to military airfields, and, in connection with international operations, to regulation by the Department of Commerce, the U.S. Customs Service, the Immigration and Naturalization Service, and the Animal and Plant Health Inspection Service of the Department of Agriculture. The Environmental Protection Agency has jurisdiction to regulate aircraft engine exhaust emissions. All air carriers are also subject to certain provisions of the Federal Communications Act of 1934, as amended, because of their extensive use of radio and other communication facilities. Additional laws and regulations have been imposed from time to time by federal, state, and local governments that have increased significantly the cost of operations by imposing additional requirements or restrictions on operations. For example, certain cities, states, and local airport authorities prohibit flights in and out of their airports with Stage II aircraft (as defined by the FAA) or between certain hours. The FAA has proposed amendments to its flight and rest time regulations which, if adopted as proposed, could restrict the ability of the Company to respond to a shipper's request for same day delivery and/or would require the Company to hire and train additional qualified pilots to perform the Company's flight operations. The adoption of new laws, policies, or regulations, or changes in the interpretation or application of existing laws, policies or regulations, whether by the FAA, the DOT, the Federal Communications Commission, the United States government, or any foreign, state, or local government, could have a material adverse impact on Kitty Hawk and its operations. The Company's revenue fleet is comprised of ten Boeing 727-200 aircraft manufactured between 1969 and 1978, five Douglas DC-9-15 aircraft manufactured during 1967 and 1968, and nine turbo-prop Convairs manufactured between 1948 and 1957. Manufacturer's Service Bulletins ("Service Bulletins") and FAA Airworthiness Directives ("Directives") issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis cause certain of these aircraft to be subject to extensive aircraft examinations and may require certain of these aircraft to undergo structural inspections and modifications to address problems of corrosion and structural fatigue at specified times. It is possible that additional Service Bulletins or Directives applicable to the types of aircraft included in the Company's fleet could be issued in the future. The cost of compliance with Directives and Service Bulletins cannot currently be estimated, but could be substantial. The DOT and the FAA have the authority to modify, amend, suspend, or revoke the authority and licenses issued to the Company for failure to comply with the provisions of law or applicable regulation. In addition, the DOT and the FAA may impose civil or criminal penalties for violations of applicable rules and regulations. Such actions by the FAA or the DOT, if taken, could have a material adverse effect on Kitty Hawk. The DOT and the Environmental Protection Agency exercise regulatory jurisdiction over the transportation of hazardous materials. The Company may from time to time transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility for compliance with these regulations and are responsible for proper packaging and labeling. Substantial civil monetary penalties can be imposed on both shippers and air carriers for infractions of these regulations. Certain of the Company's air freight carrier operations are conducted wholly between two or more points that are all located outside of the United States. To the extent required to do so, the Company obtains authority to operate such foreign operations from the aeronautical authorities of the countries in which such operations are conducted. As with the certificates and license obtained from U.S. authorities, the Company must comply with all applicable rules and regulations imposed by these foreign aeronautical authorities or be subject to the suspension, amendment or modification of its operating authorities. On December 31, 1995, a 6.25% federal transportation excise tax applicable to air freight transportation expired. Reinstatement of the tax or adoption of a different tax or user fee by the government will result in higher costs to shippers of air freight and air freight carriers, which may have a material adverse effect on the Company's freight traffic, yields, revenue, and margins. On July 9, 1996, the U.S. Senate passed legislation that, if enacted into law, would reinstate the 6.25% federal transportation excise tax. Under current federal aviation law, the Company's air freight carrier could cease to be eligible to operate as an air freight carrier if more than 25% of the voting stock of the Company were owned or controlled by non- 11 14 U.S. citizens. Moreover, in order to hold an air freight carrier certificate, the president and two-thirds of the directors and officers of an air carrier must be U.S. citizens. All of the Company's directors and officers are U.S. citizens. Furthermore, (i) the Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter and (ii) the Bylaws do not permit non-U.S. citizens to serve as directors or officers of the Company. See "Business -- Government Regulation" and "Description of Capital Stock." COMPETITION The market for air freight carrier services has been and is expected to remain highly competitive. Kitty Hawk competes with other air freight carriers with regard to furnishing on-demand charters and ACMI contract charters. The Company believes that the basis for such competition is price, quality of service, and the location and performance characteristics of aircraft. The Company's air freight carrier is also subject to competition from other modes of transportation, including, but not limited to, railroads and trucking. Numerous competitors of Kitty Hawk provide or coordinate door-to-door air freight charters on an expedited basis. The market for air logistics also has been and is expected to remain highly competitive. The Company's principal competitors for on-demand air logistics services are other air logistics companies, air freight carriers which seek to book charters directly with customers, and air freight companies that offer expedited service. During the last fourteen months, each of Emery Worldwide Airlines Inc., Federal Express Corporation, and United Parcel Service have entered the expedited air freight business by offering "next-flight-out" service. The Company's ability to attract and retain business also is affected by the decisions of the transportation departments of commercial and industrial businesses whether, and to what extent, to coordinate their own transportation needs. Prior to 1990, GM conducted its air logistics business in-house. GM and certain other customers maintain transportation departments that could be expanded to manage charters in-house which could have a material adverse effect on Kitty Hawk. With respect to the Company's ACMI contract charter business, the Company could be adversely affected by the decision of certain of its certificated customers to acquire additional aircraft, or by its uncertificated customers to acquire and operate their own aircraft, to service routes currently serviced by Company aircraft. Many of the Company's competitors and customers have substantially greater financial resources than the Company. POSSIBILITY THAT HISTORICAL RATES OF GROWTH WILL NOT CONTINUE; MANAGEMENT OF EXPANDED OPERATIONS From August 31, 1990 to May 31, 1996, Kitty Hawk experienced substantial growth. If Kitty Hawk continues to grow, the Company's ability to manage growth successfully will require it to continue to improve its operations and financial management; to develop the management skills of its account managers and supervisors; and to train, motivate, and effectively manage its employees. The Company's failure to manage growth successfully could have a material adverse effect on the Company's business. A significant factor in the growth of the Company and its air logistics business has been the utilization by certain manufacturers (particularly GM) of "just-in-time" inventory management systems that rely on the use of same-day air freight delivery service. Because many manufacturers have already adopted "just-in-time" inventory management programs, much of the growth in the expedited, same-day air logistics business associated with the conversion to such inventory control systems may already have occurred and, therefore, the rates of growth historically experienced by the Company's air logistics business may not continue. See "Business -- Overview of Expedited Air Freight Transportation Industry." The Company's future success is dependent to a significant degree on its ability to manage and integrate profitably five Boeing 727-200Fs that the Company intends to acquire and place in service during fiscal year 1997, three of which the Company anticipates will be initially dedicated to ACMI contract charter use. Kitty Hawk is seeking to obtain new ACMI contracts with additional and existing customers, to which the Company anticipates such aircraft would be dedicated when placed in service. The Company intends to have new ACMI contracts in place for these aircraft by the time they are placed in service. However, to the extent arrangements for such new ACMI contracts have not been made at such time, Kitty Hawk would seek other 12 15 revenue opportunities for such aircraft although there can be no assurance that such opportunities will be available at such time. The failure to generate adequate revenue from such Boeing 727-200Fs pending the entering into of ACMI contracts, or the failure to secure ACMI contracts for such aircraft, could have a material adverse effect on the Company. Furthermore, there also can be no assurance that Kitty Hawk will be able to achieve profitable results from these aircraft or any other aircraft acquired in the future. See "Business." RISKS RELATED TO GROWTH THROUGH ACQUISITIONS One of Kitty Hawk's business strategies is to continue its growth by pursuing the acquisition of both domestic and international strategic suppliers of on-demand air and related ground transportation services. Growth through acquisition involves substantial risks, including improper valuation and inadequate or unsuccessful integration of acquired businesses. There can be no assurance that suitable acquisition candidates will be available, that the Company will be able to acquire, profitably manage, or successfully integrate such additional companies, or that any such future acquisitions will produce returns justifying the investment by Kitty Hawk. In addition, the Company may compete for acquisition candidates with its competitors or other companies that have significantly greater resources than the Company. See "Business -- Business Strategy." Kitty Hawk currently intends to finance future acquisitions by issuing shares of Common Stock to sellers of such businesses as all or a portion of the consideration to be paid. Any future such issuance may result in substantial dilution to purchasers of the shares of Common Stock offered hereby. In the event that sellers of potential acquisition candidates are unwilling to accept shares of Common Stock as part of the consideration for the sale of their businesses, Kitty Hawk may be required to utilize its available cash resources or to pursue other types of financing to complete any acquisitions. DEPENDENCE ON KEY PERSONNEL The Company believes that its continued success depends, and will continue to depend, on the services of: (i) M. Tom Christopher, the founder, Chairman of the Board of Directors, Chief Executive Officer, and, until recently, the sole stockholder of the Company and (ii) Tilmon J. Reeves, the President and Chief Operating Officer of the Company who is primarily responsible for the day-to-day operations of the Company. The loss of services of either Mr. Christopher or Mr. Reeves could have a material adverse effect on the Company. The GM Agreement provides that GM may terminate the GM Agreement in the event of a change in management of Kitty Hawk Charters, Inc. Mr. Christopher, Mr. Reeves, and Mr. Richard R. Wadsworth, Senior Vice President -- Finance, Chief Financial Officer, and Secretary have entered into employment agreements with the Company. See "Management -- Employment Agreements." OPERATIONS DEPENDENT UPON LIMITED FLEET Because 18 of the Company's 24 aircraft are or are expected to be dedicated to service under ACMI contracts (and the Company anticipates three of the five aircraft to be purchased with the proceeds of the offering also will be so dedicated), in the event one or more of the Company's aircraft were destroyed or out of service for an extended period of time, the Company's ability to fulfill its obligations under one or more of its ACMI contracts could be impaired. While Kitty Hawk believes that its insurance coverage is sufficient to cover the replacement cost of an aircraft, there can be no assurance that suitable replacement aircraft could be purchased or leased or that, if purchased, the Company could utilize such an aircraft without incurring substantial costs or delays. SEASONALITY The Company's air logistics business is seasonal, with its highest revenues historically occurring in the Company's second and fourth fiscal quarters due to the services provided to the U.S. Postal Service during the Christmas holiday season in the Company's second fiscal quarter and to increased production schedules of GM and its suppliers in the Company's first and fourth fiscal quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality" and "Business." 13 16 CONTROL BY MR. CHRISTOPHER Immediately after completion of this offering, Mr. Christopher will own 7,123,436 shares, or approximately 68.2% (63.9% if the Underwriters' over-allotment option is exercised in full), of the Common Stock. Consequently, Mr. Christopher will have the ability to elect all of the directors of the Company and to effect or prevent certain corporate transactions that require majority approval, including mergers and other business combinations. Furthermore, Mr. Christopher will be able to reject proposed transactions favored by a majority of the independent stockholders pursuant to voting decisions made by Mr. Christopher in his capacity as a stockholder, which decisions may be made independent of his fiduciary duty to stockholders in his capacity as a director of the Company. See "Principal Stockholders and Selling Stockholder." BENEFITS TO SELLING STOCKHOLDER AND OTHER AFFILIATES OF THE COMPANY Benefits to the Selling Stockholder, Mr. Christopher, as a result of the offering include the increased marketability of his shares of Common Stock and the sale of certain of his shares of Common Stock in the offering. The original aggregate purchase price of Mr. Christopher's shares in a predecessor corporation, which shares he ultimately exchanged for his shares of Common Stock, was approximately $1,000. Messrs. Reeves and Wadsworth recently were granted, and exercised, options to purchase 390,707 and 153,567 shares of Common Stock respectively for a purchase price of $.01 per share. Pursuant to a provision in such options, the Company withheld 40% of the shares of Common Stock to be issued to Messrs. Reeves and Wadsworth in order to satisfy income tax withholding obligations. Messrs. Reeves and Wadsworth also will benefit from the increased marketability of their shares. The shares of Common Stock held by Messrs. Christopher, Reeves and Wadsworth will have a market value (based upon an assumed initial offering price of $15.00 per share) immediately following the offering of $106,851,540 ($100,101,525 if the Underwriters' over-allotment option is exercised in full), $3,516,360 and $1,382,100, respectively. See "Management" and "Principal Stockholders and Selling Stockholder." NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this offering. Accordingly, no assurance can be given as to the liquidity of the market for the Common Stock or the price at which any sales may occur. The future market price of the Common Stock is likely to depend upon a variety of events, including quarter-to-quarter variations in operating results, news announcements, trading volume, general market trends, and other factors. The initial public offering price of the Common Stock will be determined by negotiations among the Company, the Selling Stockholder, and the representatives of the Underwriters and may not be indicative of the market price of the Common Stock after this offering. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following this offering could adversely affect prevailing market prices for the Common Stock. Upon completion of this offering, 10,450,000 shares of Common Stock will be outstanding. The 3,000,000 shares (or 3,450,000 shares, if the Underwriters' over-allotment option is exercised in full) offered hereby will be freely tradable by persons that are not "affiliates" of Kitty Hawk without restriction under the Securities Act of 1933, as amended (the "Securities Act"). All of the remaining 7,450,000 shares of Common Stock (7,000,000 shares if the Underwriters' over-allotment option is exercised in full) of Common Stock are deemed "restricted securities" pursuant to Rule 144 under the Securities Act and may be resold to the extent permitted by Rule 144 and Rule 701 of the Securities Act or any exemption under the Securities Act. The Company intends to file a registration statement under the Securities Act covering the 600,000 shares of Common Stock reserved for issuance under the Company's Omnibus Securities Plan, 401(k) Savings Plan, Annual Incentive Compensation Plan and Employee Stock Purchase Plan (collectively, the "Plans"). See "Management -- Employee Compensation Plans and Arrangements." As of the date hereof, no options or shares had been issued under any of these Plans. Such registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to 14 17 affiliates, be available for sale in the open market when issued pursuant to the Plans, subject to provisions of the Plans, including vesting, and the lock-up agreements described herein. The Selling Stockholder, as well as Messrs. Reeves and Wadsworth, will hold, in the aggregate, 7,450,000 shares of Common Stock after this offering (7,000,000 shares if the Underwriters' over-allotment option is exercised in full). The Company, its directors and executive officers (other than the Selling Stockholder, who has agreed to a period of 360 days) have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock of the Company or any securities convertible into, or exercisable or exchangeable for, Common Stock of the Company, except for the grant of options or other rights under the Company's Omnibus Securities Plan so long as such options do not vest within such 180 day period. Such consent of Smith Barney Inc. may be provided without notice to purchasers of the Common Stock or to officials of the Nasdaq National Market System. See "Management -- Employee Compensation Plans and Arrangements" and "Shares Eligible for Future Sale." POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS AND THE GM AGREEMENT The Certificate of Incorporation and Bylaws of Kitty Hawk include certain provisions that may be deemed to have anti-takeover effects and may delay, defer, or prevent a takeover attempt that a stockholder of the Company might consider to be in the best interests of the Company or its stockholders. These provisions: (i) classify the Company's Board of Directors into three classes, each of which will serve for different three year periods, (ii) provide that only the Board of Directors, the Chairman of the Board of Directors, or the beneficial owners of 25% or more of the outstanding voting capital stock may call special stockholders' meetings, (iii) require the vote of the holders of at least two-thirds of the outstanding shares of each class of the Company's capital stock then entitled to vote thereon for the stockholders to amend or repeal the Bylaws or certain provisions of the Certificate of Incorporation, (iv) require the vote of at least two-thirds of the members of the Board of Directors who are elected by the holders of Common Stock for the Board of Directors to amend or repeal the Bylaws, (v) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings, (vi) subject the Company to a provision of Delaware law that restricts certain "business combinations" involving a stockholder who owns 15% or more of the Company's outstanding voting stock, (vii) limit the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter, and (viii) prohibit non-U.S. citizens from serving as directors or officers of the Company. See "Description of Capital Stock -- Special Provisions of the Certificate of Incorporation and Bylaws" and "Business -- Government Regulation." In addition, the requirement that the vote of the holders of at least two-thirds of the outstanding shares of each class of the Company's capital stock is necessary for the stockholders to amend or repeal the Bylaws or certain provisions of the Certificate of Incorporation may adversely affect the extent to which stockholders, other than Mr. M. Tom Christopher, exercise control over the Company. GM may terminate the GM Agreement in the event Mr. Christopher no longer holds majority ownership of the Company or if a major automobile manufacturer acquires more than 20% of the outstanding Common Stock of the Company. PREFERRED STOCK The authorized capital stock of the Company includes 1,000,000 shares of preferred stock (the "Preferred Stock"). The Board of Directors, in its sole discretion, may designate and issue one or more series of Preferred Stock from the authorized and unissued shares of Preferred Stock. Subject to limitations imposed by law or the Company's Certificate of Incorporation, the Board of Directors is empowered to determine: (i) the designation of and the number of shares constituting each series of Preferred Stock, (ii) the dividend rate for each series, (iii) the terms and conditions of any voting, conversion, and exchange rights for each series, (iv) the amounts payable on each series upon redemption or the Company's liquidation, dissolution or 15 18 winding-up, (v) the provisions of any sinking fund for the redemption or purchase of shares of any series, and (vi) the preferences and the relative rights among the series of Preferred Stock. At the discretion of the Board of Directors, and subject to its fiduciary duties, the Preferred Stock could be used to deter any takeover attempt, by tender offer or otherwise. In addition, Preferred Stock could be issued with voting and conversion rights that could adversely affect the voting power of holders of Common Stock. The issuance of Preferred Stock could also result in a series of securities outstanding that would have preferences over the Common Stock with respect to dividends and in liquidation. The Board of Directors has no current intention to issue shares of Preferred Stock. DILUTION The initial public offering price is substantially higher than the net tangible book value per share of the Common Stock. Accordingly, investors purchasing shares of Common Stock in this offering will incur immediate and substantial dilution of $9.05 per share based upon an assumed initial offering price of $15.00 per share. See "Dilution." USE OF PROCEEDS The net proceeds to be received by Kitty Hawk from this offering, after deducting the estimated underwriting discount and offering expenses payable by the Company, are estimated to be approximately $37.0 million, based on an assumed initial public offering price of $15.00 per share. The Company will not receive any proceeds from the sale of shares of Common Stock offered by the Selling Stockholder. Kitty Hawk intends to use the proceeds to acquire and modify five additional Boeing 727-200F aircraft for an estimated total cost of approximately $23.5 million, three of which the Company anticipates will be initially dedicated to ACMI contract charter use and two of which will be dedicated to on-demand charters. The Company, however, periodically evaluates the utilization of its owned aircraft and, therefore, the Company's actual aircraft use may vary materially from the current plans. In addition, the Company intends to utilize approximately $13.5 million of the net proceeds to repay all but approximately $1.6 million of bank indebtedness incurred or expected to be incurred to purchase, maintain, and modify (including cargo reconfiguration and noise abatement modifications) two Boeing 727-200s acquired during July 1996 or, to the extent such maintenance and modification expenses have not been incurred prior to the receipt of net proceeds from this offering, to pay such expenses as incurred. Of this indebtedness: (i) $3.0 million (which amount of indebtedness is currently outstanding) bears interest at the lender's prime rate or, at the Company's option, the London Interbank Offering Rate plus 1.95%, is secured by the Company's accounts receivable, and has a final maturity date of July 31, 1996, and (ii) $10.5 million (which is expected to be incurred under the anticipated coordinated banking relationship described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources") is expected to bear interest at the London Interbank Offering Rate plus 150 to 200 basis points (based upon a fixed charge coverage ratio), be secured by accounts receivable, and would have to be repaid under the terms of the anticipated coordinated banking relationship within 150 days of its advance. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment grade obligations. DIVIDEND POLICY Kitty Hawk has never declared or paid any cash dividends on the Common Stock. The Company presently intends to retain earnings for development and growth of its business and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The terms of the Company's existing loan agreements with Wells Fargo Bank, National Association prohibit the payment of dividends on the Common Stock. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors, after taking into account various factors, including the Company's earnings, capital requirements and surplus, financial position, contractual restrictions, and other relevant business conditions and there can be no assurance that dividends will be paid. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 16 19 DILUTION As of May 31, 1996, the net tangible book value of Kitty Hawk was $23.3 million, or $3.14 per share of Common Stock. Net tangible book value per share is defined as the book value of all tangible assets of the Company, less its total liabilities, divided by the total number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the 2,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $15.00 per share and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company as of May 31, 1996 would have been approximately $60.3 million, or $5.95 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $2.81 per share to the existing stockholders and an immediate dilution to new stockholders of $9.05 per share. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share............... $15.00 Net tangible book value per share before the offering......... $3.14 Increase per share attributable to new investors.............. 2.81 ----- Pro forma net tangible book value per share after the offering.................................................... 5.95 ------ Dilution per share to new investors........................... $ 9.05(1) ======
- --------------- (1) Excludes the effect of 326,564 shares issued to Messrs. Reeves and Wadsworth on June 26, 1996, upon the exercise of outstanding options. See "Management -- Employee Compensation Plans and Arrangements." The following table sets forth on a pro forma basis as of June 28, 1996 the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid, and the average price per share paid by the existing stockholders and by the new investors (before deduction of underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ----------- ------- --------- Existing stockholders........ 7,750,000 74.16% $ 4,265 .01% * New investors................ 2,700,000 25.84 40,500,000 99.99 $ 15.00 ---------- ------ ----------- ------ Total........................ 10,450,000 100.00% $40,504,265 100.00% ========== ====== =========== ======
- --------------- * Less than $0.01 per share. The foregoing table assumes no exercise of the Underwriters' over-allotment option. Under Kitty Hawk's Omnibus Securities Plan and 401(k) Savings Plan, Annual Incentive Compensation Plan and Employee Stock Purchase Plan, Kitty Hawk has reserved for issuance 300,000, 200,000 and 100,000 shares of Common Stock, respectively. As of June 28, 1996, no options or shares had been issued under any of these plans. To the extent that any options or shares are issued under these plans, there will be further dilution to new investors. 17 20 CAPITALIZATION The following table sets forth the capitalization of Kitty Hawk at May 31, 1996, and as adjusted to give effect to the sale of the 2,700,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share and the application of the estimated net proceeds therefrom as described in "Use of Proceeds."
MAY 31, 1996 --------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Current maturities of long-term debt............................. $ 4,347 $ 4,347 ======= ======= Long-term debt................................................... $21,392 $21,392 Stockholders' equity: Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued............................................ -- -- Common stock, $.01 par value; 25,000,000 shares authorized; 7,423,436 shares issued and outstanding; 10,123,436 shares issued and outstanding as adjusted(1).............................. 74 101 Paid-in capital................................................ 2,907 39,880 Retained earnings.............................................. 20,303 20,303 ------- ------- Total stockholders' equity....................................... 23,284 60,284 ------- ------- Total capitalization............................................. $44,676 $81,676 ======= =======
- --------------- (1) Does not include: (i) 326,564 shares issued to Messrs. Reeves and Wadsworth on June 26, 1996, upon the exercise of outstanding options, (ii) 300,000 shares of Common Stock available for the future grant of stock options under the Company's Omnibus Securities Plan and for matching contributions by the Company under its 401(k) Savings Plan, (iii) 200,000 shares of Common Stock available for issuance under the Company's Annual Incentive Compensation Plan, and (iv) 100,000 shares of Common Stock available for issuance under the Company's Employee Stock Purchase Plan. See "Management -- Employee Compensation Plans and Arrangements." 18 21 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) The following table sets forth selected financial and operating data with respect to Kitty Hawk for each of the fiscal years indicated and the nine months ended May 31, 1995 and May 31, 1996. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. The selected financial data as of and for each of the fiscal years ended August 31, 1991 through 1995 and as of and for the nine months ended May 31, 1996 has been derived from audited consolidated financial statements of the Company. In the opinion of management of the Company, the data presented for the nine months ended May 31, 1995, which are derived from the Company's unaudited consolidated financial statements, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for such period. Results for the nine months ended May 31, 1996 are not necessarily indicative of results for the entire fiscal year.
NINE MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, MAY 31, ----------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- ------- -------- INCOME STATEMENT DATA: Revenues: Air freight carrier.......................... $ 6,121 $ 6,760 $12,939 $ 28,285 $ 41,117 $30,768 $ 37,042 Air logistics................................ 27,260 45,893 52,840 79,415 62,593 47,404 70,084 ------- ------- ------- -------- -------- ------- -------- Total revenues................................. 33,381 52,653 65,779 107,700 103,710 78,172 107,126 Total costs of revenues........................ 28,100 48,465 55,201 92,951 85,532 64,362 89,734 ------- ------- ------- -------- -------- ------- -------- Gross profit................................... 5,281 4,188 10,578 14,749 18,178 13,810 17,392 General and administrative expenses............ 3,827 2,930 4,394 6,013 7,832 5,156 6,676 Non-qualified profit sharing expense........... -- -- 250 732 1,001 772 901 Stock option grant to executive................ -- -- -- -- -- -- 2,907(1) ------- ------- ------- -------- -------- ------- -------- Operating income............................... 1,454 1,258 5,934 8,004 9,345 7,882 6,908 Interest expense............................... (132) (157) (134) (343) (1,185) (783) (1,344) Contract settlement income, net(2)............. -- -- 725 1,178 -- -- -- Other income (expense)......................... (49) 287 193 (432) (601) 87 169 ------- ------- ------- -------- -------- ------- -------- Income before income taxes..................... 1,273 1,388 6,718 8,407 7,559 7,186 5,733 Income taxes................................... 427 375 2,613 3,146 3,143 2,736 2,322 ------- ------- ------- -------- -------- ------- -------- Net income..................................... $ 846 $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,450 $ 3,411(1) ======= ======= ======= ======== ======== ======= ======== Net income per share........................... $ 0.08 $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.56 $ 0.43(1) ======= ======= ======= ======== ======== ======= ======== Weighted average common and common equivalent shares outstanding........................... 10,089 8,671 7,968 7,968 7,968 7,968 7,968 OPERATING DATA: Air Freight Carrier Revenue aircraft owned (at end of period).... 9 11 10 15 21 21 23 Flight hours flown(3)........................ 3,615 3,567 7,030 11,795 15,283 11,253 14,168 Number of on-demand charters flown........... 377 292 752 1,182 1,238 951 987 Number of ACMI contract charters flown....... 257 655 1,314 1,734 2,555 1,794 2,530 Air Logistics Number of charters managed(4)................ 6,137 8,416 8,996 15,531 14,198 10,458 11,209 BALANCE SHEET DATA: Working capital................................ $ 913 $ 895 $ 4,679 $ 4,223 $ 1,747 $ 727 $ 4,450 Total assets................................... 9,699 9,874 18,598 37,911 47,954 45,382 61,977 Long-term debt, including current maturities... 1,085 2,367 976 9,145 16,981 17,209 25,739 Stockholder's equity........................... 2,226 3,184 7,289 12,550 16,966 17,000 23,284
- --------------- (1) Results for the nine months ended May 31, 1996, lack comparability to prior periods because such period includes one of two nonrecurring grants to an executive officer of stock options that resulted in a charge to earnings of approximately $2,907,000. Had this grant of stock options not occurred, net income for the nine months ended May 31, 1996 would have been $5,141,000 and net income per share would have been $0.65. See "Management -- Employee Compensation Plans and Arrangements." (2) Reflects sums received in settlement of litigation. See "Legal Proceedings -- Litigation and Arbitration Related to Postal Contract" and Note 5 of Notes to Consolidated Financial Statements. (3) As reported by the Company to the FAA. (4) Includes on-demand charters flown by the Company's air freight carrier. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Revenues. The Company's revenues are derived from two related businesses: (i) air freight carrier and (ii) air logistics. Air freight carrier revenues are derived substantially from ACMI contract and on-demand charters flown with Company aircraft. Air logistics revenues are derived substantially from on-demand air freight charters arranged by Kitty Hawk for its customers utilizing the flight services of third-party air freight carriers. With respect to on-demand charters that are arranged by the Company and flown by its air freight carrier, charges to the customer for air transportation are accounted for as air freight carrier revenues and charges for ground handling and transportation are accounted for as air logistics revenues. GM and the U.S. Postal Service have accounted for a substantial majority of the Company's revenues for the last three fiscal years and the nine months ended May 31, 1996. A contract with GM for on-demand charters produced revenues of $36.0 million, $67.9 million, $48.9 million, and $42.1 million in fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, respectively, which represented 54.7%, 63.1%, 47.1%, and 39.3% of the Company's total revenues for such periods. Of the revenues derived from GM for fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, 10.7%, 15.4%, 20.8%, and 18.8%, respectively, were attributable to the air freight carrier and 89.3%, 84.6%, 79.2%, and 81.2%, respectively, were attributable to air logistics. Revenues derived from GM for fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, constituted 30.0%, 36.9%, 24.7%, and 21.4%, respectively, of the revenues derived from the air freight carrier business and 60.8%, 72.4%, 61.9%, and 48.7%, respectively, of the revenues derived from the air logistics business. Of the Company's gross profits from air logistics in fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, GM accounted for $2.1 million (32.2%), $3.0 million (50.4%), $1.4 million (27.1%), and $2.8 million (37.1%), respectively. The U.S. Postal Service accounted for revenues of $17.3 million, $11.1 million, $10.0 million, and $21.3 million in fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, respectively, which represented 26.3%, 10.3%, 9.7%, and 19.8% of the Company's total revenues for such periods, respectively. Of the revenues derived from the U.S. Postal Service for fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, 83.0%, 74.5%, 59.6%, and 92.5%, respectively, were attributable to air logistics for seasonal Christmas charters flown by third-party air freight carriers and 17.0%, 25.5%, 40.4%, and 7.5%, respectively, were attributable to the air freight carrier for ACMI contract charters. Revenues derived from the U.S. Postal Service for fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, constituted 22.7%, 10.0%, 9.9%, and 4.3%, respectively, of the revenues derived from the air freight carrier business and 27.2%, 10.4%, 9.6%, and 28.1%, respectively, of the revenues derived from the air logistics business. Of the Company's gross profits from air logistics in fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, the U.S. Postal Service accounted for $4.0 million (61.5%), $2.0 million (33.8%), $1.0 million (18.9%), and $3.8 million (50.0%), respectively. Burlington Air Express, Inc. accounted for revenues of $10.0 million in the nine months ended May 31, 1996, which represented 9.3% of the total revenues for such period and constituted 25.9% of the revenues derived from the air freight carrier business and 0.5% of the revenues derived from the air logistics business. Of these revenues, 96.2% were attributable to the air freight carrier for ACMI contract charters and 3.8% were attributable to air logistics. See "Risk Factors -- Dependence on Significant Customers." Costs of Revenues. The principal components of the costs of revenues attributable to the air freight carrier consist of the costs for the maintenance and operation of its aircraft including the salaries of pilots and maintenance personnel, charges for fuel, insurance and maintenance, and depreciation of engines and airframes. Generally, charges for fuel are only applicable for the on-demand charters flown by the air freight carrier because fuel for the ACMI contract charters is generally provided by the customer or billed to them on a direct pass-through basis. The principal components of the costs of revenues attributable to air logistics consist of subcharter costs paid to third-party air freight carriers and costs paid for ground handling and transportation. With respect to on-demand charters that are flown by the air freight carrier, all related air 20 23 transportation expenses are allocated to the air freight carrier and all related cargo ground handling and transportation expenses are allocated to air logistics. Under an earlier version of the Company's Annual Incentive Compensation Plan, the Company awarded semiannual cash bonuses to its employees. See "Management -- Employee Compensation Plans and Arrangements." The aggregate amount of the bonuses for each of the fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, have equaled 3.6%, 8.0%, 11.7%, and 13.6% of the Company's income before the deduction of income taxes and the bonuses that were paid under the Annual Incentive Compensation Plan. Significant Events Affecting Comparability of Results of Operations. Since September 1, 1992, several events have affected the comparability of results of operations for each of the last three fiscal years and the nine months ended May 31, 1995 and 1996, and will affect the comparability of the results of operations for fiscal year 1996. First, on December 31, 1995, the Company granted Mr. Reeves options to purchase 390,707 shares of Common Stock for an exercise price of $.01 per share, that resulted in a charge to earnings of approximately $2,907,000. Second, on June 12, 1996, the Company granted Mr. Wadsworth options to purchase 153,567 shares of Common Stock for an exercise price of $.01 per share, which will result in a charge to earnings in the fourth quarter of fiscal 1996 of approximately $1,325,000. Third, fiscal years 1993 and 1994 included contract settlement income amounting to $725,000 and $1,178,000, respectively. See Note 5 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS The following table sets forth, on a comparative basis for the periods indicated, the components of the Company's gross profit (in thousands) and the gross profit margin by revenue type:
FISCAL YEAR ENDED AUGUST 31, NINE MONTHS ENDED MAY 31, -------------------------------------------------------- ------------------------------------ 1993 1994 1995 1995 1996 ---------------- ---------------- ---------------- ---------------- ---------------- Air freight carrier: Revenues................... $12,939 100.0% $28,285 100.0% $41,117 100.0% $30,768 100.0% $37,042 100.0% Costs of revenues.......... 8,912 68.9 19,550 69.1 28,104 68.4 20,795 67.6 27,246 73.6 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Gross profit............... $ 4,027 31.1% $ 8,735 30.9% $13,013 31.6% $ 9,973 32.4% $ 9,796 26.4% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Air logistics: Revenues................... $52,840 100.0% $79,415 100.0% $62,593 100.0% $47,404 100.0% $70,084 100.0% Costs of revenues.......... 46,288 87.6 73,402 92.4 57,428 91.7 43,567 91.9 62,488 89.2 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Gross profit............... $ 6,552 12.4% $ 6,013 7.6% $ 5,165 8.3% $ 3,837 8.1% $ 7,596 10.8% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
21 24 The following table presents, for the periods indicated, consolidated income statement data expressed as a percentage of total revenues:
FISCAL YEAR ENDED AUGUST NINE MONTHS 31, ENDED MAY 31, ------------------------- --------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Revenues: Air freight carrier.............................. 19.7% 26.3% 39.6% 39.4% 34.6% Air logistics.................................... 80.3 73.7 60.4 60.6 65.4 ----- ----- ----- ----- ----- Total revenues..................................... 100.0 100.0 100.0 100.0 100.0 Total costs of revenues............................ 83.9 86.3 82.5 82.3 83.8 ----- ----- ----- ----- ----- Gross profit....................................... 16.1 13.7 17.5 17.7 16.2 General and administrative expenses................ 6.7 5.6 7.6 6.6 6.2 Non-qualified profit sharing expense............... 0.4 0.7 0.9 1.0 0.8 Stock option grant to executive.................... -- -- -- -- 2.7 ----- ----- ----- ----- ----- Operating income................................... 9.0 7.4 9.0 10.1 6.5 Interest expense................................... (0.2) (0.3) (1.1) (1.0) (1.3) Contract settlement income, net.................... 1.1 1.1 -- -- -- Other income (expense)............................. 0.3 (0.4) (0.6) 0.1 0.2 ----- ----- ----- ----- ----- Income before income taxes......................... 10.2 7.8 7.3 9.2 5.4 Income taxes....................................... 4.0 2.9 3.0 3.5 2.2 ----- ----- ----- ----- ----- Net income......................................... 6.2% 4.9% 4.3% 5.7% 3.2% ===== ===== ===== ===== =====
NINE MONTHS ENDED MAY 31, 1996 COMPARED TO NINE MONTHS ENDED MAY 31, 1995 Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI contract charter revenues were $14.6 million and $20.8 million, or 39.5% and 56.3%, respectively, of total air freight carrier revenues for the nine months ended May 31, 1996, as compared to $14.5 million and $14.9 million, or 47.2% and 48.4%, respectively, for the nine months ended May 31, 1995. ACMI contract charter revenues for the nine months ended May 31, 1996, increased 40.0% over the nine months ended May 31, 1995, primarily as the result of additional Boeing 727-200F ACMI contract charters. Revenues from on-demand charters flown by Company aircraft for the nine months ended May 31, 1996, increased 0.7% from the comparable prior year period. For the nine months ended May 31, 1996, as compared to the nine months ended May 31, 1995, prices for the Company's on-demand and ACMI contract charters remained relatively constant. Revenues -- Air Logistics. Air logistics revenues increased $22.7 million, or 47.8%, to $70.1 million in the nine months ended May 31, 1996, from $47.4 million in the nine months ended May 31, 1995. This increase was primarily due to increased demand for on-demand charters from the automobile industry in the fourth quarter of calendar year 1995 and a substantial increase in the number of managed charters for the U.S. Postal Service during December 1995. For the nine months ended May 31, 1996, as compared to the nine months ended May 31, 1995, prices for the Company's air logistics services remained relatively constant. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $6.5 million, or 31.0%, to $27.2 million in the nine months ended May 31, 1996, from $20.8 million in the nine months ended May 31, 1995, reflecting the increased volume of business from Boeing 727-200F ACMI contract charters. Gross profit margin from the air freight carrier decreased to 26.4% in the nine months ended May 31, 1996, from 32.4% in the comparable prior year period. This decrease reflects the increase in ACMI contract charters, which produce lower gross margins than on-demand charters. As reported to the FAA, overall aircraft utilization increased to 14,168 flight hours for the nine months ended May 31, 1996, from 11,253 in the nine months ended May 31, 1995, a 25.9% increase. This increase was primarily due to the increased hours flown for ACMI contract charters. 22 25 Costs of Revenues -- Air Logistics. Air logistics costs of revenues increased $18.9 million, or 43.4%, to $62.5 million in the nine months ended May 31, 1996, from $43.6 million in the nine months ended May 31, 1995, reflecting the increased volume of business. The gross profit margin from air logistics increased to 10.8% in the nine months ended May 31, 1996, from 8.1% in the comparable prior year period, a 33.3% increase. This increase was primarily due to the Company's success in reducing its costs paid to third-party air freight carriers and ground service providers and increased gross profit margin from the Company's U.S. Postal Service Christmas contract in December 1995. General and Administrative Expenses. General and administrative expenses increased $1.5 million, or 29.5%, to $6.7 million in the nine months ended May 31, 1996, from $5.2 million in the nine months ended May 31, 1995. This increase was primarily due to an increase in support functions and administrative costs associated with the growth in the aircraft fleet and the increased revenue volume for the air freight carrier in the nine months ended May 31, 1996. As a percentage of total revenues, general and administrative expenses decreased to 6.2% in the nine months ended May 31, 1996, from 6.6% in the nine months ended May 31, 1995. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased $129,000, or 16.7%, to $901,000 in the nine months ended May 31, 1996, from $772,000 in the nine months ended May 31, 1995, reflecting the increased profitability from operating activities of Kitty Hawk in the nine months ended May 31, 1996. Stock Option Grant to Executive. During the nine months ended May 31, 1996, the Company granted an executive officer options to purchase 390,707 shares of Common Stock that resulted in a charge to earnings of approximately $2,907,000. Operating Income. Operating income decreased $1.0 million, or 12.4%, to $6.9 million in the nine months ended May 31, 1996, from $7.9 million in the nine months ended May 31, 1995. Operating income margin decreased to 6.5% from 10.1%, for the nine month periods ended May 31, 1996, and 1995, respectively. Interest Expense. Interest expense increased to $1.3 million for the nine months ended May 31, 1996 from $783,000 in the nine months ended May 31, 1995, a 71.7% increase. The increase was primarily the result of the incurrence of additional long-term debt to finance the acquisition of two Boeing 727-200F aircraft in the second half of fiscal year 1995 and two additional Boeing 727-200F aircraft in the nine months ended May 31, 1996. Other Income (Expense). Other income increased to $169,000 in the nine months ended May 31, 1996, from $87,000 in the comparable prior year period, primarily due to increased interest income. Income Taxes. Income taxes as a percentage of income before income taxes increased to 40.5% for the nine months ended May 31, 1996, from 38.1% for the comparable prior year period. The increase was primarily due to increased state income taxes. Net Income. As a result of the above, net income decreased to $3.4 million in the nine months ended May 31, 1996, from $4.5 million in the nine months ended May 31, 1995, a 23.3% decrease. Net income as a percentage of total revenues decreased to 3.2% in the nine months ended May 31, 1996, from 5.7% in the comparable prior year period. FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994 Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI contract charter revenues were $18.1 million and $20.9 million, or 44.2% and 50.8%, respectively, of total air freight carrier revenues for fiscal year 1995, as compared to $15.4 million and $10.6 million, or 54.5% and 37.4%, respectively, for fiscal year 1994. The increase in on-demand and ACMI contract charter revenues for fiscal year 1995 over fiscal year 1994, was 17.9% and 97.1%, respectively. These increases were primarily the result of additional Boeing 727-200F ACMI contract charters and increased on-demand charters flown by the Company's jet aircraft. For fiscal year 1995 as compared to fiscal year 1994, prices for the Company's ACMI contract charter services and U.S. Postal Service Christmas contracts remained relatively constant. 23 26 Revenues -- Air Logistics. Air logistics revenues decreased $16.8 million, or 21.2%, to $62.6 million in fiscal year 1995 from $79.4 million in fiscal year 1994 primarily due to the substantial decline in volume of on-demand charters for the automobile industry in the first half of calendar 1995 as compared to the same period in 1994. This decline was primarily the result of the temporary decision by GM to significantly reduce use of expedited transportation, including Kitty Hawk's air logistics services, as part of a cost containment initiative. Prices for the Company's on-demand charters decreased slightly due to a revenue rate reduction in the GM Agreement which took effect on May 1, 1994. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $8.6 million, or 43.8%, to $28.1 million in fiscal year 1995 from $19.5 million in fiscal year 1994, reflecting the increased volume of business from ACMI contract and on-demand charters flown by the Company's jet aircraft. Gross profit margin from the air freight carrier increased slightly to 31.6% in fiscal year 1995 from 30.9% in fiscal year 1994, a 2.3% increase. As reported to the FAA, overall aircraft utilization increased to 15,283 flight hours for fiscal year 1995 from 11,795 flight hours in fiscal year 1994, a 29.6% increase. This increase was primarily the result of the inclusion of an additional four Boeing 727-200Fs, and two Douglas DC-9-15F aircraft into the Company's operations during fiscal year 1995. Costs of Revenues -- Air Logistics. Air logistics costs of revenues decreased $16.0 million, or 21.8%, to $57.4 million in fiscal year 1995 from $73.4 million in fiscal year 1994, reflecting the decrease in the volume of business. The gross profit margin from air logistics increased to 8.3% in fiscal year 1995 from 7.6% in fiscal year 1994, a 9.2% increase. This increase was primarily due to the Company's success in reducing its costs paid to third-party air freight carriers and ground service providers in the second half of fiscal year 1995. General and Administrative Expenses. General and administrative expenses increased $1.8 million, or 30.3%, to $7.8 million in fiscal year 1995 from $6.0 million in fiscal year 1994. As a percentage of total revenues, general and administrative expenses increased to 7.6% in fiscal year 1995 from 5.6% in fiscal year 1994. This increase was primarily due to an increase in support functions and number of personnel associated with the growth in the aircraft fleet and the revenue volume for the air freight carrier in fiscal year 1995. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense increased to $1.0 million in fiscal year 1995 from $732,000 in fiscal year 1994, a 36.8% increase, reflecting the increased profitability from operating activities of Kitty Hawk in fiscal year 1995. Operating Income. Operating income increased $1.3 million, or 16.8%, to $9.3 million in fiscal year 1995 from $8.0 million in fiscal year 1994. Operating income margin increased to 9.0% from 7.4% for fiscal year 1995 and 1994, respectively. Interest Expense. Interest expense increased to $1.2 million for fiscal year 1995 from $343,000 in fiscal year 1994, a 246.0% increase. The increase was primarily the result of the incurrence of additional long-term debt to finance the acquisition of two Boeing 727-200 aircraft in the second half of fiscal year 1994 and two Douglas DC-9-15F aircraft and two Boeing 727-200 aircraft in fiscal year 1995. Other Income (Expense). Other expense increased to $601,000 in fiscal year 1995 from $432,000 in fiscal year 1994, a 39.1% increase. This increase was primarily due to the write off of costs associated with the Company's attempted initial public offering. Income Taxes. Income taxes as a percentage of income before income taxes increased to 41.6% for fiscal year 1995 from 37.4% in fiscal year 1994. The increase was primarily due to higher state income taxes. Net Income. As a result of the above, net income decreased to $4.4 million for fiscal year 1995 from $5.3 million in fiscal year 1994, a 16.0% decrease. Net income as a percentage of total revenues was 4.3% in fiscal year 1995 compared to 4.9% for fiscal year 1994. 24 27 FISCAL YEAR ENDED AUGUST 31, 1994 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1993 Revenues -- Air Freight Carrier. Air freight carrier revenues increased $15.3 million, or 118.6%, to $28.3 million from $12.9 million as a result of new ACMI contract charters with two air freight companies. Revenues -- Air Logistics. Air logistics revenues increased $26.6 million, or 50.3%, to $79.4 million from $52.8 million. This increase was attributable almost exclusively to the increased volume of business from a strong automotive industry for on-demand charters. Prices for the Company's services generally were slightly lower for fiscal year 1994 as compared to fiscal year 1993. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $10.6 million, or 119.4%, to $19.5 million in fiscal year 1994 from $8.9 million in fiscal year 1993 reflecting the increased volume of business. As reported to the FAA, overall aircraft utilization increased to 11,795 flight hours in fiscal year 1994 as compared to 7,030 flight hours in fiscal year 1993, a 67.8% increase. Gross profit margin from the air freight carrier decreased slightly to 30.9% in fiscal year 1994 from 31.1% in fiscal year 1993. Kitty Hawk experienced a decrease in fuel costs as a percentage of air freight carrier revenues to 16.5% in fiscal year 1994 compared to 19.6% in fiscal year 1993. The Company attributes this decrease to slightly lower market fuel costs and the Company's negotiation of lower into-plane fuel charges in fiscal year 1994. Generally, the Company's air freight carrier only incurs net fuel costs in connection with the on-demand charters flown by it. Costs of Revenues -- Air Logistics. Air logistics costs of revenues increased $27.1 million, or 58.6%, to $73.4 million in fiscal year 1994 from $46.3 million in fiscal year 1993, reflecting the increased volume of business. Gross profit margin from air logistics decreased to 7.6% in fiscal year 1994 from 12.4% in fiscal year 1993, due primarily to a $6.1 million decrease in revenues derived from the Christmas charters managed for the U.S. Postal Service. General and Administrative Expenses. General and administrative expenses increased $1.6 million, or 36.8%, to $6.0 million in fiscal year 1994 from $4.4 million in fiscal year 1993. This increase was primarily due to increased administrative expenditures to support the Company's 63.7% increase in revenues in fiscal year 1994 as compared to fiscal year 1993. As a percentage of total revenues, general and administrative expenses decreased to 5.6% in fiscal year 1994 from 6.7% in fiscal year 1993. This decrease was primarily due to the increase in total revenues which more than offset the increase in costs associated with the additional expenditures. Operating Income. Operating income increased $2.1 million, or 34.9%, to $8.0 million in fiscal year 1994 from $5.9 million in fiscal year 1993. Operating income margin decreased to 7.4% from 9.0%. Interest Expense. Interest expense increased to $343,000 in fiscal year 1994 from $134,000 in fiscal year 1993. This increase in interest expense was due primarily to a net increase in debt of approximately $8.2 million attributable to financing of aircraft acquired in fiscal year 1994. Contract Settlement Income, Net. Contract settlement income was $1.2 million in fiscal year 1994 as compared to $725,000 in fiscal year 1993. Kitty Hawk recorded contract settlement income (net of expenses) for fiscal year 1993 based upon its best estimate at that time of the ultimate outcome of the matter. In fiscal year 1994, the final, more favorable resolution resulted in the Company's recording additional contract settlement income. The settlement income resulted from the division and allocation of the benefits to the Company, Mr. Christopher, and other parties resulting from a settlement of litigation among Emery Worldwide Airlines, Inc., Express One International, Inc., the U.S. Postal Service, and the Company. See "Business -- Legal Proceedings -- Litigation and Arbitration Related to Postal Contract." Other Income (Expense). Other expense in fiscal year 1994 was $432,000 primarily reflecting charges associated with certain current litigation. See "Business -- Legal Proceedings -- Litigation about Charter Agreement." Other income for fiscal year 1993 relates primarily to gains on the disposal of property and equipment. 25 28 Net Income. As a result of the above, net income increased $1.2 million, or 28.2%, to $5.3 million in fiscal year 1994 from $4.1 million in fiscal year 1993. Net income margin decreased to 4.9% from 6.2%. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily for the acquisition and modification of aircraft and working capital. In addition, Kitty Hawk has, and will continue to have, capital requirements for the requisite periodic and major overhaul maintenance checks for its air freight carrier fleet. The Company's funding of its capital requirements historically has been from a combination of internally generated funds and bank borrowings. Cash provided by operating activities was $4.3 million, $7.6 million, $9.1 million, and $8.8 million in fiscal years 1993, 1994, and 1995 and in the nine months ended May 31, 1996, respectively. At the end of fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, the Company had working capital of $4.7 million, $4.2 million, $1.7 million, and $4.5 million, respectively. Kitty Hawk has a $9.2 million credit facility, a $3.0 million revolving credit facility and an $8.9 million loan with Wells Fargo Bank, National Association ("WFB"), successor in interest to First Interstate Bank of Texas, N.A. As of May 31, 1996, approximately $6.1 million was outstanding under the credit facility and $7.2 million was outstanding under the loan. On July 17, 1996, $3 million was outstanding under the revolving credit facility. The credit facility bears interest at an adjusted Eurodollar rate plus 2.25%. Of the $6.1 million outstanding under the credit facility on May 31, 1996, $2.1 million matures in 1999 and is secured by two DC-9-15F aircraft, and $4.0 million matures in 2000 and is secured by two Boeing 727-200F aircraft. The revolving credit facility bears interest at the lender's prime rate or, at the Company's option, the London Interbank Offered Rate plus 1.95% and is secured by the Company's accounts receivable. The revolving credit facility expires on July 31, 1996. The loan bears interest at an adjusted Eurodollar rate plus 2.00%. Of the $7.2 million outstanding on this loan as of May 31, 1996, $3.5 million matures in March 2001 and is secured by two DC-9-15F aircraft, and $3.7 million matures in July 2001 and is secured by two Boeing 727-200F aircraft. Each of the credit facilities and loans with WFB prohibit (i) the payment of dividends or any other payment or distribution on account of the Company's capital stock, (ii) the redemption or acquisition of the Company's capital stock or that of a subsidiary, and (iii) the setting apart of any money for a sinking fund or similar fund for any dividend or other distribution on the Company's capital stock. All of the WFB loans and credit facilities contain covenants regarding the financial performance of the Company, including the maintenance of minimum or maximum ratios of: debt service coverage (1.5 to 1.0), leverage (3.0 to 1.0), and debt to cash flow (4.0 to 1.0). Each of the WFB loans contains certain other covenants, including limitations on the ability of the Company to change its business, and the credit facilities contain a right to set off against payments on all other WFB loans upon default by the Company. If a "Change of Control" occurs, WFB may accelerate or terminate the loans and credit facilities. "Change of Control" includes the failure of the Company to own all of the outstanding stock of certain of its subsidiaries and Mr. Christopher failing to own at least 51% of the outstanding stock of the Company or ceasing to be active in the management of the Company. Certain of the WFB loans also contain covenants with respect to aircraft maintenance and continuous use and are cross-collateralized. The revolving credit facility prohibits certain acquisitions and other business combinations, transactions with affiliates, and the prepayment of other debt without the prior written consent of WFB. The Company also has an $11.2 million loan with Bank One, Texas, N.A. ("BOT"). As of May 31, 1996, $11.2 million was outstanding on this loan. The proceeds of this loan were used to purchase two Boeing 727-200 aircraft. The loan bears interest at an adjusted Eurodollar rate plus 1.5% to 2.5% based upon a debt-to-cash-flow ratio of the Company and matures in June 2003. There is an interest rate swap agreement in place with BOT that effectively converts the floating rate loan into a fixed rate loan at 7.7%. This loan is 26 29 secured by two Boeing 727-200F aircraft owned by the Company. The BOT loan contains certain covenants regarding the financial performance of the Company, including the maintenance of minimum or maximum ratios of: debt service coverage (1.25 to 1.0), leverage (3.0 to 1.0), debt to cash flow (5.0 to 1.0) and interest coverage ratios (1.5 to 1.0), and certain other covenants with respect to the maintenance and use of the aircraft, and insurance. BOT may accelerate or terminate its commitment under the loan if the Company ceases to own all of the outstanding stock of Aircraft Leasing, Inc. and Kitty Hawk Aircargo, Inc. In addition, the Company has a loan with 1st Source Bank. As of May 31, 1996, the outstanding balance of this loan was $1.0 million. The loan bears interest at 9.75%, is secured by a DC9-15-F and matures in May 2000. The 1st Source loan contains certain aircraft maintenance covenants and provides that a change in the Company's business is an event of default upon which 1st Source may declare all or any part of the remaining unpaid principal immediately due and payable. Kitty Hawk anticipates it will enter into a coordinated banking relationship with WFB and BOT on or before July 26, 1996. The Company anticipates that this coordinated relationship would result in a single loan agreement governing (i) $13.3 million of existing debt with WFB, (ii) $11.2 million of existing debt with BOT, (iii) a new $10.0 million facility for eventual term debt to be provided 80% by WFB and 20% by BOT and (iv) a $15.0 million revolving line of credit to be provided 50% by WFB and 50% by BOT. Under the coordinated banking relationship, the Company believes its existing $13.3 million of debt with WFB would mature in June 2002 and would be secured by aircraft currently mortgaged to WFB and its $11.2 million of existing debt with BOT would mature in June 2003 and would be secured by aircraft currently mortgaged to BOT. Kitty Hawk anticipates that borrowings under the $10.0 million facility would be restricted to the purchase of one DC-9-15F noise abatement kit and up to seven airframe overhauls checks for Boeing 727-200F aircraft currently owned by Kitty Hawk. In addition, the Company believes that the facility would be secured by the aircraft already pledged to WFB and BOT. The Company anticipates that all advances under this facility would be required to be made by December 31, 1997, and the loan would mature on June 30, 2003. Kitty Hawk further believes that borrowings under the $15.0 million revolving line of credit would be restricted to aircraft acquisitions and modifications, except that up to $5.0 million will be available for general corporate purposes. Kitty Hawk anticipates that this line of credit would be secured by accounts receivable, would expire on December 31, 1998, and would require that any advance for the purchase or modification of additional aircraft be repaid in full within 150 days. Kitty Hawk believes that each of these loans would bear interest from 150 to 200 basis points above the London Interbank Offered Rate, and prohibit (i) the payment of dividends or any other payment or distribution on account of the Company's capital stock, (ii) the redemption or acquisition of the Company's capital stock or that of a subsidiary, and (iii) the setting apart of any money for a sinking fund or similar fund for any dividend on, redemption of, acquisition of, or other distribution on, the Company's capital stock. In addition, the Company believes these loans would be subject to certain early repayment penalties or swap breakage fees. During fiscal years 1994 and 1995 and the nine months ended May 31, 1996, the restrictions under the Company's credit facilities did not have a material impact on the Company's ability to meet its cash obligations and restrictions under the Company's proposed facility are not expected to have any such impact in the future. Capital expenditures were $1.3 million, $13.9 million, $17.9 million, and $17.2 million for fiscal years 1993, 1994, and 1995 and for the nine months ended May 31, 1996, respectively. The $17.2 million in capital expenditures for the nine months ended May 31, 1996 were primarily for the purchase of: (i) three Boeing 727-200 aircraft and the cargo and noise abatement modification of two of these aircraft and (ii) three used JT8D-7/-9 jet engines. The $17.9 million in capital expenditures for fiscal year 1995 were due primarily to the purchase of: (i) two Boeing 727-200 aircraft and their cargo modification, (ii) three JT8D-15 jet engines for installation on one of the Boeing 727-200 aircraft, (iii) two Douglas DC-9-15F aircraft in cargo configuration, (iv) noise abatement equipment with respect to one of the Douglas DC-9-15F aircraft, (v) five used/overhauled Rolls Royce Dart Convair engines, (vi) two used JT8D-7/-9 jet engines, (vii) a Westwind 1124 jet aircraft to be used for corporate purposes only, and (viii) the cargo modification of one Boeing 727-200 aircraft acquired at the end of fiscal year 1994. The $13.9 million in capital expenditures for fiscal 27 30 year 1994 were primarily for the purchase of: (i) three Boeing 727-200 aircraft and the cargo modification of two of these aircraft, (ii) two Douglas DC-9-15F aircraft in cargo configuration, (iii) three Convair 600/640 turbo-prop aircraft, and (iv) ground handling equipment. Capital expenditures in fiscal year 1993 were primarily for cargo containers and ground handling equipment. The acquisitions of all of the Boeing 727-200 aircraft and subsequent cargo conversions, the Douglas DC-9-15F aircraft and the JT8D-15 engines in the past three years were financed by bank borrowings and internally generated funds, except for one Boeing 727-200 aircraft received in the settlement of the ANET litigation described in "Business -- Legal Proceedings." All other capital acquisitions were financed from internally generated funds. Kitty Hawk anticipates purchasing and modifying to cargo configuration five 727-200s (including modifying two of these 727-200s with noise abatement equipment for approximately $5.2 million) for an aggregate capital expenditure of approximately $23.5 million in fiscal year 1997. The Company believes, based upon its knowledge of the market for ACMI contract charters of jet and turbo-prop aircraft, that recent and planned changes to the composition of its fleet towards jet aircraft will afford the Company the opportunity to expand its ACMI contract charter business and direct to its air freight carrier additional on-demand charters that require jet service. The Company further believes the $5.2 million amount for noise abatement modifications proposed for fiscal year 1997 for two of these five aircraft proposed to be purchased, together with an additional $6.8 million to modify currently owned aircraft with noise abatement equipment during fiscal 1997, represents the total capital expenditures that would currently be necessary to comply with the requirements of existing applicable environmental regulations for such fiscal year. See "Business -- Government Regulation." The Company historically has followed, and currently intends to follow, a policy of retiring Convairs at the time of their next scheduled major overhaul maintenance checks rather than expending the amounts necessary for such checks. The Company believes that revenue lost from retiring its Convair turbo-prop aircraft from service will be offset by revenue gains from recent additions of Boeing 727-200Fs and Douglas DC-9-15Fs. The Company further believes increased maintenance costs resulting from the addition of these jet aircraft will be exceeded by corresponding increased revenues. Schedule disruptions caused by periodic maintenance checks for these jet aircraft generally will be less frequent than for the Company's turbo-prop aircraft; however, schedule disruptions resulting from such periodic maintenance checks will generally be considerably longer for these jets (during which time the jets will be unavailable for revenue service) than for the Company's turbo-prop aircraft. During such periodic maintenance checks, the Company intends to avoid a disruption of service by substituting another aircraft that otherwise would be dedicated to on-demand service. Kitty Hawk presently intends to either exercise its option to purchase for approximately $2.0 million the facility it currently occupies at Dallas/Ft. Worth International Airport on or before March 1, 1997 or attempt to negotiate an extension of the lease. The Company believes that the net proceeds from this offering, together with available funds, bank borrowings, and cash flows expected to be generated by operations, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, if cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities will result in additional dilution to the Company's stockholders. There can be no assurance that additional equity or debt financing will be available at all or that, if available, such financing will be obtainable on terms favorable to the Company. SEASONALITY Certain customers of the Company engage in seasonal businesses, especially the U.S. Postal Service, GM, and other customers in the automotive industry. As a result, Kitty Hawk's air logistics business has historically experienced its highest quarterly revenues and profitability in its second fiscal quarter due to the peak activity of the U.S. Postal Service during the Christmas season and in its first and fourth fiscal quarters when production schedules of the automotive industry typically increase. 28 31 The following table reflects certain selected quarterly operating results, which have not been audited or reviewed, for each quarter since the fiscal quarter ended May 31, 1994. The information has been prepared on the same basis as the audited Consolidated Financial Statements appearing elsewhere in this Prospectus and includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information shown. The Company's results vary significantly from quarter to quarter and the operating results for any quarter are not necessarily indicative of the results that may be expected for any future period.
FISCAL QUARTER ENDED ------------------------------------------------------------------------------------------------- AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31 1994 1994 1995 1995 1995 1995 1996 1996 --------- ----------- ----------- ------- --------- ----------- ----------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues........... $31,122 $29,593 $31,743 $16,835 $25,539 $36,045 $48,577 $22,504 Gross profit............. 4,275 5,210 6,290 2,310 4,368 5,936 8,190 3,265 Operating income (loss)................. 2,022 3,310 3,912 660 1,463 3,564 2,447 897 Net income (loss)........ 1,623 1,960 2,298 192 (34) 1,956 1,273 182 Net income (loss) per share.................. $ 0.20 $ 0.25 $ 0.29 $ 0.02 $ (0.01) $ 0.25 $ 0.16 $ 0.02
29 32 BUSINESS GENERAL Kitty Hawk is one of the leading providers of air freight charter services in the United States, emphasizing highly-reliable, time-sensitive services. The Company's air freight carrier owns 24 aircraft, 16 of which are currently used in scheduled airport-to-airport freight service under contracts primarily with major freight forwarders in North America and the Pacific Rim. These contracts generally require the Company to supply aircraft, crew, maintenance, and insurance ("ACMI") and to meet certain on-time performance standards, while its customers are responsible for substantially all other operating expenses, including fuel. Additionally, Kitty Hawk is the leading provider of same-day air logistics charter services in the United States. Through its advanced, proprietary computer software, the Company manages delivery of extremely time- sensitive freight utilizing the on-demand charter services of both third-party air freight carriers and planes from the Company's fleet that are not then committed to ACMI service. The Company's total revenues have increased to $103.7 million in fiscal year 1995 from $33.4 million in fiscal year 1991. During the same period, the Company's owned aircraft fleet grew to 21 aircraft from 9 aircraft. Kitty Hawk has been profitable in every fiscal year since its inception in 1985. OVERVIEW OF EXPEDITED AIR FREIGHT TRANSPORTATION INDUSTRY The expedited air freight transportation industry is composed largely of same-day, next-day, and two-day services for the delivery of heavy-weight freight (as distinguished from packages). The Company directly participates in the same-day service segment of this industry by coordinating on-demand air charters and ancillary services through third-parties and by providing on-demand air charters through its own air freight carrier. Kitty Hawk also indirectly participates in the next-day and two-day delivery segment of this industry by providing ACMI contract charters for air freight companies. ACMI Contract Charters. The next-day and two-day freight delivery business for heavy-weight freight is dominated by large nationally known companies such as Burlington Air Express, Inc., DHL Airways, Inc., and Emery Worldwide Airlines, Inc. The Company's air freight carrier indirectly participates in these businesses by providing primary and additional lift capacity through ACMI contract charters for airfreight companies on designated routes for specific time periods. The Company's air freight carrier has also historically provided contract charters for mail delivery for the U.S. Postal Service. Most contracts with these customers are for periods varying from thirty days to three years. Kitty Hawk does not engage directly in the next-day or two-day delivery business, and, therefore, does not compete directly with its customers in this segment. According to the "McDonnell Douglas World Economic and Traffic Outlook 1995," the growth rate in international cargo traffic during 1994 was 5.7% while the amount of cargo flown on domestic routes grew by 5.6%, which resulted in overall world cargo traffic growth of 5.7% during 1994. The "Boeing 1995 World Air Cargo Forecast," predicts the world air freight (non-mail) market will increase at an average rate of 6.7% per year through, and triple by, 2014. During this time period, the intra-Asia air freight market is predicted by the same source to grow by over 8% per year and the U.S. domestic air freight market is expected to grow approximately 5% per year. Consequently, Boeing projects a corresponding increase in the world air cargo fleet to approximately 2,080 dedicated freighter aircraft in 2014 from approximately 1,003 dedicated freighter aircraft in 1994. In the "Boeing 1996 Current Market Outlook," Boeing updated this forecast to 2,260 dedicated freighter aircraft in 2015. Of this increase in the number of dedicated air freighter aircraft, Boeing expects the small freighter aircraft class, which includes the Boeing 727-200, to account for approximately 26% of this increase. Each of the foregoing projected growth rates are estimates only and there can be no assurance that such rates of growth will be achieved. As the Stage III noise control standards are phased into effect by January 1, 2000, the Company believes the supply of Boeing 727-200 aircraft available for freighter reconfiguration will increase as commercial airlines retire all or portions of their passenger-equipped 727-200s rather than bringing them into compliance with the Stage III noise control regulations. With over 180 Boeing 707s and certain "short" Douglas DC-8s facing likely retirement from use in the U.S. market because of the costs of equipping these aircraft to comply 30 33 with the Stage III noise control standards, which the Company believes is not economically feasible, the Company also believes that in many cases freight traditionally shipped on such aircraft will be shipped in the future on Boeing 727-200F aircraft. See "Government Regulation." There can be no assurance, however, of the future availability of Boeing 727-200 aircraft or the status of the Boeing 727-200F as an aircraft type favored for freighter use in replacement of retired freighter aircraft types. See "Business -- Aircraft Ownership and Operation." On-Demand Air Logistics. In contrast to the market for next-day and two-day delivery services of heavy-weight freight, the Company believes that the market in North America for on-demand air logistics is served by hundreds of air freight carriers, the vast majority of which are privately held, operate from only one location, and do not coordinate "door-to-door" charter delivery services to the extent provided by the Company. Of these air charter companies in the Company's database, the Company believes approximately 40 are operated under Part 121 of the FAA regulations and are therefore licensed to operate aircraft certificated to transport in excess of 7,500 pounds of freight. The Company's air freight carrier also operates under Part 121 of the FAA regulations. Kitty Hawk believes that future demand for expedited, same-day air logistics services from commercial and industrial customers will depend upon a number of factors, including: (i) outsourcing -- more companies, seeking to outsource non-core activities, determine that air freight delivery operations can be outsourced effectively; (ii) enhanced inventory management -- more companies determine to emphasize or place greater emphasis on "just-in-time" deliveries and other methods to improve the management of inventory through the use of reliable, same-day air freight delivery services; and (iii) increased customer expectations -- more companies experience a need for expedited, same-day delivery service as their expectations for the timeliness of deliveries increases. BUSINESS STRATEGY The Company's strategy is to continue its rapid growth by: (i) acquiring additional Boeing 727-200 aircraft primarily for its ACMI contract business to meet expected growth in air freight transportation demand in both the North American and Pacific Rim markets, (ii) increasing its focus on marketing to firms reducing inventory and shortening product cycle times through direct air shipments from manufacturer to end user, (iii) continuing to provide high quality service through the ongoing development and enhancement of its computerized database, information software, and tracking systems, and (iv) pursuing the acquisition of domestic and international strategic suppliers of on-demand air and related ground transportation services. Acquiring Additional Aircraft to Meet Expected Growth in the Air Freight Industry. Kitty Hawk intends to acquire additional Boeing 727-200 aircraft to capitalize upon the projected demand for small freighters in the world air cargo market. See "Overview of Expedited Air Freight Transportation Industry -- ACMI Contract Charters." Increase Marketing to Firms Reducing Inventory and Shortening Product Cycle Times. The Company believes that many manufacturing and non-manufacturing firms are adopting inventory management systems that reduce inventory and shorten product cycle times. To avoid costly inventory shortages or work stoppages, such inventory management systems often require on-demand air charters to supply inventory directly from the manufacturer to the end users. Kitty Hawk has recently expanded, and will continue to expand, its marketing efforts, particularly its logistics and air freight carrier services, to potential and existing customers outside of the automotive industry. See "Business -- Sales and Marketing." Continuing to Provide High Quality Services Through Enhanced Technology. The Company's full-time staff of five computer programmers intends to continue developing systems and software to enhance productivity, knowledge, and customer service. The Company has developed and is testing an Internet system to provide its account managers with real-time updates on available third party on-demand air charter aircraft across North America. The Company believes that this system will enable it to meet customer demands more efficiently and quickly in the future. In addition, Kitty Hawk is working to enhance communication between its flight managers and flight crews by utilizing laptop computers with communications software that will enable the Company to quickly exchange operating data between Company headquarters and an aircraft, 31 34 including while such aircraft is airborne. By increasing speed and reliability of communications through the use of these laptop computers, the Company believes it can reduce telecommunications and labor costs. Finally, Kitty Hawk intends to provide its maintenance and flight crews with on-line access to the latest operating and maintenance manuals stored on CD-ROMs. Acquire Strategic Suppliers of On-Demand Transportation Services. The Company intends to acquire third party suppliers of on-demand air and related ground transportation services. As the leading provider of expedited, same-day air logistics charter services in a highly fragmented industry, the Company believes such acquisitions should provide strategic and operational benefits, including the reduction of costs that result from centralizing finance, administration, and information technology functions. Additionally, because the Company's gross profit margin on flights flown by third party air freight carriers is generally lower than on flights flown by the Company's air freight carrier, Kitty Hawk believes that such acquisitions will increase its average gross profit margin. However, the Company is not presently engaged in any negotiations and has no present understandings, agreements, or commitments with respect to any business acquisition. AIR FREIGHT CARRIER General Kitty Hawk has owned and operated aircraft for on-demand air freight charter services since 1985. In 1987, the Company's air freight carrier was expanded to include ACMI contract charter service. Pursuant to ACMI contracts, the Company's air freight carrier provides scheduled charters carrying heavy-weight freight and mail for entities that engage primarily in next-day and two-day delivery service to their customers. The Company's air freight carrier monitors its on-time performance for its ACMI contract charter and on-demand functions. Aircraft Fleet The Company owns and operates 22 aircraft in revenue service and has recently purchased two additional Boeing 727-200 aircraft that the Company expects to place into revenue service in January 1997. The following table contains certain information about the Company's fleet:
MAXIMUM TAKE-OFF YEAR CURRENT AIRCRAFT TYPE WEIGHT (LBS) MANUFACTURED ENGINE MODEL USE CURRENT BASE - ----------------------------------------------- ------------ ----------------- ---------- ------------------------- Boeing 727-200..................... 194,800 1978 P&W JT8D-15 * * Boeing 727-200 194,800 1978 P&W JT8D-15 * * Boeing 727-200F.................... 178,000 1976 P&W JT8D-9A ACMI Phoenix, AZ Boeing 727-200F.................... 178,000 1976 P&W JT8D-15 ACMI Saipan, CNMI Boeing 727-200F.................... 194,800 1975 P&W JT8D-15 ACMI San Jose, CA Boeing 727-200F.................... 194,800 1975 P&W JT8D-15 ACMI Brownsville, TX Boeing 727-200F.................... 175,500 1975 P&W JT8D-9A On-Demand Ypsilanti, MI Boeing 727-200F.................... 178,000 1969 P&W JT8D-9A ACMI Austin, TX Boeing 727-200F.................... 178,000 1969 P&W JT8D-9A ACMI Minneapolis/St. Paul, MN Boeing 727-200F.................... 178,000 1968 P&W JT8D-9A ACMI Manila, Philippines Douglas DC-9-15F................... 90,700 1968 P&W JT8D-7B ACMI Syracuse, NY Douglas DC-9-15F................... 90,700 1968 P&W JT8D-7B On-Demand Ypsilanti, MI Douglas DC-9-15F................... 90,700 1967 P&W JT8D-7B On-Demand Dallas/Ft. Worth, TX Douglas DC-9-15F................... 90,700 1967 P&W JT8D-7B On-Demand Ypsilanti, MI Douglas DC-9-15F................... 90,700 1967 P&W JT8D-7B On-Demand Ypsilanti, MI Convair 640........................ 55,000 1957 Rolls Royce Dart ACMI Ypsilanti, MI Convair 640........................ 55,000 1957 Rolls Royce Dart ACMI El Paso, TX Convair 640........................ 55,000 1952 Rolls Royce Dart ACMI Laredo, TX Convair 640........................ 55,000 1952 Rolls Royce Dart On-Demand El Paso, TX Convair 600........................ 46,200 1949 Rolls Royce Dart ACMI Memphis, TN Convair 600........................ 46,200 1948 Rolls Royce Dart ACMI Pittsburgh, PA Convair 600........................ 46,200 1948 Rolls Royce Dart ACMI Cleveland, OH Convair 600........................ 46,200 1948 Rolls Royce Dart ACMI El Paso, TX Convair 600........................ 46,200 1948 Rolls Royce Dart ACMI Albuquerque, NM
- --------------- * These aircraft, acquired in July 1996, will undergo certain maintenance and modification procedures, including cargo reconfiguration and noise abatement modifications, prior to operating in revenue service for the Company. The Company anticipates that these aircraft will initially be dedicated to ACMI contract service. 32 35 The aircraft described above do not include two piston engine Convairs owned by the Company that are operated by Rhoades Aviation, Inc. pursuant to a lease purchase agreement with the Company. Under the terms of the lease purchase agreement, the Company has granted to Rhoades Aviation, Inc., an option to purchase either or both of these aircraft at a price that decreases to zero over the term of the lease purchase agreement. The aircraft described above also do not include a Westwind 1124 jet aircraft owned by the Company and utilized solely for the transport of Company personnel. ACMI Contracts As an FAA Part 121 certificated carrier, the Company's air freight carrier provides primary lift capacity as well as additional lift capacity for overflow and seasonal freight transportation needs on an ACMI contract basis. In the nine months ended May 31, 1996, ACMI contracts accounted for approximately 19.5% of the Company's total revenues. As of the date of this Prospectus, Kitty Hawk was operating seven Boeing 727-200Fs, eight Convairs and one Douglas DC-9-15F under ACMI contracts with Burlington Air Express, Inc., Ting Hong Oceanic Enterprises Co., Ltd., Pacific East Asia Cargo Airlines, Inc., DHL Airways, Inc., and Emery Worldwide Airlines, Inc. The Company believes that its relationships with its ACMI customers are mutually satisfactory. However, there can be no assurance that such contracts will not be canceled in accordance with their terms. See "Risk Factors -- Dependence on Significant Customers." On July 15, 1996, the Company entered into an ACMI contract with Pan Air Lineas Aereas S.A. ("Pan Air") to lease one Boeing 727-200F aircraft to Pan Air in scheduled service from a GD Express Worldwide, N.V. hub in Cologne, Germany. The lease is scheduled to commence on September 15, 1996 and terminate on November 29, 1996. The Company's ACMI contracts typically require the Company to supply aircraft, crew, maintenance, and insurance, while its customers are responsible for substantially all other aircraft operating expenses, including fuel, fuel servicing, airport freight handling fees, landing and parking fees, ground handling expenses, and aircraft push-back costs. These ACMI contracts also typically require the Company to operate specific aircraft and/or provide minimum air freight capacity, and generally are terminable if the Company (i) fails to meet certain minimum performance levels, (ii) otherwise breaches the contract, or (iii) becomes subject to other customary events of default. The ACMI contracts also provide that the Company has exclusive operating control and direction of each aircraft the Company operates and that certain foreign-based customers must obtain any government authorizations and permits required to service the designated routes. See "-- Government Regulation." Therefore, the Company's route structure is limited to areas in which customers gain access from the relevant governments. The Company is permitted under its ACMI Contracts to utilize, and, in fact often does utilize, its aircraft in on-demand service in the periods between ACMI contract flights. Burlington Air Express, Inc. Burlington Air Express, Inc. ("Burlington") currently leases under one ACMI contract five of the Company's Boeing 727-200Fs and under a separate ACMI contract three of the Company's Convairs. Under each contract, Burlington pays the Company a fixed fee for each scheduled round-trip flown by the Company and a per hour charge for any non-scheduled flight requested by Burlington. At present, each of the five Boeing 727-200Fs leased by Burlington is scheduled to fly five round-trips per non-holiday week. The Boeing 727-200F ACMI contract is for a term expiring on March 1, 1999, but pursuant to the terms of the contract, either party may upon thirty days' written notice terminate the services of one Boeing 727-200F aircraft immediately and one additional Boeing 727-200F aircraft on or after each of March 1, 1997, March 1, 1998 and September 1, 1998. In addition, Burlington may earlier terminate the contract if, among other reasons, the Company fails to meet certain performance standards or if majority ownership or control of the Company is acquired by a competitor of Burlington. The Company operates three Convairs on behalf of Burlington pursuant to a contract between the parties on terms substantially similar to those set forth in the Boeing 727-200F ACMI contract between the parties. 33 36 Pacific East Asia Cargo Airlines, Inc. Pacific East Asia Cargo Airlines, Inc. ("PEACA"), an affiliate of TNT Express Worldwide, Inc., currently leases one of the Company's Boeing 727-200F aircraft in scheduled service from Manila, Philippines under an ACMI contract that expires on April 26, 1998. PEACA may earlier terminate the contract if the Company fails to meet certain performance standards. Under the terms of the contract, PEACA pays the Company a guaranteed fixed monthly fee and an additional fixed charge per flight hour per month in excess of a certain threshold. The contract provides that prior to September 30, 1996, PEACA may give notice to require the Company, within six months of such notice, to upgrade the current Boeing 727-200F Stage II aircraft to a Boeing 727-200F Stage III aircraft with certain specified engines and hushkit. See "Business -- Government Regulation." In the event PEACA exercises its option, the charges under the contract will automatically increase to certain specified levels. Because all of the Company's revenues from this ACMI contract, and many of its costs, are in U.S. dollars, the Company is able to minimize currency risks normally associated with doing business overseas. Ting Hong Oceanic Enterprises, Ltd. Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") currently leases one of the Company's Boeing 727-200F aircraft in scheduled service from Saipan, CNMI under an ACMI contract that expires on August 31, 1997. Ting Hong may earlier terminate the contract if the Company fails to meet certain performance standards. Under the terms of the contract, Ting Hong pays the Company in U.S. dollars a guaranteed fixed monthly fee and an additional fixed charge per flight hour per month in excess of a certain threshold. In connection with a recent extension of the contract's term, Ting Hong granted the Company certain rights of first refusal to match third parties' rates and terms with respect to new operating leases or renewals or extensions of existing operating leases for services similar to those provided under the contract. DHL Airways, Inc. DHL Airways, Inc. ("DHL") currently leases four Convairs and one Douglas DC-9-15F from the Company under an ACMI contract that is terminable upon thirty days' prior written notice. For use of the aircraft, DHL pays the Company a fixed charge per scheduled round-trip less certain penalties for late departures or arrivals, other than as a result of delays beyond the Company's control or caused by DHL's fault or negligence. Currently, each aircraft leased by DHL under this contract is scheduled to fly five round-trips per non-holiday week. DHL may earlier terminate the contract if the Company fails to meet certain performance standards. On-Demand Charter Service The air freight carrier provides on-demand charter service for customers of the Company's air logistics business. Approximately 3.4%, 7.7%, 8.7%, and 8.8% of the on-demand charters managed by the Company during fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, respectively, were flown by the air freight carrier. These charters were flown mostly for GM. The Company also has flown its own aircraft on certain of the seasonal charters it has managed for the U.S. Postal Service. See "Air Logistics -- Seasonal Charters for the United States Postal Service." The Company intends to direct a higher percentage of on-demand charters to its air freight carrier as its fleet size increases. On-demand contract charters flown by the air freight carrier generate a higher gross margin to the Company than charters subcontracted to third-party carriers. Acquisition Program Kitty Hawk has embarked on a program of selective aircraft acquisitions because it believes certain aircraft can be profitably deployed to increase its ACMI contract charter business as well as on-demand charter services. In fiscal year 1997, the Company intends to add five Boeing 727-200F aircraft to its airline fleet, three of which the Company anticipates initially will be dedicated to ACMI contract charter use and two initially dedicated to on-demand charters. See "Use of Proceeds." Although Kitty Hawk has not entered into any contracts to utilize the aircraft to be purchased with the proceeds of the offering and no such contract is imminent, the Company currently is negotiating with a number of existing and potential customers for ACMI contract charters. The Company believes, based upon its knowledge of the on-demand market, that it can utilize two of the additional Boeing 727-200Fs to be acquired with the proceeds of the offering for the foreseeable future in on-demand service without violating the terms of the GM Agreement. The Company, 34 37 however, periodically evaluates the utilization of its owned aircraft and, therefore, the Company's actual aircraft use may vary materially from the current plans. Any jet aircraft not in use on an ACMI contract charter route may be employed in on-demand service. See "Risk Factors -- Dependence on Significant Customers" and "Business -- Air Freight Carrier -- Aircraft Fleet." AIR LOGISTICS General On-demand air charters of heavy-weight freight generally are used when "next-flight-out" delivery services of commercial airlines or the next-day delivery services of air freight companies or other service providers cannot meet the customer's delivery deadline. Utilizing a proprietary computerized database, the Company's air logistics services involve coordinating "door-to-door" transportation by arranging for ground pick-up, loading, air transportation, unloading, and ground delivery of the freight. Kitty Hawk has managed a broad variety of freight shipments including military equipment, satellites, rescue/disaster recovery supplies, and exotic animals. The most frequent use of on-demand charters is to deliver manufacturing or replacement parts to avoid a work stoppage. Manufacturers who employ the "just-in-time" methodology encourage the order and delivery of inventory just before it is needed at the assembly plant. On-demand charters also are used to transport replacement parts on an expedited basis so that critical equipment can be kept operational or put back in service to avoid or minimize the length of a shut-down. Firms that are reducing inventory and shortening product cycle times through direct air shipments also use on-demand charters. For example, the Company has transported goods for electronics and apparel concerns between their domestic operations and their operations in Central or South America. The Company intends to increase its marketing focus on such types of firms. See "Business -- Sales and Marketing." The customers of the Company's on-demand air logistics services include companies that are engaged in industries such as automotive, chemical, computer, mail and bulk package delivery, retail merchandising, and oil field service and equipment. Typically, the premium costs incurred in utilizing on-demand charters to achieve expedited same-day delivery are justified by the Company's customers on the basis that greater costs would otherwise be incurred as a result of a work stoppage or having to maintain greater inventory levels. A significant portion of all on-demand, same-day air freight charters in North America is accounted for by the automotive industry. The importance of the automotive industry to on-demand air charters reflects the large number of automobile parts, the complexity of an automotive manufacturer's supplier and assembly plant network, and the high cost of shutting down production facilities. Kitty Hawk believes that "just-in-time" inventory systems have increased the use of on-demand air charters by the automotive industry and that on-demand air charters are an integral cost of such "just-in-time" inventory management systems. Because automotive manufacturers generally carry less inventory than in the past, unanticipated parts shortages may occur more frequently. The Company has experienced rapid growth in the number of on-demand charters managed for customers unrelated to the automotive industry. The Company believes it managed 919 non-automotive on-demand charters for the nine months ended May 31, 1996 as compared to 634 non-automotive on-demand charters for the nine months ended May 31, 1995. Delivery of Logistics Services For the nine months ended May 31, 1996, Kitty Hawk arranged an average of approximately 41 on-demand charters per day and it has arranged as many as 214 charters in a single day. Each transaction originates from a customer's telephonic request to arrange a charter answered by one of the Company's 16 full-time account managers who are on duty 24 hours per day, 365 days per year. The information collected during the first few minutes after a request for a charter is received is critical to the successful completion of the charter on a timely basis. The Company believes it provides dependable service on a cost-effective basis 35 38 because of its computerized database, information software, and tracking systems, its training of account managers, and its standardized charter management procedures. With respect to each freight shipment managed by the Company, the account manager is required to input the following information in a computerized charter work sheet: (i) contact information for both the shipper and the recipient; (ii) the estimated time the freight will be available at the shipper's location and the estimated time the recipient needs the shipment delivered; (iii) the specifications of the freight to be shipped; and (iv) information concerning needed ground transportation between the shipper's facility and the origin airport as well as between the destination airport and the recipient's facility. The account manager (subject to the review of a supervisor) selects the proper type of aircraft to be used for the shipment. Once the most appropriate aircraft meeting the charter requirements has been identified, the information maintained by the Company concerning the charter operator is reviewed to ensure that the chosen carrier meets all of the Company's requirements. The account manager also is responsible for airport selection. Factors which affect airport selection include proximity to shipper/receiver, runway lengths and weight bearing capabilities, instrument approach and weather reporting facilities, fuel availability, and loading and unloading capabilities. Any ground transportation and handling also are typically arranged by the account manager. Unless the customer requesting the logistics services is already subject to a written agreement concerning pricing, the customer is quoted a price per mile by aircraft type on a round trip basis plus charges for loading, unloading, and ground transportation. The shipment size and speed requirements are taken into account in selecting aircraft type. The Company's per mile prices are developed based upon a schedule of tariffs by aircraft type provided by third-party air carriers. The procedure for account managers is to maintain periodic communication with the customer throughout the charter. The Company's goal is to notify the customer of all details of the charter within 15 minutes after receiving the request for a charter, including aircraft type, carrier, the time the material will be picked up at the shipper's location, the time the aircraft will be in position at the origin airport, when the aircraft will be loaded and depart, flight time, and the time the shipment will be delivered to the recipient. If any of these details change significantly during the course of the charter, the customer is notified promptly. Because a significant amount of information concerning a charter is required to be assimilated by the account manager within a very short time frame, the training period typically necessary for an account manager is between six and nine months. Kitty Hawk has access to experienced outside personnel who work as account managers on a temporary basis during periods of peak demand. The Company believes its existing number of account managers is adequate for the foreseeable future. Upgrades to the Company's computer systems and related technology have facilitated an increase in the productivity of each account manager and the Company will seek further upgrades. See "Business -- Sales and Marketing." Database, Information Software, and Tracking Systems Database System. Kitty Hawk believes that its database is critical to its ability to arrange on-demand air charters in a timely and reliable manner. The Company maintains in its database a carrier profile for over 500 air freight carriers that provide on-demand charter service. A carrier profile generally contains the following information that is pertinent to the Company's carrier selection decision: (i) the carrier's location and aircraft list, including physical descriptions, year, make and model, and engines; (ii) the most recent certificate of insurance obtained with respect to the carrier; (iii) copies of the carrier's current FAA Air Carrier Certificates and Operating Specifications and any other international operating certificates; (iv) the carrier's 24-hour contact information; and (v) copies of the tariff agreement with the carrier. The most utilized carriers are visited by Company representatives at least annually to inspect the carrier's facilities and equipment and to update the carrier database. The database also contains information concerning ground transportation and aircraft loading companies in North America that is similar to its information concerning air carriers. 36 39 The Company has developed and is testing an Internet system to provide its account managers with real-time updates on available third party on-demand air charter aircraft across North America. The Company believes that this system will enable it to meet customer demands more efficiently and quickly in the future. Information Software System. The Company's logistics system was developed in 1990 to automate access to the Company's database and has been frequently revised and improved. This system provides on-screen information regarding air carriers, aircraft type and specifications, fuel suppliers, cargo handlers, and surface carriers, along with relevant cost information. In addition, Kitty Hawk is an on-line subscriber to Jeppesen's Flight Planning and Kavouras Meteorological services. The flight planning services provided by Jeppesen integrate airport analyses (comprised of runway lengths, altitudes, hours of operation and noise abatement procedures) with the current weather data and other information to provide an automated flight plan. This flight planning service then transmits electronically the automated flight plan to the pilot and to the FAA contemporaneously. The Company is currently testing the feasibility of a wireless information link between a laptop computer located on-board the Company's aircraft and a computer located at the Company's headquarters. This computer link, if successful, will allow the Company to transmit flight plans, weather packages and flight releases directly to the pilot. This on-board laptop computer is expected to permit the pilot to compute and transmit weight and balance, payload, flight times, and fuel into-plane information directly to Company headquarters. In addition, Kitty Hawk intends to provide its maintenance and flight crews with on-line access to the latest operating and maintenance manuals stored on CD-ROMs. Tracking System. In December 1993, the Company began operation of its HawkEye system, which was developed internally by its full time programming and computer support staff. HawkEye allows account managers to track an aircraft's progress from origin to destination on his or her computer screen and on the main projection board of the control room. Aircraft icons show each flight, its direction, and information about the flight including the type of aircraft, the flight number, its current altitude, ground speed, distance to destination, and times of departure and estimated arrival. The data supporting the HawkEye System is a direct data feed obtained from the FAA's Air Traffic Control computer system. Although the data obtained by the HawkEye system is readily available for a fee, the Company is not aware of any other air logistics provider that currently uses the FAA data feed with some form of programming similar to HawkEye. This real-time information available from the HawkEye system enables the Company's account managers to provide a level of service which the Company believes is not otherwise currently available in the market for on-demand, same-day air logistics. Seasonal Charters for the United States Postal Service Since 1986, Kitty Hawk has managed Christmas season charters for the U.S. Postal Service utilizing third-party air freight carriers in order to provide additional lift capacity for this peak period. Of the Company's total revenues for fiscal years 1993, 1994, and 1995 and the nine months ended May 31, 1996, these Christmas season managed charters accounted for $14.3 million (21.8%), $8.3 million (7.7%), $6.0 million (5.8%), and $19.7 million (18.4%), respectively. The U.S. Postal Service awards contracts periodically pursuant to a public bidding process that considers quality of service and other factors, including to a lesser extent price. Bids for contracts to provide these Christmas season charters generally are submitted in the summer of each year and are typically awarded during the following fall. The Company recently bid for an annual contract with the U.S. Postal Service for the 1996 Christmas season peak mailing period. In the future, the air freight carrier may fulfill certain Christmas season charters with the U.S. Postal Service. See "Risk Factors -- Dependence on Significant Customers." MAINTENANCE The Company's aircraft require considerable maintenance in order to remain in compliance with FAA regulations. The Company estimates that at current rates of operation of its existing fleet, during the fiscal year 1997, the next scheduled major overhaul maintenance checks for six Boeing 727-200Fs will be completed and, during the fiscal year 1998, three will be completed. The Company does not anticipate any of its aircraft, at 37 40 current rates of operation, requiring major overhaul maintenance checks during fiscal year 1999. The Company estimates that the service life of each of its revenue aircraft extends beyond the year 2000. Kitty Hawk historically has followed, and currently intends to follow, a policy of retiring Convairs at the time of their next scheduled major overhaul maintenance checks rather than expending the amounts necessary for such checks. Any equipment being placed on the Company's operating certificate is inspected and repaired prior to being utilized by the Company for either on-demand or ACMI contract charters. The Company's maintenance facilities enable it to perform all required airframe maintenance and minor engine repairs on the aircraft ranging from overnight "turnaround" checks to major airframe overhauls. The Company performs all maintenance for its fleet, including line maintenance, at its own maintenance facilities, except for repairs to avionics and overhauls of engines and airframes. All contract maintenance is performed by subcontracted FAA-approved maintenance facilities under the on-site supervision and/or inspection of Company quality assurance personnel. Management currently anticipates no difficulties in acquiring needed parts. See "Risk Factors -- Aircraft Ownership and Operation." The Company has engaged in accident-free operation of aircraft since its inception in 1985 (the FAA defines "accident" as an aircraft occurrence involving death, injury, or substantial damage). The Company has been fined by the FAA only once in its operating history, when in 1988, it was fined $5,000 for operating a Convair with one less than the required number of engine fire suppression systems. RELATIONSHIP WITH GM From the mid-1980s through June 1990, Kitty Hawk used its own aircraft to fly on-demand charters for GM assembly plants and suppliers that directly acquired on-demand charters from the open market. In 1990, GM made the decision to outsource its air logistics function. From among many bidders, including some of the largest cargo airlines and air freight forwarders in the United States, the Company was selected as GM's primary air logistics provider. Under the terms of the GM Agreement, the Company's air logistics business is encouraged to utilize the air freight carrier but is prohibited from (i) placing with the Company's air freight carrier in excess of 30% of the total number of air charters arranged for GM in any calendar year and (ii) placing with the Company's air freight carrier charters producing revenue in excess of 30% of the total revenue derived from air charters arranged for GM in any calendar year. In the nine months ended May 31, 1996, the Company's air freight carrier flew 583 on-demand charters (or 8.1% of total charters arranged for GM by the Company's air logistics business) resulting in $7.9 million of revenues to the Company (or 18.8% of the total revenues derived by the Company from GM). The GM Agreement does not provide for automatic fuel price adjustments. Since execution of the GM Agreement in June 1990, however, the Company and GM have agreed to seven fuel price adjustments reflecting both increases and decreases in the price of aircraft fuel. The term of the GM Agreement extends through May 1997 and thereafter from month-to-month until terminated by thirty days' written notice. The GM Agreement, however, stipulates that in the event of an irreconcilable difference, either party may, with or without cause, terminate the agreement following a quarterly review meeting by giving the other party at least 30 days' prior written notice thereof. Furthermore, GM may terminate the GM Agreement on ten days' written notice if there is a change in (i) management of Kitty Hawk Charters, Inc., the Company's wholly-owned subsidiary, through which the Company's air logistics business is conducted, or (ii) the stock ownership of the Company such that (a) Mr. Christopher no longer holds a majority of the outstanding Common Stock of the Company or (b) a major automobile manufacturer acquires more than 20% of the outstanding Common Stock of the Company, unless such changes are communicated to GM at least 60 days prior to the effective date and GM concurs with the changes. Due to its significant use of on-demand charters, GM could conceivably determine that it is more economical to arrange charters in-house. For the following reasons, Kitty Hawk believes it is unlikely that GM will re-establish in-house air logistics operations: (i) the Company's performance under the GM Agreement has resulted in what the Company believes is a good relationship with GM; (ii) such re-establishment of in-house air logistics operations is contrary to the prevailing trend in the automotive industry towards outsourcing 38 41 and reducing general liability exposure; (iii) GM would have to make a significant investment in personnel and systems to replicate the Company's service capabilities; and (iv) the Company believes that it provides service at a lower total cost than GM can achieve by arranging air logistics in-house. SALES AND MARKETING The Company's primary marketing focus is on transportation executives, financial officers, and purchasing directors of major users of air freight transportation services and other logistics providers. In connection with the Company's emphasis on developing and maintaining long-term relationships with major customers, an individual from the Company is dedicated to particular accounts. This individual is responsible for educating the client about the Company's service capabilities, ensuring quality service, and determining how the Company can best serve the customer. The Company's five dedicated sales and marketing personnel, in addition to the Company's 16 account managers, typically maintain close customer contact through weekly calls and periodic visits. Four of the Company's five dedicated marketing personnel concentrate on developing air logistics business outside of the automotive industry in keeping with the Company's strategy of diversifying its air logistics customer base. These efforts will include an increased focus on firms that are reducing inventory and shortening product cycle times. The marketing effort on behalf of the air freight carrier business is primarily focused on selected freight forwarders and integrators and the existing customers of its air freight carrier business. Customers also are encouraged to visit Kitty Hawk to meet with Company executives, tour facilities, and learn more about the Company's services. The Company does not engage in a significant amount of mass media advertising. Kitty Hawk believes that retaining existing customers is equally as important as generating new clients and is a direct result of customer satisfaction. The Company will continue to upgrade its database, information software, and tracking systems to maintain high quality service. The Company has developed a feature that enables customers to access the Company's aircraft tracking system on a "real time" basis to monitor their own freight. This feature allows account managers to be more productive by reducing time spent updating customers on the status of shipments. EMPLOYEES At May 31, 1996, Kitty Hawk employed approximately 281 full-time personnel, of which 47 were involved in sales and administrative functions and 234 in maintenance and flight operations (including 127 pilots). The Company is not party to any collective bargaining agreement and considers its relations with its employees to be satisfactory. The Company intends to motivate certain employees through ownership of Common Stock and options to purchase Common Stock and to encourage all employees to own Common Stock. GROUND FACILITIES Kitty Hawk occupies a 40,000 square foot facility located at Dallas/Fort Worth International Airport. This facility includes administrative offices, maintenance work areas, and hangar and parts storage facilities as well as flight operations and training facilities. The Company has an option to purchase the building, subject to the consent of the Dallas/Fort Worth Regional Airport Board, with an exercise price of $2.0 million at June 30, 1996, which option amount decreases by $5,000 per month, pursuant to a five-year lease agreement that commenced March 1, 1993. The option to purchase the property will expire on March 1, 1997. There is no stated renewal on the lease. The Company presently intends to either exercise its option or to attempt to negotiate an extension of the lease. See "Management -- Certain Transactions." Management believes that its current facilities are adequate to support the growth in operations that the Company believes will result from the purchase of seven Boeing 727-200s. The Company maintains an approximately 20,000 square foot secondary maintenance facility comprised of a maintenance work area, hangar and an area for the storage of certain aircraft repair parts and maintenance items. In addition, Kitty Hawk occupies approximately 12 small rental parts storage spaces (aggregating approximately 2,000 square feet) at a number of origin airports around the country and in the Pacific Rim, principally supporting the ACMI contract charter operations, and approximately four apartments in various locations (aggregating approximately 7,500 square feet) for flight crew layovers. In conjunction with providing warehouse services for 39 42 IBM, the Company utilizes an aggregate of less than 2,000 square feet of warehouse space at approximately 13 locations throughout the United States. GOVERNMENT REGULATION The Company's air freight carrier is subject to Title 49 of the United States Code (formerly the Federal Aviation Act of 1958, as amended), under which the DOT and the FAA exercise regulatory authority over air carriers. The DOT regulates the economic aspects of the airline industry, while the FAA regulates air safety and flight operations. The DOT is primarily responsible for regulating economic issues affecting air service, including, among other things, air carrier certification and fitness, insurance, consumer protection, unfair methods of competition, and transportation of hazardous materials. The FAA is primarily responsible for regulating air safety and flight operations, including, among other things, airworthiness requirements for each type of aircraft the Company's air freight carrier operates, pilot and crew certification, aircraft maintenance and operational standards, noise abatement, airport slots, and other safety-related factors. The Company's operations are subject to routine, and periodically more intensive, inspections and oversight by the FAA. Following a review of safety procedures at ValuJet, Inc., the FAA on June 19, 1996, announced it would propose changes to the FAA's and air carriers' oversight of contract maintenance and training procedures which, if implemented, would result in higher scrutiny of such maintenance and training procedures and could result in the Company incurring increased maintenance costs for its contract maintenance. See "Business -- Maintenance." Because the Company conducts operations for the U.S. military, it is also subject to inspections by the Department of Defense (the "DOD"). The Company's air freight carrier is also subject to regulation by the DOD in connection with operations to military airfields and, in connection with international operations, to regulation by the Department of Commerce, the U.S. Customs Service, the Immigration and Naturalization Service, and the Animal and Plant Health Inspection Service of the Department of Agriculture. The Environmental Protection Agency has jurisdiction to regulate aircraft engine exhaust emissions. All air carriers are also subject to certain provisions of the Federal Communications Act of 1934, as amended, because of their extensive use of radio and other communication facilities. Additional laws and regulations have been imposed from time to time by federal, state, and local governments that have increased significantly the cost of operations by imposing additional requirements or restrictions on operations. For example, certain cities, states, and local airport authorities prohibit flights in and out of their airports with Stage II aircraft (as defined by the FAA) or between certain hours. The FAA has proposed amendments to its flight and rest time regulations which, if adopted as proposed, could restrict the ability of the Company to respond to a shipper's request for same day delivery and/or would require the Company to hire and train additional qualified pilots to perform the Company's flight operations. The adoption of new laws, policies, or regulations or changes in the interpretation or application of existing laws, policies, or regulations, whether by the FAA, the DOT, the Federal Communications Commission, the United States government, or any foreign, state, or local government, could have a material adverse impact on Kitty Hawk and its operations. The Company's revenue fleet is comprised of ten Boeing 727-200 aircraft manufactured between 1969 and 1978, five Douglas DC-9-15 aircraft manufactured during 1967 and 1968, and nine turbo-prop Convairs manufactured between 1948 and 1957. Manufacturer's Service Bulletins ("Service Bulletins") and FAA Airworthiness Directives ("Directives") issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis cause certain of these aircraft to be subject to extensive aircraft examinations and may require certain of these aircraft to undergo structural inspections and modifications to address problems of corrosion and structural fatigue at specified times. It is possible that additional Service Bulletins or Directives applicable to the types of aircraft included in the Company's fleet could be issued in the future. The cost of compliance with Directives and Service Bulletins cannot currently be estimated, but could be substantial. 40 43 Airline operators must comply with FAA noise standard regulations promulgated under Title 49 of the United States Code, the Noise Control Act of 1972, the Quiet Communities Act of 1978, the Airport Noise and Capacity Act of 1990, and the Environmental Protection Agency Engine Emission Regulations promulgated under the Clean Air Act of 1970, as amended (collectively, the "Noise Regulations"). The Noise Regulations affect the Company's five Douglas DC-9-15Fs and its eight Boeing 727-200Fs (the "Jet Fleet"). Four of the aircraft in the Jet Fleet are currently in compliance with Stage III noise control standards. By the following deadlines, the Company must bring the Jet Fleet into Stage III compliance to the extent indicated: December 31, 1996, 50%; December 31, 1998, 75%; and January 1, 2000, 100%. Kitty Hawk intends to comply with the next deadline of December 31, 1996 by modifying one of its DC-9-15Fs and two of its 727-200Fs with noise suppression kits during November and December of 1996 for a total cost of $6.8 million (FAA rules permit rounding down to the next whole aircraft to determine 50% of fleet size). In addition to three firm orders for noise suppression kits, the Company currently holds an option for six noise suppression kits and their installation for Boeing 727-200Fs at a cost of $2.6 million for each aircraft modified. Certain airport operations have adopted local regulations which, among other things, impose curfews and noise abatement requirements. These local regulations currently have little effect on the Company. The DOT and the FAA have the authority to modify, amend, suspend, or revoke the authority and licenses issued to the Company for failure to comply with the provisions of law or applicable regulation. In addition, the DOT and the FAA may impose civil or criminal penalties for violations of applicable rules and regulations. Such actions by the FAA or the DOT, if taken, could have a material adverse effect on Kitty Hawk. The DOT and the Environmental Protection Agency exercise regulatory jurisdiction over the transportation of hazardous materials. The Company may from time to time transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility for compliance with these regulations and are responsible for proper packaging and labeling. Substantial civil monetary penalties can be imposed on both shippers and air carriers for infractions of these regulations. Certain of the Company's air freight carrier operations are conducted wholly between two or more points that are all located outside of the United States. As with the certificates and license obtained from U.S. authorities, the Company must comply with all applicable rules and regulations imposed by these foreign aeronautical authorities or be subject to the suspension, amendment or modification of its operating authorities. On December 31, 1995, a 6.25% federal transportation excise tax applicable to air freight transportation expired. Reinstatement of the tax or adoption of a different tax or user fee by the government will result in higher costs to shippers of air freight and air freight carriers, which may have a material adverse effect on freight traffic, yields, revenue, and margins. On July 9, 1996, the U.S. Senate passed legislation that, if enacted into law, would reinstate the 6.25% federal transportation excise tax. Under current federal aviation law, the Company's air freight carrier could cease to be eligible to operate as an air freight carrier if more than 25% of the voting stock of the Company were owned or controlled by non-U.S. citizens. Moreover, in order to hold an air freight carrier certificate, the president and two-thirds of the directors and officers of an air carrier must be U.S. citizens. All of the Company's directors and officers are U.S. citizens. Furthermore, (i) the Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter and (ii) the Bylaws do not permit non-U.S. citizens to serve as directors or officers of the Company. INSURANCE The Company is vulnerable to potential losses which may be incurred in the event of an aircraft accident. Any such accident could involve not only repair or replacement of a damaged aircraft and its consequent temporary or permanent loss from service, but also potential claims involving injury to persons or property. The Company is required by the DOT to carry liability insurance on each of its aircraft, and each of the Company's aircraft leases and ACMI contracts also requires the Company to carry such insurance. Any extended interruption of the Company's operations due to the loss of an aircraft could have a material adverse 41 44 effect on the Company. See "Risk Factors -- Operations Dependent upon Limited Fleet." The Company currently maintains public liability and property damage insurance and aircraft liability insurance for each of the aircraft in the fleet in amounts consistent with industry standards. Aircraft hull insurance is maintained for all aircraft other than the Convairs. The Company maintains baggage and cargo liability insurance if not provided by its customers under ACMI contracts. Although the Company believes that its insurance coverage is adequate, there can be no assurance that the amount of such coverage will not be changed upon renewal or that the Company will not be forced to bear substantial losses from accidents. Substantial claims resulting from an accident could have a material adverse effect on the Company's financial condition and could affect the ability of the Company to obtain insurance in the future. The Company attempts to monitor the amount of liability insurance maintained by the third-party carriers utilized in its air logistics business through, among other things, the obtaining of certificates of insurance. COMPETITION The market for air freight carrier services has been and is expected to remain highly competitive. Kitty Hawk competes with other air freight carriers with regard to furnishing on-demand charters and ACMI contract charters. The Company believes that the basis for such competition is price, quality of service, and the location and performance characteristics of aircraft. The Company's air freight carrier is also subject to competition from other modes of transportation including, but not limited to, railroads and trucking. Numerous competitors of Kitty Hawk provide or coordinate door-to-door air freight charters on an expedited basis. The market for air logistics also has been and is expected to remain highly competitive. The Company's principal competitors for on-demand air logistics services are other air logistics companies, air freight carriers which seek to book charters directly with customers, and air freight companies that offer expedited service. During the last fourteen months, each of Emery Worldwide, FedEx, and the United Parcel Service have entered the expedited freight business by offering "next-flight-out" service. The Company's ability to attract and retain business also is affected by the decisions of the transportation departments of commercial and industrial businesses whether, and to what extent, to coordinate their own transportation needs. Prior to 1990, GM conducted its air logistics business in-house. GM and certain other customers maintain transportation departments that could be expanded to manage charters in-house which could have a material adverse effect on Kitty Hawk. With respect to the Company's ACMI contract charter business, the Company could be adversely affected by the decision of certain of its certificated customers to acquire additional aircraft, or by its uncertificated customers to acquire and operate their own aircraft, to service routes currently serviced by Company aircraft. Many of the Company's competitors and customers have substantially greater financial resources than the Company. LEGAL PROCEEDINGS Litigation and Arbitration Related to Postal Contract The U.S. Postal Service selected the Company's air freight carrier in September 1992 as the successful bidder on a contract for a multi-city network of air transportation services supporting the U.S. Postal Service's Express Mail system. Another air freight carrier (the "Co-Bidder") was associated with the Company in the successful bid (the "ANET bid"). Two unsuccessful bidders, including Emery Worldwide Airlines, Inc. ("Emery") (the incumbent), sued to enjoin the award. This litigation (the "ANET Litigation") was settled in April 1993 by agreements under which the U.S. Postal Service terminated the Company's contract for convenience and awarded the contract to Emery. In lieu of damages for the contract's termination, the U.S. Postal Service paid $10.0 million into an escrow account to be divided between the Company and the Co-Bidder. Also under the settlement, Emery delivered releases of the Company's contractual obligations to purchase more than $40 million in aircraft and equipment, paid $2.7 million into the escrow account, and agreed to pay $162,500 into the escrow each quarter for up to 10 years so long as the Emery contract remained in effect. 42 45 Before settling the ANET litigation, the Company, Mr. Christopher, the Co-Bidder and the Co-Bidder's stockholder agreed, among other things, to hold the escrowed funds in escrow until they had agreed upon an allocation and distribution, or until the matter was resolved by binding arbitration. Subsequent disagreements led to litigation and arbitration among the Company, Mr. Christopher, the Co-Bidder and the Co-Bidder's stockholder that were resolved pursuant to a comprehensive settlement reached in August 1994. Under the comprehensive settlement, the Company received approximately $3.5 million in cash from the escrowed funds, and obtained a Boeing 727-200. Also under the comprehensive settlement agreement, Mr. Christopher received rights to one-half of any future contingent quarterly payments from Emery. Qui Tam Litigation In March 1995, the Company was served with a complaint filed on behalf of the U.S. government by a third-party plaintiff seeking to share a recovery under the Federal False Claims Act (the "Act"). The suit, filed in May 1994 in the federal district court for the District of Columbia, was filed under seal in accordance with the Act, to enable the U.S. Government to review the claim before its disclosure to the defendants. The U.S. Government declined to pursue the claim, but the third-party plaintiff chose to continue. The suit claimed that the Company and the Co-Bidder fraudulently failed to disclose to the U.S. Postal Service, both in the ANET bid and in the settlement of the ANET litigation, that some of aircraft the Company proposed to purchase and use to perform the contract were aging aircraft with high use, and claimed that the Company, the Co-Bidder and Emery similarly fraudulently conspired in connection with the settlement of the ANET litigation. The suit sought to recover treble the $10 million settlement payment made by the U.S. Postal Service in settling the ANET litigation, plus the third-party plaintiff's costs and fees. In May 1996, the court granted the Company its motion to dismiss the suit and awarded the Company its attorneys' fees and costs. The plaintiff has asked the court to reconsider its ruling. The Company does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. Litigation about Charter Agreement The Company filed suit in the 14th Judicial District Court of Dallas County, Texas against Express One International, Inc. ("Express One") in July 1992 claiming under a one-year aircraft charter by Express One to the Company that Express One breached its obligations and seeking actual damages of approximately $60,000. Express One counterclaimed that the Company wrongfully repudiated the charter and fraudulently induced Express One to provide services not required by the charter. Express One claimed damages of $356,718 for services allegedly performed, $1,140,000 for additional fees it would have received under the charter, an unspecified amount of punitive damages, and additional amounts for its attorneys' fees and costs. In February 1995, a jury verdict awarded the Company $25,000 in damages plus its attorneys' fees and denied Express One's counterclaims. In May 1995, the court entered judgment in favor of the Company for $25,000 in damages, for $148,115 in attorneys' fees through trial, and for additional attorneys' fees if Express One appealed. Before the time for appeal expired, Express One filed a petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Texas (Sherman Division). The Company filed its claim based on the judgment in the bankruptcy proceeding. In November 1995, Express One filed an appeal, to which the Company responded. Kitty Hawk does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. Routine Litigation The Company from time to time is involved in various routine legal proceedings incidental to the conduct of its business. As of the date of this Prospectus, the Company was not engaged in any legal proceeding expected to have a material adverse effect upon the Company. 43 46 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, their ages, and positions are as follows:
NAME AGE POSITION WITH COMPANY -------------------------------- --- ------------------------------------------ M. Tom Christopher(1)........... 49 Chairman of the Board of Directors and Chief Executive Officer Tilmon J. Reeves................ 56 President, Chief Operating Officer, and Director Richard R. Wadsworth............ 49 Senior Vice President -- Finance, Chief Financial Officer, Secretary, and Director Theodore J. Coonfield(2)........ 48 Director James R. Craig(2)............... 57 Director Robert F. Grammer(1)(2)......... 60 Director Lewis S. White(1)............... 56 Director
- --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. The Board of Directors consists of seven members, including four independent directors. Executive officers are elected by the Board of Directors and serve at its discretion. M. TOM CHRISTOPHER has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since its inception in 1985, and serves in the class of directors whose terms expire at the 1997 annual meeting of stockholders. Prior to assuming these positions, he formed and managed Kitty Hawk Charters, Inc. He has over 18 years of experience in the air freight industry, including serving as an account manager for Burlington Northern Airfreight from 1976 to 1978. TILMON J. REEVES has served as President and Chief Operating Officer of the Company since May 1993 and has over 30 years of aviation experience. Prior to assuming his current positions, he served as Vice President of the Company's air freight carrier from March 1992 to May 1993. Prior to joining Kitty Hawk, Mr. Reeves served as Vice President (Sales) of Express One from April 1991 to March 1992. Mr. Reeves served as the Managing Director -- Cargo Services for American Airlines, Inc. from March 1989 to January 1991. Mr. Reeves became a director in October 1994 and serves in the class of directors whose terms expire at the 1998 annual meeting of stockholders. RICHARD R. WADSWORTH has served as Senior Vice President -- Finance since October 1992, Chief Financial Officer since September 1994, and Secretary since October 1994. Prior to his current role, he served in a consulting capacity to Kitty Hawk in the preparation of various bids for the Company's contract air freight service from December 1991 to September 1992. Mr. Wadsworth served as Senior Underwriter in the Dallas office of Stephens Inc. from September 1989 until July 1991. Mr. Wadsworth filed for bankruptcy protection in his individual capacity in February of 1992. Mr. Wadsworth became a director in October 1994 and serves in the class of directors whose terms expire at the 1999 annual meeting of stockholders. THEODORE J. COONFIELD became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1998 annual meeting of stockholders. Since April 1996, Mr. Coonfield has been a consultant with Performance Consulting Group, a firm specializing in change management consulting primarily in the banking and insurance industry. From January 1993 to April 1996, Mr. Coonfield was a consultant with the Richard-Rogers Group, a consulting firm specializing in total quality issues, where he primarily engaged in consulting for firms in the transportation industry. From 1990 to December 1992, Mr. Coonfield was the Special Assistant to the Director of the Department of Human Resources for the State of Oregon. Since 1985, Mr. Coonfield has been the President of Oregon Wine Designs, Inc., a wine production and marketing firm. 44 47 JAMES R. CRAIG became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1997 annual meeting of stockholders. Mr. Craig is an attorney who has served of counsel to Burke, Wright & Keiffer, P.C. since 1990. Prior to his affiliation with Burke, Wright & Keiffer, P.C., Mr. Craig was in private law practice in Dallas since 1971, and in 1989 served as President of Whitehall Development Company, a real estate development firm, of which he is now a director. ROBERT F. GRAMMER became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1997 annual meeting of stockholders. From 1986 to October 1993, Mr. Grammer was Chairman, President and owner of R.G. Aviation, a provider of aircraft-related services. Mr. Grammer retired from this position in October of 1993 to manage his personal investments. LEWIS S. WHITE became a director of the Company in October 1994 and serves in the class of directors whose terms expire at the 1999 annual meeting of stockholders. From 1988 to April 1996, Mr. White was President of L. S. White & Co., a management consulting firm. In April 1996, Mr. White became a partner in Claymore Partners, Ltd., a firm specializing in business turnaround, restructuring, and corporate finance. Prior to 1988, he held senior financial positions with Paramount Communications Inc. and Union Carbide Corporation. Mr. White is also a director of Whitehall Corporation, a New York Stock Exchange company principally involved in aircraft maintenance. DIRECTOR COMPENSATION Pursuant to the Company's Bylaws, the members of the Board of Directors may be compensated in a manner and at a rate determined from time to time by the Board of Directors. Directors who are employees of Kitty Hawk do not receive additional compensation for service as a director. Under the Company's Omnibus Securities Plan, directors who are not employees of the Company shall receive shares of Common Stock in an amount equal to their net annual retainer (which is currently anticipated to be $10,000). COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal year 1995, Mr. Christopher, the Chief Executive Officer of the Company, determined executive officer compensation. During the last three fiscal years, Martinaire East, Inc. ("Martinaire"), a corporation 50% owned by Mr. Christopher, leased a Learjet (the "Learjet"), 50% owned by Mr. Christopher, from the Company and provided the Company with on-demand charter services utilizing the Learjet. During fiscal years 1993, 1994, and 1995, the Company paid Martinaire $1.8 million, $1.0 million and $232,000, respectively, for on-demand charter services rendered, which amounts Mr. Christopher believed represented market rates. The Company's charges to Martinaire for leasing the Learjet and related operating expenses (at costs Mr. Christopher believed represented market rates) went largely unpaid until October 1994. The balance owed to Kitty Hawk for the Learjet lease and related operating expenses at fiscal year end 1993 and 1994 was $428,262 and $481,297, respectively. In accordance with Company policy, no interest was accrued on these amounts. On October 24, 1994, the owners of the Learjet, including Mr. Christopher, agreed to sell the Learjet. In connection with this sale, Martinaire repaid the Company approximately $636,000 representing all unpaid amounts owed to the Company at that date for the Learjet lease and related operating expenses. Beginning in March 1993, Mr. Christopher, in his individual capacity, subleased the Company's present facility at Dallas/Fort Worth International Airport for a guaranteed minimum rent of $21,000 per month from Robert F. Grammer, a director of the Company. During October 1994, Mr. Christopher transferred his entire interest in this sublease to the Company, and the Company assumed Mr. Christopher's obligations and liabilities to Mr. Grammer under the sublease, including environmental liabilities, if any. See "Business -- Ground Facilities." Other than the delay in collecting the Martinaire receivable, the Company believes that the terms of each transaction discussed above were as favorable to Kitty Hawk as would have been obtainable from unaffiliated parties under similar circumstances. 45 48 Under the terms of the settlement allocating the benefits of the ANET Litigation, Mr. Christopher received rights to certain contingent future payments. See "Business -- Legal Proceedings -- Litigation and Arbitration Related to Postal Contract." EXECUTIVE COMPENSATION The table below sets forth information concerning the annual and long-term compensation for services in all capacities to Kitty Hawk for fiscal year 1994 and 1995, with respect to those persons who were, at August 31, 1994 and 1995, (i) the Chief Executive Officer and (ii) the other two most highly compensated executive officers of the Company (collectively, with the Chief Executive Officer, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ------------------------------------- UNDERLYING ALL OTHER PRINCIPAL POSITIONS FISCAL YEAR SALARY BONUS OPTIONS COMPENSATION - ----------------------------------------------- ----------- -------- -------- ------------ ------------ M. Tom Christopher 1994 $120,000 $512,000 -- $ 25,022(1) Chairman of the Board of Directors and Chief 1995 120,000 898,731 -- 352,163(2) Executive Officer Tilmon J. Reeves 1994 101,000 225,000 -- 2,982(3) President and Chief Operating Officer 1995 125,000 108,335 245,708(4) 2,310(3) Richard R. Wadsworth 1994 110,000 96,000 -- 1,675(3) Senior Vice President -- Finance, Chief 1995 110,000 70,000 92,140(5) 2,262(3) Financial Officer, and Secretary
- --------------- (1) Consists of (i) matching contributions to the Company's 401(k) Savings Plan for Mr. Christopher and (ii) life insurance premiums paid on Mr. Christopher's behalf. Does not include any contingent payments to Mr. Christopher under the ANET litigation settlement made subsequent to fiscal year 1994. These payments are contingent upon the Emery contract remaining in effect. See "Business -- Legal Proceedings -- Litigation and Arbitration Related to Postal Service Contract." (2) Consists of (i) contingent payments in the amount of $325,000 received by Mr. Christopher under the ANET litigation settlement during fiscal year 1995 (ii) life insurance premiums paid on Mr. Christopher's behalf, and (iii) matching contributions to the Company's 401(k) Savings Plan for Mr. Christopher. (3) Consists of matching contributions to the Company's 401(k) Savings Plan. (4) The option covering these shares was rescinded on June 12, 1996. See "Management -- Employee Compensation Plans and Arrangements." (5) The option covering these shares was rescinded on June 12, 1996, when Mr. Wadsworth was granted a new option. See "Management -- Employee Compensation Plans and Arrangements." 46 49 STOCK OPTIONS The following table sets forth certain information concerning options granted in fiscal year 1995 to the Company's Named Executive Officers. The Company has no outstanding stock appreciation rights and granted no stock appreciation rights during fiscal year 1995. The options described in the tables below were replaced with options having an exercise price of $.01 per share. Messrs. Reeves and Wadsworth fully exercised these replacement options on June 26, 1996. See "Management -- Employee Compensation Plans and Arrangements." No options for the purchase of Common Stock are currently outstanding. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS -------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM OPTIONS EMPLOYEES BASE PRICE EXPIRATION --------------------------- GRANTED IN FISCAL YEAR ($/SH) DATE 5%($) 10%($) ---------- -------------- ----------- --------------- ---------- ---------- Tilmon J. Reeves........ 245,708(1) 72.7% $7.81 October 5, 2004 $1,206,836 $3,058,359 Richard R. Wadsworth.... 92,140(2) 27.3% $7.81 October 5, 2004 $ 425,561 $1,146,878
- --------------- (1) The option covering these shares was rescinded on June 12, 1996. See "Management -- Employee Compensation Plans and Arrangements." (2) The option covering these shares was rescinded on June 12, 1996 when Mr. Wadsworth was granted a new option. See "Management -- Employee Compensation Plans and Arrangements." The following table sets forth certain information concerning the value of unexercised options held at August 31, 1995 by the Company's Named Executive Officers. None of the Named Executive Officers exercised options during fiscal year 1995. FISCAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF SECURITIES UNDERLYING IN-THE- UNEXERCISED OPTIONS AT 8/31/95 MONEY OPTIONS AT 8/31/95(1) ------------------------------- --------------------------- NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - --------------------------------------------- ------------------------------- --------------------------- Tilmon J. Reeves............................. 0/245,708(2) $0/$0 Richard R. Wadsworth......................... 0/92,140(3) $0/$0
- --------------- (1) Calculated by determining the difference between the fair market value of the securities underlying the option at August 31, 1995 ($5.62 per share as determined by the Board of Directors) and the exercise price of the Named Executive Officer's option. In determining the fair market value of the Company's Common Stock, the Board of Directors relied upon an independent appraisal of an investment banking firm, which considered various factors, including the Company's financial condition and business prospects, its operating results, and the absence of a market for its Common Stock. (2) The option covering these shares was rescinded on December 31, 1995, when Mr. Reeves was granted a new option. See "Management -- Employee Compensation Plans and Arrangements." (3) The option covering these shares was rescinded on June 12, 1996, when Mr. Wadsworth was granted a new option. See "Management -- Employee Compensation Plans and Arrangements." EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS The Company has adopted an Omnibus Securities Plan (the "Plan") for the employees of the Company and its subsidiaries. The number of shares of Common Stock reserved for issuance under the Plan is 300,000 shares. The Plan will be administered by the Compensation Committee of the Board of Directors. The 47 50 Compensation Committee may grant stock based and non-stock based compensation to Plan participants, including nonqualified stock options, incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, stock appreciation rights, other derivative securities, stock bonuses, restricted stock, awards denominated in stock units, securities convertible into stock, phantom stock, dividend equivalent rights, and performance awards that are contingent upon the Company's performance or the performance of the Plan participant. Awards under the Plan may contain provisions that, if a change in control of the Company occurs, give the Compensation Committee discretion to offer to purchase awards from Plan participants and make adjustments or modifications to outstanding awards to protect and maintain the rights and interests of the Plan participants or take any other action the award agreements may authorize. A change in control of the Company is deemed to occur upon any of the following events: (i) a consolidation or merger in which the Company does not survive, unless the Company's stockholders retain the same proportionate common stock ownership in the surviving company after the merger, (ii) a sale of all or substantially all of the Company's assets, (iii) the approval by the Company's stockholders of a plan to dissolve or liquidate the Company, (iv) a third party acquires 20% or more of the Company's voting securities, or (v) during any two-year period, persons who constituted a majority of the Company's Board of Directors at the beginning of such period cease to serve as directors for any reason other than death, unless each new director was approved by at least two-thirds of the directors then still in office who were directors at the beginning of the two-year period. Under the Company's Annual Incentive Compensation Plan, the Compensation Committee will determine and award semiannual bonuses to employees of the Company. The aggregate amount of bonuses available for award by the Compensation Committee is limited to 10% of the Company's income before the deduction of income taxes and the bonuses that may be paid under the Annual Incentive Compensation Plan. The Company may elect under the Annual Incentive Compensation Plan to pay up to the full amount of the bonuses in Common Stock. Up to a maximum of 200,000 shares may be awarded as bonuses under the Annual Incentive Compensation Plan. Kitty Hawk also intends to amend its 401(k) Savings Plan to provide that it may elect to match employee contributions in cash or Common Stock and that employees may elect to direct that their accounts be invested in Common Stock. The aggregate number of shares of Common Stock to be issued pursuant to the 401(k) Savings Plan and the Plan cannot exceed 300,000 shares. Employees of the Company will be able to purchase an aggregate of 100,000 shares of Common Stock pursuant to an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986, as amended, at a price equal to 85% of the market value of the Common Stock on certain specified dates effective upon the later of April 1, 1997 or thirty days following the registration of shares reserved under such Employee Stock Purchase Plan. On October 5, 1994, the Company granted Mr. Reeves and Mr. Wadsworth nonqualified options to purchase an aggregate of 245,708 shares and 92,140 shares, respectively, of Common Stock. These options had a term of 10 years, an exercise price of $7.81 per share, and vested in five equal annual increments commencing on August 31, 1995. Upon the occurrence of a change in control of the Company, the death or disability of the optionee or the termination of the optionee other than for cause, the vesting of these nonqualified options would have automatically accelerated. In the event of a change in control of the Company, the Compensation Committee could have, in its discretion, elected to repurchase option shares at their market value or make adjustments or modifications to outstanding options to protect and maintain the rights and interests of optionees. A change in control of the Company was deemed to occur in the same manner as described above with respect to the Plan. On December 31, 1995, the Company granted Mr. Reeves an option to purchase 390,707 shares of Common Stock and on June 12, 1996, rescinded all options earlier granted to Mr. Reeves. The December 31, 1995 option would have terminated upon the earliest of (i) the date at which all optioned shares had been delivered, (ii) December 31, 2005, or (iii) the date 12 months after Mr. Reeves' death. The option was fully vested and had an exercise price of $0.01 per share. During the term of the option, the Company agreed to pay life insurance premiums required to maintain a term policy insuring Mr. Reeves up to an amount not to exceed $1,600,000. If Kitty Hawk fulfilled its obligations under the life insurance contract and Mr. Reeves died before 48 51 all of the options were exercised, the remaining options would have terminated automatically upon Mr. Reeves' death. On June 12, 1996, the Company granted Mr. Wadsworth an option to purchase 153,567 shares of Common Stock and rescinded all options earlier granted to Mr. Wadsworth. The June 12, 1996 option would have terminated upon the earliest of (i) the date at which all optioned shares had been delivered, (ii) December 31, 2015, or (iii) the date 12 months after Mr. Wadsworth's death. The option was fully vested and had an exercise price of $0.01 per share. On June 26, 1996, Messrs. Reeves and Wadsworth fully exercised their options. In order to satisfy any income tax withholding obligations arising by virtue of the exercise of their options, at the election of each of Messrs. Reeves and Wadsworth pursuant to the terms of their respective options, the Company withheld from the shares to be delivered to Mr. Reeves, 156,283 shares and Mr. Wadsworth, 61,427 shares, the fair market value of which is anticipated to equal to the Company's tax withholding obligation with respect thereto. Pursuant to their respective option agreements, Messrs. Reeves and Wadsworth have the right to have the Company register shares received upon exercise of their options in at least the same ratio of ownership as the number of Mr. Christopher's common shares included in a registration of Kitty Hawk's shares. Messrs. Reeves and Wadsworth waived this right with respect to this offering. The Company also has entered into split-dollar life insurance agreements with a trust for the benefit of Mr. Christopher and his wife to provide the trust with death benefits of an aggregate of $5 million under life insurance policies. Under the split-dollar agreements, the Company pays the premiums under the insurance policies. Upon Mr. Christopher's death or the termination of the agreements, the Company is entitled to reimbursement of premiums it has paid to the extent of the death benefits paid or the cash surrender value of the policies, as applicable. Pursuant to a salary continuation agreement, in the event that the Board of Directors determines that Mr. Christopher has become disabled, the Company has agreed to continue to pay Mr. Christopher the average monthly compensation he received during the two years prior to the date of his disability until he dies or is no longer disabled. Kitty Hawk has adopted its employee compensation plans and arrangements to motivate certain employees through ownership of Common Stock and options to purchase Common Stock and to encourage all employees to own Common Stock. EMPLOYMENT AGREEMENTS Mr. Christopher has an employment agreement with Kitty Hawk that provides for an initial annual base salary of at least $125,000 and bonuses determined by the Compensation Committee pursuant to the Company's Annual Incentive Compensation Plan and otherwise. Mr. Christopher's employment agreement contains (i) a confidentiality provision that prohibits disclosure of the Company's proprietary information and (ii) a covenant not to compete that provides upon Mr. Christopher's termination of employment with the Company for any reason, Mr. Christopher shall not engage, directly or indirectly, in the air logistics, charter brokerage, on-demand, or scheduled carriage business under an FAA Part 121 or Part 135 certificate for five years following such termination. The employment agreement may be terminated by either party with or without cause. If the employment agreement is terminated by the Company without a material breach by Mr. Christopher, he is entitled to six months of compensation at his then-current salary. Messrs. Reeves and Wadsworth have employment agreements with Kitty Hawk that provide for an initial annual base salary of at least $125,000 and $110,000, respectively, and annual bonuses determined by the Compensation Committee pursuant to the Company's Annual Incentive Compensation Plan and otherwise. These employment agreements provide that Mr. Reeves and Mr. Wadsworth are prohibited from engaging in the air logistics, charter brokerage, on-demand, or scheduled carriage business under an FAA Part 121 or Part 135 certificate for three and two years, respectively, following termination of employment. These employment agreements also contain a confidentiality provision that prohibits disclosure of the Company's proprietary information. These employment agreements may be terminated by either party thereto with or without cause. Mr. Reeves' employment agreement provides that if he is terminated by the Company without 49 52 material breach by Mr. Reeves, he shall be entitled to 100% of his then-current salary in the year following termination and 50% of such annual compensation in both the second and third year following termination and all rights under the stock options and other benefits described above. Mr. Wadsworth's employment agreement provides that if he is terminated by the Company without material breach by Mr. Wadsworth, he shall be entitled to 100% of his then-current salary in the year following termination and 50% of such annual compensation in the second and third year following termination and all rights under the stock options and other benefits described above. CERTAIN TRANSACTIONS Prior to being employed by the Company as an executive officer, Mr. Wadsworth was paid fees aggregating $126,000 during fiscal years 1992 and 1993 for consulting services rendered to the Company in connection with its bid for the postal contract that was the subject of the ANET Litigation. Mr. Craig, a director of the Company, is of counsel to Burke, Wright & Keiffer, P.C., counsel to the Company. During fiscal years 1993, 1994, and 1995, the Company paid an aggregate of $542,051 to Burke, Wright & Keiffer, P.C. for legal services rendered. Although Kitty Hawk has no present intention to do so, it may in the future enter into other transactions and agreements incidental to its business with its directors, officers, and principal stockholders. The Company intends any such transactions and agreements to be on terms no less favorable to the Company than could be obtained from unaffiliated parties on an arms' length basis. Accordingly, the Company has adopted a policy that any such transaction in which the amount involved exceeds $50,000 or any such transactions in which the aggregate amount per director, officer, or 10% stockholder exceeds $100,000 per fiscal year must be approved by a majority of the Company's independent and disinterested directors. See "Business -- Compensation Committee Interlocks and Insider Participation." PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER The following table sets forth certain information concerning the beneficial ownership of the Company's Common Stock as of June 28, 1996 and as adjusted to reflect the sale of the shares offered hereby from (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) the Selling Stockholder, (iii) each director of the Company, (iv) each executive officer of the Company, and (v) all of the directors and executive officers of the Company as a group. See "Management" and "Certain Transactions" for a description of the Selling Stockholder's position, office, or other material relationship with the Company within the past three years. All shares shown in the table below are held with sole voting and investment power, subject to community property laws.
SHARES OWNED SHARES OWNED BENEFICIALLY BEFORE BENEFICIALLY AFTER OFFERING SHARES OFFERING ------------------- BEING ------------------- NAME NUMBER PERCENT SOLD NUMBER PERCENT - -------------------------------------------- --------- ------- ------- --------- ------- M. Tom Christopher (1)...................... 7,423,436 95.8% 300,000 7,123,436 68.2% Tilmon J. Reeves (1)........................ 234,424 3.0% 0 234,424 2.2% Richard R. Wadsworth (1).................... 92,140 1.2% 0 92,140 0.9% All directors and executive officers as a group..................................... 7,750,000 100.0% 300,000 7,450,000 71.3%
- --------------- (1) The address for this stockholder is 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas 75261. 50 53 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Kitty Hawk consists of (i) 25,000,000 shares of Common Stock, par value $.01 per share and (ii) 1,000,000 shares of preferred stock, par value $1.00 per share. On June 28, 1996, there were three holders of record of Common Stock with 7,750,000 shares outstanding, and no shares of Preferred Stock were outstanding. COMMON STOCK Holders of shares of Common Stock are entitled to share ratably in such dividends as may be declared by the Board of Directors and paid by the Company out of funds legally available therefor, subject to prior rights of any outstanding shares of any preferred stock. See "Dividend Policy." In the event of any dissolution, liquidation, or winding up of the Company, holders of shares of Common Stock are entitled to share ratably in assets remaining after payment of all liabilities and liquidation preferences, if any. Except as otherwise required by law or the Certificate of Incorporation, the holders of Common Stock are entitled to one vote per share on all matters voted on by stockholders, including the election of directors. The Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter. See "Business -- Government Regulation." Holders of shares of Common Stock have no preemptive, cumulative voting, subscription, redemption, or conversion rights. The rights, preferences, and privileges of holders of Common Stock are subject to the rights, preferences, and privileges granted to the holders of any series of preferred stock which the Company may issue in the future. PREFERRED STOCK The Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of fully authorized shares of preferred stock in classes or series and may, at the time of issuance, determine the powers, rights, preferences, and limitations of each class or series. Satisfaction of any dividend preferences on outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on Common Stock. Also, holders of preferred stock would be entitled to receive a preference payment in the event of any liquidation, dissolution, or winding up of the Company before any payment is made to the holders of Common Stock. Under certain circumstances, the issuance of such preferred stock may render more difficult or tend to discourage a merger, tender offer, or proxy contest, the assumption of control by a holder of a large block of the Company's securities, or the removal of incumbent management. SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS The Certificate of Incorporation and Bylaws of Kitty Hawk include certain provisions that could have anti-takeover effects. The provisions are intended to enhance the likelihood of continuity and stability in the composition of, and in the policies formulated by, the Board of Directors. These provisions also are intended to help ensure that the Board of Directors, if confronted by a surprise proposal from a third party that has acquired a block of Common Stock of the Company, will have sufficient time to review the proposal, to develop appropriate alternatives to the proposal, and to act in what the Board of Directors believes to be the best interests of the Company and its stockholders. These provisions of the Certificate of Incorporation may not be amended or repealed by the stockholders of the Company except upon the vote of the holders of at least two-thirds of the outstanding shares of each class of the Company's capital stock then entitled to vote thereon. The following is a summary of the provisions contained in the Company's Certificate of Incorporation and Bylaws and is qualified in its entirety by reference to such documents in the respective forms filed as exhibits to the Registration Statement of which this Prospectus forms a part. 51 54 Amendment of Bylaw Provisions The Certificate of Incorporation provides that Bylaw provisions may be adopted, altered, amended, or repealed only by the affirmative vote of (i) at least two-thirds of the members of the Board of Directors who are elected by the holders of Common Stock or (ii) the holders of at least two-thirds of the outstanding shares of each class of the Company's capital stock then entitled to vote thereon. Classified Board of Directors The Certificate of Incorporation provides for a Board of Directors divided into three classes of directors serving staggered three-year terms. The classification of directors has the effect of making it more difficult for stockholders to change the composition of the Board of Directors in a short period of time. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Number of Directors; Filling Vacancies; Removal The Certificate of Incorporation provides that the Board of Directors will fix the number of members of the Board of Directors to consist of at least one member (plus such number of directors as may be elected from time to time pursuant to the terms of any series of preferred stock that may be issued and outstanding from time to time). The Company's Bylaws provide that the Board of Directors, acting by majority vote of the directors then in office, may fill any newly created directorship or vacancies on the Board of Directors. Under the Delaware General Corporation Law (the "DGCL"), in the case of a corporation having a classified board, stockholders may remove a director only for cause (unless the certificate of incorporation provides otherwise). The Company's Certificate of Incorporation provides that a director may only be removed for cause. "Cause" is defined in the Certificate of Incorporation to mean that a director (i) has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal, (ii) has missed 12 consecutive meetings of the Board of Directors, or (iii) has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of his duties to the corporation in a matter of substantial importance to the corporation, and such adjudication has become final and non-appealable. These provisions will preclude a stockholder from simultaneously removing incumbent directors without cause and gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. Special Meetings The Bylaws and Certificate of Incorporation provide that special meetings of stockholders may be called by a majority of the Board of Directors, the Chairman of the Board of Directors, or by any holder or holders of at least 25% of any class of the Company's outstanding capital stock then entitled to vote at the meeting. Advance Notice Requirements for Stockholder Proposals and Director Nominees The Bylaws establish an advance notice procedure with regard to business proposed to be submitted by a stockholder at any annual or special meeting of stockholders of the Company, including the nomination of candidates for election as directors. The procedure provides that a written notice of proposed stockholder business at any annual meeting must be received by the Secretary of the Company not more than 180 days nor less than 120 days before the first anniversary of the prior year's annual meeting or, in the event of a special meeting, not more than 10 days after the notice of the special meeting. Notice to Kitty Hawk from a stockholder who proposes to nominate a person at a meeting for election as a director must contain all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, including such person's written consent to being named in a proxy statement as a nominee and to serving as a director if elected. 52 55 The chairman of a meeting of stockholders may determine that a person is not nominated in accordance with the nominating procedure, in which case such person's nomination will be disregarded. If the chairman of a meeting of stockholders determines that other business has not been properly brought before such meeting in accordance with the Bylaw procedures, such business will not be conducted at the meeting. Nothing in the nomination procedure or the business will preclude discussion by any stockholder of any nomination or business properly made or brought before the annual or any other meeting in accordance with the foregoing procedures. Limitations on Directors' Liability The Company's Certificate of Incorporation provides that, to the fullest extent permitted by Delaware law, no director shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. The effect of this provision is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from gross negligence), except for liability (i) for any breach of his duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (unlawful payments of dividends or unlawful stock repurchases or redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. This provision also will not limit the liability of directors under federal securities laws for violations not involving a breach of fiduciary duty. This elimination of liability for monetary damages permitted by Delaware law does not alter the standard of conduct with which directors must comply nor does it affect the availability of equitable relief to the Company and its stockholders. Restrictions on Foreign Directors, Officers and Voting The Company's Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any matter. Furthermore, the Bylaws do not permit non-U.S. citizens to serve as directors or officers of the Company. DELAWARE STATUTE The Certificate of Incorporation of Kitty Hawk provides for the Company to be subject to Section 203 of the DGCL ("Section 203"). Under Section 203, certain transactions and business combinations between a corporation and an "interested stockholder" owning 15% or more of the corporation's outstanding voting stock are restricted, for a period of three years from the date the stockholder becomes an interested stockholder. Generally, Section 203 prohibits significant business transactions such as a merger with, disposition of assets to, or receipt of disproportionate financial benefits by, the interested stockholder, or any other transaction that would increase the interested stockholder's proportionate ownership of any class or series of the Company's capital stock unless: (i) the transaction resulting in a person's becoming an interested stockholder, or the business combination, has been approved by the Board of Directors before the person becomes an interested stockholder; (ii) the interested stockholder acquires 85% or more of the outstanding voting stock of the Company in the same transaction that makes it an interested stockholder; or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the Board of Directors and by the holders of at least two-thirds of the Company's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. 53 56 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, 10,450,000 shares of the Company's Common Stock will be outstanding. The 3,000,000 shares (3,450,000 shares if the Underwriters' over-allotment option is exercised in full) of Common Stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless acquired by "affiliates" of the Company. All of the remaining 7,450,000 shares (7,000,000 shares if the Underwriters' over-allotment option is exercised in full) of Common Stock are deemed "restricted securities" within the meaning of Rule 144 under the Securities Act (the "Restricted Shares") and may be resold only in compliance with (i) Rule 701 of the Securities Act or (ii) Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an "affiliate," who has beneficially owned his or her shares for at least two years from the later of the date such Restricted Shares were acquired from the Company or (if applicable) the date they were acquired from an "affiliate," is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 104,500 shares upon consummation of this offering) or (ii) the average weekly trading volume of the then outstanding shares during the four calendar weeks preceding each such sale. Sales under Rule 144 also are subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. A person (or persons whose shares are aggregated) who is not deemed an "affiliate" of the Company and has not been an affiliate of the Company for at least the prior three months, and who has owned shares for at least three years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares under Rule 144 without regard to the volume limitations and the other conditions described above. As defined in Rule 144, an "affiliate" of an issuer is a person that directly or indirectly, through the use of one or more intermediaries, controls, or is controlled by, or is under the common control with, such issuer. Any employee, officer, or director of Kitty Hawk who purchases his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits non-affiliates, subject to the limitations and requirements of Rule 701, to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitations, or notice provisions of Rule 144 and permits affiliates, subject to the limitations and restrictions of Rule 701, to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days from the date of this Prospectus. The Company intends to file a registration statement under the Securities Act covering the 600,000 shares of Common Stock reserved for issuance under the Company's Omnibus Securities Plan, 401(k) Savings Plan, Annual Incentive Compensation Plan and Employee Stock Purchase Plan (the "Plans"). See "Management -- Employee Compensation Plans and Arrangements." As of the date hereof, no options or shares had been issued under any of these Plans. Such registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market when issued pursuant to the Plans, subject to provisions of the Plans, including vesting, and the lock-up agreements described herein. The Company, its directors and executive officers (other than the Selling Stockholder, who has agreed to a period of 360 days) have agreed that for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase, or otherwise transfer, or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, Common Stock of the Company, except for the grant of options or other rights under the Company's Omnibus Securities Plan so long as such options do not vest within such 180 day period. 54 57 UNDERWRITING Upon the terms and subject to the conditions of the Underwriting Agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company and the Selling Stockholder have agreed to sell to such Underwriter, the number of shares of Common Stock set forth opposite the name of such Underwriter.
UNDERWRITERS NUMBER OF SHARES ------------------------------------------------------------- ---------------- Smith Barney Inc. ........................................... Alex. Brown & Sons Incorporated.............................. Fieldstone FPCG Services, L.P. .............................. ------------- Total.............................................. 3,000,000 =============
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all Shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such Shares are taken. The Underwriters, for whom Smith Barney Inc., Alex. Brown & Sons Incorporated and Fieldstone FPCG Services, L.P. are acting as the Representatives, propose to offer the Shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial offering of the shares to the public, the public offering price and such concessions may be changed by the Representatives. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm any Shares to any accounts over which they exercise discretionary authority. The Selling Stockholder has granted to the Underwriters an option, exercisable for thirty days from the date of this Prospectus, to purchase up to 450,000 additional shares of Common Stock at the price to public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the offering of the Shares offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of Shares set forth opposite each Underwriter's name in the preceding table bears to the total number of Shares listed in such table. The Company, its directors and executive officers (other than the Selling Stockholder who has agreed to a period of 360 days) have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase, or 55 58 otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, Common Stock of the Company, except for the grant of options or other rights under the Company's Omnibus Securities Plan so long as such options do not vest within such 180 day period. Prior to this offering, there has not been any public market for the Common Stock of the Company. Consequently, the initial public offering price for the Shares of Common Stock included in this offering has been determined by negotiations between the Company, the Selling Stockholder, and the Representatives. Among the factors considered in determining such price were the history of and prospects for the Company's business and the industry in which it competes, an assessment of the Company's management and the present state of the Company's development, the past and present revenues and earnings of the Company, the prospects for growth of the Company's revenues and earnings, the current state of the U.S. economy and the current level of economic activity in the industry in which the Company competes and in related or comparable industries, and currently prevailing conditions in the securities markets, including current market valuations of publicly traded companies which are comparable to the Company. The Company, the Selling Stockholder, and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. Fieldstone FPCG Services, L.P., one of the Underwriters, and its affiliates have provided investment banking services to the Company from time to time, for which it has received customary fees, including acting as financial advisor and placement agent in connection with the Company's issuance of senior secured debt. LEGAL MATTERS The validity of the shares offered hereby and certain other legal matters will be passed upon for the Company and the Selling Stockholder by Haynes and Boone, LLP, Dallas, Texas. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Alston & Bird, Atlanta, Georgia. EXPERTS The consolidated financial statements of Kitty Hawk, Inc., at August 31, 1994 and 1995 and at May 31, 1996, and for each of three years in the period ended August 31, 1995 and for the nine months ended May 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 56 59 ADDITIONAL INFORMATION Kitty Hawk has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions having been omitted pursuant to the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement, including the exhibits and schedules thereto. The Registration Statement (with exhibits and schedules thereto) can be inspected and copied at the public reference facilities maintained by the Commission at its principal offices at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 29549, at prescribed rates. Kitty Hawk intends to furnish to stockholders annual reports containing audited consolidated financial statements and an opinion thereon expressed by independent auditors and quarterly reports for each of the first three quarters of each fiscal year containing unaudited condensed financial information. 57 60 KITTY HAWK, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors......................................................... F-2 Consolidated Balance Sheets as of August 31, 1994 and 1995 and May 31, 1995 (unaudited) and 1996............................................................................. F-3 Consolidated Statements of Income for the years ended August 31, 1993, 1994 and 1995 and the nine months ended May 31, 1995 (unaudited) and 1996.......................... F-4 Consolidated Statements of Stockholder's Equity for the years ended August 31, 1993, 1994 and 1995 and the nine months ended May 31, 1996................................. F-5 Consolidated Statements of Cash Flows for the years ended August 31, 1993, 1994 and 1995 and the nine months ended May 31, 1995 (unaudited) and 1996..................... F-6 Notes to Consolidated Financial Statements............................................. F-7
F-1 61 REPORT OF INDEPENDENT AUDITORS Stockholders Kitty Hawk, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Kitty Hawk, Inc. and subsidiaries as of August 31, 1994 and 1995, and May 31, 1996 and the related consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended August 31, 1995 and the nine months ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kitty Hawk, Inc. and subsidiaries at August 31, 1994 and 1995, and May 31, 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1995 and the nine months ended May 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas June 28, 1996 F-2 62 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AUGUST 31, MAY 31, -------------------------- -------------------------- 1994 1995 1995 1996 ----------- ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents............... $ 4,838,363 $ 3,801,378 $ 3,770,170 $ 4,249,314 Trade accounts receivable............... 15,640,873 12,967,734 7,892,621 12,662,398 Receivables from affiliates............. 481,297 -- 437,000 -- Deferred income taxes................... 159,732 50,410 159,732 1,218,272 Aircraft supplies....................... 121,671 98,386 293,615 36,163 Prepaid expenses and other assets....... 265,132 797,825 1,309,753 1,143,722 ----------- ----------- ----------- ----------- Total current assets............ 21,507,068 17,715,733 13,862,891 19,309,869 Property and equipment Aircraft................................ 18,565,277 36,179,455 36,179,455 52,994,099 Machinery and equipment................. 1,185,203 1,425,272 1,402,740 1,552,945 Furniture and fixtures.................. 240,922 251,349 251,349 252,601 Transportation equipment................ 111,625 176,057 144,182 222,259 ----------- ----------- ----------- ----------- 20,103,027 38,032,133 37,977,726 55,021,904 Less: accumulated depreciation and amortization......................... (3,699,176) (7,794,332) (6,458,717) (12,355,097) ----------- ----------- ----------- ----------- Net property and equipment........... 16,403,851 30,237,801 31,519,009 42,666,807 ----------- ----------- ----------- ----------- Total assets.............................. $37,910,919 $47,953,534 $45,381,900 $61,976,676 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable........................ $11,711,275 $ 9,327,109 $ 6,574,370 $ 7,274,750 Accrued expenses........................ 1,332,040 1,336,696 1,758,800 1,431,278 Accrued maintenance reserves............ 596,369 2,026,255 2,027,363 1,570,743 Income taxes payable.................... 1,883,898 -- 120,260 235,890 Current maturities of long-term debt.... 1,760,799 3,278,553 2,655,483 4,346,924 ----------- ----------- ----------- ----------- Total current liabilities....... 17,284,381 15,968,613 13,136,276 14,859,585 Long-term debt............................ 7,384,136 13,702,652 14,553,099 21,392,393 Deferred income taxes..................... 692,892 1,316,365 692,892 2,440,569 Commitments and contingencies Stockholder's equity Preferred stock, $1 par value: Authorized shares -- 1,000,000, none issued............................... -- -- -- -- Common stock, $.01 par value: Authorized shares -- 25,000,000, issued and outstanding -- 7,423,436............. 74,234 74,234 74,234 74,234 Additional paid-in capital.............. -- -- -- 2,906,758 Retained earnings....................... 12,475,276 16,891,670 16,925,399 20,303,137 ----------- ----------- ----------- ----------- Total stockholder's equity...... 12,549,510 16,965,904 16,999,633 23,284,129 ----------- ----------- ----------- ----------- Total liabilities and stockholder's equity.................................. $37,910,919 $47,953,534 $45,381,900 $61,976,676 =========== =========== =========== ===========
See accompanying notes. F-3 63 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED AUGUST 31, NINE MONTHS ENDED MAY 31, ----------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ------------ ------------ ----------- ------------ (UNAUDITED) Revenues: Air freight carrier.................. $12,938,780 $ 28,284,894 $ 41,117,564 $30,768,148 $ 37,042,033 Air logistics........................ 52,840,224 79,414,952 62,592,819 47,403,641 70,083,930 ----------- ------------ ------------ ----------- ------------ Total revenues................ 65,779,004 107,699,846 103,710,383 78,171,789 107,125,963 Costs of revenues: Air freight carrier.................. 8,912,348 19,549,833 28,104,280 20,795,051 27,245,989 Air logistics........................ 46,288,250 73,401,606 57,428,344 43,566,922 62,488,433 ----------- ------------ ------------ ----------- ------------ Total costs of revenues....... 55,200,598 92,951,439 85,532,624 64,361,973 89,734,422 ----------- ------------ ------------ ----------- ------------ Gross profit........................... 10,578,406 14,748,407 18,177,759 13,809,816 17,391,541 General and administrative expenses.... 4,393,876 6,012,975 7,832,167 5,155,901 6,675,633 Non-qualified employee profit sharing expense.............................. 250,000 731,862 1,000,957 771,919 901,074 Stock option grant to executive........ -- -- -- -- 2,906,758 ----------- ------------ ------------ ----------- ------------ Operating income....................... 5,934,530 8,003,570 9,344,635 7,881,996 6,908,076 Other income (expense): Interest expense..................... (134,420) (342,502) (1,184,921) (782,951) (1,344,202) Contract settlement income, net...... 724,683 1,177,742 -- -- -- Other, net........................... 192,789 (431,957) (600,667) 87,010 169,435 ----------- ------------ ------------ ----------- ------------ Income before income taxes............. 6,717,582 8,406,853 7,559,047 7,186,055 5,733,309 Income taxes........................... 2,612,559 3,146,157 3,142,653 2,735,932 2,321,842 ----------- ------------ ------------ ----------- ------------ Net income............................. $ 4,105,023 $ 5,260,696 $ 4,416,394 $ 4,450,123 $ 3,411,467 =========== ============ ============ =========== ============ Net income per share................... $ 0.52 $ 0.66 $ 0.55 $ 0.56 $ 0.43 =========== ============ ============ =========== ============ Weighted average common and common equivalent shares outstanding........ 7,967,710 7,967,710 7,967,710 7,967,710 7,967,710 =========== ============ ============ =========== ============
See accompanying notes. F-4 64 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK TOTAL -------- ---------- ----------- -------- ----------- Balance at August 31, 1992........ $106,048 $ -- $ 3,138,743 $(61,000) $ 3,183,791 Net income...................... -- -- 4,105,023 -- 4,105,023 -------- ---------- ----------- -------- ----------- Balance at August 31, 1993........ 106,048 -- 7,243,766 (61,000) 7,288,814 Retirement of treasury stock in connection with the Kitty Hawk, Inc. merger............ (31,814) -- (29,186) 61,000 -- Net income...................... -- -- 5,260,696 -- 5,260,696 -------- ---------- ----------- -------- ----------- Balance at August 31, 1994........ 74,234 -- 12,475,276 -- 12,549,510 Net income...................... -- -- 4,416,394 -- 4,416,394 -------- ---------- ----------- -------- ----------- Balance at August 31, 1995........ 74,234 -- 16,891,670 -- 16,965,904 Stock option grant to executive.................... -- 2,906,758 -- -- 2,906,758 Net income...................... -- -- 3,411,467 -- 3,411,467 -------- ---------- ----------- -------- ----------- Balance at May 31, 1996........... $ 74,234 $2,906,758 $20,303,137 $ -- $23,284,129 ======== ========== =========== ======== ===========
See accompanying notes. F-5 65 KITTY HAWK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31, NINE MONTHS ENDED MAY 31, ----------------------------------------- --------------------------- 1993 1994 1995 1995 1996 ----------- ------------ ------------ ------------ ------------ (UNAUDITED) Operating activities: Net income........................... $ 4,105,023 $ 5,260,696 $ 4,416,394 $ 4,450,123 $ 3,411,467 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...... 976,739 1,935,348 4,095,156 2,759,541 4,722,054 (Gain) loss disposal of property and equipment.................... (41,860) 62,251 -- -- -- Aircraft received in contract settlement....................... -- (750,000) -- -- -- Deferred income taxes.............. 1,186,728 (638,568) 732,795 -- (43,658) Stock option grant to executive.... -- -- -- -- 2,906,758 Deferred income.................... (83,333) -- -- -- -- Changes in operating assets and liabilities: Trade accounts receivable........ (3,159,203) (8,036,613) 2,673,139 7,748,252 305,336 Contract settlement receivable... (3,500,000) 3,500,000 -- -- -- Receivables from affiliates...... (123,476) (53,035) 481,297 44,297 -- Aircraft supplies................ (16,179) (19,778) 23,285 (171,944) 62,223 Prepaid expenses and other assets........................ (137,168) 283,342 (532,693) (1,044,621) (345,897) Accounts payable and accrued expenses...................... 4,659,023 4,063,034 (2,379,510) (4,710,145) (1,957,777) Accrued maintenance reserves..... 190,333 379,535 1,429,886 1,430,994 (455,512) Income taxes payable............. 269,377 1,614,521 (1,883,898) (1,763,638) 235,890 ----------- ------------ ------------ ------------ ------------ Net cash provided by operating activities........................... 4,326,004 7,600,733 9,055,851 8,742,859 8,840,884 Investing activities Capital expenditures................. (1,317,619) (13,875,983) (17,929,106) (17,874,699) (17,151,060) Proceeds from sale of property and equipment.......................... 1,097,761 -- -- -- -- ----------- ------------ ------------ ------------ ------------ Net cash used in investing activities........................... (219,858) (13,875,983) (17,929,106) (17,874,699) (17,151,060) Financing activities Proceeds from issuance of long-term debt............................... -- 10,916,656 9,911,240 9,401,826 11,225,000 Repayments of long-term debt......... (1,391,011) (2,747,533) (2,074,970) (1,338,179) (2,466,888) ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities................. (1,391,011) 8,169,123 7,836,270 8,063,647 8,758,112 ----------- ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents..................... 2,715,135 1,893,873 (1,036,985) (1,068,193) 447,936 Cash and cash equivalents at beginning of period............................ 229,355 2,944,490 4,838,363 4,838,363 3,801,378 ----------- ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period............................ $ 2,944,490 $ 4,838,363 $ 3,801,378 $ 3,770,170 $ 4,249,314 =========== ============ ============ ============ ============
See accompanying notes. F-6 66 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight services through two related businesses: (i) an air freight carrier and (ii) an air logistics service provider, all primarily in North America. The Company provided air logistics services to one customer which accounted for approximately 55%, 63%, 47% and 39% of its revenues in fiscal years 1993, 1994 and 1995 and the nine months ended May 31, 1996, respectively. Related accounts receivable from this customer at August 31, 1994 and 1995 and May 31, 1996, were approximately $7,743,000, $5,089,000 and $4,310,000, respectively. The contract for these services is effective through May 31, 1997; however, such contract may be canceled by either party with 30 days notice. Another customer accounted for approximately 26%, 10%, 10% and 20% of the Company's revenues in fiscal years 1993, 1994 and 1995 and the nine months ended May 31, 1996, respectively. The Company generally sells on open accounts with 30-day terms and does not require collateral for credit sales. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line and accelerated methods over estimated useful lives ranging from three to ten years. Convair and DC-9 airframes are depreciated over the period remaining to the next major airframe overhaul since the Company does not expect to perform major airframe overhauls on these aircraft. Boeing 727-200 airframes are depreciated over an estimated useful life of ten years. Costs relating to major airframe overhauls are capitalized as incurred and amortized over the estimated number of flight hours until the next overhaul (the deferral method). No major airframe overhauls have been performed to date. Estimated costs relating to periodic jet airframe maintenance are accrued over the flight hours remaining before such periodic maintenance must be performed. Costs relating to non-jet periodic airframe maintenance are expensed as incurred. With respect to aircraft engines, the estimated useful life is the period to the next required engine overhaul, as the Company currently anticipates the cost of overhauling its engines would exceed the cost of replacement. Income Taxes Income taxes have been provided using the liability method in accordance with the Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Revenue Recognition Revenues are recognized as services are provided. Net Income Per Share Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. The effect of options to purchase 390,707 and F-7 67 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 153,567 shares of the Company's common stock at $0.01 granted to certain executives in December 1995 and June 1996, respectively, have been included in the calculation of weighted average common and common equivalent shares for all periods presented. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and held in banks, money market funds, and other investments with original maturities of three months or less. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Reorganization In October 1994, Kitty Hawk, Inc. was organized as a wholly owned subsidiary of Kitty Hawk Group, Inc. ("Group"). Group subsequently merged with Kitty Hawk, Inc. with Kitty Hawk, Inc. being the surviving entity. In connection therewith, each outstanding share of Group common stock was exchanged for 106,049 shares of Kitty Hawk, Inc. common stock. Additionally, Group stock held in treasury was retired. The accompanying consolidated financial statements present the effects of the merger on a retroactive basis. Reclassifications Certain amounts from prior years have been reclassified to conform to current year presentation. 2. DEBT Long-term debt consists of the following:
AUGUST 31, AUGUST 31, MAY 31, 1994 1995 1996 ---------- ----------- ----------- (1) Note payable, bearing interest at prime plus 1.75% (11.0% at May 31, 1996) payable in 48 monthly installments of $25,021 plus interest, with a maturity date of December 1996; secured by a Douglas DC-9 aircraft, with a carrying value of approximately $838,000 at May 31, 1996............. $ 675,562 $ 350,291 $ 125,104 (2) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.25% (7.723% at May 31, 1996) payable in 21 quarterly installments of $153,354 plus interest, with a maturity date of September 1999; secured by two Douglas DC-9 aircraft, with a carrying value of approximately $3,088,000 at May 31, 1996........................................... 3,233,218 2,607,021 2,146,958 (3) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.25% (7.723% at May 31, 1996) payable in 71 monthly installments of $76,891 plus interest, with a maturity date of October 2000; secured by two Boeing 727-200 aircraft, with a carrying value of approximately $5,309,000 at May 31, 1996........................................... 5,236,155 4,767,245 3,998,334
F-8 68 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, AUGUST 31, MAY 31, 1994 1995 1996 ----------- ----------- ----------- (4) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.00% (7.473% at May 31, 1996) payable in 72 monthly installments of $60,517 plus interest, with a maturity date of March 2001; secured by two DC-9 aircraft, with a carrying value of approximately $4,366,000 at May 31, 1996........ -- 4,054,641 3,509,988 (5) Note payable, bearing interest at an adjusted Eurodollar rate plus 2.00% (7.473% at May 31, 1996) payable in 72 monthly installments of $59,077 plus interest, with a maturity date of July 2001; secured by two Boeing 727-200 aircraft, with a carrying value of approximately $5,027,000 at May 31, 1996........................................... -- 4,201,507 3,733,433 (6) Note payable, bearing interest at 9.75% payable in 18 monthly installments of interest only and 42 monthly installments of $28,212 plus interest beginning December 1996, with a maturity date of May 2000; secured by a Douglas DC-9 aircraft, with a carrying value of approximately $838,000 at May 31, 1996........................................... -- 1,000,500 1,000,500 (7) Note payable, bearing interest at an adjusted Eurodollar rate plus 1.50% to 2.50% based upon a debt-to-cash-flow ratio of the Company (7.0625% at May 31, 1996) payable in monthly installments of interest only through June 1996 and 28 quarterly installments of $400,893 plus interest beginning September 1996, with a maturity date of June 2003; secured by two Boeing 727-200 aircraft, with a carrying value of approximately $12,377,000 at May 31, 1996........................................... -- -- 11,225,000 ----------- ----------- ----------- 9,144,935 16,981,205 25,739,317 Less current portion............................... 1,760,799 3,278,553 4,346,924 ----------- ----------- ----------- $7,384,136 $13,702,652 $21,392,393 =========== =========== ===========
Maturities of long-term debt at May 31, 1996 are as follows: Three months ended August 31, 1996.............................. $ 817,870 1997............................................................ 4,808,921 1998............................................................ 4,842,407 1999............................................................ 4,857,078 2000............................................................ 4,368,473 2001............................................................ 2,825,821 Thereafter...................................................... 3,218,747 ----------- $25,739,317 ===========
Certain notes subject the Company to financial covenants, including debt service coverage, cash flow and leverage ratios. These notes also prohibit the payment of dividends. The Company makes quarterly elections to have the borrowings under notes 2 and 3 bear interest at either the prime rate minus 0.25% or the adjusted F-9 69 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Eurodollar rate plus 2.25% and notes 4 and 5 bear interest at either the prime rate or adjusted Eurodollar rate plus 2.00%. The Company has entered into two interest rate swap agreements to reduce the impact of changes in the floating interest rate on note 7 in the table above. At May 31, 1996 the Company has outstanding two interest rate swap agreements with the commercial bank to whom note 7 is payable, having a total notional principal amount of $9,225,000. These swap agreements effectively change the interest rate exposure on $9,225,000 of the total principal amount of note 7 to a fixed 7.75 percent. The notional principal amounts of the interest rate swaps reduce in proportion to required principal reductions on the related note. The Company is exposed to credit loss in the event of nonperformance by the other party in the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparty. Based on a quote provided by the bank, these swap agreements, if terminated at May 31, 1996, would have resulted in a payment to the Company of approximately $395,000. The Company has a $3,000,000 revolving line of credit facility (the "Facility"), expiring June 30, 1996, which bears interest, at the Company's option, at the bank's prime rate or adjusted Eurodollar rate plus 1.95%. Borrowings are limited to a percentage of eligible accounts receivable. The Facility also subjects the Company to various financial covenants, including maintenance of various liquidity and net worth levels. At May 31, 1996, $3,000,000 was available to the Company under the Facility. The Company is negotiating an expansion of its line of credit. Based upon the variable interest rates provided for in the substantial majority of the Company's long-term debt, management believes the fair value of its long-term debt approximates its carrying value at May 31, 1996. The Company made cash interest payments of $127,262, $280,754, $1,088,928 and $1,374,285 during fiscal years ended 1993, 1994 and 1995, and the nine months ended May 31, 1996, respectively. 3. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED AUGUST 31, NINE MONTHS ------------------------------------ ENDED MAY 31, 1993 1994 1995 1996 ---------- ---------- ---------- ------------- Current income tax: Federal...................................... $1,251,025 $3,434,725 $1,829,723 $ 1,961,075 State........................................ 174,806 350,000 580,135 404,425 ---------- ---------- ---------- ----------- Total current income tax............. 1,425,831 3,784,725 2,409,858 2,365,500 ---------- ---------- ---------- ----------- Deferred income tax: Federal...................................... 1,060,804 (608,460) 627,993 (37,806) State........................................ 125,924 (30,108) 104,802 (5,852) ---------- ---------- ---------- ----------- Total deferred income tax............ 1,186,728 (638,568) 732,795 (43,658) ---------- ---------- ---------- ----------- $2,612,559 $3,146,157 $3,142,653 $ 2,321,842 ========== ========== ========== ===========
F-10 70 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences between the provision for income taxes and the amount computed by applying the statutory federal tax rate to income before income taxes are as follows:
YEAR ENDED AUGUST 31, NINE MONTHS ------------------------------------ ENDED MAY 31, 1993 1994 1995 1996 ---------- ---------- ---------- ------------- Income tax computed at statutory rate........ $2,283,978 $2,858,330 $2,570,076 $ 1,949,325 State income taxes, net of federal benefit... 198,482 211,129 452,058 266,921 Other, net................................... 130,099 76,698 120,519 105,596 ---------- ---------- ---------- ----------- Total.............................. $2,612,559 $3,146,157 $3,142,653 $ 2,321,842 ========== ========== ========== ===========
The components of the net deferred tax liabilities recognized on the accompanying balance sheets are as follows:
AUGUST 31, ------------------------- MAY 31, 1994 1995 1996 ----------- ----------- ----------- Deferred tax liabilities: Depreciation........................................ $ (996,335) $(2,071,971) $(3,026,169) Prepaid expenses.................................... (11,069) (117,440) (33,799) ----------- ----------- ----------- Total deferred tax liabilities.............. (1,007,404) (2,189,411) (3,059,968) ----------- ----------- ----------- Deferred tax assets: Stock option grant to executive..................... -- -- 1,084,221 Nondeductible accruals.............................. 166,365 167,850 167,750 Airframe reserves................................... 220,292 755,606 585,700 Accrued bonuses..................................... 4,436 -- -- State taxes......................................... 83,151 -- -- ----------- ----------- ----------- Total deferred tax assets................... 474,244 923,456 1,837,671 ----------- ----------- ----------- Net deferred tax liability............................ $ (533,160) $(1,265,955) $(1,222,297) =========== =========== ===========
The Company made cash income tax payments of $1,133,985, $2,170,203, $4,552,371 and $2,078,673 during fiscal years 1993, 1994 and 1995, and the nine months ended May 31, 1996, respectively. 4. COMMITMENTS The Company leases its primary office and maintenance space under a non-cancelable operating lease which expires in fiscal year 1998 from a party who, effective October 1994, became a member of the Company's Board of Directors. Rent expense under this lease was $216,152, $260,970, $252,595 and $191,156 for fiscal years 1993, 1994 and 1995, and the nine months ended May 31, 1996, respectively. The minimum annual rental under the noncancelable operating lease is $63,000, $252,000 and $126,000 for the three months ended August 31, 1996, for fiscal year 1997, and for fiscal year 1998, respectively. Under the lease agreement, the Company has the option to purchase the office facilities and the landlord's interest in the associated ground lease at any time prior to March 1, 1997 for consideration of $2,200,000 less $5,000 for each monthly rental payment made after March 1, 1993. The Company leases its secondary maintenance space under a cancelable operating lease which expires in May 1999. The lease can be canceled by either party with 60 days notice. Rent expense under this lease was $59,853 and $136,250 in fiscal year 1995 and the nine months ended May 31, 1996. The minimum annual rental under this lease is $40,875, $163,500, $163,500 and $122,625 for the three months ended August 31, 1996, and fiscal year 1997, 1998 and 1999, respectively. F-11 71 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. CONTRACT SETTLEMENT In September 1992, the Company was awarded a contract by the United States Postal Service (the "USPS"). An unaffiliated air freight carrier (the "associated bidder") was associated with the Company in the successful bid. Prior to the commencement of the contract, competing bidders filed suit against the USPS seeking to set aside the award. In April 1993, to avoid the expense and uncertainty of continued litigation, the Company accepted a settlement. Under the settlement, the contract was terminated for convenience and re-awarded to the incumbent. Additionally, the Company received $12.7 million and the right to receive up to a total of $6.5 million over ten years in installments of $162,500 per quarter, contingent on the re-awarded contract remaining in effect. Appropriate releases were exchanged. At August 31, 1993, the Company and the associated bidder had not agreed upon the division of the settlement proceeds, which were held in escrow; but the Company reasonably estimated its share of the proceeds, exclusive of the $6.5 million to be paid in installments over ten years, to be at least $3.5 million. The Company therefore recorded the $3.5 million as a receivable in current assets and, net of contract-related expense, settlement income of $724,683 for fiscal year 1993. During fiscal year 1994, the Company and the associated bidder agreed to a division of the settlement proceeds and resolution of all their related claims. Under that agreement, the Company received from escrow approximately $3.5 million cash, obtained title to a Boeing 727-200 aircraft, independently valued and recorded by the Company at $750,000, and was relieved of $1.2 million of previously accrued transportation costs. Additionally, one-half of the contingent future quarterly installment payments were allocated to the Company's stockholder. As a result of this settlement, for fiscal year 1994, the Company recorded additional contract settlement income of $1,177,742, which is net of approximately $730,000 in additional settlement costs, principally legal fees. This amount also included both income and an offsetting expense of $677,239, representing the estimated fair value of the future quarterly installment payments that will be paid directly to the Company's sole stockholder. 6. LITIGATION The Company filed suit against Express One International, Inc. ("Express One") in July 1992 in Dallas County, Texas, claiming that Express One breached an aircraft charter agreement and seeking actual damages of approximately $60,000. Express One counterclaimed, asserting that the Company wrongfully repudiated the lease agreement and seeking damages of $356,718 for services performed, $1,140,000 for additional fees it would have received under the contract, punitive damages and its attorney's fees and costs. In February 1995, a jury verdict in the case granted the Company $25,000 in damages plus its attorneys fees and denied Express One's claims. The court entered judgment in favor of the Company for $25,000 in damages, for $148,115 in attorneys fees through trial and for additional attorneys fees if Express One appeals. Before expiration of the time for appeal, Express One filed a petition under Chapter 11 of the U.S. Bankruptcy Code. There is a dispute about whether Express One has preserved a right to appeal and whether the judgment has become final. Therefore, the judgment awarded to the Company has not been recorded in the financial statements. The Company does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. The USPS selected the Company's air freight carrier in September 1992 as the successful bidder on a contract for a multi-city network of air transportation services supporting the USPS Express Mail system. Two unsuccessful bidders sued the USPS to enjoin the award. The Company intervened. This litigation (the "ANET Litigation") was settled in April 1993 by agreements under which the USPS terminated the Company's contract for convenience and awarded the contract to the incumbent contractor, Emery Worldwide Airlines, Inc. ("Emery"). F-12 72 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In March 1995, the Company was served with a complaint in a qui tam lawsuit filed on behalf of the U.S. Government by a third-party plaintiff seeking to share a recovery under the Federal False Claims Act (the "Act"). The suit, filed in May 1994, was filed under seal in accordance with the Act, to enable the U.S. Government to review the claim before its disclosure to the defendants. The U.S. Government declined to pursue the claim, but the third-party plaintiff chose to continue. The suit claimed that the Company and another defendant fraudulently failed to disclose to the USPS, both in the Company's successful bid and in the settlement of the ANET litigation, that some of the aircraft the Company proposed to purchase and use to perform the contract were aging aircraft with high use, and claimed that the Company and Emery similarly fraudulently conspired in connection with the settlement of the ANET litigation. The suit sought to recover treble the $10 million settlement payment made by the USPS in settling the ANET litigation, plus the third party plaintiff's costs and fees. The Company moved to dismiss the suit with prejudice on grounds that it was barred by the Act. The Company also sought to recover its attorneys' fees from the plaintiff and to obtain sanctions against the plaintiff's attorneys. The Company believes the suit was clearly frivolous because, among other things, the Company in the ANET bid identified each aircraft by serial number, age, hours and cycles, and made available use and maintenance records for each aircraft as required by the request for proposal, and that the USPS reviewed and inspected the aircraft, data and records and found them acceptable. In May 1996, the court dismissed the suit and awarded the Company its attorneys' fees and costs. The plaintiff has asked the court to reconsider its ruling. The Company does not expect the outcome of this matter to have a material adverse effect upon the Company's financial condition or results of operations. Additionally, in the normal course of business, the Company is a party to matters of litigation, none of which, in the opinion of management, will have a material adverse effect on the Company's financial condition or the results of operations. 7. STOCK OPTIONS In October 1994 the Company granted non-qualified options to two executives to purchase a total of 337,848 shares of common stock at $7.81 per share. In December 1995, the Company canceled 245,708 of the options outstanding and granted to an executive a non-qualified option to purchase 390,707 shares of common stock at $0.01 per share. The new option has a term of nine years and is fully vested. Based on an independent appraisal commissioned by the Company, the fair value of the option of $2,906,758 is reflected as a charge to earnings in the accompanying statement of income for the nine months ended May 31, 1996. In June 1996, the Company canceled the remaining 92,140 options outstanding and granted to another executive a non-qualifying option to purchase 153,567 shares of common stock at $0.01 per share. The new option has a term of nine years and is fully vested. Based on an independent appraisal commissioned by the Company, the fair value of the option of $1,588,202 will be reflected as a charge to earnings during the fourth fiscal quarter ending August 31, 1996. 8. RELATED PARTY TRANSACTIONS The Company provided maintenance and other services as well as cash advances to Martinaire East, Inc. ("Martinaire"), a company that is 50% owned by the Company's stockholder. Total sales to Martinaire for fuel and services were approximately $424,000, $235,000, $22,000 and $0 in fiscal years 1993, 1994 and 1995, and the nine months ended May 31, 1996, respectively. Martinaire also flies charter service for the Company. During fiscal years 1993, 1994 and 1995, and the nine months ended May 31, 1996, Martinaire provided the Company services in the amount of approximately $1,799,000, $982,000, $232,000 and $1,502,000, respec- F-13 73 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) tively. At August 31, 1994 and 1995, and May 31, 1996, approximately $481,000, $0 and $0, respectively, was due from Martinaire. 9. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code. Established effective September 1, 1993, the plan covers substantially all employees meeting minimum service requirements. Under the plan, contributions are voluntarily made by employees and the Company provides matching contributions based upon the employees contribution. The Company incurred $80,812, $121,217, and $123,993 in matching contributions related to this plan during fiscal year 1994 and 1995, and the nine months ended May 31, 1996, respectively. The Company has adopted: - An Omnibus Securities Plan (the Plan) under which 300,000 shares of its common stock are reserved for issuance to its employees. The Plan will be administered by the Company's Compensation Committee which may grant stock based and non-stock based compensation to the Plan participants. - An Annual Incentive Compensation Plan (the Compensation Plan) under which the Compensation Committee will determine and award semiannual bonuses to employees of the Company. The aggregate amount of bonuses available for award is limited to 10% of the Company's income before income taxes and the bonuses to be paid under the Compensation Plan. The Company may elect to pay the full amount of the bonuses in common stock, which is limited to total stock distributions of 200,000 shares of common stock. - An Employee Stock Purchase Plan covering up to 100,000 shares of the Company's common stock. 10. SUBSEQUENT EVENT On June 28, 1996 the Company approved a 1.2285391-for-1 stock split effected as a stock dividend. All references to common stock and per share data have been restated to give effect to the split. F-14 74 [PICTURE OF KITTY HAWK BUILDING] [PICTURE OF KITTY HAWK AIRCRAFT PIERCING WORLD MAP] [PICTURE OF KITTY HAWK BOEING 727] [PICTURE OF KITTY HAWK AIRCRAFT] [PICTURE OF KITTY HAWK AIRCRAFT BEING LOADED] [PICTURE OF KITTY HAWK CONTROL ROOM] 75 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER, OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 The Company........................... 7 Risk Factors.......................... 8 Use of Proceeds....................... 16 Dividend Policy....................... 16 Dilution.............................. 17 Capitalization........................ 18 Selected Consolidated Financial and Operating Data...................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 30 Management............................ 44 Certain Transactions.................. 50 Principal Stockholders and Selling Stockholder......................... 50 Description of Capital Stock.......... 51 Shares Eligible for Future Sale....... 54 Underwriting.......................... 55 Legal Matters......................... 56 Experts............................... 56 Additional Information................ 57 Index to Consolidated Financial Statements.......................... F-1
Until , 1996 (25 days after the commencement of the offering), all dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 3,000,000 SHARES KITTY HAWK, INC. COMMON STOCK [KITTY HAWK, INC. LOGO] ------------ PROSPECTUS , 1996 ------------ SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED FIELDSTONE FPCG SERVICES, L.P. - ------------------------------------------------------ - ------------------------------------------------------ 76 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Estimated expenses payable solely by the Company in connection with the issuance and distribution of the securities to be registered, other than underwriting discounts and expenses, are as follows: SEC registration fee.............................................. $ 19,034 NASD filing fee................................................... 6,020 Nasdaq application fee............................................ 45,125 Printing and engraving expenses................................... * Legal fees and expenses........................................... * Accounting fees and expenses...................................... * Blue sky fees and expenses........................................ * Transfer agent and registrar fees................................. * Miscellaneous expenses............................................ * -------- Total................................................... $665,000 ========
- --------------- * To be supplied by Amendment. ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's Certificate of Incorporation provides that no director of the Company will be personally liable to the Company or any of its stockholders for monetary damages arising from the director's breach of fiduciary duty as a director. However, this does not apply with respect to any action in which the director would be liable under Section 174 of the General Corporation Law of the State of Delaware ("Delaware Code") nor does it apply with respect to any liability in which the director (i) breached his duty of loyalty to the Company or its stockholders; (ii) did not act in good faith or, in failing to act, did not act in good faith; (iii) acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law; or (iv) derived an improper personal benefit. The Certificate of Incorporation of the Company provides that the Company shall indemnify its directors and officers and former directors and officers to the fullest extent permitted by the Delaware Code. Pursuant to the provisions of Section 145 of the Delaware Code, the Company has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee, or agent of the Company, against any and all expenses, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with such action, suit, or proceeding. The power to indemnify applies only if such person acted in good faith and in a manner he reasonably believed to be in the best interest, or not opposed to the best interest, of the Company and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the Company as well, but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of negligence or misconduct unless the court, in its discretion, believes that in light of all the circumstances indemnification should apply. The statute further specifically provides that the indemnification authorized thereby shall not be deemed exclusive of any other rights to which any such officer or director may be entitled under any bylaws, agreements, vote of stockholders or disinterested directors, or otherwise. II-1 77 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Company granted certain options to Messrs. Reeves and Wadsworth in December of 1995 and June of 1996, respectively. See "Management -- Employee Compensation Plans and Arrangements." All such options were issued in connection with employment or consulting services rendered pursuant to Rule 701 and/or Section 4(2) of the Securities Act of 1933, as amended and were exercised on June 27, 1996. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits: 1.1*** -- Form of Underwriting Agreement. 3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the "Company"), filed as Exhibit 3.1 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.2 -- Bylaws of the Company, filed as Exhibit 3.2 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company, filed as Exhibit 3.3 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.4 -- Amendment No. 1 to the Bylaws of the Company, filed as Exhibit 3.4 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 4.1*** -- Specimen Common Stock Certificate. 5.1*** -- Opinion of Haynes and Boone, LLP, regarding legality of the Common Stock being issued. 10.1 -- Master Agreement for Air Charter Transportation Services ("GM Agreement") dated as of June 4, 1990 by and between General Motors Corp. ("GM") and Kitty Hawk Charters, Inc. ("Charters"), filed as Exhibit 10.1 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, ` which exhibit is incorporated herein by reference. 10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9, 1990 by and between the Company and GM, filed as Exhibit 10.2 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4, 1991 by and between the Company and GM, filed as Exhibit 10.3 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1, 1990 by and between the Company and GM, filed as Exhibit 10.4 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
II-2 78 10.5 -- Addendum No. 3 to the GM Agreement dated as of November 5, 1990 by and between the Company and GM, filed as Exhibit 10.5 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.6 -- Addendum No. 4 to the GM Agreement dated as of December 3, 1990 by and between the Company and GM, filed as Exhibit 10.6 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7, 1991 by and between the Company and GM, filed as Exhibit 10.7 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.8 -- Addendum No. 6 to the GM Agreement dated as of February 4, 1991 by and between the Company and GM, filed as Exhibit 10.8 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4, 1991 by and between the Company and GM, filed as Exhibit 10.9 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.10 -- Revision to Appendices and to Master Agreement for Air Charter Transportation Services dated August 13, 1992 by and between the Company and GM, filed as Exhibit 10.10 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1, 1994 by and between the Company and GM, filed as Exhibit 10.11 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.12 -- Aircraft Charter Agreement dated as of February 9, 1994 by and between the Company and DHL Airways, Inc., filed as Exhibit 10.13 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.13* -- Agreement to Furnish Three (3) CV-600 Aircraft and Air Cargo Services dated as of May 15, 1995 by and between the Company and Burlington Air Express Inc. ("Burlington"). 10.14** -- Agreement to Furnish Five (5) B727-200 Aircraft and Air Cargo Services dated as of March 1, 1996 by and between the Company and Burlington. 10.15** -- Aircraft Operating Lease dated as of March 14, 1995 by and between Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") and the Company. 10.16** -- Amendment and Extension of Aircraft Operating Lease dated April 24, 1996 by and between Ting Hong and the Company. 10.17** -- Aircraft Operating Lease dated April 19, 1996 by and between the Company and Pacific East Asia Cargo Airlines, Inc. 10.18 -- Settlement Agreement dated as of August 22, 1994 by and between the Company, Aircargo, Leasing, M. Tom Christopher, American International Airways, Inc., and Conrad Kalitta, filed as Exhibit 10.32 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.19 -- Sublease Agreement dated as of March 1, 1993 by and between Robert F. Grammer and M. Tom Christopher, filed as Exhibit 10.33 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
II-3 79 10.20 -- Transfer and Assignment of Sublease Agreement dated as of October 26, 1994 by and between the Company, M. Tom Christopher and Robert F. Grammer, filed as Exhibit 10.34 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.21 -- Amended and Restated Loan Agreement dated as of May 10, 1994 by and between Leasing, the Company, Aircargo and First Interstate Bank of Texas, N.A., filed as Exhibit 10.35 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.22*** -- First Amendment to Amended and Restated Loan Agreement dated as of January 17, 1995 between the Company and First Interstate Bank of Texas, N.A. 10.23*** -- Loan Agreement dated as of December 18, 1995 between the Company and Bank One, Texas, N.A. 10.24*** -- Loan Agreement dated as of January 17, 1995 between the Company and First Interstate Bank of Texas, N.A. 10.25 -- Salary Continuation Agreement dated as of June 15, 1993 by and between the Company and M. Tom Christopher, filed as Exhibit 10.36 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.26 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as Exhibit 10.37 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.27 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as Exhibit 10.38 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.28 -- Kitty Hawk, Inc. 1994 Omnibus Securities Plan, filed as Exhibit 10.39 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.29 -- Form of Stock Option Agreement to be used under 1994 Omnibus Securities Plan, filed as Exhibit 10.44 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.30 -- Kitty Hawk, Inc. Employee Stock Purchase Plan, filed as Exhibit 10.41 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.31 -- Kitty Hawk, Inc. Annual Incentive Compensation Plan, filed as Exhibit 10.42 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.32 -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as Exhibit 10.43 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.33 -- Employment Agreement dated as of October 27, 1994 by and between the Company and M. Tom Christopher, filed as Exhibit 10.45 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
II-4 80 10.34 -- Employment Agreement dated as of October 27, 1994 by and between the Company and Richard R. Wadsworth, filed as Exhibit 10.46 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.35 -- Employment Agreement dated as of October 27, 1994 by and between the Company and Tilmon J. Reeves, filed as Exhibit 10.47 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.36 -- Amended and Restated Stock Option Agreement dated as of October 26, 1994 by and between Richard R. Wadsworth and the Company, filed as Exhibit 10.48 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.37 -- Amended and Restated Stock Option Agreement dated as of October 26, 1994 by and between Tilmon J. Reeves and the Company, filed as Exhibit 10.49 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.38* -- Stock Option Agreement dated June 12, 1996 by and between Richard R. Wadsworth, Jr. and the Company. 10.39* -- Stock Option and Life Insurance Agreement dated December 31, 1995 by and between Tilmon J. Reeves and the Company. 10.40 -- Request for written consent to expand ownership without management change dated as of October 26, 1994 granted by GM, filed as Exhibit 10.50 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.41 -- Request for written consent to certain disclosures of Master Agreement and contractual relationship dated as of October 26, 1994 granted by GM, filed as Exhibit 10.51 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.42 -- Kavouras Customer Order Acknowledgment, filed as Exhibit 10.52 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.43 -- Kavouras Meteorological Services Agreement, filed as Exhibit 10.53 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.44 -- Computer Flight Plan and Weather Service Agreement dated as of June 11, 1992 by and between Aircargo and Jeppesen DataPlan, Inc., filed as Exhibit 10.54 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.45** -- Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (the "FEASI Agreement"). 10.46** -- Amendment No. 1 dated November 17, 1992 to the FEASI Agreement. 10.47** -- Amendment No. 2 dated February 1993 to the FEASI Agreement. 10.48** -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement. 10.49** -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement. 10.50** -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement.
II-5 81 21.1* -- Subsidiaries of the Registrant. 23.1* -- Consent of Ernst & Young LLP. 23.2 -- Consent of Haynes and Boone (contained in legal opinion). 24.1* -- The power of attorney of officers and directors of the Company is set forth on the signature page hereto. 27.1* -- Financial Data Schedule.
- --------------- * Filed herewith. ** Filed herewith and confidential treatment requested for certain portions pursuant to the Commission's Rule 406. *** To be filed by amendment. (b) Financial Statement Schedules and Auditors' Reports on Schedules: None ITEM 17. UNDERTAKINGS The undersigned Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-6 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the day of , 1996. KITTY HAWK, INC. By: /s/ M. TOM CHRISTOPHER ------------------------------------ M. Tom Christopher Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Kitty Hawk, Inc. (the "Company") hereby constitutes and appoints, M. Tom Christopher and Richard R. Wadsworth, or either of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute, and file any and all documents relating to this Registration Statement, including any and all amendments, exhibits and supplements thereto and including any Registration Statement filed pursuant to Rule 462(b) of the Securities Act of 1933, with any regulatory authority, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the day of , 1996.
NAME CAPACITIES - --------------------------------------------- -------------------------------------------- /s/ M. TOM CHRISTOPHER Chairman of the Board of Directors, and - --------------------------------------------- Chief Executive Officer M. Tom Christopher /s/ TILMON J. REEVES President, Chief Operating Officer, and - --------------------------------------------- Director Tilmon J. Reeves /s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief - --------------------------------------------- Financial Officer, Secretary, and Richard R. Wadsworth Director, and Principal Financial and Accounting Officer /s/ TED J. COONFIELD Director - --------------------------------------------- Ted J. Coonfield /s/ JAMES R. CRAIG Director - --------------------------------------------- James R. Craig /s/ ROBERT F. GRAMMER Director - --------------------------------------------- Robert F. Grammer /s/ LEWIS S. WHITE Director - --------------------------------------------- Lewis S. White
II-7 83 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - -------------------- ------------------------------------------------------------------------ 1.1*** -- Form of Underwriting Agreement. 3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the "Company"), filed as Exhibit 3.1 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.2 -- Bylaws of the Company, filed as Exhibit 3.2 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company, filed as Exhibit 3.3 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 3.4 -- Amendment No. 1 to the Bylaws of the Company, filed as Exhibit 3.4 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 4.1*** -- Specimen Common Stock Certificate. 5.1*** -- Opinion of Haynes and Boone, LLP, regarding legality of the Common Stock being issued. 10.1 -- Master Agreement for Air Charter Transportation Services ("GM Agreement") dated as of June 4, 1990 by and between General Motors Corp. ("GM") and Kitty Hawk Charters, Inc. ("Charters"), filed as Exhibit 10.1 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9, 1990 by and between the Company and GM, filed as Exhibit 10.2 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4, 1991 by and between the Company and GM, filed as Exhibit 10.3 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1, 1990 by and between the Company and GM, filed as Exhibit 10.4 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.5 -- Addendum No. 3 to the GM Agreement dated as of November 5, 1990 by and between the Company and GM, filed as Exhibit 10.5 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.6 -- Addendum No. 4 to the GM Agreement dated as of December 3, 1990 by and between the Company and GM, filed as Exhibit 10.6 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
84
EXHIBIT NO. DESCRIPTION - -------------------- ------------------------------------------------------------------------ 10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7, 1991 by and between the Company and GM, filed as Exhibit 10.7 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.8 -- Addendum No. 6 to the GM Agreement dated as of February 4, 1991 by and between the Company and GM, filed as Exhibit 10.8 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4, 1991 by and between the Company and GM, filed as Exhibit 10.9 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.10 -- Revision to Appendices and to Master Agreement for Air Charter Transportation Services dated August 13, 1992 by and between the Company and GM, filed as Exhibit 10.10 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1, 1994 by and between the Company and GM, filed as Exhibit 10.11 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.12 -- Aircraft Charter Agreement dated as of February 9, 1994 by and between the Company and DHL Airways, Inc., filed as Exhibit 10.13 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.13* -- Agreement to Furnish Three (3) CV-600 Aircraft and Air Cargo Services dated as of May 15, 1995 by and between the Company and Burlington Air Express Inc. ("Burlington"). 10.14** -- Agreement to Furnish Five (5) B727-200 Aircraft and Air Cargo Services dated as of March 1, 1996 by and between the Company and Burlington. 10.15** -- Aircraft Operating Lease dated as of March 14, 1995 by and between Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") and the Company. 10.16** -- Amendment and Extension of Aircraft Operating Lease dated April 24, 1996 by and between Ting Hong and the Company. 10.17** -- Aircraft Operating Lease dated April 19, 1996 by and between the Company and Pacific East Asia Cargo Airlines, Inc. 10.18 -- Settlement Agreement dated as of August 22, 1994 by and between the Company, Aircargo, Leasing, M. Tom Christopher, American International Airways, Inc., and Conrad Kalitta, filed as Exhibit 10.32 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.19 -- Sublease Agreement dated as of March 1, 1993 by and between Robert F. Grammer and M. Tom Christopher, filed as Exhibit 10.33 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
85
EXHIBIT NO. DESCRIPTION - -------------------- ------------------------------------------------------------------------ 10.20 -- Transfer and Assignment of Sublease Agreement dated as of October 26, 1994 by and between the Company, M. Tom Christopher and Robert F. Grammer, filed as Exhibit 10.34 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.21 -- Amended and Restated Loan Agreement dated as of May 10, 1994 by and between Leasing, the Company, Aircargo and First Interstate Bank of Texas, N.A., filed as Exhibit 10.35 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.22*** -- First Amendment to Amended and Restated Loan Agreement dated as of January 17, 1995 between the Company and First Interstate Bank of Texas, N.A. 10.23*** -- Loan Agreement dated as of December 18, 1995 between the Company and Bank One, Texas, N.A. 10.24*** -- Loan Agreement dated as of January 17, 1995 between the Company and First Interstate Bank of Texas, N.A. 10.25 -- Salary Continuation Agreement dated as of June 15, 1993 by and between the Company and M. Tom Christopher, filed as Exhibit 10.36 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.26 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as Exhibit 10.37 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.27 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and between the Company and James R. Craig, filed as Exhibit 10.38 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.28 -- Kitty Hawk, Inc. 1994 Omnibus Securities Plan, filed as Exhibit 10.39 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.29 -- Form of Stock Option Agreement to be used under 1994 Omnibus Securities Plan, filed as Exhibit 10.44 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.30 -- Kitty Hawk, Inc. Employee Stock Purchase Plan, filed as Exhibit 10.41 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.31 -- Kitty Hawk, Inc. Annual Incentive Compensation Plan, filed as Exhibit 10.42 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.32 -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as Exhibit 10.43 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
86
EXHIBIT NO. DESCRIPTION - -------------------- ------------------------------------------------------------------------ 10.33 -- Employment Agreement dated as of October 27, 1994 by and between the Company and M. Tom Christopher, filed as Exhibit 10.45 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.34 -- Employment Agreement dated as of October 27, 1994 by and between the Company and Richard R. Wadsworth, filed as Exhibit 10.46 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.35 -- Employment Agreement dated as of October 27, 1994 by and between the Company and Tilmon J. Reeves, filed as Exhibit 10.47 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.36 -- Amended and Restated Stock Option Agreement dated as of October 26, 1994 by and between Richard R. Wadsworth and the Company, filed as Exhibit 10.48 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.37 -- Amended and Restated Stock Option Agreement dated as of October 26, 1994 by and between Tilmon J. Reeves and the Company, filed as Exhibit 10.49 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.38* -- Stock Option Agreement dated June 12, 1996 by and between Richard R. Wadsworth, Jr. and the Company. 10.39* -- Stock Option and Life Insurance Agreement dated December 31, 1995 by and between Tilmon J. Reeves and the Company. 10.40 -- Request for written consent to expand ownership without management change dated as of October 26, 1994 granted by GM, filed as Exhibit 10.50 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.41 -- Request for written consent to certain disclosures of Master Agreement and contractual relationship dated as of October 26, 1994 granted by GM, filed as Exhibit 10.51 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.42 -- Kavouras Customer Order Acknowledgment, filed as Exhibit 10.52 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.43 -- Kavouras Meteorological Services Agreement, filed as Exhibit 10.53 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference.
87
EXHIBIT NO. DESCRIPTION - -------------------- ------------------------------------------------------------------------ 10.44 -- Computer Flight Plan and Weather Service Agreement dated as of June 11, 1992 by and between Aircargo and Jeppesen DataPlan, Inc., filed as Exhibit 10.54 to the Registrant's previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, which exhibit is incorporated herein by reference. 10.45** -- Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (the "FEASI Agreement"). 10.46** -- Amendment No. 1 dated November 17, 1992 to the FEASI Agreement. 10.47** -- Amendment No. 2 dated February 1993 to the FEASI Agreement. 10.48** -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement. 10.49** -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement. 10.50** -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement. 21.1* -- Subsidiaries of the Registrant. 23.1* -- Consent of Ernst & Young LLP. 23.2 -- Consent of Haynes and Boone (contained in legal opinion). 24.1* -- The power of attorney of officers and directors of the Company is set forth on the signature page hereto. 27.1* -- Financial Data Schedule.
- --------------- * Filed herewith. ** Filed herewith and confidential treatment requested for certain portions pursuant to the Commission's Rule 406. *** To be filed by amendment. EX-10.13 2 AGREEMENT TO FURNISH THREE AIRCRAFT 1 EXHIBIT 10.13 AGREEMENT TO FURNISH THREE (3) CV-600 AIRCRAFT AND AIR CARGO SERVICES THIS AGREEMENT TO FURNISH CV-600 AIRCRAFT AND AIR CARGO SERVICES (this "Agreement") is made and entered into as of the 15th day of May, 1995, by and between Kitty Hawk Group, Inc., a Texas Corporation ("Contractor"), and BURLINGTON AIR EXPRESS INC., a Delaware Corporation ("Burlington"). Preliminary Statement The Contractor wishes to acquire, operate and maintain the Aircraft for the exclusive use and benefit of Burlington Monday through Saturday morning in accordance with the terms hereof. NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, the parties hereby agree as follows: I. DEFINITIONS (A) Defined Terms. Except as otherwise specified, the following terms have the respective meanings set forth below for all purposes of the Agreement, and the definitions of such terms are equally applicable both to the singular and plural forms thereof. "Aeronautics Authority" means, as appropriate, the United States Department of Transportation, the Secretary of Transportation, the FAA or the Administrator of the FAA, or any person, governmental department, bureau, commission or agency succeeding to the functions of any of the foregoing or otherwise having jurisdiction with respect to the ownership, leasing operation, use or maintenance of the Aircraft. "Air Carrier" means any air carrier which is a United States "Domestic Air Carrier" as defined in Part 121 of FAR and has a Certificate of Public Convenience and Necessity issued pursuant to Section 401 or 418 of the Aviation Act. "Aircraft" means three (3) Convair 600 described on Schedule I hereto, with the Registration Numbers described thereon. "Aviation Act" means the Federal Aviation Act of 1958, as amended from time to time, or any successor or substituted legislation at the time in effect and applicable, and the rules and regulations promulgated pursuant thereto. "Block Hour" means, for each Aircraft, each hour or part thereof (computed to the nearest one-tenth of an hour) elapsing from the moment such Aircraft begins movement under 1 2 its own power at the airport at which a flight segment of a Scheduled Route (or, if Burlington so instructs, for unscheduled flying) departs until such Aircraft comes to rest at the next airport at which such flight segment terminates and such Aircraft is no longer moving under its own power. "Burlington Hub" means the air cargo handling and operations base designated by Burlington from time to time as the hub of its freight forwarding operations to which the Services relate. "Business Day" means any day other than a Saturday, Sunday or any statutory holiday. "Dangerous Goods" means, for purposes of this agreement, any and all "dangerous goods," "hazardous materials," "hazardous substances," "restricted articles" and any similar terms as defined in the applicable Dangerous Goods Regulations from time to time. "Dangerous Goods Regulations" may mean one or more of the following: Hazardous Materials Transportation Act of 1970 (Public Law 91458, October 16, 1970, 84 Stat. 977); the Hazardous Materials Transportation Act (Public Law 98633, January 3, 1975, as Stat. 2156); (U.S. Code of Federal Regulations, Title 49 (49CR); International Civil Aviation Organization Technical Instruction for the Safe Transport of Dangerous Goods (ICAO); International Air Transport Association Dangerous Goods Regulations (IATA); Restricted Articles Circular 6-D, Published by Airline Tariff Publishing Company, Federal Air Regulations Part 121, or any other applicable law or industry regulations which regulates the transportation of dangerous or hazardous goods or other materials, as amended, supplemented or replaced from time to time, and in each case, the rules and regulations from time to time promulgated pursuant thereto. "Departure" means each occasion upon which an Aircraft under the control of Contractor in the performance of Services in fact departs from a point of origination or an intermediate point on a Scheduled Route. "Departure Reliability Factor" means with respect to any date, the number (expressed as percentage) obtained by dividing (i) the number of Departures in fact made by Contractor during the immediately preceding consecutive twenty-one (21) Scheduled Flight Days divided by (ii) the number of Departures scheduled during such consecutive twenty-one (21) Scheduled Flight Days. Reliability calculations will not be effective for the initial twenty-one (21) days of operation. "$" and "dollars" means the lawful currency of the United States of America. "Event of Default" means each of the events specified in the Article VIII hereof. 2 3 "FAA" means the United States Federal Aviation Administration or any person, governmental department, bureau, commission or agency succeeding to the functions thereof. "FAR" means the regulations promulgated pursuant to the Aviation Act. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease, security interest or other claim. "Owner" means Kitty Hawk Group, Inc., a Texas Corporation. "Person" means an individual, a corporation, an association, a partnership, a trust or estate, a government or any agency or political subdivision thereof or any entity. "Schedule Reliability Factor" means, as of any date, the number (expressed as a percentage) obtained by dividing (i) the number of Departures which occurred within fifteen (15) minutes of their respective scheduled departure times during the immediately preceding twenty-one (21) consecutive Flight Days by (ii) the total number of Departures occurring during such twenty-one (21) Flight Days. Reliability factors will not be calculated during the initial twenty-one (21) day period. "Scheduled Departure" means each occasion upon which Contractor in performance of Services is scheduled to depart from a point of origination or an intermediate point on a Scheduled Route, whether or not a Departure actually occurs. "Scheduled Route" means the applicable route designed by Burlington for the performance of Services pursuant to the terms of this Agreement, including points of origination, intermediate points and points of termination as well as scheduled departure and arrival times, as such route may be changed from time to time by Burlington pursuant to Section II(H) hereof. "Services" means the services required to be performed and the actions required to be taken by Contractor pursuant to the terms of this Agreement. (B) Interpretation. The terms used in the Agreement, unless otherwise defined herein or unless the context otherwise requires, shall have the meanings established by common usage in the commercial air cargo transport industry and in the course of dealing between Burlington and Contractor. II. PROVISION OF AIR CARGO SERVICES (A) Generally. Contractor shall provide the Aircraft, and Contractor, as an independent contractor, shall operate the Aircraft for the use and benefit of Burlington and furnish to Burlington the Services, upon the terms and conditions set forth herein. 3 4 (B) Term and Frequency of Service. 1. The Services shall commence on or about May 15th, 1995 or sooner, if mutually agreeable between parties. 2. The Aircraft shall be operated and maintained by Contractor in such a manner so that the Aircraft performs a minimum of one round trip flight per day on each Scheduled Flight Day. 3. Except as otherwise provided in Article VIII hereof the term of this Agreement shall commence on May 15, 1995 and shall be extended thereafter until terminated by either party giving the other party thirty (30) days prior written notice. (C) Service Obligations. Except to the extent that Burlington is responsible to pay for or provide for personnel, services, equipment, payments and other items pursuant to Section II(E) hereof, Contractor, at Contractor's sole cost and expense, shall be responsible to pay for and provide all personnel, services, maintenance, supplies, equipment, payments and other items necessary or advisable in connection with the performance of the Services in accordance with applicable Aeronautics Authority requirements and other standards and applicable laws and the terms of this Agreement, as follows: 1. Contractor shall provide all flight crews necessary to operate the Aircraft in strict accordance with the requirements of the Scheduled Routes, the Scheduled Flying Days and the Scheduled Departures. All such personnel shall be properly qualified and licensed as pilots or flight engineers respectively with respect to the Aircraft they are operating. 2. Contractor shall provide all maintenance crews and management personnel necessary or advisable for the operation and maintenance of the Aircraft, including but not limited to dispatchers and supervisory and administrative personnel who shall have any required licenses and ratings in full force and effect and shall be properly qualified to perform the maintenance work on the Aircraft to which they are assigned. 3. Contractor shall provide for all flight and maintenance crew training. 4. Contractor shall pay (i) all compensation of Contractor's employees (including but not limited to salaries, social security, premiums for medical and other insurance (including employer's liability insurance and workers' compensation insurance, payroll taxes, pension costs and other fringe benefits), (ii) all per diem allowances or meals for the flight crews, maintenance crews, dispatchers, supervisory and administrative personnel and (iii) all other related expenses, including accommodations and transportation at, to and from the airport, for the flight crews, maintenance and other ground staff and any other Contractor personnel at all locations. 4 5 5. During the term of this Agreement Contractor shall maintain the Aircraft in good working order and good condition and in strict compliance with all the requirements of FAR Part 121 and all other applicable Aeronautics Authority rules and regulations. Contractor shall maintain the airworthiness certificate for each Aircraft in full force and effect, without material restrictions. Contractor shall maintain the neat and clean appearance (to include necessary paint touch-up) of each Aircraft. 6. Contractor shall perform or cause to be performed all maintenance, service, overhaul and repair of the Aircraft. 7. Contractor shall make available for inspection upon request to Burlington at any time and from time to time during the term of this Agreement (and Burlington shall have the right to inspect) the Aircraft, the maintenance facilities and procedures of Contractor, and any books, manuals, revision services, documents, files, data or records in the possession of Contractor relating to the Aircraft and its operation for Burlington. 8. Contractor, at its expense, shall provide (a) all expendable, consumable and rotable components and parts, (b) line shop and service supplies, and (c) shipping of all parts. 9. Contractor shall submit to Burlington, at such time and in such manner as Burlington may from time to time reasonably request, reports routinely prepared by Contractor concerning flight exceptions, aircraft systems, and engine reliability. 10. Contractor shall perform flight planning and aircraft dispatching and shall manage all communications and operations. All flight operations shall be under exclusive control of Contractor. 11. Contractor shall prepare all returns, reports and other filings relating to any tax based upon the property, the net or gross income or receipts of Contractor. 12. Contractor shall pay and discharge when due all liabilities and obligations it may have with respect to any Person which could result in a Lien with respect to any Aircraft, any Aircraft Engine or any spare engines or spare parts or which could adversely affect the performance of Contractor's obligations hereunder, including but not limited to obligations owing Contractor's employees, suppliers, vendors, lessors and subcontractors. (D) Exceptions. Burlington shall bear the cost of the following personnel, services equipment payments and other items incurred in the performance of service under this Agreement; 1. Loading and unloading cargo; 2. ULD Containers; 5 6 3. Power carts; used for loading and unloading operations and Engine starts; 4. Towing and pushback fees; 5. Parking and ramp charges; 6. Deicing the Aircraft; 7. Landing fees; 8. Fuel; 9. All seneam and other fees associated with Mexico operations; provided, that none of the foregoing are payable by Burlington to the extent they are to be provided in connection with Contractor's maintenance obligations or if they result from Contractor's breach of this Agreement or its negligence or willful misconduct; provided, further, that Burlington shall bear such foregoing costs only in respect of the operation of the Aircraft on the Scheduled Routes or when otherwise flown at Burlington's direction; and provided, further, that nothing in this Section II(E) shall operate to relieve Contractor from any obligations or liability arising out of any breach of the terms of this Agreement. (Should Contractor supply any items listed in this Section II(D), then Burlington will reimburse Contractor its total expense within thirty (30) days of receipt of invoice for such expense.) (E) Reliability. Subject to the force majeure provision set forth in Section XI(H) hereof as qualified below and the circumstances referred to below, and without limiting Burlington's rights under Article VIII(A) hereof, Contractor shall perform the Services in a manner such that the Schedule Reliability Factor is at all times not less than 97.5% and the Departure Reliability Factor is at all times not less than 98.5%. For purposes of this Section II(F), circumstances beyond Contractor's reasonable control shall include failure to perform by Burlington employees or its agents, adverse weather conditions, delay or damage to Aircraft caused by a loading/unloading operator designated by Burlington, grounding of aircraft due to temporary or permanent cancellation of the Aircraft Type Certificate. Circumstances not beyond the Contractor's control shall include, but are not limited to, those so described in Section XI(H). Origination or intermediate stop Contractor caused delays will not be chargeable to Contractor if the flight in question terminates at the last stop on the applicable Scheduled Route within fifteen (15) minutes of the Schedule or departs for the last stop on the applicable Scheduled Route within fifteen (15) minutes of Schedule. (F) Service-Related Obligations of Contractor. Without limiting the scope of Contractor's obligations under this Agreement, Contractor, at its sole cost and expense, shall have the following obligations: 6 7 1. Flight Planning and Reports. Contractor shall prepare all necessary flight planning and flight following activities required to perform the Services and shall submit to Burlington within twenty-four (24) hours following the completion of any Aircraft flight a Flight Summary Report in a mutually agreed format describing such Aircraft flight. 2. Crew Rest and In-Transit Facilities. Contractor shall provide crew rest facilities and transit layover facilities for crews providing Services in connection with this Agreement. Contractor crews will not be permitted to lay-over in the Burlington offices, and Burlington will not provide a lounge for them. 3. Fuel Reports. Within twenty-four (24) hours following completion of each Aircraft flight, Contractor shall submit to Burlington a daily Fuel Uplift and Purchase Report in a mutually agreed format with fuel tickets attached. 4. Configuration and Fueling. In rendering the Services, Contractor shall configure and fuel each Aircraft so as to provide the maximum practicable cargo payload at all times, taking into consideration all relevant flight planning and scheduling factors. Contractor shall at all times conduct its flight operations in accordance with usual and customary air carrier practices and to the extent consistent therewith use its best efforts to conserve fuel. 5. Travel Privileges. Burlington shall be entitled to travel privileges for its personnel acting as couriers on the Aircraft provided Contractor shall have first right to move personnel necessary to perform its obligations. Travel privileges will be subject to FAA regulations, when applicable. 6. Dangerous Goods. Contractor shall pay special attention and consideration to the inspection, handling, loading, stowing and/or carriage of Dangerous Goods. Contractor's personnel, engaged in any aspect of inspection, handling, loading, stowing and/or carriage of Dangerous Goods shall prior thereto deliver to Burlington documented evidence that they have successfully completed an initial and recurrent training program for Dangerous Goods for air transportation that is satisfactory to Burlington standards. A complete record of their proficiency and an outline of their training program shall be kept on file by Contractor. Contractor shall insure that its personnel comply with all relevant provisions of Federal, State or local Dangerous Goods Regulations applicable to the performance of their functions and are trained and comply with Burlington's procedures for handling, documenting and transporting Dangerous Goods on the Aircraft. (G) Route Changes. Burlington may at any time during the term of this Agreement change the departure times or the Scheduled Routes upon no less than seven (7) calendar days prior notice to Contractor; provided, however, that Burlington may make nominal departure time or enroute changes as it deems operationally necessary or advisable without prior notice. In the event that Burlington changes the origination or termination points of a Scheduled 7 8 Route and, as a direct result, Contractor incurs Relocation Costs Burlington shall reimburse Contractor for such Relocation Costs within fifteen (15) days of presentation of detailed invoices, reasonably satisfactory to Burlington, for such Relocation Costs incurred by Contractor; provided, however, that in no event shall Burlington be responsible for such costs in excess of $5,000 for a change in a Scheduled Route. This Section H shall not apply to a relocation of the Burlington Hub. If Burlington geographically relocates the Burlington Hub, Burlington and Contractor will negotiate a mutually agreeable basis for reimbursement of the Relocation Costs imposed upon Contractor in connection with such a relocation. III. PAYMENT TO CONTRACTOR (A) Payment for Services. Contractor shall invoice Burlington in accordance with the rates established on Schedule I attached hereto, on a weekly basis. Each invoice shall be submitted to Burlington within five (5) business days from the closing of the previous calendar week and shall cover all services provided for that week pursuant to this Agreement. Within ten (10) business days after receipt of a weekly invoice, the total amount indicated thereon shall become due and payable; provided however, that Burlington may in good faith dispute the accuracy of any weekly invoice. (B) Reimbursement of Fees and Costs. If Contractor shall have paid any fees or incurred any out-of-pocket costs which are to be reimbursed to Contractor by Burlington, and such fees or costs shall not have already been reimbursed by Burlington, then Contractor will be reimbursed for such fees or costs by submitting to Burlington together with a Monthly Statement invoices or other evidences of payment reasonably satisfactory to Burlington in respect of such fees or costs and stating on such Monthly Statement the total amount of such fees and costs for which it is due reimbursement. (C) Taxes. 1. Burlington shall pay all taxes imposed by any governmental authority upon the payments to Contractor made by Burlington pursuant to the terms of this Agreement, including but not limited to any Federal, state or local transportation or excise taxes as may from time to time be applicable. Notwithstanding the foregoing, Burlington shall not be responsible for (a) any tax imposed on or measured by the gross or net income, receipts, capital or net worth, franchises, excess profits or conduct of business of Contractor, (b) any sales, use or property tax or other similar tax imposed on or with respect to, the or services purchased or used by Contractor in connection with the rendition of the Services hereunder, (c) any taxes imposed upon Contractor by any jurisdiction if such taxes result from the present, future or former connection of Contractor (or any affiliate of Contractor) to such jurisdiction unless arising out of the performance of this Agreement, (d) taxes which arise out of or are caused by any negligence or willful misconduct of Contractor, or any act or failure to act prohibited by this Agreement or any misrepresentation by Contractor, or any failure by Contractor to claim on a timely and proper basis applicable exemptions or reductions, (e) taxes to the extent attributable to any period after 8 9 the termination or expiration of the term of this Agreement, (f) taxes which are imposed as a result of a voluntary or involuntary bankruptcy of Contractor, (g) taxes imposed on a transferee of Contractor of any interest in this Agreement to the extent the amount of such taxes exceeds the amount of such taxes that would not have been imposed had there not been such a transfer, or (h) penalties, fines, additions to tax or interest to the extent resulting from the negligence or misconduct of Contractor in giving Burlington any notice required in the immediately succeeding paragraph, or the failure to file any returns that are timely and proper. 2. Contractor shall notify Burlington at least thirty (30) days prior to the due date for any taxes subject to indemnification pursuant to the preceding paragraph (1) or immediately upon determination of assessment thereof of any such taxes. If directed in writing by Burlington, Contractor shall, at Burlington's expense, take such action as Burlington may request to contest the imposition of such tax and shall, if requested, permit Burlington in Contractor's name to contest the imposition of such tax. Contractor shall at Burlington's expense, fully cooperate with Burlington in contesting such claim, give Burlington any relevant information relating to such claim which may be within Contractor's knowledge or control, and file any necessary documents which may be required regarding such claim. In the event Contractor fails to contest or fails to permit Burlington to contest any claim for taxes, Burlington shall not be obligated to indemnify Contractor for any such taxes. 3. If as a result of a payment of an indemnity, Contractor shall realize a tax benefit not previously taken into account in computing the amount of such payment, or shall obtain a refund of all or any part of a tax paid by Burlington or with respect to which Burlington had made an indemnity payment, the Contractor shall pay Burlington the amount of such refund, or benefit (taking into account any tax consequences to Contractor with respect to the receipt of such a refund and the payment of such amounts over to Burlington) within thirty (30) days after Contractor receives such refund or realizes such benefit. If, in addition to such refund, the Contractor shall receive an amount representing interest on the amount of such refund, Burlington shall be paid that proportion of such interest which is fairly attributable to taxes paid by Burlington or paid by the Contractor with funds provided by Burlington. IV. REPRESENTATIONS AND WARRANTIES (A) Contractor's Representations. Contractor represents and warrants that on the date hereof: 1. Corporate Status. Contractor is a corporation duly organized, validly existing, in good standing under the laws of the State of Texas, is licensed or qualified to do business in all jurisdictions where the failure to do so could have a material adverse effect on its ability to perform its obligations hereunder. 2. Authority. Contractor has or will acquire the full power, authority and legal right to execute, deliver and perform the terms of this Agreement, including but not 9 10 limited to under the laws, rules and regulations of the Aeronautics Authority. This Agreement has been duly authorized by all necessary corporate action of Contractor and has been duly executed and delivered, and it constitutes a legal, valid and binding obligation of Contractor enforceable in accordance with its terms. This Agreement does not contravene any law, governmental rule, regulation or order known to and binding on Contractor or contravene the certificate of incorporation or bylaws of Contractor or contravene the provisions of or constitute any default under, or result in the creation of any lien upon any of the property of Contractor under, any indenture, mortgage, contract or other agreement to which Contractor is a party or by which it is bound. 3. No Conflicting Agreements. Contractor is not in default under any agreement to which it is a party nor is Contractor a party to any agreement or instrument or subject to any charter or other corporate restriction, which individually or in the aggregate might materially adversely affect the financial or other condition, business, assets, liabilities or operations of Contractor or the ability of Contractor to perform its obligations under this Agreement. 4. Governmental Approvals. All necessary licenses, permits, consents or approvals of, notices to or registrations with or the taking of any other action in respect of, the Aeronautic Authority's or any other federal, state, foreign or applicable governmental authority or agency required to be obtained or accomplished by Contractor in connection with the execution and delivery by Contractor of this Agreement and for providing the Services have been obtained or accomplished by Contractor or are being obtained or are being accomplished and Contractor is an Air Carrier. 5. Litigation. a. There are no pending or, to its knowledge, threatened actions or proceedings to which Contractor is a party which might materially adversely affect the financial or other condition, business, assets, liabilities or operations of Contractor or the ability of Contractor to perform its obligations under this Agreement; and b. There are no pending or, to its knowledge, threatened actions or proceedings of which Contractor has knowledge before any court or administrative agency which might materially adversely affect the financial or other condition, business, assets, liabilities or operations of Contractor or the ability of Contractor to perform its obligations under this Agreement. (B) Burlington's Representations. Burlington represents and warrants to Contractor that on the date hereof: 1. Corporate Status. Burlington is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. 10 11 2. Authority. Burlington has the full power, authority, and legal right to execute, deliver, and perform the terms of this Agreement. This Agreement has been duly authorized by all necessary corporate action of Burlington and has been duly executed and delivered and it constitutes a legal, valid and binding obligation of Burlington enforceable in accordance with its terms. This Agreement does not contravene any law, governmental rule, regulation or order known to and binding on Burlington or contravene the certificate of incorporation or bylaws of Burlington or contravene the provisions of or constitute any default under, result in the creation of any lien upon any of the property of Burlington under, any indenture, mortgage, contract or other agreement to which Burlington is a party or by which it is bound. V. CONDITIONS TO EFFECTIVENESS OF AGREEMENT (A) Burlington's Conditions. This Agreement shall not be enforceable against Burlington until Burlington shall have received the following, in each case in form and substance reasonably satisfactory to it: 1. A certificate of the Aeronautics Authority or other evidence that Contractor and its personnel are qualified and certified to transport Dangerous Goods. (B) Contractor's Conditions. This Agreement shall not be enforceable against Contractor until Contractor shall have received the following, in each case in form and substance reasonably satisfactory to it: 1. A certificate of Burlington attesting to the authority of the person or persons authorized to execute and deliver this Agreement and any other documents to be executed on behalf of Burlington in connection with the transactions contemplated hereby. VI. COVENANTS OF CONTRACTOR AND BURLINGTON The parties covenant and agree as follows: (A) Further Assurances. Contractor will cause to be done, executed, acknowledged and delivered each and every further acts, documents and assurances as Burlington may reasonably require for accomplishing the purposes of this Agreement. (B) Operating Requirements. Contractor shall not use or operate any Aircraft, or permit any Aircraft to be used or operated, in violation of any applicable law or regulation, or contrary to any condition of any airworthiness certificate, license, registration or regulation relating to such Aircraft. Contractor shall be responsible for and shall indemnify and hold Burlington harmless from and against all penalties, fines or other expenses imposed by the FAA or other governmental agencies due to violations of any laws, rules or regulations by Contractor. 11 12 (C) Insurance. Each party hereto will at all times until the term hereof has expired or been terminated cause to be carried and maintained at its sole cost and expense the applicable insurance coverage, in an amount not less than the amount, and containing the provisions, terms and conditions, set forth below. 1. Hull and Liability Insurance. a. Contractor will be responsible for "all risk" hull insurance (including any war risk hull insurance) for the Aircraft covered by this Agreement. Contractor shall be solely responsible for the insurance of its spare parts, engines and other property. b. Contractor will be responsible and cause to be obtained and maintained aircraft liability insurance, including bodily injury or death liability, property damage liability, product liability and contractual liability, in an amount not less than $250,000,000 on a combined single limit basis, and personal injury liability insurance (excluding passenger) in an amount not less than $25,000,000 on a combined single limit basis. Contractor's aircraft liability and hull insurance will name Burlington as an additional insured as its interest may appear, and will provide that any modification, alteration and/or change which is material and adverse to Burlington or the policy, or cancellation of, such policy shall only be effective as to Burlington upon receipt by Burlington of thirty (30) days' prior written notice, or seven (7) days' written notice as respects war and allied perils coverage, or otherwise to the extent of the prevailing notice period then provided by the applicable insurance market. 2. Workers' Compensation Insurance and Employer's Liability Insurance. a. Each of Contractor and Burlington agree to cause to be obtained and maintained, each with respect to its own employees, and at its sole cost and expense, statutory Workers' Compensation Insurance covering the jurisdictions in which it operates including the monopolistic states of Washington and Ohio. Each party's insurance policy will contain all states and foreign coverage endorsements. b. Each of Contractor and Burlington agree to cause to be obtained and maintained, for its own account and interest, at its sole cost and expense, employer's liability coverage in an amount not less than $1,000,000. 3. Comprehensive General Liability Insurance/Product Liability Insurance. Contractor, at its sole cost and expense, shall cause to be obtained and maintained comprehensive general liability insurance, including contractual liability, which, without limitation, shall specifically insure the indemnity of Contractor in Sections VI(B) and XI(A) hereof subject to the terms and conditions of such policy, and including product liability insurance with respect to any maintenance, modifications or repairs performed on the Aircraft by Contractor or any of its subcontractors, in an amount not less than 12 13 $250,000,000, naming Burlington as an additional insured thereunder and otherwise in form and substance reasonably satisfactory to Burlington. 4. Insurance Certificates. Before the furnishing by Contractor of any services hereunder and again prior to the expiration or renewal of any policy of insurance during the term of this Agreement, Contractor and Burlington shall exchange certificates of insurance evidencing the insurance required to be carried by Contractor and Burlington under this agreement, in a form and substance reasonably satisfactory. Such insurance shall provide that any modification, alteration and/or change which is material and adverse to Burlington or Contractor, or cancellation of, such insurance shall only be effective as to Burlington or Contractor upon receipt by Burlington or Contractor of thirty (30) days' prior written notice. 5. Right to Insure. In the event that Contractor fails to maintain the insurance required to be obtained and maintained by it pursuant to this Section, Burlington, may, with reasonable advance written notice to Contractor, at its option but without any obligation, provide such insurance and if it so elects, which it may do in its absolute discretion, as to itself alone and not the other person. The cost of providing such substitute insurance shall be payable on demand by Burlington together with interest thereon at the rate of 10% per annum from and including the date of demand to and excluding the date paid. (D) Transportation of Dangerous Goods. Contractor shall at all times cause itself to be registered with the Aeronautics Authority and otherwise qualified to transport Dangerous Goods under the Dangerous Goods Regulations on a current up-to-date basis. (E) Notification of Default. Contractor or Burlington as applicable shall notify the other of the occurrence of any Event of Default or the existence of any circumstances which with notice or the passage of time, or both, would become an Event of Default promptly after Contractor or Burlington has knowledge thereof. VII. TEMPORARY DISCONTINUANCE OF SCHEDULED ROUTES (A) Temporary Discontinuance of Scheduled Route. Burlington has the right without cause, after giving forty-eight (48) hours prior written notice in its sole and absolute discretion to direct Contractor temporarily to discontinue flying the Aircraft. Burlington may direct Contractor to resume temporarily discontinued flight provided that Burlington gives to Contractor notice thereof not less than the number of days prior to the scheduled resumption as indicated in the following table: 13 14
Period of Temporary Days Prior Discontinuance to Resumption - ------------------- ------------- 1 to 10 calendar days 1 calendar day 11 to 20 calendar days 7 calendar days 21 or more calendar days 14 calendar days
During such temporary discontinuance, Burlington shall be obligated to pay Contractor the daily scheduled rate. VIII. DEFAULT/TERMINATION (A) Default by Contractor. Without limiting the obligations of Contractor or the rights and remedies of Burlington as provided in this Agreement, each of the following events (whether any such event shall be voluntary or involuntary or arise by operation of law or due to any compliance with any law, rule or regulation or any judgement, order or decree) shall constitute an "Event of Default": (i) Contractor shall fail to make any payment required to be made by Contractor hereunder when due and such failure continues for a period of ten (10) Business Days; or (ii) at any time during the term of this Agreement either (a) the Scheduled Reliability Factor for any period shall be less than 95% or the Departure Schedule Reliability Factor for any period shall be less than 97%, and Burlington shall have given notice to Contractor to cure the default and twenty-one (21) days shall have expired after the giving of such notice, and, then or thereafter during the term of this Agreement, either (a) the Scheduled Reliability Factor shall again be less than 95% for any period or the Departure Reliability Factor shall again be less than 97% for any period and Burlington has already given Contractor its one (1) notice to cure, or (b) notwithstanding the foregoing the Scheduled Reliability Factor shall ever be less than 93% of the Departure Reliability Factor shall ever be less than 95%; provided, however, that in the event that Contractor breaches its obligations under this Agreement to maintain the Scheduled Reliability Factor for any applicable period described in clause (a) or (b) above, unless Burlington has notified Contractor in writing of such breach within fifteen (15) days thereof, Burlington shall be deemed to have waived its right to terminate this Agreement as a result of such breach for such period (but not any other period); or (iii) if Contractor shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it under this Agreement not otherwise covered specifically in this Section VIII(A) and if such failure is curable 14 15 without prejudice to Burlington, such failure shall continue uncured for a period of thirty (30) days after written notice thereof to Contractor from Burlington so long as Contractor is at all times diligently prosecuting such cure during such thirty (30) day period; or (iv) any representation or warranty made by Contractor in or pursuant to this Agreement or in any document or certificate delivered pursuant to this Agreement is or proves to have been incorrect in any material respect when made; (v) Contractor assigns or sublets or attempts to assign or sublet any of its rights or delegates or attempts to delegate any of its duties or obligations under this Agreement without the prior written consent of Burlington; or (vi) Contractor consents to the appointment of a custodian, receiver, trustee, examiner or liquidator of itself or of a substantial part of its property, or Contractor makes a general assignment of the benefit of creditors, or Contractor admits in writing its inability to pay its debts generally as they become due, or Contractor is unable to or does not pay its debts generally as they come due, or Contractor files a voluntary petition in bankruptcy or a voluntary petition or an answer seeking reorganization in a proceeding under any bankruptcy laws (as now or hereafter in effect) or an answer admitting the material allegations of a petition, or Contractor by voluntary petition, answer, or consent seeks relief under the provisions of any other existing or future bankruptcy, reorganization or other similar law providing for the reorganization or winding up of corporations, or providing for an agreement, composition, extension or adjustment with its creditors, or any corporate action is taken by Contractor in furtherance of any of the foregoing; or (vii) an order, judgment or decree is entered by any court or governmental agency of competent jurisdiction appointing, without the consent of Contractor, a custodian, receiver, trustee, examiner or liquidator of Contractor or of any substantial part of its property, or any substantial part of the property of Contractor is sequestered, and any such order, judgment or decree of appointment or sequestration remains in force undismissed, unstayed or unvacated for a period of thirty (30) days after the date of entry thereof; or (viii) a petition against contractor in a proceeding under the bankruptcy, reorganization or similar laws of the United States of America or any other insolvency laws (as now or hereinafter in effect) of any competent jurisdiction is filed and is not withdrawn or dismissed within thirty (30) days thereafter, or if, under the provisions of any law providing for reorganization or winding-up of corporations which may apply to Contractor, any court of competent jurisdiction assumes jurisdiction, custody or control of Contractor or of any substantial part of its property and such jurisdiction, custody or control remains in force or unrelinquished, unstayed or undismissed for a period of thirty (30) days, or if in any such case at any time an order for relief is granted; or 15 16 (ix) majority ownership or effective control of Contractor is acquired by a competitor of Burlington. (x) Contractor voluntarily or involuntarily ceases or suspends all or any substantial part of its operations for any reason, or Contractor announces a future cessation or suspension of all or any substantial part of operations for any reason whatsoever, other than in each case as excused by Section XI(H) hereof, or Contractor ceases or suspends any of its Services hereunder or announces a future cessation or suspension of any thereof for any reason whatsoever, other than as excused by Section XI(H) hereof (xi) a final judgment is rendered by a court of competent jurisdiction for the payment of money not, in the reasonable judgment of Burlington covered by insurance in excess of one million dollars ($1,000,000), or final judgments are rendered for the payment of money not, in the reasonable judgment of Burlington, covered by insurance in excess of one million dollars ($1,000,000) in the aggregate, shall be rendered against Contractor, or any other final judgment is rendered by a court of competent jurisdiction which restrains, hinders or otherwise, in the reasonable judgment of Burlington, materially and adversely affects Contractor's present or future performance of any of its obligations hereunder; or (xii) any obligation of Contractor or any of its affiliates for the payment of borrowed money (whether as borrower or guarantor), or payment of the deferred purchase price of any property or services (whether as buyer or guarantor), or payment of any obligation under any lease (or sublease) of real or personal property (whether as lessee or sublessee or guarantor) shall not be paid when the same becomes due, whether by acceleration or otherwise, after expiration of any applicable grace period or extension thereof, or Contractor fails to perform or observe in any material respect any other provision (unless such provision has been waived) with respect to any such obligation or in any agreement securing or relating to such obligation, and the effect of such failure is to permit such an obligation to be declared due or is to cause such obligation to become due prior to its stated maturity or in the case of a lease (or sublease) to permit the lessor or sublessor to take any action to terminate or repossess, if any such obligations described in this clause (xiii) individually or in the aggregate are in excess of one million dollars ($1,000,000); or (xiii) it is or becomes unlawful for Contractor to perform any of its obligations hereunder; Upon the occurrence of any Event of Default described in clause (vi), (vii) or (viii) above, this Agreement and Burlington's obligations and Contractor's rights hereunder shall automatically terminate without notice, and upon the occurrence and during the continuance of any other Event of Default, Burlington shall immediately be entitled to terminate this Agreement and Burlington's obligations and Contractor's rights under this Agreement by notice thereof to Contractor, in each without cost or penalty of any kind and without limiting Burlington's rights 16 17 or remedies at law or in equity with respect thereto, including, but not limited to the recovery of damages due to such a termination. (B) Default by Burlington. Without limiting the obligations of Burlington or the rights and remedies of Contractor as provided in this Agreement, each of the following events (whether any such event shall be voluntary or involuntary or arise by operation of law or due to any compliance with any law, rule or regulation or any judgment, order or decree) shall constitute an "Event of Default": (i) If Burlington shall fail to make any payment required to be made by Burlington hereunder and such failure continues for a period of ten (10) Business Days after written notice thereof is received by Burlington; or (ii) If Burlington shall fail to carry and maintain insurance in accordance with the provisions of Section VI(C) hereof; or (iii) If Burlington shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it under this Agreement and if, in the reasonable opinion of Contractor, such failure is curable without prejudice to Contractor, such failure shall continue unremedied for a period of thirty (30) days after written notice thereof to Burlington from Contractor so long as Burlington is at all times diligently prosecuting such cure during such thirty (30) day period; or (iv) Burlington consents to the appointment of a custodian, receiver, trustee or liquidator of itself or of a substantial part of its property, or makes a general assignment for the benefit of creditors, or Burlington admits in writing its inability to pay its debts generally as they become due, or Burlington is unable to or does not pay its debts generally as they become due, or Burlington files a voluntary petition in bankruptcy or a voluntary petition or an answer seeking reorganization in a proceeding under any bankruptcy laws (as now or hereafter in effect) or an answer admitting the material allegations of a petition, answer, or consent, seeks relief under the provisions of any other existing or future bankruptcy or other similar law providing for the reorganization or winding up of corporations, or providing for an agreement, composition, extension or adjustment with its creditors; or (v) An order, judgment or decree is entered by any court or governmental agency of competent jurisdiction appointing, without the consent of Burlington, a custodian, receiver, trustee or liquidator of Burlington or of any substantial part of its property, or any substantial part of the property of Burlington is sequestered, and any such order, judgement or decree of appointment or sequestration remains in force undismissed, unstayed or unvacated for a period of thirty (30) days after the date of entry thereof; or (vi) A petition against Burlington in a proceeding under the bankruptcy laws of the United States of America or other insolvency laws (as now or hereinafter in 17 18 effect) is filed and is not withdrawn or dismissed within thirty (30) days thereafter, or if, under the provision of any law providing for reorganization or winding-up of corporations which may apply to Burlington any court of competent jurisdiction assumes jurisdiction, custody or control of Burlington or of any substantial or of any substantial part of its property and such jurisdiction, custody or control renames in force on unrelinquished, unstayed or undismissed for a period of thirty (30) days, or if in any such case at any time an order for relief is granted. (vii) Any representation or warranty made or deemed made by Burlington in or pursuant to this Agreement is or proves to have been incorrect in any material respect when made or deemed made; Upon the occurrence of any Event of Default described in this Section VIII (B), Contractor shall immediately be entitled to terminate this Agreement and its obligations and Burlington's rights under this Agreement by notice thereof to Burlington, in each case without cost or penalty of any kind and, subject to the overall limit or Contractor's recovery rights against Burlington set forth in Section VII hereof, without limiting Contractor's rights in respect of the recovery of damages due to such a termination. (C) Events of Termination. Each of the following events (whether any such event should be voluntary or involuntary or arise by operation of law or due to any compliance with any law, rule or regulation of any judgment, or order or decree) shall constitute an event of termination which shall immediately entitle Burlington to terminate without notice to Contractor, this Agreement without cost or penalty of any kind and without limiting Burlington's rights or remedies at law or in equity with respect thereto, including but not limited to the recovery of damages due to such a termination: (i) Contractor shall fail to carry and maintain in full force and effect insurance in accordance with the provisions of Section VI(C) hereof or any notice of cancellation shall be given with respect to any such insurance or Contractor shall operate any Aircraft outside of the scope or in violation of, or Contractor shall otherwise fail to comply with, the terms of any insurance or government indemnity coverage maintained by Burlington or Contractor with respect to any Aircraft; or (ii) Contractor disposes, conveys or transfers or threatens to dispose, convey or transfer all or a material part of its assets, or Contractor liquidates or dissolves or consolidates or merges with any other Person, whether in one or a series of transactions, related or not, without Burlington's prior written consent which will not be unreasonably withheld, or (iii) the airworthiness certificate of the Aircraft is revoked, suspended, canceled, withdrawn, terminated or not renewed or otherwise ceases to be in full force and effect or becomes subject to any material restriction; or any consent, authorization, license, 18 19 certificate or approval of or registration with any governmental authority applicable to Contractor's performance of its obligations under this Agreement, including, without limitation, its certificate issued under FAR Part 121 or its Certificate of Convenience and Necessity issued under the Aviation Act, is not made or is not maintained in full force and effect or otherwise revoked, suspended, canceled, withdrawn, terminated or not renewed for any reason whatsoever. IX. INDEPENDENT CONTRACTOR Contractor is an independent Contractor and, without waiving any rights or remedies hereunder in favor of Burlington, Burlington shall not in any manner supervise, direct or control Contractor's performance under this Agreement. Contractor shall not in any manner supervise, direct or control any of the employees of Burlington. The employees of Contractor engaged in performing services hereunder shall be considered employees of Contractor for all purposes and under no circumstances shall be deemed employees of Burlington. Employees of Burlington shall be considered employees of Burlington for all purposes and under no circumstances shall be deemed employees of Contractor. Nothing in this Agreement shall be construed as giving one party to this Agreement control over the managerial practices, financial administration or personnel practices, policies or procedures of the other party. Contractor shall have full and exclusive liability for the payment of Workers' compensation and employer's liability insurance premiums with respect to its employees and for the payment of all taxes, contributions and other payments for unemployment compensation or annuities now or hereinafter imposed upon employers by the government of the United States of America or by any individual state, local or foreign authority with respect to such employees. X. INDEMNIFICATION (A) Indemnification by Contractor. Contractor agrees to defend (if requested by an applicable Burlington Indemnitee but failure to request such defense shall not reduce or otherwise affect Contractor's liability for the reasonable expenses of such defense by such Burlington Indemnitee), indemnify and hold harmless Burlington and its affiliates, parent company and each of their officers, directors, shareholders, agents, servants and employees (the "Burlington Indemnities") from and against all liabilities and reasonable expenses, including but not limited to reasonable expenses of defense (including reasonable legal fees and expenses) and other reasonable expenses, for injury to or death of any person and for loss of or damage to any property, including the Aircraft and any cargo, arising out of or in any manner connected with (i) the negligence or willful misconduct of Contractor, or any of its entities controlled by or under common control with Contractor or any of their subcontractors, officers, directors, agents, servants or employees in connection with the provision of services hereunder, or (ii) maintenance, modification or repair of the Aircraft. Contractor hereby waives, releases and renounces any and all claims and recourse rights now or hereafter existing against any Burlington Indemnitee, and Contractor agrees not to claim against or sue any Burlington Indemnitee, for any claim, injury, 19 20 loss, damage, obligation, liability or expense to be indemnified by Contractor except for liabilities and expenses to be indemnified by Burlington as stated below. Burlington shall promptly notify Contractor of any claim as to which indemnification is sought from Contractor of any of its insurers. Subject to the rights of insurers under policies of insurance maintained pursuant to this Agreement, Contractor shall have the sole right to investigate and the right in its sole discretion to defend or compromise any claim for which indemnification is sought under Section XI(A), and Burlington shall cooperate, and Burlington shall cause each of the Burlington Indemnities to cooperate, with all reasonable requests of Contractor or its insurers in connection therewith. Where Contractor or the insurers under a policy of insurance maintained by or on behalf of Contractor undertake the defense with respect to a claim, no additional legal fees or expenses of any Burlington Indemnitee in connection with the defense of such claim shall be indemnified hereunder unless such fees or expenses were incurred expressly at the request of Contractor. Subject to the requirements of any policy of insurance, Burlington or any other Burlington Indemnitee may participate at its own expense in any judicial proceeding controlled by Contractor or its insurers pursuant to the preceding provisions; provided, that such party's participation does not, in the opinion of Contractor or any of its insurers, interfere with such proceeding or control. Notwithstanding the above, Burlington shall have the right to investigate and defend any litigation at its own expense. (B) Indemnification By Burlington. Except for the liabilities and expenses to be indemnified by Contractor as stated above, Burlington agrees to defend, indemnify, and hold harmless Contractor and its subcontractors and each of their officers, directors, shareholders, agents, servants, and employees from and against all liabilities and reasonable expenses, including, but not limited to reasonable expenses of defense (including reasonable legal fees and expenses) and other reasonable expenses for injury to or death of any person or loss of or damage to any property arising out of or in any way connected with the negligence or willful misconduct of Burlington, or any of its entities controlled by or under common control with Burlington or any of their subcontractors, officers, directors, agents, servants or employees in connection with the provision of services hereunder. (C) Cooperation. In the case of any claim indemnified hereunder, indemnitee agrees to cooperate with indemnitor and the insurers as any of them may reasonably request in the exercise of their rights to investigate, defend or compromise any such claim or as may be required to retain the benefits of such insurance with respect to any such claim. (D) Subrogation. Indemnitor shall be subrogated to the rights and remedies of indemnitee on whose behalf any such claim was paid or for which indemnification is otherwise sought with respect to the condition or event giving rise to such claim. Should indemnitee receive any refund, in whole or in part, with respect to any claim paid by indemnitor or its insurers hereunder, indemnitee shall promptly pay the amount refunded over to indemnitor. 20 21 XI. MISCELLANEOUS (A) Notices. All notices, requests, demands, and other communications, under this Agreement, shall be in writing and sent by U.S. Registered Mail, postage prepaid, receipt requested, or by courier service, and shall be deemed to have been duly given as of the date indicated on the return receipt card mailed to the party to whom notice is given or as of the date indicated on the delivery receipt of the courier, and properly addressed as follows: To Burlington: Burlington Air Express Inc. 1 Air Cargo Parkway Swanton, Ohio 43558 Attention: Sr. Vice President Air Operations Burlington Air Express Inc. 18200 Von Karman Avenue Irvine, California 92715 Attention: Senior Counsel To Contractor: Kitty Hawk Group, Inc. 1515 West 20th Street DFW Airport, Texas 75261 Attn: President Any party may change its address for the purposes of this Section by giving the other party written notice of the new address in the manner set forth above. (B) Validity, Waiver. In the event that any provisions of this Agreement shall be held to be invalid, the same shall not affect in any respect whatsoever the validity of the remainder of this Agreement. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. (C) Governing Law, Gender, Headings. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. As used in this agreement, the masculine, feminine or neuter gender, and the singular and plural number shall each be deemed to include the others whenever the context so indicates. Section headings contained in this Agreement are for convenience only, and shall not be considered for any purpose in construing this Agreement. (D) Attorney's Fees. In the event of a dispute between the parties arising out of the terms, conditions, and obligations imposed by this Agreement, the prevailing party in such 21 22 dispute shall be entitled to recover reasonable attorney's fees, costs and expenses incurred in connection therewith. (E) Successors and Assigns. THIS AGREEMENT AND THE VARIOUS RIGHTS AND OBLIGATIONS HEREUNDER SHALL INURE TO THE BENEFIT OF AND BE BINDING UPON THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS. CONTRACTOR ACKNOWLEDGES THAT THIS AGREEMENT IS A PERSONAL SERVICES CONTRACT AND NEITHER THIS AGREEMENT NOR ANY OF CONTRACTOR'S RIGHTS OR OBLIGATIONS HEREUNDER MAY BE ASSIGNED OR DELEGATED BY CONTRACTOR WITHOUT THE PRIOR WRITTEN CONSENT OF BURLINGTON. (F) Non-Disclosure and Confidentiality. Contractor and Burlington agree to keep confidential such information as Contractor and Burlington may from time to time impart to each other regarding their business affairs, including but not limited to this Agreement, and Contractor or Burlington will not in whole or in part, now or at any time, disclose said information or this Agreement, during the term of this Agreement, except in each case to a Person who is or would be permitted assignee if such Person agrees in writing to be bound by this Section or to professional advisors which are under a duty to maintain the confidentiality hereof or as may be required by law or legal process. (G) Entire Agreement, Etc. This Agreement and the Leases represent the entire agreement between the parties with respect to the subject matter hereof, superseding all prior inconsistent agreements, and no oral agreements have been made. This Agreement may be executed in one or more separate counterparts, each of which, when so executed, shall be deemed to be an original. Such counterparts shall, together, constitute and be one and the same instrument. The Schedules attached hereto are incorporated herein by this reference and shall for the purpose of this Agreement be deemed to be a part hereof. This Agreement can be modified only in writing and such modification must be signed by the parties hereto before it shall become effective. (H) Force Majeure. Except as provided herein, each party hereto will be excused from performance under this Agreement by the other as a result of any event of force majeure, including, but not limited to, acts of any government or subdivision thereof, the improper failure or refusal of any government or governmental agency to issue necessary permits or operating authorities, acts of God, weather, damage or destruction of flight equipment, lack of fuel availability at airports to be used, riots or civil commotions, strikes or labor stoppage, military emergency, war or hazards of damages incident to the state of war, or any other causes which is beyond the control of either party and which prevents either party from performing this Agreement, so long as in each case such event of force majeure or other cause beyond the control of such party is not caused by such party's breach of this Agreement or negligence or willful misconduct; provided, however, that circumstances within contractor's reasonable control shall include, but are not limited to, circumstances related to Contractor's financial condition or sickness, absenteeism, tardiness, or the unavailability of flight crews, other than additional crews 22 23 required due to temporary scheduling changes made by Burlington, or inability to provide services hereunder or grounding of any of the Aircraft by the Aeronautics Authority due to reasons arising out of Contractor's operating procedures or its failure to maintain in full force and effect its FAR Part 121 authority and Section 401 or 418 certification. Contractor or Burlington shall use their best efforts to eliminate or mitigate any adverse affect on the performance of its obligations hereunder resulting from force majeure or other circumstances beyond its control. (I) Non-Exclusive Agreement. Nothing in this Agreement is intended to or shall require Burlington or Contractor to utilize the services or facilities of the other to the exclusion of others. (J) Rights Cumulative. All rights and remedies from time to time conferred upon or reserved to Burlington and Contractor are cumulative, and none is intended to be exclusive of another. No delay or omission in insisting upon the strict observance or performance of any provision of this Agreement, or in exercising any right or remedy shall be construed as a waiver or relinquishment of such provision, nor shall it impair such right or remedy. Every right and remedy may be exercised from time to time and as often as deemed expedient. (K) Survival. All indemnities by Contractor or Burlington contained in this Agreement shall survive the expiration or other termination of this Agreement. XII. CERTIFICATION The parties have each caused this Agreement to be executed on the day mentioned at the beginning of this Agreement. The individual signing on behalf of the corporate party certifies that he or she is duly authorized to make this Agreement binding for and on behalf of that corporation. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date and date first above written. BURLINGTON AIR EXPRESS INC. KITTY HAWK GROUP INC. By: /s/ GLEN A. BEECHER By: /s/ TILMON J. REEVES ----------------------------- --------------------------- Name: Glen A. Beecher Name: Tilmon J. Reeves --------------------------- ------------------------- Title: Sr. Vice President Title: President -------------------------- ------------------------ 23 24 SCHEDULE I To Agreement to Furnish Three (3) CV-600 Aircraft and Air Cargo Services dated as of May 15, 1995, and effective on or about May 15, 1995. Scheduled Route
Flight CV-600 - ------------- Arrival Departure ------- --------- MTY 2336z LRD 0017z 1503z MTY 1550z
Flight CV-600 - ------------- Arrival Departure ------- --------- CUU 0030z ELP 0145z 1800z CUU 1910z
Flight CV-600 - ------------- Arrival Departure ------- --------- ABQ 0025z ELP 0130z 1320z ABQ 1425z
Route Schedule will be flown five (5) days a week, except for Burlington designated holidays. Daily Rate: Complete route schedule $2,500.00 ACMI per aircraft. There shall be no compensation for scheduled flights that exceed the block hours of the published route schedule except for weather holds and diversions. Off Line Rate: $850.00 per block hour ACMI. Off Line Rate Calculation: Off line flying will be considered as the total flying in any flight day in which the published route schedule has been deviated from by request of Burlington, unrelated to mechanical problems, or maintenance requirements. In the event the published schedule has been accomplished and Burlington requests additional flying, that additional flying, shall be calculated by using the off line rate. Route Change Rate: Burlington shall pay a daily rate to Contractor of $850.00 per block hour (ACMI) or $2,500.00 (ACMI), whichever is higher, for any route change required by Burlington pursuant to Section IIH of this Agreement. EX-10.14 3 AGREEMENT TO FURNISH FIVE AIRCRAFT 1 EXHIBIT 10.14 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION - ------------------------------------------------------------------------------- AGREEMENT TO FURNISH FIVE (5) B727-200 AIRCRAFT AND AIR CARGO SERVICES DATED AS OF MARCH 1, 1996 BY AND BETWEEN KITTY HAWK AIRCARGO, INC. AND BURLINGTON AIR EXPRESS, INC. - ------------------------------------------------------------------------------- 2 AGREEMENT TO FURNISH FIVE (5) B727-200 AIRCRAFT AND AIR CARGO SERVICES THIS AGREEMENT TO FURNISH B727-200 AIRCRAFT AND AIR CARGO SERVICES (this "Agreement") is made and entered into as of the 1st day of March, 1996 by and between Kitty Hawk Air Cargo, Inc., a Texas Corporation ("Contractor") and Burlington Air Express, Inc., a Delaware Corporation ("Burlington"). PRELIMINARY STATEMENT The Contractor wishes to acquire, operate and maintain the Aircraft for the exclusive use and benefit of Burlington Monday through Saturday morning in accordance with the terms hereof. NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, the parties hereby agree as follows: 1. DEFINITIONS A. Defined Terms - Except as otherwise specified, the following terms have the respective meanings set forth below for all purposes of the Agreement, and the definitions of such terms are equally applicable both to the singular and plural forms thereof. "Aeronautics Authority" means, as appropriate, the United States Department of Transportation, the Secretary of Transportation, the FAA or the Administrator of the FAA, or any person, governmental department, bureau, commission or agency succeeding to the functions of any of the foregoing or otherwise having jurisdiction with respect to the ownership, leasing operation, use or maintenance of the Aircraft. "Air Carrier" means any air carrier which is a United States "Domestic Air Carrier" as defined in Part 121 of FAR and has a Certificate of Public Convenience and Necessity issued pursuant to Section 401 or 418 of the Aviation Act. "Aircraft" means five (5) Boeing 727-200 described on Schedule 1 and 1.a. hereto, with the Registration Numbers described thereon. "Aviation Act" means the Federal Aviation Act of 1958, as amended from time to time, or any successor or substituted legislation at the time in effect and applicable, and the rules and regulations promulgated pursuant thereto. 1 3 "Block Hour" means, for each Aircraft, each hour or part thereof (computed to the nearest one-tenth of an hour) elapsing from the moment such Aircraft begins movement under its own power at the airport at which a flight segment of a Scheduled Route (or, if Burlington so instructs, for unscheduled flying) departs until such Aircraft comes to rest at the next airport at which such flight segment terminates and such Aircraft is no longer moving under its own power. "Burlington Hub" means the air cargo handling and operations base designated by Burlington from time to time as the hub of its freight forwarding operations to which the Services relate. "Business Day" means any day other than a Saturday, Sunday or any statutory holiday. "Dangerous Goods" means, for purposes of this agreement, any and all "dangerous goods," "hazardous materials," "hazardous substances," "restricted articles" and any similar terms as defined in the applicable Dangerous Goods Regulations from time to time. "Dangerous Goods Regulations" may mean one or more of the following: Hazardous Materials Transportation Act of 1970 (Public Law 91458, October 16, 1970, 84 Stat.977); the Hazardous Materials Transportation Act (Public Law 98633, January 3, 1975, as Stat.2156); (US Code of Federal Regulations, Title 49 (49CR); International Civil Aviation Organization Technical Instruction for the Safe Transport of Dangerous Goods (ICAO); International Air Transport Association Dangerous Goods Regulations (IATA); Restricted Articles Circular 6-D, Published by Airline Tariff Publishing Company. Federal Air Regulations Part 121, or any other applicable law or industry regulations which regulates the transportation of dangerous or hazardous goods or other materials, as amended, supplemented or replaced from time to time, and in each case, the rules and regulations from time to time promulgated pursuant thereto. "Departure" means each occasion upon which an Aircraft under the control of Contractor in the performance of Services in fact departs from a point of origination or an intermediate point on a Scheduled Route. "Departure Reliability Factor" means with respect to any date, the number (expressed as percentage) obtained by dividing (i) the number of Departures in fact made by Contractor during the immediately preceding consecutive twenty-one (21) Scheduled Flight Days divided by (ii) the number of Departures scheduled during such consecutive twenty-one (21) Scheduled Flight Days. Reliability calculations will not be effective for the initial twenty-one (21) days of operation. "$" and "dollars" means the lawful currency of the United States of America. "Event of Default" means each of the events specified in the Article VIII hereof. "FAA" means the United States Federal Aviation Administration or any person, governmental department, bureau, commission or agency succeeding to the functions thereof. 2 4 "FAR" means the regulations promulgated pursuant to the Aviation Act. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease, security interest or other claim. "Owner" means Kitty Hawk Aircargo, Inc., a Texas Corporation. "Person" means an individual, a corporation, an association, a partnership, a trust or estate, a government or any agency or political subdivision thereof or any entity. "Schedule Reliability Factor" means, as of any date, the number (expressed as a percentage) obtained by dividing (i) the number of Departures which occurred within fifteen (15) minutes of their respective scheduled departure times during the immediately preceding twenty-one (21) consecutive Flight Days by (ii) the total number of Departures occurring during such twenty-one (21) Flight Days. Reliability factors will not be calculated during the initial twenty-one (21) day period. "Scheduled Departure" means each occasion upon which Contractor in performance of Services is scheduled to depart from a point of origination or an intermediate point on a Scheduled Route, whether or not a Departure actually occurs. "Scheduled Route" means the applicable route designed by Burlington for the performance of Services pursuant to the terms of this Agreement, including points of origination, intermediate points and points of termination as well as scheduled departure and arrival times, as such route may be changed from time to time by Burlington pursuant to Section II(H) hereof. "Services" means the services required to be performed and the actions required to be taken by Contractor pursuant to the terms of this Agreement. B. Interpretation - The terms used in the Agreement, unless otherwise defined herein or unless the context otherwise requires, shall have the meanings established by common usage in the commercial air cargo transport industry and in the course of dealing between Burlington and Contractor. II. PROVISION OF AIR CARGO SERVICES A. Generally - Contractor shall provide the Aircraft, and Contractor, as an independent contractor, shall operate the Aircraft for the use and benefit of Burlington and furnish to Burlington the Services, upon the terms and conditions set forth herein. B. Term and Frequency of Service 1. The Services shall commence on or about March 1, 1996 or sooner, if mutually agreeable between parties. 3 5 2. The Aircraft shall be operated and maintained by Contractor in such a manner so that the Aircraft performs a minimum of one round trip flight per day on each Scheduled Flight Day. 3. Except as otherwise provided in Article VIII and II.B.4. hereof the term of this Agreement shall commence on March 1, 1996 and shall be extended for a period of three years. 4. After the period of time indicated by registration number below, the contract services may be terminated with respect to that aircraft by either party giving the other party thirty (30) days written notice. N278US 36 months N6827 12 months N279US 30 months N6809 30 days N855AA 24 months C. Service Obligations - Except to the extent that Burlington is responsible to pay for or provide for personnel, services, equipment, payments and other items pursuant to Section II(E) hereof, Contractor, at Contractor's sole cost and expense, shall be responsible to pay for and provide all personnel, services, maintenance, supplies, equipment, payments and other items necessary or advisable in connection with the performance of the Services in accordance with applicable Aeronautics Authority requirements and other standards and applicable laws and the terms of this Agreement, as follows: 1. Contractor shall provide all flight crews necessary to operate the Aircraft in strict accordance with the requirements of the Scheduled Routes, the Scheduled Flying Days and the Scheduled Departures. All such personnel shall be properly qualified and licensed as pilots or flight engineers respectively with respect to the Aircraft they are operating. 2. Contractor shall provide all maintenance crews and management personnel necessary or advisable for the operation and maintenance of the Aircraft, including but not limited to dispatchers and supervisory and administrative personnel who shall have any required licenses and ratings in full force and effect and shall be properly qualified to perform the maintenance work on the Aircraft to which they are assigned. 3. Contractor shall provide for all flight and maintenance crew training. 4. Contractor shall pay (i) all compensation of Contractor's employees (including but not limited to salaries, social security, premiums for medical and other insurance (including employer's liability insurance and workers' compensation insurance, payroll taxes, pension costs and other fringe benefits), (ii) all per diem allowances or meals for the flight crews, maintenance crews, dispatchers, supervisory and administrative personnel and (iii) all other related expenses, including accommodations and transportation at, to and from the airport, for the flight crews, maintenance and other ground staff and any other Contractor personnel at all locations. 4 6 5. During the term of this Agreement Contractor shall maintain the Aircraft in good working order and good condition and in strict compliance with all the requirements of FAR Part 121 and all other applicable Aeronautics Authority rules and regulations. Contractor shall maintain the airworthiness certificate for each Aircraft in full force and effect, without material restrictions. Contractor shall maintain the neat and clean appearance (to include necessary paint touch-up) of each Aircraft. 6. Contractor shall perform or cause to be performed all maintenance, service, overhaul and repair of the Aircraft. 7. Contractor shall make available for inspection upon request to Burlington at any time and from time to time during the term of this Agreement (and Burlington shall have the right to inspect) the Aircraft, the maintenance facilities and procedures of Contractor, and any books, manuals, revision services, documents, files, data or records in the possession of Contractor relating to the Aircraft and its operation for Burlington. 8. Contractor, at its expense, shall provide (a) all expendable, consumable and rotable components and parts, (b) line shop and service supplies, and (c) shipping of all parts. 9. Contractor shall submit to Burlington, at such time and in such manner as Burlington may from time to time reasonably request, reports routinely prepared by Contractor concerning flight exceptions, aircraft systems, and engine reliability. 10. Contractor shall perform flight planning and aircraft dispatching and shall manage all communications and operations. All flight operations shall be under exclusive control of Contractor. 11. Contractor shall prepare all returns, reports and other filings relating to any tax based upon the property, the net or gross income or receipts of Contractor. 12. Contractor shall pay and discharge when due all liabilities and obligations it may have with respect to any Person which could result in a Lien with respect to any Aircraft, any Aircraft Engine or any spare engines or spare parts or which could adversely affect the performance of Contractor's obligations hereunder, including but not limited to obligations owing Contractor's employees, suppliers, vendors, lessors and subcontractors. D. Exceptions - Burlington shall bear the cost of the following personnel, services equipment payments and other items incurred in the performance of service under this Agreement: 1. Loading and unloading; 2. ULD Containers; 3. Power carts; used for loading and unloading operations and engine starts; 4. Costs associated with air startups; 5 7 5. Towing and pushback fees; 6. Parking and ramp charges; 7. De-icing the Aircraft; 8. Landing fees; 9. Fuel; provided, that none of the foregoing are payable by Burlington to the extent they are to be provided in connection with Contractor's maintenance obligations or if they result from Contractor's breach of this Agreement or its negligence or willful misconduct; provided further, that Burlington shall bear such foregoing costs only in respect of the operation of the Aircraft on the Scheduled Routes or when otherwise flown at Burlington's direction; and provided further, that nothing in this Section II(E) shall operate to relieve Contractor from any obligation or liability arising out of any breach of the terms of this Agreement. (Should Contractor supply any items listed in this Section II(D), then Burlington will reimburse Contractor its total expense within thirty (30) days of receipt of invoice for such expense.) E. Reliability - Subject to the force majeure provision set forth in Section XI(H) hereof as qualified below and the circumstances referred to below, and without limiting Burlington's rights under Article VIII(A) hereof, Contractor shall perform the Services in a manner such that the Schedule Reliability Factor is at all times not less than 97.5% and the Departure Reliability Factor is at all times not less than 98.5%. For purposes of this Section II(F), circumstances beyond Contractor's reasonable control shall include failure to perform by Burlington employees or its agents, adverse weather conditions, delay or damage to Aircraft caused by a loading/unloading operator designated by Burlington, grounding of Aircraft due to temporary or permanent cancellation of the Aircraft Type Certificate. Circumstances not beyond the Contractor's control shall include, but are not limited to, those so described in Section XI(H). Origination or intermediate stop Contractor caused delays will not be chargeable to Contractor if the flight in question terminates at the last stop on the applicable Scheduled Route within fifteen (15) minutes of the Schedule or departs for the last stop on the applicable Scheduled Route within fifteen (15) minutes of Schedule. F. Service Related Obligations of Contractor - Without limiting the scope of Contractor's obligations under this Agreement, Contractor, at its sole cost and expense, shall have the following obligations: 1. Flight Planning and Reports Contractor shall prepare all necessary flight planning and flight following activities required to perform the Services and shall submit to Burlington within twenty-four (24) hours following the completion of any Aircraft flight a Flight Summary Report in a mutually agreed format describing such Aircraft flight. 2. Crew Rest and In-Transit Facilities Contractor shall provide crew rest facilities and transit layover facilities for crews providing Services in connection with this Agreement. Contractor crews will not be permitted to layover in the Burlington offices and Burlington will not provide a lounge for them. 6 8 3. Fuel Reports Within twenty-four (24) hours following completion of each Aircraft flight, Contractor shall submit to Burlington a daily Fuel Uplift and Purchase Report in a mutually agreed format with fuel tickets attached. 4. Configuration and Fueling In rendering the Services, Contractor shall configure and fuel each Aircraft so as to provide the maximum practicable cargo payload at all times, taking into consideration all relevant flight planning and scheduling factors. Contractor shall at all times conduct its flight operations in accordance with usual and customary air carrier practices and to the extent consistent therewith use its best efforts to conserve fuel. 5. Travel Privileges Burlington shall be entitled to travel privileges for its personnel acting as couriers on the Aircraft provided Contractor shall have first right to move personnel necessary to perform its obligations. Travel privileges will be subject to FAA regulations, when applicable. 6. Dangerous Goods Contractor shall pay special attention and consideration to the inspection, handling, loading, stowing and/or carriage of Dangerous Goods. Contractor's personnel, engaged in any aspect of inspection, handling, loading, stowing and/or carriage of Dangerous Goods shall prior thereto deliver to Burlington documented evidence that they have successfully completed an initial and recurrent training program for Dangerous Goods for air transportation that is satisfactory to Burlington standards. A complete record of their proficiency and an outline of their training program shall be kept on file by Contractor. Contractor shall insure that its personnel comply with all relevant provisions of Federal, State or local Dangerous Goods Regulations applicable to the performance of their functions and are trained and comply with Burlington's procedures for handling, documenting and transporting Dangerous Goods on the Aircraft. G. Route Changes - Burlington may at any time during the term of this Agreement change the departure times or the Scheduled Routes upon no less than seven (7) calendar days prior notice to Contractor; provided, however, that Burlington may make nominal departure time or enroute changes as it deems operationally necessary or advisable without prior notice. In the event that Burlington changes the origination or termination points of a Scheduled Route and, as a direct result, Contractor incurs Relocation Costs Burlington shall reimburse Contractor for such Relocation Costs within fifteen (15) days of presentation of detailed invoices, reasonably satisfactory to Burlington, for such Relocation Costs incurred by Contractor; provided, however, that in no event shall Burlington be responsible for such costs in excess of $7,500 for a change in a Scheduled Route. This Section II(H) shall not apply to a relocation of the Burlington Hub. If Burlington geographically relocates the Burlington Hub, Burlington and Contractor will negotiate a mutually agreeable basis for reimbursement of the Relocation Costs imposed upon Contractor in connection with such a relocation. 7 9 III. PAYMENT TO CONTRACTOR A. Payment for Services - Contractor shall invoice Burlington in accordance with the rates established on Scheduled I attached hereto, on a weekly basis. Each invoice shall be submitted to Burlington within five (5) business days from the closing of the previous calendar week and shall cover all services provided for that week pursuant to this Agreement. Within ten (10) business days after receipt of a weekly invoice, the total amount indicated thereon shall become due and payable; provided however, that Burlington may in good faith dispute the accuracy of any weekly invoice. B. Reimbursement of Fees and Costs - If Contractor shall have paid any fees or incurred any out-of-pocket costs which are to be reimbursed to Contractor by Burlington, and such fees or costs shall not have already been reimbursed by Burlington, then Contractor will be reimbursed for such fees or costs by submitting to Burlington together with a Monthly Statement invoices or other evidences of payment reasonably satisfactory to Burlington in respect of such fees or costs and stating on such Monthly Statement the total amount of such fees and costs for which it is due reimbursement. C. Taxes 1. Burlington shall pay all taxes imposed by any governmental authority upon the payments to Contractor made by Burlington pursuant to the terms of this Agreement, including but not limited to any Federal, State or Local transportation or excise taxes as may from time to time be applicable. Notwithstanding the foregoing, Burlington shall not be responsible for (a) any tax imposed on or measured by the gross or net income, receipts, capital or net worth, franchises, excess profits or conduct of business of Contractor, (b) any sales, use or property tax or other similar tax imposed on or with respect to, the or services purchased or used by Contractor in connection with the rendition of the Services hereunder, (c) any taxes imposed upon Contractor by any jurisdiction if such taxes result from the present, future or former connection of Contractor (or any affiliate of Contractor) to such jurisdiction unless arising out of the performance of this Agreement, (d) taxes which arise out of or are caused by any negligence or willful misconduct of Contractor, or any act or failure to act prohibited by this Agreement or any misrepresentation by Contractor, or any failure by Contractor to claim on a timely and proper basis applicable exemptions or reductions, (e) taxes to the extent attributable to any period after the termination or expiration of the term of this Agreement, (f) taxes which are imposed as a result of a voluntary or involuntary bankruptcy of Contractor, (g) taxes imposed on a transferee of Contractor of any interest in this Agreement to the extent the amount of such taxes exceeds the amount of such taxes that would not have been imposed had there not been such a transfer, or (h) penalties, fines, additions to tax or interest to the extent resulting from the negligence or misconduct of Contractor in giving Burlington any notice required in the immediately succeeding paragraph, or the failure to file any returns that are timely and proper. 8 10 2. Contractor shall notify Burlington at least thirty (30) days prior to the due date for any taxes subject to indemnification pursuant to the preceding paragraph (1) or immediately upon determination of assessment thereof of any such taxes. If directed in writing by Burlington, Contractor shall, at Burlington's expense, take such action as Burlington may request to contest the imposition of such tax and shall, if requested, permit Burlington in Contractor's name to contest the imposition of such tax. Contractor shall at Burlington's expense, fully cooperate with Burlington in contesting such claim, give Burlington any relevant information relating to such claim which may be within Contractor's knowledge or control, and file any necessary documents which may be required regarding such claim. In the event Contractor fails to contest or fails to permit Burlington to contest any claim for taxes, Burlington shall not be obligated to indemnify Contractor for any such taxes. 3. If as a result of a payment of an indemnity, Contractor shall realize a tax benefit not previously taken into account in computing the amount of such payment, or shall obtain a refund of all or any part of a tax paid by Burlington or with respect to which Burlington or benefit (taking into account any tax consequences to Contractor with respect to the receipt of such a refund and the payment of such amounts over to Burlington) within thirty (30) days after Contractor receives such refund or realizes such benefit. If, in addition to such refund, the Contractor shall receive an amount representing interest on the amount of such refund, Burlington shall be paid that proportion of such interest which is fairly attributable to taxes paid by Burlington or paid by the Contractor with funds provided by Burlington. IV. REPRESENTATIONS AND WARRANTIES A. Contractor's Representations -- Contractor represents and warrants that on the date hereof: 1. Corporate Status Contractor is a corporation duly organized, validly existing, in good standing under the laws of the State of Texas, is licensed or qualified to do business in all jurisdictions where the failure to do so could have a material adverse effect of its ability to perform its obligations hereunder. 2. Authority Contractor has or will acquire the full power, authority and legal right to execute, deliver and perform the terms of this Agreement, including but not limited to under the laws, rules and regulations of the Aeronautics Authority. This Agreement has been duly authorized by all necessary corporate action of Contractor and has been duly executed and delivered, and it constitutes a legal, valid and binding obligation of Contractor enforceable in accordance with its terms. This Agreement does not contravene any law, governmental rule, regulation or order known to and binding on Contractor or contravene the certificate of incorporation or bylaws of Contractor or contravene the provisions of or 9 11 constitute any default under, or result in the creation of any lien upon any of the property of Contractor under, any indenture, mortgage, contract or other agreement to which Contractor is a party or by which it is bound. 3. No Conflicting Agreements Contractor is not in default under any agreement to which it is a party nor is Contractor a party to any agreement or instrument or subject to any charter or other corporate restriction, which individually or in the aggregate might materially adversely affect the financial or other condition, business, assets, liabilities or operations of Contractor or the ability of Contractor to perform its obligations under this Agreement. 4. Governmental Approvals All necessary licenses, permits, consents or approvals of, notices to or registrations with or the taking of any other action in respect of, the Aeronautic Authority's or any other federal, state, foreign or applicable governmental authority or agency required to be obtained or accomplished by Contractor in connection with the execution and delivery by Contractor of this Agreement and for providing the Services have been obtained or accomplished by Contractor or are being obtained or are being accomplished and Contractor is an Air Carrier. 5. Litigation a. There are no pending or, to its knowledge, threatened actions or proceedings to which Contractor is a party which might materially adversely affect the financial or other condition, business, assets, liabilities or operations of Contractor or the ability of Contractor to perform its obligations under this Agreement; and b. There are no pending or, to its knowledge, threatened actions or proceedings of which Contractor has knowledge before any court or administrative agency which might materially adversely affect the financial or other condition, business, assets, liabilities or operations of Contractor or the ability of Contractor to perform its obligations under this Agreement. B. Burlington's Representations - Burlington represents and warrants to Contractor that on the date hereof: 1. Corporate Status Burlington is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. 2. Authority Burlington has the full power, authority, and legal right to execute, deliver, and perform the terms of this Agreement. This Agreement has been duly authorized by all necessary corporate action of Burlington and has been duly executed and delivered and it constitutes a legal, valid and binding obligation of Burlington enforceable in accordance with its terms. This Agreement does not contravene any law, governmental rule, regulation or order known to and binding on Burlington or contravene the 10 12 certificate of incorporation or bylaws of Burlington or contravene the provisions of or constitute any default under, result in the creation of any lien upon any of the property of Burlington under, any indenture, mortgage, contract or other agreement to which Burlington is a party or by which it is bound. V. CONDITIONS TO EFFECTIVENESS OF AGREEMENT A. Burlington's Conditions - This Agreement shall not be enforceable against Burlington until Burlington shall have received the following, in each case in form and substance reasonable satisfactory to it: 1. A certificate of the Aeronautics Authority or other evidence that Contractor and its personnel are qualified and certified to transport Dangerous Goods. B. Contractor's Conditions - This Agreement shall not be enforceable against Contractor until Contractor shall have received the following, in each case in form and substance reasonably satisfactory to it: 1. A certificate of Burlington attesting to the authority of the person or persons authorized to execute and deliver this Agreement and any other documents to be executed on behalf of Burlington in connection with the transactions contemplated hereby. VI. COVENANTS OF CONTRACTOR AND BURLINGTON The parties covenant and agree as follows: A. Further Assurances - Contractor will cause to be done, executed, acknowledged and delivered each and every further acts, documents and assurances as Burlington may reasonably require for accomplishing the purposes of this Agreement. B. Operating Requirements - Contractor shall not use or operate any Aircraft, or permit any Aircraft to be used or operated, in violation of any applicable law or regulation, or contrary to any condition of any airworthiness certificate, license, registration or regulation relating to such Aircraft. Contractor shall be responsible for and shall indemnify and hold Burlington harmless from and against all penalties, fines or other expenses imposed by the FAA or other governmental agencies due to violations of any laws, rules or regulations by Contractor. 11 13 C. Insurance - Each party hereto will at all times until the term hereof has expired or been terminated cause to be carried and maintained at its sole cost and expense the applicable insurance coverage, in an amount not less than the amount, and containing the provisions, terms and conditions, set forth below. 1. Hull and Liability Insurance a. Contractor will be responsible for "all risk" hull insurance (including any war risk hull insurance) for the Aircraft covered by this Agreement. Contractor shall be solely responsible for the insurance of its spare parts, engines and other property. b. Contractor will be responsible and cause to be obtained and maintained aircraft liability insurance, including bodily injury or death liability, property damage liability, product liability and contractual liability, in an amount not less than $200,000,000 on a combined single limit basis, and personal injury liability insurance (excluding passenger) in an amount not less than $20,000,000 on a combined single limit basis. Contractor's aircraft liability will name Burlington as an additional insured as its interest may appear, and will provide that any modification, alteration and/or change which is material and adverse to Burlington or the policy, or cancellation of, such policy shall only be effective as to Burlington upon receipt by Burlington of thirty (30) days prior written notice, or seven (7) days written notice as respects war and allied perils coverage, or otherwise to the extent of the prevailing notice period then provided by the applicable insurance market. 2. Workers' Compensation Insurance and Employer's Liability Insurance a. Each of Contractor and Burlington agree to cause to be obtained and maintained, each with respect to its own employees, and at its sole cost and expense, statutory Workers' Compensation Insurance covering the jurisdictions in which it operates including the monopolistic states of Washington and Ohio. Each party's insurance policy will contain all states and foreign coverage endorsements. b. Each of Contractor and Burlington agree to cause to be obtained and maintained, for its own account and interest, at its sole cost and expense, employer's liability coverage in an amount not less than $1,000,000. 3. Comprehensive General Liability Insurance/Product Liability Insurance Contractor, at its sole cost and expense, shall cause to be obtained and maintained comprehensive general liability insurance, including contractual liability, which, without limitation, shall specifically insure the indemnity of Contractor in Sections VI(B) and XI(A) hereof subject to the terms and conditions of such policy, and including product liability insurance with respect to any maintenance, modifications or repairs performed on the Aircraft by Contractor or any of its subcontractors, in 12 14 an amount not less than $200,000,000 naming Burlington as an additional insured thereunder and otherwise in form and substance reasonably satisfactory to Burlington. 4. Insurance Certificates Before the furnishing by Contractor of any services hereunder and again prior to the expiration or renewal of any policy of insurance during the term of this Agreement, Contractor and Burlington shall exchange certificates of insurance evidencing the insurance required to be carried by Contractor and Burlington under this agreement, in a form and substance reasonably satisfactory. Such insurance shall provide that any modification, alteration and/or change which is material and adverse to Burlington or Contractor, or cancellation of, such insurance shall only be effective as to Burlington or Contractor upon receipt by Burlington or Contractor of thirty (30) days prior written notice. 5. Right to Insure In the event that Contractor fails to maintain the insurance required to be obtained and maintained by it pursuant to this Section, Burlington, may, with reasonable advance written notice to Contractor, at its option but without any obligation, provide such insurance and if it so elects, which it may do in its absolute discretion, as to itself alone and not the other person. The cost of providing such substitute insurance shall be payable on demand by Burlington together with interest thereon at the rate of 10% per annum from and including the date of demand to and excluding the date paid. D. Transportation of Dangerous Goods - Contractor shall at all times cause itself to be registered with the Aeronautics Authority and otherwise qualified to transport Dangerous Goods under the Dangerous Goods Regulations on a current up-to-date basis. E. Notification of Default - Contractor or Burlington as applicable shall notify the other of the occurrence of any Event of Default or the existence of any circumstances which with notice or the passage of time, or both, would become an Event of Default promptly after Contractor or Burlington has knowledge thereof. 13 15 VII. TEMPORARY DISCONTINUANCE OF SCHEDULED ROUTES A. Temporary Discontinuance of Scheduled Route - Burlington has the right without cause, after giving forty-eight (48) hours prior written notice in its sole and absolute discretion to direct Contractor temporarily to discontinue flying the Aircraft. Burlington may direct Contractor to resume temporarily discontinued flight provided that Burlington gives to Contractor notice thereof not less than the number of days prior to the scheduled resumption as indicated in the following table:
PERIOD OF TEMPORARY DAYS PRIOR DISCONTINUANCE TO RESUMPTION ------------------- ------------- 1 to 10 calendar days 1 calendar day 11 to 20 calendar days 7 calendar days 21 or more calendar days 14 calendar days
During such temporary discontinuance, Burlington shall be obligated to pay Contractor the daily scheduled rate. VIII. DEFAULT/TERMINATION A. Default by Contractor - Without limiting the obligations of Contractor or the rights and remedies of Burlington as provided in this Agreement, each of the following events (whether any such event shall be voluntary or involuntary or arise by operation of law or due to any compliance with any law, rule or regulation or any judgment, order or decree) shall constitute an "Event of Default": (i) Contractor shall fail to make any payment required to be made by Contractor hereunder when due and such failure continues for a period of ten (10) Business Days; or (ii) at any time during the term of this Agreement either (a) the Scheduled Reliability Factor for any period shall be less than 95% or the Departure Schedule Reliability Factor for any period shall be less than 97%, and Burlington shall have given notice to Contractor to cure the default and twenty-one (21) days shall have expired after the giving of such notice, and then or thereafter during the term of this Agreement, either (a) the Scheduled Reliability Factor shall again be less than 95% for any period or the Departure Reliability Factor shall again be less than 97% for any period and Burlington has already given Contractor its one (1) notice to cure, or (b) notwithstanding the foregoing the Scheduled Reliability Factor shall ever be less than 93% or the Departure Reliability Factor shall ever be less than 95%; provided however, that in the event that Contractor breaches its obligations under this Agreement to maintain the Scheduled Reliability Factor for any applicable period described in clause (a) or (b) above, unless Burlington has notified Contractor in writing of such breach within fifteen (15) days thereof, Burlington shall be deemed to have waived its right to terminate this Agreement as a result of such breach for such period (but not any other period); or 14 16 (iii) if Contractor shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it under this Agreement not otherwise covered specifically in this Section VIII(A) and if such failure is curable without prejudice to Burlington, such failure shall continue uncured for a period of thirty (30) days after written notice thereof to Contractor from Burlington so lag as Contractor is at all times diligently prosecuting such cure during such thirty (30) day period; or (iv) any representation or warranty made by Contractor in or pursuant to this Agreement or in any document or certificate delivered pursuant to this Agreement is or proves to have been incorrect in any material respect when made; (v) Contractor assigns or sublets or attempts to assign or sublet any of its rights or delegates or attempts to delegate any of its duties or obligations under this Agreement without the prior written consent of Burlington; or (vi) Contractor consents to the appointment of a custodian, receiver, trustee, examiner or liquidator of itself or of a substantial part of its property, or Contractor makes a general assignment of the benefit of creditors, or Contractor admits in writing its inability to pay its debts generally as they become due, or Contractor is unable to or does not pay its debts generally as they come due, or Contractor files a voluntary petition in bankruptcy or a voluntary petition or an answer seeking reorganization in a proceeding under any bankruptcy laws (as now or hereafter in effect) or an answer admitting the material allegations of a petition, or Contractor by voluntary petition, answer, or consent seeks relief under the provisions of any other existing or future bankruptcy, reorganization or other similar law providing for the reorganization or winding up of corporations, or providing for an agreement, composition, extension or adjustment with its creditors, or any corporate action is taken by Contractor infurtherance of any of the foregoing; or (vii) an order, judgment or decree is entered by any court or governmental agency of competent jurisdiction appointing, without the consent of Contractor, a custodian, receiver, trustee, examiner or liquidator of Contractor or of any substantial part of its property, or any substantial part of the property of Contractor is sequestered, and any such order, judgment or decree of appointment or sequestration remains in force undismissed, unstayed or unvacated for a period of thirty (30) days after the date of entry thereof; or 15 17 (viii) a petition against contractor in a proceeding under the bankruptcy, reorganization or similar laws of the United States of America or any other insolvency laws (as now or hereinafter in effect) of any competent jurisdiction is filed and is not withdrawn or dismissed within thirty (30) days thereafter, or if, under the provisions of any law providing for reorganization or winding-up of corporations which may apply to Contractor, any court of competent jurisdiction assumes jurisdiction, custody or control of Contractor or of any substantial part of its property and such jurisdiction, custody or control remains in force or unrelinquished, unstayed or undismissed for a period of thirty (30) days, or if in any such case at any time an order for relief is granted; or (ix) majority ownership or effective control of Contractor is acquired by a competitor of Burlington. (x) Contractor voluntarily or involuntarily ceases or suspends all or any substantial part of its operations for any reason, or Contractor announces a future cessation or suspension of all or any substantial part of operations for any reason whatsoever, other than in each case as excused by Section XI(H) hereof, or Contractor ceases or suspends any of its Services hereunder or announces a future cessation or suspension of any thereof for any reason whatsoever, other than as excused by Section XI(H) hereof. (xi) a final judgment is rendered by a court of competent jurisdiction for the payment of money not, in the reasonable judgment of Burlington, covered by insurance in excess of one million dollars ($1,000,000), or final judgments are rendered for the payment of money not, in the reasonable judgment of Burlington, covered by insurance in excess of one million dollars ($1,000,000) in the aggregate, shall be rendered against Contractor, or any other final judgment is rendered by a court of competent jurisdiction which restrains, hinders or otherwise, in the reasonable judgment of Burlington, materially and adversely affects Contractor's present or future performance of any of its obligations hereunder; or 16 18 (xii) any obligation of Contractor or any of its affiliates for the payment of borrowed money (whether as borrower or guarantor), or payment of the deferred purchase price of any property or services (whether as buyer or guarantor), or payment of any obligation under any lease (or sublease) of real or personal property (whether as lessee or sublessee or guarantor) shall not be paid when the same becomes due, whether by acceleration or otherwise, after expiration of any applicable grace period or extension thereof, or Contractor fails to perform or observe in any material respect any other provision (unless such provision has been waived) with respect to any such obligation or in any agreement securing or relating to such obligation, and the effect of such failure is to permit such an obligation to be declared due or is to cause such obligation to become due prior to its stated maturity or in the case of a lease (or sublease) to permit the lessor or sublessor to take any action to terminate or repossess, if any such obligations described in this clause (xiii) individually or in the aggregate are in excess of one million dollars ($1,000,000); or (xiii) it is or becomes unlawful for Contractor to perform any of its obligations hereunder; Upon the occurrence of any Event of Default described in clause (vi), (vii), or (viii) above, this Agreement and Burlington's obligations and Contractor's rights hereunder shall automatically terminate without notice, and upon the occurrence and during the continuance of any other Event of Default, Burlington shall immediately be entitled to terminate this Agreement and Burlington's obligations and Contractor's rights under this Agreement by notice thereof to Contractor, in each without cost or penalty of any kind and without limiting Burlington's rights or remedies at law or in equity with respect thereto, including, but not limited to the recovery of damages due to such a termination. B. Default by Burlington - Without limiting the obligations of Burlington or the rights and remedies of Contractor as provided in this Agreement, each of the following events (whether any such event shall be voluntary or involuntary or arise by operation of law or due to any compliance with any law, rule or regulation or any judgment, order or decree) shall constitute an "Event of Default": (i) If Burlington shall fail to make any payment required to be made by Burlington hereunder and such failure continues for a period of ten (10) Business Days after written notice thereof is received by Burlington; or (ii) If Burlington shall fail to carry and maintain insurance in accordance with the provisions of Section VI(C) hereof; or (iii) If Burlington shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it under this Agreement and if, in the reasonable opinion of Contractor, such failure is curable without prejudice to Contractor, such failure shall continue unremedied for a period of thirty (30) days after written notice thereof to Burlington from Contractor so long as Burlington is at all times diligently prosecuting such cure during such thirty (30) day period; or 17 19 (iv) Burlington consents to the appointment of a custodian, receiver, trustee or liquidator of itself or of a substantial part of its property, or makes a general assignment for the benefit of creditors, or Burlington admits in writing its inability to pay its debts generally as they become due, or Burlington is unable to or does not pay its debts generally as they become due, or Burlington files a voluntary petition in bankruptcy or a voluntary petition or an answer seeking reorganization in a proceeding under any bankruptcy laws (as now or hereafter in effect) or an answer admitting the material allegations of a petition, answer, or consent, seeks relief under the provisions of any other existing or future bankruptcy or other similar law providing for the reorganization or winding up of corporations, or providing for an agreement, composition, extension or adjustment with its creditors; or (v) An order, judgment or decree is entered by any court or governmental agency of competent jurisdiction appointing, without the consent of Burlington, a custodian, receiver, trustee or liquidator of Burlington or of any substantial part of its property, or any substantial part of the property of Burlington is sequestered, and any such order, judgment or decree of appointment or sequestration remains in force undismissed, unstayed or unvacated for a period of thirty (30) days after the date of entry thereof; or (vi) a petition against Burlington in a proceeding under the bankruptcy laws of the United States of America or other insolvency laws (as now or hereinafter in effect) is filed and is not withdrawn or dismissed within thirty (30) days thereafter, or if, under the provision of any law providing for reorganization or winding-up of corporations which may apply to Burlington any court of competent jurisdiction assumes jurisdiction, custody or control of Burlington or of any substantial part of its property and such jurisdiction, custody or control remains in force on unrelinquished, unstayed or undismissed for a period of thirty (30) days, or if in any such case at any time an order for relief is granted. (vii) Any representation or warranty made or deemed made by Burlington in or pursuant to this Agreement is or proves to have been incorrect in any material respect when made or deemed made. Upon the occurrence of any Event of Default described in this Section VIII(B), Contractor shall immediately be entitled to terminate this Agreement and its obligations and Burlington's rights under this Agreement by notice thereof to Burlington, in each case without cost or penalty of any kind and, subject to the overall limit on Contractor's recovery rights against Burlington set forth in Section VII hereof, without limiting Contractor's rights in respect of the recovery of damages due to such a termination. 18 20 C. Events of Termination - Each of the following events (whether any such event should be voluntary or involuntary or arise by operation of law or due to any compliance with any law, rule or regulation or any judgment, or order or decree) shall constitute an event of termination which shall immediately entitle Burlington to terminate without notice to Contractor, this Agreement without cost or penalty of any kind and without limiting Burlington's rights or remedies at law or in equity with respect thereto, including but not limited to the recovery of damages due to such a termination: (i) Contractor shall fail to carry and maintain in full force and effect insurance in accordance with the provisions of Section VI(C) hereof or any notice of cancellation shall be given with respect to any such insurance or Contractor shall operate any Aircraft outside of the scope or in violation of, or Contractor shall otherwise fail to comply with, the terms of any insurance or government indemnity coverage maintained by Burlington or Contractor with respect to any Aircraft; or (ii) Contractor disposes, conveys or transfers or threatens to dispose, convey or transfer all or a material part of its assets, or Contractor liquidates or dissolves or consolidates or merges with any other Person, whether in one or a series of transactions, related or not, without Burlington's prior written consent which will not be unreasonably withheld, or (iii) the airworthiness certificate of the Aircraft is revoked, suspended, canceled, withdrawn, terminated or not renewed or otherwise ceases to be in full force and effect or becomes subject to any material restriction; or any consent, authorization, license, certificate or approval of or registration with any governmental authority applicable to Contractor's performance of its obligations under this Agreement, including, without limitation, its certificate issued under FAR Part 121 or its Certificate of Convenience and Necessity issued under the Aviation Act, is not made or is not maintained in full force and effect or otherwise revoked, suspended, canceled, withdrawn, terminated or not renewed for any reason whatsoever. IX. INDEPENDENT CONTRACTOR Contractor is an independent Contractor and, without waiving any rights or remedies hereunder in favor of Burlington, Burlington shall not in any manner supervise, direct or control Contractor's performance under this Agreement. Contractor shall not in any manner engaged in performing services hereunder shall be considered employees of Contractor for all purposes and under no circumstances shall be deemed employees of Burlington. Employees of Burlington shall be considered employees of Burlington for all purposes and under no circumstances shall be deemed employees of Contractor. Nothing in this Agreement shall be construed as giving one party to this Agreement control over the managerial practices, financial administration or personnel practices, policies or procedures of the other party. Contractor shall have full and exclusive liability for the payment of Workers' compensation and employer's liability insurance premiums with respect to its employees and for the payment of all taxes, contributions and other payments for unemployment compensation or annuities now or hereinafter 19 21 imposed upon employers by the government of the United States of America or by any individual state, local or foreign authority with respect to such employees. X. INDEMNIFICATION A. Indemnification by Contractor -- Contractor agrees to defend (if requested by an applicable Burlington Indemnitee but failure to request such defense shall not reduce or otherwise affect Contractor's liability for the reasonable expenses of such defense by such Burlington Indemnitee), indemnify and hold harmless Burlington and its affiliates, parent company and each of their officers, directors, shareholders, agents, servants and employees (the "Burlington Indemnities") from and against all liabilities and reasonable expenses, including but not limited to reasonable expenses of defense (including reasonable legal fees and expenses) and other reasonable expenses, for injury to or death of any person other than an employee or agent of the Burlington Indemnities insured in the course of the employment and for loss of or damage to any property, including the Aircraft and any cargo, arising out of or in any manner connected with (i) the negligence or willful misconduct of Contractor, or any of its entities controlled by or under common control with Contractor or any of their subcontractors, officers, directors, agents, servants or employees in connection with the provision of services hereunder, or (ii) maintenance, modification or repair of the Aircraft. Contractor hereby waives, releases and renounces any and all claims and recourse rights now or hereafter existing against any Burlington Indemnitee, and Contractor agrees not to claim against or sue any Burlington Indemnitee, for any claim, injury, loss, damage, obligation, liability or expense to be indemnified by Contractor, except for liabilities and expenses to be indemnified by Burlington as stated below. Burlington shall promptly notify Contractor of any claim as to which indemnification is sought from Contractor of any of its insurers. Subject to the rights of insurers under policies of insurance maintained pursuant to this Agreement, Contractor shall have the sole right to investigate and the right in its sole discretion to defend or compromise any claim for which indemnification is sought under Section XI(A), and Burlington shall cooperate, and Burlington shall cause each of the Burlington Indemnities to cooperate, with all reasonable requests of Contractor or its insurers in connection therewith. Where Contractor or the insurers under a policy of insurance maintained by or on behalf of Contractor undertake the defense with respect to a claim, no additional legal fees or expenses of any Burlington Indemnitee in connection with the defense of such claim shall be indemnified hereunder unless such fees or expenses were incurred expressly at the request of Contractor. Subject to the requirements of any policy of insurance, Burlington or any other Burlington Indemnitee may participate at its own expense in any judicial proceeding controlled by Contractor or its insurers pursuant to the preceding provisions; provided, that such party's participation does not, in the opinion of Contractor or any of its insurers, interfere with such proceeding or control. Notwithstanding the above, Burlington shall have the right to investigate and defend any litigation at its own expense. 20 22 B. Indemnification By Burlington - Except for the liabilities and expenses to be indemnified by Contractor as stated above, Burlington agrees to defend, indemnify, and hold harmless Contractor and its subcontractors and each of their officers, directors, shareholders, agents, servants, and employees from and against all liabilities and reasonable expenses, including, but not limited to reasonable expenses of defense (including reasonable legal fees and expenses) and other reasonable expenses for injury to or death of any person or loss of or damage to any property arising out of or in any way connected with the negligence or willful misconduct of Burlington, or any of its entities controlled by or under common control with Burlington or any of their subcontractors, officers, directors, agents, servants or employees in connection with the provision of services hereunder. C. Cooperation - In the case of any claim indemnified hereunder, Indemnitee agrees to cooperate with Indemnitor and the insurers as any of them may reasonably request in the exercise of their rights to investigate, defend or compromise any such claim or as may be required to retain the benefits of such insurance with respect to any such claim. D. Subrogation - Indemnitor shall be subrogated to the rights and remedies of Indemnitee on whose behalf any such claim was paid or for which indemnification is otherwise sought with respect to the condition or event giving rise to such claim. Should Indemnitee receive any refund, in whole or in part, with respect to any claim paid by Indemnitor or its insurers hereunder, Indemnitee shall promptly pay the amount refunded over to Indemnitor. XI. MISCELLANEOUS A. Notices - All notices, requests, demands, and other communications, under this Agreement, shall be in writing and sent by US Registered Mail, postage prepaid, receipt requested, or by courier service, and shall be deemed to have been duly given as of the date indicated on the return receipt card mailed to the party to whom notice is given or as of the date indicated on the delivery receipt of the courier, and properly addressed as follows: To Burlington: Burlington Air Express, Inc. 1 Air Cargo Parkway Swanton, Ohio 43558 Attn: Sr. Vice President, Air Operations Burlington Air Express, Inc. 18200 Von Karman Avenue Irvine, California 92715 Attn: Senior Counsel To Contractor: Kitty Hawk, Inc. 1515 West 20th Street DFW Airport, Texas 75261 Attn: President 21 23 Any party may change its address for the purposes of this Section by giving the other party written notice of the new address in the manner set forth above. B. Validity, Waiver - In the event that any provisions of this Agreement shall be held to be invalid, the same shall not affect in any respect whatsoever the validity of the remainder of this Agreement. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. C. Governing Law, Gender, Headings - THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. As used in this Agreement, the masculine, feminine or neuter gender, and the singular and plural number shall each be deemed to include the others whenever the context so indicates. Section headings contained in this Agreement are for convenience only, and shall not be considered for any purpose in construing this Agreement. D. Attorney's Fees - In the event of a dispute between the parties arising out of the terms, conditions, and obligations imposed by this Agreement, the prevailing party in such dispute shall be entitled to recover reasonable attorney's fees, costs and expenses incurred in connection therewith. E. Successors and Assigns - THIS AGREEMENT AND THE VARIOUS RIGHTS AND OBLIGATIONS HEREUNDER SHALL INURE TO THE BENEFIT OF AND BE BINDING UPON THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS. CONTRACTOR ACKNOWLEDGES THAT THIS AGREEMENT IS A PERSONAL SERVICES CONTRACT AND NEITHER THIS AGREEMENT NOR ANY OF CONTRACTOR'S RIGHTS OR OBLIGATIONS HEREUNDER MAY BE ASSIGNED OR DELEGATED BY CONTRACTOR WITHOUT THE PRIOR WRITTEN CONSENT OF BURLINGTON. F. Non-Disclosure and Confidentiality - Contractor and Burlington agree to keep confidential such information as Contractor and Burlington may from time to time impart to each other regarding their business affairs, including but not limited to this Agreement, and Contractor or Burlington will not in whole or in part, now or at any time, disclose said information or this Agreement, during the term of this Agreement, except in each case to a Person who is or would be permitted assignee if such Person agrees in writing to be bound by this Section or to professional advisors which are under a duty to maintain the confidentiality hereof or as may be required by law or legal process. 22 24 G. Entire Agreement, Etc. -- This Agreement and the Leases represent the entire agreement between the parties with respect to the subject matter hereof, superseding all prior inconsistent agreements, and no oral agreements have been made. This Agreement may be executed in one or more separate counterparts, each of which, when so executed, shall be deemed to be an original. Such counterparts shall, together, constitute and be one and the same instrument. The Schedules attached hereto are incorporated herein by this reference and shall for the purpose of this Agreement be deemed to be a part hereof. This Agreement can be modified only in writing and such modification must be signed by the parties hereto before it shall become effective. H. Force Majeure -- Except as provided herein, each party hereto will be excused from performance under this Agreement by the other as a result of any event of force majeure, including, but not limited to, acts of any government or subdivision thereof, the improper failure or refusal of any government or governmental agency to issue necessary permits or operating authorities, acts of God, weather, damage or destruction of flight equipment, lack of fuel availability at airports to be used, riots or civil commotions, strikes or labor stoppage, military emergency, war or hazards of damages incident to the state of war, or any other causes which is beyond the control of either party and which prevents either party from performing this Agreement, so long as in each case such event of force majeure or other cause beyond the control of such party is not caused by such party's breach of this Agreement or negligence or willful misconduct; provided, however, that circumstances within contractor's reasonable control shall include, but are not limited to, circumstances related to Contractor's financial condition or sickness, absenteeism, tardiness, or the unavailability of flight crews, other than additional crews sickness, absenteeism, tardiness, or the unavailability of flight crews, other than additional crews required due to temporary scheduling changes made by Burlington, or inability to provide services hereunder or grounding of any of the Aircraft by the Aeronautics Authority due to reasons arising out of Contractor's operating procedures or its failure to maintain in full force and effect its FAR Part 121 authority and Section 401 or 418 certification. Contractor or Burlington shall use their best efforts to eliminate or mitigate any adverse affect on the performance of its obligations hereunder resulting from force majeure or other circumstances beyond its control. I. Non-Exclusive Agreement -- Nothing in this Agreement is intended to or shall require Burlington or Contractor to utilize the services or facilities of the other to the exclusion of others. J. Rights Cumulative -- All rights and remedies from time to time conferred upon or reserved to Burlington and Contractor are cumulative, and none is intended to be exclusive of another. No delay or omission in insisting upon the strict observance or performance of any provision of this Agreement, or in exercising any right or remedy shall be construed as a waiver or relinquishment of such provision, nor shall it impair such right or remedy. Every right and remedy may be exercised from time to time and as often as deemed expedient. K. Survival -- All indemnities by Contractor or Burlington contained in this Agreement shall survive the expiration or other termination of this Agreement. 23 25 XII. CERTIFICATION The parties have each caused this Agreement to be executed on the day mentioned at the beginning of this Agreement. The individual signing on behalf of the corporate party certifies that he or she is duly authorized to make this Agreement binding for and on behalf of that corporation. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date and the date first written. BURLINGTON AIR EXPRESS, INC. KITTY HAWK AIR CARGO, INC. /s/ GLEN A. BEECHER /s/ TILMON J. REEVES --------------------------------- ---------------------------- Glen A. Beecher Tilmon J. Reeves Sr. Vice President President 24 26 SCHEDULE I To Agreement to furnish Three (3) B727-200 Aircraft and Air Cargo Services dated as of February 21, 1996, and effective on March 1, 1996. SCHEDULED ROUTE B727-200-223 EFFECTIVE ON MARCH 1, 1996 AUS/MLI/TOL/MLI/AUS B727-200-223 EFFECTIVE ON MARCH 1, 1996 PHX/TOL/PHX B727-200-223 EFFECTIVE ON MARCH 1, 1996 MSP/TOL/MSP Route Schedule will be flown five (5) days per week, except for Burlington designated holidays. (not to exceed eight (8) per year) Daily Rate: AUS complete route schedule [BLACKOUT] ACMI. PHX complete route schedule [BLACKOUT] ACMI. MSP complete route schedule [BLACKOUT] ACMI. There will be no compensation for scheduled flights that exceed the block hours of the published route schedule except for weather holds and diversions. Off Line Rate: [BLACKOUT] per block hour ACMI. Off Line Rate Calculation: Off line flying will be considered as the total flying in any flight day in which the published route schedule has been deviated from by the request of Burlington, unrelated to mechanical problems, or maintenance requirements. In the event the published schedule has been accomplished and Burlington requests additional flying, that additional flying, shall be calculated by using the off line rate. Route Change Rate: Burlington shall pay a daily rate to Contractor of [BLACKOUT] per block hour (ACMI) or [BLACKOUT] (ACMI) per day total for three (3) aircraft, whichever is higher, for any route changes required by Burlington pursuant to Section IIH of this Agreement. BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION 27 SCHEDULE 1.a To Agreement to furnish Two (2) B727-200 Aircraft and Air Cargo Services dated as of February 21, 1996, and effective on February 24, 1996. SCHEDULED ROUTE B727-200-251 STAGE 3 EFFECTIVE ON February 24, 1996 SJC/TOL/STL/SJC B727-200-251 STAGE 3 EFFECTIVE ON MARCH 1, 1996 BRO/IAH/TOL/IAH/BRO Route Schedule will be flown five (5) days per week, except for Burlington designated holidays. (not to exceed eight (8) per year) Daily Rate: SJC complete route schedule [BLACKOUT] ACMI. BRO complete route schedule [BLACKOUT] ACMI. There will be no compensation for scheduled flights that exceed the block hours of the published route schedule except for weather holds and diversions. Off Line Rate: [BLACKOUT] per block hour ACMI. Off Line Rate Calculation: Off line flying will be considered as the total flying in any flight day in which the published route schedule has been deviated from by the request of Burlington, unrelated to mechanical problems, or maintenance requirements. In the event the published schedule has been accomplished and Burlington requests additional flying, that additional flying, shall be calculated by using the off line rate. Route Change Rate: Burlington shall pay a daily rate to Contractor of [BLACKOUT] per block hour (ACMI) or [BLACKOUT] (ACMI) per day total for two (2) aircraft, whichever is higher, for any route changes required by Burlington pursuant to Section IIH of this Agreement. BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION EX-10.15 4 AIRCRAFT OPERATING LEASE 1 EXHIBIT 10.15 BLACKED-OUT TEXT OMITTED AND 3/13/95 SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION - ------------------------------------------------------------------------------- AIRCRAFT OPERATING LEASE - ------------------------------------------------------------------------------- 1.0 DATE AND PARTIES 1.1 Date. This aircraft operating lease (this "lease") is effective March 14, 1995. 1.2 Parties. The parties to this lease are: A. Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") Kaohsiung Fishery Building Room 101-8 No. 3 East 2nd Road Chien Chen Fish Port Kaohsiung, Taiwan R.O.C. Phone: 07-8227601 Fax: 07-8416155 B. Kitty Hawk Aircargo, Inc. ("Kitty Hawk") Attention: Mr. T. James Reeves, President P.O. Box 612787 1515 West 20th DFW Airport, Texas 75261 U.S.A. Phone: (214) 456-2200 Fax: (214) 456-2210 2.0 RECITATIONS 2.1 KITTY HAWK. Kitty Hawk holds a U.S. FAA Part 121 air-carrier certificate and related DOT authority under which it operates cargo aircraft in lease service. 2.2 TING HONG. Ting Hong wishes to lease a cargo aircraft under operating lease. 2.3 PURPOSE. Kitty Hawk will provide and Ting Hong will obtain aircraft services under this lease. Aircraft Operating Lease Page 1 of 13 2 3/13/95 3.0 COVENANTS, REPRESENTATIONS AND WARRANTIES 3.1 LEASED AIRCRAFT A. Kitty Hawk shall operate under this lease one Boeing 727-200 aircraft with a maximum gross cargo payload of 55,000 lbs., equipped with Pratt & Whitney JT8D-15 engines, configured with twelve cargo-pallet positions and two belly holds (the "leased aircraft"). B. The initial leased aircraft shall be Boeing 727-200 aircraft, serial no. 20995, U.S. registration no. 854AA (the "initial aircraft"). C. Kitty Hawk may from time to time, for maintenance, operating or other reasons, and without charge to Ting Hong for flight hours or other expenses incurred in the substitution, substitute another aircraft (a "substitute aircraft") of the same model, configuration, registration and certification, and of equivalent capability, in place of the initial aircraft. The term "leased aircraft" shall refer to the initial aircraft and to any substitute aircraft while any of them is operated under this lease. D. Kitty Hawk represents and warrants to Ting Hong that (i) the initial aircraft has an FAA airworthiness certificate and has all required U.S. governmental authority to carry general cargo for hire in the U.S., and that (ii) to the best of Kitty Hawk's knowledge the initial aircraft is airworthy and has been maintained in all material respects in conformity with FAA requirements; and warrants that the same will be true as to any substitute aircraft. Kitty Hawk further represents and warrants that the estimates of maximum payloads on various possible routes, as set forth in Captain Ben Planchon's letter to Ting Hong, dated March 2, 1995, a copy of which is Exhibit A, are accurate for normal atmospheric conditions that do not require unusual fuel loads for safe and proper operations. KITTY HAWK MAKES NO OTHER REPRESENTATION OR WARRANTY THAT ANY LEASED AIRCRAFT IS IN ANY RESPECT SUITABLE FOR THE PURPOSES OF THIS LEASE. E. Without relying upon any representation by Kitty Hawk except those is subparagraph 3.1(D), Ting Hong has determined that a Boeing 727-200 in the cargo configuration described in subparagraph 3.1(A) is suitable for the application and routes that Ting Hong contemplates under this lease. 3.2 OPERATIONS. Kitty Hawk shall position the leased aircraft to Saipan International Airport (the "Saipan base"), and be prepared at the commencement of the lease to begin cargo service under the lease. During the term of the lease, Kitty Hawk shall Aircraft Operating Lease Page 2 of 13 3 3/13/95 operate the leased aircraft solely for carriage of light general cargo tendered by Ting Hong, including perishable seafood, on schedules and routes within the South Pacific/Indonesia area (the "South Pacific operating area") in which Ting Hong requires aircraft service, as directed from time to time by Ting Hong, except that (i) all schedules shall be within commercially-reasonable performance capabilities of the leased aircraft, (ii) Ting Hong shall give to Kitty Hawk notice of schedule and routing requirements no later than 48 hours before each required aircraft movement, (iii) Ting Hong shall not change schedule or routing requirements less than 8 hours before aircraft departure, and (iv) all routes, airports, loading, operating and flying conditions shall be subject to the reasonable approval of Kitty Hawk's operating personnel. Kitty Hawk shall not be required to operate the leased aircraft an any respect that violates U.S. law, rules and regulations; the law, rules and regulations of any other country; Kitty Hawk's operations and maintenance programs; or the dictates of good operating practice. 3.3 U.S. AUTHORITY. Kitty Hawk represents and warrants to Ting Hong that it holds, and promises that it shall maintain in effect throughout the lease, at Kitty Hawk's sole expense, all U.S. governmental authority for it to operate the leased aircraft for hire in carrying cargo within the South Pacific operating area. 3.4 SOUTH PACIFIC AREA AUTHORITY. Ting Hong represents, warrants and covenants to Kitty Hawk that Ting Hong holds or shall obtain, and shall maintain in effect throughout this lease, at Ting Hong's sole expense, all non-U.S. governmental authority required to enable Kitty Hawk's operation of the leased aircraft in the South Pacific operating area as may be required under this lease, without change of registration of the leased aircraft, and without Kitty Hawk's being required to pay any fee related to such authorization; so long as Kitty Hawk maintains and operates the leased aircraft in accordance with FAA and DOT requirements, and at no material cost timely submits such applications and documentation as are requested by Ting Hong. 3.5 TERM. The term of this lease shall commence on the earlier of (i) the day forty-five days after the day Kitty Hawk receives the initial payment under paragraph 3.11(B), or (ii) the first day that the leased aircraft is dispatch ready at the Saipan base; and shall end at midnight GMT on the first anniversary of the commencement date. 3.6 PERFORMANCE. A. Kitty Hawk shall make the leased aircraft dispatch ready at the Saipan base no later than forty-five days after the day Kitty Hawk receives the initial payment under paragraph 3.11(B). Thereafter throughout the lease Kitty Hawk shall exert its best efforts to maintain the leased aircraft in dispatch-ready condition, with properly-rested and qualified flight crew on hand, for all scheduled flights. B. Throughout the lease Kitty Hawk shall exert its best efforts to perform all scheduled flights to arrive at each scheduled destination no later than 15 minutes after the scheduled arrival time. Aircraft Operating Lease Page 3 of 13 4 3/13/95 C. Kitty Hawk shall be responsible for arrival delays of more than 15 minutes from schedule, and for any unavailability of the leased aircraft, caused by maintenance failure of any type or crew failure of any kind. D. Kitty Hawk shall not be responsible for arrival delays or unavailability of the leased aircraft caused by: 1. weather conditions being below operating minimums at departure, destination or alternate airport; 2. any other weather conditions, unless the aircraft could have flown in such conditions in the absence of a maintenance failure; 3. departure delays attributable to completion of positioning of cargo on the aircraft less than 15 minutes prior to scheduled departure, or to inaccuracy of weight or deficiency in documentation or packaging of cargo; 4. departure delays attributable to fueling delays beyond Kitty Hawk's reasonable control; 5. air-traffic control or other governmental delays; 6. damage to the leased aircraft by Ting Hong or its agents, by loading or unloading personnel, or by ground equipment; or 7. acts of God, fire, flood, strike, labor dispute, riot, insurrection, war, or any other cause beyond Kitty Hawk's reasonable control. E. If the leased aircraft is unavailable on any day for which there are scheduled operations, and the unavailability is because of a maintenance failure or a crew unavailability of any kind, then the guaranteed aggregate flight hours for the term of the lease under paragraph 3.11(F) shall be reduced by the number of flight hours scheduled for such day and not flown. F. If the leased aircraft fails in any calendar month during the term of the lease to achieve a minimum level of 95% on-time arrival, excluding delays for causes listed in subparagraph 3.6(D), Ting Hong may terminate the lease by giving 30 days' advance notice to Kitty Hawk. 3.7 CHARACTER, PACKAGING, DOCUMENTATION OF CARGO; CARGO LOSS LIMITATIONS. A. Ting Hong shall only tender to Kitty Hawk cargo that can be transported lawfully. Aircraft Operating Lease Page 4 of 13 5 3/13/95 B. Ting Hong shall cause all cargo to be prepared, packed, and loaded so as to endure safe transportation by ordinary handling. Kitty Hawk shall have no responsibility for packaging or repackaging of cargo. Ting Hong shall provide all necessary or appropriate shipping documentation, and shall provide Kitty Hawk timely and accurate weights on all items tendered for transportation. C. Kitty Hawk may reject any item that in the reasonable opinion of Kitty Hawk's flight crew is improperly loaded or in condition such that it could damage the leased aircraft. However, such right of rejection is not intended or to be construed to relieve Ting Hong of any obligation properly to inspect, prepare, protect, pack, mark and document items for shipment, or to impose any liability or obligation upon Kitty Hawk. D. Ting Hong intends to use the leased aircraft predominantly to carry its own fresh seafood. Such cargo can be very valuable, and is inherently fragile and perishable. Loss or damage to such cargo can result from many unrelated causes, including delayed or incorrect handling, storage, packaging, loading, unloading, and ultimate delivery. A transportation delay for any reason can result in material loss of value of such cargo. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, TING HONG RELIEVES AND RELEASES KITTY HAWK OF ANY OBLIGATION TO TING HONG FOR UNINTENDED DAMAGE TO OR LOSS OF ANY CARGO CARRIED UNDER THIS LEASE, WHETHER OR NOT CAUSED BY NEGLIGENCE OF ANY CHARACTER, THAT EXCEEDS THE DAMAGE OR LOSS THAT MIGHT HAVE BEEN SUFFERED BY NON-PERISHABLE GENERAL CARGO FROM DELAY OR OTHER PERFORMANCE FAILURE, ACTION OR INACTION BY KITTY HAWK. TING HONG SHALL INDEMNIFY KITTY HAWK AND HOLD IT HARMLESS AGAINST LIABILITY, LOSS AND COST OF DEFENSE UPON ALL CLAIMS FOR UNINTENDED DAMAGE TO OR LOSS OF ANY CARGO CARRIED UNDER THIS LEASE, WHETHER OR NOT CAUSED BY NEGLIGENCE OF ANY CHARACTER, THAT EXCEEDS THE DAMAGE OR LOSS THAT MIGHT HAVE BEEN SUFFERED BY NON-PERISHABLE GENERAL CARGO FROM DELAY OR OTHER PERFORMANCE FAILURE, ACTION OR INACTION BY KITTY HAWK. 3.8 KITTY HAWK'S PAYMENTS. Kitty Hawk shall pay its costs and expenses of ownership of the leased aircraft; for salaries, housing at the Saipan base, and standard employee benefits for flight and maintenance crews; for insurance, maintenance, fuel and oil on vehicles supplied by Ting Hong under paragraph 3.9(K); for flight and maintenance crew use; for costs and expenses of maintenance, parts and labor for the leased aircraft; for aircraft hull, liability and war risk insurance upon the leased aircraft; for aircraft inflight communications fees; for flight crew housing costs for all overnight stays away from the Saipan base caused by maintenance failure of any type or crew failure of any kind; for fuel for aircraft operations for non-revenue maintenance tests and for flight crew training Aircraft Operating Lease Page 5 of 13 6 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE 3/13/95 COMMISSION flights required by Kitty Hawk; for taxes attributable to Kitty Hawk's net income from the lease; and for the costs and expenses of dispatching the leased aircraft. 3.9 Ting Hong's Payments in Addition to Rent. Ting Hong shall be responsible for and timely pay the following costs and expenses incurred in operation of the leased aircraft under this lease: A. aircraft ground handling, loading and unloading; B. fuel, oil, fluids and lubricants; except fuel for aircraft operations for non-revenue maintenance tests and for flight crew training flights required by Kitty Hawk; C. aircraft landing fees and parking fees; D. aircraft overflight fees; E. approach and departure fees; F. customs and immigration fees or charges; G. any excise or sales taxes imposed by an government in the South Pacific operating area, excluding U.S., upon rent payments under this lease; H. hotel accommodations for flight crew for all overnight stays away from the Saipan base, if such stays are caused by scheduling or are requested by Ting Hong; I. a lockable and secure storage facility at the Saipan base for storage of aircraft parts and maintenance equipment; and J. one automobile for the sole use by each Kitty Hawk flight crew at the Saipan base, and one truck for the sole use by the maintenance crew at the Saipan base. 3.10 Liens Attributable to Ting Hong. Ting Hong shall not permit any lien, claim or encumbrance to be created or to exist against the leased aircraft as a result of any claim against Ting Hong or as a result of nonpayment of any cost or expense that is to be paid by Ting Hong under paragraph 3.9. 3.11 Rental Payments. A. Ting Hong shall pay to Kitty Hawk rent of [BLACKOUT] for each of the first 1,800 flight hours of use of the leased aircraft under this lease, and rent of [BLACKOUT] for each flight hour in excess of 1,800 flight hours before April 16, 1996 (a "flight hour" is an hour of airborne operation of the Aircraft Operating Lease Page 6 of 13 7 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE 3/13/95 COMMISSION leased aircraft during the term of this lease, with time of each flight operation beginning when the aircraft takes off for purposes of flight and ending when the aircraft touches down at its next landing; except that flight hours do not include time of operation for non-revenue maintenance tests and for flight crew training flights required by Kitty Hawk, and that flight hours do not include flight hours for positioning the initial aircraft from DFW to the Saipan base). B. Ting Hong shall no later than March 14, 1995, pay in advance to Kitty Hawk: 1. a positioning deposit of [BLACKOUT] (the "positioning deposit") to pay Kitty Hawk's actual costs and expenses (the "positioning costs") of first positioning the initial aircraft from DFW to the Saipan base at the commencement of the lease (Kitty Hawk shall report its positioning costs to Ting Hong at the commencement of the lease, Kitty Hawk shall at the commencement of the lease repay to Ting Hong any amount by which the positioning deposit exceeds the positioning costs, and Kitty Hawk shall be solely responsible for positioning costs in excess of [BLACKOUT] and in case of any delay in positioning caused by mechanical problems, Kitty Hawk shall be responsible for all extra expense such as crew accommodations and overnight parking fees attributable to such delay); 2. livery fees of $4,000.00 to reimburse Kitty Hawk for one repainting of the leased aircraft; and 3. [BLACKOUT] as a prepayment of rental for 120 flight hours of the leased aircraft. C. Ting Hong shall no later than May 25, 1995, pay to Kitty Hawk: 1. [BLACKOUT] as a prepayment of rental for an additional 120 flight hours of the leased aircraft; and 2. if the aircraft operated more than 120 flight hours from the commencement date through April 30, 1995, then [BLACKOUT] for each such excess flight hour. D. Ting Hong shall no later than June 25, 1995, and no later than the twenty-fifth day of each calendar month thereafter, pay to Kitty Hawk: 1. [BLACKOUT] as a prepayment of rental for an additional 120 flight hours of the leased aircraft; and Aircraft Operating Lease Page 7 of 13 8 3/13/95 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION 2. if the aircraft operated more than 120 flight hours during the preceding calendar month, then rent for each excess flight hour. E. Ting Hong shall no later than April 25, 1996, pay to Kitty Hawk a nonrefundable repositioning fee of [BLACKOUT] which shall be Kitty Hawk's full compensation and reimbursement of all costs and expenses of repositioning the leased aircraft from the Saipan base to DFW at the end of the lease. F. Ting Hong guarantees to pay Kitty Hawk for at least 1,800 flight hours during the term of this lease, and if at the end of this lease the aggregate flight hours for which Ting Hong has paid Kitty Hawk is less than 1,800, then Ting Hong shall pay additional rent equal to such shortfall. G. At the end of the full term of the lease, when Ting Hong has fully complied with its payment and indemnity obligations under the lease, or if the lease is terminated before the end of its term, Kitty Hawk shall promptly reimburse to Ting Hong the amount of any unused prepaid rental, without interest. H. All payments by Ting Hong to Kitty Hawk under this lease shall be by wire transfer to Kitty Hawk's account, as follows: Bank One, Texas, N.A. Dallas, Texas, U.S.A. ABA number: 111000614 Account of: Kitty Hawk Aircargo, Inc.- Operating Account Account number: 0100128206 3.12 INSURANCE. Kitty Hawk shall throughout the term of this lease maintain in effect aircraft all-risk liability insurance of at least $20 million combined single limit coverage, which shall include coverage for liability for bodily injury and property damage, shall extend to Ting Hong as an additional insured, and shall not be cancelable without 30 days' advance written notice to Ting Hong. Kitty Hawk shall within five days after the execution of this lease deliver to Ting Hong a certificate evidencing such insurance, and if requested by Ting Hong, copies of insurance policies and endorsements providing such coverage. 3.13 EXCLUSION OF WARRANTIES, LIMITATION OF DAMAGES, AND PARTIAL RELEASE. Except for Kitty Hawk's express warranties elsewhere in this lease, KITTY HAWK WITH TING HONG'S CONSENT DENIES AND EXCLUDES ALL WARRANTIES, EXPRESS AND IMPLIED, STATUTORY AND OTHERWISE, INCLUDING WITHOUT LIMITATION THAT THE LEASED AIRCRAFT IS OR WILL BE FIT FOR ANY PURPOSE. NEITHER KITTY HAWK NOR TING HONG SHALL HAVE ANY RESPONSIBILITY TO THE OTHER FOR ANY INCIDENTAL, RESULTANT, OR CONSEQUENTIAL DAMAGES OF ANY KIND. TING HONG IRREVOCABLY WAIVES AND RELEASES ALL TORT CLAIMS Aircraft Operating Lease Page 8 of 13 9 3/13/95 AGAINST KITTY HAWK ARISING OUT OF ACTIONS OR OMISSIONS OF KITTY HAWK UNDER THIS LEASE EXCEPT THOSE CAUSED BY KITTY HAWK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 3.14 Ownership and Control of Leased Aircraft and Rights of Movement. This lease grants to Ting Hong no rights of ownership, control or operation of any leased aircraft. Kitty Hawk shall at all times retain and exercise all rights of operation and movement of the leased aircraft. 3.15 Denial of Agency and Joint Venture. Kitty Hawk has no agency, joint venture or partnership relationship with Ting Hong, and neither this lease nor performance under it shall be deemed or construed to create an agency or joint venture relationship. Neither Kitty Hawk nor Ting Hong shall have the right under this lease to supervise, direct or control any employee of the other in any manner or for any purpose. 3.16 Kitty Hawk Default. If Kitty Hawk materially fails to comply with any of its obligations under this lease; and if Kitty Hawk fails to remedy such default within ten business days after Ting Hong gives to Kitty Hawk notice of such default, then Ting Hong may without prejudice to any claim against Kitty Hawk terminate this lease for cause upon ten business days' advance notice to Kitty Hawk. 3.17 Early Termination of Lease; Limitation of Damages. If Ting Hong terminates this lease under the provisions of subparagraph 3.6(F) or paragraph 3.16, Kitty Hawk shall end operations of the leased aircraft under this lease at the termination date. IN NO EVENT SHALL KITTY HAWK BE RESPONSIBLE IN DAMAGES FOR ANY BREACH OF THIS LEASE IN AN AMOUNT EXCEEDING IN THE AGGREGATE MORE THAN (I) ONE-HALF OF ALL LEASE PAYMENTS EARNED BY KITTY HAWK UNDER THE LEASE TO THE DATE OF TERMINATION, PLUS (II) THE RETURN OF ANY UNEARNED ADVANCE LEASE DEPOSITS. 3.18 Ting Hong Default. If Ting Hong fails timely to deliver rental payments, Kitty Hawk may without notice suspend operations of the leased aircraft under this lease; or if Ting Hong fails timely and materially to comply with any of its other performance, payment or indemnity obligations under this lease, and fails to remedy such default within ten business days of Kitty Hawk's giving notice of such default; then Kitty Hawk may without prejudice to any claim against Ting Hong terminate this lease for cause, permanently cease operations under this lease, and return the leased aircraft to the U.S. 3.19 Other Representations and Warranties. A. Ting Hong represents and warrants to Kitty Hawk that: 1. Ting Hong is a limited liability company that has been duly formed and is in good standing under the laws of The Republic of China, which has authority to execute, deliver and perform its obligations under this lease. 2. Ting Hong's execution, delivery and performance under this lease have been duly authorized by all requisite action, and this Aircraft Operating Lease Page 9 of 13 10 3/13/95 lease, including without limitation the arbitration provisions of paragraph 4.4, is in all respects enforceable against Ting Hong in accordance with its terms. B. Kitty Hawk represents and warrants to Ting Hong that: 1. Kitty Hawk is a corporation that has been duly formed and is in good standing under the laws of the State of Texas, which has authority to execute, deliver and perform its obligations under this lease. 2. Kitty Hawk's execution, delivery and performance under this lease have been duly authorized by all requisite action, and this lease, including without limitation the arbitration provisions of paragraph 4.4, is in all respects enforceable against Kitty Hawk in accordance with its terms. 3.20 INDEMNITIES. A. Kitty Hawk shall indemnify Ting Hong and hold it harmless from and against liability, loss and cost of defense: 1. attributable to breach by Kitty Hawk of any of its representations and warranties in this lease, or of its representation, warranty and covenant under paragraph 3.3; or 2. upon any claim that is the responsibility of Kitty Hawk under paragraph 3.8. B. Ting Hong shall indemnify Kitty Hawk and hold it harmless from and against liability, loss and cost of defense: 1. attributable to breach by Ting Hong of any of its representations and warranties in this lease, or of its representation, warranty and covenant under paragraph 3.4; 2. upon any claim that is the responsibility of Ting Hong under paragraph 3.9; or 3. attributable to breach by Ting Hong of any of its obligations under paragraph 3.10. 3.21 OPINION OF COUNSEL; EVIDENCE OF ABILITY TO PERFORM INDEMNITIES. Ting Hong shall within ten days after execution of this lease deliver to Kitty Hawk (i) an option of counsel, in form and substance reasonably acceptable to Kitty Hawk, expressing favorable opinions as to the matters warranted by Ting Hong under paragraphs 3.4 and 3.19(A); and (ii) evidence reasonably satisfactory to Kitty Hawk that it has and will during the term of AIRCRAFT OPERATING LEASE Page 10 of 13 11 3/13/95 this lease maintain the financial ability to perform its indemnity obligations under paragraph 3.20(B), or deliver a guaranty of those indemnity obligations in form and substance reasonably acceptable to Kitty Hawk. If either condition is not satisfied, Kitty Hawk may terminate this lease by notice to Ting Hong, and if it does so shall promptly return to Ting Hong any payments that it has then received from Ting Hong, less any cost or expense incurred by Kitty Hawk to such time in connection with this lease, after which neither party shall have further obligation under this lease. 4.0 GENERAL PROVISIONS 4.1 AMENDMENTS. To amend this lease, Kitty Hawk and Ting Hong must sign a written amendment that identifies by paragraph number the provision that it purports to amend. No noncomplying course of dealing shall be construed to amend this lease. 4.2 NOTICES. All notices under this lease must be in writing. Notices may be given by DHL or Federal Express delivery, facsimile, telegram, telex or other delivery to a party at its notice address in paragraph 1.2. Notices given by DHL or Federal Express, fees prepaid, addressed to the intended recipient at its notice address in paragraph 1.2, or to such other notice address as that party designates by notice to the other party, shall be deemed given five business days after deposit with DHL or Federal Express. Any notice given by other means shall be effective only when received by an executive officer of the addressee. Delivery of a notice to a Kitty Hawk flight or maintenance crew member engaged in the operating or maintaining the leased aircraft shall never be deemed giving of a notice to Kitty Hawk for purposes of this lease. 4.3 CONSTRUCTION. A. Texas substantive law shall govern the effect and construction of this lease. The law of the United States, including the Federal Arbitration Act, and if and to the extent applicable the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, shall govern the effect and enforceability of provisions of this lease concerning arbitration, jurisdiction and venue. B. All dollar amounts under this lease are in U.S. dollars. C. A business day is any day other than a Saturday, Sunday, or legal holiday in Texas. D. This lease binds and benefits the parties and their respective successors and assigns. E. Warranties expressed in this lease shall survive investigation by any party and termination of the lease. All indemnities survive termination of the lease. Aircraft Operating Lease Page 11 of 13 12 3/13/95 F. No rule of construction resolving any ambiguity against a drafting party shall apply. G. Failure to enforce a default under this lease shall not be construed to be a waiver of such default or of any other default. H. This lease is the entire agreement between Kitty Hawk and Ting Hong with respect to the subject matter, and merges and supersedes all former agreements, promises or representations, whether oral or written, express or implied, that relate in any way to the subject matter. I. If any provision of this lease is invalid or unenforceable, the remaining provisions shall be enforceable. J. Titles and headings are only for convenient reference and are not to be construed in interpretation. K. No party may assign to another any rights under this lease without the written consent of the other party. L. If any provision of this lease is invalid or ineffective for any reason, the remaining provisions shall nevertheless be effective. M. Exhibit A is attached to this agreement for identification. 4.4 BINDING AGREEMENT TO ARBITRATE DISPUTES. Any controversy or claim arising out of or relating to this lease, or to any breach of this lease, shall be settled exclusively by arbitration under the International Arbitration Rules of the American Arbitration Association; but the locale of any such arbitration shall be in Dallas County, Texas; arbitrators shall be nationals of the United States; and the language of the arbitration shall be English. Any suit to require arbitration under this lease, or to enforce judgment upon an arbitration award, must be brought in the United States District Court for the Northern District of Texas. The parties acknowledge that this lease shall be deemed to be executed in Dallas County, Texas, and that this lease will be partially performed in Dallas County, Texas. A prevailing party in litigation to require arbitration, in arbitration, or in litigation to enforce an arbitration award shall be entitled to recover reasonable attorneys' fees and costs. KITTY HAWK AIRCARGO, INC. By: /s/ M. TOM CHRISTOPHER ------------------------ M. Tom Christopher Chairman of the Board and Chief Executive Officer Aircraft Operating Lease Page 12 of 13 13 3/13/95 TING HONG OCEANIC ENTERPRISE CO., LTD. By: /s/ JANE GOANG-FEI ------------------------ Jane Goang-FEI President Aircraft Operating Lease Page 13 of 13 EX-10.16 5 AMENDMENT & EXTENSION OF AIRCRAFT OPERATING LEASE 1 EXHIBIT 10.16 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION - -------------------------------------------------------------------------------- AMENDMENT AND EXTENSION OF AIRCRAFT OPERATING LEASE - -------------------------------------------------------------------------------- 1.0 DATE, PARTIES AND RECITATIONS 1.1 DATE. This amendment and extension of an aircraft operating lease (this "amendment") is effective April 24, 1996. 1.2 PARTIES. The parties to this amendment are Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong"), and Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). 1.3 AIRCRAFT OPERATING LEASE. Ting Hong and Kitty Hawk are parties to an Aircraft Operating Lease (the "lease") dated March 14, 1996, under which Kitty Hawk currently leases to Ting Hong and operates one cargo-configured Boeing 727-200 aircraft, serial number 20995, registration number N854AA. 1.4 MODIFICATION AND EXTENSION. Ting Hong and Kitty Hawk modify and extend the lease and otherwise agree as follows. 2.0 ACKNOWLEDGMENTS AND AMENDMENTS 2.1 DEFINED TERMS. Terms that are defined in the lease have the same defined meanings when used in this amendment. 2.2 COMMENCEMENT DAY AND TERM EXTENSION. The parties acknowledge that the commencement day of the lease was May 3, 1995. Paragraph 3.5 of the lease is amended so that the term of the lease is extended to and ends at midnight GMT on August 31, 1997. The portion of the term of the lease from the effective date of this amendment through August 31, 1997, is referred to in this amendment as the "extended term." 2.3 PAID UNUSED HOURS. The parties acknowledge that guaranteed flight hours under Paragraph 3.11(F) of the lease exceeded by 165 hours the actual flight hours to the date of this amendment. Kitty Hawk acknowledges that Ting Hong has paid additional rent under Paragraph 3.11(F) of the lease for those 165 guaranteed but unused flight hours. Amendment and Extension of Aircraft Operating Lease Page 1 of 3 2 2.4 Hourly Rent. Paragraph 3.11(A) of the lease is changed to provide that Ting Hong shall pay to Kitty Hawk rent of [BLACKOUT] for each flight hour of use of the leased aircraft during the extended term; except that: A. if the aggregate flight hours in any consecutive 12 month period during the extended term exceed 1,500, then the hourly rent for any additional flight hours in that 12 month period will be waived until hourly rent has been so waived for an aggregate of 165 flight hours during the extended term; and B. if the aggregate flight hours in any consecutive 12 month period during the extended term exceed 1,800, then the hourly rent for all flight hours over 1,800 in that 12 month period ("reduced rate hours") will be reduced to [BLACKOUT]. 2.5 Monthly Rent Payment. Paragraph 3.11(D) of the lease is modified to provide that no later than May 25, 1996, and no later than the twenty-fifth day of each calendar month thereafter, Ting Hong must pay to Kitty Hawk (i) [BLACKOUT] as a prepayment for 125 flight hours in the next calendar month of the extended term, and (ii) the rent, if any, for all then completed flight hours for which Ting Hong has not previously paid rent. 2.6 Scheduled Maintenance. Paragraphs 3.2, 3.6 and 3.11 of the lease are modified to provide that: A. Kitty Hawk may on May 1, 1996, remove the leased aircraft from service for scheduled maintenance, and Kitty Hawk will not be obligated to operate the leased aircraft or any substitute aircraft under the lease until the earlier of (i) the date the scheduled maintenance is completed and the leased aircraft is available for operations at the Saipan base, or (ii) June 7, 1996; and if delivery is later, Kitty Hawk will supply alternate aircraft or pay Ting Hong for startup/standown expenses of their 727-100 aircraft. B. Ting Hong will have no obligation to prepay or pay any rent for; flight hours operated during the month of May 1996. 2.7 Repositioning Fee. Paragraphs 3.11(E) of the lease is modified to provide that the repositioning fee under that paragraph is payable not later than August 25, 1997. 2.8 Guaranteed Flight Hours. Paragraphs 3.11(F) of the lease is modified to provide that Ting Hong (i) does not guarantee any number of aggregate flight hours during the extended term, but (ii) does guarantee to pay rent for at least 125 flight hours, whether or not used, during each month of the extended term in which the leased aircraft is in service (except that if the leased aircraft is not dispatch ready on June 1, 1996, the monthly minimum flight hour guarantee for the month of June 1996 will be proportionally reduced per diem to apply only to the days in which the leased aircraft is dispatch ready). BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION 3 2.9 Third-Party Operations. Paragraphs 3.2 of the lease is modified to provide that during the extended term both Ting Hong and Kitty Hawk have the right to offer the use of the leased aircraft to third parties. Ting Hong may tender cargo of third parties for any scheduled operation, without affecting any of its obligations under the lease as modified by this amendment. Kitty Hawk may employ the aircraft for operations for third parties so long as those third party operations do not materially interfere with Kitty Hawk's performance of its obligations to Ting Hong under the lease as modified by this amendment; and the number of hours, if any, of Kitty Hawk's operation of the leased aircraft in such third party revenue service during the extended term will be included in aggregate flight hours for purposes of determining when Ting Hong is entitled to the reduced rate hours under Para. 3.11(A) of; the lease as modified by Para. 2.4(B) of this amendment. Third party operations will also be used for meeting Ting Hong's guaranteed flight hours. 2.10 Rights of First Refusal. As a material inducement to Kitty Hawk to execute this amendment, Ting Hong promises that it shall not during the extended term, without giving Kitty Hawk at least 30 days' prior written notice and the right of first refusal at rates and term offered by a third party, either (i) enter into any operating lease of any additional aircraft with any third party for services such as those supplied by the leased aircraft under the lease, or (ii) renew or extend any existing operating agreement or execute any new operating agreement with any third party to operate any aircraft now owned or leased by Ting Hong, or to be acquired by Ting Hong during the extended term, for services such as those supplied by the leased aircraft under the lease. Kitty Hawk is obligated to provide technical assistance at no cost to transition aircraft owned by Ting Hong to the Kitty Hawk maintenance program in order that the aircraft be operated by Kitty Hawk. 2.11 Waiver of Known Defaults. Each party waives and releases all known claims, if any, against the other for breach of any obligation under the lease to the date of this amendment. 2.12 No other Modifications. The lease has not been modified except under this amendment, and as modified by this amendment remains effective. KITTY HAWK AIRCARGO, INC. BY: /s/ TILMON J. REEVES -------------------------- Tilmon J. Reeves President TING HONG OCEANIC ENTERPRISE CO., LTD. BY: /s/ TE-SHENG LEE ------------------------- for Jan Goang Fei President EX-10.17 6 AIRCRAFT OPERATING LEASE 1 EXHIBIT 10.17 4/19/96 rev BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION - -------------------------------------------------------------------------------- AIRCRAFT OPERATING LEASE - -------------------------------------------------------------------------------- 1.0 DATE AND PARTIES This aircraft operating lease (this "Agreement"), which is made as of April 19, 1996, is between KITTY HAWK AIRCARGO, INC. ("Kitty Hawk"), a Texas corporation, and PACIFIC EAST ASIA CARGO AIRLINES, INC. ("PEAC"), a Philippines corporation. 2.0 RECITATIONS 2.1 KITTY HAWK. Kitty Hawk holds a U.S. FAA Part 121 air-carrier certificate and related U.S. DOT authority under which it operates cargo aircraft in lease service. 2.2 PEAC. PEAC is a Philippine airline providing "on time" air cargo services to customers on schedules and routes between Manila, Jakarta, Singapore and other Approved Flight Destinations. 2.3 PURPOSE. PEAC wishes to wet lease a cargo aircraft, and Kitty Hawk agrees to wet lease a cargo aircraft to PEAC, under the terms of this Agreement. 3.0 DEFINITIONS AND USAGE 3.1 PRIMARY DEFINED TERMS. When used herein and capitalized, unless the context clearly indicates otherwise, these terms shall have these special meanings: AIRCRAFT: the Initial Aircraft identified in Paragraph 4.2(A), any Upgraded Aircraft under Paragraph 4.2(C), and any Substitute Aircraft under Paragraph 4.2(D) or 4.4, while any of them is operated hereunder. APPROVED FLIGHT DESTINATIONS: the airfields listed in Exhibit C, which may be amended from time to time under Paragraph 4.3(E). Aircraft Operating Lease Page 1 2 4/19/96 rev APPROVED MAINTENANCE PROGRAM: Kitty Hawk's FAA-approved maintenance program for the maintenance of Boeing 727 aircraft. APPROVED OPERATIONS SPECIFICATIONS: Kitty Hawk's FAA-approved operation specifications for Boeing 727 aircraft. ATO: the Philippine Air Transportation Office, and any successor to any of its functions. BASIC RENT: minimum monthly rent payable by PEAC under Paragraph 4.10. BLOCK HOUR: each whole or partial hour elapsing from the moment the chocks are removed from the wheels of the Aircraft for Flights until the chocks are next again returned to the wheels of the Aircraft; accumulated to two decimal places throughout each calendar month. CAB: the Philippine Civil Aeronautics Board, and any successor to any of its functions. COMMENCEMENT DATE: the day the Initial Aircraft first departs Kitty Hawk's DFW Facility for the Manila Airport. The parties anticipate that the Commencement Date will be on or about April 26, 1996. CONVENTION: the Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air, signed at Warsaw on October 12, 1929, or that convention as amended by the Hague Convention on September 28, 1955, and the Guadalajara Convention on September 18, 1961, whichever may be applicable. DFW FACILITY: Kitty Hawk's hangar at DFW Airport, Dallas, Texas. DOT: the U.S. Department of Transportation, and any successor to any of its functions. FAA: the U.S. Federal Aviation Administration, and any successor to any of its functions. FEASI: Federal Express Aviation Services, Inc. FLIGHT: a flight of the Aircraft during the Lease Term (i) to initially position the Initial Aircraft from the DFW facility to the Manila Airport, (ii) in connection with maintenance of the Aircraft as required or reasonably necessary under the Approved Maintenance Program or Approved Operations Specifications, (iii) under the Operating Aircraft Operating Lease Page 2 3 4/19/96 rev Schedule, or (iv) for a Special Charter Flight; but the term "Flight" does not include any positioning flight of any Upgraded or Substitute Aircraft, and does not include any repositioning flight of any Aircraft to the DFW Facility. FLYING PERSONNEL: Kitty Hawk's flight crews while assigned to the operation of the Aircraft. IATA: the International Air Transport Association. LEASE TERM: the period beginning on the Commencement Date and ending on the Termination Date. MAINTENANCE PERSONNEL: Kitty Hawk's maintenance personnel. MANILA AIRPORT: Manila Naia Airport, Philippines. OPERATING SCHEDULE: the schedule of repetitive Flights to be performed by the Aircraft, as set forth in Exhibit B, which may be amended from time to time under Paragraph 4.3(D), on routes between Jakarta, Singapore, Manila, and other Approved Flight Destinations. PEAC ACOC: the PEAC Aircraft Carrier Operating Certificate issued by the ATO. PHILIPPINES: the Republic of the Philippines. RENT: Basic Rent and Supplemental Rent. SPECIAL CHARTER FLIGHT: a Flight to be performed by the Aircraft under Paragraph 4.3(F). SUPPLEMENTAL RENT: any additional monthly rent payable by PEAC under Paragraph 4.10. TERMINATION DATE: midnight GMT on the second anniversary of the Commencement Date, or the earlier date on which this Agreement is terminated under Paragraph 4.4, 4.7(D), 4.18 or 4.19. TOTAL LOSS: any of the following events with respect to the Aircraft: (i) actual, constructive, compromised, agreed or arranged total loss or destruction of the Aircraft; or damage to the Aircraft rendering repair impracticable or uneconomical, or rendering the Aircraft permanently unfit for normal use for any reason; Aircraft Operating Lease Page 3 4 4/19/96 rev (ii) requisition of title to or use of, or other compulsory acquisition, requisition, capture, seizure, deprivation, confiscation, detention or prohibition of use of the Aircraft for any reason by any government, aeronautical authority, or competent authority, whether de jure or de facto; or (iii) hijacking, theft, disappearance, condemnation, confiscation or seizure of the Aircraft other than in circumstances referred to in the preceding clause (ii) which deprives PEAC of use of the Aircraft form more than two consecutive days. U.S.: the United States of America. 3.2 OTHER DEFINED TERMS. Other terms are defined elsewhere herein, with the defined term appearing in quotation marks within parentheses immediately following the defining term or phrase. When used in this Agreement, unless the context clearly indicates otherwise, those defined terms shall have those limited meanings. 3.3 USAGE. Defined terms may be used in the singular or plural. The words "hereof," "herein," "hereby," and "hereunder" always refer to this Agreement as a whole, and never to a particular provision. Unless otherwise clearly indicated, paragraph ("Paragraph") references are to paragraphs hereof. 4.0 COVENANTS, REPRESENTATIONS AND WARRANTIES 4.1 AGREEMENT TO LEASE. For the Lease Term and under the terms of this Agreement, Kitty Hawk agrees to wet lease the Aircraft to PEAC, and PEAC agrees to take the Aircraft on wet lease. 4.2 THE AIRCRAFT. A. The Aircraft described in Exhibit A (the "Initial Aircraft"), bears manufacturer's serial number 19484 and U.S. registration no. N6809, and is a Stage II aircraft powered by three Pratt & Whitney JT8D-9A engines. B. Kitty Hawk represents and warrants to PEAC that (i) Exhibit A accurately describes the Initial Aircraft, which is currently on Kitty Hawk's Approved Operations Specifications, (ii) the Initial Aircraft is under U.S. registration, has an FAA airworthiness certificate, and has all required U.S. governmental authority to carry general cargo for hire in the U.S., and (iii) to the best of Aircraft Operating Lease Page 4 5 4/19/96 rev Kitty Hawk's knowledge the Initial Aircraft is airworthy and has been maintained in all material respects in conformity with the Approved Maintenance Program and FAA requirements. Kitty Hawk further represents, warrants and promises that subparts (ii) and (iii) of the preceding sentence will be true as to any Upgraded or Substitute Aircraft; that subpart (ii) will at all times remain true as to the Aircraft throughout the Lease Term; and that Kitty Hawk will maintain the Aircraft so that subpart (iii) will at all times remain true as to the Aircraft throughout the Lease Term. KITTY HAWK MAKES NO OTHER REPRESENTATION OR WARRANTY THAT ANY AIRCRAFT IS OR WILL BE IN ANY RESPECT SUITABLE FOR THE PURPOSES OF THIS AGREEMENT. C. By giving to Kitty Hawk an upgrade notice no later than September 30, 1996, and selecting one of the following engine and hushkit configurations, PEAC may elect once to upgrade the Aircraft to a Boeing 727-200 Stage III aircraft, equipped with either (i) Pratt & Whitney JT8D-9 engines and a FEASI lightweight hushkit, or (ii) Pratt & Whitney JT8D-15 engines and a FEASI heavyweight hushkit. If PEAC so elects to upgrade the Aircraft, Kitty Hawk must no later than six months after receiving PEAC's election notice substitute the appropriate upgraded aircraft (an "Upgraded Aircraft") as the Aircraft hereunder, without the substitution disrupting, delaying or canceling any Flight under the Operating Schedule or any Special Charter Flight that Kitty Hawk has consented to operate. If PEAC does not give such an upgrade notice before October 1, 1996, it may do so later, but only if with Kitty Hawk's consent, which Kitty Hawk may withhold, or condition on increase in Basic or Supplemental Rent, delayed substitution of the Upgraded Aircraft, or extension of the Lease Term, if in Kitty Hawk's reasonable opinion (i) the cost, expense or difficulty of the delayed substitution of the Upgraded Aircraft would be materially greater than in the case of a timely notice, (ii) the remaining Lease Term would be insufficient to assure Kitty Hawk reasonable economic return for the dedication of increased capital investment required to supply the Upgraded Aircraft, or (iii) the delayed substitution of the Upgraded Aircraft would otherwise materially increase Kitty Hawk's cost of difficulty of performing hereunder. D. From time to time, for maintenance, operating or other reasons, Kitty Hawk may, with PEAC's prior written consent, which PEAC must not withhold unreasonably, substitute another aircraft (a "Substitute Aircraft") of the same model, Aircraft Operating Lease Page 5 6 4/19/96 rev configuration, registration and certification, and of equivalent capability, in place of the Aircraft for which the substitution is made. Kitty Hawk shall not permit such a substitution to disrupt, delay or cancel any Flight under the Operating Schedule or any Special Charter Flight that Kitty Hawk has consented to operate. A Substitute Aircraft in temporary use to enable necessary and prompt maintenance of the Aircraft for which the substitution is made need not be in PEAC livery. PEAC shall have no obligation to pay Rent or Supplemental rent for any Block Hours operated for substitution of Aircraft under this Paragraph 4.2(D), or to pay or reimburse any costs or expenses, including without limitation costs described in Paragraph 4.11, that are incurred by Kitty Hawk in connection with the substitution. E. Without relying upon any representation by Kitty Hawk except those in Paragraph 4.2(B), PEAC has determined that a Boeing 727-200 as described in Paragraph 4.2(A) is suitable to perform the Operating Schedule set out in Exhibit B. 4.3 OPERATIONS. A. On the Commencement Date, which must be no later than 30 days after Kitty Hawk receives PEAC's Security Deposit under Paragraph 4.10(G), Kitty Hawk must cause the Initial Aircraft to depart the DFW Facility for the Manila Airport, by the shortest reasonable routing, and must promptly after the Commencement Date position the Initial Aircraft to the Manila Airport in PEAC's livery, and be prepared to begin operations under the Operating Schedule. B. Throughout the Lease Term Kitty Hawk shall: 1. cause sufficient numbers of properly trained, certified, and licensed Flying Personnel (with valid air-transport pilot's licenses and appropriate type endorsements), being at least three flight crews, each including a captain, a first officer, and a flight engineer, to be stationed at Manila and elsewhere as required to operate the Aircraft so as to perform the Operating Schedule; 2. periodically and upon PEAC's request, report to PEAC all Flying Personnel staffing arrangements and plans; and give PEAC reasonable prior notice of any addition or substitution of Flying Personnel so as to give PEAC a reasonable opportunity to obtain all necessary permits, Aircraft Operating Lease Page 6 7 4/19/96 rev visas and other authorizations necessary for such addition or substitution; 3. arrange for the proper management, administration, and performance of maintenance of the Aircraft as may be reasonably required to enable the Aircraft to perform the Operating Schedule, by (i) contracting for commercial maintenance services, sufficient numbers of dedicated maintenance personnel, and adequate lockable parts-storage and office facilities to be provided for the Aircraft at Jakarta by KFS Aviation, Inc., or other reputable and competent maintenance organizations, (ii) establishing and maintaining at Jakarta, and elsewhere if reasonably necessary, a sufficient supply of appropriate spare parts as may be reasonably required to enable the Aircraft to perform the Operating Schedule (and reporting to PEAC before the Commencement Date and periodically upon PEAC's reasonable request thereafter, the principal spare parts in that spare parts supply), and (iii) causing sufficient numbers of properly trained, certified, and licensed Maintenance Personnel to be stationed at Jakarta and elsewhere; 4. periodically and upon PEAC's request, report to PEAC all contract maintenance arrangements and Maintenance Personnel staffing arrangements and plans; and give PEAC reasonable prior notice of any addition or substitution of Maintenance Personnel, so as to give PEAC a reasonable opportunity to obtain all necessary permits, visas and other authorizations necessary for such addition or substitution; 5. maintain the Aircraft in accordance with the Approved Maintenance Program, the Approved Operations Specifications, all FAA and manufacturers' directives, and all other laws, rules, regulations, airworthiness directives and orders of U.S. or other governmental authorities having jurisdiction, including performance of transit, service and maintenance checks that may be required from time to time (and give to PEAC reasonable advance notice of at least 30 days before scheduled "B" and "C" checks, and give to PEAC as much advance notice as is practicable in the case of any aircraft substitution arrangements necessitated by those checks or by any Aircraft Operating Lease Page 7 8 4/19/96 rev unanticipated maintenance required as a result of those checks); 6. operate the Aircraft in accordance with the Approved Maintenance Program, the Approved Operations Specifications, all FAA and manufacturers' directives, and all other laws, rules, regulations, airworthiness directives and orders of U.S. or other governmental authorities having jurisdiction, with qualified and properly-certificated, and properly-attired Flying Personnel, complying with all flight-time limitations imposed on Kitty Hawk's Flying Personnel by U.S. or other governmental authority; 7. keep the Aircraft clean internally and externally in accordance with internationally-accepted airline standards; 8. provide to PEAC all aircraft-related documentation necessary for the operation of the Aircraft, including a copy of Kitty Hawk's operator's certifications, as amended from time to time; 9. no later than five days after the end of each month during the Lease Term, deliver to PEAC copies of flight logs and such other certifications and data as are reasonably required for the timely calculation of Block Hours and for the timely payment of any Supplemental Rent; 10. provide all required initial and ongoing recurrent training of Flying and Maintenance Personnel; and provide and be responsible for all costs and expenses of third-party training and examiners, and of any required simulator and related Aircraft flying time solely for such training; 11. exert its best efforts to cause Flying and Maintenance Personnel to comply fully with all requirements of ATO and other non-U.S. authorities with respect to training, licensing, certification, and dress requirements applicable to the operations of the Aircraft; 12. exert its best efforts consistent with sound and efficient operating practice, while performing the Operating Aircraft Operating Lease Page 8 9 4/19/96 rev Schedule, to minimize flight and ground times of the Aircraft; 13. exert its best efforts to overcome any operational or technical problems and otherwise exert its best efforts to cause the Aircraft to perform (i) all Flights under and in accordance with the Operating Schedule, and (ii) all Special Charter Flights that Kitty Hawk has consented to operate; and 14. exert its reasonable good-faith efforts to conduct its operations hereunder and to cause its Flying and Maintenance Personnel at all times to conduct themselves hereunder in accordance with generally-accepted norms of competent, professional air-carrier conduct. C. During the Lease Term, Kitty Hawk must only operate the Aircraft on Flights hereunder. D. PEAC may from time to time amend the Operating Schedule by changing repetitive scheduled Flights, subject to Kitty Hawk's consent which it must not withhold unreasonably if the amendment does not materially increase Kitty Hawk's costs or difficulty of performance hereunder. PEAC must give to Kitty Hawk notice of any amendment to the Operating Schedule no later than 48 hours before each change in a required movement of the Aircraft; but Kitty Hawk acknowledges that special circumstances may make the required advance notice of amendment to the Operating Schedule impracticable, and in case of such circumstances, shall exert its reasonable efforts to accommodate requests on shorter notice. All Flights under the Operating Schedule must be within commercially-reasonable performance capabilities of the Aircraft, to and from Approved Flight Destinations, and on routes for which PEAC holds all relevant non-U.S. route licenses and other governmental authorizations. PEAC may not require changes to the Operating Schedule that would necessitate a temporary increase in the number of Flying Personnel assigned to the Aircraft. E. PEAC may from time to time add airfields to the Approved Flight Destinations by giving Kitty Hawk no less than 10 business days' advance written notice, but only if the FAA accepts the added airfields by endorsing the Approved Operations Specifications, and (ii) the added airfields will not materially increase Kitty Hawk's costs or difficulty of performance Aircraft Operating Lease Page 9 10 4/19/96 rev hereunder. Kitty Hawk acknowledges that special circumstances may make the required advance notice of addition of Approved Flight Destinations impracticable, and in case of such circumstances, shall exert its reasonable efforts to accommodate requests for addition of Approved Flight Destinations on shorter notice. F. PEAC may from time to time request that the Aircraft operate a Special Charter Flight, subject to Kitty Hawk's consent which it must not withhold unreasonably if performing the Special Charter Flight does not materially increase Kitty Hawks' costs or difficulty of performing hereunder. To request a Special Charter Flight, PEAC should give Kitty Hawk at least seven days advance notice to enable Kitty Hawk to make the necessary Flying Personnel and maintenance arrangements and to request any required endorsement of Special Charter Flight destinations on its Approved Operations Specifications; but Kitty Hawk acknowledges that special circumstances may make such advance notice impracticable, and in case of such circumstances, shall exert its reasonable efforts to accommodate requests for Special Charter Flights on shorter notice. All Special Charter Flights must be within commercially-reasonable performance capabilities of the Aircraft, to and from Approved Flight Destinations or other destinations that can be timely endorsed on the Approved Operations Specifications without material expense to Kitty Hawk, and on routes for which PEAC holds all relevant non-U.S. route licenses and other governmental authorizations. PEAC may not require Special Charter Flights that would necessitate a temporary increase in the number of Flying Personnel assigned to the Aircraft. G. Notwithstanding that Kitty Hawk and the Flying Personnel will perform all Flights at the request and on behalf of PEAC, that the Aircraft will be endorsed on the PEAC ACOC, and that the operation of the Flights will be monitored by the ATO; the parties acknowledge and agree that the Aircraft and its operations will at all times be under the direction and control of Kitty Hawk and of the captain of the flight crew of Flying Personnel then in charge of the Aircraft. The captain of that flight crew will have complete discretion concerning (i) the load carried, including the amount of cargo and its distribution, (ii) whether or not a Flight should be undertaken, (iii) when and where landings should be made, and (iv) all other matters relating to the operation of the Aircraft; and PEAC shall accept Aircraft Operating Lease Page 10 11 4/19/96 rev all such decisions of the captain of the flight crew of Flying Personnel then in charge of the Aircraft as final and binding. H. On all Flights under the Operating Schedule and on all Special Charter Flights, Kitty Hawk must carry only cargo tendered by PEAC, and must operate the Aircraft in PEAC's livery (except in the case of a temporary Substitute Aircraft as provided under Paragraph 4.2(D)), with flight crew uniformed as reasonably required by PEAC. I. Kitty Hawk must not, and must not be required to, operate the Aircraft in any way that violates (i) any U.S. law, rule or regulation, (ii) any law, rule or regulation of any other country having jurisdiction over the Aircraft, (iii) the Approved Operations Specification, (iv) the Approved Maintenance Program, (v) standard aircraft hull insurance operating limits or conditions, (vi) the dictates of good operating practice, or (vii) the terms and conditions of this Agreement. 4.4 TOTAL LOSS OF AIRCRAFT. If during the Lease Term the Aircraft suffers a Total Loss, Kitty Hawk must endeavor as soon as possible to replace the Aircraft with a Substitute Aircraft of the same model, configuration, registration and certification, and of equivalent capability, in place of the Aircraft for which the substitution is made, without charge to PEAC for Block Hours flown in the substitution, or any obligation of PEAC for other costs or expenses incurred in the substitution. If Kitty Hawk is unable so to replace the Aircraft with a Substitute Aircraft within 30 days after the occurrence of the Total Loss, this Agreement shall terminate without further liability of either party except as to rights and obligations accrued to such termination, and except that Kitty Hawk shall promptly return to PEAC any Rent prepaid to Kitty Hawk for any period following the occurrence of the Total Loss and any unreturned Earnest Money and Security Deposits that exceed PEAC's obligations to Kitty Hawk accrued to such termination. 4.5 U. S. AUTHORIZATIONS. Kitty Hawk represents and warrants to PEAC that it holds, and promises that it shall maintain in effect throughout the Lease Term, at Kitty Hawk's sole expense, (i) an FAA Part 121 air carrier certificate and all required DOT authority to carry general cargo for hire in the U.S., and (ii) all U.S. governmental authorizations required for Kitty Hawk to operate the Aircraft hereunder. 4.6 NON-U.S. OPERATING AUTHORIZATIONS. PEAC represents, warrants and promises to Kitty Hawk that PEAC holds or shall obtain, and shall maintain in effect throughout the Lease Term, at PEAC's sole expense, all authorizations and traffic rights by the CAB and other relevant non-U.S. civil Aircraft Operating Lease Page 11 12 4/19/96 rev aviation authorities required to enable Kitty Hawk's operation of the Aircraft on Flights without change of registration, so long as Kitty Hawk maintains and operates the Aircraft in accordance with the Approved Maintenance Program, the Approved Operations Specifications, and all other FAA and DOT requirements, but Kitty Hawk shall timely submit at no material cost to Kitty Hawk such applications and documentation as are requested by PEAC for such purposes. PEAC shall timely obtain all visas and work permits required by Flying Personnel and Maintenance Personnel for services hereunder, but Kitty Hawk shall timely submit to PEAC such applications and documentation as are requested by PEAC for such purposes, and Kitty Hawk shall promptly reimburse to PEAC on request all governmental fees or charges for such visas and work permits. 4.7 ON-TIME PERFORMANCE. A. Kitty Hawk shall exert its best efforts to perform all Flights under the Operating Schedule to arrive at each scheduled destination no later than 12 minutes after the scheduled arrival time. B. For purposes of determining whether Kitty Hawk has met the on- time-arrival standard of Paragraph 4.7(A), Kitty Hawk will be responsible, except as provided in Paragraph 4.7(C), for: 1. any arrival delay of more than 12 minutes from any scheduled arrival under the Operating Schedule, caused by Aircraft maintenance failure, by tardiness or unavailability of required Flying Personnel, or by any other operational matter within Kitty Hawk's control; and 2. any cancellation of a Flight under the Operating Schedule, caused by Aircraft maintenance failure, by tardiness or unavailability of required Flying Personnel, or by any other operational matter within Kitty Hawk's control, which cancellation of a Flight will be deemed an arrival delay of more than 12 minutes from schedule at the scheduled destination of that canceled flight. C. For purposes of determining whether Kitty Hawk has met the on-time-arrival standard of Paragraph 4.7(A), Kitty Hawk will not be responsible for any arrival delay or any cancellation of a Flight caused by: 1. weather conditions being below operating minimums at departure, destination or alternate airport; Aircraft Operating Lease Page 12 13 4/19/96 rev 2. any other weather conditions, unless the aircraft could have flown in such conditions in the absence of a maintenance failure; 3. departure delays attributable to completion of positioning of cargo on the aircraft less than 15 minutes prior to scheduled departure, or to inaccuracy of weight or deficiency in documentation or packaging of cargo; 4. departure delays attributable to fueling delays beyond Kitty Hawk's reasonable control; 5. air-traffic control or other governmental delays; 6. damage to the Aircraft by PEAC or its agents, by loading or unloading personnel, or by ground equipment; or 7. acts of God, fire, flood, strike, labor dispute, riot, insurrection, war, or any other cause beyond Kitty Hawk's reasonable control. D. If the Aircraft fails in any calendar month during the Lease Term to achieve a minimum level of 95% on-time arrival under the standards of Paragraphs 4.7(A), (B) and (C), PEAC may terminate the Agreement by giving 30 days' advance notice to Kitty Hawk, but only if PEAC gives such notice no later than 30 days after the end of the month of performance failure. 4.8 OTHER KITTY HAWK PERFORMANCE. A. Kitty Hawk shall during the Lease Term: 1. exert its best efforts to make available to PEAC general information relating to engineering or commercial matters that becomes known to Kitty Hawk and that may assist PEAC in the conduct of its business; 2. give immediate notice to PEAC on becoming aware of the details and circumstances of any action or anticipated action by the FAA, ATO, or any other person or entity, concerning alleged or actual violations or noncompliance with any law, rule or regulation, which may prejudice the continued operation of the Aircraft hereunder; Aircraft Operating Lease Page 13 14 4/19/96 rev 3. give prompt notice to PEAC upon becoming aware of any labor dispute that affects or may affect Kitty Hawk's performance hereunder. B. Kitty Hawk shall be responsible for repositioning the Aircraft to a destination of its choosing promptly after the Termination Date and for all costs and expenses of that repositioning. Moreover, Kitty Hawk shall promptly after the Termination Date remove PEAC's livery from the Aircraft, at Kitty Hawk's sole cost and expense. 4.9 CHARACTER, PACKAGING, DOCUMENTATION OF CARGO; CARGO LOSS LIMITATIONS. A. PEAC shall only tender to Kitty Hawk cargo that can be transported lawfully. B. PEAC shall cause all cargo to be prepared, packed, and loaded so as to endure safe transportation by proper handling in accordance with IATA regulations for the cargo concerned (including dangerous goods). Kitty Hawk shall have no responsibility for packaging or repackaging cargo. PEAC shall provide all necessary or appropriate shipping documentation, and shall provide Kitty Hawk timely and accurate weights on all cargo tendered. C. Kitty Hawk may reject any cargo that in the reasonable opinion of the Flying Personnel then in charge of the Aircraft is improperly loaded or in condition such that it could damage the Aircraft. However, such right of rejection is not intended or to be construed to relieve PEAC of any obligation properly to inspect, prepare, protect, pack, mark and document items for shipment, or to impose any liability or obligation upon Kitty Hawk. D. PEAC intends to use the Aircraft to carry its customers' general-cargo air freight. Loss or damage to such cargo can result from many unrelated causes, including delayed or incorrect handling, storage, packaging, loading, unloading, and ultimate delivery. KITTY HAWK SHALL NOT BE LIABLE FOR LOSS OF, DAMAGE TO, OR DELAY IN TRANSPORTATION OF ANY CARGO HEREUNDER, WHETHER ARISING IN CONTRACT OR IN TORT OR HOWEVER CAUSED, (I) EXCEPT AS REQUIRED BY THE CONVENTION OR OTHER APPLICABLE LAW, AND (II) EXCEPT FOR ANY SUCH CLAIM Aircraft Operating Lease Page 14 15 4/19/96 rev BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION RESULTING (A) FROM WILLFUL MISCONDUCT OF KITTY HAWK OR ITS FLYING OR MAINTENANCE PERSONNEL, OR (B) FROM THEIR ACTIONS DONE WITH INTENT TO CAUSE DAMAGE, OR DONE RECKLESSLY AND WITH KNOWLEDGE THAT DAMAGE WILL PROBABLY RESULT. PEAC SHALL INDEMNIFY KITTY HAWK AND HOLD IT HARMLESS AGAINST LIABILITY, LOSS AND COST OF DEFENSE UPON ALL CLAIMS FOR WHICH KITTY HAWK HAS NO LIABILITY UNDER THE PRECEDING SENTENCE. 4.10 RENTAL PAYMENTS. A. PEAC shall pay to Kitty Hawk for use of the Aircraft hereunder (i) minimum monthly rent ("Basic Rent") of [BLACKOUT] per calendar month during the Lease Term, plus (ii) additional monthly rent ("Supplemental Rent") of [BLACKOUT] per Block Hour for each Block Hour, if any, in excess of 212 Block Hours in each calendar month during the Lease Term. For any partial calendar month, these items shall be prorated per diem: (i) Basic Rent and (ii) the 212 monthly Block Hours before Supplemental Rent is due. B. If PEAC exercises its option under Paragraph 4.2(C) to upgrade the Aircraft, PEAC shall after substitution of the Upgraded Aircraft pay to Kitty Hawk for use of the Aircraft hereunder: 1. if the PEAC elects an Upgraded Aircraft equipped with JT8D-9 engines and a lightweight hushkit, (i) Basic Rent of [BLACKOUT] per calendar month during the remaining Lease Term plus (ii) Supplemental Rent of [BLACKOUT] per Block Hour in excess of 212 Block Hours in each full calendar month during the remaining Lease Term; and 2. if the PEAC elects an Upgraded Aircraft equipped with JT8D-15 engines and a heavyweight hushkit, (i) Basic Rent of [BLACKOUT] per calendar month during the remaining Lease Term plus (ii) Supplemental Rent of [BLACKOUT] per Block Hour in excess of 212 Block Hours in each full calendar month during the remaining Lease Term. C. For any calendar month that is partly but not entirely within the Lease Term, both (i) Basic Rent and (ii) the 212 monthly Block Hours before Supplemental Rent is due, shall be reduced so as to be in the ratio that (a) the number of days in that calendar month that are within the Lease Term bears to (b) the number of days in that calendar month. Aircraft Operating Lease Page 15 16 4/19/96 rev BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION D. If (i) any Flight under the Operating Schedule is canceled because of unavailability of the Aircraft caused by maintenance failure of any type, by Flying Personnel failure of any kind, or by any other operational matter within Kitty Hawk's control that is not described in Paragraph 4.7(C), and if (ii) the unflown Block Hours for that Flight would have been within the Block Hours covered by Basic Rent; then the Basic Rent for the month in which the Flight was canceled will be reduced by the amount of Basic Rent allocable to the unflown Block Hours, and Kitty Hawk shall promptly reimburse to PEAC any Basic Rent for those unflown Block Hours that PEAC had prepaid. E. If PEAC exercises its option under Paragraph 4.2(C) to upgrade the Aircraft, hours of operation of the replaced aircraft incurred in repositioning the replaced aircraft to the DFW Facility, and hours or operation of the aircraft being substituted incurred in positioning that aircraft to begin service as the Aircraft hereunder will not be Block Hours for which Basic or Supplemental Rent is payable, but PEAC will be obligated under Paragraph 4.11(C) to reimburse certain expenses incurred by Kitty Hawk in repositioning the replaced aircraft and in positioning the Substitute Aircraft. F. PEAC has delivered to Kitty Hawk a [BLACKOUT] earnest money deposit (the "Earnest Money Deposit") under the preliminary letter agreement between Kitty Hawk and PEAC dated March 6, 1996 (the "Preliminary Letter Agreement"), which Kitty Hawk may apply to costs to change the livery of the Initial Aircraft and to any other agreed costs to be reimbursed by PEAC that are incurred by Kitty Hawk before the Commencement Date. Kitty Hawk must no later than 30 days after the Commencement Date (1) account to PEAC for all expenditures charged against the Earnest Money Deposit, and (2) return the unused balance of the Earnest Money Deposit to PEAC, without interest. G. Promptly after execution and delivery of this agreement and before the Commencement Date, PEAC shall pay to Kitty Hawk a [BLACKOUT] deposit (the "Security Deposit"). At the end of the Lease Term, when PEAC has fully complied with its payment and indemnity obligations under the Agreement, Kitty Hawk shall promptly reimburse the Security Deposit to PEAC, with interest compounded annually at the rate of 5% per annum for the period Kitty Hawk holds the Security Deposit. Aircraft Operating Lease Page 16 17 4/19/96 rev H. Before the Commencement Date, PEAC shall pay in advance to Kitty Hawk the prorated Basic Rent for the Initial Aircraft for the period beginning with the Commencement Date and ending April 30, 1996. I. For each calendar month beginning with May 1996 and thereafter during the term hereof, PEAC shall pay to Kitty Hawk no later than 10 days after the end of such month (i) the Basic Rent and Supplemental Rent, if any, for such month, and (ii) any other amount payable by PEAC to Kitty Hawk under Paragraph 4.11. J. The Security Deposit and all Rent and other amounts payable by PEAC to Kitty Hawk hereunder shall be by wire transfer to Kitty Hawk's account, as follows: Bank One, Texas, N.A. Dallas, Texas, U.S.A. ABA number: 111000614 Account of: Kitty Hawk Aircargo, Inc. - Operating Account Account number: 0100128206 4.11 PEAC'S RESPONSIBILITIES AND PAYMENTS IN ADDITION TO RENT A. PEAC shall be responsible for arranging for provision of, and timely paying all costs and expenses incurred in connection with Flights for: 1. fuel for the Aircraft; 2. aircraft navigation, approach and departure, landing and parking permissions; 3. aircraft overflight rights and other required rights and permissions (except for U.S.); 4. Aircraft ground handling; and 5. cargo handling, containers, and loading and unloading expenses. B. PEAC shall be responsible for timely paying all costs and expenses incurred in connection with Flights (excluding maintenance Flights) for: Aircraft Operating Lease Page 17 18 4/19/96 rev 1. aircraft inflight communications fees, and all other communication costs reasonably incurred in connection with the operation of the Aircraft hereunder; 2. customs and immigration fees or charges; 3. any excise or sales taxes imposed by any government, except any U.S. state or federal government, upon rent payments hereunder; 4. ground transportation for Flying Personnel from accommodation to the Manila Airport and return, and hotel accommodations and related and necessary ground transportation for Flying Personnel while away from the Manila Airport in operations hereunder; 5. standard PEAC Aircraft catering; 6. a contribution toward crew-accommodation costs, payable to Kitty Hawk, in the amount of $3,000 per 3-person flight crew of Flying Personnel per month for up to three flight crews, and a reasonable addition contribution toward crew-accommodation costs, not to exceed $1,000 per person, for any additional Flying Personnel reasonably required from time to time to perform the Operating Schedule. 7. a lockable and secure parts-storage and office facility at the Manila Airport; 8. painting the Initial Aircraft in PEAC's livery before the Commencement Date (to be charged against the Earnest Money Deposit); and 9. if PEAC exercises its option under Paragraph 4.2(C) to upgrade the Aircraft, painting the Upgraded Aircraft in PEAC's livery before its substitution. C. If PEAC exercises its option under Paragraph 4.2(C) to upgrade the Aircraft, PEAC shall promptly reimburse to Kitty Hawk upon request Kitty Hawk's actual out-of-pocket expenses incurred in repositioning the replaced aircraft to the DFW Facility and in positioning the aircraft to be substituted, by the shortest reasonable routes (including without limitation fuel and aircraft Aircraft Operating Lease Page 18 19 4/19/96 rev inflight communications fees), and of repainting the replaced aircraft to change its livery. D. PEAC shall not be responsible, liable or obligated in any way to Kitty Hawk or any of its Flying or Maintenance Personnel for any taxes of any nature levied by any governmental authority with respect to employment or compensation of any Flying or Maintenance Personnel. 4.12 LIENS ATTRIBUTABLE TO PEAC. PEAC shall not permit any lien, claim or encumbrance to be created or to exist against the Aircraft as a result of any claim against PEAC or as a result of nonpayment of any cost or expense that is to be paid by PEAC under Paragraph 4.11. 4.13 KITTY HAWK'S PAYMENTS. Excepting costs and expenses to be paid by PEAC under Paragraph 4.11; and in addition to Kitty Hawk's payment obligations expressed elsewhere in this Agreement, Kitty Hawk shall pay all of its costs and expenses of owning, maintaining and operating the Aircraft; including without limitation A. salaries, crew accommodations, and standard employee benefits for Flying and Maintenance Personnel (including without limitation gross salaries, per diems, U.S. social security and medicare withholding and taxes, licenses, license validations, medical renewals, loss-of-license insurance, employee-benefit-plan contributions, and other employee benefits, if any, that are payable from time to time), and payroll administration and required U.S. withholding for Flying and Maintenance Personnel; B. oil, fluid and lubricants for the Aircraft; C. maintenance, parts and labor for the Aircraft, and all costs of shop-maintenance visits and positioning and repositioning operations of the Aircraft for any maintenance reasons whatsoever; D. aircraft hull, liability and war risk insurance upon the Aircraft required under Paragraph 4.14; and E. U.S. and Texas taxes, if any, attributable to Kitty Hawk's net income from the Agreement, and its capital and other business operations. Aircraft Operating Lease Page 19 20 4/19/96 rev 4.14 INSURANCE. Kitty Hawk must maintain in effect with respect to all Aircraft operations hereunder comprehensive airline liability insurance, including aircraft third-party, passenger, baggage, contractual, cargo, mail and airline general third-party liability insurance, including war and allied perils coverage where available, of at least $200 million combined single limit coverage, any one occurrence, each aircraft (but products in the aggregate), which must name PEAC as an additional insured, must waive subrogation and setoff against PEAC, must provide for severability of interest in all respects save the limit of liability, must be primary without right of contribution from any other insurance with respect to PEAC, and must not be cancelable without 30 days' advance written notice (except 7 days' advance written notice for termination of war and allied perils coverage) to PEAC. Kitty Hawk must within three business days after the execution of this Agreement deliver to PEAC a certificate evidencing such insurance, and if requested by PEAC, copies of insurance policies and endorsements providing such coverage. Kitty Hawk will also maintain in effect throughout the Lease Term such hull all-risk insurance covering the Aircraft, and all other aircraft, engines and spare parts involved in committed to operations hereunder, including war and allied perils coverage where available, as Kitty Hawk is required to maintain by financing covenant or regulatory requirement, or as Kitty Hawk in its discretion deems desirable, except that such hull insurance must waive subrogation against PEAC. If PEAC makes available to Kitty Hawk lower-cost alternative insurance coverage that is equivalent or better in all material respects, in Kitty Hawk's reasonable opinion, than the insurance coverage required or to be maintained by Kitty Hawk under this paragraph, Kitty Hawk must accept such alternative coverage in lieu of the insurance coverage required or to be maintained by Kitty Hawk hereunder, and Basic Rent for the Aircraft shall be adjusted to reflect Kitty Hawk's monthly premium savings for any period of such alternative coverage. 4.15 EXCLUSION OF WARRANTIES AND LIMITATION OF DAMAGES. Except for Kitty Hawk's express warranties elsewhere herein, KITTY HAWK WITH PEAC'S CONSENT DENIES AND EXCLUDES ALL WARRANTIES, EXPRESS AND IMPLIED, STATUTORY AND OTHERWISE, INCLUDING WITHOUT LIMITATION THAT THE AIRCRAFT IS OR WILL BE FIT FOR ANY PURPOSE. NEITHER KITTY HAWK NOR PEAC SHALL HAVE ANY RESPONSIBILITY TO THE OTHER FOR ANY INCIDENTAL, RESULTANT, OR CONSEQUENTIAL DAMAGES OF ANY KIND. 4.16 DENIAL OF AGENCY AND JOINT VENTURE. Kitty Hawk has no agency, joint venture or partnership relationship with PEAC, and neither this Agreement nor performance under it shall be deemed or construed to create an agency or joint venture relationship. Neither Kitty Hawk nor PEAC shall have the right hereunder to supervise, direct or control any employee of the other in any manner or for any purpose. Aircraft Operating Lease Page 20 21 4/19/96 rev 4.17 DENIAL OF COMMON CARRIER STATUS. Neither Kitty Hawk nor PEAC is a common carrier, and neither Kitty Hawk nor PEAC accepts the obligations of a common carrier. 4.18 KITTY HAWK DEFAULT. If Kitty Hawk fails timely and materially to comply with any of its obligations hereunder; and if Kitty Hawk fails to remedy such default within 20 business days after PEAC gives to Kitty Hawk notice of such default; then PEAC may without prejudice to any claim against Kitty Hawk terminate this Agreement for cause upon three business days' advance notice to Kitty Hawk. 4.19 PEAC DEFAULT. If PEAC fails timely to pay any Rent and fails to remedy such default within five business days after Kitty Hawk gives PEAC notice of such default, Kitty Hawk may without further notice suspend operations of the Aircraft hereunder. If PEAC fails timely and materially to comply with any of its other performance, payment or indemnity obligations hereunder, and (i) if PEAC fails to remedy such default within 20 business days after Kitty Hawk gives PEAC notice of such default, and (ii) if GD Express Worldwide fails to cure such PEAC default within five business days after Kitty Hawk gives GD Express Worldwide notice of such default in accordance with Paragraph 5.2, stating (i) that PEAC is in default of its obligations under the Agreement, (ii) that Kitty Hawk will terminate the term of the Agreement and seek to enforce its rights under the guaranty given under Paragraph 4.23(A)(2) if the default is not cured within five business days after the date of the notice, and (iii) the manner in which the default may be cured; then Kitty Hawk may without prejudice to any claim against PEAC or under any guaranty given under Paragraph 4.23(A)(2), terminate this Agreement for cause by notice to PEAC, permanently cease operations hereunder, and return the Aircraft to the U.S. 4.20 EARLY TERMINATION OF AGREEMENT. If this Agreement terminates under Paragraph 4.4, 4.7(D), 4.18 or 4.19, Kitty Hawk shall end operations of the Aircraft at the termination date, and Kitty Hawk shall promptly return to PEAC any Rent prepaid to Kitty Hawk for any period after the termination and any Earnest Money and Security Deposits to the extent that they in the aggregate exceed PEAC's obligations hereunder to Kitty Hawk accrued but unpaid to the date of such termination (including without limitation any damages for any breach by PEAC). 4.21 OTHER REPRESENTATIONS AND WARRANTIES. A. PEAC represents and warrants to Kitty Hawk that: 1. PEAC is a corporation that has been duly formed and is in good standing under the laws of the Philippines, and that Aircraft Operating Lease Page 21 22 4/19/96 rev it has full authority to execute, deliver and perform its obligations hereunder. 2. PEAC's execution, delivery and performance hereunder have been duly authorized by all requisite actions, and this Agreement, including without limitation the arbitration provisions of Paragraph 5.4, is enforceable against PEAC in accordance with its terms. B. Kitty Hawk represents and warrants to PEAC that: 1. Kitty Hawk is a corporation that has been duly formed and is in good standing under the laws of Texas, and that it has full authority to execute, deliver and perform its obligations hereunder. 2. Kitty Hawk's execution, delivery and performance hereunder have been duly authorized by all requisite action, and this Agreement, including without limitation the arbitration provisions of Paragraph 5.4, is enforceable against Kitty Hawk in accordance with its terms. 4.22 INDEMNITIES. A. Kitty Hawk shall indemnify PEAC and hold it harmless from and against liability, loss and cost of defense attributable to: 1. breach by Kitty Hawk of any of its representations and warranties in this Agreement, including without limitation any of its representations, warranties and covenants under Paragraphs 4.2(B) and 4.5; or 2. any claim that is the responsibility of Kitty Hawk under Paragraph 4.13. B. PEAC shall indemnify Kitty Hawk and hold it harmless from and against liability, loss and cost of defense attributable to: 1. breach by PEAC of any of its representations and warranties in this Agreement, including without limitation its representation, warranty and covenant under Paragraph 4.6; 2. any claim that is the responsibility of PEAC under Paragraph 4.11; or Aircraft Operating Lease Page 22 23 4/19/96 rev 3. breach by PEAC of any of its obligations under Paragraph 4.11. 4.23 OPINION OF COUNSEL; ASSURANCE OF PEAC PERFORMANCE. A. PEAC shall no later than three business days before the Commencement Date deliver to Kitty Hawk: 1. an opinion of counsel, in form and substance reasonably acceptable to Kitty Hawk, expressing favorable opinions as to the matters warranted by PEAC under Paragraph 4.21(A); and 2. a guaranty by GD Express Worldwide N.V. ("GD Express Worldwide"), or another entity acceptable to Kitty Hawk, subject to enforcement by arbitration under the terms of Paragraph 5.4, and otherwise in form and substance reasonably acceptable to Kitty Hawk, guaranteeing the performance, payment and collection of all of PEAC's obligations hereunder, including without limitation its payment obligations under Paragraphs 4.10 and 4.11 and its indemnity obligations under Paragraph 4.22(B); which guaranty may provide that the guarantor may terminate the guaranty only as to obligations incurred by PEAC after termination of the guaranty (and without diminishing the enforceability of the guaranty as to PEAC obligations incurred before the termination of the guaranty), if: (a) PEAC (or GD Express Worldwide, as PEAC's attorney-in-fact for such purposes, as provided in Paragraph 5.3(K)(1)) by notice to Kitty Hawk requests an assignment of the Agreement that complies with Paragraph 5.3(K)(1), so that Kitty Hawk's withholding its consent to the assignment would be unreasonable; and (i) Kitty Hawk fails timely to grant its consent to that requested assignment; and (ii) Kitty Hawk receives written notice from the guarantor at least five business days before the proposed termination of the guaranty that it will terminate unless Kitty Hawk grants its consent to the requested assignment before the proposed termination; or Aircraft Operating Lease Page 23 24 4/19/96 rev (b) the guarantor tenders a new and substitute guaranty, otherwise in the form and substance of, and subject to the requirements of, the original guaranty, and by a guarantor reasonably acceptable to Kitty Hawk, guaranteeing the performance, payment and collection of all of PEAC's obligations for the remainder of the Lease Term. B. If either of the conditions in Paragraph 4.23(A) is not timely satisfied, Kitty Hawk may terminate this Agreement by notice to PEAC, and if it does so shall promptly return to PEAC any payments that it has then received from PEAC, less any cost or expense incurred by Kitty Hawk to such time in connection with this Agreement, after which neither party shall have further obligation hereunder. 5.0 GENERAL PROVISIONS 5.1 AMENDMENTS. To amend this Agreement, Kitty Hawk and PEAC must sign a written amendment that identifies by paragraph number the provision that it purports to amend. No amendment shall be effective unless approved in writing by GD Express Worldwide. No noncomplying course of dealing shall be construed to amend this Agreement. 5.2 NOTICES. All notices hereunder must be in writing. Notices may be given by facsimile, telex, SITA, TNT courier or other physical delivery to a party at its initial notice address below, or to such other notice address as that party designates from time to time by notice to the other party. Delivery of a notice to a Kitty Hawk flight or maintenance crew member engaged in the operating or maintaining the Aircraft shall never be deemed giving of a notice to Kitty Hawk for purposes of this Agreement. Notices given by facsimile, telex or SITA shall be deemed given when transmitted if confirmation of receipt is obtained by answerback or fax confirmation. Other notices shall be deemed given when received at the notice address. Initial notice addresses are: A. if to PEAC: Pacific East Asia Cargo Airlines, Inc. P.O. Box No. 7776, Manila Domestic Airport Philippines Facsimile: (63-2) 832 3401 Attention: Captain B.S. Solis, Managing Director Aircraft Operating Lease Page 24 25 4/19/96 rev with a copy to: TNT International Aviation Services Archway House 114/116 St. Leonard's Road Windsor SL4 3DG Berkshire England Facsimile: (44-1753) 858172 SITA: Attention: Managing Director B. if to Kitty Hawk: Kitty Hawk Aircargo, Inc. P.O. Box 612787 1515 West 20th DFW Airport, Texas 75261 U.S.A. Facsimile: (214) 456-2296 Attention: Mr. Tilmon J. Reeves, President C. if to GD Express Worldwide for purposes of Paragraph 4.19: GD Express Worldwide N.V. Hoogoorddreef 61 1101 BE Amsterdam The Netherlands 5.3 CONSTRUCTION. A. The substantive law of the State of New York shall govern the effect and construction of this Agreement. The U.S. Federal Arbitration Act, and to the extent applicable the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, shall govern the effect and enforceability of provisions of this Agreement concerning arbitration, jurisdiction and venue. B. All dollar amounts hereunder are in U.S. dollars. C. A business day is any other than a Saturday, Sunday, or legal holiday in Texas or Manila. Aircraft Operating Lease Page 25 26 4/19/96 rev D. This Agreement binds and benefits the parties and their respective successors and assigns. E. All warranties and indemnities hereunder shall survive termination of this Agreement. F. No rule of construction resolving any ambiguity against a drafting party shall apply. G. Failure to enforce a default hereunder shall not be construed to be a waiver of such default or of any other default. H. This Agreement is the entire agreement between Kitty Hawk and PEAC with respect to the subject matter, and merges and supersedes all former agreements, promises or representations, whether oral or written, express or implied, including without limitation the Preliminary Letter Agreement, that relate in any way to the subject matter. I. If any provision of this Agreement is invalid or unenforceable, the remaining provisions shall be enforceable. J. Titles and headings are only for convenient reference and are not to be construed in interpretation. K. No party may assign to another any rights hereunder without the written consent of the other party, except as follows: 1. With the prior written consent of Kitty Hawk, which it may not withhold unreasonably, PEAC (or GD Express Worldwide, as PEAC's attorney-in-fact, and PEAC represents and warrants to Kitty Hawk that Kitty Hawk may at all times during the Lease Term rely upon the continuing effective authority of GD Express Worldwide to act as PEAC's attorney-in-fact for purposes of such assignment) may assign its rights under this Agreement to a company that forms part of the GD Express Worldwide N.V. Group of Companies, with a view to transferring the operation of the Aircraft from the South East Asia region into the GD Express Worldwide European Air Network, or into any other region in which GD Express Worldwide has established an air network, if (i) the assignee enforceably represents and warrants all matters represented and warranted by PEAC hereunder, and enforceably assumes and agrees to pay and perform all of Aircraft Operating Lease Page 26 27 4/19/96 rev PEAC's unperformed obligations hereunder, as they may be modified, if at all, by the proposed assignment, (ii) Kitty Hawk receives an opinion of counsel, in form and substance reasonably acceptable to Kitty Hawk, expressing a favorable opinion that the matters represented and warranted by PEAC under Paragraph 4.22(A) are also true as to the assignee, (iii) Kitty Hawk receives a new or renewed guaranty in form and substance reasonably acceptable to Kitty Hawk, guaranteeing the performance, payment and collection of all of the assignee's obligations hereunder, including without limitation its payment obligations under Paragraphs 4.10 and 4.11 and its indemnity obligations under Paragraph 4.22(B), with such modifications to the Agreement, if any, as may be proposed with the assignment, (iv) the assignment, with such modifications to the Agreement, if any, as may be proposed with the assignment, does not materially decrease Kitty Hawk's reasonably-predictable income from performance of the remainder of the Lease Term, or increase Kitty Hawk's difficulty of performance hereunder, and (v) PEAC or the assignee pays all costs and expenses reasonably incurred by Kitty Hawk in connection with the assignment. 2. Any assignment under the preceding Paragraph 5.3(K)(1) may also be a novation relieving PEAC of its obligations hereunder if PEAC has fulfilled all of its payment and indemnity obligations to the date of the assignment. L. Kitty Hawk must consent to a security assignment of PEAC's rights under this Agreement to GD Express Worldwide in connection with the granting of a guaranty under Paragraph 4.23(A)(2), if such security assignment: 1. does not allow the security assignee to exercise powers as assignee unless (a) PEAC defaults hereunder and fails timely to cure that default, or (b) GD Express Worldwide loses its ability to influence day-to-day operations of PEAC through share holding and corporate and contractual arrangements; and 2. does not otherwise modify the requirements in Paragraph 5.3(K), which GD Express Worldwide as security assignee must nevertheless fulfill, if it obtains the authority to exercise powers as assignee through the occurrence of one or both Aircraft Operating Lease Page 27 28 4/19/96 rev of the conditions in Paragraph 5.3(L)(1), before Kitty Hawk's obligations under this Agreement will be altered. M. Exhibits A, B and C are attached hereto and incorporated by this reference as parts of this Agreement. 5.4 AGREEMENT TO ARBITRATE DISPUTES. Any controversy or claim arising out of or relating to this Agreement, or to any breach of this Agreement, shall be settled exclusively by arbitration under the International Arbitration Rules of the American Arbitration Association (the "AAA"); but the locale of any such arbitration shall be New York, New York, or London, England, at the election of the party responding to the first arbitration demand filed with the AAA; arbitrators shall be U.S. or English nationals; and the language of the arbitration shall be English. Any suit to require arbitration hereunder, or to enforce judgment upon an arbitration award, may be brought in the U.S. District Court for the Southern District of New York or in a court of appropriate jurisdiction in London, England. A prevailing party in litigation to require arbitration, in arbitration, or in litigation to enforce an arbitration award shall be entitled to recover reasonable attorneys' fees and costs. KITTY HAWK AIRCARGO, INC. By: /s/ RICHARD R. WADSWORTH, JR. ----------------------------------------- Richard R. Wadsworth, Jr. Vice President PACIFIC EAST ASIA CARGO AIRLINES, INC. By: /s/ BENJAMIN S. SOLIS ----------------------------------------- Benjamin S. Solis Authorized representative of and on behalf of PEAC and of Amihan Management Services, Inc., PEAC's manager and agent Aircraft Operating Lease Page 28 29 EXHIBIT A AIRCRAFT SPECIFICATION Boeing 727-200 Aircraft bearing Manufacturer's Serial Number 19484 and U.S. Registration Number N6809 powered by three (3) Pratt & Whitney JT8D-9A engines. The Aircraft will be in a cargo configuration which will include cargo restraint systems to allow for the carriage of 125" X 88" and 108" X 88" ULD structural containers AAY and ABY IATA specifications in 12 positions. The Aircraft shall be fresh out of "C" Check and have: (i) Dual HF installation; (ii) Dual GPS (Trimble TNL 8100) or single GPS plus VLF/Omega GNS; and (iii) Corrosion Protection Corrosion Prevention cleared for a minimum of two (2) years. 30 EXHIBIT B OPERATING SCHEDULE
Flight No. Route Departure Time Arrival Time Days of Operation - ---------- ----- -------------- ------------ ----------------- PEC316 CGK-SIN 203OLT 2305LT 1,2,3,4 PEC316 CGK-SIN 1450LT 1725LT 6 PEC316 SIN-MNL 1825LT 2200LT 6 PEC316 SIN-MNL 0005LT 0340LT 2,3,4,5 PEC315 MNL-SIN 0425LT 0755LT 2,3,4,5 PEC315 SIN-CGK 1005LT 1040LT 2,3,4,5 PEC315 MNL-SIN 0905LT 1235LT 7 PEC315 SIN-CGK 1335LT 1410LT 7
Days of Operation: Monday is the first day of operation through to Sunday being the seventh day of operation All times quoted are Local Times for the respective points of departure and arrival. 31 EXHIBIT C APPROVED FLIGHT DESTINATIONS Cheju Clark Jakarta Johor Bahru Kaohsiung Kuala Lumpur Mactan Manila Pusan Seoul Singapore Subic Bay Taipei and all such other airfields as may be mutually agreed between Kitty Hawk and PEAC subject always to the appropriate government approvals to be obtained by PEAC and Kitty Hawk. EX-10.38 7 STOCK OPTION AGREEMENT 1 EXHIBIT 10.38 6/12/96 - ------------------------------------------------------------------------------- STOCK OPTION AGREEMENT - ------------------------------------------------------------------------------- 1.0 DATE AND PARTIES 1.1 DATE. This stock option agreement ("agreement") is dated and effective as of June 12, 1996. 1.2 PARTIES. The parties to this agreement are: A. Richard R. Wadsworth, Jr. ("Wadsworth") 4300 Stanford Dallas, TX 75225 B. Kitty Hawk, Inc. ("Kitty Hawk") Attention: Chief Executive Officer P.O. Box 612787 1515 West 20th DFW Airport, TX 75261 2.0 RECITATIONS 2.1 WADSWORTH. Wadsworth is vice-president of Kitty Hawk, a member of its board of directors, and its chief financial officer. He has contributed significantly to Kitty Hawk's success during his employment by Kitty Hawk, and Kitty Hawk wishes to provide additional incentive for his future contributions to Kitty Hawk's success. 2.3 CONSIDERATION. Kitty Hawk's covenants hereunder are in consideration of Wadsworth's past services and contributions to Kitty Hawk's success, and to supply additional incentives for his continuing contributions to Kitty Hawk's success. 3.0 OPTION TERMS 3.1 GRANT OF OPTION. Kitty Hawk grants to Wadsworth an option (the "option") to purchase from Kitty Hawk 125,000 shares (the "optioned shares") of Kitty Hawk's common stock, whose par value is $.01 per share, on the terms hereof. 3.2 TERM OF OPTION. The option shall be effective from the date hereof until the earliest of (i) the date at which all optioned shares have been delivered hereunder, (ii) December 31, 2015, or (iii) the date 12 months after Wadsworth's death; but the option is subject to early termination under Paragraph 3.10(D). Stock Option Agreement Page 1 2 6/12/96 3.3 EXERCISE. Wadsworth may exercise the option at any time, and from time to time, in whole or in part, in whole-share increments of not less than 5,000 shares at a time, by giving notice of exercise to Kitty Hawk, stating the number of shares to be purchased and confirming that the representations and warranties in paragraph 4.1 remain true as of the date of the notice with respect to the shares to be purchased under such notice. 3.4 EXERCISE PRICE. The exercise price shall be $.01 per share. The exercise price must be tendered in cash with the notice of exercise. 3.5 ISSUANCE. Kitty Hawk shall issue and deliver to Wadsworth the shares stated in a notice of exercise complying with this agreement, no later than 10 business days after receiving the notice. 3.6 INCOME TAX WITHHOLDING. If Kitty Hawk is required or entitled by applicable law to withhold taxes in connection with the delivery of any shares hereunder, at the time and as a condition of the delivery of such shares Wadsworth shall either (i) tender to Kitty Hawk the amount of such withholding in cash, or (ii) if then permitted by applicable law and with Kitty Hawk's consent (which Kitty Hawk may not withhold unreasonably), authorize Kitty Hawk to deduct from the number of shares to be delivered a number of shares of a value, determined by their then fair market value, equal to the amount of such withholding. Any shares deducted for withholding shall be deemed issued and delivered in determining the number of optioned shares that have been delivered hereunder. 3.7 OPTION VESTED, UNCONDITIONAL AND IRREVOCABLE. Wadsworth's rights hereunder are fully vested, unconditional and irrevocable during the term hereof. During Wadsworth's lifetime, termination of Wadsworth's employment by Kitty Hawk or any of its affiliates for any reason (including without limitation involuntary termination with or without cause, voluntary resignation, retirement or disability) shall not affect Wadsworth's rights hereunder. Nor are Wadsworth's rights hereunder conditioned on or subject to loss or diminution if during or after Wadsworth's employment by Kitty Hawk or any of its affiliates Wadsworth directly or indirectly engages in competition with Kitty Hawk or discloses any proprietary and confidential business information of Kitty Hawk or its affiliates in breach or violation of any agreement with or implied obligation to Kitty Hawk or any of its affiliates; but this sentence is not intended or to be construed as a waiver or relinquishment by Kitty Hawk of any existing or future claim or other remedy against Wadsworth for any such breach or violation. 3.8 RIGHTS AS STOCKHOLDER. Wadsworth shall have no rights as a stockholder with respect to any optioned shares that have not been delivered. 3.9 RIGHTS AS EMPLOYEE. This agreement neither confers upon Wadsworth any rights to continue in Kitty Hawk's employ, nor modifies any of Wadsworth's rights or obligations under his employment or other agreements with Kitty Hawk. 3.10 CHANGES IN CAPITALIZATION. A. This agreement does not affect in any way the right or power of Kitty Hawk to make adjustments, reclassifications, reorganizations, or changes of its Stock Option Agreement Page 2 3 capital structure, to merge or consolidate, to dissolve or liquidate, or to sell or transfer all or any part of its business or assets. B. If before the termination hereof, outstanding shares of Kitty Hawk's common stock are changed into, or exchanged for a different number or kind of shares or securities of Kitty Hawk through reorganization, merger, recapitalization, reclassification, stock split, reverse stock split, stock dividend, or similar transaction, the description of the undelivered optioned shares shall be deemed modified so that the undelivered optioned shares shall be of the same class and character as the holder of the optioned shares would have been entitled to receive had such undelivered optioned shares been delivered and outstanding before the change was effected. C. If Kitty Hawk is dissolved or liquidated, or is reorganized, merged, or consolidated with one or more other entities so that Kitty Hawk is not the surviving corporation; or if substantially all of Kitty Hawk's property is sold; then Wadsworth shall be entitled to receive for each undelivered optioned share upon exercise of the option, the cash, securities or property that Wadsworth would have been entitled to receive with respect to such optioned share had such optioned share been delivered and outstanding when the event was effected. D. Kitty Hawk may terminate this agreement as of the effective date of any reorganization, merger, consolidation, dissolution, liquidation or other change of capitalization of the types identified in Paragraphs 3.10(B) or (C), by notifying Wadsworth or his personal representative at least 30 days before the effective date of such event, and by permitting the exercise of the option as to all undelivered optioned shares during the 30-day period immediately preceding the effective date of such event. 3.11 REGISTRATION. If at any time Kitty Hawk registers any of any material portion of its common shares under the Securities Act of 1933, the Securities Exchange Act of 1934, any other federal securities-regulation statute, or any state securities act, or obtains exemption from such registration for the public offer or sale of such share, Kitty Hawk shall include in such registration or exemption Wadsworth's delivered shares and undelivered optioned shares hereunder in at least the same ratio as Kitty Hawk's common shares then held by or for M. Tom Christopher are included in such registration or exemption. 4.0 REPRESENTATIONS, WARRANTIES AND OTHER COVENANTS 4.1 WADSWORTH'S REPRESENTATIONS AND WARRANTIES. Wadsworth represents and warrants to Kitty Hawk that: A. Wadsworth holds his rights hereunder for his own account, without the participation of any other person, and with the intent of holding this agreement and all shares delivered hereunder ("delivered shares") for investment, and without the intent of participating, directly or indirectly, in Stock Option Agreement Page 3 4 6/12/96 a distribution of Kitty Hawk shares, and not with a view to, or for resale in connection with, any distribution of any part of the delivered shares or undelivered optioned shares. B. As chief financial officer and a member of the board of directors of Kitty Hawk, president of its aircraft-leasing subsidiary, and vice-president of its air-carrier subsidiary, Wadsworth has had full access to all material information relating to the business and affairs of Kitty Hawk, and has received all information and data with respect to Kitty Hawk and the optioned shares that he has requested and has deemed relevant in connection with his receipt of his rights hereunder. Wadsworth does not rely upon any representation or warranty by any person or entity with respect to the future value of, or income from, the optioned shares, but rather relies upon his own independent examination and judgment as to Kitty Hawk's prospects. 4.2 WADSWORTH'S SPECIAL COVENANTS. Wadsworth acknowledges, covenants and agrees with Kitty Hawk that: A. Neither this agreement nor the optioned shares are registered under any federal or state law relating to the registration of securities for sale, and this agreement is, and the optioned shares will be, issued and delivered in reliance on exemptions from registration under such laws. B. Wadsworth shall not offer for sale, sell or transfer any rights hereunder or any delivered shares except in accordance with applicable securities laws and with the provisions hereof. C. Except as provided in Paragraph 3.11, Kitty Hawk shall have no obligation to register delivered shares or to comply with any exemption available for Wadsworth sale of delivered shares without registration, and Kitty Hawk shall have no obligation to act in any manner so as to make Rule 144 under the Securities Act of 1933 available with respect to the sale of delivered shares by Wadsworth. D. A legend indicating that delivered shares have not been registered under the applicable securities laws, and referring to any applicable restrictions on transferability and sale of delivered shares, may be placed on any certificate delivered to Wadsworth with respect to any delivered shares, and any transfer agent of Kitty Hawk may be instructed to require compliance with any such legend. E. Wadsworth's exercise of this option as to any optioned shares, and acceptance of delivery of any delivered shares shall constitute Wadsworth's confirmation that all of his representations, warranties and covenants under Section 4.0 are true, correct and effective as of such time. 5.0 GENERAL PROVISIONS Stock Option Agreement Page 4 5 6/12/96 5.1 ASSIGNMENT. Wadsworth may not transfer, assign or grant any security interest in any rights hereunder. 5.2 AMENDMENTS. To terminate, amend, modify, supplement or waive any provision hereof, both parties must sign a written amendment that identifies by paragraph number the provision that it purports to amend. No noncomplying course of dealing shall be construed to amend this agreement. 5.3 NOTICES. Notices hereunder must be in writing. A notice may be given by United States certified mail, postage prepaid, return receipt requested, addressed to the intended recipient at its address in paragraph 1.2, or to such other notice address as that party designates by notice to the other party. If given by mail, a notice shall be effective three business days after mailing. A business day is any day other than a Saturday, Sunday, or legal holiday in Texas. A notice given by other means shall be effective only when received by the addressee. 5.4 WAIVER OF PUNITIVE AND CONSEQUENTIAL DAMAGES. BOTH PARTIES WAIVE, RELEASE, AND AGREE NOT TO SUE OR ASSERT ANY CLAIM (INCLUDING A CLAIM SUBJECT TO ARBITRATION) AGAINST ANY PARTY TO THIS AGREEMENT, OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS, FOR PUNITIVE OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY CLAIM IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT. 5.5 CONSTRUCTION. A. This agreement has been executed and delivered in Texas, whose substantive law (excluding conflict of laws rules that might apply the substantive law of another jurisdiction) shall govern its effect and construction, except that Delaware corporate law shall govern the internal affairs of Kitty Hawk and other corporate matters where applicable. This agreement merges and supersedes all prior oral or written agreements with respect to the subject matter. It binds the parties and their respective heirs, personal representatives, successors and assigns. B. Representations and warranties expressed herein shall survive investigation by either party and delivery of shares or other performance. C. No waiver of a noncompliance hereunder shall be construed to be a waiver of any other noncompliance. D. Titles and headings are only for convenient reference and are not to be construed in interpretation. E. When used herein, defined terms (in quotation marks within parentheses immediately following the defining term or phrase) have the defined meanings unless the context clearly indicates otherwise. Defined terms may be used in the singular or plural. The words "hereof," "herein," and Stock Option Agreement Page 5 6 6/12/96 "hereunder" always refer to this agreement as a whole, and never to a particular provision. Unless otherwise clearly indicated, section ("Section") and paragraph ("Paragraph") references are to sections and paragraphs hereof. 5.6 BINDING AGREEMENT TO ARBITRATE DISPUTES. All disputes under or relating to this agreement must be resolved exclusively by binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") in effect at the time the arbitration proceeding commences; except that (i) the locale of any arbitration shall be Dallas, Texas, (ii) the arbitrator or arbitrators shall with any final award supply written findings of fact and conclusions of law, and (iii) any party may seek from a court of competent jurisdiction any provisional remedy that may be necessary to protect its rights or assets pending the commencement of the arbitration or its determination of the merits of the controversy. The arbitration award shall be final and binding on all parties, and judgment upon such arbitration award may be entered in any court having jurisdiction. A prevailing party in arbitration or litigation about this agreement shall be entitled to recover its reasonable attorneys' fees and costs. KITTY HAWK: KITTY HAWK, INC. By: /s/ M. TOM CHRISTOPHER ------------------------------ M. Tom Christopher Chairman of the Board and Chief Executive Officer WADSWORTH: /s/ RICHARD R. WADSWORTH, JR. ------------------------------ Richard R. Wadsworth, Jr. Stock Option Agreement Page 6 EX-10.39 8 STOCK OPTION AND LIFE INSURANCE AGREEMENT 1 EXHIBIT 10.39 - -------------------------------------------------------------------------------- STOCK OPTION AND LIFE INSURANCE AGREEMENT - -------------------------------------------------------------------------------- 1.0 DATE AND PARTIES 1.1 DATE. This stock option agreement ("agreement") is dated and effective December 31, 1995. 1.2 PARTIES. The parties to this agreement are: A. Tilmon J. Reeves ("Reeves") 3210 Green Glen Dr. Carrollton, TX 75007 B. Kitty Hawk, Inc. ("Kitty Hawk") Attention: Chief Executive Officer P.O. Box 612787 1515 West 20th DFW Airport, TX 75261 2.0 RECITATIONS 2.1 REEVES. Reeves is president of Kitty Hawk, a member of its board of directors, and its chief operating officer. He has contributed significantly to Kitty Hawk's success during his employment by Kitty Hawk, and Kitty Hawk wishes to provide additional incentive for his future contributions to Kitty Hawk's success. 2.2 CONSIDERATION. Kitty Hawk's covenants hereunder are in consideration of Reeves past services and contributions to Kitty Hawk's success, and to supply additional incentives for his continuing contributions to Kitty Hawk's success. 3.0 OPTION TERMS 3.1 GRANT OF OPTION. Kitty Hawk grants to Reeves an option (the "option") to purchase from Kitty Hawk 318,026 shares (the "optioned shares") of Kitty Hawk's common stock, whose par value is $.01 per share, on the terms hereof. 3.2 TERM OF OPTION. The option shall be effective from the date hereof until the earliest of (i) the date at which all optioned shares have been delivered hereunder, (ii) December 31, 2005, or (iii) the date 12 months after Reeves' death; but the option is subject to early termination under Paragraph 3.10(D) and Paragraph 5.2. 3.3 EXERCISE. Reeves may exercise the option at any time, and from time to time, in whole or in part, in whole-share increments of not less than 5,000 shares at a time, by giving notice of exercise to Kitty Hawk, stating the number of shares to be purchased and STOCK OPTION AND LIFE INSURANCE AGREEMENT Page l 2 confirming that the representations and warranties in Paragraph 4.1 remain true as of the date of the notice with respect to the shares to be purchased under such notice. 3.4 EXERCISE PRICE. The exercise price shall be $.01 per share. The exercise price must be tendered in cash with the notice of exercise. 3.5 ISSUANCE. Kitty Hawk shall issue and deliver to Reeves the shares stated in a notice of exercise complying with this agreement, no later than 10 business days after receiving the notice. 3.6 INCOME TAX WITHHOLDING. If Kitty Hawk is required or entitled by applicable law to withhold taxes in connection with the delivery of any shares hereunder, at the time and as a condition of the delivery of such shares Reeves shall either (i) tender to Kitty Hawk the amount of such withholding in cash, or (ii) if then permitted by applicable law and with Kitty Hawk's consent (which Kitty Hawk may not withhold unreasonably), authorize Kitty Hawk to deduct from the number of shares to be delivered a number of shares of a value, determined by their then fair market value, equal to the amount of such withholding. Any shares deducted for withholding shall be deemed issued and delivered in determining the number of optioned shares that have been delivered hereunder. 3.7 OPTION VESTED, UNCONDITIONAL AND IRREVOCABLE. Reeves' rights hereunder are fully vested, unconditional and irrevocable during the term hereof. During Reeves' lifetime, termination of Reeves' employment by Kitty Hawk or any of its affiliates for any reason (including without limitation involuntary termination with or without cause, voluntary resignation, retirement or disability) shall not affect Reeves' rights hereunder. Nor are Reeves' rights hereunder conditioned on or subject to loss or diminution if during or after Reeves' employment by Kitty Hawk or any of its affiliates Reeves directly or indirectly engages in competition with Kitty Hawk or discloses any proprietary and confidential business information of Kitty Hawk or its affiliates in breach or violation of any agreement with or implied obligation to Kitty Hawk or any of its affiliates; but this sentence is not intended or to be construed as a waiver or relinquishment by Kitty Hawk of any existing or future claim or remedy against Reeves for any such breach or violation. 3.8 RIGHTS AS STOCKHOLDER. Reeves shall have no rights as a stockholder with respect to any optioned shares that have not been delivered. 3.9 RIGHTS AS EMPLOYEE. This agreement neither confers upon Reeves any rights to continue in Kitty Hawk's employ, nor modifies any of Reeves' rights or obligations under his employment or other agreements with Kitty Hawk. 3.10 CHANGES IN CAPITALIZATION. A. This agreement does not affect in any way the right or power of Kitty Hawk to make adjustments, reclassifications, reorganizations, or changes of its capital structure, to merge or consolidate, to dissolve or liquidate, or to sell or transfer all or any part of its business or assets. B. If before the termination hereof, outstanding shares of Kitty Hawk's common stock are changed into, or exchanged for a different number or kind of shares or securities of Kitty Hawk through reorganization, merger, recapitalization, STOCK OPTION AND LIFE INSURANCE AGREEMENT Page 2 3 reclassification, stock split, reverse stock split, stock dividend, or similar transaction, the description of the undelivered optioned shares shall be deemed modified so that the undelivered optioned shares shall be of the same class and character as the holder of the optioned shares would have been entitled to receive had such undelivered optioned shares been delivered and outstanding before the change was effected. C. If Kitty Hawk is dissolved or liquidated, or is reorganized, merged, or consolidated with one or more other entities so that Kitty Hawk is not the surviving corporation; or if substantially all of Kitty Hawk's property is sold; then Reeves shall be entitled to receive for each undelivered optioned share upon exercise of the option, the cash, securities or property that Reeves would have been entitled to receive with respect to such optioned share had such optioned share been delivered and outstanding when the event was effected. D. Kitty Hawk may terminate this agreement as of the effective date of any reorganization, merger, consolidation, dissolution, liquidation or other change of capitalization of the types identified in Paragraphs 3.10(B) or (C), by notifying Reeves or his personal representative at least 30 days before the effective date of such event, and by permitting the exercise of the option as to all undelivered optioned shares during the 30-day period immediately preceding the effective date of such event. 3.11 Registration. If at any time Kitty Hawk registers any material portion of its common shares under the Securities Act of 1933, the Securities Exchange Act of 1934, any other federal securities-regulation statute, or any state securities act, or obtains exemption from such registration for the public offer or sale of such share, Kitty Hawk shall include in such registration or exemption Reeves' delivered shares and undelivered optioned shares hereunder in at least the same ratio as Kitty Hawk's common shares then held by or for M. Tom Christopher are included in such registration or exemption. 4.0 REPRESENTATIONS, WARRANTIES AND OTHER COVENANTS 4.1 REEVES' REPRESENTATIONS AND WARRANTIES. Reeves represents and warrants to Kitty Hawk that: A. Reeves holds his rights hereunder for his own account, without the participation of any other person, and with the intent of holding this agreement and all shares delivered hereunder ("delivered shares") for investment, and without the intent of participating, directly or indirectly, in a distribution of Kitty Hawk shares, and not with a view to, or for resale in connection with, any distribution of any part of the delivered shares or undelivered optioned shares. B. As a principal executive officer and member of the board of directors of Kitty Hawk and its air-carrier subsidiary, Reeves has had full access to all material information relating to the business and affairs of Kitty Hawk, and has received all information and data with respect to Kitty Hawk and the optioned shares that he has requested and has deemed relevant in connection STOCK OPTION AND LIFE INSURANCE AGREEMENT Page 3 4 with his receipt of his rights hereunder. Reeves does not rely upon any representation or warranty by any person or entity with respect to the future value of, or income from, the optioned shares, but rather relies upon his own independent examination and judgment as to Kitty Hawk's prospects. 4.2 REEVES' SPECIAL COVENANTS. Reeves acknowledges, covenants and agrees with Kitty Hawk that A. Neither this agreement nor the optioned shares are registered under any federal or state law relating to the registration of securities for sale, and this agreement is, and the optioned shares will be, issued and delivered in reliance on exemptions from registration under such laws. B. Reeves shall not offer for sale, sell or transfer any rights hereunder or any delivered shares except in accordance with applicable securities laws and with the provisions hereof. C. Except as provided in Paragraph 3.11, Kitty Hawk shall have no obligation to register delivered shares or to comply with any exemption available for Reeves sale of delivered shares without registration, and Kitty Hawk shall have no obligation to act in any manner so as to make Rule 144 under the Securities Act of 1933 available with respect to the sale of delivered shares by Reeves. D. A legend indicating that delivered shares have not been registered under the applicable securities laws, and referring to any applicable restrictions on transferability and sale of delivered shares, may be placed on any certificate delivered to Reeves with respect to any delivered shares, and any transfer agent of Kitty Hawk may be instructed to require compliance with any such legend. E. Reeves' exercise of this option as to any optioned shares, and acceptance of delivery of any delivered shares shall constitute Reeves' confirmation that all of his representations, warranties and covenants under Section 4.0 are true, correct and effective as of such time. 5.0 LIFE INSURANCE 5.1 INSURANCE POLICY AND PREMIUMS. During the term of the option, in each calendar year in which at the beginning of the year there are undelivered optioned shares hereunder, Kitty Hawk shall pay to a life insurance company of Reeves' selection the annual premium (the "annual premium") required to maintain in force a term life insurance policy (the "insurance policy") insuring Reeves' life for an amount equal to the product of (i) $1,600,000.00 multiplied by (ii) a fraction of which (a) the numerator is the number, on the first day of such calendar year, of undelivered optioned shares hereunder as to which Reeves has given no notice of exercise, and (b) the denominator is 318,026; on the conditions that the insurance policy must be issued to and held by Reeves; that the beneficiary must at all times be Reeves' estate or his spouse; and that the annual premium does not exceed 150% of the standard premium for such a policy for a man of Reeves' age. Kitty Hawk shall have no interest in the insurance policy. Kitty Hawk shall also pay on Reeves' behalf the federal income tax withholding attributable to Kitty Hawk's payment of STOCK OPTION AND LIFE INSURANCE AGREEMENT Page 4 5 the annual premium. Annual premiums and related withholding paid by Kitty Hawk hereunder shall be treated as compensation to Reeves, but shall not reduce any other compensation to which Reeves is entitled under other compensation or bonus agreements and plans. 5.2 CONDITIONAL TERMINATION OF OPTION. If Reeves dies when there are undelivered optioned shares hereunder, and if Kitty Hawk has fulfilled its obligations under Paragraph 5.1, then the option granted in Paragraph 3.1 shall upon Reeves' death automatically terminate as to all undelivered optioned shares, and no estate, personal representative, heir, or other person or entity shall have any claim hereunder with respect to any undelivered optioned shares. 6.0 GENERAL PROVISIONS 6.1 ASSIGNMENT. Reeves may not transfer, assign or grant any security interest in any rights hereunder. 6.2 AMENDMENTS. To terminate, amend, modify, supplement or waive any provision hereof, both parties must sign a written amendment that identifies by paragraph number the provision that it purports to amend. No noncomplying course of dealing shall be construed to amend this agreement. 6.3 NOTICES. Notices hereunder must be in writing. A notice may be given by United States certified mail, postage prepaid, return receipt requested, addressed to the intended recipient at its address in paragraph 1.2, or to such other notice address as that party designates by notice to the other party. If given by mail, a notice shall be effective three business days after mailing. A business day is any day other than a Saturday, Sunday, or legal holiday in Texas. A notice given by other means shall be effective only when received by the addressee. 6.4 WAIVER OF PUNITIVE AND CONSEQUENTIAL DAMAGES. BOTH PARTIES WAIVE, RELEASE, AND AGREE NOT TO SUE OR ASSERT ANY CLAIM (INCLUDING A CLAIM SUBJECT TO ARBITRATION) AGAINST ANY PARTY TO THIS AGREEMENT, OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS, FOR PUNITIVE OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY CLAIM IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT. 6.5 CONSTRUCTION. A. This agreement has been executed and delivered in Texas, whose substantive law (excluding conflict of laws rules that might apply the substantive law of another jurisdiction) shall govern its effect and construction, except that Delaware corporate law shall govern the internal affairs of Kitty Hawk and other corporate matters where applicable. This agreement merges and supersedes all prior oral or written agreements with respect to the subject matter. It binds the parties and their respective heirs, personal representatives, successors and assigns. B. Representations and warranties expressed herein shall survive investigation by either party and delivery of shares or other performance. STOCK OPTION AND LIFE INSURANCE AGREEMENT Page 5 6 C. No waiver of a noncompliance hereunder shall be construed to be a waiver of any other noncompliance. D. Titles and headings are only for convenient reference and are not to be construed in interpretation. E. When used herein, defined terms (in quotation marks within parentheses immediately following the defining term or phrase) have the defined meanings unless the context clearly indicates otherwise. Defined terms may be used in the singular or plural. The words "hereof," "herein," and "hereunder" always refer to this agreement as a whole, and never to a particular provision. Unless otherwise clearly indicated, section ("Section") and paragraph ("Paragraph") references are to sections and paragraphs hereof. 6.6 BINDING AGREEMENT TO ARBITRATE DISPUTES. All disputes under or relating to this agreement must be resolved exclusively by binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") in effect at the time the arbitration proceeding commences; except that (i) the locale of any arbitration shall be Dallas, Texas, (ii) the arbitrator or arbitrators shall with any final award supply written findings of fact and conclusions of law, and (iii) any party may seek from a court of competent jurisdiction any provisional remedy that may be necessary to protect its rights or assets pending the commencement of the arbitration or its determination of the merits of the controversy. The arbitration award shall be final and binding on all parties, and judgment upon such arbitration award may be entered in any court having jurisdiction. A prevailing party in arbitration or litigation about this agreement shall be entitled to recover its reasonable attorneys' fees and costs. KITTY HAWK: KITTY HAWK, INC. By: /s/ M. TOM CHRISTOPHER ------------------------------ M. Tom Christopher Chairman of the Board and Chief Executive Officer REEVES: /s/ TILMON J. REEVES ---------------------------------- Tilmon J. Reeves STOCK OPTION AND LIFE INSURANCE AGREEMENT Page 6 EX-10.45 9 PURCHASE AGREEMENT 1 EXHIBIT 10.45 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURCHASE AGREEMENT between FEDERAL EXPRESS CORPORATION and POSTAL AIR, INC. Dated: October 22, 1992 2 TABLE OF CONTENTS RECITALS ............................................................... 1 DEFINITIONS ............................................................ 2 ARTICLE 1 -- SUBJECT OF AGREEMENT Section 1.1 Sale of Kits by Federal to Buyer ............... 5 Section 1.2 Installation Facility .......................... 5 Section 1.3 Delivery of Kits ............................... 5 Section 1.4 Condition of Aircraft at Modification .......... 5 Section 1.5 Grant of Limited License ....................... 6 Section 1.6 Kits to Conform to STC Specifications .......... 6 Section 1.7 Kit Delivery Schedule .......................... 6 ARTICLE 2 -- PRICE AND PAYMENT Section 2.1 Payment Schedule and Amount .................... 7 Section 2.2 Late Payments .................................. 7 Section 2.3 Federal's Termination Right .................... 7 Section 2.4 Title .......................................... 8 Section 2.5 Taxes .......................................... 9 ARTICLE 3 -- DELIVERY AND RISK OF LOSS Section 3.1 Delivery of Kits ............................... 10 Section 3.2 Risk of Loss ................................... 10 Section 3.3 Delivery of Manuals, Etc. ...................... 10 ARTICLE 4 -- INDEMNIFICATION Section 4.1 Buyer's Indemnification ........................ 11 ARTICLE 5 -- WARRANTY Section 5.1 Warranty by Federal ............................ 12 Section 5.2 Limitation of Warranty ......................... 12 Section 5.3 Assignment of Manufacturers' Warranties ........ 14 Section 5.4 Buyer's Acts or Omissions ...................... 14 Section 5.5 Exclusive Remedy ............................... 15 -i- 3 ARTICLE 6 -- INSURANCE Section 6.1 Buyer's Insurance .................................. 16 ARTICLE 7 -- RIGHTS IN DATA Section 7.1 Data Rights ........................................ 17 Section 7.2 Confidentiality .................................... 17 ARTICLE 8 -- PATENT PROTECTION Section 8.1 Patent Indemnity ................................... 19 Section 8.2 Limitations of Liability ........................... 19 ARTICLE 9 -- EXCUSABLE DELAY Section 9.1 Excusable Delay .................................... 21 ARTICLE 10 -- EVENTS OF DEFAULT Section 10.1 Events of Default ................................ 22 Section 10.2 Remedies ......................................... 23 ARTICLE 11 -- SUPPORT SERVICES Section 11.1 Support Services ................................ 24 ARTICLE 12 -- APPLICABLE LAW, MERGER -- NOTICES Section 12.1 Exclusive Agreement; Applicable Law ............. 25 Section 12.2 Notices ......................................... 25 Section 12.3 Waiver .......................................... 26 Section 12.4 Assignment ...................................... 26 Section 12.5 Non-Disclosure .................................. 26 Section 12.6 Transfer of Aircraft or Engines ................. 27 EXHIBITS EXHIBIT A -- AIRCRAFT CONFIGURATION SPECIFICATION EXHIBIT B -- STAGE 3 KIT SPECIFICATIONS EXHIBIT C -- DELIVERY SCHEDULE EXHIBIT D -- PURCHASE PRICE & PAYMENT SCHEDULE EXHIBIT E -- DATA, MANUALS AND TECHNICAL DOCUMENTATION EXHIBIT F -- ESCALATION FORMULA -ii- 4 PURCHASE AGREEMENT This Aircraft Equipment Sales Agreement, dated as of October 22, 1992 ("Agreement"), between Federal Express Corporation, a Delaware Corporation ("Federal") and Postal Air, Inc., a Texas Corporation, ("Buyer"). RECITALS 1. Federal has developed a kit consisting of various component parts (the "Kits") suitable for installation on Boeing Model 727 aircraft to enable such aircraft to meet the Stage 3 noise standards of Part 36 of the Federal Aviation Regulations in effect as of the date of this Agreement, attached hereto as Exhibit A; 2. Federal has obtained a Supplemental Type Certificate ("STC"), enabling Federal to license modification of such aircraft to comply with Stage 3. 3. Buyer is the owner of certain Boeing 727 aircraft with configurations as outlined in Exhibit A attached hereto and incorporated herein (the "Aircraft") and desires to contract with Federal for the sale of the Kits, and desires to have the Aircraft modified to meet Stage 3 through the installation of the Kits by the Installation Facility, as hereinafter defined. NOW, THEREFORE, in consideration of the mutual covenants herein contained, Federal and Buyer agree as follows: -1- 5 DEFINITIONS In addition to the words and terms elsewhere defined in this Agreement, the following words and terms as used in this Agreement shall have the following meanings unless some other meaning is apparent from the context in which the words and terms are used: Additional Work. Any repair, maintenance or modification of the Aircraft deemed necessary prior to or during the Installation of the Kit by the Installation Facility, as further described in Section 1.2 of the Agreement. Aircraft. Buyer's Boeing Model 727 Aircraft, individually or collectively, and including all engines, parts, components, equipment and accessories installed thereon, on which the Kits shall be installed and as specified in Exhibit A. All references to Boeing Model 727 and 727 aircraft throughout this Agreement shall specifically mean the eligible aircraft configurations identified in Exhibit A. Aircraft Kit(s). The Heavyweight Kit(s), Heavyweight Upgrade Kit(s) or the Lightweight Kit(s), collectively or individually. Configuration Specification. The specification describing the required configuration of the Aircraft, to be configured by Buyer, prior to installation of the Kits as set forth in Exhibit A of the Agreement. Delivery. The delivery of a Kit by Federal to Buyer. Delivery Date. The date of delivery of a Kit by Federal to Buyer. FAA. The United States Federal Aviation Administration, or any successor. Facility. The facility operated by the Installation Facility for performance of the modification. -2- 6 Federal's Facility. The warehousing facility maintained or caused to be maintained by Federal. Heavyweight Kit. One shipset of noise reduction kit hardware, consisting of various component parts suitable for Installation on the Aircraft, for modification of an aircraft and the three Engines installed thereon, together with relevant data, manuals and documents, and meeting the requirements and specifications hereof and similar to those set forth in Exhibit B. Heavyweight Upgrade Kit. One shipset of noise reduction hardware, consisting of various component parts suitable for Installation on an Aircraft which has a Lightweight Kit properly installed, together with relevant data, manuals and documents, and meeting the requirements hereof and as set forth in Exhibit B. Installation Facility. The third party, if any, selected by Buyer in accordance with Section 1.2 hereof to perform the Installation. Installation. The installation by the Installation Facility of the Kit on Buyer's Aircraft in accordance with the STC Specifications. Kit. The shipsets of noise reduction kits consisting of various component parts suitable for installation on the Aircraft, purchased by Buyer pursuant to the terms and conditions of the Agreement. Kit Delivery Schedule. A schedule setting forth the Delivery Dates of the Kits, as further described in Exhibit B, as amended from time to time. Lightweight Kit. One shipset of noise reduction hardware, consisting of various component parts suitable for Installation on the Aircraft, for modification of an aircraft and the three Engines installed thereon, together with relevant data, manuals and documents, and meeting the requirements and specifications hereof and as set forth in Exhibit B. -3- 7 Stage 3. The Stage 3 noise standards of the Federal Aviation Regulations, 14 C.F.R. Part 36, as in effect on the date hereof. Purchase Price. The price to be paid by Buyer to Federal for the purchase of the Kits as specified in Exhibit D. STC. A Supplemental Type Certificate issued by the FAA. Specifications. The specifications for the Kit as described in Exhibit A. -4- 8 ARTICLE 1 SUBJECT OF AGREEMENT Section 1.1 - Sale of Kits by Federal to Buyer. Federal hereby sells to Buyer and Buyer purchases from Federal, the Kits for installation on Buyer's Aircraft, pursuant to the terms and subject to the conditions of this Agreement. Buyer agrees and represents to Federal that the Kits are being purchased for and will be installed on the Aircraft and that such Aircraft are owned by Buyer. Section 1.2 - Installation Facility. The Installation of the Kits shall be performed by the Installation Facility designated by Buyer, provided, however, that Buyer shall select the Installation Facility from the list of approved Installation Facilities, to be furnished by Federal as such list may be amended from time to time. Federal shall have the right, at any time and upon notification to Buyer, to designate another or a different approved Installation Facility and Buyer hereby consents to such designation. Section 1.3 - Delivery of Kit. The Kit Delivery shall be F.O.B. Federal's Facility. Section 1.4 - Condition of Aircraft at Induction. At induction of the Aircraft into the Facility, the Aircraft shall be airworthy, in operable condition and suitable for the Installations specified in Exhibit A. The Installation Facility shall perform an inspection of the Aircraft and provide Buyer's representative at the Facility, with a copy to Federal, with the results of the inspection as promptly as possible after arrival of the Aircraft at the Facility, taking into account the need for the scheduling of Kit Installation activity at the Facility. The Installation costs, including but not limited to, any cost associated with upgrading to short-track cascade thrust reversers and all costs for work necessary to put the Aircraft in the proper condition for Installation, shall be paid by Buyer. Any repair, maintenance -5- 9 or modification of the Aircraft deemed necessary prior to or during the Installation of the Kits and required as a prerequisite for performance of the Installation ("Additional Work") will be determined by the Installation Facility and Federal and may not be deferred or rejected by Buyer, and the charges and costs, including but not limited to the charges and costs of the Installation Facility, relating thereto shall be the obligation of Buyer and not of Federal. Federal shall have no responsibility or liability whatsoever with respect to the Installation or Additional Work performed by the Installation Facility. Buyer hereby agrees that any repair, maintenance or modification of the Aircraft prior to or during the Installation beyond those required by the STC shall be the sole responsibility of the Buyer, and Buyer hereby indemnifies and holds harmless Federal, its officers, directors, employees, agents, contractors or subcontractors against any claims from Buyer or any party claiming through Buyer or any third party, may hereafter assert with respect to such repairs, maintenance or modifications. Section 1.5 - Grant of Limited License. Upon Installation of the Kit, and subject to the terms and conditions of this Agreement, Federal will grant to Buyer, and Buyer will accept the grant of a paid-up, non-exclusive, limited license to use the STC on the modified Aircraft. Section 1.6 - Kits to Conform to STC Specifications. Subject to proper Installation, Federal warrants that the Kits shall conform to the Specifications, as described in Exhibit A, and the Aircraft will comply with Stage 3 at the specified weights stated in the Specifications without operational degradation. Section 1.7 - Kit Delivery Schedule. Upon execution of this Agreement and payment by Buyer of the portion of the Purchase Price stated herein, Federal shall assign and reserve for Buyer a position for each of Buyer's Kits on the Kit Delivery Schedule maintained by Federal for Kit deliveries as specified in Exhibit B. -6- 10 ARTICLE 2 PRICE AND PAYMENT Section 2.1 - Payment Schedule and Amount. In consideration for the sale of the Kits, and granting of the limited license, Buyer agrees to pay Federal the amount per Kit (the "Purchase Price") and at the times set forth in Exhibit D, which amounts shall be paid in full, unless Federal has failed to perform its obligations under this Agreement or this Agreement shall have been terminated as to such Kits pursuant to Section 2.3. The Purchase Price is subject to adjustment by Federal at any time to reflect any changes in the Purchase Price due to taxes or any changes required pursuant to any law or governmental regulation or requirement or interpretation thereof established by any governmental agency in order for Federal to be able to maintain the STC. All payments to be made hereunder shall be made in United States currency, and in immediately available funds in accordance with the Payment Schedule set forth in Exhibit D. Federal shall have no obligation to deliver the Kits until Buyer has made all payments required under this Agreement. Section 2.2 - Late Payments. If any payments due under this Agreement from Buyer are not paid when due, the Buyer shall pay interest on such overdue amounts at the rate of eighteen percent (18%) per annum or the highest legal rate under applicable law, whichever is lower. Federal shall not be obligated to perform any future obligation under this Agreement unless Buyer shall have paid in full the Purchase Price and all other amounts due and owing to Federal under this Agreement. Section 2.3 - Federal's Termination Right. (a) In addition to the remedies set forth in Article 10, if Buyer fails to make any payment under this Agreement -7- 11 within ten (10) days of the date that such payment is due, Federal, may, in its sole discretion, terminate this Agreement upon five (5) days written notice to Buyer. Upon such termination, Federal shall be entitled to retain any monies, including any deposits paid by Buyer pursuant to this Agreement, and shall further be entitled to compensation for the value of all materials purchased and any services performed pursuant to this Agreement, and any other damages available to Federal under applicable laws. Upon such termination by Federal neither party shall have any further obligations one to the other with respect to any undelivered Kits except that the rights and obligations of the parties under Section 2.4 and Articles 4 and 7 shall survive such termination. (b) If Buyer fails to make timely payments according to the Payment Schedule stated in Exhibit D, Federal shall, in addition to the remedies set forth in Section 2.3(a) above and Section 10, be entitled, at its sole option, to reassign Buyer's Delivery Date and notify Buyer of such reassignment and advise Buyer of the next available Delivery Date. If Federal elects to reassign Buyer's Delivery Date as described above, Federal shall have the right to require Buyer to pay to Federal a penalty fee of $50,000.00 per rescheduled Kit, plus any increase in the Purchase Price if such reassigned Delivery Date occurs during a period in which Federal's standard purchase price for the sale of the Kits is higher than the Purchase Price set forth in this Agreement. Section 2.4 - Title. Title to the Kits shall not pass to Buyer (or any other party) until Buyer has made all payments required by it under this Agreement with respect to the Kits. Federal shall retain a purchase money security interest in the Kits until full payment therefor is made. This Agreement shall serve, for purposes of perfecting Federal's purchase money security interest in the Kits, as a Security Agreement, and Federal as Buyer's agent and attorney-in-fact, may file this -8- 12 Agreement with such governmental entitles as Federal deems advisable in order to perfect its security interest in the Kits. Buyer agrees to execute any and all documents as may be necessary to perfect the security interest granted pursuant to this section. In no event shall Buyer have, obtain or assert any right, title or interest in the STC except as specified in this Agreement. Section 2.5 - Taxes. (a) The Purchase Price does not include, and Buyer shall be liable for, all property, sales, use, excise or any other similar taxes and customs or other duties which may be applicable to this Agreement, the sales of Kits, the Installation, and the limited license of the STC under this Agreement (the "Taxes"), other than taxes on or measured by Federal's net income. Buyer shall promptly remit to Federal and shall indemnify, defend and hold Federal, its officers, employees and directors, harmless from and against all such Taxes, customs or other duties and all interest and any penalties assessed in connection with such Taxes, customs or other duties. (b) The provisions of this Section 2.5 shall survive the completion of the transactions contemplated by this Agreement or its earlier cancellation or termination, and if any such Taxes, duties, interest or penalties are at any time levied against or sought from Federal, Buyer shall promptly reimburse Federal in full with respect to any such levy. -9- 13 ARTICLE 3 DELIVERY AND RISK OF LOSS Section 3.1 - Delivery of Kits. The Delivery shall be performed in accordance with the Kit Delivery Schedule described in Exhibit C, F.O.B. Federal's Facility. Section 3.2 - Risk of Loss. Risk of loss and damage to or destruction of the Kit shall transfer from Federal to Buyer upon Delivery of the Kits at Federal's Facility. Section 3.3 - Delivery of Manuals, Etc. Federal shall deliver to Buyer, in accordance with the Kit Delivery Schedule, such data, manuals and other documents as set forth in Exhibit E. -10- 14 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ARTICLE 4 INDEMNIFICATION Section 4.1 - Buyer's Indemnification. (a) [BLACKOUT] (b) [BLACKOUT] -11- 15 ARTICLE 5 WARRANTY Section 5.1 - Warranty by Federal. (a) Subject to the limitations and conditions set forth in Section 5.2 below and the proper Installation of the Kits for which Federal takes no responsibility, Federal warrants to Buyer that the Kits, at the time of Delivery of a Kit to Buyer, shall conform to the Specifications and shall be free from defects arising from failure to conform to the Specifications. The foregoing warranty shall not apply to accessories, equipment or parts which are not manufactured by Federal. (b) To obtain the benefit of the warranty provision above, non-conformity to the Specification and defects arising from such failure to conform to the Specification must become apparent within twenty four (24) months from Delivery by Federal to Buyer of the Kits or four thousand (4000) flight hours, from Installation by Buyer of the Kits as to which a warranty claim is made by Buyer, whichever shall occur first (the "Warranty Period"), failing which the above warranty shall expire and be of no force and effect. Section 5.2 - Limitation of Warranty. (a) Federal's liability under this Article 5 is limited to the repair of defects or to the repair or replacement of articles or components (with a similar article or component free from such defect) of any portions of the Kits which are defective. Any repair or replacement shall not extend the Warranty Period beyond the period still remaining on the original articles or components and any article or component so replaced shall become the property of Federal. In addition, Federal reserves the right to make changes in the design of parts, equipment and accessories being replaced or repaired and to -12- 16 provide improvements without incurring any obligation to retrofit the same or similar changes or improvements on other Kits of Buyer previously delivered under this Agreement. (b) Federal shall, as to each defect referred to above, be relieved of all obligation and liability if: (i) The Kit, or the Aircraft upon which it is installed, has been operated in a manner not specifically approved under the STC, unless Buyer establishes to the reasonable satisfaction of Federal that such operation was not a cause of or contribute to the defect; (ii) The Aircraft upon which a Kit has been installed has not been operated or maintained in accordance with the manuals of instructions, data or other documentation furnished under Section 3.3, unless Buyer establishes to the reasonable satisfaction of Federal that such operation or maintenance, as the case may be, was not a cause of the defect; (iii) The Aircraft upon which a Kit has been installed shall have been operated in a way not consistent with customary airline use or Buyer's normal operations, unless Buyer establishes to the reasonable satisfaction of Federal that such operation was not the cause of or contribute to the defect; (iv) The Kit shall have been altered, repaired or modified without Federal's approval, unless Buyer establishes to the reasonable satisfaction of Federal that such alteration, repair, modification or operation was not a cause of or contribute to the defect. (v) Buyer does not (A) notify Federal within fifteen (15) days following such defect becoming apparent to Buyer; and (B) return the defective accessory, part or equipment to the location directed by Federal (or, if such return is not feasible and Federal so agrees in advance in writing, to Buyer's base repair shop or other appropriate facility) within thirty (30) days of such defect becoming apparent; or (vi) Buyer does not submit reasonable proof to Federal within fifteen (15) days after the defect becomes apparent that the defect is due to a matter covered by Federal's warranty under this Article 5. (c) Federal shall approve or disapprove Buyer's substantiation of its warranty claim in writing within sixty (60) days of the receipt thereof. In the -13- 17 negotiation of the Purchase Price, the parties considered the limitations on, and the exceptions to, the liability contained in this Article 5 and the Purchase Price was based, in part, upon such limitations and exceptions. (d) Normal wear and tear and the need for regular overhaul shall not constitute a defect or failure under this Article 5. (e) No warranty is given with respect to any equipment, accessory or part which is not proprietary to Federal; however, Federal shall, pursuant to Section 5.3, endeavor to obtain warranties from its vendors with respect to such nonproprietary items which warranties shall either run to Buyer specifically or be assignable to Buyer. Section 5.3 - Assignment of Manufacturers' Warranties. Upon delivery to Buyer of any Kits, Federal shall assign to Buyer all of Federal's rights under any warranty (express or implied), service policy or product agreement of the manufacturer or of any maintenance and overhaul agencies of any accessories, equipment and parts incorporated in or a part of such Kits, or of any subcontractor or supplier or vendor thereof, to the extent that such rights are assignable and relate to such accessories, equipment and parts. Upon the reasonable request of Buyer, Federal shall give notice to any such manufacturers and maintenance and overhaul agencies of the assignment of such warranty to Buyer. Section 5.4 - Buyer's Acts or Omissions. Federal shall have no liability whatsoever for any damages or claims of any nature arising in any manner out of or from the acts or omissions of Buyer, Installation Facility or any third party providing directly or indirectly services to Buyer, including but not limited to the installation of any Kit on any aircraft or engine. Buyer agrees to indemnify, defend and hold harmless Federal, its directors, officers and employees from any and all liabilities, damages, losses, expenses, demands, claims, suits or judgments, -14- 18 including reasonable attorneys' fees and expenses in any manner arising out of such acts or omissions of Buyer, Installation Facility or any third party providing directly or indirectly services to Buyer. Section 5.5 - Exclusive Remedy. THE WARRANTIES PROVIDED IN THIS ARTICLE 5 AND THE OBLIGATIONS AND LIABILITIES OF FEDERAL HEREUNDER ARE EXCLUSIVE AND IN LIEU OF, AND BUYER HEREBY WAIVES, ALL OTHER REMEDIES, WARRANTIES, GUARANTIES OR LIABILITIES, EXPRESS OR IMPLIED, WITH RESPECT TO FEDERAL, ITS OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES, CONTRACTORS, VENDORS AND ITS SUBCONTRACTORS, CONSULTANTS AND MATERIALMEN, ARISING BY LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION ANY OBLIGATION OR LIABILITY OF FEDERAL AND SUCH OTHER PERSONS AND ENTITIES ARISING FROM NEGLIGENCE OR WITH RESPECT TO FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY, LOSS OF USE, REVENUE OR PROFIT OR FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES. BUYER HEREBY RELEASES AND HOLDS HARMLESS, INDEMNIFIES AND DEFENDS FEDERAL AND SUCH OTHER PERSONS AND ENTITIES, WITH COUNSEL ACCEPTABLE TO FEDERAL FROM AND AGAINST ANY AND ALL CLAIMS ARISING IN ANY MANNER OUT OF OR IN CONNECTION WITH THIS AGREEMENT. THIS WARRANTY SHALL NOT BE EXTENDED, ALTERED OR VARIED EXCEPT BY A WRITTEN INSTRUMENT SIGNED BY FEDERAL AND BUYER. -15- 19 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ARTICLE 6 INSURANCE Section 6.1 - Buyer's Insurance. [BLACKOUT] -16- 20 ARTICLE 7 RIGHTS IN DATA Section 7.1 - Data Rights. All designs, drawings, specifications, reports, computer software, photographs, instruction manuals, and other technical information and data (the "Data") of Federal relating to the Kits or the STC shall be deemed as confidential information to Federal and all proprietary rights and interest in the subject matter thereof shall be and remain the exclusive property of Federal. Buyer agrees that it will not use or disclose any of Federal's Data for the manufacture or procurement of articles which are the subject of this Agreement or any similar articles or cause said articles to be manufactured by or procured from any other source, or reproduce said Data and information or otherwise appropriate them without the written authorization of Federal unless such rights are specifically authorized in this agreement or in the data provided in Article 3. Section 7.2 - Confidentiality. a) Buyer agrees that it will not disclose or make available to any third party the details of this Agreement, any of Federal's Data or other information pertaining to the Kits or the STC obtained by Buyer from Federal without obtaining Federal's prior written consent of unless such authorization is specifically authorized in this Agreement or in the data provided in Article 3. (b) Buyer acknowledges that any use or disclosure of any Data other than for the sole benefit of Federal will be wrongful and will cause irreparable injury to Federal and, therefore, agrees to hold such Data in strictest confidence and not to make use of it other than for the benefit of Federal. (c) Buyer agrees that in the event of any violation or threatened violation of this Section 7.2, Federal shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as an equitable -17- 21 accounting of all profits or benefits arising from such violation, which rights and remedies shall be cumulative and in addition to any other rights or remedies at law or in equity to which Federal may be entitled. -18- 22 ARTICLE 8 PATENT PROTECTION Section 8.1 - Patent Indemnity. Federal hereby agrees to indemnify, protect and hold harmless Buyer from and against all claims, demands, proceedings, suits and actions and all liabilities, expenses and costs (excluding any consequential damages, costs, expenses, liabilities and loss of profits resulting from loss of use, but including costs of replacing the infringing item or of otherwise curing any infringement on account of which use of an Aircraft by Buyer is prevented) in case of any actual or alleged infringement of any United States patent or any patent issued under the laws of any other country into or out of which Buyer is from time to time lawfully operating the Aircraft, provided such country is a signatory to Article 27 of the convention on Civil Aviation signed by the United States at Chicago on December 7, 1944 provided, however, that the foregoing agreement by Federal to indemnify, protect and save harmless Buyer shall not apply to accessories, equipment or parts which are not manufactured by Federal or pursuant to Federal's detailed design or which are manufactured by or which are incorporated in the Aircraft at Buyer's request in place of or in addition to those proposed by Federal, or which were furnished by Buyer. Section 8.2 - Limitations of Liability. (a) Federal's liability under this Article 8 is conditioned upon commencement of suit against Buyer or Buyer's receipt of written charge of such infringement, and upon written notice by Buyer to Federal within ten (10) days after the receipt by Buyer of notice of the institution of such suit after its receipt of such charge. Federal shall have the option at any time to conduct negotiations with the party or parties charging infringement, to intervene in any suit commenced, and to assume, conduct or control the defense -19- 23 thereof. (b) Federal's liability under this Article 8 is further conditioned upon Buyer promptly furnishing to Federal all data, papers, records and other assistance or defense against any such claim or suit for infringement; and (except as to amounts payable under a judgment) upon Federal's prior written approval of Buyer's payment or assumption of any expenses, damages, costs or royalties for Federal is asked to respond pursuant hereto. (c) The patent indemnity obligations above are in lieu of all other patent indemnities whatsoever, whether oral, written, express or implied. -20- 24 ARTICLE 9 EXCUSABLE DELAY Section 9.1 - Excusable Delay. (a) Neither Federal nor Buyer shall be liable for nor be deemed to be in default on account of delays in the performance of this Agreement due to causes not reasonably within their respective control, including, but not limited to, civil war, insurrections, strikes, riots, fires, floods, explosions, earthquakes, serious accidents, acts of government, governmental priorities, allocation or orders affecting materials, facilities, acts of God, acts of terrorism or sabotage, failure of transportation systems, epidemics, quarantine restrictions or labor troubles or other events causing cessation, slow-down or interruption of work, failures or delays of vendors, contractors, subcontractors or materialmen to perform their contracts, or due to any other cause reasonably beyond the control of, respectively, Federal or Buyer ("Excusable Delay"). (b) Either Federal or Buyer shall have the absolute right, upon thirty (30) days written notice to the other party, to terminate this Agreement as to any Kits then undelivered without liability if an Excusable Delay covered by this Article 9 continues for more than one hundred eighty (180) consecutive days, inclusive of such thirty (30) day notice period. (c) If an Excusable Delay causes a delay in the Kit Delivery Schedule, the parties shall negotiate in good faith a revised schedule, as may be applicable, mutually acceptable to both parties. -21- 25 ARTICLE 10 DEFAULT AND REMEDIES Section 10.1. Events of Default. The occurrence of one or more of the following events of default (the "Events of Default") shall entitle the non-defaulting party to exercise those rights and remedies in Section 10.2: (i) If either party shall fail in the performance of any of the obligations contained in this Agreement, which failure shall continue uncured for a period of five (5) business days following written notice from the other party, unless the defaulting party provides to the other adequate assurance of its ability to cure such failure within a commercially reasonable time, and thereafter so cures; (ii) If either party shall file a voluntary petition in bankruptcy, or shall be adjudicated as bankrupt or insolvent or shall file any petition or answer seeking any reorganization, composition, readjustment, liquidation or similar relief for itself under any present or future statutes, law or regulation of the United States or shall seek or consent to or acquiesce in the appointment of any trustee, or shall make any general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; (iii) If a petition shall be filed against either party seeking any reorganization, composition, readjustment, liquidation or similar relief under any present or future statute, law or regulation of the United States and shall remain undismissed or unstayed for an aggregate of ninety (90) days (whether or not consecutive), or if any trustee, receiver or liquidator of either party is appointed, which appointment shall remain unvacated or unstayed for an aggregate of ninety (90) days (whether or not consecutive); or (iv) If any representation or warranty made by any party herein or made in any statement or certificate furnished or required hereunder, or in connection with the execution and delivery of this Agreement proves untrue in any material respect as of the date of the issuance or making thereof. -22- 26 Section 10.2. Remedies. (a) Upon the occurrence of an Event of Default by Buyer, Federal shall be entitled to: (i) terminate this Agreement with respect to any one or more Kits scheduled to be delivered; (ii) terminate this Agreement in its entirety; (iii) reschedule the Kit Delivery Schedule; (iv) retain possession of the Kit; (v) retain the deposits and progress payments as liquidated damages; (vi) pursue all other remedies available at law or in equity in addition to those set forth in this Agreement, which remedies shall be cumulative and not exclusive. (b) Upon the occurrence of an Event of Default by Federal, Buyer shall have the right to pursue all other remedies available at law or in equity in addition to those set forth in this Agreement, which remedies shall be cumulative and not exclusive. -23- 27 ARTICLE 11 TOOLING: SUPPORT SERVICES Section 11.1 -- Support Services. (a) Federal will provide, at no additional charge to Buyer, the services of an engineer experienced in Kit Installation for up to ten business days to advise and assist Buyer's Installation Facility with the initial Installation of an Aircraft Kit. (b) Federal will maintain trained technical staff available to provide consulting, technical, operational or trouble shooting services with respect to the Kits. (c) Buyer may submit a request for such services to FEASI Aviation Products, 2600 Nonconnah Blvd., Suite 132, Memphis, Tennessee, 38132; Telephone: (901) 922-6891, FAX: (901) 922-6872, Telex: 822101, SITA: MEMWZFM or to such other contact as Federal may specify by Notice to Buyer. Off hours and weekend A.O.G. and Technical Support can be obtained by calling "Sky Pager" 1-800-759-7243, Pin #52916, or to such other contact as Federal may specify by notice to Buyer. A written request signed by appropriate management must be submitted prior to initiation of the requested services. (d) Services performed under this Section are available at no charge to Buyer during the first three years following Installation. However, if such services require FEASI or vendor personnel to perform services away from their principal place of business in excess of five (5) days per request, Federal reserves the right to be reimbursed for all or part of its actual reasonable expenses of each occurrence of services so provided. -24- 28 ARTICLE 12 APPLICABLE LAW, NOTICES Section 12.1 -- Exclusive Agreement: Applicable Law. This Agreement and its Exhibits are the complete, exclusive and entire agreement between the parties with respect to the subject matter hereof. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee, U.S.A. and in executing this Agreement, the parties hereby submit to the jurisdiction of the courts of the State of Tennessee and agree to Shelby County as the appropriate venue for any claim or action brought under or arising from this Agreement. This Agreement, and any term or condition hereof, shall not be varied, contradicted, explained or supplemented by an oral agreement or representation, by course of dealing or performance or by usage of trade, nor amended or changed in any other manner except by an instrument in writing, executed by both Federal and Buyer. Federal and Buyer agree that at the time of execution hereof there are no other agreements, understandings, conditions, warranties, guaranties or representations, oral or written, express or implied, with respect to the subject matter of this Agreement that are not hereby merged or superseded. Section 12.2 -- Notices. Except as otherwise expressly provided in this Agreement, all notices required or authorized shall be given in writing either by personal delivery, by registered or certified mail or by Federal Express Service, and the date on which any such notice is received by the addressee shall be deemed to be the effective date of such notice. Notices to Federal and Buyer shall be addressed as noted below, or to such other person or such other address as a party may designate from time to time: -25- 29 If to Buyer: Postal Air, Inc. 2967 N. Air Field Drive DFW Airport, TX 75261 Attn.: Mr. Jim Reeves If to Federal: Federal Express Corporation Attn.: Vice President, Fleet Development & Acquisitions 2005 Corporate Ave. Memphis, TN 38132 FAX: 901-395-3828 With a copy to: FEASI Aviation Products Attn.: Managing Director 2600 Nonconnah Blvd., Suite 132 Memphis, TN 38132 FAX: 901-922-6872
Section 12.3 - Waiver. The failure of either party to enforce at anytime any of the provisions of this Agreement, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a present or future waiver of such provisions, nor in any way to effect the validity of this Agreement or any part thereof, or the right of the other party thereafter to enforce each and every such provision. The express waiver by either party of any provision, condition or requirement to this Agreement shall not constitute a waiver of any future obligation to comply with such provision, condition or requirement. Section 12.4 - Assignment. This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective successors and assigns, but neither the rights nor the duties of either party under this Agreement may be assigned, in whole or part, by either party without the prior written consent of the other party. Section 12.5 - Non-Disclosure. Neither party hereto shall disclose the price, payment or other terms of this Agreement or any agreement supplementing or -26- 30 amending it, to third parties without the prior written consent of the other party; provided, however, that either party may disclose this Agreement to the extent required by law. Section 12.6 - Transfer of Aircraft or Engines. Buyer may not resell or lease any uninstalled Kits without Federal's prior written permission. Buyer may sell, assign or transfer to any party an Aircraft or Engine upon which a Kit is properly Installed at any time. The data, manuals and drawings provided with the Kits by Federal may also be assigned upon obtaining execution of a non-disclosure agreement reasonably satisfactory to Federal. -27- 31 IN WITNESS WHEREOF, the parties have signed this Agreement on the date first above written. APPROVED FEDERAL EXPRESS CORPORATION AS TO LEGAL FORM CSB 10/22/92 By: /s/ JAMES R. PARKER - ---------------- -------------------------------------- LEGAL DEPT. Name: James R. Parker -------------------------------------- Title: Vice President -------------------------------------- ("Federal") POSTAL AIR, INC. By: /s/ TILMON J. REEVES -------------------------------------- Name: Tilmon J. Reeves -------------------------------------- Title: Vice President -------------------------------------- ("Buyer") -28- 32 Exhibit A to that certain Purchase Agreement between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") Dated October 22, 1992 ------------------------------------------------------------ CONFIGURATION SPECIFICATION I. FOR BOEING 727-100 SERIES LIGHTWEIGHT KIT 1. Airframe. Buyer is responsible for ensuring that the Aircraft described in Exhibit C is a Boeing 727-100 airframe equipped with Pratt & Whitney JT8D-7 or -9 model Engines in serviceable condition under the Operator's F.A.A.-approved maintenance manual, and is certified for operation at maximum takeoff weights equal to the desired Stage 3 operating weight. 2. Engine, Nacelle, Pylon & Thrust Reverser. A. Service Bulletins. The following manufacturer's service bulletins (S.B.s) must be accomplished on the aircraft by Buyer at Buyer's expense prior to or concurrent with the Installation: P&W S.B. 4127 Incorporation of Double Wall Noise Attenuation Treatment P&W S.B. 5465 Incorporation of Improved No. 4 1/2 and 6 Bearing Outer Internal Oil Tube Boeing S.B. 78-82 Cascade Vane Configuration Boeing S.B. 78-84 and 78-86 (for thrust reversers equipped with long track actuators; alternatively, installation of track cover P/N 23-1110-55 must be accomplished) Chin-duct mounted CSD oil cooler installation (-7 engines only).
Page 1 of 6 33 P&W A.S.B. 5841 Improved first stage fan blade retaining plate (-9, -9A, -15 & 15A) engines only. P&W S.B. 6072 Re-angled Mid span shroud (-15A only)
B. Parts. Buyer's Aircraft shall be equipped with the following parts prior to or concurrent with Kit Installation: Forward cone bolt #10-60517-39 or -53 for Elastomer type mounts or #10-60517-47 or -51 for Metal-L-Flex type mounts. Aft cone bolt #10-60517-46 or -54 for Elastomer type mounts or #10-60517-12 or -52 for Metal-L-Flex type mounts. 3. Parts to be Conveyed to Federal Following Installation. The following parts removed from the modified Engines will be conveyed to Federal in servicable condition at Buyer's expense condition within 30 days of Kit delivery:
PART NUMBER DESCRIPTION QUANTITY --------------------------- --------------------------- --------------------------- 65-37963-xx Tailpipe Assy. 1 per Engine or 65-27846-xx or 65-57862-xx or 24-1050-3, -5 23-1020-1, -11 Vane Assy, Cascade 2 per Engine or 65-88232-xx 65-27811-xx Shroud Assy, Fwd 1 per Engine or 22-80-xx 23-1110-1 Cover, Track 2 per Engine or 65-37912-xx or 65-37839-xx 750601 (typ -9) C-1 Fan Blades 27 per Engine or 792101 (typ -7) C-1 Fan Blades 30 per Engine 65-19685-xx Boeing Inlet 2 per Aircraft 61-20194-xx Wiring Harness 3 per Aircraft
Page 2 of 6 34 II. FOR BOEING 727-200 SERIES LIGHTWEIGHT KIT 1. Airframe. Buyer is responsible for ensuring that the Aircraft described in Exhibit C are Boeing 727-200 airframes equipped with Pratt & Whitney JT8D-7 or -9 model Engines in serviceable condition under the Operator's F.A.A.-approved maintenance manual, and are certified for operation at respective maximum takeoff and landing weights of up to 177,600 lbs. and 154,500 lbs. for -7 powered aircraft, or up to 169,500 lbs. and 154,500 lbs. for -9 powered aircraft. 2. Engine, Nacelle, Pylon & Thrust Reverser. A. Service Bulletins. The following manufacturer's service bulletins (S.B.s) must be accomplished on the aircraft by Buyer at Buyer's expense prior to or concurrent with the Installation: P&W S. B. 4127 Incorporation of Double Wall Noise Attenuation Treatment P&W S. B. 5465 Incorporation of Improved No. 4 1/2 and 6 Bearing Outer Internal Oil Tube Boeing S. B. 78-82 Cascade Vane Configuration Boeing S. B. 78-84 and 78-86 (for thrust reversers equipped with long track actuators; alternatively, installation of track cover P/N 23-1110-55 must be accomplished) Chin-duct mounted CSD oil cooler installation (-7 engines only). P&W A. S. B. 5841 Improved first stage fan blade retaining plate (-9, -9A, -15 & 15A) engines only. P&W S. B. 6072 Re-angled Mid span shroud (-15A only)
B. Parts. Buyer's Aircraft shall be equipped with the following parts prior to or concurrent with Kit Installation: Forward cone bolt #10-60517-39 or -53 for Elastomer type mounts or #10-60517-47 or -51 for Metal-L-Flex type mounts. Aft cone bolt #10-60517-46 or -54 for Elastomer type mounts or #10-60517-12 or -52 for Metal-L-Flex type mounts. Page 3 of 6 35 3. Parts to be Conveyed to Federal Following Installation. The following parts removed from the modified Engines will be conveyed to Federal in serviceable condition at Buyer's expense condition within 30 days of Kit delivery:
PART NUMBER DESCRIPTION QUANTITY --------------------------- --------------------------- --------------------------- 65-37963-xx Tailpipe Assy 1 per Engine or 65-27846-xx or 65-57862-xx or 24-1050-3, -5 23-1020-1, -11 Vane Assy, Cascade 2 per Engine or 65-88232-xx 65-27811-xx Shroud Assy, Fwd 1 per Engine or 22-80-xx 23-1110-1 Cover, Track 2 per Engine or 65-37912-xx or 65-37839-xx 750801 (typ -9) C-1 Fan Blades 27 per Engine or 792101 (typ -7) C-1 Fan Blades 30 per Engine 65-19685-xx Boeing Inlet 2 per Aircraft 61-20194-xx Wiring Harness 3 per Aircraft
III. FOR BOEING 727-200 SERIES HEAVYWEIGHT KIT 1. Airframe. Buyer is responsible for ensuring that the Aircraft described in Exhibit C is a Boeing 727-200 airframe equipped with Pratt & Whitney JT8D-9, -9A, -15, -15A, 17 or -17A model Engines in serviceable condition under the Operator's F.A.A.-approved maintenance manual, and certified with maximum takeoff weights and landing weights equivalent to the State 3 maximum takeoff and landing weights as may be desired, and as are offered by Federal. Page 4 of 6 36 2. Engine, Nacelle, Pylon & Thrust Reverser. A. Service Bulletins. The following manufacturer's service bulletins (S.B.s) must be accomplished on the Aircraft by Buyer at Buyer's expense prior to or concurrent with Kit installation: P&W S.B. 2141 #1 Oil Damped Bearing P&W S.B. 5532 Oil Cooler Outlet Fuel Tube P&W A.S.B. 5841 Improved first Stage Blade Retaining Plate (-9, -9A, -15, -15A, -17 & -17A Engines only) P&W S.B. 6072 Re-Angled Midspan Shroud (-15A & -17A Engines only) P&W S.B. 4127 Incorporation of Double Wall Noise Attenuation Treatment P&W S.B. 5465 Incorporation of Improved No. 4 1/2 and 6 Bearing Outer Internal Oil Tube Boeing S.B. 78-82 Cascade Vane Configuration Boeing S.B. 78-84 (for thrust reversers equipped with long track actuators; and 78-86 alternatively, installation of track cover P/N 23-1110-55 must be accomplished)
B. Parts. Buyer's Aircraft shall be equipped with the following parts prior to or concurrent with Kit Installation: Elastomer-type forward and aft engine mounts if not already installed on aircraft. Forward cone bolt #10-60517-53 for Elastomer type engine mounts. Aft cone bolt #10-60517-54 for Elastomer type engine mounts. 3. Parts to be Conveyed to Federal Following Installation. The following parts removed from the modified Engines will be conveyed to Federal at Buyer's expense in serviceable condition within 30 days of Kit delivery:
PART NUMBER DESCRIPTION QUANTITY - ----------------- -------------------- --------------- 24-1050-9 Tailpipe Assy 1 per Engine or 65-57862-xx
Page 5 of 6 37
PART NUMBER DESCRIPTION QUANTITY - ----------------- -------------------- --------------- 750801 (typical) C-1 Fan Blades 27 per Engine or 790831 23-1020-1, -11 Vane Assy, Cascade 2 per Engine or 65-88232-xx 65-27811-xx Shroud Assy, Fwd 1 per Engine or 22-80-xx 23-1110-1 Cover, Track 2 per Engine or 65-37912-xx or 65-37839-xx 61-20194-xx Thrust Reverser 3 per Aircraft Wiring Harness 65-37985-9 Actuator Fairing 3 per Aircraft Assembly 65-25397-147 Body Fin Fairing 1 per Aircraft Assembly TBD Mach Airspeed 2 per Aircraft Indicator
Page 6 of 6 38 EXHIBIT B to that certain Purchase Agreement between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") Dated October 22, 1992 ------------------------------------------------------------ I. B727-100 LIGHTWEIGHT KIT SPECIFICATIONS 1. Major Components. (a) Each Aircraft Kit consists of the following major components:
DESCRIPTION PART NUMBERS QUANTITY - ------------------------ ---------------- -------- Center Mixer Kit 807896 1 Pod Mixer Kit 807895 2 Thrust Reverser Kit 33-1000-21 3 Airframe/Pylon Kit B27-54-003 1 Acoustical Inlet, Left 727-22000-xxx 1 Acoustical Inlet, Right 727-22000-xxx 1 C-1 Fan Blades 845601 (-9 typ) 81 or 844201 (-7 typ)
2. Stage 3 Compliance. Each Aircraft Kit, after Installation on an Aircraft meeting the Configuration Specification, will permit such Aircraft to comply with Stage 3 when operated at -7 or -9 thrust. 3. Performance. The Aircraft described in Exhibit C, with an aircraft Kit properly installed, will not suffer a reduction in operating performance as a result of the Installation of such aircraft Kit with regard to thrust, N1 and N2 rotor speeds or exhaust gas temperature. Page 1 of 3 39 II. B727-200 LIGHTWEIGHT KIT SPECIFICATIONS 1. Major Components. (a) Each Aircraft Kit consists of the following major components:
DESCRIPTION PART NUMBERS QUANTITY - ------------------------ ---------------- -------- Center Mixer Kit 807896 1 Pod Mixer Kit 807895 2 Thrust Reverser Kit 33-1000-21 3 Airframe/Pylon Kit B27-54-003 1 Acoustical Inlet, Left 727-11000-xxx 1 Acoustical Inlet, Right 727-10000-xxx 1 C-1 Fan Blades 845601 (-9 typ) 81 or 844201 (-7 typ)
2. Stage 3 Compliance. Each Aircraft Kit, after Installation on an Aircraft meeting the Configuration Specification, will permit such Aircraft to comply with Stage 3 when operated at -7 thrust at a maximum takeoff weight of up to 177,600 lbs. and a maximum landing weight of up to 154,500 lbs., or when operated at -9 thrust and a maximum takeoff weight of up to 169,500 lbs. and a maximum landing weight of up to 154,500 lbs. 3. Performance. The Aircraft described in Exhibit C, with an aircraft Kit properly installed, will not suffer a reduction in operating performance as a result of the Installation of such Aircraft Kit with regard to thrust, N1 and N2 rotor speeds or exhaust gas temperature. III. HEAVYWEIGHT KIT SPECIFICATIONS 1. Major Components. (a) Each Heavyweight Kit consists of the following major components:
DESCRIPTION PART NUMBERS QUANTITY - ----------------------------- ----------------- -------- Center Mixer Kit 807896-002 1 Pod Mixer Kit 807895 2 Thrust Reverser Kit 33-2000-3 3 Airspeed Indicator WL606AMA10 2 Respaced Inlet Guidevane Kit 808966 2 Double Chamfer C-1 Blades 808231 or 845601 81
2. Stage 3 Compliance. Each Aircraft Kit, after Installation on an Aircraft meeting the Configuration Specification, will permit such Aircraft, with a maximum takeoff weight of up to 199,000 lbs. to comply with Stage 3 when operated at -15 thrust; such other Heavyweight Kits for -9 and -17 powered aircraft, as may be offered by Federal, shall similarly permit an Aircraft to comply with Stage 3 at the certified Kit weight combinations. Page 2 of 3 40 3. Performance. The Aircraft described in Exhibit C, with an aircraft Kit properly installed, will not suffer a reduction in operating performance as a result of the Installation of such Aircraft Kit with regard to thrust, N1 and N2 rotor speeds or exhaust gas temperature. III. HEAVYWEIGHT UPGRADE KIT SPECIFICATIONS 1. Major Components. (a) Each Heavyweight Upgrade Kit consists of the following major components:
DESCRIPTION PART NUMBERS QUANTITY ----------------------------- ----------------------- -------- Airframe Kit B27-53-019 2 B27-53-025 1 Pylon Kit B27-54-016 1 Airspeed Indicator WL606AMA10 2 Thrust Reverser Kit 24-1056-25 3 25-1000-1 3 23-1061-52 3 23-1061-54 3 23-1061-59 3 23-1061-66 3 23-1061-67 3 23-1118-1 3 25-1020-1 3 25-1021-1 3 Respaced Inlet Guidevane Kit 808966 2 Double Chamfer C-1 Blades 845431 or 845601 81 Acoustic Tailpipes 24-1050-23/25/27 or 29 3 Acoustic Tailpipe Extension 24-1056-25 3
2. Stage 3 Compliance. Each Aircraft Kit, after Installation on an Aircraft meeting the Configuration Specification, will permit such Aircraft, with a maximum takeoff weight of up to 199,000 lbs. to comply with Stage 3 when operated at -15 thrust; such other Heavyweight Kits for -9 and -17 powered aircraft, as may be offered by Federal, shall similarly permit an Aircraft to comply with Stage 3 at the certified Kit weight combinations. 3. Performance. The Aircraft described in Exhibit C, with an aircraft Kit properly installed, will not suffer a reduction in operating performance as a result of the Installation of such Aircraft Kit with regard to thrust, N1 and N2 rotor speeds or exhaust gas temperature. Page 3 of 3 41 Exhibit C to that certain Purchase Agreement between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") Dated October 22, 1992 ------------------------------------------------------------ LIGHTWEIGHT KIT DELIVERY SCHEDULE A. Not later than November 3, 1992, Buyer shall provide written notice to Federal of its choice of one delivery schedule from the two options listed below (1 or 2): 1. Delivery schedule option 1:
AIRCRAFT MODEL/ SCHEDULED KIT NO. ENGINE TYPE DELIVERY DATE - ------- ----------------- ----------------- 1 B727-100 / JT8D-7 November 17, 1992 2 B727-100 / JT8D-7 November 17, 1992 3 B727-100 / JT8D-7 December 2, 1992 4 B727-100 / JT8D-7 December 2, 1992 5 B727-100 / JT8D-7 December 2, 1992 6 B727-200 / JT8D-9 March 1, 1993 7 B727-200 / JT8D-9 March 1, 1993 8 B727-200 / JT8D-7 March 1, 1993 9 B727-200 / JT8D-9 April 1, 1993 10 B727-200 / JT8D-7 April 1, 1993
2. Delivery schedule option 2:
AIRCRAFT MODEL/ SCHEDULED KIT NO. ENGINE TYPE DELIVERY DATE - ------- ----------------- ----------------- 1 B727-100 / JT8D-7 November 17, 1992 2 B727-100 / JT8D-7 November 17, 1992 3 B727-100 / JT8D-7 December 2, 1992 4 B727-100 / JT8D-7 December 2, 1992 5 B727-100 / JT8D-7 December 2, 1992 6 B727-200 / JT8D-9 December 17, 1992 7 B727-200 / JT8D-9 December 17, 1992 8 B727-200 / JT8D-7 January 14, 1993 9 B727-200 / JT8D-7 January 14, 1993 10 B727-200 / JT8D-9 January 14, 1993
Page 1 of 1 42 If Delivery Schedule Option 2 is selected, Buyer agrees to return one shipset of exchange C-1 fan blades (as defined in Exhibit A) to Federal or its designee within 5 business days of each Kit delivery. Buyer acknowledges that Federal shall not be liable for any Kit delivery delays resulting from not receiving the above referenced blades within 5 business days. B. Federal and Buyer agree to determine the Aircraft Serial Number for each Kit upon Agreement execution for Kits 1-5, and not later than Sixty (60) days prior to the delivery date established above for Kits 6-10. Buyer acknowledges its understanding that the normal FAA processing time for the aircraft flight manual supplement is 30-60 days and that Federal shall not be liable for delays resulting from not receiving the above referenced information at least 60 days prior to scheduled Kit delivery. Page 2 of 2 43 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION Exhibit D to that certain Purchase Agreement between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") Dated October 22, 1992 ---------------------------------------------------------- PURCHASE PRICE AND PAYMENT SCHEDULE Notwithstanding anything in this Agreement to the contrary, the entire Purchase Price for any Kit must be paid not later than the Delivery Date of such Kit. I. PURCHASE PRICE The Purchase Price for the manufacture and delivery of Ten (10) Lightweight Kits shall be: [BLACKOUT] for each B727-100 Lightweight Aircraft Kit and [BLACKOUT] for each B727-200 Lightweight Aircraft Kit if such Kits shall be delivered by May 31, 1993. In the event Buyer supplies Double Chamfer Cut C-1 Fan Blades for the three Engines on an Aircraft, Federal shall provide Buyer with a credit in the amount of [BLACKOUT] toward the Kit Purchase Price. If any Kit is scheduled for delivery after May 31, 1993, such Kit Price shall be adjusted according to the formula outlined in Exhibit E. II. PAYMENT AND DEPOSIT SCHEDULE A. Within ten (10) days following execution of this Agreement, Buyer shall pay to Federal an initial non-refundable deposit of [BLACKOUT] per Kit and shall pay to Federal an additional non-refundable amount of [BLACKOUT] as an advance payment for Kits number One (1) through Five (5). Buyer shall also, within ten (10) days following execution of this Agreement, establish an irrevocable letter of credit in a form acceptable to Federal, with Citibank N.A., Union Planters National Bank of Tennessee or another bank acceptable to Federal, whose short term credit rating shall be AA or higher, which letter of credit shall guarantee payment of [BLACKOUT] per Kit to Federal on Kits number Six (6) through Ten (10) in any event of default by Buyer. Page 1 of 2 44 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION B. All payments shall be made by wire transfer in immediately available U.S. funds to the account of Federal Express Corporation, account number 0710784, at Union Planters National Bank (ABA number 084000084). III. OPTIONS ON ADDITIONAL KITS Subject to Buyer taking delivery of the ten (10) Kits specified in Paragraph I above, Buyer shall have the option to purchase up to twelve (12) additional Aircraft Kits for Delivery between April 1, 1993 and December 31, 1996 for use on its aircraft, and subject to all other terms and conditions of this Agreement. Buyer shall provide Federal with a minimum of 180 days written notice of the date delivery of each Kit is requested. Federal shall make best efforts to deliver the requested number of Kits in the requested month but shall not be obligated to provide more than Two (2) Kits in any given month. The Purchase Price of these Kits shall be [BLACKOUT] for each B727-100 Lightweight Kit, [BLACKOUT] for each B727-200 Lightweight Kit and [BLACKOUT] Dollars U.S. [BLACKOUT] for each B727-200 Heavyweight Kit. These prices shall be escalated for Kits delivered after August 31, 1993 according to the Price Adjustment Formula in Exhibit F. In the event Buyer supplies Double Chamfer Cut C-1 Fan Blades for the three Engines on an Aircraft with regard to Option Kits, Federal shall provide Buyer with a credit in the amount of [BLACKOUT] toward the Option Kit Purchase Price. Heavyweight Kits shall not be available for delivery before July 1, 1993. IV. HEAVYWEIGHT UPGRADE KITS Between July 1, 1994 and December 31, 1996, Buyer shall have the option to purchase from Federal shipset kits of components to allow the upgrade of its B727-200 Lightweight Aircraft Kits to Heavyweight Kits, as available from Federal. The Purchase Price of such upgrade Kits shall be [BLACKOUT]. Federal shall issue Buyer a [BLACKOUT] credit toward the Purchase Price of each Heavyweight Upgrade Kit if Buyer provides Boeing acoustical inlets and returns to Federal in serviceable condition the Burbank Acoustical inlets furnished with the Lightweight Aircraft Kit. Buyer shall provide Federal with at least 270 days written notice of the desired Delivery Date of each Heavyweight Upgrade Kit and shall pay Federal a non-refundable deposit of [BLACKOUT] for each Heavyweight Upgrade Kit so ordered. The Purchase Prices of Heavyweight Upgrade Kits described in this Paragraph shall be subject to adjustment according to the formula in Exhibit F. Page 2 of 2 45 Exhibit E to that certain Purchase Agreement between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") Dated October 22, 1992 _________________________________________________________ DATA, MANUALS AND TECHNICAL DOCUMENTATION 1. General. Federal shall furnish to Buyer the data, manuals and technical documentation described in this Exhibit E in the quantities and media specified, delivered to the indicated addressee. Unless otherwise specified herein, such Data shall be furnished by Federal at no additional charge to Buyer. All Data shall be in the English language and units of measurement, except as otherwise specified. 2. Revisions. Federal shall provide Buyer with Data revision service as necessary for the operation and maintenance of the Kits, in the quantities and format specified in this Exhibit, for so long as Buyer owns any aircraft with a Kit installed. Federal shall also provide Buyer with revisions pertaining to such matters as FAA-required changes, in-service experience, and changes involving safety for as long as Buyer owns any aircraft with a Kit installed. 3. Buyer Addressee. All Data furnished by Federal hereunder, unless Buyer notifies Federal otherwise, shall be shipped to: Postal Air, Inc. Attn: 2967 Airfield Drive DFW Airport, TX 75261 Page 1 of 2 46 DATA AND DOCUMENTS Delivery Item Description/Document No. Schedule Quantity Format - ---- ------------------------ -------- -------- ------ 1 Aircraft Flight Manual B 1 Print 1 side Supplement 2 Stage 3 Kit Installation A 1 Print 1 side Manual 727S307LW 3 Aviation Equipment Overhaul A 1 Print 1 side Manuals 727-23-2 & 727-23-5 4 Pylon Installation Drawings A 1 Print 1 side B727-54-003 Thrust Reverser Harness A 1 Print 1 side Drawing (#B27-78-001-12) 5 Supplemental Type Certificate A 1 Print 1 side Note: Parts Catalog information is included in Item No. 2 Delivery Schedule Code Meaning - ---- ------- A Concurrent with delivery of each Kit. B Concurrent with delivery of each Kit, or within 60 days of receipt of Aircraft Serial Number, whichever is later. Page 2 of 2 47 EXHIBIT F to that certain Purchase Agreement between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") Dated October 22, 1992 ------------------------------------------ PURCHASE PRICE ESCALATION FORMULA Kit Purchase Prices as agreed upon by the parties in this agreement will be calculated in accordance with the formula set forth below: P = [(P - P ) x (CPI CPI ) ] + P i base pw1 Del / base pw2 Where P = Kit Purchase Price (rounded to the nearest whole number) i P = Base Kit price (September 1992 dollars) base P = Pratt & Whitney (PW) Commercial Parts Support pw1 Price List prices as of September 1, 1992 for PW parts included in the kit. P = Pratt & Whitney (PW) Commercial Parts support Price List pw2 as of the date of scheduled Delivery for PW parts included in the kit. CPI = U.S. Government Consumer Price Index for all Urban Areas base as of September, 1992. CPI = U.S. Government Consumer Price Index for all Urban Areas Del as of Kit Delivery Date. If the U.S. Department of Labor, by footnote, appendix or by any method, discontinues or revises any of the data referred to above (not including benchmark adjustments) or revises the methodology of obtaining them, Buyer and Federal shall mutually agree upon a substitute for the revised or discontinued data. Said Page 1 of 2 48 substitute is to lead in application to the same adjustment result, insofar as possible, as would have been achieved by continuing the use of the original data had it not been revised or discontinued. If escalation provisions are made nonenforceable or otherwise rendered null and void by law or by any agency of the United States Government, the parties agree, to the extent they may lawfully do so, to adjust equitably the purchase price of each Kit to reflect an allowance for increases in labor and materials costs occurring since September 1, 1992 to the date of Delivery for such Kit. Index values used at the time of Delivery are not subject to later adjustment. Page 2 of 2 EX-10.46 10 AMENDMENT NO.1 TO THE FEASI AGREEEMENT 1 EXHIBIT 10.46 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION Amendment 1 To that certain Purchase Agreement dated October 22, 1992 between Federal Express Corporation and Postal Air, Inc. RECITALS This Amendment (the "Amendment") is entered into by and between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") and amends the Purchase Agreement dated as of October 22, 1992 (the "Purchase Agreement") by and between Federal and Buyer. Terms capitalized herein which are not otherwise defined in this Amendment shall have the meanings set forth for such terms as provided in the Purchase Agreement unless the context clearly requires otherwise. 1. Federal and Buyer entered into the Purchase Agreement, which specifies the purchase of Ten (10) Aircraft Kits from Federal by Buyer, and 2. A temporary restraining order by a Federal judge has resulted in the imposition of an "ANET contract Stop work order" by the U.S. Postal Service, which is affecting Buyer's ability to take delivery of Aircraft Kits according to the original dates specified in the Agreement, Buyer and Federal now therefore agree, in consideration of the foregoing and the mutual covenants contained herein, as follows: 1. Exhibit C to the Purchase Agreement shall be replaced in its entirety with the following: A. Within Ten (10) business days following the lifting of the "ANET Contract Stop Work Order" by the U.S. Postal Service, or January 30, 1993, whichever date shall occur first, Buyer shall negotiate new delivery dates with Federal for Aircraft Kits for delivery not later than September 1993. Federal shall use best efforts to deliver Kits according to the schedule requested by Buyer, but shall not be obligated to provide any kits until 210 days after deposits are received from Buyer. B. Federal and Buyer agree to determine the Aircraft serial number for each kit not later than Sixty (60) days prior to the negotiated delivery dates. Buyer acknowledges its understanding that the normal FAA processing time for the Aircraft Flight Manual Supplements is 30-60 days and that Federal shall not be liable for any delays resulting from not receiving the above referenced information at least 60 days prior to the negotiated Kit delivery dates. 2. Exhibit D, Paragraph II is replaced in its entirety with the following: A. Within Ten (10) days following the lifting of the "ANET Contract Stop Work Order" issued by the U.S. Postal Service in November 1992, or January 30, 1993, whichever date shall occur first, Buyer shall pay to Federal the non-refundable deposits of [BLACKOUT] per Kit required under the Agreement. The balance of the Purchase Price for each Kit shall be due at Delivery. 2 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION B. All payments shall be made by wire transfer in immediately available U.S. funds to the account of Federal Express Corporation, account number 0710784, at Union Planters National Bank (ABA number 084000084). 3. Except as otherwise specified in this Amendment, all terms and conditions of the Purchase Agreement shall remain in full effect. IN WITNESS WHEREOF, the Parties have signed this Amendment to the Agreement on this 17th day of November, 1992. APPROVED FEDERAL EXPRESS CORPORATION AS TO LEGAL FORM ("Federal") /s/ CSB 11/17/92 - ------------------ By: JAMES R. PARKER LEGAL DEPARTMENT ------------------------------ Name: James R. Parker --------------------------------- Title: Vice President --------------------------------- POSTAL AIR, INC. ("Buyer") By: TILMON J. REEVES ------------------------------ Name: Tilmon J. Reeves --------------------------------- Title: Vice President --------------------------------- EX-10.47 11 AMENDMENT NO.2 TO THE FEASI AGREEMENT 1 EXHIBIT 10.47 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION Amendment 2 To that certain Purchase Agreement dated October 22, 1992 between Federal Express Corporation and Postal Air, Inc. RECITALS This Amendment (the "Amendment") is entered into by and between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") and amends the Purchase Agreement dated as of October 22, 1992 (the "Purchase Agreement") by and between Federal and Buyer. Terms capitalized herein which are not otherwise defined in this Amendment shall have the meanings set forth for such terms as provided in the Purchase Agreement unless the context clearly requires otherwise. 1. Federal and Buyer entered into the Purchase Agreement, which specifies the purchase of Ten (10) Aircraft Kits from Federal by Buyer, and 2. A restraining order issued by a Federal judge has negated the award of the ANET-93-01 contract to Buyer by the U.S. Postal Service, which is affecting Buyer's ability to take delivery of Aircraft Kits according to the original dates specified in the Agreement, Buyer and Federal now therefore agree, in consideration of the foregoing and the mutual covenants contained herein, as follows: 1. Exhibit C to the Purchase Agreement shall be replaced in its entirety with the following: A. Within Ten (10) business days following the reawarding of the ANET-93-01 contract to Buyer by the U.S. Postal Service, Buyer shall negotiate new delivery dates with Federal for the Ten (10) Aircraft Kits. Federal shall use best efforts to deliver Kits according to the schedule requested by Buyer, but shall not be obligated to provide any kits until 210 days after deposits are received from Buyer. Should Buyer not be reawarded the ANET-93-01 contract by April 30, 1993, or otherwise proceed with the terms and conditions of the Agreement, Buyer shall elect One (1) of the following options by written notice to Federal not later than April 30, 1993: i. Buyer may elect to terminate the Agreement by paying to Federal a one-time cancellation fee of $300,000 not later than May 10, 1993, upon which the Parties shall have no further obligation to one another. ii. Buyer may request one further extension of the dates on which deposits and delivery date notice shall be required 2 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION to a date not later than December 31, 1993. If Buyer thereafter elects to terminate the Agreement, Buyer shall pay to Federal a one-time cancellation fee of $500,000 within ten days of providing such notice or January 10, 1994, whichever date shall occur first. Upon the payment of such cancellation fee by the above dates, the Parties shall have no further obligation to one another. iii. Buyer may elect to proceed with delivery of one (1) or more Kits between August 1, 1993 and December 31, 1994 on dates to be mutually agreed upon by the Parties. If this option is elected, Buyer shall, not later than May 10, 1993, place with Federal a non-refundable deposit of [BLACKOUT] per Kit, which shall be applicable to the Purchase Price. Such Kits shall be purchased at Federal's 1993 list price of [BLACKOUT] per B727-100 Lightweight Kit, [BLACKOUT] per B727-200 Lightweight Kit or [BLACKOUT] per B727-200 Heavyweight Kit. In the event this option is elected, and the Kit(s) are delivered in accordance with the terms and conditions of the Agreement, no further cancellation fees shall be payable and the Parties shall have no further obligations to one another. B. Federal and Buyer agree to determine the Aircraft serial number for each kit not later than sixty (60) days prior to the negotiated delivery dates of such Kit. Buyer acknowledges its understanding that the normal FAA processing time for the Aircraft Flight Manual Supplements is 30-60 days and that Federal shall not be liable for any delays resulting from not receiving the above referenced information at least sixty (60) days prior to the negotiated Kit delivery dates. 2. Exhibit D, Paragraph II is replaced in its entirety with the following: A. Within Ten (10) business days following the reawarding of the ANET-93-01 contract to Buyer by the U.S. Postal Service or May 10, 1993 if Buyer elects to exercise the option outlined in Section A.iii of Exhibit C, Buyer shall pay to Federal the non-refundable deposits of [BLACKOUT] per Kit required under the Agreement. The balance of the Purchase Price for each Kit shall be due at Delivery. B. All payments shall be made by wire transfer in immediately available U.S. funds to the account of Federal Express Corporation, account number 0710784, at Union Planters National Bank (ABA number 084000084). 3. Except as otherwise specified in this Amendment, all terms and conditions of the Purchase Agreement shall remain in full effect. 3 IN WITNESS WHEREOF, the Parties have signed this Amendment to the Agreement on this _____ day of February, 1993. FEDERAL EXPRESS CORPORATION ("Federal") By: JAMES R. PARKER ---------------------------- Name: James R. Parker ------------------------------- Title: Vice President ------------------------------- POSTAL AIR, INC. ("Buyer") By: TILMON J. REEVES ---------------------------- Name: Tilmon J. Reeves ------------------------------- Title: Vice President ------------------------------- EX-10.48 12 AMENDMENT NO.3 TO THE FEASI AGREEMENT 1 EXHIBIT 10.48 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION Amendment Three To that certain Purchase Agreement dated October 22, 1992 between Federal Express Corporation and Postal Air, Inc. This Amendment to Purchase Agreement (the "Amendment") is entered into by and between Federal Express Corporation ("Federal") and Postal Air, Inc. ("Buyer") and amends the Purchase Agreement dated as of October 22, 1992 (and as amended by Amendments One and Two dated November 17, 1992 and February 1993 respectively, the "Purchase Agreement") by and between Federal and Buyer. Terms capitalized herein which are not otherwise defined in this Amendment shall have the meanings set forth for such terms as provided in the Purchase Agreement unless the context clearly requires otherwise. RECITALS 1. Federal and Buyer entered into the Purchase Agreement, which specifies the purchase of Ten (10) Aircraft Kits from Federal by Buyer; 2. As a result of a federal district decision negating and voiding the award by the United States Postal Service to Buyer of a material contract, Buyer shall be unable to take delivery of the Aircraft Kits; 3. Federal and Buyer desire to amend the Purchase Agreement to reflect their agreement with respect to Buyer's inability to perform under the Purchase Agreement; NOW, THEREFORE, in consideration of the foregoing, and subject to the conditions set forth herein, the parties hereto agree as follows: 1. Exhibit C to the Purchase Agreement shall be replaced in its entirety with the following: A. Buyer shall have the option to take delivery of one (1) Lightweight Aircraft Kit between January 1, 1994 and December 31, 1994. Buyer shall provide Federal with a minimum of 210 days notice of the date delivery of the Kit is desired. B. Federal and Buyer agree to determine the Aircraft serial number for each kit not later than Sixty (60) days prior to the negotiated delivery dates. Buyer acknowledges its understanding that the normal FAA processing time for the Aircraft Flight Manual Supplements is 30-60 days and that Federal shall not be liable for any delays resulting from not receiving the above referenced information at least 60 days prior to the negotiated Kit delivery dates. Page 1 of 3 2 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION 2. Exhibit D, Paragraph I is replaced in its entirety with the following: The Purchase Price for the manufacture and delivery of one (1) Lightweight Kit in 1994 shall be [BLACKOUT] for each 727-100 Lightweight Kit and [BLACKOUT] for each 727-200 Lightweight Kit. In the event Buyer provides the double chamfer-cut C-1 fan blades required for the Installation, Federal shall provide to Buyer a credit in the amount of [BLACKOUT] for each engine so installed. 3. Exhibit D, Paragraph II is replaced in its entirety with the following: A. In consideration of Federal's release of Buyer from its obligations to purchase ten (10) Aircraft Kits, and for the payment of damages incurred by Federal in connection with such release, Buyer shall pay to Federal not later than June 18, 1993 a termination fee of Three Hundred Thousand Dollars U.S. ($300,000), which may, in the event Buyer exercises its option to purchase the Kit, be applied toward the Purchase Price of the Kit. The balance of the Purchase Price for the Kit shall be due at Delivery. In the event Buyer does not exercise its option to take delivery of the Kit, as indicated in Exhibit C, Federal shall retain the termination fee and the Parties shall have no further obligation to one another with respect to the Purchase Agreement. B. All payments shall be made by wire transfer in immediately available U.S. funds to the account of Federal Express Corporation, account number 0710784, at Union Planters National Bank (ABA number 084000084). 4. Exhibit D, Paragraph III shall be deleted in its entirety. 5. Exhibit D, Paragraph IV shall be renumbered as Paragraph III. 6. The execution and delivery of this Amendment by Federal is expressly conditioned upon the delivery of the $300,000 termination fee referred to in Paragraph 3 above within the time frame set forth in such paragraph. In the event such termination fee is not timely paid, this Amendment shall be null and void, ab initio. Page 2 of 3 3 7. Except as otherwise specified in this Amendment, all terms and conditions of the Purchase Agreement shall remain in full effect. IN WITNESS WHEREOF, the Parties have signed this Amendment to this 11th day of June, 1993. APPROVED FEDERAL EXPRESS CORPORATION AS TO LEGAL FORM ("Federal") /s/ CSB 6/11/93 - ------------------ By: JAMES R. PARKER LEGAL DEPARTMENT ---------------------------- Name: James R. Parker ------------------------------- Title: Vice President ------------------------------- POSTAL AIR, INC. ("Buyer") By: TILMON J. REEVES ----------------------------- Name: Tilmon J. Reeves -------------------------------- Title: President -------------------------------- SIGNED 6/18/93 Page 3 of 3 EX-10.49 13 AMENDMENT NO.4 TO THE FEASI AGREEMENT 1 EXHIBIT 10.49 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION Amendment Four To that certain Purchase Agreement dated October 22, 1992 between Federal Express Corporation and Postal Air, Inc. This Amendment to the Purchase Agreement ("Amendment #4") is entered into by and between Federal Express Corporation ("Federal") and Kitty Hawk Air Cargo, Inc., as successor-in-interest to Postal Air, Inc., and Aircraft Leasing, Inc., an affiliate of Kitty Hawk Air Cargo, Inc. ("Buyer") and amends the Purchase Agreement dated October 22, 1992 (and as amended by Amendments One, Two and Three dated November 17, 1992, February 1993 and June 11, 1993 respectively, the "Purchase Agreement") by and between Federal and Buyer. Terms capitalized herein which are not otherwise defined in this Amendment shall have the meanings set forth for such terms as provided in the Purchase Agreement unless the context clearly requires otherwise. RECITALS 1. Federal and Buyer entered into the Purchase Agreement, which originally specified delivery of ten (10) Aircraft Kits from Federal to Buyer; 2. Federal and Buyer amended the Purchase Agreement in Amendment #3 to reflect their agreement with respect to Buyer's inability to perform under the Purchase Agreement; 3. Amendment #3 specified the payment by Buyer to Federal of a Termination Fee in the amount of $300,000, with such Termination Fee being applicable to the Purchase Price of one (1) Lightweight Kit if ordered prior to May 31, 1994 for delivery not later than December 31, 1994; 4. Buyer paid to Federal the Termination Fee outlined in Paragraph 3, above; 5. Buyer has notified Federal of is intent to purchase one (1) Lightweight Aircraft Kit with a mutually agreed upon delivery date of June 16, 1994; NOW, THEREFORE, in consideration of the foregoing, and subject to the terms and conditions set forth herein, the parties hereto agree as follows: 1. Postal Air, Inc. has changed its legal operating name to Kitty Hawk Air Cargo, Inc. All references to "Buyer" in the Purchase Agreement shall mean Kitty Hawk Air Cargo, Inc. and Aircraft Leasing, Inc. Each of Kitty Hawk Air Cargo, Inc. and Aircraft Leasing, Inc. shall be jointly and severably liable for all of Buyer's obligations and liabilities which may accrue hereunder. By its execution hereof, Aircraft Leasing, Inc. Page 1 of 5 2 agrees to adhere to and be bound by the terms and conditions of the Purchase Agreement and to assume all obligations and liabilities thereunder. 2. The notice address for Buyer in Section 12.2 and Exhibit E shall be replaced with the following: Kitty Hawk Air Cargo, Inc. Attn.: Mr. Jim Reeves 1515 20th Street DFW Airport, TX 75261 FAX: 214-456-2296 3. Exhibit C of the Purchase Agreement shall be replaced in its entirety with the following: A. Delivery Schedule:
AIRCRAFT MODEL/ SCHEDULE KIT NO. ENGINE/SERIAL NO. DELIVERY DATE ------- ----------------- ------------- 1 B727-200/JT8D-9A/ June 16, 1994 20186
The Aircraft Flight Manual Supplement provided by Federal for the above aircraft shall allow Stage 3 operation with each of the following engine and CSD oil cooler configurations:
CSD OIL COOLER ENGINE TYPE CONFIGURATION MTOGW (lbs.) ----------- -------------- ------------ JT8D-7B Chin 177,600 JT8D-9, -9A Fan 169,500 JT8D-9, -9A Chin 175,000*
* This weight is offered pending final FAA certification of this configuration. In the event this weight is not approved by FAA, Federal will provide the highest MTOGW which can be certified under the Lightweight Kit configuration. B. Notice regarding Aircraft Flight Manual Data: Upon execution of this Amendment, Buyer shall provide Federal with the FAA-approved flight manual pages referencing the Aircraft serial number and maximum takeoff and landing weights on which each Kit shall be installed. Buyer acknowledges its understanding that the normal FAA processing time for the Stage 3 aircraft flight manual supplement is 30-60 days and that Federal Page 2 of 5 3 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION shall not be liable for delays resulting from not receiving the above referenced information at least 60 days prior to each schedules Delivery Date. This includes the June 16, 1994 delivery date scheduled in Exhibit C. 4. Exhibit D shall be replaced in its entirety with the following: Notwithstanding anything in this Agreement to the contrary, the entire Purchase Price for each Kit must be paid not later than the Delivery Date of such Kit. A. Purchase Price and Payment Schedule: i. Firm Order Kit. The Purchase Price for the manufacture and delivery of one (1) 727-200 Lightweight Kit before December 31, 1994 shall be [BLACKOUT]. For any deliveries after December 31, 1994, the above 1994 Kit Price shall be adjusted according to the formula outlined in Exhibit F. ii. Option Kit. Subject to taking delivery of the Firm Order Kit described in Paragraph A.i. above, Buyer shall be granted one (1) option for delivery of a Lightweight Kit upon 270 days written notice for delivery not later than May 30, 1996. The Base Purchase Price for the Option Kit shall be [BLACKOUT] for a 727-100 Lightweight Kit, and [BLACKOUT] for a 727-200 Lightweight Kit. If such option Kit is delivered after December 31, 1994, the above 1994 Kit Price shall be adjusted according to the formula outlined in Exhibit F. iii. Credits. Federal shall extend to Buyer a credit of [BLACKOUT] per Engine if such Engine is already installed with double chamfer-cut C-1 fan blades suitable for use in the Stage 3 conversion; a credit of [BLACKOUT] shall also be extended toward the Purchase Price of each Lightweight Kit if Buyer furnishes Boeing Acoustical Inlets suitable for use in the Stage 3 installation. iv. Delivery of Kits. All Kits shall be delivered F.O.B. Federal's Facility in Memphis, Tennessee. Page 3 of 5 4 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION B. Payment and Deposit Schedule. i. Termination Fee Applicability. Federal acknowledges that Buyer has previously paid the Termination Fee of $300,000, which amount is applicable to the balance of the Purchase Price payable at delivery of the Firm Order Kit. ii. Additional Deposit on Firm Order Kit. Not later than May 12, 1994, Buyer shall pay to Federal an additional non-refundable deposit of [BLACKOUT] as an advance payment applicable to the Purchase Price. iii. Option Kit. Upon exercising the Option Kit pursuant to Paragraph 2.A.ii above, Buyer shall pay to Federal a non-refundable deposit of [BLACKOUT] as an advance payment applicable to the Purchase Price. iv. Payment of Balance of the Purchase Price. Upon delivery of each Kit to Buyer, Buyer shall pay Federal the balance of the Kit Purchase Price. All payments shall be made in immediately available U.S. funds to the account of Federal Express Corporation, account number 0710784 at Union Planters National Bank (ABA number 084000084). 5. Exhibit F (Escalation Formula) shall be modified as follows: A. The formula term for Pbase shall be defined as follows: Pbase = Base Kit Price (September 1993 dollars). B. The formula term for Ppw1 shall be defined as follows: Ppw1 = Pratt & Whitney (PW) Commercial Parts Support Price List prices as of September 1, 1993. C. The formula for CPIbase shall be modified as follows: CPIbase = U.S. Government Consumer Price Index for all urban areas as of September, 1993. Page 4 of 5 5 6. Except as otherwise specified in this Amendment, all terms and conditions of the Purchase Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Parties have signed this Amendment on this 10th day of May, 1994. FEDERAL EXPRESS CORPORATION APPROVED ("Federal") AS TO LEGAL FORM /s/ KHS 5/10/94 By: /s/ JAMES R. PARKER ---------------- ---------------------- LEGAL DEPT. Name: James R. Parker ---------------------- Title: Vice President ---------------------- KITTY HAWK AIR CARGO, INC. ("Buyer") By: /s/ TILMON J. REEVES ---------------------- Name: Tilmon J. Reeves ---------------------- Title: President ---------------------- AIRCRAFT LEASING, INC. ("Buyer") By: /s/ R.R. WADSWORTH JR. ---------------------- Name: R.R. Wadsworth Jr. ---------------------- Title: President ---------------------- Page 5 of 5 EX-10.50 14 AMENDMENT NO. 5 TO THE FEASI AGREEMENT 1 EXHIBIT 10.50 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMITTION AMENDMENT FIVE To that certain Purchase Agreement dated October 22, 1992 between Federal Express Corporation and Postal Air, Inc. This Amendment to the Purchase Agreement ("Amendment #5") is entered into by and between Federal Express Corporation ("Federal") and Kitty Hawk Air Cargo, Inc., as successor-in-interest to Postal Air, Inc., and Aircraft Leasing, Inc., an affiliate of Kitty Hawk Air Cargo, Inc. ("Buyer") and amends the Purchase Agreement dated October 22, 1992 (and as amended by Amendments One, Two, Three and Four dated November 17, 1992, February 1993, June 11, 1993 and May 10, 1994 respectively, the "Purchase Agreement") by and between Federal and Buyer. Terms capitalized herein which are not otherwise defined in this Amendment shall have the meanings set forth for such terms as provided in the Purchase Agreement unless the context clearly requires otherwise. Recitals 1. Buyer has purchased one (1) Lightweight Aircraft Kit pursuant to the Agreement, which Kit was delivered June 16, 1994; 2. Buyer and FedEx wish to amend the Agreement to provide for six (6) additional Aircraft Kits to be Delivered to Buyer between December 1, 1995 and May 31, 1999 in accordance with the terms and conditions of the Agreement; NOW, THEREFORE, in consideration of the foregoing, and subject to the terms and conditions set forth herein, the parties agree as follows: 1. With respect to Firm Order Kits #2 through #7, Exhibit C of the Purchase Agreement shall be replaced in its entirety with the new Delivery Schedule in Attachment I to this Amendment #5. 2. With respect to Firm Order Kits #2 through #7, Exhibit D shall be replaced in its entirety with the new Attachment II to this Amendment #5. 3. Exhibit F (Escalation Formula) shall be modified as follows: A. The formula term for Pbase shall be defined as follows: Pbase = Base Kit Price (December 1994 dollars). B. The formula term for Ppwl shall be as follows: Ppwl = Pratt & Whitney (PW) Commercial Parts Support Price List prices as of December 1, 1994. Page 1 of 2 2 C. The formula for CPIbase shall be modified as follows: CPIbase = U.S. Government Consumer Price Index for all urban areas as of December 1994. 4. Except as otherwise specified in this Amendment, all terms and conditions of the Purchase Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Parties have signed this Amendment on this 29th day of September, 1995. FEDERAL EXPRESS CORPORATION APPROVED ("Federal") AS TO LEGAL FORM /s/ KHS 10/06/95 By: /s/ JAMES R. PARKER ---------------- ---------------------- LEGAL DEPT. Name: James R. Parker ---------------------- Title: Vice President ---------------------- KITTY HAWK AIR CARGO, INC. ("Buyer") By: /s/ TILMON J. REEVES ---------------------- Name: Tilmon J. Reeves ---------------------- Title: President ---------------------- AIRCRAFT LEASING, INC. ("Buyer") By: /s/ R.R. WADSWORTH JR. ---------------------- Name: R.R. Wadsworth Jr. ---------------------- Title: President ---------------------- Page 2 of 2 3 Amendment #5 Attachment I. Exhibit C to that certain Purchase Agreement between Federal Express Corporation ("FedEx") and Kitty Hawk Air Cargo, Inc. and Aircraft Leasing, Inc. as successors in interest to Postal Air, Inc. ("Buyer") Dated October 22, 1992 AIRCRAFT KIT DELIVERY SCHEDULE - --------------------------------------------------------------------------------
AIRCRAFT MODEL/ SCHEDULED KIT NO. TYPE OF KIT DELIVERY DATE - ------- ---------------------- ------------------------------ 2 B727-200 / Heavyweight On or about 31-Dec-95 3 TBD / TBD Between 1-Mar-95 & 31-May-96 4 TBD / TBD Between 1-Jun-95 & 31-Dec-96 5 TBD / TBD Between 1-Jun-95 & 31-May-98 6 TBD / TBD Between 1-Jun-95 & 31-May-99 7 TBD / TBD Between 1-Jun-95 & 31-May-99
Buyer shall provide FedEx with the FAA-approved flight manual pages referencing the Aircraft serial number, engine power rating, the maximum takeoff and landing weights for the Aircraft on which each Kit shall be installed, and copies of Airframe major repairs and installed supplemental type certificates, not later than Sixty (60) days prior to the delivery date established above. Buyer acknowledges its understanding that the normal FAA processing time for the Stage 3 aircraft flight manual supplement is 30-60 days and that FedEx shall not be liable for delays resulting from not receiving the above referenced information at least 60 days prior to each scheduled Kit Delivery Date. Unless otherwise specified, Buyer shall also provide FedEx with at least 60 days notice of whether the double chamfer-cut C-1 fan blades should be delivered concurrent with Delivery of each Kit or at a later date upon 30 days notice from Buyer (i.e. to facilitate the 5 day return requirement on the removed C-1 fan blades). Unless otherwise specified, Heavyweight Kit Buyers shall also provide FedEx with at least 180 days notice of whether -15, -15A, - -17 or -17A engines will be installed. Page 1 of 1 4 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION Amendment #5 Attachment II. Exhibit D to that certain Purchase Agreement between Federal Express Corporation ("FedEx") and Kitty Hawk Air Cargo, Inc. and Aircraft Leasing, Inc. as successors in interest to Postal Air, Inc. ("Buyer") Dated October 22, 1992 - ------------------------------------------------------------------------------- PURCHASE PRICE AND PAYMENT SCHEDULE Notwithstanding anything in this Agreement to the contrary, the entire Purchase Price for any Kit must be paid not later than the Delivery Date of such Kit. I. PURCHASE PRICE AND DELIVERY OF KITS A. Firm Order Kit. The 1995 Base Purchase Price for the manufacture and delivery of six (6) Aircraft Kits shall be [BLACKOUT] per 727-100 Lightweight Kit, [BLACKOUT] 727-200 Lightweight Kit and [BLACKOUT] per 727-200 Heavyweight Kit before [BLACKOUT]. For any deliveries after December 31, 1995, the above 1995 Base Kit Price shall be adjusted according to the formula outlined in Exhibit F. B. Option Kits. In addition to the Kits described in paragraph I.A. above, Buyer shall be granted six (6) options exercisable upon at least 180 days written notice for delivery on dates to be mutually agreed upon between June 1, 1996 and May 31, 1999, subject to availability. Option Kits shall be available only following delivery of all Firm Order Kits under the Agreement. The 1995 Base Purchase Price for Option Kits shall be as follows:
727-100 727-200 727-200 Light- Light- Heavy- weight Kit weight Kit weight Kit ---------- ---------- ---------- Option Kit #1-#3 [BLACKOUT] [BLACKOUT] [BLACKOUT] Option Kit #4-#6 [BLACKOUT] [BLACKOUT] [BLACKOUT]
Page 1 of 3 5 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION For deliveries after December 31, 1995, the above Base Purchase Price shall be adjusted according to the formula outlined in Exhibit F. All costs of meeting the Configuration Specification in Exhibit A shall be for Buyer's account. C. Credits. FedEx shall extend to Buyer a credit of [BLACKOUT] per engine if such Engine is already installed with Pratt & Whitney double chamfer cut C-1 fan blades or is in compliance with Pratt & Whitney service bulletin 6072 (as appropriate. These credits shall only be available if specifically requested by Buyer prior to Kit Delivery. D. Delivery of Kits: All Kits shall be delivered F.O.B. Memphis, Tennessee. With respect to Option Kits, and Firm Order Kits which do not have a specific Delivery Date, Buyer shall provide FedEx with at least 180 days written notice of the date delivery of each Kit is requested and the type of Kit being ordered. Subject to delivery position availability, FedEx shall confirm delivery position availability to Buyer in writing within five (5) Business Days of Buyer's request. E. Transfer of Kits Between Buyer's Aircraft: Following Aircraft Kit Installation on an Aircraft, Buyer shall be permitted, upon 210 days written notice to FedEx, to purchase Transfer Kits, as available from FedEx, to allow the transfer to the Stage 3 Kit engines from such Aircraft to another Buyer-owned or operated Aircraft, subject to the payment of the following transfer fees: i. The 1995 Base Purchase Price of each Transfer Kit to allow transfer of a Lightweight Kit shall be [BLACKOUT]. ii. The 1995 Base Purchase Price of each Transfer Kit to allow the transfer of a Heavyweight Kit shall be [BLACKOUT]. The Transfer Kit Prices in this paragraph shall be escalated, as appropriate, in accordance with the formula in Exhibit F. All costs of meeting the Configuration Specification in Exhibit A shall be at Buyer's expense. II. PAYMENT AND DEPOSIT SCHEDULE A. Deposits i Initial Deposits: Upon contract execution, Buyer shall pay to FedEx a non-refundable deposit of [BLACKOUT] for Firm Order Kit #2 and [BLACKOUT] per Kit for Firm Order Kits #3 through #7 as an advance payment applicable to the Purchase Price at Delivery. Page 2 of 3 6 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ii. Progress Payments for Firm Order Kits #3 through #7 only: At least 180 days prior to the scheduled Delivery Date of each Firm Order Kit. Buyer shall pay to FedEx a nonrefundable deposit of [BLACKOUT] as an advance payment applicable to the Purchase Price at Delivery. iii. Option Kits: Upon exercising each option pursuant to paragraph I.B. above, Buyer shall pay to FedEx a non-refundable deposit of [BLACKOUT] as an advance payment applicable to the Purchase Price at Delivery. iv. Transfer Kits: Upon ordering Transfer Kits, Buyer shall pay to FedEx a non-refundable deposit of [BLACKOUT] for each Lightweight Transfer Kit and [BLACKOUT] for each Heavyweight Transfer Kit. B. Payment of Balance of Purchase Price Upon delivery of each Kit or Transfer Kit to Buyer, Buyer shall pay FedEx the balance of the Kit price. All payments shall be made by wire transfer in immediately available U.S. funds to the account of Federal Express Corporation, account number 07701985, at Citibank N.A., New York, NY (ABA number 021000089). Page 3 of 3 EX-21.1 15 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 Kitty Hawk Charters, Inc., a Texas corporation Kitty Hawk Aircargo, Inc., a Texas corporation Aircraft Leasing, Inc., a Texas corporation Skyfreighters Corporation, a Texas corporation EX-23.1 16 CONSENT OF ERNST & YOUNG LLP. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference of our firm under the caption "Experts" and the use of our report dated June 28, 1996, in the Registration Statement (Form S-1) and related Prospectus of Kitty Hawk, Inc. and subsidiaries for the registration of 3,450,000 shares of its common stock. ERNST & YOUNG LLP Dallas, Texas July 17, 1996 EX-27.1 17 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS AUG-31-1996 SEP-01-1995 MAY-31-1996 4,249 0 12,662 0 36 19,310 55,022 12,355 61,977 14,860 21,392 74 0 0 23,210 61,977 0 107,126 0 89,734 3,808 0 1,344 5,733 2,322 3,411 0 0 0 3,411 0.43 0.43
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