FINE AIR SERVICES CORP, 10-K405, 2000-04-14

FINE AIR SERVICES CORP
10-K405, 2000-04-14
AIR TRANSPORTATION, NONSCHEDULED

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended: DECEMBER 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ___________________ to __________________

Commission file number: 333-59359

FINE AIR SERVICES CORP.
(Exact name of registrant as specified in its charter)

DELAWARE 65-0838357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)

2261 N.W. 67TH AVENUE
BUILDING 700
MIAMI, FLORIDA 33122
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (305) 871-6606

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 30, 2000, the aggregate market value of the Company's
common equity held by non-affiliates was $0

The number of shares of Common Stock of the registrant outstanding as
of March 30, 2000 was 3,000.

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<PAGE>

INDEX TO ITEMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I............................................................................................................3
Item 1. Business......................................................................................3
Item 2. Properties...................................................................................15
Item 3. Legal Proceedings............................................................................16
Item 4. Submission of Matters to a Vote of Security Holders..........................................16
PART II..........................................................................................................17
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters....................17
Item 6. Selected Financial Data......................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................30
Item 8. Financial Statements and Supplementary Data..................................................31
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.........47
PART III.........................................................................................................47
Item 10. Directors And Officers Of Registrant.........................................................47
Item 11. Executive Compensation.......................................................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................50
Item 13. Certain Relationships and Related Transactions...............................................50
PART IV..........................................................................................................51
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................51
</TABLE>

2
<PAGE>

PART I

ITEM 1. BUSINESS.

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE FACTORS SET FORTH UNDER THE CAPTION
"RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" IN "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" OF
THIS ANNUAL REPORT ON FORM 10-K AND ELSEWHERE IN THIS REPORT.

OVERVIEW

We are a leading provider of air cargo services between the United
States and Central and South America and the Caribbean. Since 1994, we have been
the largest international air cargo carrier serving Miami International Airport
(MIA), based on tons of cargo transported to and from that airport. MIA is the
largest international cargo airport in the United States and the third largest
international cargo airport in the world. Our air cargo services consist of
scheduled cargo services, which includes integrated air and truck cargo
transportation and other logistics services, and long- and short-term ACMI
(aircraft, crew, maintenance and insurance) and charter services. In addition,
we provide third party aircraft and engine maintenance, repairs and overhauls,
as well as spare parts sales, engine leasing, training and other services. Our
scheduled cargo services provide seamless transportation linking North America,
Europe, Asia and the Pacific Rim with 31 Central and South America and Caribbean
cities. Our customers include international and domestic freight forwarders,
integrated carriers, passenger and cargo airlines, major shippers, the United
States Department of Defense and the United States Postal Service. Our recent
acquisition of Arrow Air, provides us with complementary route structures that
further strengthened our market presence in South America and the Caribbean.

As of December 31, 1999, we marketed our scheduled cargo services
through a sales network consisting of seven domestic sales offices serving over
55 major U .S. cities, six international sales offices serving over 30 cities in
Europe, Canada, Asia, the Pacific Rim, Africa and Australia and 21 sales offices
in Central and South America and the Caribbean. We receive cargo directly from
freight forwarders and other shippers through our domestic and international
sales network and from other airlines pursuant to interline agreements. We
utilize our own fleet of aircraft and the services of other airlines through
interline and other contractual relationships to provide reliable air cargo
service to Central and South America and the Caribbean. We have interline
relationships with over 60 airlines, including Air France, American Airlines,
China Airlines, Continental Airlines, Iberia, Korean Air and Virgin Atlantic.

Our customers utilize our ACMI and charter services to obtain lift
capacity without acquiring their own aircraft. Under a typical ACMI contract, we
supply the aircraft, crew, maintenance and insurance, either on a regularly
scheduled or ad hoc basis, while the customer bears all other aircraft operating
expenses, including fuel, landing and parking fees and ground and cargo handling
expenses. Under a typical charter contract, we bear all the aircraft operating
expenses. Our ACMI and charter customers bear the risk of utilizing the cargo
capacity of our aircraft. By offering ACMI and charter services in addition to
scheduled cargo services, we are able to schedule our fleet to satisfy demand on
our own routes while improving utilization and generating additional revenue
from ACMI and charter services.

We perform a full range of maintenance, repair and overhaul services
for DC-8 aircraft and Pratt & Whitney JT3D aircraft engines. We own over 150
spare aircraft engines (approximately 30 of which are reserved to support our
own aircraft fleet) and an extensive inventory of spare aircraft parts and
consumable materials required to support line maintenance, scheduled airframe
maintenance and engine maintenance and repairs for our aircraft as well as third
parties. We believe that our inventory of spare parts for DC-8 aircraft is among
the largest in the world. We also operate FAA-approved professional pilot and
mechanic training schools.

ARROW AIR ACQUISITION

3
<PAGE>

sold back to the Sellers for $7.2 million two of the DC-8 aircraft we acquired
in this acquisition which were not critical to the operation of Arrow Air's
business. We accounted for these combined transactions as a purchase of a
business for financial reporting purposes. The aggregate purchase price was
$112.5 million in cash and the assumption of an estimated $24.9 million of
liabilities. In connection with our acquisition of Arrow Air, we acquired the
following assets:

o 12 DC-8 and four L-1011 aircraft (including one DC-8 and one
L-1011 which currently are in passenger configuration),

o one DC10-30 cargo aircraft,

o 132 spare aircraft engines,

o inventories of aircraft and engine parts,

o equipment relating to certain repair shops, and

o Arrow Air's operating certificates and route authorities.

In November 1999, we sold the DC10-30 cargo aircraft to a third party for
approximately $21.0 million.

Based in close proximity to Fine Air Services at MIA, Arrow Air is a
leading provider of air cargo services to South America and the Caribbean. Arrow
Air has operated under the same name longer than any other all-cargo airline in
the United States, and is well recognized in its markets for providing reliable
scheduled and ACMI and charter cargo services to its customers. Its hubs in
Miami and Puerto Rico provide efficient access to cities throughout North
America, Central and South America and the Caribbean.

AIR CARGO SERVICES

Our scheduled cargo services provide seamless transportation linking
North America, Europe, Asia and the Pacific Rim with Central and South America
and the Caribbean to serve the varied needs of our customers. Our customers
include international and domestic freight forwarders, integrated carriers,
passenger and cargo airlines, major shippers, the United States Department of
Defense and the United States Postal Service. Our air cargo services consist of
scheduled cargo services, which includes integrated air and truck cargo
transportation and other logistics services, long-and short-term ACMI (aircraft,
crew, maintenance and insurance) and charter services and transportation
logistics services, such as warehousing, local pick-up and intermodal
transportation of freight. In addition, we provide third party aircraft and
engine maintenance, repairs and overhauls, as well as spare parts sales, engine
leasing, training and other services.

SCHEDULED CARGO SERVICES

We offer regular air cargo service between North America and 31 cities
in Central and South America and the Caribbean, of which we serve 24 directly,
four are served by customers that utilize our aircraft on an ACMI or AMI basis
to service such routes and three are served by other airlines pursuant to
interline relationships. Cargo service is offered on a pre-booked, priority or
space-available basis, and we impose no size or weight restrictions on
shipments, except limitations necessitated by the capacity of the aircraft
serving the particular route. We do not dedicate a particular aircraft to anyone
route and maintain the flexibility to adjust our flight services, number of
daily flights and the cargo capacity of the aircraft serving each destination
and to add intermediate stops to pick up or deliver additional cargo based on
variations in demand. We have operated as many as six flights per day to a
particular destination to meet the demand for air cargo service to such
destination.

In connection with the acquisition of Arrow Air, we have increased the
frequency of our weekly flights to certain destinations and added flights to
several new destinations. Specifically, Arrow Air's hub in San Juan allows us to
increase our frequency of flights in the Caribbean and South America. In
addition, we now have the regulatory authority necessary to commence flights to
Argentina.

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<PAGE>

Our freight rates are based upon the type of freight, weight or volume,
delivery service and destination. Rates vary depending on the type of freight
and, in most instances, durable goods and perishables command higher rates than
dry goods. We offer priority next day delivery service at double our normal
rates and second day delivery service, which is billed on a space-available
basis. Rates on longer routes generally are higher than short-haul destinations.
Freight is priced on a per kilogram basis and is adjusted for low weight, high
volume freight in accordance with industry standards. We also offer pallet rates
for larger shipments. From time to time, our customers require the shipment of
hazardous or restricted materials or oversized pieces which require additional
handling, and the customer is charged higher rates. We charge a base rate plus
prevailing second carrier agreement rates for our interline services.

We transport a broad range of goods and commodities. Generally, a
majority of our southbound freight consists of durable goods, such as industrial
equipment and parts, electronic and computer equipment, medical instruments,
pharmaceuticals, vehicles, oilfield equipment, magazines, newspapers and mail,
consumer durables and textiles. Our northbound freight is comprised mainly of
finished textiles, pharmaceuticals, handicrafts and perishables, including
seafood, flowers and fruits and vegetables. Many of the items that we transport
northbound to the United States are perishable commodities, and our customers
rely on the dependability of our cargo service and our ability to accommodate
seasonal and variable airfreight requirements.

CARGO SALES NETWORK AND MARKETING

CARGO SALES NETWORK. As of December 31, 1999, our sales network was
comprised of our Miami headquarters, six regional sales offices in major U.S.
cities (three of which we operate and three of which are operated by general
sales agents), 21 sales offices in Central and South America and the Caribbean
and general sales agents in Europe, Canada, Asia, the Pacific Rim, Africa and
Australia. Our sales efforts are designed to maximize utilization of our
scheduled cargo service by seeking to achieve a balance between southbound and
northbound air cargo shipments.

Each of our sales offices markets our air cargo services to customers
within its region. Our U .S. sales offices, as well as our offices in El
Salvador, the Dominican Republic and Venezuela, have transportation logistics
capabilities, including intermodal relationships with major trucking companies
for local pick-up and delivery of customers' freight. Our personnel solicit
shipment orders and process air waybills and other documentary requirements for
customers' shipments. In areas not covered directly by our own sales personnel,
we engage general sales agents on a commission basis to sell our air cargo
services. Most of these general sales agents represent us on an exclusive basis
to destinations we serve. Air cargo sales made by general sales agents are based
on our published rate sheets and are documented utilizing our air waybills.

MARKETING. Our sales personnel and general sales agents market our air
cargo services directly to freight forwarders integrated carriers, passenger and
cargo airlines and major shippers. We participate in international air cargo
trade shows and advertise our services in industry trade journals. General sales
agents directly market our air cargo services to potential customers within
their territories using our trade names. In addition, some of our general sales
agents, such as Air Cargo Partners, which represents us in Europe and Asia,
include our air cargo services in their sales literature and published rate
sheets.

TRANSPORTATION LOGISTICS SERVICES

Freight forwarders, integrated carriers and airlines generally deliver
their cargo to our facility at the point of departure. Accordingly, most of the
freight we transport is either delivered to our MIA hub for shipment to South or
Central America or the Caribbean, or to our operations stations in South or
Central America or the Caribbean for shipment to the United States or beyond.
Smaller freight forwarders with less developed logistics capabilities often rely
on us to arrange for truck or air transportation of their cargo between our MIA
hub and the point of origin and/or destination. In addition, some major freight
forwarders request us to arrange for shipment, generally by truck carrier, of
their customers' freight from the point of origin to expedite shipment and
minimize administrative and handling costs.

When we provide transportation logistics services, our personnel
determine the best means of, and then arrange for, the transportation of the
freight between our warehouse facilities in Miami and the customers points of

5
<PAGE>

origin and destination. Whenever possible, we seek to achieve cost savings for
our customers by consolidating shipments and using major truckload carriers to
transport the consolidated freight. Southbound shipments that are more
time-sensitive or which have a value that justifies the cost of expedited
delivery usually are transported by air on scheduled passenger or cargo airlines
to Miami. Each of our sales offices maintains warehouse capabilities for storage
and consolidation of freight, generally through arrangements with local third
party warehouse operators.

We offer our customers a variety of ancillary services tailored to
their particular need, for which we generally charge an additional fee, such as
the following:

o Arranging for local pick-up and delivery,

o Warehousing of cargo shipments, expedited document delivery for
customs clearance, priority notification to consignees of cargo
arrival,

o Assisting in the preparation of air waybills and shipping
documents, including customs export declarations, pro forma and
foreign consular invoices and other customs documentary
requirements,

o Assisting in obtaining export or import licenses, and arranging
for cargo insurance.

CUSTOMERS

FREIGHT FORWARDERS. Freight forwarders are important participants in
the domestic and international air freight markets. Major international freight
forwarders increasingly have become reluctant to arrange transportation of their
customers' freight through integrated cargo carriers (such as FedEx, UPS or DHL)
because these carriers compete with the freight forwarders for the same cargo
customers. As a result, we believe that independent air cargo service companies
such as Fine Air, who can provide reliable air cargo services and handle the air
and truck cargo transportation requirements of both large and small freight
forwarders, have an opportunity to capture an increasing share of the air
freight market. Freight forwarder customers include major international freight
forwarders such as Air Express International, Danzas, Eagle USA, Expeditors
International, Fritz Companies and Nippon Express, as well as smaller regional
freight forwarders.

INTERLINE CUSTOMERS. Many major international airlines sell air cargo
services to destinations they do not serve directly and utilize other airlines
or cargo carriers to transport their customers' cargo from the cities they serve
to the ultimate destination. For example, most of our European interline
customers fly to Miami or one or more major Central and South American or
Caribbean destinations but sell air cargo services to other destinations to
which they have no direct flights. These airlines will deliver cargo to our MIA
hub or a regional sales office for transportation at a fixed rate to our Central
and South American or Caribbean scheduled destinations. We also transport cargo
at a fixed rate from our Central and South American and Caribbean scheduled
destinations to interline customers at our MIA hub to be distributed by
interline customers to destinations throughout the world.

As of December 31, 1999, we handled interline freight for over 60
airlines, including Air France, American Airlines, China Airlines, Continental
Airlines, Iberia, Korean Air and Virgin Atlantic.

MILITARY AND OTHER CUSTOMERS. Arrow Air has provided cargo services to
the United States Department of Defense since 1981. Arrow Air has provided
service to the military both for scheduled operations and in times of peak
demand, such as during the Persian Gulf War. In addition, we provide cargo
services to the United States Postal Service, the U.S. Department of State,
industrial manufacturers, distributors and other large corporations that arrange
for the shipment of their own air freight. Because of our reliability,
reputation and position in our Central and South American and Caribbean markets,
several major multinational corporations have also either directed their
independent freight forwarders to use our air cargo services or designated us as
their air carrier of choice for shipments to or from these markets.

During the year ended December 31,1997, Aero Transcolombiana de Carga,
S.A. accounted for 13.5% of our total revenues. We had no single customer that
accounted for more than 10% of our total revenues in 1998 or 1999.

6
<PAGE>

ACMI AND CHARTER SERVICE

Certain of our customers, most of which are international airlines,
utilize our ACMI and charter services to obtain lift capacity without acquiring
their own aircraft. Under these contracts, we provide our aircraft from as
infrequently as one flight per week to as many as twelve flights per week, or on
an ad hoc basis. In addition, one of our aircraft currently is dedicated
exclusively to service under an ACMI contract that expires in 2001. We also
provide ACMI services for the seasonal or peak demands of Latin American produce
and flower growers and domestic delivery services such as the United States
Postal Service and United Parcel Service. In addition, we believe Arrow Air is
one of only a few air cargo carriers with worldwide charter authority, which
allows us to provide ACMI and charter services to customers anywhere in the
world.

A typical ACMI contract requires us to supply the aircraft, crew,
maintenance and insurance for specified cargo operations, while the customer is
responsible for substantially all other aircraft operating expenses, including
fuel, landing and parking fees and ground and cargo handling expenses. Under the
contract, we have exclusive operating control and direction of its aircraft and
our customer must obtain any government authorizations and permits required to
service the designated routes. See "-Government Regulation." Under a typical
charter contract, we bear all the aircraft operating expenses. Most of our ACMI
and charter contracts do not require us to operate a specific aircraft for our
customer. Generally, our ACMI contracts are for a two-year term but are
cancelable by either party upon five days' written notice. Our charter contracts
are generally on an ad hoc basis. With the exception of one aircraft operated by
an ACMI customer, all of our aircraft are operated both on our own cargo flights
and for ACMI customers. This enables us to schedule our fleet to satisfy demand
on our own routes while improving fleet utilization and generating additional
revenue from ACMI services.

AIRCRAFT FLEET

As of December 31, 1999, our fleet consisted of 25 narrowbody DC-8
cargo aircraft, one narrowbody DC-8 passenger aircraft, four widebody L-1011
cargo aircraft and one widebody L-1011 passenger aircraft. Our fleet includes
six "stretch" DC-8s, which have a longer fuselage and more cargo volume capacity
and we generally utilize these aircraft to serve higher volume routes. We
maintain flexibility to adjust on a daily basis the aircraft we use for our own
cargo routes based on demand. For example, we may respond to low demand on a
particular route by utilizing the same aircraft to handle two or more
destinations or to satisfy higher demand on another route by utilizing our
stretch aircraft or adding additional flights. Similarly, although we may commit
to provide a cargo flight for an ACMI or charter customer at a particular time
or date, we maintain the flexibility to utilize whichever of our aircraft best
serves the capacity and distance required for the flight.

As of December 31, 1999 our aircraft ranged in age from 20 to 40 years,
with an average age of approximately 32 years. Based on the useful life of DC-8
aircraft as estimated by the FAA and Boeing and our current maintenance program,
we expect to be able to operate our DC-8 aircraft for at least 10 more years.

The following table contains information concerning our operating fleet
at December 31, 1999.
<TABLE>
<CAPTION>
AIRCRAFT NUMBER YEAR OF APPROX. CARGO RANGE
TYPE OF AIRCRAFT MANUFACTURE CAPACITY (LBS) (NAUTICAL MILES)
---- ----------- ----------- -------------- ----------------
<S> <C> <C> <C> <C>
DC-8-51 4 1959 - 1968 72,300 - 77,200 2,000 - 3,000
DC-8-54 7 1962 - 1968 89,200 - 92,600 2,000 - 3,000
DC-8-55 1 1965 92,700 2,500 - 3,000
DC-8-61 2 1967 -1971 91,300 2,000 - 3,000
DC-8-62 7 1967 - 1970 84,000 - 95,000 3,000 - 4,000
DC-8-63 3 1968 102,000 - 111,500 2,500 - 3,500
L-1011 4 1975 - 1978 125,000 2,000 - 3,000
</TABLE>

In addition to our operating fleet of 28 aircraft, we own one
L-1011-500 passenger aircraft, one DC-8-63 passenger aircraft and one DC-8-62
cargo aircraft. We intend to use these aircraft for spare parts, convert the
aircraft for cargo operations or sell these aircraft.

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FLIGHT OPERATIONS AND CONTROL. Our dispatch and flight operations
personnel plan and control our flight operations, including aircraft
dispatching, flight following and crew scheduling, from our MIA base. Our flight
control office is manned 24 hours per day, seven days per week. Logistical
support necessary for operations into the airports served by our flights also
are coordinated from our MIA base.

To enhance the reliability of our service, we seek, when possible, to
maintain at least one spare aircraft at all times. The spare aircraft can be
dispatched on short notice to most locations we serve when a substitute aircraft
is needed. Maintaining one or more spare aircraft allows us to better ensure the
availability of aircraft for our regular cargo flights and to provide our ACMI
customers with high dispatch reliability.

MAINTENANCE. We perform substantially all of the inspections,
maintenance and repairs required to keep our fleet of DC-8 aircraft in operation
and in compliance with our FAA-approved maintenance program at our own
facilities. In addition, we perform line maintenance on our L-1011 aircraft but
outsource the heavy maintenance on these aircraft. Whenever possible, we also
utilize our own employees to perform line maintenance, such as correcting
irregularities noted by flight crews and maintaining aircraft log books, at the
foreign airports we serve. We believe that maintaining our own fleet of DC-8
aircraft reduces maintenance costs, minimizes out-of service time for our DC-8
aircraft and achieves a high level of reliability.

For Fine Air Service's aircraft, in addition to routine daily
maintenance, we perform the following maintenance:
<TABLE>
<CAPTION>
AIRCRAFT TYPE CHECK FREQUENCY ESTIMATED COST
------------- ----- --------- --------------
<S> <C> <C> <C>
DC-8 "A" Check Earlier of 150 hours or six months $800
"B" Check Earlier of 425 hours or 12 months $12,000
"C" Check Earlier of 3,300 hours or 36 months $650,000
"D" Check Earlier of 25,000 hours or 12 years $1.3 - $1.6 million

L-1011 "A" Check Every 300 hours $10,000
"C" Check Earlier of 3,000 hours or 13 months $1.5 million
"D" Check Earlier of 24,000 hours or 10 years $2.5 million

<CAPTION>
For Arrow Air's aircraft, in addition to routine daily maintenance,
we perform the following maintenance:

<S> <C> <C> <C>
DC-8 "A" Check Every 150 hours $1,000
"B" Check Every 650 hours $12,000
"C" Check Earlier of 3,300 hours or 18 months $750,000
"D" Check Every 25,000 hours or 12 years $1.6 million

L-1011 "A" Check Every 140 hours $8,000
"B" Check Every 400 hours $12,000
"C" Check Earlier of 3,000 hours or 15 months $1.7 million
</TABLE>

Fine Air Services is authorized to maintain its own aircraft and aircraft
of other air carriers pursuant to its air carrier operating certificate. Fine
Air Services also operates an FAA certified repair station for Pratt & Whitney
JT3D aircraft engines, which perform complete repair services on our DC-8
aircraft engines.

Fine Air Services' MIA facility accommodates up to two large widebody
aircraft (such as Boeing 747s), three medium widebody aircraft (such as
McDonnel1 Douglas DC-10s or Lockheed L-1011s) or three narrowbody aircraft (such
as DC-8s) simultaneously for repairs and maintenance operations. In addition,
Arrow Air's MIA facility accommodates up to two narrowbody aircraft.

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<PAGE>

Our maintenance and engineering personnel coordinate all routine and
non-routine maintenance operations, including the following:

o tracking the maintenance status of each aircraft,

o communicating with maintenance personnel in connection with every
arrival and departure,

o consulting with manufacturers and vendors about procedures to
correct irregularities, and o training our line maintenance
personnel on the requirements of our FAA-approved maintenance
program.

We conduct virtually all of our own maintenance training.

We own approximately 30 spare aircraft engines and an extensive
inventory of spare aircraft parts and consumable materials which are reserved to
support line maintenance, scheduled airframe maintenance and engine maintenance
and repairs for our operating fleet. In addition, we have over 120 additional
serviceable or repairable Pratt & Whitney JT3D and JT8D aircraft engines,
Rolls-Royce RB211 aircraft engines and general Electric CF6 aircraft engines and
additional inventories of aircraft and engine parts. All spare aircraft engines
are continually overhauled and refurbished to extend their useful life and are
used in our normal operations on an as-needed basis. We also own larger aircraft
components, such as airframe structures, landing gears and flight controls. We
opportunistically purchase spare parts, spare engines, entire inventories and
other aircraft components when "bulk" purchases of these items have been
available or market conditions are otherwise favorable. Generally, bulk purchase
opportunities have arisen when airlines or manufacturers of parts sell large
amounts of inventory in a single transaction or in conjunction with a
bankruptcy. Opportunistic inventory purchases have allowed us to obtain a large
inventory of spare parts at a lower cost than could have been obtained by
purchasing on an individual basis. From time to time, parts may become
unavailable or be in short supply. In the past, we have been able to design and
manufacture from manufacturers' drawings structural parts pursuant to a limited
license granted by the manufacturer. We believe that such practices will
continue to be available within the industry in the near future.

TRAINING. The FAA mandates initial and recurrent training for most
flight, maintenance and engineering personnel. Initial pilot training consists
of a two-month program that involves FAA regulations and licensing exams,
emergency and security procedures, handling of hazardous materials, systems,
flight simulator sessions and actual operating experience with our aircraft. We
generally hire pilots whom we have "pre-screened" as a result of such training.
We pay for all of the recurrent training required for our pilots and pay for
most of the training of our ground service and maintenance personnel. Our
training programs have received all required FAA approvals.

We operate our own FAA-approved professional training schools at our
MIA facility, where we conduct all of the training programs required for our
personnel. In addition, we offer training to third party individuals in an
effort to control our overhead costs related to training.

GROUND HANDLING. We utilize our own ground handling personnel and
equipment for loading, servicing and maintaining our aircraft at MIA and at most
of the other airports we serve whenever it is cost effective to do.

FUEL. Fuel is a significant operating cost. We generally purchase
bonded fuel that is tax-free to us because the fuel is utilized for
international flights. Our exposure to fuel risk is reduced to the extent that
we provide air cargo services under ACMI contracts, under which the customer is
responsible for providing fuel. We do not believe that fluctuations in the price
of fuel have had a significant impact on our results of operations in recent
years because we have been able to pass on increases to customers in the form of
fuel surcharges.

INFORMATION SYSTEMS

We have invested significant management and financial resources in the
development of information systems to facilitate our cargo, flight and
maintenance operations, provide our personnel accurate and timely information
and increase the level of service and information we provide to customers. We
continually assess our management information systems and, during 1999
information systems for maintenance and logistics management, cargo handling
management and financial applications were acquired, implemented, and put into
production. Additionally, flight operations and crew management software has
been acquired and will be fully operational during the first quarter of 2000.

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<PAGE>

Information concerning the status of shipments currently is available
only to our personnel, but we intend to increase the amount of information
available on-line to our customers. We also utilize the U.S. Customs
Department's Automated Manifest System, which was first made available at MIA,
to expedite customs clearance for our customers' air freight. This system allows
us to electronically transfer our cargo manifest to customs while a flight is in
transit and "pre-clear" much of the cargo, thereby reducing transfer delays,
promptly releasing freight and allowing it to be transported to its destination
more quickly.

Our maintenance operations utilize information systems with bar coding
to track and control spare parts inventory and costs associated with each
maintenance task. In addition to maintaining records concerning the maintenance
status and history of each major aircraft part or component, as required by FAA
regulations, we utilize our information systems to track the labor and parts
cost of each maintenance task performed by its personnel.

SECURITY AND SAFETY

SECURITY. We conduct various security procedures to comply with FAA
regulations. Our customers are required to inform us in writing of the nature
and composition of their airfreight. We also take the following security
precautions:

o conduct daily cargo searches,
o x-ray our customers' air freight, and
o conduct searches for hazardous materials, weapons, explosive
devices and illegal freight.

We use search dogs at MIA to seek out explosives and controlled
substances. We also conduct searches for contraband in foreign countries at the
point of origin prior to departure for the United States. Notwithstanding these
procedures, we could unknowingly transport contraband or hazardous materials for
our customers, which could result in fines, penalties, flight bans or possible
damage to our aircraft. We believe we maintain an excellent cooperative
relationship with U.S. Customs, the U.S. Department of Agriculture and the U .S.
Drug Enforcement Agency.

SAFETY AND INSPECTIONS. We are committed to the safe operation of our
aircraft. In compliance with FAA regulations, our aircraft are subject to
various levels of scheduled maintenance or "checks" and periodically go through
complete overhauls. See "-Aircraft Fleet-Maintenance." Our maintenance efforts
are monitored closely by the FAA, with FAA representatives often on-site to
observe maintenance being performed. We also conduct extensive safety checks and
audits on a regular basis. All of our flight operations and maintenance manuals
are FAA approved.

Following the August 7, 1997 crash of one of our aircraft, the FAA
placed our operations under heightened scrutiny. As a result of concerns
expressed by the FAA, we voluntarily ceased operations on September 4, 1997, and
on September 12, 1997 we entered into a consent agreement with the FAA. Under
this consent agreement, we agreed not to resume operations until the FAA
approved new cargo handling and hazardous materials procedures to be implemented
by us. We also agreed to make a remedial payment of $1.5 million to the FAA for
the costs of the FAA's investigation, review and re-inspection of us. Pursuant
to this consent agreement, $500,000 of this assessment was waived as a result of
our compliance with certain requirements prior to December 31, 1997. We resumed
operations on a limited basis on October 28, 1997, approximately seven weeks
after suspending operations, and were fully operational by the first quarter of
1998. We are in full compliance with the terms of this consent agreement.

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<PAGE>

to such agreement we plead guilty to charges of the following conduct arising
after, and unrelated to the aircraft involved in, the accident: (i) discarding,
destroying and concealing documents and records in violation of federal law and
(ii) making false statements to the FAA regarding the completion of certain
inspection and maintenance procedures. The plea agreement calls for us to pay a
$3,500,000 fine and to further implement a safety inspection program. This fine
is to be satisfied by an immediate cash payment of $500,000 with the remaining
$3,000,000 to be paid over four years in $750,000 installments. We are also
jointly and severally liable with our joint venture partner for an additional
fine of $1,500,000 levied on the joint venture pursuant to a separate plea
agreement. We have entered into an agreement with our joint venture partner,
whereby they have agreed to be responsible for 50% of the total fines of
$5,000,000. The plea agreements are expected to be approved by the U.S. District
Court for the Southern District of Florida in June 2000 following routine
pre-sentencing investigations by the court and, in addition to the assessment of
fines mentioned above, we expect to be placed on probation for a period of four
years.

On March 17, 1995, Arrow Air voluntary suspended operations following
charges by the FAA that it had failed to keep adequate maintenance records and
had incorrectly placed serviceable tags on aircraft parts that had not been
properly approved for such tags. Arrow Air reached a settlement with the FAA on
April 29, 1995, pursuant to which it agreed to (1) resume operations only after
being re-certified, (2) replace certain key management personnel and (3) make a
$1.5 million remedial payment to defray costs of the FAA's investigation and
costs associated with the re-certification. Arrow Air resumed operations under
the terms of this agreement on June 9, 1995. In addition, in July 1998, as a
result of a federal grand jury investigation of the improper tagging of parts
which arose out of the FAA investigation, Arrow Air pled guilty to a six count
information, paid a total of $5.0 million in fines and restitution payments and
was placed on probation for up to five years.

According to the National Transportation Safety Board Regulations, an
"aircraft accident" is an occurrence associated with the operation of an
aircraft which takes place between the time any person boards the aircraft with
the intention of flight and all said persons have disembarked, and in which any
person suffers death or serious injury, or in which the aircraft receives
substantial damage. On August 7, 1997, one of our aircraft crashed immediately
following takeoff from MIA. The aircraft, enroute to Santa Domingo, Dominican
Republic, was carrying denim on an ACMI flight. Five persons died as a result of
the accident. Other than this accident, during the last 10 years, our aircraft,
while being operated by us, have not been involved in any accidents. In May
1994, one of our aircraft, while being leased and operated by a non-affiliated
foreign airline, was involved in a non-fatal aircraft accident. The aircraft
sustained significant damage during take-off due to the failure of the
aircraft's nose gear component and was declared a total loss by the insurers.

RISK MANAGEMENT

Our operations involve risks of potential liability against us in the
event of aircraft accidents. An accident could result in substantial cost to
repair or replace a damaged aircraft or claims for damaged or destroyed cargo
and significant potential liability for claims for injury or death to third
parties and our crew members. We purchase hull insurance for our aircraft on an
agreed value basis to provide coverage for total losses and repair expenses in
the event of a partial loss, subject to a $500,000 deductible in the event of
partial losses. The DOT requires airlines to carry at least $20 million of
liability insurance. We currently maintain public liability insurance in the
amount of $500 million per occurrence. With the exception of claims relating to
the August 1997 crash of one of our aircraft, we have had a low claim experience
and believe that we enjoy a good reputation with our insurance providers.

To insure against risks associated with our maintenance and engine
repair operations, we maintain aviation and airline product liability, premises
and hangarkeepers insurance in amounts and on terms generally consistent with
industry practice. To date, we have not experienced any significant uninsured or
insured claims related to its maintenance or engine repair services.

We are legally responsible to our customers for the safe delivery of
cargo to its ultimate destination, subject to contractual and legal limitations
on liability of $20.00 per kilogram ($9.07 per pound) for international flights
and $0.50 per pound for domestic flights. We carry insurance for these claims.

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<PAGE>

COMPETITION

The market for airfreight services is highly competitive. Our cargo
services compete for cargo volume principally with other all-cargo airlines,
integrated carriers and scheduled and non-scheduled passenger airlines, which
have substantial belly cargo capacity. To a lesser extent, we also compete for
freight forwarding business with fully integrated carriers, some of which are
also our customers. Our ACMI and charter services compete primarily with other
airlines that operate all-cargo aircraft and have lift capacity in excess of
their own needs. Our ACMI and charter business also could be adversely affected
by the decision of our air carrier customers to acquire additional aircraft or
by our non-air carrier customers to acquire and operate their own aircraft. Many
of our competitors have substantially greater financial and other resources and
more extensive facilities and equipment than us.

EMPLOYEES

As of December 31, 1999, We had 1,421 employees, including the following:

o 272 flight operations personnel,
o 563 maintenance, technical and security personnel,
o 292 cargo handling personnel, and
o 294 executive, administrative, sales and financial personnel.

In October 1997, the International Brotherhood of Teamsters was
certified to represent Fine Air's flight deck crewmembers for collective
bargaining purposes. We have been negotiating a collective bargaining agreement
with representatives of the Teamsters since mid-1998. The final collective
bargaining agreement could result in higher employee compensation and work rule
changes that could increase our operating costs and constrain our operating
flexibility or result in other changes adverse to our business. While we intend
to negotiate with the Teamsters in good faith, we cannot assure you that we will
be able to enter into a collective bargaining agreement. Our failure to enter
into a collective bargaining agreement could result in work stoppages.

Arrow Air's flight deck crewmembers have been represented by an "in
house" union since February 1984. Arrow Air's collective bargaining agreement
with these employees became amendable on August 1, 1999 and we are currently in
negotiation for a new agreement. We cannot assure you that we will be able to
renegotiate this agreement on satisfactory terms.

FAA regulations require our pilots to be licensed as commercial pilots,
with specific ratings for the aircraft type to be flown, and to be medically
certified as physically fit to fly aircraft. Licenses and medical certification
are subject to periodic continuation requirements, including recurrent training
and minimum amounts of recent flying experience. Mechanics and quality control
inspectors must also licensed and qualified for specific aircraft. Under our
supplemental certification status flight dispatchers do not need to be licensed.
We routinely perform employee background checks for a ten- year period prior to
employment and conduct more pre-employment screening than mandated by FAA
regulations. In addition, our management personnel who are directly involved in
the supervision of flight operations, training, maintenance and aircraft
inspection must meet experience standards prescribed by FAA regulations. All of
our employees are subject to pre-employment drug and alcohol testing, and
employees holding certain positions are subject to subsequent random testing.

GOVERNMENT REGULATION

GENERAL. Our business is subject to extensive government regulation
under U.S. laws and the laws of the various countries which we serve. We are
subject to Title 49 of the United States Code (formerly the Federal Aviation act
of 1958, as amended), under which the DOT and the FAA exercise regulatory
authority over air carriers. The DOT and the FAA have the authority to modify,
amend, suspend or revoke the authority and licenses issued to our personnel and
us if they or we fail to comply with the provisions of law or applicable
regulations. In addition, the Dot and the FAA may impose civil or criminal
penalties for violations of applicable rules and regulations. Such actions by
the FAA or the DOT, if taken, could have a material adverse effect on our
business.

Most of our operations are conducted between the United States and
foreign countries, or between two or more points located outside the United
States. As with the certificates and licenses obtained from U.S. authorities, we

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<PAGE>

must comply with all applicable rules and regulations imposed by foreign
aeronautical authorities or risk having our foreign operating certificates or
licenses revoked, suspended, amended or modified.

Our international operations also are governed by air services
agreements between the United States and foreign countries where we operate.
Under Some of these air services agreements, traffic rights in those countries
are available to only a limited number of and in some cases only one or two,
U.S. air carriers and are subject to approval by the applicable foreign
regulators, limiting growth opportunities in such countries.

The adoption of new laws, policies or regulations, amendments to
existing laws or regulations or changes in the interpretation or application of
existing laws, policies or regulations, whether by the FAA, the DOT, the U.S.
government or any foreign, state or local government, could have a material
adverse effect on our business.

CERTIFICATES OF PUBLIC CONVENIENCE AND NECESSITY. The DOT maintains
authority over domestic and international aviation and has jurisdiction over
international routes. In order to engage in our air transportation business, we
are required to maintain a Certificate of Public Convenience and Necessity
("CPCN"). Prior to issuing a CPCN, DOT examines a company's managerial
competence, financial resources and plans and compliance disposition in order to
determine whether the carrier is fit, willing and able to engage in the
transportation services it has proposed to undertake. Among other things, a
company holding a CPCN must qualify as a United States citizen, which requires
that (1) it be organized under the laws of the United States or a State,
territory or possession thereof, (2) that its chief executive officer and at
least two-thirds of its Board of Directors and other managing officers be United
States citizens, (3) that not more than 25% of its voting stock be owned or
controlled, directly or indirectly, by foreign nationals, and (4) that it not
otherwise be subject to foreign control. A CPCN confers no proprietary rights on
the holder and DOT may impose conditions or restrictions on such a CPCN.

The DOT has issued Fine Air Services a CPCN to engage in:
o interstate and overseas charter air transportation,
o foreign charter air transportation, and
o scheduled air transportation between Miami, Florida and Santo
Domingo, Dominican Republic

The DOT has issued Arrow Air a CPCN to engage in:
o interstate and overseas charter air transportation,
o foreign charter air transportation, and
o scheduled air transportation between the United States and 34
countries worldwide.

By virtue of our CPCNs to engage in interstate, overseas and foreign
charter air transportation of property and mail, both Fine Air Services and
Arrow Air are vested with authority from the U.S. government to conduct
all-cargo operations worldwide.

The DOT has also granted Fine Air Services and Arrow Air numerous
"exemptions" from the federal transportation statute to permit them to engage in
scheduled foreign air transportation to 28 cities in 18 countries and six cities
in four countries, respectively. Many carriers operate under such exemption
authority, which is granted for up to a period of two years and is typically
renewed by the DOT upon timely requests to do so. CPCNs and grants of exemption
authority are subject to standard DOT terms, conditions and limitations and may
be conditioned, suspended or withdrawn. We are also required to obtain separate
DOT authorization for each long-term wet lease (over 60 days) arrangement.

SAFETY, TRAINING AND MAINTENANCE REGULATIONS. Virtually every aspect of
our air carrier operations is subject to extensive FAA regulation, including the
areas of safety, training and maintenance. To ensure compliance with FAA rules
and regulations, the FAA routinely inspects our operations and aircraft. If the
FAA finds that we have not complied with applicable rules and regulations, they
can propose civil monetary penalties or suspend or revoke our licenses, permits
or authority to operate our aircraft or routes. If we incur substantial
penalties, or lose any of our material licenses, permits or authorities, our
business could be materially adversely affected. We cannot predict when we will
be subject to such inspections or regulations, or the impact of such
inspections.

Before we can operate a new aircraft type, we must demonstrate to the
FAA that we can safely operate and maintain the aircraft. This includes our
preparation of detailed operational, training and maintenance manuals, which

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<PAGE>

must be accepted by the FAA. Furthermore, we must demonstrate that we can
implement and comply with such manuals, properly train our crews and
successfully operate proving flights for the FAA before introducing the new
aircraft type into revenue service. We cannot assure you that the FAA will
certify us for operation of any new aircraft types we may seek to operate.

NOISE ABATEMENT REGULATIONS. Airline operators must comply with FAA
noise control regulations primarily promulgated under the Airport Noise and
Capacity Act of 1990. All of our DC-8 aircraft are affected by these noise
control regulations which require, among other things, that airlines must bring
their fleets into compliance with Stage III standards by December 31, 1999. Any
aircraft not complying with Stage III standards on January 1, 2000 may not be
operated in the United States until it is modified to comply with these
standards. Of the 28 aircraft in our operating fleet, 24 aircraft currently
comply with Stage III standards and we intend to modify the remainder of our
operating fleet during 2000.

Some airport operators have adopted local regulations, which, among
other things, impose curfews, and other noise limiting requirements and other
airport operators may do so in the future. Our international operations also are
affected by noise regulations in foreign countries that may be stricter than
those in effect in the United States.

AGING AIRCRAFT REGULATIONS. All of our aircraft are subject to ADs
which may be issued at any time under the FAA's " Aging Aircraft" program or
issued on an ad hoc basis. These ADs could cause us to conduct extensive
examinations and structural inspections of our aircraft and to make
modifications to our aircraft to address or prevent problems of corrosion and
structural fatigue. Our cost to comply with FAA ADs issued under the Aging
Aircraft program cannot currently be estimated but could be substantial and
could have a material adverse effect on our business.

HAZARDOUS MATERIALS REGULATIONS. The FAA exercises regulatory
jurisdiction over transporting hazardous materials. We transport articles that
are subject to these regulations. Shippers of hazardous materials share
responsibility with the air carrier for compliance with these regulations and
are primarily responsible for proper packaging and labeling. If we fail to
discover any undisclosed hazardous materials or mislabel or otherwise ship
hazardous materials, we may suffer possible aircraft damage or liability, as
well as, substantial monetary penalties. Any of these events could have a
material adverse effect on our business. The FAA has increased its monitoring of
shipments of hazardous materials

ENVIRONMENTAL REGULATIONS. Our operations must comply with numerous
environmental laws, ordinances and regulations. Under current federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
clean up of hazardous or toxic substances on, under or in such property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to clean up such contaminated property properly, may adversely
affect the ability of the owner of the property to use such property as
collateral for a loan or to sell such property. Environmental laws also may
impose restrictions on the manner in which a property may be used or transferred
or in which businesses may be operated and may impose remedial or compliance
costs. The costs of defending against claims of liability or cleaning up
contaminated property and the cost of complying with environmental laws could
have a material adverse effect on our business.

Currently, we are not aware of any environmental contamination for
which we are liable for the cost of removal or cleanup. In part because of the
highly industrialized nature of many of the locations at which we operate, we
cannot assure you that we have discovered all environmental contamination for
which we may be responsible.

OTHER REGULATIONS. We are subject to regulation by various other or
oversight by Federal agencies other than the FAA or the DOT. The laws and
regulations to which we are subject, and the agencies responsible for compliance
with such laws and regulations, include the following:

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<PAGE>

o our labor relations are generally regulated under the Railway
Labor Act, which vests in the National Mediation Board certain
regulatory powers with respect to disputes between airlines and
labor unions arising under collective bargaining agreements,

o The Federal Communications Commission regulates our use of radio
facilities pursuant to the Federal Communications Act of 1934, as
amended,

o the Commerce Department has jurisdiction over our interstate
transportation of cargo,

o the Customs Service inspects cargo imported from our
international

o we must comply with Immigration and Naturalization Service
regulations regarding the citizenship of our employees,

o the Animal and Plant Health Inspection Service of the Department
of Agriculture inspects animals, plants and produce imported from
our international destinations, and

o we must comply with wage, work conditions and other regulations
of the Department of Labor regarding our employees.

In addition, Arrow Air is subject to biennial inspections by the United
States Department of Defense as a condition of retaining its eligibility to
perform military charter flights. The last such inspection was completed in June
1998. As a result of its military business, Arrow Air has been required from
time to time to meet operational standards beyond those normally required by the
DOT, the FAA and other government agencies.

ITEM 2. PROPERTIES.

Substantially all of the our aircraft loading, unloading, maintenance,
flight operations and ground handling are accomplished at our two MIA hangar
facility, which in the aggregate consists of the following:

o approximately 201,000 square feet of hangar space, maintenance
shops, work areas, and parts storage areas;

o approximately 697,000 square feet of aircraft ramp space;

o approximately 34,100 square feet of administrative offices; and

o approximately 50,000 square feet of expansion space which the
Company can employ in the future for offices or additional
workshops.

The hangar facility accommodates up to two large widebody aircraft
(such as Boeing 747s), three medium widebody aircraft (such as McDonnell Douglas
DC-10s or Lockheed L-1011s) or three narrowbody aircraft (such as DC-8s)
simultaneously. We believe the maintenance facilities are adequate to meet our
own maintenance needs for at least the next several years.

We maintain three cargo facilities at MIA. Our main cargo facility
consists of 56,600 square feet of warehouse space, which is utilized primarily
to process airfreight for export and 14,500 square feet of office space. Our
other two cargo facilities consist of a building with 27,700 square feet of
warehouse space and 8,600 square feet of office space and a building with 33,700
square feet of warehouse space and 7,500 square feet of office space.

We lease our MIA hangar facility from Metropolitan Dade County under
two leases one with a term expires in 2001, with two five-year renewal options,
and one on a month to month basis. Our MIA cargo facilities are also leased from
Miami-Dade County. The lease for our main cargo facility expired in 1999 and we
are currently negotiating an extension, this lease on a short-term basis. The
leases on our other two cargo facilities expire in 2003 and 2004.

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<PAGE>

The Company leases approximately 33,000 square feet for its engine
repair facilities from an unrelated third party under leases which expire in
September 2001 and an additional 170,000 square feet for engine repair, part
storage areas and work areas under a lease which expires in February 2000.

We maintain regional sales and administrative offices scheduled cargo
services operations located at or near airports in three main U.S. cities and 14
Central and South American and Caribbean cities. All of such properties are
leased from unrelated third parties.

In November 1999, we leased a new import cargo facility located on MIA
with adjacent ramp side access, which includes approximately 15,000 square feet
of office space and approximately 57,000 square feet of dry storage space. Our
lease for this facility expires in 2004.

An import cargo facility is also planned to be located on MIA with ramp
side access and is projected to include approximately 115,000 square feet of
warehouse space and 15,000 square feet of supporting office space, consisting of
65,000 square feet of cold storage space and 50,000 square feet of dry storage
space. This facility is projected to be leased through different sources in 2001
after obtaining industrial development revenue bond financing through Miami-Dade
County.

ITEM 3. LEGAL PROCEEDINGS.

The United States Attorney for the Southern District of Florida
conducted an investigation relating to the August 7, 1997 accident involving one
of our aircraft. We and one of our ACMI customers who leased and loaded the
subject aircraft and with whom we operate a joint venture were the subjects of
the investigation. See "Business - Security and Safety." In addition, following
a major FAA inspection of our operations in 1999, the FAA commenced an
investigation of certain of our employees in connection with alleged violations
of FAA regulations including falsification of certain maintenance records and
failure to perform required maintenance functions on certain of our aircraft.
The U.S. Attorney also commenced an investigation relating to these alleged FAA
violations. While we were advised by our counsel that we had substantial and
meritorious defenses to these alleged violations, we chose to accept
responsibility for our conduct and avoid any further liability arising from
these investigations and any and all other potential claims by the U.S.
government arising before March 22, 2000, by entering into a plea agreement with
the U.S. Attorney. Pursuant to such agreement we plead guilty to charges of the
following conduct arising after, and unrelated to the aircraft involved in, the
accident: (i) discarding, destroying and concealing documents and records in
violation of federal law and (ii) making false statements to the FAA regarding
the completion of certain inspection and maintenance procedures. The plea
agreement calls for us to pay a $3,500,000 fine and to further implement a
safety inspection program. This fine is to be satisfied by an immediate cash
payment of $500,000 with the remaining $3,000,000 to be paid over four years in
$750,000 installments. We are also jointly and severally liable with our joint
venture partner for an additional fine of $1,500,000 levied on the joint venture
pursuant to a separate plea agreement. We have entered into an agreement with
our joint venture partner, whereby they have agreed to be responsible for 50% of
the total fines of $5,000,000. The plea agreements are expected to be approved
by the U.S. District Court for the Southern District of Florida in June 2000
following routine pre-sentencing investigations by the court and, in addition to
the assessment of fines mentioned above, we expect to be placed on probation for
a period of four years.

While the Company is from time to time involved in litigation in the
ordinary course of business, there are no material legal proceedings currently
pending against it or to which any of its property is subject other than set
forth above.

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

No matter was submitted to a vote of security holders during the fiscal
quarter ended December 31, 1999.

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PART II

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

We do not have any established public trading market for any class of our common
equity.

ITEM 6. SELECTED FINANCIAL DATA.

The balance sheet data set forth below as of December 31, 1995, 1996,
1997, 1998 and 1999 and the statement of operations data for each of the years
in the five-year period ended December 31, 1999 have been derived from the
Company's audited consolidated financial statements. The following data should
be read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included in "Item 8. Financial Statements
and Supplementary Data" of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997(1) 1998 1999
------- -------- ---------- ------- -------
STATEMENT OF OPERATIONS DATA: (dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Scheduled cargo services............... $40,124 $54,775 $56,412 $76,079 $120,039
ACMI and charter services.............. 35,340 35,520 31,080 37,645 61,796
Aircraft parts, repairs and other...... 885 3,953 2,502 2,379 14,764
------- -------- ---------- ------- -------

Total revenues........................ 76,349 94,248 89,994 116,103 196,599
------- -------- ---------- ------- -------

Total operating expenses.................. 64,646 81,040 91,021 107,039 177,086
------- -------- ---------- ------- -------

Operating income (loss)................... 11,703 13,208 (1,027) 9,064 19,513

Other income (expense):
Interest expense....................... (985) (966) (1,091) (12,830) (21,853)
Legal settlement....................... (4,170)
Interest and other income, net......... 320 786 2,233 8,630 3,157
------- -------- ---------- ------- -------

Total other, net...................... (665) (180) 1,142 (4,200) (22,866)
------- -------- ---------- ------- -------

Net income (loss)......................... $11,038 $13,028 $ 115 $4,864 $(3,353)
======= ======== ========== ======= =======

BALANCE SHEET DATA (AT PERIOD END):

Working capital........................... $9,735 $13,710 $2,970 $132,307 $ 16,523
Total assets.............................. 57,026 65,886 82,846 244,058 303,029
Total debt................................ 13,129 11,357 30,084 190,217 226,133

SELECTED FINANCIAL DATA:

Depreciation and amortization............. $6,924 $9,390 $11,470 13,236 24,284
Capital expenditures...................... 15,164 14,108 32,836 39,114 57,852

OPERATING DATA:

Destinations served (end of period)....... 21 27 29 23 31
Tons of freight transported--scheduled
cargo services......................... 64,906 75,923 68,844 94,647 149,005
ACMI block hours flown.................... 12,068 12,289 10,712 11,355 17,305
Aircraft in service (end of period)....... 14 15 14 14 28
- -----------------
<FN>
(1) Our 1997 results were adversely affected by the temporary cessation of operations for seven weeks during
September and October 1997. We gradually resumed operations during the remainder of 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations of Fine Air."
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "--RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS," BELOW, AND ELSEWHERE IN THIS REPORT. THE FOLLOWING
DISCUSSION ALSO SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION SET FORTH IN
"ITEM 6. SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED IN "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
OF THIS ANNUAL REPORT ON FORM 10-K.

OVERVIEW

Our revenues come from (1) scheduled cargo services, which includes
integrated air and truck cargo transportation and other logistics services, (2)
long and short-term ACMI (aircraft, crew, maintenance and insurance) and charter
services, and (3) aircraft and engine maintenance, repairs and overhauls, spare
part sales, engine leasing, training, and other services.

During the past five years, our revenues increased to $196.6 million in
1999 from $76.3 million in 1995. Our revenue growth during this period has been
substantially the result of the introduction and expansion of our scheduled
cargo services and recent acquisitions of Arrow Air. We began offering scheduled
cargo services at the beginning of 1994 and we expanded these services to
include 31 Central and South American and Caribbean destinations as of December
31, 1999. Our revenues from scheduled cargo services increased at a compound
annual rate of 24.5 % from 1995 to 1999 and represented 61.1% of our total
revenues in 1999, compared to 52.6% of our total revenues in 1995.

The shift in mix of our revenues during the past five years has
impacted our operating margins, as we have committed significant resources to
build the infrastructure to support our scheduled cargo services, including
moving to a new cargo warehouse and new MIA hangar facilities in 1996, opening
additional domestic and foreign sales offices and adding sales, flight,
warehouse, cargo and ground handling personnel.

We believe that we can utilize our existing infrastructure and fleet to
expand our scheduled cargo services to new destinations in Central and South
America and the Caribbean. We plan to continue to emphasize the development of
scheduled cargo services for future revenue growth while at the same time
expanding our ACMI and charter services. Our ACMI and charter services have been
more profitable than our scheduled cargo services, primarily because increased
demand for ACMI and charter services during the fourth quarter generally has
resulted in higher aircraft utilization and more profitable ACMI and charter
rates.

Our revenues from scheduled cargo services consist principally of charges
for freight transported on our scheduled cargo routes and charges for
transportation logistics services, such as truck and interline transportation of
freight, local pick-up and delivery, warehousing and assistance in document
preparation and processing.

We sell air cargo services to destinations we serve directly,
destinations served by our ACMI and charter customers, as well as, destinations
served by other airlines on an interline basis. Our freight rates are based upon
the type of freight, weight or volume, delivery service and the destination.
Beginning in the third quarter of 1996, our revenues from scheduled cargo
services included fuel surcharges that we instituted following significant
increases in fuel prices during the year. During the first quarter of 1997, fuel
prices began to decline, and we removed our fuel surcharges in certain markets
in the second quarter of 1997. As a result of the surge in fuel prices in the
fourth quarter of 1999, we reinstated the fuel surcharges in certain markets.

Our revenues from ACMI and charter services are derived from ACMI and
charter contracts under which we supply our aircraft for specified cargo
operations or on an ad hoc basis. We charge our customers for such services on a
per block hour basis subject, in certain instances, to specified minimum
charges. Our ACMI customers are responsible for substantially all other aircraft
operating expenses, including fuel, landing, parking fees and ground and cargo
handling expenses. Our ACMI customers and also provide their own crews. We bear
all operating expenses under a charter contract.

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<PAGE>

Our revenues from aircraft parts, repairs and other are comprised
principally of (1) charges for third party maintenance services, including
airframe, component and engine maintenance, repairs and overhauls, (2) spare
parts sales and leasing, and (3) other.

Our flying operations expenses are comprised principally of (1) fuel, (2)
crew, (3) overflight, landing and parking fees, (4) aircraft rental expenses,
(5) expenses for transporting freight to and from our MIA hub from our sales
offices, and (6) interline transportation expenses. Flying operations expenses
associated with our ACMI services, such as fuel, overflight, landing and parking
fees, are either paid directly by our customer or billed to the customer on a
direct pass-through basis. Most of our ACMI customers purchase their own fuel.
We bear such expenses for our charter customers.

Our aircraft and traffic servicing expenses consists principally of
personnel, equipment repair and third party expenses associated with (1) our
cargo warehouse, (2) our cargo and ground handling operations, (3)
communications and (4) flight planning. Our aircraft and traffic servicing
expenses have increased over the past three years as we have added personnel to
handle the increase in our scheduled cargo services.

Our maintenance expenses include: labor, parts and supplies associated
with the maintenance, repair and overhaul of our aircraft and engines, and third
party maintenance services. We capitalize our costs associated with major engine
and aircraft maintenance ("C" and "D") checks as they occur and then amortize
them over their expected useful lives, ranging from 3 years for "C" checks and
engine repairs, to 8 years for "D" checks. We expense our other maintenance
costs, including costs associated with routine maintenance checks as incurred.
Because we pay for maintenance whether our aircraft are used in scheduled cargo
service, ACMI or charter service, maintenance expenses are not affected by
changes in the mix of revenues from these services.

Our general and administrative expenses are primarily: (1) salaries and
benefits for our executive and administrative personnel, (2) insurance, (3)
security expenses and (4) rent, utilities and other occupancy expenses
associated with our cargo warehouse and MIA hangar facilities and domestic and
international operations stations and sales offices.

Our selling expenses are principally: (1) salaries and benefits for our
sales personnel, (2) commissions we pay to third party general sales agents, (3)
advertising and marketing expenses and (4) provision for bad debts.

Our depreciation and amortization expenses are attributed principally to
depreciation on aircraft, aircraft components and ground equipment, and
amortization of capitalized major airframe and engine maintenance, repairs and
overhauls.

ACQUISITION

On March 10, 1999, we purchased from affiliates of Arrow Air (the
"Sellers") all of Arrow Air's operating assets and certain additional assets of
its affiliates, and on April 9, 1999, we purchased 100% of the common stock of
Arrow Air. During July 1999, we purchased from the Sellers additional engine
modules. During October 1999, we sold back to the Sellers for $7.2 million two
of the DC-8 aircraft we acquired in this acquisition which were not critical to
the operation of Arrow Air's business. We accounted for these combined
transactions as a purchase of a business for financial reporting purposes. The
aggregate purchase price was $112.5 million in cash and the assumption of an
estimated $24.9 million of liabilities. In connection with our acquisition of
Arrow Air, we acquired the following assets:

o 13 DC-8 and four L-1011 aircraft (including one DC-8 and one L-1011
which currently are in passenger configuration),

o one DC10-30 cargo aircraft,

o 132 spare aircraft engines,

o inventories of aircraft and engine parts,

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<PAGE>

o equipment relating to certain repair shops, and

o Arrow Air's operating certificates and route authorities.

In November 1999, we sold the DC10-30 cargo aircraft to a third party for
approximately $21.0 million.

RESULTS OF OPERATIONS OF FINE AIR

The following table sets forth, for the periods presented, certain of
our revenue, expense and income items as a percentage of our total operating
revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Scheduled cargo services.......................... 62.7% 65.5% 61.1%
ACMI and charter services......................... 34.5 32.4 31.4
Aircraft parts, repairs and other................. 2.8 2.1 7.5
---------- ------------ -----------
Total operating revenues........................ 100.0% 100.0% 100.0%
========== ============ ===========

Operating expenses:
Flying operations................................. 38.0% 34.0% 28.6%
Aircraft and traffic servicing.................... 9.7 10.4 9.9
Maintenance....................................... 16.9 15.5 17.4
General and administrative........................ 17.9 15.6 14.0
Selling........................................... 5.9 5.3 4.6
Cost of sales - aircraft parts.................... -- - 3.1
Depreciation and amortization..................... 12.7 11.4 12.4
---------- ------------ -----------
Total operating expenses........................ 101.1 92.2 90.1
---------- ------------
Operating income (loss).............................. (1.1) 7.8 9.9
Interest and other income (expense), net............. 1.2 (3.6) (11.6)
---------- ------------- ------------
Net income (loss).................................... 0.1% 4.2% (1.7)%
========== ============ ============
</TABLE>

Our financial results were adversely impacted in 1998 and 1999 by
economic downturns in Latin America, which resulted in a decreased demand for
airfreight traffic to and from this region. In addition, during 1998 revenues
from Colombia and Ecuador were adversely impacted by a reduction in flower
production due to severe weather patterns caused by El Nino.

Our revenues in the second half of 1997 were adversely affected by our
voluntary cessation of operations for seven weeks and the subsequent effects of
such temporary interruption of services in connection with the August 7, 1997
crash of one of our aircraft.

FISCAL 1999 COMPARED TO 1998

REVENUES.

Our total revenues increased 69.3% to $196.6 million in 1999 from
$116.1 million in 1998, due primarily to an increase in revenues from scheduled
cargo services of $43.9 million. Total block hours flown by our fleet increased
44.7% to 34,966 in 1999 from 24,160 in 1998 due primarily to the acquisition of
Arrow Air.

Our revenues from scheduled cargo services increased 57.8% to $120.0
million in 1999 from $76.1 million in 1998 due to increases in the tons of
freight we transported. We flew 17,661 scheduled block hours in 1999 compared to
12,805 hours in 1998, a 37.9% increase. We transported 149,005 tons of freight
in 1999, a 57.4% increase from 94,647 tons in 1998, primarily as a result of the
introduction of L-1011 widebody aircraft service in the first quarter of

20
<PAGE>

1999, and the acquisition of Arrow Air which added ten DC-8 aircraft and three
L-1011 widebody aircraft to our operating fleet.

Our revenues from ACMI services increased 64.2% to $61.8 million in
1999 from $37.6 million in 1998, primarily due to our acquisition of Arrow Air.
Our total block hours flown for ACMI and charter services increased 52.4% to
17,305 in 1999 from 11,355 in 1998.

Our revenues from aircraft parts, repairs and other increased 516.7% to
$14.8 million in 1999 from $2.4 million in 1998, primarily due to revenues of
$10.3 million from the sale of aircraft parts and rotable exchange fees. The
aircraft parts business was acquired in connection with the asset purchase
component of the acquisition of Arrow Air.

OPERATING EXPENSES.

Our flying operations expenses increased 42.5% to $56.3 million in 1999
from $39.5 million in 1998, due primarily to increased intermodal/interline
transportation and other costs associated with the increase in scheduled cargo
service block hours and tons of freight transported, as well as increased crew
costs associated with the increase in total block hours. As a percentage of our
total revenues, flying operations expenses decreased to 28.6% in 1999 from 34.0%
in 1998 primarily as a result of an increase in our total revenues not
associated with scheduled cargo services due to our acquisition of Arrow Air.

Our aircraft and traffic servicing expenses increased 61.0% to $19.5
million in 1999 from $12.1 million in 1998, due primarily to the addition of
personnel to handle the increase in our scheduled cargo services, and other
cargo-related expenses associated with the increase in tonnage. As a percentage
of our total revenues, aircraft and traffic servicing expenses decreased to 9.9%
in 1999 from 10.4% in 1998.

Our maintenance expenses increased 90.1% to $34.2 million in 1999 from
$18.0 million in 1998, due primarily to the increase in block hours we operated
and to an increase in field line maintenance requirements associated with
hushkits installation, training costs and inefficiencies created during
increased FAA surveillance. As a percentage of our total revenues, maintenance
expenses increased to 17.4% in 1999 from 15.5% in 1998.

Our general and administrative expenses increased 52.3% to $27.5 million
in 1999 from $18.1 million in 1998, due primarily to increases in rent,
telephone, security expense and professional fees. As a percentage of our total
revenues, general and administrative expenses decreased to 14.0% in 1999 from
15.6% in 1998.

Our selling expenses increased 48.5% to $9.1 million in 1999 from $6.2
million in 1998, due primarily to an increase in commissions and other selling
expenses associated with the increase in our scheduled cargo revenues. As a
percentage of our total revenues, selling expenses decreased to 4.6% 1999 from
5.3% in 1998.

Our cost of sales - aircraft parts totaled $6.2 million in 1999 and
consisted of the cost of spare parts sold and costs associated with repairs,
overhauls or certifications of parts sold or exchanged.

Our depreciation and amortization expenses increased 83.5% to $24.3
million in 1999 from $13.2 million in 1998, due primarily to additional
depreciation associated with increases in capitalized maintenance cost, and
installation of hushkits for our aircraft. As a percentage of our total
revenues, depreciation and amortization expenses increased to 12.4% in 1999 from
11.4% in 1998.

OPERATING INCOME.

Our operating income increased to $19.5 million in 1999 from a $9.1
million income in 1998.

INTEREST AND OTHER INCOME, NET.

Our interest and other income, net increased $17.0 million in 1999
compared to 1998. In 1999, our net interest expense increased $9.0 million, due
primarily to interest expense related to the $190 million of 9 7/8% Senior Notes
outstanding during 1999, and additional expense due to increased borrowings
under our revolving loan facility.

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<PAGE>

Interest income and other income, net decreased as a result of our use of cash
to fund the acquisition of Arrow Air and our settlement of the government
investigation of $4.2 million

NET INCOME (LOSS).

As a result of the above factors, we suffered a net loss of $3.4 million
for the year ended December 31, 1999 compared to net income of $4.9 million for
the year ended December 31, 1998.

FISCAL 1998 COMPARED TO 1997

REVENUES.

Our total revenues increased 29.0% to $116.1 million in 1998 from $90.0
million in 1997, due primarily to an increase in revenues from scheduled cargo
services of $19.7 million. Our revenues in the second half of 1997 were
adversely affected by our voluntary cessation of operations for seven weeks and
the subsequent effects of such temporary interruption of services. Total block
hours flown by our fleet increased 24.7% to 24,160 in 1998 from 19,372 in 1997
due primarily to an increase of 4,145 hours flown for our scheduled cargo
services.

Our revenues from scheduled cargo services increased 34.9% to $76.1
million in 1998 from $56.4 million in 1997 due to increases in the tons of
freight we transported and our introduction of service to new markets. We flew
12,805 scheduled block hours flown in 1998 compared to 8,660 hours in 1997, a
47.9% increase. Our revenues from scheduled cargo operations in 1997 included
$2.2 million in fuel surcharges assessed during the first half of 1997. We
transported 94,647 tons of freight in 1998, a 37.5% increase from 68,844 tons in
1997. This was primarily a result of increased sales efforts by our domestic and
international sales network in 1998. In addition, we transported lower than
normal amount of freight in 1997 due to the temporary cessation of our
operations in the second half of 1997.

Our revenues from ACMI services increased 20.9% to $37.6 million in 1998
from $31.1 million in 1997, primarily due to an increase in hourly rates
associated with an increase in demand for aircraft domestically. In addition, we
flew more ACMI hours in 1998. Our ACMI block hours flown increased 6.0% to
11,355 in 1998 from 10,712 in 1997.

Our revenues from aircraft parts, repairs and other decreased 4.0% to
$2.4 million in 1998 from $2.5 million in 1997. During 1998, we concentrated our
sales efforts on building our scheduled cargo services.

OPERATING EXPENSES.

Our flying operations expenses increased 15.5% to $39.5 million in 1998
from $34.2 million in 1997, due primarily to increased intermodal/interline
transportation and other costs associated with the increase in scheduled cargo
service block hours and tons transported, as well as increased crew costs
associated with the increase in total block hours. These increased costs were
partially offset by a decrease in expenses associated with the rental of
aircraft during the temporary cessation of our operations in the second half of
1997. As a percentage of our total revenues, flying operations expenses
decreased to 34.0% in 1998 from 38.0% in 1997 primarily as a result of decreased
fuel prices.

Our aircraft and traffic servicing expenses increased 39.1% to $12.1
million in 1998 from $8.7 million in 1997, due primarily to our addition of
personnel to handle the increase in our scheduled cargo services, and other
cargo-related expenses associated with the increase in tonnage. As a percentage
of our total revenues, aircraft and traffic servicing expenses increased to
10.4% in 1998 from 9.7% in 1997, primarily due to our emphasis on scheduled
cargo service.

Our maintenance expenses increased 18.4% to $18.0 million in 1998 from
$15.2 million in 1997, due primarily to the increase in block hours we operated
and to an increase in field line maintenance requirements associated with new
domestic ACMI contracts we operated during 1998. As a percentage of our total
revenues, maintenance expenses decreased to 15.5% in 1998 from 16.9% in 1997.

Our general and administrative expenses increased 12.4% to $18.1 million
in 1998 from $16.1 million in 1997, due primarily to increased expenses (rent,
telephone, security and office expense) to support our expanding operations

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<PAGE>

and the build-up of our infrastructure. As a percentage of our total revenues,
general and administrative expenses decreased to 15.6% in 1998 from 17.9% in
1997.

Our selling expenses increased 17.0% to $6.2 million in 1998 from $5.3
million in 1997, due primarily to an increase in commissions and other selling
expenses associated with the increase in our scheduled cargo revenues. This was
partially offset by a $0.5 million decrease in our provision for bad debts. As a
percentage of our total revenues, selling expenses decreased to 5.3% 1998 from
5.9% in 1997.

Our depreciation and amortization expenses increased 14.8% to $13.2
million in 1998 from $11.5 million in 1997; due primarily to increases in
equipment and increased amortization of capitalized maintenance costs. As a
percentage of our total revenues, depreciation and amortization expenses
decreased to 11.4% in 1998 from 12.7% in 1997.

OPERATING INCOME.

Our operating income increased to $9.1 million in 1998 from a $1.0
million loss in 1997.

INTEREST AND OTHER INCOME, NET.

Our interest and other income, net decreased $5.5 million in 1998
compared to 1997. In 1998, our net interest expense increased $7.1 million. This
was offset by a gain of $3.4 million related to a lawsuit judgment. In 1997 we
recorded a gain on an insurance settlement of $3.9 million, which was partially
offset by costs related to our initial public offering ($1.0 million) and a $1.0
million remedial payment we made to the FAA pursuant to the Consent Agreement.

NET INCOME.

As a result of the above factors, our net income increased to $4.9
million for the year ended December 31, 1998 from $0.1 million for the year
ended December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1999, our primary sources of liquidity consisted of
approximately $10.7 million of cash and cash equivalents, cash flows expected to
be generated from operations, non-core assets sales and our $45.0 million credit
facility. We had working capital of $16.5 million at December 31, 1999 compared
to $132.3 million at December 31, 1998. The decrease in our working capital was
due principally to the use of $112.5 million of cash in connection with our
acquisition of Arrow Air and the classification of our credit facility as a
current liability. This classification is a result of our credit facility
maturing in November 2000; however, we intend to extend the maturity of this
credit facility prior to such date or to replace it with a new credit facility
with a later maturity date.

Our net cash provided (used) by operating activities was $13.8 million,
$12.5 million and $ (1.8) million during 1997, 1998 and 1999, respectively. This
decrease in cash flow from operating activities was partially due to an increase
in accounts receivable of $25.6 million for 1999 which were primarily associated
with the acquired business. In addition, our net income decreased by $8.2
million in 1999.

Our net cash used in investing activities was $26.4 million, $40.3
million and $149.7 million for 1997, 1998 and 1999, respectively. This increase
was due principally to our $112.5 million acquisition of Arrow Air In addition,
purchases of property and equipment increased by $57.8 million primarily due to
capitalized heavy maintenance costs and installations of hushkits.

Our net cash provided by financing activities was $13.9 million, $150.2
million and $37.5 million for 1997, 1998, and 1999. This decrease resulted
primarily from our receipt in 1998 of $193.5 million of net proceeds from the
sale of the Senior Notes. We made distributions to our stockholders of $3.4
million, $4.4 million and $1.3 million in 1997, 1998, and 1999 respectively,
primarily to enable them to pay income taxes related to our income.

Our tax returns for the years ended December 31, 1995, 1996, and 1997 are
currently under examination by the Internal Revenue Service. The examination
relates specifically to our treatment of certain repairs and maintenance,
including safety checks mandated by the FAA, as expenses for tax purposes.
Should the Internal Revenue Service take the position that these costs should
have been capitalized and subsequently depreciated, a substantial

23
<PAGE>

assessment could result. Because the examination is in process, we cannot
presently determine the amount of an assessment, if any. We believe that our
treatment of such costs as deductible for tax purposes is proper and we are
prepared to defend our position vigorously, if it becomes necessary.

We have elected to be taxed as an S corporation and therefore are not
subject to Federal and state income taxes. Instead, the taxable income or loss
is included in the individual tax returns of our shareholders. However, we make
distributions to our shareholders of any tax liability they incur as a result of
such taxable income.

We have no material commitments for future capital expenditures, apart
from normal scheduled major airframe and engine repairs and maintenance and the
hushkitting of our DC-8 aircraft. As December 31, 1999, hushkits for 21 of our
DC-8 aircraft had been purchased or installed. At an estimated average cost of
$3.0 million per hushkit, the cost to acquire hushkits for our remaining three
DC-8 aircraft plus two spare hushkits will be approximately $15 million. We are
purchasing a number of these hushkits from a related party as such related party
currently is the only supplier of the type of hushkit required for certain of
our aircraft. We will also purchase or lease hushkits from a third party.

We have a $45.0 million credit facility with Nations Credit Commercial
Corporation, which expires in November 2000. Our borrowings under this facility
bear interest at the lender's prime rate plus 0.75%. The unused portion of the
facility is subject to a fee at the rate of 0.30% per annum. Our borrowings
under this facility are collateralized primarily by 10 DC-8 aircraft, one L-1011
aircraft and certain of our receivables and inventories. As of March 29, 2000 we
had approximately $32.5 million outstanding under this facility.

During the past two years, a substantial portion of our cash requirements
have been met utilizing the proceeds of the Senior Notes and bank borrowings. As
a result of our significant debt obligations, we are highly leveraged and must
devote a significant portion of our annual cash flow to service our debt. We
also have significant working capital and capital expenditure requirements to
fund the current level and anticipated growth of our operations. Although our
cash flow from operating activities was positive in 1997 and 1998, in 1999 we
experienced negative cash flow, due largely to a significant increase in our
accounts receivable and capital expenditures, including significant purchases of
hushkits. Based on our current cash and cash equivalents, availability under our
credit facility and cash flow expected from operations, without taking the
actions described below we may not have sufficient capital to meet our
anticipated short-term cash needs, including the interest payment of
approximately $9.4 million on the Senior Notes which is due June 1, 2000. We
currently are seeking to obtain additional capital through a variety of means,
including obtaining new credit facilities or other financing for our operations
and obtaining purchase or lease financing for the hushkits we are acquiring. We
are also exploring our options for refinancing or restructuring our indebtedness
under the Senior Notes. We may not be able to obtain additional financing or
reduce or defer our debt obligations on acceptable terms. We will also seek to
raise additional capital by selling non-core assets. Although we have been
successful in the past in selling non-core assets at advantageous prices and in
a timely fashion, we may not be able to find buyers for these assets at
favorable or acceptable prices or at all. If we are unable to raise a sufficient
amount of additional capital during the next few months, we may be required to
curtail our operations or scale back our growth plans, and we may be unable to
pay the scheduled installment of interest on the Senior Notes. The failure to
pay debt service would be a default under the indenture under which the Senior
Notes were issued and a default under our credit facility, both of which would
have a material adverse effect on our financial condition.

Notwithstanding the above, we currently believe that we will be
successful in obtaining additional funding or will be able to sell a sufficient
amount of non-core assets to meet our short-term cash needs. We estimate that we
will need to raise approximately $10 million in additional financing or from
assets sales to meet our cash requirements for the next twelve months. If we are
successful in obtaining additional cash through financings or asset sales, or
alternatively are able to defer the interest payment due under the Senior Notes,
then we anticipate based on our current level of operations that our cash and
cash equivalents, current credit facility and cash flows expected to be
generated by operations will be adequate to meet our needs for working capital
and capital expenditures for at least the next twelve months.

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<PAGE>

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company's business, results of operations and financial condition
could be adversely affected by a number of factors, including the following:

OUR SUBSTANTIAL LEVERAGE COULD AFFECT OUR FINANCIAL RESULTS OR OPERATIONS.

We are highly leveraged and have significant debt service requirements.
At December 31, 1999 our total consolidated indebtedness was approximately
$225.2 million.

Our significant leverage could adversely impact us in several ways, including:

o we may be unable to obtain additional financing in the future,

o we will have to dedicate a substantial portion of our cash to
principal and interest payments, which will reduce funds available for
other purposes,

o we may be unable to adjust rapidly to changing market conditions,

o we may be more vulnerable to downturns in general economic conditions,
or downturns in our business, and

o we may be at a disadvantage to competitors with less leverage.

Our ability to make scheduled principal and interest payments or to
refinance our debt will depend on our future financial performance, which to a
certain extent will be subject to economic, financial, competitive and other
factors beyond our control. We cannot assure you that our business will generate
sufficient cash flow to make principal and interest payments on time and to make
necessary capital expenditures. If we cannot do this, we may be required to seek
to refinance all or a portion of our debt, to sell assets or to obtain
additional financing, any of which we may be unable to do on acceptable terms.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

RESTRICTIVE COVENANTS IN THE INSTRUMENTS GOVERNING OUR DEBT LIMIT OUR
FLEXIBILITY.

Certain of our debt instruments contain a number of significant
covenants. These covenants generally limit our ability, among other things, too:

o borrow additional money,
o pay dividends on our common stock,
o repurchase our common stock,
o use assets as security in other transactions,
o make investments in unrestricted subsidiaries,
o sell certain assets,
o merge with or into other companies, and
o enter into certain transactions with our affiliates.

These covenants require us to meet certain financial tests before
incurring certain types of additional debt. Our ability to comply with these
covenants in the future will depend on our future financial performance. If we
were unable to comply with these covenants, there would be default under our
debt agreements. If the lenders or holders of our debt instruments did not waive
such default, the default could result in acceleration of our debt, which would
have a material adverse effect on our financial condition.

WE MAY EXPERIENCE DIFFICULTY INTEGRATING THE ARROW AIR OPERATIONS INTO OUR OWN.

On April 9, 1999 we completed the acquisition of Arrow Air. The full
benefits of a business combination of Fine Air Services and Arrow Air will
require the integration of each company's administrative, finance, sales and

25
<PAGE>

marketing organizations, the coordination of each company's sales efforts, and
the implementation of appropriate operations, financial and management systems
and controls in order to capture the efficiencies and the cost reductions that
are expected to result from the acquisition. This will require substantial
attention from the Fine Air management team, which has minimal experience
integrating the operations of companies the size of Fine Air Services and Arrow
Air. The diversion of management attention, as well as any other difficulties,
which may be encountered in the transition and integration process, could have
an adverse impact on our revenue and operating results. Furthermore, Arrow Air
has had operating losses in each of the last three years. We may not be able to
realize the anticipated cost savings with respect to the acquisition in which
case our results of operations may be adversely affected. We cannot assure you
that we will be able to successfully integrate Arrow Air's operations or achieve
the goals that motivated us to acquire the assets of Arrow Air, either of which
could have a material adverse effect on Our business. In addition, in connection
with the acquisition of the capital stock of Arrow Air, we may be subject to
liabilities relating to Arrow Air's business of which we are not aware. Although
we are entitled to indemnification for such liabilities, the party from which we
acquired the capital stock of Arrow Air may be unable to perform its obligations
to indemnify us.

OUR OPERATING RESULTS DEPEND ON THE EFFICIENT UTILIZATION OF OUR AIRCRAFT FLEET.

Our operating results are highly dependent on our ability to effectively
utilize our fleet of aircraft. There can be no assurance, however, that
operation of the aircraft in our fleet will prove to be profitable. Inability to
keep our aircraft in revenue service or achieve an acceptable level of aircraft
utilization could have a material adverse effect on our business.

THE INTERNATIONAL NATURE OF OUR BUSINESS INVOLVES SPECIAL RISKS.

Most of our revenue comes from providing scheduled air cargo services
and ACMI and charter services to Central and South America and the Caribbean.
There are many potential problems and risks associated with doing business in
foreign countries that could adversely affect our business, including:

o potential adverse changes in the diplomatic relations of foreign
countries with the United States,

o hostility from local populations directed against U.S. businesses or
employees,

o restrictions on the withdrawal of foreign investment and earnings,

o government policies against businesses owned by non-nationals,

o the risk of expropriations of property or insurrections that could
result in losses against which we are not insured.

Our international operations also are subject to economic uncertainties
that might result from actions by foreign governments or regulatory authorities,
including:

o requiring us to renegotiate or modify our agreements or arrangements
with governmental authorities, and

o imposing or changing taxes, tariffs, foreign exchange or currency
restrictions or other laws or rules that may restrict our business or
make it more expensive for us to do business in a particular country.

At some foreign airports, we are required by local governmental
authorities or market conditions to contract with third parties for maintenance,
ground and cargo handling and other services performance by these third parties
of such services is beyond our control, and if they experience operating
difficulties or fail to fulfill their obligations to us, own reputation or
business might be adversely affected.

In addition, traffic rights to many foreign countries are subject to
bilateral air services agreements between the United States and the foreign
countries, are allocated only to a limited number of U.S. carriers and are
subject to approval by the applicable foreign regulators. Consequently, our
ability to provide air cargo service in some foreign

26
<PAGE>

markets depends in part on the willingness of the U.S. Department of
Transportation (the "DOT") to allocate limited traffic rights to us, rather than
to competing U .S. airlines, and on the approval of the applicable foreign
regulators.

Most of our revenue is in U .S. dollars. However, a large portion of
our revenue is from customers whose revenue is not in U.S. dollars. Therefore,
any significant devaluation in our customers' currencies relative to the U.S.
dollar could adversely effect their ability to pay us in U .S. dollars or to
continue to use our services, which could have a material adverse effect on our
business.

COMPETITION COULD ADVERSELY AFFECT OUR BUSINESS AND PROFITABILITY.

The market for airfreight services is highly competitive. Our scheduled
cargo services compete for cargo volume principally with other all-cargo
airlines, integrated carriers and scheduled and non-scheduled passenger
airlines, which have substantial belly cargo capacity. To a lesser extent, we
also compete for freight forwarding business with fully integrated carriers,
some of which are also our customers. Our ACMI and charter services compete
primarily with other airlines that operate all-cargo aircraft and have lift
capacity in excess of their own needs. Our ACMI and charter business also could
be adversely affected by the decision of our air carrier customers to acquire
additional aircraft or by our non-air carrier customers to acquire and operate
their own aircraft. Many of our competitors have substantially greater financial
and other resources and more extensive facilities and equipment than us.

THE OWNERSHIP AND OPERATION OF AIRCRAFT REQUIRES SUBSTANTIAL AMOUNTS OF CAPITAL

Our air cargo carrier business is highly capital intensive. We have
made significant capital investments to acquire the aircraft, ground and cargo
handling, equipment and inventory of spare parts necessary for the operation of
our business. We historically have purchased, and intend to continue to
purchase, used aircraft, which tend to require more maintenance and be less
fuel-efficient than newer generation aircraft. Older aircraft also tend to be
subject to more Airworthiness Directives ("ADs") promulgated by the FAA and
other unanticipated maintenance costs than newer aircraft, and are required to
undergo extensive structural inspections on an ongoing basis.

We currently operate 27 DC-8 aircraft, which were converted from
passenger configuration to freighter configuration by installing a large cargo
door and various cargo container-handling systems. The FAA issued
authorizations, called Supplemental Type Certificates ("STCs") to various
companies to convert DC-8 aircraft from passenger to cargo configuration. All of
our converted aircraft were converted pursuant to these STCs. The FAA has been
re-evaluating these STCs and formed a DC-8 Cargo Conversion Joint Task Force
(the "JTF") in 1997. The JTF includes all operators of converted DC-8 aircraft,
all holders of STCs relating to DC-8 conversions and a team of FAA
representatives. The JTF is currently reviewing the STC data to develop a
solution, if required, for all DC-8 operators. Although we do not expect this
matter to have a material adverse effect on our business, we can not assure you
that the ultimate resolution of this matter will not require significant capital
investments by us.

THE AIR FREIGHT BUSINESS IS CYCLICAL IN NATURE, AND OUR BUSINESS IS SEASONAL.

The air freight industry is highly sensitive to general economic and
political conditions. Demand for our services and our financial results could be
materially adversely affected by downturns in global or regional economies that
result in decreased demand for airfreight transportation. Our financial results
were adversely impacted in 1998 and 1999 by economic downturns in Latin America,
which resulted in a decreased demand for airfreight traffic to and from this
region. In addition, during 1998 revenues from Colombia and Ecuador were
adversely impacted by a reduction in flower production due to severe weather
patterns caused by El Nino.

Our business has been, and is expected to continue to be, seasonal in
nature, with a majority of our revenues and operating income falling in the
second half of the year (principally the fourth quarter). Our fourth quarter
revenues and operating income are typically higher due to an increase in cargo
transported in anticipation of and during the holiday season. Our financial
results would be materially adversely affected if our operations were
interrupted during this period due to unanticipated maintenance, compliance with
ADs, severe weather or other factors beyond our control.

27
<PAGE>

WE MAY BE ADVERSELY AFFECTED BY INCREASED FUEL COSTS OR SHORTAGES OF FUEL.

Fuel is a major expense for all airlines. Both the cost and
availability of aviation fuel are subject to economic and political factors and
events that we can neither control nor accurately predict. We have no agreement
with any fuel supplier assuring the availability or price stability of fuel.
Higher fuel prices resulting from fuel shortages or other factors could
adversely affect our profitability if we are unable to pass on the full amount
of fuel price increases to customers through fuel surcharges or higher rates.
Accordingly, substantial price increases in, or the unavailability of adequate
supplies of, fuel may have a material adverse effect on our business.

WE MAY UNKNOWINGLY CARRY CONTRABAND FOR OUR CUSTOMERS.

Although required to do so, customers may fail to inform us about cargo
that contains hazardous materials, weapons or explosive devices. In addition,
our own checks and searches may not reveal the presence of these materials or
substances in customers' cargo. Some of our aircraft fly to and from countries,
such as Colombia, where substantial quantities of illegal drugs are
manufactured. In the past, without our prior knowledge, individuals have tried
to smuggle illegal drugs into the U.S. on our aircraft. If we transport
unmanifested hazardous materials, illegal drugs or other contraband for our
customers, our aircraft could be damaged or seized and/or we may suffer
substantial monetary penalties. Any of these events could have a material
adverse effect on our business.

In one such instance, the government of Peru alleged that we supplied a
chartered aircraft, which transported weapons to Ecuador in February 1995 during
the Ecuador-Peru conflict, and revoked our right to fly commercially into Peru.
The particular flight at issue was a chartered aircraft, and we denied any
wrongdoing. The FAA found after an investigation of the matter that there was
not sufficient evidence to support a conclusion that we violated regulations
governing the transportation of hazardous materials by air. We received
authority from the government of Peru to resume service in March 1999.

WE ARE DEPENDENT ON THE CONTINUED SERVICES OF OUR KEY EXECUTIVES.

We believe that our success depends on, and will continue to depend on,
the services of Frank Fine, our founder and our Chairman of the Board of
Directors and Barry Fine, our President and Chief Executive Officer. If we lose
the services of either of them, our business could be materially adversely
affected. We do not have employment agreements with either Frank or Barry Fine
nor do we maintain "key man" life insurance. We also believe that our ability to
retain other members of our senior management team and key personnel is critical
to our future success.

UNION REPRESENTATION OF OUR EMPLOYEES COULD INCREASE OUR OPERATING COSTS AND
CONSTRAIN OUR OPERATING FLEXIBILITY.

In October 1997, the International Brotherhood of Teamsters was
certified to represent Fine Air Services' flight deck crewmembers for collective
bargaining purposes. We have been negotiating a collective bargaining agreement
with representatives of the Teamsters since mid-1998. The final collective
bargaining agreement could result in higher employee compensation and work rule
changes that could increase our operating costs and constrain our operating
flexibility or result in other changes adverse to our business. While we intend
to negotiate with the Teamsters in good faith, we cannot assure you that we will
be able to enter into a collective bargaining agreement. Our failure to enter
into a collective bargaining agreement could result in work stoppages

Arrow Air's flight deck crewmembers have been represented by an "in
house" union since February 1984. Arrow Air's collective bargaining agreement
with these employees became amendable on August 1, 1999, and we cannot assure
you that we will be able to renegotiate this agreement on satisfactory terms. In
addition, it is possible that the Teamsters or another union will seek to
represent Arrow Air's employees when the current agreement expires.

Also, many airline industry employees are represented by labor unions,
and we are likely to be subject to future unionization efforts as our operations
expand. We cannot assure you that our non-union employees will remain non-union.

28
<PAGE>

OUR BUSINESS IS HIGHLY REGULATED.

Our business is subject to extensive government regulation under U.S.
laws and the laws of the various countries, which we serve. We are subject to
Title 49 of the United States Code (formerly the Federal Aviation Act of 1958,
as amended), under which the DOT and the FAA exercise regulatory authority over
air carriers. The DOT and the FAA have the authority to modify, amend, suspend
or revoke the authority and licenses issued to our personnel and us if they or
we fail to comply with the provisions of law or applicable regulations. In
addition, the DOT and the FAA may impose civil or criminal penalties for
violations of applicable rules and regulations. Such actions by the FAA or the
DOT, if taken, could have a material adverse effect on our business. See
"Business - Government Regulation."

Following the August 7, 1997 crash of one of our aircraft, the FAA
placed our operations under heightened scrutiny. As a result of concerns
expressed by the FAA, we voluntarily ceased operations on September 4,1997, and
on September 12,1997 we entered into a consent agreement with the FAA. Under
this consent agreement, we agreed not to resume operations until the FAA
approved new cargo handling and hazardous materials procedures to be implemented
by us. We also agreed to make a remedial payment of $1.5 million to the FAA for
the costs of the FAA's investigation, review and re-inspection of us. Pursuant
to this consent agreement, $500,000 of this assessment was waived as a result of
our compliance with certain requirements prior to December 31, 1997. We resumed
operations on a limited basis on October 28, 1997, approximately seven weeks
after suspending operations, and were fully operational by the first quarter of
1998. We are in full compliance with the terms of this consent agreement.

On March 17, 1995, Arrow Air voluntary suspended operations following
charges by the FAA that it had failed to keep adequate maintenance records and
had incorrectly placed serviceable tags on aircraft parts that had not been
properly approved for such tags. Arrow Air reached a settlement with the FAA on
April 29, 1995, pursuant to which it agreed to (1) resume operations only after
being re-certified, (2) replace certain key management personnel, and (3) make a
$1.5 million remedial payment to defray costs of the FAA's investigation and
costs associated with the re-certification. Arrow Air resumed operations under
the terms of this agreement on June 9, 1995. In addition, in July 1998, as a
result of a federal grand jury investigation of the improper tagging of parts
which arose out of the FAA investigation, Arrow Air pled guilty to a six count
information, paid a total of $5.0 million in fines and restitution payments and
was placed on probation for up to five years.

We can not assure you that the FAA will not subject us to heightened
scrutiny as a result of any of the above. Inability to keep any of our aircraft
in revenue service as a result of any such FAA scrutiny in the future could have
a material adverse effect on our business. See "Business - Security and Safety."

29
<PAGE>

WE MAY SUFFER UNINSURED LOSSES OR BE UNABLE TO MAINTAIN ADEQUATE INSURANCE
COVERAGE AT A REASONABLE COST.

Our operations involve risks of potential liability against us in the
event of aircraft accidents. Although we believe our current insurance coverage
is adequate and consistent with current industry practice, we cannot assure you
that our coverage will not be changed or that we will not suffer substantial
losses and lost revenues from accidents. Substantial claims resulting from an
accident in excess of our insurance coverage could have a material adverse
effect on our business.

Aviation insurance premiums historically have fluctuated based on
factors that include the loss history of the industry in general and the insured
carrier. Our ability to maintain adequate insurance coverage on economical terms
could be adversely affected by general industry conditions or losses incurred by
us. Any significant increase in our current insurance expense could have a
material adverse effect on our business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to a number of market risks in the ordinary course of
business. These risks, which include interest rate risk and commodity price
risk, arise in the normal course of business rather than from trading.

Our indebtedness under our line of credit creates interest rate risk as
it bears interest at floating rates. As of December 31, 1999, we had
approximately $35.2 million outstanding under this line of credit. In addition,
as of December 31, 1999 we had approximately $190.0 million of long-term debt
outstanding which bears interest at a fixed rate.

We require significant quantities of jet fuel to operate our aircraft
which exposes us to commodity price risk associated with the market price for
such fuel. Our exposure to fuel risk is reduced to the extent that we provide
air cargo services under ACMI contracts, under which the customer is responsible
for providing fuel. For scheduled cargo services, we have been generally been
able to pass on increases to customers in the form of fuel surcharges and expect
to be able to continue to do so although we cannot assure you that we will be
successful.

30
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report of Deloitte & Touche LLP................................................... 32

Report of Independent Certified Public Accountants of PricewaterhouseCoopers LLP........................ 33

Consolidated Balance Sheets as of December 31, 1998 and 1999............................................ 34

Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999.............. 35

Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1998
and 1999.............................................................................................. 36

Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999.............. 37

Notes to Consolidated Financial Statements.............................................................. 38
</TABLE>

31
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Fine Air Services Corp.
Miami, Florida

We have audited the accompanying consolidated balance sheet of Fine Air Services
Corp. and subsidiaries (the "Company") as of December 31, 1999, and the related
consolidated statement of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.

DELOITTE & TOUCHE LLP
CERTIFIED PUBLIC ACCOUNTANTS

Miami, Florida
April 10, 2000

32
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Directors of Fine Air Services Corp.:

In our opinion, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1998
present fairly, in all material respects, the financial position of Fine Air
Services Corp. and its subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Fine Air
Services Corp. for any period subsequent to December 31, 1998.

PRICEWATERHOUSECOOPERS LLP

Miami, Florida
March 25, 1999

33
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $124,632,274 $ 10,671,757
Accounts receivable, net ......................................... 16,090,397 36,300,298
Current portion of loans and long-term receivables ............... 2,470,757 3,503,253
Parts inventory .................................................. -- 35,120,793
Prepaid expenses and other current assets ........................ 839,189 2,770,915
------------ ------------
Total current assets ........................................... 144,032,617 88,367,016
------------ ------------

Property and equipment, net .......................................... 82,459,577 164,161,237
------------ ------------

Other assets:
Restricted cash .................................................. 303,504 316,881
Loans and long-term receivables, less current portion ............ 9,351,084 13,263,789
Advances to shareholders ......................................... -- 952,253
Aircraft and engines held for sale ............................... -- 22,660,000
Deposits and other assets ........................................ 1,594,731 3,039,402
Operating certificate, net ....................................... -- 4,750,000
Deferred debt issuance costs, net ................................ 6,316,209 5,518,625
------------ ------------
Total assets ................................................... $244,057,722 $303,029,203
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. 4,186,345 8,757,256
Accrued expenses ................................................. 5,750,111 24,584,039
Interest payable ................................................. 1,653,248 1,833,792
Line of credit ................................................... -- 35,183,205
Current portion of long-term obligations ......................... 135,445 1,485,275
------------ ------------
Total current liabilities ...................................... 11,725,149 71,843,567
------------ ------------

Long-term obligations:
Capital lease obligation, less current portion .................. 81,752 464,247
Legal settlement, less current portion .......................... -- 3,169,865
Senior Notes .................................................... 190,000,000 190,000,000
------------ ------------
Total liabilities .............................................. 201,806,901 265,477,679
------------ ------------

Commitments and contingencies (Notes 9, 11, 12)

Stockholders' equity:
Common stock, $0.01 par value; 3,000 shares authorized, issued and
outstanding .................................................... 30 30
Retained earnings ................................................ 42,244,318 37,551,494
Accumulated other comprehensive income ........................... 6,473 --
------------ ------------
Total stockholders' equity ..................................... 42,250,821 37,551,524
------------ ------------
Total liabilities and stockholders' equity ..................... $244,057,722 $303,029,203
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

34
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Scheduled cargo services ...................... $ 56,412,349 $ 76,079,187 $ 120,039,487
ACMI and charter services ..................... 31,079,449 37,645,389 61,796,491
Aircraft parts, repairs and other ............. 2,502,372 2,378,847 14,763,528
------------- ------------- -------------
Total operating revenues .................... 89,994,170 116,103,423 196,599,506
------------- ------------- -------------
Operating expenses:
Flying operations ............................. 34,198,136 39,505,917 56,308,756
Aircraft and traffic servicing ................ 8,709,798 12,085,255 19,456,732
Maintenance ................................... 15,247,112 18,004,391 34,225,407
General and administrative .................... 16,131,561 18,055,817 27,491,368
Selling ....................................... 5,264,365 6,152,126 9,137,540
Cost of sales - aircraft parts ................ -- -- 6,182,966
Depreciation and amortization ................. 11,469,954 13,235,861 24,283,571
------------- ------------- -------------
Total operating expenses .................... 91,020,926 107,039,367 177,086,340
------------- ------------- -------------
Operating (loss) income ..................... (1,026,756) 9,064,056 19,513,166
------------- ------------- -------------
Other income (expense):
Interest income ............................... 225,017 4,855,241 2,723,932
Interest expense net of capitalized interest of
$440,000 in 1997............................. (1,090,838) (12,830,307 (21,853,391)
Gain on insurance and litigation settlements .. 3,905,373 3,388,574 --
Legal settlement .............................. -- -- (4,169,865)
Other, net .................................... (1,897,582) 220,816 433,063
------------- ------------- -------------
Total other, net ............................ 1,141,970 (4,365,676) (22,866,261)
------------- ------------- -------------
Income (loss) before extraordinary gain ........... 115,214 4,698,380 (3,353,095)
Extraordinary gain on repurchase of Senior Notes .. -- 165,520 --
------------- ------------- -------------
Net income (loss) ................................. $ 115,214 $ 4,863,900 $ (3,353,095)
============= ============= =============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

35
<PAGE>

FINE AIR SERVICES CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
------------------------------
ACCUMULATED
SHARES AMOUNT RETAINED OTHER
------------ ------------ EARNINGS COMPREHENSIVE TOTAL
------------ INCOME (LOSS) ------------
------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 3,000 $ 30 $ 45,054,666 $ (24,517) $ 45,030,179
Net income -- -- 115,214 -- 115,214
Distributions -- -- (3,370,212) -- (3,370,212)
Change in unrealized loss on
investment securities -- -- 38,015 38,015
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 3,000 30 41,799,668 13,498 41,813,196
Net income -- -- 4,863,900 -- 4,863,900
Distributions -- -- (4,419,250) -- (4,419,250)
Change in unrealized gain on
investment securities -- -- -- (7,025) (7,025)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 3,000 30 42,244,318 6,473 42,250,821

Net loss -- -- (3,353,095) -- (3,353,095)
Distributions -- -- (1,339,729) -- (1,339,729)
Change in unrealized gain on -- -- (6,473) (6,473)
investment securities ------------ ------------ ------------ ------------ ------------

Balances at December 31, 1999 3,000 $ 30 $ 37,551,494 $ -- $ 37,551,524
============ ============ ============ ============ ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

36
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... $ 115,214 $ 4,863,900 $ (3,353,095)
------------- ------------- -------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities, net of
acquisition:
Extraordinary gain on repurchase of Senior Notes ............ -- (165,520) --
Depreciation and amortization ............................... 11,469,954 13,235,861 24,283,571
Amortization of deferred debt issuance costs ................ 12,820 537,522 801,464
Bad debt expense ............................................ 882,546 405,539 950,908
Excess of insurance proceeds over net book value of assets .. (3,905,373) -- --
destroyed
Gain on disposal of property and equipment .................. (32,000) --
(473,183)

Loss on sales of investment securities ...................... 86,916 -- --
Changes in operating assets and liabilities:
Accounts receivable ....................................... 2,920,862 (6,148,037) (25,576,768)
Prepaid expenses and other assets ......................... 126,580 (216,090) (1,647,159)
Parts inventory ........................................... -- -- 4,240,522
Accounts payable .......................................... (1,186,398) (1,031,843) 4,570,911
Interest payable .......................................... 134,481 851,992 180,544
Accrued expenses .......................................... 2,961,347 591,125 (6,023,233)
Other liabilities ......................................... 230,000 (460,000) 262,089
------------- ------------- -------------
Total adjustments ....................................... 13,701,735 7,600,549 1,569,666
------------- ------------- -------------
Net cash provided by (used in) operating activities ....... 13,816,949 12,464,449 (1,783,429)
------------- ------------- -------------
Cash flows from investing activities:

Acquisition ................................................. -- -- (112,484,901)
Purchases of property and equipment ......................... (32,500,061) (39,114,339) (57,852,012)
Proceeds from sales of property and equipment ............... 32,000 --
21,175,000

(Increase) decrease in restricted cash, net ................. (527,339) 405,508 (13,377)
Proceeds from sales of investment securities ................ 119,165 -- --
Increase in loans receivable ................................ -- (2,000,000) (1,000,000)
Proceeds from insurance settlement .......................... 6,500,000 -- --
Principal payments on notes receivable ...................... -- 430,670 470,758
------------- ------------- -------------
Net cash used in investing activities ..................... (26,376,235) (40,278,161) (149,704,532)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from long-term obligations ......................... 20,000,000 212,000,000 5,087,355
Deferred debt issuance costs ................................ (466,247) (6,734,784) (3,880)
Principal payments on long-term debt ........................ (1,572,464) (50,584,675) (288,741)
Proceeds from (payment on) line of credit ................... (700,000) -- 35,183,205

Distributions to stockholders ............................... (3,370,212) (4,419,250) (1,339,729)
Advances to stockholders .................................... -- --
(952,253)

Payments of capital lease obligations ....................... (26,937) (92,217) (158,513)
------------- ------------- -------------
Net cash provided by financing activities ................. 13,864,140 150,169,074 37,527,444
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents ............... 1,304,854 122,355,362 (113,960,517)
Cash and cash equivalents, beginning of year ................... 972,058 2,276,912 124,632,274
------------- ------------- -------------
Cash and cash equivalents, end of year ......................... $ 2,276,912 $ 124,632,274 $ 10,671,757
============= ============= =============

Supplemental disclosures of cash flow information:

Cash paid during the year for interest ...................... $ 956,357 $ 11,440,793 $ 21,672,847
============= ============= =============
Supplemental disclosures of non-cash investing activities: (also
see Note 3)
Change in unrealized holding gain on available for sale
investment securities ....................................... $ (38,015) $ 7,025 $ (6,473)
============= ============= =============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

37
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS:

Fine Air Services Corp. and subsidiaries, (the "Company") is primarily engaged
in interstate, overseas and foreign charter and scheduled air transportation of
cargo and mail pursuant to authority granted by the United States Department of
Transportation and operates in the United States, South and Central America, and
the Caribbean. The Company has worldwide charter authority granted by the United
States Department of Transportation and is also engaged in aircraft leasing,
repair and maintenance and, since 1999, aircraft parts sales. Latin America
sales accounted for over 80% of total revenues for the three years ended
December 31, 1999. Foreign sales were conducted in U.S. dollars.

2. SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Fine Air Services
Corp. and its wholly owned subsidiaries, Fine Air Services, Inc. ("Fine Air"),
Agro Air Associates, Inc. ("Agro Air"), Arrow Air, Inc. ("Arrow Air"), and
Fine/AAA Interair, Inc. ("Fine/AAA"). All significant intercompany accounts and
transactions have been eliminated. The Company accounts for its 50% joint
venture interest in Aeromar Airlines under the equity method of accounting. The
Company's share in the operations of this joint venture are currently not
material.

Certain amounts for prior years have been reclassified in the consolidated
financial statements to conform to the classification used in 1999.

LIQUIDITY

The Company is experiencing certain cash flow difficulties which management
attributes to the Company's growth, recent acquisition and integration of Arrow
Air, leverage position, seasonality and capital expenditures that have been made
to comply with FAA noise reduction requirements. The Company believes it can
meet its cash needs through cash flow generated by operations and the sale of
certain valuable non-core assets and by obtaining purchase or lease financing
for the hushkits it is acquiring. Should these methods not be sufficient,
management is prepared to take certain actions, including expense and cost
reductions, requesting interest payment deferrals from its lenders and seeking
additional sources of equity or financing. No assurances can be given that
management will be successful in its efforts.

REVENUE RECOGNITION

Aircraft, crew, maintenance and insurance ("ACMI") and charter services revenue
is generally recognized on a flight by flight basis, although revenue derived
from certain long term ACMI contracts is recognized on a pro rata basis
according to block hour usage specified in such contracts. Revenue from
scheduled cargo services is recognized when the related cargo reaches its final
destination. Revenue from aircraft parts, repairs, and other is recognized as
services are performed or upon shipment of the product to the customer.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company uses estimates principally with respect to the allowance for doubtful
accounts on accounts and loan receivables, the economic useful lives of property
and equipment and salvage value on owned aircraft. Actual results could differ
from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash (both interest bearing and
non-interest bearing) and certificates of deposit and other highly liquid
instruments having maturities of three months or less from the date of purchase.

RESTRICTED CASH

Restricted cash consists of certificates of deposit required to collateralize
various letters of credit.

38
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

INVESTMENT SECURITIES

Securities that the Company does not have the intent or ability to hold to
maturity are classified as either "available-for-sale" or as "trading" and are
carried at fair value. Unrealized gains and losses on available for sale
securities are classified as accumulated other comprehensive income (loss)
within equity. Unrealized gains and losses on trading securities are recognized
in current earnings. As of December 31, 1998, all securities have been
classified as available for sale and are included in other current assets. Such
securities were sold during 1999.

PARTS INVENTORY

Parts inventory consist of aircraft and engine spare parts held for sale and are
stated at the lower of average cost or market value.

EXPENDABLE PARTS

Expendable parts are stated at the lower of average cost or market value and
included in other current assets.

PROPERTY AND EQUIPMENT

Property and equipment, including rotable aircraft parts are stated at cost.
Depreciation and amortization is computed using the straight-line method over
the shorter of the estimated useful lives of the assets, or lease term as
follows:

Aircraft, engines and hushkits 10 to 15 years (10% residual value)
Aircraft and engine overhauls 3 to 10 years
Rotable parts 5 to 10 years
Machinery and equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Automobile and trucks 5 to 7 years
Leasehold improvements lease term

The cost of major scheduled maintenance, overhauls and modifications to
airframes, engines and certain components are capitalized. Routine maintenance
and repairs are charged to expense as incurred.

OPERATING CERTIFICATE

A portion of the purchase price related to the Arrow Air acquisition (see Note
3) was allocated to Arrow Air's operating certificate. The operating certificate
is being amortized, on a straight-line basis, over 20 years.

LONG-LIVED ASSETS

Long-lived assets to be held and used are reviewed for impairment whenever
changes in circumstances indicate that the related carrying amounts may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the fair value of the asset. The Company does not believe
impairment charges are warranted as of December 31, 1998 and 1999.

INCOME TAXES

The Company has elected to be taxed as an S corporation and therefore is not
subject to Federal and State income taxes. Instead, the taxable income or loss
is included in the individual income tax returns of the stockholders. The
Company makes distributions to its stockholders in the amount of any tax
liability they incur as a result of such taxable income.

During 1999, the Company made a distribution of approximately $2.9 million
to its stockholders related to an Internal Revenue Service ("IRS")
examination of the Company's 1993 and 1994 tax returns. The Company's tax
returns for 1995 through 1997 are scheduled for examination by the IRS and
management cannot predict the outcome of such examination.

39
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

DEFERRED DEBT ISSUANCE COSTS

Costs relating to the issuance of the debt are deferred and amortized on a
straight-line basis (approximating the interest method) over the term of the
related debt instruments as interest expense. Amortization of deferred debt
issuance costs was $12,820, $537,522 and $801,464 for the years ended December
31, 1997, 1998 and 1999.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash equivalents, accounts
receivable, loans receivable and long-term receivables, accounts payable, line
of credit, capital lease obligation and the Senior Notes The fair values of the
loans receivable have been estimated based on interest rates available for
similar instruments and approximate their carrying values. The fair value of the
Senior Notes has been estimated based on information received from financial
advisors which at December 31, 1998 and 1999 when applied to face value of the
bond would result in an approximate fair value of $171,000,000 and $135,000,000,
respectively. The fair value of all other financial instruments were not
materially different from their carrying value.

COMPREHENSIVE INCOME

The Company's comprehensive income only includes unrealized gains on investment
securities. The Company has no other elements of comprehensive income.

SEGMENT REPORTING

The Company operates two brands, Fine Air and Arrow Air. The brands have been
aggregated as a single operating segment based on the similarity of their
economic characteristics as well as the product and services provided. The
Company does not dedicate aircraft, flight and maintenance personnel and
administrative support exclusively to

40
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

scheduled cargo services or ACMI and charter service. The Company maximizes the
utilization of its resources to the most favorable revenue mix depending on the
time of year (for example high ACMI during the peak Christmas season) and market
forces.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting treatment. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133", an amendment to SFAS No. 133. SFAS
No. 137 deferred the effective date of adoption of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company has not yet quantified the impact, if
any, of adopting SFAS No. 133 on its financial statement and has not determined
the timing or method of adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income.

In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC's views on the application of
generally accepted accounting principles to revenue recognition. The Company has
reviewed SAB No. 101 and believes that it is in compliance with the SEC's
interpretation of revenue recognition.

3. ACQUISITION

On March 10, 1999, the Company purchased all of Arrow Air's operating assets and
certain additional assets of its affiliates, and on April 9, 1999, the Company
purchased 100% of the common stock of Arrow Air. During July 1999, the Company
purchased certain engine modules directly from the former owners of Arrow Air.
During October 1999, the Company sold certain aircraft to the former owners of
Arrow Air. These combined transactions were accounted by the Company as a
purchase of a business. The net aggregate purchase price was allocated to the
assets acquired and liabilities assumed based on their fair value as follows:

Purchase price allocation:
Parts inventory..................................... $39,361,000
Prepaid expenses and other assets .................. 1,736,000
Property and equipment.............................. 47,585,000
Aircraft and engines held for sale.................. 43,660,000
Operating certificate .............................. 5,000,000
Liabilities assumed................................. (24,857,000)
------------
Net cash purchase price............................. $112,485,000
============

The final purchase price determination and allocation will be contingent upon
final assessment or appraisal of the fair value of the net assets acquired.

The following unaudited pro forma information presents the results of operations
of the Company as if the transaction had been consummated as of the beginning of
the periods presented. This pro forma information does

41
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

not purport to be indicative of what would have occurred had the acquisition
been made as of those dates or of results which may occur in the future.

1998 1999
---- ----

Total operating revenues $204,168,000 $215,089,000
Operating income 23,048,000 15,164,000
Net income (loss) 9,944,000 (10,497,000)

On December 30, 1999, the Company received from the former owners of Arrow Air a
secured promissory note in the amount of $1,000,000 in exchange for the Company
assuming additional specified liabilities not previously contemplated in
connection with the original transaction. This loan is secured by a mortgage and
security agreement, bears interest at 18%, is due on demand. See Note 7.

4. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

During 1997 one customer accounted for 13.5% of total operating revenues. No
customers accounted for more than 10% of total operating revenues in 1998 and
1999. Two customers accounted for 57% and 41% of net account receivables as of
December 31, 1998 and 1999, respectively. Credit is extended based on an
evaluation of a customer's financial condition. The Company's allowance for
doubtful accounts is based on current market conditions and continuous
evaluation of the customer's credit worthiness and has consistently been within
management's expectations. Actual results could differ.

5. ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Activity in the allowance for doubtful accounts was as follows:

YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
----------- ----------- -----------
Balance, beginning of year ....... $ 1,308,976 $ 1,246,863 $ 1,607,783
Provision ........................ 882,546 405,539 950,908
Receivables charged off .......... (944,659) (44,619) (120,669)
Recoveries ....................... -- -- 21,116
----------- ----------- -----------
Balance, end of year ............. $ 1,246,863 $ 1,607,783 $ 2,459,138
=========== =========== ===========

6. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following at:

DECEMBER 31,

1998 1999
------------- -------------
Aircraft, engines and betterments .............. $ 91,339,013 $ 147,402,163
Automobile and trucks .......................... 416,719 561,361

42
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

Leasehold improvements, furniture and fixtures . 1,540,820 2,700,270
Machinery and equipment ........................ 2,499,978 3,459,495
Hushkits ....................................... -- 38,500,000
Rotable parts .................................. 4,074,163 11,966,105
------------- -------------
99,870,693 204,589,394
Accumulated depreciation and amortization ...... (44,892,542) (52,811,826)
------------- -------------
Sub-total ............................... 54,978,151 151,777,568
Aircraft and engine overhauls in process ....... 342,424 4,751,892
Hushkits in production ......................... 27,139,002 7,631,776
------------- -------------

Property and equipment, net .................... $ 82,459,577 $ 164,161,237
============= =============

For the years ended December 31, 1997, 1998, and 1999, depreciation and
amortization expense totaled approximately $11,470,000, $13,236,000 and
$24,284,000, respectively.

7. LOANS AND LONG-TERM RECEIVABLES:

Loans and long-term receivables consist of the following as of December 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer revolving credit agreement, interest at prime plus
1% (9.5% at December 31, 1999),
due on demand and collateralized by the customer's accounts
receivable $ 2,000,000 $ 2,000,000

Note receivable from Arrow Air's former owners, 18 %, due on
demand 1,000,000

Note receivable from ACMI Customer, 9%, payable in 11 quarterly principal and
interest installments of $194,101 with a balloon payment of approximately
$2,778,000 (plus any unpaid principal and interest) at November 1, 2000 3,569,000 3,098,573

Long-term receivables from ACMI customer 6,252,841 10,668,469
----------- -----------
Total 11,821,841 16,767,042

Less Current Portion ( 2,470,757 ) ( 3,503,253 )
----------- -----------
Loans and Long-Term Receivables, net $ 9,351,084 $13,263,789
=========== ===========
</TABLE>

To secure the note and long-term receivable from the ACMI customer, the customer
has granted the Company an unconditional and continuing security interest in all
of its tangible and intangible assets and its common stock. The Company has
historically offered extended payment terms to this customer and it is
management's intent to continue to provide this customer with continued service
so that the customer is able to operate at current or increased levels in the
future.

43
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

In March 2000, the Company entered into a letter of intent to acquire a
controlling interest in this ACMI customer in exchange for the discharge by the
Company of receivables owed by such customer. Management believes that the
routes operated by this customer have a value in excess of the receivables being
discharged.

8. SENIOR NOTES AND LINE OF CREDIT

SENIOR NOTES - On June 5, 1998, the Company consummated the sale of $200 million
9-7/8% Senior Notes due June 1, 2008. On August 14, 1998, the Company
repurchased $10,000,000 of the Senior Notes at 95% of the face value plus
accrued interest of approximately $203,000. This transaction resulted in an
extraordinary gain of $165,000. Interest on the Senior Notes is payable on a
semi-annual basis on June 1 and December 1 of each year, commencing December 1,
1998. The Senior Notes are general unsecured obligations of the Company and are
fully and unconditionally guaranteed by the Company's subsidiaries (the
"Subsidiary Guarantors") on a joint and several bases.

Separate financial statements of the Subsidiary Guarantors are not presented
because: (i) Fine Air Services Corp. is a holding company with no independent
operations; (ii) each of the Subsidiary Guarantors is a wholly-owned subsidiary
of the Company and together comprise all of the Company's direct and indirect
subsidiaries, and (iii) management has determined that such information is not
material to investors.

Covenants with respect to the Senior Notes contain certain limitations on the
Company's ability to, among other things: incur additional indebtedness unless
certain ratio's are met, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, create restrictions on the ability of a subsidiary to
pay dividends or make certain payments, sell or issue preferred stock of
subsidiaries to third parties, merge or consolidate with any other person, or
sell, assign, transfer, lease, convey or otherwise of all or substantially all
of their assets. The Company believes it is in compliance with all such
covenants as of December 31, 1999.

LINE OF CREDIT - As of December 31, 1999 the Company has a $45,000,000 line of
credit with a commercial institution. The borrowings under this line are secured
primarily by specific aircraft, receivables and inventories. Interest is payable
monthly calculated at a certain bank's prime rate plus 0.75%. As of December 31,
1999, the prevailing interest rate under the revolving credit facility was
9.25%, and the line matures in November 2000. The unused portion of the line of
credit is subject to a fee at the rate of .30% per annum.

9. LEASE COMMITMENTS:

OPERATING LEASES

The Company leases office, hangar and warehouse space under long-term and month
to month leases.

Future minimum non-cancelable operating lease payments at December 31, 1999 are
as follows:

2000 ................................................... $4,444,000
2001 ................................................... 1,382,000
2002 ................................................... 752,000
2003 ................................................... 585,000
--------
Total: ........................................ $7,163,000
----------

Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $2,865,000, $3,570,000 and $6,418,000, respectively.

44
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

CAPITAL LEASES

Future minimum payments for equipment under capital leases at December 31, 1999
are as follows:

2000................................................... $519,583
2001................................................... 437,293
2002................................................... 40,228
--------
Total minimum obligation 997,104
Interest (47,582)
--------
Net minimum lease payment 949,522
Current portion (485,275)
---------
Long-term obligation, net $464,247
========

10. RELATED PARTY TRANSACTIONS:

The Company is required to meet certain noise standards and, therefore, the
Company has installed hushkits on certain of its aircraft. In 1996, the Company
entered into an agreement with Quiet Technology Venture, Ltd. ("QTV"), an entity
in which the Company's stockholders have a controlling interest, to design and
manufacture the necessary hushkits applicable to certain of the Company's models
of DC-8 aircraft which have no hushkit available from other sources. Included in
property and equipment at December 31, 1999 are approximately $36,000,000 and
$7,632,000 of completed and in-process hushkits manufactured by QTV. The Company
intends to continue to acquire hushkits from QTV until all applicable aircraft
comply with the FAA's noise control regulation.

For the years ended December 31, 1997, 1998, and 1999, the Company recorded
revenues (repairs, training and other) of approximately $1,121,000, $2,096,000
and $760,000, respectively, relating to work performed for QTV. At December 31,
1998, $3,850,000 relating to those revenues were included in accounts
receivable, non-current. At December 31, 1999, no amounts were due from QTV.

During 1997, 1998 and 1999 ACMI revenues recognized from transactions with
Aeromar Airlines amounted to 4,033,000, $4,580,000, and $4,943,000,
respectively. Accounts receivable from Aeromar Airlines amounted to $514,000 and
$2,179,000 at December 31, 1998 and 1999, respectively.

At December 31, 1998 and 1999, the Company had advances of $233,000 and
$258,000, respectively, to several related parties affiliated with the Company's
stockholders.

11. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK:

At December 31, 1998 and 1999, the Company had outstanding $1,024,000 and
$1,321,000, respectively, of irrevocable standby letters of credit to guarantee
landing fees in certain countries and to guarantee rent at the Miami
International Airport corporate offices and hangar facilities. These letters of
credit have been collateralized by restricted cash on deposit at the bank
issuing such letters of credit and by a line of credit with a financial
institution.

12. COMMITMENTS AND CONTINGENCIES:

The Company is subject to regulations under U.S. laws and the laws of the
various countries to which it flies its aircraft. Domestically, the Company is
subject to and must comply with certain rules and regulation of the Federal
Aviation Administration ("FAA") and Department of Transportation ("DOT"), and
must comply with numerous

45
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

environmental and employee related laws and ordinances as well as rules and
regulations of other governmental agencies. The Company believes that it is in
material compliance with all applicable laws and regulations of such
governmental entities.

The Company has entered into various employment agreements with certain key
employees. Such employment agreements provide for, among other things, base
annual salary, certain bonuses and severance benefits. Aggregate annual
compensation under these agreements is approximately $425,000 annually.

In January 1997, the Company obtained a $3,400,000 judgment against a former
insurance carrier. The judgment was appealed, and final adjudication was made in
February 1998. On March 3, 1998, the Company received the full amount of the
judgment, which was recognized as other income during 1998.

The Company is involved in legal proceedings, claims and litigation arising in
the ordinary course of business. In the opinion of management, the outcome of
this litigation will not have a material impact on the Company's financial
position, results of operations, or liquidity.

13. AIRCRAFT ACCIDENT:

On August 7, 1997, one of the Company's aircraft crashed. The aircraft, enroute
to the Dominican Republic, was on an ACMI flight. Five persons died as a result
of the accident. Following the crash, the FAA placed the Company's operations
under heightened scrutiny and the Company voluntarily ceased operations on
September 4, 1997 and on September 12, 1997 entered into a consent agreement
with the FAA. The Company did not to resume operations until the FAA approved
the implementation of new cargo handling procedures. The Company resumed
operations on a limited basis on October 28, 1997, was fully operational by the
first quarter of 1998 and believes it is currently in full compliance with the
terms of this consent agreement. The Company made a payment of $1.0 million to
the FAA for the costs of its investigation and received an insurance settlement
for the loss of the aircraft of $6,500,000 resulting in a gain of $3,905,373
during 1997.

14. EMPLOYEE BENEFITS PLAN

In March 1998, the Company adopted a 401(k) plan (the "Plan") which covers
substantially all employees. Under provisions of the Plan, eligible employees
may contribute to the plan, subject to certain restrictions. Company
contributions are at the discretion of its Board of Directors. The Company did
not make any contributions to the Plan during 1998 or 1999. Arrow Air had a
similar plan for its employees which was terminated during early 2000.

15. SUBSEQUENT EVENT:

In March 2000, the Company entered into a plea agreement with the U.S. Attorney.
The plea agreement calls for the Company to pay a $3,500,000 fine. The Company
is also jointly and severally liable for an additional fine of $1,500,000 levied
by the U.S. Attorney under a separate plea agreement with Aeromar Airlines, a
Florida General Partnership, in which the Company and Aeromar Airlines, Inc. are
partners. The Company has entered into an agreement with Aeromar Airlines, Inc.
and Aeromar C por A, the owner of Aeromar Airlines, Inc., whereby these two
entities have agreed to be responsible for 50% of this $5,000,000 fine. Although
the Company believes that Aeromar Airlines, Aeromar Airlines, Inc., and Aeromar
C por A each possess sufficient financial resources to pay their portion of
these fines, the Company has recorded a charge of $5,000,000 representing the
maximum potential exposure to the Company arising from these fines. The
$5,000,000 fine is payable in equal installments over 5 years and has been
discounted using an interest factor of 10%. Accordingly, the net present value
of $4,169,865 has been included as a charge in the Consolidated Statements of
Operations for the year ended December 31, 1999.

46
<PAGE>

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

In January 2000, we engaged Deloitte & Touche LLP as our new
independent certified public accountants to audit the Company's financial
statements for the fiscal year ended December 31, 1999. At that time, we chose
not to renew the engagement of PricewaterhouseCoopers LLP, who previously
served as our independent certified public accountants. The decision to change
accountants was approved by our members of the Board of Directors.

In connection with the audit of our financial statements for the years
ended December 30,1998 and 1997, we had no disagreements with
PricewaterhouseCoopers LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which if not
resolved to their satisfaction would have caused PricewaterhouseCoopers LLP to
make reference thereto in connection with its report. PricewaterhouseCoopers
LLP's report on our financial statements for the year ended December 31, 1998
and 1997 contain no adverse opinion or disclaimer of opinion and is not
qualified or modified as to uncertainty, audit scope or accounting principles.

PART III

ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.

The following table sets forth certain information regarding our
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
J. Frank Fine......................... 75 Chairman of the Board
Barry H. Fine......................... 47 President, Chief Executive Officer and Director
John D. Zappia........................ 48 President of Fine/AAA Interair, Inc. and Director
Orlando M. Machado.................... 40 Senior Vice President and Chief Financial Officer
Guillermo J. Cabeza................... 32 Chief Operating Officer and President and Chief
Executive Officer of Arrow Air, Inc.
</TABLE>

J. FRANK FINE founded Fine Air's predecessor in 1976 and has served as
our Chairman of the Board since inception. Mr. Fine also served as President and
Chief Executive Officer from our inception until June 1997. Mr. Fine also served
as Vice President, North America and General Sales Agent of Alas de Transporte
International, S.A., a Dominican all-cargo airline ("Alas"), from 1988 to 1992;
Vice President, North America and General Sales Agent of Interamericana de
Aviacion, C.A., a Venezuelan all-cargo airline ("Interamericana"), from 1988 to
1992; Vice President, North America and General Sales Agent of Aerochago, S.A.,
a Dominican all-cargo airline ("Aerochago"), from 1985 to 1988; and President,
North America and General Manager of Aeromar C. por A., a Dominican all-cargo
carrier ("Aeromar"), from 1978 to 1985. Mr. Fine is the father of Barry H. Fine.

BARRY H. FINE has served as President and Chief Executive Officer since
June 1997 and has served as a member of our board of directors since inception.
Mr. Fine served as our Vice President and General Manager from inception until
June 1997. Mr. Fine served as Vice President, North America, U.S. General
Counsel and U.S. General Sales Agent of Alas from 1988 to 1992; Vice President,
North America and U.S. General Sales Agent of Interamericana from 1988 to 1992;
Vice President, North America and General Counsel of Aerochago from 1985 to
1988; and Vice President, North America and General Counsel of Aeromar from 1982
to 1985.

JOHN D. ZAPPIA has served as the President of Fine/AAA Interair, Inc.
and has served as member of our board of directors since December 1999. Mr.
Zappia served as Senior Vice President and Chief Operating Officer of Fine Air
from June 1997 until December 1999. Mr. Zappia served as Senior Vice President,
Maintenance and Operations of Fine Air from November 1992 until June 1997. Since
1991, Mr. Zappia has been a member of the Miami Maintenance Management Council,
an association of maintenance companies and was its President from 1991 to 1995.
From March 1984 to November 1992, Mr. Zappia served as Vice President of
Maintenance of Agro Air. Prior to joining us, Mr. Zappia's experience in the
airline industry includes: Electrical and Avionics Lead Mechanic of Air Florida
(1980-1984); Technical Consultant to Aviation Components and Accessories, Inc.,
an FAR 145 repair station (1981-1984); Lead Avionics and Electrical Mechanic of
Airlift International, Inc. (1979-1980); Supervisor, FAA Accessory Overhaul Shop
of Marco Island Airways (1977-1979); and Accessory Mechanic of Dixie Air Parts
Inc. (1972-1979).

47
<PAGE>

ORLANDO M. MACHADO has served as our Senior Vice President and Chief
Financial Officer since July 1997. From December 1987 to June 1997, Mr. Machado
held various positions at Greenwich Air Services, Inc., a diversified
independent gas turbine engine repair and overhaul company ("Greenwich"), and
most recently served as Vice President of Finance. Prior to joining Greenwich,
Mr. Machado, who is a certified public accountant, was employed by Coopers &
Lybrand, L.L.P., as an audit manager.

GUILLERMO J. CABEZA has served as our Chief Operating Officer since
December 1999 and as the President and Chief Executive Officer of Arrow Air
since June 1998. Mr. Cabeza served as the Vice President of Operations of Arrow
Air from November 1997 until June 1998. From February 1992 to November 1997, Mr.
Cabeza held various positions with Arrow Air including Director of Flight Safety
and Training, Director of Flight Standards and Publications and Assistant
Director of Operations. Mr. Cabeza holds aircraft dispatcher and commercial
instrument licenses and is a certified ground instructor and flight instructor.

Officers of Fine Air serve at the pleasure of the Board of Directors.
Except as noted above, there are no family relationships among any of our
executive officers and directors.

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE. The following table sets forth all
compensation awarded to, earned by or for services rendered to Fine Air in all
capacities during the year ended December 31, 1999 by the Chief Executive
Officer and the other executive officers of the Company whose salary and bonus
during 1999 exceeded $100,000 (the "Named Officers").
<TABLE>
<CAPTION>
YEAR ALL OTHER OTHER ANNUAL
---- SALARY BONUS COMPENSATION(2) COMPENSATION
------ ----- --------------- ------------
NAME AND PRINCIPAL POSITION

<S> <C> <C> <C> <C> <C>
J. Frank Fine,
Chairman of the Board......................... 1999 $250,000 $-- $ 4,598 $--
1998 250,000 5,276
1997 164,742 -- 11,079 --
Barry H. Fine,
President and Chief Executive Officer......... 1999 $250,000 -- $29,221 --
1998 250,000 24,622
1997 199,842 -- 23,095 --

Guillermo Cabeza,
Chief Operating Officer..................... 1999 $142,250(4)

John D. Zappia,
President, Fine/AAA Interair, Inc............. 1999 $185,000 -- -- --
1998 165,000
1997 134,762 -- -- --
Orlando M. Machado,
Chief Financial Officer...................... 1999 $165,000 -- --
1998 150,000 $150,000(3)
1997 70,673 -- -- --
</TABLE>

48
<PAGE>

- ---------------
(1) Does not include cash dividends paid to the Named Officers of which
approximately $652,000 for J. Frank Fine and approximately $201,000 for
Barry H. Fine was in excess of amounts of funds required to pay tax
obligations for the Company's income. See "Certain Transaction." Messrs.
Frank and Barry Fine currently receive annual salaries of $250,000.

(2) Represents amounts related to the Named Officers' personal use of Company
automobiles and a portion of the premiums for health insurance provided to
Named Officers.

(3) Represents amount paid to executive in lieu of a stock award pursuant to
executive's employment agreement. Such employment agreement provided for a
stock award at the time of an initial public offering of the Company's
common stock or a cash award of $150,000 in lieu thereof if an initial
public offering was not consummated prior to December 31, 1997.

(4) Represents amount paid for the period April 10,1999 to December 31, 1999.

EMPLOYMENT AGREEMENT

Effective July 7, 1997, Fine Air entered into a three-year employment
agreement with Orlando M. Machado, pursuant to which he will serve as Chief
Financial Officer. Mr. Machado will receive an annual base salary of $150,000
(effective January 1, 1999, Mr. Machado's annual base salary was increased to
$165,000 and effective February 2000's was increased to $200,000) and such
bonuses as may be awarded from time to time in the discretion of the Board or
any compensation committee thereof. If the agreement is terminated prior to the
expiration of the term other than by reason of death, Disability (as defined) or
Cause (as defined), or by him for Good Reason (generally defined as the
diminution of his duties or other breach by the Fine Air of the agreement), Mr.
Machado (or his estate or beneficiaries) will receive, in addition to accrued
salary and other benefits to which he may be entitled, his base salary for a
period of two years following such termination. The agreement prohibits Mr.
Machado from competing with Fine Air during the term of the agreement and for a
period of one year after termination of his employment, other than a termination
by him for Good Reason or a termination by the Fine Air without Cause.

Effective February 23, 2000, Fine Air entered into a three-year
employment agreement with Guillermo J. Cabeza, pursuant to which he will serve
as Chief Operating Officer of Fine Air and President and Chief Executive Officer
of Arrow Air, Inc. Mr. Cabeza will receive an annual base salary of $225,000 and
such bonuses as may be awarded from time to time in the discretion of the Board
or any compensation committee thereof. If the agreement is terminated prior to
the expiration of the term other than by reason of death, Disability (as
defined) or Cause (as defined), or by him for Good Reason (generally defined as
the diminution of his duties or other breach by Fine Air of the agreement), Mr.
Cabeza (or his estate or beneficiaries) will receive, in addition to accrued
salary and other benefits to which he may be entitled, his base salary for a
period of one year following such termination. Separately following a change of
control and upon certain conditions, Mr. Cabeza will receive his base salary for
a period of one and one half-year following such termination. The agreement
prohibits Mr. Cabeza from competing with Fine Air during the term of the
agreement and for a period of one year after termination of his employment,
other than a termination by him for Good Reason or a termination by the Fine Air
without Cause.

49
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information as of December 31, 1999
concerning the beneficial ownership of our outstanding Common Stock.

SHARES BENEFICIALLY
OWNED
-----

NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT
--------------------------------------- ------ -------
J. Frank Fine....................................... 1,500 50.0%
Barry H. Fine....................................... 1,500 50.0%

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

(1) The address of each person or entity listed is c/o Fine Air Services,
Inc., 2261 N.W. 67th Avenue, Bldg. 700, Miami, Florida 33152.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

J. Frank Fine, Fine Air's Chairman, and Barry H. Fine, Fine Air's
President and Chief Executive Officer (collectively, the "Principal
Shareholders"), each own 50% of the capital stock of Fine Air. The Principal
Shareholders also each owned 50% of the capital stock of Fine Air Services and
Agro Air. On June 3, 1998, each of the Principal Shareholders contributed to
Fine Air his interest in Fine Air Services and Agro Air, each of which became a
wholly owned subsidiary of Fine Air. The Principal Shareholders received no
additional consideration for contributing their interests in Fine Air Services
and Agro Air to Fine Air.

Fine Air is subject to taxation under Subchapter S of the Code and
comparable provisions of state income tax laws. As a result, the net income of
Fine Air, for federal and certain state income tax purposes, was reported by and
taxable directly to Fine Air's shareholders during that time rather than to Fine
Air. Fine Air has paid cash dividends to their shareholders in amounts at least
sufficient to provide them funds for tax obligations payable by them on account
of Fine Air's income. During 1997, 1998 and 1999, Fine Air made aggregate cash
distributions to its shareholders of $3,370,212, $4,419,250 and $1,683,230,
respectively. Frank and Barry Fine received 58% and 42%, respectively, of the
aggregate cash distributions made by Fine Air during 1997, 1998 and 1999. During
May 1998, Fine Air made a distribution to its shareholders of approximately $3.5
million in excess of amounts required by the shareholders to pay income taxes.

At December 31, 1998 and 1999, Fine Air had advanced $233,000 and
$258,000, respectively, to several related parties affiliated with Fine Air's
stockholders. In addition, at December 31, 1999, Fine Air had outstanding
advances of $952,000 to its stockholders.

The Principal Shareholders own 30% of the capital stock of Quiet
Nacelle Corporation ("QNC") and 100% of the capital stock of Quiet Technology,
Inc. ("QTI") and Quiet Technology DC-8, Inc. ("QTD"). Quiet Technology Venture,
Limited ("QTV, Ltd."), a partnership engaged in the manufacture of hushkits for
DC-8-50 series and DC-8-61 aircraft (the aircraft used by Fine Air), in which
(i) QTD is the general partner and has a 1% interest, (ii) QTI is a limited
partner and has a priority return on capital and 94.83% interest and (iii) QNC
is a limited partner and has a 4.16% interest. During 1997, 1998 and 1999, Fine
Air performed approximately $1,121,000, $2,096,000 and $760,000 of services for
QTV, Ltd. Fine Air's services consisted of supplying parts and labor to
manufacture hushkit components in support of QTV, Ltd.'s efforts. At December
31, 1998 and 1999, the balances of Fine Air's accounts receivable due from QTV,
Ltd. were $3,850,000 and $0, respectively.

Fine Air has purchased from QTV, Ltd. 14 hushkits for its DC8 aircraft
and intends to purchase two spare hushkits. The purchase price for these
hushkits was $3.0 million each. As of December 31, 1997, 1998 and 1999, Fine Air
had cumulative advances to QTV, Ltd. of $8,800,000, $27,139,000 and $43,632,000,
respectively.

We believe that the terms of Fine Air's transactions with Frank Fine
Company and QTV, Ltd. were at least as favorable to Fine Air as those that could
have been obtained from unaffiliated third parties.

50
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) 1. Financial Statements:

Reference is made to the Index to Financial Statements set forth in
Item 8. Financial Statements and Supplementary Data of this Annual Report on
Form 10-K.

2. Financial Statement Schedules:

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission (the "Commission") are not
required under the related instructions, the required information is contained
in the financial statements and notes thereto or are not applicable, and
therefore have been omitted.

3. Exhibits:

The following exhibits are filed as part of this Annual Report on Form
10-K:

EXHIBIT DESCRIPTION
- ------- -----------

3.1 Registrant's Certificate of Incorporation (3.1) (1)

3.2 Registrant's Bylaws (3.2) (1)

10.1 Indenture, dated as of June 5, 1998, between the Registrant
and The Bank of New York, as Trustee (4.1) (1)

10.2 Agreement of Purchase and Sale of Assets, dated as of
February 5, 1999, as amended March 10, 1999 by and among
Fine Air Services Corp., International Air Leases of PR,
Inc. and Anthony Tirri (99.1) (2)

10.3 Stock Purchase Agreement, dated as of February 5, 1999, by
and among Fine Air Services Corp., International Air Leases
of PR, Inc., Anthony Tirri, Jean Tirri and John Ebert (99.2)
(2)

10.4 Loan Agreement, dated as of February 5, 1999, by and among
Fine Air Services Corp., International Air Leases of PR,
Inc. and Anthony Tirri (99.3) (2)

10.5* Employment Agreement, dated as of July 7, 1997, between the
Registrant and Orlando M. Machado. (3)

10.6* Employment Agreement, dated as of February 23,2000, between
the Registrant and Guillermo J. Cabeza. (3)

21.1 Subsidiaries of the Registrant (3)

27.1 Financial Data Schedule (3)

- -----------------
(1) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Company's Registration Statement on Form S-4
(Registration No. 333-59359).
(2) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Company's Report on Form 8-K (Event of February 5,
1999).
(3) Filed herewith.
(4) * Management Contract or Compensatory Plan.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

51
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FINE AIR SERVICES CORP.

By: /S/ BARRY H. FINE
---------------------------------
Barry H. Fine
April 14, 1999 President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE

/S/ J. FRANK FINE Chairman of the Board April 14, 2000
- -----------------------------------------
J. Frank Fine

/S/ BARRY H. FINE President, Chief Executive Officer and April 14, 2000
- -----------------------------------------
Barry H. Fine. Director

/S/ ORLANDO M. MACHADO Senior Vice President and Chief Financial April 14, 2000
- -----------------------------------------
Orlando M. Machado Officer (principal financial and accounting
officer)

/S/ JOHN D. ZAPPIA Director April 14, 2000
- -----------------------------------------
John D. Zappia
</TABLE>

52
<PAGE>

EXHIBIT INDEX

EXHIBIT DESCRIPTION
------- -----------

10.5 Employment Agreement, dated as of July 7, 1997, between the
Registrant and Orlando M. Machado.

10.6 Employment Agreement, dated as of February 23,2000, between
the Registrant and Guillermo J. Cabeza.

21.1 Subsidiaries of the Company

27.1 Financial Data Schedule - For SEC use only

EXHIBIT 10.5

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (this "Agreement"), entered into as of the 7th day
of July 1997 (the "Effective Date") by and between FINE AIRLINES, INC., a
Florida corporation having its principal offices at 2261 N.W. 67th Avenue,
Building 700, Miami, Florida 33122 (the "Company"), and ORLANDO M. MACHADO, an
individual residing at 19886 N.W. 62nd Avenue, Miami, Florida 33015 (the
"Executive").

W I T N E S S E T H :

WHEREAS, the Executive has been employed as a senior financial officer
with Greenwich Air Services, Inc., a company engaged in the overhaul, repair,
maintenance and servicing of gas turbine aircraft and aeroderivative engines;

WHEREAS, the Company desires to obtain the personal services of the
Executive as Senior Vice President of Finance and Chief Financial Officer of the
Company from and after the Effective Date;

WHEREAS, the Executive is willing and able to render services to the
Company on the terms and conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound thereby, the
parties hereby agree as follows:

1. NATURE OF EMPLOYMENT.

1.1 Subject to the terms and conditions of this Agreement, the Company
shall, throughout the term of this Agreement, retain the Executive, and the
Executive shall render services to the Company, in the capacity and with the
title of Chief Financial Officer.

1.2 In such capacity, the Executive shall have and exercise
responsibility for overseeing and actively participating in all aspects of the
Company's financial affairs, including, without limitation (a) the establishment
and implementation of financial policy, (b) the supervision of the activities of
the Treasurer's, Controller's and credit and collection departments, (c)
responsibility for the negotiation of the terms of debt and equity financings
for the Company, (d) the supervision of the Company's auditors, (e) directing
the preparation of financial forecasts and SEC financial reports on Form 10-K,
Form 10-Q and other periodic reports, (f) participating in discussions, meetings
and other communications with security analysts, investment bankers, lenders and
other members of the financial community, and (g) such other similar or related
duties customarily performed by a chief financial officer as may be assigned to
the Executive from time to time by the Chairman of the Board, President or Chief
Executive Officer of the Company or the Board of Directors of the Company (the
"Board").

<PAGE>

1.3 Throughout the period of his employment hereunder, the Executive
shall: (a) devote his full business and professional time, attention, knowledge
and skills, faithfully, diligently and to the best of his ability, to the active
performance of his duties and responsibilities hereunder on behalf of the
Company; (b) observe and carry out such rules, regulations, policies, directions
and restrictions as may be established from time to time by the Board, including
but not limited to the standard policies and procedures of the Company as in
effect from time to time; and (c) do such traveling at the Company's expense as
may reasonably be required in connection with the performance of such duties and
responsibilities; PROVIDED, HOWEVER, that the Executive shall not be assigned to
regular duties that would reasonably require him to relocate his permanent
residence from that first set forth above.

1.4 Subject to compliance with his covenants and agreements set forth
in Section 1.3 above and his fiduciary duties to the Company as an executive
officer thereof, the Executive may engage (a) in other professional activities,
and (b) in charitable, educational, religious, civic and similar types of
activities (all of which shall be deemed to benefit the Company), speaking
engagements, membership on the board of directors of other organizations, and
similar activities; PROVIDED, that the foregoing business and other activities
do not inhibit or prohibit the performance of his duties hereunder or inhibit or
conflict in any way with the businesses of the Company.

2. TERM OF EMPLOYMENT; TERMINATION.

2.1 TERM. Subject to the terms and conditions hereof, the term of the
Executive's employment pursuant to this Agreement (the "Term") shall commence on
the Effective Date and shall continue for a period of three (3) years after the
Effective Date. The Term may be renewed by mutual written agreement of the
Executive and the Company.

2.2 TERMINATION. The Executive's employment under this Agreement may be
terminated upon mutual written agreement of the Company and the Executive, or
under the following circumstances:

(a) DEATH. The Executive's employment under this Agreement shall
terminate automatically upon his death.

(b) DISABILITY. If, as a result of the Executive's incapacity due
to physical or mental illness, disability or impairment the Executive shall have
failed to perform all of his duties under this Agreement for a period in excess
of four (4) consecutive months, or in excess of one hundred eighty
non-consecutive days within any period of three hundred sixty five (365) days,
the Company may terminate the Executive's employment under this Agreement for
"Disability." If the Company and the Executive do not agree on whether there
exists a condition constituting a Disability, the determination of a Disability
shall be made by a qualified physician selected and paid for by the Company (and
reasonably acceptable to the Executive), whose determination shall be conclusive
and binding on the Company and the Executive.

2
<PAGE>

(c) CAUSE. The Company may terminate the Executive's employment
under this Agreement for Cause. For purposes of this Agreement, the term "Cause"
shall mean (i) the willful failure by the Executive to perform his duties under
this Agreement (other than any such failure resulting from the Executive's
incapacity due to physical or mental illness, disability or impairment), after a
demand for performance is delivered to the Executive by the Company specifically
identifying the manner in which the Company believes the Executive has not
performed his duties, and the Executive shall have failed to resume performance
of such duties within thirty (30) days of receiving such demand, (ii) a breach
by the Executive of any of the material covenants and agreements of the
Executive contained in this Agreement, including those provided in Sections 5
and 6 below, which, in any case, is not corrected in all material respects (if
so correctable) within thirty (30) days after written notice of same from the
Company to the Executive; (iii) any breach by the Executive of his fiduciary
duties and obligations to the Company which is not corrected in all material
respects (if so correctable within thirty (30) days after written notice of same
from the Company to the Executive; (iv) conduct constituting fraud or
embezzlement or gross dishonesty by Executive in connection with the performance
of his duties under this Agreement, or a formal charge or indictment of
Executive for or conviction of Executive of a felony or, if it shall adversely
damage or bring into disrepute the business, reputation or goodwill of the
Company, or impair the Executive's ability to perform his duties with the
Company any crime involving moral turpitude.

(d) TERMINATION BY THE EXECUTIVE. The Executive may terminate his
employment under this Agreement for Good Reason. For purposes of this Agreement
the term "Good Reason" shall mean, without the Executive's express written
consent, the occurrence of any one or more of the following: (i) the failure by
the Company to make any payment to the Executive required to be made during the
Term within thirty (30) days after payment is due, or (ii) a breach by the
Company of any other material covenant or agreement to be performed by it
hereunder (including the failure to re-appoint the Executive to the offices
described in Section 1.1 of this Agreement or any material diminution in the
duties of the Executive which reduces the scope or importance of such position)
and shall fail to cure or remedy the same within thirty (30) days after written
notice thereof to the Company.

(e) NOTICE OF TERMINATION. Any termination of the Executive's
employment by the Company or by the Executive (other than termination pursuant
to Section 2.2(a), above) shall be communicated by written Notice of Termination
to the other party hereto given in accordance with Section 8. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.

(f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
the Executive's employment is terminated as a result of death, the date of his
death, (ii) if the Executive's employment is terminated for Disability, the date
the Notice of Termination is given, (iii) if the Executive's employment is
terminated by the Company for Cause or by the Executive for Good Reason, the
date specified in the Notice of Termination after the expiration of any
applicable cure periods, and (iv) if

3
<PAGE>

the Executive's employment is terminated by the Company or the Executive for any
other reason, the date on which a Notice of Termination is given.

3. COMPENSATION AND BENEFITS.

3.1 BASE SALARY. As compensation for his services to be rendered
hereunder, the Company shall pay to the Executive, throughout the Term of this
Agreement, a base salary of One Hundred Fifty Thousand ($150,000) Dollars per
annum (the "Base Salary"), payable in periodic installments in accordance with
the standard payroll practices of the Company in effect from time to time, but
not less than twice each month. Notwithstanding the foregoing, the Base Salary
may, by action and in the discretion of the Board or any compensation committee
thereof, be increased at any time or from time to time.

3.2 BONUSES. In addition to the Base Salary, the Executive shall be
entitled to receive from time to time such annual bonus payments as the Board or
any compensation committee thereof may determine in its discretion.

3.3 FRINGE BENEFITS. The Company shall also make available to the
Executive, throughout the period of his employment hereunder, such benefits and
perquisites as are generally provided by the Company to its other senior
management employees, including but not limited to eligibility for participation
in any group life, medical, health, dental, disability or accident insurance,
pension plan, 401(k) savings and investment plan, profit-sharing plan, employee
stock purchase plan, incentive compensation plan or other such benefit plan or
policy, if any, which may presently be in effect or which may hereafter be
adopted by the Company for the benefit of its employees generally, in each case
subject to and on a basis consistent with the terms, conditions and overall
administration of such plan or arrangement. The Company shall proovide the
Executive such coverage under any directors and officers liability policies it
maintains as is provided to its other senior management employees and shall
enter into an indemnification agreement with the Executive on terms and
conditions as similar agreements entered into with other senior management
employees.

3.4 EXPENSES. During the Term, the Company shall reimburse the
Executive, reasonably promptly after presentment by the Executive to the Company
of appropriate receipts and vouchers therefor and related information in such
form and detail as the Company may reasonably request, for any reasonable
out-of-pocket business expenses incurred by the Executive in connection with the
performance of his duties and responsibilities hereunder in accordance with the
policies and procedures of the Company and its subsidiaries for the
reimbursement of business expenses. The Company shall also provide the Executive
with a $500.00 per month car allowance. In addition, the Company shall reimburse
the Executive for the cost of maintaining his C.P.A. license, including any
required professional education courses and fees for memberships in professional
associations.

3.5 VACATION. The Executive shall be entitled to take, from time to
time, normal and reasonable vacations with pay, consistent with the Company's
standard policies and procedures in effect from time to time, at such times as
shall be mutually convenient to the Executive and the Company, and so as not to
interfere unduly with the conduct of the business of the Company.

4
<PAGE>

3.6 STOCK AWARD AND STOCK OPTIONS.

(a) STOCK AWARD. On the date that the Company's Registration
Statement No. 333-28569 in respect of its initial public offering of shares of
Company Common Stock, $.01 par value per share (the "Common Stock"), shall be
declared effective by the Securities and Exchange Commission (the "IPO Effective
Date"), the Company shall issue to the Executive as an award under the Company's
Long-Term Incentive Plan (the "Incentive Plan"), that number of whole shares of
Common Stock (the "Bonus Stock"), as shall be determined by dividing (i)
$150,000 by (ii) the initial public offering price per share of the Common Stock
set forth in the final prospectus forming a part of such Registration Statement
(the "IPO Price") and rounding such sum to the nearest whole number. In the
event that, for any reason, the IPO Effective Date does not occur prior to
December 31, 1997, in lieu of the Bonus Stock, the Company shall pay to the
Executive on or before January 31, 1998, the sum of One Hundred Fifty Thousand
($150,000) Dollars in cash. The Company agrees that if the aggregate Market
Value (as hereinafter defined) of the Bonus Stock is less than One Hundered
Fifty Thousand ($150,000) on the earlier to occur of (i) the effective date of
any registration statement under the Securitites Act of 1933, as amended,
covering the resale by the Executive (or his spouse, beneficiaries or estate, if
applicable) of the Bonus Stock, or (ii) one year after the IPO Effective Date,
then the Executive shall have the option, exercisable by written notice to the
Company during the fifteen (15) day period immediately following the earlier of
such dates, to require the Company to repurchase the Bonus Stock at price per
share equal to the IPO Price. For purpose of this Section 3.5(a), the term
"Market Value" means the average of the closing sales prices per share of the
Common Stock, as reported by Nasdaq, during the ten trading day period
immediately preceding the date of determination.

(b) STOCK OPTIONS. On the IPO Effective Date, the Company shall
grant to the Executive pursuant to the Incentive Plan options to purchase (the
"Options") a maximum aggregate of Seventy Five Thousand (75,000) shares of
Common Stock (as such number may thereafter be adjusted in accordance with the
provisions of the Incentive Plan)(the "Option Shares") at an exercise price per
share equal to the IPO Price (the "Exercise Price"). The Options shall be
granted subject to all of the terms and conditions of the Incentive Plan and the
following terms and conditions: (i) the Options shall have a term expiring on
December 31, 2002 (the "Option Expiration Date"); (ii) subject to termination of
the Options prior to vesting as provided in clause (iii) below, the Options
shall vest and become exercisable (A) to the extent of the first 33-1/3% of the
Option Shares, one year after the Effective Date, (B) to the extent of an
additional 33-1/3% of the Option Shares, two years after the Effective Date, and
(C) with respect to the balance of the Option Shares, three years after the
Effective Date, provided, that all unvested Options shall vest immediately upon
termination of the Executive's empoyment hereunder by the Executive for Good
Reason or by the Company for any reason other than death, Disability or Cause;
and (iii) to the extent not previously vested and exercised pursuant to their
terms, the Options shall terminate upon the earlier to occur of: (A) one year
after the Date of Termination of the Executive's employment by reason of his
death, (B) six months after the Date of Termination of the Executive's
employment by the Company without Cause or for Disability or by the Executive
for Good Reason, (C) on the Date of Termination of the

5
<PAGE>

Executive's employment by the Company for Cause or by the Executive other than
for a Good Reason, and (D) the Option Expiration Date.

4. COMPENSATION UPON TERMINATION.

4.1 DEATH. If the Executive's employment is terminated by reason of his
death, the Company shall pay to such person as the Executive shall have
designated in a notice filed with the Company, or, if no such person shall have
been designated, to his estate, any unpaid amounts of his Base Salary accrued
prior to the date of his death. Upon making such payment, the Company shall have
no further liability hereunder; provided, that the Executive's spouse,
beneficiaries or estate, as the case may be, shall be entitled to receive any
amounts then payable pursuant to any pension or employee benefit plan, life
insurance policy or other plan, program or policy then maintained or provided by
the Company to the Executive in accordance with the terms thereof.

4.2 CAUSE; DISABILITY; OTHER THAN FOR GOOD REASON. If the Executive's
employment shall be terminated by the Company for Cause or Disability or by the
Executive for any reason other than a Good Reason, the Company shall pay the
Executive any unpaid amounts of his Base Salary accrued prior to the Date of
Termination. Upon making such payment, the Company shall have no further
liability hereunder; provided, that the Executive shall be entitled to receive
any amounts then payable pursuant to any pension or employee benefit plan, life
insurance policy or other plan, program or policy then maintained or provided by
the Company to the Executive in accordance with the terms thereof.

4.3 GOOD REASON; OTHER THAN CAUSE OR DISABILITY. If the Company shall
terminate the Executive's employment other than as a result of his death or for
Cause or Disability, or the Executive shall terminate his employment for Good
Reason, then the Company shall pay the Executive, (A) any unpaid amounts of his
Base Salary accrued prior to the Date of Termination, (B) in lieu of any further
salary or bonus payments to the Executive for periods subsequent to the Date of
Termination, and as a severance benefit to the Executive, a lump sum payment
equal to two times his Base Salary in effect at the time Notice of Termination
is given (or the Date of Termination where no Notice of Termination is required
hereunder), and (C) any amounts then payable pursuant to any pension or employee
benefit plan, life insurance policy or other plan, program or policy then
maintained or provided by the Company to the Executive in accordance with the
terms thereof.

5. RESTRICTIVE COVENANTS.

5.1 The Executive hereby acknowledges and agrees that (i) the business
contacts, customers, suppliers, technology, product designs and specifications,
know-how, trade secrets, marketing techniques, promotional methods and other
aspects of the business of the Company have been of value to the Company and
will be of value to the Company, and have provided the Company and will
hereafter provide the Company with substantial competitive advantage in the
operation of its business, and (ii) the Executive has and will continue to have
detailed knowledge and possesses and will possess confidential information
concerning the business and operations of the Company.

6
<PAGE>

5.2 Unless otherwise approved in writing by Company or its Chairman of
the Board after full disclosure by the Executive to Company's Board of Directors
of all relevant facts and circumstances, the Executive shall not, directly or
indirectly, for the Executive or through or on behalf of any other person or
entity, at any time during the "Restrictive Period" (as defined in clause (b)
below):

(a) divulge, transmit or otherwise disclose or cause to be
divulged, transmitted or otherwise disclosed, any clients or customer lists,
technology, know-how, trade secrets, marketing techniques, contracts or other
confidential or proprietary information of the Company of whatever nature,
whether now existing or hereafter created or developed (provided, however, that
for purposes hereof, information shall not be considered to be confidential or
proprietary if (i) the information, and its relevance in the applicable
instance, is a matter of common knowledge or public record, (ii) the
information, and its relevance in the applicable instance, is generally known in
the industry, or (iii) the information is disclosed to Executive after
termination of his employment by another person not prohibited from making such
disclosure, (iv) the information is required to be disclosed by law pursuant to
court order or subpoena, or (v) the Executive can demonstrate that such
information, and its relevance in the particular instance, was already known to
the recipient thereof other than by reason of any breach of any obligation under
this Agreement or any other confidentiality or non-disclosure agreement); and/or

(b) at any time during the period commencing on the date hereof
through and including the date which shall be one (1) year following the last
day of the Term, unless the Executive's employment with the Company shall be
terminated by the Company without Cause or by the Executive for Good Reason (the
"Restrictive Period"), invest, carry on, engage or become involved, either as an
employee, agent, advisor, officer, director, stockholder (excluding ownership of
not more than 5% of the outstanding shares of a publicly held corporation if
such ownership does not involve managerial or operational responsibility),
manager, partner, joint venturer, participant or consultant in any business
enterprise (other than the Company or any of their respective Subsidiaries,
affiliates, successors or assigns) which derives 10% or more of its consolidated
revenues from providing air freight transportation services (the "Company
Business").

5.3 It is recognized and hereby acknowledged by the Company and the
Executive that a breach by the Executive of any of the agreements contained in
this Section 5 may cause irreparable harm or damage to the Company, or its
subsidiaries, the monetary amount of which may be virtually impossible to
ascertain. As a result, the Executive and the Company agree that the Company and
any of its subsidiaries shall be entitled to seek and obtain injunctive and/or
other equitable relief to require specific performance of or prevent, restrain
and/or enjoin a breach of the provisions of this Section 5 by the Executive or
his associates, affiliates, partners or agents, in any such case without the
necessity of proving actual damages or posting bond, and that such right to an
injunction shall be cumulative and in addition to whatever other remedies the
Company may possess.

5.4 Upon the termination of the Executive's employment with the
Company, the Executive shall immediately surrender and deliver to the Company
all notes, drawings, diagrams, models,

7
<PAGE>

prototypes, lists, books, records, documents and data of every kind or
description, in whatever written or other media (including, without limitation,
electronic, tape, or other form of storage) relating to or connected with the
business contacts, client or customer lists, technology, know-how, trade
secrets, marketing techniques, contracts or other confidential or proprietary
information of the Company, its business, its properties, or its customers
referred to in Section 5.2(b) above.

6. INVENTIONS; INTELLECTUAL PROPERTY.

6.1 The Executive shall promptly communicate to the Company and
disclose to the Company in such form as the Company requests from time to time,
all drawings, sketches, models, records, information, details and data (in
whatever media the same may be created or recorded including, without
limitation, print, tape, electronic, or otherwise) pertaining to all ideas,
processes, trademarks, inventions, improvements, discoveries and improvements,
product designs and specifications, and other intellectual property, whether
patented or unpatented, and copyrightable or uncopyrightable, made, conceived,
developed, acquired or implemented by the Executive, solely or jointly, during
the term of this Agreement (the "Development Term"), whether or not conceived
during regular working hours through the use of Company time, material or
facilities or otherwise (each of the foregoing hereinafter referred to,
individually and collectively, as a "Development"). The Executive hereby
assigns, transfers, conveys and sells to the Company all right, title and
interest in and to all Developments, whether now existing or hereafter existing
during the Development Term, and acknowledges that the same, whether now
existing or hereafter existing during the Development Term, are the sole and
exclusive property of the Company for which the Executive is being adequately
compensated hereunder. At any time and from time to time, upon the request of
the Company and at its expense, the Executive will execute and deliver to the
Company any and all applications, assignments, instruments, documents and
papers, give evidence and do any and all other acts which, in the opinion of the
Company, are or may be necessary or desirable to document such transfer or to
enable the Company to file and prosecute applications for and to acquire,
maintain and enforce any and all patents, trademark or tradename registrations,
copyrights or other rights under United States, foreign, state or local law with
respect to any such Developments or to obtain any extension, validation,
reissue, continuance, division or renewal of any of the same, in whole or in
part, and otherwise to establish, protect and enforce the Company's rights in
and to such intellectual property.

6.2 Notwithstanding anything to the contrary contained in this
Agreement, the foregoing Section 6.1 shall only apply and be effective to the
extent permitted under applicable law. In this regard, the provisions of Section
6.1 of this Agreement which provide that the Executive shall assign or offer to
assign any of the Executive's rights in an invention to the Company shall not
apply to any invention for which no equipment, supplies, facility, or trade
secret information of the Company was used and which was developed entirely on
the Executive's own time, unless (a) the invention relates (i) directly to the
business of the Company, or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) the invention results from any work
performed by the Executive for the Company.

8
<PAGE>

7. ASSIGNMENT.

7.1 This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive other
than by will or the laws of descent and distribution. This Agreement and all
rights of the Executive hereunder shall inure to the benefit of and be enforce
able by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees. If the
Executive should die while any amounts would still be payable to him hereunder,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Executive's personal or legal
representatives or, if there be no such persons, the Executive's estate.

7.2 This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns. The Company will require any
successor (by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance reasonably satisfactory to the Executive, to assume expressly
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean the Company and any
successor to its business and/or assets as aforesaid which executes and delivers
an assumption and agreement provided for in this Section 7.2 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law, or otherwise.

8. NOTICES.

Any notices, requests, demands or other communications required or
permitted under this Agreement shall be in writing and shall be deemed to have
been given when delivered personally, one (1) day after being sent by recognized
overnight courier service will all charges prepaid or charged to the sender's
account, or three (3) days after being mailed by certified mail, return receipt
requested, addressed to the party being notified at the address of such party
first set forth above, or at such other address as such party may hereafter have
designated by notice; PROVIDED, HOWEVER, that any notice of change of address
shall not be effective until its receipt by the party to be charged therewith.

9. GENERAL.

9.1 Neither this Agreement nor any of the terms or conditions
hereof may be waived, amended or modified except by means of a written
instrument duly executed by the party to be charged therewith. Any waiver or
amendment shall only be applicable in the specific instance, and shall not
constitute or be construed as a waiver or amendment in any other or subsequent
instance. No failure or delay on the part of either party in respect of any
enforcement of obligations hereunder shall in any manner affect such party's
right to seek or effect enforcement at any other time or in respect of any other
required performance.

9
<PAGE>

9.2 The captions and Section headings used in this Agreement are
for convenience of reference only, and shall not affect the construction or
interpretation of this Agreement or any of the provisions hereof.

9.3 This Agreement, and all matters or disputes relating to the
validity, construction, performance or enforcement hereof, shall be governed,
construed and controlled by and under the laws of the State of Florida
applicable to contracts entered into and performed wholly within Florida.

9.4 The Company may withhold from any amounts payable under this
Agreement all Federal, State or other taxes as legally shall be required.

9.5 This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original hereof, but all of which
together shall constitute one and the same instrument.

9.6 This Agreement constitutes the sole and entire agreement and
understanding between the parties hereto as to the subject matter hereof, and
supersedes all prior discussions, agreements and understandings of every kind
and nature between them as to such subject matter.

9.7 If any provision of this Agreement is held invalid or
unenforceable, either in its entirety or by virtue of its scope or application
to given circumstances, such provision shall thereupon be deemed modified only
to the extent necessary to render same valid, or not applicable to given
circumstances, or excised from this Agreement, as the situation may require; and
this Agreement shall be construed and enforced as if such provision had been
included herein as so modified in scope or application, or had not been included
herein, as the case may be.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the date first set forth above.

FINE AIRLINES, INC.

By:
------------------------------------
Title:

---------------------------------------
ORLANDO M. MACHADO

EXHIBIT 10.6

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (this "Agreement"), entered into as of the 23rd
day of February 2000 (the "Effective Date") by and between FINE AIR SERVICES,
INC., a Florida corporation having its principal offices at 2261 N.W. 67th
Avenue, Building 700, Miami, Florida 33122 (hereinafter "Fine"), and GUILLERMO
J. CABEZA, an individual residing at 6558 N.W. 113th Place, Miami, Florida 33178
(the "Executive").

W I T N E S S E T H:

WHEREAS, the Executive is employed as Chief Operating Officer of Fine
and President and CEO of Arrow Air, Inc., (hereinafter "Arrow") a sister company
engaged in the air cargo business;

WHEREAS, Fine and Arrow have begun the process of merging wherein the
two entities shall become one operating company (hereinafter Fine, Arrow and the
combined entity shall collectively be referred to as the "Company");

WHEREAS, the Company desires to continue the personal services of the
Executive in his current capacities from and after the Effective Date;

WHEREAS, the Executive is willing and able to render services to the
Company on the terms and conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound thereby, the
parties hereby agree as follows:

1. Nature of Employment.

1.2 In such capacity, the Executive shall have and exercise
responsibility for (a) overseeing and actively participating in all aspects of
Fine's airline operations, and such other similar or related duties customarily
performed by a chief operating officer as may be assigned to the Executive from
time to time by the Chairman of the Board, President or Chief Executive Officer
of Fine or the Board of Directors of Fine (the "Board"); and (b) providing
leadership and direction for Arrow pursuant to policies established by its Board
of Directors.

1.3 Throughout the period of his employment hereunder, the Executive
shall: (a) devote his full business and professional time, attention, knowledge
and skills, faithfully, diligently

<PAGE>

and to the best of his ability, to the active performance of his duties and
responsibilities hereunder on behalf of the Company; (b) observe and carry out
such rules, regulations, policies, directions and restrictions as may be
established from time to time by the Boards, including but not limited to the
standard policies and procedures of the Company as in effect from time to time;
and (c) do such traveling at the Company's expense as may reasonably be required
in connection with the performance of such duties and responsibilities;
provided, however, that the Executive shall not be assigned to regular duties
that would reasonably require him to relocate his permanent residence from that
first set forth above.

1.4 Subject to compliance with his covenants and agreements set forth
in Section 1.3 above and his fiduciary duties to the Company as an executive
officer thereof, the Executive may engage (a) in other professional activities,
and (b) in charitable, educational, religious, civic and similar types of
activities (all of which shall be deemed to benefit the Company), speaking
engagements, membership on the board of directors of other organizations, and
similar activities; provided, that the foregoing business and other activities
do not inhibit or prohibit the performance of his duties hereunder or inhibit or
conflict in any way with the businesses of the Company.

2. Term of Employment; Termination.

2.1 Term. Subject to the terms and conditions hereof, the term of the
Executive's employment pursuant to this Agreement (the "Term") shall commence on
the Effective Date and shall continue for a period of three (3) years after the
Effective Date. The Term may be renewed by mutual written agreement of the
Executive and the Company.

2.2 Termination. The Executive's employment under this Agreement may be
terminated upon mutual written agreement of the Company and the Executive, or
under the following circumstances:

a. Death. The Executive's employment under this Agreement
shall terminate automatically upon his death.

b. Disability. If, as a result of the Executive's incapacity
due to physical or mental illness, disability or impairment the Executive shall
have failed to perform all of his duties under this Agreement for a period in
excess of four (4) consecutive months, or in excess of one hundred eighty
non-consecutive days within any period of three hundred sixty five (365) days,
the Company may terminate the Executive's employment under this Agreement for
"Disability." If the Company and the Executive do not agree on whether there
exists a condition constituting a Disability, the determination of a Disability
shall be made by a qualified physician selected and paid for by the Company (and
reasonably acceptable to the Executive), whose determination shall be conclusive
and binding on the Company and the Executive.

2
<PAGE>

c. Cause. The Company may terminate the Executive's employment
under this Agreement for Cause. For purposes of this Agreement, the term "Cause"
shall mean (i) the willful failure by the Executive to perform his duties under
this Agreement (other than any such failure resulting from the Executive's
incapacity due to physical or mental illness, disability or impairment), after a
demand for performance is delivered to the Executive by the Company specifically
identifying the manner in which the Company believes the Executive has not
performed his duties, and the Executive shall have failed to resume performance
of such duties within thirty (30) days of receiving such demand, (ii) a breach
by the Executive of any of the material covenants and agreements of the
Executive contained in this Agreement, including those provided in Sections 5
and 6 below, which, in any case, is not corrected in all material respects (if
so correctable) within thirty (30) days after written notice of same from the
Company to the Executive; (iii) any breach by the Executive of his fiduciary
duties and obligations to the Company which is not corrected in all material
respects (if so correctable within thirty (30) days after written notice of same
from the Company to the Executive; (iv) conduct constituting fraud or
embezzlement or gross dishonesty by Executive in connection with the performance
of his duties under this Agreement, or a formal charge or indictment of
Executive for or conviction of Executive of a felony or, if it shall adversely
damage or bring into disrepute the business, reputation or goodwill of the
Company, or impair the Executive's ability to perform his duties with the
Company any crime involving moral turpitude.

d. Termination by the Executive. The Executive may terminate
his employment under this Agreement for Good Reason. For purposes of this
Agreement the term "Good Reason" shall mean, without the Executive's express
written consent, the occurrence of any one or more of the following: (i) the
failure by the Company to make any payment to the Executive required to be made
during the Term within thirty (30) days after payment is due, or (ii) the terms
and conditions set forth in Section 4.3(b) of this Agreement become applicable,
or (iii) a breach by the Company of any other material covenant or agreement to
be performed by it hereunder (including the failure to re-appoint the Executive
to the offices described in Section 1.1 of this Agreement or any material
diminution in the duties of the Executive which reduces the scope or importance
of such position) and shall fail to cure or remedy the same within thirty (30)
days after written notice thereof to the Company.

e. Notice of Termination. Any termination of the Executive's
employment by the Company or by the Executive (other than termination pursuant
to Section 2.2(a), above) shall be communicated by written Notice of Termination
to the other party hereto given in accordance with Section 8. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.

f. Date of Termination. "Date of Termination" shall mean (i)
if the Executive's employment is terminated as a result of death, the date of
his death, (ii) if the Executive's employment is terminated for Disability, the
date the Notice of Termination is given,

3
<PAGE>

(iii) if the Executive's employment is terminated by the Company for Cause or by
the Executive for Good Reason, the date specified in the Notice of Termination
after the expiration of any applicable cure periods, and (iv) if the Executive's
employment is terminated by the Company or the Executive for any other reason,
the date on which a Notice of Termination is given.

Compensation and Benefits.

3.1 Base Salary. As compensation for his services to be rendered
hereunder, the Company shall pay to the Executive, throughout the Term of this
Agreement, a base salary of Two Hundred Twenty-Five Thousand ($225,000) Dollars
per annum (the "Base Salary"), payable in periodic installments in accordance
with the standard payroll practices of the Company in effect from time to time,
but not less than twice each month. Notwithstanding the foregoing, the Base
Salary may, by action and in the discretion of the Board or any compensation
committee thereof, be increased at any time or from time to time.

3.2 Bonuses. In addition to the Base Salary, the Executive shall be
entitled to receive from time to time such annual bonus payments as the Board or
any compensation committee thereof may determine in its discretion.

3.3 Fringe Benefits. The Company shall also make available to the
Executive, throughout the period of his employment hereunder, such benefits and
perquisites as are generally provided by the Company to its other senior
management employees, including but not limited to eligibility for participation
in any group life, medical, health, dental, disability or accident insurance,
pension plan, 401(k) savings and investment plan, profit-sharing plan, employee
stock purchase plan, incentive compensation plan or other such benefit plan or
policy, if any, which may presently be in effect or which may hereafter be
adopted by the Company for the benefit of its employees generally, in each case
subject to and on a basis consistent with the terms, conditions and overall
administration of such plan or arrangement.

3.4 Expenses. During the Term, the Company shall reimburse the
Executive, reasonably promptly after presentment by the Executive to the Company
of appropriate receipts and vouchers therefor and related information in such
form and detail as the Company may reasonably request, for any reasonable
out-of-pocket business expenses incurred by the Executive in connection with the
performance of his duties and responsibilities hereunder in accordance with the
policies and procedures of the Company and its subsidiaries for the
reimbursement of business expenses.

3.5 Vacation. The Executive shall be entitled to take, from time to
time, normal and reasonable vacations with pay, consistent with the Company's
standard policies and procedures in effect from time to time, at such times as
shall be mutually convenient to the Executive and the Company, and so as not to
interfere unduly with the conduct of the business of the Company.

4
<PAGE>

3.6 Stock Options. On the IPO Effective Date, the Company shall grant
to the Executive pursuant to the Incentive Plan options to purchase (the
"Options") a maximum aggregate of Thirty Thousand (30,000) shares of Common
Stock (as such number may thereafter be adjusted in accordance with the
provisions of the Incentive Plan)(the "Option Shares") at an exercise price per
share equal to the IPO Price (the "Exercise Price"). The Options shall be
granted subject to all of the terms and conditions of the Incentive Plan and the
following terms and conditions: (i) the Options shall have a term expiring on
December 31, 2005 (the "Option Expiration Date"); (ii) subject to termination of
the Options prior to vesting as provided in clause (iii) below, the Options
shall vest and become exercisable (A) to the extent of the first 33-1/3% of the
Option Shares, one year after the Effective Date, (B) to the extent of an
additional 33-1/3% of the Option Shares, two years after the Effective Date, and
(C) with respect to the balance of the Option Shares, three years after the
Effective Date, except that all unvested options shall immediately vest upon
termination of Executive's employment for any reason other than for cause; and
(iii) to the extent not previously vested and exercised pursuant to their terms,
the Options shall terminate upon the earlier to occur of: (A) one year after the
Date of Termination of the Executive's employment by reason of his death, (B)
six months after the Date of Termination of the Executive's employment by the
Company without Cause or for Disability or by the Executive for Good Reason, (C)
on the Date of Termination of the Executive's employment by the Company for
Cause or by the Executive other than for a Good Reason, and (D) the Option
Expiration Date.

4. Compensation Upon Termination.

4.1 Death. If the Executive's employment is terminated by reason of his
death, the Company shall pay to such person as the Executive shall have
designated in a notice filed with the Company, or, if no such person shall have
been designated, to his estate, (i) any unpaid amounts of his Base Salary
accrued prior to the date of his death and (ii) the Executive's Base Salary for
a period of four (4) months after the date of his death. Upon making such
payments, the Company shall have no further liability hereunder; provided, that
the Executive's spouse, beneficiaries or estate, as the case may be, shall be
entitled to receive any amounts then payable pursuant to any pension or employee
benefit plan, life insurance policy or other plan, program or policy then
maintained or provided by the Company to the Executive in accordance with the
terms thereof.

4.2 Cause; Disability; Other than for Good Reason. If the Executive's
employment shall be terminated by the Company for Cause or Disability or by the
Executive for any reason other than a Good Reason, the Company shall pay the
Executive any unpaid amounts of his Base Salary accrued prior to the Date of
Termination. Upon making such payment, the Company shall have no further
liability hereunder; provided, that the Executive shall be entitled to receive
any amounts then payable pursuant to any pension or employee benefit plan, life
insurance policy or other plan, program or policy then maintained or provided by
the Company to the Executive in accordance with the terms thereof.

5
<PAGE>

4.3 Good Reason; Other than Cause or Disability.

(a) Prior to Change in Control. If the Company shall terminate
the Executive's employment other than as a result of his death or for Cause or
Disability, or the Executive shall terminate his employment for Good Reason,
then the Company shall pay the Executive, (A) any unpaid amounts of his Base
Salary accrued prior to the Date of Termination, and (B) in lieu of any further
salary or bonus payments to the Executive for periods subsequent to the Date of
Termination as a severance benefit to the Executive, one (1) year his Base
Salary, and (C) any amounts then payable pursuant to any pension or employee
benefit plan, life insurance policy or other plan, program or policy then
maintained or provided by the Company to the Executive in accordance with the
terms thereof.

(b) Following Change in Control. If, following a Change in
Control of the Company, the Executive's employment shall be terminated other
than as a result of his death or for Cause or Disability, and 1) the Executive
shall terminate his employment for Good Reason pursuant to Section 2.2, or 2)
his place of employment is relocated more than 100 miles, or 3) the Executive is
offered a less favorable position (one in which the Executive will not continue
to perform substantially the same functions for the Company) or 4) the Executive
is offered less favorable remuneration (including annual base salary, bonus and
fringe benefits), then the Executive shall be entitled to (A) any unpaid amounts
of his Base Salary accrued prior to the Date of Termination, and (B) in lieu of
any further salary or bonus payments to the Executive for periods subsequent to
the Date of Termination as a severance benefit to the Executive, an amount equal
to one and a half years Base Salary at the rate in effect at the time Notice of
Termination is given (or the Date of Termination where no Notice of Termination
is required hereunder), and (C) any amounts then payable pursuant to any pension
or employee benefit plan, life insurance policy or other plan, program or policy
then maintained or provided by the Company to the Executive in accordance with
the terms thereof.

(c) Change in Control. For purposes of this Agreement, the
term "Change in Control" shall mean the approval by the shareholders of the
Company of a reorganization, merger, consolidation or other form of corporate
transaction or series of transactions, in each case with respect to which
persons who were shareholders of the Company immediately prior to such
reorganization, merger, consolidation or other corporate transaction or
transactions do not, immediately thereafter, own more than 50% of the combined
voting power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated company's then outstanding voting
securities, or a liquidation, dissolution of the Company or the sale of all or
substantially all of the assets of the Company (unless such reorganization,
merger, consolidation or other corporate transaction, liquidation, dissolution
or sale is subsequently abandoned). Both the Executive and the Company agree
that Change of Control shall not mean the merger, reorganization, consolidation
or other form of corporate transaction between Fine and Arrow and any such
transaction shall have no effect on this Agreement.

6
<PAGE>

5. Restrictive Covenants.

5.1 The Executive hereby acknowledges and agrees that (i) the business
contacts, customers, suppliers, technology, product designs and specifications,
know-how, trade secrets, marketing techniques, promotional methods and other
aspects of the business of the Companies have been of value to the Companies and
will be of value to the Companies, and have provided the Company and will
hereafter provide the Company with substantial competitive advantage in the
operation of its business, and (ii) the Executive has and will continue to have
detailed knowledge and possesses and will possess confidential information
concerning the business and operations of the Company.

5.2 Unless otherwise approved in writing by Company or their Chairman
of the Board after full disclosure by the Executive to Company's Board of
Directors of all relevant facts and circumstances, the Executive shall not,
directly or indirectly, for the Executive or through or on behalf of any other
person or entity, at any time during the "Restrictive Period" (as defined in
clause (b) below):

(b) at any time during the period commencing on the date
hereof through and including the date which shall be one (1) year following the
last day of the Term, unless the Executive's employment with the Company shall
be terminated by the Company without Cause or by the Executive for Good Reason
(the "Restrictive Period"), invest, carry on, engage or become involved, either
as an employee, agent, advisor, officer, director, stockholder (excluding
ownership of not more than 5% of the outstanding shares of a publicly held
corporation if such ownership does not involve managerial or operational
responsibility), manager, partner, joint venturer, participant or consultant in
any business enterprise (other than the Company or any of their respective
Subsidiaries, affiliates, successors or assigns) which derives 10% or more of
its consolidated revenues from providing air freight transportation services
(the "Company Business").

7
<PAGE>

5.4 Upon the termination of the Executive's employment with the
Company, the Executive shall immediately surrender and deliver to the Company
all notes, drawings, diagrams, models, prototypes, lists, books, records,
documents and data of every kind or description, in whatever written or other
media (including, without limitation, electronic, tape, or other form of
storage) relating to or connected with the business contacts, client or customer
lists, technology, know-how, trade secrets, marketing techniques, contracts or
other confidential or proprietary information of the Company, its business, its
properties, or its customers referred to in Section 5.2(b) above.

6. Inventions; Intellectual Property.

8
<PAGE>

and enforce any and all patents, trademark or tradename registrations,
copyrights or other rights under United States, foreign, state or local law with
respect to any such Developments or to obtain any extension, validation,
reissue, continuance, division or renewal of any of the same, in whole or in
part, and otherwise to establish, protect and enforce the Company's rights in
and to such intellectual property.

7. Assignment.

9
<PAGE>

8. Notices.

Any notices, requests, demands or other communications required or
permitted under this Agreement shall be in writing and shall be deemed to have
been given when delivered personally, one (1) day after being sent by recognized
overnight courier service will all charges prepaid or charged to the sender's
account, or three (3) days after being mailed by certified mail, return receipt
requested, addressed to the party being notified at the address of such party
first set forth above, or at such other address as such party may hereafter have
designated by notice; provided, however, that any notice of change of address
shall not be effective until its receipt by the party to be charged therewith.

9. General.

9.4 The Company may withhold from any amounts payable under this
Agreement all Federal, State or other taxes as legally shall be required.

9.5 This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original hereof, but all of which
together shall constitute one and the same instrument.

10
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the date first set forth above.

FINE AIR SERVICES, INC.

/S/ BARRY H. FINE
-----------------------------
By: Barry H. Fine
Title: President

GUILLERMO J. CABEZA

/S/ GUILLERMO J. CABEZA
-----------------------------

EXHIBIT 21.1

SUBSIDIARIES OF THE COMPANY

NAME JURISDICTION OF INCORPORATION PERCENT OWNERSHIP
---- ----------------------------- -----------------
Fine Air Services, Inc. Florida 100%
Agro Air Associates, Inc. Florida 100%
Fine/AAA Interair, Inc. Florida 100%
Arrow Air, Inc. Florida 100%

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,672
<SECURITIES> 0
<RECEIVABLES> 36,300
<ALLOWANCES> (2,459)
<INVENTORY> 35,121
<CURRENT-ASSETS> 88,367
<PP&E> 216,973
<DEPRECIATION> (52,812)
<TOTAL-ASSETS> 303,029
<CURRENT-LIABILITIES> (71,844)
<BONDS> (190,000)
0
0
<COMMON> 0
<OTHER-SE> (37,552)
<TOTAL-LIABILITY-AND-EQUITY> (303,029)
<SALES> (196,600)
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 951
<INTEREST-EXPENSE> 21,853
<INCOME-PRETAX> (3,353)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,353)
<EPS-BASIC> 0
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</TABLE>