-----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, VTFQSuUzow41T66lG7CjBYorAVJGHr/gA8Nziug1c/suKtOuDCnPhogMP6YsfwzC /GrC35PBdqRRyMmxEOdWfQ== 0000950134-96-004654.txt : 19960906 0000950134-96-004654.hdr.sgml : 19960906 ACCESSION NUMBER: 0000950134-96-004654 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960904 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-08307 FILM NUMBER: 96625323 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/A 1 AMENDMENT NO. 1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1996 REGISTRATION NO. 333-8307 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- KITTY HAWK, INC. (Exact name of registrant as specified in its charter) DELAWARE 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. / / 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 SEPTEMBER 4, 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] [PICTURE OF KITTY HAWK CONTROL ROOM] 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 (such as weather and customer-related delays). 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 500 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 15,183 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 2,601 2,530 Air Logistics Number of on-demand charters managed(3)...................... 6,514 8,708 9,748 16,713 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 $0.69. 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. CAPITAL INTENSIVE NATURE OF 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 five Boeing 727-200s, two Douglas DC-9-15Fs. 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 addition, the Company's financial results can be adversely affected by unexpected engine or airframe repairs to the extent uninsured. 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, General Motors Corporation, the U.S. Postal Service, and Burlington Air Express, Inc., 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%), 8 11 $48.9 million (47.1%), and $42.1 million (39.3%), 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. See "Business -- Relationship with GM." 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 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. See "Business -- Air Logistics -- United States Postal Service." 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 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 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 9 12 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 OF CUSTOMERS' BUSINESSES 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 Domestic 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 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 10 13 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. Foreign Regulation. 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. Excise Tax. On August 27, 1996, a 6.25% federal transportation excise tax applicable to air freight transportation was reinstated. Reinstatement of the tax 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. Restrictions on Foreign Ownership and Control. 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. See "Business -- Government Regulation" and "Description of Capital Stock." 11 14 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. There can be no assurance that the Company will be able to compete successfully with existing or new competitors. 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; CHALLENGES PRESENTED BY 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. The Company's future success also depends on its continuing ability to attract and retain highly qualified mechanical, technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will retain its key mechanical, managerial and technical employees or that it will be successful in attracting, assimilating or retaining other highly qualified mechanical, technical and managerial personnel in the future. 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 seven Boeing 727-200Fs that the Company has either recently acquired or intends to acquire and place in service during fiscal year 1997, five 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, 12 15 Kitty Hawk would seek other 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. Additionally, Kitty Hawk's existing Amended and Restated Credit Agreement dated August 14, 1996 with Wells Fargo Bank (Texas), N.A. and Bank One, Texas, N.A. (the "Credit Agreement") restricts the Company's ability to make certain types of acquisitions. See "Business -- Business Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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. In addition, the Credit Agreement is terminable if Mr. Christopher ceases to be the Chief Executive Officer of Kitty Hawk or active in the management of the Company. 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. 13 16 SEASONALITY The Company's air logistics business is seasonal, with its highest revenues historically occurring in the Company's first, 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. The Company's results of operations would be adversely and disproportionately affected if the Company's air logistics revenues were substantially lower than those normally expected during such three fiscal quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality" and "Business." 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; POSSIBLE VOLATILITY OF STOCK 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 could be subject to wide fluctuations in response to 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- 14 17 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 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, GM AGREEMENT AND CREDIT 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. 15 18 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. In addition, the Credit Agreement is terminable in the event: (i) Mr. Christopher ceases to own a majority of the Company's outstanding voting stock, (ii) if Mr. Christopher ceases to be the Chief Executive Officer of Kitty Hawk or active in its management or (iii) a "group" within the meaning of Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended, acquires beneficial ownership of 25% or more of the outstanding voting stock of Kitty Hawk. ABILITY TO ISSUE PREFERRED STOCK The authorized capital stock of the Company includes 1,000,000 shares of preferred stock (the "Preferred Stock"). The Board of Directors, in its sole discretion, may designate and issue one or more series of Preferred Stock from the authorized and unissued shares of Preferred Stock. Subject to limitations imposed by law or the Company's Certificate of Incorporation, the Board of Directors is empowered to determine: (i) the designation of and the number of shares constituting each series of Preferred Stock, (ii) the dividend rate for each series, (iii) the terms and conditions of any voting, conversion, and exchange rights for each series, (iv) the amounts payable on each series upon redemption or the Company's liquidation, dissolution or winding-up, (v) the provisions of any sinking fund for the redemption or purchase of shares of any series, and (vi) the preferences and the relative rights among the series of Preferred Stock. At the discretion of the Board of Directors, and subject to its fiduciary duties, the Preferred Stock could be used to deter any takeover attempt, by tender offer or otherwise. In addition, Preferred Stock could be issued with voting and conversion rights that could adversely affect the voting power of holders of Common Stock. The issuance of Preferred Stock could also result in a series of securities outstanding that would have preferences over the Common Stock with respect to dividends and in liquidation. The Board of Directors has no current intention to issue shares of Preferred Stock. IMMEDIATE SUBSTANTIAL 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 $31.3 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 $5.7 million of the net proceeds to repay all but approximately $6.12 million of bank indebtedness incurred to purchase, maintain, and modify (including cargo reconfiguration and noise abatement modifications) two Boeing 727-200s acquired during July 1996. Of the $5.7 million of indebtedness to be repaid, (i) approximately $3.8 million bears interest at a Eurodollar rate plus 1.5%, is secured by certain aircraft owned by the Company, all aircraft acquired with the proceeds from the Credit Agreement, certain leases of aircraft and engines, accounts, chattel paper, general intangibles and other personal property, and has a final maturity date of December 1996 and (ii) approximately $1.9 million 16 19 bears interest at a Eurodollar rate plus 1.5%, is secured by certain aircraft owned by the Company, all aircraft acquired with the proceeds from the Credit Agreement, certain leases of aircraft and engines, accounts, chattel paper, general intangibles and other personal property, and has a final maturity date of December 31, 1998. 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. The following table illustrates the Company's intended use of the proceeds of the offering:
ESTIMATED INTENDED USE OF PROCEEDS REQUIRED AMOUNT ---------------------------------------------------------------------- --------------- Purchase and Modify Five Additional Boeing 727-200F Aircraft.......... $31.3 million Repay a Portion of the Indebtedness Incurred to Purchase, Maintain and Modify Two Recently Acquired Boeing 727-200F Aircraft............... 5.7 million --------------- Total Estimated Proceeds.................................... $37.0 million ============
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 Credit Agreement with Wells Fargo Bank, National Association and Bank One, Texas, N.A. restrict Kitty Hawk's ability to declare and pay dividends to its stockholders during any fiscal year to an amount not to exceed 25% of the Company's net income during the immediately preceding fiscal year. 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." 17 20 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% $ 5,430 .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 (i) includes 326,564 shares issued to Messrs. Reeves and Wadsworth on June 26, 1996 and (ii) 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. 18 21 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." 19 22 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 15,183 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 2,601 1,811 2,530 Air Logistics Number of on-demand charters managed(4)...... 6,514 8,708 9,748 16,713 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 $0.69. See "Management -- Employee Compensation Plans and Arrangements." (2) Reflects sums received in settlement of litigation. See "Business -- 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. 20 23 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, 10.8%, 15.4%, 20.8%, and 18.8%, respectively, were attributable to the air freight carrier and 89.2%, 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 21 24 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% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
22 25 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. 23 26 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. 24 27 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 15,183 flight hours for fiscal year 1995 from 11,795 flight hours in fiscal year 1994, a 28.7% increase. This increase was primarily the result of the inclusion of an additional four Boeing 727-200Fs, 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. 25 28 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. 26 29 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. On August 14, 1996 Kitty Hawk entered into the Credit Agreement with Wells Fargo Bank (Texas), National Association ("WFB"), successor in interest to First Interstate Bank of Texas, N.A., and Bank One, Texas, N.A. ("BOT") for a $15 million Revolving Credit Loans Facility (the "Revolving Credit Facility"), an approximately $12.7 million Term Loans A Facility (the "Term Loans A"), an approximately $11.2 million Term Loans B Facility (the "Term Loans B") and a $10 million Term Loans C Facility (the "Term Loans C") (collectively, the "Commitments"). As of August 28, 1996 approximately $11.9 million was outstanding under the Revolving Credit Facility, approximately $12.7 million was outstanding under the Term Loans A, approximately $11.2 million was outstanding under the Term Loans B and $0 was outstanding under the Term Loans C. The Commitments bear interest at WFB's prime rate or, at Kitty Hawk's option, a Eurodollar rate plus 1.5% to 2.0% based upon a debt-to-cash flow ratio of Kitty Hawk. Under the Credit Agreement, $10 million of proceeds of the Revolving Credit Facility are restricted to use from time to time for interim financing of up to $6.5 million per aircraft for aircraft acquisitions by the Company; the remaining $5 million of the Facility may be used for general corporate purposes, including interim financing for acquired aircraft that exceeds the limits that apply to the restricted portion. The outstanding balance of the Revolving Credit Facility results from borrowing to pay revolving credit indebtedness to WFB which was recently incurred by Kitty Hawk in connection with purchasing two Boeing 727-200s that are being converted to freighter configuration, and to fund such cargo conversion, noise abatement modifications and maintenance on those two aircraft. The Revolving Credit Facility expires on December 31, 1998. Any advance under the portion of the Revolving Credit Facility that is restricted to interim financing for aircraft acquisition must be repaid in full within 150 days of first advance for the acquired aircraft. All advances under the commitment for Term Loans C must be made by April 29, 1998. The Term Loans A matures on March 31, 2002 and the Term Loans B and C mature on March 31, 2003. The Commitments are cross-collateralized and are secured by certain aircraft owned by the Company, all aircraft acquired with advances under the restricted portion of the Revolving Credit Facility while those advances are outstanding, certain leases of aircraft and engines, accounts, chattel paper, general intangibles and other personal property. The Credit Agreement prohibits (i) the redemption or repurchase of the Company's securities, (ii) the payment of dividends to Kitty Hawk's stockholders in an amount over 25% of the Company's net income of the immediately preceding fiscal year, (iii) certain investments, acquisitions of stock, acquisitions of assets to the extent that the business acquired is not in the present lines of business of the Company, and other business combinations, (iv) certain transactions with affiliates and (v) the Company to incur any additional indebtedness, liabilities or obligations other than debt incurred (a) with the prior written consent of certain lenders, (b) with WFB or BOT or (c) in the ordinary course of business not to exceed $25 million. The Credit Agreement also contains certain other covenants, including limitations on the ability of the Company to change its lines of business. If a "Change of Control" occurs, WFB and BOT may accelerate or 27 30 terminate the Commitments. "Change of Control" includes (a) the failure of Kitty Hawk to own all of the outstanding stock of certain of its subsidiaries, (b) Mr. Christopher failing to own at least 51% of the outstanding stock of Kitty Hawk, (c) Mr. Christopher ceasing to be Chief Executive Officer of Kitty Hawk or active in the management of the Company or (d) if, after the consummation of a public offering, any person (or two or more persons acting as a group) acquiring beneficial ownership of 25% or more of the outstanding shares of Common Stock. During fiscal years 1994 and 1995 and the nine months ended May 31, 1996, similar restrictions and prohibitions under the Company's other credit facilities did not have a material impact on the Company's ability to meet its cash obligations and the Company does not believe that the restrictions under the Credit Agreement will have any such impact in the future. In addition, the Company has a loan with 1st Source Bank. As of August 1, 1996, the outstanding balance of this loan was approximately $1 million. The loan bears interest at 9.7%, 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 a event of default upon which 1st Source may declare all or any part of the remaining unpaid principal. 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 year 1994 were primarily for the purchase of: (i) two 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 $5.0 million) for an aggregate capital expenditure of approximately $31.3 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 $5.0 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 28 31 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. In March 1995, the Financial Accounting Standard Board issued Statement No. 121 Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement 121 in the first quarter of fiscal year 1997 and, based on current circumstances, does not believe that adopting Statement No. 121 will affect materially its financial statements. The Company accounts for stock-based compensation utilizing the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". The Company is not required to adopt the provisions of SFAS No. 123 until fiscal 1997. Under SFAS 123, companies are allowed to continue to apply the provisions of APB Opinion No. 25 to their stock-based compensation arrangements. As such, the Company will only be required to supplement its financial statements with additional disclosures in fiscal 1997. 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. 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 overall world cargo traffic growth was 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. Stage III noise control standards require noncomplying aircraft to be modified with a noise suppression kit (or "hushkit") designed to meet certain noise level limits (which are significantly stricter than Stage II standards) during various phases of an aircraft's operation and flight. With 30 33 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 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 "Risk Factors -- 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 31 34 enable the Company to quickly exchange operating data between Company headquarters and an aircraft, 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 revenue 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 (i) a Westwind 1124 jet aircraft owned by the Company and utilized solely for the transport of Company personnel and (ii) the Company's undivided one-third interest in two Falcon 20C jet aircraft to be leased to a third-party operator. See "Management -- Compensation Committee Interlocks and Insider Participation." 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 "Risk Factors -- 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 7.7%, 7.1%, 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 "Business -- 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." The Company has recently acquired an undivided one-third interest in two Falcon 20C jet aircraft and pursuant to an anticipated co-ownership agreement will lease such aircraft to a third-party operator. The Company intends to charter such jet aircraft in on-demand service. See "Management -- Compensation Committee Interlocks and Insider Participation." 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. Kitty Hawk has arranged as many as 208 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 35 38 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 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 36 39 transportation and aircraft loading companies in North America that is similar to its information concerning air carriers. 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. 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. 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%), 37 40 $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 was awarded a 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 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 National Transportation Safety Board 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 38 41 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 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. 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 (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. "Risk Factors -- Dependence on Significant Customers." 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 39 42 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 "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 located in Ypsilanti, Michigan 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 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 40 43 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. 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 ten 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 41 44 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 August 27, 1996, a 6.25% federal transportation excise tax applicable to air freight transportation was reinstated. Reinstatement of the tax 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. 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 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 revenue fleet in amounts consistent with industry standards. All-risk aircraft hull insurance is maintained for all aircraft in the revenue fleet other than the Convairs. 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 42 45 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. 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. 43 46 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. 44 47 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................ 57 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. 45 48 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. On August 17, 1996, the Company acquired an undivided one-third interest in two Falcon 20C jet aircraft together with two individuals unaffiliated with the Company who will each hold a one-third interest in such aircraft. An interim acquisition note (the "Note") in the amount of $1,700,000 covering the purchase price and immediately necessary maintenance was executed by Mr. Christopher and Bruce Martin. The Company anticipates that this Note will be extended for five years, will be secured by the Falcon 20C jet aircraft, and will be amended to provide for monthly installments of principal and interest. The Company further anticipates that the Company and Tom Wachendorfer will execute such extended Note, following which the Company and Messrs. Martin and Wachendorfer will be jointly and severally liable for repayment of the Note. Concurrent with the extension of the Note, Mr. Christopher will be released from liability therefor. 46 49 The Company anticipates entering into a co-ownership and contribution agreement (the "Co-Ownership Agreement") with Messrs. Martin and Wachendorfer under which the parties will agree to lease the two Falcon 20C jet aircraft to Martinaire. Currently, Messrs. Martin and Wachendorfer are the only shareholders of Martinaire. The Company further anticipates that the Co-Ownership Agreement will require the parties thereto to contribute equally to the payment of all amounts due to the lender under the Note. The Company expects the lease with Martinaire governing such aircraft will require Martinaire to (i) maintain hull insurance on the aircraft in an amount at least equal to the fair market value of the aircraft and liability insurance of at least $50 million combined single limit coverage and (ii) name the co-owners, including the Company, as additional insureds and as loss payees. 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. 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 of $2,975 to the Company's 401(k) Savings Plan for Mr. Christopher and (ii) life insurance premiums of $22,047 paid on Mr. Christopher's behalf. Does not include any contingent payments to Mr. Christopher under the ANET litigation settlement made subsequent to fiscal year 1994. These payments are contingent upon the Emery contract remaining in effect. See "Business -- Legal Proceedings -- Litigation and Arbitration Related to Postal 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 of $25,500 paid on Mr. Christopher's behalf, and (iii) matching contributions of $1,663 to the Company's 401(k) Savings Plan for Mr. Christopher. 47 50 (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." 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." 48 51 (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 and the outside directors of the Company. 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 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 49 52 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 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. 50 53 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 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 $533,786 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 "Management -- Compensation Committee Interlocks and Insider Participation." 51 54 PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER The following table sets forth certain information concerning the beneficial ownership of the Company's Common Stock as of August 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. 52 55 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 August 15, 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. 53 56 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. 54 57 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. 55 58 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. 56 59 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 57 60 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. 58 61 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. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. 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. 59 62 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 63 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 64 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 65 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 66 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 67 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 68 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 method 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 69 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. As a result of the merger, there was no financial change in basis of the Company. 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 70 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 71 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 72 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 73 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 74 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 $1,325,446 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 75 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 76 [PICTURE OF KITTY HAWK BUILDING] [PICTURE OF KITTY HAWK CONTAINERS] [PICTURE OF KITTY HAWK BOEING 727] [PICTURE OF KITTY HAWK AIRCRAFT] [PICTURE OF KITTY HAWK AIRCRAFT BEING LOADED] [MAP OF KITTY HAWK SCHEDULED PACIFIC RIM ROUTES] 77 ================================================================================ 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....................... 17 Dilution.............................. 18 Capitalization........................ 19 Selected Consolidated Financial and Operating Data...................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 21 Business.............................. 30 Management............................ 45 Certain Transactions.................. 51 Principal Stockholders and Selling Stockholder......................... 52 Description of Capital Stock.......... 53 Shares Eligible for Future Sale....... 56 Underwriting.......................... 57 Legal Matters......................... 58 Experts............................... 58 Additional Information................ 59 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. ================================================================================ 78 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................................... 150,000 Legal fees and expenses........................................... 210,000 Accounting fees and expenses...................................... 135,000 Blue sky fees and expenses........................................ 5,000 Transfer agent and registrar fees................................. 10,000 Miscellaneous expenses............................................ 84,821 -------- Total................................................... $665,000 ========
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 79 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 80 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 81 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**** -- 10.22**** -- 10.23**** -- 10.24**** -- 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. Amended and Restated Omnibus Securities Plan, dated as of September 3, 1996. 10.29**** -- 10.30* -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan, dated as of September 3, 1996. 10.31* -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, dated as of September 3, 1996. 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. 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**** -- 10.37**** -- 10.38**** -- 10.39**** -- 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.
II-4 82 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. 10.51* -- Amended and Restated Credit Agreement, dated as of August 14, 1996, by and among the Company, Wells Fargo Bank (Texas), National Association, and Bank One, Texas, N.A. 21.1*** -- Subsidiaries of the Registrant. 23.1* -- Consent of Ernst & Young LLP. 23.2 -- Consent of Haynes and Boone, LLP (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. ** Previously filed and confidential treatment requested for certain portions pursuant to the Commission's Rule 406. *** Previously filed. **** Exhibit deleted because it is no longer applicable. (b) Financial Statement Schedules and Auditors' Reports on Schedules: None II-5 83 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 84 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of September, 1996. KITTY HAWK, INC. By: /s/ RICHARD R. WADSWORTH ------------------------------------ Richard R. Wadsworth Senior Vice President -- Finance, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities indicated on the 3rd day of September, 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 * /s/ RICHARD R. WADSWORTH - --------------------------------------------- Richard R. Wadsworth (As Attorney-in-Fact for each person as indicated)
II-7 85 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.
86
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.
87
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**** -- 10.22**** -- 10.23**** -- 10.24**** -- 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. Amended and Restated Omnibus Securities Plan, dated as of September 3, 1996. 10.29**** -- 10.30* -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan, dated as of September 3, 1996. 10.31* -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, dated as of September 3, 1996. 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. 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**** -- 10.37**** -- 10.38**** --
88
EXHIBIT NO. DESCRIPTION - -------------------- ------------------------------------------------------------------------ 10.39**** -- 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. 10.51* -- Amended and Restated Credit Agreement, dated as of August 14, 1996, by and among the Company, Wells Fargo Bank (Texas), National Association, and Bank One, Texas, N.A. 21.1*** -- Subsidiaries of the Registrant. 23.1* -- Consent of Ernst & Young LLP. 23.2 -- Consent of Haynes and Boone, LLP (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.
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 FORM OF UNDERWRITING AGREEMENT 3,000,000 Shares KITTY HAWK, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- September __, 1996 SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED FIELDSTONE FPCG SERVICES, L.P. As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: Kitty Hawk, Inc., a Delaware corporation (the "Company"), proposes to issue and sell an aggregate of 2,700,000 shares of its common stock, $0.01 par value per share, to the several Underwriters named in Schedule II hereto (the "Underwriters") and the person named in Part A of Schedule I hereto (the "Selling Stockholder") proposes to sell to the several Underwriters 300,000 shares of common stock of the Company. The Company and the Selling Stockholder are hereinafter sometimes referred to as the "Sellers." The Company's common stock, $0.01 par value, is hereinafter referred to as the "Common Stock" and the 2,700,000 shares of Common Stock to be issued and sold to the Underwriters by the Company and the 300,000 shares of Common Stock to be sold to the Underwriters by the Selling Stockholder are hereinafter referred to as the "Firm Shares." The Selling Stockholder also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional 450,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares." The Company and the Selling Stockholder wish to confirm as follows their respective agreements with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S--1 under the Act (the "registration statement"), including a prospectus subject to completion relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective, or, if the registration statement became effective prior to the 2 execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post--effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post--effective amendment. The term "Registration Statement" shall also include any registration statement relating to the Shares that is filed and declared effective pursuant to Rule 462(b) under the Act. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b), provided that if a prospectus that meets the requirements of Section 10(a) of the Act is delivered pursuant to Rule 434(b) under the Act, then (i) the term "Prospectus" as used in this Agreement means the prospectus subject to completion (as defined in Rule 434(g) under the Act) relating to the Shares as supplemented by the information contained in the term sheet described in Rule 434(b)(3) under the Act, and (ii) the date of such prospectus shall be deemed to be the date of such term sheet. The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. 2. Agreements to Sell and Purchase. Subject to such adjustments as you may determine in order to avoid fractional shares, the Company agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholder herein contained and subject to all the terms and conditions set forth herein, each Underwriter, severally and not jointly, agrees to purchase from the Company, at a purchase price of $______ per Share (the "purchase price per share"), the number of Firm Shares which bears the same proportion to the aggregate number of Firm Shares to be issued and sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholder. Subject to such adjustments as you may determine in order to avoid fractional shares, the Selling Stockholder agrees, subject to all the terms and conditions set forth herein, to sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholder herein contained and subject to all the terms and conditions set forth herein, each Underwriter, severally and not jointly, agrees to purchase from the Selling Stockholder at the purchase price per share that number of Firm Shares which bears the same proportion to the number of Firm Shares set forth opposite the name of such Selling Stockholder in Schedule I hereto as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholder. The Selling Stockholder also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholder herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Selling Stockholder at the purchase price per share, pursuant to an option (the "over- -allotment option") which may be exercised at any time (but not more than once) prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such -2- 3 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to 450,000 shares from the Selling Stockholder. Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the over--allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Selling Stockholder the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be sold by the Selling Stockholder as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholder. 3. Terms of Public Offering. The Company and the Selling Stockholder have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Haynes and Boone, LLP, 3100 NationsBank Plaza, 901 Main Street, Texas 75202, at 9:00 A.M., Dallas time, on _________, 1996 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement among you, the Company and the Selling Stockholder. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Haynes and Boone, LLP, at such time and on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company and the Selling Stockholder of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement among you, the Company and the Selling Stockholder. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor in immediately available funds. 5. Agreements of the Company. The Company agrees with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post--effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post--effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post--effective amendment has become effective. - 3 - 4 (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any material adverse change in the Company's financial condition, business, properties, net worth or results of operations of the Company and its subsidiaries, taken as a whole, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, four (4) signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may reasonably request. (d) The Company will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have reasonably requested, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may reasonably request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time - 4 - 5 any event shall occur that is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto, and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve--month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section ll(a) of the Act. (i) During the period of five years hereafter, the Company will furnish to you as soon as available, a copy of each report of the Company mailed to stockholders or filed with the Commission. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 12 hereof or by notice given by you terminating this Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company or the Selling Stockholder to comply with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all out--of- -pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder substantially in accordance with the description set forth in the Prospectus. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) For a period of 180 days after the date hereof, the Company will not, without the prior written consent of Smith Barney Inc., (i) 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 or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by - 5 - 6 delivery of Common Stock or such other securities, in cash or otherwise, except for (x) sales to the Underwriters pursuant to this Agreement, (y) the sale pursuant to options currently outstanding and described as outstanding in the Prospectus provided that the exercising optionee is subject to a lock-up agreement as described in this Agreement or (z) the grant of options, securities or other rights under the Company's Omnibus Securities Plan. (n) The Company has furnished "lock-up" letters, in form and substance satisfactory to you, signed by each of its current officers and directors and each of its stockholders. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (p) The Company will use its best efforts to have the Common Stock listed, subject to notice of issuance, on the Nasdaq National Market concurrently with the effectiveness of the registration statement. 6. Agreements of the Selling Stockholder. The Selling Stockholder agrees with the several Underwriters as follows: (a) Such Selling Stockholder will cooperate to the extent necessary to cause the registration statement or any post--effective amendment thereto to become effective at the earliest practicable time. (b) Such Selling Stockholder will pay all Federal and other taxes, if any, on the transfer or sale of the Shares being sold by the Selling Stockholder to the Underwriters. (c) Such Selling Stockholder will do or perform all things required to be done or performed by the Selling Stockholder under this Agreement prior to the Closing Date or any Option Closing Date, as the case may be, to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. (d) Such Selling Stockholder has executed a "lock-up" letter as provided in Section 5(n) above and, for a period of 360 days after the date hereof, will not, without the prior written consent of Smith Barney Inc., (i) 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 or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, except for sales to the Underwriters pursuant to this Agreement. (e) Except as stated in this Agreement and in any Prepricing Prospectus and the Prospectus, such Selling Stockholder will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (f) Such Selling Stockholder will advise you promptly, and if requested by you, will confirm such advice in writing, within the period of time referred to in Section 5(f) hereof, of any material - 6 - 7 adverse change in the financial condition, business, properties, net worth or results of operations of the Company and its subsidiaries, taken as a whole, or of any change in information relating to such Selling Stockholder or the Company or any new information relating to the Company or relating to any matter stated in the Prospectus or any amendment or supplement thereto which comes to the attention of such Selling Stockholder that suggests that any statement made in the Registration Statement or the Prospectus (as then amended or supplemented, if amended or supplemented) is or may be untrue in any material respect or that the Registration Statement or Prospectus (as then amended or supplemented, if amended or supplemented) omits or may omit to state a material fact or a fact necessary to be stated therein in order to make the statements therein not misleading in any material respect, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented, if amended or supplemented) in order to comply with the Act or any other law. 7. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post--effective amendment thereto shall become effective and the prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) or Rule 462 under the Act, complied or will comply in all material respects with the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the prospectus or any amendment or supplement thereto made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) All the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the Shares to be issued and sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; and the capital stock of the Company conforms to the description thereof in the registration statement and the prospectus. (d) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware with full corporate power and authority to legally own or lease and use its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered or qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the financial condition, business, properties, net worth or results of operations of the Company and the subsidiaries taken as a whole (a "Material Adverse Effect"). Kitty Hawk Aircargo, Inc. is an "air carrier" and a "citizen of the United States" within the meaning of that portion of the United States Code comprising those provisions formerly referred to as the Federal Aviation Act of 1958, and now primarily codified in - 7 - 8 Title 49 of the United States Code, as amended (the "Aviation Act") and holds an "air carrier operating certificate issued by the Secretary of Transportation" within the meaning of 11 U.S.C. Section 1110. (e) All the Company's subsidiaries that are required to be listed in an exhibit to the Registration Statement (collectively, the "Subsidiaries") are so listed. Each Subsidiary is a corporation duly incorporated, validly existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own or lease and use its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered or qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a Material Adverse Effect; all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest, equity or other encumbrance. (f) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any of its subsidiaries, or to which the Company or any of its subsidiaries, or to which any of their respective properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the Act. The descriptions of the terms of any such contracts or documents contained in the Registration Statement or the Prospectus are correct in all material respects. (g) Neither the Company nor any of the Subsidiaries is in (i) violation of its certificate or articles of incorporation or by--laws, or other organizational documents, (ii) violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of its subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries (except for any such violation or violations that, singly or in the aggregate, would not have a Material Adverse Effect), or (iii) default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument to which the Company or any of its subsidiaries is a party or by which any of them or any of their respective properties may be bound, and no condition or state of facts exists that, with the passage of time or the giving of notice or both, would constitute such a default (except for any such default or defaults that, singly or in the aggregate, would not have a Material Adverse Effect). (h) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby (A) requires any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and compliance with the securities or Blue Sky laws of various jurisdictions, all of which have been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or (B) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties are bound, or violates or will violate any current statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective - 8 - 9 properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them are bound or to which any of the property or assets of any of them is subject. (i) The accountants, Ernst & Young LLP, who have certified or shall certify the financial statements included in the Registration Statement and the Prospectus (or any amendment or supplement thereto) are independent public accountants as required by the Act. (j) The consolidated historical and pro forma financial statements, together with related schedules and notes, included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), comply as to form in all material respects with the requirements of the Act. Such historical financial statements present fairly the consolidated financial position, results of operations and changes in financial position of the entities covered thereby on the basis stated in the Registration Statement at the respective dates indicated and the results of their operations and their cash flows for the respective periods indicated, in accordance with generally accepted accounting principles consistently applied throughout such periods. The pro forma financial statements included in the Registration Statement and the Prospectus and any amendment or supplement thereto, have been prepared on a basis consistent with such historical financial statements, except for the pro forma adjustments specified therein, and give effect to assumptions made on a reasonable basis and present fairly the historical and proposed transactions contemplated by this Agreement and the Prospectus (and any amendment or supplement thereto). The other financial and statistical data included in the Prospectus and in the Registration Statement, historical and pro forma, are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the entities covered thereby. (k) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except (i) as rights to indemnity and contribution hereunder may be limited by federal or state securities laws, and (ii) as to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles. (l) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), (i) neither the Company nor any of its subsidiaries has incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Company and its subsidiaries taken as a whole, (ii) there has not been any change in the capital stock, or material increase in the short--term debt or long--term debt, of the Company or any of its subsidiaries, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the financial condition, business, net worth or results of operations of the Company and its subsidiaries taken as a whole, (iii) there has not been any material restriction in the operation of the Company's or the Subsidiaries' aircraft, including as a result of action by the Federal Aviation Administration or the Department of Transportation, and (iv) neither the Company nor any of its Subsidiaries have received an indication, either orally or in writing, that any material contract described in the Prospectus, including the agreements between the Company and General Motors Corporation and Burlington Air Express, Inc., respectively, will or is reasonably likely to be terminated prior to expiration of any such agreement or that any such agreement will not be renewed. - 9 - 10 (m) Neither the Company nor any of its subsidiaries own any real property. Each of the Company and its subsidiaries has good and marketable title to all personal property and aircraft described in the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement and all the real property described in the Prospectus as being held under lease by each of the Company and its subsidiaries is held by it under valid, subsisting and enforceable leases. (n) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (o) The Company and each of its subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its respective properties and to conduct its business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; the Company and each of its subsidiaries has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company or any of its subsidiaries. (p) Each of the Company and its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (q) To the Company's knowledge, neither the Company nor any of its subsidiaries nor any employee or agent of the Company or any subsidiary has made any payment of funds of the Company or any subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (r) The Company and each of its subsidiaries have filed all tax returns required to be filed, which returns are complete and correct, and neither the Company nor any subsidiary of the Company is in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto, except for (i) the grant of extensions for the filing of such returns and payment of any taxes, interest and penalties due thereon for which adequate reserves have been established with respect to such returns and (ii) all such failures to file or pay that would not, individually, or in the aggregate, have a Material Adverse Effect. (s) No holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement except as described in the Prospectus. - 10 - 11 (t) The Company and its subsidiaries own or possess all patents, patent applications, trademarks, trademark registrations and applications, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing. (u) The Company is not now, and after sale of the Shares to be sold by it hereunder and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (v) The Company has complied with all provisions of Florida Statutes, Section 517.075, relating to issuers doing business with Cuba. (w) Except as disclosed in the Prospectus, the Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a Material Adverse Effect. (x) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which the Company is engaged and proposes to engage and the Company has no reason to believe that it will not be able to renew such insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. 8. Representations and Warranties of the Selling Stockholder. The Selling Stockholder represents and warrants to each Underwriter that: (a) The Selling Stockholder now has, and on the Closing Date and any Option Closing Date will have, good and valid title to the Shares to be sold by the Selling Stockholder hereunder, free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer. (b) The Selling Stockholder now has, and on the Closing Date and any Option Closing Date will have, full legal right, power and authorization, and any approval required by law, to sell, assign transfer and deliver such Shares in the manner provided in this Agreement, and upon delivery of and payment for such Shares hereunder, the several Underwriters will acquire good and valid title to such Shares free and clear of any lien, claim, security interest, or other encumbrance. (c) This Agreement has been duly authorized, executed and delivered by the Selling Stockholder and is the valid and binding agreement of the Selling Stockholder enforceable against the Selling Stockholder in accordance with its terms, except (i) as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and (ii) as to applicable bankruptcy, - 11 - 12 insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles. (d) Neither the execution and delivery of this Agreement by the Selling Stockholder nor the consummation of the transactions herein contemplated by the Selling Stockholder requires any consent, approval, authorization or order of, or filing or registration with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required under the Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) or conflicts or will conflict with or constitutes or will constitute a breach of, or default under, or violates or will violate, any agreement, indenture or other instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is or may be bound or to which any of the Selling Stockholder's property or assets is subject, or any statute, law, rule, regulation, ruling, judgment, injunction, order or decree applicable to the Selling Stockholder or to any property or assets of the Selling Stockholder. (e) The Registration Statement and the Prospectus, insofar as they relate to the Selling Stockholder, do not and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (f) The Selling Stockholder does not have any knowledge or any reason to believe that the Registration Statement or the Prospectus (or any amendment or supplement thereto) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (g) The Selling Stockholder has not taken, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares, except for the lock--up arrangements described in the Prospectus. 9. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the several - 12 - 13 Underwriters no later than 2:00 p.m., New York City time, on the business day following the date hereof, in such quantity as the Underwriters shall have reasonably requested. The foregoing indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) The Selling Stockholder agrees to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto (if used within the period set forth in Section 5(d)(ii)), or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (b) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the several Underwriters no later than 2:00 p.m., New York City time, on the business day following the date hereof, in such quantity as the Underwriters shall have reasonably requested. Notwithstanding the foregoing, the aggregate liability of the Selling Stockholder for indemnification under this Section 9(b) shall be limited to an amount equal to the aggregate amount of the net proceeds of the offering (before expenses but after deduction of underwriting discounts and commissions) received by such Selling Stockholder. The foregoing indemnity agreement shall be in addition to any liability which the Selling Stockholder may otherwise have. (c) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company or the Selling Stockholder, such Underwriter or such controlling person shall promptly notify the parties against whom indemnification is being sought (the "indemnifying parties"), and such indemnifying parties shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the indemnifying parties have agreed in writing to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the indemnifying parties and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and any indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the indemnifying parties shall, in connection with any one such action, suit or proceeding or separate - 13 - 14 but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The indemnifying parties shall not be liable for any settlement of any such action, suit or proceeding effected without their written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the indemnifying parties agree to indemnify and hold harmless any Underwriter, to the extent provided in paragraph (a) of this Section 9, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (d) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, the Selling Stockholder, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, the Selling Stockholder, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (d), such Underwriter shall have the rights and duties given to the Company by paragraph (c) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, the Selling Stockholder, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (c) above. The foregoing indemnity agreement shall be in addition to any liability which any Underwriter may otherwise have. (e) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under paragraphs (a), (b) or (d) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholder on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholder bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Shares hereunder, any determination of the relative benefits received by the Company, the Selling Stockholder or the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company and the Selling Stockholder, and the underwriting - 14 - 15 discounts and commissions received by the Underwriters, from the sale of such Additional Shares, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Stockholder on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholder on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, the aggregate liability of the Selling Stockholder for contribution under this Section 9(e) shall be limited to an amount equal to the aggregate amount of the net proceeds of the offering (before expenses but after deduction of underwriting discounts and commissions) received by such Selling Stockholder. (f) The Company, the Selling Stockholder and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (e) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (e) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule II hereto (or such numbers of Firm Shares increased as set forth in Section 12 hereof) and not joint. (g) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (h) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 9 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 9 and the representations and warranties of the Company and the Selling Stockholder set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or the Selling Stockholder or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, any person controlling the Company, or the Selling Stockholder shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 9. - 15 - 16 10. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post--effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post--effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, properties, net worth, or results of operations of the Company or the Subsidiaries not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or any officer or director of the Company or the Selling Stockholder which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially adversely affect the market for the Shares. (c) You shall have received on the Closing Date, an opinion of Haynes and Boone, LLP, counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Company is a corporation duly incorporated and validly existing under the laws of the State of Delaware with full corporate power and authority to own or lease its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly qualified to transact business as a foreign corporation under the laws of the State of Texas; (ii) Each of the Subsidiaries is a corporation duly incorporated and validly existing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own or lease its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); and all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned of record by the Company free and clear of any perfected security interest; (iii) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock"; - 16 - 17 (iv) All the shares of capital stock of the Company outstanding prior to the issuance of the Shares to be issued and sold by the Company hereunder, have been duly authorized and validly issued, and are fully paid and nonassessable; (v) The Shares to be issued and sold to the Underwriters by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable free of any preemptive rights under the Certificate of Incorporation or Delaware General Corporation Law; (vi) The form of certificates for the Shares comply with all requirements of the Delaware General Corporation Law; (vii) The Registration Statement and all post--effective amendments, if any, have become effective under the Act and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); (viii) This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except for provisions contained in this Agreement purporting to limit rights of third parties and except as enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles; (ix) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, compliance by the Company with the provisions hereof, nor consummation by the Company of the transactions contemplated hereby, conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation (or charter document by whatever name) or bylaws, of the Company or any of the Subsidiaries or any agreement listed under Item 10 of the exhibits to the Registration Statement, nor will any such action result in any violation of any existing law or regulation, (assuming compliance with all applicable state securities and Blue Sky laws), applicable to the Company, the Subsidiaries or any of their respective properties and excluding any opinion concerning fraud under the laws of the State of Texas; (x) No consent, approval, authorization or other order of, or registration or filing with, any Federal or State of Texas court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company (except as have been obtained under the Act and the Exchange Act or such as may be required under state securities or Blue Sky laws governing the offer, purchase and distribution of the Shares) for the valid issuance and sale of the Shares to the Underwriters as contemplated by this Agreement; and (xi) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) appear on their face to be appropriate response in all material respects with the requirements of the Act. - 17 - 18 Haynes and Boone, LLP shall confirm in its opinion (i) that is has received certificates of good standing for the Company from the States of Texas and Delaware, which certificates shall be attached as an exhibit to such opinion; and (ii) that it has received certificates of good standing for Kitty Hawk Aircargo, Inc., from the States of Indiana, Michigan, Minnesota, Montana, Ohio and Washington which certificates shall be attached as an exhibit to such opinion. Haynes and Boone, LLP shall also confirm that, to its knowledge (based solely upon the investigation described in such opinion letter), the descriptions in the Registration Statement and the Prospectus under the captions "Business - Relationship with GM," and "Business - Air Freight Carrier - - ACMI Contracts - Burlington Air Express, Inc.," of the contracts between the Company and The General Motors Corporation and the Company and Burlington Air Express, Inc., respectively, constitute fair summaries in all material respects of such contracts. Haynes and Boone, LLP shall further confirm that, to its knowledge, the issue and sale of the Shares being issued at such Closing Date or Option Closing Date and the performance of this Agreement and the consummation of the transactions herein contemplated does not conflict with or violate any order, judgment or decree of any court or governmental agency or body having jurisdiction over the Company or any of its Subsidiaries or any of their respective properties or assets. Such counsel shall also state that, although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or the Option Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Company as to laws of any jurisdiction other than the General Corporation Law of the State of Delaware or the laws of the State of Texas or the federal laws of the United States, provided that (1) each such local counsel is reasonably acceptable to the Representatives, (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance reasonably satisfactory to them and their counsel, and (3) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon. Haynes and Boone, LLP, may expressly limit the expression of the foregoing opinions to the laws of the State of Texas, the General Corporation Law of the State of Delaware and the federal laws of the United States and may exclude all laws, rules and regulations related to aviation and the effect such laws, rules and regulations may have on such opinions. Such counsel shall also provide that Alston & Bird shall be entitled to rely on such opinion with respect to matters involving Texas law in connection with the rendering of their opinion pursuant to subsection (e) of this Section. (d) You shall have received on the Closing Date, an opinion of Burke, Wright & Keiffer, P.C., corporate counsel for the Company and counsel for the Selling Stockholder, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: - 18 - 19 (i) The Company and each of the Subsidiaries has full corporate power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Company and the Subsidiaries taken as a whole), to own their respective properties and to conduct their respective businesses as now being conducted, as described in the Prospectus; (ii) Except as disclosed in the Prospectus, the Company owns of record, directly or indirectly, all the outstanding shares of capital stock of each of the Subsidiaries free and clear of any lien, adverse claim, security interest, equity, or other encumbrance; (iii) Other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or any of their property, is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto); (iv) There are no agreements, contracts, indentures, leases or other instruments, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be; (v) Except as disclosed in the Prospectus, the Company and the Subsidiaries own all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and Burke, Wright & Keiffer, P.C. is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing; (vi) Neither the Company nor any of the Subsidiaries is in violation of its respective certificate or articles of incorporation or bylaws, or other organizational documents, or to the knowledge of such counsel, is in default in the performance of any material obligation, agreement or condition contained in any agreement filed as an exhibit under Item 10 of the exhibits to the Registration Statement, except as may be disclosed in the Prospectus; (vii) To the knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries; (viii) This Agreement has been duly executed and delivered by or on behalf of the Selling Stockholder and is the valid and binding agreement of the Selling Stockholder enforceable against the Selling Stockholder in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Selling Stockholder's obligations hereunder - 19 - 20 may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditor's rights generally and by general equitable principles; (ix) To the knowledge of such counsel, the Selling Stockholder has full legal right, power and authorization, and any approval required by law, to sell, assign, transfer and deliver good and marketable title to the Shares which the Selling Stockholder has agreed to sell pursuant to this Agreement; (x) The execution and delivery of this Agreement by the Selling Stockholder and the consummation of the transactions contemplated hereby will not conflict with, violate, result in a breach of or constitute a default under the terms or provisions of any agreement, indenture, mortgage or other instrument known to such counsel to which the Selling Stockholder is a party or by which he or any of his assets or property is bound, or any court order or decree of any law, rule or regulation (assuming compliance with all applicable state securities and Blue Sky laws governing the purchase and distribution of the Shares) applicable to the Selling Stockholder or to any of the property or assets of the Selling Stockholder; (xi) The execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated hereby will not conflict with, violate, result in a breach of or constitute a default under the terms or provisions of any agreement, indenture, mortgage or other instrument known to such counsel to which the Company is a party, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Subsidiaries or any court order or decree of any law, rule or regulation (assuming compliance with all applicable state securities and Blue Sky laws governing the purchase and distribution of the Shares) judgment, injunction, order or decree known to such counsel after reasonable inquiry applicable to the Company or to any of the property or assets of the Company; (xii) Upon delivery of the Shares pursuant to this Agreement and payment therefor as contemplated herein (assuming that the Underwriters are bona fide purchasers within the meaning of the Uniform Commercial Code) the Underwriters will acquire good and marketable title to the Shares free and clear of any lien, claim, security interest, or other encumbrances, restriction on transfer or other defect in title; and (xiii) Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and such counsel does not know of any commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company; (xiv) Except as described in the Prospectus, there is no holder of any security of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any Common Stock or other securities of the Company included in the registration statement or the right, as a result of the filing of the registration statement, to require registration under the Act of any shares of Common Stock or other securities of the Company; (xv) Good and unencumbered title (except for security interests granted by the Company to its secured lenders) to each of the aircraft owned by the Company and its Subsidiaries is ensured by aircraft title insurance in amounts equal to the most recent appraisal for each such aircraft; and - 20 - 21 (xvi) The Company and its Subsidiary Kitty Hawk Air Cargo, Inc., is an "air carrier" and a "citizen of the United States" within the meaning of that portion of the United States Code comprising those provisions formerly referred to as the Federal Aviation Act of 1958, and now primarily codified in Title 49 of the United States Code, as amended (the "Aviation Act") and holds an "air carrier operating certificate" by the Secretary of Transportation" issued by the Federal Aviation Administration. The statements in the Prospectus and the Registration Statement, insofar as they are descriptions of government regulation under the captions "Business - Government Regulation" and "Risk Factors - Government Regulation" are accurate and present fairly the information required to be shown. In addition, the Company holds all requisite authority under certificates issued by the Department of Transportation to conduct its worldwide cargo charter operations as currently conducted, and no such certificate is the subject of any "show cause" or other order, or any proceeding of any kind, including any that might reasonably result in a final order impairing the validity of the certificate. With respect to the preceding sentence, Burke, Wright & Keiffer shall be entitled to rely on an opinion of Bagielo, Silverberg & Goldman. (e) You shall have received on the Closing Date an opinion of Alston & Bird, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to the matters referred to in clauses (v), (vii), (viii), (xii) and (xx) of the foregoing paragraph (c) and such other related matters as you may request. (f) You shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from Ernst & Young LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (g) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short--term or long--term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or Supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Subsidiaries, taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 10(g) and in Section 10(h) hereof. (h) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. - 21 - 22 (i) All the representations and warranties of the Selling Stockholder contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by or on behalf of the Selling Stockholder to the effect set forth in this Section 10(i) and in Section 10(j) hereof. (j) The Selling Stockholder shall not have failed at or prior to the Closing Date to have performed or complied with any of his agreements herein contained and required to be performed or complied with by him hereunder at or prior to the Closing Date. (k) The Shares shall have been listed or approved for listing upon notice of issuance on the Nasdaq National Market. (l) The Sellers shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Company or the Selling Stockholder and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company or the Selling Stockholder, as the case may be, to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 10, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (i) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c), (d) and (e) shall be revised to reflect the sale of Additional Shares. 11. Expenses. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by it of their obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the printing (or reproduction) and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (v) the registration of the Shares under the Exchange Act and the listing of the Shares on the Nasdaq National Market; (vi) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (viii) the transportation and other expenses - 22 - 23 incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company and the Selling Stockholder. 12. Effective Date of Agreement. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post--effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post--effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company and the Selling Stockholder. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one--tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non--defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule II hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non--defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one--tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non- defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non--defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule II hereto who, with your approval and the approval of the Company, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 12 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 13. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company or the Selling Stockholder, by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York or Texas shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the - 23 - 24 United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 14. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements in the first and third paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 7(b) and 9 hereof. 15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at Kitty Hawk, Inc., 1515 West 20th Street, 2nd Floor, P. O. Box 612787, Dallas/Fort Worth Airport, Texas 612787, Attention: M. Tom Christopher, Chief Executive Officer; or (ii) if to the Selling Stockholder, at Kitty Hawk, Inc., 1515 West 20th Street, 2nd Floor, P.O. Box 612787, Dallas/Fort Worth Airport, Texas 75261, Attention: M. Tom Christopher, Chief Executive Officer, with a copy to Greg Samuel c/o of Haynes and Boone, LLP. 3100 NationsBank Plaza, 901 Main Street, Dallas, Texas 75202 or (iii) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, its directors and officers, the Selling Stockholder and the other controlling persons referred to in Section 9 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 16. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas applicable to contracts made and to be performed within the State of Texas. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Stockholder and the several Underwriters. Very truly yours, KITTY HAWK, INC. By: ------------------------------ M. Tom Christopher Chairman of the Board - 24 - 25 The Selling Stockholder --------------------------------- M. Tom Christopher Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule II hereto. SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED FIELDSTONE FPCG SERVICES, L.P. As Representatives of the Several Underwriters By SMITH BARNEY INC. By: ------------------------------------------- Managing Director - 25 - 26 SCHEDULE I KITTY HAWK, INC. Part A -- Firm Shares Number of Selling Stockholder Firm Shares ------------------- ----------- --------------- Total........ --------------- Part B -- Additional Shares Number of Selling Stockholder Additional Shares ------------------- ----------------- --------------- Total........ --------------- - 26 - 27 SCHEDULE II KITTY HAWK, INC. Number of Number of Underwriter Firm Shares Underwriter Firm Shares - ----------- ----------- ----------- ----------- Smith Barney Inc. .... Alex. Brown & Sons Incorporated Fieldstone FPCG Services, L.P. --------------- Total........ --------------- - 27 - EX-4.1 3 SPECIMEN COMMON STOCK CERTIFICATE 1
EXHIBIT 4.1 - -------------------------------------------------------------------------------------------------------------------------------- INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE - ----------------------------------- ------------------------------- NUMBER SHARES [KITTY HAWK LOGO] KH - ----------------------------------- ------------------------------- THIS CERTIFICATE IS TRANSFERABLE IN COMMON STOCK DALLAS, TEXAS AND NEW YORK, NEW YORK CUSIP 498326 10 7 KITTY HAWK(R), INC. SEE REVERSE FOR CERTAIN LEGENDS - ------------------------------------------------------------------------------------------------------------------------------- This Certifies that SPECIMEN is the owner of - ------------------------------------------------------------------------------------------------------------------------------- FULLY PAID AND NON-ASSESSABLE SHARES, $.01 PAR VALUE, OF THE COMMON STOCK OF KITTY HAWK, INC. transferable on the books of the Corporation by the holder hereof, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed or accompanied by a proper assignment. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Certificate of Incorporation and Bylaws of the Corporation and all amendments thereof, to all of which the holder by the acceptance hereof consents. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. TRANSFER AGENT AND REGISTRAR /s/ RICHARD R. WADSWORTH, JR. /s/ M. TOM CHRISTOPHER [SEAL] BY SPECIMEN SPECIMEN AUTHORIZED SIGNATURE Secretary Chairman of the Board - --------------------------------------------------------------------------------------------------------------------------------
2 KITTY HAWK, INC. The Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the Corporation, and the qualifications, limitations or restrictions of such preferences and/or rights. A stockholder may make the request to the Corporation at its principal executive offices. The rights of persons who are not "citizens of the United States" (as defined in 49 U.S.C. 40102(a)(15), as now in effect or as hereafter amended) to vote the securities represented by this Certificate are subject to certain restrictions contained in the Certificate of Incorporation of the Corporation, copies of which are on file at the principal executive offices of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ......... Custodian .......... TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act .......................... tenants in common (State)
Additional abbreviations may also be used though not in the above list. For value received, ___________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE) - -------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint --------------------------------------------- - -------------------------------------------------------------------------------- Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated, ---------------------------- NOTICE THE SIGNATURES(S) TO THIS X ASSIGNMENT MUST CORRESPOND ------------------------------ WITH THE NAME(S) AS WRITTEN (SIGNATURE) UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT X ALTERATION OR ENLARGEMENT OR ------------------------------ ANY CHANGE WHATEVER. (SIGNATURE) ------------------------------- THIS SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION AS DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934 AS AMENDED ------------------------------- SIGNATURE(S) GUARANTEED BY: ------------------------------- EX-5.1 4 OPINION OF HAYNES & BOONE 1 EXHIBIT 5.1 [HAYNES AND BOONE LETTERHEAD] September 3, 1996 Kitty Hawk, Inc. 1515 West 20th Street Dallas/Fort Worth International Airport, Texas 75261 Re: Registration of 3,450,000 shares of Common Stock of Kitty Hawk, Inc. Gentlemen: We have acted as counsel to Kitty Hawk, Inc., a Delaware corporation (the "Company"), in connection with the preparation of the Company's Registration Statement on Form S-1 (Registration No. 333-8307) and the amendments thereto (the Registration Statement, as amended, is hereinafter referred to as the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. The Registration Statement relates to (i) the offer and sale by the Company of up to 2,700,000 shares of its Common Stock, par value $0.01 per share ("Common Stock") and (ii) the offer and sale of up to 750,000 shares of Common Stock by the Selling Stockholder (herein so called) identified in the Registration Statement. The shares of Common Stock to be sold by the Company are hereinafter referred to as the "Company Securities" and the shares of Common Stock to be sold by the Selling Stockholder are hereinafter referred to as the "Stockholder Securities." The opinions expressed herein relate solely to, are based solely upon and are limited exclusively to, the internal substantive laws of the State of Texas, the General Corporation Laws of the State of Delaware and applicable federal laws of the United States of America. In connection therewith, we have examined and relied upon the original, or copies certified to our satisfaction, of (i) the Certificate of Incorporation of the Company, as amended (the "Certificate of Incorporation"), and the Bylaws of the Company, as amended; (ii) the minutes and records of the corporate proceedings of the Company with respect to the issuance by the Company of the shares of Company Securities and Stockholder Securities; (iii) the Registration Statement and all exhibits thereto; (iv) the form of Underwriting Agreement (herein so called), to be entered into among the Company, the Selling Stockholder, and Smith Barney Inc., Alex. Brown & Sons Incorporated and Fieldstone FPCG Services, L.P., as Underwriters named in the Underwriting Agreement; (v) such other documents and instruments as we have deemed 2 Kitty Hawk, Inc. September 3, 1996 Page 2 necessary for the expression of the opinions contained herein and (vi) the specimen Common Stock certificate filed as Exhibit 4.1 to the Registration Statement. In making the foregoing examinations, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photostatic copies thereof. As to various questions of fact material to this opinion, where such facts have not been independently established, and as to the content and form of certain minutes, records, resolutions and other documents or writings of the Company, we have relied, to the extent we have deemed reasonably appropriate, upon representations or certificates of officers of the Company or governmental officials. We have assumed that the Underwriting Agreement will be executed in substantially the same form submitted to us. Finally, we have assumed that all formalities required by the Company's Certificate of Incorporation, Bylaws and the Delaware General Corporation Law will be complied with when the Stockholder Securities and the Company Securities are issued. Based upon the foregoing, and having due regard for such legal considerations as we deem relevant, we are of the opinion that (i) the Stockholder Securities will, when sold, be validly issued, fully paid and nonassessable and (ii) the Company Securities, upon receipt by the Company of the full consideration for the Company Securities in accordance with the terms of the Underwriting Agreement and upon passage of the pricing resolutions of the Pricing Committee of the Company's Board of Directors, will, when sold, be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement and to the reference to this firm under "Legal Matters" in the Prospectus forming a part of such Registration Statement. Very truly yours, Haynes and Boone, LLP EX-10.28 5 AMENDED & RESTATED OMNIBUS SECURITIES PLAN 1 EXHIBIT 10.28 KITTY HAWK, INC. Amended and Restated Omnibus Securities Plan Dated September 3, 1996 2 TABLE OF CONTENTS Article I Amendment and Restatement; Purpose.....................1 Article II Definitions............................................1 Article III Eligibility............................................5 Article IV Awards.................................................6 Article V Award Agreements......................................12 Article VI Shares Subject to the Plan............................16 Article VII Administration........................................18 Article VIII Adjustments Upon Changes in Capitalization............20 Article IX Change of Control.....................................23 Article X Rights of Employees...................................25 Article XI Compliance with Applicable Legal Requirements.........25 Article XII Amendment and Termination.............................26 Article XIII Unfunded Plan.........................................27 Article XIV Limits of Liability...................................27 Article XV Miscellaneous.........................................28
i 3 ARTICLE I AMENDMENT AND RESTATEMENT; PURPOSE Effective this September 3, 1996, Kitty Hawk, Inc. (the "Company") adopts this Amended and Restated Omnibus Securities Plan (the "Plan"), which amends, restates and supersedes in its entirely the 1994 Omnibus Securities Plan that was adopted by the Company as of June 28, 1996 (the "Effective Date"), to benefit the Company's stockholders by creating a flexible "omnibus" vehicle to provide a variety of medium and long-term incentive compensation opportunities to senior and executive management of the Company. In doing so, the Plan provides an important link between the compensation of senior and executive management and Company performance. The Awards under the Plan will compensate management for the creation of shareholder value. In this way the Plan is intended to encourage and reward superior performance by individuals whose performance is a key element in achieving the Company's continued financial and operational success. In addition, the Plan will assist the Company recruit, reward, retain, and motivate management to achieve the Company's mission of being a top performer in its industry by rewarding the creation of shareholder value. ARTICLE II DEFINITIONS 2.1 "Award" or "Awards" means an award granted pursuant to Article IV. 1 4 2.2 "Award Agreement" means an agreement described in Article V entered into between the Company and a Participant, setting forth the terms, conditions and any limitations applicable to the Award granted to the Participant. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.5 "Committee" means the Compensation Committee of the Board, which shall be comprised solely of no less than two outside directors. For this purpose, the term "outside director" means a director of the Board who (i) is not an Employee or a former Employee of the Company, (ii) has never served as an officer of an entity currently affiliated with the Company, and (iii) is not paid remuneration (as defined in regulations under Code Section 162(m)) from the Company, directly or indirectly, in any capacity other than as a director. Each member of the Committee at the time of his appointment to the Committee and while he is a member thereof, must also be a "Non-Employee Director" as that term is defined in Rule 16b-3 promulgated under the Exchange Act. 2.6 "Company" means Kitty Hawk, Inc., a Delaware corporation or any successor corporation. 2 5 2.7 "Employee" means any individual who is an employee of the Company or any Participating Affiliate, or a member of the Board. 2.8 "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. 2.9 "Fair Market Value" of a Share means the value of a Share as of any date, determined as follows: (a) if the Shares are listed on a national securities exchange or if last sales prices are reported for the Shares as of such date, the closing price per Share as reported on such date; (b) if the Shares are not listed on a national securities exchange and last sale prices are not reported for the Shares, but the Shares are traded in the over-the-counter market, the mean between the closing bid and asked prices per Share on such date; or (c) if there is no generally recognized market for the Shares as of such date, the fair market value per Share as determined in good faith by the Committee. 2.10 "Insider" means any person who is subject to Section 16. 2.11 "Participant" means an Employee who has been designated by the Committee to be eligible for an Award pursuant to this Plan. 3 6 2.12 "Participating Affiliate" means a subsidiary of the Company, of which the Company beneficially owns, directly or indirectly, more than fifty percent (50%) of the aggregate voting power of all outstanding classes and series of stock, and which has one or more employees designated by the Committee to be eligible for an Award pursuant to this Plan. 2.13 "Performance Awards" means performance-based compensation as described in Section 162(m) of the Code. 2.14 "Restricted Stock" means Shares which have certain restrictions attached to the ownership thereof, which may be issued under Section 4.4. 2.15 "Restricted Stockholder" means any person who (i) is the beneficial owner (as such term is defined in Rule 16a-1 promulgated under the Exchange Act) of ten percent or more of the outstanding Shares or any other class of equity securities of the Company registered under Section 12 of the Exchange Act, and (ii) is not an officer or director of the Company. 2.16 "Retirement" means termination of employment with the Company or a Participating Affiliate upon attainment of normal retirement age of sixty-five (65), or as otherwise determined under the Kitty Hawk, Inc. 401(k) Savings Plan, or the applicable retirement plan of a Participating Affiliate. 4 7 2.17 "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under Section 16, as amended effective November 1, 1996 by Release No. 34-37260. 2.18 "Section 16" means Section 16 of the Exchange Act or any successor regulation and the rules promulgated thereunder as they may be amended from time to time. 2.19 "Share" means a share of common stock (par value $0.01) of the Company. 2.20 "Stock Appreciation Right" means a right, the value of which is determined relative to the appreciation in value of Shares which may be issued under Section 4.3. 2.21 "Stock Option" means a right to purchase Shares and includes Incentive Stock Options and Non-Qualified Options as defined in Section 4.2. ARTICLE III ELIGIBILITY Awards may be granted only to Employees who are designated as Participants from time to time by the Committee. The Committee shall consider an 5 8 individual's position, responsibilities, and importance to the Company among other factors in determining which Employees shall be Participants. The types of Awards to be made to Participants and the terms, conditions, and limitations applicable to the Awards are left to the sole discretion of the Committee, subject to the terms of the Plan. The Committee's decision as to eligibility and the nature and timing of Awards under the Plan is final. ARTICLE IV AWARDS 4.1 Awards shall be made in the form of Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Awards, and other types of Awards described in Section 4.6 hereof. Subject to the other provisions of this Plan, Awards may also be granted individually, in combination, or in tandem with, in replacement of, or as alternatives to, grants or rights under this Plan and any other employee plan of the Company. 4.2 A Stock Option is a right to purchase a specified number of Shares at a specified price during such specified time as the Committee shall determine. (a) Stock Options granted may be either of a type that complies with the requirements of incentive stock options as defined in Section 422 of the Code ("Incentive Stock Options") or of a type that does not comply with such requirements ("Non-Qualified Stock Options"); provided, however, that the aggregate number of Shares which may be offered for purchase pursuant to Incentive Stock Options under this Plan shall not exceed three 6 9 hundred thousand (300,000) Shares, and that the aggregate number of Shares which may be offered to any Employee during any calendar year shall not exceed one-hundred thousand (100,000) Shares. (b) The exercise price per Share of any Stock Option shall be determined by the Committee and set forth in the Award Agreement. However, a Stock Option granted to a "covered employee" as defined in Section 162(m) of the Code shall not have an exercise price less than the Fair Market Value of a Share on the date the Stock Option is granted. (c) A Stock Option may be exercised, in whole or in part, by the giving of written notice of exercise to the Company specifying the number of Shares to be purchased. (d) The exercise price of the Shares subject to the Stock Option may be paid in cash or may also be paid by the tender of Shares already owned by the Participant (to the extent permitted by Rule 16b-3), or through a combination of cash and Shares, or through such other means the Committee determines are consistent with the Plan's purpose and applicable law. No fractional Shares will be issued or accepted. (e) If an Incentive Stock Option is granted to a Participant who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than ten percent (10%) of the combined voting power of all classes of stock of the Company (or any parent or subsidiary), the exercise price shall be at least one hundred ten percent (110%) of the Fair Market Value per Share on the date such stock option is granted. 7 10 No portion of any Incentive Stock Option may be exercised after the expiration of ten (10) years from the date such stock option is granted. However, if a Participant owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than ten percent (10%) of the combined voting power of all classes of stock of the Company (or any parent or subsidiary) and an Incentive Stock Option is granted to such Participant, the term of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no more than five (5) years from the date such option is granted. Upon termination of Participant's employment, the Participant may not exercise any Incentive Stock Option later than three (3) months after his termination of employment, except in the case of death or disability as provided under Section 5.1(a) (ii). If Shares acquired upon exercise of an Incentive Stock Option are disposed of by a Participant prior to the expiration of either two (2) years from the date such Incentive Stock Option is granted or one (1) year from the transfer of Shares to the Participant pursuant to the exercise of such Incentive Stock Option, or in any other disqualifying disposition within the meaning of Section 422 of the Code, such Participant shall notify the Company in writing of the date and terms of such disposition. A disqualifying disposition by a Participant shall not affect the status of any other Stock Option granted under the Plan as an Incentive Stock Option within in the meaning of Section 422 of the Code. The Committee may not grant Incentive Stock Options under the Plan to any Participant which would permit the aggregate Fair Market Value 8 11 (determined on the date such Stock Option is granted) of the Shares with respect to which Incentive Stock Options under this and any other plan of the Company and its subsidiaries) are exercisable for the first time by such Participant during any calendar year to exceed one hundred thousand dollars ($100,000). 4.3 A Stock Appreciation Right is a right to receive, upon surrender of the right, but without payment, an amount payable in cash and/or Shares under the terms and conditions as the Committee shall determine. The Committee shall make all Stock Appreciation Rights awarded to Insiders subject to Section 16 and shall include such terms and conditions in the Award Agreements so as to comply with Section 16. (a) A Stock Appreciation Right may be granted in tandem with part or all of, in addition to, or completely independent of a Stock Option or any other Award under this Plan; provided, however, the aggregate number of Shares with respect to which such Stock Appreciation Rights may be granted to any Participant shall not exceed one hundred thousand (100,000) Shares. A Stock Appreciation Right issued in tandem with a Stock Option may be granted at the time of grant of the related Stock Option or at any time thereafter during the term of the Stock Option. (b) The amount payable in cash and/or Shares with respect to each right shall be equal in value to the amount by which the Fair Market Value per Share on the exercise date exceeds the exercise price of the Stock Appreciation Right. The applicable exercise price shall be established by the Committee, but must be equal to or greater than the Fair Market Value on the date of grant if granted to a "covered employee" as defined in Section 9 12 162(m) of the Code. The amount payable in Shares, if any, is determined with reference to the Fair Market Value on the date of exercise. (c) Stock Appreciation Rights issued in tandem with Stock Options shall be exercisable only to the extent that the Stock Options to which they relate are exercisable. Upon exercise of the Stock Appreciation Right, the Stock Option issued in tandem with the Stock Appreciation Right shall automatically terminate, to the extent of such exercise, and the Participant shall surrender to the Company such Stock Option, whereupon agreements evidencing the unexercised portions of such Stock Appreciation Rights and Stock Options will be issued to such Participant, if applicable. Stock Appreciation Rights issued in tandem with Stock Options shall automatically terminate upon the exercise of such Stock Option, to the extent of such exercise, whereupon agreements evidencing the unexercised portions of Stock Appreciation Rights and Stock Options will be issued to such Participant, if applicable. 4.4 Shares of Restricted Stock are Shares that are issued to a Participant and are subject to such terms, conditions, and restrictions as the Committee deems appropriate (including without limitation those imposed in order to exempt such grant from Section 162(m) of the Code), which may include, but are not limited to, restrictions upon the sale, assignment, transfer, or other disposition of the Restricted Stock and the requirement of forfeiture of the Restricted Stock upon termination of employment under certain specified conditions. As a condition to any Award hereunder, the Committee may require a Participant to pay to the Company an amount equal to, or in excess of, the par value of the 10 13 shares of Restricted Stock awarded to him or her. Any such Restricted Stock Award shall automatically expire if not purchased in accordance with the Committee's requirements, if any, within thirty (30) days after the date of grant. The Committee may provide for the lapse of any such term or condition or waive any term or condition based on such factors or criteria as the Committee may determine. The Participant shall have, with respect to awards of Restricted Stock for which the Participant is the holder of record, all of the rights of a shareholder of the Company, including the right to vote the Restricted Stock and the right to receive any cash or stock dividends on such Restricted Stock. The Committee shall have the discretionary authority to determine the total number of Shares available for Awards under the Plan as Restricted Stock to be issued during the duration of the Plan, however, the maximum number of Shares that may be issued to any Participant or Participants as Restricted Stock under the Plan shall not exceed one hundred thousand (100,000) Shares. 4.5 Performance Awards may be granted under this Plan from time to time based on the terms and conditions as the Committee deems appropriate (including without limitation those imposed in order to exempt such grant from Section 162(m) of the Code), provided that such Awards shall not be inconsistent with the terms and purposes of this Plan. Performance Awards may be in the form of performance units, performance shares and such other forms of Performance Awards which the Committee shall determine. For this purpose, "performance shares" are grants of Shares based on satisfying preestablished Company performance criteria set by the Committee. "Performance Units" are cash allotments of dollar-denominated units whose 11 14 payment or value is contingent on performance as measured against predetermined objectives over a multi-year period of time. The Committee shall determine the performance measurements and criteria for such Performance Awards. 4.6 The Committee may from time to time grant (i) Shares, (ii) other stock-based and non-stock-based Awards under the Plan including, without limitation, those Awards pursuant to which Shares are or may in the future be acquired, (iii) Awards denominated in Share units, (iv) securities convertible into Shares, (v) phantom securities (whereby Participants can take advantage in the appreciation of Share prices without actual ownership of Shares), (vi) dividend equivalents (whereby a Participant becomes entitled through the use of a derivative security attached to an option to dividends and other rights derived from the underlying Shares had the Participant owned such Shares), and (vii) other forms or derivatives related to the Shares as it deems appropriate. The Committee shall determine the terms and conditions of such other stock, stock-based, and non-stock based Awards (including without limitation those imposed in order to exempt such grant from Section 162(m) of the Code), provided that such Awards shall not be inconsistent with the terms and purposes of this Plan. ARTICLE V AWARD AGREEMENTS 5.1 Each Award under this Plan shall be evidenced by an Award Agreement setting forth the number of Shares or other security, Stock Appreciation Rights, 12 15 or units subject to the Award and such other terms and conditions applicable to the Award as determined by the Committee. (a) Award Agreements shall include the following terms: (i) A provision describing the treatment of an Award in the event of the Retirement, Disability, death or other termination of a Participant's employment with the Company, including, but not limited to terms relating to the vesting, time for exercise, forfeiture, or cancellation of an Award in such circumstances. For this purpose, the term "Disability" shall have the same meaning as it is given in the Kitty Hawk, Inc. 401(k) Savings Plan. (ii) A provision that a Participant shall have no rights as a stockholder with respect to any securities covered by an Award until the date the Participant becomes the holder of record. Except as provided in Article VIII, no adjustment shall be made for dividends or other rights, unless the Award Agreement specifically requires such adjustment. (iii) A provision requiring the withholding of applicable taxes required by law from all amounts paid in satisfaction of an Award. In the case of an Award paid in cash, the withholding obligation shall be satisfied by withholding the applicable amount and paying the net amount in cash to the Participant. In the case of Awards paid in Shares or other securities of the Company, a Participant may satisfy the withholding obligation by paying the amount of any taxes in cash or, with the approval of the Committee (and with respect to Insiders, 13 16 compliance with Section 16), Shares or other securities may be deducted from the payment to satisfy the obligation in full or in part as long as such withholding of Shares does not violate any applicable laws, rules, or regulations of federal, state, or local authorities. The number of Shares or other securities to be deducted shall be determined by reference to the Fair Market Value of such Shares or the fair market value of such other securities as determined by the Committee, on the applicable date. (iv) In the discretion of the Committee, a provision requiring a holding period. In the case of an Award to Restricted Stockholder: (A) of an equity security, a provision stating (or the effect of which is to require) that such security must be held for a least six months (or such longer period as the Committee in its discretion specifies) from the date of acquisition; or (B) of a derivative security with a fixed exercise price within the meaning of Section 16, a provision stating (or the effect of which is to require) that at least six months (or such longer period as the Committee in its discretion specifies) must elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security; or (C) of a derivative security without a fixed exercise price within the meaning of Section 16, if necessary to comply with Section 16, a provision stating (or the effect of which is to require) that at 14 17 least six months (or such longer period as the Committee in its discretion specifies) must elapse from the date upon which such price is fixed to the date of disposition of the derivative security (other than by exercise or conversion) or its underlying equity security. (b) Award Agreements may include the following terms: (i) Any provisions (A) permitting, subject to the provisions of Section 16 applicable to Insiders, the surrender of outstanding Awards or securities held by the Participant in order to exercise or realize rights under other Awards, or in exchange for the grant of new Awards under similar or different terms (including the grant of reload options, which provide for granting of options with an exercise price equal to the then Fair Market Value of a Share upon the tender by a Participants of Shares already owned to exercise an outstanding option), or (B) requiring holders of Awards to surrender outstanding Awards as a condition precedent to the grant of new Awards under the Plan. (ii) Such other terms as are necessary and appropriate to effect an Award to the Participant including but not limited to the term of the Award, payment provisions, vesting provisions, deferrals, any requirements for continued employment with the Company, any other restrictions or conditions (including performance requirements) on the Award and the method by which restrictions or conditions lapse, effect on the Award of a Change of Control as defined in Article IX, and the price, amount or value 15 18 of Awards. Award Agreements may also contain such other terms as may be necessary to comply with Section 16. 16 19 ARTICLE VI SHARES SUBJECT TO THE PLAN 6.1 Subject to the adjustment provisions of Article VIII, the number of Shares for which Awards may be granted under the Plan shall not exceed three hundred thousand (300,000) Shares. 6.2 To the extent permitted by Section 16, any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award, or Awards settled in cash in lieu of Shares, shall be available for further Awards in addition to those available under Section 6.1. 6.3 For the purpose of computing the total number of Shares granted under the Plan, the following rules shall apply to Awards payable in Shares or other securities, where appropriate: (a) except as provided in (e) of this Section, each Stock Option shall be deemed to be the equivalent of the maximum number of Shares that may be issued upon exercise of the particular Stock Option; (b) except as provided in (e) of this Section, each other stock-based Award payable in a security other than Shares shall be deemed to be equal to the number of Shares to which it relates; (c) except as provided in (e) of this Section, where the number of Shares available under the Award is variable on the date it is granted, the number 17 20 of Shares shall be determined by reference to Section 16 and the rules promulgated thereunder, or in the absence of any such applicable rules, determined by the Committee in good faith; (d) where one or more types of Awards (both of which are payable in Shares or another security) are granted in tandem with each other, such that the exercise of one type of Award with respect to a number of Shares cancels an equal number of Shares of the other, the amount outstanding under the tandem Award shall be deemed to be equal to the greater number of Shares issuable under either Award; and (e) each security awarded or deemed to be awarded under the preceding subsections of this Section 6.3 shall be treated as a Share, even if the Award is for a security other than a Share. Additional rules for determining the number of Shares granted under the Plan may be made by the Committee, as it deems necessary or appropriate. 6.4 The Shares or other stock which may be issued pursuant to an Award under the Plan may be treasury or authorized, but unissued stock, or stock may be acquired, subsequently or in anticipation of the transaction, in the open market or in private transactions to satisfy the requirements of the Plan. 18 21 ARTICLE VII ADMINISTRATION 7.1 A majority of the members of the Committee shall constitute a quorum. The vote of a majority of a quorum shall constitute action by the Committee. 7.2 The Committee will be responsible for declaring the material terms under which the Performance Awards are to be paid, including performance goals. Prior to the payment of a performance-based Award, the Committee shall certify that the predetermined performance goals and any other material terms were in fact satisfied. 7.3 The Committee shall periodically determine the Participants in the Plan and the nature, amount, pricing, timing, and other terms of Awards to be made to such individuals. 7.4 The Committee shall have the power to interpret and administer the Plan. All questions of interpretation with respect to the Plan, the number of Shares or other securities, Stock Appreciation Rights, or units granted, and the terms of any Award Agreements shall be determined by the Committee and its determination shall be final and conclusive upon all parties in interest. In the event of any conflict between an Award Agreement and the Plan, the terms of the Plan shall govern. 19 22 7.5 It is the intent of the Company that the Plan and Awards hereunder satisfy and be interpreted in a manner, that, in the case of Participants who are or may be Insiders, satisfies the applicable requirements of Rule 16b-3, so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 and will not be subjected to avoidable liability thereunder. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. Moreover, in the event the Plan does not include a provision required by Rule 16b-3 to be stated therein, such provision (other than one relating to eligibility requirements, or the price and amount of awards) shall be deemed automatically to be incorporated by reference into the Plan insofar as Insiders are concerned. 7.6 The Committee may delegate to the officers or employees of the Company the authority to execute and deliver such instruments and documents, to do all such acts and things, and to take all such other steps deemed necessary, advisable or convenient for the effective administration of the Plan in accordance with its terms and purpose, except that the Committee may not delegate any discretionary authority with respect to substantive decisions or functions regarding the Plan or Awards thereunder as these relate to Insiders including but not limited to decisions regarding the timing, eligibility, pricing, amount or other material terms of such Awards. 20 23 7.7 In the case of Awards that are intended to be Performance Awards, before any such Performance Award is granted to a "covered employee" as defined in Code Section 162(m), the Committee shall disclose to the shareholders and the shareholders must approve the material terms of the award, including: (a) A description of the class of employees who are eligible to participate in the Plan. (b) A general description of the business criteria on which the performance goals are based. (c) Either the formula for computing the compensation or the maximum dollar amount that will be paid if the performance goal is satisfied. (d) Such other information as the Committee deems necessary to comply with the requirements under Section 162(m) of the Code. ARTICLE VIII ADJUSTMENTS UPON CHANGES IN CAPITALIZATION 8.1 If, while any Awards are outstanding, the outstanding Shares are hereafter increased, decreased, changed into, or exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock dividend, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments shall be made by the Committee in the number and/or kind of shares which are subject to purchase or award under outstanding Awards and in the purchase price or prices applicable to such outstanding Awards in order to prevent the dilution or enlargement of rights. In addition, in any such event, the number and/or kind of Shares which may be offered under the Plan shall also be proportionately adjusted to the same end. This Plan does not affect in any way the right 21 24 or power of the Company 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. 8.2 Upon the dissolution or liquidation of the Company, or upon a reorganization, merger, or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or stock of the Company to another corporation, the holder of each Award, then outstanding under the Plan, will thereafter be entitled to receive with respect to such Award, as nearly as reasonably may be determined, the cash, securities and/or property which a holder of one Share was entitled to receive upon and at the time of such transaction, upon payment of the purchase price required by the terms of the Award, if any. Notwithstanding the foregoing, however, any Award under this Plan that entitles an Employee to purchase securities of the Company may be canceled by the Company as of the effective date of any such reorganization, merger, or consolidation, or of any dissolution or liquidation of the Company, by giving notice to the Employee or his personal representative of the Company's intention to do so and by permitting the Employee to pay any amounts that would otherwise be due under the terms of an Award Agreement to obtain securities available to the Employee as an Award during the thirty (30) day period next preceding such effective date. 8.3 In the event of a change in the Shares of the Company as presently constituted, which is limited to a change of all its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be Shares within the meaning of this Plan. 22 25 8.4 To the extent that the foregoing adjustments relate to Awards, Shares, or securities of the Company, such adjustments shall be made by the Committee, and its determination in that respect shall be final, binding, and conclusive. 8.5 Except as expressly provided in this Article, the Participant shall have no right to any adjustment of the number or price of Shares subject to any Award under the Plan by reason of any subdivision or consolidation of shares of any class or the payment of any dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation, and except as provided, any issue by the Company of shares of any class, or securities convertible into shares of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to the Award. 8.6 The grant of an Award pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 23 26 ARTICLE IX CHANGE OF CONTROL 9.1 The Committee shall determine the effect of a Change of Control and specify such effect in Award Agreements that are issued pursuant to the Plan. These effects may include, but are not limited to: (a) offering to purchase any outstanding Award made pursuant to this Plan from the holder for its Fair Market Value or such value established under the Award Agreement, as determined by the Committee, as of the date of the Change of Control; or (b) making adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants following such Change of Control. 9.2 For the purposes of this Section, a "Change of Control" shall mean the earliest date on which any of the following events shall occur: (a) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Shares would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of the Shares immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or any lease, exchange, or other transfer (excluding transfer by way of pledge or hypothecation), in one transaction or a series of related transactions, of all, or substantially all, of the assets of the Company; 24 27 (b) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (c) any "person" (as such term is defined in Section 3(a)(9) or Section 13(d)(3) under the Exchange Act ) or any "group" (as such term is used in Rule 13d-5 promulgated under the Exchange Act), other than the Company or any successor of the Company or any subsidiary of the Company or any employee benefit plan of the Company or any subsidiary (including such plan's trustee), becomes a beneficial owner for purposes of Rule 13d-3 promulgated under the Exchange Act, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the Company's then outstanding securities having the right to vote in the election of directors; or (d) during any period of two consecutive years, individuals who, at the beginning of such period constituted the entire Board, cease for any reason (other than death) to constitute a majority of the directors, unless the election, or the nomination for election, by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 25 28 ARTICLE X RIGHTS OF EMPLOYEES 10.1 Status as an eligible Employee shall not be construed as a commitment that any Award will be made under the Plan to such eligible Employee or to eligible Employees generally. 10.2 Nothing contained in the Plan (or in any other documents related to this Plan or to any Award) shall confer upon any Employee or Participant any right to continue in the employ or other service of the Company or constitute any contract or limit in any way the right of the Company to change such person's compensation or other benefits or to terminate the employment of such person with or without cause. ARTICLE XI COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS 11.1 No certificate for Shares distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended from time to time, or any successor statute, the Exchange Act and the requirements of the exchanges or interdealer quotation systems on which the Shares may, at the time, be listed or quoted. 26 29 11.2 Anything in this Plan to the contrary notwithstanding, if, at any time specified herein for the issue of Shares or other securities to a Participant, any law, or any regulation or requirement of the Securities and Exchange Commission or any other governmental authority having jurisdiction shall require either the Company or the Participant to take any action in connection with the Shares or Awards then to be issued, the issue of the Shares or Awards shall be deferred until the action shall have been taken; however, the Company shall have no liability whatsoever as a result of the non-issuance of the Shares or Awards, except to refund to Participant any consideration tendered in respect of the purchase price. ARTICLE XII AMENDMENT AND TERMINATION The Board may at any time amend, suspend, or terminate the Plan (provided that the Board shall seek stockholder approval of any amendments to the extent it deems necessary to maintain an exemption from Section 162(m) of the Code). The Committee may at any time alter or amend any or all Award Agreements under the Plan to comply with any laws that govern such agreements. However, no such action may, without further approval of the stockholders of the Company, be effective if such approval is required in order that transactions in Company securities under the Plan, as they relate to Insiders, be exempt from the operation of Section 16(b) of the Exchange Act. 27 30 ARTICLE XIII UNFUNDED PLAN The Plan shall be unfunded. Neither the Company, Board of Directors, nor the Committee shall be required to segregate any assets that may at any time be represented by Awards made pursuant to the Plan. Neither the Company, the Committee, nor the Board of Directors shall be deemed to be a trustee of any amounts to be paid under the Plan. ARTICLE XIV LIMITS OF LIABILITY 14.1 Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by the Plan and the Award Agreement. 14.2 No member of the Board or the Committee, nor any Employee acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board and the Committee and each Employee acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation. 28 31 ARTICLE XV MISCELLANEOUS 15.1 The Plan shall, subject to stockholder approval, continue from its Effective Date as set out in Article I until December 31, 2003, unless the Plan is terminated in accordance with the provisions of Article XII. 15.2 The laws of the State of Texas shall govern all matters relating to this Plan except to the extent superseded by the laws of the United States. 15.3 Any controversy or claim arising under this Plan must be settled exclusively by arbitration under the Commercial Arbitration Rules of the American Arbitration Association; except that the preceding paragraph shall govern applicable law and construction, and the arbitration locale shall be Dallas, Texas. Costs (excluding attorneys' fees) of any arbitration shall be born by the Company. 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. 15.4 The Plan shall be submitted to the stockholders of the Company for their approval and adoption. The Plan shall not be effective and no Award shall be made hereunder, unless and until the Plan has been so approved and adopted at a meeting of the Company's stockholders. 29 32 15.5 The Company may require that there be presented to and filed with it by any Participant under the Plan, such evidence as it may deem necessary to establish that the options granted or Shares to be purchased or transferred are being acquired for investment and not with a view to their distribution. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer to be effective immediately, subject to approval by the stockholders of the Company within twelve (12) months after the date on which this Plan is adopted by the Board of Directors of the Company. KITTY HAWK, INC. By: /s/ RICHARD WADSWORTH --------------------------------- Title: SECRETARY ------------------------------- 30 EX-10.30 6 AMENDED & RESTATED EMPLOYEE STOCK OWNERSHIP PLAN 1 EXHIBIT 10.30 KITTY HAWK, INC. Amended and Restated Employee Stock Purchase Plan Dated September 3, 1996 2 TABLE OF CONTENTS Article I Amendment and Restatement; Purpose..................1 Article II Definitions.........................................1 Article III Eligibility.........................................6 Article IV Participation.......................................7 Article V Payroll Deductions..................................8 Article VI Terms and Conditions of Options.....................9 Article VII Exercise of Option.................................10 Article VIII Death, Termination, or Withdrawal..................12 Article IX Shares Under Option................................13 Article X Administration.....................................14 Article XI Amendment and Termination of the Plan..............16 Article XII Nontransferability.................................17 Article XIII Use of Funds.......................................17 Article XIV Changes in Capitalization, Merger, Etc.............17 Article XV Adjustments to Shares..............................19 Article XVI Beneficiary Designation............................20 Article XVII Registration and Qualification of Shares...........21 Article XVIII Shareholder Approval...............................22 Article XIX Restrictions on Participants Subject to Short-Swing Profit Rules.......................................22 Article XX Miscellaneous......................................23
i 3 ARTICLE I AMENDMENT AND RESTATEMENT; PURPOSE 1.1 Effective as of September 3, 1996, Kitty Hawk, Inc. (the "Company") adopts this Amended and Restated Employee Stock Purchase Plan, which amends, restates and supersedes in its entirely the Kitty Hawk, Inc. Employee Stock Purchase Plan that was adopted by the Company as of June 28, 1996. 1.2 The Plan is intended to encourage employees of Kitty Hawk, Inc. (the "Company") and its participating subsidiary corporations to acquire an ownership interest in the Company through the purchase of shares of common stock of the Company on a tax-favored basis. The Plan is intended to enhance shareholder value by aligning employee efforts with the financial success of the Company. The Plan is also intended to enhance employee benefits and improve employee retention through the use of a convenient payroll-based savings vehicle that is tax favored. It is the intention of the Company to have a broad-based nondiscriminatory plan under the Code. This Plan is also intended to qualify as an "employee stock purchase plan" under Section 423 of the Code; provided, however, that the provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of Section 423. ARTICLE II DEFINITIONS 2.1 "Change in Control" means the earliest date on which either of the following events shall occur: (a) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving 1 4 corporation or pursuant to which shares of the Company's common stock would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or any lease, exchange or other transfer (excluding transfer by way of pledge or hypothecation), in one transaction or a series of related transactions, of all, or substantially all, of the assets of the Company; (b) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (c) any "person" (as such is defined in Section 3(a)(9) or Section 13(d)(3) under the Securities Exchange Act of 1934 (the "1934 Act")) or any "group" (as such term is used in Rule 13d-5 promulgated under the 1934 Act), other than the Company or any successor of the Company or any subsidiary of the Company or any employee benefit plan of the Company or any subsidiary (including such plan's trustee), becomes a beneficial owner for purposes of Rule 13d-3 promulgated under the 1934 Act, directly or indirectly, of securities of the Company representing 20% or more of the Company's then outstanding securities having the right to vote in the election of directors; or . (d) during any period of two consecutive years, individuals who, at the beginning of such period constituted the entire Board of Directors of the Company, cease for any reason (other than death) to constitute a majority of the directors, unless the election, or the nomination for election, by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 2 5 2.2 "Code" means the Internal Revenue Code of 1986, as amended. 2.3 "Committee" means the committee responsible for the administration of the Plan provided for in Article X. 2.4 "Company" means Kitty Hawk, Inc., a Delaware corporation. 2.5 "Compensation" means base pay, plus overtime. 2.6 "Effective Date" means April 1, 1997, or a date established by the Committee not to exceed thirty (30) days following registration of the Shares reserved pursuant to the Plan with the United States Securities and Exchange Commission, whichever is later. 2.7 "Eligible Employee" means an Employee of the Employer who is eligible for participation in the Plan in accordance with Article III. 2.8 "Employee" means any current, common law employee of the Employer. 2.9 "Employer" means the Company and any Subsidiary, provided that participation in the Plan by the Subsidiary is approved by the Board of Directors of the Company. 2.10 "Exercise Date" means the last business day on which shares of common stock of the Company are traded on an established market or quoted on an inter- 3 6 dealer quotation system coinciding with or immediately prior to each June 30th, and December 31st during the Term of the Plan. 2.11 "Fair Market Value" of a Share means the value of a Share as of any date, determined as follows: (a)if the Shares are listed on a national securities exchange or if last sales prices are reported for the Shares as of such date, the closing price per Share as reported on such date; (b) if the Shares are not listed on a national securities exchange and last sale prices are not reported for the Shares, but the Shares are traded in the over-the-counter market, the mean between the closing bid and asked prices per Share on such date; or (c)if there is no generally recognized market for the Shares as of such date, the fair market value per Share as determined in good faith by the Committee in any manner acceptable under Section 423 of the Code. 2.12 "Offering Commencement Date" means the first business day during the Term of the Plan on which Shares are traded on an established market or quoted on an inter-dealer quotation system coinciding with or immediately following an Exercise Date; provided, however, that the initial Offering Commencement Date shall mean the first business date on which Shares are traded on an established market or quoted on an inter-dealer quotation system coinciding or immediately following the Effective Date. 2.13 "Offering Period" means the period from the Offering Commencement Date to the next succeeding Exercise Date. 4 7 2.14 "Parent" means an entity as described in Section 424(e) of the Code. 2.15 "Participant" means an Employee of the Employer who has satisfied the eligibility requirements and who elects to participate in the Plan in accordance with Article IV. 2.16 "Participation Date" means the first Offering Commencement Date on or after an Eligible Employee enrolls to participate in the Plan under the terms of Article IV, provided the initial Participation Date for Eligible Employees as of such date shall be the Effective Date of the Plan. 2.17 "Plan" means this Amended and Restated Employee Stock Purchase Plan, as amended from time to time. 2.18 "Rule 16b-3" means Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended effective November 1, 1996 by Release No. 34-37260. 2.19 "Shares" means the shares of common stock of the Company, par value one cent ($.01). 2.20 "Subsidiary" means an entity as described in Section 424(f) of the Code. 2.21 "Term of the Plan" means the time period from the initial Offering Commencement Date to the Termination Date of the Plan. 5 8 2.22 "Termination Date" means the final Exercise Date on which all of the Shares available to be purchased under the Plan have been purchased by Eligible Employees. 6 9 ARTICLE III ELIGIBILITY 3.1 Any Employee of the Employer who has completed at least one year of continuous service, works a regular schedule of at least twenty (20) hours per week, and is employed by the Company for at least five (5) months per calendar year shall be eligible to participate in the Plan, subject to the limitations imposed by Section 423 of the Code. For purposes hereof, service with any corporation, partnership, or other entity acquired by the Employer shall be deemed to be service with the Employer if the Employee is employed by the Employer on the Employee's Participation Date. For purposes of the immediately preceding sentence, a corporation, partnership, or other entity shall be deemed to have been acquired by the Employer in the event the Employer has acquired a substantial amount of the assets of such corporation, partnership, or other entity or in the event the Employer has acquired more than fifty percent (50%) of the stock of any such corporation. 3.2 Any Employee who is also a member of the Board of Directors of an Employer shall be eligible to participate in the Plan; provided that an Employee that is a director of the Company cannot serve as a member of the Committee. 3.3 Notwithstanding any provision of the Plan to the contrary, no Employee shall be granted an option to purchase Shares under this Plan: (a) if such Employee, immediately after the option is granted, owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or a Parent or a Subsidiary of the Company. For purposes of determining share ownership, the rules of Section 424(d) of the Code shall apply, and stock which the Employee may 7 10 purchase under outstanding options shall be treated as stock owned by the Employee; or (b) which permits the stock which an Employee may purchase under all employee stock purchase plans of the Company and its Parent and Subsidiary corporations to accrue at a rate which exceeds $25,000 of the Fair Market Value of such stock, determined as of the applicable Offering Commencement Date, for each calendar year in which such option is outstanding at any time. The term "accrue" shall be interpreted in accordance with Section 423(b)(8) of the Code. ARTICLE IV PARTICIPATION 4.1 Participation in the Plan is completely voluntary. Subject to Article XIX, an Eligible Employee may enroll to participate in the Plan by completing a written payroll deduction authorization on such form(s) as may be provided from time to time by the Committee and submitting the enrollment to the Employer's payroll department in a manner prescribed by the Committee. Participation in the Plan shall begin no earlier than the Participation Date coinciding with or immediately following the date on which the Employee completes the eligibility requirements under Article III. 4.2 Following initial enrollment, payroll deductions for a Participant shall automatically continue as of each Participation Date, but shall end on the Termination Date; provided, however, that such payroll deductions may be terminated by the Participant at any time as provided in Article VIII. 8 11 4.3 Following initial enrollment, payroll deductions for a Participant shall automatically continue as of each Offering Commencement Date, but shall end on the Termination Date; provided, however, that such payroll deductions may be terminated by the Participant at any time as provided in Section 5.4 or Article VIII. ARTICLE V PAYROLL DEDUCTIONS 5.1 Upon enrollment, a Participant shall elect to make contributions to the Plan by selecting a whole percentage of his compensation (e.g., three percent of compensation) to be deducted from payroll (in full dollar amounts and in amounts calculated to be as uniform as practicable throughout the Offering Period) in an aggregate amount not in excess of fifteen percent (15%) of such Participant's Compensation, as determined on the Offering Commencement Date. The Committee may declare a minimum authorized payroll deduction in order to limit administrative expenses associated with the Plan. 5.2 Payroll deductions shall be the exclusive method to accumulate proceeds to purchase Shares under the Plan. Participants may not make any separate cash payments outside payroll deductions under the Plan. 5.3 Payroll deductions made by Participants shall be accumulated under individual accounts maintained for each Participant; provided, however, that such separate accounting shall not limit the Company's use of the funds as provided under Article XIII. 5.4 Subject to Article XIX, a Participant may terminate payroll deductions at any time by fifteen days' prior written notice, in a manner prescribed by the Committee. 9 12 Subject to Article XIX, a Participant who elects to terminate payroll deductions may not resume payroll deductions until the next Offering Commencement Date. Upon termination of payroll deductions under this Section 5.4, the Participant's individual account shall, subject to Article XIX, be distributed in accordance with Section 8.3. ARTICLE VI TERMS AND CONDITIONS OF OPTIONS 6.1 Offerings made under this Plan shall be evidenced by agreements in such form as the Committee shall approve, provided that all Employees shall have the same rights and privileges and provided further that the terms of such offering shall comply with and be subject to the terms and conditions of this Plan. 6.2 The Plan will be implemented with semi-annual offerings of Shares of the Company as of each Offering Commencement Date until the total number of Shares set aside for the Plan under Article IX have been issued under the Plan. 6.3 Subject to Section 7.3, on each Offering Commencement Date the Participant shall be deemed to have been granted an option to purchase two thousand (2,000) Shares from the Participant's individual account during the Offering Period. Subject to Section 7.3, on the Exercise Date the Participant's individual account will be used to purchase the maximum number of full Shares that the account balance will permit. 6.4 The Participant will have no interest in Shares covered by an option until such option has been exercised. 10 13 6.5 All options that are not exercised on the first Exercise Date after being granted shall lapse on such Exercise Date and all payroll deductions attributable to these options shall be distributed to the Participants in cash without interest or earnings as soon as practicable after the Exercise Date on which such options lapse. 6.6 No certificate for Shares distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended from time to time or any successor statute, the 1934 Act and the requirements of the exchanges or interdealer quotation systems on which the Shares may, at the time, be listed or quoted. ARTICLE VII EXERCISE OF OPTION 7.1 The exercise price of all Shares to be purchased by a Participant under the Plan shall be the lesser of eighty-five percent (85%) of the Fair Market Value of the Shares of the Company on the Exercise Date or eighty-five percent (85%) of the Fair Market Value of the Shares of the Company on the immediately preceding Offering Commencement Date. For this purpose, the Fair Market Value of the Shares shall be equal to the Fair Market Value of such Shares on the Exercise Date or previous Offering Commencement Date, whichever is applicable, or the nearest prior business day on which trading occurs. If Shares have not been publicly traded during the five (5) business days immediately preceding the Exercise Date or previous Offering Commencement Date, whichever is applicable, then the fair market value of such Shares shall be determined in good faith by the Committee in any manner acceptable under Section 423 of the Code. 11 14 7.2 Unless a Participant gives written notice of intent to withdraw payroll deductions as provided in Section 8.3, the Participant's option to purchase Shares shall be exercised automatically on behalf of the Participant on each Exercise Date. The exercise will be based on the number of full Shares which can be purchased using accumulated payroll deductions in the Participant's individual account at the applicable exercise price. Fractional Shares shall not be issued under the Plan. If payroll deductions are applied to the exercise of a Participant's option to purchase Shares as of an Exercise Date, any amounts remaining in the Participant's individual account representing fractional Shares will be carried over and applied to a subsequent offering. 7.3 In no event shall the number of Shares issued under the Plan exceed the maximum number of Shares available for sale under Section 9.1. If the total number of Shares for which options are to be granted on any date in accordance with Article VI exceeds the number of Shares then available under the Plan (after deduction of all Shares for which options have been exercised or are then outstanding), the Committee shall make a pro rata allocation of the remaining available Shares based on the respective payroll deduction amounts of all Participants in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable. In such event, payroll deductions to be made shall be reduced accordingly and the Committee shall give written notice of such reduction to each Participant affected thereby and, if necessary, excess payroll deductions previously credited to the Participants' accounts shall be returned to the Participants without interest. 12 15 ARTICLE VIII DEATH, TERMINATION, OR WITHDRAWAL 8.1 In the event of death of a Participant prior to the Termination Date, the beneficiary or beneficiaries designated by the Participant under Article XVI may give notice to the Committee, within ninety (90) days after the death of the Participant, of the beneficiary's or beneficiaries' election to purchase the number of full Shares which the accumulated payroll deductions in the account of such deceased Participant will purchase at the option price specified in Section 7.1 (which may not be less than 85% of the Fair Market Value of the Shares on the previous Offering Commencement Date, if such purchase occurs before the Exercise Date), and upon such notice the deceased Participant's accumulated payroll deductions shall be used to purchase such Shares within three (3) months after the date of the Participant's death. The balance in the Participant's individual account after the purchase of such Shares shall be distributed in cash without interest. If no such notice is received by the Committee within said ninety (90) days, the Participant's accumulated payroll deductions held in the individual account will be distributed to such beneficiary or beneficiaries in cash without interest. 8.2 Upon termination of the Participant's employment with an Employer for any reason other than the death of the Participant during an Offering Period, the accumulated payroll deductions credited to the Participant's account shall be returned to the Participant without interest. 8.3 Subject to Article XIX, a Participant who terminates payroll deductions under Section 5.4 of the Plan may request a withdrawal of payroll deductions credited to the Participant's individual account under the Plan at any time prior to an Exercise Date by giving written notice as prescribed by the Committee. All of the 12 16 Participant's payroll deductions credited to the Participant's account shall be paid to the Participant, without interest, as soon as administratively practicable and no sooner than two weeks after receipt of the Participant's notice of withdrawal. No further payroll deductions shall be made from the Participant's Compensation unless the Participant makes a request to commence participation again in accordance with Section 8.4. 8.4 Subject to Article XIX, if a Participant makes a request to withdraw accumulated payroll deductions under Section 8.3, the Participant will not be eligible to participate in the Plan earlier than the first Offering Commencement Date immediately following the date of such withdrawal request, based on procedures established by the Committee. ARTICLE IX SHARES UNDER OPTION 9.1 The maximum number of Shares which shall be made available for sale under the Plan shall be one hundred thousand (100,000), subject to adjustment upon changes in capitalization of the Company as provided in Articles XIV and XV. 9.2 As promptly as practicable after the Exercise Date, the Company shall deliver to such Participant certificates for the number of full Shares purchased upon exercise of the option. The balance, without interest, of any payroll deductions credited to the Participant's account which were not used for the purchase of Shares shall be rolled over and applied toward the purchase of Shares at the next Exercise Date. Shares issued pursuant to the Plan shall be subject to a two year restriction on alienability as described in Section 9.3 and such other restrictions and for such 14 17 period as the Company shall designate and the certificates representing the Shares shall include a legend reflecting such restrictions. 9.3 If the Participant transfers or otherwise disposes of any Shares purchased under the Plan within two (2) years after an Offering Commencement Date applicable to such Shares, or within one (1) year after the transfer of such Shares to the Participant, other than by will or the laws of descent and distribution, then the Participant shall notify the Employer immediately of such disposition. ARTICLE X ADMINISTRATION 10.1 The Board of Directors of the Company shall appoint a Committee to administer the Plan. Each member of the Committee at the time of his appointment to the Committee and while he is a member thereof, must be a "Non-Employee Director," as that term is defined in Rule 16b-3. 10.2 Each member of the Committee shall serve until his or her successor is appointed. Any member of the Committee may be removed by the Board of Directors, with or without cause, which shall have the power to fill any vacancy which may occur. A Committee member may resign upon written notice to the Board of Directors. 10.3 The Committee shall have the following powers and duties: (a) to direct the administration of the Plan in accordance with the provisions herein set forth; 15 18 (b) to adopt rules of procedure and regulations necessary for the administration of the Plan, provided the rules are not inconsistent with the terms of the Plan; (c) to determine all questions with regard to rights of Participants of the Plan, including but not limited to rights of eligibility of an Employee to participate in the Plan; (d) to enforce the terms of the Plan and the rules and regulations the Committee adopts; (e) to furnish the Employer with information which the Employer may require for tax or other purposes; (f) to engage the service of advisors, including consultants and counsel (who may, if appropriate, be counsel for the Employer) and agents whom it may deem advisable to assist it with the performance of its duties; (g) to receive from the Employer and from Employees such information as shall be necessary for the proper administration of the Plan; (h) to select a secretary, who need not be a member of the Committee; and (i) to otherwise interpret and construe the Plan. 10.4 The decision of a majority of the members of the Committee appointed shall control. In case of a vacancy in the membership of the Committee, the remaining members of the Committee may exercise any and all of the powers, authorities, duties, and discretion conferred upon the Committee pending the filling of the vacancy. The Committee may, but need not, call or hold formal meetings. Any decisions made or action taken pursuant to written approval of all of the then members shall be sufficient. The Committee shall maintain adequate records of its decisions. 16 19 10.5 The Committee may authorize any one of its members, or its secretaries, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters, or other documents. 10.6 The Committee shall administer the Plan in a uniform, nondiscriminatory manner for the exclusive benefit of the Participants. 10.7 The Committee shall maintain, or cause to be maintained, records which will adequately disclose all required information about the Plan. The books, forms, and methods of accounting shall be the responsibility of the Committee. ARTICLE XI AMENDMENT AND TERMINATION OF THE PLAN The Board of Directors may at any time amend, suspend, or terminate the Plan, but the Board of Directors shall seek stockholder approval of any amendments to the extent it deems necessary to maintain the exemption from Section 162(m) of the Code. The Committee may at any time alter or amend any or all Award Agreements under the Plan to comply with any laws that govern such agreements. (a) materially increase the number of Shares which may be issued under the Plan; (b) materially modify the requirements as to eligibility for participation; (c) materially increase the benefits accruing to Participants under the Plan; or (d) extend the duration of the Plan beyond the date approved by the stockholders of the Company. 17 20 ARTICLE XII NONTRANSFERABILITY 12.1 Except as provided in Section 8.1 and Article XVI, neither payroll deductions credited to a Participant's individual account nor any rights with regard to the exercise of an option or to receive Shares under the Plan may be assigned, transferred, pledged, or otherwise encumbered or disposed of in any way by the Participant, and any such attempted assignment, transfer, pledge, or other encumbrance or disposition shall be null and void and without effect, but the Committee may, at its option, treat such act as an election to withdraw funds in accordance with Article VIII. ARTICLE XIII USE OF FUNDS 13.1 All payroll deductions received or held by the Employer under this Plan may be used by the Employer for any corporate purposes and the Employer shall not be obligated to segregate such payroll deductions or to accrue or pay interest (or other earnings) on such payroll deductions. ARTICLE XIV CHANGES IN CAPITALIZATION, MERGER, ETC. 14.1 If, while any options are outstanding, the outstanding shares of common stock of the Company are decreased, changed into, or exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock dividend, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments shall be made by the Committee in the number and/or kind of shares which are subject to purchase 18 21 under outstanding options and in the option exercise price or prices applicable to such outstanding options in order to prevent the dilution or enlargement of rights. In addition, in any such event, the number and/or kind of Shares which may be offered under the Plan shall also be proportionately adjusted to the same end. This Plan does not affect in any way the right or power of the Company 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. 14.2 Upon the dissolution or liquidation of the Company, or upon a reorganization, merger, or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or stock of the Company to another corporation, the holder of each option then outstanding under the Plan will thereafter be entitled to receive at the next Exercise Date upon the exercise of such option for each Share as to which such option shall be exercised, as nearly as reasonably may be determined, the cash, securities, and/or property which a holder of one Share was entitled to receive upon and at the time of such transaction. Alternatively, the Committee may designate that the dissolution or liquidation of the Company shall cause each outstanding option to terminate, provided in such event that immediately prior to such dissolution or liquidation, each Participant shall be repaid the payroll deductions credited to the Participant's account without interest. 14.3 In the event of a change in the Shares of the Company as presently constituted, which is limited to a change of all its authorized shares with par value into the same number of shares with a different par value or without par value, the 19 22 shares resulting from any such change shall be deemed to be Shares within the meaning of this Plan. ARTICLE XV ADJUSTMENTS TO SHARES 15.1 To the extent that the foregoing adjustments relate to Shares or securities of the Company, such adjustments shall be made by the Committee, and its determination in that respect shall be final, binding, and conclusive, provided that each option granted pursuant to this Plan shall not be adjusted in a manner that causes the option to fail to continue to satisfy the requirements of an option issued pursuant to an "employee stock purchase plan" within the meaning of Section 423 of the Code. 15.2 Except as expressly provided in Articles XIV and XV, the Participant shall have no right to any adjustment of the number or price of Shares subject to any option under the Plan by reason of any subdivision or consolidation of shares of any class or the payment of any dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation, and except as so provided, any issue by the Company of shares of any class, or securities convertible into shares of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to the option. 15.3 The grant of an option pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge or to 20 23 consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. ARTICLE XVI BENEFICIARY DESIGNATION 16.1 A Participant may file with the Company a written designation of the Participant's beneficiary or beneficiaries who may elect to purchase Shares or receive cash to the Participant's credit under the Plan in the event of such Participant's death prior to delivery to the Participant of such Shares and cash. Such designation of beneficiary may be changed by the Participant at any time by written notice. If no written designation is given, the beneficiary of record under the Kitty Hawk Group, Inc. 401(k) Savings Plan will be considered the beneficiary for this Plan. 16.2 Upon the death of a Participant and receipt by the Committee of proof deemed adequate by it of the identity and existence at the Participant's death of one or more beneficiaries validly designated by the Participant under the Plan, the Company shall deliver such Shares and/or cash to such beneficiary or beneficiaries in accordance with Section 8.1. If upon the death of a Participant there is no surviving beneficiary duly designated as above provided, the Committee shall deliver the Participant's accumulated payroll deductions to the Participant's surviving spouse, if any, or if there is no such surviving spouse, then to the executor or administrator of the estate of the Participant (in accordance with Section 8.1). 16.3 The Employer, the Committee and the members thereof, shall not be liable for any distribution made of Shares or cash pursuant to any will or other 21 24 testamentary disposition made by such Participant, or because of the provisions of law concerning intestacy, or otherwise. No designated beneficiary shall, prior to the death of the Participant by whom he has been designated, acquire any interest in the Shares or cash credited to the Participant under the Plan. ARTICLE XVII REGISTRATION AND QUALIFICATION OF SHARES The offering of the Shares hereunder is expressly made subject to the registration or qualification of such Shares under any federal or state law, or the obtaining of consent or approval by any governmental regulatory body, which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to, or in connection with, the offering, issuance or purchase of such Shares. The Company shall make every reasonable effort to effect such registration or qualification or to obtain such consent or approval. Anything in this Plan to the contrary notwithstanding, if, at any time specified herein for the issue of Shares to a Participant, any law, or any regulation or requirement of the Securities and Exchange Commission or any other governmental authority having jurisdiction shall require either the Company or the Participant to take any action in connection with the Shares then to be issued, the issue of the Shares shall be deferred until the action shall have been taken; however, the Company shall have no liability whatsoever as a result of the non-issuance of the Shares, except to refund to Participant any consideration tendered in respect of the exercise price. 22 25 ARTICLE XVIII SHAREHOLDER APPROVAL The Plan is expressly made subject to approval of the Company's shareholders in accordance with the laws of the State of Delaware, and, at Company's election, to the receipt by the Company from the Internal Revenue Service of a favorable determination letter or ruling, in scope and content satisfactory to the Committee's advisors, respecting the qualification of the Plan within the meaning of Section 423 of the Code. If the Plan is not so approved by the shareholders on or before one year after this Plan's adoption by the Board of Directors and, if at the election of the Company, the aforesaid determination letter or ruling from the Internal Revenue Service is not received, this Plan shall be deemed not to have come into effect. In such case, the accumulated payroll deductions credited to the account of each Participant shall be paid to the Participant without interest. ARTICLE XIX RESTRICTIONS ON PARTICIPANTS SUBJECT TO SHORT-SWING PROFIT RULES Notwithstanding any provision of this Plan to the contrary, those Participants that are directors, executive officers, and ten percent (10%) or greater stockholders subject to Section 16 of the 1934 Act must effect transactions in Shares, including without limitation initial or periodic transactions resulting from an election to participate in the Plan or change levels of participation with respect to the Shares, in accordance with Section 16 and the rules promulgated thereunder. To the extent any provision of the Plan or action by the Committee fails to comply with all applicable conditions of Rule 16b- 23 26 3 or its successors, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. Moreover, in the event the Plan does not include a provision required by Rule 16b-3 to be stated therein, such provision (other than one relating to eligibility requirements, or the price and amount of an option) shall be deemed automatically to be incorporated by reference into the Plan insofar as Participants subject to Section 16 of the 1934 Act are concerned. ARTICLE XX MISCELLANEOUS 20.1 The Plan does not, directly or indirectly, create any absolute right for the benefit of any Employee or class of Employees to purchase any Shares under the Plan, or create in any Employee or class of Employees any right with respect to continuation of employment by the Employer, and it shall not be deemed to interfere in any way with the Employer's right to terminate, or otherwise modify, an Employee's employment at any time. 20.2 The provisions of the Plan shall, in accordance with its terms, be binding upon, and inure to the benefit of, all successors of each Employee, including, without limitation, such Employee's estate and the executors, administrators, or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Employee. 20.3 The laws of the State of Texas shall govern all matters relating to this Plan except to the extent superseded by the laws of the United States. 20.4 Any controversy or claim arising under this Plan must be settled exclusively by arbitration under the Commercial Arbitration Rules of the American Arbitration Association; except that the preceding paragraph shall govern applicable law and construction, and the arbitration locale shall be Dallas, Texas. Costs (excluding 24 27 attorneys' fees) of any arbitration shall be born by the Company. 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. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer to be effective as of the Effective Date, subject to approval by the stockholders of the Company within twelve (12) months after the date on which this Plan is adopted by the Board of Directors of the Company. KITTY HAWK, INC. By: /s/ RICHARD WADSWORTH ------------------------------ Title: Secretary --------------------------- 25 EX-10.31 7 AMENDED & RESTATED ANNUAL INCENTIVE COMP. PLAN 1 EXHIBIT 10.31 KITTY HAWK, INC. Amended and Restated Annual Incentive Compensation Plan Dated September 3, 1996 2 TABLE OF CONTENTS Article I Amendment and Restatement; Establishment and Purpose.....1 Article II Definitions..............................................1 Article III Eligibility..............................................3 Article IV Awards...................................................4 Article V Administration...........................................6 Article VI Amendment and Termination................................7 Article VII Miscellaneous............................................8
i 3 ARTICLE I AMENDMENT AND RESTATEMENT; ESTABLISHMENT AND PURPOSE 1.1 Effective as of the Effective Date described herein, Kitty Hawk, Inc. (the "Company") adopts this Amended and Restated Annual Incentive Compensation Plan, which amends, restates and supersedes in its entirely the Kitty Hawk, Inc. Annual Incentive Compensation Plan that was adopted by the Company as of June 28, 1996. 1.2 The purpose of this Plan is to provide for the payment of incentive compensation from the profits of Kitty Hawk, Inc. to employees who contribute to the success of the Company. This Plan is expressly intended to be unfunded and discretionary. ARTICLE II DEFINITIONS 2.1 "Award" means a Cash Bonus and/or Stock Bonus granted to a Participant pursuant to Article IV hereof. 2.2 "Award Date" means the last business day in the month of February and August each year during the Term of the Plan. 1 4 2.3 "Award Period" means the period for which an Award is granted. An Award Period shall be the six-calendar-month period immediately preceding the last day in February and the six-calendar-month period immediately preceding August 31st each year. 2.4 "Base Salary" means the Participant's regular base pay and overtime pay, excluding bonuses and all other forms of compensation from the Employer. 2.5 "Board" means the Board of Directors of Kitty Hawk, Inc. 2.6 "Cash Bonus" means the portion of an Award which is payable in cash. 2.7 "Committee" means a special subcommittee of the Compensation Committee of the Board which is composed solely of no less than two outside directors. For this purpose, the term "outside director" means a director of the Board who (i) is not an Employee or a former Employee of the Employer, (ii) has never served as an officer of an entity currently affiliated with the Employer, and (iii) is not paid remuneration (as defined in regulations under Section 162(m) of the Code) from the Employer, directly or indirectly, in any capacity other than as a director. Each member of the Committee at the time of his appointment to the Committee and while he is a member thereof, must be a "Non-Employee Director," as that term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934. 2 5 2.8 "Effective Date" means December 1, 1994. 2.9 "Employer" means Kitty Hawk, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries. 2.10 "Plan" means the Amended and Restated Annual Incentive Compensation Plan, as amended from time to time. 2.11 "Restricted Stockholder" means any person who (i) is the beneficial owner (as such terms is defined in Rule 16a-1 promulgated under the Exchange Act) of ten percent or more of the outstanding Stock or any other class of equity securities of the Employer registered under Section 12 of the Exchange Act, and (ii) is not an officer or director of the Company. 2.12 "Rule 16b-3" means Rule 16b-3 promulgated under Section 16 of the Exchange Act, as amended effective November 1, 1996, by Release No. 34-37260. 2.13 "Stock" means the common stock, par value $.01, of Kitty Hawk, Inc. 2.14 "Stock Bonus" means the portion of an Award payable in Stock. 2.15 "Term of the Plan" means the period from the Effective Date of the Plan to the date on which the Plan is terminated. 3 6 ARTICLE III ELIGIBILITY Each employee of an Employer who has completed at least six months of continuous full time employment with the Employer, who regularly works at least twenty (20) hours per week, who is employed by the Company for at least five (5) months per calendar year, and who is actively employed on the Award Date shall be eligible to participate in the Plan (the "Participant"). 4 7 ARTICLE IV AWARDS 4.1 As soon as practicable following the close of an Award Period, the Committee, in its sole discretion, shall determine the amount, if any, of the Cash Bonus and the Stock Bonus to which each Participant is entitled with respect to such Award Period. Awards shall not exceed in the aggregate ten percent (10%) of the combined income before income taxes of the Company and its consolidated subsidiaries for the Award Period, determined in accordance with generally accepted accounting principles applied on a consistent basis, and before the deduction of any Awards for such period. 4.2 The maximum aggregate number of Shares that may be awarded as Stock Bonuses shall be two hundred thousand (200,000) Shares. 4.3 All Awards are fully vested and nonforfeitable from the Award Date, and cash shall be paid or stock certificates issued as soon as practicable after the Award is made. 4.4 All amounts payable under this Plan shall constitute a general obligation of the Employer. No Participant shall have any right, title, or interest whatever in or to, or any preferred claim in or to, any investment reserves, accounts or funds that the Employer may purchase, establish, or accumulate to aid in providing the payments described in this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall 5 8 create or be construed to create a trust or a fiduciary relationship of any kind between the Employer and a Participant or any other person. 4.5 The Employer may withhold or cause to be withheld from any Award payment any federal, state, or local taxes required by law to be withheld with respect to such payment and such sum as the Employer may reasonably estimate as necessary to cover any taxes for which the Employer may be liable and which may be assessed with regard to such payment. In the event that the Employer awards a Stock Bonus and the Cash Bonus awarded, if any, for the same Award Period is insufficient to enable the Company to pay such taxes, either a Cash Bonus for each Participant will be awarded and withheld in an amount sufficient to cover any taxes which would be required to be withheld from the combined Award, or an amount sufficient to cover taxes required to be withheld from the Stock Bonus shall be withheld from other compensation payable by the Employer to the Participant. 4.6 No Participant shall have any rights by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Plan. 4.7 All Stock paid pursuant to an Award is freely transferable, subject to compliance with applicable securities laws, except that Stock awarded to a Restricted Stockholder, shall not be transferable for a period of six months from the date such Stock is transferred to the Restricted Stockholder. The Committee may, as a condition to the Award of a Stock Bonus, require a 6 9 Participant to make such investment and other representations the Committee deems reasonably necessary. 4.8 As a condition to any Award hereunder, the Committee may require a Participant to pay to the Company an amount equal to, or in excess of, the par value of the Shares awarded to him or her. Any such Stock Bonus shall automatically expire if not purchased in accordance with the Committee's requirements within thirty (30) days after the date of the Award. ARTICLE V ADMINISTRATION 5.1 The Committee shall have the right and the power to administer and interpret the Plan, and to determine the amount and form of the Awards under the Plan. The determination of the Committee as to any disputed questions of construction and interpretation shall be final, binding, and conclusive upon all persons. 5.2 The expenses of administering the Plan shall be borne by the Employer. 5.3 The members of the Committee, officers, directors, and employees of the Company shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability, or expense that may be imposed upon or reasonably incurred by them in connection with or resulting from any claim, action, suit, or proceeding to which they may be a party or in which they may be involved by reason of any action taken or 7 10 failure to act under this Plan, and against and from any and all amounts paid by them in settlement or paid by them in satisfaction of a judgment in any such action, suit, or proceeding. The foregoing provision shall not be applicable to any person if the loss, cost, liability, or expense is due to such person's gross negligence or willful misconduct. ARTICLE VI AMENDMENT AND TERMINATION 6.1 This Plan shall continue in the event of a merger, consolidation, or acquisition where the Company is not the surviving corporation, unless the successor or acquiring corporation shall elect to terminate the Plan. 6.2 The Company expressly reserves the right to amend the Plan by resolution of the Board, at any time and in any manner, including the making of retroactive amendments, and expressly reserves the right to terminate the Plan at any time by resolution of the Board; provided, however, in the event of an amendment or termination of the Plan, Awards previously made by the Committee shall continue to be obligations of the Employer and shall be paid in accordance with the terms of the Plan. Any such amendment or termination shall be evidenced in writing. 6.3 With respect to persons subject to Section 16 of the Securities Exchange Act of 1934 ("1934 Act"), transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors promulgated under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the 8 11 Committee. Moreover, in the event the Plan does not include a provision required by Rule 16b-3 to be stated therein, such provision (other than one relating to eligibility requirements, or the price and amount of an Award) shall be deemed automatically to be incorporated by reference into the Plan insofar as Participants subject to Section 16 of the 1934 Act are concerned. ARTICLE VII ADJUSTMENTS UPON CHANGES IN CAPITALIZATION 7.1 If, while any Awards are outstanding, the outstanding Shares are hereafter increased, decreased, changed into, or exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock dividend, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments shall be made by the Committee in the number and/or kind of shares which are subject to purchase or award under outstanding Awards and in the purchase price or prices applicable to such outstanding Awards in order to prevent the dilution or enlargement of rights. In addition, in any such event, the number and/or kind of Shares which may be offered under the Plan shall also be proportionately adjusted to the same end. This Plan does not affect in any way the right or power of the Company 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. 7.2 Upon the dissolution or liquidation of the Company, or upon a reorganization, merger, or consolidation of the Company with one or more 9 12 corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or stock of the Company to another corporation, the holder of each Award, then outstanding under the Plan, will thereafter be entitled to receive with respect to such Award, as nearly as reasonably may be determined, the cash, securities and/or property which a holder of one Share was entitled to receive upon and at the time of such transaction, upon payment of the purchase price required by the terms of the Award, if any. Notwithstanding the foregoing, however, any Award under this Plan that entitles an Employee to purchase securities of the Company may be canceled by the Company as of the effective date of any such reorganization, merger, or consolidation, or of any dissolution or liquidation of the Company, by giving notice to the Employee or his personal representative of the Company's intention to do so and by permitting the Employee to pay any amounts that would otherwise be due under the terms of an Award Agreement to obtain securities available to the Employee as an Award during the thirty (30) day period next preceding such effective date. 7.3 In the event of a change in the Shares of the Company as presently constituted, which is limited to a change of all its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be Shares within the meaning of this Plan. 10 13 7.4 To the extent that the foregoing adjustments relate to Awards, Shares, or securities of the Company, such adjustments shall be made by the Committee, and its determination in that respect shall be final, binding, and conclusive. 7.5 Except as expressly provided in this Article, the Participant shall have no right to any adjustment of the number or price of Shares subject to any Award under the Plan by reason of any subdivision or consolidation of shares of any class or the payment of any dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation, and except as provided, any issue by the Company of shares of any class, or securities convertible into shares of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to the Award. 7.6 The grant of an Award pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. ARTICLE VIII MISCELLANEOUS 8.1 In the event any provision of the Plan shall be held invalid or illegal for any reason, any illegality or invalidity shall not affect the remaining parts 11 14 of the Plan, but the Plan shall be construed and enforced as if the illegal or invalid provision had never been part of the Plan, and Kitty Hawk, Inc. shall have the right to correct and remedy any defect in the Plan. 8.2 Except when otherwise indicated by the context, any masculine terminology when used in the Plan shall also include the feminine gender and the neuter gender, and the definition of any term in the singular shall also include the plural. 8.3 This plan shall be governed and construed in accordance with the laws of the State of Texas. 8.4 This Plan shall not be interpreted or construed as an employment contract. The Plan shall not give any person the right to be continued in employment, and all employees shall remain subject to change of salary, transfer, change of job, discipline, layoff, discharge, or any other change of employment status. 8.5 Any controversy or claim arising under this Plan must be settled exclusively by arbitration under the Commercial Arbitration Rules of the American Arbitration Association; except that the preceding paragraph shall govern applicable law and construction, and the arbitration locale shall be Dallas, Texas. Costs (excluding attorneys' fees) of any arbitration shall be born by the Company. A prevailing party in litigation to require arbitration, in 12 15 arbitration, or in litigation to enforce an arbitration award shall be entitled to recover reasonable attorneys' fees and costs. 8.6 The Plan shall be submitted to the stockholders of the Company for their approval and adoption. The Plan shall not be effective and no Award shall be made hereunder unless and until the Plan has been so approved and adopted at a meeting of the Company's stockholders. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer to be effective as of the Effective Date, subject to approval by the stockholders of the Company. KITTY HAWK, INC. By: /s/ RICHARD WADSWORTH -------------------------------- Title: Secretary ----------------------------- 13 EX-10.51 8 AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.51 ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 14, 1996 among KITTY HAWK, INC. and AIRCRAFT LEASING, INC., as Borrowers and Guarantors, KITTY HAWK AIRCARGO, INC. and KITTY HAWK CHARTERS, INC., as Guarantors, and SKYFREIGHTERS CORPORATION, as a Party, WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION as Agent and THE LENDERS NAMED HEREIN $15,000,000.00 REVOLVING CREDIT LOANS FACILITY $12,744,000.45 TERM LOANS A FACILITY $11,225,000.00 TERM LOANS B FACILITY $10,000,000.00 TERM LOANS C FACILITY ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE 1 - Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2 Other Definitional Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 1.3 Accounting Terms and Determinations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 1.4 Financial Covenants and Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE 2 - Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 2.1 Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 2.2 The Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 2.3 Repayment of Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 2.4 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.5 Borrowing Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 2.6 Optional Prepayments, Conversions and Continuations of Loans . . . . . . . . . . . . . . . . . 34 Section 2.7 Mandatory Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 2.8 Minimum Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.9 Certain Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.10 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 2.11 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 2.12 Computations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.13 Termination or Reduction of Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.14 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE 3 - Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 3.1 Method of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 3.2 Pro Rata Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 3.3 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 3.4 Non-Receipt of Funds by Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 3.5 Withholding Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 3.6 Withholding Tax Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 ARTICLE 4 - Yield Protection and Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 4.1 Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 4.2 Limitation on Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.3 Illegality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.4 Treatment of Affected Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.5 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.6 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.7 Additional Interest on Eurodollar Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.8 Mitigation of Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
i 3 ARTICLE 5 - Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 5.1 Collateral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 5.2 Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 5.3 New Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 5.4 Release of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 5.5 Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 5.6 Title Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE 6 - Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 6.1 Initial Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 6.2 All Extensions of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 6.3 Additional Conditions Precedent to Revolving Credit Loans . . . . . . . . . . . . . . . . . . . 60 Section 6.4 Additional Conditions Precedent to Term Loans C . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 6.5 Closing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 ARTICLE 7 - Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.1 Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.3 Corporate Action; No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.4 Operation of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.5 Litigation and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.6 Rights in Properties; Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.7 Enforceability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.8 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.9 Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.11 Margin Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.12 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.13 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.14 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.15 Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.16 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.17 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.18 Public Utility Holding Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.20 Labor Disputes and Acts of God . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.21 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.22 Outstanding Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.23 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.24 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.25 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.26 Common Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.27 Compliance with the WFB Agreements and the Bank One Agreement . . . . . . . . . . . . . . . . 68
ii 4 ARTICLE 8 - Affirmative Covenants . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 8.1 Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 8.2 Maintenance of Existence; Conduct of Business. . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 8.3 Maintenance of Properties; Hush Kits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 8.4 Taxes and Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 8.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 8.6 Inspection Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 8.7 Keeping Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 8.8 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 8.9 Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 8.10 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 8.11 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 8.12 Aircraft Registration, Maintenance, Operation, Insignia . . . . . . . . . . . . . . . . . . . 77 Section 8.13 Replacement of Parts; Alterations, Modifications and Additions. . . . . . . . . . . . . . . . 78 ARTICLE 9 - Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.1 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.2 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.3 Mergers, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 9.4 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 9.5 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 9.6 Limitation on Issuance of Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 9.7 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 9.8 Disposition of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 9.9 Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 9.10 Environmental Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 9.11 Intercompany Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 9.12 Management Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 9.13 Modification of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 9.14 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 9.15 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 9.16 Territorial Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 ARTICLE 10 - Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 10.1 Senior Funded Debt to Cash Flow Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 10.2 Fixed Charge Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 10.3 Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 10.4 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 10.5 Accounts Payable Turndays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
iii 5 ARTICLE 11 - Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 11.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 11.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Section 11.3 Performance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 11.4 Cash Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 ARTICLE 12 - Agency and Intercreditor Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 12.1 Appointment, Powers and Immunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 12.2 Rights of Agent as a Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Section 12.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Section 12.4 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Section 12.5 Independent Credit Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Section 12.6 Several Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Section 12.7 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Section 12.8 Initial Allocation of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Section 12.9 Beneficiaries of Article 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 ARTICLE 13 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Section 13.1 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Section 13.2 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Section 13.3 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 13.4 No Duty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 13.5 No Fiduciary Relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 13.6 Equitable Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 13.7 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 13.8 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 13.9 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Section 13.10 ENTIRE AGREEMENT; AMENDMENT AND RESTATEMENT; WAIVER OF CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Section 13.11 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Section 13.12 Maximum Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Section 13.13 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Section 13.14 GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Section 13.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.16 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.17 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.18 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.19 Independence of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.20 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 13.21 Approvals and Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Section 13.22 Joint and Several Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Section 13.23 AGREEMENT FOR BINDING ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
iv 6 INDEX TO EXHIBITS
Exhibit Description of Exhibit ------- ---------------------- "A" Assignment and Acceptance "B" Revolving Credit Loans Note "C" Term Loans A Note "D" Term Loans B Note "E" Term Loans C Note "F" Notice of Borrowing, Conversion, Continuation or Prepayment "G" Arbitration Program "H" Aircraft Acquisition Letter
INDEX TO SCHEDULES
Schedule Description of Schedule -------- ----------------------- 1.1 Aircraft Release Amounts 7.5 Litigation 7.9 Debt 7.10 Taxes 7.12 ERISA Matters 7.14 Capitalization 7.21 Material Contracts 7.24 Employee Matters 7.25 Insurance 9.5 Investments
v 7 AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT ("Agreement"), dated as of August 14, 1996, is among KITTY HAWK, INC., a Delaware corporation ("Kitty Hawk"), AIRCRAFT LEASING, INC., a Texas corporation ("Leasing"), KITTY HAWK AIRCARGO, INC., a Texas corporation ("Aircargo"), KITTY HAWK CHARTERS, INC., a Texas corporation ("Charters"), SKYFREIGHTERS CORPORATION, a Texas corporation ("Skyfreighters"), WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association, BANK ONE, TEXAS, N.A., a national banking association, and each of the lending institutions which may from time to time become a party hereto or any successor or assignee thereof (individually, a "Lender" and, collectively, "Lenders"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association, as agent for itself and the other Lenders (in such capacity, together with its successors and assigns in such capacity, "Agent"). RECITALS: A. Kitty Hawk, Leasing, Aircargo and Wells Fargo (as hereinafter defined; then known as First Interstate Bank of Texas, N.A.) are parties to that certain Amended and Restated Loan Agreement dated as of May 10, 1994 (as amended by that certain First Amendment to Amended and Restated Loan Agreement dated as of January 17, 1995, the "WFB Agreement No. 1"); B. Kitty Hawk, Leasing, Aircargo and Wells Fargo (then known as First Interstate Bank of Texas, N.A.) are parties to that certain Loan Agreement dated as of January 17, 1995 (the "WFB Agreement No. 2"); C. Kitty Hawk, Aircargo, Charters and Wells Fargo (then known as First Interstate Bank of Texas, N.A.) are parties to that certain Loan Agreement dated as of July 1, 1995 (the "WFB Agreement No. 3"); D. Kitty Hawk, Leasing, Aircargo and Bank One, Texas, N.A. ("Bank One") are parties to that certain Loan Agreement dated as of December 18, 1995 (the "Bank One Agreement"); E. Kitty Hawk, Leasing, Aircargo and Charters have requested that Wells Fargo and Bank One amend and restate the WFB Agreements (as hereinafter defined) and the Bank One Agreement and provide the credit facilities to Kitty Hawk and Leasing described herein; F. The WFB Agreements and the Bank One Agreement and all agreements, documents and instruments (including, without limitation, promissory notes, guaranty agreements, aircraft mortgages, security agreements and financing statements) relating thereto and all security interests, liens, charges and encumbrances securing the indebtedness, liabilities and obligations evidenced or created thereby are, concurrently herewith, being assigned to the Agent for and on behalf of Lenders; 8 G. The indebtedness, liabilities and obligations of Kitty Hawk, Leasing, Aircargo, Charters and Skyfreighters provided for herein and in the other Loan Documents (as hereinafter defined) (i) are to be secured by the Collateral (as hereinafter defined) and (ii) are to be guaranteed by the Guaranties (as hereinafter defined) provided for herein; and H. Wells Fargo and Bank One are willing to make the credit facilities described herein available to Kitty Hawk and Leasing upon the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Definitions Section 1.1 Definitions. As used in this Agreement, the following terms have the following meanings: "Accounts Payable Turndays" means, at any particular time for any applicable period, an amount equal to (a) the aggregate accounts payable of the Kitty Hawk Companies, on a consolidated basis, at such time, divided by (b) an amount equal to the product of (i) the cost of goods sold of the Kitty Hawk Companies, on a consolidated basis, during such period, multiplied by (ii) the number of calendar days during such period. "Acquired Aircraft" means any and all aircraft purchased or to be purchased pursuant to an Aircraft Acquisition with proceeds of any Revolving Credit Loans and all (i) airframes (including, without limitation, all parts, appliances, components, instruments, accessories, accessions, attachments, equipment or avionics, communications, radar, navigation systems or other electronic equipment installed in, appurtenant to or delivered with or in respect of such airframes), (ii) engines (including, without limitation, all engines installed on, appurtenant to or delivered with or in respect of the airframe of such aircraft, together with any and all parts, appliances, components, accessories, accessions, attachments or equipment installed on, appurtenant to or delivered with or in respect of such engines and any replacement aircraft engine which is required or permitted to be installed upon such airframe), and (iii) all loose equipment, spare parts, manuals, logbooks, flight records, maintenance records and other historical records or information relating to any of the foregoing items. "Additional Costs" has the meaning specified in Section 4.1. "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of one percent determined by Agent (which determination shall be conclusive in the absence of manifest error) to be equal to (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period divided by (b) one minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. 2 9 "Adjusted LIBO Rate" means, for any Interest Period, a fixed interest rate, per annum, equal to the lesser of: (a) the rate (rounded upwards if necessary to the nearest whole one-hundredth of one percent (1/100%)), determined as the quotient of (i) the Applicable LIBO Rate, divided by (ii) the number equal to one hundred percent (100%) minus the Reserve Requirement; and (b) the Maximum Rate. The Adjusted LIBO Rate shall be adjusted automatically on the effective date of any change in the Reserve Requirement, such adjustment to affect any advances outstanding on such effective date. Each determination of an Adjusted LIBO Rate by Bank One (or, if Bank One is no longer a Lender with respect to the Term Loans B, Agent or any Lender designated by Agent which holds Term Loans B), including any determination as to the applicability or allocability of reserves to Eurocurrency liabilities or as to the amount of such reserves, shall be conclusive and final in the absence of manifest error. "Advance Period" means the period from the Closing Date to but excluding the Term Loans C Availability Termination Date. "Affiliate" means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such first Person, (b) that directly or indirectly beneficially owns or holds five percent or more of any class of voting Capital Stock of such first Person, or (c) five percent or more of the voting Capital Stock of which is directly or indirectly beneficially owned or held by such first Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall Agent or any Lender be deemed an Affiliate of Kitty Hawk or any its Subsidiaries. "Agent" has the meaning specified in the introductory paragraph of this Agreement. "Aggregate Loan Percentage" means, as to any Lender, the percentage equivalent of a fraction, (a) the numerator of which is the sum of (i) the outstanding Revolving Credit Loans Commitment (or, if such Commitment has terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and Letter of Credit Liabilities) of such Lender, plus (ii) the outstanding Term Loans A of such Lender, plus (iii) the outstanding Term Loans B of such Lender, plus (iv) the outstanding Term Loans C Commitment (or, if such Commitment has terminated or expired, the outstanding principal amount of the Term Loans C) of such Lender, and (b) the denominator of which is the sum of (i) the outstanding Revolving Credit Loans Commitments (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and Letter of Credit Liabilities) of all Lenders, plus (ii) the outstanding Term Loans A of all Lenders, plus (iii) the outstanding Term Loans B of all Lenders, plus (iv) the outstanding Term Loans C Commitments (or, if such Commitments have terminated or expired, the outstanding principal amount of the Term Loans C) of all Lenders. "Agreement" means this Agreement and any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements hereof. 3 10 "Aircargo" means Kitty Hawk Aircargo, Inc., a Texas corporation and a Wholly-Owned Subsidiary of Kitty Hawk directly owned by Kitty Hawk. "Aircraft" means, collectively, "Aircraft A", "Aircraft B", "Aircraft C", "Aircraft D", "Aircraft E", "Aircraft F", "Aircraft G", "Aircraft H", "Aircraft I" and "Aircraft J" and includes, without limitation, the following: (i) the Airframes; (ii) the Engines; (iii) all loose equipment and spare parts relating to the foregoing items (i) and/or (ii); and (iv) any and all manuals, logbooks, flight records, maintenance records and other historical records or information relating to any of the foregoing items. "Aircraft A" means, collectively, (i) one McDonnell Douglas DC9-15F airframe, United States Aircraft Registration Number N562PC, Manufacturer's Serial No. 47012, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-7 Engine, Manufacturer's Serial No. 654677, and (iii) one Pratt & Whitney JT8D-7 Engine, Manufacturer's Serial No. 648994. "Aircraft Acquisition Letter" means a letter executed by a Responsible Officer of Leasing in the form of Exhibit "H" hereto, appropriately completed, which contains information regarding a particular Acquired Aircraft. "Aircraft Acquisitions" means the acquisition (by lease or purchase), enhancement and/or modification of any aircraft, engine, propeller, appliance or spare part owned by Leasing for use in the ordinary course of business of Leasing. "Aircraft B" means, collectively, (i) one McDonnell Douglas DC9-15F airframe, United States Aircraft Registration Number N564PC, Manufacturer's Serial No. 47062, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-7 Engine, Manufacturer's Serial No. 648989, and (iii) one Pratt & Whitney JT8D-7B Engine, Manufacturer's Serial No. 654158. "Aircraft C" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N6833, Manufacturer's Serial No. 20186, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665356, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665492, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665186. "Aircraft D" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N6827, Manufacturer's Serial No. 20180, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment and avionics installed in or appurtenant to such airframe (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666174, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665198, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666277. 4 11 "Aircraft E" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N854AA, Manufacturer's Serial No. 20995, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665206, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666105, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 655014. "Aircraft F" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N855AA, Manufacturer's Serial No. 20996, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment and avionics installed in or appurtenant to such airframe (ii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665851, (iii) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666353, and (iv) one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666113. "Aircraft G" means, collectively, (i) one McDonnell Douglas DC9-15F airframe, United States Aircraft Registration Number N561PC, Manufacturer's Serial No. 47014, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-7 Engine, Manufacturer's Serial No. 653937, and (iii) one Pratt & Whitney JT8D-7 Engine, Manufacturer's Serial No. 653897. "Aircraft H" means, collectively, (i) one McDonnell Douglas DC9-15F airframe, United States Aircraft Registration Number N563PC, Manufacturer's Serial No. 47055, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-7 Engine, Manufacturer's Serial No. 653609, and (iii) one Pratt & Whitney JT8D-7 Engine, Manufacturer's Serial No. 657666. "Aircraft I" means, collectively, (i) one Boeing 727-251A airframe, United States Aircraft Registration Number N278US, Manufacturer's Serial No. 21157, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-15 or JT8D-15A Engine, Manufacturer's Serial No. 696499, (iii) one Pratt & Whitney JT8D-15 or JT8D-15A Engine, Manufacturer's Serial No. 696502, and (iv) one Pratt & Whitney JT8D-15 or JT8D-15A Engine, Manufacturer's Serial No. 696538. "Aircraft J" means, collectively, (i) one Boeing 727-251A airframe, United States Aircraft Registration Number N279US, Manufacturer's Serial No. 21158, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, (ii) one Pratt & Whitney JT8D-15 or JT8D-15A Engine, Manufacturer's Serial No. 656997, and (iii) one Pratt & Whitney JT8D-15 or JT8D-15A Engine, Manufacturer's Serial No. 700522, and (iv) one Pratt & Whitney JT8D-15 or JT8D-15A Engine, Manufacturer's Serial No. 700579. 5 12 "Aircraft Lease A" means that certain Lease of Aircraft and Engines dated October 7, 1993, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft A from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease B" means that certain Lease of Aircraft and Engines dated October 20, 1993, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft B from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease C" means that certain Lease of Aircraft and Engines dated May 1, 1994, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft C from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease D" means that certain Lease of Aircraft and Engines dated July 1, 1994, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft D from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease E" means that certain Lease of Aircraft and Engines dated January 15, 1995, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft E from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease F" means that certain Lease of Aircraft and Engines dated January 15, 1995, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft F from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease G" means that certain Lease of Aircraft and Engines dated January 15, 1995, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft G from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease H" means that certain Lease of Aircraft and Engines dated January 15, 1995, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft H from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Lease I" means that certain Operating Lease of Aircraft, Appliances and Engines dated December 18, 1995, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft I from Leasing, as the same may be amended, modified or supplemented from time to time. 6 13 "Aircraft Lease J" means that certain Operating Lease of Aircraft, Appliances and Engines dated December 18, 1995, between Leasing and Aircargo and guaranteed by Kitty Hawk, pursuant to which Aircargo has agreed to lease the Aircraft J from Leasing, as the same may be amended, modified or supplemented from time to time. "Aircraft Mortgages" means the Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents executed by Leasing dated the Closing Date (or such other date as Leasing may execute such Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents), and any Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents at any time executed pursuant to Article 5 hereof, evidencing or creating a Lien as security for the Obligations in form and substance reasonably satisfactory to Agent, and any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements thereof. "Aircraft Release Amount" means, with respect to each particular Aircraft as of the date of determination, an amount determined by Agent in good faith equal to (a) the amount for such Aircraft set forth under the heading "Initial Aircraft Release Amount" on Schedule 1.1 hereto, minus (b) with respect to any Aircraft constituting Term Loans A Collateral, the product of the aggregate amount of principal of the Term Loans A repaid subsequent to the Closing Date multiplied by the percentage for such Aircraft set forth under the heading "Percentage Allocation" on Schedule 1.1 or, with respect to any Aircraft constituting Term Loans B Collateral, the product of the aggregate amount of principal of the Term Loans B repaid subsequent to the Closing Date multiplied by the percentage for such Aircraft set forth under the heading "Percentage Allocation" on Schedule 1.1, plus (c) the aggregate outstanding principal amount of the Term Loans C which has been advanced to enhance or otherwise with respect to such Aircraft, plus (d) the product of the aggregate outstanding principal amount of the Term Loans C which has been advanced to enhance or otherwise with respect to any Other Aircraft multiplied by ten percent. "Airframes" means those certain airframes identified in the definitions of Aircraft A, Aircraft B, Aircraft C, Aircraft D, Aircraft E, Aircraft F, Aircraft G, Aircraft H, Aircraft I and Aircraft J, together with any and all parts, appliances, components, instruments, accessories, accessions, attachments, equipment or avionics (including, without limitation, communications, radar, navigation systems or other electronic equipment) installed in, appurtenant to or delivered with or in respect of such airframes. "Applicable Eurodollar Margin" means, for the period commencing with the Closing Date and thereafter, the rate per annum set forth in the table below that corresponds to the Fixed Charge Coverage Ratio for the four fiscal quarters of the Kitty Hawk Companies on a consolidated basis then most recently ended: Fixed Charge Coverage Ratio Applicable Eurodollar Margin --------------------------- ---------------------------- Less than 1.40 to 1.00 2.00% Less than 1.60 to 1.00, but greater than or equal to 1.40 to 1.00 1.75% Greater than or equal to 1.60 to 1.00 1.50%
7 14 "Applicable Lending Office" means for each Lender and each Type of Loan, the lending office of such Lender (or of an Affiliate of such Lender) designated for such Type of Loan below its name on the signature pages hereof (or, with respect to a Lender that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it) or such other office of such Lender (or an Affiliate of such Lender) as such Lender may from time to time specify to Agent as the office by which its Loans of such Type are to be made and maintained. "Applicable LIBO Rate" means, with respect to any Interest Period or other period with respect to which interest is determined on the basis of a Eurodollar Rate, a rate per annum (calculated on the basis of a 360-day year and actual days elapsed) equal to the average (rounded up, if necessary, to the nearest 1/16 of 1%) of the offered rates determined by Bank One (or, if Bank One is no longer a Lender with respect to the Term Loans B, Agent or any Lender designated by Agent which holds Term Loans B) (with notice to Leasing) by reference to the Telerate Page 3750 as of 11:00 a.m. (London time) on the day two Business Days prior to the first day of such Interest Period for a period comparable to such Interest Period. "Applicable Rate" means: (a) during the period that any Loan is a Prime Rate Loan, the Prime Rate; and (b) during the period that any Loan is a Eurodollar Loan, the Eurodollar Rate plus the Applicable Eurodollar Margin. "Asset Disposition" means the disposition of any or all of the Property (other than the grant of a Lien as security) of any Kitty Hawk Company, whether by sale, lease, transfer, assignment, condemnation or otherwise, but excluding any involuntary disposition resulting from casualty damage to Property. "Assignee" has the meaning specified in Section 13.8(b). "Assigning Lender" has the meaning specified in Section 13.8(b). "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and its Assignee and accepted by Agent pursuant to Section 13.8(e), in substantially the form of Exhibit A hereto. "Bank One" means Bank One, Texas, N.A., a national banking association. "Bank One Agreement" has the meaning specified in Recital D of this Agreement. "Bank One Interest Rate Protection Agreement" means that certain ISDA Master Agreement dated as of December 19, 1995, between Bank One and Leasing, as it may be amended, modified, supplemented or restated at any time and from time to time with the prior 8 15 written consent of Required Lenders, and all Confirmations (as defined therein) issued pursuant thereto, including, without limitation, the two Confirmations dated December 18, 1995. "Bankruptcy Code" has the meaning specified in Section 11.1(e). "Basle Accord" means the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, supplemented and otherwise modified and in effect from time to time, or any replacement thereof. "Borrowers" means Kitty Hawk (with respect to the Revolving Credit Loans) and Leasing, (with respect to the Term Loans) and "Borrower" means either of such Borrowers, individually. "Business Day" means (a) any day on which commercial banks are not authorized or required to close in Dallas, Texas, and (b) with respect to all borrowings, payments, Conversions, Continuations, Interest Periods and notices in connection with Eurodollar Loans, any day which is a Business Day described in clause (a) above and which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Calculation Date" means the date occurring each quarter during the term of this Agreement which is 15 days after the date on which quarterly financial statements of the Kitty Hawk Companies are required by Section 8.1(b) to be delivered to Agent. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal Property, which obligations are required to be classified or accounted for as a capital lease on a balance sheet of such Person under GAAP. For purposes of this Agreement, the amount of such Capital Lease Obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Capital Stock" means corporate stock and any and all shares, partnership interests, limited partnership interests, limited liability company interests, membership interests, equity interests, participations, rights or other equivalents (however designated) of corporate stock or any of the foregoing issued by any entity (whether a corporation, a partnership or another entity). "Cash Flow" means, for any period, without duplication, the sum of the following for the Kitty Hawk Companies (or other applicable Person) for such period determined on a consolidated basis in accordance with GAAP: (a) Net Income, plus (b) Interest Expense, plus (c) income and franchise taxes to the extent deducted in determining Net Income, plus (d) depreciation and amortization expense and other non-cash items to the extent deducted in determining Net Income, plus (e) rent expense for Operating Leases to the extent deducted in determining Net Income, minus (f) non-cash income to the extent included in determining Net Income. 9 16 "Change of Control" means any of the following events: (a) Kitty Hawk shall at any time fail to own, legally and beneficially, 100% of the outstanding Capital Stock of any of the Kitty Hawk Operating Subsidiaries; (b) M. Tom Christopher or a successor reasonably acceptable to Required Lenders shall at any time fail to own, legally and beneficially, at least fifty-one percent (51%) of the outstanding voting Capital Stock of Kitty Hawk; (c) after the consummation of a Public Offering, any Person or two or more Persons (other than the Permitted Holders) acting as a group (as defined in Section 13d-3 of the Securities Exchange Act of 1934) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 25% or more of the outstanding shares of voting Capital Stock of Kitty Hawk; (d) individuals who, as of the Closing Date, constitute the Board of Directors of Kitty Hawk (the "Kitty Hawk Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of Kitty Hawk, provided, however, that any individual becoming a director of Kitty Hawk subsequent to the Closing Date whose election or nomination for election by Kitty Hawk's shareholders was approved by a vote of at least a majority of the directors then comprising the Kitty Hawk Incumbent Board shall be considered as though such individual were a member of the Kitty Hawk Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934) or other actual or threatened solicitation of proxies or contest by or on behalf of a Person other than the Board of Directors of Kitty Hawk; or (e) M. Tom Christopher or a successor reasonably acceptable to Required Lenders shall at any time cease to be chief executive officer of Kitty Hawk or active in the management of the Kitty Hawk Companies. "Charters" means Kitty Hawk Charters, Inc., a Texas corporation and a Wholly-Owned Subsidiary of Kitty Hawk directly owned by Kitty Hawk. "Closing Date" means August 14, 1996, the date of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. "Collateral" has the meaning specified in Section 5.1. "Commitment Percentage" means, as to any Lender and as to any of its Commitments (as may be applicable based upon the context in which such term is used), the percentage equivalent of a fraction, the numerator of which is the amount of the applicable outstanding Commitment of such Lender (or, if such Commitment has terminated or expired, the aggregate outstanding principal amount of the Loans and Letter of Credit Liabilities (with respect to the Revolving Credit Loans Commitment) of such Lender made or issued, respectively, pursuant to such Commitment) and the denominator of which is the aggregate amount of such applicable outstanding Commitments of all Lenders (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of the Loans and Letter of Credit Liabilities (with respect to the Revolving Credit Loans Commitments) of all Lenders made or issued, respectively, pursuant to such Commitments), as adjusted from time to time in accordance with Section 13.8. 10 17 "Commitments" means the Revolving Credit Loans Commitments, the Term Loans A Commitments, the Term Loans B Commitments and the Term Loans C Commitments. "Consolidated Liabilities" means, at any particular time, all amounts which, in conformity with GAAP, would be included as liabilities on a consolidated balance sheet of the Kitty Hawk Companies. "Consolidated Tangible Net Worth" means, at any particular time, all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of the Kitty Hawk Companies; provided, however, there shall be excluded therefrom: (a) any amount at which shares of Capital Stock of Kitty Hawk appear as an asset on Kitty Hawk's balance sheet; (b) goodwill, including any amounts, however designated, that represent the excess of the purchase price paid for assets or stock over the value assigned thereto; (c) patents, trademarks, trade names and copyrights; (d) deferred expenses; and (e) all other assets which are properly classified as intangible assets. "Continue", "Continuation" and "Continued" shall refer to the continuation pursuant to Section 2.6 of any Eurodollar Loan as a Eurodollar Loan from one Interest Period to the next Interest Period. "Contract Rate" has the meaning specified in Section 13.12(a). "Convert", "Conversion" and "Converted" shall refer to a conversion pursuant to Section 2.6 or Article 4 of one Type of Loan into another Type of Loan. "Current Date" means a date occurring no more than 30 days prior to the Closing Date or such earlier date which is reasonably acceptable to Agent. "Debt" means as to any Person at any time (without duplication): (a) all indebtedness, liabilities and obligations of such Person for borrowed money; (b) all indebtedness, liabilities and obligations of such Person evidenced by bonds, notes, debentures or other similar instruments; (c) all indebtedness, liabilities and obligations of such Person to pay the deferred purchase price of Property or performed services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than 90 days; (d) all Capital Lease Obligations of such Person; (e) all Debt of others Guaranteed by such Person; (f) all indebtedness, liabilities and obligations secured by a Lien existing on Property owned by such Person, whether or not the indebtedness, liabilities or obligations secured thereby have been assumed by such Person or are non-recourse to such Person (exclusive of operating leases as to which such Person is lessee); (g) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments; (h) all indebtedness, liabilities and obligations of such Person to redeem or retire shares of Capital Stock of such Person; (i) all liabilities and obligations (exclusive of liabilities and obligations which are not yet due) of such Person in connection with any interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more counterparties providing for the transfer or mitigation of interest rate risks either generally or under specified 11 18 contingencies; and (j) all indebtedness, liabilities and obligations of such Person in respect of unfunded vested benefits under any Plan. "Default" means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default. "Default Rate" means, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount payable by Borrowers or any Borrower under this Agreement or any other Loan Document which is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the sum of two percent plus the Applicable Rate as in effect from time to time. "Deposit Account" means a deposit account maintained by the applicable Borrower with a bank selected by such Borrower and reasonably acceptable to Agent. "Dollars" and "$" mean lawful money of the U. S. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of a group of entities, organizations or employers of which a Kitty Hawk Company is also a member and which is treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the Code. "Eligible Assignee" means (a) any Affiliate of a Lender or (b) any commercial bank, savings and loan association, savings bank, finance company, insurance company, pension fund, mutual fund or other financial institution (whether a corporation, partnership or other entity) acceptable to Agent. "Engines" means those certain aircraft engines identified in the definitions of Aircraft A, Aircraft B, Aircraft C, Aircraft D, Aircraft E, Aircraft F, Aircraft G, Aircraft H, Aircraft I and Aircraft J and any other aircraft engines which either now or in the future are installed on, appurtenant to, or delivered with or in respect of the Airframes, together with any and all parts, appliances, components, accessories, accessions, attachments or equipment installed on, appurtenant to, or delivered with or in respect of such engines. The term "Engines" shall also refer to any replacement aircraft engine which is required or permitted, under this Agreement and the Aircraft Mortgages, to be installed upon the Airframes and with respect to which the Kitty Hawk Companies comply with each of the applicable requirements contained in this Agreement and the Aircraft Mortgages. "Environmental Law" means any federal, state, local or foreign law, statute, code or ordinance, principle of common law, rule or regulation, as well as any Permit, order, decree, judgment or injunction issued, promulgated, approved or entered thereunder, relating to pollution 12 19 or the protection, cleanup or restoration of the environment or natural resources, or to the public health or safety, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, discharge or disposal of Hazardous Materials, including, without limitation as to U.S. laws, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986, 99-499, 100 Stat. 1613, the Resource Conservation and Recovery Act of 1976, 42 U. S. C. Section 6901 et seq., the Occupational Safety and Health Act, 29 U S.C. Section 651 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U. S. C. Section 1251 et seq., the Emergency Planning and Community Right to Know Act, 42 U. S. C. Section 11001 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 136 et seq., and the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and any state or local counterparts. "Environmental Liabilities" means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability or criminal, penal or civil statute, including, without limitation, any Environmental Law, Permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment. "Eurodollar Loans" means Loans the interest rate of which are determined on the basis of the rates referred to in the definition of "Eurodollar Rate" and "Adjusted Eurodollar Rate" in this Section 1.1. "Eurodollar Rate" means, for any Eurodollar Loan, for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted by the Reference Lender at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of such Interest Period for the offering by the Reference Lender to leading banks in the London interbank market of Dollar deposits in immediately available funds having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan made by the Reference Lender to which such Interest Period relates; provided, however, that, notwithstanding anything to the contrary contained in this Agreement, with respect to any Eurodollar Loan which is a Term Loan B, the "Eurodollar Rate" means the "Adjusted LIBO Rate" as such term is defined herein. Subject to the proviso contained in the immediately preceding sentence, if the Reference Lender is not participating in any Eurodollar Loans during any Interest Period therefor (whether as a result of Section 4.4 or for any other reason), the Eurodollar Rate and the Adjusted Eurodollar Rate for such Loans for such Interest Period shall be determined by reference to the amount of the Loans which the Reference Lender would have made had it been participating in such Loans. "Event of Default" has the meaning specified in Section 11.1. 13 20 "Excess Insurance Proceeds" means any and all proceeds of any Insurance Recovery which any Kitty Hawk Company (as applicable) (a) has elected to not apply to the repair, construction or replacement of the Collateral affected or to the purchase of other, similar Property for use in its business or (b) has not both (i) elected to apply to the repair, construction or replacement of the Collateral affected or to the purchase of other, similar Property for use in its business within 90 days of the event giving rise to the Insurance Recovery and (ii) actually applied to such repair, construction, replacement or purchase commencing within 180 days after the earlier to occur of the receipt of such proceeds by such Kitty Hawk Company or Agent and continuing in a reasonably prompt and diligent fashion thereafter. "FAA" means the United States Federal Aviation Administration (or any successor or replacement Governmental Authority having the same or similar authority and responsibilities). "Federal Aviation Act" means the Federal Aviation Act of 1958, now primarily codified in Title 49 of the United States Code, as amended. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest one- sixteenth of one percent 1/16 of 1%)) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day provided, that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published on such next succeeding Business Day, the Federal Funds Rate for any day shall be the average rate charged to the Reference Lender on such day on such transactions as determined by Agent. "Fixed Charge Coverage Ratio" means, for any period, the ratio of (a) the sum of the following (without duplication) for the Kitty Hawk Companies for such period determined on a consolidated basis in accordance with GAAP (i) Cash Flow, plus (ii) Maintenance Reserve Expense, to (b) the Fixed Charges of the Kitty Hawk Companies for such period. "Fixed Charges" means, for any period, the sum of the following for the Kitty Hawk Companies for such period determined on a consolidated basis in accordance with GAAP (a) Operating Lease Expense, plus (b) Interest Expense, plus (c) the current portion of Funded Debt and Capital Lease Obligations, plus (d) income and franchise taxes actually paid or payable during such period, plus (e) the Maintenance Reserve Expense. "Funded Debt" means, at any particular time without duplication, Senior Funded Debt plus Debt which by its terms is subordinated to the Obligations which would, but for such fact of subordination, be Senior Funded Debt. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their 14 21 respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Governmental Authority" means any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government. "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, Permit, certificate, license, authorization or other directive or requirement of any federal, state, county, municipal, parish, or other Governmental Authority or any department, commission, board, court, agency or any other instrumentality of any of them. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any indebtedness, liability or obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other indebtedness, liability or obligation as to the payment thereof or to protect the obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum anticipated liability in respect thereof (assuming such Person is required to perform thereunder). "Guaranties" means the Guaranty Agreements executed by the Kitty Hawk Companies, dated the Closing Date (or such other date as any Kitty Hawk Company may execute such Guaranty Agreement), guaranteeing payment and performance of the Obligations in form and substance reasonably satisfactory to Agent, and any such Guaranty Agreement at any time executed pursuant to Article 5, hereof, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Hazardous Material" means any substance, product, liquid, waste, pollutant, chemical, contaminant, insecticide, pesticide, gaseous or solid matter, organic or inorganic matter, fuel, micro-organisms, ray, odor, radiation, energy, vector, plasma, constituent or material which (a) is or becomes listed, regulated or addressed under any Environmental Law or (b) is, or is deemed to be, alone or in any combination, hazardous, hazardous waste, toxic, a pollutant, a deleterious substance, a contaminant or a source of pollution or contamination under any Environmental Law, 15 22 including, without limitation, asbestos, petroleum, underground storage tanks (whether empty or containing any substance) and polychlorinated biphenyls. "Hush Kit" means a Stage 3 noise reduction kit for installation on the engine of any Aircraft. "Issuing Bank" means Wells Fargo or such other Lender which is a commercial bank as Kitty Hawk and Agent may mutually designate from time to time which agrees to be the issuer of a Letter of Credit. "Insurance Recovery" means, with respect to any Collateral and any single occurrence or related occurrences with respect thereto, the receipt or constructive receipt by any Kitty Hawk Company, or the payment by an insurance company to Agent, of proceeds of any such Collateral or casualty insurance. "Interest Expense" means, for any period, and in accordance with GAAP, all interest on Debt of the Kitty Hawk Companies (or other applicable Person) paid or accrued during such period, including the interest portion of payments under Capital Lease Obligations. "Interest Period" means, with respect to any Eurodollar Loan, each period commencing on the date such Loan is made or Converted from a Prime Rate Loan or, in the case of each subsequent, successive Interest Period applicable to a Eurodollar Loan, the last day of the next preceding Interest Period with respect to such Loan, and ending on the numerically corresponding day in the first, second or third calendar month thereafter, as a Borrower may select as provided in Section 2.9, except that each such Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day or, if such succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day; (b) any Interest Period which would otherwise extend beyond an applicable Maturity Date shall end on such Maturity Date; (c) no more than three Interest Periods for Eurodollar Loans shall be in effect at the same time for each of the Revolving Credit Loans and the Term Loans C, and no more than one Interest Period for Eurodollar Loans shall be in effect at the same time for each of the Term Loans A and the Term Loans B; (d) no Interest Period for any Eurodollar Loan shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loans would otherwise be a shorter period, such Loans shall not be available hereunder; and (e) no Interest Period for a Term Loan may commence before and end after any principal repayment date unless, after giving effect thereto, the aggregate principal amount of the Eurodollar Loans having Interest Periods that end after such principal payment date shall be equal to or less than the amount of the applicable Term Loans scheduled to be outstanding hereunder after such principal payment date. "Investments" has the meaning specified in Section 9.5. 16 23 "Kitty Hawk" means Kitty Hawk, Inc., a Delaware corporation. "Kitty Hawk Aircraft" means, collectively, Aircraft, Other Aircraft, Acquired Aircraft and Non-Collateral Aircraft. "Kitty Hawk Companies" means, collectively, Kitty Hawk, Aircargo, Charters, Leasing and Skyfreighters, and "Kitty Hawk Company" means any of such corporations. "Kitty Hawk Operating Subsidiaries" means, collectively, Leasing, Aircargo and Charters, and "Kitty Hawk Operating Subsidiary" means any of such corporations. "Leases" means, collectively, Aircraft Lease A, Aircraft Lease B, Aircraft Lease C, Aircraft Lease D, Aircraft Lease E, Aircraft Lease F, Aircraft Lease G, Aircraft Lease H, Aircraft Lease I and Aircraft Lease J. "Lease Assignments" means the Lease Assignment executed by Leasing dated the Closing Date (or such other date as Leasing may execute such Lease Assignment), and any Lease Assignment at any time executed pursuant to Article 5 hereof, in favor of Agent for the benefit of Agent and Lenders, evidencing or creating a Lien as security for the Obligations or any portion thereof in form and substance reasonably satisfactory to Agent, and any and all amendments, modifications, supplements, renewals, tensions, restatements or replacements thereof. "Leasing" means Aircraft Leasing, Inc., a Texas corporation and a Wholly-Owned Subsidiary of Kitty Hawk directly owned by Kitty Hawk. "Lender" and "Lenders" has the meaning specified in the introductory paragraph of this Agreement, and includes, without limitation unless otherwise provided herein, any Lender in its status as an Issuing Bank. "Letter of Credit" means any standby letter of credit issued by the Issuing Bank for the account of Kitty Hawk pursuant to this Agreement. "Letter of Credit Agreement" means, with respect to each Letter of Credit to be issued by the Issuing Bank therefor, the letter of credit application and reimbursement agreement which such Issuing Bank requires to be executed by Kitty Hawk in connection with the issuance of such Letter of Credit. "Letter of Credit Liabilities" means, at any time, the aggregate undrawn face amounts of all outstanding Letters of Credit and all unreimbursed drawings under Letters of Credit. "Leverage Ratio" means, at any particular time, the ratio of (a) the sum of the following for the Kitty Hawk Companies as of such date determined on a consolidated basis in accordance with GAAP: (i) Consolidated Liabilities, plus (ii) seven times the Operating Lease Expense for the four fiscal quarters then ended, to (b) Consolidated Tangible Net Worth. 17 24 "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law or otherwise. "Loans" means the Revolving Credit Loans and the Term Loans, and "Loan" means any of the Revolving Credit Loans or the Term Loans. "Loan Documents" means this Agreement, the Notes, the Security Documents, the Letters of Credit, the Letter of Credit Agreements, the Bank One Interest Rate Protection Agreement and any and all other promissory notes, chattel mortgages, deeds of trust, security agreements, assignments, financing statements, guaranties and other agreements, documents, instruments and certificates now or hereafter executed and/or delivered pursuant to or in connection with any of the foregoing and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Maintenance Reserve Expense" means, for any period, without duplication, the aggregate of any and all reserves, sinking or other analogous funds accruals or similar accounting treatment established or used for accounting purposes, whether or not actually paid, for the maintenance, upkeep, improvement, enhancement or repair of any aircraft of Kitty Hawk or any of its Subsidiaries, such Maintenance Reserve Expense to be determined on a consolidated basis in accordance with GAAP. "Material Adverse Effect" means the occurrence of any event or the existence of any condition that has materially and adversely affected, or is reasonably expected (given the totality of circumstances then existing) to have a material adverse effect on: (a) the Properties, business, operations, financial condition or performance, cash flow, liabilities or capitalization of any Kitty Hawk Company; (b) the ability of any Kitty Hawk Company to pay and perform when due its Obligations under any Loan Document to which it is a party; (c) the value or condition of the Collateral (provided, however, that the phrase "value or" in this clause (c) shall be deemed to have been deleted after all Term Loan C Commitments have been irrevocably terminated); or (d) the validity or enforceability of (i) any of the Loan Documents, (ii) any Lien created or purported to be created by any of the Loan Documents or the required priority of any such Lien, or (iii) the rights and remedies of Agent or Lenders under any of the Loan Documents. "Material Contracts" means, as to any Person, any supply, purchase, service, employment, tax, indemnity, shareholder or other agreement or contract which is deemed to be a material contract of such Person as provided in Regulation S-K promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, and any and all amendments, modifications, supplements, renewals or restatements thereof. "Maturity Date" means the Revolving Credit Loans Maturity Date, the Term Loans A Maturity Date, the Term Loans B Maturity Date or the Term Loans C Maturity Date, as the case may be. 18 25 "Maximum Rate" means, with respect to any Lender, the maximum non-usurious interest rate, if any, that any time or from time to time may be contracted for, taken, reserved, charged or received with respect to the particular Obligations as to which such rate is to be determined, payable to such Lender pursuant to this Agreement or any other Loan Document, under laws applicable to such Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable laws now allow. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to the applicable Borrower or Borrowers at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the indicated rate ceiling described in, and computed in accordance with, Article 5069-1.04, Vernon's Texas Civil Statutes; provided, however, that, to the extent permitted by applicable law, Agent shall have the right to change the applicable rate ceiling from time to time in accordance with applicable law. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by or are required from any Kitty Hawk Company or any ERISA Affiliate since 1974 and which is covered by Title IV of ERISA. "Net Income" means, for any period, the net income (or loss) of the Kitty Hawk Companies (or other applicable Person) for such period, determined on a consolidated basis in accordance with GAAP. "Non-Collateral Aircraft" means (a) any and all aircraft, engines, propellers, appliances and spare parts hereafter owned by any of the Kitty Hawk Companies that (i) are not subject to any Lien in favor of Agent securing any Obligation and (ii) are not required to be subject to such a Lien in accordance with this Agreement or any other Loan Document (including, without limitation, Aircraft and Acquired Aircraft that previously were subject to Liens securing the Obligations, but which Liens, as of the date of determination, have been released by Agent in accordance with this Agreement), and (b) all products and proceeds thereof other than accounts (including, without limitation, Receivables), chattel paper, general intangibles and other personal property referred to in clause (d) of Section 5.1. "Notes" means the Revolving Credit Loans Notes, the Term Loans A Notes, the Term Loans B Notes, the Term Loans C Notes and any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements thereof and all substitutions therefor (including promissory notes issued by any Borrower pursuant to Section 13.8), and "Note" means any one of such promissory notes. "Obligations" means any and all (a) indebtedness, liabilities and obligations of the Kitty Hawk Companies, or any of them, to Agent, the Issuing Bank and Lenders, or any of them, evidenced by and/or arising pursuant to any of the Loan Documents (including, without limitation, the Guaranties), now existing or hereafter arising, whether direct, indirect, related, unrelated, 19 26 fixed, contingent, liquidated, unliquidated, joint, several or joint and several, including, without limitation, (i) the obligations of the Kitty Hawk Companies, or any of them, to repay the Loans and the Reimbursement Obligations, to pay interest on the Loans and the Reimbursement Obligations (including, without limitation, interest accruing after any, if any, bankruptcy, insolvency, reorganization or similar filing) and to pay all fees, indemnities, costs and expenses (including attorneys' fees and expenses) provided for in the Loan Documents and (ii) the indebtedness constituting the Loans, the Reimbursement Obligations and interest accrued thereon and such fees, indemnities, costs and expenses, and (b) liabilities and obligations of the Kitty Hawk Companies, or any of them, under the Bank One Interest Rate Protection Agreement and under any other interest rate swap, cap or collar agreement or similar arrangement between any Kitty Hawk Company and another Person providing for the transfer or mitigation of interest rate risks approved by Agent and Required Lenders as being a part of the "Obligations" hereunder. "Operating Lease" means, with respect to any Person, any lease, rental or other agreement for the use by that Person of any Property which is not a Capital Lease Obligation. "Operating Lease Expense" means, with respect to any Person, means all payments of such Person with respect to any Operating Lease. "Other Aircraft" means, collectively, (i) one Boeing 727-223 airframe, United States Aircraft Registration Number N69740, Manufacturer's Serial No. 20668, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, including, without limitation, one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665275, one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665899, and one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 665564 and (ii) one Boeing 727-223 airframe, United States Aircraft Registration Number N6809, Manufacturer's Serial No. 19484, together with any and all parts, appliances, components, instruments, accessories, accessions, equipment, and avionics installed in or appurtenant to such airframe, including, without limitation, one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666338, one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 655014, and one Pratt & Whitney JT8D-9A Engine, Manufacturer's Serial No. 666256. "Outstanding Revolving Credit" means, at any particular time, the sum of (a) the aggregate outstanding principal amount of the Revolving Credit Loans, plus (b) all Letter of Credit Liabilities. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Payor" means as specified in Section 3.4. "Pension Plan" means an employee pension benefit plan as defined in Section 3(2) of ERISA (including a Multiemployer Plan) which is subject to the funding requirements under Section 302 of ERISA or Section 412 of the Code, in whole or in part, and which is maintained 20 27 or contributed to currently or at any time within the six years immediately preceding the Closing Date or, in the case of a Multiemployer Plan, at any time since September 2, 1974, by any Kitty Hawk Company or any ERISA Affiliate for employees of any Kitty Hawk Company or any ERISA Affiliate. "Peril" means as specified in Section 8.5(a). "Permit" means any permit, certificate, approval, order, license or other authorization. "Permitted Holders" means (a) the officers and directors of the Kitty Hawk Companies as of the Closing Date, (b) all other individuals who own Capital Stock of Kitty Hawk on the Closing Date, and (c) any spouse, parent, sibling, child or grandchild of any of the aforesaid individuals (in each case, whether such relationship arises from birth, adoption or through marriage) or any trust established for the benefit of any such individuals or any spouse, parent, sibling, child or grandchild of any such individuals (in each case whether such relationship arises from birth, adoption or through marriage). "Permitted Liens" means: (a) Liens in favor of Agent (for the benefit of Agent and Lenders) securing the Obligations pursuant to the Loan Documents; (b) Liens for taxes, assessments or other governmental charges which (i) are not delinquent or (ii) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established in accordance with GAAP; (c) Liens of mechanics, materialmen, artisans or other similar statutory Liens securing obligations incurred in the ordinary course of business which (i) are not yet due or (ii) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established in accordance with GAAP; (d) Any extension, renewal or replacement of any of the foregoing, provided that Liens permitted hereunder shall not be extended or spread to cover any additional indebtedness or Property. "Person" means any individual, corporation, trust, association, company, partnership, joint venture, limited liability company, Governmental Authority, or other entity. "Plan" means any employee benefit plan as defined in Section 3(3) of ERISA established or maintained or contributed to by any Kitty Hawk Company or any ERISA Affiliate, including any Pension Plan. 21 28 "Prime Rate" means, at any time, the rate of interest per annum then most recently established by Wells Fargo as its highest commercial prime rate then in effect, which rate may not be the lowest rate of interest charged by Wells Fargo to its commercial borrowers. Each change in any interest rate provided for herein based upon the Prime Rate resulting from a change in the Prime Rate shall take effect without notice to the applicable Borrower or Borrowers at the time of such change in the Prime Rate. "Prime Rate Loans" means any Loans that bear interest at rates based upon the Prime Rate. "Principal Office" means the principal office of Agent in Dallas, Texas, presently located at 1445 Ross Avenue, Dallas, Texas 75202. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "Property" means, unless the context otherwise requires, property of all kinds, real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto), whether owned or acquired on or after the Closing Date. "Public Offering" means a public offering of any Capital Stock of Kitty Hawk. "Quarterly Payment Date" means the last day of each March, June, September and December of each year, commencing September 30, 1996. "RICO" means the Racketeer Influenced and Corrupt Organization Act of 1970, as amended from time to time. "Receivables" means, as at any date of determination thereof, each and every "account" as such term is defined in the UCC and includes, without limitation, the unpaid portion of the obligation, as stated on the respective invoice, or, if there is no invoice, other writing, of a customer of any Kitty Hawk Company in respect of goods sold and shipped or services rendered by a Kitty Hawk Company. "Reference Lender" means Wells Fargo. "Register" has the meaning specified in Section 13.8(d). "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to any Lender, any change after the Closing Date in any U.S. federal or state, or any foreign, laws or regulations (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of lenders including such Lender of or under any U.S. federal or state, or any foreign, laws or 22 29 regulations (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "Reimbursement Obligations" means the obligation of Kitty Hawk to reimburse the Issuing Bank for any drawing under a Letter of Credit. "Release" means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, discharge, disposal, disbursement, leaching or migration of Hazardous Materials into the indoor or outdoor environment or into or out of Property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water or ground water. "Remedial Action" means all actions required to (a) clean up, remove, respond to, treat or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform studies and investigations on the extent and nature of any actual or suspected contamination, the remedy or remedies to be used or health effects or risks of such contamination, or (d) perform post-remedial monitoring, care or remedy of a contaminated site. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Required Lenders" means, at any date of determination, Lenders having in the aggregate at least 66 2/3% (in Dollar amount as to any one or more of the following) of the sum of (a) the aggregate outstanding Revolving Credit Loans Commitments (or, if such Revolving Credit Loans Commitments have terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and Letter of Credit Liabilities), plus (b) the aggregate outstanding principal amount of the Term Loans A, plus (c) the aggregate outstanding principal amount of the Term Loans B, plus (d) the aggregate outstanding Term Loans C Commitments (or, if such Term Loans C Commitments have terminated or expired, the aggregate outstanding principal amount of the Term Loans C). "Required Payment" means as specified in Section 3.4. "Reserve Requirement" means, for any Eurodollar Loan of any Lender for any Interest Period therefor, the maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under any regulations of the Board of Governors of the Federal Reserve System (or any successor) by such Lender for deposits exceeding $1,000,000 against "Eurocurrency Liabilities" as such term is used in Regulation D. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such Lenders by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the Eurodollar Rate or the Adjusted Eurodollar Rate is to be determined or (b) any category of extensions of credit or other assets which include Eurodollar Loans. 23 30 "Responsible Officer" means, as to any Kitty Hawk Company, the chief financial officer, chief operating officer or chief executive officer of such Kitty Hawk Company. "Restricted Payment" means (a) any dividend or other distribution (whether in cash, Property or obligations), direct or indirect, on account of (or the setting apart of money for a sinking or other analogous fund for) any shares of any class of Capital Stock of any Kitty Hawk Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (b) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of any Kitty Hawk Company now or hereafter outstanding; (c) any payment or prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, purchase, retirement or defeasance of, or payment with respect to, any Subordinated Debt; (d) any loan, advance or payment to any officer, director or shareholder of any Kitty Hawk Company (other than as may be made in the ordinary course of business to Kitty Hawk as a shareholder), exclusive of reasonable compensation paid to officers or directors paid in the ordinary course of business; and (e) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of any Kitty Hawk Company now or hereafter outstanding. "Revolving Credit Loans" has the meaning specified in Section 2.1(a). "Revolving Credit Loans Commitment" means, as to any Lender, the obligation of such Lender, in accordance with this Agreement, to make or continue Revolving Credit Loans and to incur or participate in Letter of Credit Liabilities hereunder in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereto under the heading "Revolving Credit Loans Commitment" or, if such Lender is a party to an Assignment and Acceptance, the amount of the "Revolving Credit Loans Commitment" set forth in the most recent Assignment and Acceptance of such Lender, as the same may be reduced or terminated pursuant to Section 2.13 or 11.2, and "Revolving Credit Loans Commitments" means such obligations of all Lenders. As of the Closing Date, the aggregate principal amount of the Revolving Credit Loans Commitments is $15,000,000. "Revolving Credit Loans Lender" means, as of any date of determination, each Lender which has a Revolving Credit Loans Commitment. "Revolving Credit Loans Maturity Date" means December 31, 1998. "Revolving Credit Loans Notes" means the promissory notes, in the form of Exhibit B hereto, made by Kitty Hawk evidencing the Revolving Credit Loans. "Securities" means any and all securities and other equity rights or ownership interests of any type or character in any Person which is not a natural Person, including, without limitation, (a) Capital Stock or other equity rights, bonds, notes or other instruments convertible into Capital 24 31 Stock or other equity interests, (b) options, warrants or other rights to acquire Capital Stock or other equity interests, and (c) partnership and joint venture interests. "Security Agreements" means security agreements, pledge agreements and other agreements, documents or instruments executed by the Kitty Hawk Companies dated the Closing Date (or such other date as any Kitty Hawk Company may execute such Security Agreement), and any such agreement, document or instrument at any time executed pursuant to Article 5 hereof, evidencing or creating a Lien on the Collateral referred to in clause (d) of Section 5.1 as security for the Obligations and in form and substance reasonably satisfactory to Agent, and any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements thereof. "Security Documents" means the Guaranties, Aircraft Mortgages, the Lease Assignments, and the Security Agreements, as they may be amended, modified, supplemented, renewed, extended, restated or replaced from time to time, and any and all other agreements, deeds of trust, mortgages, chattel mortgages, security agreements, pledges, guaranties, assignments of proceeds, assignments of income, assignments of contract rights, assignments of partnership interests, assignments of royalty interests, assignments of performance or other collateral assignments, completion or surety bonds, standby agreements, subordination agreements, undertakings and other agreements, documents, instruments and financing statements now or hereafter executed and/or delivered by any Kitty Hawk Company in connection with or as security or assurance for the payment or performance of the Obligations or any part thereof. "Senior Funded Debt" means, at any particular time, exclusive of any Debt which by its terms is subordinated to the Obligations and approved to be excluded from the definition of Senior Funded Debt by Agent, (a) all Debt of the Kitty Hawk Companies which matures by its terms, or is renewable at the option of Kitty Hawk or any of its Subsidiaries, to a date more than one year after the original creation of such Debt, (b) all other Debt which would be classified as "funded indebtedness" or "long-term indebtedness" on a consolidated balance sheet of the Kitty Hawk Companies as of such date in accordance with GAAP, (c) all Debt of the Kitty Hawk Companies for borrowed money, and (d) all Capital Lease Obligations of the Kitty Hawk Companies. "Senior Funded Debt to Cash Flow Ratio" means, for any period, the ratio of (a) the sum of the following (without duplication) for the Kitty Hawk Companies for such period determined on a consolidated basis in accordance with GAAP: (i) Senior Funded Debt, plus (ii) seven times the Operating Lease Expense projected for the twelve month period from the date of determination to the anniversary date of such date of determination, to (b) Cash Flow of the Kitty Hawk Companies for the four fiscal quarters then ended. "Skyfreighters" means Skyfreighters Corporation, a Texas corporation and a Wholly-Owned Subsidiary of Kitty Hawk directly owned by Kitty Hawk. "Solvent" means, with respect to any Person as of the date of any determination, that on such date (a) the fair value of the Property of such Person (both at fair valuation and at present 25 32 fair saleable value) is greater than the total liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's Property would constitute unreasonably small capital after giving due consideration to current and anticipated future capital requirements and current and anticipated future business conduct and the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, such liabilities shall be computed at the amount which, in light of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subordinated Debt" means any and all Debt of any Kitty Hawk Company which is subordinate in right of payment to the payment of the Obligations or any portion thereof. "Subsidiary" means, with respect to any Person, any corporation or other entity of which at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such corporation or entity (irrespective of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries. "Term Loans" means the Term Loans A, the Term Loans B and the Term Loans C. "Term Loans A" has the meaning specified in Section 2.1(b). "Term Loans A Collateral" means, collectively, Aircraft A, Aircraft B, Aircraft C, Aircraft D, Aircraft E, Aircraft F, Aircraft G and Aircraft H. "Term Loans A Commitment" means, as to any Lender, the obligation of such Lender to make or continue Term Loans A hereunder in an aggregate principal amount up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereto under the heading "Term Loans A Commitment", as the same may be terminated pursuant to Section 11.2, and "Term Loans A Commitments" means such obligations of all Lenders. As of the Closing Date, the aggregate principal amount of the Term Loans A Commitments is $12,744,000.45. "Term Loans A Lenders" means, as of any date of determination, each Lender which has a Term Loans A Commitment. 26 33 "Term Loans A Maturity Date" means June 30, 2002. "Term Loans A Notes" means the promissory notes made by Leasing evidencing the Term Loans A, in the form of Exhibit C hereto. "Term Loans B" has the meaning specified in Section 2.1(c). "Term Loans B Collateral" means, collectively, Aircraft I and Aircraft J. "Term Loans B Commitment" means, as to any Lender, the obligation of such Lender to make or continue Term Loans B hereunder in an aggregate principal amount up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereto under the heading "Term Loans B Commitment", as the same may be terminated pursuant to Section 11.2, and "Term Loans B Commitments" means such obligations of all Lenders. As of the Closing Date, the aggregate principal amount of the Term Loans B Commitments is $11,225,000. "Term Loans B Lenders" means, as of any date of determination, each Lender which has a Term Loans B Commitment. "Term Loans B Maturity Date" means June 30, 2003. "Term Loans B Notes" means the promissory notes made by Leasing evidencing the Term Loans B, in the form of Exhibit D hereto. "Term Loans C" has the meaning specified in Section 2.1(d). "Term Loans C Availability Termination Date" means the earlier to occur of either (a) the making of Term Loans C in the aggregate amount of the Term Loans C Commitments or (b) April 30, 1998. "Term Loans C Commitment" means, as to any Lender, the obligation of such Lender to make or continue Term Loans C hereunder in an aggregate principal amount up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereto under the heading "Term Loans C Commitment" or, if such Lender is a party to an Assignment and Acceptance, the amount of the "Term Loans C Commitment" set forth in the most recent Assignment and Acceptance of such Lender, as the same may be reduced or terminated pursuant to Section 2.13 or 11.2, and "Term Loans C Commitments" means such obligations of all Lenders. As of the Closing Date, the aggregate principal amount of the Term Loans C Commitments is $10,000,000. "Term Loans C Lenders" means, as of any date of determination, each Lender which has a Term Loans C Commitment. "Term Loans C Maturity Date" means June 30, 2003. 27 34 "Term Loans C Notes" means the promissory notes made by Leasing evidencing the Term Loans C, in the form of Exhibit E hereto. "Title Company" means Federal Aviation Title and Guaranty Company, Oklahoma City, Oklahoma. "Type" means any type of Loan (i.e., Prime Rate Loan or Eurodollar Loan). "UCC" means the Uniform Commercial Code as in effect in the State of Texas and/or any other jurisdiction, the laws of which may be applicable to or in connection with the creation, perfection or priority of any Lien on any Property created pursuant to any Security Document. "U.S." means the United States of America. "WFB Agreements" means, collectively, the WFB Agreement No. 1, the WFB Agreement No. 2 and the WFB Agreement No. 3, as such agreements may have been amended, modified or supplemented. "WFB Agreement No. 1" has the meaning specified in Recital A of this Agreement. "WFB Agreement No. 2" has the meaning specified in Recital B of this Agreement. "WFB Agreement No. 3" has the meaning specified in Recital C of this Agreement. "Wells Fargo" means Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A. "Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary of such Person all of whose outstanding Capital Stock is owned by such Person and/or one or more of its Wholly-Owned Subsidiaries. Section 1.2 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof", "herein" and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC. Section 1.3 Accounting Terms and Determinations. (a) All accounting terms not specifically defined herein shall be construed in accordance with GAAP (subject to year end adjustments, if applicable) consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a). All financial information delivered to Agent pursuant to 28 35 Section 8.1 shall be prepared in accordance with GAAP (subject to year end adjustments, if applicable) applied on a basis consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a) or in accordance with Section 8.7. (b) Kitty Hawk shall deliver to Agent and Lenders, at the same time as the delivery of any annual, quarterly or monthly financial statement under Section 8.1, (i) a description, in reasonable detail, of any material variation between the application of GAAP employed in the preparation of the next preceding annual, quarterly or monthly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) preceding and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in this Agreement (including Article 10 hereof), neither Kitty Hawk nor any of its Subsidiaries will change the last day of its fiscal year from August 31 or, if changed in contemplation of a Public Offering, December 31, or the last days of the first three fiscal quarters of the Kitty Hawk Companies in each of its fiscal years from that existing on the Closing Date except to reflect any such change to a fiscal year ending December 31. Section 1.4 Financial Covenants and Reporting. The financial covenants contained in Article 10 shall be calculated on a consolidated basis for the Kitty Hawk Companies in accordance with GAAP. ARTICLE 2 Loans Section 2.1 Commitments. (a) Revolving Credit Loans. Subject to the terms and conditions of this Agreement (including, without limitation, Section 2.13), each Revolving Credit Loans Lender severally agrees to make one or more revolving credit loans to Kitty Hawk from time to time from and including the Closing Date to but excluding the Revolving Credit Loans Maturity Date in an aggregate principal amount outstanding not to exceed the positive remainder of (i) the amount of such Lender's Revolving Credit Loans Commitment as then in effect, minus (ii) such Lender's Commitment Percentage of the Letter of Credit Liabilities then outstanding (such revolving credit loans referred to in this Section 2.1(a) now or hereafter made by Lenders to Kitty Hawk from and including and after the Closing Date are hereinafter collectively called the "Revolving Credit Loans"). Subject to the foregoing limitations and the other terms and conditions of this Agreement, Kitty Hawk may borrow, repay and reborrow the Revolving Credit Loans hereunder. Kitty Hawk agrees to borrow Revolving Credit Loans on the Closing Date for the purpose of paying the amounts specified in the first sentence of Section 2.10(a). 29 36 (b) Term Loans A. Subject to the terms and conditions of this Agreement, each Term Loans A Lender severally agrees to make a term loan to Leasing in a single disbursement on the Closing Date in an amount equal to such Lender's Term Loans A Commitment (such term loans referred to in this Section 2.1(b) made by the Term Loans A Lenders to Leasing are hereinafter collectively called the "Term Loans A"). The Term Loans A Commitments shall terminate upon the making of the Term Loans A. (c) Term Loans B. Subject to the terms and conditions of this Agreement, each Term Loans B Lender severally agrees to make a term loan to Leasing in a single disbursement on the Closing Date in an amount equal to such Lender's Term Loans B Commitment (such term loans referred to in this Section 2.1(c) made by the Term Loans B Lenders to Leasing are hereinafter collectively called the "Term Loans B"). The Term Loans B Commitments shall terminate upon the making of the Term Loans B. (d) Term Loans C. Subject to the terms and conditions of this Agreement (including, without limitation, Section 2.13), each Term Loans C Lender severally agrees to make term loans to Leasing, at any time and from time to time, but no more than once each month (exclusive of Continuations and Conversions of Term Loans C in accordance with Section 2.1(e)) as provided for herein, during the Advance Period, in an aggregate principal amount not to exceed the amount of such Lender's Term Loans C Commitment then in effect (such term loans referred to in this Section 2.1(d) made by the Term Loans C Lenders to Leasing are hereinafter collectively called the "Term Loans C"). Leasing may not repay and then reborrow any Term Loans C, the Term Loans C Commitments shall reduce upon each making of the Term Loans C by an aggregate amount equal to the aggregate amount of the Term Loans C then made and the Term Loans C Commitments shall terminate upon the making of the Term Loans C in the aggregate amount of $10,000,000. (e) Continuation and Conversion of Loans. Subject to the terms of this Agreement, the applicable Borrower may borrow the Loans as Prime Rate Loans or Eurodollar Loans and, until the respective Maturity Date thereof, the applicable Borrower may Continue Eurodollar Loans or Convert Loans of one Type into Loans of the other Type. (f) Lending Offices. Loans of each Type made by each Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. Section 2.2 The Notes. The Revolving Credit Loans made by each Revolving Credit Loans Lender shall be evidenced by a single promissory note of Kitty Hawk in substantially the form of Exhibit B hereto, dated the Closing Date, payable to the order of such Lender in a principal amount equal to its Revolving Credit Loans Commitment as originally in effect, and otherwise duly completed. The Term Loans A made by each Term Loans A Lender shall be evidenced by a single promissory note of Leasing in substantially the form of Exhibit C hereto, dated the Closing Date, payable to the order of such Lender in a principal amount equal to its 30 37 Term Loans A Commitment as originally in effect, and otherwise duly completed. The Term Loans B made by each Term Loans B Lender shall be evidenced by a single promissory note of Leasing in substantially the form of Exhibit D hereto, dated the Closing Date, payable to the order of such Lender in a principal amount equal to its Term Loans B Commitment as originally in effect, and otherwise duly completed. The Term Loans C made by each Term Loans C Lender shall be evidenced by a single promissory note of Leasing in substantially the form of Exhibit E hereto, dated the Closing Date, payable to the order of such Lender in a principal amount equal to its Term Loans C Commitment as originally in effect, and otherwise duly completed. Each Lender is hereby authorized by the applicable Borrower to endorse on the schedule (or a continuation thereof) attached to each Note of such Lender, to the extent applicable, the date, amount and Type of and the Interest Period for each Loan made by such Lender to the applicable Borrower and the amount of each payment or prepayment of principal of such Loan received by such Lender, provided that any failure by such Lender to make any such endorsement shall not affect the obligations of the applicable Borrower under such Note or this Agreement in respect of such Loan. Section 2.3 Repayment of Loans. (a) Kitty Hawk shall pay to Agent for the account of the Revolving Credit Loans Lenders the outstanding principal of the Revolving Credit Loans (and the outstanding principal of the Revolving Credit Loans shall be due and payable) on the Revolving Credit Loans Maturity Date; provided, however, that, notwithstanding anything to the contrary contained in this Agreement, with respect to Revolving Credit Loans which are used for Aircraft Acquisitions, Kitty Hawk shall pay to Agent for the account of the Revolving Credit Loans Lenders the entire principal amount of such Revolving Credit Loans (and the entire outstanding principal amount of such Revolving Credit Loans shall be due and payable) on or before 150 days after the date of the borrowing of such Revolving Credit Loans. (b) Leasing shall pay to Agent for the account of the Term Loans A Lenders the outstanding principal of the Term Loans A (and the outstanding principal of the Term Loans A shall be due and payable) in 23 installments, commencing on September 30, 1996 and continuing on each Quarterly Payment Date thereafter through and including March 31, 2002, each of which installments shall be in the amount of $531,000.18. In addition, Leasing shall pay to Agent for the account of the Term Loans A Lenders all outstanding principal of the Term Loans A (and all outstanding principal of the Term Loans A shall be due and payable) on the Term Loans A Maturity Date. (c) Leasing shall pay to Agent for the account of the Term Loans B Lenders the outstanding principal of the Term Loans B (and the outstanding principal of the Term Loans B shall be due and payable) in 27 installments, commencing on September 30, 1996 and continuing on each Quarterly Payment Date thereafter through and including March 31, 2003, each of which installments shall be in the amount set forth below: 31 38 Quarterly Payment Date Principal Installment ---------------------- --------------------- September 30, 1996 $306,598.90 December 31, 1996 $312,477.93 March 31, 1997 $318,469.70 June 30, 1997 $324,576.36 September 30, 1997 $330,800.10 December 31, 1997 $337,143.20 March 31, 1998 $343,607.92 June 30, 1998 $350,196.60 September 30, 1998 $356,911.62 December 31, 1998 $363,755.40 March 31, 1999 $370,730.42 June 30, 1999 $377,839.17 September 30, 1999 $385,084.23 December 31, 1999 $392,468.23 March 31, 2000 $399,993.80 June 30, 2000 $407,663.68 September 30, 2000 $415,480.62 December 31, 2000 $423,447.48 March 31, 2001 $431,567.08 June 30, 2001 $439,842.38 September 30, 2001 $448,276.36 December 31, 2001 $456,872.07 March 31, 2002 $465,632.58 June 30, 2002 $474,561.08 September 30, 2002 $483,660.80 December 31, 2002 $492,934.99 March 31, 2003 $502,387.02
In addition, Leasing shall pay to Agent for the account of the Term Loans B Lenders all outstanding principal of the Term Loans B (and all outstanding principal of the Term Loans B shall be due and payable) on the Term Loans B Maturity Date. (d) Leasing shall pay to Agent for the account of the Term Loans C Lenders the principal of the Term Loans C outstanding on the Term Loans C Availability Termination Date (and the outstanding principal of the Term Loans C shall be due and 32 39 payable) in 20 installments, commencing on June 30, 1998 and continuing on each Quarterly Payment Date thereafter through and including March 31, 2003, each of which installments shall be in the amount equal to (i) the aggregate principal amount of the Term Loans C outstanding on the Term Loans C Availability Termination Date, divided by (ii) 21. In addition, Leasing shall pay to Agent for the account of the Term Loans C Lenders all outstanding principal of the Term Loans C (and all outstanding principal of the Term Loans C shall be due and payable) on the Term Loans C Maturity Date. (e) In the event of any prepayment of the Term Loans A, the Term Loans B or the Term Loans C in connection with any release of any of the Aircraft in accordance with Section 5.4(b), such prepayment shall be applied in accordance with the proviso contained in clause (d) of Section 2.6 (if a voluntary prepayment) or the proviso contained in the first sentence of Section 2.7(d) (if a mandatory prepayment) with the effect that (i) the amount of each subsequent installment of principal of the Term Loans A as provided in Section 2.3(b) shall be reduced pro rata in connection with any such prepayment of the Term Loans A such that the then remaining outstanding principal amount of the Term Loans A shall be payable in equal quarterly installments on each Quarterly Payment Date thereafter and on the Term Loans A Maturity Date, (ii) the amount of each subsequent installment of principal of the Term Loans B as provided in Section 2.3(c) shall be reduced pro rata in connection with any such prepayment of the Term Loans B such that each of the then remaining principal installments are reduced by the same percentage, and (iii) the amount of each subsequent installment of principal of the Term Loans C as provided in Section 2.3(d) shall be reduced pro rata in connection with any such prepayment of the Term Loans C such that the then outstanding principal amount of the Term Loans C shall be payable in equally quarterly installments on each Quarterly Payment Date thereafter and on the Term Loans C Maturity Date. Section 2.4 Interest. (a) Interest Rate. The applicable Borrower shall pay to Agent for the account of each applicable Lender interest on the unpaid principal amount of each Loan made by such Lender to such Borrower for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (i) during the periods any such Loan is a Prime Rate Loan, the lesser of (A) the Prime Rate or (B) the Maximum Rate; and (ii) during the periods any such Loan is a Eurodollar Loan, the lesser of (A) the Eurodollar Rate plus the Applicable Margin or (B) the Maximum Rate. (b) Payment Dates. Accrued interest on the Loans shall be due and payable as follows: (i) in the case of Prime Rate Loans, on each Quarterly Payment Date; 33 40 (ii) in the case of each Eurodollar Loan, on the last day of the Interest Period with respect thereto; (iii) upon the payment or prepayment of any Loan or the Conversion of any Loan to a Loan of the other Type (but only on the principal amount so paid, prepaid or Converted); and (iv) on the Maturity Date for such Loan. (c) Default Interest. Notwithstanding the foregoing, the applicable Borrower shall pay to Agent for the account of each applicable Lender interest at the applicable Default Rate on any principal of any Loan made by such Lender to such Borrower, any Reimbursement Obligation and (to the fullest extent permitted by law) any other amount payable by the applicable Borrower under this Agreement or any other Loan Document to or for the account of such Lender, which is not paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Interest payable at the Default Rate shall be payable from time to time on demand by Agent. Section 2.5 Borrowing Procedure. Kitty Hawk, with respect to the Revolving Credit Loans, and Leasing, with respect to the Term Loans, shall give Agent notice of each borrowing hereunder in accordance with Section 2.9. Not later than 12:00 noon (Dallas, Texas time) on the date specified for each borrowing hereunder, each Lender will make available the amount of the Loan to be made by it on such date to Agent, at the Principal Office, in immediately available funds, for the account of the applicable Borrower. The amount so received by Agent shall, subject to the terms and conditions of this Agreement, be made available to the applicable Borrower by wire transfer of immediately available funds to the applicable Deposit Account no later than 2:00 p.m. (Dallas, Texas time). Section 2.6 Optional Prepayments, Conversions and Continuations of Loans. Subject to Section 2.7, the applicable Borrower shall have the right from time to time to prepay the principal of the Loans, to Convert all or part of a Loan of one Type into a Loan of another Type or to Continue Eurodollar Loans; provided that: (a) Kitty Hawk, with respect to the Revolving Credit Loans, and Leasing, with respect to the Term Loans, shall give Agent notice of each such prepayment, Conversion or Continuation as provided in Section 2.9, (b) Eurodollar Loans may only be Converted on the last day of the Interest Period, (c) except for Conversions of Eurodollar Loans into Prime Rate Loans, no Conversions or Continuations shall be made while a Default has occurred and is continuing, and (d) optional prepayments of any Term Loans shall be applied to the then remaining principal installments of such Term Loans, in the inverse order of the maturities of such installments; provided, however, that any optional prepayment of principal of the applicable Term Loans equal to the Aircraft Release Amount for an Aircraft made in connection with the release of such Aircraft pursuant to Section 5.4(b) shall be applied to the applicable Term Loans in accordance with this Agreement (as provided or referred to in the definition of Aircraft Release Amount) and shall be applied to each of the then remaining principal installments of the applicable Term Loans pro rata based upon the percentage that each such 34 41 principal installment is to the then total outstanding principal amount of such Term Loans (or, with respect to any prepayment of the Term Loans C prior to the Term Loans C Availability Termination Date, to the then outstanding principal amount of the Term Loans C). Section 2.7 Mandatory Prepayments. (a) Insurance Recovery. Each Kitty Hawk Company shall, within two Business Days after it receives any Excess Insurance Proceeds, pay (or cause to be paid) to Agent, as a prepayment of the Term Loans, an aggregate amount equal to such Excess Insurance Proceeds. The proceeds of any Excess Insurance Proceeds shall be applied to the Term Loans A if such Excess Insurance Proceeds result from a casualty loss to the Term Loans A Collateral and shall be applied to the Term Loans B if such Excess Insurance Proceeds result from a casualty loss to the Term Loans B Collateral. After such application of the Excess Insurance Proceeds to either the Term Loans A or the Term Loans B (as applicable), any remaining Excess Insurance Proceeds shall, after the Term Loans A or the Term Loans B, respectively, are paid in full (as applicable), be applied in order of priority to (i) the Term Loans C (until such Loans are paid in full), (ii) the Revolving Credit Loans, and (iii) the Term Loans B or the Term Loans A, respectively. Notwithstanding anything to the contrary contained in this Section 2.7(a), in the event of Leasing's receipt of Excess Insurance Proceeds payable with respect to any Aircraft or Acquired Aircraft in an amount in excess of the Aircraft Release Amount for such Aircraft or the amount required to release such Acquired Aircraft pursuant to Section 5.4(c), respectively, then Leasing shall not be obligated to pay, pursuant to this Section 2.7(a), an amount of such Excess Insurance Proceeds in excess of the Aircraft Release Amount for such Aircraft or the amount required to release such Acquired Aircraft pursuant to Section 5.4(c), respectively. (b) Asset Dispositions. Each Kitty Hawk Company shall, concurrently with any sale or other disposition of any Collateral, pay (or cause to be paid) to Agent, as a prepayment of the Term Loans, an aggregate amount equal to 100% of the proceeds resulting from such sale or other disposition of such Collateral. Such proceeds shall be applied to the Term Loans A if such Collateral is Term Loans A Collateral and shall be applied to the Term Loans B if such Collateral is Term Loans B Collateral. After such application of proceeds to either the Term Loans A or the Term Loans B (as applicable), any remaining proceeds shall, after the Term Loans A or the Term Loans B, respectively, are paid in full (as applicable), be applied in order of priority to (i) the Term Loans C (until such Loans are paid in full), (ii) the Revolving Credit Loans, and (iii) the Term Loans B or the Term Loans A, respectively. Notwithstanding anything to the contrary contained in this Section 2.7(b), in the event that the proceeds from any such sale or other disposition of an Aircraft or Acquired Aircraft are in excess of the Aircraft Release Amount for such Aircraft or the amount required to release such Acquired Aircraft pursuant to Section 5.4(c), respectively, then Leasing shall not be obligated to pay, pursuant to this Section 2.7(b), an amount of such proceeds in excess of the Aircraft Release Amount for such Aircraft or the amount required to release such Acquired Aircraft pursuant to Section 5.4(c), respectively. Nothing contained in this Section 2.7 shall be 35 42 construed to authorize or permit the sale or other disposition of any Collateral other than in compliance with Section 9.8(a). (c) Revolving Credit Loans. If at any time the Outstanding Revolving Credit exceeds an amount equal to the Revolving Credit Loans Commitments at such time, within one Business Day after the occurrence thereof, Kitty Hawk shall pay to Agent the amount of such excess as a prepayment of the Revolving Credit Loans. (d) Application of Mandatory Prepayments. All prepayments pursuant to subsections (a) and (b) preceding, if and to the extent the same are required to be applied to the Term Loans in accordance with such subsections, shall be applied to the then remaining installments of principal of the Term Loans A, the Term Loans B or the Term Loans C, as required by such subsections, in the inverse order of the maturities of such installments; provided, however, that any mandatory prepayment of principal of the applicable Term Loans equal to the Aircraft Release Amount for an Aircraft made in connection with the release of such Aircraft pursuant to Section 5.4(b) shall be applied to the applicable Term Loans in accordance with this Agreement (as provided or referred to in the definition of Aircraft Release Amount) and shall be applied to each of the then remaining principal installments of the applicable Term Loans pro rata based upon the percentage that each such principal installment is to the then total outstanding principal amount of such Term Loans (or, with respect to any prepayment of the Term Loans C prior to the Term Loans C Availability Termination Date, to the then outstanding principal amount of the Term Loans C). Notwithstanding anything to the contrary contained in this Section 2.7, any prepayment required to be applied to the Term Loans A or the Term Loans B pursuant to the provisions of this Section 2.7 shall, if the Term Loans A or Term Loans B, as applicable, shall have been paid in full, be applied to the Term Loans C, and any prepayment required to be applied to the Term Loans C pursuant to the provisions of this Section 2.7 shall, if the Term Loans C shall have been paid in full, be applied in order of priority to the Revolving Credit Loans and then to the remaining balance of the Term Loans B or the Term Loans A, respectively. Section 2.8 Minimum Amounts. Except for Conversions and prepayments pursuant to Section 2.7 and Article 4, each borrowing, each Conversion and each prepayment of principal of the Revolving Credit Loans used for general corporate purposes shall be in an amount at least equal to $100,000 or an integral multiple in excess thereof (borrowings, prepayments or Conversions of or into Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder shall be deemed separate borrowings, prepayments and Conversions for purposes of the foregoing, one for each Type or Interest Period). Section 2.9 Certain Notices. Notices by the applicable Borrower to Agent of terminations or reductions of Commitments, of borrowings, Conversions, Continuations and prepayments of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by Agent not later than 10:00 a.m. (Dallas, Texas, time) on the Business Day prior to 36 43 the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below: Number of Notice Business Days Prior ------ ------------------- Terminations or Reductions of Commitments 1 Borrowings of Revolving Credit Loans, Term Loans A and Term Loans B 1 Prime Rate Loans Borrowings of Revolving Credit Loans, Term Loans A and Term Loans B 3 Eurodollar Loans Borrowings of Term Loans C 3 Conversions or Continuations of Loans 3 Prepayments of Revolving Credit Loans which are Prime Rate Loans 1 Prepayments of Revolving Credit Loans which are Eurodollar Loans 3 Prepayments of Term Loans 3
Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or prepayment shall specify the Loans to be borrowed, Converted, Continued or prepaid and the amount (subject to Section 2.8 hereof) and Type of the Loans to be borrowed, Converted, Continued or prepaid (and, in the case of a Conversion, the Type of Loans to result from such Conversion) and the date of borrowing, Conversion, Continuation or prepayment (which shall be a Business Day). Notices of borrowings, Conversions, Continuations or prepayments shall be in the form of Exhibit F hereto, appropriately completed as applicable. Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. Agent shall promptly notify Lenders of the contents of each such notice. In the event the applicable Borrower fails to select the Type of Loan, or the duration of any Interest Period for any Eurodollar Loan, within the time period and otherwise as provided in this Section 2.9, such Loan (if outstanding as Eurodollar Loan) will be automatically Converted into a Prime Rate Loan on the last day of the preceding Interest Period for such Loan or (if outstanding as a Prime Rate Loan) will remain as, or (if not then outstanding) will be made as, a Prime Rate Loan. The applicable Borrower may not borrow any Eurodollar Loans, Convert any Loans into Eurodollar Loans or Continue any Loans as Eurodollar Loans if the interest rate for such Eurodollar Loans would exceed the Maximum Rate. Bank One shall, promptly upon the making of any such Eurodollar Loan, notify Agent of the Eurodollar Rate attributable to any Eurodollar Loan which is a Term Loan B. 37 44 Section 2.10 Use of Proceeds. (a) Kitty Hawk agrees with Agent and Lenders that it will, on the Closing Date, borrow Revolving Credit Loans in an aggregate amount sufficient to pay in full all existing principal indebtedness, accrued interest, fees, costs and expenses owed by Kitty Hawk to Wells Fargo under the WFB Agreement No. 3, and Kitty Hawk hereby irrevocably requests that Agent deliver such proceeds to Wells Fargo to pay such indebtedness. Kitty Hawk agrees with Agent and Lenders that the proceeds of the Revolving Credit Loans to be made on and after the Closing Date shall be used by Kitty Hawk, Leasing, Aircargo and Charters (i) for general corporate purposes, and (ii) to provide interim financing for Aircraft Acquisitions by Leasing such interim financing not to exceed at any time $6,500,000 attributable to any single Acquired Aircraft; provided, however, that the sum of the aggregate principal amount of the Revolving Credit Loans outstanding at any time used for other than the purpose specified in clause (ii) preceding plus the Letter of Credit Liabilities outstanding at any time shall not, at any time, exceed $5,000,000. Each of Kitty Hawk and Wells Fargo represents and warrants to Bank One that, as of the Closing Date, the aggregate outstanding principal amount of the indebtedness owed by Kitty Hawk to Wells Fargo under the WFB Agreement No. 3 is $3,000,000. (b) Leasing agrees with Agent and Lenders that the proceeds of the Term Loans A shall be used by Leasing to pay in full $12,744,000.45 of existing indebtedness owed by Leasing to Wells Fargo under the WFB Agreement No. 1 and the WFB Agreement No. 2, and Leasing hereby irrevocably requests that Agent deliver all of such proceeds to Wells Fargo to pay such indebtedness (and Wells Fargo agrees to apply such proceeds to pay such indebtedness). Each of Leasing and Wells Fargo represents and warrants to Bank One that, as of the Closing Date, the aggregate outstanding principal amount of the indebtedness owed by Leasing to Wells Fargo under the WFB Agreement No. 1 and the WFB Agreement No. 2 is $12,744,000.45. (c) Leasing agrees with Agent and Lenders that the proceeds of the Term Loans B shall be used by Leasing to pay in full $11,225,000 of existing indebtedness owed by Leasing to Bank One under the Bank One Agreement, and Leasing hereby irrevocably requests that Agent deliver all of such proceeds to Bank One to pay such indebtedness (and Bank One agrees to apply such proceeds to pay such indebtedness). Each of Leasing and Bank One represents and warrants to Wells Fargo that, as of the Closing Date, the aggregate outstanding principal amount of the indebtedness owed by Leasing to Bank One under the Bank One Agreement is $11,225,000. (d) Leasing agrees with Agent and Lenders that the proceeds of the Term Loans C shall be used by Leasing to finance the purchase of one DC9 Hush Kit and up to seven heavy "C" checks for the Aircraft and for labor relating thereto; provided, however, that up to two of such heavy "C" checks may be performed with respect to the Other Aircraft. 38 45 (e) None of the proceeds of any Loan have been or will be used to acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended, or to purchase or carry any margin stock (within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System). Section 2.11 Fees. (a) Kitty Hawk agrees to pay to Agent for the account of each Revolving Credit Loans Lender a commitment fee on the daily average unused or unfunded amount of such Lender's Revolving Credit Loans Commitment, for the period from and including the Closing Date to and including the Revolving Credit Loans Maturity Date, at the rate of one-quarter of one percent (0.25%) per annum based on a 360 day year and the actual number of days elapsed, which accrued commitment fees shall be payable in arrears on each Quarterly Payment Date and on the Revolving Credit Loans Maturity Date. (b) Leasing agrees to pay to Agent for the account of each Term Loans C Lender a commitment fee on the daily average unused or unfunded amount of such Lender's Term Loans C Commitment, for the period from and including the Closing Date to and including the Term Loans C Availability Termination Date, at the rate of one-quarter of one percent (0.25%) per annum based on a 360 day year and the actual number of days elapsed, which accrued commitment fees shall be payable in arrears on each Quarterly Payment Date and on the Term Loans C Availability Termination Date. (c) Kitty Hawk agrees to pay to Agent, for its own account, an agency fee in the amount of $10,000, which fee in such amount shall be payable in advance on the Closing Date and on each anniversary of the Closing Date through and including August 14, 2002. (d) Leasing agrees to pay to Agent for the account of the Term Loans A Lenders or the Term Loans C Lenders (as applicable), a prepayment fee concurrently with each prepayment of principal of the Term Loans A or the Term Loans C, respectively; provided, however, that no such prepayment fee shall be required with respect to (i) any mandatory prepayment required pursuant to Section 2.7(a) or 2.7(b), (ii) any prepayment made with the proceeds of a Public Offering within 30 days after the consummation of such Public Offering, (iii) any prepayment of up to 25% of the outstanding principal amount of the Term Loans A or the Term Loans C prior to August 14, 1997, or (iv) any prepayment made on or after August 14, 1998. Such prepayment fee shall be in an amount equal to (A) two percent of the aggregate principal amount prepaid if such prepayment occurs prior to August 14, 1997, or (B) one percent of the aggregate principal amount prepaid if such prepayment occurs prior to August 14, 1998, but on or after August 14, 1997. 39 46 Section 2.12 Computations. Interest and fees payable by the applicable Borrower hereunder and under the other Loan Documents on all Loans shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) occurring in the period for which payable unless, in the case of interest, such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Section 2.13 Termination or Reduction of Commitments. (a) Notwithstanding anything to the contrary contained in this Agreement: (i) the Revolving Credit Loans Commitments shall automatically terminate at 10:00 a.m. (Dallas, Texas time) on the Revolving Loans Commitments Maturity Date; and (ii) the Term Loans C Commitments shall automatically terminate at 10:00 a.m. (Dallas, Texas time) on the Term Loans C Availability Termination Date (subject to earlier termination if the Term Loans C are fully funded prior to such time). (b) Kitty Hawk and Leasing shall have the right to terminate or reduce in part the unused portion of the Revolving Credit Loans Commitments and the Term Loans C Commitments, respectively, at any time and from time to time, provided that (i) it shall give notice of each such termination or reduction as provided in Section 2.9 and (ii) each partial reduction shall be in an aggregate amount at least equal to $500,000 or an integral multiple of $100,000 in excess thereof. The Revolving Credit Loans Commitments and the Term Loans C Commitments may not be reinstated after they have been terminated or increased after they have been reduced. Section 2.14 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Kitty Hawk may utilize the Revolving Credit Loans Commitments by requesting that the Issuing Bank issue Letters of Credit; provided, that the aggregate amount of outstanding Letter of Credit Liabilities shall not at any time exceed $5,000,000. Upon the date of issue of each Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Revolving Credit Loans Lender, and each Revolving Credit Loans Lender shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation to the extent of such Revolving Credit Loans Lender's Commitment Percentage of the Revolving Credit Loans Commitments. (b) Kitty Hawk shall give the Issuing Bank (with a copy to Agent) at least five Business Days prior notice (effective upon receipt and irrevocable unless appropriately revoked sufficiently prior to issuance of the Letter of Credit) specifying the date of each Letter of Credit and the nature of the transactions to be supported thereby. Upon receipt 40 47 of such notice the Issuing Bank shall promptly notify the Revolving Credit Loans Lenders of the contents thereof and of each such Lender's Commitment Percentage of the amount of the proposed Letter of Credit. Each Letter of Credit shall have an expiration date that does not exceed one year from the date of issuance and that does not extend beyond the Revolving Credit Loans Maturity Date, shall be payable in Dollars, shall support a transaction entered into in the ordinary course of Kitty Hawk's or its Subsidiaries' business, shall be satisfactory in form and substance to the Issuing Bank, and shall be issued pursuant to such agreements, documents and instruments (including a Letter of Credit Agreement) as the Issuing Bank may reasonably require, none of which shall be inconsistent with this Section 2.14. Each Letter of Credit shall (i) provide for the payment of drafts presented for, on or thereunder by the beneficiary in accordance with the terms thereof, when such drafts are accompanied by the documents (if any) described in the Letter of Credit and (ii) to the extent not inconsistent with the terms hereof or any applicable Letter of Credit Agreement, be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (together with any subsequent revision thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Bank, the "UCP"), and shall, as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the laws of the State of Texas. (c) Kitty Hawk agrees to pay to Agent for the account of each Lender, in arrears on each Quarterly Payment Date (beginning on September 30, 1996) and on the expiration date of each Letter of Credit, a nonrefundable letter of credit fee with respect to each Letter of Credit issued in an amount equal to one percent (1.00%) per annum of the daily average face amount of the Letter of Credit in effect during the period then ended. Agent agrees to pay to each Lender, promptly after receiving any payment of such Letter of Credit fees, such Lender's Commitment Percentage of such fees. Kitty Hawk agrees to pay to Issuing Bank for its own account, in arrears on each Quarterly Payment Date (beginning on September 30, 1996) and on the expiration date of each Letter of Credit, a nonrefundable letter of credit fee with respect to each Letter of Credit issued by the Issuing Bank in an amount equal to one-quarter of one percent (0.25%) per annum of the daily average face amount of the Letter of Credit in effect during the period then ended. In addition to the foregoing fees, Kitty Hawk shall pay or reimburse the Issuing Bank for such normal and customary costs and expenses, including, without limitation, administrative, issuance, amendment, payment and negotiation charges, as are incurred or charged by the Issuing Bank in issuing, effecting payment under, amending or otherwise administering any Letter of Credit. (d) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment or other drawing under such Letter of Credit, the Issuing Bank shall promptly notify Kitty Hawk and each Revolving Credit Loans Lender as to the amount to be paid as a result of such demand or drawing and the respective payment date. If at any time the Issuing Bank shall make a payment to a beneficiary of a Letter of Credit pursuant to a drawing under such Letter of Credit, each Revolving Credit Loans Lender will pay to the Issuing Bank, immediately upon the Issuing Bank's demand at any time commencing after 41 48 such payment until reimbursement therefor in full by Kitty Hawk, an amount equal to such Lender's Commitment Percentage of such payment, together with interest on such amount for each day from the date of such payment to the date of payment by such Lender of such amount at a rate of interest per annum equal to the Federal Funds Rate. (e) Kitty Hawk shall be irrevocably and unconditionally obligated to immediately reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. The Issuing Bank will pay to each Revolving Credit Loans Lender such Revolving Credit Loans Lender's Commitment Percentage of all amounts received from or on behalf of Kitty Hawk for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Revolving Credit Loans Lender has made payment to the Issuing Bank in respect of such Letter of Credit pursuant to subsection (d) above. Outstanding Reimbursement Obligations shall bear interest at the Default Rate and such interest shall be payable on demand. (f) The Reimbursement Obligations of Kitty Hawk under this Agreement and the other Loan Documents shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the other Loan Documents under all circumstances whatsoever, including, without limitation, the following circumstances: (i) Any lack of validity or enforceability of any Letter of Credit or any other Loan Document; (ii) Any amendment or waiver of or any consent to departure from any Loan Document; (iii) The existence of any claim, setoff, counterclaim, defense or other right which any Kitty Hawk Company or other Person may have at any time against any beneficiary of any Letter of Credit, Agent, the Issuing Bank, Lenders or any other Person, whether in connection with this Agreement or any other Loan Document or any unrelated transaction; (iv) Any statement, draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) Payment by the Issuing Bank under any Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, provided, that such payment shall not have constituted gross negligence or willful misconduct of the Issuing Bank; and 42 49 (vi) Any other circumstance whatsoever, whether or not similar to any of the foregoing, provided that such other circumstance or event shall not have been the result of the gross negligence or willful misconduct of the Issuing Bank. (g) Kitty Hawk assumes all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to its use of such Letter of Credit. Neither Agent, the Issuing Bank, Lenders nor any of their respective officers or directors shall have any responsibility or liability to Kitty Hawk or any other Person for: (a) the failure of any draft to bear any reference or adequate reference to any Letter of Credit, or the failure of any documents to accompany any draft at negotiation, or the failure of any Person to surrender or to take up any Letter of Credit or to send documents apart from drafts as required by the terms of any Letter of Credit, or the failure of any Person to note the amount of any instrument on any Letter of Credit, (b) errors, omissions, interruptions or delays in transmission or delivery of any messages, (c) the validity, sufficiency or genuineness of any draft or other document, or any endorsement(s) thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent or forged or any statement therein is untrue or inaccurate in any respect, (d) the payment by the Issuing Bank to the beneficiary of any Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Letter of Credit, or (e) any other circumstance whatsoever in making or failing to make any payment under a Letter of Credit; provided, however, that, notwithstanding the foregoing, Kitty Hawk shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to Kitty Hawk, to the extent of any direct, but not indirect or consequential, damages suffered by Kitty Hawk which Kitty Hawk proves in a final nonappealable judgment were caused by (i) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit complied with the terms thereof or (ii) the Issuing Bank's willful failure to pay under any Letter of Credit after presentation to it of documents strictly complying with the terms and conditions of such Letter of Credit. The Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. ARTICLE 3 Payments Section 3.1 Method of Payment. All payments of principal, interest, fees and other amounts to be made by the applicable Borrower under this Agreement and the other Loan Documents shall be made to Agent at the Principal Office for the account of each Lender's Applicable Lending Office in Dollars and in immediately available funds, without setoff, deduction or counterclaim, not later than 11:00 a.m. (Dallas, Texas time) on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The applicable Borrower shall, at the time of making each such payment, specify to Agent the sums payable by such Borrower under this Agreement and the other Loan Documents to which such payment is to be applied (and 43 50 in the event that the applicable Borrower fails to so specify, or if an Event of Default has occurred and is continuing or if a Default would exist after the making of such payment, Agent may apply such payment to such Borrower's Loans, Reimbursement Obligations and other Obligations in such order and manner as Agent may elect, subject to Section 3.2). Upon the occurrence and during the continuation of an Event of Default, all proceeds of any Collateral and all other funds of any Borrower or Guarantor in the possession of Agent or any Lender may be applied by Agent to the Obligations in such order and manner as Agent may elect, subject to the provisions of Section 3.2 and 12.8. Notwithstanding the foregoing, however, but subject to and except as otherwise provided in Section 12.8, if an Event of Default has occurred and is continuing, Agent and Lenders agree among themselves that all such payments, proceeds and funds, shall be applied (or, in the case of Letter of Credit Liabilities consisting of the undrawn face amount of Letters of Credit, held by Agent as cash collateral for application against) pro rata to the Outstanding Revolving Credit and to the outstanding principal amount of the Term Loans A, the Term Loans B and the Term Loans C (based upon (a) the Outstanding Revolving Credit, (b) the outstanding principal amount of the Term Loans A, (c) the outstanding principal amount of the Term Loans B and (d) the outstanding principal amount of the Term Loans C, in each case as a percentage of the sum of the Outstanding Revolving Credit plus the aggregate outstanding principal amount of all of the Term Loans). Each payment received by Agent under this Agreement or any other Loan Document for the account of a Lender shall be paid promptly to such Lender, in immediately available funds, for the account of such Lender's Applicable Lending Office. Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and commitment fee, as the case may be. Section 3.2 Pro Rata Treatment. Except to the extent otherwise provided in this Agreement: (a) each Loan shall be made by Lenders under Section 2.1, each payment of commitment fees under Section 2.11(a) or 2.11(b) shall be made for the account of Lenders, and each termination or reduction of the Commitments under Section 2.13 shall be applied to the appropriate Commitments of the applicable Lenders, pro rata according to the respective unused Commitments; (b) the making, Conversion and Continuation of Loans of a particular Type (other than Conversions provided for by Section 4.4) shall be made pro rata among Lenders holding Loans of such Type according to the amounts of their respective appropriate Commitments; (c) each payment and prepayment by the applicable Borrower of principal of or interest on Loans of a particular Type shall be made to Agent for the account of Lenders holding Loans of such Type pro rata in accordance with the respective unpaid principal amounts of such Loans held by such Lenders; (d) Interest Periods for Loans of a particular Type shall be allocated among Lenders holding Loans of such Type pro rata according to the respective principal amounts held by such Lenders; and (e) Lenders (other than the Issuing Bank) shall purchase participations in the Letters of Credit pro rata in accordance with their respective Commitment Percentages of the Revolving Credit Loans Commitments. Section 3.3 Sharing of Payments, Etc. Subject to Section 12.8, if a Lender shall obtain payment of any principal of or interest on any of the Obligations due to such Lender hereunder through the exercise of any right of setoff, banker's lien, counterclaim or similar right, or 44 51 otherwise, it shall promptly purchase from the other Lenders participations in the Obligations held by other Lenders in such amounts, and make such adjustments from time to time, as shall be equitable to the end that all Lenders shall share pro rata in accordance with the unpaid principal and interest on the Obligations then due to each of them. To such end, all Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if all or any portion of such excess payment is thereafter rescinded or must otherwise be restored. Each Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any Lender so purchasing a participation in the Obligations by the other Lenders may exercise all rights of setoff, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Obligations in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness, liability or obligation of any Borrower. Section 3.4 Non-Receipt of Funds by Agent. Unless Agent shall have been notified by a Lender or the applicable Borrower ("Payor") prior to the date on which such Lender is to make payment to Agent of the proceeds of a Loan to be made by it hereunder or the applicable Borrower is to make a payment to Agent for the account of one or more of Lenders, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that Payor does not intend to make the Required Payment to Agent, Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if Payor has not in fact made the Required Payment to Agent, the recipient of such payment shall, on demand, pay to Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was so made available by Agent until the date Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such period. Section 3.5 Withholding Taxes. (a) All payments by any Borrower of principal of and interest on the Loans and the Letter of Credit Liabilities and of all fees and other amounts payable under the Loan Documents shall be made free and clear of, and without deduction by reason of, any present or future taxes, levies, duties, imposts, assessments or other charges levied or imposed by any Governmental Authority (other than any taxes imposed on the overall net income of Agent or any Lender or any lending office of Agent or such Lender by any jurisdiction in which Agent or such Lender or any such lending office is located). If any such taxes, levies, duties, imposts, assessments or other charges are so levied or imposed, each appropriate Borrower (as applicable depending upon which Borrower was obligated with respect to the original payment) will (i) make additional payments in such amounts so that every net payment of principal of and interest on the Loans and the Letter of Credit Liabilities and of all other amounts payable by it under the Loan Documents, after withholding or deduction for or on account of any such present or future taxes, levies, duties, imposts, assessments or other charges (including any tax imposed on or measured 45 52 by net income of a Lender attributable to payments made to or on behalf of a Lender pursuant to this Section 3.5 and any penalties or interest attributable to such payments), will not be less than the amount provided for herein or therein absent such withholding or deduction (provided that no Borrower shall have any obligation to pay such additional amounts to any Lender to the extent that such taxes, levies, duties, imposts, assessments or other charges are levied or imposed by reason of the failure of such Lender to comply with the provisions of Section 3.6), (ii) make such withholding or deduction and (iii) remit the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law. Without limiting the generality of the foregoing, each Borrower will, upon written request of any Lender, reimburse each such Lender for the amount of (A) such taxes, levies, duties, imports, assessments or other charges so levied or imposed by any Governmental Authority and paid by such Lender as a result of payments made by such Borrower under or with respect to the Loans other than such taxes, levies, duties, imports, assessments and other charges previously withheld or deducted by such Borrower which have previously resulted in the payment of the required additional amount to Lender, and (B) such taxes, levies, duties, assessments and other charges so levied or imposed with respect to any Lender reimbursement under the foregoing clause (A), so that the net amount received by such Lender (net of payments made under or with respect to the Loans and the Letter of Credit Liabilities) after such reimbursement will not be less than the net amount such Lender would have received if such taxes, levies, duties, assessments and other charges on such reimbursement had not been levied or imposed. Each Borrower shall furnish promptly to Agent for distribution to each affected Lender, as the case may be, upon request of such Lender, official receipts evidencing any such payment, withholding or reduction. (b) Each Borrower will indemnify Agent and each Lender (without duplication) against, and reimburse Agent and each Lender for, all present and future taxes, levies, duties, imposts, assessments or other charges (including interest and penalties) levied or collected (whether or not legally or correctly imposed, assessed, levied or collected), excluding, however, any taxes imposed on the overall net income of Agent or such Lender or any lending office of Agent or such Lender by any jurisdiction in which Agent or such Lender or any such lending office is located, on or in respect of this Agreement, any of the Loan Documents or the Obligations or any portion thereof ("reimbursable taxes"). Any such indemnification shall be on an after- tax basis, taking into account any such reimbursable taxes imposed on the amounts paid as indemnity. (c) If and to the extent actually known by such Lender, each Lender will use reasonable efforts to notify Kitty Hawk and Agent, in a reasonably prompt fashion after such assignment is made, of any assignment of the Commitments or the Loans by such Lender to an Eligible Assignee which is subject to a withholding tax that will impose any payment obligation upon a Borrower pursuant to this Section 3.5. Each Lender will use reasonable efforts to notify Kitty Hawk and Agent of any amounts to be paid by any Borrower pursuant to this Section 3.5 in a reasonably prompt fashion after such Lender becomes aware of the circumstances which require the payment of such amounts by such Borrower. A Borrower shall not be obligated to pay any amounts to a Lender pursuant to 46 53 this Section 3.5 which accrued more than 90 days prior to the date upon which such Lender initially notified such Borrower of the general circumstances which require such payment. Section 3.6 Withholding Tax Exemption. Each Lender that is not incorporated or otherwise formed under the laws of the U.S. or a state thereof agrees that it will, prior to or on or about the Closing Date or the date upon which it becomes a party to this Agreement, deliver to Kitty Hawk, for and on behalf of Borrowers, and Agent two duly completed copies of U.S. Internal Revenue Service Form 1001, 4224 or W-8, as appropriate, certifying in any case that such Lender is entitled to receive payments from Borrowers under any Loan Document without deduction or withholding of any U.S. federal income taxes. Each Lender which so delivers a Form 1001, 4224 or W-8 further undertakes to deliver to Kitty Hawk, for and on behalf of Borrowers, and Agent two additional copies of such form (or a successor form) on or before the date such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by any Borrower or Agent, in each case certifying that such Lender is entitled to receive payments from Borrowers under any Loan Document without deduction or withholding of any U.S. federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises Kitty Hawk, for and on behalf of Borrowers, and Agent that it is not capable of receiving such payments without any deduction or withholding of U.S. federal income tax. ARTICLE 4 Yield Protection and Illegality Section 4.1 Additional Costs. (a) The applicable Borrower (i.e., Kitty Hawk or Leasing) shall pay directly to each Lender from time to time, within ten days after the request of such Lender, the costs incurred by such Lender which such Lender reasonably determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any of such Loans, or any reduction in any amount receivable by such Lender hereunder in respect of any such Loans or obligations (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change occurring after the Closing Date which: (i) changes the basis of taxation of any amounts payable to such Lender under this Agreement or its Notes in respect of any of such Loans (other than income taxes and franchise taxes attributable to net income of such Lender or its Applicable Lending Office for any of such Loans by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); 47 54 (ii) imposes or modifies any reserve, special deposit, minimum capital, capital ratio or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (including any of such Loans or any deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof, but excluding the Reserve Requirement to the extent it is included in the calculation of the Adjusted Eurodollar Rate); or (iii) imposes any other condition affecting this Agreement or the Notes or any of such extensions of credit or liabilities or commitments. Each applicable Lender will notify Kitty Hawk (with a copy to Agent), with respect to the Revolving Credit Loans, and Leasing (with a copy to Agent), with respect to the Term Loans, of any event occurring after the Closing Date which will entitle such Lender to compensation pursuant to this Section 4.1(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and (if so requested by the applicable Borrower) will, if and to the extent that it is reasonably feasible for such Lender to do so given administrative and other considerations, designate a different Applicable Lending Office for the Eurodollar Loans of such Lender if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable opinion of such Lender, violate any law, rule or regulation or be in any way disadvantageous to such Lender. Each applicable Lender will furnish Kitty Hawk or Leasing, as applicable, with a certificate setting forth the basis and the amount of each request of such Lender for compensation under this Section 4.1(a). If any Lender requests compensation from a Borrower under this Section 4.1(a), the applicable Borrower may, by notice to such Lender (with a copy to Agent), suspend the obligation of such Lender to make or Continue making, or Convert Prime Rate Loans into, Eurodollar Loans until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (b) Without limiting the effect of the foregoing provisions of this Section 4.1, in the event that, by reason of any Regulatory Change, any Lender either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender which includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Lender so elects by notice to Kitty Hawk or Leasing, as applicable (with a copy to Agent), the obligation of such Lender to make or Continue making, or Convert Prime Rate Loans into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (c) Determinations and allocations by any Lender for purposes of this Section 4.1 of the effect of any Regulatory Change on its costs of maintaining its obligation to 48 55 make Loans or of making or maintaining Loans or on amounts receivable by it in respect of Loans or bankers' acceptances, and of the additional amounts required to compensate such Lender in respect of any Additional Costs, shall be conclusive in the absence of manifest error, provided that such determinations and allocations are made on a reasonable basis. Section 4.2 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if with respect to any Eurodollar Loans for any Interest Period therefor: (a) Agent determines (which determination shall be made reasonably and in good faith and shall be conclusive absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof are not being provided in the relative amounts or for the relative maturities for purposes of determining the rate of interest for such Loans as provided in this Agreement; or (b) any Lender determines (which determination shall be in good faith and shall be conclusive absent manifest error) and notifies Agent that the relevant rates of interest referred to in the definition of "Eurodollar Rate" or "Adjusted Eurodollar Rate" in Section 1.1 hereof on the basis of which the rate of interest for such Loans for such Interest Period is to be determined do not accurately reflect the cost to such Lender of making or maintaining such Loans for such Interest Period; then Agent shall give the applicable Borrower prompt notice thereof and, so long as such condition remains in effect, such Lender shall be under no obligation to make Eurodollar Loans or to Convert Prime Rate Loans into Eurodollar Loans and the applicable Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into Prime Rate Loans in accordance with the terms of this Agreement. Section 4.3 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to (a) honor its obligation to make Eurodollar Loans or (b) maintain Eurodollar Loans, then such Lender shall promptly notify the applicable Borrower thereof (with a copy to Agent) and such Lender's obligation to make or maintain Eurodollar Loans and to Convert Prime Rate Loans into Eurodollar Loans hereunder shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 4.4 hereof shall be applicable). Section 4.4 Treatment of Affected Loans. If the obligation of any Lender to make or Continue, or to Convert Prime Rate Loans into, Eurodollar Loans is suspended pursuant to Section 4.1 or 4.3 hereof, such Lender's Eurodollar Loans shall be automatically Converted into Prime Rate Loans on the last day(s) of the then current Interest Period(s) for the Eurodollar Loans (or, in the case of a Conversion required by Section 4.1(b) or 4.3 hereof, on such earlier date as such Lender may specify to the applicable Borrower (with a copy to Agent) and, unless and until such 49 56 Lender gives notice as provided below that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to such Conversion no longer exist: (a) To the extent that such Lender's Eurodollar Loans have been so Converted, all payments and prepayments of principal which would otherwise be applied to such Lender's Eurodollar Loans shall be applied instead to its Prime Rate Loans; and (b) All Loans which would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made as or Converted into Prime Rate Loans and all Loans of such Lender which would otherwise be Converted into Eurodollar Loans shall be Converted instead into (or shall remain as) Prime Rate Loans. If such Lender gives notice to the applicable Borrower (with a copy to Agent) that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to the Conversion of such Lender's Eurodollar Loans pursuant to this Section 4.4 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans are outstanding, such Lender's Prime Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by Lenders holding Eurodollar Loans and by such Lender are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. Section 4.5 Compensation. The applicable Borrower(s) shall pay to Agent for the account of each Lender, promptly upon the request of such Lender through Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense incurred by it as a result of: (a) any payment, prepayment or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the outstanding Loans pursuant to Section 11.2) on a date other than the last day of an Interest Period for such Loan; or (b) any failure by any Borrower for any reason (including, without limitation, the failure of any conditions precedent specified in Article 6 to be satisfied) to borrow, Convert or prepay a Eurodollar Loan on the date for such borrowing, Conversion or prepayment specified in the relevant notice of borrowing, prepayment or Conversion under this Agreement. The loss (as opposed to cost or expense) to be compensated under clause (a) of this Section 4.5 shall not exceed an amount equal to the excess, if any, of (i) the amount of interest which otherwise would have accrued on the principal amount so paid, prepaid or Converted to the last day of the Interest Period at the applicable rate for such Eurodollar Loan over (ii) the cost to the applicable Lender of the interest component of such Eurodollar Loan which otherwise would have accrued. 50 57 Section 4.6 Capital Adequacy. If, after the Closing Date, any Lender shall have determined that the adoption or implementation of any applicable law, rule or regulation regarding capital adequacy (excluding any law, rule or regulation in existence as of the Closing Date which implements the Basle Accord as it exists as of the Closing Date but including any other law, rule or regulation implementing the Basle Accord), or any change therein, or any change in the interpretation or administration thereof by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or compliance by such Lender (or its parent) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any central bank or other Governmental Authority (excluding any guideline or other requirement in existence as of the Closing Date which implements the Basle Accord as it exists as of the Closing Date but including any other guideline or other requirement implementing the Basle Accord), has or would have the effect of reducing the rate of return on such Lender's (or its parent's) capital as a consequence of its obligations hereunder or the transactions contemplated hereby to a level below that which such Lender (or its parent) could have achieved but for such adoption, implementation, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within ten Business Days after demand by such Lender (with a copy to Agent), the applicable Borrower(s) shall pay to such Lender such additional amount or amounts as will compensate such Lender (or its parent) for such reduction. A certificate of such Lender claiming compensation under this Section 4.6 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error, provided that the determination thereof is made on a reasonable basis. In determining such amount or amounts, such Lender may use any reasonable averaging and attribution methods. Section 4.7 Additional Interest on Eurodollar Loans. The applicable Borrower(s) shall pay, directly to Agent for the account of each Lender from time to time, additional interest on the unpaid principal amount of each Eurodollar Loan held by such Lender, from the date of the making of such Eurodollar Loan until such principal amount is paid in full, at an interest rate per annum determined by such Lender in good faith equal to the positive remainder (if any) of (a) the Adjusted Eurodollar Rate applicable to such Eurodollar Loan minus (b) the Eurodollar Rate applicable to such Eurodollar Loan; provided, however, that this sentence shall not apply to any Eurodollar Loan which is a Term Loan B the additional interest on which is included in the definition of Adjusted LIBO Rate herein. Each payment of additional interest pursuant to this Section 4.7 shall be payable by the applicable Borrower(s) on each date upon which interest is payable on such Eurodollar Loan pursuant to Section 2.4(b); provided, however, that the applicable Borrower(s) shall not be obligated to make any such payment of additional interest until the first Business Day after the date when such Borrower(s) has been informed (i) that such Lender is subject to a Reserve Requirement and (ii) of the amount of such Reserve Requirement (after which time the applicable Borrower(s) shall be obligated to make all such payments of additional interest, including, without limitation, such payment of additional interest that otherwise would have been payable by such Borrower(s) on or prior to such time had such Borrower(s) been earlier informed). Section 4.8 Mitigation of Additional Costs. It is the general intent of the parties hereto that, with respect to the matters referred to in Sections 3.5, 4.1(a) and 4.6, no Borrower shall be 51 58 discriminated against by any Lender relative to such Lender's general practice with respect to borrowers of comparable credits extended by such Lender under comparable circumstances. Accordingly, for purposes of Sections 3.5, 4.1(a) and 4.6, each Lender agrees to use reasonable efforts to ensure that the applicable Borrower is not requested to pay increased costs of a kind or type which are not also generally requested to be paid by borrowers of comparable credits extended by such Lender under comparable circumstances. In connection with any request that a Borrower pay increased costs pursuant to Section 3.5, 4.1(a) or 4.6, the Lender requesting such payment shall deliver to such Borrower and Agent information in reasonable detail specifying the events giving rise to such increased costs, the basis for determining and allocating such increased costs and a good faith estimate (if and to the extent feasible) of the amounts of such particular increased costs which may be incurred in the future. ARTICLE 5 Security Section 5.1 Collateral. To secure the full and complete payment and performance of the Obligations, each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries shall, on or before the Closing Date or, with respect to any Acquired Aircraft, on or before the date of the funding of the Revolving Credit Loans the proceeds of which are or are to be used to purchase such Acquired Aircraft, grant to Agent for the benefit of Agent and Lenders a perfected, first priority Lien on all of its right, title and interest in and to the following Property, whether now owned or hereafter acquired, pursuant to the Security Documents as more specifically provided in the Security Documents, all of which Collateral shall secure payment and performance of all of the Obligations: (a) all Aircraft and all engines, propellers, appliances and spare parts installed in or appurtenant to any such Aircraft and all products and proceeds thereof; (b) all Acquired Aircraft and all engines, propellers, appliances and spare parts installed in or appurtenant to any such Acquired Aircraft and all products and proceeds thereof; (c) all Leases; and (d) all accounts (including, without limitation, Receivables), chattel paper and general intangibles and other personal property specified in the Security Agreements. Section 5.2 Guaranties. Each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries shall guarantee the payment and performance of the Obligations pursuant to the applicable Guaranty. Section 5.3 New Collateral. Notwithstanding anything to the contrary contained in this Agreement or any Aircraft Mortgage, Leasing shall, contemporaneously with each acquisition of any equipment or enhancement to any Aircraft or any Acquired Aircraft, execute, acknowledge 52 59 and deliver to Agent, in favor of Agent for the benefit of Agent and Lenders, such agreements, documents and instruments, including, without limitation, Aircraft Mortgages or Security Agreements or amendments or modifications to Aircraft Mortgages or Security Agreements, covering such acquired equipment or enhancements as may reasonably be requested by Agent, together with evidence reasonably satisfactory to Agent and its counsel of Agent's valid, first priority Lien on the equipment and enhancements acquired. Section 5.4 Release of Collateral. (a) Accounts and Related Collateral. Subject to Section 5.4(d), Agent and Lenders agree that, upon five Business Days prior written request by Kitty Hawk and if (but only if) (i) all Revolving Credit Loans have been irrevocably paid in full, (ii) no Letter of Credit Liabilities are outstanding, and (iii) the Revolving Credit Loans Commitments have been fully terminated or expired, Agent shall (at Kitty Hawk's expense) release its Lien on the Collateral consisting of accounts created by the Security Agreements executed by Kitty Hawk and the Operating Companies; provided, however, that Agent shall not have any obligation to release its Lien on any chattel paper or any rental or other payments due or payable under any Lease or other lease of any Aircraft. (b) Single Aircraft Release. Subject to Section 5.4(d), Agent and Lenders agree that, upon five Business Days prior written request from Leasing and if (but only if) Leasing prepays the applicable outstanding principal amount of (i) the Term Loans A (with respect to any requested release of any Term Loans A Collateral) or the Term Loans B (with respect to any requested release of Term Loans B Collateral) and (ii) the Term Loans C (to the extent that proceeds of Term Loans C were used for enhancement or other purposes with respect to such Aircraft) by an aggregate amount equal to the Aircraft Release Amount attributable to a particular Aircraft, Agent shall (at Leasing's expense) release its Lien on such Aircraft; provided, however, that Agent shall have no obligation to release its Lien on such Aircraft unless Agent shall have received a then current appraisal of all Aircraft that will remain subject to Agent's Lien under the Aircraft Mortgages after giving effect to such requested release (the "Remaining Aircraft"), which appraisal must be in form, substance and content reasonably satisfactory to Agent and must be performed by an appraiser reasonably satisfactory to Agent and must show that, after giving effect to such prepayment, the aggregate outstanding principal amount of the Term Loans will be less than or equal to 80% of the appraised value of the Remaining Aircraft. (c) Acquired Aircraft Release. Subject to Section 5.4(d), Agent and Lenders agree that, upon five (5) business days prior written request from Leasing and if (but only if) Leasing prepays the applicable outstanding principal amounts of the Revolving Credit Loans used for Aircraft Acquisition of an Acquired Aircraft and attributable to such Acquired Aircraft, Agent shall (at Leasing's expense) release its Lien on such Acquired Aircraft. (d) Additional Conditions to Releases. Notwithstanding anything to the contrary contained in Section 5.4(a), 5.4(b) or 5.4(c), (i) Agent shall not be required to 53 60 release any Lien on any Collateral if a Default shall have occurred and be continuing, (ii) Agent shall not be required to execute any document effectuating any release of a Lien on terms which, in Agent's reasonable opinion, would expose Agent to liability or create any obligation not reimbursed by Borrowers or entail any warranty by Agent (other than that Agent holds the Lien and enforceably releases it), and (iii) such release shall not in any manner discharge, affect or impair any of the Obligations or any of Agent's Liens on any Collateral not required to be so released or proceeds thereof. Section 5.5 Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, without notice to the applicable Borrower or any other Person (any such notice being hereby expressly waived by Borrowers), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the applicable Borrower against any and all of the Obligations of the applicable Borrower now or hereafter existing under this Agreement, any of such Lender's Notes or any other Loan Document, irrespective of whether or not Agent or such Lender shall have made any demand under this Agreement, any of such Lender's Notes or any such other Loan Document and although such Obligations may be unmatured. Each Lender agrees promptly to notify Kitty Hawk (with a copy to Agent), with respect to the Revolving Credit Loans, and Leasing (with a copy to Agent), with respect to the Term Loans, after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights and remedies of each Lender hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have. Section 5.6 Title Insurance. Leasing shall (at its sole cost and expense) purchase owner and mortgagee policies of title insurance (or, if acceptable to Required Lenders, amendments or endorsements to existing polices of title insurance) insuring that Leasing has indefeasible title to each of the Aircraft and the Acquired Aircraft and that Agent, for the benefit of Agent and Lenders, holds a perfected, first priority Lien on each of the Aircraft and the Acquired Aircraft pursuant to the Loan Documents. The mortgagee policy of title insurance in favor of Agent shall be in an amount, shall be issued by the Title Company or another title insurance company reasonably acceptable to Agent and shall contain such terms and provisions as are reasonably acceptable to Agent. ARTICLE 6 Conditions Precedent Section 6.1 Initial Extension of Credit. The obligation of each Lender to make its initial Loan under this Agreement and the obligation of the Issuing Bank to issue the initial Letter of Credit under this Agreement are subject to the conditions precedent that Agent shall have received, on or before the Closing Date, all of the following in form and substance reasonably satisfactory to Agent and, in the case of actions to be taken, evidence that the following required actions have been taken to the satisfaction of Agent: 54 61 (a) Resolutions. Resolutions of the Board of Directors of each Kitty Hawk Company certified by its Secretary or an Assistant Secretary which authorize the execution, delivery and performance by such Kitty Hawk Company of the Loan Documents to which it is or is to be a party (including, without limitation, with respect to Leasing, resolutions which authorize the Aircraft Mortgages and the other Security Documents relating to any Acquired Aircraft that may be purchased); (b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of each Kitty Hawk Company certifying the name of each officer or other representative of such Kitty Hawk Company (i) who is authorized to sign the Loan Documents to which such Kitty Hawk Company is or is to be a party (including any certificates contemplated therein), together with specimen signatures of each such officer or other representative, and (ii) who will, until replaced by other officers or representatives duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with the Loan Documents and the transactions contemplated thereby; (c) Articles or Certificates of Incorporation, etc. The articles or certificates of incorporation, certificate of formation, certificate of limited partnership, partnership agreement or other applicable constitutional document of each Kitty Hawk Company certified by the Secretary of State or other applicable Governmental Authority of the jurisdiction of incorporation or organization of such Kitty Hawk Company and dated as of a Current Date; (d) Bylaws. The bylaws of each Kitty Hawk Company certified by the Secretary or an Assistant Secretary of such Kitty Hawk Company; (e) Governmental Certificates. Certificates of appropriate officials confirming (i) the existence and good standing, status or compliance, as applicable, of each Kitty Hawk Company in their respective jurisdictions of incorporation or organization and any and all jurisdictions where such Kitty Hawk Company is qualified to do business as a foreign corporation or other entity, each such certificate to be dated as of a Current Date, (ii) that Aircargo is an air carrier certified by the FAA and qualifies in all respects as a citizen of the U.S. as defined in the Federal Aviation Act, (iii) that Leasing is the registered owner of each of the Aircraft pursuant to proper registrations under the Federal Aviation Act, and (iv) that each of the Aircraft is airworthy as evidenced by a valid, current Certificate of Airworthiness issued by the FAA with respect to such Aircraft; (f) Revolving Credit Loans Notes. The Revolving Credit Loans Notes duly completed and executed by Kitty Hawk; (g) Term Loans A Notes. The Term Loans A Notes duly completed and executed by Leasing; 55 62 (h) Term Loans B Notes. The Term Loans B Notes duly completed and executed by Leasing; (i) Term Loans C Notes. The Term Loans C Notes duly completed and executed by Leasing; (j) Guaranties. A Guaranty executed by each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries; (k) Security Documents. The Security Documents executed by each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries, including, without limitation, Security Agreements executed by each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries and Aircraft Mortgages and Lease Assignments executed by Leasing; (l) Assignment of Notes and Liens. Documentation reasonably satisfactory to Agent executed by Wells Fargo and Bank One pursuant to which (i) all Debt of Kitty Hawk and the Kitty Hawk Operating Subsidiaries owed to Wells Fargo and Bank One and all Liens securing such Debt, and (ii) the WFB Agreements and the Bank One Agreement and all other material "Loan Documents", as such term is defined in the WFB Agreements and the Bank One Agreement, are assigned to Agent, and Agent shall have received an originally executed counterpart or a photocopy (as Agent may require) of the WFB Agreements, the Bank One Agreement and such other material "Loan Documents" and copies of all material agreements, documents, instruments and certificates required to have been delivered to Bank One in connection with the "First Drawdown", the "Second Drawdown" and the "Third Drawdown" (as such terms are defined in the Bank One Agreement) in accordance with Sections 6.1, 6.2 and 6.3 of the Bank One Agreement. (m) Insurance Policies. Copies of all insurance policies required by this Agreement and the other Loan Documents, together with loss payable endorsements naming Agent as loss payee under all such casualty insurance policies and Agent as an additional insured party under all such liability policies; (n) Financing Statements. Financing statements and all other requisite filing documents executed by Kitty Hawk and the Kitty Hawk Operating Subsidiaries necessary to perfect the Liens created pursuant to the Security Documents and to assign any previously existing Liens in favor of Wells Fargo and Bank One to Agent; (o) Title and Lien Searches. (i) Title and Lien searches performed by the Title Company confirming that (A) each of the Aircraft is duly registered with the FAA in the name of Leasing, (B) Agent, for the benefit of Agent and Lenders, has a perfected, first priority Lien in the Term Loans A Collateral and the Term Loans B Collateral as security for the payment and performance of the Obligations; (ii) a policy of title insurance (or amendments or endorsements thereto) for each of the Aircraft with Agent as named insured as required pursuant to Section 5.6; and (iii) Lien searches in the names of each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries (and in all names under which each such 56 63 Person has done business within the last five years and in all names of Persons who previously owned any of the material Properties constituting Collateral as Agent may reasonably require) in each state where each such Person maintains an office or has Property, showing no financing statements or other Lien instruments of record except for Permitted Liens and Liens not otherwise prohibited by Section 9.2 (including, without limitation, Liens on Non-Collateral Aircraft); (p) Aircraft Leases, etc. The originals of the Leases and copies of the Leases as recorded with the FAA, and the originals of all other leases pursuant to which Leasing, as lessor, leases any Aircraft or other Collateral and the originals of all chattel paper which constitutes Collateral, all of which shall be marked "Lessor's Chattel Paper Copy"; (q) Consents. Copies of all material consents necessary for the execution, delivery and performance by each of the Kitty Hawk Companies of the Loan Documents to which it is a party, including, without limitation, any consents or waivers to the grant of a Lien in the Collateral or execution of a Guaranty, which consents shall be certified by a Responsible Officer of the applicable Kitty Hawk Company as true and correct copies of such consents as of the Closing Date; (r) Permits. If and to the extent required by Agent, copies of all material Permits affecting Kitty Hawk or any of its Subsidiaries in connection with its businesses or any of the Properties owned or leased by it, and evidence reasonably satisfactory to Agent that such Permits are in full force and effect; (s) Payment of Fees and Expenses. Kitty Hawk shall have paid to Agent the agency fee referred to in Section 2.11 that is payable on the Closing Date and, to the extent required by Agent, the applicable Borrower shall have paid all fees, costs and expenses of or incurred by Agent and its counsel referred to in Section 13.1 to the extent billed on or before the Closing Date and payable pursuant to this Agreement; (t) Regulatory Approvals. Evidence reasonably satisfactory to Agent that all filings, consents or approvals with or of Governmental Authorities necessary to consummate the transactions contemplated by the Loan Documents have been made and obtained, as applicable; (u) Compliance with Laws. As of the Closing Date, each Kitty Hawk Company shall have complied with all Governmental Requirements necessary to consummate the transactions contemplated by this Agreement and the other Loan Documents; (v) No Prohibitions. No Governmental Requirement shall prohibit the consummation of the transactions contemplated by this Agreement or any other Loan Document, and no order, judgment or decree of any Governmental Authority or arbitrator shall, and no litigation or other proceeding shall be pending or threatened which would, enjoin, prohibit, restrain or otherwise adversely affect the consummation of the 57 64 transactions contemplated by this Agreement or the other Loan Documents or otherwise have a Material Adverse Effect; (w) No Material Adverse Change. As of the Closing Date, no material adverse change shall have occurred with respect to the financial condition, results of operations, business, operations, capitalization, liabilities or prospects of Kitty Hawk or any of its Subsidiaries since May 31, 1996; (x) Wiring Instructions. Prior to the Closing Date, written instructions to Agent from Kitty Hawk, with respect to the Revolving Credit Loans, and from Leasing, with respect to the Term Loans, regarding the disbursement of the proceeds of the Loans on the Closing Date, which instructions shall request that: (i) the appropriate amount of proceeds of Revolving Credit Loans to be advanced on the Closing Date shall be disbursed to Wells Fargo in payment of all existing Debt of Kitty Hawk owing to Wells Fargo under the WFB Agreement No. 3, (ii) the proceeds of the Term Loans A to be advanced on the Closing Date shall be disbursed to Wells Fargo in payment of all existing Debt owing to Wells Fargo by Leasing under the WFB Agreement No. 1 and the WFB Agreement No. 2, and (iii) the proceeds of the Term Loans B to be advanced on the Closing Date shall be disbursed to Bank One in payment of all existing Debt of Leasing owing to Bank One by Leasing under the Bank One Agreement (in each case to the extent necessary to pay in full such Debt of Kitty Hawk or Leasing, as applicable) shall be immediately wire transferred, or otherwise paid, directly to the holders of such Debt; (y) Financial Statements. Copies of each of the financial statements referred to in Section 7.2; (z) Opinions of Counsel. Favorable opinions of counsel for the Kitty Hawk Companies relating to the Loan Documents and the Kitty Hawk Companies and such other matters as Agent may reasonably request; (aa) Accountant's Letter. A letter from Kitty Hawk authorizing the independent public accountant of the Kitty Hawk Companies to communicate with Agent and Lenders and acknowledging reliance by Agent and Lenders on past, present and future financial statements; (bb) Schedules. All schedules attached or to be attached to this Agreement (if any, to the extent that such schedules are not attached as of the execution of this Agreement) shall be satisfactory in form and substance to Agent in its sole discretion; (cc) Appraisals. A current "desk top" appraisal of each of the Aircraft, which appraisal must be in form, substance and content reasonably satisfactory to Agent and must be performed by an appraiser reasonably satisfactory to Agent and must show that the aggregate appraisal value of the Aircraft is $42,700,000 or more; 58 65 (dd) Letters of Credit. With respect to the issuance of a Letter of Credit, the Letter of Credit Agreement in the form required by the Issuing Bank with respect thereto executed by Kitty Hawk; and (ee) Payment of Amounts owed under the WFB Agreements and the Bank One Agreement. Kitty Hawk or Leasing (as applicable), i.e., whichever is the primary obligor with respect to such indebtedness under the WFB Agreements and the Bank One Agreement, shall have paid to Wells Fargo or Bank One (as applicable), i.e., whichever is the obligee with respect to such indebtedness under the WFB Agreements and the Bank One Agreement, all accrued interest, fees, costs and expenses and other amounts payable by it under the WFB Agreements and the Bank One Agreement, respectively. The Kitty Hawk Companies shall deliver, or cause to be delivered, to Agent sufficient counterparts of each agreement, document or instrument to be received by Agent under this Section 6.1 to permit Agent to distribute a copy of the same to each of Lenders. After the request of either Kitty Hawk or Leasing, Agent shall inform Kitty Hawk and Leasing in writing as to the status of satisfaction of the conditions precedent set forth in this Section 6.1. Section 6.2 All Extensions of Credit. The obligation of each Lender to make any Loan (including the initial Loans) under this Agreement and the obligation of the Issuing Bank to issue any Letter of Credit (including the initial Letter of Credit) under this Agreement are subject to the satisfaction of each of the conditions precedent set forth in Section 6.1 and each of the following additional conditions precedent: (a) No Default or Material Adverse Effect. No Default or Material Adverse Effect shall have occurred and be continuing, or would result from such Loan or Letter of Credit; (b) Representations and Warranties. All of the representations and warranties of the Kitty Hawk Companies contained in Article 7 hereof and in the other Loan Documents shall be true and correct on and as of the date of such Loan or Letter of Credit with the same force and effect as if such representations and warranties had been made on and as of such date; and (c) Additional Documentation. Agent shall have received such additional approvals, opinions, agreements, documents, instruments and certificates as Agent may reasonably request. Each notice of borrowing or request for the issuance of a Letter of Credit by the applicable Borrower hereunder shall constitute a representation and warranty by such Borrower that the conditions precedent set forth in Sections 6.2(a) and (b) have been satisfied (both as of the date of such notice and, unless Kitty Hawk, with respect to the Revolving Credit Loans, or Leasing, with respect to the Term Loans, otherwise notifies Agent prior to the date of such borrowing or Letter of Credit, as of the date of such borrowing or Letter of Credit). 59 66 Section 6.3 Additional Conditions Precedent to Revolving Credit Loans. The obligation of each Revolving Credit Loans Lender to make any Revolving Credit Loan (other than a Revolving Credit Loan which Leasing specifies to Agent is being used for, and may be used for, general corporate purposes as provided in clause (i) of Section 2.10(a)), the proceeds of which will be used in whole or in part for any Aircraft Acquisition, is subject to the satisfaction of each of the conditions precedent set forth in Sections 6.1 and 6.2 and each of the following additional conditions precedent, all of which must be in form and substance or otherwise satisfactory to Agent: (a) Leasing shall have delivered the Aircraft Acquisition Letter to Agent relating to the Acquired Aircraft to be purchased pursuant to such Aircraft Acquisition; (b) Leasing shall have executed and delivered to Agent an Aircraft Mortgage identical in form and substance to the Aircraft Mortgage relating to the Aircraft (except for the description of the Acquired Aircraft and the reference to amendment and restatement of prior aircraft mortgages) pursuant to which Agent for the benefit of Agent and Lenders shall have a perfected, first priority Lien on such Acquired Aircraft as security for payment and performance of the Obligations and such Aircraft Mortgage shall have been appropriately filed with the FAA; (c) Leasing shall have delivered to Agent: (i) Title and Lien searches performed by the Title Company or another aircraft title company reasonably acceptable to Agent confirming that (A) the Acquired Aircraft is duly registered with the FAA in the name of Leasing, (B) Agent, for the benefit of Agent and Lenders, has a perfected, first priority Lien in the Acquired Aircraft as security for the payment and performance of the Obligations; (ii) A policy or the Title Company's unconditional commitment to issue a policy of mortgagee title insurance (or amendments or endorsements thereof) for the Acquired Aircraft with Agent as named insured as required pursuant to Section 5.6; and (iii) Lien Searches in the name of Leasing (and in all names under which Leasing has done business within the last five years and in the names of all Persons who previously owned the Acquired Aircraft, as Agent may require) in each state where each such Person maintains an office or has Property, showing no financing statements or other Lien instruments of record affecting the Acquired Aircraft; (d) Leasing shall have received or filed (and shall have confirmed to Agent that it has received or filed and provided a copy thereof to Agent) each of the following: (i) an executed warranty bill of sale for such Property executed by the seller; 60 67 (ii) an executed FAA Bill of Sale (AC Form 8050-2) (acceptable to the FAA and Agent for recording with the FAA) for such Property, executed by the seller, and validly transferring title to such Property to Leasing on the FAA's records; (iii) an executed FAA Aircraft Registration Application (AC Form 8050-1) for such Property for registering such Property in the name of the Leasing; (iv) a valid airworthiness certificate for such Property (FAA Form 8100-2); and (v) releases of all Liens (if any) encumbering such Property or any part thereof, other than materialmen's or mechanic's Liens not filed of record; (e) Additional Documentation. Agent shall have received such additional approvals, opinions or documents as it or its legal counsel, Jenkens & Gilchrist, P.C., may reasonably request, in connection with the perfection and priority of its Lien on such Acquired Aircraft. Section 6.4 Additional Conditions Precedent to Term Loans C. The obligation of each Term Loans C Lender to make any Term Loan C is subject to the satisfaction of each of the conditions precedent set forth in Sections 6.1 and 6.2 and each of the following additional conditions precedent, all of which must be in form and substance or otherwise satisfactory to Agent: (a) Leasing shall have notified Agent of the proposed specific use of the proceeds of such Term Loans C (which use of proceeds shall comply with Section 2.10(d)) including, without limitation, the specific Aircraft or Other Aircraft to be enhanced or modified with such proceeds, and the principal amount of such Term Loans C then requested to be made shall not exceed 80% of the cost of the labor and/or enhancements to the Aircraft or Other Aircraft to be financed with such proceeds; and (b) Leasing shall have delivered to Agent a certificate certifying as to the matters referred to in clause (a) preceding, together with a true and correct copy of each invoice for materials, supplies and/or labor to be financed with the proceeds of such Term Loans C. Section 6.5 Closing Certificates. The Kitty Hawk Companies shall, concurrently with the Closing Date, execute and deliver to Agent a Closing Certificate in form and substance reasonably satisfactory to Agent certifying as to the satisfaction of each of the conditions precedent set forth in Section 6.1 and 6.2 which are required to be satisfied on or before the Closing Date. 61 68 ARTICLE 7 Representations and Warranties Each of the Kitty Hawk Companies jointly and severally represents and warrants to Agent and Lenders that the following statements are, and after giving effect to the funding of the initial Loans on the Closing Date will be, true, correct and complete: Section 7.1 Corporate Existence. Each Kitty Hawk Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority to own its Properties and carry on its business as now being or as proposed to be conducted, and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a Material Adverse Effect. Each Kitty Hawk Company has the power, authority and legal right to execute, deliver and perform its obligations under the Loan Documents to which it is or may become a party. Except for Leasing, Aircargo and Charters, neither Kitty Hawk nor any of its Subsidiaries owns any Subsidiary which is an operating company or is engaged in any material business operations. Section 7.2 Financial Statements. Kitty Hawk has delivered to Agent and Lenders (i) audited consolidated and consolidating financial statements of the Kitty Hawk Companies as of and for the fiscal years ended August 31, 1994 and 1995 and (ii) unaudited interim financial statements as of and for the periods ended November 30, 1995 and February 29, 1996 and audited interim financial statements as of and for the period ended May 31, 1996. Such financial statements are complete, true and correct, have been prepared in accordance with GAAP and fairly and accurately present, on a consolidated and consolidating (where applicable) basis, the financial condition of Kitty Hawk and its consolidated Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither Kitty Hawk nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments except as referred to or reflected in such financial statements. There has not been, as of the Closing Date, any material adverse change in the business, condition (financial or otherwise), operations, prospects or Properties of any Kitty Hawk Company since the effective dates of the most recent applicable financial statements referred to in this Section 7.2. Section 7.3 Corporate Action; No Breach. The execution, delivery and performance by each Kitty Hawk Company of the Loan Documents to which it is or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite corporate or other entity action on the part of each Kitty Hawk Company and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) the articles or certificates of incorporation or bylaws of any Kitty Hawk Company, (ii) any Governmental Requirement or any order, writ, injunction or decree of any Governmental Authority or arbitrator, or (iii) any agreement, document or instrument to which any Kitty Hawk Company is a party or by which any Kitty Hawk Company or any of its Property is bound or 62 69 subject, or (b) constitute a default under any such agreement, document or instrument, or result in the creation or imposition of any Lien (except a Lien in favor of Agent for and on behalf of Lenders under the Security Documents as provided in Article 5) upon any of the revenues or Property of any Kitty Hawk Company. Section 7.4 Operation of Business. Each Kitty Hawk Company possesses all Permits, franchises, licenses, patents, copyrights, trademarks, tradenames and authorizations or rights thereto necessary or appropriate to conduct its business substantially as now conducted and as presently proposed to be conducted. None of such Persons is in violation of any valid rights of others with respect to any of the foregoing. Section 7.5 Litigation and Judgments. Except as disclosed on Schedule 7.5 hereto, there is no action, suit, investigation or proceeding before or by any Governmental Authority or arbitrator pending or, to the knowledge of any Kitty Hawk Company, threatened against or affecting any Kitty Hawk Company that could, if adversely determined, reasonably be expected to have a Material Adverse Effect. There are no outstanding judgments against any Kitty Hawk Company. No Kitty Hawk Company has received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed to any liability or disadvantage that could reasonably be expected to have a Material Adverse Effect. Section 7.6 Rights in Properties; Liens. Leasing is the true and lawful owner of each of the Aircraft and is the registered owner of each of the Aircraft pursuant to proper registrations under the Federal Aviation Act. Aircargo is an air carrier certified by the FAA and qualifies in all respects as a citizen of the U.S. as defined in the Federal Aviation Act. Each of the Aircraft is in freight configuration and is presently leased by Leasing as lessor to Aircargo as lessee pursuant to the applicable Lease. Each of the Leases is valid and enforceable in accordance with its terms. Each of the Kitty Hawk Companies has good and indefeasible title to or, with respect to leasehold interests, valid leasehold interests in its Properties and assets, real and personal, including the Properties, assets and leasehold interests reflected in the financial statements described in Section 7.2, and none of the Properties or leasehold interests (excluding Non-Collateral Aircraft) of any Kitty Hawk Company is subject to any Lien, except Permitted Liens. Section 7.7 Enforceability. The Loan Documents have been duly and validly executed and delivered by each of the Kitty Hawk Companies that is a party thereto as of the Closing Date, and such Loan Documents constitute the legal, valid and binding obligations of the Kitty Hawk Companies, enforceable against the Kitty Hawk Companies in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights and general principles of equity. Section 7.8 Approvals. No authorization, approval or consent of, and no filing or registration with or notice to, any Governmental Authority or third party is or will be necessary for the execution, delivery or performance by any Kitty Hawk Company of any of the Loan Documents to which it is or will be a party or for the validity or enforceability thereof, except for such consents, approvals and filings as have been (or will have been as of the Closing Date) validly obtained or made and are in full force and effect. None of the Kitty Hawk Companies has 63 70 failed to obtain any material governmental consent, approval, license, Permit, franchise or other governmental authorization necessary for the ownership or use of any of its Properties or the conduct of its business. Section 7.9 Debt. As of the Closing Date, neither Kitty Hawk nor any of its Subsidiaries has any Debt except for (a) the Obligations, and (b) the Debt disclosed on Schedule 7.9 hereto. Section 7.10 Taxes. Except as disclosed on Schedule 7.10 hereto, the Kitty Hawk Companies have filed all tax returns (federal, state and local) required to be filed, including all income, franchise, employment, Property and sales tax returns, and have paid all of their respective liabilities for taxes, assessments, governmental charges and other levies that are due and payable. No Kitty Hawk Company is aware of any pending investigation of any Kitty Hawk Company or any of its Subsidiaries by any taxing authority or of any pending but unassessed tax liability of any Kitty Hawk Company or any of its Subsidiaries. No tax Liens have been filed and, except as disclosed on Schedule 7.10, no claims are being asserted against any Kitty Hawk Company or any of its Subsidiaries with respect to any taxes. Except as disclosed on Schedule 7.10 hereto, as of the Closing Date, none of the income tax returns of any Kitty Hawk Company or any of its Subsidiaries is under audit. The charges, accruals and reserves on the books of the Kitty Hawk Companies in respect of taxes or other governmental charges are in accordance with GAAP. Section 7.11 Margin Securities. Neither any Kitty Hawk Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Section 7.12 ERISA. Neither any Kitty Hawk Company nor any ERISA Affiliate maintains or contributes to, or has any obligation under, any Pension Plan other than the Pension Plans identified on Schedule 7.12. Each Plan of each Kitty Hawk Company is in compliance in all material respects with all applicable provisions of ERISA and the Code. Neither a Reportable Event nor a Prohibited Transaction has occurred within the last 60 months with respect to any Plan. No notice of intent to terminate a Pension Plan has been filed, nor has any Pension Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Pension Plan, nor has the PBGC instituted any such proceedings. Neither any Kitty Hawk Company nor any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan. Each Kitty Hawk Company and each ERISA Affiliate has met its minimum funding requirements under ERISA and the Code with respect to all of its Plans subject to such requirements, and, as of the Closing Date, except as specified on Schedule 7.12, the present value of all vested benefits under each funded Plan (exclusive of any Multiemployer Plan) do not and will not exceed the fair market value of all such Plan assets allocable to such benefits, as determined on the most recent valuation date of such Plan and in accordance with ERISA. Neither any Kitty Hawk Company nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. No litigation is pending or threatened 64 71 concerning or involving any Plan. There are no unfunded or unreserved liabilities (on either a going-concern basis or a wind-up basis) relating to any Plan that could, individually or in the aggregate, have a Material Adverse Effect if such Kitty Hawk Company were required to fund or reserve such liability in full. As of the Closing Date, no funding waivers have been or will have been requested or granted under Section 412 of the Code with respect to any Plan. As of the Closing Date, no unfunded or unreserved liability for benefits under any Plan exceed $100,000, with respect to any Plan, or $100,000 in the aggregate with respect to all such Plans or Plans (exclusive of any Multiemployer Plans) on either a going-concern basis or a wind-up basis. Section 7.13 Disclosure. No written statement, information, report, representation or warranty made by any Kitty Hawk Company in any Loan Document or furnished to Agent or any Lender by any Kitty Hawk Company in connection with the Loan Documents or any transaction contemplated hereby or thereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to any Kitty Hawk Company which has had a Material Adverse Effect or which could reasonably be expected to have a Material Adverse Effect. Section 7.14 Capitalization. (a) On and as of the Closing Date, the number and class of the authorized Capital Stock, the par value per share and the number of shares issued and outstanding with respect to the Capital Stock of each of the Subsidiaries of Kitty Hawk is as set forth on Schedule 7.14. Kitty Hawk owns all of the issued and outstanding Capital Stock each of its Subsidiaries. (b) On and as of the Closing Date, Kitty Hawk has no Subsidiaries other than Leasing, Aircargo, Charters and Skyfreighters (an inactive Texas corporation), and none of Kitty Hawk's Subsidiaries has any Subsidiaries. Skyfreighters is not an operating company, is not engaged in any business and does not have any material assets or Properties. (c) All of the issued and outstanding Capital Stock of each of the Subsidiaries of Kitty Hawk has been validly issued and is fully paid and nonassessable, and there are no outstanding subscriptions, options, warrants, calls or rights (including preemptive rights) to acquire, and no outstanding securities or instruments convertible into, Capital Stock of any Subsidiary of Kitty Hawk. Section 7.15 Agreements. No Kitty Hawk Company is a party to any indenture, loan, credit agreement, stock purchase agreement or any lease or other agreement, document or instrument, or subject to any charter or corporate restriction, that could reasonably be expected to have a Material Adverse Effect. No Kitty Hawk Company is in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, document or instrument material to its business to which it is a party. 65 72 Section 7.16 Compliance with Laws. No Kitty Hawk Company is in violation in any material respect of any Governmental Requirement. Section 7.17 Investment Company Act. No Kitty Hawk Company is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 7.18 Public Utility Holding Company Act. No Kitty Hawk Company is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.19 Environmental Matters. (a) Except for instances of noncompliance with or exceptions to any of the following representations and warranties that could not have, individually or in the aggregate, a Material Adverse Effect: (i) Each Kitty Hawk Company and all of its Properties and operations is in full compliance with all Environmental Laws. No Kitty Hawk Company is aware of, or has received any written notice of, any past, present or future conditions, events, activities, practices or incidents which may interfere with or prevent the compliance or continued compliance by any Kitty Hawk Company with all Environmental Laws; (ii) Each Kitty Hawk Company has obtained all Permits that are required under applicable Environmental Laws, and all such Permits are in good standing and all such Persons are in compliance with all of the terms and conditions thereof; (iii) No Hazardous Materials exist on, about or within or have been (to the knowledge of any Kitty Hawk Company) or are being used, generated, stored, transported, disposed of on or Released from any of the Properties of any Kitty Hawk Company except in compliance with applicable Environmental Laws. The use which each Kitty Hawk Company makes and intends to make of its respective Properties will not result in the use, generation, storage, transportation, accumulation, disposal or Release of any Hazardous Material on, in or from any of its Properties except in compliance with applicable Environmental Laws; (iv) No Kitty Hawk Company nor any of its currently or previously owned or leased Properties or operations are subject to any outstanding or, to the knowledge of any Kitty Hawk Company, threatened order from or agreement with any Governmental Authority or other Person or subject to any judicial or administrative proceeding with respect to (A) any failure to comply with Environmental Laws, (B) any Remedial Action, or (C) any Environmental Liabilities; 66 73 (v) There are no conditions or circumstances associated with the currently or previously owned or leased Properties or operations of any Kitty Hawk Company that could reasonably be expected to give rise to any Environmental Liabilities or claims resulting in any Environmental Liabilities. No Kitty Hawk Company is subject to, or has received written notice of, any claim from any Person alleging that any Kitty Hawk Company is or will be subject to any Environmental Liabilities; (vi) No Property of any Kitty Hawk Company is a treatment facility (except for the recycling of Hazardous Materials generated on-site and the treatment of liquid wastes subject to the Clean Water Act or for temporary storage of Hazardous Materials generated on-site prior to their disposal off-site) or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., regulations thereunder or any comparable provision of state law. Each Kitty Hawk Company is in compliance with all applicable financial responsibility requirements of all Environmental Laws; and (vii) No Kitty Hawk Company has failed to file any notice required under applicable Environmental Law reporting a Release. (b) No Lien arising under any Environmental Law that could have, individually or in the aggregate, a Material Adverse Effect has attached to any Property or revenues of any Kitty Hawk Company. Section 7.20 Labor Disputes and Acts of God. Neither the business nor the Properties of any Kitty Hawk Company are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance) that is having or could have a Material Adverse Effect. Section 7.21 Material Contracts. Attached hereto as Schedule 7.21 is a complete list, as of the Closing Date, of all Material Contracts of the Kitty Hawk Companies, other than the Loan Documents. All of the Material Contracts are in full force and effect and no Kitty Hawk Company is in default under any Material Contract and no other Person that is a party thereto is, to the knowledge of any Kitty Hawk Company, in default under any of the Material Contracts. None of the Material Contracts prohibit the transactions contemplated under the Loan Documents. Section 7.22 Outstanding Securities. As of the Closing Date, all outstanding securities (as defined in the Securities Act of 1933, as amended, or any successor thereto, and the rules and regulations of the Securities and Exchange Commission thereunder) of each Kitty Hawk Company have been offered, issued, sold and delivered in compliance with all applicable Governmental Requirements. 67 74 Section 7.23 Solvency. Each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries, as a separate entity, is Solvent, both before and after giving effect to the Loans. Section 7.24 Employee Matters. Except as set forth on Schedule 7.24, as of the Closing Date (a) neither Kitty Hawk nor any of its Subsidiaries is subject to any collective bargaining agreement, and (b) no petition for certification or union election is pending with respect to the employees of Kitty Hawk or any of its Subsidiaries, and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of Kitty Hawk or any of its Subsidiaries. There are no strikes, slowdowns, work stoppages or controversies pending or, to the knowledge of the Kitty Hawk Companies, threatened against any Kitty Hawk Company which could have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 7.24, as of the Closing Date, no Kitty Hawk Company is subject to an employment contract with any executive officer or director of a Kitty Hawk Company. Section 7.25 Insurance. Schedule 7.25 sets forth an accurate summary description of all policies of insurance (including, without limitation, the coverage and deductibles thereunder, the limits of such insurance and the issuers of such insurance) that will be in effect as of the Closing Date for the Kitty Hawk Companies. To the extent such policies have not been replaced, no notice of cancellation has been received for such policies and the Kitty Hawk Companies are in compliance with all of the terms and conditions of such policies. Section 7.26 Common Enterprise. Each of the Kitty Hawk Companies is a member of an affiliated group, and the Kitty Hawk Companies are collectively engaged in a common enterprise with one another. Each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries expects to derive substantial benefit (and may reasonably be expected to derive substantial benefit), directly and indirectly, from all Loans and Letters of Credit contemplated by this Agreement, both in its separate capacity and as a member of an affiliated and integrated group. Each of Kitty Hawk and the Kitty Hawk Operating Subsidiaries will receive reasonably equivalent value in exchange for the Collateral and Guaranties being provided by it as security for the payment and performance of the Obligations. Section 7.27 Compliance with the WFB Agreements and the Bank One Agreement. Each Kitty Hawk Company is in compliance, in all material respects, with the WFB Agreements and the Bank One Agreement and all other "Loan Documents" as such term is defined in the WFB Agreements and the Bank One Agreement. Without limiting the generality of the foregoing, to the knowledge of each Kitty Hawk Company, all conditions precedent to the obligations of Wells Fargo and Bank One to make loans to Kitty Hawk or Leasing (as applicable) under the WFB Agreements and the Bank One Agreement, respectively, were previously complied with in all material respects. 68 75 ARTICLE 8 Affirmative Covenants Each Kitty Hawk Company jointly and severally covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder or any Letter of Credit remains outstanding, it will perform and observe, or cause to be performed and observed, the following covenants: Section 8.1 Reporting Requirements. Kitty Hawk will furnish to Agent and each Lender: (a) Annual Financial Statements. As soon as available, and in any event within 90 days after the end of each fiscal year of Kitty Hawk, beginning with the fiscal year ending August 31, 1996: (i) a copy of the annual audit report of the Kitty Hawk Companies for such fiscal year containing, on a consolidated basis, a balance sheet and statements of income, shareholders' equity and sources and uses of cash as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited and certified by Ernst & Young or other independent certified public accountants of recognized standing reasonably acceptable to Agent and containing no qualification thereto except as may be reasonably acceptable to Agent, to the effect that such report has been prepared in accordance with GAAP; (ii) consolidating schedules with respect to the balance sheet, statement of income, shareholders' equity and sources and uses of cash for each of the Kitty Hawk Companies; and (iii) a certificate of such independent certified public accountants to Agent (A) stating that to their knowledge no Default has occurred and is continuing, or if in their opinion a Default has occurred and is continuing, stating the nature thereof, and (B) confirming the calculations set forth in the officer's certificate referred to in Section 8.1(c) delivered concurrently therewith; (b) Quarterly Financial Statements. As soon as available, and in any event within 45 days after the end of each of the quarters of each fiscal year of Kitty Hawk, beginning with the fiscal quarter ending November 30, 1996, unless Kitty Hawk's fiscal year end shall have previously been changed to December 31, then September 30, 1996, an unaudited financial report of the Kitty Hawk Companies as of the end of such fiscal quarter and for the portion of the fiscal year then ended containing, on a consolidated and consolidating basis, balance sheets and statements of income, shareholders' equity and sources and uses of cash, together with consolidating schedules and worksheets, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail certified by a Responsible Officer of Kitty Hawk to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments) the financial condition and results of operations of the Kitty Hawk Companies, on a consolidated and consolidating basis, at the date and for the periods indicated therein; 69 76 (c) Compliance Certificate. Concurrently with the delivery of each of the financial statements referred to in Sections 7.1(a) and 7.1(b), a certificate of a Responsible Officer of Kitty Hawk (i) stating that to the best of such officer's knowledge, no Default has occurred and is continuing, or if a Default has occurred and is continuing, stating the nature thereof and the action that has been taken and is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with Sections 10.1, 10.2, 10.3, 10.4 and 10.5. (d) Applicable Eurodollar Margin Certificate. Concurrently with the delivery of each of the financial statements referred to in Section 8.1(b), a certificate of a Responsible Officer of each Borrower showing in reasonable detail the calculation of the Applicable Eurodollar Margin as of the next Calculation Date; (e) Management Letters. Promptly upon receipt thereof, a copy of any management or comment letter submitted to Kitty Hawk or any of its Subsidiaries by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects, or Properties of Kitty Hawk or any of its Subsidiaries; (f) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any Governmental Authority or arbitrator affecting Kitty Hawk or any of its Subsidiaries which, if determined adversely to Kitty Hawk or such Subsidiary, could reasonably be expected to have a Material Adverse Effect; (g) Notice of Default. As soon as possible and in any event within 5 days after the occurrence of each Default, a written notice setting forth the details of such Default and the action that the Kitty Hawk Companies have taken and propose to take with respect thereto; (h) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which any Kitty Hawk Company or any of its ERISA Affiliates files with or receives from the PBGC or the U.S. Department of Labor under ERISA, and as soon as possible and in any event within five days after such Person knows or has reason to know that any Pension Plan is insolvent, or that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or Multiemployer Plan, or that the PBGC or any Kitty Hawk Company or any ERISA Affiliate has instituted or will institute proceedings under ERISA to terminate or withdraw from or reorganize any Pension Plan, a certificate of a Responsible Officer of such Kitty Hawk Company setting forth the details as to such insolvency, withdrawal, Reportable Event, Prohibited Transaction or termination and the action such Kitty Hawk Company has taken and proposes to take with respect thereto; (i) Reports to Other Creditors. Promptly after the furnishing thereof, copies of each written statement or report required to be furnished by any Kitty Hawk Company to any other party pursuant to the terms of any indenture, loan, or credit or similar 70 77 agreement and not otherwise required to be furnished to Agent pursuant to this Section 8.1; (j) Notice of Material Adverse Effect. As soon as possible and in any event within five days after the occurrence thereof, written notice of any matter that could reasonably be expected to have a Material Adverse Effect; (k) Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by any Kitty Hawk Company to its stockholders generally and one copy of each regular, periodic or special report, registration statement or prospectus filed by any Kitty Hawk Company with any securities exchange or the Securities and Exchange Commission or any successor agency, and of all press releases and other statements made by any of the Kitty Hawk Companies to the public containing material developments in its business; (l) Notice of New Subsidiaries. Concurrently with the delivery of each of the financial statements referred to in Sections 8.1(a) and 8.1(b), notice of the creation or acquisition of any Subsidiary of any Kitty Hawk Company after the Closing Date and subsequent to the last delivery of such information; (m) Appraisals. From time to time upon the request of Agent, (i) appraisals of the Aircraft reasonably satisfactory in form and substance to Agent (which appraisals shall be at the expense of Leasing except if and to the extent that such appraisals are required by Agent on more than one occasion during any fiscal year of Kitty Hawk) and (ii) within 30 days of Agent's request therefor, an appraisal of each Acquired Aircraft reasonably satisfactory in form and substance to Agent (which appraisal shall be at the expense of Leasing) and based on an as modified or completed basis; (n) Insurance. Within 60 days prior to the end of each fiscal year of Kitty Hawk, a report in form and substance reasonably satisfactory to Agent summarizing all material insurance coverage maintained by the Kitty Hawk Companies as of the date of such report and all material insurance coverage planned to be maintained by such Persons in the subsequent fiscal year; (o) Plan Information. From time to time, as reasonably requested by Agent or any Lender, such books, records and other documents relating to any Pension Plan as Agent or any Lender shall specify; prior to any termination, partial termination or merger of a Pension Plan covering employees of any Kitty Hawk Company or any ERISA Affiliate, or a transfer of assets of a Pension Plan covering employees of any Kitty Hawk Company or any ERISA Affiliate, written notification thereof; promptly upon any Kitty Hawk Company's receipt thereof, a copy of any determination letter or advisory opinion regarding any Pension Plan received from any Governmental Authority and any amendment or modification thereto as may be necessary as a condition to obtaining a favorable determination letter or advisory opinion; and promptly upon the occurrence 71 78 thereof, written notification of any action requested by any Governmental Authority to be taken as a condition to any such determination letter or advisory opinion; (p) Environmental Assessments and Notices. Promptly after the receipt thereof, a copy of each environmental assessment (including any analysis relating thereto) prepared with respect to any real Property of any Kitty Hawk Company and each notice sent by any Governmental Authority relating to any failure or alleged failure to comply with any Environmental Law or any liability with respect thereto; and (q) General Information. Promptly, such other information concerning any Kitty Hawk Company as Agent may from time to time reasonably request. Section 8.2 Maintenance of Existence; Conduct of Business. Each Kitty Hawk Company will preserve and maintain its corporate or other entity existence (except for mergers of Subsidiaries permitted by Section 9.3) and all of its material leases, privileges, licenses, Permits, franchises, qualifications, patents, trademarks, copyrights, intangible Property and rights that are necessary or appropriate in the ordinary conduct of its business (including, without limitation and as to Aircargo, its Federal Aviation Act Part 121 air carrier operating certificate). Each Kitty Hawk Company will conduct its business in an orderly and efficient manner in accordance with good business practices. All Aircraft and Other Aircraft, other than Non-Collateral Aircraft, will be maintained as ready and available for regular, uninterrupted revenue generating operation in compliance with all laws and FAA regulations. Section 8.3 Maintenance of Properties; Hush Kits. Leasing will, at all times, have good and indefeasible title to each of the Aircraft and each of the Leases free and clear of any Lien other than the perfected, first priority Liens of Agent for the benefit of Agent and Lenders pursuant to the Loan Documents as security for the Obligations. Each Kitty Hawk Company will maintain, keep and preserve all of its material Properties necessary, useful or appropriate in the proper conduct of its business in good repair, working order and condition (ordinary wear and tear excepted) and make all necessary repairs, renewals, replacements, betterments and improvements thereof. All Aircraft and Other Aircraft maintenance and service will be performed in compliance with all airworthiness directives and mandatory service bulletins and any and all repairs, modifications and conversions of the Aircraft and of Other Aircraft and the installation of Hush Kits shall be done in accordance with any and all FAA specifications and requirements. The Kitty Hawk Companies (a) will cause a Hush Kit to be added to each of the Aircraft (which does not presently have a Hush Kit) on or before December 31, 1998, or (b) if and to the extent that such a Hush Kit is not added to any such Aircraft by such date, will, from time to time within 30 days after any request by Agent and pursuant to an Aircraft Mortgage and other Security Documents reasonably satisfactory to Agent, grant to Agent a perfected, first priority Lien (as security for the Obligations) on other Stage 3 (as so qualifying under the Airport Noise and Capacity Act of 1990 and the regulations promulgated thereunder) Kitty Hawk Aircraft reasonably acceptable to Agent that have an aggregate fair market value at least equal to the value of the Aircraft specified by Agent which does not then have a Hush Kit in exchange for Agent's release of its Lien on such Aircraft specified by Agent. 72 79 Section 8.4 Taxes and Claims. Each Kitty Hawk Company will pay or discharge at or before maturity or before becoming delinquent (a) all taxes, levies, assessments and governmental charges imposed on it or its income or profits or any of its Property and (b) all lawful claims for labor, material and supplies, which, if unpaid, might become a Lien upon any of its Property; provided, however, that no Kitty Hawk Company will be required to pay or discharge any tax, levy, assessment or governmental charge or claim for labor, material or supplies whose amount, applicability or validity is being contested in good faith by appropriate proceedings being diligently pursued and for which adequate reserves have been established under GAAP. Section 8.5 Insurance. (a) Public Liability and Property Damage Insurance. The Kitty Hawk Companies shall carry or cause to be carried with respect to the Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, and with respect to all other Kitty Hawk Aircraft in operation, at their expense, comprehensive airline liability (including, without limitation, passenger, contractual, bodily injury, cargo and property damage liability) insurance (i) in an amount for each such aircraft of not less than (a) $50,000,000 per occurrence combined single limit with respect to each of Aircraft A, Aircraft B, Aircraft G and Aircraft H and all other Kitty Hawk Aircraft except Boeing 727-200 series aircraft and (b) $200,000,000 per occurrence combined single limit with respect to each of Aircraft C, Aircraft D, Aircraft E, Aircraft F, Aircraft I and Aircraft J and all other Kitty Hawk Aircraft that are Boeing 727-200 series aircraft, (ii) of the type and covering the same risks as from time to time are applicable to similar aircraft owned or leased by the Kitty Hawk Companies, (iii) of the type customarily carried by U.S. commercial air carriers similarly situated with the applicable Kitty Hawk Company and operating similar aircraft and engines and covering risks of the kind customarily insured against by such carriers, and (iv) which is maintained in effect with insurers of recognized reputation and responsibility. (b) Insurance Against Loss or Damage. The Kitty Hawk Companies shall maintain or cause to be maintained in effect, at their expense, with insurers of recognized reputation and responsibility, all-risk aircraft hull insurance covering the Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, and all-risk property damage insurance covering engines and parts while removed from such aircraft and not replaced by similar components title to which is vested in Leasing free and clear of all Liens, which insurance shall include, without limitation, except with respect to all-risk property damage insurance and to the extent commercially available, aircraft war risk and governmental confiscation and expropriation and hijacking insurance; provided, that such insurance shall at all times be for an amount not less than the greater of 110% of the aggregate outstanding principal amount of the Loans advanced against such aircraft or the amount which, in the judgment of Kitty Hawk, is sufficient to fully insure the fair market value of such aircraft (but shall not be required to exceed such fair market value as of the Closing Date). In addition, the Kitty Hawk Companies shall maintain or cause to be maintained in effect, at their expense, insurance of the types and in the amounts specified in this Section 8.5(b) preceding covering all other Kitty Hawk Aircraft in operation if and to the extent that such insurance is commercially available; provided, however, that 73 80 aircraft war risk and governmental confiscation and expropriation and hijacking insurance shall not be required to be maintained with respect to such other Kitty Hawk Aircraft. (c) Adjustment. Except during a period when a Default has occurred and is continuing, all losses covered by insurance will be adjusted by the Kitty Hawk Companies with the insurers. (d) Application of Insurance Proceeds if no Default. Each Kitty Hawk Company will cause each Insurance Recovery relating to the Collateral to be deposited promptly with Agent as security for the Obligations. If no Default shall have occurred and be continuing, the applicable Kitty Hawk Company may use each such Insurance Recovery to repair, restore or replace the Property that was the subject of such Insurance Recovery. An Insurance Recovery will only be released to a Kitty Hawk Company pursuant to this Section 8.5(d) upon delivery by such Kitty Hawk Company to Agent of evidence reasonably satisfactory to Agent of the expenditure of amounts in repair, restoration or replacement of the Property that was the subject of the Insurance Recovery or the purchase of other, similar Property for use in the Kitty Hawk Company's business in which Agent, for the benefit of Agent and Lenders, shall have a perfected, first priority Lien as security for the Obligations. Each Kitty Hawk Company will promptly pay all Excess Insurance Proceeds to Agent for application against the Obligations in accordance with Section 2.7(a). (e) Application of Insurance Proceeds if a Default. If a Default shall have occurred and be continuing, each Kitty Hawk Company will cause all proceeds of insurance paid on account of the loss of or damage to any Property of a Kitty Hawk Company and all awards of compensation for any Property of any Kitty Hawk Company taken by condemnation or eminent domain to be paid directly to Agent to be applied against or held as security for the Obligations, at the election of the Required Lenders. (f) Certificates. The Kitty Hawk Companies shall furnish, or cause to be furnished, to Agent, on or before the Closing Date and concurrently with the renewal of each insurance policy (but in no event less frequently than once each calendar year commencing in 1997), a certificate signed by an authorized representative of the insureds (the "Insurance Broker"), describing in reasonable detail the hull and liability insurance (and property insurance for detached engines and parts) then carried and maintained with respect to the Aircraft, Other Aircraft and Acquired Aircraft, and stating the opinion of such Insurance Broker that (i) such insurance complies with the terms hereof and (ii) that such insurance provides coverages against risks that are customarily insured against by U.S. air carriers, and that such coverages are in substantially similar forms, are of such types and have limits within the range of limits as are customarily carried by U.S. carriers. The Kitty Hawk Companies shall cause such Insurance Brokers to agree to advise Agent in writing of any default in the payment of any premium and of any other act or omission on the part of any Kitty Hawk Company of which it has knowledge and which might invalidate or render unenforecable, in whole or in part, any insurance on the Aircraft, Other Aircraft and Acquired Aircraft, and to advise Agent in writing at least 30 days 74 81 (except a maximum of 7 days with respect to war risk coverages) prior to the cancellation (but not scheduled expiration if renewed prior thereto) or material adverse change of any insurance maintained pursuant to this Section 8.5. The Kitty Hawk Companies shall also cause such Insurance Brokers to agree to deliver to Agent, at or before the expiration of any insurance policy referenced in a previously delivered certificate of insurance, a new certificate substantially in the form delivered on the Closing Date except for changes in the coverage consistent with the terms hereof. If the Kitty Hawk Companies fail to maintain or cause to be maintained insurance as herein provided, the Required Lenders may at their sole option, but shall be under no duty to, provide such insurance and, in such event, the Kitty Hawk Companies shall, upon demand, reimburse the Required Lenders for the costs thereof; provided, however, that no exercise by the Required Lenders of said option shall affect the provisions of this Agreement, including the provisions that failure by the Kitty Hawk Companies to maintain the prescribed insurance shall constitute an Event of Default. (g) Deductibles. The Kitty Hawk Companies shall have the right to self-insure to the extent of any applicable mandatory minimum per aircraft (or, if applicable, per annum or other period) hull or liability insurance deductible imposed by the aircraft hull or liability insurer. (h) Terms of Insurance Policies. Any policies of insurance carried in accordance with this Sections 8.5 covering the Aircraft, Other Aircraft and Acquired Aircraft, and any policies taken out in substitution or replacement for any such policies, (i) shall name Agent, for and on behalf of each of the Lenders, and the Lenders as additional insured, with respect to liability policies, and Agent, for and on behalf of each of the Lenders as loss payee, with respect to casualty policies (but without imposing on any such party liability to pay premiums with respect to such insurance), (ii) may provide for self-insurance to the extent permitted in Section 8.5(g), (iii) shall provide that, if the insurers cancel such insurance for any reason whatever or if the same is allowed to lapse for non-payment of premium or if any material change is made in the insurance which adversely affects the interest of Agent, such lapse, cancellation or change shall not be effective as to Agent for 30 days (except a maximum of seven days with respect to war risk coverages in accordance with standard industry practice) after receipt by Agent of written notice by such insurers of such lapse, cancellation or change, (iv) shall provide that the interests of Agent and the Lenders in such policies shall not be invalidated by any action or inaction of any Kitty Hawk Company or any other Person having possession and shall insure the interests of Agent and the Lenders, as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by any Kitty Hawk Company or by any such Person having possession, (v) shall be primary without any right of contribution from any other insurance which is carried by Agent or the Lenders, (vi) shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured, (vii) shall waive any right of the insurers to set-off or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of Agent, and (viii) shall provide that, in the event of loss involving the Aircraft, Other Aircraft or Acquired Aircraft, Agent shall be sole loss payee for the account of all interests. 75 82 Section 8.6 Inspection Rights. At any reasonable time and from time to time, each Kitty Hawk Company will permit representatives and agents of Agent and each Lender to examine, copy and make extracts from its books and records, to visit and inspect its Properties and to discuss its business, operations and financial condition with its officers and independent certified public accountants. Each Kitty Hawk Company will authorize their accountants in writing (with a copy to Agent) to comply with this Section 8.6. Section 8.7 Keeping Books and Records. The Kitty Hawk Companies will maintain appropriate books of record and account in accordance with GAAP consistently applied in which true, full and correct entries will be made of all their respective dealings and business affairs. If any changes in accounting principles from those used in the preparation of the financial statements referenced in Section 8.1 are hereafter required or permitted by GAAP and are adopted by any Kitty Hawk Company with the concurrence of its independent certified public accountants and such changes in GAAP result in a change in the method of calculation or the interpretation of any of the financial covenants, standards or terms found in Section 8.1 or Article 10 or any other provision of this Agreement, the Kitty Hawk Companies and the Required Lenders agree to amend any such affected terms and provisions so as to reflect such changes in GAAP with the result that the criteria for evaluating the Kitty Hawk Companies' financial condition shall be the same after such changes in GAAP as if such changes in GAAP had not been made; provided that, until any necessary amendments have been made, the certificate required to be delivered under Section 8.1(c) hereof demonstrating compliance with Article 10 shall include calculations setting forth the adjustments from the relevant items as shown in the current financial statements based on the changes to GAAP to the corresponding items based on GAAP as used in the financial statements referenced in Section 7.2(a), in order to demonstrate how such financial covenant compliance was derived from the current financial statements. All airframe and engine logs for the Aircraft and other aircraft will be correct, complete and accurate. Section 8.8 Compliance with Laws. Each Kitty Hawk Company will comply in all material respects with all applicable Governmental Requirements. Section 8.9 Compliance with Agreements. Each Kitty Hawk Company will comply in all material respects with all material agreements, contracts, documents and instruments binding on it or affecting its Properties or business. Section 8.10 Further Assurances. Each Kitty Hawk Company will execute and deliver such further agreements, documents and instruments and take such further action as may be requested by Agent to carry out the provisions and purposes of this Agreement and the other Loan Documents, to evidence the Obligations and to create, preserve, maintain and perfect the Liens of Agent for the benefit of itself and Lenders in and to the Collateral and the required priority of such Liens. Without limiting the generality of the foregoing, each Kitty Hawk Company will use all reasonable efforts to obtain agreements (e.g., landlord and mortgagee consents and waivers) of the owners of the leased real properties and the lenders of such owners, in form and substance reasonably satisfactory to Agent, as Agent may request from time to time. 76 83 Section 8.11 ERISA. Each Kitty Hawk Company will, and will cause each of its ERISA Affiliates to, comply with all minimum funding requirements and all other material requirements of ERISA so as not to give rise to any liability thereunder. Section 8.12 Aircraft Registration, Maintenance, Operation, Insignia. (a) Registration and Maintenance. The Kitty Hawk Companies, at their own cost and expense, shall: (i) cause the Aircraft, Other Aircraft and Acquired Aircraft to be duly registered in the name of Leasing and to remain duly registered in the name of Leasing under the Federal Aviation Act; (ii) maintain, service, repair and overhaul each of the Aircraft, Other Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, (A) so as to keep such aircraft in good operating condition and so as to keep the such aircraft in such condition as may be necessary to enable the airworthiness certification for such aircraft to be maintained in good standing at all times under the Federal Aviation Act, (B) so as to comply with all airworthiness directives (at the time and to the extent applicable to the Kitty Hawk Companies or other operator of such aircraft), manufacturer manuals and mandatory service bulletins and all applicable insurance policies, and (C) in substantially the same manner as the applicable Kitty Hawk Company maintains, services, repairs or overhauls similar aircraft and without in any way discriminating against such aircraft (or in such other manner as shall have been approved by Required Lenders in writing); (iii) maintain or cause to be maintained all records, logs and other materials required to be maintained in respect of the Aircraft, Other Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, by the Federal Aviation Act or any applicable Government Authority; and (iv) continuously cause the Aircraft, Other Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, to remain in normal revenue generating operation (subject to maintenance requirements in the ordinary course of business). (b) Insignia. On or before September 1, 1996, the Kitty Hawk Companies agree to affix and maintain (or cause to be affixed and maintained), conspicuously displayed, on the cockpit bulkhead of each Aircraft, other than Non-Collateral Aircraft, and on each engine, a nameplate (or, with respect to engines, a stencil) bearing the inscription: Mortgaged To Wells Fargo Bank (Texas), National Association (as Agent for itself and other Lenders) 77 84 (such nameplate to be replaced, if necessary, with a nameplate reflecting the name of any successor mortgagee). The Kitty Hawk Companies shall not allow the name of any Person to be placed on any Aircraft, other than Non- Collateral Aircraft, as a designation that might be interpreted as a claim of ownership; provided, that nothing herein shall prohibit a Kitty Hawk Company from placing its or its vendee's customary colors and insignia on the Aircraft. Section 8.13 Replacement of Parts; Alterations, Modifications and Additions. (a) Replacement of Parts. The Kitty Hawk Companies shall, at their own cost and expense, promptly replace or cause to be replaced all parts for any Aircraft or Acquired Aircraft, other than Non- Collateral Aircraft, which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair, obsolete or permanently rendered unfit for use for any reason whatsoever. All replacement parts shall be owned by Leasing free and clear of all Liens (other than Liens in favor of Agent securing the Obligations) and shall be in as good an operating condition as, and shall have a value at least equal to, the parts replaced, assuming such replaced parts were in the condition and repair required to be maintained by the terms hereof. All parts at any time removed from the Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, shall remain the property of Borrower and remain subject to the Lien of the Loan Documents, no matter where located, until such time as (i) such parts shall be replaced by parts which are free and clear of all Liens and have become subject to the Lien of the Loan Documents or (ii) with respect to parts removed from Acquired Aircraft, the Lien on the Acquired Aircraft has been released by Agent. (b) Alterations, Modifications and Additions. The Kitty Hawk Companies shall, at their own expense, make (or cause to be made) such alterations and modifications in and additions to the Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, as may be required to meet the applicable standards of the FAA and to maintain the standard certificate of airworthiness for such aircraft. In addition, the Kitty Hawk Companies may, at their own expense, from time to time make such alterations and modifications in and additions to the Aircraft and Acquired Aircraft, other than Non-Collateral Aircraft, as they may deem desirable in the proper conduct of their business; provided, that no such alteration, modification or addition impairs the condition or airworthiness of any such Aircraft and Acquired Aircraft or diminishes the value below the value thereof immediately prior to such alteration, modification or addition assuming any such Aircraft and Acquired Aircraft were then in the condition required to be maintained by the terms of the Loan Documents. All parts incorporated or installed in or attached or added to the Aircraft and Acquired Aircraft, other than Non- Collateral Aircraft, as the result of any such alteration, modification or addition (the "Additional Parts") shall, without further act, become subject to the Lien of the Loan Documents. The Kitty Hawk Companies may, at their own expense at any time, so long as no Default shall have occurred and be continuing, remove or suffer to be removed any Additional Part, provided that such Additional Part: 78 85 (i) is in addition to, and not in replacement of or substitution for, (A) any part originally incorporated or installed in or attached to such aircraft upon the cargo conversion of and installation of Hush Kits on such aircraft, or (B) any part in replacement of or substitution for any such part; (ii) is not required to be incorporated or installed in or attached or added to such aircraft pursuant to the terms hereof or under any contract; and (iii) can be removed from such aircraft without impairing the condition or airworthiness or diminishing the value of such aircraft which such aircraft would have had at such time had such alteration, modification or addition not occurred. Upon the removal thereof as provided above, such Additional Part shall no longer be deemed subject to the Lien of the Loan Documents. Section 8.14 Ownership of Subsidiaries. Kitty Hawk shall at all times own all issued and outstanding Capital Stock of the Kitty Hawk Operating Subsidiaries and Skyfreighters. ARTICLE 9 Negative Covenants Each Kitty Hawk Company jointly and severally covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder or any Letter of Credit remains outstanding, it will perform and observe, or cause to be performed and observed, the following covenants: Section 9.1 Debt. No Kitty Hawk Company will, without the prior written consent of Required Lenders, incur, create, assume or permit to exist any Debt, except: (a) Debt of the Kitty Hawk Companies to Agent and Lenders pursuant to the Loan Documents; (b) Debt owed to Bank One under the Bank One Interest Rate Protection Agreement as in effect on the Closing Date; and (c) Debt (in addition to the Debt referred to in clauses (a) and (b) preceding) incurred in the ordinary course of business (including, without limitation, Debt incurred to finance the acquisition of additional aircraft) not to exceed $25,000,000 in aggregate principal amount at any time outstanding. Section 9.2 Limitation on Liens. No Kitty Hawk Company will incur, create, assume or permit to exist any Lien upon any Collateral (including, without limitation, Aircraft and Acquired Aircraft during such time as such Aircraft and Acquired Aircraft are subject to, or are required to be subject to, a Lien in accordance with this Agreement or the other Loan Documents) except 79 86 Permitted Liens. No Kitty Hawk Company will incur, create, assume or permit to exist any Lien upon any Capital Stock issued by any Subsidiary of Kitty Hawk. Section 9.3 Mergers, Etc. No Kitty Hawk Company will, without the prior written consent of the Required Lenders, (a) become a party to a merger or consolidation, (b) wind-up, dissolve or liquidate itself, (c) form, purchase or acquire a Subsidiary, or (d) purchase or acquire all or a material or substantial part of the business or Properties of any Person; provided, however, that any Subsidiary of Kitty Hawk may merge with and into Kitty Hawk or any Kitty Hawk Operating Subsidiary if (but only if) (i) the surviving entity in such merger is Kitty Hawk or a Wholly-Owned Subsidiary of Kitty Hawk, (ii) if a Kitty Hawk Operating Subsidiary is a party to such merger, the surviving entity in such merger is Kitty Hawk or a Kitty Hawk Operating Subsidiary, (iii) at the time of such merger, each entity that is a party thereto is Solvent, and (iv) the parties to such merger execute and deliver to Agent such agreements, documents and instruments as Agent may reasonably request in order to ensure that the Loan Documents and the Liens in the Collateral in favor of Agent are not affected by such merger; and provided, further, however, that Kitty Hawk or a Kitty Hawk Operating Subsidiary may acquire the business or Properties of any Person pursuant to an asset acquisition (as opposed to an acquisition of Capital Stock) if and to the extent that the business or Properties acquired are used in the present lines of business of Kitty Hawk and the Kitty Hawk Operating Subsidiaries. Section 9.4 Restricted Payments. No Kitty Hawk Company will make or permit to be made any Restricted Payments, except: (a) subject to the subordination provisions relating thereto, the Kitty Hawk Companies may make regularly scheduled payments (as opposed to prepayments) of principal and accrued interest on any Subordinated Debt permitted to be incurred in accordance with Section 9.1; (b) Subsidiaries of Kitty Hawk other than the Kitty Hawk Operating Subsidiaries may declare and pay dividends to Kitty Hawk to the extent permitted by applicable law; (c) the Kitty Hawk Operating Subsidiaries may declare and pay dividends to Kitty Hawk to the extent permitted by applicable law and consistent with prudent business practices; (d) purchases by Kitty Hawk of shares of Capital Stock of Kitty Hawk from employees of the Kitty Hawk Companies upon the termination of the employment of such employees, provided that the amount paid therefor shall not exceed the fair market value of such shares to be purchased and shall not exceed $100,000 in the aggregate during any fiscal year; and (e) Kitty Hawk may declare and pay dividends to its shareholders during any fiscal year in an aggregate amount not to exceed 25% of Net Income of the Kitty Hawk Companies during the immediately preceding fiscal year; 80 87 provided, however, that no Restricted Payments may be made pursuant to any of clauses (a), (d) or (e) preceding or may be made by Leasing pursuant to clauses (c) preceding if a Default exists at the time of such Restricted Payment or would result therefrom. Section 9.5 Investments. No Kitty Hawk Company will make or permit to be made or remain outstanding any advance, loan or extension of credit (except an advance, loan or extension of credit to customers and suppliers in the ordinary course of business not to exceed $2,000,000 in aggregate amount at any time outstanding) or any capital contribution to or investment in any Person, or purchase or own any stock, bonds, notes, debentures or other securities of any Person, or be or become a joint venturer with or partner of any Person (all such transactions being herein called "Investments"), except: (a) Investments in obligations or securities received in settlement of debts (created in the ordinary course of business) owing to a Kitty Hawk Company; (b) existing Investments identified on Schedule 9.5 hereto; (c) Investments in securities issued or guaranteed by the U.S. with maturities of one year or less from the date of acquisition; (d) Investments in certificates of deposit and Eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any Lender or with any domestic commercial bank having capital and surplus in excess of $500,000,000; (e) Investments in repurchase obligations with a term of not more than seven days for securities of the types described in clause (c) preceding with any Lender or with any domestic commercial bank having capital and surplus in excess of $500,000,000; (f) Investments in commercial paper of a domestic issuer rated A-1 or better or P-1 or better by Standard & Poor's Corporation or Moody's Investors Services, Inc., respectively, maturing not more than six months from the date of acquisition; and (g) Investments by Kitty Hawk in the Kitty Hawk Operating Subsidiaries existing on the Closing Date and, if a Default does not exist at the time of such Investment or would not result therefrom, additional Investments by Kitty Hawk in any Kitty Hawk Operating Subsidiary made after the Closing Date. Without limiting the generality of the foregoing, neither Kitty Hawk nor any Kitty Hawk Operating Subsidiary will, except as may be expressly permitted by the preceding clauses (a) through (g), make any Investment in (i) Skyfreighters (except for the Investment of Kitty Hawk in Skyfreighters made prior to the Closing Date), (ii) any other Subsidiary other than a Kitty Hawk Operating Subsidiary, or (iii) any other entity. 81 88 Section 9.6 Limitation on Issuance of Capital Stock. No Subsidiary of Kitty Hawk will at any time issue, sell, assign or otherwise dispose of (a) any of its Capital Stock, (b) any securities exchangeable for or convertible into or carrying any rights to acquire any of its Capital Stock, or (c) any option, warrant or other right to acquire any of its Capital Stock; provided, however, that, if and to the extent not otherwise prohibited by this Agreement or the other Loan Documents, a Kitty Hawk Operating Subsidiary may issue additional shares of its Capital Stock to Kitty Hawk. Section 9.7 Transactions with Affiliates. No Kitty Hawk Company will enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate of any Kitty Hawk Company except in the ordinary course of and pursuant to the reasonable requirements of such Kitty Hawk Company's business and upon fair and reasonable terms no less favorable to such Kitty Hawk Company than would be obtained in a comparable arms-length transaction with a Person not an Affiliate of a Kitty Hawk Company. Section 9.8 Disposition of Property. No Kitty Hawk Company will sell, lease, assign, transfer or otherwise dispose of any of its Property, except: (a) dispositions of Property, other than Collateral, in the ordinary course of business or consistent with prudent business practices (including, without limitation, sales of Aircraft and Acquired Aircraft concurrently with Agent's release of its Lien thereon in accordance with Sections 5.4(b) and 5.4(c), respectively); and (b) with respect to Aircraft and Acquired Aircraft and which constitute Collateral, leases of such Aircraft by Leasing to Aircargo for fair consideration pursuant to the applicable Leases and leases of such Acquired Aircraft for fair consideration, each of which Leases or leases shall be Operating Leases and none of which Leases or leases shall be finance leases or shall grant to the lessee any option to purchase the Aircraft or Acquired Aircraft or any portion thereof. Section 9.9 Lines of Business. No Kitty Hawk Company will (a) engage in any air transportation of passengers for hire, or in any material line or lines of business activity other than the businesses in which it is engaged on the Closing Date and lines of business reasonably related thereto or (b) discontinue any material line or lines of business in which it is engaged on the Closing Date. Each of Leasing and Aircargo acknowledges and agrees that (i) each of the Leases is subject and subordinate to the Aircraft Mortgages and this Agreement and that all indebtedness, liabilities and obligations of Leasing and Aircargo under the Aircraft Mortgages and the Agreement shall be deemed to be incorporated into each of the Leases as if independently stated therein, and (ii) it shall not, without the prior written consent of Required Lenders, permit any lease or sublease of any of the Aircraft or Acquired Aircraft while it is, or is required to be, subject to a Lien in accordance with this Agreement or the other Loan Documents, except an operating lease of any such aircraft to a customer of a Kitty Hawk Company under which such 82 89 Aircraft or Acquired Aircraft remains listed on Aircargo's operations specifications and Aircargo remains fully responsible for maintenance and operation of such Aircraft or Acquired Aircraft. Section 9.10 Environmental Protection. No Kitty Hawk Company will (a) use (or permit any tenant to use) any of its Properties for the handling, processing, storage, transportation or disposal of any Hazardous Material except in compliance with applicable Environmental Laws, (b) generate any Hazardous Material except in compliance with applicable Environmental Laws, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material in violation of any Environmental Law, or (d) otherwise conduct any activity or use any of its Properties in any manner, that violates or is likely to violate any Environmental Law or create any Environmental Liabilities for which any Kitty Hawk Company would be responsible, except for circumstances or events described in clauses (a) through (d) preceding that could not, individually or in the aggregate, have a Material Adverse Effect. Section 9.11 Intercompany Transactions. Except as may be expressly permitted or required by the Loan Documents, no Kitty Hawk Company will create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary of Kitty Hawk to (a) pay dividends or make any other distribution to any Kitty Hawk Company in respect of the Capital Stock of any such Subsidiary or with respect to any other interest or participation in, or measured by, its profits, (b) pay any indebtedness owed to any Kitty Hawk Company, (c) make any loan or advance to any Kitty Hawk Company, or (d) sell, lease or transfer any of its Property to any Kitty Hawk Company. Section 9.12 Management Fees. No Kitty Hawk Company will pay any management, consulting or similar fees (excluding directors' fees and regular professional fees for services rendered) to any Affiliate of any Kitty Hawk Company or to any director, officer or employee of any Kitty Hawk Company or any Affiliate of any Kitty Hawk Company. Section 9.13 Modification of Other Agreements. No Kitty Hawk Company will consent to or implement any termination, amendment, modification, supplement or waiver of (a) any Subordinated Debt or any agreement, document or instrument evidencing or governing such Debt, (b) the certificate or articles of incorporation or bylaws (or analogous constitutional documents) of any Kitty Hawk Company, or (c) any Material Contract to which it is a party or any Permit which it possesses unless such termination, amendment, modification, supplement or waiver could not be materially adverse to Kitty Hawk or any of its Subsidiaries or Agent or any Lender. Section 9.14 ERISA. No Kitty Hawk Company will: (a) allow, or take (or permit any ERISA Affiliate to take) any action which would cause, any unfunded or unreserved liability for benefits under any Plan (exclusive of any Multiemployer Plan) to exist or to be created that exceeds $100,000 with respect to any such Plan or $200,000 with respect to all such Plans in the aggregate on either a going concern or a wind-up basis; or 83 90 (b) with respect to any Multiemployer Plan, allow, or take (or permit any ERISA Affiliate to take) any action which would cause, any unfunded or unreserved liability for benefits under any Multiemployer Plan to exist or to be created, either individually as to any such Plan or in the aggregate as to all such Plans, that could, upon any partial or complete withdrawal from or termination of any such Multiemployer Plan or Plans, have a Material Adverse Effect. Section 9.15 Leases. No Kitty Hawk Company will consent or agree to or implement any termination, amendment, modification, supplement or waiver of or to any of the Leases so long as the Aircraft to which such Lease relates is, or is required to be, subject to a Lien in favor of Agent in accordance with this Agreement or the other Loan Documents. Section 9.16 Territorial Restrictions. No Kitty Hawk Company will: (a) use, repair, maintain, overhaul or operate any Kitty Hawk Aircraft, or permit any other Person to use, repair, maintain, overhaul or operate any Kitty Hawk Aircraft, in violation of any applicable law or any applicable rule, regulation, treaty, order or certification of any government or Governmental Authority (domestic or foreign), or in violation of any airworthiness certificate, license or registration issued by any such authority; or (b) operate or permit any other Person to operate a Kitty Hawk Aircraft, while it is, or is required to be, subject to a Lien in favor of Agent in accordance with this Agreement or the other Loan Documents, to or in any area (i) excluded from coverage by any insurance policy or policies required to be carried or maintained by the terms of this Agreement, unless with U.S. governmental indemnity or with other insurance or governmental indemnity reasonably acceptable to Agent and (ii) in the event that such aircraft is not covered by aircraft war risk and governmental confiscation and expropriation and hijacking insurance, unless the Geneva Convention on the International Recognition of Rights in Aircraft shall be in effect in such jurisdictions in which such area lies and any agreements, documents or instruments evidencing Agent's Lien in and to such aircraft as Agent may reasonably require have been executed by the appropriate Persons and appropriately filed in such jurisdictions. ARTICLE 10 Financial Covenants Each Kitty Hawk Company jointly and severally covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder or any Letter of Credit remains outstanding, it will perform and observe, or cause to be performed and observed, the following covenants: Section 10.1 Senior Funded Debt to Cash Flow Ratio. The Kitty Hawk Companies will not permit the Senior Funded Debt to Cash Flow Ratio, calculated as of the end of each fiscal 84 91 quarter of Kitty Hawk, commencing with the fiscal quarter ended August 31, 1996, for the four fiscal quarters then ended, to be greater than 3.00 to 1.00. Section 10.2 Fixed Charge Coverage Ratio. The Kitty Hawk Companies will not permit the Fixed Charge Coverage Ratio, calculated as of the end of each fiscal quarter of Kitty Hawk, commencing with the fiscal quarter ended August 31, 1996, for the four fiscal quarters of Kitty Hawk then ended, to be less than 1.20 to 1.00. Section 10.3 Leverage Ratio. The Kitty Hawk Companies will not permit the Leverage Ratio, calculated as of the end of each fiscal quarter of Kitty Hawk, commencing with the fiscal quarter ended August 31, 1996, to be greater than 3.00 to 1.00. Section 10.4 Net Income. The Kitty Hawk Companies will not permit the Net Income, exclusive of noncash extraordinary gains and exclusive of noncash extraordinary losses to the extent included or deducted, respectively, in determining Net Income, calculated as of the end of each fiscal quarter of Kitty Hawk, commencing with the fiscal quarter ended August 31, 1996, for the four fiscal quarters then ended, to be less than $1.00. Section 10.5 Accounts Payable Turndays. The Kitty Hawk Companies will maintain Accounts Payable Turndays, calculated as of the end of each fiscal quarter of Kitty Hawk, commencing with the fiscal quarter ended August 31, 1996, for the portion of the fiscal year then ended, of not more than 60 days. ARTICLE 11 Default Section 11.1 Events of Default. Each of the following shall be deemed an "Event of Default": (a) Any Kitty Hawk Company shall fail to pay, repay or prepay when due any amount of principal or interest owing to Agent or any Lender pursuant to this Agreement or any other Loan Document or any fee, expense or other amount or other Obligation owing to Agent or any Lender pursuant to this Agreement or any other Loan Document, in each case within three Business Days after the due date thereof. (b) Any representation or warranty made or deemed made by any Kitty Hawk Company in any Kitty Hawk Company or in any certificate, report, notice or financial statement furnished at any time in connection with this Agreement or any other Loan Document shall be false, misleading or erroneous in any material respect when made or deemed to have been made. (c) Any Kitty Hawk Company shall fail to perform, observe or comply with any covenant, agreement or term contained in Sections 5.1, 5.2, 8.1(g), 8.1(j), 8.1(l), 8.1(n), 8.2 (other than the last two sentences of Section 8.2), clause (i) of 8.12(a), 8.14, 85 92 Article 9 or Article 10 of this Agreement; any Kitty Hawk Company shall fail to perform, observe or comply with any covenant, agreement or term contained in Sections 8.5, 8.6, 8.7, 8.8, 8.9, 8.10 and 8.12 (other than clause (i) of Section 8.12(a)) and such failure is not remedied or waived within three days after such failure commenced; any Kitty Hawk Company shall fail to perform, observe or comply with any covenant, agreement or term contained in Sections 5.3, 8.1 (other than Sections 8.1(g), 8.1(j), 8.1(l) or 8.1(n)), 8.4, or 8.13 and such failure is not remedied or waived within ten days after such failure commenced; any Kitty Hawk Company shall fail to perform, observe or comply with any covenant, agreement or term contained in any Lease, Guaranty, Aircraft Mortgage, Security Agreement or any other Security Document, subject to any grace period (if any) applicable to such covenant, agreement or term contained in such Lease, Guaranty, Aircraft Mortgage, Security Agreement or other Security Document, respectively; or any Kitty Hawk Company shall fail to perform, observe or comply with any other covenant, agreement or term contained in this Agreement or any other Loan Document (other than covenants to pay the Obligations) and such failure is not remedied or waived within the earlier to occur of 30 days after such failure commenced or, if a different grace period is expressly made applicable in such other Loan Document, such applicable grade period. (d) Any of Kitty Hawk or any Kitty Hawk Operating Subsidiary ceases to be Solvent or shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due. (e) Any Kitty Hawk Company shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of itself or of all or any substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the U. S. Bankruptcy Code (11 U.S.C. Section 101, et seq.) (as now or hereafter in effect, the "Bankruptcy Code"), (iv) institute any proceeding or file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, winding-up or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate or other action for the purpose of effecting any of the foregoing. (f) A proceeding or case shall be commenced, without the application, approval or consent of any Kitty Hawk Company in any court of competent jurisdiction, seeking as to such Kitty Hawk Company (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of all or any substantial part of its Property, or (iii) similar relief under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against any Kitty Hawk Company shall be entered in an involuntary case under the Bankruptcy Code. 86 93 (g) Any Kitty Hawk Company shall fail to discharge within a period of 30 days after the commencement thereof any attachment, sequestration, forfeiture or similar proceeding or proceedings involving an aggregate amount in excess of $250,000 against any of its Properties. (h) A final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate shall be rendered by a court or courts against the Kitty Hawk Companies or any of them on claims not covered by insurance or as to which the insurance carrier has denied responsibility and the same shall not be discharged, or a stay of execution thereof shall not be procured, within five days from the date of entry thereof and the Kitty Hawk Companies or any of them shall not, within said period of five days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. (i) Any Kitty Hawk Company shall fail to pay when due any principal of or interest on any Debt (other than the Obligations) having (either individually or in the aggregate) a principal amount of at least $500,000, or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred (and shall not have been waived or otherwise cured) that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment. (j) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Kitty Hawk Company or any of its shareholders, or any Kitty Hawk Company shall deny that it has any further liability or obligation under any of the Loan Documents, or any Lien created by the Loan Documents shall for any reason cease to be a valid, first priority perfected Lien (except for Permitted Liens, if any, which are permitted by the Loan Documents to have priority over the Liens in favor of Agent) upon any of the Collateral purported to be covered thereby. (k) Any of the following events shall occur or exist with respect to any Kitty Hawk Company or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Pension Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Pension Plan or the termination of any Pension Plan; (iv) any event or circumstance that could reasonably be expected to constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Pension Plan, or the institution by the PBGC of any such proceedings; (v) any "accumulated funding deficiency" (as defined in Section 406 of ERISA or Section 412 of the Code), whether or not waived, shall exist with respect to any Plan; or (vi) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Plan or the reorganization, insolvency or termination of any Pension Plan; and in each case above, 87 94 such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of Required Lenders subject any Kitty Hawk Company or any ERISA Affiliate to any tax, penalty or other liability to a Plan, a Multiemployer Plan, the PBGC or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed $250,000. (l) The occurrence of a Change of Control. (m) The occurrence of a default under any Subordinated Debt or any agreement, document or instrument creating or evidencing such Debt, unless (i) such default has been waived, cured or consented to in accordance with such agreement, document or instrument, (ii) such default is not a payment default, (iii) the maturity of the Debt affected thereby has not been accelerated, and (iv) such waiver or consent is not made in connection with any amendment or modification of any such agreement, document or instrument or in connection with any payment to the holders of any such Debt. (n) If, at any time, any event or circumstance shall occur which gives any holder of any Subordinated Debt the right to request or require Kitty Hawk or any of its Subsidiaries to redeem, purchase or prepay any such Debt. Section 11.2 Remedies. If any Event of Default shall occur and be continuing, Agent may and, if directed by the Required Lenders, Agent shall do any one or more of the following: (a) Acceleration. Declare all outstanding principal of and accrued and unpaid interest on the Loans and Reimbursement Obligations and all other amounts payable by any Borrower under the Loan Documents immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived; (b) Termination of Commitments. Terminate the Commitments (including, without limitation, any obligation of Issuing Bank to issue Letters of Credit) without notice to Borrowers or any other Kitty Hawk Company; (c) Judgment. Reduce any claim to judgment; (d) Foreclosure. Foreclose or otherwise enforce any Lien granted to Agent for the benefit of Agent and Lenders to secure payment and performance of the Obligations in accordance with the terms of the Loan Documents; or (e) Rights. Exercise any and all rights and remedies afforded by the laws of the State of Texas or any other jurisdiction, by any of the Loan Documents, by equity or otherwise; 88 95 provided, however, that upon the occurrence of an Event of Default under Section 11.1(e) or Section 11.1(f), the Commitments of all of Lenders (including, without limitation, any obligation of Issuing Bank to issue Letters of Credit) shall immediately and automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Loans and all other amounts payable under the Loan Documents shall thereupon become immediately and automatically due and payable, all without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived. Section 11.3 Performance by Agent. If any Kitty Hawk Company shall fail to perform any covenant or agreement in accordance with the terms of the Loan Documents, Agent may, at the direction of the Required Lenders, perform or attempt to perform such covenant or agreement on behalf of such Kitty Hawk Company. In such event, Borrowers shall, at the request of Agent, promptly pay any amount expended by Agent or Lenders in connection with such performance or attempted performance to Agent at the Principal Office, together with interest thereon at the applicable Default Rate from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that neither Agent nor any Lender shall have any liability or responsibility for the performance of any obligation of Borrowers or any other Kitty Hawk Company under this Agreement or any of the other Loan Documents. Section 11.4 Cash Collateral. If an Event of Default shall have occurred and be continuing, Kitty Hawk shall, if requested by Agent or Required Lenders, pledge to Agent as security for the Obligations an amount in immediately available funds equal to the then outstanding Letter of Credit Liabilities, such funds to be held in a cash collateral account satisfactory to Agent without any right of withdrawal by Kitty Hawk or any other Kitty Hawk Company. ARTICLE 12 Agency and Intercreditor Provisions Section 12.1 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Neither Agent nor any of its Affiliates, officers, directors, employees, attorneys or agents shall be liable for any action taken or omitted to be taken by any of them hereunder or otherwise in connection with this Agreement or any of the other Loan Documents except for its or their own gross negligence or willful misconduct. Without limiting the generality of the preceding sentence, Agent (a) may treat the payee of any Note as the holder thereof until Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to Agent, (b) shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Lender, (c) shall not be required to initiate any 89 96 litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Lenders, (d) shall not be responsible to Lenders for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Person to perform any of its obligations hereunder or thereunder, (e) may consult with legal counsel (including counsel for any Kitty Hawk Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts, and (f) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing reasonably believed by it to be genuine and signed or sent by the proper party or parties. As to any matters not expressly provided for by this Agreement, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Lenders, and such instructions of the Required Lenders and any action taken or failure to act pursuant thereto shall be binding on all of Lenders; provided, however, that Agent shall not be required to take any action which exposes Agent to liability or which is contrary to this Agreement or any other Loan Document or applicable law. Section 12.2 Rights of Agent as a Lender. With respect to its Commitments, the Loans made by it and the Notes and Letters of Credit issued to or by it, Wells Fargo (and any successor acting as Agent) in its capacity as a Lender or Issuing Bank hereunder shall have the same rights and powers hereunder as any other Lender or Issuing Bank and may exercise the same as though it were not acting as Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include Agent in its individual capacity. Agent and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, act as trustee under indentures of, provide merchant banking services to, own securities of, and generally engage in any kind of banking, trust or other business with, the Kitty Hawk Companies or any of their Affiliates and any other Person who may do business with or own securities of the Kitty Hawk Companies or any of their Affiliates, all as if it were not acting as Agent and without any duty to account therefor to Lenders. Section 12.3 Defaults. Agent shall not be deemed to have knowledge or notice of the occurrence of a Default (other than the non-payment of principal of or interest on the Loans or Reimbursement Obligations or of commitment fees) unless Agent has received notice from a Lender or a Kitty Hawk Company specifying such Default and stating that such notice is a "notice of default". In the event that Agent receives such a notice of the occurrence of a Default, Agent shall give prompt notice thereof to Lenders (and shall give each Lender prompt notice of each such non-payment). Agent shall (subject to Section 12.1) take such action with respect to such Default as shall be directed by the Required Lenders, provided that unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall seem advisable and in the best interest of Lenders. 90 97 Section 12.4 INDEMNIFICATION. EACH LENDER HEREBY AGREES TO INDEMNIFY AGENT FROM AND HOLD AGENT HARMLESS AGAINST (TO THE EXTENT NOT REIMBURSED UNDER SECTIONS 13.1 AND 13.2, BUT WITHOUT LIMITING THE OBLIGATIONS OF ANY KITTY HAWK COMPANY UNDER SECTIONS 13.1 AND 13.2), RATABLY IN ACCORDANCE WITH ITS PRO RATA SHARE (CALCULATED ON THE BASIS OF THE AGGREGATE LOAN PERCENTAGES), ANY AND ALL LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES) AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (BUT EXCLUDING NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF AGENT'S DUTIES AS AGENT HEREUNDER) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY AGENT UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED, FURTHER, THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE EXTENT CAUSED BY AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF LENDERS THAT AGENT SHALL BE INDEMNIFIED HEREUNDER FROM AND HELD HARMLESS AGAINST ALL OF SUCH LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES) AND DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF AGENT (EXCEPT TO THE EXTENT THE SAME ARE CAUSED BY AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT). WITHOUT LIMITING ANY OTHER PROVISION OF THIS SECTION 12.4, EACH LENDER AGREES TO REIMBURSE AGENT PROMPTLY UPON DEMAND FOR ITS PRO RATA SHARE (CALCULATED ON THE BASIS OF THE AGGREGATE LOAN PERCENTAGES) OF ANY AND ALL OUT-OF- POCKET EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES) INCURRED BY AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, TO THE EXTENT THAT AGENT IS NOT PROMPTLY REIMBURSED FOR SUCH EXPENSES BY KITTY HAWK OR THE OPERATING COMPANIES. Section 12.5 Independent Credit Decisions. Each Lender agrees that it has independently and without reliance on Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Kitty Hawk Companies and its 91 98 own decision to enter into this Agreement and that it will, independently and without reliance upon Agent or any other Lender, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. Agent shall not be required to keep itself informed as to the performance or observance by any Kitty Hawk Company of this Agreement or any other Loan Document or to inspect the Properties or books of any Kitty Hawk Company. Except for notices, reports and other documents and information expressly required to be furnished to Lenders by Agent hereunder or under the other Loan Documents, Agent shall not have any duty or responsibility to provide any Lender with any credit or other financial information concerning the affairs, financial condition or business of any Kitty Hawk Company (or any of their Affiliates) which may come into the possession of Agent or any of its Affiliates. Section 12.6 Several Commitments. The Commitments and other obligations of Lenders under this Agreement are several. The default by any Lender in making a Loan in accordance with its Commitment shall not relieve the other Lenders of their obligations under this Agreement. In the event of any default by any Lender in making any Loan, each nondefaulting Lender shall be obligated to make its Loan but shall not be obligated to advance the amount which the defaulting Lender was required to advance hereunder. In no event shall any Lender be required to advance an amount or amounts with respect to any of the Loans which would in the aggregate exceed such Lender's Commitment with respect to such Loans. No Lender shall be responsible for any act or omission of any other Lender. Section 12.7 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving notice thereof to Lenders and Borrowers. Upon any such resignation, the Required Lenders will have the right to appoint another Lender as a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the U.S. or any state thereof or of a foreign country if acting through its U.S. branch and having combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges, immunities and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any Agent's resignation as Agent, the provisions of this Article 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was Agent. Each Agent (including each successor Agent) agrees that, so long as it is acting as Agent under this Agreement, it shall be a Lender under this Agreement. Section 12.8 Initial Allocation of Collateral. Agent and Lenders agree that, notwithstanding anything to the contrary contained in this Agreement, if an Event of Default has occurred and, as a result thereof, any Term Loans A Collateral or any Term Loans B Collateral is sold, transferred or disposed of or retained in cancellation of any Debt, all proceeds of such sale, transfer or other disposition or retention shall be applied as follows: 92 99 (a) if such Collateral is Terms Loans A Collateral, first, to payment of all principal of and accrued interest on the Term Loans A, second, to the payment of all principal of and accrued interest on the Term Loans C, third, to the payment (or, with respect to outstanding Letters of Credit, held as security for payment) of all principal of and accrued interest on the Revolving Credit Loans and Letter of Credit Liabilities, fourth, to the payment of all principal of and accrued interest on the Term Loans B and the Bank One Interest Rate Protection Agreement, and, fifth, to the remaining Obligations as Agent may determine; and (b) if such Collateral is Terms Loans B Collateral, first, to payment of all principal of and accrued interest on the Term Loans B and the Bank One Interest Rate Protection Agreement, second, to the payment of all principal of and accrued interest on the Term Loans C, third, to the payment (or, with respect to outstanding Letters of Credit, held as security for payment) of all principal of and accrued interest on the Revolving Credit Loans and Letter of Credit Liabilities, fourth, to the payment of all principal of and accrued interest on the Term Loans A, and, fifth, to the remaining Obligations as Agent may determine. Section 12.9 Beneficiaries of Article 12. Notwithstanding anything to the contrary contained in this Agreement, each Kitty Hawk Company acknowledges and agrees that the terms and provisions of this Article 12 other than Section 12.6 are intended solely for the benefit of Agent and Lenders and that no Kitty Hawk Company is a beneficiary of any of such terms or provisions or may enforce any of such terms or provisions against Agent or any Lender. ARTICLE 13 Miscellaneous Section 13.1 Expenses. Whether or not the transactions contemplated hereby are consummated, each of Borrowers hereby jointly and severally agrees, on demand, to pay or reimburse Agent and each of Lenders for paying: (a) all reasonable out-of-pocket costs and expenses of Agent in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents, and any and all waivers, amendments, modifications, renewals, extensions and supplements thereof and thereto, and the syndication of the Commitments and the Loans, including, without limitation, the reasonable fees and expenses of legal counsel for Agent, (b) all out-of-pocket costs and expenses of Agent and Lenders in connection with any Default, the exercise of any right or remedy and the enforcement of this Agreement or any other Loan Document or any term or provision hereof or thereof, including, without limitation, the fees and expenses of all legal counsel for Agent and/or any Lender (unless, with respect to legal counsel of any Lender other than Wells Fargo, Agent has not approved of the payment by Borrowers of the fees and expenses of such counsel), (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents, (d) all costs, expenses, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by this Agreement or any other Loan Document, and (e) all 93 100 out-of-pocket costs and expenses incurred by Agent in connection with due diligence, computer services, copying, appraisals, environmental audits, collateral audits, field exams, insurance, consultants and search reports. Section 13.2 INDEMNIFICATION. EACH KITTY HAWK COMPANY HEREBY JOINTLY AND SEVERALLY AGREES TO INDEMNIFY AGENT AND EACH LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' AND CONSULTANTS' FEES AND EXPENSES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) THE RELATED TRANSACTIONS, (D) ANY BREACH BY ANY KITTY HAWK COMPANY OF ANY REPRESENTATION, WARRANTY, COVENANT OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (E) THE USE OR PROPOSED USE OF ANY LOAN OR LETTER OF CREDIT, (F) ANY AND ALL TAXES, LEVEES, DEDUCTIONS AND CHARGES IMPOSED ON AGENT, ISSUING BANK OR ANY LENDER IN RESPECT OF ANY LOAN OR LETTER OF CREDIT (EXCLUSIVE OF INCOME AND FRANCHISE TAXES ATTRIBUTABLE TO NET INCOME), (G) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN OR AFFECTING ANY OF THE PROPERTIES OF ANY KITTY HAWK COMPANY, EXCEPT TO THE EXTENT THAT THE LOSS, DAMAGE OR CLAIM IS THE DIRECT RESULT OF AN INTENTIONAL AND AFFIRMATIVE ACT BY THE PERSON TO BE INDEMNIFIED THAT CONSTITUTES GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH PERSON, OR (H) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING; BUT EXCLUDING ANY OF THE FOREGOING TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION 13.2 SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES (INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES), CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES AND EXPENSES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON. THE OBLIGATIONS OF EACH OF THE KITTY HAWK COMPANIES 94 101 UNDER THIS SECTION 13.2 SHALL SURVIVE THE REPAYMENT OF THE LOANS AND OTHER OBLIGATIONS AND TERMINATION OF THE COMMITMENTS. Section 13.3 Limitation of Liability. None of Agent, any Issuing Bank, any Lender or any Affiliate, officer, director, employee, attorney or agent thereof shall be liable for any error of judgment or act done in good faith, or be otherwise liable or responsible under any circumstances whatsoever (including such Person's negligence), except for such Person's gross negligence or willful misconduct. None of Agent, any Issuing Bank, any Lender or any Affiliate, officer, director, employee, attorney or agent thereof shall have any liability with respect to, and each of the Kitty Hawk Companies hereby waives, releases and agrees not to sue any of them upon, any claim for any special, indirect, incidental or consequential damages suffered or incurred by any Borrower or any other Kitty Hawk Company in connection with, arising out of or in any way related to this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Each Kitty Hawk Company hereby waives, releases and agrees not to sue Agent, any Issuing Bank or any Lender or any of their respective Affiliates, officers, directors, employees, attorneys or agents for exemplary or punitive damages in respect of any claim in connection with, arising out of or in any way related to this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section 13.4 No Duty. All attorneys, accountants, appraisers and other professional Persons and consultants retained by Agent and Lenders shall have the right to act exclusively in the interest of Agent and Lenders and shall have no duty of disclosure, duty of loyalty, duty of care or other duty or obligation of any type or nature whatsoever to Kitty Hawk or any of its Subsidiaries or any of their shareholders or any other Person. Section 13.5 No Fiduciary Relationship. The relationship between each Kitty Hawk Company and Agent and each Issuing Bank and Lender is solely that of debtor and creditor, and neither Agent, any Issuing Bank nor any Lender has any fiduciary or other special relationship with any Borrower or any other Kitty Hawk Company, and no term or condition of any of the Loan Documents shall be construed so as to deem the relationship between any Borrower and Agent or any Issuing Bank or Lender, or any other Kitty Hawk Company and Agent or any Issuing Bank or Lender, to be other than that of debtor and creditor. No joint venture or partnership is created by this Agreement between or among Agent or any Issuing Bank or any Lender or between or among any Borrower or any other Kitty Hawk Company and Agent or any Issuing Bank or any Lender. Section 13.6 Equitable Relief. Each Kitty Hawk Company recognizes that, in the event it fails to pay, perform, observe or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to Agent and Lenders. Each Kitty Hawk Company therefore agrees that Agent and Lenders, if Agent or Lenders so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Section 13.7 No Waiver; Cumulative Remedies. No failure on the part of Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, 95 102 power or privilege under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section 13.8 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither any Borrower nor any other Kitty Hawk Company may assign or transfer any of its rights or obligations under this Agreement or any other Loan Document without the prior written consent of Agent and Lenders. Any Lender may sell participations in all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitments and the Loans owing to it and the Letters of Credit issued by it); provided, however, that (i) such Lender's obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitments) shall remain unchanged, (ii) such Lender shall remain solely responsible to Borrowers for the performance of such obligations, (iii) such Lender shall remain the holder of its Notes for all purposes of this Agreement, and (iv) Borrowers shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. (b) Each Kitty Hawk Company and each of Lenders agree that any Lender (the "Assigning Lender") may at any time assign to one or more Eligible Assignees all, or a proportionate part of all, of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitments and Loans and Letters of Credit) (each an "Assignee"); provided, however, that (i) each such assignment may be of a varying percentage of the Assigning Lender's rights and obligations under this Agreement and the other Loan Documents and may relate to some but not all of such rights and/or obligations, (ii) except in the case of an assignment of all of a Lender's rights and obligations under this Agreement and the other Loan Documents, the amount of the Commitments and Loans and Letters of Credit of the Assigning Lender being assigned pursuant to each assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than the lesser of (A) an aggregate amount equal to $1,000,000 calculated based upon the sum of the Revolving Credit Loans Commitment assigned (or, if such Commitment has terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and face amount of outstanding Letters of Credit assigned) plus the aggregate outstanding principal amount of the Term Loans assigned, or (B) an aggregate amount equal to five percent of the sum of the aggregate outstanding Revolving Credit Loans Commitments (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of the Revolving Credit Loans and aggregate outstanding face amount of the Letters of Credit) plus the aggregate outstanding principal amount of the Term Loans, and (iii) the 96 103 parties to each such assignment shall execute and deliver to Agent for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with the Notes subject to such assignment, and a processing and recordation fee of $2,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof or such other date as may be approved by Agent, (1) the Assignee thereunder shall be a party hereto as a "Lender" and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and under the Loan Documents, and (2) the Assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a Lender's rights and obligations under the Loan Documents, such Lender shall cease to be a party thereto, provided that such Lender's rights under Article 4, Section 13.1 and Section 13.2 accrued through the date of assignment shall continue). (c) By executing and delivering an Assignment and Acceptance, the Assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such Assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition or results of operations of any Kitty Hawk Company or the performance or observance by any Kitty Hawk Company of its obligations under the Loan Documents; (iii) such Assignee confirms that it has received a copy of the other Loan Documents, together with copies of the financial statements referred to in Section 7.2 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such Assignee will, independently and without reliance upon Agent or such Assigning Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such Assignee confirms that it is an Eligible Assignee; (vi) such Assignee appoints and authorizes Agent to take such action as agent on its behalf and exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) such Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. (d) Agent shall maintain at its Principal Office a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names 97 104 and addresses of Lenders and the Commitments of, and principal amount of the Loans owing to and Letters of Credit issued by, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrowers, Agent and Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes under the Loan Documents. The Register shall be available for inspection by any Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an Assigning Lender and Assignee representing that it is an Eligible Assignee, together with the Notes subject to such assignment, Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt written notice thereof to the applicable Borrower or Borrowers. Within five Business Days after its receipt of such notice the applicable Borrower or Borrowers, at its or their expense, shall execute and deliver to Agent in exchange for each surrendered Note evidencing particular Loans, a new Note evidencing such Loans payable to the order of such Eligible Assignee in an amount equal to such Loans assigned to it and, if the Assigning Lender has retained any Loans, a new Note evidencing such Loans payable to the order of the Assigning Lender in the amount of such Loans retained by it (each such promissory note shall constitute a "Note" for purposes of the Loan Documents). Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibits B, C, D and/or E hereto, as applicable. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.8, disclose to the Assignee or participant or proposed Assignee or participant any information relating to Kitty Hawk or any of its Subsidiaries or any other Kitty Hawk Company furnished to such Lender by or on behalf of Kitty Hawk or any of its Subsidiaries or any other Kitty Hawk Company; provided that each such actual or proposed Assignee or participant shall agree to be bound by the provisions of Section 13.20. (g) Any Lender may assign and pledge all or any of the Notes held by it to any Federal Reserve Bank or the U.S. Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by the Federal Reserve System and/or Federal Reserve Bank; provided, however, that any payment made by a Borrower for the benefit of such assigning and/or pledging Lender in accordance with the terms of the Loan Documents shall satisfy such Borrower's obligations under the Loan Documents in respect thereof to the extent of such payment. No such assignment and/or pledge shall release the assigning and/or pledging Lender from its obligations hereunder. Section 13.9 Survival. All representations and warranties made or deemed made in this Agreement or any other Loan Document or in any document, statement or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and 98 105 the other Loan Documents and the making of the Loans, and no investigation by Agent or any Lender or any closing shall affect the representations and warranties or the right of Agent or any Lender to rely upon them. Without prejudice to the survival of any other obligation of each of the Kitty Hawk Companies hereunder, the obligations of each of the Kitty Hawk Companies under Article 4 and Sections 13.1 and 13.2 shall survive repayment of the Loans, the Reimbursement Obligations and the other Obligations. Section 13.10 ENTIRE AGREEMENT; AMENDMENT AND RESTATEMENT; WAIVER OF CLAIMS. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, TERM SHEETS, AGREEMENTS (INCLUDING, WITHOUT LIMITATION THE WFB AGREEMENTS AND THE BANK ONE AGREEMENT), REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. This Agreement amends and restates in their entirety (but does not extinguish the indebtedness, liabilities or obligations evidenced by or outstanding under) the WFB Agreements and the Bank One Agreement. The execution of this Agreement and the other Loan Documents executed in connection herewith does not extinguish the indebtedness, liabilities or obligations evidenced by or outstanding under the WFB Agreements or the Bank One Agreement, nor does such execution constitute a novation with respect to any such indebtedness, liabilities or obligations. Each Kitty Hawk Company represents and warrants to Agent and Lenders that, as of the Closing Date, there are no claims or offsets against, or defenses or counterclaims to, its indebtedness, liabilities and obligations under the WFB Agreements and the Bank One Agreement, or the promissory notes or the other "Loan Documents" as defined therein. TO INDUCE AGENT AND LENDERS TO ENTER INTO THIS AGREEMENT, KITTY HAWK AND THE OPERATING COMPANIES WAIVE ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE HEREOF AND RELATING TO ANY OF THE WFB AGREEMENTS, THE BANK ONE AGREEMENT OR SUCH "LOAN DOCUMENTS" OR THE TRANSACTIONS CONTEMPLATED THEREBY. Section 13.11 Amendments. No amendment or waiver of any term or provision of this Agreement, the Notes or any other Loan Document to which any Kitty Hawk Company is a party, nor any consent to any departure by any Kitty Hawk Company therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Lenders and any Kitty Hawk Company (as applicable) in writing, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver or consent shall, unless in writing and signed by all of Lenders and the Kitty Hawk Companies, do any of the following: (a) increase the Commitments of Lenders or subject Lenders to any additional obligations; (b) reduce the principal of, or interest on, the Loans or any fees or other amounts payable hereunder; (c) postpone any date fixed for any payment (including, without limitation, any mandatory prepayment) of principal of, or interest on, the Loans or any 99 106 fees or other amounts payable hereunder; (d) waive any of the conditions precedent specified in Article 6; (e) change the Commitment Percentages or the Aggregate Loan Percentages or the aggregate unpaid principal amount of the Loans, the Reimbursement Obligations or other Obligations or the number or interests of Lenders which shall be required for Lenders or any of them to take any action under this Agreement; (f) change any provision contained in Section 3.2, Section 3.3 or this Section 13.11 or modify the definition of "Required Lenders" contained in Section 1.1; or (g) except as expressly authorized by this Agreement, release any Collateral from any of the Liens created by the Security Documents or release any guaranty of all or any portion of the Obligations. Notwithstanding anything to the contrary contained in this Section 13.11, no amendment, waiver or consent shall be made with respect to Article 12 hereof without the prior written consent of Agent and Agent and Lenders may, without the agreement of any Kitty Hawk Company, amend the terms and provisions of Article 12 other than Section 12.6. Section 13.12 Maximum Interest Rate. (a) No interest rate specified in this Agreement or any other Loan Document shall at any time exceed the Maximum Rate. If at any time the interest rate (the "Contract Rate") for any Obligation shall exceed the Maximum Rate, thereby causing the interest accruing on such Obligation to be limited to the Maximum Rate, then any subsequent reduction in the Contract Rate for such Obligation shall not reduce the rate of interest on such Obligation below the Maximum Rate until the aggregate amount of interest accrued on such Obligation equals the aggregate amount of interest which would have accrued on such Obligation if the Contract Rate for such Obligation had at all times been in effect. (b) Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, none of the terms and provisions of this Agreement or the other Loan Documents shall ever be construed to create a contract or obligation to pay interest at a rate in excess of the Maximum Rate, and neither Agent nor any Lender shall ever charge, receive, take, collect, reserve or apply, as interest on the Obligations, any amount in excess of the Maximum Rate. The parties hereto agree that any interest, charge, fee, expense or other obligation provided for in this Agreement or in the other Loan Documents which constitutes interest under applicable law shall be, ipso facto and under any and all circumstances, limited or reduced to an amount equal to the lesser of (i) the amount of such interest, charge, fee, expense or other obligation that would be payable in the absence of this Section 13.12(b) or (ii) an amount, which when added to all other interest payable under this Agreement and the other Loan Documents, equals the Maximum Rate. If, notwithstanding the foregoing, Agent or any Lender ever contracts for, charges, receives, takes, collects, reserves or applies as interest any amount in excess of the Maximum Rate, such amount which would be deemed excessive interest shall be deemed a partial payment or prepayment of principal of the Obligations and treated hereunder as such, and if the Obligations, or applicable portions thereof, are paid in full, any remaining excess shall promptly be paid to the applicable Borrower or Borrowers (as appropriate). In determining whether the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, Borrowers, Agent and Lenders shall, to the maximum extent permitted by applicable law, (i) characterize any nonprincipal payment 100 107 as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the Obligations, or applicable portions thereof, so that the interest rate does not exceed the Maximum Rate at any time during the term of the Obligations; provided that, if the unpaid principal balance is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, Agent and/or Lenders, as appropriate, shall refund to the applicable Borrower or Borrowers (as appropriate) the amount of such excess and, in such event, Agent and Lenders shall not be subject to any penalties provided by any laws for contracting for, charging, receiving, taking, collecting, reserving or applying interest in excess of the Maximum Rate. (c) Pursuant to Article 15.10(b) of Chapter 15, Subtitle 79, Revised Civil Statutes of Texas 1925, as amended, each Kitty Hawk Company agrees that such Chapter 15 (which regulates certain revolving credit loan accounts and revolving tri-party accounts) shall not govern or in any manner apply to the Obligations. Section 13.13 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which any Kitty Hawk Company is a party shall be given or made by telecopy or in writing and telecopied, mailed by certified mail return receipt requested or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof (or, with respect to a Lender that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it); or, as to any party, at such other address as shall be designated by such party in a notice to each other party given in accordance with this Section 13.13. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid; provided, however, that notices to Agent shall be deemed given when received by Agent. Section 13.14 GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. EXCEPT AS MAY BE EXPRESSLY STATED TO THE CONTRARY IN CERTAIN LOAN DOCUMENTS, THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES) AND APPLICABLE LAWS OF THE U.S. EACH OF KITTY HAWK AND THE OPERATING COMPANIES HEREBY SUBMITS TO THE NON- EXCLUSIVE JURISDICTION OF EACH OF (1) THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, AND (2) ANY TEXAS STATE COURT SITTING IN DALLAS COUNTY, TEXAS, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH OF KITTY HAWK AND THE OPERATING COMPANIES HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS 101 108 IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH PERSON AT ITS ADDRESS SET FORTH UNDERNEATH ITS SIGNATURE HERETO. EACH OF KITTY HAWK AND THE OPERATING COMPANIES HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORM. Section 13.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13.16 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section 13.17 Headings. The headings, captions and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 13.18 Construction. Each of each Kitty Hawk Company, Agent and each Lender acknowledges that it has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the parties hereto. Section 13.19 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists. Section 13.20 Confidentiality. Each Lender agrees to exercise its best efforts to keep any information delivered or made available by any Kitty Hawk Company to it which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by such Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Lender from disclosing such information (a) to any other Lender, (b) to any Person if reasonably incidental to the administration of the Loans, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority having jurisdiction over such Lender, (e) which has been publicly disclosed, (f) in connection with any litigation to which Agent, any Lender or their respective Affiliates may be a party, (g) to the extent reasonably required in connection with the exercise of any right or remedy under the Loan Documents, (h) to such Lender's legal counsel, independent auditors and affiliates, and (i) to any actual or proposed 102 109 participant or Assignee of all or part of its rights hereunder, so long as such actual or proposed participant or Assignee agrees to be bound by the provisions of this Section 13.20. Section 13.21 Approvals and Consent. Except as may be expressly provided to the contrary in this Agreement or in the other Loan Documents (as applicable), in any instance under this Agreement of the other Loan Documents where the approval, consent or exercise of judgment of Agent or any Lender is requested or required, (a) the granting or denial of such approval or consent and the exercise of such judgment shall be within the sole discretion of Agent or such Lender, respectively, and Agent and such Lender shall not, for any reason or to any extent, be required to grant such approval or consent or to exercise such judgment in any particular manner, regardless of the reasonableness of the request or the action or judgment of Agent or such Lender, and (b) no approval or consent of Agent or any Lender shall in any event be effective unless the same shall be in writing and the same shall be effective only in the specific instance and for the specific purpose for which given. Section 13.22 Joint and Several Obligations. Each and every representation, warranty, covenant or agreement of the Kitty Hawk Companies, Kitty Hawk and any Kitty Hawk Operating Subsidiary or the Kitty Hawk Operating Subsidiaries contained herein shall be, and shall be deemed to be, the joint and several representation, warranty, covenant and agreement of each such Kitty Hawk Company. Section 13.23 AGREEMENT FOR BINDING ARBITRATION. EACH OF THE PARTIES HERETO AGREES TO BE BOUND BY THE TERMS AND PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF WELLS FARGO, WHICH ARBITRATION PROGRAM IS ATTACHED HERETO AS EXHIBIT G. ALL DISPUTES AMONG THE PARTIES HERETO SHALL BE RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF ANY PARTY HERETO. THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK. 103 110 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. KITTY HAWK: ---------- KITTY HAWK, INC. By: /s/ M. TOM CHRISTOPHER ------------------------------------- Name: M. Tom Christopher Title: Chairman of the Board of Directors and Chief Executive Officer LEASING: ------- AIRCRAFT LEASING, INC. By: /s/ RICHARD R. WADSWORTH, JR. ------------------------------------- Name: Richard R. Wadsworth, Jr. Title: President AIRCARGO: -------- KITTY HAWK AIRCARGO, INC. By: /s/ TILMON J. REEVES ------------------------------------- Name: Tilmon J. Reeves Title: President CHARTERS: -------- KITTY HAWK CHARTERS, INC. By: /s/ RICHARD R. WADSWORTH, JR. ------------------------------------- Name: Richard R. Wadsworth, Jr. Title: Vice President 104 111 SKYFREIGHTERS: -------------- SKYFREIGHTERS CORPORATION By: /s/ RICHARD R. WADSWORTH, JR. --------------------------------- Name: Richard R. Wadsworth, Jr. Title: Vice President Address for Notices to each Kitty Hawk -------------------------------------- Company: ------- Kitty Hawk, Inc., Aircraft Leasing, Inc., Kitty Hawk Aircargo, Inc., Kitty Hawk Charters, Inc. or Skyfreighters Corporation (as applicable) P.O. Box 612787 Dallas, Texas 75261 Attention: Mr. M. Tom Christopher 1515 W. 20th Street DFW Airport, Texas 75261 Fax No.: (214) 456-2210 Telephone No.: (214) 456-2220 105 112 AGENT AND A LENDER: ------------------ COMMITMENTS: WELLS FARGO BANK (TEXAS) NATIONAL Revolving Credit Loans ASSOCIATION Commitment: $ 7,500,000.00 By: /s/ DREW KEITH ----------------------- Term Loans A Name: Drew Keith Commitment: $12,744,000.45 Title: Vice President Term Loans C Commitment: $ 8,000,000.00 Address for Notices to Applicable ---------------------------------- Lending Office and Principal Office: -------------- -------------------- Wells Fargo Bank (Texas) National Association 1445 Ross Avenue, Suite 300 Dallas, Texas 75202 Attention: Drew Keith Fax No.: (214) 855-1340 Telephone No.: (214) 740-0099 ADDITIONAL LENDERS: ------------------ COMMITMENTS: BANK ONE, TEXAS, N.A. Revolving Credit Loans Commitment: $ 7,500,000.00 By: /s/ KEITH WRIGHT ------------------------------- Name: Keith Wright Term Loans B Title: Vice President Commitment: $11,225,000.00 Term Loans C Commitment: $ 2,000,000.00 Address for Notices to Applicable ---------------------------------- Lending Office: -------------- Bank One, Texas, N.A. 1717 Main Street, 3rd Floor Dallas, Texas 75201 Attention: Keith Wright Fax No.: (214) 290-2447 Telephone No.: (214) 290-2683 EX-23.1 9 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and the use of our report dated June 28, 1996, in the Registration Statement (Form S-1 No. 333-8307) 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 August 30, 1996 -----END PRIVACY-ENHANCED MESSAGE-----