KITTY HAWK INC, S-1, 1997-09-22

KITTY HAWK INC
S-1, 1997-09-22
AIR TRANSPORTATION, NONSCHEDULED

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------

KITTY HAWK, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 4731 75-2564006
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification no.)
M. TOM CHRISTOPHER
CHIEF EXECUTIVE OFFICER
1515 WEST 20TH STREET 1515 WEST 20TH STREET
P.O. BOX 612787 P.O. BOX 612787
DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS
75261 75261
(972) 456-2200 (972) 456-2200
(Address, including zip code, and telephone (Name, address, including zip code, and telephone
number, including number,
area code, of registrant's principal executive including area code, of agent for service)
offices)
</TABLE>

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

Copies of communications to:

<TABLE>
<S> <C>
MICHAEL M. BOONE JOEL S. KLAPERMAN
GREG R. SAMUEL JAMES S. SCOTT, SR.
HAYNES AND BOONE, LLP SHEARMAN & STERLING
3100 NATIONSBANK PLAZA 599 LEXINGTON AVENUE
901 MAIN STREET NEW YORK, NEW YORK 10022
DALLAS, TEXAS 75202-3789 (212) 848-4000
(214) 651-5000
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is to be made pursuant to Rule 434, please
check the following box. [ ]
---------------------

CALCULATION OF REGISTRATION FEE
================================================================================

PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $.01 par value... 4,715,000 shares $18.25(2) $86,048,750(2) $26,075
==================================================================================================================
</TABLE>

(1) Includes 615,000 shares of Common Stock which the U.S. Underwriters have the
option to purchase solely to cover over-allotments, if any.

(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, based on the last reported sale price of the Common
Stock on the Nasdaq National Market on September 17, 1997.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus"); and one to be used in connection with a concurrent international
offering (the "International Prospectus"). The two prospectuses will be
identical in all respects except for the front cover pages.

The form of U.S. Prospectus is included herein and the form of the front
cover page of the International Prospectus follows the front cover page of the
U.S. Prospectus.
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

PROSPECTUS (Subject To Completion)
Issued September 22, 1997

4,100,000 Shares

[KITTY HAWK, INC. LOGO]
KITTY HAWK, INC.

COMMON STOCK

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

OF THE 4,100,000 SHARES OF COMMON STOCK OFFERED HEREBY (THE "COMMON STOCK
OFFERING"), 3,000,000 SHARES OF COMMON STOCK ARE BEING SOLD BY THE COMPANY AND
1,100,000 SHARES ARE BEING SOLD BY STOCKHOLDERS OF THE COMPANY (THE "SELLING
STOCKHOLDERS"). SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE NET PROCEEDS FROM THE SALE OF SHARES OF COMMON STOCK BY THE
SELLING STOCKHOLDERS. OF THE 4,100,000 SHARES OF COMMON STOCK OFFERED HEREBY,
3,280,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY
THE U.S. UNDERWRITERS, AND 820,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER
THE SYMBOL "KTTY." ON , 1997, THE LAST REPORTED SALE PRICE OF THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $ PER SHARE.

CONCURRENTLY WITH THE COMMON STOCK OFFERING, THE COMPANY IS OFFERING
$340,000,000 AGGREGATE PRINCIPAL AMOUNT OF SENIOR SECURED NOTES (THE "NOTES") OF
THE COMPANY DUE 2004 (THE "NOTE OFFERING"). THE CLOSING OF THE COMMON STOCK
OFFERING IS SUBJECT TO THE CONCURRENT CONSUMMATION OF THE MERGER AND THE NOTE
OFFERING. SEE "THE MERGER," "USE OF PROCEEDS" AND "DESCRIPTION OF CERTAIN
INDEBTEDNESS."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------

PRICE $ A SHARE
------------------------

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>

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

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities including liabilities under the
Securities Act of 1933. See "Underwriters."
(2) Before deducting expenses payable solely by the Company estimated to be
$ .
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
615,000 additional shares of Common Stock at the price to public, less
underwriting discounts and commissions, for the purpose of covering
over-allotments, if any. See "Underwriters." If the U.S. Underwriters
exercise such option in full, the total price to public, underwriting
discounts and commissions and proceeds to Company will be $ ,
$ and $ , respectively.
------------------------

The Shares are offered, subject to prior sale, when, as and if accepted by
the several Underwriters, subject to approval of certain legal matters by
Shearman & Sterling, counsel for the Underwriters. It is expected that delivery
of the Shares will be made on or about , 1997 at the office of
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------

MORGAN STANLEY DEAN WITTER BT ALEX. BROWN

, 1997
<PAGE> 4

PROSPECTUS (Subject To Completion)
Issued September 22, 1997

4,100,000 Shares

[KITTY HAWK, INC. LOGO]
KITTY HAWK, INC.

COMMON STOCK

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

Of the 4,100,000 shares of Common Stock offered hereby (the "Common Stock
Offering"), 3,000,000 shares of Common Stock are being sold by the Company and
1,100,000 shares are being sold by stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any of the net proceeds from the sale of shares of Common Stock by the
Selling Stockholders. Of the 4,100,000 shares of Common Stock offered hereby,
820,000 shares are being offered initially outside of the United States and
Canada by the International Underwriters and 3,280,000 shares are being offered
initially in the United States and Canada by the U.S. Underwriters. See
"Underwriters." The Common Stock is quoted on the Nasdaq National Market under
the symbol "KTTY." On , 1997, the last reported sale price of the
Common Stock on the Nasdaq National Market was $ per share.

Concurrently with the Common Stock Offering, the Company is offering
$340,000,000 aggregate principal amount of Senior Secured Notes (the "Notes") of
the Company due 2004 (the "Note Offering"). The closing of the Common Stock
Offering is subject to the concurrent consummation of the Merger and the Note
Offering. See "The Merger," "Use of Proceeds" and "Description of Certain
Indebtedness."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------

PRICE $ A SHARE
------------------------

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

MORGAN STANLEY DEAN WITTER BT ALEX. BROWN
INTERNATIONAL

, 1997
<PAGE> 5

[DESCRIPTION OF PICTURES]

2
<PAGE> 6

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING STOCKHOLDER OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, ANY SECURITY OTHER THAN THE COMMON STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 4
Risk Factors..................................... 12
The Merger....................................... 22
Use of Proceeds.................................. 26
Price Range of Common Stock...................... 26
Dividend Policy.................................. 26
Capitalization................................... 27
Unaudited Pro Forma Combined Financial
Information.................................... 28
Selected Financial and Operating Data............ 35
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 39
Business......................................... 60
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management....................................... 76
Certain Transactions............................. 84
Principal and Selling Stockholders............... 86
Description of Capital Stock..................... 87
Description of Certain Indebtedness.............. 89
Shares Eligible for Future Sale.................. 91
Underwriters..................................... 93
Legal Matters.................................... 95
Experts.......................................... 95
Available Information............................ 96
Index to Financial Statements.................... F-1
</TABLE>

---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITERS."
---------------------

Industry statistics and projections presented herein were obtained from the
Boeing Report (as defined) which the Company has not independently verified.
---------------------

FORWARD LOOKING STATEMENTS

STATEMENTS CONTAINED IN THIS PROSPECTUS REGARDING THE COMPANY'S
EXPECTATIONS WITH RESPECT TO THE INTEGRATION OF KITTY HAWK AND THE KALITTA
COMPANIES, INCLUDING THE SYNERGIES RELATED THERETO, FUTURE OPERATIONS AND OTHER
INFORMATION, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "EXPECT," "COULD," "ANTICIPATE," "ESTIMATE" OR "CONTINUE"
OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY,
ARE FORWARD LOOKING STATEMENTS. SEE "RISK FACTORS" FOR CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD LOOKING STATEMENTS,
INCLUDING IMPORTANT RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM RESULTS REFERRED TO IN FORWARD LOOKING STATEMENTS. THERE
CAN BE NO ASSURANCE THAT THE COMPANY'S EXPECTATIONS REGARDING ANY OF THESE
MATTERS WILL BE FULFILLED.

3
<PAGE> 7

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) and pro forma
financial information appearing elsewhere in this Prospectus. The closing of
this Common Stock Offering is conditioned on the concurrent consummation of (i)
the mergers (collectively, the "Merger") of American International Airways, Inc.
("AIA"), American International Travel, Inc. ("AIT"), Flight One Logistics, Inc.
("FOL"), Kalitta Flying Services, Inc. ("KFS") and O.K. Turbines, Inc. ("OK")
(collectively, the "Kalitta Companies") with and into separate subsidiaries of
Kitty Hawk pursuant to the Merger Agreement (as defined) and (ii) the Note
Offering. This Common Stock Offering, the Merger and the Note Offering are
referred to herein collectively as the "Transactions". Unless otherwise
indicated or the context otherwise requires, references in this Prospectus to
(i) "Kitty Hawk" refer to Kitty Hawk, Inc. and its consolidated subsidiaries
prior to giving effect to the consummation of the Merger and (ii) the "Company"
refer to Kitty Hawk and the Kalitta Companies on a combined basis after giving
effect to the consummation of the Transactions, including the combination of the
businesses conducted by Kitty Hawk and the Kalitta Companies prior to the
Merger.

THE COMPANY

BUSINESS

The Company is a leading U.S. and international air freight carrier and the
leading provider of air freight charter logistics services in the U.S. The
Company also provides airframe and engine maintenance services for third parties
as well as for its own fleet. On a pro forma basis, after giving effect to the
Merger, the Company's total revenues for the twelve months ended December 31,
1996 and the six months ended June 30, 1997 were $552 million and $256 million,
respectively.

Air Freight Services. The Company is a leading provider of scheduled and
charter air freight services. The Company's scheduled air freight operations
include an overnight freight service operating within a network of 45 North
American cities and a service between Los Angeles, the Hawaiian Islands and
several Pacific Rim countries. The Company's air freight charter operations
include (i) contractual charters under which the Company generally supplies
aircraft, crew, maintenance and insurance ("ACMI") and (ii) on-demand charters.
The Company also provides passenger air charter services on a contractual and
on-demand basis.

Air Freight Logistics Services. The Company is the leading provider of
same-day air freight charter logistics services in the U.S. The Company arranges
the delivery of time sensitive freight using aircraft of third party air freight
carriers as well as its own fleet. During 1996 the air logistics business
managed over 14,000 on-demand flights, of which less than 10% were flown by the
Company's fleet.

Aircraft Maintenance Services. The Company is one of the few dedicated air
freight carriers in the world that provides comprehensive aircraft maintenance
services, including engine overhaul and airframe repair, to other aircraft
operators as well as for its own fleet. This capability allows the Company to
reduce its overall maintenance costs, including reduced aircraft downtime. The
Company has major maintenance facilities in Oscoda and Ypsilanti, Michigan and
Dallas, Texas.

FLEET

The Company operates a fleet of 121 aircraft, including (i) four Boeing
747s, six Lockheed L-1011s, 20 Douglas DC-8s, 31 Boeing 727s and five Douglas
DC-9-15Fs for its air freight carrier business, (ii) two Boeing 747s and two
Lockheed L-1011s for its air passenger charter business and (iii) 51 small jet
and prop aircraft (which include primarily Lear jets and Convairs) in air
freight and/or passenger air charter service.

AIR FREIGHT MARKET

According to the 1996/97 World Air Cargo Forecast published by the Boeing
Company (the "Boeing Report"), the world air cargo market grew at an average
rate of more than 8% per year from 1970 to 1995 as
4
<PAGE> 8

measured in revenue ton kilometers, more than 2.5 times the growth rate of world
Gross Domestic Product. Also, according to the Boeing Report, the world air
freight market is expected to grow at 6.7% annually through 2015. Management
believes this projected growth in the world air freight market will be fueled by
many factors, including economic growth, relaxation of international trade
barriers, increasingly time-sensitive product delivery schedules, increased use
of "just-in-time" inventory management systems and increasing levels of Internet
commerce. In addition, according to the Boeing Report, there is a trend towards
shipping freight in dedicated freighter aircraft and rather than cargo space in
passenger aircraft.

COMPETITIVE STRENGTHS

The Company believes that the following factors are competitive strengths
and promote strong relationships with its diversified customer base.

- Established Market Position. The Company, including its predecessors,
have provided air freight carrier services for more than 30 years. The
Company's extensive fleet and the diversity of its air freight carrier
services (scheduled, contract charters and on-demand charters) have
enabled it to become a leading U.S. and international air freight
carrier. The Company has a diversified customer base, including (i)
freight forwarders such as Burlington Air Express, Eagle USA and Emery
Worldwide Airlines, (ii) U.S. government agencies such as the U.S. Postal
Service and the U.S. Military and (iii) businesses such as General Motors
and Boeing.

- Attractive Fleet Characteristics. The Company believes that it has been
successful in purchasing and modifying aircraft for its own fleet at
favorable costs. The aircraft in the Company's fleet range from Boeing
747s to prop aircraft, enabling the Company to provide its customers with
the aircraft type best suited to their particular transportation needs.
The size and diversity of its fleet also allows the Company to deploy
aircraft among its three air freight service lines in a manner which
improves fleet utilization.

- Broad Service Capabilities. The Company believes that its air freight
carrier services are attractive to its customers for several reasons,
including (i) its history of providing reliable service, (ii) its ability
to provide time-definite air transportation of almost any type or size of
freight to most destinations worldwide upon short notice, (iii) its
ability to manage critical freight shipments in North America from
pick-up through delivery and (iv) its ability to provide its customers
with real time updates of aircraft location and progress. In addition,
the Company is able to coordinate its domestic and international
scheduled services to offer customers reliable freight delivery service
to and from North America and the Pacific Rim and Central and South
America. The Company's capabilities are enhanced by its management
information systems which enable the Company to continually monitor its
flight operations, thereby facilitating aircraft and flight crew
scheduling.

RATIONALE FOR THE MERGER

The combination of Kitty Hawk and the Kalitta Companies pursuant to the
Merger makes the Company one of the leading U.S. and international air freight
carriers as well as the leading provider of air freight charter logistics
services in the U.S. The Merger permits the Company to achieve a number of
strategic and financial objectives, including:

- Increased Utilization of On-Demand Aircraft. Prior to the Merger, less
than 10% of the on-demand charters arranged by Kitty Hawk were flown on
Kitty Hawk's aircraft. With the addition of the Kalitta Companies'
aircraft, the Company will direct a larger percentage of its on-demand
charters to its own aircraft, rather than to third parties. Because
on-demand charters flown on the Company's aircraft generate a higher
gross margin than charters subcontracted to third parties, the Company
believes this strategy will improve its profitability over time.

- Opportunities for Cost Savings. The Company believes the Merger will
permit it to achieve annual cost savings by enabling it to increase the
Kalitta Companies' crew utilization, reduce Kitty Hawk's reliance on
third party maintenance, reduce parts inventory and consolidate
duplicative airport support bases as well as through other economies of
scale, including lower aircraft insurance premiums.
5
<PAGE> 9

- Integration of Fleet Operations. The Company believes the Merger will
permit it to integrate the Kalitta Companies' scheduled air freight
operations with Kitty Hawk's air freight carrier services, resulting in
expanded customer services and increased revenues. The combined fleet
should also enhance operating efficiencies and revenues by better
matching aircraft size and operating capabilities with route systems and
customer needs. Finally, the Company believes the resultant combination
of services and fleet capabilities will provide new domestic and
international marketing opportunities.

GROWTH STRATEGIES

The Company's revenue has grown significantly over the last several years
and the Company believes it can continue to increase revenues through the
following opportunities:

- Expansion of ACMI Charter Business. The Company believes there are, and
will continue to be, opportunities to obtain ACMI contracts with
international air carriers due to the projected shortage of wide-body
aircraft needed to service those carrier's markets. The Company intends
to expand its fleet of wide-body freighter aircraft by acquiring three
Boeing 747 aircraft from Middle East Airlines Airliban, S.A.I. (the "MEA
Boeing 747s"). The Company plans to focus its efforts in the European,
South American and Asia/Pacific markets and to connect route systems in
those markets with its scheduled North American route systems.

- Expansion of On-Demand Charter Business. The Company believes there are
significant opportunities to grow its on-demand charter business because
of continuing demand for expedited air freight delivery services,
especially in the case of "just-in-time" inventory systems and other time
sensitive shipments. In addition to improving the utilization of the
Kalitta Companies' aircraft, the Company anticipates purchasing
additional aircraft to capitalize on this expected growth.

- Expansion of Third Party Maintenance Services. The Company is one of the
few dedicated air freight carriers in the world capable of maintaining
and repairing aircraft which range in size from Boeing 747s to prop
aircraft. Although the Company currently provides aircraft maintenance
services to several customers, including Lufthansa, the Company intends
to significantly increase its marketing of its third party maintenance
services. In particular, the Company intends to focus on marketing jet
engine overhauls and maintenance, for which management believes there is
a trend toward a limited number of service providers.

- Expansion of Scheduled Freight Business. Because of the growth in the
amount of freight shipped through its scheduled overnight freight hub in
Terre Haute, Indiana, the Company anticipates moving its hub from Terre
Haute to a new facility in Fort Wayne, Indiana in the spring of 1999.
This new facility is expected to have nearly twice the sorting capacity
of the Terre Haute, Indiana facility. In addition, the new facility is
designed to improve productivity by reducing the time to load and unload
aircraft and by decreasing sorting times.

- Strategic Acquisitions. The Company will, from time to time, pursue
acquisitions that enable it to (i) acquire complementary aircraft at
favorable costs, (ii) expand its operations in selected geographic areas
or (iii) achieve other strategic or operational benefits.

RECENT FINANCIAL PERFORMANCE OF THE KALITTA COMPANIES

The Kalitta Companies posted net losses in 1996 and the first six months of
1997. The Kalitta Companies' management believes that the recent negative
financial performance can be attributed to a number of factors, including (i)
the incurrence of abnormally high engine overhaul expenses due to Federal
Aviation Administration Airworthiness Directives ("Directives"), (ii) the loss
of revenue resulting from the effective grounding of two Boeing 747s in January
1996 due to a series of Directives, (iii) the incurrence of start-up costs
associated with establishing the Kalitta Companies' wide-body passenger charter
business, (iv) the incurrence of costs to add and maintain flight crews in
anticipation of increased air freight carrier business which has not yet
materialized in part due to delays in acquiring aircraft and (v) lower revenues
from the U.S. Military which the Company believes will be mitigated as the
Company has recently become eligible
6
<PAGE> 10

to operate passenger charters for the U.S. Military. Kitty Hawk has taken these
factors into account in evaluating the merits of the Merger and the Kalitta
Companies' future financial performance. Kitty Hawk has also considered that the
Kalitta Companies' management focused primarily on growing revenues and fleet
size, rather than on profitability. After the Merger, the Company's management
will focus on meeting profit objectives in day-to-day operations and believes
the Kalitta Companies' recent financial performance can be substantially
improved following the Merger, although there can be no assurance in this
regard. See "The Merger -- Financial Performance of the Kalitta Companies and
the Merger Rationale."

THE OFFERING

Common Stock offered:

U.S. offering.................... 3,280,000 shares
International offering........... 820,000 shares
Total Common Stock offered.... 4,100,000 shares

By the Company................... 3,000,000 shares
By the Selling Stockholders...... 1,100,000 shares

Common Stock to be outstanding
after the offering................. 18,550,957 shares(1)(2)

Concurrent Note Offering........... Concurrently with the Common Stock
Offering, the Company is conducting the
Note Offering under Rule 144A of the
Securities Act. The Common Stock Offering
will be closed concurrently with and is
conditioned upon, the consummation of the
Merger and the Note Offering. See
"Description of Certain Indebtedness."

Use of proceeds.................... For (i) the payment of $20.0 million in
cash pursuant to the Merger Agreement,
(ii) the repayment of certain
indebtedness and (iii) for working
capital purposes. See "Use of Proceeds"
and "Description of Certain
Indebtedness."

Nasdaq National Market Symbol...... KTTY
- ---------------
(1) Does not include (i) 300,000 shares of Common Stock available for issuance
under the Company's Amended and Restated Omnibus Securities Plan, (ii)
198,193 shares of Common Stock available for issuance under the Company's
Amended and Restated Annual Incentive Compensation Plan and (iii) 100,000
shares of Common Stock available for issuance under the Company's Amended
and Restated Employee Stock Purchase Plan. See "Management -- Employee
Compensation Plans and Arrangements."
(2) Includes the issuance of 5,099,150 shares of Common Stock pursuant to the
Merger Agreement. See "The Merger."

All information in this Prospectus assumes (i) a public offering price of
$18.75 per share for the shares offered hereby, which was the closing price of
the Common Stock as reported by the Nasdaq National Market on September 8, 1997
and (ii) no exercise of the Underwriters' over-allotment option. Unless
otherwise indicated, the pro forma financial information in this Prospectus
gives effect to the Transactions.

RISK FACTORS

Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific risk
factors set forth under "Risk Factors" for risks involved with an investment in
the Common Stock offered hereby.

GENERAL

The Company is a Delaware corporation. The Company's principal executive
offices are located at 1515 West 20th Street, Dallas/Fort Worth International
Airport, Texas 75261 and its telephone number at that address is (972) 456-2200.
7
<PAGE> 11

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following summary historical financial and operating data and pro forma
financial and operating data, giving effect to the Transactions and Refinancings
(as defined) as if they occurred on January 1, 1996 and, in the case of balance
sheet data, as if they occurred on June 30, 1997, should be read in conjunction
with Kitty Hawk's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus and the Kalitta Companies' Combined Financial
Statements and Notes thereto included elsewhere in this Prospectus as well as
the information appearing in "Unaudited Pro Forma Combined Financial
Information," "Selected Financial and Operating Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The pro forma results have not been adjusted to eliminate abnormally high
engine overhaul expenses, costs incurred to add and maintain flight crews in
anticipation of increased air freight carrier business which has not yet
materialized in part due to delays in acquiring aircraft and start-up costs
associated with establishing the Kalitta Companies' wide-body passenger charter
business. In addition, although approximately $85 million of the proceeds of the
Common Stock Offering and the Note Offering are expected to be used to purchase
and modify the MEA Boeing 747s, no adjustments have been made to reflect
revenues or operating costs expected to be generated by these aircraft.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------
HISTORICAL PRO FORMA
---------------------------- ------------------------
KALITTA
KITTY HAWK(1) COMPANIES ADJUSTMENTS COMBINED
-------------- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Air freight carrier................... $ 55,504 $388,193 $ (4,914) $438,783
Air logistics......................... 77,168 -- -- 77,168
Maintenance and other(2).............. -- 36,348 -- 36,348
-------- -------- -------- --------
Total revenues.......................... 132,672 424,541 (4,914) 552,299
Gross profit (loss)..................... 23,874 44,395 (2,198) 66,071
Stock option grants to executives(3).... 4,231 -- -- 4,231
Operating income (loss)................. 9,457 21,495 (2,198) 28,754
Interest expense........................ (2,062) (21,632) (12,975) (36,669)(4)
Minority interest....................... -- (1,146) -- (1,146)
Income (loss) before income taxes....... 7,686 (17) (15,173) (7,504)
Net income (loss)....................... $ 4,648(3) $ (17)(5) $(12,135) $ (7,504)
Net income (loss) per share............. $ 0.55(3) -- -- $ (0.45)
Weighted average common and common
equivalent shares outstanding......... 8,477 -- 8,099 16,576
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 47,159 $ 53,413 $ -- $100,572
Adjusted EBITDA(6)...................... $ 22,372 $ 53,586 $ 3,607 $ 79,565
Ratio of adjusted EBITDA to total
interest expense...................... 10.8x 2.5x -- 2.2x
Ratio of earnings to fixed charges(7)... 4.6x 1.0x -- --
OPERATING DATA:
Aircraft (at end of period)............. 26 98 -- 124
Flight hours(8)......................... 21,587 91,690 -- 113,277
</TABLE>

8
<PAGE> 12

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------
HISTORICAL PRO FORMA
------------------------ ----------------------
KALITTA
KITTY HAWK COMPANIES ADJUSTMENTS COMBINED
---------- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Air freight carrier................................... $33,237 $182,352 $(1,373) $214,216
Air logistics......................................... 27,232 -- -- 27,232
Maintenance and other(2).............................. -- 14,488 -- 14,488
------- -------- ------- --------
Total revenues.......................................... 60,469 196,840 (1,373) 255,936
Gross profit (loss)..................................... 12,806 (7,475) 9,460 14,791
Operating income (loss)................................. 7,250 (19,443) 9,460 (2,733)
Interest expense........................................ (1,049) (12,098) (5,471) (18,618)(4)
Minority interest....................................... -- (893) -- (893)
Income (loss) before income taxes....................... 6,625 (30,943) 3,989 (20,329)
Net income (loss)....................................... 3,975 $(30,943)(5) $ 6,639 (20,329)
Net income (loss) per share............................. $ 0.38 -- -- $ (1.10)
Weighted average common and common equivalent
shares outstanding.................................... 10,452 -- 8,099 18,551
OTHER FINANCIAL DATA:
Capital expenditures.................................... $39,544 $ 14,101 $ -- $ 53,645
Adjusted EBITDA(6)...................................... $12,134 $ (1,976) $12,305 $ 22,463
Ratio of adjusted EBITDA to total interest expense(9)... 11.6x -- 1.2x
Ratio of earnings to fixed charges(7)................... 5.0x -- --
OPERATING DATA:
Aircraft (at end of period)............................. 28 98 126
Flight hours(8)......................................... 13,461 43,161 56,622
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------
HISTORICAL PRO FORMA
------------------------ ----------------------
KALITTA
KITTY HAWK COMPANIES ADJUSTMENTS COMBINED
---------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)............................ $ 10,588 $(222,422)(10) $337,459 $125,625
Total assets............................................ 117,358 366,848 194,465 678,671
Total debt.............................................. 34,051 248,256 82,936 365,243
Stockholders' equity.................................... $ 62,249 $ 35,531 $ 88,451 $186,231
</TABLE>

- ---------------
(1) On December 4, 1996, Kitty Hawk changed its fiscal year end to December 31
from August 31. The financial and operating data presented above is based
on the unaudited twelve month period ended December 31, 1996.
(2) Includes revenues from related parties. See "Certain Transactions" and Note
8 of Notes to Combined Financial Statements of the Kalitta Companies.
(3) Includes nonrecurring grants of stock options to two executive officers
that resulted in a charge to earnings of approximately $4,231. Had these
grants of stock options not occurred, net income for the twelve months
ended December 31, 1996 would have been approximately $7,194 and net income
per share would have been $0.85. See "Management -- Stock Option Grants."
(4) Pro forma interest expense assumes a rate of 10% on the Notes. Each 1/4
percentage point change in the interest rate results in a change in
interest expense of $850 for the year ended December 31, 1996 and $425 for
the six months ended June 30, 1997.
(5) Prior to the Merger, the Kalitta Companies filed income tax returns under
Subchapter S of the U.S. Federal Income Tax Code. Therefore, all taxable
income or losses of each of the Kalitta Companies have passed through to
the sole shareholder of the Kalitta Companies.
(6) Adjusted EBITDA represents net income (loss) before income tax expense,
interest expense, depreciation, amortization (and, with respect to the
Kalitta Companies, minority interest) and certain items described below.
Kitty Hawk's adjusted EBITDA excludes approximately $4,231 from stock
options granted to executives in fiscal year 1996. The Kalitta Companies'
adjusted EBITDA excludes gains and losses from dispositions of aircraft
held for resale in each period presented and approximately $1,123 from a
gain from settlement of a contract dispute in 1996 and a gain on an
insurance settlement of approximately $542 for the six months ended June
30, 1997. Adjusted EBITDA is presented because it is a financial indicator
of the Company's ability to incur and service debt. However, adjusted
EBITDA is not calculated under generally accepted accounting principles
("GAAP"), is not necessarily comparable to similarly titled measures of
other companies and should not be considered in isolation, as a substitute
for operating income, net income or cash flow data prepared in accordance
with GAAP, or as a measure of the Company's profitability or liquidity.
(7) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) prior to income tax expense (benefit) (and, with respect to
the Kalitta Companies, minority interest) and fixed charges (less
capitalized interest). Fixed charges consist of capitalized interest,
interest expense, amortization of debt expense and one-third of rental
payments on operating leases (such factor having been deemed by the Company
to represent the interest portion of such payments). The Kalitta Companies'
historical earnings were not sufficient to cover fixed charges by
approximately $30,050 for the six months ended June 30, 1997. On a pro
forma basis, the Company's earnings would not have been sufficient to cover
fixed charges by $8,417 for the year ended December 31, 1996 and $20,185
for the six months ended June 30, 1997.
(8) As reported to the FAA (as defined). Flight hours reported are less than
block hours, which also include the time an aircraft is operating under its
own power whether or not airborne. The Company generally bills its
customers on a block hour basis.
(9) For the six months ended June 30, 1997, the Kalitta Companies' adjusted
EBITDA was $(1,976) and net interest expense was $12,098, resulting in a
failure to cover interest expense.
(10) Includes long-term debt and notes payable reclassified as current of
$203,016 and $201,443 at December 31, 1996 and June 30, 1997, respectively.
9
<PAGE> 13

SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF KITTY HAWK

The summary historical financial and operating data below represents
financial information of Kitty Hawk and its subsidiaries for each of the fiscal
years indicated in the five year period ended August 31, 1996 and the six months
ended June 30, 1996 and 1997, which information was derived from the audited
consolidated financial statements of Kitty Hawk for each of the fiscal years
indicated in the five year period ended August 31, 1996 and from the unaudited
condensed consolidated financial statements of Kitty Hawk for the six months
ended June 30, 1996 and 1997. Operating results for the six months ended June
30, 1996 and 1997 are not necessarily indicative of results that may be expected
for a calendar year. In the opinion of management of Kitty Hawk, the selected
statement of operations data presented as of and for the six months ended June
30, 1996 and 1997, which are derived from Kitty Hawk's unaudited Consolidated
Financial Statements appearing elsewhere in this Prospectus, reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for such
periods. On December 4, 1996, Kitty Hawk changed its fiscal year end from August
31 to December 31.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, JUNE 30,
-------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Air freight carrier......................... $ 6,760 $12,939 $ 28,285 $ 41,117 $ 52,922 $25,274 $33,237
Air logistics............................... 45,893 52,840 79,415 62,593 89,493 27,010 27,232
------- ------- -------- -------- -------- ------- -------
Total revenues................................ 52,653 65,779 107,700 103,710 142,415 52,284 60,469
Gross profit.................................. 4,188 10,578 14,749 18,178 23,515 7,676 12,806
Stock option grants to executives(1).......... -- -- -- -- 4,231 4,231 --
Operating income (loss)....................... 1,258 5,934 8,004 9,345 9,034 (1,095) 7,250
Interest expense.............................. (157) (134) (343) (1,185) (1,859) (1,023) (1,049)
Net income (loss)............................. 1,013 4,105 5,261 4,416 4,109 (1,149) 3,975
Net income (loss) per share................... $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52 $ (0.14) $ 0.38
Weighted average common and common equivalent
shares outstanding.......................... 8,671 7,968 7,968 7,968 7,928 7,968 10,452
OTHER FINANCIAL DATA:
Capital expenditures.......................... $ 3,019 $ 1,318 $ 13,876 $ 17,929 $ 33,538 $17,008 $39,544
Adjusted EBITDA(2)............................ $ 2,149 $ 7,104 $ 9,507 $ 12,839 $ 19,840 $ 6,890 $12,134
Ratio of adjusted EBITDA to interest
expense..................................... 13.7x 53.0x 27.7x 10.8x 10.7x 6.7x 11.6x
Ratio of earnings to fixed charges(3)......... 7.9x 33.6x 20.6x 6.9x 4.4x -- 5.0x
OPERATING DATA:
Aircraft owned (at end of period)............. 11 10 15 21 22 23 28
Flight hours(4)............................... 3,567 7,030 11,795 15,183 20,237 10,029 13,461
Number of on-demand charters flown............ 292 752 1,182 1,238 1,918 879 580
Number of ACMI contract charters flown........ 655 1,314 1,734 2,601 4,030 1,741 2,415
Number of on-demand charters managed(5)....... 8,708 9,748 16,713 14,198 19,578 7,459 6,640
</TABLE>

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

(1) Results for fiscal year ended August 31, 1996 and six months ended June 30,
1996 lack comparability to other periods because such periods include
nonrecurring grants to two executive officers of stock options that resulted
in a charge to earnings of approximately $4,231. Had these grants of stock
options not occurred, net income for the fiscal year ended August 31, 1996
and the six months ended June 30, 1996, would have been approximately $6,637
and $1,390, respectively, and net income per share would have been $0.84 and
$0.17, respectively. See "Management -- Stock Option Grants."

(2) Adjusted EBITDA represents net income (loss) before interest expense, income
tax expense, depreciation, amortization and certain items described below.
Adjusted EBITDA excludes approximately $4,231 from stock options granted to
executives in 1996 and approximately $725 and $1,178 in contract settlements
in fiscal 1993 and 1994, respectively. Adjusted EBITDA is presented because
it is a financial indicator of Kitty Hawk's ability to incur and service
debt. However, adjusted EBITDA is not calculated under GAAP, is not
necessarily comparable to similarly titled measures of other companies and
should not be considered in isolation, as a substitute for operating income,
net income or cash flow data prepared in accordance with GAAP or as a
measure of Kitty Hawk's profitability or liquidity.

(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) prior to income tax expense (benefit) and fixed charges (less
capitalized interest.) Fixed charges consist of capitalized interest,
interest expense, amortization of debt expense and one-third of rental
payments on operating leases (such factor having been deemed by Kitty Hawk
to represent the interest portion of such payments). Earnings were not
sufficient to cover fixed charges by $1,980 for the six month period ended
June 30, 1996.

(4) As reported by Kitty Hawk to the FAA. Flight hours reported are less than
block hours, which also include the time an aircraft is operating under its
own power whether or not airborne. Kitty Hawk generally bills its customers
on a block hour basis.

(5) Includes on-demand charters flown by Kitty Hawk aircraft.
10
<PAGE> 14

SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
OF THE KALITTA COMPANIES

The summary historical combined financial and operating data below
represents financial information of the Kalitta Companies for each of the fiscal
years indicated in the five year period ended December 31, 1996 and the six
months ended June 30, 1996 and 1997 which information was derived from the
audited combined financial statements of the Kalitta Companies for each of the
fiscal years indicated in the five year period ended December 31, 1996 and from
the unaudited combined financial statements of the Kalitta Companies for the six
months ended June 30, 1996 and 1997. The selected statement of operations data
for the six months ended June 30, 1996 and 1997 have been derived from the
unaudited Combined Financial Statements of the Kalitta Companies, which, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information set
forth therein. Operating results for the six months ended June 30, 1996 and 1997
are not necessarily indicative of results that may be expected for a calendar
year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Air freight carrier.................... $95,144 $194,525 $298,081 $359,404 $388,193 $177,431 $182,352
Maintenance and other(1)............... 2,606 5,584 7,449 14,279 36,348 13,164 14,488
------- -------- -------- -------- -------- -------- --------
Total revenues........................... 97,750 200,109 305,530 373,683 424,541 190,595 196,840
Gross profit (loss)...................... 12,870 34,323 54,023 26,010 44,395 15,133 (7,475)
Operating income (loss).................. 7,081 23,222 38,519 2,471 21,495 3,608 (19,443)
Interest expense, net.................... (4,396) (6,745) (8,007) (14,749) (21,632) (10,187) (12,098)
Minority interest........................ (424) (1,458) (2,758) (3,092) (1,146) (511) (893)
Net income (loss)(2)..................... $ 5,161 $ 16,543 $ 30,593 $ 4,486 $ (17) $ (5,558) $(30,943)
UNAUDITED PRO FORMA DATA:
Unaudited pro forma net income
(loss)(3).............................. $ 3,200 $ 10,257 $ 18,968 $ 2,781 $ (17) $ (5,558) $(30,943)
OTHER FINANCIAL DATA:
Capital expenditures..................... $55,863 $ 20,468 $ 77,832 $153,719 $ 53,413 $ 29,697 $ 14,101
Adjusted EBITDA(4)....................... $16,080 $ 35,645 $ 52,328 $ 23,443 $ 53,586 $ 19,454 $ (1,976)
Ratio of adjusted EBITDA to total
interest expense(5).................... 5.0x 5.3x 6.5x 1.6x 2.5x 1.9x --
Ratio of earnings to fixed charges (6)... 2.0x 2.4x 3.3x 1.2x 1.0x -- --
OPERATING DATA:
Aircraft (at end of period).............. 59 65 86 95 98 94 98
Flight hours (7)......................... 39,404 55,220 76,346 84,058 91,690 43,347 43,161
</TABLE>

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

(1) Includes revenues from related parties. See "Certain Transactions" and Note
8 of Notes to Combined Financial Statements of the Kalitta Companies.

(2) The Kalitta Companies filed income tax returns under Subchapter S of the
U.S. Federal Income Tax Code. Therefore, all taxable income or losses of the
Kalitta Companies have passed through to the sole shareholder of the Kalitta
Companies.

(3) Represents net income adjusted for the approximate federal and state income
taxes (by applying statutory rates) that would have been incurred if the
Kalitta Companies had been subject to tax as a C corporation. No tax benefit
has been provided for 1996 and for the six months ended June 30, 1996 and
1997 due to the uncertainty of the Kalitta Companies' ability to recover
such benefits.

(4) Adjusted EBITDA represents net income (loss) before minority interest,
interest expense (net of capitalized interest), depreciation, amortization
and certain items described below. Adjusted EBITDA excludes approximately
$8,148 and $542 from gains on insurance settlements in 1995 and the six
months ended June 30, 1997, respectively, $1,123 from a gain from settlement
of a contract dispute in 1996 and the six months ended June 30, 1996 and net
gains from disposition of aircraft held for resale in each period presented.
Adjusted EBITDA is presented because it is a financial indicator of the
Kalitta Companies' ability to incur and service debt. However, adjusted
EBITDA is not calculated under GAAP, is not necessarily comparable to
similarly titled measures of other companies and should not be considered in
isolation, as a substitute for operating income, net income or cash flow
data prepared in accordance with GAAP or as a measure of the Kalitta
Companies' profitability or liquidity.

(5) For the six months ended June 30, 1997, the Kalitta Companies' adjusted
EBITDA was $(1,976) and net interest expense was $12,098, resulting in a
failure to cover interest expense.

(6) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before minority interest and fixed charges (less capitalized
interest). Fixed charges consist of capitalized interest, interest expense,
amortization of debt expense and one-third of rental payments on operating
leases (such factor having been deemed by the Kalitta Companies to represent
the interest portion of such payments). Earnings were not sufficient to
cover fixed charges by approximately $5,368 and $30,050 for the six months
ended June 30, 1996 and June 30, 1997, respectively.

(7) As reported to the FAA by the Kalitta Companies. Flight hours reported are
less than block hours, which also include the time an aircraft is operating
under its own power whether or not airborne. The Kalitta Companies generally
bill customers on a block hour basis.
11
<PAGE> 15

RISK FACTORS

An investment in the Common Stock involves a high degree of risk. In
addition to the other information in this Prospectus, prospective investors
should carefully consider the following risk factors relating to the Company and
its Common Stock before making an investment. This Prospectus contains
forward-looking statements which involve risk and uncertainties. The discussions
set forth below constitute cautionary statements regarding important matters
that could cause actual results to differ significantly from the results
discussed in the forward-looking statements. If the Company should experience
the adverse effects of any of these risks, it could have a material adverse
effect on the Company and the value of the Common Stock.

COMPANY RELATED RISKS

RECENT FINANCIAL PERFORMANCE OF THE KALITTA COMPANIES

The Kalitta Companies' operations will constitute a majority of the
combined operations of the Company after the Merger is consummated. For 1996 and
the first six months of 1997, the financial operating results of the Kalitta
Companies have shown a significant negative trend. For the first six months of
1997, the Kalitta Companies sustained a negative gross profit of $7.5 million,
an operating loss of $19.4 million and a net loss of $30.9 million. The Kalitta
Companies' operating losses for the six months ended June 30, 1997 were
primarily the result of abnormally high engine overhaul expenses, the continued
grounding of certain aircraft, certain continuing start-up costs, low flight
crew utilization and lower U.S. military revenues. See "The Merger -- Financial
Performance of the Kalitta Companies and Merger Rationale" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- The
Kalitta Companies." While the Company believes the Kalitta Companies are taking
steps necessary to improve their financial performance, there can be no
assurance that any such improvement will occur or that the Kalitta Companies
will become profitable. The failure to improve the financial performance of the
Kalitta Companies would have a material adverse effect on the Company and the
value of the Common Stock.

The Kalitta Companies have been and continue to be in default under certain
bank loan agreements, including defaults arising from failure to make certain
principal payments. The defaults entitle the affected lenders to accelerate
repayment of their loans and to foreclose on collateral securing these loans,
including aircraft. The outstanding indebtedness of the Kalitta Companies under
these loan agreements will be refinanced with the net proceeds of this Common
Stock Offering and the net proceeds of the Note Offering. See "Risk
Factors -- Substantial Leverage and Debt Service" and "Use of Proceeds."

SUBSTANTIAL LEVERAGE AND DEBT SERVICE

In connection with the Merger, the Company will incur substantial
indebtedness (through the issuance of the Notes) for the purpose of refinancing
indebtedness of Kitty Hawk and of the Kalitta Companies and to acquire and
modify the MEA Boeing 747s. As of June 30, 1997, after giving effect to the
Transactions and Refinancings, on a pro forma basis, the Company's total
indebtedness would have been approximately $365 million (substantially all of
which would have been secured) and its stockholders' equity would have been $186
million. On a pro forma basis, assuming the Merger had occurred at the beginning
of each of the following fiscal periods, earnings would not have been sufficient
to cover fixed charges by approximately $8.4 million and $20.2 million for 1996
and for the six months ended June 30, 1997, respectively. In addition, the
Company intends to replace the Credit Agreement (as defined) with a new
revolving credit facility of up to $100 million, although there can be no
assurance in this regard.

The degree to which the Company is leveraged could have important
consequences to holders of Common Stock, including (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired in
the future; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing funds available to the Company for other
purposes; and (iii) the Company's substantial leverage may place the Company at
a competitive disadvantage, hinder its ability to adjust rapidly to changing
market conditions and make it more vulnerable in the event of a downturn

12
<PAGE> 16

in general economic conditions or its business or in the event of a strike or
other labor problems at one of its significant customers.

The Company's ability to make scheduled principal and interest payments, or
to refinance its indebtedness (including the Notes) will depend on its future
financial performance, which to a certain extent will be subject to economic,
financial, competitive and other factors beyond its control. Based upon the
Company's current operations and anticipated growth, management believes that
future cash flows from operations, together with the proceeds of this Common
Stock Offering and the Note Offering and available borrowings under the Credit
Agreement or any successor facility, will be adequate to meet its anticipated
requirements for working capital, capital expenditures and scheduled principal
and interest payments for at least the next twelve months. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." There can be no assurance, however, that the
Company's business will generate sufficient cash flow from operations to service
its indebtedness and make necessary capital expenditures. If unable to do so,
the Company may be required to refinance all or a portion of its indebtedness,
including the Notes, to sell assets or to obtain additional financing. There can
be no assurance that any such refinancing would be possible, that any assets
could be sold (or, if sold, of the timing of such sales and the amount of
proceeds realized therefrom) or that additional financing could be obtained, any
of which could have a material adverse effect on the Company and the value of
the Common Stock.

RISKS OF BUSINESS INTEGRATION

There can be no assurance that the Company will be able to integrate the
operations of Kitty Hawk and the Kalitta Companies successfully or achieve the
potential benefits of the Merger. The benefits of the Merger will require (i)
the integration of administrative, finance, purchasing, dispatching,
maintenance, sales and marketing organizations, (ii) the coordination of
aircraft operations and (iii) the implementation of appropriate operational,
financial and management systems and controls. This will require substantial
attention from the Company. The failure to successfully integrate Kitty Hawk and
the Kalitta Companies would have a material adverse effect on the Company and
the value of the Common Stock. Moreover, no assurance can be given that the
impact of integrating the Kalitta Companies as presented in such Unaudited Pro
Forma Combined Financial Information will be as presented. See "Unaudited Pro
Forma Combined Financial Information."

CONTROL BY MESSRS. CHRISTOPHER AND KALITTA

Immediately after completion of this Common Stock Offering, Mr. Christopher
as Chairman and Chief Executive Officer will own 5,673,436 shares, or
approximately 30.6%, of the outstanding Common Stock, and Mr. Kalitta as Vice
Chairman will own 5,099,150 shares, or approximately 27.5%, of the outstanding
Common Stock. As a consequence, the success of the Company will depend, in some
part, upon the ability of Messrs. Christopher and Kalitta to work together.
Prior to the Merger, Messrs. Christopher and Kalitta were competitors and had
disagreements, one of which resulted in litigation between Kitty Hawk and the
Kalitta Companies. See "Business -- Legal Proceedings -- U.S. Postal Service
Contract." Disagreements between Messrs. Christopher and Kalitta in the future
could delay or disrupt the Company's operations and have a material adverse
effect on the Company and the value of the Common Stock. Messrs. Christopher and
Kalitta will enter into a voting agreement that, among other things, provides
that for thirty-six months after the Merger, Messrs. Christopher and Kalitta
will vote their shares of Common Stock in favor of director nominees selected by
a Nominating Committee or in certain cases, the Board of Directors. See "The
Merger -- Bylaw Amendments Concerning Governance of the Company and
Stockholders' Agreement."

CYCLICALITY AND SEASONALITY

The Company's services are provided to numerous industries and customers
that experience significant fluctuations in demand based on economic conditions
and other factors beyond the control of the Company. The demand for the
Company's services could be materially adversely affected by downturns in the
businesses of the Company's customers. For the six months ended June 30, 1997,
on a pro forma basis after giving effect to the Merger, the Company believes a
significant percentage of its revenues were generated from services

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<PAGE> 17

provided to the U.S. automotive industry, which has historically been a cyclical
industry. A contraction in the U.S. automotive industry, a prolonged work
stoppage or other significant labor dispute involving that industry, or a
reduction in the use of air freight charters by that industry, could have a
material adverse effect on the Company and the value of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Certain customers of the Company engage in seasonal businesses, especially
the U.S. Postal Service, General Motors Corp. ("GM") and other customers in the
automotive industry. As a result, the Company's air carrier business and air
freight charter logistics business have historically experienced their highest
quarterly revenues and profitability during the fourth quarter of the calendar
year due to the peak Christmas season activity of the U.S. Postal Service and
during the period from June 1 to November 30 when production schedules of the
automotive industry typically increase. Consequently, the Company generally
experiences its lowest quarterly revenue and profitability during the first
quarter of the calendar year. In addition, the Company has provided charter
carrier services to the U.S. Military during periods of heightened military
activity, such as the Persian Gulf conflict, which has caused its results of
operations to fluctuate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality" and "Business."

AVAILABILITY OF FACILITIES

The Company leases the majority of its facilities from third parties. If
the Company continues to grow, it must be able to expand its current facilities
or relocate to new ones.

The Company's scheduled air freight operations utilize a sorting space at
the Hulman Regional Airport in Terre Haute, Indiana. This sorting space is
licensed from Roadway Global Air for a term which expires in August 1998.
Because of the growth in the amount of freight sorted at this facility, the lack
of available expansion space and the limited airport facilities in Terre Haute,
the Company plans to move this sorting operation to Fort Wayne, Indiana in the
spring of 1999. The Company is currently negotiating a lease with the airport
authority in Fort Wayne and an interim lease for its current space in Terre
Haute. There can be no assurance that the Company will be able to complete
either of these negotiations or do so on favorable terms. Moreover, the move to
Fort Wayne is dependent on the issuance of bonds by the Fort-Wayne-Allen County
Airport Authority (the "Fort Wayne Authority"). There can be no assurance that
the Fort Wayne Authority will complete the bond issuance in a timely manner or
at all. The failure of the Company to successfully obtain sufficient space to
operate could have a material adverse effect on the Company and the value of the
Common Stock. See "Business -- Scheduled Air Cargo Services" and
"Business -- Facilities."

The Company also leases its Oscoda, Michigan maintenance facilities under
various subleases from the Oscoda-Wurtsmith Airport Authority (the "Wurtsmith
Authority"). These subleases expire on dates ranging from October 1997 to
December 2013 and are subject to earlier termination upon termination of the
prime lease between the U.S. Government and the Wurtsmith Authority. The Company
is highly dependent on its facilities in Oscoda. There can be no assurance that
the Company will be successful in extending these subleases or do so on
favorable terms. Failure to extend one or more of the subleases would force the
Company either to reduce substantially its maintenance capabilities or relocate
the Oscoda maintenance operations, either of which could increase costs and
reduce revenues. If the Company were forced to relocate these maintenance
operations, there can be no assurance that the Company would be able to find
alternative space on acceptable terms. In addition, the cost to move to another
site would be significant. The occurrence of any of these events, or the failure
in general of the Company to obtain facilities to conduct efficiently any of its
operations, would have a material adverse effect on the Company and the value of
the Common Stock. See "Business -- Maintenance" and "Business -- Facilities."

DEPENDENCE ON AIRCRAFT AVAILABILITY

The Company's revenues are dependent on the availability of its aircraft.
In the event that one or more of the Company's aircraft are lost or out of
service for an extended period of time, the Company may be forced to lease or
purchase replacement aircraft or, if necessary, convert an aircraft from
passenger to freighter

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<PAGE> 18

configuration. There can be no assurance that suitable replacement aircraft
could be located on acceptable terms. The Company does not maintain business
interruption insurance to cover this risk. Loss of revenue resulting from any
such business interruption or costs to replace aircraft could have a material
adverse effect on the Company and the value of the Common Stock.

DEPENDENCE ON KEY PERSONNEL

The Company believes that its continued success depends and will continue
to depend, on the services of M. Tom Christopher, the founder of Kitty Hawk and
Chairman of the Board of Directors and Chief Executive Officer of the Company,
Conrad A. Kalitta, the Vice Chairman (upon consummation of the Merger), Tilmon
J. Reeves, the President of the Company and Richard R. Wadsworth, the Senior
Vice President -- Finance, Chief Financial Officer and Secretary. The loss of
the services of any of Messrs. Christopher, Kalitta, Reeves or Wadsworth could
have a material adverse effect on the Company and the value of the Common Stock.
Each of Messrs. Christopher, Kalitta, Reeves and Wadsworth have entered into
employment agreements with the Company. See "Management -- Employment
Agreements."

EMPLOYEE RELATIONS

The Company believes that it has good relations with its employees. As a
result of the Merger, the Company is subject to a collective bargaining
agreement with the Airline Division of the International Brotherhood of
Teamsters (the "Teamsters Union") covering the cockpit crews of one of the
Kalitta Companies. By its terms, the contract remains in force beyond its stated
expiration date of August 29, 1997 until a new agreement is negotiated. Although
the Company and the Teamsters Union have commenced "interest-based" bargaining,
there can be no assurance that a new collective bargaining agreement can be
reached or that negotiations will not result in work stoppages, a substantial
increase in salaries or wages, changes in work rules or other changes adverse to
the Company. The cockpit crews of Kitty Hawk are not unionized. There can be no
assurance that upon consummation of the Merger Kitty Hawk's cockpit crews will
remain non-unionized. Unionization of Kitty Hawk's cockpit crews, work
stoppages, increased wages or other labor related matters could have a material
adverse effect on the Company and the value of the Common Stock. See
"Business -- Employees."

RISKS RELATED TO GROWTH THROUGH ACQUISITIONS

One of the Company's business strategies is to continue its growth by
pursuing the strategic acquisition of both domestic and international providers
of air freight carrier or logistics services. Growing through acquisitions
involves substantial risks, including overvaluing the acquired business and
inadequately or unsuccessfully integrating the acquired business. There can be
no assurance that suitable acquisition candidates will be available, that the
Company will be able to acquire, profitably manage or successfully integrate
such additional companies or that any such future acquisitions will produce
returns justifying the investment by the Company. In addition, the Company may
compete for acquisition candidates with its competitors or other companies that
have significantly greater resources than the Company. Additionally, the terms
of the Notes and the Company's existing Amended and Restated Credit Agreement
dated August 14, 1996 with Wells Fargo Bank (Texas), N.A. and Bank One, Texas,
N.A. (the "Credit Agreement") restrict the Company's ability to make certain
types of acquisitions. See "Business -- Growth Strategies" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

The Company may finance future acquisitions by issuing shares of Common
Stock. Any future issuance of Common Stock may result in substantial dilution to
purchasers of the shares of Common Stock offered hereby. In addition, any
acquisition could result in the Company increasing the amount of goodwill
reflected on its consolidated balance sheet, which will be charged against net
earnings in future periods as such goodwill is amortized.

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DEPENDENCE ON COMPUTER SYSTEMS

The Company utilizes a number of computer systems to schedule flights and
personnel, track aircraft and freight, bill customers, pay expenses and monitor
a variety of its activities, ranging from safety compliance to financial
performance. The failure of the hardware or software that support these computer
systems, or the loss of data contained in any of them, could significantly
disrupt the Company's operations, which could have a material adverse effect on
the Company and the value of the Common Stock. See "Business -- Air Freight
Logistics Service -- Database, Information Software and Tracking Systems."

In addition, like most businesses which are highly dependent on their
computer systems, some of the Company's computer software may not correctly
record, manipulate and retrieve dates from the year 2000 and beyond.
Accordingly, the Company may be forced to expend significant sums to overcome
this problem. The failure of the Company to adequately address this problem
could have a material adverse effect on the Company and the value of the Common
Stock.

RESTRICTIVE COVENANTS

The Notes will contain restrictive financial and operating covenants with
respect to liens, indebtedness, investments, prepayments of subordinated debt,
dividends, equity redemptions and other matters. The Credit Agreement also
contains restrictive financial and operating covenants, including maintenance
covenants. These restrictive covenants could prohibit the Company from taking
actions that are in the best interest of the stockholders and could have a
material adverse effect on the value of the Common Stock. See "Description of
Certain Indebtedness."

POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S
CERTIFICATE OF INCORPORATION, BYLAWS AND AGREEMENTS

The Certificate of Incorporation and Bylaws of the Company include certain
provisions that have anti-takeover effects and may delay, defer or prevent a
takeover attempt that a stockholder of the Company might consider to be in the
best interests of the Company or its stockholders. These provisions would have
an adverse effect on the price of the Common Stock. These provisions (i)
classify the Company's Board of Directors into three classes, each of which
serve for different three year periods, (ii) provide that only the Board of
Directors, the Chairman of the Board of Directors or the beneficial owners of
25% or more of the outstanding voting capital stock may call special
stockholders' meetings, (iii) require the vote of the holders of at least
two-thirds of the outstanding shares of each class of the Company's capital
stock then entitled to vote thereon to amend or repeal the Bylaws or certain
provisions of the Certificate of Incorporation, (iv) require the vote of at
least two-thirds of the members of the Board of Directors to amend or repeal the
Bylaws, (v) establish certain advance notice procedures for nomination of
candidates for election as directors and for stockholder proposals to be
considered at stockholders' meetings, (vi) subject the Company to a provision of
Delaware law that restricts certain "business combinations" involving a
stockholder who owns 15% or more of the Company's outstanding voting stock,
(vii) limit the aggregate voting power of non-U.S. persons to 22 1/2% of the
votes voting on or consenting to any matter, (viii) prohibit non-U.S. citizens
from serving as directors or officers of the Company and (ix) prohibit
stockholders from taking action by written consent. See "Description of Capital
Stock -- Special Provisions of the Certificate of Incorporation and Bylaws" and
"Business -- Government Regulation." In addition, the requirement that the vote
of the holders of at least two-thirds of the outstanding shares of each class of
the Company's capital stock is necessary to amend or repeal the Bylaws or
certain provisions of the Certificate of Incorporation may adversely affect the
extent to which stockholders, other than Messrs. Christopher and Kalitta acting
together, exercise control over the Company. In addition, holders of the Notes
will have the right to require the Company to repurchase the Notes upon a Change
of Control (as defined in the Note Indenture).

ABILITY TO ISSUE PREFERRED STOCK

The authorized capital stock of the Company includes 1,000,000 shares of
preferred stock (the "Preferred Stock"). The Board of Directors, in its sole
discretion, may designate and issue one or more series of Preferred

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<PAGE> 20

Stock from the authorized and unissued shares of Preferred Stock. Subject to
limitations imposed by law or the Company's Certificate of Incorporation, the
Board of Directors is empowered to determine (i) the designation of and the
number of shares constituting each series of Preferred Stock, (ii) the dividend
rate for each series, (iii) the terms and conditions of any voting, conversion
and exchange rights for each series, (iv) the amounts payable on each series
upon redemption or the Company's liquidation, dissolution or winding-up, (v) the
provisions of any sinking fund for the redemption or purchase of shares of any
series and (vi) the preferences and the relative rights among the series of
Preferred Stock. At the discretion of the Board of Directors and subject to its
fiduciary duties, the Preferred Stock could be used to deter any takeover
attempt, by tender offer or otherwise. In addition, Preferred Stock could be
issued with voting and conversion rights that could adversely affect the voting
power of holders of Common Stock. The issuance of Preferred Stock could also
result in a series of securities outstanding that would have preferences over
the Common Stock with respect to dividends and in liquidation. Any of the
foregoing could have a material adverse effect on the value of the Common Stock.
The Board of Directors has no current intention to issue shares of Preferred
Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
this offering, or the market perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. Upon completion
of this Common Stock Offering, 18,550,957 shares (19,165,957 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock will
be outstanding. The 4,100,000 shares (4,715,000 shares, if the Underwriters'
over-allotment option is exercised in full) offered hereby will be freely
tradable by persons who are not "affiliates" of the Company without restriction
under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to
Rule 144 under the Securities Act, upon completion of this Common Stock
Offering, 10,929,150 shares of Common Stock will be deemed "restricted
securities" that may be resold to the extent permitted under Rule 144 and Rule
701 of the Securities Act or under any exemption under the Securities Act.

Under the terms of a Stockholders' Agreement to be entered into
contemporaneously with the Merger, Messrs. Christopher and Kalitta will have
incidental registration rights for the ten-year period commencing with the
Closing, subject to customary cutback and exclusion provisions; provided that
the number of shares proposed to be sold by either Mr. Christopher or Mr.
Kalitta in any such registration shall not be less than 50,000 shares.

The Company has filed registration statements under the Securities Act
covering 600,000 shares of Common Stock reserved for issuance under the
Company's Amended and Restated Omnibus Securities Plan, Amended and Restated
Annual Incentive Compensation Plan and Amended and Restated Employee Stock
Purchase Plan (collectively, the "Plans"). See "Management -- Employee
Compensation Plans and Arrangements." As of the date hereof, 1,807 shares had
been issued under these Plans. Shares registered under such registration
statements are available for sale in the open market when issued pursuant to the
Plans, subject to Rule 144 volume limitations applicable to affiliates and to
provisions of the Plans, including vesting.

Messrs. Christopher, Kalitta, Reeves and Wadsworth, who collectively will
hold 10,929,150 shares of Common Stock in the aggregate after this Common Stock
Offering and the Merger, along with the Company and its other directors and
executive officers have agreed that, for a period of 90 days from the date of
this Prospectus, they will not, without the prior written consent of Morgan
Stanley & Co. Incorporated, offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for, Common Stock, except for up to
shares issuable pursuant to the Plans. Such consent of Morgan Stanley & Co.
Incorporated may be provided without notice to purchasers of the Common Stock or
to officials of the Nasdaq National Market System. See "Management -- Employee
Compensation Plans and Arrangements."

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<PAGE> 21

INDUSTRY RELATED RISKS

GOVERNMENT REGULATION

General. The Company is subject to Title 49 of the United States Code
(formerly the Federal Aviation Act of 1958, as amended), under which the
Department of Transportation ("DOT") and the FAA exercise regulatory authority
over air carriers. The DOT is primarily responsible for regulating economic
issues affecting air service, including, among other things, air carrier
certification and fitness, insurance, consumer protection, unfair competition
and transportation of hazardous materials. The FAA is primarily responsible for
regulating air safety and flight operations, including, among other things,
airworthiness requirements for aircraft, pilot and crew certification, aircraft
maintenance and operational standards, noise abatement, airport slots and other
safety-related factors. Certain of the Company's aircraft are subject to
Directives which require modifications to the affected aircraft. See
"Business -- Fleet" and "Business -- Government Regulation." In addition, the
Company is subject to regulation by various other federal, state, local and
foreign authorities, including the Department of Defense and the Environmental
Protection Agency.

The Company's international operations are governed by bilateral air
services agreements between the United States and foreign countries where the
Company operates. Under some of these bilateral 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. carriers and are subject to approval by the DOT and
applicable foreign regulators, limiting growth opportunities in such countries.

The DOT and the FAA have the authority to modify, amend, suspend or revoke
the authority and licenses issued to the Company for failure to comply with the
provisions of law or applicable 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 the Company and the value of the Common Stock. The adoption of
new laws, policies or regulations or changes in the interpretation or
application of existing laws, policies or regulations, whether by the FAA, the
DOT, the U.S. government or any foreign, state or local government, could have a
material adverse effect on the Company and the value of the Common Stock.

Safety, Training and Maintenance Regulations. The Company's operations are
subject to routine, and periodically more intensive, inspections and oversight
by the FAA. Following a review of safety procedures at ValuJet, Inc.
("ValuJet"), the FAA adopted changes to procedures concerning oversight of
contract maintenance and training. The Company believes it is currently in
compliance with such changes. It is possible that subsequent events, such as the
recent crash of a cargo aircraft owned by Fine Air Services Inc., ("Fine Air")
could result in additional Directives, which could have a material adverse
effect on the value of the Common Stock.

In September 1996 pursuant to the FAA's National Aviation Safety Inspection
Program, the Kalitta Companies underwent a broad but routine inspection of all
of the Kalitta Companies' aircraft and maintenance operations. This inspection
resulted in a report from the FAA citing the Kalitta Companies with a number of
regulatory infractions, none of which were sufficiently serious to cause the FAA
to curtail or otherwise restrict any of the Kalitta Companies' operations. As a
consequence of the FAA's inspection, however, the FAA and the Kalitta Companies
entered into a Consent Order in January 1997 which required the Kalitta
Companies to revise certain internal policies and procedures to address the
regulatory violations noted in the inspection report as well as enforcement
actions that had been pending prior to the inspection. Without admitting any
fault, the Kalitta Companies agreed to pay a fine of $450,000, one-third of
which is suspended and will be forgiven if the Kalitta Companies comply with all
the terms of the Consent Order. At this time, the Kalitta Companies' management
believe the Kalitta Companies are in compliance with the Consent Order and
expect the FAA to conduct another inspection of similar scope in the fourth
quarter of 1997 to verify such compliance. The Consent Order also provides that
it is a full and conclusive settlement of any civil penalties the Kalitta
Companies could incur for regulatory violations occurring before January 1,
1997, but does not preclude the FAA from taking enforcement action with respect
to the Kalitta Companies' air carrier operating certificate, which could have a
material adverse effect on the value of the Common Stock.

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<PAGE> 22

Modification of Aircraft. Thirty-nine aircraft in the Company's fleet do
not meet FAA noise abatement standards. All of these aircraft must be brought
into compliance by January 1, 2000. The Company may retire some of these
aircraft instead of modifying them. If all 39 aircraft are brought into
compliance, the Company estimates that the cost would be approximately $100
million, not including aircraft downtime. There can be no assurance regarding
the actual cost or that the Company will have or be able to raise the necessary
funds. See "Business -- Government Regulations." In addition, the Company
expects to purchase and modify the MEA Boeing 747s and to bring these into
revenue service in stages during 1998. However, there can be no assurance as to
when these aircraft will be purchased or how quickly and at what cost they can
be modified or placed in revenue service.

Aging Aircraft Regulations; Potential Compliance Costs. All of the
Company's aircraft are subject to Manufacturer's Service Bulletins ("Service
Bulletins") and Directives issued under the FAA's "Aging Aircraft" program or
issued on an ad hoc basis. These Service Bulletins or Directives could cause
certain of these aircraft to be subject to extensive aircraft examinations and
require certain of these aircraft to undergo structural inspections and
modifications to address problems of corrosion and structural fatigue at
specified times. It is possible that additional Service Bulletins or Directives
applicable to the types of aircraft included in the Company's fleet could be
issued in the future, particularly in light of recent aircraft crashes at
ValuJet and Fine Air. The cost of compliance with such Directives and Service
Bulletins cannot currently be estimated, but could be substantial.

COMPETITION

The market for air freight services is highly competitive. Because the
Company offers a broad range of air freight services, its competitors vary by
geographic market and type of service. The Company competes on the basis of size
and availability of aircraft with required performance characteristics, price
and reliability. The Company's air freight carrier services are also subject to
competition from other modes of transportation, including, but not limited to,
railroads and trucking. Additional demand for air freight carrier services over
the last few years has resulted in numerous new entrants in this business. The
Company believes there are limited barriers to entry into this business and that
increased demand may stimulate additional competition.

The Company's air freight business competes primarily with air freight
carriers, and from time to time, with integrated carriers such as Burlington Air
Express and Emery Air Freight. The Company also competes on a limited basis with
scheduled freight operations of passenger airlines and overnight delivery
services such as Airborne Express, Inc., DHL Airways, Inc., Federal Express and
United Parcel Service. Numerous competitors of the Company provide or coordinate
door-to-door air freight charters on an expedited basis. The Company also
competes with other dedicated air freight carriers such as Atlas Air, Cargolux,
Challenge Air Cargo, Emery Worldwide, Evergreen International Airlines, Gemini
Air Cargo, Polar Air Cargo and Southern Air Transport.

The market for air logistics also has been and is expected to remain highly
competitive. The Company's principal competitors for on-demand air logistics
services are other air logistics companies, air freight carriers which seek to
book charters directly with customers and air freight companies that offer
expedited service.

The Company's ability to attract and retain business also is affected by
whether and to what extent its customers decide to coordinate their own
transportation needs. For example, prior to 1990, GM conducted its air logistics
business in-house. GM and certain other customers maintain transportation
departments that could be expanded to manage charters in-house which could have
a material adverse effect on the Company and the value of the Common Stock. With
respect to the Company's ACMI contract charter business, the Company could be
adversely affected by the decision of certain of its certificated customers to
acquire additional aircraft or by its uncertificated customers to acquire and
operate their own aircraft. In this regard, many of the Company's competitors
and customers have substantially greater financial resources than the Company.

ENVIRONMENTAL MATTERS

The Company's 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

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<PAGE> 23

owner or operator of real property may be liable for the costs of removal or
remediation 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 remediate 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 remediating
contaminated property and the cost of complying with environmental laws could
have a material adverse effect on the Company and the value of the Common Stock.
See "Business -- Environmental."

The Company is aware of the presence of environmental contamination on
properties that the Kalitta Companies lease or own. The Company does not believe
that the costs of responding to the known contamination should or will be borne
solely by the Company, if at all. While the Company does not believe that the
costs of responding to the presence of such contamination is likely to have a
material adverse effect on the Company or the value of the Common Stock there
can be no assurance in this regard. Pursuant to the Merger Agreement, Mr.
Kalitta has agreed, subject to certain limitations, to indemnify the Company for
a period of 42 months against any losses arising with respect to environmental
liabilities related to contamination at any of the Kalitta Companies'
facilities. See "The Merger -- Indemnitees."

In part because of the highly industrialized nature of many of the
locations at which the Company operates, there can be no assurance that the
Company has discovered all environmental contamination for which it may be
responsible.

CAPITAL INTENSIVE NATURE OF AIRCRAFT OWNERSHIP AND OPERATION

Capital Investment. The Company's air carrier business is highly capital
intensive. In order to further expand the Company's air carrier business, the
Company intends to purchase used jet aircraft that typically require certain
modifications, including reconfiguring the aircraft from passenger to cargo use
and installing equipment to comply with noise abatement regulations. The market
for used jet aircraft is volatile and can be negatively affected by limited
supply, increased demand and other market factors and recently has experienced
significant price increases. Therefore, there can be no assurance that the
Company will be able to purchase and modify additional aircraft at favorable
prices or that the Company will have or be able to obtain sufficient resources
with which to make such purchases and modifications. See "Business -- Growth
Strategies," "Business -- Government Regulation" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

Operating Costs. The operation of the Company's air freight and passenger
carrier business incurs considerable operational, maintenance, fuel and
personnel costs. The Company's financial results can be adversely affected by
unexpected engine or airframe repairs to the extent uninsured, compliance with
maintenance directives and regulations of the FAA and associated aircraft
downtime. In addition, spare or replacement parts and components may not be
readily available in the marketplace. Failure to obtain necessary parts or
components in a timely manner or at favorable prices could have a material
adverse effect on the Company and the value of the Common Stock.

Fuel is a significant cost of operating the Company's aircraft for
on-demand services and the aircraft of third party providers of charter
services. Both the cost and availability of fuel are subject to many economic
and political factors and events occurring throughout the world and recently the
cost of fuel has fluctuated markedly. The Company has no agreement with any fuel
supplier assuring the availability or price stability of fuel and such
agreements are generally not available in the industry. The Company generally
passes on fuel cost increases to its customers under ACMI charter contracts, but
under certain contracts and the Company's scheduled operations, the Company's
ability to pass on increased fuel costs is limited. Accordingly, the future cost
and availability of fuel to the Company cannot be predicted and substantial
price increases in, or the unavailability of adequate supplies of, fuel may have
a material adverse effect on the Company and the value

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<PAGE> 24

of the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Maintenance," and
"Business -- Government Regulation."

VOLATILITY OF AIR FREIGHT SERVICES MARKET

The demand for air freight services is highly dependent on the strength of
both the domestic and global economy. Although the air freight services industry
has experienced strong growth over the last several years (see
"Business -- Industry Overview"), general economic downturns could have a
material adverse effect on the Company and the value of the Common Stock.

UTILIZATION OF AIRCRAFT

The Company's profitability is highly dependent on its ability to
effectively utilize its diverse fleet of aircraft. There can be no assurance,
however, that operation of any of the various types of aircraft in the Company's
fleet will prove to be profitable. The failure of the Company to keep its
aircraft in revenue service or achieve an acceptable level of aircraft
utilization could have a material adverse effect on the Company and the value of
the Common Stock.

RISK OF ACCIDENT; INSURANCE COVERAGE AND EXPENSES

The Company's operations involve risks of potential liability against the
Company in the event of aircraft accidents and, in the case of the Company's air
ambulance services, for medical malpractice. The Company is required by the DOT
to carry liability insurance on each of its aircraft. The Company also carries
medical liability insurance for its air ambulance business. Although the Company
believes its current insurance coverage is adequate and consistent with current
industry practice, there can be no assurance that the amount of such coverage
will not be changed or that the Company will not bear substantial losses and
lost revenues from accidents. Substantial claims resulting from an accident in
excess of related insurance coverage could have a material adverse effect on the
Company and the value of the Common Stock. In addition, any significant increase
in the Company's current insurance expense could have a material adverse effect
on the Company and the value of the Common Stock. Moreover, any aircraft
accident, even if fully insured, could cause a public perception that some of
the Company's aircraft are less safe or reliable than other aircraft, which
could have a material adverse effect on the Company and the value of the Common
Stock. During the last five years, the Kalitta Companies have had eight
accidents and several other safety related incidents involving its aircraft with
varying degrees of damage to the aircraft involved. In 1992, the pilot of one of
the Kalitta Companies' small aircraft was fatally injured in one of these
accidents. See "Business -- Insurance" and "Business -- Training and Safety."

INTERNATIONAL BUSINESS RISK

The Company expects to continue to derive a substantial portion of its
revenues from providing air freight carrier services to customers in South and
Central America and the Pacific Rim. The risks of doing business in foreign
countries include potential adverse changes in the diplomatic relations between
foreign countries and the U.S., hostility from local populations directed at a
U.S. flag carrier, government policies against foreign-owned businesses, adverse
effects of currency exchange controls, restrictions on the withdrawal of foreign
investment and earnings and the risk of insurrections that could result in
losses against which the Company is not insured. The Company's international
operations also are subject to economic uncertainties, including risks of
renegotiation or modification of existing agreements or arrangements with
exchange restrictions and changes in taxation. Any of these events could have a
material adverse effect on the Company and the value of the Common Stock.

Nearly all of the Company's revenue is denominated in U.S. dollars.
However, a meaningful portion of the Company's revenue is derived from customers
whose revenue is denominated in foreign currencies. Therefore, any significant
devaluation in such currencies relative to the U.S. dollar could have an adverse
effect on such customer's ability to pay the Company or to continue to use its
services, which could have a material adverse effect on the Company and the
value of the Common Stock.

21
<PAGE> 25

CONTRABAND RISK

Although required to do so, customers may fail to inform the Company about
hazardous or illegal cargo. If the Company fails to discover any undisclosed
weapons, explosives, illegal drugs or other hazardous or illegal cargo or
mislabels or otherwise ships hazardous materials, it may suffer possible
aircraft damage or liability, as well as fines, penalties or flight bans,
imposed by both the country of origin and of destination. Any of these events
could have a material adverse effect on the Company and the value of the Common
Stock. The Company is a member of the U.S. Super Carrier Initiative. Members of
the U.S. Super Carrier Initiative work with representatives of the U.S. Customs
Service and the U.S. Drug Enforcement Agency to prevent the importation of
illegal drugs into the U.S.

THE MERGER

The Merger Agreement. In September 1997, Kitty Hawk, Mr. Christopher, the
Kalitta Companies and Mr. Kalitta entered into an Agreement and Plan of Merger
(the "Merger Agreement"). Pursuant to the Merger Agreement, upon the
satisfaction of the conditions to the Merger, each of the respective Kalitta
Companies will be merged with and into separate subsidiaries of Kitty Hawk, with
each of the respective Kalitta Companies surviving the Merger as a direct,
wholly owned subsidiary of Kitty Hawk. At the effective time of the Merger, the
outstanding shares of capital stock of four of the Kalitta Companies will be
converted, in the aggregate, into the right to receive 5,099,150 shares of
Common Stock, and the outstanding shares of the remaining Kalitta Company will
be converted into the right to receive $20 million cash. Prior to the execution
of the Merger Agreement, the respective Boards of Directors of Kitty Hawk and
the Kalitta Companies and Mr. Kalitta, as the sole shareholder of each of the
Kalitta Companies, voted affirmatively to approve the Merger in accordance with
the terms of the Merger Agreement and applicable law. No other corporate action
is required for obtaining board of directors' and stockholders' approval of
Kitty Hawk or the Kalitta Companies for the Merger.

Recent Financial Performance of the Kalitta Companies and the Merger
Rationale. In 1996, the Kalitta Companies reported a small net loss. During the
first six months of 1997, the financial performance deteriorated substantially
with the Kalitta Companies sustaining a negative gross profit of $7.5 million,
an operating loss of $19.4 million and a net loss of $30.9 million. In addition,
the Kalitta Companies are heavily leveraged. Since 1995, the Kalitta Companies
have from time to time been in default under certain covenants of their loan
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview of the Kalitta Companies." These financial
issues contributed to the Kalitta Companies (i) entering into an agreement on
July 31, 1997 to sell sixteen Boeing 727s to Kitty Hawk in order to generate
cash for the acquisition and modification of wide-body aircraft and to provide
working capital and (ii) pursuing the Merger.

In evaluating the merits of the Merger, among other things, the management
teams of the two companies focused on the primary factors that have contributed
to the recent deterioration in the financial performance of the Kalitta
Companies and whether these factors would be expected to have a continuing
negative impact on the financial performance of the Kalitta Companies. Moreover,
they examined whether the combination of Kitty Hawk and the Kalitta Companies
would help eliminate, or at least mitigate, the effect of these factors. As a
result of their analysis, the management of the two companies expects the
financial performance of the Kalitta Companies to improve and significant
financial benefits to result following the consummation of the Merger.
Management's expectation is based on the following:

- Diminishing Impact of Recent Adverse Factors. The Kalitta Companies
believe that the following five factors have primarily accounted for the
decline in their financial performance since January 1, 1996 (i) the
incurrence of abnormally high jet engine overhaul expenses resulting from
the Kalitta Companies compliance with a series of Directives issued in
early 1996, (ii) beginning in January 1996, the loss of revenues
resulting from the effective grounding of two Boeing 747s pursuant to a
series of Directives, (iii) the incurrence of start-up costs associated
with establishing the Kalitta Companies' large aircraft passenger charter
business, (iv) the incurrence of costs to add and maintain flight crews
in anticipation of increased air carrier business which has not yet
materialized in part due to delays in

22
<PAGE> 26

acquiring aircraft and (v) a decline in revenues from the U.S. Military
resulting from a decrease in the air freight-only charter requirements of
the U.S. Military and an increase in competition for that business. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Overview of the Kalitta Companies."

The management of Kitty Hawk and the Kalitta Companies expect engine
overhaul expense to be a lower percentage of revenues in future periods
and do not expect passenger charter service start-up costs to recur. They
also believe that crew and aircraft utilization can be improved because
the Merger will afford the Company opportunities to (i) direct more
on-demand charters to the Kalitta Companies' small aircraft, rather than
to third parties and (ii) direct on-demand charters to Boeing 727s used in
the Company's scheduled overnight freight operations which have been used
infrequently for on-demand charters in the past. After the Merger, the
Company also expects to increase its charter business with the U.S.
Military because the Kalitta Companies recently became eligible to fly
passenger charters for the U.S. Military. Management also expects to
partially mitigate the ongoing effects of the Directive that effectively
grounded the Boeing 747s by returning one of them to limited load service
in the latter half of 1998.

- Expense Reductions. Several means were identified for substantially
reducing the current levels of certain operating expenses of the Kalitta
Companies following the consummation of the Transactions.
By insuring all the aircraft of the combined companies under one hull and
liability policy, it is estimated that the Company's annual insurance
premium costs will be reduced by approximately $1.5 million during the
first year following the Merger. Management also expects that Kitty
Hawk's maintenance expense can be reduced by shifting previously
outsourced maintenance to the Kalitta Companies' maintenance facilities.
Furthermore, there are potential cost savings to be gained (i) from
purchasing in bulk certain supplies, including fuel and (ii) through
parts inventory reduction permitted by the scale of the combined
operations.

- Improved Capital Resources. The consummation of this Common Stock
Offering and the Note Offering will provide the Company with sufficient
capital resources to refinance indebtedness of the Kalitta Companies on
more favorable terms and provide working capital. In particular, the
Company will have sufficient capital resources to enable it to acquire
the MEA Boeing 747s and associated spare engines and parts which it
expects to purchase. Recently, the Kalitta Companies have been hindered
due to their liquidity problems and lack of capital resources.

- Adoption of Kitty Hawk Management Discipline. Finally, in examining ways
for improving the financial performance of the Kalitta Companies, it was
recognized that Kitty Hawk's management has emphasized profitability, as
contrasted to the Kalitta Companies which have primarily focused on
growing revenues and fleet size. After the Merger, the Company intends to
apply the management discipline of Kitty Hawk to the day-to-day
operations of the Kalitta Companies.

There can be no assurance that the expectations described above for improving
the performance of the Kalitta Companies will be realized. The failure to
achieve the contemplated improvement of the financial performance of the Kalitta
Companies could have a material adverse effect on the Company and the value of
the Common Stock. See "Risk Factors."

Conditions to the Merger. Pursuant to the Merger Agreement, the
consummation of the Merger is subject to the satisfaction or waiver of certain
conditions at the closing of the Merger, including (i) the respective
representations and warranties set forth in the Merger Agreement made by Kitty
Hawk, Mr. Kalitta and the Kalitta Companies shall be true and correct, (ii) Mr.
Christopher, Kitty Hawk, Mr. Kalitta and the Kalitta Companies shall have
performed and complied with their respective covenants and conditions set forth
in the Merger Agreement, (iii) all required regulatory approvals and consents of
third parties shall have been obtained, (iv) there shall have been no change in
Kitty Hawk's or the Kalitta Companies' respective business, labor relations,
financial conditions, properties, assets, liabilities or results of operations
(or the occurrence of any event which might reasonably be expected to result in
any such change), which in the respective judgment of Kalitta or Kitty Hawk,
made in good faith, has had or would reasonably be expected to have a material

23
<PAGE> 27

adverse effect (as defined in the Merger Agreement) on Kitty Hawk or the Kalitta
Companies (as the case may be), (v) the last reported sale price of a share of
Common Stock on the Nasdaq National Market immediately preceding the closing
date of the Merger and the average of the last reported sales price of a share
of Common Stock on the Nasdaq National Market for the 20 consecutive trading
days ending on the trading day immediately preceding the closing date shall be
at least $12.00, (vi) the Kalitta Companies shall have purchased one MEA Boeing
747 by October 20, 1997 and obtained a legally binding contract by October 20,
1997 to purchase two MEA Boeing 747s after November 30, 1997 but before January
15, 1998, (vii) the Note Offering shall have been consummated and the net
proceeds from the Common Stock Offering and the Note Offering shall be greater
than or equal to $380 million, (viii) Mr. Kalitta shall have been released from
all of his personal guaranties of the outstanding funded indebtedness of the
Kalitta Companies as a consequence of the Refinancings, (ix) certain fairness
opinions shall have not been withdrawn or adversely modified, and (x) certain
aspects of the Merger, as related to Mr. Kalitta, must qualify as a tax-free
reorganization.

Indemnities. Under the terms of the Merger Agreement, Mr. Kalitta has
agreed to indemnify Kitty Hawk and certain of its affiliates against any loss,
damage, deficiency, liability, judgment, claim or expense (collectively, the
"Losses") incurred by Kitty Hawk that arise out of (i) a breach or alleged
breach by Mr. Kalitta or any of the Kalitta Companies (other than KFS) of the
Merger Agreement or (ii) environmental matters relating to the Kalitta Companies
(other than KFS) as described in the Merger Agreement. Separate indemnity is
provided by Mr. Kalitta and KFS to Kitty Hawk and certain of its affiliates for
Losses resulting from breaches of the Merger Agreement by KFS and environmental
claims relating to the KFS properties. Under the terms of the Merger Agreement,
Kitty Hawk has agreed to indemnify Mr. Kalitta against any Losses incurred by
Mr. Kalitta that arise out of a breach or alleged breach of the Merger Agreement
by Kitty Hawk, Mr. Christopher or the subsidiaries to be merged into the Kalitta
Companies. No party has the right to any indemnification until the aggregate
amount of its indemnity claims exceeds $1.0 million. The indemnification
obligations of Mr. Kalitta are limited to the sum of (i) the fair market value
from time to time of 1,150,000 shares of Common Stock with respect to Losses,
other than those relating to KFS, and (ii) $6 million for certain Losses
relating to KFS. The shares and $3 million cash will be placed in escrow by Mr.
Kalitta to secure these respective indemnity obligations. The indemnification
obligations of Kitty Hawk are limited to $10 million. No claims for
indemnification may be brought by either party after 30 months from the date of
the Merger, except that Kitty Hawk may make indemnity claims for environmental
matters for up to 42 months from the date of the Merger.

Bylaw Amendments Concerning Governance of the Company. Pursuant to the
Merger Agreement, effective at or prior to the effective time of the Merger (the
"Effective Time") (i) the Bylaws of Kitty Hawk shall be amended to provide that
the number of directors comprising the full Board of Directors will be seven and
(ii) such persons named as directors under "Management" shall be the directors
of the Company to serve in the classes so indicated in "Management."

Pursuant to the Merger Agreement, on or prior to the Effective Time, the
Bylaws of the Company also shall provide that (i) a Nominating Committee of the
Board of Directors shall be created for a 36-month period commencing with the
Effective Time, (ii) such Nominating Committee shall consist of Messrs.
Christopher and Kalitta for so long as each is a director of the Company, and
(iii) such Nominating Committee shall have the powers and duties described in,
and be subject to the provisions concerning, notice, quorum, membership and
resolution of deadlock and related provisions described in this paragraph. To
the extent permitted by applicable law, such Nominating Committee shall have the
exclusive power on behalf of the Board of Directors to nominate persons for
election as directors of the Company and to fill vacancies on the Board of
Directors. Messrs. Christopher and Kalitta have agreed under the Merger
Agreement and the Stockholders' Agreement (described below) to (i) vote, and
cause each of their respective affiliates to vote for the nominees of the
Nominating Committee (or the nominee of the entire Board of Directors in
accordance with the Bylaws if the Nominating Committee cannot agree within 10
days) and (ii) not vote, nor permit any of their respective affiliates to vote,
any shares of Common Stock they beneficially own in favor of any person to serve
as a director of the Company unless such person has been nominated by the
Nominating Committee (or the nominee of the entire Board of Directors in
accordance with the Bylaws if the Nominating Committee

24
<PAGE> 28

cannot agree within 10 days). The Nominating Committee shall nominate the
persons named in this Prospectus under "Management" for re-election when their
terms expire unless any such person is unable or unwilling to serve or if such
person has been removed for cause within the meaning of the Delaware General
Corporation Law or the Bylaws. However, Mr. Christopher will have the right to
fill any vacancy in the board seats of Messrs. Coonfield or Reeves and Mr.
Kalitta will have the right to fill any vacancy in the board seats of Messrs.
Kelsey or Sauder.

If the Nominating Committee does not agree then either member may require a
meeting of the Board of Directors to resolve such disagreement. Any individual
selected to serve as a member of the Board of Directors, if the Nominating
Committee is unable to agree upon a nominee or a person to fill a vacancy, must
(i) not be a Family Member (as defined in the Merger Agreement) of either Mr.
Kalitta or Mr. Christopher, (ii) not be a former or current employee of any
Kalitta Company, AIC, Kitty Hawk or its subsidiaries, (iii) have within the
preceding 60 months been a director, chief financial officer or chief executive
officer of a U.S. company whose stock is listed on any of the New York Stock
Exchange Inc., American Stock Exchange or Nasdaq National Market System and (iv)
be a citizen of the United States. The rights and obligations of Messrs.
Christopher and Kalitta relating to the selection of directors and director
nominees shall terminate upon the earlier of (a) 36 months after the Effective
Time, (b) the death, Disability (as defined in the Merger Agreement) or
voluntary resignation as a director of either Mr. Christopher or Mr. Kalitta or
(c) the sale of all shares beneficially owned by both Mr. Christopher and Mr.
Kalitta; provided, that in the event of the voluntary resignation as a director
of Mr. Christopher and Mr. Kalitta, the other will remain subject to his
obligations to vote the Common Stock and other voting securities of the Company
as provided above. If the Board is unable to agree on a nominee or person to
fill a vacancy, stockholders have a right to petition a Delaware court to
resolve the deadlock or any other deadlock.

The Bylaws of Kitty Hawk also shall be amended to provide that (a) until
the first anniversary of the Effective Date, the Chairman of the Board shall be
elected exclusively by the stockholders and (b) the Chief Executive Officer
shall be elected, until the first anniversary of the Effective Date, exclusively
by the stockholders, and shall serve as the chief executive officer of Kitty
Hawk and, subject to the supervision of the Board of Directors, shall have the
general management and control of Kitty Hawk and its subsidiaries. Pursuant to
the Merger Agreement, Kitty Hawk has agreed to cause the election of Mr. Kalitta
as President of AIA until the first anniversary of the Effective Time and Mr.
Kalitta has agreed to vote his Common Stock or other voting securities in favor
of Mr. Christopher as Chairman of the Board and Chief Executive Officer until
the first anniversary of the Effective Time.

The Bylaws of the Company also shall be amended to provide that the
provisions of the Bylaws concerning the number and classification of directors,
the powers and duties of the Nominating Committee, the provisions concerning a
deadlock of the Nominating Committee and the offices of Chairman of the Board
and Chief Executive Officer and related Bylaw provisions may be amended prior to
the end of the 36-month period commencing with the Effective Time only by the
affirmative vote of 75% of the members of the Board of Directors or the holders
of 75% of the outstanding Common Stock.

Stockholders' Agreement. Messrs. Christopher and Kalitta and the Company
will, contemporaneously with the Closing and pursuant to the terms of the Merger
Agreement, enter into a Stockholders' Agreement. Under the terms of the
Stockholders' Agreement, Messrs. Christopher and Kalitta will have incidental
registration rights for the ten-year period commencing with the Closing, subject
to customary cutback and exclusion provisions; provided that the number of
shares proposed to be sold by Mr. Christopher or Mr. Kalitta in any such
registration shall not be less than 50,000 shares. The expenses relating to such
registrations will be paid by the Company. In addition to the voting provisions
described above, the Stockholders' Agreement permits transfers to certain
Affiliates that agree to be bound by the terms of the Stockholders' Agreement.

The Note Offering and Refinancings. Concurrently with this Common Stock
Offering, the Company is offering $340 million aggregate principal amount of
Senior Secured Notes. The consummation of the Note Offering is conditioned upon
the consummation of (i) the Merger and (ii) this Common Stock Offering. The
Company intends to use the net proceeds of the Note Offering and this Common
Stock Offering to refinance all the outstanding indebtedness of the Company,
including indebtedness of the Kalitta Companies (the "Refinancings"), except for
indebtedness under Kitty Hawk's existing credit facility with Wells Fargo Bank

25
<PAGE> 29

(Texas) N.A. and Bank One Texas N.A. and financing incurred by Kitty Hawk to
purchase the Boeing 727s from AIA. The Company believes the Refinancings will
provide the Company with greater financial flexibility by, among other things,
(i) extending maturities of certain indebtedness, (ii) reducing the weighted
average interest rate of outstanding indebtedness and (iii) increasing operating
flexibility. See "Description of Certain Indebtedness."

To the extent the foregoing constitutes a summary of the material terms of
the Merger Agreement and the Stockholders' Agreement, it is qualified in its
entirety by reference to the agreements which are filed as exhibits to the
Registration Statement of which this Prospectus forms a part.

USE OF PROCEEDS

The net proceeds to be received by the Company from this Common Stock
Offering, after deducting the estimated underwriting discount and offering
expenses payable by the Company, are estimated to be approximately $
million. The Company intends to use $20 million of such net proceeds to pay the
$20 million cash portion of the consideration to be paid to Mr. Kalitta, as the
sole shareholder of the Kalitta Companies, in connection with the consummation
of the Merger and to use such net proceeds along with the net proceeds of the
Note Offering to purchase and modify the MEA Boeing 747s and to repay
approximately $ million of indebtedness of the Company, interest rates
ranging from to and final maturity dates ranging from
to . See "The Merger -- The Note Offering and Refinancings"
and "Description of Certain Indebtedness." The Company intends to use the
remaining net proceeds from this Common Stock Offering and the Note Offering, if
any, for working capital purposes. The Company will not receive any proceeds
from the sale of shares of Common Stock offered by the Selling Stockholder.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "KTTY" since the Company's initial public offering on October 9,
1996. The following table sets forth the range of high and low sale prices of
the Common Stock for the periods shown below.

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Three Months Ended November 30, 1996 (from October 9,
1996)..................................................... $14 3/4 $10 1/2
One Month Ended December 31, 1996........................... 13 1/4 10
Three Months Ended March 31, 1997........................... 12 5/8 10
Three Months Ended June 30, 1997............................ 17 1/8 11 7/8
Three Months Ended September 30, 1997 (through September 15,
1997)..................................................... 20 1/4 15
</TABLE>

At September 16, 1997, the Company had approximately 1,300 holders of
record and beneficial owners of the Company's Common Stock.

DIVIDEND POLICY

Kitty Hawk has never declared or paid any cash dividends on the Common
Stock. The Company presently intends to retain earnings, if any, for development
and growth of its business and does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. The Credit Agreement and the Senior
Notes contain significant limitations on the Company's ability to pay dividends.
See "Description of Certain Indebtedness." Payment of future dividends, if any,
will be at the discretion of the Company's Board of Directors, after taking into
account various factors, including the Company's earnings, capital requirements
and surplus, financial position, contractual restrictions and other relevant
business considerations and there can be no assurance that dividends will be
paid. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

26
<PAGE> 30

CAPITALIZATION

The following table sets forth the capitalization of Kitty Hawk at June 30,
1997 and the Company on a pro forma basis to give effect to the consummation of
(i) the sale of the 3,000,000 shares of Common Stock offered by the Company
hereby at an assumed offering price of $18.75 per share, (ii) the Note Offering,
(iii) the Merger, including the issuance of 5,099,150 shares of Common Stock in
connection therewith and (iv) the application of the estimated net proceeds to
be received by the Company from this Common Stock Offering and the Note Offering
as described in "Use of Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
KITTY THE
HAWK COMPANY
------- ---------
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt........................ $ 4,774 $ 3,486
======= ========
Long-term debt(1)........................................... $29,277 $361,757
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; no shares issued........................... -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized; 10,669,517 shares issued and outstanding;
18,768,667 shares issued and outstanding
pro forma(2)........................................... 107 188
Paid-in capital........................................... 33,950 157,851
Retained earnings......................................... 30,268 30,268
Common stock in treasury -- 217,710 shares................ (2,076) (2,076)
------- --------
Total stockholders' equity.................................. 62,249 186,231
------- --------
Total capitalization........................................ $91,526 $547,988
======= ========
</TABLE>

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

(1) See "Description of Certain Indebtedness."

(2) Does not include (i) 300,000 shares of Common Stock available for the future
grant under the Company's Amended and Restated Omnibus Securities Plan, (ii)
198,193 shares of Common Stock available for issuance under the Company's
Amended and Restated Annual Incentive Compensation Plan and (iii) 100,000
shares of Common Stock available for issuance under the Company's Amended
and Restated Employee Stock Purchase Plan. See "Management -- Employee
Compensation Plans and Arrangements."

27
<PAGE> 31

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

The following sets forth the Company's Unaudited Pro Forma Combined
Financial Information for the year ended December 31, 1996 and the six months
ended June 30, 1997, in each case giving effect to the Transactions and
Refinancings. The Company's Unaudited Pro Forma Combined Statement of Operations
Information presents the Transactions and the Refinancings, as if they had been
consummated at the beginning of 1996. The Company's Unaudited Pro Forma Combined
Balance Sheet Information presents the Transactions and the Refinancings as if
they had been consummated on June 30, 1997.

The Unaudited Pro Forma Combined Financial Information of the Company is
presented for illustrative purposes only and does not purport to present the
financial position or results of operations of the Company had the Transactions
and the Refinancings occurred on the dates indicated, nor are they necessarily
indicative of the results of operations which may be expected to occur in the
future. The Unaudited Pro Forma Combined Financial Information should be read in
conjunction with the separate historical financial statements of Kitty Hawk and
the Kalitta Companies appearing elsewhere in this Prospectus. Certain amounts
reported in the Kalitta Companies' historical combined financial statements have
been reclassified to conform with the Kitty Hawk presentations in the Unaudited
Pro Forma Combined Financial Information

The accompanying Unaudited Pro Forma Combined Financial Information has
been prepared under guidelines established by Article 11 of Regulation S-X under
the Securities Act. Under those guidelines, only "factually supportable"
adjustments are applied in the presentation of pro forma financial information.
Accordingly, no pro forma adjustments have been applied to reflect (i) revenues
or operating costs expected to be generated from the MEA Boeing 747 aircraft
expected to be purchased and modified for approximately $85 million or (ii)
operating efficiencies or cost savings (other than approximately $1.5 million of
insurance savings) expected to result from the Merger.

In addition, the guidelines do not allow pro forma adjustments to eliminate
the effect of unusual or non-recurring items affecting results of operations in
the periods presented. The pro forma results have not been adjusted to eliminate
abnormally high engine overhaul expenses, costs incurred to add and maintain
flight crews in anticipation of increased air freight carrier business which has
not yet materialized in part due to delays in acquiring aircraft and start-up
costs associated with establishing the Kalitta Companies' wide-body passenger
charter business. In addition, although approximately $85 million of the
proceeds of the Common Stock Offering and the Note Offering are expected to be
used to purchase and modify the MEA Boeing 747s, no adjustments have been made
to reflect additional revenues from these aircraft.

The historical balance sheet information for Kitty Hawk and the Kalitta
Companies has been derived from the unaudited June 30, 1997 balance sheets of
Kitty Hawk and the Kalitta Companies included elsewhere in this Prospectus. The
historical statement of operations data for the 12 months ended December 31,
1996 has been derived from unaudited information presented in Footnote 10 to
Kitty Hawk's audited financial statements included elsewhere in this Prospectus
and from the audited combined statements of operations of the Kalitta Companies
for the year ended December 31, 1996 included elsewhere in this Prospectus. The
historical statement of operations data for Kitty Hawk and the Kalitta Companies
for the six months ended June 30, 1997 has been derived from their respective
unaudited statements of operations for the six months ended June 30, 1997
included elsewhere in this Prospectus.

The pro forma adjustments relating to the purchase of the Kalitta Companies
represent the Company's preliminary determinations of these adjustments and are
based upon available information and certain assumptions the Company considers
reasonable under the circumstances. Final amounts could differ from those set
forth therein and those differences could be material. The Company expects to
finalize its purchase price allocation subsequent to the completion of these
Transactions. The unaudited interim financial statements of Kitty Hawk referred
to above include, in the opinion of management of Kitty Hawk, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of Kitty Hawk for the unaudited interim period. The
unaudited interim financial statements of the Kalitta Companies referred to
above include, in the opinion of management of the Kalitta Companies, all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results of the Kalitta Companies for the unaudited
interim period.

28
<PAGE> 32

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

BALANCE SHEET
JUNE 30, 1997

<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA
KALITTA -----------------------
KITTY HAWK COMPANIES ADJUSTMENTS COMBINED
---------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents..................... $ 8,952 $ 2,701 $ 101,6303a $113,283
Restricted cash............................... -- 2,868 2,868
Trade accounts receivable..................... 15,122 54,700 69,822
Accounts receivable -- related parties........ -- 2,642 2,642
Inventory and aircraft supplies............... 4,435 23,213 27,648
Prepaid expenses and other current assets..... 5,366 19,229 (186)3b 24,409
-------- -------- --------- --------
Total current assets.................. 33,875 105,353 101,444 240,672
Property and equipment, net..................... 83,483 260,616 83,7003c 427,799
Other assets.................................... -- 879 9,3213d 10,200
-------- -------- --------- --------
Total assets.......................... $117,358 $366,848 $ 194,465 $678,671
======== ======== ========= ========
Current Liabilities:
Accounts payable and accrued expenses......... $ 18,513 $ 79,819 $ 13,2293e $111,561
Notes payable to bank, reclassified as
current.................................... -- 56,483 (56,483)3f --
Long-term debt, reclassified as current....... -- 188,782 (188,782)3f --
Note payable and bank line of credit.......... -- 2,691 (2,691)3f --
Current maturities of long-term debt.......... 4,774 (1,288)3f 3,486
-------- -------- --------- --------
Total current liabilities............. 23,287 327,775 (236,015) 115,047
Note payable.................................... -- 300 300
Long-term debt.................................. 29,277 -- 332,1803f 361,457
Deferred income taxes........................... 2,545 -- 9,8493g 12,394
Minority interest............................... -- 3,242 3,242
Stockholders' equity, net....................... 62,249 35,531 88,4514 186,231
-------- -------- --------- --------
Total liabilities and stockholders'
equity.............................. $117,358 $366,848 $ 194,465 $678,671
======== ======== ========= ========
</TABLE>

See accompanying notes.

29
<PAGE> 33

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------- ----------------------
KALITTA
KITTY HAWK COMPANIES ADJUSTMENT COMBINED
---------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Air freight carrier........................... $ 55,504 $388,193 $ (4,914)2a $438,783
Air logistics................................. 77,168 -- 77,168
Maintenance and other......................... -- 36,348 36,348
-------- -------- -------- --------
Total revenues........................ 132,672 424,541 (4,914) 552,299
Cost of Revenues:
Air freight carrier........................... 40,860 357,830 (2,716)2b 395,974
Air logistics................................. 67,938 -- 67,938
Maintenance and other......................... -- 22,316 22,316
-------- -------- -------- --------
Total costs of revenues............... 108,798 380,146 (2,716) 486,228
-------- -------- -------- --------
Gross profit (loss)............................. 23,874 44,395 (2,198) 66,071
General and administrative expenses............. 8,943 22,900 31,843
Non-qualified employee profit sharing........... 1,243 -- 1,243
Stock option grants to executive................ 4,231 -- 4,231
-------- -------- -------- --------
Total operating expenses.............. 14,417 22,900 -- 37,317
-------- -------- -------- --------
Operating income (loss)......................... 9,457 21,495 (2,198) 28,754
Other Income (Expense):
Interest expense, net......................... (2,062) (21,632) (12,975)2c (36,669)
Other, net.................................... 291 1,266 1,557
-------- -------- -------- --------
Income (loss) before income taxes and minority
interest...................................... 7,686 1,129 (15,173) (6,358)
Minority interest............................... -- 1,146 1,146
-------- -------- -------- --------
Income (loss) before income taxes............... 7,686 (17) (15,173) (7,504)
Income taxes (benefit).......................... 3,038 -- (3,038)2d --
-------- -------- -------- --------
Net income (loss)............................... $ 4,648 $ (17) $(12,135) $ (7,504)
======== ======== ======== ========
Net income (loss) per share..................... $ 0.55 $ (0.45)
======== ========
Weighted average common and common equivalent
shares outstanding............................ 8,477 8,099 16,576
======== ======== ========
</TABLE>

See accompanying notes.

30
<PAGE> 34

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------- -----------------------
KALITTA
KITTY HAWK COMPANIES ADJUSTMENTS COMBINED
---------- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Air freight carrier......................... $33,237 $182,352 $(1,373)2a $214,216
Air logistics............................... 27,232 -- 27,232
Maintenance and other....................... -- 14,488 14,488
------- -------- ------- --------
Total revenues...................... 60,469 196,840 (1,373) 255,936
Cost of Revenues:
Air freight carrier......................... 22,844 194,115 (10,833)2b 206,126
Air logistics............................... 24,819 -- 24,819
Maintenance and other....................... -- 10,200 10,200
------- -------- ------- --------
Total costs of revenues............. 47,663 204,315 (10,833) 241,145
------- -------- ------- --------
Gross profit (loss)........................... 12,806 (7,475) 9,460 14,791
General and administrative expenses........... 4,884 11,968 16,852
Non-qualified employee profit sharing......... 672 -- 672
------- -------- ------- --------
Total operating expenses............ 5,556 11,968 -- 17,524
------- -------- ------- --------
Operating income (loss)....................... 7,250 (19,443) 9,460 (2,733)
Other Income (Expense):
Interest expense, net....................... (1,049) (12,098) (5,471)2c (18,618)
Other, net.................................. 424 1,491 1,915
------- -------- ------- --------
Income (loss) before income taxes and minority
interest.................................... 6,625 (30,050) 3,989 (19,436)
Minority interest............................. -- (893) (893)
------- -------- ------- --------
Income (loss) before income taxes............. 6,625 (30,943) 3,989 (20,329)
Income taxes (benefit)........................ 2,650 -- (2,650)2d --
------- -------- ------- --------
Net income (loss)............................. $ 3,975 $(30,943) $ 6,639 $(20,329)
======= ======== ======= ========
Net income (loss) per share................... $ 0.38 $ (1.10)
======= ========
Weighted average common and common equivalent
shares outstanding.......................... 10,452 8,099 18,551
======= ======= ========
</TABLE>

See accompanying notes.

31
<PAGE> 35

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)

1. Allocation of Purchase Price -- Based upon the Kalitta Companies' June 30,
1997 unaudited balance sheet, the purchase price would have been calculated
and allocated as follows:

<TABLE>
<S> <C>
PURCHASE PRICE DETERMINATION:
Cash.................................. $ 20,000
5,099,150 shares of Kitty Hawk common
stock.............................. 71,388
Related expenses...................... 700
Plus estimated fair value of
liabilities assumed:
Accounts payable and accrued
expenses (including $13,229
maintenance accrual to conform to
Kitty Hawk's accounting method)... 93,048
Notes payable, reclassified as
current........................... 59,174
Long-term debt, reclassified as
current, including approximately
$3,000 in early payment
penalties......................... 191,782
Note payable....................... 300
Deferred income taxes.............. 9,849
Minority interest.................. 3,242
--------
Total purchase price to
allocate..................... $449,483
========
PURCHASE PRICE ALLOCATION:
Current assets........................ $105,167
Property and equipment, principally
aircraft........................... 344,316
--------
$449,483
========
</TABLE>

The foregoing preliminary purchase price determination and allocation are
based on the June 30, 1997 Kalitta Companies balance sheet and preliminary
estimates of fair value of assets acquired and liabilities assumed. The final
purchase price determination and allocation is contingent upon final
assessment or appraisal of the fair value of the net assets acquired and the
final consideration given.

32
<PAGE> 36

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)

2. Pro Forma Combined Statement of Operations -- The Company's Pro Forma
Combined Statement of Operations data for the year ended December 31, 1996
and the six months ended June 30, 1997 includes the following adjustments:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------------
<S> <C> <C>
a. Elimination of intercompany revenue.................. $ (4,914) $ (1,373)

b. Cost of revenues:
- Elimination of intercompany revenue................. (4,914) (1,373)
- Conforming the Kalitta Companies' aircraft
maintenance accounting policy to that of Kitty
Hawk................................................ (2,107) (11,555)
- Decreasing insurance costs for the combined fleet... (1,500) (750)
- Increasing depreciation expense from the step-up in
fair value of acquired property and equipment,
principally aircraft, and adjusting the useful lives
of the acquired aircraft............................ 5,805 2,845
--------- --------
(2,716) (10,833)
--------- --------
c. Interest expense:
- Repaying existing Kalitta Company credit
facilities.......................................... 21,632 12,098
- Repaying existing Kitty Hawk credit facilities...... 850 160
- The Notes........................................... (34,000) (17,000)
- Amortizing deferred financing costs................. (1,457) (729)
--------- --------
(12,975) (5,471)

d. Adjustments to reduce income tax expense by the
amount incurred by Kitty Hawk........................ (3,038) (2,650)
--------- --------
$ (12,135) $ 6,639
========= ========
</TABLE>

The tax effects of the remaining pro forma net operating loss carryforward
at December 31, 1996 and at June 30, 1997 have not been reflected as an
income tax benefit in the pro forma statements of operations due the
uncertainty of future realization.

Interest expense on the Notes assumes an interest rate of 10%. Each 1/4
percentage point change in the interest rate of the Notes results in a
change in interest expense of $850 and $425 for the year ended December 31,
1996 and the six months ended June 30, 1997, respectively.

33
<PAGE> 37

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)

3. Pro Forma Balance Sheet -- For purposes of preparing the Unaudited Pro
Forma Combined Balance Sheet, the Kalitta Companies' assets and liabilities
have been recorded at their estimated fair values, the final determination
of which has not yet been made. Accordingly, the purchase accounting
adjustments made in connection with the development of the unaudited pro
forma financial information reflect the Company's best estimate based upon
currently available information. However, such adjustments could change and
such changes may be material.

<TABLE>
<CAPTION>
AS OF JUNE 30,
1997
--------------------------------
<S> <C> <C>
a. Cash:
- Issuing 3,000,000 shares of common stock at an
assumed price of $18.75 per share................... $ 56,250
- Cash payment to Kalitta Companies shareholder....... (20,000)
- Proceeds of the Notes............................... 340,000
- Repaying existing credit facilities including early
payment penalties of approximately $3,000........... (260,064)
- Expenses of the Transactions and the Refinancing.... (14,556)
--------
$101,630
b. Other current assets................................. (186)
c. Adjusting property and equipment, principally
aircraft, to their estimated fair value, to the
extent of available purchase price................... 83,700
d. Other assets, principally deferred financing costs... 9,321
e. Adjusting accrued maintenance to conform the Kalitta
Companies' accounting policy to that of Kitty Hawk... 13,229
f. Adjusting notes payable, reclassified as current,
long-term debt, reclassified as current and note
payable for the following:
- The Note Offering................................... 340,000
- Repayment of existing credit facilities............. (257,064)
--------
82,936
g. Recording deferred income taxes related to the book
and tax basis differences of the assets acquired and
liabilities assumed in the Merger.................... 9,849
</TABLE>

4. Stockholders' Equity -- Stockholders' equity has been adjusted to reflect
the issuance of 5,099,150 shares of Kitty Hawk's common stock in
conjunction with the Merger and the issuance of 3,000,000 shares in the
Common Stock Offering at an assumed offering price of $18.75 per share.

34
<PAGE> 38

SELECTED FINANCIAL AND OPERATING DATA

KITTY HAWK

The following table sets forth selected financial and operating data with
respect to Kitty Hawk for each of the fiscal years indicated, for the four
months ended December 31, 1995 and 1996 and for the six months ended June 30,
1996 and 1997. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. The selected income statement and balance sheet
data as of and for each of the fiscal years ended August 31, 1992 through 1996
and for the four months ended December 31, 1996 has been derived from audited
Consolidated Financial Statements of Kitty Hawk appearing elsewhere in this
Prospectus. Operating results for the four months ended December 31, 1995 and
1996 and for the six months ended June 30, 1996 and 1997 are not necessarily
indicative of results that may be expected for a calendar year. In the opinion
of management of Kitty Hawk, the selected statement of operations and balance
sheet data presented as of and for the four months ended December 31, 1995 and
for the six months ended June 30, 1996 and 1997, which are derived from Kitty
Hawk's unaudited Consolidated Financial Statements appearing elsewhere in this
Prospectus, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations for such periods.

<TABLE>
<CAPTION>
FOUR MONTHS
ENDED SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, JUNE 30,
-------------------------------------------------- ----------------- -------------------
1992 1993 1994 1995 1996 1995 1996 1996 1997
------- ------- -------- -------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Air freight carrier............ $ 6,760 $12,939 $ 28,285 $ 41,117 $ 52,922 $17,994 $20,577 $25,274 $33,237
Air logistics.................. 45,893 52,840 79,415 62,593 89,493 51,734 39,408 27,010 27,232
------- ------- -------- -------- -------- ------- ------- ------- -------
Total revenues................... 52,653 65,779 107,700 103,710 142,415 69,728 59,985 52,284 60,469
Total costs of revenues.......... 48,465 55,201 92,951 85,532 118,900 57,682 47,580 44,608 47,663
------- ------- -------- -------- -------- ------- ------- ------- -------
Gross profit..................... 4,188 10,578 14,749 18,178 23,515 12,046 12,405 7,676 12,806
General and administrative
expenses....................... 2,930 4,394 6,013 7,832 9,080 2,862 2,725 4,572 4,884
Non-qualified profit sharing
expense........................ -- 250 732 1,001 1,170 889 962 (32) 672
Stock option grants to
executives..................... -- -- -- -- 4,231(1) -- -- 4,231(1) --
------- ------- -------- -------- -------- ------- ------- ------- -------
Operating income................. 1,258 5,934 8,004 9,345 9,034 8,295 8,718 (1,095) 7,250
Interest expense................. (157) (134) (343) (1,185) (1,859) (482) (684) (1,023) (1,049)
Contract settlement income,
net(2)......................... -- 725 1,178 -- -- -- -- -- --
Loss on asset disposal........... -- -- -- -- (589) -- -- -- --
Other income (expense)........... 287 193 (432) (601) 291 38 626 138 424
------- ------- -------- -------- -------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... 1,388 6,718 8,407 7,559 6,877 7,851 8,660 (1,980) 6,625
Income taxes..................... 375 2,613 3,146 3,143 2,768 3,097 3,367 (831) 2,650
------- ------- -------- -------- -------- ------- ------- ------- -------
Net income (loss)................ $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293 $(1,149)(1) $ 3,975
======= ======= ======== ======== ======== ======= ======= ======= =======
Net income (loss) per share...... $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55 $ (0.14)(1) $ 0.38
======= ======= ======== ======== ======== ======= ======= ======= =======
Weighted average common and
common equivalent shares
outstanding.................... 8,671 7,968 7,968 7,968 7,928 7,968 9,610 7,968 10,452
OTHER FINANCIAL DATA:
Capital expenditures............. $ 3,019 $ 1,318 $ 13,876 $ 17,929 $ 33,538 $ 175 $13,796 $17,008 $39,544
Adjusted EBITDA(3)............... $ 2,149 $ 7,104 $ 9,507 $ 12,839 $ 19,840 $10,014 $12,546 $ 6,890 $12,134
Ratio of adjusted EBITDA to total
interest expense............... 13.7x 53.0x 27.7x 10.8x 10.7x 20.8x 18.3x 6.7x 11.6x
Ratio of earnings to fixed
charges(4)..................... 7.9x 33.6x 20.6x 6.9x 4.4x 15.9x 12.9x -- 5.0x
OPERATING DATA:
Air freight carrier
Aircraft owned (at end of
period)........................ 11 10 15 21 22 21 26 23 28
Flight hours(5).................. 3,567 7,030 11,795 15,183 20,237 6,320 7,670 10,029 13,461
Number of on-demand charters
flown.......................... 292 752 1,182 1,238 1,918 827 243 879 580
Number of ACMI contract charters
flown.......................... 655 1,314 1,734 2,601 4,030 1,049 1,586 1,741 2,415
Air freight charter logistics
Number of on-demand charters
managed(6)..................... 8,708 9,748 16,713 14,198 19,578 9,356 4,185 7,459 6,640
</TABLE>

35
<PAGE> 39

<TABLE>
<CAPTION>
AUGUST 31, DECEMBER 31, JUNE 30,
---------------------------------------------- ------------------ ------------------
1992 1993 1994 1995 1996 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............. $ 895 $ 4,679 $ 4,223 $ 1,747 $(6,962)(7) $12,722 $ 33,519 $ 6,370 $ 10,588
Total assets.......................... 9,874 18,598 37,911 47,954 79,828 80,109 123,027 68,136 117,358
Total debt............................ 2,367 976 9,145 16,981 36,912 21,695 24,768 25,602 34,051
Stockholders' equity.................. $3,184 $ 7,289 $12,550 $16,966 $23,639 $21,721 $ 58,292 $24,796 $ 62,249
</TABLE>

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

(1) Results for the fiscal year ended August 31, 1996 and the six months ended
June 30, 1996 lack comparability to other periods because such periods
include nonrecurring grants to two executive officers of stock options that
resulted in a charge to earnings of approximately $4,231. Had these grants
of stock options not occurred, net income for fiscal year ended August 31,
1996 and the six months ended June 30, 1996 would have been approximately
$6,637 and $1,390, respectively, and net income per share would have been
$0.84 and $0.17, respectively. See "Management -- Stock Option Grants."

(2) Reflects sums received in settlement of litigation. See "Legal
Proceedings -- Litigation and Arbitration Related to Postal Contract" and
Note 5 of Notes to Consolidated Financial Statements.

(3) Adjusted EBITDA represents net income (loss) before income tax expense,
interest expense, depreciation, amortization and certain items described
below. Adjusted EBITDA excludes approximately $4,231 from stock options
granted to executives in 1996 and approximately $725 and $1,178 in contract
settlements in fiscal 1993 and 1994, respectively. Adjusted EBITDA is
presented because it is a financial indicator of Kitty Hawk's ability to
incur and service debt. However, adjusted EBITDA is not calculated under
GAAP, is not necessarily comparable to similarly titled measures of other
companies and should not be considered in isolation, as a substitute for
operating income, net income or cash flow data prepared in accordance with
GAAP or as a measure of Kitty Hawk's profitability or liquidity.

(4) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) prior to income tax expense (benefit) and fixed charges (less
capitalized interest). Fixed charges consist of capitalized interest,
interest expense, amortization of debt expense and one-third of rental
payments on operating leases (such factor having been deemed by Kitty Hawk
to represent the interest portion of such payments). Earnings were not
sufficient to cover fixed charges by $1,980 for the six month period ended
June 30, 1996.

(5) As reported by Kitty Hawk to the FAA. Flight hours reported are less than
block hours, which also include the time an aircraft is operating under its
own power whether or not airborne. Kitty Hawk generally bills its customers
on a block hour basis.

(6) Includes on-demand charters flown by Kitty Hawk aircraft.

(7) Working capital includes a $10 million Revolving Credit Facility classified
as a current liability that was subsequently repaid.

36
<PAGE> 40

THE KALITTA COMPANIES

The following table sets forth selected financial and operating data with
respect to the Kalitta Companies for each of the fiscal years indicated and for
the six months ended June 30, 1996 and 1997. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Combined Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus. The selected income
statement and balance sheet data as of and for each of the fiscal years
indicated in the five year period ended December 31, 1996 have been derived from
the audited Combined Financial Statements of the Kalitta Companies. The selected
statement of operations and balance sheet data for the six months ended June 30,
1996 and 1997 have been derived from the unaudited Combined Financial Statements
of the Kalitta Companies, which, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The information
presented under the captions "Other Financial Data" and "Aircraft Data" have not
been derived from audited data for any periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the results which may be expected for the full year.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Air freight carrier services....................... $ 95,144 $194,525 $298,081 $359,404 $388,193 $177,431 $182,352
Maintenance and other(1)........................... 2,606 5,584 7,449 14,279 36,348 13,164 14,488
-------- -------- -------- -------- -------- -------- --------
Total revenues....................................... 97,750 200,109 305,530 373,683 424,541 190,595 196,840
OPERATING COSTS AND EXPENSES(2):
Flight............................................. 37,259 62,877 115,614 168,775 150,256 68,663 82,229
Maintenance........................................ 22,114 51,933 64,722 103,389 115,082 50,337 69,121
Fuel............................................... 16,508 38,554 57,362 54,538 82,717 40,616 35,498
Depreciation....................................... 8,999 12,422 13,809 20,972 32,091 15,846 17,467
Selling, general and administrative................ 4,232 9,554 13,273 21,676 21,889 10,088 11,284
Provision for doubtful accounts.................... 1,557 1,547 2,231 1,862 1,011 1,437 684
-------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses................... 90,669 176,887 267,011 371,212 403,046 186,987 216,283
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations........................ 7,081 23,222 38,519 2,471 21,495 3,608 (19,443)
OTHER INCOME (EXPENSE):
Interest expense................................... (4,396) (6,781) (8,121) (15,064) (22,012) (10,402) (12,371)
Interest income.................................... 36 113 315 379 216 273
Gain on disposition of aircraft held for resale and
property and equipment, net...................... 3,018 1,945 3,390 11,708 131 395 949
Gain on contract termination....................... -- -- -- -- 1,123 1,123 --
Gain on insurance settlement(3).................... -- -- -- 8,148 -- -- 542
Miscellaneous...................................... (118) (421) (550) -- 13 13 --
-------- -------- -------- -------- -------- -------- --------
Total other income (expense)......................... (1,496) (5,221) (5,168) 5,107 (20,365) (8,655) (10,607)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before minority interest............... 5,585 18,001 33,351 7,578 1,129 (5,047) (30,050)
Minority interest(4)................................. (424) (1,458) (2,758) (3,092) (1,146) (511) (893)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)(5)................................. $ 5,161 $ 16,543 $ 30,593 $ 4,486 $ (17) $ (5,558) $(30,943)
======== ======== ======== ======== ======== ======== ========
UNAUDITED PRO FORMA DATA:
Unaudited pro forma net income (loss)(6)............. $ 3,200 $ 10,257 $ 18,968 $ 2,781 $ (17) $ (5,558) $(30,943)
OTHER FINANCIAL DATA:
Capital expenditures................................. $ 55,863 $ 20,468 $ 77,832 $153,719 $ 53,413 $ 29,697 $ 14,101
Adjusted EBITDA(7)................................... $ 16,080 $ 35,645 $ 52,328 $ 23,443 $ 53,586 $ 19,454 $ (1,976)
Ratio of adjusted EBITDA to total interest
expense(8)......................................... 5.0x 5.3x 6.5x 1.6x 2.5x 1.9x --
Ratio of earnings to fixed charges(9)................ 2.0x 2.4x 3.3x 1.2x 1.0x -- --
</TABLE>

37
<PAGE> 41

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(10)..................... $ (6,242) $ 4,299 $(12,037) $(19,700) $(195,413) $(195,330) $(222,422)
Total assets...................................... 123,773 163,925 272,461 377,597 380,103 355,080 366,848
Total debt........................................ 80,010 84,936 137,405 220,471 238,350 222,504 248,256
Stockholder's equity.............................. $ 31,043 $ 46,461 $ 77,099 $ 66,292 $ 67,085 $ 58,232 $ 35,531
OPERATING DATA:
Aircraft under operating leases................... 7 8 4 4 2 3 4
Aircraft owned.................................... 52 57 82 91 96 91 94
-------- -------- -------- -------- --------- --------- ---------
Total aircraft.................................... 59 65 86 95 98 94 98
======== ======== ======== ======== ========= ========= =========
Flight hours(11).................................. 39,404 55,220 76,346 84,058 91,690 43,347 43,161
</TABLE>

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

(1) Includes revenues from related parties. See "Certain Transactions" and Note
8 of Notes to Combined Financial Statements.

(2) Includes expenses to related parties. See "Certain Transactions" and Note 8
of Notes to Combined Financial Statements.

(3) The gain for the year ended December 31, 1995 represents the amount by
which the insurance settlement received by AIA by reason of damage to one
of its aircraft exceeded the actual costs incurred to repair the damage.
The difference occurred because AIA was able to effect the repair using its
own maintenance capability and obtain the replacement parts from an unused
airframe having no book value. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

(4) American International Cargo is a general partnership in which AIA holds a
60% interest. See "Business -- Scheduled Cargo Services."

(5) The Kalitta Companies filed income tax returns under Subchapter S of the
U.S. Federal Income Tax Code. Therefore, all taxable income or losses of
the Kalitta Companies have passed through to the sole shareholder of the
Kalitta Companies.

(6) Represents net income adjusted for the approximate federal and state income
taxes (by applying statutory rates) that would have been incurred if the
Kalitta Companies had been subject to tax as a C corporation. No tax
benefit has been provided for the year ended December 31, 1996 and for the
six months ended June 30, 1996 and 1997 due to the uncertainty of the
Kalitta Companies' ability to recover such benefits.

(7) Adjusted EBITDA represents net income (loss) before minority interest,
interest expense (net of capitalized interest), depreciation, amortization
and certain items described below. Adjusted EBITDA excludes approximately
$8,148 and $542 from gains on insurance settlements in 1995, and the six
months ended June 30, 1997, respectively, $1,123 from a gain from
settlement of a contract dispute in 1996 and the six months ended June 30,
1996, and net gains from disposition of aircraft held for resale in each
period presented. Adjusted EBITDA is presented because it is a financial
indicator of the Kalitta Companies' ability to incur and service debt.
However, adjusted EBITDA is not calculated under GAAP, is not necessarily
comparable to similarly titled measures of other companies and should not
be considered in isolation, as a substitute for operating income, net
income or cash flow data prepared in accordance with GAAP or as a measure
of the Kalitta Companies' profitability or liquidity.

(8) For the six months ended June 30, 1997, the Kalitta Companies' adjusted
EBITDA was ($1,976) and net interest expense was $12,098, resulting in a
failure to cover interest expense.

(9) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before minority interest and fixed charges (less capitalized
interest). Fixed charges consist of capitalized interest, interest expense,
amortization of debt expense and one-third of rental payments on operating
leases (such factor having been deemed by the Kalitta Companies to
represent the interest portion of such payments). Earnings were not
sufficient to cover fixed charges by approximately $5,368 and $30,050 for
the six months ended June 30, 1996 and June 30, 1997, respectively.

(10) Includes long-term debt and notes payable reclassified to current of
$203,016, $173,765 and $201,443 at December 31, 1996, June 30, 1996 and
June 30, 1997, respectively.

(11) As reported to the FAA by the Kalitta Companies. Flight hours reported are
less than block hours, which also include the time an aircraft is operating
under its own power whether or not airborne. The Kalitta Companies
generally bill its customers on a block hour basis.

38
<PAGE> 42

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW OF KITTY HAWK

General

Change of Fiscal Year. On December 4, 1996, Kitty Hawk changed its fiscal
year end from August 31 to December 31. The following discussion is of Kitty
Hawk's financial condition and results of operations (i) for the six months
ended June 30, 1996 and 1997, (ii) for the four months ended December 31, 1995
and December 31, 1996 and (iii) for the fiscal years ended August 31, 1994, 1995
and 1996.

Revenues. Kitty Hawk's revenues are derived from two related businesses (i)
air freight carrier and (ii) air logistics. Air freight carrier revenues are
derived substantially from ACMI contract and on-demand charters flown with Kitty
Hawk's aircraft. Air logistics revenues are derived substantially from on-demand
air freight charters arranged by Kitty Hawk for its customers utilizing the
flight services of third party air freight carriers. With respect to on-demand
charters that are arranged by Kitty Hawk and flown with its own aircraft,
charges to the customer for air transportation are accounted for as air freight
carrier revenues and charges for ground handling and transportation are
accounted for as air logistics revenues.

The principal factors that have contributed to revenue growth over the past
several years have been increases in the size of Kitty Hawks fleet (from 10
aircraft at December 31, 1993 to 28 aircraft at June 30, 1997), the general U.S.
economic expansion since 1992 and the increased global demand for time sensitive
air freight services.

Costs of Revenues. The principal components of the costs of revenues
attributable to the air freight carrier business consist of the costs for the
maintenance and operation of its aircraft including the salaries of pilots and
maintenance personnel, charges for fuel, insurance and maintenance and
depreciation of engines and airframes. Generally, charges for fuel are only
applicable for the on-demand charters flown by the air freight carrier because
fuel for the ACMI contract charters is generally provided by the customer or
billed to them on a direct pass-through basis. The principal components of the
costs of revenues attributable to air logistics consist of sub-charter costs
paid to third party air freight carriers and costs paid for ground handling and
transportation. With respect to on-demand charters that are flown on Kitty
Hawk's aircraft, all related air transportation expenses are allocated to the
air freight carrier and all related cargo ground handling and transportation
expenses are allocated to the air logistics business.

Under the Kitty Hawk Amended and Restated Annual Incentive Compensation
Plan, Kitty Hawk awarded semiannual cash bonuses to its employees. The aggregate
amount of the bonuses for each of fiscal years 1994, 1995 and 1996, the
Transition Period and the six months ended June 30, 1997, have equaled 8.0%,
11.7%, 9.5%, 10.0% and 9.2%, respectively, of Kitty Hawk's income before the
deduction of income taxes, stock option grants to executives and the bonuses
that were expensed under the Kitty Hawk Amended and Restated Annual Incentive
Compensation Plan.

Kitty Hawk's gross margins have been substantially higher in its air
freight carrier business (which uses Kitty Hawk aircraft) than in its air
logistics business (which principally uses third party aircraft).

Significant Events Affecting Comparability of Results of Operations. Since
September 1, 1993, several events have affected the comparability of results of
operations for each of the last three fiscal years. In fiscal year 1996, Kitty
Hawk granted Messrs. Reeves and Wadsworth options to purchase 390,707 and
153,567 shares of Common Stock, respectively, for an exercise price of $0.01 per
share, that resulted in a charge to earnings of approximately $4,231,000. In
fiscal year 1995, Kitty Hawk expensed approximately $727,000 relating to its
attempted initial public offering. In fiscal year 1994, contract settlement
income amounted to approximately $1,178,000. See Note 5 of Notes to Consolidated
Financial Statements.

Post-Merger Results. Beginning in the fourth quarter of 1997, the Company's
results will be affected by the Transactions and the Refinancings. Expenses will
be increased by the amortization of the stepped up value of the Kalitta
Companies' fleet (approximately $5.8 million of non-cash annual expense), the
amortization of

39
<PAGE> 43

deferred financing costs associated with the Note Offering (approximately $1.5
million of non-cash annual expense) and cash interest expense with respect to
the Notes (approximately $34.0 million of annual expense).

Reduced Dependence on Significant Customers. Historically, Kitty Hawk
derived a substantial amount of revenue from a limited number of customers. Upon
consummation of the Merger, the Company will be significantly less dependent on
revenues from these customers.

RESULTS OF OPERATIONS OF KITTY HAWK

The following table sets forth, on a comparative basis for the periods
indicated, the components of Kitty Hawk's gross profit (in thousands) and the
gross profit margin by revenue type:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
---------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
AIR FREIGHT CARRIER:
Revenues.................................................. $28,285 100.0% $41,117 100.0% $52,922 100.0%
Costs of revenues......................................... 19,550 69.1 28,104 68.4 38,760 73.2
------- ----- ------- ----- ------- -----
Gross profit.............................................. $ 8,735 30.9% $13,013 31.6% $14,162 26.8%
======= ===== ======= ===== ======= =====
AIR LOGISTICS:
Revenues.................................................. $79,415 100.0% $62,593 100.0% $89,493 100.0%
Costs of revenues......................................... 73,402 92.4 57,428 91.7 80,140 89.5
------- ----- ------- ----- ------- -----
Gross profit.............................................. $ 6,013 7.6% $ 5,165 8.3% $ 9,353 10.5%
======= ===== ======= ===== ======= =====
</TABLE>

<TABLE>
<CAPTION>
FOUR MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
1995 1996 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AIR FREIGHT CARRIER:
Revenues..................................... $17,994 100.0% $20,577 100.0% $25,274 100.0% $33,237 100.0%
Costs of revenues............................ 11,685 64.9 13,784 67.0 20,340 80.5 22,844 68.7
------- ----- ------- ----- ------- ----- ------- -----
Gross profit................................. $ 6,309 35.1% $ 6,793 33.0% $ 4,934 19.5% $10,393 31.3%
======= ===== ======= ===== ======= ===== ======= =====
AIR LOGISTICS:
Revenues..................................... $51,734 100.0% $39,408 100.0% $27,010 100.0% $27,231 100.0%
Costs of revenues............................ 45,997 88.9 33,796 85.8 24,268 89.8 24,819 91.1
------- ----- ------- ----- ------- ----- ------- -----
Gross profit................................. $ 5,737 11.1% $ 5,612 14.2% $ 2,742 10.2% $ 2,412 8.9%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>

40
<PAGE> 44

The following table presents, for the periods indicated, consolidated
income statement data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
FISCAL YEAR FOUR MONTHS SIX MONTHS
ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, JUNE 30,
--------------------- ------------- -------------
1994 1995 1996 1995 1996 1996 1997
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Air freight carrier....................................... 26.3% 39.6% 37.2% 25.8% 34.3% 48.3% 55.0%
Air logistics............................................. 73.7 60.4 62.8 74.2 65.7 51.7 45.0
----- ----- ----- ----- ----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total costs of revenues..................................... 86.3 82.5 83.5 82.7 79.3 85.3 78.8
----- ----- ----- ----- ----- ----- -----
Gross profit................................................ 13.7 17.5 16.5 17.3 20.7 14.7 21.2
General and administrative expenses......................... 5.6 7.6 6.4 4.1 4.5 8.8 8.1
Non-qualified profit sharing expense........................ 0.7 0.9 0.8 1.3 1.6 (0.1) 1.1
Stock option grants to executives........................... -- -- 3.0 -- -- 8.1 --
----- ----- ----- ----- ----- ----- -----
Operating income (loss)..................................... 7.4 9.0 6.3 11.9 14.6 (2.1) 12.0
Interest expense............................................ (0.3) (1.1) (1.3) (0.7) (1.2) (2.0) (1.7)
Contract settlement income, net............................. 1.1 -- -- -- -- -- --
Loss on asset disposal...................................... -- -- (0.4) -- -- -- --
Other income (expense)...................................... (0.4) (0.6) 0.2 0.1 1.0 0.3 0.7
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes........................... 7.8 7.3 4.8 11.3 14.4 (3.8) 11.0
Income taxes................................................ 2.9 3.0 1.9 4.4 5.6 (1.6) 4.4
----- ----- ----- ----- ----- ----- -----
Net income (loss)........................................... 4.9% 4.3% 2.9% 6.9% 8.8% (2.2)% 6.6%
===== ===== ===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI
contract charter revenues were $7.5 million and $25.0 million or 22.4% and
75.1%, respectively, of total air freight carrier revenues for the six months
ended June 30, 1997, as compared to $10.2 million and $14.3 million or 40.3% and
56.5%, respectively, for the six months ended June 30, 1996. ACMI contract
charter revenues for the six months ended June 30, 1997 increased 74.8% over six
months ended June 30, 1996, primarily as the result of additional Boeing 727-200
ACMI contract charters. Revenues from on-demand charters flown by Kitty Hawk
aircraft for the six months ended June 30, 1997 decreased 26.9% from the
comparable prior year period due to aircraft being shifted from on-demand to
ACMI contract charters. For the six months ended June 30, 1997, as compared to
the six months ended June 30, 1996, prices for Kitty Hawk's on-demand and ACMI
contract charters remained relatively constant.

Revenues -- Air Logistics. Air logistics revenues increased $221,000, or
0.8%, to $27.2 million in the six months ended June 30, 1997, from $27.0 million
in the six months ended June 30, 1996. This increase was primarily due to
increased demand for on-demand charters generally and specifically for charters
which require larger aircraft generating greater revenues. For the six months
ended June 30, 1997, as compared to the six months ended June 30, 1996, prices
for Kitty Hawk's air logistics services remained relatively constant.

Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $2.5 million or 12.3% to $22.8 million in the six months
ended June 30, 1997, from $20.3 million in the six months ended June 30, 1996,
reflecting increased costs associated with increased fleet size and ACMI
contract charters. The gross profit margin from the air freight carrier
increased to 31.3% in the six months ended June 30, 1997, from 19.5% in the six
months ended June 30, 1996. The increase was primarily the result of reduced
maintenance costs from operational efficiencies associated with increased fleet
size and reduced depreciation costs associated with the sale of four JT8D-9A
engines.

As reported to the FAA, overall aircraft utilization increased to 13,461
flight hours for the six months ended June 30, 1997, from 10,029 in the six
months ended June 30, 1996, a 34.2% increase. This increase was primarily due to
increased hours flown for ACMI contract charters.

41
<PAGE> 45

Costs of Revenues -- Air Logistics. Air logistics costs of revenues
increased $551,000, or 2.3%, to $24.8 million in the six months ended June 30,
1997, from $24.3 million in the six months ended June 30, 1996, reflecting an
increased volume of business. The gross profit margin from air logistics
decreased to 8.9% in the six months ended June 30, 1997, from 10.2% in the
comparable prior year period, a decrease of 12.7%. This decrease was primarily
due to increased costs paid to third party air freight carriers.

General and Administrative Expenses. General and administrative expenses
increased $312,000, or 6.8%, to $4.9 million in the six months ended June 30,
1997, from $4.6 million in the six months ended June 30, 1996. This increase was
primarily due to an increase in support functions and administrative costs
associated with the growth in the aircraft fleet and the increased volume of
business of the air freight carrier in the six months ended June 30, 1997. As a
percentage of total revenues, general and administrative expenses decreased to
8.1% in the six months ended June 30, 1997, from 8.8% in the six months ended
June 30, 1996.

Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased $705,000, to $672,000 in the six months ended June 30, 1997,
from ($33,000) in the six months ended June 30, 1996, reflecting the increase of
net income before taxes in the six months ended June 30, 1997.

Stock Option Grants to Executives. During the six month period ended June
30, 1996, Kitty Hawk granted two executive officers options to purchase 544,274
shares of Common Stock that resulted in a charge to earnings of approximately
$4,231,000.

Operating Income. As a result of the above, operating income increased $8.3
million, or 762%, to $7.2 million in the six months ended June 30, 1997, from
($1.1) million in the six months ended June 30, 1996. Operating income margin
increased to 12.0% in the six months ended June 30, 1997, from (2.1%) in the six
months ended June 30, 1996.

Interest Expense. Interest expense remained relatively constant at $1.0
million for the six months ended June 30, 1997, as compared to the six months
ended June 30, 1996.

Other Income (Expense). Other income increased to $425,000 in the six
months ended June 30 1997, from $138,000 in the comparable prior year period.
The increase was primarily due to increased interest income in the six months
ended June 30, 1997, from the investment of proceeds from the Company's initial
public offering.

Income Taxes. Income taxes as a percentage of income before income taxes
decreased to 40% for the six months ended June 30, 1997, from 42% for the
comparable prior year period. The increase was primarily due to decreased state
income taxes.

Net Income. As a result of the above, net income increased to $4.0 million
in the six months ended June 30, 1997, compared to ($1.1) million in the six
months ended June 30, 1996. Net income as a percentage of total revenues
increased to 6.6% in the six months ended June 30, 1997, from (2.2%) in the
comparable prior year period.

FOUR MONTHS ENDED DECEMBER 31, 1996 COMPARED TO FOUR MONTHS ENDED DECEMBER 31,
1995

Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI
contract charter revenues were $3.0 million and $16.9 million, or 14.5% and
82.3%, respectively, of total air freight carrier revenues for the four months
ended December 31, 1996, as compared to $7.8 million and $9.2 million, or 43.2%
and 51.3%, respectively, for the four months ended December 31, 1995. ACMI
contract charter revenues for the four months ended December 31, 1996, increased
83.7% over the four months ended December 31, 1995, primarily as the result of
additional Boeing 727-200 ACMI contract charters. Revenues from on-demand
charters flown by Kitty Hawk aircraft for the four months ended December 31,
1996 decreased 61.6% from the comparable prior year period primarily as the
result of shifting the air freight carrier's aircraft being used for on demand
charters to ACMI contract charters. For the four months ended December 31, 1996,
as compared to the four months ended December 31, 1995, prices for Kitty Hawk's
on-demand and ACMI contract charters remained relatively constant.

42
<PAGE> 46

Revenues -- Air Logistics. Air logistics revenues decreased $12.3 million,
or 23.8%, to $39.4 million in the four months ended December 31, 1996, from
$51.7 million in the four months ended December 31, 1995. This decrease was
primarily due to decreased demand for on demand charters from the automobile
industry in the fourth quarter of calendar year 1996 and is partially offset by
an increase in the number of managed charters for the U.S. Postal Service during
December 1996. For the four months ended December 31, 1996, as compared to the
four months ended December 31, 1995, prices for Kitty Hawk's air logistics
services remained relatively constant.

Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $2.1 million, or 18.0%, to $13.8 million in the four months
ended December 31, 1996, from $11.7 million in the four months ended December
31, 1995, reflecting the increased volume of business from Boeing 727-200 ACMI
contract charters. Gross profit margin from the air freight carrier decreased to
33.0% in the four months ended December 31, 1996, from 35.1% in the comparable
prior year period. This decrease reflects the increase in ACMI contract
charters, which produce lower gross margins than on-demand charters.

As reported to the FAA, overall aircraft utilization increased to 7,670
flight hours for the four months ended December 31, 1996, from 6,320 in the four
months ended December 31, 1995, a 21.4% increase. This increase was primarily
due to the increased hours flown for ACMI contract charters.

Costs of Revenues -- Air Logistics. Air logistics costs of revenues
decreased $12.2 million, or 26.5%, to $33.8 million in the four months ended
December 31, 1996, from $46.0 million in the four months ended December 31,
1995, reflecting the decreased volume of business. The gross profit margin from
air logistics increased to 14.2% in the four months ended December 31, 1996,
from 11.1% in the comparable prior year period, an increase of 27.9%. This
increase was primarily due to Kitty Hawk's additional revenues and increased
gross profit margin from Kitty Hawk's U.S. Postal Service Christmas contract in
December 1996 and its success in reducing its costs paid to third party air
freight carriers and ground service providers.

General and Administrative Expenses. General and administrative expenses
decreased $137,000, or 4.8%, to $2.7 million in the four months ended December
31, 1996, from $2.9 million in the four months ended December 31, 1995. This
decrease was primarily due to a reduction of professional fees and bank charges
in the four months ended December 31, 1996. As a percentage of total revenues,
general and administrative expenses increased to 4.5% in the four months ended
December 31, 1996, from 4.1% in the four months ended December 31, 1995.

Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased $73,000, or 8.2%, to $962,000 in the four months ended
December 31, 1996, from $889,000 in the four months ended December 31, 1995,
reflecting the increased profitability from operating activities of Kitty Hawk
in the four months ended December 31, 1996.

Operating Income. Operating income increased $423,000, or 5.1%, to $8.7
million in the four months ended December 31, 1996, from $8.3 million in the
four months ended December 31, 1995. Operating income margin increased to 14.6%
from 11.9%, for the four months ended December 31, 1996 and 1995, respectively.

Interest Expense. Interest expense increased to $684,000 for the four
months ended December 31, 1996 from $482,000 in the four months ended December
31, 1995, a 42.0% increase. The increase was primarily the result of the
incurrence of additional long-term debt to finance the acquisition of Boeing
727-200 aircraft subsequent to December 31, 1995.

Other Income (Expense). Other income increased to $626,000 in the four
months ended December 31, 1996, from $38,000 in the comparable prior year
period. The increase was primarily due to the temporary investment of the net
proceeds of the Offering.

Income Taxes. Income taxes as a percentage of income before income taxes
decreased to 38.9% for the four months ended December 31, 1996, from 39.4% for
the comparable prior year period. The decrease was primarily due to decreased
state income taxes.

Net Income. As a result of the above, net income increased to $5.3 million
in the four months ended December 31, 1996, from $4.8 million in the four months
ended December 31, 1995, a 11.3% increase. Net

43
<PAGE> 47

income as a percentage of total revenues increased to 8.8% in the four months
ended December 31, 1996, from 6.9% in the comparable prior year period.

FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995

Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI
contract charter revenues were $20.7 million and $30.1 million, or 39.2% and
56.8%, respectively, of total air freight carrier revenues for fiscal year 1996,
as compared to $18.1 million and $20.9 million, or 44.2% and 50.8%,
respectively, for fiscal year 1995. ACMI contract charter revenues for fiscal
year 1996, increased 44.0% over fiscal year 1995, primarily as the result of
additional Boeing 727-200 ACMI contract charters. Revenues from on-demand
charters flown by Kitty Hawk aircraft for fiscal year 1996 increased 14.0% from
the comparable prior year period. For fiscal year 1996, as compared to fiscal
year 1995, prices for Kitty Hawk's on-demand and ACMI contract charters remained
relatively constant.

Revenues -- Air Logistics. Air logistics revenues increased $26.9 million,
or 43.0%, to $89.5 million in fiscal year 1996, from $62.6 million in fiscal
year 1995. This increase was primarily due to increased demand for on demand
charters from the automobile industry in the fourth quarter of calendar year
1995 and a substantial increase in the number of managed charters for the U.S.
Postal Service during December 1995. For fiscal year 1996, as compared to fiscal
year 1995, prices for Kitty Hawk's air logistics services remained relatively
constant.

Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $10.7 million, or 37.9%, to $38.8 million in fiscal year
1996, from $28.1 million in fiscal year 1995, reflecting the increased volume of
business from Boeing 727-200 ACMI contract charters. Gross profit margin from
the air freight carrier decreased to 26.8% in fiscal year 1996, from 31.6% in
the comparable prior year period. This decrease reflects the increase in ACMI
contract charters, which produce lower gross margins than on-demand charters.

As reported to the FAA, overall aircraft utilization increased to 20,237
flight hours for fiscal year 1996, from 15,183 in fiscal year 1995, a 33.3%
increase. This increase was primarily due to the increased hours flown for ACMI
contract charters.

Costs of Revenues -- Air Logistics. Air logistics costs of revenues
increased $22.7 million, or 39.5%, to $80.1 million in fiscal year 1996, from
$57.4 million in fiscal year 1995, reflecting the increased volume of business.
The gross profit margin from air logistics increased to 10.5% in fiscal year
1996, from 8.3% in the comparable prior year period, a 26.5% increase. This
increase was primarily due to Kitty Hawk's success in reducing its costs paid to
third party air freight carriers and ground service providers and increased
gross profit margin from Kitty Hawk's U.S. Postal Service Christmas contract in
December 1995.

General and Administrative Expenses. General and administrative expenses
increased $1.2 million, or 15.9%, to $9.1 million in fiscal year 1996, from $7.8
million in fiscal year 1995. This increase was primarily due to an increase in
support functions and administrative costs associated with the growth in the
aircraft fleet and the increased revenue volume for the air freight carrier in
fiscal year 1996. As a percentage of total revenues, general and administrative
expenses decreased to 6.4% in fiscal year 1996, from 7.6% in fiscal year 1995.

Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased $169,000, or 16.9%, to $1.2 million in fiscal year 1996, from
$1.0 million in fiscal year 1995, reflecting the increased profitability from
operating activities of Kitty Hawk in fiscal year 1996.

Stock Option Grants to Executives. During fiscal year 1996, Kitty Hawk
granted two executive officers options to purchase 544,274 shares of Common
Stock that resulted in a charge to earnings of approximately $4,231,000.

Operating Income. Operating income decreased $311,000, or 3.3%, to $9.0
million in fiscal year 1996, from $9.3 million in fiscal year 1995. Operating
income margin decreased to 6.3% from 9.0%, for fiscal year 1996 and 1995,
respectively.

Interest Expense. Interest expense increased to $1.9 million for fiscal
year 1996 from $1.2 million in fiscal year 1995, a 56.9% increase. The increase
was primarily the result of the incurrence of additional long-term

44
<PAGE> 48

debt to finance the acquisition of two Boeing 727-200 aircraft in the second
half of fiscal year 1995 and two additional Boeing 727-200 aircraft in fiscal
year 1996.

Loss on Asset Disposal. Loss on asset disposal for fiscal year 1996 was
$589,000, which resulted from write-downs associated with equipment
dispositions. There were no losses on asset disposal in fiscal year 1995.

Other Income (Expense). Other income increased to $291,000 in fiscal year
1996, from an expense of $601,000 in the comparable prior year period. The
increase was primarily due to the write-off of costs associated with Kitty
Hawk's attempted initial public offering in fiscal year 1995 and increased
interest income in fiscal year 1996.

Income Taxes. Income taxes as a percentage of income before income taxes
decreased to 40.3% for fiscal year 1996, from 41.6% for the comparable prior
year period. The decrease was primarily due to decreased state income taxes.

Net Income. As a result of the above, net income decreased to $4.1 million
in fiscal year 1996, from $4.4 million in fiscal year 1995, a 7.0% decrease. Net
income as a percentage of total revenues decreased to 2.9% in fiscal year 1996,
from 4.3% in the comparable prior year period.

FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994

Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI
contract charter revenues were $18.1 million and $20.9 million, or 44.2% and
50.8%, respectively, of total air freight carrier revenues for fiscal year 1995,
as compared to $15.4 million and $10.6 million, or 54.5% and 37.4%,
respectively, for fiscal year 1994. The increase in on-demand and ACMI contract
charter revenues for fiscal year 1995 over fiscal year 1994, was 17.9% and
97.1%, respectively. These increases were primarily the result of additional
Boeing 727-200 ACMI contract charters and increased on-demand charters flown by
Kitty Hawk's jet aircraft. For fiscal year 1995 as compared to fiscal year 1994,
prices for Kitty Hawk's ACMI contract charter services and U.S. Postal Service
Christmas contracts remained relatively constant.

Revenues -- Air Logistics. Air logistics revenues decreased $16.8 million,
or 21.2%, to $62.6 million in fiscal year 1995 from $79.4 million in fiscal year
1994 primarily due to the substantial decline in volume of on-demand charters
for the automobile industry in the first half of calendar 1995 as compared to
the same period in 1994. This decline was primarily the result of the temporary
decision by GM to significantly reduce use of expedited transportation,
including Kitty Hawk's air logistics services, as part of a cost containment
initiative. Prices for Kitty Hawk's on-demand charters decreased slightly due to
a revenue rate reduction in the GM Agreement which took effect on May 1, 1994.

Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $8.6 million, or 43.8%, to $28.1 million in fiscal year 1995
from $19.5 million in fiscal year 1994, reflecting the increased volume of
business from ACMI contract and on-demand charters flown by Kitty Hawk's jet
aircraft. Gross profit margin from the air freight carrier increased slightly to
31.6% in fiscal year 1995 from 30.9% in fiscal year 1994, a 2.3% increase. As
reported to the FAA, overall aircraft utilization increased to 15,183 flight
hours for fiscal year 1995 from 11,795 flight hours in fiscal year 1994, a 28.7%
increase. This increase was primarily the result of the inclusion of an
additional four Boeing 727-200s and two Douglas DC-9-15F aircraft into Kitty
Hawk's operations during fiscal year 1995.

Costs of Revenues -- Air Logistics. Air logistics costs of revenues
decreased $16.0 million, or 21.8%, to $57.4 million in fiscal year 1995 from
$73.4 million in fiscal year 1994, reflecting the decrease in the volume of
business. The gross profit margin from air logistics increased to 8.3% in fiscal
year 1995 from 7.6% in fiscal year 1994, a 9.2% increase. This increase was
primarily due to Kitty Hawk's success in reducing its costs paid to third party
air freight carriers and ground service providers in the second half of fiscal
year 1995.

General and Administrative Expenses. General and administrative expenses
increased $1.8 million, or 30.3%, to $7.8 million in fiscal year 1995 from $6.0
million in fiscal year 1994. As a percentage of total revenues, general and
administrative expenses increased to 7.6% in fiscal year 1995 from 5.6% in
fiscal year

45
<PAGE> 49

1994. This increase was primarily due to an increase in support functions and
number of personnel associated with the growth in the aircraft fleet and the
revenue volume for the air freight carrier in fiscal year 1995.

Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased to $1.0 million in fiscal year 1995 from $732,000 in fiscal
year 1994, a 36.8% increase, reflecting the increased profitability from
operating activities of Kitty Hawk in fiscal year 1995.

Operating Income. Operating income increased $1.3 million, or 16.8%, to
$9.3 million in fiscal year 1995 from $8.0 million in fiscal year 1994.
Operating income margin increased to 9.0% from 7.4% for fiscal year 1995 and
1994, respectively.

Interest Expense. Interest expense increased to $1.2 million for fiscal
year 1995 from $343,000 in fiscal year 1994, a 246.0% increase. The increase was
primarily the result of the incurrence of additional long-term debt to finance
the acquisition of two Boeing 727-200 aircraft in the second half of fiscal year
1994 and two Douglas DC-9-15F aircraft and two Boeing 727-200 aircraft in fiscal
year 1995.

Other Income (Expense). Other expense increased to $601,000 in fiscal year
1995 from $432,000 in fiscal year 1994, a 39.1% increase. This increase was
primarily due to the write off of costs associated with Kitty Hawk's attempted
initial public offering.

Income Taxes. Income taxes as a percentage of income before income taxes
increased to 41.6% for fiscal year 1995 from 37.4% in fiscal year 1994. The
increase was primarily due to higher state income taxes.

Net Income. As a result of the above, net income decreased to $4.4 million
for fiscal year 1995 from $5.3 million in fiscal year 1994, a 16.0% decrease.
Net income as a percentage of total revenues was 4.3% in fiscal year 1995
compared to 4.9% for fiscal year 1994.

OVERVIEW OF THE KALITTA COMPANIES

Revenues. The Kalitta Companies derive their revenues primarily from two
types of services: air freight carrier services and third party maintenance.
During the past three years, the Kalitta Companies' revenues increased at a
compound annual rate of 28.5% to $424.5 million in 1996 from $200.1 million in
1993. The Kalitta Companies revenue growth has been substantially the result of
new scheduled freight contracts and an increase in aircraft capacity.

Revenues from air freight carrier services are derived from three sources
(i) scheduled cargo services, (ii) on-demand cargo charter services, and (iii)
passenger charter services.

Scheduled cargo services are generally utilized by other airlines and
freight forwarders. These services range in type from a commitment by the
Kalitta Companies to transport freight on its scheduled freight routes to the
lease of the entire capacity of one or more aircraft with crew, also known as a
"wet-lease." Also included in scheduled cargo services is revenue generated from
the Kalitta Companies' overnight freight service operating within a network of
45 North American cities, and from the Kalitta Companies' consolidated 60%
partnership interest in American International Cargo ("AIC"), which flies
scheduled routes from the West Coast of the United States to the Pacific Rim.

On-demand cargo services are derived from single trip or short-term
airfreight customers. Customers may be charged in one of two ways, (i) an
"all-inclusive" flat fee on the basis of the aircraft type and number of miles
to be flown, or, (ii) the customer may charter the aircraft on an ACMI basis
where the customer pays a negotiated rate for each "block hour" during which the
aircraft is operating under its own power. This rate covers the cost to operate
the aircraft, including crew, the cost of scheduled maintenance, insurance and
ground support. Additional fees may be applicable for such costs as fuel,
handling and ramp fees, customs support and ground transport.

With both scheduled and contract services, operating costs such as fuel,
landing rights and cargo handling are either (i) paid directly by the customer
or (ii) included in the contract price and paid by the Kalitta Companies.

46
<PAGE> 50

Revenues from passenger charter services consist principally of
arrangements with tour operators for the transport of leisure travelers to
domestic and international locations. The tour operators generally pay a fixed
price for the use of the aircraft and assume the risk for both the sale of seats
and any increase in fuel prices after a date fixed in the contract.

Revenues from third party maintenance services are generated from engine,
airframe and component repairs and overhauls provided to third parties.

Operating Expenses. Operating expenses consist of flight expenses,
maintenance, fuel, depreciation and selling, general and administrative ("SG&A")
expenses. Flight expenses are comprised principally of salaries and benefits for
crews and other flight related personnel, hull and liability insurance of
aircraft, aircraft and engine lease expense, crew travel and meal expenses, crew
training costs, navigational expenses and other expenses necessary to conduct
flight operations. Flight expenses attributable to crew salaries and benefits
are particularly sensitive to crew utilization. Crews are guaranteed a fixed
salary based upon 60 block hours per month. To the extent they actually fly less
than 60 hours, the expense attributable to the fixed portion of their salaries
is not offset by revenue. Crew utilization is measured by the actual hours flown
as a percentage of the crew member's 60-hour guaranty. Flight expenses also
include aircraft lease, or subcharter, expense incurred to lease or charter
aircraft from other airlines, as well as costs associated with the Kalitta
Companies' ground handling and flight planning operations.

Flight expenses associated with scheduled and charter services, such as
landing and parking fees and overflight fees are either paid directly by the
Kalitta Companies' customer or billed to the customer on a direct pass-through
basis. Pass-through expenses are offset by an equal amount of revenue derived
from inclusion of those expenses in the aggregate amount charged to the
customer.

Maintenance expenses are comprised principally of labor, parts and supplies
associated with the maintenance, repair and overhaul of the Kalitta Companies'
aircraft and engines and maintenance services provided by others. Costs
associated with major maintenance checks have been expensed when incurred. Kitty
Hawk capitalizes the costs of major maintenance checks and, after the Merger,
the Kalitta Companies' policies will be adjusted to conform with Kitty Hawk's
policies. Costs associated with the modification of aircraft from passenger to
freight capacity are capitalized when incurred and amortized over their expected
useful lives, ranging from 7 to 14 years, depending on the type of aircraft.
Maintenance expenses also include the cost of sales associated with third party
maintenance revenues.

Fuel expenses are comprised principally of fuel costs associated with the
Kalitta Companies' scheduled and chartered cargo and passenger services. Fuel
costs are either paid directly by the Kalitta Companies' customer or billed to
the customer on a direct pass-through basis and are offset by an equal amount of
revenue derived from inclusion of the fuel expense in the total price paid by
the customer.

Depreciation expenses are comprised principally of depreciation on
aircraft, aircraft components and ground equipment and the amortization of
capitalized airframe modifications and repairs.

SG&A expenses are comprised principally of salaries and benefits for sales,
administrative, accounting and information system personnel and corporate
executives. Also included in administrative expenses are commissions paid to
third party sales agents, advertising and marketing expenses and legal expenses.

47
<PAGE> 51

RESULTS OF OPERATIONS OF THE KALITTA COMPANIES

The following table sets forth, on a comparative basis for the periods
indicated, the components of the Kalitta Companies' gross profit (in thousands)
and the gross profit margin by revenue type:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Air freight carrier services:
Revenues........................ $298,081 100.0% $359,404 100.0% $388,193 100.0%
Costs of revenues............... 247,023 82.9 338,538 94.2 357,830 92.2
-------- ----- -------- ----- -------- -----
Gross profit.................... $ 51,058 17.1% $ 20,866 5.8% $ 30,363 7.8%
======== ===== ======== ===== ======== =====
Maintenance and other:
Revenues........................ $ 7,449 100.0% $ 14,279 100.0% $ 36,348 100.0%
Costs of revenues............... 4,484 60.2 9,135 64.0 22,316 61.4
-------- ----- -------- ----- -------- -----
Gross profit.................... $ 2,965 39.8% $ 5,144 36.0% $ 14,032 38.6%
======== ===== ======== ===== ======== =====
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------
1996 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Air freight carrier services:
Revenues............................................ $177,431 100.0% $182,352 100.0%
Costs of revenues................................... 167,520 94.4 194,115 106.5
-------- ----- -------- -----
Gross profit (loss)................................. $ 9,911 5.6% $(11,763) (6.5)%
======== ===== ======== =====
Maintenance and other:
Revenues............................................ $ 13,164 100.0% $ 14,488 100.0%
Costs of revenues................................... 7,942 60.3 10,200 70.4
-------- ----- -------- -----
Gross profit........................................ $ 5,222 39.7% $ 4,288 29.6%
======== ===== ======== =====
</TABLE>

48
<PAGE> 52

The following table presents, for the periods indicated, consolidated
income statement data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
REVENUES:
Air freight carrier services...... 97.6% 96.2% 91.4% 93.1% 92.6%
Maintenance and other............. 2.4 3.8 8.6 6.9 7.4
----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Flight............................ 37.8 45.2 35.4 36.0 41.8
Maintenance....................... 21.2 27.7 27.1 26.4 35.1
Fuel.............................. 18.8 14.6 19.5 21.3 18.0
Depreciation...................... 4.5 5.6 7.6 8.3 8.9
Selling, general and
administrative................. 4.3 5.8 5.2 5.3 5.7
Provision for doubtful accounts... 0.7 0.5 0.2 0.8 0.3
----- ----- ----- ----- -----
Total operating expenses............ 87.3 99.4 95.0 98.1 109.8
----- ----- ----- ----- -----
Operating income (loss)............. 12.7 0.6 5.0 1.9 (9.8)
----- ----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest expense, net............. (2.6) (3.9) (5.1) (5.3) (6.1)
Other income net.................. 0.9 5.3 0.3 0.8 0.8
----- ----- ----- ----- -----
Total other income (expense)........ (1.7) 1.4 (4.8) (4.5) (5.3)
----- ----- ----- ----- -----
Income (loss) before minority
interest.......................... 11.0 2.0 0.2 (2.6) (15.5)
Minority interest................... (0.9) (0.8) (0.2) (0.3) (0.1)
----- ----- ----- ----- -----
Net income (loss)(1)................ 10.1% 1.2% 0.0% (2.9)% (15.6)%
===== ===== ===== ===== =====
</TABLE>

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

(1) Prior to the Merger, the Kalitta Companies filed income tax returns under
Subchapter S of the U.S. Federal Income Tax Code. Therefore, all taxable
income or losses of each of the Kalitta Companies have passed through to the
sole shareholder of the Kalitta Companies.

SIX MONTHS ENDED AS OF JUNE 30, 1997 AS COMPARED TO THE SIX MONTHS ENDED AS OF
JUNE 30, 1996

Revenues. Revenues increased $6.2 million, or 3.3%, to $196.8 million in
first six months of 1997 as compared to $190.6 million in first six months of
1996. This increase reflected the increase of four aircraft available to the
Kalitta Companies on a weighted average basis over the first six months of 1997
compared to the first six months of 1996, including two Lockheed L-1011-200s
(one of which was modified from passenger to freighter configuration), one
Boeing 727-200 freighter and one Douglas DC-8-50 freighter.

Air freight carrier service revenue increased $4.9 million, or 2.8%, to
$182.3 million in the first six months of 1997 from $177.4 million in the first
six months of 1996. This increase resulted from three factors. First, the
addition of a Lockheed L-1011-200 freighter in late 1996 to the Los
Angeles-Honolulu route for AIC. Second, the Kalitta Companies realized the full
period effect of contract charter flights into and out of Brazil and Columbia,
which commenced late in the second quarter of 1996 when the Kalitta Companies
was awarded operating authority for these countries. Third, the Kalitta
Companies experienced an increase in the number of customers serviced in
on-demand cargo services.

Offsetting these increases, however, was (i) a reduction in the number of
aircraft leased to DHL Airways, Inc., (ii) a reduction in the number of aircraft
operated by the Kalitta Companies for Burlington and (iii) a decline in revenue
generated from flights operated for the U.S. Military. The decline in revenues
from the U.S. Military occurred because of increased competition for this
business, as well as an increase in contract awards to airlines able to provide
both freight and passenger service, the latter of which AIA was not qualified

49
<PAGE> 53

by the military to provide. The Kalitta Companies have recently become eligible
to provide passenger charter service for the U.S. Military.

Third party maintenance and other revenue increased $1.3 million or 10.1%,
to $14.5 million in the first six months of 1997 from $13.2 million in the first
six months of 1996. The Kalitta Companies increased third-party engine
maintenance work during the second half of 1996 and throughout the first six
months of 1997 as a result of new contracts with Lufthansa and International
Turbine.

Operating Expenses. Operating expenses increased by $29.3 million, or
15.7%, to $216.3 million for the first six months of 1997 from $187.0 million in
the same period in 1996. As a percent of revenues, operating expenses increased
to 109.8% for the first six months of 1997 from 98.1% in the same period in
1996. Flight expenses increased $13.6 million, or 19.8%, to $82.2 million for
the first six months of 1997 from $68.7 million in the same period in 1996. The
increase was due primarily to (i) an increase in crew labor and training costs,
(ii) increased subcharter expense and (iii) an increase in the overall level of
operating activity. Crew labor and training costs increased and average crew
utilization dropped to approximately 45% in the first six months of 1997
compared to approximately 53% in the prior year period, primarily as a result of
an increased number of crews hired and trained in advance of anticipated
increased levels of flight activity which did not materialize in part due to
delays in acquiring aircraft. Expenses also increased because the Kalitta
Companies were forced to subcharter three aircraft from third parties in order
to meet service commitments during periods of unscheduled maintenance on their
aircraft.

Maintenance expenses increased $18.8 million, or 37.3%, to $69.1 million in
the first six months of 1997, as compared to $50.3 million in the same six month
period in 1996. Maintenance expenses increased as a percentage of revenues to
35.1% from 26.4%. The increase was primarily attributable to (i) engine repairs
beginning in August 1996 relating to a Directive affecting the RB211 engines
that power the Lockheed L-1011 aircraft and unanticipated repairs and overhauls
on the JT3, JT8 and JT9 engines, (ii) start-up costs associated with the
preparation of two L-1011 aircraft to initiate the Company's wide-body passenger
charter service, (iii) a substantial increase in the number of aircraft serviced
at the Oscoda maintenance facility and the related costs of components and
aircraft parts and (iv) the addition of personnel required to perform the
increased levels of aircraft maintenance and repair in the Kalitta Companies'
facilities.

Fuel costs decreased $5.1, million, or 12.6%, to $35.5 million for the six
months ended June 30, 1997, as compared to $40.6 million in the same period in
1996. This decrease was attributable to a drop in the amount of charter activity
for the U.S. Military. The Kalitta Companies' contracts with the U.S. Military
include the cost of fuel in the contract price. Consequently, fuel expense is
directly offset by revenue attributable to the fuel cost portion of the contract
price.

Depreciation expense increased $1.6 million, or 10.2%, to $17.5 million for
the six months ended June 30, 1997 from $15.8 million for the same period in
1996, primarily as a result of the increase in the number of aircraft in the
Kalitta Companies' fleet during the latter part of 1996 and in 1997.

Selling, general and administrative expenses increased $1.2 million, or
11.9%, to $11.3 million for the six months ended June 30, 1997 from $10.1
million for the six months ended June 30, 1996, primarily due to increased
payroll related costs. Administrative understaffing, the expansion of
maintenance operations and increases in overall activity generated the need for
increased support personnel in the areas of information systems, human resources
and sales and marketing. In addition, the Kalitta Companies experienced an
increase in fees associated with its indebtedness over the latter part of 1996
and into the first six months of 1997.

As a result of the above facts, the Kalitta Companies experienced an
operating loss of $19.4 million (9.9% of revenue) during the six months ended
June 30, 1997 compared to an operating income of $3.6 million during the six
months ended June 30, 1996.

Other Income (Expense). Net interest expense increased $1.9 million, or
18.8%, to $12.1 million in the six months ended June 30, 1997 from $10.2 million
in the six months ended June 30, 1996. The increase was due to increased
borrowings relating to the acquisition of new aircraft and ground support
equipment, as well

50
<PAGE> 54

as increased borrowings under the Kalitta Companies' revolving credit line. The
average interest rate on the Kalitta Companies' borrowings decreased to 9.5%
from 9.9% in the prior year period.

Gain on disposition of property and equipment, net, increased $0.6 million
to $1.0 million for the six months ended June 30, 1997, as compared to $0.4
million for the first six months of 1996. The increase resulted from the sale of
one Boeing 727-100 passenger aircraft in January 1997.

Minority Interest. Minority interest represents the earnings attributable
to the 40% of AIC owned by a third party. Minority interest increased $0.4
million to $0.9 million for the first six months of 1997, as compared to $0.5
million for the same period in 1996. The increase is attributable to higher
earnings at AIC resulting from the addition of a Lockheed L-1011 aircraft to the
Los Angeles-Honolulu route and the implementation of inter-island service in
Hawaii.

YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenues. Revenues increased $50.8 million, or 13.6%, to $424.5 million in
1996 from $373.7 million in 1995. This was due to an increase in scheduled cargo
revenues and to an increase in the average number of aircraft available. In
1996, the Kalitta Companies added four Lockheed L-1011s, three Boeing 727s, one
DC-8-50 and three additional Hansa aircraft to their fleet.

Air freight carrier service revenues increased $28.8 million, or 8.0%, to
$388.2 million in 1996 from $359.4 million in 1995. This increase was due to
four factors. First, the Kalitta Companies increased the number of cities served
by its overnight cargo service and introduced a second-day product. Second, AIC
introduced inter-island flights in the Hawaiian Islands in December 1995, and
added a second Lockheed L-1011 to its Los Angeles-Honolulu route. Third, the
Kalitta Companies obtained new contract work for International Air Charter,
AeroFloral and Fast Air, as well as additional charter work for the U.S.
Military. Fourth, passenger charter revenues increased as a result of the
Kalitta Companies decision to enter the passenger charter market for leisure
travel in the fourth quarter of 1996.

Offsetting these increases was a decrease in revenues due to the loss of
the U.S. Postal Service (the "Postal Service") Christmas Network ("CNET")
contract. In 1995, the Kalitta Companies' revenues from CNET were approximately
$42.9 million, $4.1 million of which represented fuel charges passed-through to
the Postal Service and booked by the Kalitta Companies as an expense.

Third party maintenance revenue increased $22.1 million or 154.6%, to $36.3
million in 1996 from $14.2 million in 1995. This is due to engine maintenance
contracts with Lufthansa and Spirit Airlines which were executed in 1996, as
well as increased activity for the Kalitta Companies' small engine maintenance
division because of continuous expansion of its customer base and the business
failure of a competitor.

Operating Expenses. As a percentage of total revenues, operating expenses
decreased to 95.0% of revenues in 1996 from 99.4% in 1995. This decrease was
largely due to the costs to hire and train flight and maintenance crews in 1995
in anticipation of the expansion of the Kalitta Companies' fleet in 1995.

Flight expenses decreased $18.5 million, or 11%, to $150.3 million in 1996
from $168.8 million in 1995. The operation of additional aircraft in the latter
part of 1995 with crews hired and trained in 1995 caused crew utilization in
1996 to increase to 52.0%, as compared to 44.0% in 1995. As a consequence, the
Kalitta Companies were able to better absorb labor and benefit costs associated
with these crews in 1996 than in 1995. Training costs associated with the
reduction in the average number of crews decreased $0.4 million in 1996, as
compared to 1995. Flight expenses also decreased because (i) the Kalitta
Companies lost the 1996 CNET contract to Kitty Hawk which eliminated costs
associated with the subcharter in 1995 of several aircraft required to fulfill
the contract, (ii) the Kalitta Companies purchased a Boeing 747 freighter in
June of 1996 that it had been leasing and (iii) subcharter expense for KFS
decreased $1.5 million in 1996 as compared to 1995 because of an increase in
available aircraft. These decreases were offset by increases in revenue related
costs such as parking, air navigation and landing fees and ground handling costs
resulting from increased flight activity in 1996 as compared to 1995.

51
<PAGE> 55

Maintenance expense increased $11.7 million, or 11.3%, to $115.1 million in
1996 from $103.4 million in 1995. The increase was due to extensive engine
maintenance and overhaul costs incurred in 1996 as compared to 1995 and, in
part, as a consequence, an increase in employee-related maintenance costs. The
increase was partially offset by a decrease in both maintenance work performed
for the Kalitta Companies by outside parties and in the number of contract
laborers which had both been used in 1995 to complete significant maintenance
checks on a number of the Kalitta Companies' aircraft.

Fuel costs increased $28.2 million, or 51.7%, to $82.7 million in 1996 from
$54.5 million in 1995 because of an increase in charter activity for the U.S.
Military, increased flight activity for on-demand charters, and fuel price
increases during the latter half of 1996. This increase, however, did not have
as significant an effect on the Kalitta Companies' results of operations because
the increased fuel costs were included in the charges to customers and booked as
revenues which offsets fuel expense.

Depreciation expense increased $11.1 million, or 53.0%, to $32.1 million in
1996, as compared to $21.0 million in 1995 due to an increase in the number of
aircraft brought into the Kalitta Companies' fleet during the latter part of
1995 and present during all of 1996.

Selling, general and administrative expenses increased $0.2 million, or
1.0%, to $21.9 million in 1996 from $21.7 million in 1995. This increase was
attributable to increases in administrative payroll related costs during 1996
over 1995.

Other Income (Expense). Interest expense net increased $6.9 million, or
46.7%, to $21.6 million in 1996 from $14.7 million in 1995, due to an increase
in indebtedness relating to the acquisition of aircraft and ground support
equipment and to an increase in the Kalitta Companies' revolving credit line.
Gain on disposition of property and equipment, net, decreased to $0.1 million
for 1996 from $11.7 million for 1995. The net gain in 1995 mainly represents the
sale of an aircraft engine, four Boeing 727-200 freighter aircraft, one Beech
aircraft, one Boeing 727-200 passenger aircraft and one Douglas DC-8-50
freighter aircraft.

Minority Interest. Minority interest in AIC decreased $2.0 million, or
64.5%, to $1.1 million in 1996 from $3.1 million in 1995. This decrease was due
to increased costs associated with additional aircraft service, the start-up of
inter-island service in Hawaii and an increase in cost for the use of aircraft.

YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994

Revenues. Revenues increased $68.2 million, or 22.3%, to $373.7 million in
1995 from $305.5 million in 1994. This was due to new contract cargo business
and additional aircraft capacity resulting from the completion of modification
from passenger to freighter configuration of 13 aircraft acquired by the Kalitta
Companies from late 1994 through the end of 1995, including one Lockheed
L-1011-200, one Douglas DC-8 and 11 Boeing 727-200s. KFS also added three
aircraft to its fleet in 1995.

Air freight carrier service revenues increased $61.3 million, or 20.6%, to
$359.4 million in 1995 from $298.1 million in 1994. This increase was due
primarily to three factors. First, an increase in the number of cities serviced
during 1995 over 1994 as well as an overall increase in lift capacity resulting
from both an increase in the average number of aircraft operated per night by
AIA and a change in the mix of the types of aircraft used by the Kalitta
Companies. Second, the impact of the full year effect of AIC's service to
Australia which commenced in the third quarter of 1994 led to increased revenues
along with the addition by AIC of a weekend round trip between San Francisco and
Honolulu in 1995. Third, six new contracts for which a majority of the revenues
were realized in 1995, as well as AIA's 1995 CNET contract for the Postal
Service during the holiday season led to increased revenues.

Offsetting these increases were decreases in revenues generated in 1995
from flights for the U.S. Military as compared to 1994.

Third party maintenance revenue increased $6.9 million or 93.2%, to $14.3
million in 1995 from $7.4 million in 1994. This was due to an increase in
maintenance work for third parties.

Operating Expenses. As a percentage of total revenues, operating expenses
increased to 99.3% of revenues in 1995 from 87.4% in 1994. Most of the increase
resulted from the cost to hire and train flight and

52
<PAGE> 56

maintenance crews in connection with the expansion of the Kalitta Companies'
fleet of aircraft with Boeing 747-200, Lockheed L-1011 and Boeing 727-200
freighters. Also contributing to the increased percentage of costs to revenue
during 1995 was the one-time cost associated with the relocation of hub
operations from Ypsilanti, Michigan to Terre Haute, Indiana in May 1995 at a
cost of $3.1 million, including revenue lost by reason of both the direct costs
of the move and the resultant disruption in service. The Kalitta Companies made
the move to overcome operating restrictions at Willow Run Airport in Ypsilanti,
Michigan relating to adverse weather conditions and inadequate facilities.

Flight expenses increased $53.2 million, or 46.0%, to $168.8 million in
1995, as compared to $115.6 million in 1994. In anticipation of the expansion of
its fleet, the Kalitta Companies increased its number of pilots by an average of
182 pilots, a 54.0% increase. Because not all of the new aircraft for which
these pilots had been hired had yet been acquired or were still in modification,
crew utilization for 1995 was approximately 44% as compared to approximately 53%
in 1994. Additionally, travel and training costs associated with the new crew
members were approximately $2.6 million, with an additional training cost for
current crews of $1.3 million. Aircraft lease expense also increased 50.4% to
$19.4 million in 1995 from $12.9 million in 1994 for three reasons. First, the
Kalitta Companies leased a Boeing 747 aircraft to fulfill its obligations while
casualty damage to one of its own Boeing 747s was being repaired. Second, the
increase in the number of cities serviced forced the Kalitta Companies to
subcharter additional aircraft. Finally, flight expenses were higher in 1995
than in 1994 because of an increase in revenue-related costs such as landing,
air navigation and parking fees and ground handling costs.

Maintenance expenses increased $38.7 million, or 59.8%, to $103.4 million
in 1995 from $64.7 million in 1994 due to (i) an increase in regular, recurring
maintenance on aircraft resulting from the growth in size of the fleet, (ii)
unusually high maintenance costs because of special maintenance on damaged
aircraft, (iii) a decision to perform "C-Check" level maintenance on all of its
Boeing 727-200s while they were undergoing modification to freighters and (iv)
additional maintenance required on the Boeing 727-200s to meet FAA "Aging
Aircraft" requirements. See "Business -- Regulation." In conjunction with these
costs, employee-related costs increased $12.4 million, or 49.6%, to $37.4
million in 1995, as compared to $25.0 million in 1994. In addition, costs for
aircraft parts increased $12.8 million, or 50.8%, to $38.3 million in 1995 from
$25.5 million in 1994. Finally, outside maintenance labor costs increased during
1995 to meet peak maintenance demands throughout the year.

Fuel costs decreased $2.9 million, or 5.1%, to $54.5 million in 1995 from
$57.4 million in 1994 because of a decrease in contract cargo service for
customers where the Kalitta Companies were directly responsible for the cost of
fuel.

Depreciation expense increased $7.2 million, or 52.2%, to $21.0 million in
1995 from $13.8 million in 1994. This increase was the result of the significant
number of aircraft which were modified to freighters and placed in revenue
service during the second half of 1994 and in 1995, including two Boeing
747-200s, ten Boeing 727-200s, three Douglas DC-8s and one Lockheed L-1011
aircraft. KFS also added three aircraft to its fleet during 1995.

Selling, general and administrative expenses increased $8.4 million, or
63.2%, to $21.7 million in 1995 from $13.3 million in 1994. The majority of this
increase resulted from the addition of administrative staff to support
expansion. In addition, during 1995, the Kalitta Companies incurred $1.9 million
in consulting costs associated with improving its support systems.

Other Income (Expense). Interest expense net increased $6.7 million, or
83.8%, to $14.7 million in 1995 from $8.0 million in 1994 due to an increase in
indebtedness relating to the acquisition of aircraft, as well as the purchase of
related ground support equipment. Net gain on disposition of property and
equipment was $11.7 million in 1995, as compared to $3.4 million in 1994. The
gain in 1995 resulted from the sale of an aircraft engine, four Boeing 727-200
freighters, one Douglas DC-8 freighter, one Boeing 727-200 passenger aircraft
and one Beech aircraft.

In June 1995, one of the Kalitta Companies' Boeing 747 aircraft sustained
damage to the underside of its fuselage when wind shear conditions experienced
on approach to the Panama City airport caused the fuselage

53
<PAGE> 57

to drag over some fixed landing lights and received an insurance award of $11.2
million (net of a $250,000 deductible) as a result of the casualty. The Kalitta
Companies were able to use its own maintenance capability to complete repairs to
the aircraft and obtain spare parts from an owned airframe which had zero book
value. The cost incurred by the Kalitta Companies to complete the repair was
approximately $3.1 million. The excess insurance proceeds resulted in a gain.
However, the Kalitta Companies lost revenue during the 14 weeks while the
aircraft was out of service, incurred costs to maintain crews and maintenance
personnel and experienced the higher cost of increased use of a Boeing 747-200
freighter dry-leased to meet obligations to third parties while the damaged
aircraft was in repair.

Minority Interest. Minority interest in AIC increased $0.3 million, or
10.7%, to $3.1 million in 1995, as compared to $2.8 million in 1994 due to
increased revenue activities.

LIQUIDITY AND CAPITAL RESOURCES

Kitty Hawk. Kitty Hawk's capital requirements are primarily for the
acquisition and modification of aircraft and working capital. In addition, Kitty
Hawk has and will continue to have, capital requirements for the requisite
periodic and major overhaul maintenance checks for its air freight carrier
fleet. Kitty Hawk's funding of its capital requirements historically has been
primarily from a combination of internally generated funds, bank borrowings and
the proceeds of its initial public offering. In addition to purchasing aircraft,
Kitty Hawk has leased aircraft and entered into a sale leaseback for acquisition
transaction and may enter into similar transactions in the future.

Cash provided by operating activities was $11.9 million and $13.7 million
in the six months ended June 30, 1997 and 1996, respectively. As of June 30,
1997 and 1996, Kitty Hawk had working capital of $10.6 million and $6.4 million,
respectively.

On August 1, 1997 Kitty Hawk announced that it had reached an agreement
(the "727 Purchase Agreement") with American International Airways, Inc. ("AIA")
and certain of its affiliates to purchase sixteen Boeing 727-200 aircraft,
fifteen of which are in freighter configuration, for approximately $51 million.
The 727 Purchase Agreement was closed in September 1997. In connection
therewith, Kitty Hawk borrowed approximately $46 million pursuant to a new term
loan arrangement. See "Description of Certain Indebtedness -- Kitty Hawk Debt."
Kitty Hawk will perform AIA's ACMI contracts under which some of the aircraft
are now operating.

On August 14, 1996, Kitty Hawk entered into a Credit Agreement with Wells
Fargo Bank (Texas), National Association ("WFB") and Bank One, Texas, N.A.
("BOT") for a $15 million Revolving Credit Loans Facility (the "Revolving Credit
Facility"), an approximately $12.7 million Term Loans A Facility (the "Term
Loans A"), an approximately $11.2 million Term Loans B Facility (the "Term Loans
B") and a $10 million Term Loans C Facility (the "Term Loans C") (collectively,
the "Commitments"). As of August 14, 1997, approximately $3.5 million was
outstanding under the Revolving Credit Facility, approximately $10.6 million was
outstanding under Term Loans A, approximately $10 million was outstanding under
Term Loans B and $8.6 was outstanding under Term Loans C. Borrowings under these
Commitments bear interest at WFB's prime rate or, at Kitty Hawk's option, a
Eurodollar rate plus 1.5% to 2.0% based upon a debt-to-cash flow ratio of Kitty
Hawk.

Under the Credit Agreement, $10 million of proceeds of the Revolving Credit
Facility are restricted to use from time to time for interim financing of up to
$6.5 million per aircraft for aircraft acquisitions by Kitty Hawk; the remaining
$5 million of the Revolving Credit Facility may be used for general corporate
purposes, including interim financing for acquired aircraft that exceeds the
limits that apply to the restricted portion. Term Loans C must be used to
finance the purchase of one Douglas DC-9-15F hushkit and up to seven major
maintenance checks for jet aircraft.

The Revolving Credit Facility expires on December 31, 1998. Any advance
under the portion of the Revolving Credit Facility that is restricted to interim
financing for aircraft acquisition must repaid in full within 150 days of first
advance for the acquired aircraft. All advances under the Commitment for Term
Loans C must be made by April 29, 1998. The Term Loans A mature on March 31,
2002 and the Term

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<PAGE> 58

Loans B and C mature on March 31, 2003. The Commitments are cross-collateralized
and are secured by certain aircraft owned by Kitty Hawk, all aircraft acquired
with advances under the restricted portion of the Revolving Credit Facility
while those advances are outstanding, certain leases of aircraft and engines,
accounts, chattel paper, general intangibles and other personal property.

Kitty Hawk has two loans with 1st Source Bank. As of August 14, 1997, the
outstanding balance of the first loan was approximately $835,000. The loan bears
interest at 9.75%, is secured by a DC-9-15F and matures in May 2000. As of
August 14, 1997, the outstanding balance of the second loan was approximately
$1.2 million. The loan bears interest at 8.5%, is secured by a DC-9-15F and
matures in July, 2002. The 1st Source loans contain certain aircraft maintenance
covenants and provides that a change in Kitty Hawk's business is an event of
default upon which 1st Source may declare all or any part of the remaining
unpaid principal due and payable.

In November 1996, in connection with Kitty Hawk's acquisition of a
one-third undivided interest in four Falcon 20 jet aircraft, Kitty Hawk and the
two other co-owners of such aircraft entered into a five year, $4.3 million term
loan. The loan bears interest at a floating prime rate, is secured by the four
Falcon 20 jet aircraft and requires monthly payments of principal and interest.
Kitty Hawk's liability under such loan is limited to $2.0 million.

Capital expenditures were $39.5 million and $17 million for the six months
ended June 30, 1997 and 1996, respectively. Capital expenditures for the six
months ended June 30, 1997 were primarily for the overhaul of two JT8D-7 jet
engines and the purchase of (i) two Boeing 727-200 aircraft, (ii) cargo and
noise abatement modifications for two Boeing 727-200 aircraft, (iii) noise
abatement equipment with respect to one DC-9-15F aircraft, (iv) six
reconditioned JT8D-7 jet engines, (v) leasehold improvements to Boeing 727-200
aircraft, (vi) the leasehold and improvements of its 40,000 square foot
headquarters facility, (vii) major maintenance checks and (viii) ground service
equipment. Capital expenditures for the six months ended June 30, 1996 were
primarily for the purchase of (i) three Boeing 727-200 aircraft and (ii) cargo
and noise abatement modifications for two Boeing 727-200 aircraft.

Pursuant to a registration statement on Form S-1 (Reg. No. 333-8307),
effective October 9, 1996, Kitty Hawk sold in an initial public offering
2,700,000 shares of Common Stock, raising net proceeds of approximately $29.3
million to purchase and modify to cargo configuration five Boeing 727-200
aircraft. As of August 14, 1997, Kitty Hawk has used approximately $22.3 million
of the net proceeds of the initial public offering to fund these expenses. Kitty
Hawk has purchased (i) one Boeing 727-200 freighter aircraft for $4.4 million,
(ii) one Boeing 727-200 aircraft for $2.3 million which is being modified to
cargo configuration for an additional cost of approximately $3.5 million
(including approximately $2.2 million for noise abatement equipment), (iii) one
Boeing 727-200 aircraft for $3.5 million which was modified to cargo
configuration for an additional cost of approximately $5.0 million (including
noise abatement equipment for approximately $2.5 million) and (iv) one Boeing
727-200 aircraft for $3.5 million which was placed into revenue service as a
leased passenger aircraft until its next major maintenance check (approximately
3,000 flight hours) at which time Kitty Hawk currently anticipates modifying the
aircraft to cargo configuration for an additional cost of approximately $5.0
million (including $2.5 million for noise abatement equipment).

In December 1996, Kitty Hawk amended its agreement with its supplier of
noise abatement equipment to increase the number of hushkits it has firmly
committed to purchase and to establish fixed prices. In connection with this new
agreement, Kitty Hawk paid the vendor an additional $350,000 in deposits on
future, firm orders valued between $13 and $17.5 million, depending on type
selected. In fiscal year 1997, Kitty Hawk anticipates an aggregate capital
expenditure of $4.3 million for noise abatement modifications, which Kitty Hawk
believes represents the total capital expenditures that would currently be
necessary to comply with the requirements of existing applicable environmental
regulations for such fiscal year. In fiscal year 1998, Kitty Hawk anticipates an
aggregate capital expenditure ranging from $9 million to $11 million for noise
abatement modifications to aircraft currently owned. In fiscal year 1998, Kitty
Hawk anticipates an aggregate capital expenditure ranging from $18 million to
$20 million for noise abatement modifications to aircraft currently proposed to
be purchased. In the event Kitty Hawk acquires more aircraft than currently
proposed, Kitty

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<PAGE> 59

Hawk's anticipated aggregate capital expenditures for noise abatement
modifications in fiscal year 1998 could materially increase.

As of June 30, 1997, Kitty Hawk's revenue fleet is comprised of 25 owned
and 3 leased aircraft, which includes 16 Boeing 727-200 aircraft manufactured
between 1969 and 1978, 5 Douglas DC-9-15F aircraft manufactured during 1967 and
1968 and 7 turbo-prop Convairs manufactured between 1948 and 1957. Of Kitty
Hawk's revenue fleet of 28 aircraft, Kitty Hawk operates 26 aircraft in active
revenue service and is in the process of converting two Boeing 727-200 aircraft
to cargo configuration. Kitty Hawk anticipates converting an additional Boeing
727-200 aircraft to cargo configuration in 1998. These aircraft do not include
Kitty Hawk's undivided one-third interest in four Falcon 20 jet aircraft leased
to a third party operator. Service Bulletins and Directives issued under the
FAA's "Aging Aircraft" program or issued on an ad hoc basis cause certain of
these aircraft to be subject to extensive aircraft examinations and require
certain of these aircraft to undergo structural inspections and modifications to
address problems of corrosion and structural fatigue at specified times. It is
possible that additional Service Bulletins or Directives applicable to the types
of aircraft included in Kitty Hawk's fleet could be issued in the future. The
cost of compliance with such Directives and Service Bulletins cannot currently
be estimated, but could be substantial.

As of June 30, 1997, Kitty Hawk operated a fleet of 16 Boeing 727-200
aircraft all of which were previously converted from passenger configuration to
freighter configuration by the installation of a large cargo door and numerous
interior modifications related to the installation of cargo container handling
systems. The FAA has issued a proposed Directive, which if adopted, would limit
the cargo capacity of the Boeing 727s until certain modifications are made. See
"Business -- Aircraft Fleet."

Kitty Hawk historically has followed and currently intends to follow, a
policy of retiring Convairs at the time of their next scheduled major overhaul
maintenance checks rather than expending the amounts necessary to complete such
checks. Two Convairs have been retired since December 31, 1996.

The Kalitta Companies. The Kalitta Companies' capital requirements are
primarily for the acquisition and modification of aircraft, for the expansion
and improvement of maintenance and support facilities and infrastructure. In
addition, the Kalitta Companies have, and will continue to have, capital
requirements for the requisite and periodic routine overhaul maintenance on
aircraft. The Kalitta Companies also lease aircraft from time to time. Capital
needs have historically been funded with a combination of cash flow from
operations, aircraft sales and bank borrowings.

Cash provided by operating activities was $3.1 million and $22.7 million
for the first six months of 1997 and 1996, respectively. As of June 30, 1997,
the Kalitta Companies had cash and cash equivalents of $2.7 million, as compared
to $2.4 million as of June 30, 1996. The Kalitta Companies had a working capital
deficit of $222.4 million at June 30, 1997, compared to a deficit of $195.3
million at June 30, 1996. The decrease in cash flow from operating activities
was due primarily to the increase in net loss and a decrease in accounts
receivable for the first six months of 1997 as compared to the first six months
of 1996. Net cash provided by operating activities was $26.4 million, $49.9
million and $32.6 million in 1996, 1995 and 1994, respectively.

Net cash used in investing activities was $10.8 million and $19.8 million
for the six months ended June 30, 1997 and 1996, respectively. Total capital
expenditures decreased 52.5% to $14.1 million for the six months ended June 30,
1997 from $29.7 million for the same period in 1996. Expenditures in the first
six months of 1996 represented the purchase of additional aircraft and
capitalization of costs to modify the aircraft to freighter configuration. Net
cash used in investing activities was $42.4 million, $121.3 million and $71.3
million in 1996, 1995 and 1994, respectively, and primarily represented
additional aircraft added to the fleet, flight equipment acquired and
capitalized airframe maintenance. Net cash used in investing activities in 1995
included costs of modification of the Kalitta Companies' Boeing 727-200 aircraft
to freighters as a majority of these aircraft were acquired in 1994 and were
placed in revenue service throughout 1995.

Net cash provided by financing activities was $8.1 million for the six
months ended June 30, 1997 as compared to net cash used in financing activities
of $1.6 million in the six months ended June 30, 1996. Net cash provided by
financing activities was $17.2 million, $67.8 million and $42.3 million in 1996,
1995 and

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<PAGE> 60

1994, respectively. Cash provided by financing activities for each year
primarily represented additional borrowings to fund the Kalitta Companies'
acquisition of aircraft and equipment and to assist in funding operations during
those years.

The Kalitta Companies' liquidity is affected by the seasonal nature of
their businesses. Primarily because of the increase in airfreight during the
Christmas holiday season, a significant portion of the revenues are earned in
the fourth calendar quarter. During the first quarter, the Kalitta Companies
typically experience lower levels of utilization and yields as demand for cargo
charters is reduced relative to other times of the year.

The Kalitta Companies have a revolving credit and term loan facility under
an Amended and Restated Credit Agreement, as amended (the "Kalitta Companies
Credit Agreement"), with Comerica Bank, Detroit, Michigan ("Comerica") and
Heller Financial, Inc. ("Heller"). Under the Kalitta Companies Credit Agreement,
the Kalitta Companies may borrow up to $55 million on a revolving credit basis,
subject to a borrowing base formula (the "Credit Facility"). In addition, the
Kalitta Companies may borrow up to an additional $5 million, subject to a
borrowing base formula (the "Second Credit Facility"). As of June 30, 1997, the
outstanding principal balance on the Credit Facility was $55 million and the
outstanding principal balance of the Second Credit Facility was approximately
$4.6 million.

Amounts outstanding under the Credit Facility bear interest at a per annum
variable rate equal to Comerica's prime rate plus 1.25% (subject to certain
adjustments as set forth in the Credit Agreement), and AIA and KFS are obligated
to make monthly payments of accrued interest. All of the indebtedness under the
Credit Facility must be repaid by December 9, 1999.

Pursuant to the Credit Agreement, Comerica has made two additional loans to
AIA to finance aircraft acquisitions, one in the principal amount of $13.8
million outstanding on June 30, 1997 (the "Bridge Loan"), and the other in the
principal amount of $3.9 million outstanding on June 30, 1997 (the "Mortgage
Loan"). Both the Bridge Loan and the Mortgage Loan are payable in monthly
installments of principal and interest with interest accruing at Comerica's
prime rate, plus 2% and 1.75%, respectively. The Bridge Loan is due on December
9, 1999, and the Mortgage Loan on May 19, 1999.

In addition, AIA has a term loan from Comerica (the "Term Loan") under a
separate term loan agreement (the "Term Loan Agreement") to which Heller is not
a party. AIA used the Term Loan to refinance certain other indebtedness owed to
Comerica. As of June 30, 1997, the outstanding principal balance of the Term
Loan was $13.9 million. The principal balance accrues interest at a per annum
variable rate equal to Comerica's prime rate plus two percent, subject to
certain adjustments. The Term Loan is payable in equal monthly principal
installments of approximately $309,090 plus accrued interest until February 15,
2001, when the entire outstanding principal amount and all accrued interest is
due.

The loans under the Credit Agreement and the Term Loan Agreement are
secured by substantially all of the assets of AIA, KFS and FOL, except for
certain assets pledged to other lenders and for certain real estate. In
addition, the Credit Agreement contains restrictions on the ability of AIA, KFS
and FOL to pledge assets to their respective future lenders. AIA and Mr. Kalitta
have guaranteed all indebtedness owing to Heller and Comerica by KFS or FOL; and
Mr. Kalitta, KFS and FOL have guaranteed all indebtedness owed to Heller and
Comerica by AIA.

The Credit Agreement, Term Loan Agreement and related documents contain a
number of restrictive covenants, as well as affirmative covenants requiring the
maintenance of certain financial conditions. At December 31, 1996 and continuing
in 1997, the Kalitta Companies were in violation of these covenants, as well as
other covenants contained in the Credit Agreement and the related documents. See
"Risk Factors -- Recent Financial Performance of the Kalitta Companies."

The Kalitta Companies have generally financed the acquisition and, when
necessary, the modification of aircraft to freighter configuration, with the
proceeds of financings secured by airframes, engines and, in some cases, ground
handling equipment. Sources for this type of financing presently include
Comerica, FINOVA Capital Corporation ("Finova"), First National Bank of Ohio,
Sanwa Business Credit Corporation, NationsBank (formerly known as Boatmen's
National Bank of Saint Louis), 1st Source Bank, Fleet Credit

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<PAGE> 61

Corporation, General Electric Capital Corporation, First Security Bank National
Association, as trustee, Morgans Waterfall, BSI Nassau (Bahamas), Michigan
National Bank and Concord Capital Corporation.

As of June 30, 1997, total indebtedness of the Kalitta Companies (excluding
payables, accrued liabilities, minority interest and indebtedness incurred under
the Credit Facility) was approximately $188.8 million, approximately $71.5
million of which was held by Finova. Approximately $128.5 million of this
indebtedness accrues interest at fixed rates ranging from 6.4% to 18.0% per
annum, while the remainder accrues interest at variable rates ranging from one
to four percent over a specified per annum prime or other base rate. Maturities
of term indebtedness range between one and seven years, with current maturities
at June 30, 1997 of approximately $43.8 million.

The Kalitta Companies have been and continue to be in default with respect
to essentially all of their lenders, including Comerica and Finova. The defaults
relate to non-compliance with certain financial, operating and other covenants
that restrict the activities of the Kalitta Companies. These covenants restrict,
among other things, the ability to grant liens, incur indebtedness, make capital
expenditures, make investments, prepay debt, pay dividends and redeem equity.
See "Risk Factors -- Recent Financial Performance of the Kalitta Companies."

Substantially all of the indebtedness of the Kalitta Companies will be
retired with the net proceeds of this Common Stock Offering and the Note
Offering, subject to the payment of approximately $3 million in prepayment
penalties. See "Use of Proceeds."

The Company. The Company believes that available funds, bank borrowings and
cash flows expected to be generated by operations, along with the net proceeds
of this Common Stock Offering and the Notes Offering, will be sufficient to meet
its anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. Thereafter, if cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
sell additional equity or debt securities or obtain additional credit
facilities. However, there can be no assurance that the Company will be able to
sell any additional equity or debt securities.

SEASONALITY

Kitty Hawk. Certain customers of Kitty Hawk engage in seasonal businesses,
especially the U.S. Postal Service and customers in the automotive industry. As
a result, Kitty Hawk's air freight charter logistics business has historically
experienced its highest quarterly revenues and profitability during the fourth
quarter of the calendar year due to the peak Christmas season activity of the
U.S. Postal Service and during the period from June 1 to November 30 when
production schedules of the automotive industry typically increase.
Consequently, Kitty Hawk experiences its lowest quarterly revenue and
profitability during the first quarter of the calendar year.

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<PAGE> 62

The following table reflects certain selected quarterly operating results,
which have not been audited or reviewed, for each quarter since the fiscal
quarter ended August 31, 1994. The information has been prepared on the same
basis as the Consolidated Financial Statements of Kitty Hawk appearing elsewhere
in this Prospectus and includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the information
shown. Kitty Hawk's results vary significantly from quarter to quarter and the
operating results for any quarter are not necessarily indicative of the results
that may be expected for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED ONE MONTH QUARTER ENDED
----------------------------------------------------------------- ENDED --------------------
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1996 1996 1996 1996 1996 1997 1997
------------ ------------ ------- ---------- ------------ ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues....... $36,045 $48,577 $22,504 $35,289 $25,414 34,572 $28,102 $32,366
Gross profit......... 5,936 8,190 3,265 6,124 5,118 7,288 5,355 7,451
Operating income..... 3,564 2,447 897 2,126 2,851 5,868 2,571 4,679
Net income........... 1,956 1,273 182 698 1,632 3,661 1,414 2,561
Net income per
share.............. $ 0.25 $ 0.16 $ 0.02 $ 0.09 $ 0.18 $ 0.37 $ 0.14 $ 0.25
</TABLE>

Kalitta Companies. Certain customers of the Kalitta Companies engage in
seasonal businesses, especially the U.S. Postal Service and customers in the
automotive industry. As a result, the Kalitta Companies business has
historically experienced its highest quarterly revenues and profitability during
the fourth quarter of the calendar year due to the peak Christmas season
activity of the U.S. Postal Service and during the period from June 1 to
November 30 when production schedules of the automotive industry typically
increase. Consequently, the Kalitta Companies experience their lowest quarterly
revenue and profitability during the first quarter of the calendar year.

The following table reflects certain selected quarterly operating results,
which have not been audited or reviewed, for each quarter since the fiscal
quarter ended December 31, 1994. The information has been prepared on the same
basis as the Combined Financial Statements of the Kalitta Companies appearing
elsewhere in this Prospectus and includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the
information shown. The Kalitta Companies' results vary significantly from
quarter to quarter and the operating results for any quarter are not necessarily
indicative of the results that may be expected for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue............................ $ 84,303 $106,292 $110,417 $123,529 $ 92,898 $103,943
Gross profit (loss)...................... (1,440) 16,573 14,921 14,341 (12,058) 4,583
Operating income (loss).................. (6,626) 10,233 8,707 9,180 (17,940) (1,503)
Net Income (loss)........................ $$(12,019) $ 6,461 $ 2,771 $ 2,770 $(22,786) $ (8,157)
</TABLE>

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<PAGE> 63

BUSINESS

The description of the business of the Company that follows is the business
of Kitty Hawk and the Kalitta Companies on a combined basis as if the Merger had
been consummated. The closing of this Common Stock Offering is conditioned on
the concurrent consummation of the Merger and the Note Offering.

GENERAL

The Company is a leading U.S. and international air freight carrier and the
leading provider of air freight logistics services for the delivery of freight
on a highly-reliable, time sensitive basis. The Company also provides air
passenger charter services and aircraft maintenance services.

INDUSTRY OVERVIEW

Air Freight Carrier Services. The market for air freight services is served
by an industry which is composed of (i) "door-to-door" express package delivery
companies such as Federal Express and United Parcel Service, (ii)
"freight-forwarders" that contract for air freight carrier service, (iii) air
freight carriers that provide scheduled air freight delivery service and (iv)
air freight carriers that provide on-demand charter service. These participants
in the air freight services industry provide same-day, next-day and/or two-day
delivery services. A number of air freight carriers, including the Company,
provide a combination of these services.

The Company directly participates in the same-day service segment of this
industry by providing (i) regularly scheduled air freight service between
certain airports, (ii) contract charter services and (iii) on-demand charter
services. The Company also participates indirectly in the next-day and two-day
freight delivery business by providing primary and additional lift capacity
through contract charters for integrated air freight companies (such as
Burlington Air Express, Inc., DHL Airways, Inc. and Emery Worldwide Airlines,
Inc.) on designated routes for specified time periods. The Company has also
historically provided contract charters for mail delivery for the U.S. Postal
Service. The Company does not engage directly in the next-day or two-day
"door-to-door" delivery business and, therefore, does not compete directly with
its customers in this segment.

According to the Boeing Report, the world air cargo market grew at an
average rate of more than 8% per year from 1970 to 1995 as measured in revenue
ton kilometers, more than 2.5 times the growth rate of world Gross Domestic
Product. Also, according to the Boeing Report, the world air freight market is
expected to increase at 6.7% annually through 2015. Management believes this
projected growth in the world air freight market will be fueled by many factors,
including economic growth, relaxation of international trade barriers,
increasingly time-sensitive product delivery schedules and increased use of
"just-in-time" inventory management systems as well as a shift towards dedicated
air freight carriers and away from utilizing cargo space in commercial airlines
due to the higher levels of service and reliability. The foregoing projected
growth rate is only an estimate and there can be no assurance that such rate of
growth will be achieved.

Air Freight Logistics Services. Demand for air freight charter logistics
services is driven by demand for same day delivery of time sensitive freight.
Factors which have contributed to the growth in demand for air logistics
services include (i) outsourcing -- an increasing number of companies requiring
same-day delivery of freight have decided to outsource air freight delivery
operations; (ii) "just-in-time" inventory management -- many manufacturers have
adopted just-in-time inventory management techniques which, while enhancing such
manufacturers' inventory turnover, increases the importance of just-in-time
delivery of needed component parts; and (iii) increased customer
expectations -- more companies are requiring suppliers to meet specified
delivery requirements in order to remain qualified as suppliers and such
suppliers will utilize same day air freight as necessary to meet these delivery
requirements.

In contrast to the market for next-day and two-day freight delivery
services, the Company believes that the market in North America for on-demand
charters is served by hundreds of air freight carriers, the vast majority of
which are privately held, operate from only one location and do not coordinate
"door-to-door" charter delivery services to the extent of the Company's air
logistics business.

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<PAGE> 64

Other. The Company believes there is a substantial market for aircraft
maintenance services in the United States and a trend towards a limited number
of providers of all levels of maintenance checks on large and small jet engines.
Because of the Company's comprehensive engine and aircraft maintenance
capabilities, management believes it is well positioned to capitalize on this
trend.

The Company's passenger charter airline primarily caters to leisure
travelers booking scheduled trips through tour operators and does not generally
compete with scheduled passenger airlines. In addition, U.S. passenger charter
operators have traditionally provided service to the U.S. Military to supplement
its lift capacity, particularly during times of conflict.

COMPETITIVE STRENGTHS

The Company believes that the following factors are competitive strengths
and promote strong relationships with its diversified customer base.

GROWTH STRATEGIES

The Company's revenue has grown significantly over the last several years
and the Company believes it can continue to increase revenues through the
following opportunities:

- Expansion of ACMI Charter Business. The Company believes there are, and
will continue to be, opportunities to obtain ACMI contracts with
international air carriers due to the projected shortage of wide-body
aircraft needed to service those carrier's markets. The Company intends
to expand its fleet of wide-body freighter aircraft by acquiring the
three MEA Boeing 747s. The Company plans to focus its efforts in the
European, South American and Asia/Pacific markets and to connect route
systems in those markets with its scheduled North American route systems.

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<PAGE> 65

In addition to improving the utilization of the Kalitta Companies'
aircraft, the Company anticipates purchasing additional aircraft to
capitalize on this expected growth.

SERVICES
AIR CARRIER SERVICES

The Company uses a diversified fleet of four Boeing 747s, six Lockheed
L-1011s, 20 Douglas DC-8s, five Douglas DC-9s, 31 Boeing 727s and seven
turbo-prop Convairs to provide air freight services on (i) a regularly scheduled
basis between certain airports, (ii) a contract charter basis and (iii) an
on-demand charter basis.

Scheduled Freight Services

Domestic. The Company operates a scheduled airport-to-airport air freight
carrier service which provides overnight delivery to and from 45 cities in the
United States. Freight received each evening is delivered by 8:00 a.m. the next
day, Tuesday through Friday mornings, throughout the year. The majority of
overnight deliveries are routed through the Company's 90,000 square foot sorting
center located at the Hulman Regional Airport in Terre Haute, Indiana. In the
first six months of 1997, an average of 1,055 shipments, totaling approximately
442 tons of freight, were processed during each nightly primary sorting
operation at the Hulman Regional Airport. The Company's right to use its space
at the Hulman Regional Airport expires in August 1998. The Company is currently
negotiating an extension of this lease through the spring of 1999, at which time
the Company anticipates relocating its sorting operations from the Hulman
Regional Airport to the Fort Wayne-Allen County Airport in Fort Wayne, Indiana
in the spring of 1999. This new facility is expected to permit the Company to
handle nearly twice the sorting capacity of the Terre Haute facility. In
addition, the facility is designed to improve productivity by reducing the time
to load and unload aircraft and decreasing sorting times. See
"Business -- Facilities."

The Company's overnight operation caters primarily to freight-forwarders
and other cargo airlines which either handle ground transport themselves or
contract with others to do so. The Company competes with certain of these
companies that ship large and odd-sized freight, including the United Parcel
Service, Emery Air Freight and Burlington Air Express, as well as commercial
passenger airlines which provide freight service on their scheduled flights.

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<PAGE> 66

The Company's scheduled air freight service currently transports air
freight to and from airports located in 23 cities. In addition, the Company
contracts with third parties to transport freight between those 23 airports and
22 other airport locations at which the Company receives and delivers freight at
scheduled times. The following is a list of the current delivery locations for
the Company's scheduled operations:

<TABLE>
<CAPTION>
AIRPORT DELIVERY LOCATIONS TRUCK DELIVERY LOCATIONS
-------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Atlanta, GA Hartford, CT Philadelphia, PA Albany, NY Grand Rapids, MI Pittsburgh, PA
Baltimore, MD Kansas City, KS Phoenix, AZ Chicago, IL Indianapolis, IN South Bend, IN
Boston, MA Los Angeles, CA Portland, OR Cincinnati, OH Joplin, MO Springfield, MO
Charlotte, NC Miami, FL San Francisco/ Columbus, OH Louisville, KY St. Louis, MO
Cleveland, OH Minneapolis, MN Oakland, CA Dayton, OH Milwaukee, WI Tampa, FL
Dallas/Fort Memphis, TN Seattle, WA Detroit, MI Nashville, TN Wichita, KS
Worth, TX Newark, NJ Terre Haute, IN Washington, D.C. New York, NY
Denver, CO Orlando, FL Ypsilanti, MI Fort Wayne, IN Omaha, NE
El Paso, TX
</TABLE>

International. The Company provides scheduled international service through
American International Cargo ("AIC"), a general partnership in which the Company
owns a 60% interest. AIC was formed in October 1992. The 40% interest in AIC
which is not owned by the Company is owned by Pacific Aviation Logistics, Inc.,
which also serves as the managing partner of AIC.

AIC operates scheduled air freight service between Los Angeles and Honolulu
every Tuesday through Saturday and each Saturday, from Honolulu to the South
Pacific and Asia, including Pago Pago, Auckland, Melbourne, Singapore, Hong Kong
and Anchorage. AIC also operates scheduled air freight service five times per
week between Los Angeles and Honolulu and the Hawaiian Islands. AIC charters
from the Company under ACMI contracts a Boeing 747, a Lockheed L-1011 and a
Boeing 727 to provide these scheduled air freight services. The Company believes
the contracts for these services contain hourly rates that are below market
rates. However, the Company can adjust these rates at any time, other than the
hourly rate for the Boeing 747 which is fixed through the end of 1997. AIC is
responsible for the cost of fuel, landing fees and ground handling charges.

Contract Charter Freight Services

The Company provides air freight charter services on a contractual basis
for a variety of customers, including the U.S. Postal Service, the U.S. Military
and freight forwarders and other airlines including Burlington Air Express,
Emery Worldwide Air Freight Co., DHL Airways, Inc., Ting Hong Oceanic
Enterprises Co., Ltd., Pacific East Asia Cargo Airlines, Inc., Japan Airlines
and AeroLineas Argentina S.A.

ACMI Domestic. The terms of the Company's ACMI contracts vary, but they
typically require the Company to supply aircraft, crew, maintenance and
insurance, while its customers are responsible for substantially all other
aircraft operating expenses, including fuel, fuel servicing, airport freight
handling, landing and parking fees, ground handling expenses and aircraft
push-back costs. These ACMI contracts also typically require the Company to
operate specific aircraft and/or provide minimum air freight capacity and
generally are terminable if the Company (i) fails to meet certain minimum
performance levels, (ii) otherwise breaches the contract, or (iii) becomes
subject to other customary events of default. The Company is permitted under its
ACMI Contracts to utilize and, in fact often does utilize, its aircraft in
on-demand service in the periods between ACMI contract flights.

ACMI International. The Company operates ACMI contracts in foreign
countries as well as between the U.S. and foreign countries. The ACMI contracts
provide that the Company has exclusive operating control and direction of each
aircraft the Company operates and that certain foreign-based customers must
obtain any government authorizations and permits required to service the
designated routes. See "Risk Factors -- Government Regulation." Therefore, the
Company's route structure is limited to areas in which customers gain authority
from the relevant governments.

The Company currently supplies supplemental airlift capacity to the flag
carriers of five Central American countries, including Aviateca (Guatemala),
Taca International Airlines (El Salvador), Nica

63
<PAGE> 67

(Nicaragua), Copa (Panama) and Lacsa (Costa Rica). Because these airlines are
the national airlines of their respective countries, the Company receives
operating authority for each of those countries. The Company also has operating
authority for Brazil, Columbia and Ecuador. From its Miami location, the Company
currently operates four trips per week to Brazil pursuant to a contract with
International Air Charter and six trips per week to Cali and Medellin, Columbia
for AeroFloral for the shipment of fresh flowers. In addition, the Company
operates two Boeing 727 aircraft in ACMI service between countries in the
Pacific Rim.

U.S. Postal Service. The Company has historically performed a variety of
services for the U.S. Postal Service, ranging from regularly scheduled delivery
throughout the year to special contracts bid by the U.S. Postal Service to meet
increased demand during the Christmas holiday season. Similar to an ACMI
contract, the Company's contracts with the U.S. Postal Service generally allow
the Company to pass-through its fuel costs, landing charges and other variable
costs. Accordingly, the Company is not generally at risk of loss in the event
these variable costs increase during the term of these fixed-price arrangements.

Since 1993, the Company has been the prime contractor for the "Christmas
Network" established by the U.S. Postal Service to provide air transportation
and ground handling services primarily for second-day mail among a network of
domestic cities during the December holiday rush. The U.S. Postal Service awards
contracts periodically pursuant to a public bidding process that considers
quality of service and other factors, including to a lesser extent price. The
Company is currently making scheduled mail flights from Seattle to Anchorage for
the U.S. Postal Service six days per week. The Company's contract for this
service runs through February 1998 and is subject to annual renewal by either
the Company or the U.S. Postal Service. This contract may be canceled by either
party upon 30 days notice.

U.S. Military. The Company has historically provided air freight charter
services for the U.S. Military. The U.S. Military pays the Company's fuel costs,
landing fees and other variable charges. The Company has recently become
eligible to operate passenger charters for the U.S. Military. The Company
believes that its ability to provide both air freight and air passenger charter
service to the U.S. Military will enhance its ability to obtain contract
charters for the U.S. Military.

On-Demand Charter Freight Services

The Company's aircraft are utilized to fly on-demand charters for customers
of the Company's air logistics business. Approximately 7.1%, 8.7%, 9.8% and 8.7%
of the on-demand charters managed by Kitty Hawk during fiscal years 1994, 1995
and 1996 and the six months ended June 30, 1997, respectively, were flown on
Kitty Hawk's aircraft. With the addition of the Kalitta Companies aircraft upon
consummation of the Merger, the Company will direct a higher percentage of
on-demand charters to its fleet, rather than to third party carriers. On-demand
contract charters flown on the Company's aircraft generate a higher gross margin
to the Company than charters subcontracted to third party carriers. Another
on-demand service provided by the Company is medical air ambulance services.

Air Passenger Charters

The Company operates a fleet of 32 passenger configured aircraft, including
two Boeing 747s, two Lockheed L-1011s, 19 Lear jets and 9 other small aircraft.
The Company's principal customers for large aircraft air passenger charters are
independent tour operators, cruise lines, sponsors of incentive travel packages
and specialty charters and passenger airlines that "wet" lease aircraft. Sales
to tour operators represent the most significant portion of the Company's
passenger charter business. These leisure-market programs are generally
contracted for repetitive, round-trip patterns, operating over extended periods
of time. The tour operator pays a fixed price for use of the aircraft and
assumes responsibility and risk for the actual sale of the available aircraft
seats and fuel increases. The Company also operates on-demand passenger charter
flights using large and small aircraft.

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<PAGE> 68

AIR FREIGHT CHARTER LOGISTICS SERVICES

General. The Company is the leading provider of same-day air freight
charter logistics services in North America. The Company arranges the delivery
of time sensitive freight utilizing aircraft of third party air freight carriers
as well as its own fleet. On-demand air charters of freight generally are used
when "next-flight-out" delivery services of commercial airlines or the next-day
delivery services of air freight companies or other service providers cannot
meet the customer's delivery deadline. The Company's air freight logistics
services involve coordinating "door-to-door" transportation by arranging for
ground pick-up, loading, air transportation, unloading and ground delivery of
the freight. The Company has managed a broad variety of freight shipments
including military equipment, satellites, rescue/disaster recovery supplies and
exotic animals.

The customers of the Company's on-demand air freight charter logistics
services include companies that are engaged in industries such as automotive,
chemical, computer, mail and bulk package delivery, retail merchandising and oil
field service and equipment. Typically, the premium costs incurred in utilizing
on-demand charters to achieve expedited same-day delivery are justified by the
Company's customers on the basis that greater costs would otherwise be incurred
as a result of a work stoppage or having to maintain greater inventory levels.

For the six months ended June 30, 1997, Kitty Hawk arranged an average of
approximately 37 on-demand charters per day and has arranged as many as 208
charters in a single day. The Company believes it provides dependable service on
a cost-effective basis because of its computerized database, information
software and tracking systems, its training of account managers and its
standardized charter management procedures. The Company provides logistics
services 24 hours per day, 365 days per year.

Database, Information Software and Tracking Systems. The Company believes
that its database is critical to its ability to arrange on-demand air charters
in a timely and reliable manner. The Company maintains in its database a
detailed carrier profile for over 500 air freight carriers that provide
on-demand charter service and information concerning ground transportation and
aircraft loading companies in North America. The Company has implemented an
Internet system to provide its account managers with real-time updates on
available third party on-demand charter aircraft across North America. The
Company believes that this system enables it to meet customer demands more
efficiently and quickly. In addition, the Company anticipates developing
additional Internet systems to market its services to firms engaged in direct
marketing over the Internet.

The Company's logistics system was developed in 1990 to automate access to
the Company's database and has been frequently revised and improved. This system
provides on-screen information regarding air carriers, aircraft type and
specifications, fuel suppliers, cargo handlers and surface carriers, along with
relevant cost information. In addition, the Company is an on-line subscriber to
Jeppesen's Flight Planning and Kavouras Meteorological services. The flight
planning services provided by Jeppesen integrate airport analyses (comprised of
runway lengths, altitudes, hours of operation and noise abatement procedures)
with current weather data and other information necessary to provide an
automated flight plan. This flight planning service then transmits
electronically the automated flight plan to the pilot and to the FAA
contemporaneously.

The Company operates a proprietary software system ("HawkEye"), which was
developed internally by its full time programming and computer support staff.
HawkEye allows account managers to track an aircraft's progress from origin to
destination on his or her computer screen and on the control room's main
projection board. Aircraft icons show each flight, its direction and information
about the flight including the type of aircraft, the flight number, its current
altitude, ground speed, distance to destination and times of departure and
estimated arrival. The data supporting HawkEye is a direct data feed obtained
from the FAA's Air Traffic Control computer system. The Company believes that
its computer systems are generally year 2000 compliant.

AIRCRAFT MAINTENANCE SERVICES

General. The Company is one of the few dedicated air freight carriers in
the world capable of maintaining and repairing its own aircraft fleet, which
range in size from its Boeing 747s to its small prop aircraft. As a result, the
Company has the capacity to provide aircraft maintenance services to other
aircraft operators. The

65
<PAGE> 69

Company's maintenance services to third parties include primarily engine
overhauls and air frame repairs. In the last year, the Company serviced the
aircraft of Lufthansa, Spirit Airlines and Aero California. The Company has
extensive maintenance facilities in Oscoda and Ypsilanti, Michigan and Dallas,
Texas. Maintenance services at these facilities operate twenty-four hours per
day, seven days per week. See "Business -- Facilities" below.

Engine and Airframe Maintenance. The Company provides FAA-certified
inspection, maintenance, overhaul and repair services for large and small jet
engines and auxiliary power units at both the Ypsilanti and Oscoda facilities,
including all levels of maintenance checks on large and small jet engines and
auxiliary power units. The Company also performs all levels of aircraft
maintenance checks, as well as modifying certain aircraft from passenger to
freighter configuration. In addition, the Company performs avionics maintenance,
component overhaul, strip and paint operations, sheet metal fabrications and
repair and other related services. The Company believes that it is one of a
limited number of providers of all levels of maintenance checks on large and
small jet engines for third parties.

Aircraft Components, Instruments and Accessories. The Company is certified
by the FAA to service the aircraft and engine accessories used in its fleet.
These accessories include hydraulic, pneumatic, electrical, mechanical and
electronic aircraft components. The Company also maintains an FAA-approved
station for repair of a wide variety of cockpit instrumentation. This portion of
the Company's business, operated as the Aerodata Aircraft Instrument Division,
services instrumentation, not only for the Company, but also for outside
customers, including the Pentastar Aviation Division of the Chrysler
Corporation, Reliant Airlines and American Trans Air, Inc.

AIRCRAFT FLEET

As of June 30, 1997, the Company operated 121 aircraft in revenue service.
The following is a summary of certain information on the Company's current fleet
of large and small aircraft, including those which are leased by the Company
from third parties:

Large Aircraft

<TABLE>
<CAPTION>
MANUFACTURER NUMBER STAGE III
AND MODEL SERIES(1) NUMBER CONFIGURATION MAXIMUM PAYLOAD(2) COMPLIANT(3)
- --------------- --------- -------- ------------- ------------------------ ----------------
<S> <C> <C> <C> <C> <C>
Boeing 747 200 2(4) Freight 213,000-245,000 lbs. 2
Boeing 747 100 2 Freight 218,000 lbs. 2
Boeing 747 100 2 Passenger 476 passengers 2
Lockheed L-1011 200 6 Freight 125,000 lbs. 6
Lockheed L-1011 200 2 Passenger 354 passengers 2
Douglas DC-8 60 11 Freight 80,000-112,000 lbs. 6
Douglas DC-8 50 9 Freight 58,500-97,300 lbs. 0
Boeing 727 200 28(5)(6) Freight 44,000-63,000 lbs. 11
Boeing 727 100 3(5) Freight 40,000-54,500 lbs. 0
Douglas DC-9 15F 5 Freight 22,000-24,000 lbs. 0
-------- --
Total 70 31
======== ==
</TABLE>

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

(1) The series designation for certain models of aircraft shown varies within
the designation listed. The Company, for example, owns Douglas DC-8-60
series aircraft with sub-series designations of 61, 62 and 63.

(2) All figures are approximate and vary from aircraft to aircraft.

(3) This column indicates how many of the listed aircraft are now or are planned
to be compliant with the highest standard under current noise reduction
standards. Aircraft not meeting this standard must either be modified to do
so or removed from domestic service before January 1, 2000. The Company may
install "hush-kits" on all of its Douglas DC-8s that do not currently meet
the highest level of noise reduction standards at an approximate cost of
$3.5 million per aircraft provided it is economically feasible to do so.

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<PAGE> 70

Otherwise, it will retire the aircraft. See "Risk Factors -- Government
Regulation" and "Business -- Government Regulation."

(4) In addition, the Company expects to purchase the MEA Boeing 747s.

(5) One of these aircraft is wet leased by the Company from Express One on a
block hour, part-time basis for operation in the Company's overnight freight
delivery system.

(6) The Company currently leases three Boeing 727-200s from third parties.

The aircraft described above do not include (i) one Boeing 747-200 and one
Boeing 747-100 currently effectively grounded due to a series of Directives
restricting their payload, (ii) two Boeing 727-200 passenger configured aircraft
owned by the Company and leased to Sun Pacific Airlines and Continental Airlines
until mid-1998 and (iii) a third passenger configured Boeing 727-200 leased to
Champion Air on a month-to-month basis. The Company has agreed to sell the
aircraft leased to Champion Air, together with a Boeing 727-100 passenger plane,
to Cook Aircraft Leasing, Inc. for an aggregate purchase price of $7.7 million.
This transaction is expected to be consummated before the end of 1997.

Small Aircraft

<TABLE>
<CAPTION>
PROPULSION
MANUFACTURER MODEL(1) NUMBER CONFIGURATION(2) TYPE MAXIMUM PAYLOAD(3)
------------ -------- ------ ---------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Convair 640 2 Freight Turbo-prop 18,000 lbs.
Convair 600 5 Freight Turbo-prop 12,000-14,000 lbs.
3,000 lbs./8
Lear L-36-A 1 Freight/Pass./Ambulance Jet turbine passengers
3,000 lbs./8
Lear L-35-A 1 Freight/Pass./Ambulance Jet turbine passengers
3,000 lbs./8
Lear L-25 7 Freight/Pass./Ambulance Jet turbine passengers
2,000 lbs./5
Lear L-24 6 Freight/Pass./Ambulance Jet turbine passengers
2,000 lbs./5
Lear L-23 4 Freight/Pass./Ambulance Jet turbine passengers
Hansa HFB-320 3 Freight Jet turbine 4,000 lbs.
Hawker HS-125 1 Passenger Jet turbine 7 passengers
1,500 lbs./6
Mitsubishi MU-2B 2 Freight/Pass. Turbo-prop passengers
2,000 lbs./7
Mitsubishi MU-2B 1 Freight/Pass./Ambulance Turbo-prop passengers
Beechcraft BE8T 13 Freight Turbo-prop 3,400 lbs.
Cessna C-152 2 Passenger Piston prop 4 passengers
Cessna C-172 1 Passenger Piston prop 4 passengers
Piper PA-32-300 2 Freight/Pass. Piston prop 1,200 lbs./6 pass.
--
Total 51
==
</TABLE>

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

(1) The series designation for each model of aircraft shown varies within the
designation listed. For example, Mitsubishi MU-2B aircraft have series
designations of 20, 25 and 35.

(2) Not all aircraft of a particular type are configured for each of the
multiple uses shown.

(3) All figures are approximate.

The aircraft described above do not include (i) a Westwind 1124 jet
aircraft owned by the Company and utilized solely for the transport of Company
personnel, (ii) a Falcon 20C currently being modified from passenger to
freighter configuration, which will allow it to transport 6,000 lbs. of freight,
(iii) a Lear 25 which went into revenue service in July 1997, and (iv) the
Company's undivided one-third interest in four Falcon 20C jet aircraft presently
leased to a third party operator. The Company historically has followed and
currently intends to follow, a policy of retiring Convairs at the time of their
next scheduled major overhaul maintenance checks rather than expending the
amounts necessary to complete such checks.

Boeing 747 Airworthiness Directives. In January 1996, the FAA issued a
series of Directives on certain Boeing 747 aircraft which were modified for
freight hauling by GATX-Airlog Company, a subsidiary of General American
Transportation Corp ("GATX"). The Directives, which became effective on January
30, 1996, were issued because of concerns relating to the integrity of the cargo
door and surrounding floor area in the event the aircraft were operated at their
maximum cargo capacity of approximately 220,000 pounds. In spite of the fact
that the aircraft affected by the Directives have flown over 83,000 hours
without incident, the Directives require certain modifications to be made to the
aircraft. Absent such modifications, the Directives limit the cargo capacity of
these aircraft to 120,000 lbs., a limit which significantly restricts the
Company's ability to profitably operate the aircraft.

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<PAGE> 71

One of each of the Kalitta Companies' Boeing 747-200 and Boeing 747-100
freighters are affected by these Directives and have been out of service since
January 1996. GATX has proposed a solution to the problem identified by one of
the Directives which has been approved by the FAA. An appropriate means to test
the proposed solution, however, has not yet been identified. Currently, the
Company anticipates modifying the Boeing 747-100 to be in compliance with a
portion of the Directive for which the FAA has approved a solution by the latter
half of 1998, which will allow the Company to operate it with a reduced cargo
capacity of 160,000 lbs. The Company is awaiting engineering solutions to
address the remaining Directives. If the cost necessary to fully implement these
solutions and return both the Boeing 747-100 and -200 to maximum cargo capacity
is uneconomical, the Company may either operate one or both of the aircraft at
limited load or use one or both for spare parts. The Company is currently
involved in litigation against GATX to recover the cost to the repair these
aircraft as well as revenues lost as a consequence of the aircraft downtime. See
"Business -- Litigation."

Acquisition of Boeing 747s. In March 1997, the Kalitta Companies entered
into a contract with MEA to purchase for $63.0 million (i) the three MEA Boeing
747s aircraft and associated engines, (ii) four additional spare engines, and
(iii) certain other related spare parts and support equipment. Other than a $1.5
million deposit made by the Kalitta Companies, timely payments have not been
made and the contract is in default. However, the Company expects to complete
the purchase of the MEA Boeing 747s in 1997. The Company intends to use $20.5
million of the net proceeds from the sale of the Kalitta Companies' Boeing 727
aircraft to Kitty Hawk to purchase the first Boeing 747 and spare parts and
equipment and $42 million from the net proceeds of the Note Offering to purchase
the two other Boeing 747s and related spare parts and equipment. In addition,
the Company expects to spend an additional approximately $8.0 million per plane
to convert the MEA Boeing 747s from passenger to freighter configuration. The
MEA aircraft are not affected by the Directive related to Boeing 747s modified
by GATX. See "Use of Proceeds."

Purchasing the MEA Boeing 747s is expected to substantially increase the
Company's long-haul lift capacity and enable expansion of its current ACMI
operations in Central and South America. The addition of these aircraft will
also enable the Company to enter the Middle East market and expand its service
to Asia where the need for long-haul, heavy-lift air cargo service is expected
to grow.

Boeing 727 Cargo Door and Floor Modifications Regulations. The Company
currently operates a fleet of 31 Boeing 727 aircraft, 30 of which were
previously converted from passenger configuration to freighter configuration by
the installation of a large cargo door and numerous interior modifications for
cargo container handling systems. The aircraft conversions were approved by the
FAA upon the issuance of supplemental type certificates ("STCs") to four firms
that engineered and designed the conversion hardware and aircraft modification
processes. The Company's aircraft have been modified utilizing STCs held by
three of these four firms.

The FAA has reevaluated the engineering analysis which supported the
issuance of the Boeing 727 cargo modification STCs and has preliminarily
determined that the STC design features do not meet FAA certification criteria
in several respects. To address this issue the FAA has issued a proposed
Directive to address the first of the FAA's concerns -- the structural strength
of the aircraft floor structure. Other areas of concern relate to the strength
of various cargo-handling system components of the Boeing 727 aircraft and are
expected to be addressed by the FAA in subsequently issued Directives.

If the proposed Directive is adopted, each operator of Boeing 727 freighter
aircraft modified by any of the four firms will be required to limit the weight
of each container (or pallet) position and to adopt other aircraft operating
restrictions depending on the configuration of the aircraft, until the operator
can demonstrate that the floor strength meets the FAA's certification criteria.
Under the proposed Directive, the Company would be required to limit the weight
per container/pallet position to approximately 4,000 pounds from a current
maximum of 8,000 pounds. After a period of 120 days from the date the Directive
becomes effective, the maximum per position weight will be fixed at
approximately 3,000 pounds, until the Company can demonstrate that the floor
strength meets the FAA's certification criteria. The Company believes this
Directive will not have a material adverse effect on the Company.

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<PAGE> 72

The Company is responding to the FAA's proposed Directive and urging the
FAA to allow additional time before requiring operators to modify the aircraft
to bring them into compliance. In addition, the Company is working with the STC
holders which are performing engineering analysis to seek a cost effective
solution. There can be no assurance as to the terms of the final Directive and
whether a satisfactory solution can be engineered. If no such solution is
developed and approved by the FAA, the capacity of the Company's Boeing 727
fleet will be reduced which could have a materially adverse effect on the
Company and the value of the Common Stock. The FAA's proposed Directive is being
opposed on its merits by a number of Boeing 727 operators. One of the Company's
Boeing 727 aircraft was converted to freighter configuration by Boeing and is
not subject to the foregoing proposed Directive.

TRAINING AND SAFETY

The Company's management believes that high quality personnel and intensive
training programs are key to the Company's success and the maintenance of a good
safety record. As a result, the Company hires experienced flight crews and
maintenance personnel and ensures that both receive ongoing training. The
Company maintains its own Douglas DC-8 simulator in Miami which it both uses to
train its own pilots and hires out for use by other airlines. The Company also
makes use of the training facilities of other airlines, including American
Airlines, Northwest Airlines, TWA and United Airlines.

The Company has an ongoing safety program that employs an industry standard
database to track safety performance. Open facsimile and phone lines are
available for crews to report safety problems which are entered into the
database and monitored for any re-occurrence. Direct communication between
flight crews and Company management is available at all times through the
Company's dispatch system. The Company also maintains on-line communications
with other airlines and agencies.

During the last five years, the Kalitta Companies had eight accidents and
several other safety related incidents involving its aircraft with varying
degrees of damage to the aircraft involved. In 1992, the pilot of one of the
Kalitta Companies' small aircraft was fatally injured in one of these accidents.
In September 1996, pursuant to the FAA's National Aviation Safety Inspection
Program, the Kalitta Companies underwent a broad but routine inspection of all
of the Kalitta Companies' aircraft and maintenance operations. As a consequence
of the FAA's inspection, the FAA and the Kalitta Companies entered into a
Consent Order in January 1997 which required the Kalitta Companies to revise
certain internal policies and procedures to address certain regulatory
violations noted in the inspection report. See "Business -- Government
Regulation."

SALES AND MARKETING

The Company's marketing focus is on major users of air freight
transportation services and other logistics providers. In connection with the
Company's emphasis on developing and maintaining long-term relationships with
major customers, the Company employs 25 account managers who are dedicated to
major accounts. An account manager is responsible for educating the client about
the Company's service capabilities, ensuring quality service and determining how
the Company can best serve the customer. The marketing effort on behalf of the
air freight carrier business is primarily focused on selected freight forwarders
and integrators and existing customers. The Company also dedicates two
individuals to passenger air charter marketing and intends to increase its sales
efforts for third party maintenance services. The Company does not engage in
mass media advertising. The Company, however, does promote its business through
trade specific publications and trade shows as well as through its sponsorship
of drag and short-track racing.

The Company believes that retaining existing customers is equally as
important as generating new clients and is a direct result of customer
satisfaction. The Company will continue to upgrade its database, information
software and tracking systems to maintain high quality service. The Company has
developed a feature that enables customers to access the Company's aircraft
tracking system on a "real time" basis to monitor their own freight contributes
to customer satisfaction and allows account managers to be more productive by
reducing time spent updating customers on the status of shipments.

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<PAGE> 73

MAINTENANCE

The Company's aircraft require considerable maintenance in order to remain
in compliance with FAA regulations. Any equipment being placed on the Company's
operating certificate is inspected and repaired prior to being utilized by the
Company for either on-demand or contract charters. The Company has extensive
maintenance facilities in Oscoda and Ypsilanti, Michigan and Dallas, Texas. The
Company also has significant maintenance capability in Los Angeles, Miami and
Terre Haute, Indiana. Maintenance services at Ypsilanti, Oscoda, Dallas, Los
Angeles and Miami operate twenty-four hours per day, seven days per week. See
"Business -- Services -- Aircraft Maintenance Services."

GROUND FACILITIES

General. The Company's facilities consist of office space, hangars,
maintenance facilities and warehouse and storage space. Some of the Company's
hangar facilities are constructed on property ground leased from airport owners.
Accordingly, the hangar improvements revert to the owner when the ground lease
expires. These leases expire on various dates through November 2021. The Company
also has various agreements with municipalities and governmental authorities
that own and operate airports throughout the United States. These agreements
generally relate to the Company's use of general airport facilities, but may
also include leases or licenses to use hangar and maintenance space.

The following is a summary of the Company's major facilities:

<TABLE>
<CAPTION>
LOCATION USE OF SPACE OWNED/LEASED/LICENSED
-------- ------------ ---------------------
<S> <C> <C>
1515 West 20th Street, Company headquarters Owned (1)
Dallas/Fort Worth Airport, TX
1349 South Huron, Ypsilanti, MI Offices(2) Leased
Willow Run Airport, Ypsilanti, MI Office, hangar, maintenance, fuel farm & Leased
storage
N. I-94 Service Drive, Ypsilanti, MI Office, storage & maintenance Owned
Oscoda, MI Office, hangar, maintenance, housing, fuel Leased
farm & storage
Hulman Regional Airport, Terre Haute, IN Office, hangar and sorting space Licensed
Los Angeles International Airport Office, hangar & ramp Leased
Honolulu International Airport(3) Office & warehouse Leased
Miami International Airport Office, hangar, ramp & maintenance Leased
</TABLE>

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

(1) The Company owns the building and improvements and leases the land from the
Dallas/Fort Worth International Airport.

(2) The Kalitta Companies lease its headquarters building from a limited
liability company owned by Mr. Kalitta, his son Scott Kalitta and his nephew
Doug Kalitta. See "Certain Transactions."

(3) The Company has constructed a warehouse at the Honolulu International
Airport which it leases to AIC. See "Certain Transactions."

Proposed New Sorting Facility. The Company currently licenses its sorting
space at the Hulman Regional Airport in Terre Haute, Indiana from Roadway Global
Air for a term which will expire in August 1998. Because of the growth in the
volume of freight shipped in its domestic scheduled service, the lack of
available expansion space and the limited airport facilities in Terre Haute, the
Company plans to move this sorting center to Fort Wayne, Indiana in the spring
of 1999. As part of a proposed $33.1 million bond issue by the Fort Wayne
Authority, the Fort Wayne Authority would develop an air trade center with the
Company as its principal tenant. This center would be a foreign free trade zone
and have customs support for international operations. Other planned
improvements include the addition of a second runway to the airport's existing
11,000 foot runway and the expansion and improvement of associated ramp and
other facilities and infrastructure. Under a proposed 20 year lease from the
Fort Wayne Authority, the Company would occupy a sorting facility with 264,000
square feet of space (including office space), a 17,000 square foot operations
building, a 79,000 square foot maintenance hangar (large enough to
simultaneously accommodate a wide- and narrow-bodied aircraft) and a new fuel
facility. The Company has entered into discussions with the Hulman

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Regional Airport Authority to obtain an interim lease of its current space in
Terre Haute until it is able to move to Fort Wayne. There is no assurance that
the Company will be able to extend the term of the sort space sublease. See
"Risk Factors -- Availability of Facilities."

Oscoda Base. The Company subleases its maintenance facility at the former
Wurtsmith Air Force Base in Oscoda, Michigan from the Oscoda-Wurtsmith Airport
Authority pursuant to a prime lease from the U.S. Government. The terms of the
various subleases expire on dates ranging from October 1997 to December 2013.
Under the subleases, the Company has access to an 11,800 foot lighted runway
equipped for full instrument approach, as well as office, hangar, maintenance
and storage space. The hangar space includes seven hangars, two of which can
completely enclose a single wide-bodied aircraft or two narrow-bodied aircraft.
This ability to completely enclose aircraft is critical to meeting important FAA
maintenance requirements. Because the Oscoda facility is a former Air Force
base, it is also complete with living quarters and support buildings, which the
Company leases from Oscoda Township under leases which expire on dates ranging
from October 1997 to August 2005. Until 2011, the Oscoda facility is part of a
"renaissance" zone which means that the Company not pay real or personal
property taxes on its facilities and equipment in Oscoda.

EMPLOYEES

General. At June 30, 1997, on a pro forma basis assuming the Merger had
occurred prior to such time, the Company would have employed approximately 3,600
full-time personnel, of which approximately 200 would have been involved in
sales and administrative functions and approximately 3,400 in maintenance and
flight operations (including approximately 800 pilots). The Company considers
its relations with its employees to be satisfactory. The Company intends to
motivate certain employees through ownership of Common Stock and options to
purchase Common Stock and to encourage all employees to own Common Stock.

Collective Bargaining Agreement with Flight Crews of the Kalitta Companies.
Certain employee pilots and flight engineers of the Kalitta Companies are
members of the Teamsters Union. As successor to the Kalitta Companies, the
Company and these pilots and flight engineers are currently operating pursuant
to a collective bargaining agreement that expired on August 29, 1997, but
remains in effect until a new agreement is negotiated. Pilots and flight
engineers subject to the agreement are guaranteed pay based upon a minimum of 60
block hours per month. The agreement requires that all flight crew personnel
must meet minimum qualifications and includes typical seniority, furlough,
grievance, group health insurance, sick leave and vacation provisions. The
seniority provisions require that the most senior flight crews have the
opportunity to operate larger aircraft as crew positions become available by
reason of flight crew attrition or aircraft acquisitions. As a consequence, the
contract obligates the Company to incur costs to retrain crews as they advance
by seniority in operating different aircraft in the Company's fleet. The
collective bargaining agreement provides that so long as it is in effect, the
Teamsters Union will not authorize a strike and the Kalitta Companies will not
lockout union employees. The Kalitta Companies and the Teamsters Union have
commenced "interest-based" bargaining, which means that the parties have agreed
to focus on common objectives without the threat of a work stoppage.

ENVIRONMENTAL

The Company is subject to the regulations of the Environmental Protection
Agency and state and local governments regarding air quality and other matters.
The Company leases office space, hangar space, ramp space and unimproved area at
various airport locations throughout the U.S. See "Business -- Facilities." Most
of these leases require the Company to indemnify the lessor for any
environmental contamination caused by the Company. In particular, the Company
leases an underground fuel storage facility from Wayne County, Michigan at
Willow Run Airport. If the soil or groundwater in the vicinity of this
underground facility is found to be contaminated by environmental regulators,
the Company will lose its right to continue to use the facility. Moreover, the
lease provides that the Company will be solely responsible for the costs to
remediate any such contamination. If such contamination occurs or is otherwise
discovered by governmental authorities during the term of the lease with Wayne
County, the Company may incur significant expense to effect either or both of
required relocation of operations or the required clean-up.

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The Company is aware of the presence of environmental contamination on
properties that the Kalitta Companies lease or own. The Company does not believe
that the costs of responding to the known contamination should or will be borne
solely by the Company, if at all. While the Company does not believe that the
costs of responding to the presence of such contamination is likely to have a
material adverse effect on the Company or the value of the Common Stock there
can be no assurance in this regard. Pursuant to the Merger Agreement, Mr.
Kalitta has agreed, subject to certain limitations, to indemnify the Company for
a period of four years against any losses arising with respect to environmental
liabilities related to contamination at any of the Kalitta Companies'
facilities. See "The Merger -- Indemnitees."

GOVERNMENT REGULATION

General. The Company is subject to Title 49 of the United States Code
(formerly the Federal Aviation Act of 1958, as amended), under which the DOT and
the FAA exercise regulatory authority over air carriers. The DOT is primarily
responsible for regulating economic issues affecting air service, including,
among other things, air carrier certification and fitness, insurance, consumer
protection, unfair methods of competition and transportation of hazardous
materials. The FAA is primarily responsible for regulating air safety and flight
operations, including, among other things, airworthiness requirements for each
type of aircraft the Company operates, pilot and crew certification, aircraft
maintenance and operational standards, noise abatement, airport slots and other
safety-related factors. In addition, the Company is subject to regulation by
various other federal, state, local and foreign authorities, including the
Department of Defense and the Environmental Protection Agency.

The Company's international operations are governed by bilateral air
services agreements between the United States and foreign countries where the
Company operates. Under some of these bilateral 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. carriers and are subject to approval by the
applicable foreign regulators, limiting growth opportunities in such countries.

Safety, Training and Maintenance Regulations. The Company's operations are
subject to routine, and periodically more intensive, inspections and oversight
by the FAA. Following a review of safety procedures at ValuJet, the FAA adopted
changes to procedures concerning oversight of contract maintenance and training.
The Company believes it is currently in compliance with such changes. It is
possible that subsequent events, such as the recent crash of a cargo aircraft
owned by Fine Air could result in additional Directives, which could have a
material adverse effect on the value of the Common Stock.

In September 1996 pursuant to the FAA's National Aviation Safety Inspection
Program, the Kalitta Companies underwent a broad but routine inspection of all
of the Kalitta Companies' aircraft and maintenance operations. This inspection
resulted in a report from the FAA citing the Kalitta Companies with a number of
regulatory infractions, none of which were sufficiently serious to cause the FAA
to curtail or otherwise restrict any of the Kalitta Companies' operations. As a
consequence of the FAA's inspection, however, the FAA and the Kalitta Companies
entered into a Consent Order in January 1997 which required the Kalitta
Companies to revise certain internal policies and procedures to address the
regulatory violations noted in the inspection report as well as enforcement
actions that had been pending prior to the inspection. Without admitting any
fault, the Kalitta Companies agreed to pay a fine of $450,000, one-third of
which is suspended and will be forgiven if the Kalitta Companies comply with all
the terms of the Consent Order. At this time, the Kalitta Companies believe they
are in compliance with the Consent Order and expect the FAA to conduct another
inspection of similar scope in the fourth quarter of 1997 to verify such
compliance. The

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Consent Order also provides that it is a full and conclusive settlement of any
civil penalties the Kalitta Companies could incur for regulatory violations
occurring before January 1, 1997, but does not preclude the FAA from taking
enforcement action with respect to Kalitta Companies' air carrier operating
certificate.

Aging Aircraft Regulations; Potential Compliance Costs. All of the
Company's aircraft are subject to Service Bulletins and Directives issued under
the FAA's "Aging Aircraft" program or issued on an ad hoc basis. These Service
Bulletins or Directives could cause certain of these aircraft to be subject to
extensive aircraft examinations and require certain of these aircraft to undergo
structural inspections and modifications to address problems of corrosion and
structural fatigue at specified times. It is possible that additional Service
Bulletins or Directives applicable to the types of aircraft included in the
Company's fleet could be issued in the future, particularly in light of recent
aircraft crashes at ValuJet and Fine Air. The cost of compliance with such
Directives and Service Bulletins cannot currently be estimated, but could be
substantial.

Noise Abatement Regulations. Airline operators must comply with FAA noise
standard regulations primarily promulgated under the Airport Noise and Capacity
Act of 1990 (the "Noise Regulations"). The Noise Regulations affect all of the
Company's eight Boeing 747s, eight Lockheed L-1011s, 20 Douglas DC-8s, 31 Boeing
727s and five Douglas DC-9-15Fs (the "Jet Fleet"). Of the aircraft in the Jet
Fleet, 33 are currently in compliance with Stage III noise control standards,
including all of the Company's Boeing 747s and Lockheed L-1011s. By the
following deadlines, the Company must bring the Jet Fleet into Stage III
compliance by January 1, 2000. Any aircraft in the Jet Fleet that is not in
compliance with the Stage III noise control standards on January 1, 2000 may not
be operated in the U.S. until it complies with such standards. There can be no
assurance that the Company will have sufficient funds or be able to obtain
financing to cover the costs of modifying additional aircraft to meet these
deadlines. The failure to modify these aircraft could have a material adverse
effect on the Company's financial condition or results of operations. In
addition, certain airport operators have adopted local regulations which, among
other things, impose curfews and other noise abatement requirements. Finally,
the Company's international operations are affected by noise regulations in
foreign countries which may be stricter than those in effect in the U.S.

Only six of the Company's 20 Douglas DC-8 aircraft comply with the Stage
III noise control standards. The Company may elect not to modify the 14
remaining Douglas DC-8 aircraft to meet the Stage III noise control standards
because the anticipated cost of approximately $3.5 million per aircraft (not
including aircraft downtime) may exceed the economic benefits of such
modifications. If the Company cannot or does not modify these 14 Douglas DC-8
aircraft, the Company will have to remove these aircraft from service in the
United States before January 1, 2000 and may have to replace them with other
aircraft. In addition, 20 of the Company's Boeing 727 aircraft currently do not
comply with the Stage III noise control standards. The Company currently
anticipates modifying its Boeing 727 fleet (at an anticipated cost of
approximately $40 million, not including aircraft downtime) to be in compliance
with the Stage III noise control standards by the applicable deadlines. However,
there can be no assurance regarding the actual cost or that the Company will
have sufficient funds or be able to obtain financing to cover the costs of these
modifications or to replace such aircraft.

Hazardous Materials Regulations. The DOT exercises regulatory jurisdiction
over the transportation of hazardous materials. The Company may from time to
time transport articles that are subject to these regulations. Shippers of
hazardous materials share responsibility for compliance with these regulations
and are responsible for proper packaging and labeling. Substantial civil
monetary penalties can be imposed on both shippers and air carriers for
infractions of these regulations.

Foreign Operations Regulated. Certain of the Company's operations are
conducted between the U.S. and foreign countries, as well as wholly between two
or more points that are all located outside of the United States. As with the
certificates and licenses obtained from U.S. authorities, the Company must
comply with all applicable rules and regulations imposed by these foreign
aeronautical authorities or be subject to the suspension, amendment or
modification of its operating licenses issued by those authorities.

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Stock Ownership by Non-U.S. Citizens. Under current federal aviation law,
the Company's air freight carrier could cease to be eligible to operate as an
air freight carrier if more than 25% of the voting stock of the Company were
owned or controlled by non-U.S. citizens. Moreover, in order to hold an air
freight carrier certificate, the president and two-thirds of the directors and
officers of an air carrier must be U.S. citizens. All of the Company's directors
and officers are U.S. citizens. Furthermore, (i) the Certificate of
Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2%
of the votes voting on or consenting to any matter and (ii) the Bylaws do not
permit non-U.S. citizens to serve as directors or officers of the Company.

INSURANCE

The Company is vulnerable to potential losses which may be incurred in the
event of an aircraft accident. Any such accident could involve not only repair
or replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also potential claims involving injury to persons or
property. The Company is required by the DOT to carry liability insurance on
each of its aircraft and most of the Company's aircraft leases and contracts
also require the Company to carry such insurance. The Company also carries
medical liability insurance. Any extended interruption of the Company's
operations due to the loss of an aircraft could have a material adverse effect
on the Company. The Company currently maintains public liability and property
damage insurance and aircraft liability insurance for each of the aircraft in
the revenue fleet in amounts consistent with industry standards. All-risk
aircraft hull insurance is maintained for all aircraft in the revenue fleet
other than the Convairs and Beechcraft BE8Ts. The Company maintains baggage and
cargo liability insurance if not provided by its customers under contracts.
Although the Company believes that its insurance coverage is adequate, there can
be no assurance that the amount of such coverage will not be changed upon
renewal or that the Company will not be forced to bear substantial losses from
accidents. Substantial claims resulting from an accident could have a material
adverse effect on the Company and the value of the Common Stock.

The Company attempts to monitor the amount of liability insurance
maintained by the third party carriers utilized in its air logistics business
through, among other things, the obtaining of certificates of insurance.

LEGAL PROCEEDINGS

GATX Litigation. In January 1997, the Kalitta Companies filed suit against
GATX to recover damages related to the January 1996 effective grounding of two
of the Kalitta Companies' Boeing 747s pursuant to the Directive affecting
GATX-modified Boeing 747s. See "Business -- Aircraft Fleet -- Boeing 747
Airworthiness Directive." Other defendants include Pemco Aeroplex Co. (the
successor to Hayes International, Inc.) which developed the design for the STC
relating to the modifications, and Central Texas Airborne Systems, Inc.
(successor to Chrysler Technologies Airborne Systems, Inc.) which modified the
Kalitta Companies' Boeing 747s as a subcontractor for GATX. The suit is pending
in the Federal District Court for the Northern District of California and covers
a variety of claims.

U.S. Postal Service Contract. In September 1992, the U.S. Postal Service
awarded an air freight services contract to Kitty Hawk and one of the Kalitta
Companies, as co-bidders. Emery Worldwide Airlines, Inc. ("Emery") (the
incumbent) sued to enjoin the award. This litigation (the "ANET Litigation") was
settled in April 1993 by agreements under which the U.S. Postal Service
terminated the contract for convenience and awarded the contract to Emery. In
lieu of damages for the contract's termination, the U.S. Postal Service paid
$10.0 million into an escrow account to be divided between Kitty Hawk and one of
the Kalitta Companies. Also under the settlement, Emery paid $2.7 million into
the escrow account and agreed to pay $162,500 into the escrow each quarter for
up to 10 years, so long as the Emery contract remained in effect. Before
settling the ANET Litigation, Kitty Hawk, one of the Kalitta Companies and
Messrs. Christopher and Kalitta agreed, among other things, to hold the escrowed
funds in escrow until they had agreed upon an allocation and distribution, or
until the matter was resolved by binding arbitration. Subsequent disagreements
led to litigation and arbitration among Kitty Hawk, one of the Kalitta Companies
and Messrs. Christopher and Kalitta that were resolved pursuant to a
comprehensive settlement reached in August 1994. Under the comprehensive
settlement, Kitty Hawk received approximately $3.5 million in cash from the
escrowed funds and obtained a

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Boeing 727-200. Also under the comprehensive settlement agreement, Mr.
Christopher received rights to one-half of any future contingent quarterly
payments from Emery.

Routine Litigation. The Company from time to time is involved in various
routine legal proceedings incidental to the conduct of its business. As of the
date of this Prospectus, the Company was not engaged in any legal proceeding
expected to have a material adverse effect upon the Company and the value of the
Common Stock.

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MANAGEMENT

The following table sets forth the executive officers and directors of the
Company, their ages and positions, immediately prior to the Merger. As of the
date hereof, there was one vacancy on the Board of Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
M. Tom Christopher(1)................. 50 Chairman of the Board of Directors and
Chief Executive Officer
Tilmon J. Reeves...................... 57 President, Chief Operating Officer and
Director
Richard R. Wadsworth.................. 50 Senior Vice President -- Finance,
Chief Financial Officer, Secretary,
and Director
Ted J. Coonfield(1)(2)................ 48 Director
James R. Craig........................ 58 Director
Lewis S. White(1)(2).................. 57 Director
</TABLE>

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

(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Concurrently with the consummation of the Merger, Messrs. Craig and
Wadsworth will resign from the Board of Directors and Mr. Reeves will resign as
Chief Operating Officer of the Company, but will continue to serve as the
President of Kitty Hawk. Pursuant to the Merger Agreement, the vacancies in the
Board of Directors will be filled with Mr. Kalitta, George W. Kelsey and Philip
J. Sauder. Immediately after the effectiveness of the Merger, the executive
officers and directors of the Company, their ages and positions will be as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
M. Tom Christopher(1)................. 50 Chairman of the Board of Directors and
Chief Executive Officer
Conrad A. Kalitta..................... 59 Vice Chairman and Director
Tilmon J. Reeves...................... 57 President and Director
Richard R. Wadsworth.................. 50 Senior Vice President -- Finance,
Chief Financial Officer and Secretary
Ted J. Coonfield(1)(2)................ 48 Director
George W. Kelsey...................... 57 Director
Philip J. Sauder...................... 44 Director
Lewis S. White(1)(2).................. 57 Director
</TABLE>

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

(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

In addition, concurrently with the consummation of the Merger, the members
of the Company's Board of Directors will be classified as follows:

Class I -- Serves until 1998 Annual Meeting of Stockholders

Ted J. Coonfield
George W. Kelsey

Class II -- Serves until 1999 Annual Meeting of Stockholders

Tilmon J. Reeves
Philip J. Sauder

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Class III -- Serves until 2000 Annual Meeting of Stockholders
M. Tom Christopher
Conrad A. Kalitta
Lewis S. White

M. TOM CHRISTOPHER has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since its inception in 1985 and after
effectiveness of the Merger, will serve in the class of directors whose terms
expire at the 2000 annual meeting of stockholders. Prior to assuming these
positions, he formed and managed Kitty Hawk Charters, Inc. He has over 20 years
of experience in the air freight industry, including serving as an account
manager for Burlington Northern Airfreight from 1976 to 1978.

CONRAD A. KALITTA. Upon consummation of the Merger, Mr. Kalitta will be
Vice Chairman and after effectiveness of the Merger, will serve in the class of
directors whose terms expire at the 2000 annual meeting of stockholders. Mr.
Kalitta founded each of the Kalitta Companies and has been the chief executive
officer of each of the Kalitta Companies since that time. He also founded
several other aircraft service companies, some of which are now part of the
Company. Mr. Kalitta is also a professional drag racer in the "top-fuel" class
and has won three national championships.

TILMON J. REEVES has served as President and Chief Operating Officer of the
Company since May 1993 and has over 30 years of aviation experience.
Concurrently with the consummation of the Merger, Mr. Reeves will resign as the
Chief Operating Officer of the Company, but will continue to serve as the
President of Kitty Hawk. Prior to assuming his current positions, he served as
Vice President of the Company's air freight carrier from March 1992 to May 1993.
Prior to joining Kitty Hawk, Mr. Reeves served as Vice President (Sales) of
Express One from April 1991 to March 1992. Mr. Reeves served as the Managing
Director -- Cargo Services for American Airlines, Inc. from March 1989 to
January 1991. Mr. Reeves became a director in October 1994 and after
effectiveness of the Merger, will serve in the class of directors whose terms
expire at the 1999 annual meeting of stockholders.

RICHARD R. WADSWORTH has served as Senior Vice President -- Finance since
October 1992, Chief Financial Officer since September 1994 and Secretary since
October 1994. Prior to his current role, he served in a consulting capacity to
Kitty Hawk in the preparation of various bids for the Company's contract air
freight service from December 1991 to September 1992. Mr. Wadsworth became a
director in October 1994 and will resign from the Board of Directors
concurrently with the consummation of the Merger.

TED J. COONFIELD became a director of the Company in October 1994 and after
effectiveness of the Merger, will serve in the class of directors whose terms
expire at the 1998 annual meeting of stockholders. Since April 1996, Mr.
Coonfield has been a consultant with Performance Consulting Group, a firm
specializing in change management consulting primarily in the banking and
insurance industry. From January 1993 to April 1996, Mr. Coonfield was a
consultant with the Richard-Rogers Group, a consulting firm specializing in
total quality issues, where he primarily engaged in consulting for firms in the
transportation industry. From 1990 to December 1992, Mr. Coonfield was the
Special Assistant to the Director of the Department of Human Resources for the
State of Oregon. Since 1985, Mr. Coonfield has been the President of Oregon Wine
Designs, Inc., a wine production and marketing firm.

JAMES R. CRAIG became a director of the Company in October 1994 and will
resign from the Board of Directors concurrently with the consummation of the
Merger. Mr. Craig is an attorney who has served of counsel to Burke, Wright &
Keiffer, P.C. since 1990. Prior to his affiliation with Burke, Wright & Keiffer,
P.C., Mr. Craig was in private law practice in Dallas since 1971 and in 1989
served as President of Whitehall Development Company, a real estate development
firm, of which he is now a director.

GEORGE W. KELSEY. Upon consummation of the Merger, Mr. Kelsey will become a
director of the Company and after effectiveness of the Merger, will serve in the
class of directors whose terms expire at the 1998 annual meeting of
stockholders. Mr. Kelsey has served as a director of AIA since July 1995. Mr.
Kelsey is currently the owner of Kelsey Law Offices, P.C., a law firm located in
Ann Arbor, Michigan. Mr. Kelsey has practiced law in Michigan for twenty-seven
years, and has been the principal outside counsel for the Kalitta Companies. For
the last three fiscal years, the Kalitta Companies paid Mr. Kelsey's law firm an
aggregate of

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approximately $3.0 million in legal fees. Mr. Kelsey currently specializes in
commercial transactions and commercial litigation with emphasis in aviation law.

PHILIP J. SAUDER. Upon consummation of the Merger, Mr. Sauder will become a
director of the Company and after effectiveness of the Merger will serve in the
class of directors whose terms expire at the 1999 annual meeting of
stockholders. Mr. Sauder has served as a director of AIA since July 1995. Mr.
Sauder is currently a limited partner of Carlisle Enterprises, L.P. which
acquires manufacturers of engineered products and the Chairman and Chief
Executive Officer of Alpha Technologies, Inc., which manufactures high tech
instrumentation for the polymer and rubber industries. He participates in
locating and evaluating acquisition targets. From 1989 through 1994, Mr. Sauder
was employed by Abex, Inc., first as the general manager of its Cleveland
Pneumatic Division and then as the group vice president of its Aerospace
Division. From 1976 until joining Abex, Inc., Mr. Sauder served as the General
Manager of PTC Aerospace and Vice President of the Trailmobile Division of The
Pullman Company, as well as several other positions.

LEWIS S. WHITE became a director of the Company in October 1994 and after
effectiveness of the Merger, will serve in the class of directors whose terms
expire at the 2000 annual meeting of stockholders. Since 1988, Mr. White has
been President of L. S. White & Co., a firm engaged in business planning,
corporate finance, acquisitions and in business start-ups, turnarounds and
restructurings. Prior to 1988, he held senior management positions with
Paramount Communications Inc. and Union Carbide Corporation. Mr. White is also a
director of Whitehall Corporation, a company principally involved in aircraft
maintenance.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and beneficial owners of more than
10% of the Common Stock to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Based solely upon
its review of the copies of such forms received by it and its knowledge that no
Form 5s were required from reporting persons, the Company believes that, except
as disclosed below, all such reports were submitted on a timely basis during
fiscal year 1996. In April 1997, Mr. Coonfield, a director of the Company,
amended his Form 3 on file with the Commission to add one transaction.

DIRECTOR COMPENSATION

Pursuant to the Company's Bylaws, the members of the Board of Directors may
be compensated in a manner and at a rate determined from time to time by the
Board of Directors. Directors who are employees of the Company do not receive
additional compensation for service as a director. Under the Company's Omnibus
Securities Plan, directors who are not employees of the Company shall receive
shares of Common Stock in an amount equal to their net annual retainer (which is
currently approximately $14,000).

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to Kitty Hawk's October 1996 initial public offering (the "IPO"), Mr.
Christopher determined executive officer compensation. Subsequent to the IPO and
prior to November 6, 1996, Messrs. Robert F. Grammer (a former director of the
Company), Craig and Coonfield comprised the Company's Compensation Committee and
determined executive officer compensation. Subsequent to November 6, 1996,
Messrs. Coonfield and White comprised the Company's Compensation Committee and
determined executive officer compensation. None of the foregoing individuals
serving on the Compensation Committee are or have been officers or employees of
the Company or its subsidiaries.

Mr. Craig, a director of the Company, is of counsel to Burke, Wright &
Keiffer, P.C., counsel to the Company. During fiscal years 1994, 1995 and 1996
and the four months ended December 31, 1996, the Company paid an aggregate of
approximately $750,000 to Burke, Wright & Keiffer, P.C. for legal services
rendered.

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During fiscal years 1994, 1995 and 1996 and the four months ended December
31, 1996, Mr. Grammer subleased the Company's present facility at Dallas/Fort
Worth International Airport to the Company. During such period, the Company paid
an aggregate of approximately $850,000 to Mr. Grammer in lease payments. In
February 1997, the Company purchased the lease to the facility from Mr. Grammer
for approximately $1.76 million.

During fiscal years 1994 and 1995, Martinaire East, Inc. ("Martinaire"), a
corporation 50% owned by Mr. Christopher, leased a Lear jet, 50% owned by Mr.
Christopher, from the Company and provided the Company with on-demand charter
services utilizing the Lear jet. During fiscal years 1994 and 1995, the Company
paid Martinaire $1.0 million and $232,000, respectively, for use of the Lear
jet, which amounts the Company believes represented market rates. The Company's
charges to Martinaire for leasing the Lear jet and related operating expenses
(at costs the Company believes represented market rates) went largely unpaid
until October 1994. At fiscal year end 1994, the balance owed to Kitty Hawk for
the Lear jet lease and related operating expenses was $481,297. No interest was
accrued on this amount. On October 24, 1994, the owners of the Lear jet,
including Mr. Christopher, agreed to sell the Lear jet. In connection with this
sale, Martinaire repaid the Company all unpaid amounts owed to the Company at
that date for the Lear jet lease and related operating expenses.

In August 1996, Kitty Hawk acquired an undivided one-third interest in four
Falcon 20 jet aircraft with two co-owners (the "Co-Owners") who are unaffiliated
with the Company and who each hold a one-third interest in such aircraft. An
interim acquisition note in the amount of $1,700,000, covering the purchase
price and necessary maintenance, was executed by Mr. Christopher and one of the
Co-Owners. In November 1996, Kitty Hawk and the Co-Owners each acquired an
undivided one-third interest in two additional Falcon 20 jet aircraft using the
proceeds of a new five-year, $4.3 million term loan that also repaid the interim
loan on the first two aircraft.

The Company and the Co-Owners entered into a co-ownership and contribution
agreement (the "Co-Ownership Agreement") which requires the parties to
contribute equally to the payment of all amounts due under the term loan and
under which the parties leased the four Falcon 20 jet aircraft to Ameristar Jet
Charters, Inc. ("Ameristar"), an air carrier affiliated with one of the
Co-Owners, for operation in cargo charter service. The lease calls for monthly
lease payments which exceed the installments on the term loan and requires
Ameristar to maintain the aircraft and to carry appropriate hull insurance on
the aircraft and liability insurance of at least $50 million combined single
limit coverage, with the Company and the Co-Owners named as loss payees and
additional insureds.

The Company believes that the terms of each transaction discussed above
were as favorable to Kitty Hawk as would have been obtainable from unaffiliated
parties under similar circumstances.

Under the terms of the settlement allocating the benefits of the ANET
Litigation, Mr. Christopher received rights to certain contingent future
payments. See "Business -- Legal Proceedings."

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<PAGE> 83

COMPENSATION

The table below sets forth information concerning the annual and long-term
compensation for services in all capacities to Kitty Hawk for fiscal years 1994,
1995 and 1996 and during the four months ended December 31, 1996, with respect
to those persons who were during the four months ended December 31, 1996 (i) the
Chief Executive Officer and (ii) the other two most highly compensated executive
officers of Kitty Hawk (collectively, with the Chief Executive Officer, the
"Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
---------------------------- ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
M. Tom Christopher 1996(1) $ 80,000 $ -- $ -- -- $ 81,250(2)
Chairman of the Board of 1996 195,500 719,419 -- -- 369,720(3)
Directors and Chief Executive 1995 120,000 898,731 -- -- 352,163(4)
Officer 1994 120,000 512,000 -- -- 25,022(5)
Tilmon J. Reeves 1996(1) 41,667 15,000 -- -- --
President and Chief 1996 125,000 85,000 3,726,182(6) 390,707 2,375(7)
Operating Officer 1995 125,000 108,335 -- 245,708(8) 2,310(7)
1994 101,000 225,000 -- -- 2,982(7)
Richard R. Wadsworth 1996(1) 36,664 15,000 -- -- 583(7)
Senior Vice President 1996 110,000 70,000 1,464,572(6) 153,567 2,375(7)
Finance, Chief Financial 1995 110,000 70,000 -- 92,140(8) 2,262(7)
Officer and Secretary 1994 $110,000 $ 96,000 $ -- -- $ 1,675(7)
</TABLE>

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

(1) Represents the four months ended December 31, 1996.

(2) Consists of contingent payments received by Mr. Christopher under the ANET
Litigation settlement during the four months ended December 31, 1996.

(3) Consists of (i) contingent payments in the amount of $325,000 received by
Mr. Christopher under the ANET Litigation settlement during fiscal year
1996, (ii) life insurance premiums of $41,645 paid on Mr. Christopher's
behalf and (iii) matching contributions of $3,075 to the Company's 401(k)
Savings Plan for Mr. Christopher.

(4) Consists of (i) contingent payments in the amount of $325,000 received by
Mr. Christopher under the ANET Litigation settlement during fiscal year
1995, (ii) life insurance premiums of $25,500 paid on Mr. Christopher's
behalf and (iii) matching contributions of $1,663 to the Company's 401(k)
Savings Plan for Mr. Christopher.

(5) Consists of (i) matching contributions of $2,975 to the Company's 401(k)
Savings Plan for Mr. Christopher and (ii) life insurance premiums of $22,047
paid on Mr. Christopher's behalf. Does not include any contingent payments
to Mr. Christopher under the ANET Litigation settlement made subsequent to
fiscal year 1994. These payments are contingent upon the Emery contract
remaining in effect.

(6) Represents the difference between the exercise price and the fair market
value of the Common Stock underlying the stock options on June 26, 1996, the
date of exercise, of the stock options granted in fiscal year 1996. See
"Management -- Stock Option Exercises."

(7) Consists of matching contributions to the Company's 401(k) Savings Plan.

(8) The option covering these shares was rescinded on June 12, 1996.

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<PAGE> 84

STOCK OPTION GRANTS

The following table sets forth certain information concerning options
granted in fiscal year 1996 to the Company's Named Executive Officers. Messrs.
Reeves and Wadsworth fully exercised these options on June 26, 1996. The Company
did not grant any options to the Company's Named Executive Officers in the four
months ended December 31, 1996 or the six months ended June 30, 1997. No options
for the purchase of Common Stock are currently outstanding. The Company has no
outstanding stock appreciation rights and granted no stock appreciation rights
during fiscal year 1996, the four months ended December 31, 1996 or the six
months ended June 30, 1997.

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

INDIVIDUAL GRANTS
---------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS FAIR VALUE ON
UNDERLYING GRANTED TO EXERCISE OR DATE OF
OPTIONS EMPLOYEES IN BASE PRICE GRANT
NAME GRANTED FISCAL YEAR ($/SH) ($/SH) EXPIRATION DATE
---- ---------- ------------ ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Tilmon J. Reeves...... 390,707 71.8% $0.01 $7.45 December 31, 2005
Richard R.
Wadsworth........... 153,567 28.2% $0.01 $8.63 June 12, 2015

<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
------------------------------------

NAME 5%($) 10%($) 0%($)
---- ---------- ---------- ----------
<S> <C> <C> <C>
Tilmon J. Reeves...... $4,511,648 $6,859,530 $2,910,665
Richard R.
Wadsworth........... $2,054,414 $3,123,413 $1,325,732
</TABLE>

STOCK OPTION EXERCISES

The following table sets forth certain information concerning options
exercised in fiscal year 1996 by certain of the Company's Named Executive
Officers. Messrs. Reeves and Wadsworth fully exercised these options on June 26,
1996. No options for the purchase of Common Stock are currently outstanding.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED
---- --------------- ----------
<S> <C> <C>
Tilmon J. Reeves....................................... 390,707(1) $3,726,182
Richard R. Wadsworth................................... 153,567(2) $1,464,572
</TABLE>

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

(1) The Company withheld 156,283 of these shares in satisfaction of its
withholding obligations with respect to the exercise of these options.

(2) The Company withheld 61,427 of these shares in satisfaction of its
withholding obligations with respect to the exercise of these options.

EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS

Omnibus Securities Plan. The Company has adopted an Omnibus Securities Plan
(the "Omnibus Plan") for the employees of the Company and its subsidiaries and
the outside directors of the Company. The number of shares of Common Stock
reserved for issuance under the Omnibus Plan is 300,000 shares. The Omnibus Plan
will be administered by the Compensation Committee of the Board of Directors.
The Compensation Committee may grant stock based and non-stock based
compensation to Omnibus Plan participants, including nonqualified stock options,
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, stock appreciation rights, other derivative
securities, stock bonuses, restricted stock, awards denominated in stock units,
securities convertible into stock, phantom stock, dividend equivalent rights and
performance awards that are contingent upon the Company's performance or the
performance of the Omnibus Plan participant. Awards under the Omnibus Plan may
contain provisions that, if a change in control of the Company occurs, give the
Compensation Committee discretion to offer to purchase awards from Omnibus Plan
participants and make adjustments or modifications to outstanding awards to
protect and maintain the rights and interests of the Omnibus Plan participants
or take any other action the award

81
<PAGE> 85

agreements may authorize. A change in control of the Company is deemed to occur
upon any of the following events (i) a consolidation or merger in which the
Company does not survive, unless the Company's stockholders retain the same
proportionate common stock ownership in the surviving company after the merger,
(ii) a sale of all or substantially all of the Company's assets, (iii) the
approval by the Company's stockholders of a plan to dissolve or liquidate the
Company, (iv) a third party acquires 20% or more of the Company's voting
securities or (v) during any two-year period, persons who constituted a majority
of the Company's Board of Directors at the beginning of such period cease to
serve as directors for any reason other than death, unless each new director was
approved by at least two-thirds of the directors then still in office who were
directors at the beginning of the two-year period.

Annual Incentive Compensation Plan. Under the Company's Annual Incentive
Compensation Plan, the Compensation Committee will determine and award
semiannual bonuses to employees of the Company. The aggregate amount of bonuses
available for award by the Compensation Committee is limited to 10% of the
Company's income before the deduction of income taxes and the bonuses that may
be paid under the Annual Incentive Compensation Plan. The Company may elect
under the Annual Incentive Compensation Plan to pay up to the full amount of the
bonuses in Common Stock. Up to an additional 198,193 shares may be awarded as
bonuses under the Annual Incentive Compensation Plan.

Employee Stock Purchase Plan. Recently, the Company implemented an Employee
Stock Purchase Plan ("Stock Purchase Plan") which permits employees of the
Company to purchase up to an aggregate of 100,000 shares of Common Stock under
Section 423 of the Internal Revenue Code of 1986, as amended, at a price equal
to 85% of the market value of the Common Stock on certain specified dates. As of
the date hereof, no shares had been issued under the Stock Purchase Plan. Kitty
Hawk has adopted its employee compensation plans and arrangements to motivate
certain employees through ownership of Common Stock and options to purchase
Common Stock and to encourage all employees to own Common Stock.

Option Grants. On October 5, 1994, the Company granted Mr. Reeves and Mr.
Wadsworth nonqualified options to purchase an aggregate of 245,708 shares and
92,140 shares, respectively, of Common Stock. These options had a term of 10
years, an exercise price of $7.81 per share and vested in five equal annual
increments commencing on August 31, 1995. Upon the occurrence of a change in
control of the Company, the death or disability of the optionee or the
termination of the optionee other than for cause, the vesting of these
nonqualified options would have automatically accelerated. In the event of a
change in control of the Company, the Compensation Committee could have, in its
discretion, elected to repurchase option shares at their market value or make
adjustments or modifications to outstanding options to protect and maintain the
rights and interests of optionees. A change in control of the Company was deemed
to occur in the same manner as described above with respect to the Plan.

On December 31, 1995, the Company granted Mr. Reeves an option to purchase
390,707 shares of Common Stock and on June 12, 1996, rescinded all options
earlier granted to Mr. Reeves. The December 31, 1995 option would have
terminated upon the earliest of (i) the date at which all optioned shares had
been delivered, (ii) December 31, 2005 or (iii) the date 12 months after Mr.
Reeves' death. The option was fully vested and had an exercise price of $0.01
per share. During the term of the option, the Company agreed to pay life
insurance premiums required to maintain a term policy insuring Mr. Reeves up to
an amount not to exceed $1,600,000. If Kitty Hawk fulfilled its obligations
under the life insurance contract and Mr. Reeves died before all of the options
were exercised, the remaining options would have terminated automatically upon
Mr. Reeves' death.

On June 12, 1996, the Company granted Mr. Wadsworth an option to purchase
153,567 shares of Common Stock and rescinded all options earlier granted to Mr.
Wadsworth. The June 12, 1996 option would have terminated upon the earliest of
(i) the date at which all optioned shares had been delivered, (ii) December 31,
2015, or (iii) the date 12 months after Mr. Wadsworth's death. The option was
fully vested and had an exercise price of $0.01 per share.

On June 26, 1996, Messrs. Reeves and Wadsworth fully exercised their
options. In order to satisfy any income tax withholding obligations arising by
virtue of the exercise of their options, at the election of each of Messrs.
Reeves and Wadsworth pursuant to the terms of their respective options, the
Company withheld from

82
<PAGE> 86

the shares to be delivered to Mr. Reeves, 156,283 shares and Mr. Wadsworth,
61,427 shares, the fair market value of which was anticipated to equal to the
Company's tax withholding obligation with respect thereto. Pursuant to their
respective option agreements, Messrs. Reeves and Wadsworth have the right to
have the Company register shares received upon exercise of their options in at
least the same ratio of ownership as the number of Mr. Christopher's common
shares included in a registration of the Company's shares. Messrs. Reeves and
Wadsworth waived this right with respect to this offering.

Death and Disability Benefits. The Company also has entered into
split-dollar life insurance agreements with a trust for the benefit of Mr.
Christopher and his wife to provide the trust with death benefits of an
aggregate of $5 million under life insurance policies. Under the split-dollar
agreements, the Company pays the premiums under the insurance policies. Upon Mr.
Christopher's death or the termination of the agreements, the Company is
entitled to reimbursement of premiums it has paid to the extent of the death
benefits paid or the cash surrender value of the policies, as applicable.

Pursuant to a salary continuation agreement, in the event that the Board of
Directors determines that Mr. Christopher has become disabled, the Company has
agreed to continue to pay Mr. Christopher the average monthly compensation he
received during the two years prior to the date of his disability until he dies
or is no longer disabled.

EMPLOYMENT AGREEMENTS

Mr. Christopher. Mr. Christopher has an employment agreement with Kitty
Hawk that provides for an initial annual base salary of at least $125,000 and
bonuses determined by the Compensation Committee pursuant to the Company's
Annual Incentive Compensation Plan and otherwise. Mr. Christopher's employment
agreement contains (i) a confidentiality provision that prohibits disclosure of
the Company's proprietary information and (ii) a covenant not to compete that
provides upon Mr. Christopher's termination of employment with the Company for
any reason, Mr. Christopher shall not engage, directly or indirectly, in the air
logistics, charter brokerage, on-demand or scheduled carriage business under an
FAA Part 121 (now Part 119) or Part 135 certificate for five years following
such termination. The employment agreement may be terminated by either party
with or without cause. If the employment agreement is terminated by the Company
without a material breach by Mr. Christopher, he is entitled to six months of
compensation at his then-current salary.

Mr. Kalitta. Concurrently with the consummation of the Merger, the Company
will enter into an employment agreement with Mr. Kalitta that provides for an
initial annual base salary of at least $600,000 and bonuses determined by the
Compensation Committee pursuant to the Company's Annual Incentive Compensation
Plan and otherwise. Mr. Kalitta's employment agreement contains (i) a
confidentiality provision that prohibits disclosure of the Company's proprietary
information and (ii) a covenant not to compete that provides upon Mr. Kalitta's
termination of employment with the Company for any reason, Mr. Kalitta shall not
engage, directly or indirectly, in the air logistics, charter brokerage,
on-demand, or scheduled carriage business under an FAA Part 121 or Part 135
certificate for five years following such termination. The employment agreement
may be terminated by either party with or without cause. If the employment
agreement is terminated by the Company without a material breach by Mr. Kalitta,
he is entitled to six months of compensation at his then-current salary.

Messrs. Reeves and Wadsworth. Messrs. Reeves and Wadsworth have employment
agreements with Kitty Hawk that provide for an initial annual base salary of at
least $115,000 and $110,000, respectively and annual bonuses determined by the
Compensation Committee pursuant to the Company's Annual Incentive Compensation
Plan and otherwise. These employment agreements provide that Mr. Reeves and Mr.
Wadsworth are prohibited from engaging in the air logistics, charter brokerage,
on-demand or scheduled carriage business under an FAA Part 121 (now Part 119) or
Part 135 certificate for three and two years, respectively, following
termination of employment. These employment agreements also contain a
confidentiality provision that prohibits disclosure of the Company's proprietary
information. These employment agreements may be terminated by either party
thereto with or without cause. Mr. Reeves' employment agreement provides that if
he is terminated by the Company without material breach by Mr. Reeves, he shall
be entitled

83
<PAGE> 87

to 100% of his then-current salary in the year following termination and 50% of
such annual compensation in both the second and third year following termination
and all rights under the stock options and other benefits described above. Mr.
Wadsworth's employment agreement provides that if he is terminated by the
Company without material breach by Mr. Wadsworth, he shall be entitled to 100%
of his then-current salary in the year following termination and 50% of such
annual compensation in the second and third year following termination and all
rights under the stock options and other benefits described above.

CERTAIN TRANSACTIONS

Purchase of Aircraft from the Kalitta Companies. In September 1997, the
Kalitta Companies sold to Kitty Hawk for $51.0 million 16 Boeing 727 aircraft,
comprising 15 aircraft in freighter configuration and one aircraft in passenger
configuration. As part of the transaction, the Kalitta Companies assigned to
Kitty Hawk all of their customer contracts relating to the aircraft sold. The
agreement pursuant to which the sale took place includes an option in favor of
the Kalitta Companies to repurchase all but three of the aircraft on or before
March 31, 1998 at a price equal to the $51.0 million initial purchase price,
less the $14 million value of the three aircraft not subject to the option, and
plus any costs incurred by Kitty Hawk to maintain the aircraft to be
repurchased, including compliance with Directives and noise reduction standards.
The agreement also includes an option in favor of Kitty Hawk to put the 13
aircraft back to the Kalitta Companies on or before December 31, 1997 at the
same price as applies to the repurchase option. Should either party elect to
exercise its option, the Kalitta Companies would be obligated to operate the
repurchased aircraft to meet any contractual obligations of Kitty Hawk relating
thereto. In connection with the sale of these Boeing 727 aircraft, Kitty Hawk
entered into a three year ACMI contract with the Kalitta Companies to furnish
six Boeing 727s to the Kalitta Companies and one Boeing 727 to AIC.

Purchase of Services From Affiliates of Kalitta. Mr. Kalitta is the sole
stockholder of AIT, OK and FOL, each of which provided services to the other
Kalitta Companies. AIT is a certified travel agency that makes business travel
arrangements for the employees of the Kalitta Companies, particularly flight
crews. OK repairs aircraft turbine engines for small aircraft and leases and
sells aircraft engine parts, but does not compete with the aircraft maintenance
operations of the other Kalitta Companies. OK does business with KFS and over
the three year period ended December 31, 1996, KFS received parts and services
from OK having fair market values of approximately $151,000 (1994), $150,000
(1995) and $560,000 (1996). In the year ended December 31, 1996, OK began
leasing two Hansa jets from KFS to provide cargo service for United Parcel
Service. The fair market value of the lease charges for that year were
approximately $768,000.

FOL is a charter manager for a variety of customers, including,
particularly, the Delco Electronics division of GM ("Delco") and provides
logistics services for Delco. FOL has used KFS to provide charter aircraft for
Delco. Over the two-year period ended December 31, 1996, FOL incurred KFS
charter fees with a fair market value of approximately $547,000 (1995) and
$159,000 (1996).

KFS has historically provided charter services and auxiliary power unit
maintenance for AIA. AIA has chartered KFS to ferry AIA flight and maintenance
crews and other AIA personnel, as well as airframe and engine parts. During the
three year ended December 31, 1996, the total charges of KFS to AIA were
approximately $605,000 (1994), $1.3 million (1995) and $1.5 million (1996).

Mr. Kalitta is the sole shareholder of ConWes, Inc., which is a 50% joint
venture partner with National Aircraft Service, Inc. ("NAS"). NAS holds an STC
to replace a portion of the turbo-compressor in Douglas DC-8 aircraft for the
purpose of improving its heating, cooling and pressurization systems. NAS has
made these modifications to the Kalitta Companies' Douglas DC-8 aircraft for
which the joint venture was paid approximately $368,000 in 1996 and $96,000 in
1995.

Transactions with a Relative of Kalitta. One of the Kalitta Companies
currently dry leases one Douglas DC-8-50 aircraft to Trans Continental Airlines,
Inc. ("Trans Continental"), a corporation owned solely by Scott Kalitta, Mr.
Kalitta's son. The lease rate is $1,000 per block hour for the first 80 hours
per month and $800 for each block hour per month thereafter, which the Company
believes is representative of market rates. The lease expires on December 31,
1998. In addition to providing services to unrelated third

84
<PAGE> 88

parties, Trans Continental flies subcharter flights for the Kalitta Companies
and is part of the Kalitta Companies' "contractor team" for U.S. Miliary
charters. Beginning in December 1994, the Kalitta Companies leased three Douglas
DC-8 aircraft to Trans Continental at rates the management of the Kalitta
Companies believes represent fair market rates. In December 1995, the Kalitta
Companies sold Trans Continental a Douglas DC-8-62 for a purchase price of $5.1
million. In March 1996, the Kalitta Companies sold Trans Continental a Douglas
DC-8-50 for a purchase price of $750,000 after Trans Continental had completed a
heavy maintenance check on this aircraft at its cost. The management of the
Kalitta Companies believes that it sold both of these aircraft to Trans
Continental at market rates.

The Kalitta Companies also have three service contracts with Trans
Continental, including an airframe maintenance agreement, an engine maintenance
agreement and a parts exchange agreement pursuant to which the Kalitta Companies
repair and replace parts for Trans Continental at the Kalitta Companies' cost
plus 10%. The Kalitta Companies believe that the labor rates provided for in
these agreements are more favorable than market rates. The Kalitta Companies and
Trans Continental also have a parts master lease agreement pursuant to which
Trans Continental leases aircraft parts from the Company at favorable rates.
Other than the engine maintenance agreement which expires on December 31, 1998,
either party may terminate any of these agreements at any time upon 30 days'
notice to the other. During the three years ended December 31, 1996, Trans
Continental paid the Kalitta Companies approximately $353,000 (1994), $11.6
million (1995) and $5.2 million (1996) for aircraft and parts leases,
maintenance and parts.

Lease of Facilities from Kalitta Affiliates. The headquarters of the
Kalitta Companies is owned by Kalitta, L.L.C., a Michigan limited liability
company that is 20% owned by Mr. Kalitta. The remaining 80% is separately owned
in equal shares by Mr. Kalitta's son, Scott Kalitta, and Mr. Kalitta's nephew,
Doug Kalitta. The Kalitta Companies have a 10 year "net" lease for the facility
which expires on May 14, 2007 and which obligates the Kalitta Companies to pay
annual rent of approximately $712,800, as well as all costs associated with the
facility, including taxes, insurance, capital repair and replacement and other
operating expenses. Kalitta, L.L.C., however, assumed the cost of all leasehold
improvements and provides all of the furniture and fixtures for the building as
part of the lease rate. The limited liability company purchased the building in
December 1996 for approximately $2.3 million. The Company believes that this
rental rate may be greater than the fair market rent for the building. Pursuant
to the Merger Agreement, Kitty Hawk will obtain an appraisal of the fair market
rental for the building by October 31, 1997. Kalitta, L.L.C. must then either
terminate or modify the lease to reflect the appraised rent.

Loan to and Guaranty of Indebtedness of Kalitta Companies. In 1997, Mr.
Kalitta has made a number of advances to the Kalitta Companies to cover cash
shortfalls. As of June 30, 1997, the total amount of such advances was $300,462.
Interest does not accrue on the amount advanced. Under the Merger Agreement, the
Kalitta Companies are obligated to repay these advances prior to consummation of
the Merger. In addition, essentially all of the indebtedness of the Kalitta
Companies is personally guaranteed by Kalitta. As of June 30, 1997, the total
principal amount of the indebtedness so guaranteed was approximately $248
million.

Promotional Activities. The Kalitta Companies have historically sponsored
and generally provide all of the financial support for the racing activities of
Mr. Kalitta, his son Scott Kalitta, and his nephew, Doug Kalitta, including the
costs to build, maintain and transport the race cars. Over the three years ended
December 31, 1996, the total payments made by the Kalitta Companies to support
these activities were approximately $2.6 million (1994), $3.6 million (1995) and
$3.1 million (1996). In return, the Kalitta Companies have received promotional
benefits including placement of the names of the Kalitta Companies on the
vehicles and relating promotional items, as well as the opportunity to entertain
customers at racing events. Pursuant to the Merger Agreement, Mr. Kalitta will
form a new entity to purchase the racing related assets now owned by the Kalitta
Companies for $350,000 on or before the consummation of the Merger. The Company
will have no ownership interest in this entity. The Company has agreed, however,
to sponsor the racing activities of the new entity for a period of three years
in an amount of up to $2.0 million per year. Consequently, the Company will have
the same promotional opportunities as those previously used by the Kalitta
Companies.

85
<PAGE> 89

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of September 12, 1997
(except as noted) by (i) each person known by the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company and (iv) all of the directors and
executive officers of the Company as a group. Except as noted, all shares shown
in the table below are held with sole voting and investment power, subject to
community property laws.

<TABLE>
<CAPTION>
SHARES OWNED SHARES SHARES OWNED
BENEFICIALLY BEING BENEFICIALLY
BEFORE THE OFFERING SOLD AFTER THE TRANSACTIONS
------------------- --------- ----------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER NUMBER PERCENT
---------------- --------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
M. Tom Christopher(1)......................... 6,673,436 63.8% 1,000,000 5,673,436 30.6%
Conrad Kalitta(1)(2)(3)....................... 0 -- 0 5,099,150 27.5%
Tilmon J. Reeves(1)........................... 184,424 1.8% 75,000 109,424 (4)
Richard R. Wadsworth(1)(5).................... 72,140 (4) 25,000 47,140 (4)
DIRECTORS:
Ted J. Coonfield(1)........................... 600 (4) 0 600 (4)
James R. Craig(1)(5).......................... 0 -- 0 0 --
George W. Kelsey(1)(3)........................ 0 -- 0 0 --
Philip J. Sauder(1)(3)........................ 0 -- 0 0 --
Lewis S. White(1)............................. 0 -- 0 0 --
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP (7 PERSONS)........................... 6,930,600 66.3% 1,100,000 10,929,750 58.9%
RCM Capital Management, L.L.C.(6)............. 953,800 9.1% 0 953,800 5.1%
Four Embarcadero Center, Suite 2900
San Francisco, California 94111
Skyline Asset Management, L.P.(7)............. 536,100 5.1% 0 536,100 2.9%
311 S. Wacker Drive, Suite 4500
Chicago, IL 60606
</TABLE>

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

(1) The address for this stockholder is 1515 West 20th Street, Dallas/Fort Worth
International Airport, Texas 75261.

(2) Mr. Kalitta will receive 5,099,150 shares of Common Stock upon consummation
of the Merger, of which 1,150,000 will be held in escrow for 42 months to
satisfy Mr. Kalitta's indemnification obligations, if any, under the Merger
Agreement. Mr. Kalitta will retain the right to vote such shares while they
are being held in escrow.

(3) Pursuant to the Merger Agreement, Messrs. Kalitta, Kelsey and Sauder will be
appointed to the Board of Directors.

(4) Less than 1%.

(5) Concurrently with the consummation of the Merger, Messrs. Craig and
Wadsworth will resign from the Board of Directors.

(6) Based upon a Schedule 13F filed with the Commission by such beneficial owner
for the quarter ended June 30, 1997. RCM Capital Management, L.L.C. ("RCM
Capital"), an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, is the beneficial owner of such shares. RCM
Limited, L.P. ("RCM Limited") is the managing agent of RCM Capital and has
beneficial ownership of such shares only to the extent it may be deemed to
beneficially own such shares. RCM General Corporation is the general partner
of RCM Limited and has beneficial ownership of such shares only to the
extent it may be deemed to beneficially own such shares. RCM Capital is a
wholly owned subsidiary of Dresdner Bank AG ("Dresdner"), an international
banking organization headquartered in Frankfurt, Germany. Dresdner has
beneficial ownership of such shares only to the extent it may be deemed to
beneficially own such shares.

(7) Based upon a Schedule 13F filed with the Commission by such beneficial owner
for the quarter ended June 30, 1997.

86
<PAGE> 90

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of Kitty Hawk consists of (i) 25,000,000
shares of Common Stock and (ii) 1,000,000 shares of Preferred Stock. At
September 16, 1997, the Company had approximately 1,300 holders of record and
beneficial owners of Common Stock with 10,451,807 shares outstanding and no
shares of Preferred Stock outstanding.

COMMON STOCK

Holders of shares of Common Stock are entitled to share ratably in such
dividends as may be declared by the Board of Directors and paid by the Company
out of funds legally available therefor, subject to prior rights of any
outstanding shares of any preferred stock. See "Dividend Policy." In the event
of any dissolution, liquidation or winding up of the Company, holders of shares
of Common Stock are entitled to share ratably in assets remaining after payment
of all liabilities and liquidation preferences, if any.

Except as otherwise required by law or the Certificate of Incorporation,
the holders of Common Stock are entitled to one vote per share on all matters
voted on by stockholders, including the election of directors. The Certificate
of Incorporation limits the aggregate voting power of non-U.S. persons to
22 1/2% of the votes voting on or consenting to any matter. See
"Business -- Government Regulation."

Holders of shares of Common Stock have no preemptive, cumulative voting,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of Common Stock are subject to the rights, preferences and
privileges granted to the holders of any series of preferred stock which the
Company may issue in the future.

PREFERRED STOCK

The Board of Directors may, without further action by the Company's
stockholders, from time to time, direct the issuance of fully authorized shares
of preferred stock in classes or series and may, at the time of issuance,
determine the powers, rights, preferences and limitations of each class or
series. Satisfaction of any dividend preferences on outstanding shares of
preferred stock would reduce the amount of funds available for the payment of
dividends on Common Stock. Also, holders of preferred stock would be entitled to
receive a preference payment in the event of any liquidation, dissolution or
winding up of the Company before any payment is made to the holders of Common
Stock. Under certain circumstances, the issuance of such preferred stock may
render more difficult or tend to discourage a merger, tender offer, or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management.

SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS

General. The Certificate of Incorporation and Bylaws of Kitty Hawk include
certain provisions that could have anti-takeover effects. The provisions are
intended to enhance the likelihood of continuity and stability in the
composition of and in the policies formulated by, the Board of Directors. These
provisions also are intended to help ensure that the Board of Directors, if
confronted by a surprise proposal from a third party that has acquired a block
of Common Stock of the Company, will have sufficient time to review the
proposal, to develop appropriate alternatives to the proposal and to act in what
the Board of Directors believes to be the best interests of the Company and its
stockholders. These provisions of the Certificate of Incorporation may not be
amended or repealed by the stockholders of the Company except upon the vote of
the holders of at least two-thirds of the outstanding shares of each class of
the Company's capital stock then entitled to vote thereon.

The following is a summary of the provisions contained in the Company's
Certificate of Incorporation and Bylaws and is qualified in its entirety by
reference to such documents in the respective forms filed as exhibits to the
Registration Statement of which this Prospectus forms a part. In addition,
pursuant to the Merger Agreement, the Company's Bylaws will be amended to add
certain other provisions. See "The Merger -- Bylaw Amendments Concerning
Governance of the Company and Stockholders' Agreement."

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<PAGE> 91

Amendment of Bylaw Provisions. The Certificate of Incorporation provides
that Bylaw provisions may be adopted, altered, amended, or repealed only by the
affirmative vote of (i) at least two-thirds of the members of the Board of
Directors who are elected by the holders of Common Stock or (ii) the holders of
at least two-thirds of the outstanding shares of each class of the Company's
capital stock then entitled to vote thereon.

Classified Board of Directors. The Certificate of Incorporation provides
for a Board of Directors divided into three classes of directors serving
staggered three-year terms. The classification of directors has the effect of
making it more difficult for stockholders to change the composition of the Board
of Directors in a short period of time. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors.

Number of Directors; Filling Vacancies; Removal. The Certificate of
Incorporation provides that the Board of Directors will fix the number of
members of the Board of Directors to consist of at least one member (plus such
number of directors as may be elected from time to time pursuant to the terms of
any series of preferred stock that may be issued and outstanding from time to
time). The Company's Bylaws provide that the Board of Directors, acting by
majority vote of the directors then in office, may fill any newly created
directorship or vacancies on the Board of Directors.

Under the Delaware General Corporation Law (the "DGCL"), in the case of a
corporation having a classified board, stockholders may remove a director only
for cause (unless the certificate of incorporation provides otherwise). The
Company's Certificate of Incorporation provides that a director may only be
removed for cause. "Cause" is defined in the Certificate of Incorporation to
mean that a director (i) has been convicted of a felony by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal, (ii) has
missed 12 consecutive meetings of the Board of Directors or (iii) has been
adjudged by a court of competent jurisdiction to be liable for gross negligence
or misconduct in the performance of his duties to the corporation in a matter of
substantial importance to the corporation and such adjudication has become final
and non-appealable. These provisions will preclude a stockholder from
simultaneously removing incumbent directors without cause and gaining control of
the Board of Directors by filling the vacancies created by such removal with its
own nominees.

Special Meetings. The Bylaws and Certificate of Incorporation provide that
special meetings of stockholders may be called by a majority of the Board of
Directors, the Chairman of the Board of Directors, or by any holder or holders
of at least 25% of any class of the Company's outstanding capital stock then
entitled to vote at the meeting.

Advance Notice Requirements for Stockholder Proposals and Director
Nominees. The Bylaws establish an advance notice procedure with regard to
business proposed to be submitted by a stockholder at any annual or special
meeting of stockholders of the Company, including the nomination of candidates
for election as directors. The procedure provides that a written notice of
proposed stockholder business at any annual meeting must be received by the
Secretary of the Company not more than 180 days nor less than 120 days before
the first anniversary of the prior year's annual meeting or, in the event of a
special meeting, not more than 10 days after the notice of the special meeting.

Notice to Kitty Hawk from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, including such
person's written consent to being named in a proxy statement as a nominee and to
serving as a director if elected.

The chairman of a meeting of stockholders may determine that a person is
not nominated in accordance with the nominating procedure, in which case such
person's nomination will be disregarded. If the chairman of a meeting of
stockholders determines that other business has not been properly brought before
such meeting in accordance with the Bylaw procedures, such business will not be
conducted at the meeting. Nothing in the nomination procedure or the business
will preclude discussion by any stockholder of any nomination or business
properly made or brought before the annual or any other meeting in accordance
with the foregoing procedures.

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<PAGE> 92

Limitations on Directors' Liability. The Company's Certificate of
Incorporation provides that, to the fullest extent permitted by Delaware law, no
director shall be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director. The effect of this provision is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of fiduciary duty as a director (including breaches
resulting from gross negligence), except for liability (i) for any breach of his
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (unlawful payments of dividends or
unlawful stock repurchases or redemptions) or (iv) for any transaction from
which the director derived an improper personal benefit. This provision also
will not limit the liability of directors under federal securities laws for
violations not involving a breach of fiduciary duty. This elimination of
liability for monetary damages permitted by Delaware law does not alter the
standard of conduct with which directors must comply nor does it affect the
availability of equitable relief to the Company and its stockholders.

Restrictions on Foreign Directors, Officers and Voting. The Company's
Certificate of Incorporation limits the aggregate voting power of non-U.S.
persons to 22 1/2% of the votes voting on or consenting to any matter.
Furthermore, the Bylaws do not permit non-U.S. citizens to serve as directors or
officers of the Company.

DELAWARE STATUTE

The Certificate of Incorporation of Kitty Hawk provides for the Company to
be subject to Section 203 of the DGCL ("Section 203"). Under Section 203,
certain transactions and business combinations between a corporation and an
"interested stockholder" owning 15% or more of the corporation's outstanding
voting stock are restricted, for a period of three years from the date the
stockholder becomes an interested stockholder. Generally, Section 203 prohibits
significant business transactions such as a merger with, disposition of assets
to or receipt of disproportionate financial benefits by, the interested
stockholder, or any other transaction that would increase the interested
stockholder's proportionate ownership of any class or series of the Company's
capital stock unless (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, has been approved by the
Board of Directors before the person becomes an interested stockholder; (ii) the
interested stockholder acquires 85% or more of the outstanding voting stock of
the Company in the same transaction that makes it an interested stockholder; or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the Board of Directors and by the holders of
at least two-thirds of the Company's outstanding voting stock at an annual or
special meeting, excluding shares owned by the interested stockholder.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

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<PAGE> 93

DESCRIPTION OF CERTAIN INDEBTEDNESS

The following is a summary of the material terms of the Notes, the
Indenture under which the Notes will be issued (the "Indenture"), the Credit
Agreement, the New Credit Facility (as defined) and certain other existing
indebtedness of the Company and is qualified in its entirety by reference to the
related underlying documents, copies of which are filed as an exhibit to the
Registration Statement of which this Prospectus is a part.

EXISTING DEBT

During August 1996, Kitty Hawk entered into a Credit Agreement with WFB and
BOT. This Credit Agreement relates to a $15 million Revolving Credit Facility,
an approximate $12 million Term Loans A Facility, an approximate $11.2 million
Term Loans B Facility and a $10 million Term Loans C Facility (collectively, the
"Commitments"). As of August 14, 1997, approximately $3.5 million was
outstanding under the Revolving Credit Facility, approximately $10.6 million was
outstanding under Terms Loans A, approximately $10 million was outstanding under
Term Loans B and approximately $8.6 million was outstanding under Term Loans C.
These Commitments bear interest at WFB's prime rate, or at Kitty Hawk's option,
the Eurodollar rate plus 1.5% to 2.0%, based upon a debt-to-cash flow ratio of
Kitty Hawk.

The Credit Agreement subjects Kitty Hawk to financial covenants, including
fixed charge coverage, cash flow and leverage ratios. In addition, the Credit
Agreement prohibits redemption of Kitty Hawk securities, certain investments
outside Kitty Hawk's line of business, transactions with affiliates and
additional indebtedness without prior consent of WFB. The Credit Agreement also
limits the ability of Kitty Hawk to change its line of business and limits the
payment of dividends.

All amounts outstanding under the Credit Agreement are cross-collateralized
and are secured by certain aircraft owned by Kitty Hawk prior to the Merger, all
aircraft acquired with advances under the restricted portion of the Revolving
Credit Facility while those advances are outstanding, certain leases of aircraft
and engines, accounts, chattel paper, general intangibles and other personal
property.

In connection with consummation of the Common Stock Offering and the Note
Offering, the Company intends to repay all outstanding borrowings under Term
Loans A, B and C then outstanding. The Revolving Credit Facility will remain
outstanding, subject to possible refinancing. See "New Credit Facility" below.

Kitty Hawk also has two loans with 1st Source Bank. As of August 14, 1997,
the outstanding balance of the first loan was approximately $835,000. The loan
bears interest at 9.75%, is secured by a DC-9-15F and matures in May 2000. As of
August 14, 1997, the outstanding balance of the second loan was approximately
$1.2 million. The loan bears interest at 8.5%, is secured by a DC-9-15F and
matures in July, 2002. The 1st Source loans contain certain aircraft maintenance
covenants and provides that a change in Kitty Hawk's business is an event of
default upon which 1st Source may declare all or any part of the remaining
unpaid principal due and payable. In connection with the consummation of the
Common Stock Offering and the Note Offering, the Company intends to discharge
this debt.

In September 1997, Kitty Hawk purchased sixteen Boeing 727 aircraft from
AIA for an aggregate cash consideration of approximately $51 million. The
purchase of this aircraft was financed by a $46 million term loan. This loan
bears interest at the applicable rate under the Credit Agreement, plus 1.0% from
January 1 through December 31, 1999, and 1.5% beginning January 1, 2000 and
matures on June 30, 2001. Interest only is payable through March 31, 1998. The
term loan begins to amortize on June 30, 1998 with equal quarterly installments
of principal and interest until maturity. This debt will remain outstanding
following consummation of the Common Stock Offering and the Note Offering.

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<PAGE> 94

As of June 30, 1997, total indebtedness of the Kalitta Companies for money
borrowed was approximately $248.3 million. Approximately $131.1 million of this
indebtedness accrues interest at fixed rates ranging from 6.4% to 18.0% per
annum, while the remainder accrues interest at variable rates ranging from one
percent to four percent over a specified per annum prime or other base rate.
Substantially all of this indebtedness has been reclassified as current.

Substantially all of the indebtedness of the Kalitta Companies will be
retired with the net proceeds of this Common Stock Offering and the Notes
Offering, subject to payment of approximately $3 million in prepayment
penalties. See "Use of Proceeds."

NEW CREDIT FACILITY

The Company expects to obtain a revolving credit facility in the form of a
new credit facility (the "New Credit Facility") in the aggregate amount of up to
$100 million, although there can be no assurance in this regard. It is
anticipated that substantially all of this New Credit Facility will replace the
Revolving Credit Facility described above under "Existing Debt" and will be
secured by the accounts, chattel paper, inventories, general intangibles and
certain other personal property of the Company. The Company has not yet begun
negotiations with respect to the New Credit Facility and, accordingly, no
assurance can be given as to its ultimate terms or availability. See "Senior
Secured Notes" below.

SENIOR SECURED NOTES

Consummation of the Common Stock Offering is conditioned upon consummation
of the Note Offering.

The Notes will mature seven years after issuance and will be issued in an
aggregate principal amount of approximately $340 million. The Notes are expected
to bear interest at a rate of approximately 10% per annum, payable in cash
semiannually. The Notes will be secured by certain of the Company's aircraft and
the MEA Boeing 747s. The Notes will be guaranteed on a senior secured basis by
substantially all of the Company's subsidiaries, other than AIC. The Notes will
be redeemable at the Company's option, beginning in 2002, at a premium. Up to
35% of the Notes will also be redeemable at the Company's option, until 2000,
with proceeds from public equity offerings. The Notes will be initially issued
under Rule 144A, but will be required to be exchanged for Notes of substantially
identical terms registered under the Securities Act.

The Indenture will contain the following restrictive covenants, among
others: limitation on indebtedness; limitation on restricted payments (including
dividends); limitation on dividend restrictions of subsidiaries; limitation on
capital stock of subsidiaries; limitation on transactions with affiliates;
limitation on liens; limitation on sale-leaseback transactions; limitation on
asset sales; and limitation on mergers and similar transactions. In addition,
the Senior Secured Notes will be redeemable, at the holder's option, upon a
Change of Control of the Company.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Common Stock Offering, 18,550,957 shares
(19,165,957 shares if the Underwriters' over-allotment option is exercised in
full) of Common Stock will be outstanding. The 4,100,000 shares (4,715,000
shares if the Underwriters' over-allotment option is exercised in full) of
Common Stock sold in this offering will be freely tradable without restriction
or further registration under the Securities Act, unless acquired by
"affiliates" of the Company. Pursuant to Rule 144 under the Securities Act, upon
completion of this Common Stock Offering, 10,929,150 shares of Common Stock will
be deemed "restricted securities" within the meaning of Rule 144 under the
Securities Act (the "Restricted Shares") and may be resold to the extent
permitted under Rule 144 and Rule 701 of the Securities Act or under any
exemption under the Securities Act.

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<PAGE> 95

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an "affiliate," who has beneficially
owned his or her shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company or (if applicable) the date
they were acquired from an "affiliate," is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the then outstanding shares during the four calendar weeks
preceding each such sale. Sales under Rule 144 also are subject to certain
manner of sale restrictions and notice requirements and to the availability of
current public information concerning the Company. A person (or persons whose
shares are aggregated) who is not deemed an "affiliate" of the Company and has
not been an affiliate of the Company for at least the prior three months and who
has owned shares for at least two years (including the holding period of any
prior owner except an affiliate), is entitled to sell such shares under Rule 144
without regard to the volume limitations and the other conditions described
above. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly or indirectly, through the use of one or more intermediaries, controls,
or is controlled by, or is under the common control with, such issuer.

Any employee, officer, or director of Kitty Hawk who purchases his or her
shares pursuant to a written compensatory plan or contract is entitled to rely
on the resale provisions of Rule 701 under the Securities Act, which permits
non-affiliates, subject to the limitations and requirements of Rule 701, to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitations, or notice provisions of Rule 144 and permits
affiliates, subject to the limitations and restrictions of Rule 701, to sell
their Rule 701 shares without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days from the date of this Prospectus.

The Company has filed registration statements under the Securities Act
covering 600,000 shares of Common Stock reserved for issuance under the Plans.
See "Management -- Employee Compensation Plans and Arrangements." As of the date
hereof, 1,807 shares had been issued under the Plans. Shares registered under
such registration statements are available for sale in the open market when
issued pursuant to the Plans, subject to Rule 144 volume limitations applicable
to affiliates and provisions of the Plans, including vesting.

Messrs. Christopher, Kalitta, Reeves and Wadsworth, who collectively will
hold 10,929,150 shares of Common Stock in the aggregate after this Common Stock
Offering, along with the Company and its other directors and executive officers
have agreed that, for a period of 90 days from the date of this Prospectus, they
will not, without the prior written consent of Morgan Stanley & Co.
Incorporated, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for, Common Stock, except for up to shares issuable
pursuant to the Plans. Such consent of Morgan Stanley & Co. Incorporated may be
provided without notice to purchasers of the Common Stock or to officials of the
Nasdaq National Market System. See "Management -- Employee Compensation Plans
and Arrangements."

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<PAGE> 96

UNDERWRITERS

Under the terms and subject to the conditions of the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement") the U.S. Underwriters named
below are acting as U.S. Representatives, and the International Underwriters
named below are acting as International Representatives. The Underwriters (as
defined herein) have severally agreed to purchase, and the Company has agreed to
sell to them severally, the respective number of shares of Common Stock set
forth opposite the names of each Underwriter below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
BT Alex. Brown Incorporated...............................
---------
Subtotal.................................................. 3,280,000
International Underwriters:
Morgan Stanley & Co. International Limited................
BT Alex. Brown International, a division of Bankers Trust
International PLC......................................
---------
Subtotal.................................................. 820,000
---------
Total............................................. 4,100,000
=========
</TABLE>

The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock offered hereby are subject
to the approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the U.S.
Underwriters' overallotment option described below) if any such shares are
taken.

Pursuant to the agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (a)
it is not purchasing any U.S. Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
of the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions (i) it is not purchasing any International Shares (as
defined herein) for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares in the United States or in any province or territory of
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As used
herein, "United States or Canadian Person" means any national or resident of the
United States or of any province or territory of Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian Person) and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.

Pursuant to the agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.

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<PAGE> 97

Pursuant to the agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
any province or territory of Canada or to, or for the benefit of, any resident
of any province or territory of Canada in contravention of the securities laws
thereof and that any offer of Common Stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer is made, and that such dealer will
deliver to any other dealer to whom it sells any of such Common Stock a notice
to the foregoing effect.

Pursuant to the agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and during the period of six months after the date hereof will not offer
to sell any shares of Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations (to the extent applicable) with
respect to anything done by it in relation to the shares of Common Stock offered
hereby in, from or otherwise involving the United Kingdom; and (iii) it has only
issued or passed on and will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the issue of the shares
of Common Stock, other than any document which consists of, or is a part of,
listing particulars, supplementary listing particulars or any other document
required or permitted to be published by listing rules under Article IV of the
Financial Services Act 1986, if that person is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995, or is a person to whom the document may otherwise
lawfully be issued or passed on.

The Underwriters initially propose to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and part to certain dealers at a price that represents a
concession of not in excess of per share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of per share to other Underwriters or to certain dealers. After
the initial offering of the shares of Common Stock, the public offering price
and other selling terms may from time to time be varied by the Representatives.

Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters, an option exercisable for 30 days after the date of this
Prospectus, to purchase up to 600,000 additional shares of Common Stock at the
public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of shares of U.S. Shares offered by the U.S.
Underwriters hereby.

The Company and each of the executive officers and directors of the Company
have agreed that without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not (a) register for sale,
issue, offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (other than shares of Common Stock acquired in the
open market after the date of this Prospectus) or (b) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (a) or (b) above is to be settled by delivery of Common
Stock or such other securities, in cash or

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<PAGE> 98

otherwise for a period of 90 days after the date of this Prospectus, other than
(x) the shares of Common Stock to be sold hereunder, and (y) shares
issuable pursuant to the Plans.

The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.

The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed 5% of the total number of shares of Common
Stock offered by them.

In order to facilitate this Common Stock Offering, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Common Stock. Specifically, the Underwriters may overallot in connection
with the Common Stock Offering, creating a short position in the Common Stock
for their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the Common Stock Offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.

The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission. In general, a passive
market maker may not bid for, or purchase, the Common Stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the Common Stock during the specified two month prior period,
or 200 shares, whichever is greater. A passive market maker must identify
passive market making bids as such on the Nasdaq electronic inter-dealer
reporting system. Passive market making may stabilize or maintain the market
price of the Common Stock above independent market levels. Underwriters and
dealers are not required to engage in passive market making and may end passive
market making activities at any time.

BT Alex. Brown Incorporated, one of the Underwriters, rendered a fairness
opinion to the Company in connection with the Merger and received customary fees
for rendering such opinion.

LEGAL MATTERS

The validity of the shares offered hereby and certain other legal matters
will be passed upon for the Company and the Selling Stockholder by Haynes and
Boone, LLP, Dallas, Texas. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Shearman & Sterling, New
York, New York.

EXPERTS

The consolidated financial statements of Kitty Hawk, Inc., at August 31,
1995 and 1996 and at December 31, 1996 and for each of the three years in the
period ended August 31, 1996 and for the four month period ended December 31,
1996, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

The combined financial statements of American International Airways, Inc.
and related companies as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996, included in this Prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement (which report expresses an unqualified opinion

95
<PAGE> 99

and includes an explanatory paragraph which indicates that there are matters
that raise substantial doubt about the Companies' ability to continue as a going
concern), and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files reports, proxy and information statements and
other information with the Securities and Exchange Commission (the
"Commission"). The reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities that
the Commission maintains at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Commission's regional offices located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of these materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at the principal
offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such
documents may also be obtained at the Web site maintained by the Commission
(http://www.sec.gov). The Company's Common Stock is quoted on the Nasdaq
National Market and such reports, proxy and information statements and other
information may be inspected at the National Association of Securities Dealers,
Inc., 1735 K. Street N.W., Washington, D.C. 20006.

The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
Common Stock. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. Statements made in the Prospectus concerning the contents of any
documents referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description and
each such statement shall be deemed qualified in its entirety by such reference.

96
<PAGE> 100

INDEX TO FINANCIAL STATEMENTS

KITTY HAWK, INC. AND SUBSIDIARIES

<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of August 31, 1995 and 1996
and December 31, 1996..................................... F-3
Consolidated Statements of Income for the years ended August
31, 1994, 1995 and 1996 and for the four months ended
December 31, 1995 (unaudited) and 1996.................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1994, 1995 and 1996 and for the
four months ended December 31, 1996....................... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1994, 1995 and 1996 and for the four months
ended December 31, 1995 (unaudited) and 1996.............. F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheet as of June 30, 1997
(unaudited)............................................... F-17
Condensed Consolidated Statements of Operations for the six
month periods ended June 30, 1996 and 1997 (unaudited).... F-18
Condensed Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 1997 (unaudited)............ F-19
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1996 and 1997 (unaudited).... F-20
Notes to Condensed Consolidated Financial Statements........ F-21

THE KALITTA COMPANIES (AMERICAN INTERNATIONAL AIRWAYS, INC. AND
RELATED COMPANIES)
Independent Auditors' Report................................ F-24
Combined Balance Sheets at December 31, 1995 and 1996 and
June 30, 1997 (unaudited)................................. F-25
Combined Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and the six month periods
ended June 30, 1996 and 1997 (unaudited).................. F-26
Combined Statements of Stockholder's Equity for the years
ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1997 (unaudited)........................... F-27
Combined Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and the six month periods
ended June 30, 1996 and 1997 (unaudited).................. F-28
Notes to Combined Financial Statements...................... F-30
</TABLE>

F-1
<PAGE> 101

REPORT OF INDEPENDENT AUDITORS

Stockholders
Kitty Hawk, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Kitty Hawk,
Inc. and subsidiaries as of August 31, 1995 and 1996 and December 31, 1996 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended August 31, 1996 and for
the four months ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kitty Hawk,
Inc. and subsidiaries at August 31, 1995 and 1996 and December 31, 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1996 and for the four months ended
December 31, 1996, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Dallas, Texas
February 7, 1997

F-2
<PAGE> 102

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, DECEMBER 31,
1995 1996 1996
----------- ------------ ------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents....................... $3,801,378.. $ 5,763,904 $ 27,320,402
Trade accounts receivable....................... 12,967,734.. 14,195,990 37,828,018
Income tax receivable........................... -- 765,395 --
Deferred income taxes........................... 50,410..... 156,562 107,564
Inventory and aircraft supplies................. 98,386..... 1,713,812 2,789,982
Prepaid expenses and other assets............... 797,825.... 918,929 1,143,989
Deposits on aircraft............................ -- -- 5,438,628
----------- ------------ ------------
Total current assets.................... 17,715,733.. 23,514,592 74,628,583
Property and equipment
Aircraft........................................ 36,179,455.. 53,695,320 53,140,853
Aircraft work-in-progress....................... -- 13,476,355 6,732,878
Machinery and equipment......................... 1,425,272.. 1,776,319 2,680,692
Leasehold improvements.......................... -- 75,313 778,879
Furniture and fixtures.......................... 251,349 166,057 166,057
Transportation equipment........................ 176,057 236,708 289,499
----------- ------------ ------------
38,032,133 69,426,072 63,788,858
Less: accumulated depreciation and
amortization................................. (7,794,332) (13,112,786) (15,390,015)
----------- ------------ ------------
Net property and equipment.............. 30,237,801 56,313,286 48,398,843
----------- ------------ ------------
Total assets...................................... $47,953,534 $ 79,827,878 $123,027,426
=========== ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................ $ 9,327,109 $ 12,952,180 $ 8,853,292
Accrued expenses................................ 1,336,696 1,580,465 23,668,609
Income taxes payable -- -- 2,526,737
Accrued maintenance reserves.................... 2,026,255 2,323,466 2,373,157
Revolving Credit Facility for aircraft
acquisitions expected to be refinanced....... -- 10,000,000 --
Current maturities of long-term debt............ 3,278,553 3,620,240 3,687,888
----------- ------------ ------------
Total current liabilities............... 15,968,613 30,476,351 41,109,683
Long-term debt.................................... 13,702,652 23,291,302 21,080,452
Deferred income taxes............................. 1,316,365 2,421,480 2,544,900
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value: Authorized
shares -- 1,000,000, none issued............. -- -- --
Common stock, $.01 par value: Authorized
shares -- 25,000,000; issued and
outstanding -- 7,423,436 and 7,967,710 at
August 31, 1995 and 1996, respectively and
10,669,517 at December 31, 1996.............. 74,234 79,677 106,695
Additional paid-in capital...................... -- 4,635,524 33,968,700
Retained earnings............................... 16,891,670 20,999,846 26,293,298
Less common stock in treasury, 217,710 shares at
August 31, 1996 and December 31, 1996........ -- (2,076,302) (2,076,302)
----------- ------------ ------------
Total stockholders' equity.............. 16,965,904 23,638,745 58,292,391
----------- ------------ ------------
Total liabilities and stockholders' equity........ $47,953,534 $ 79,827,878 $123,027,426
=========== ============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 103

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED AUGUST 31, DECEMBER 31,
------------------------------------------ -------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier... $ 28,284,894 $ 41,117,564 $ 52,921,762 $17,994,371 $20,577,072
Air logistics......... 79,414,952 62,592,819 89,492,974 51,733,438 39,408,484
------------ ------------ ------------ ----------- -----------
Total
revenues.... 107,699,846 103,710,383 142,414,736 69,727,809 59,985,556
------------ ------------ ------------ ----------- -----------
Costs of revenues:
Air freight carrier... 19,549,833 28,104,280 38,760,430 11,684,882 13,784,331
Air logistics......... 73,401,606 57,428,344 80,139,570 45,996,786 33,795,567
------------ ------------ ------------ ----------- -----------
Total costs of
revenues.... 92,951,439 85,532,624 118,900,000 57,681,668 47,579,898
------------ ------------ ------------ ----------- -----------
Gross profit............ 14,748,407 18,177,759 23,514,736 12,046,141 12,405,658
General and
administrative
expenses.............. 6,012,975 7,832,167 9,079,891 2,861,518 2,724,763
Non-qualified employee
profit sharing
expense............... 731,862 1,000,957 1,169,880 889,046 962,263
Stock option grants to
executives......... -- -- 4,230,954 -- --
------------ ------------ ------------ ----------- -----------
Operating income........ 8,003,570 9,344,635 9,034,011 8,295,577 8,718,632
Other income (expense):
Interest expense...... (342,502) (1,184,921) (1,859,284) (481,670) (684,173)
Contract settlement
income, net........ 1,177,742 -- -- -- --
Loss on asset
disposal........... -- -- (589,049) -- --
Other, net............ (431,957) (600,667) 291,255 37,507 625,910
------------ ------------ ------------ ----------- -----------
Income before income
taxes................. 8,406,853 7,559,047 6,876,933 7,851,414 8,660,369
Income taxes............ 3,146,157 3,142,653 2,767,744 3,096,769 3,366,917
------------ ------------ ------------ ----------- -----------
Net income.............. $ 5,260,696 $ 4,416,394 $ 4,109,189 $ 4,754,645 $ 5,293,452
============ ============ ============ =========== ===========
Net income per share.... $ 0.66 $ 0.55 $ 0.52 $ 0.60 $ 0.55
============ ============ ============ =========== ===========
Weighted average common
and common equivalent
shares outstanding.... 7,967,710 7,967,710 7,927,856 7,967,710 9,609,920
============ ============ ============ =========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 104

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1993.............. 10,604,908 $106,048 $ -- $ 7,243,766 $ (61,000) $ 7,288,814
Retirement of treasury stock in
connection with the Kitty Hawk, Inc.
merger.............................. (3,181,472) (31,814) -- (29,186) 61,000 --
Net income............................ -- -- -- 5,260,696 -- 5,260,696
----------- -------- ----------- ----------- ----------- -----------
Balance at August 31, 1994.............. 7,423,436 74,234 -- 12,475,276 -- 12,549,510
Net income............................ -- -- -- 4,416,394 -- 4,416,394
----------- -------- ----------- ----------- ----------- -----------
Balance at August 31, 1995.............. 7,423,436 74,234 -- 16,891,670 -- 16,965,904
Stock option grants to
executives.......................... -- -- 4,230,954 -- -- 4,230,954
Exercise of employee stock options
(See Note 1)........................ 544,274 5,443 -- (1,013) -- 4,430
Purchase of treasury stock, 217,710
shares, at cost..................... -- -- -- -- (2,076,302) (2,076,302)
Tax benefit of stock option grants to
executives.......................... -- -- 404,570 -- -- 404,570
Net income............................ -- -- -- 4,109,189 -- 4,109,189
----------- -------- ----------- ----------- ----------- -----------
Balance at August 31, 1996.............. 7,967,710 79,677 4,635,524 20,999,846 (2,076,302) 23,638,745
Shares sold in initial public
offering.............................. 2,700,000 27,000 29,311,510 -- -- 29,338,510
Shares issued to employees under the
Annual Incentive Compensation Plan.... 1,807 18 21,666 -- -- 21,684
Net income for the four months ended
December 31, 1996..................... -- -- -- 5,293,452 -- 5,293,452
----------- -------- ----------- ----------- ----------- -----------
Balance at December 31, 1996............ 10,669,517 $106,695 $33,968,700 $26,293,298 $(2,076,302) $58,292,391
=========== ======== =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 105

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED AUGUST 31, DECEMBER 31,
------------------------------------------ ---------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income......................... $ 5,260,696 $ 4,416,394 $ 4,109,189 $ 4,754,645 $ 5,293,452
Adjustments to reconcile net income
net cash provided by operating
activities:
Depreciation and amortization.... 1,935,348 4,095,156 6,873,033 1,681,489 3,201,903
Loss on disposal of property and
equipment...................... 62,251 -- 589,049 -- --
Aircraft received in contract
settlement..................... (750,000) -- -- -- --
Deferred income taxes............ (638,568) 732,795 998,963 -- 172,418
Stock option grants to
executives..................... -- -- 4,230,954 -- --
Changes in operating assets and
liabilities:
Trade accounts receivable...... (8,036,613) 2,673,139 (1,228,256) (27,954,848) (23,632,028)
Contract settlement
receivable.................. 3,500,000 -- -- -- --
Receivables from affiliates.... (53,035) 481,297 -- -- --
Income taxes receivable........ -- -- (765,395) -- 765,395
Inventory and aircraft
supplies.................... (19,778) 23,285 (1,615,426) (298,872) (1,076,170)
Prepaid expenses and other..... 283,342 (532,693) (121,104) (5,854,576) (5,663,688)
Accounts payable and accrued
expenses.................... 4,063,034 (2,379,510) 3,868,840 19,622,927 17,989,256
Accrued maintenance reserves... 379,535 1,429,886 297,211 281,184 49,691
Income taxes payable........... 1,614,521 (1,883,898) -- 2,782,766 2,526,737
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities............... 7,600,733 9,055,851 17,237,058 (4,985,285) (373,034)
Investing activities:
Proceeds from sale of assets....... -- -- -- -- 18,508,431
Capital expenditures............... (13,875,983) (17,929,106) (33,537,567) (174,697) (13,795,891)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities............... (13,875,983) (17,929,106) (33,537,567) (174,697) 4,712,540
Financing activities:
Proceeds from issuance of common
stock............................ -- -- 4,430 -- 29,338,510
Proceeds from issuance of long-term
debt............................. 10,916,656 9,911,240 23,117,000 5,725,000 1,500,000
Repayments of long-term debt....... (2,747,533) (2,074,970) (3,186,663) (1,011,103) (13,643,202)
Acquisition of treasury shares..... -- -- (2,076,302) -- --
Shares issued under Annual
Incentive Compensation Plan...... -- -- -- -- 21,684
Tax benefit of stock option grant
to executives.................... -- -- 404,570 -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities......................... 8,169,123 7,836,270 18,263,035 4,713,897 17,216,992
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 1,893,873 (1,036,985) 1,962,526 (446,085) 21,556,498
Cash and cash equivalents at
beginning of period................ 2,944,490 4,838,363 3,801,378 3,801,378 5,763,904
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period............................. $ 4,838,363 $ 3,801,378 $ 5,763,904 $ 3,355,293 $ 27,320,402
============ ============ ============ ============ ============
</TABLE>

See accompanying notes.

F-6
<PAGE> 106

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight
services through two related businesses (i) an air freight carrier and (ii) an
air logistics service provider, all primarily in North America. The Company
provided air logistics services to one customer which accounted for
approximately 63%, 47%, 41% and 16% of its total revenues in fiscal years 1994,
1995, 1996 and for the four months ended December 31, 1996, respectively.
Related accounts receivable from this customer at August 31, 1995 and 1996 and
December 31, 1996, were approximately $5,089,000, $4,915,000 and $2,156,000,
respectively. The contract for these services is effective through May 31, 1997;
however, such contract may be canceled by either party with 30 days notice.
Another customer accounted for approximately 10%, 10%, 15% and 44% of the
Company's total revenues in fiscal years 1994, 1995, 1996 and for the four
months ended December 31, 1996, respectively. Related accounts receivable from
this customer at August 31, 1995 and 1996 and December 31, 1996 were
approximately $22,000, $0 and $27,086,000, respectively. The Company generally
sells on open accounts with 30-day terms and does not require collateral for
credit sales.

On December 4, 1996, the Company elected to change its fiscal year end to
December 31. Operating results for the four month period ended December 31, 1996
are not necessarily indicative of the results that may be expected for a
calendar year. Operating results for the four month period ended December 31,
1995 (unaudited) include all adjustments management believes are necessary for a
fair presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line and accelerated methods over estimated useful lives ranging
from three to ten years. Convair and DC-9 airframes are fully depreciated over
the period remaining to the next major airframe overhaul since the Company does
not expect to perform major airframe overhauls on these aircraft. Boeing 727-200
airframes are fully depreciated over an estimated useful life of ten years.

Costs relating to major airframe overhauls are capitalized as incurred and
amortized over the estimated number of flight hours until the next overhaul (the
deferral method). No major airframe overhauls have been performed on the
Company's aircraft since their respective dates of acquisition.

With respect to aircraft engines, the useful life is the estimated number
of flight hours remaining until the next required engine overhaul.

Income Taxes

Income taxes have been provided using the liability method in accordance
with the Financial Accounting Standards Board Statement No. 109, Accounting for
Income Taxes.

Revenue Recognition

Revenues are recognized as services are provided.

F-7
<PAGE> 107

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net Income Per Share

Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. The effect of options to purchase 390,707 and 153,567 shares of the
Company's common stock at $0.01 granted to certain executives in December 1995
and June 1996, respectively, have been included in the calculation of weighted
average common and common equivalent shares for the years ended August 31, 1994,
1995 and 1996.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and held in banks, money market funds and other investments with
original maturities of three months or less.

Inventory

Inventory consists of aircraft parts and supplies and is stated at the
lower of average cost or market.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

Stock-Based Compensation

The Company accounts for stock-based compensation utilizing Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Under the provisions of SFAS No. 123, the Company
has elected to continue to apply the provisions of APB Opinion No. 25 to its
stock-based compensation arrangements and provide supplementary financial
statement disclosures as required under SFAS No. 123.

Reorganization

In October, 1994, Kitty Hawk, Inc. was organized as a wholly-owned
subsidiary of Kitty Hawk Group, Inc. ("Group"). Group subsequently merged with
Kitty Hawk, Inc. with Kitty Hawk, Inc. being the surviving entity. In connection
therewith, each outstanding share of Group common stock was exchanged for
106,049 shares of Kitty Hawk, Inc. common stock. Additionally, Group stock held
in treasury was retired. The accompanying consolidated financial statements
present the effects of the merger on a retroactive basis.

Reclassifications

Certain amounts from prior years have been reclassified to conform to
current year presentation.

Stock Split

On June 28, 1996 the Company approved a 1.2285391-for-1 stock split
effected as a stock dividend. All references to common stock and per share data
have been restated to give effect to the split.

F-8
<PAGE> 108

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, DECEMBER 31,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
(1) Note payable, bearing interest at prime
plus 1.75% payable in 48 monthly
installments of $25,021 plus interest,
with a maturity date of December 1996... $ 350,291 $ 50,042 $ --
(2) Note payable, bearing interest at 9.75%
payable in 18 monthly installments of
interest only and 42 monthly
installments of $28,212 including
interest beginning December 1996, with a
maturity date of May 2000; secured by a
Douglas DC-9 aircraft, with a carrying
value of approximately $940,000 at
December 31, 1996....................... 1,000,500 1,000,500 980,417
(3) Note payable, bearing interest at an
adjusted Eurodollar rate plus 1.50% to
2.00% based upon a fixed charge coverage
ratio of the Company (7.125% at December
31, 1996), payable in 28 quarterly
installments plus interest beginning
September 1996, with a maturity date of
June 2003; secured by two Boeing 727-200
aircraft, with a carrying value of
approximately $11,036,000 at December
31, 1996................................ -- 11,225,000 10,605,923
(4) Note payable, bearing interest at an
adjusted Eurodollar rate plus 1.50% to
2.00% based upon a fixed charge coverage
ratio of the Company (7.125% at December
31, 1996), payable in 23 quarterly
installments of $531,000 plus interest
beginning September 1996, with a
maturity date of June, 2002; secured by
four Douglas DC-9 aircraft and four
Boeing 727-200 aircraft, with a net
carrying value of approximately
$17,918,000 at December 31, 1996........ -- 12,744,000 11,682,000
(5) Note payable, bearing interest at an
adjusted Eurodollar rate plus 2.25%
payable in 21 quarterly installments of
$153,354 plus interest, with a maturity
date of September 1999. (See (4)
above.)................................. 2,607,021 -- --
(6) Note payable, bearing interest at an
adjusted Eurodollar rate plus 2.25%
payable in 71 monthly installments of
$76,891 plus interest, with a maturity
date of October 2000. (See (4)
above.)................................. 4,767,245 -- --
(7) Note payable, bearing interest at an
adjusted Eurodollar rate plus 2.00%
payable in 72 monthly installments of
$60,517 plus interest, with a maturity
date of March 2001. (See (4) above.).... 4,054,641 -- --
</TABLE>

F-9
<PAGE> 109

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, DECEMBER 31,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
(8) Note payable, bearing interest at an
adjusted Eurodollar rate plus 2.00%
payable in 72 monthly installments of
$59,077 plus interest, with a maturity
date of July 2001. (See (4) above.)..... 4,201,507 -- --
(9) Revolving Credit Facility for general
corporate purposes...................... -- 1,892,000 1,500,000
----------- ----------- -----------
16,981,205 26,911,542 24,768,340
Less current portion........................ 3,278,553 3,620,240 3,687,888
----------- ----------- -----------
$13,702,652 $23,291,302 $21,080,452
=========== =========== ===========
</TABLE>

Maturities of long-term debt at December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997........................................................ $ 3,687,888
1998........................................................ 5,317,534
1999........................................................ 3,958,056
2000........................................................ 3,911,104
2001........................................................ 3,900,557
Thereafter.................................................. 3,993,201
-----------
$24,768,340
===========
</TABLE>

During August 1996, the Company entered into a new Credit Agreement (notes
(3), (4) and (9) above) with a bank and refinanced a portion of the existing
notes payable. Proceeds of note (4) in the amount of $12,744,000 were used to
pay down the outstanding balances of the existing notes payable (notes (5), (6),
(7) and (8)).

The Credit Agreement subjects the Company to financial covenants, including
fixed charge coverage, cash flow and leverage ratios. In addition, the Credit
Agreement prohibits redemption of Company securities, certain investments
outside the Company's line of business, transactions with affiliates and
additional indebtedness without prior consent of the Bank. The Credit Agreement
also limits the ability of the Company to change its line of business and limits
the payment of dividends.

At December 31, 1996 the Company has outstanding two interest rate swap
agreements with the commercial bank to whom note (3) is payable, having a total
notional principal amount of $11,225,000. These swap agreements effectively
change the interest rate exposure on note (3) to a fixed 7.75 percent. The
notional principal amounts of the interest rate swaps reduce in proportion to
required principal reductions on the related note. The Company is exposed to
credit loss in the event of nonperformance by the other party in the interest
rate swap agreements. However, the Company does not anticipate nonperformance by
the counterparty. Based on a quote provided by the bank, these swap agreements
could have been terminated at December 31, 1996 in exchange for a payment to the
Company of $106,059.

Under the Credit Agreement, the Company also has a $15 million Revolving
Credit Facility available, of which $10 million is restricted for interim
financing of up to $6.5 million per aircraft for aircraft acquisitions by the
Company; the remaining $5 million is for general corporate purposes, including
interim financing for acquired aircraft that exceeds the limits that apply to
the restricted portion. Any advance under the portion that is restricted to
interim financing for aircraft acquisition ($0 at December 31, 1996) must be
repaid in full within 150 days of first advance for the acquired aircraft. The
outstanding balance of the Revolving Credit Facility results from borrowings in
connection with working capital requirements. The Revolving Credit

F-10
<PAGE> 110

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Facility bears interest at an adjusted Eurodollar rate plus 1.50% to 2.00% based
upon a fixed charge coverage ratio of the Company or at prime (8.25% at December
31, 1996). The Revolving Credit Facility expires on December 31, 1998 and $13.5
million was available to be borrowed by the Company at December 31, 1996.

Under the Credit Agreement, the Company also has a $10 million facility
available to finance the purchase of one DC-9-15F hushkit and up to seven major
maintenance checks for jet aircraft. The funds will be available to the Company
until April 29, 1998 and any borrowings under this facility mature March 31,
2003. At December 31, 1996, the entire $10 million was available to the Company.
At December 31, 1996, the Company had approximately $1,400,000 in standby
letters of credit outstanding.

All amounts outstanding under the Credit Agreement are cross-collateralized
and are secured by certain aircraft owned by the Company, all aircraft acquired
under the restricted portion of the Revolving Credit Facility while those
advances are outstanding, certain leases of aircraft and engines, accounts,
chattel paper, general intangibles and other personal property.

Based upon the variable interest rates provided for in the substantial
majority of the Company's long-term debt, management believes the fair value of
its long-term debt approximates its carrying value at December 31, 1996.

In connection with the Company's recent acquisition of a one-third
undivided interest in four Falcon 20 jet aircraft, the co-owners of the aircraft
entered into a five year, $4.3 million term loan, bearing interest at a floating
prime rate, which is secured by all four Falcon 20 aircraft and requires monthly
payments of principal and interest. The co-owners leased the aircraft to an air
carrier affiliated with one of the co-owners. The lease calls for monthly lease
payments which exceed the installments on the term loan. The Company's liability
under this term loan is limited to $2.0 million.

The Company made cash interest payments of $280,754, $1,088,928, $1,765,523
and $664,164 during fiscal years ended 1994, 1995, 1996 and for the four months
ended December 31, 1996, respectively.

3. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
YEAR ENDED AUGUST 31, DECEMBER 31,
------------------------------------ ------------
1994 1995 1996 1996
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Current income tax:
Federal........................... $3,434,725 $1,829,723 $1,352,390 $ 2,768,672
State............................. 350,000 580,135 416,391 425,827
---------- ---------- ---------- ------------
Total current income
tax..................... 3,784,725 2,409,858 1,768,781 3,194,499
---------- ---------- ---------- ------------
Deferred income tax:
Federal........................... (608,460) 627,993 758,138 141,169
State............................. (30,108) 104,802 240,825 31,249
---------- ---------- ---------- ------------
Total deferred income
tax..................... (638,568) 732,795 998,963 172,418
---------- ---------- ---------- ------------
$3,146,157 $3,142,653 $2,767,744 $ 3,366,917
========== ========== ========== ============
</TABLE>

F-11
<PAGE> 111

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED AUGUST 31, ENDED
------------------------------------ DECEMBER 31,
1994 1995 1996 1996
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Income tax computed at statutory
rate.............................. $2,858,330 $2,570,076 $2,338,157 $3,031,129
State income taxes, net of federal
benefit........................... 211,129 452,058 433,763 297,928
Other, net.......................... 76,698 120,519 (4,176) 37,860
---------- ---------- ---------- ----------
Total..................... $3,146,157 $3,142,653 $2,767,744 $3,366,917
========== ========== ========== ==========
</TABLE>

The components of the net deferred tax liabilities recognized on the
accompanying balance sheets are as follows:

<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, DECEMBER 31,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation................................ $(2,071,971) $(3,318,803) $ (3,461,603)
Prepaid expenses............................ (117,440) (17,229) (66,228)
----------- ----------- ------------
Total deferred tax liabilities...... (2,189,411) (3,336,032) (3,527,831)
----------- ----------- ------------
Deferred tax assets:
Nondeductible accruals...................... 167,850 173,790 173,790
Airframe reserves........................... 755,606 897,324 916,705
----------- ----------- ------------
Total deferred tax assets........... 923,456 1,071,114 1,090,495
----------- ----------- ------------
Net deferred tax liability.................... $(1,265,955) $(2,264,918) $ (2,437,336)
=========== =========== ============
</TABLE>

The Company made cash income tax payments of $2,170,203, $4,552,371,
$2,078,673 and $571,420 during fiscal years 1994, 1995, 1996 and for the four
months ended December 31, 1996, respectively.

4. COMMITMENTS

The Company leases its primary office and maintenance space under a
non-cancelable operating lease which expires in fiscal year 1998 from a party
who, effective October 1994, became a member of the Company's Board of
Directors. Rent expense under this lease was $260,970, $252,595, $254,934 and
$84,305 for fiscal years 1994, 1995, 1996 and for the four months ended December
31, 1996, respectively. Under the lease agreement, the Company has the option to
purchase the office facilities and the landlord's interest in the associated
ground lease at any time prior to March 1, 1997 for consideration of $2,200,000
less $5,000 for each monthly rental payment made after March 1, 1993. Based upon
an agreement with the lessor of the facility, the Company expects to close the
purchase of the facility for approximately $1.76 million in February 1997.

The Company leases its secondary maintenance space under a cancelable
operating lease which expires in May 1999. The lease can be canceled by either
party with 60 days notice. Rent expense under this lease was $59,853, $163,500
and $54,500 in fiscal years 1995, 1996 and for the four months ended December
31, 1996, respectively.

In December 1996, the Company sold at cost two recently acquired and
modified Boeing 727-200 aircraft to a third party and entered into an operating
lease agreement for such aircraft commencing January 1, 1997, ending December
31, 1997, with monthly lease payments of approximately $252,000, with five
successive one year renewal options. The Company has an option to purchase the
aircraft at the end of each year and guarantees to the lessor certain minimum
sale values if the Company elects not to renew the lease or exercise

F-12
<PAGE> 112

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

its purchase option. The funds from the sale were partially used to pay
indebtedness incurred to acquire, convert to cargo configuration, perform
maintenance updates and hushkit the aircraft.

In November 1996, the Company acquired a Boeing 727-200 aircraft in
passenger configuration under a seven year operating lease at a monthly rate of
$50,000. The aircraft is being modified to cargo configuration and is undergoing
maintenance updates at the Company's cost.

Minimum annual rentals at December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997........................................................ $3,793,476
1998........................................................ 763,500
1999........................................................ 668,125
2000........................................................ 600,000
2001........................................................ 600,000
Thereafter.................................................. 1,200,000
----------
$7,625,101
==========
</TABLE>

During December 1996, the Company entered into firm purchase commitments to
acquire hushkits for seven of its Boeing 727-200 aircraft for a total purchase
price of up to $17,500,000.

5. CONTRACT SETTLEMENT

In September 1992, the Company was awarded a contract by the United States
Postal Service (the "USPS"). An unaffiliated air freight carrier (the
"associated bidder") was associated with the Company in the successful bid.
Prior to the commencement of the contract, competing bidders filed suit against
the USPS seeking to set aside the award.

In April 1993, to avoid the expense and uncertainty of continued
litigation, the Company accepted a settlement. Under the settlement, the
contract was terminated for convenience and re-awarded to the incumbent.
Additionally, the Company received $12.7 million and the right to receive up to
a total of $6.5 million over ten years in installments of $162,500 per quarter,
contingent on the re-awarded contract remaining in effect. Appropriate releases
were exchanged.

At August 31, 1993, the Company and the associated bidder had not agreed
upon the division of the settlement proceeds, which were held in escrow; but the
Company reasonably estimated its share of the proceeds, exclusive of the $6.5
million to be paid in installments over ten years, to be at least $3.5 million.
The Company therefore recorded the $3.5 million as a receivable and, net of
contract-related expense, settlement income of $724,683 for fiscal year 1993.

During fiscal year 1994, the Company and the associated bidder agreed to a
division of the settlement proceeds and resolution of all their related claims.
Under that agreement, the Company received from escrow approximately $3.5
million cash, obtained title to a Boeing 727-200 aircraft, independently valued
and recorded by the Company at $750,000 and was relieved of $1.2 million of
previously accrued transportation costs. Additionally, one-half of the
contingent future quarterly installment payments were allocated to the Company's
majority stockholder. As a result of this settlement, for fiscal year 1994, the
Company recorded additional contract settlement income of $1,177,742, which is
net of approximately $730,000 in additional settlement costs, principally legal
fees. This amount also included both income and an offsetting expense of
$677,239, representing the estimated fair value of the future quarterly
installment payments that will be paid directly to the Company's majority
stockholder.

F-13
<PAGE> 113

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LITIGATION

The Company filed suit against Express One International, Inc. ("Express
One") in July 1992 in Dallas County, Texas, claiming that Express One breached
an aircraft charter agreement and seeking actual damages of approximately
$60,000. Express One counterclaimed, asserting that the Company wrongfully
repudiated the lease agreement and seeking damages of $356,718 for services
performed, $1,140,000 for additional fees it would have received under the
contract, punitive damages and its attorney's fees and costs.

In February 1995, a jury verdict in the case granted the Company $25,000 in
damages plus its attorneys fees and denied Express One's claims. The court
entered judgment in favor of the Company for $25,000 in damages, for $148,115 in
attorneys fees through trial and for additional attorneys fees if Express One
appeals. Before expiration of the time for appeal, Express One filed a petition
under Chapter 11 of the U.S. Bankruptcy Code. There is a dispute about whether
Express One has preserved a right to appeal and whether the judgment has become
final. Therefore, the judgment awarded to the Company has not been recorded in
the financial statements. The Company does not expect the outcome to have a
material adverse effect upon the Company's financial condition or results of
operations.

The USPS selected the Company's air freight carrier in September 1992 as
the successful bidder on a contract for a multi-city network of air
transportation services supporting the USPS Express Mail system. Two
unsuccessful bidders sued the USPS to enjoin the award. The Company intervened.
This litigation (the "ANET Litigation") was settled in April 1993 by agreements
under which the USPS terminated the Company's contract for convenience and
awarded the contract to the incumbent contractor, Emery Worldwide Airlines, Inc.
("Emery").

In March 1995, the Company was served with a complaint in a qui tam lawsuit
filed on behalf of the U.S. Government by a third party plaintiff seeking to
share a recovery under the Federal False Claims Act (the "Act"). The suit, filed
in May 1994, was filed under seal in accordance with the Act, to enable the U.S.
Government to review the claim before its disclosure to the defendants. The U.S.
Government declined to pursue the claim, but the third party plaintiff chose to
continue. The suit claimed that the Company and another defendant fraudulently
failed to disclose to the USPS, both in the Company's successful bid and in the
settlement of the ANET litigation, that some of the aircraft the Company
proposed to purchase and use to perform the contract were aging aircraft with
high use and claimed that the Company and Emery similarly fraudulently conspired
in connection with the settlement of the ANET litigation. The suit sought to
recover treble the $10 million settlement payment made by the USPS in settling
the ANET litigation, plus the third party plaintiff's costs and fees.

The Company moved to dismiss the suit with prejudice on grounds that it was
barred by the Act. The Company also sought to recover its attorneys' fees from
the plaintiff and to obtain sanctions against the plaintiff's attorneys. The
Company believes the suit was clearly frivolous because, among other things, the
Company in the ANET bid identified each aircraft by serial number, age, hours
and cycles and made available use and maintenance records for each aircraft as
required by the request for proposal and that the USPS reviewed and inspected
the aircraft, data and records and found them acceptable. In May 1996, the court
dismissed the suit and awarded the Company its attorneys' fees and costs. The
plaintiff has asked the court to reconsider its ruling. The Company does not
expect the outcome to have a material adverse effect upon the Company's
financial condition or results of operations.

Additionally, in the normal course of business, the Company is a party to
matters of litigation, none of which, in the opinion of management, will have a
material adverse effect on the Company's financial condition or the results of
operations.

F-14
<PAGE> 114

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. STOCK OPTIONS

In October 1994 the Company granted non-qualified options to two executives
to purchase a total of 337,848 shares of common stock at $7.81 per share.

In December 1995, the Company canceled 245,708 of the options outstanding
and granted to an executive a nonqualified option to purchase 390,707 shares of
common stock at $0.01 per share. The new option had a term of nine years and was
fully vested. In June 1996, the Company canceled the remaining 92,140 options
outstanding and granted to another executive a non-qualified option to purchase
153,567 shares of common stock at $0.01 per share. The new option had a term of
nine years and was fully vested. On June 26, 1996, the executives fully
exercised their options. No options remain outstanding at December 31, 1996.
Based on an independent appraisal commissioned by the Company, the fair value of
the options of $4,230,954 is reflected as a charge to earnings in the
accompanying statement of income for the year ended August 31, 1996, under APB
Opinion No. 25 and represents the fair value which would have been charged under
SFAS 123. Accordingly, no supplemental disclosures under SFAS No. 123 are
necessary.

8. RELATED PARTY TRANSACTIONS

The Company provided maintenance and other services as well as cash
advances to Martinaire East, Inc. ("Martinaire"), a company in which a minority
interest was owned by the Company's majority stockholder. Total sales to
Martinaire for fuel and services were approximately, $235,000 and $22,000 in
fiscal years 1994 and 1995, respectively. Martinaire also flies charter service
for the Company. During fiscal years 1994 and 1995, Martinaire provided the
Company services in the amount of approximately $982,000 and $232,000,
respectively. At December 31, 1996, Martinaire is no longer considered to be a
related party.

9. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS

The Company has a retirement savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all employees meeting minimum
service requirements. Under the plan, voluntary contributions are made by
employees and the Company provides matching contributions based upon the
employees' contribution. The Company incurred $80,812, $121,217, $159,967 and
$56,378 in matching contributions related to this plan during fiscal years 1994,
1995, 1996 and for the four months ended December 31, 1996, respectively.

The Company has adopted:

- An Omnibus Securities Plan (the Plan) under which 300,000 shares of its
common stock are reserved for issuance to its employees. The Plan is
administered by the Company's Compensation Committee which may grant
stock based and nonstock based compensation to the Plan participants. No
awards have been granted under the Plan as of December 31, 1996.

- An Annual Incentive Compensation Plan (the Compensation Plan) under which
the Compensation Committee awards semiannual bonuses to employees of the
Company. The aggregate amount of bonuses available for award is limited
to 10% of the Company's income before income taxes and the bonuses to be
paid under the Compensation Plan. The Company may elect to pay the full
amount of the bonuses in common stock, which is limited to total stock
distributions of 200,000 shares of common stock. As of December 31, 1996,
198,193 shares were available for distribution.

- An Employee Stock Purchase Plan covering up to 100,000 shares of the
Company's common stock.

F-15
<PAGE> 115

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. CALENDAR YEAR INCOME STATEMENT (UNAUDITED)

As described above, the Company has changed its year end to December 31.
The following table presents historical information recast on a calendar quarter
basis for 1996.

QUARTERS FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 TOTAL
--------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier.................... $10,059 $15,215 $14,341 $15,889 $ 55,504
Air logistics.......................... 10,195 16,815 16,134 34,024 77,168
------- ------- ------- ------- --------
Total revenues................. 20,254 32,030 30,475 49,913 132,672
------- ------- ------- ------- --------
Costs of revenues:
Air freight carrier.................... 8,256 12,084 9,348 11,172 40,860
Air logistics.......................... 9,155 15,112 14,872 28,799 67,938
------- ------- ------- ------- --------
Total costs of revenues........ 17,411 27,196 24,220 39,971 108,798
------- ------- ------- ------- --------
Gross profit............................. 2,843 4,834 6,255 9,942 23,874
General and administrative expenses...... 2,271 2,301 2,305 2,066 8,943
Non-qualified employee profit sharing
expense................................ (91) 58 477 799 1,243
Stock option grants to executives........ 0 4,232 (1) 0 4,231
------- ------- ------- ------- --------
Operating income......................... 663 (1,757) 3,474 7,077 9,457
Other income (expense):
Interest expense....................... (520) (504) (507) (531) (2,062)
Loss on asset disposal................. 0 0 (589) 0 (589)
Other, net............................. 102 36 125 617 880
------- ------- ------- ------- --------
Income before income taxes............... 245 (2,225) 2,503 7,163 7,686
Income taxes............................. 95 (927) 1,096 2,774 3,038
------- ------- ------- ------- --------
Net income (loss)........................ $ 150 $(1,298) $ 1,407 $ 4,389 $ 4,648
======= ======= ======= ======= ========
Net income (loss) per share.............. $ 0.02 $ (0.16) $ 0.18 $ 0.43 $ 0.55
======= ======= ======= ======= ========
Net income, adjusted for non-recurring
items.................................. $ 150 $ 1,264 $ 2,467 $ 4,397 $ 8,278
======= ======= ======= ======= ========
Net income per share, adjusted for non-
recurring items........................ $ 0.02 $ 0.16 $ 0.32 $ 0.43 $ 0.98
======= ======= ======= ======= ========
Weighted average common and common
equivalent shares outstanding.......... 7,968 7,968 7,750 10,215 8,477
======= ======= ======= ======= ========
</TABLE>

F-16
<PAGE> 116

KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
Current assets
Cash and cash equivalents................................. $ 8,952,142
Trade accounts receivable................................. 15,122,410
Deferred income taxes..................................... 107,564
Inventory and aircraft supplies........................... 4,434,467
Prepaid expenses and other assets......................... 1,422,498
Deposits on aircraft...................................... 3,835,909
------------
Total current assets.............................. 33,874,990
------------
Property and equipment
Aircraft.................................................. 72,352,742
Aircraft work-in-progress................................. 22,508,984
Machinery and equipment................................... 3,118,992
Leasehold improvements.................................... 3,061,731
Building.................................................. 1,798,119
Furniture and fixtures.................................... 166,057
Transportation equipment.................................. 325,764
------------
103,332,389
Less: accumulated depreciation and amortization........... (19,849,788)
------------
Net property and equipment........................ 83,482,601
------------
Total assets...................................... $117,357,591
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 5,986,169
Accrued expenses.......................................... 8,850,700
Income taxes payable...................................... 1,077,057
Accrued maintenance reserves.............................. 2,598,562
Current maturities of long-term debt...................... 4,774,363
------------
Total current liabilities......................... 23,286,851
Long-term debt.............................................. 29,277,295
Deferred income taxes....................................... 2,544,900
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value: Authorized
shares -- 1,000,000, none issued....................... --
Common stock, $.01 par value: Authorized
shares -- 25,000,000; issued and
outstanding -- 10,669,517.............................. 106,695
Additional paid-in capital............................. 33,949,825
Retained earnings...................................... 30,268,327
Less common stock in treasury, -- 217,710 shares at
June 30, 1997 and December 31, 1996................... (2,076,302)
------------
Total stockholders' equity........................ 62,248,545
------------
Total liabilities and stockholders' equity........ $117,357,592
============
</TABLE>

See accompanying notes.

F-17
<PAGE> 117

KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues:
Air freight carrier....................................... $25,274,245 $33,237,034
Air logistics............................................. 27,010,379 27,231,490
----------- -----------
Total revenues.................................... 52,284,624 60,468,524
----------- -----------
Costs of revenues:
Air freight carrier....................................... 20,340,217 22,843,865
Air logistics............................................. 24,267,931 24,818,999
----------- -----------
Total costs of revenues........................... 44,608,148 47,662,864
----------- -----------
Gross profit................................................ 7,676,476 12,805,660
General and administrative expenses......................... 4,572,011 4,884,325
Non-qualified employee profit sharing expense............... (32,778) 671,757
Stock option grants to executives........................... 4,232,204 --
----------- -----------
Operating income (loss)..................................... (1,094,961) 7,249,578
Other income (expense):
Interest expense.......................................... (1,023,278) (1,049,382)
Other, net................................................ 137,680 424,853
----------- -----------
Income (loss) before income taxes........................... (1,980,559) 6,625,049
Income taxes (benefit)...................................... (831,242) 2,650,020
----------- -----------
Net income (loss)........................................... (1,149,317) 3,975,029
=========== ===========
Net income (loss) per share................................. $ (0.14) $ 0.38
=========== ===========
Weighted average common and common equivalent shares
outstanding............................................... 7,967,710 10,451,807
=========== ===========
</TABLE>

See accompanying notes.

F-18
<PAGE> 118

KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)

See accompanying notes.

F-19
<PAGE> 119

KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income (loss)......................................... $ (1,149,317) $ 3,975,029
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 3,616,752 4,459,773
Deferred income taxes..................................... (43,658) --
Stock option grants to executives......................... 4,230,954 --
Changes in operating assets and liabilities:
Trade accounts receivable................................. 21,617,441 22,705,608
Inventory and aircraft supplies........................... 307,547 (1,644,485)
Prepaid expenses and other................................ 5,256,173 (278,509)
Deposits on aircraft...................................... -- 1,602,719
Accounts payable and accrued expenses..................... (17,008,776) (17,685,032)
Accrued maintenance reserves.............................. (466,694) 225,405
Income taxes payable...................................... (2,614,105) (1,449,680)
------------ ------------
Net cash provided by operating activities................... 13,746,317 11,910,828
Investing activities:
Capital expenditures........................................ (17,007,546) (39,543,531)
------------ ------------
Financing activities:
Proceeds from issuance of long-term debt.................... 5,525,018 11,112,999
Repayments of long-term debt................................ (1,618,350) (1,829,681)
Additional costs relating to initial public offering........ (18,875)
Proceeds from issuance of common stock...................... 4,430 --
------------ ------------
Net cash provided by (used in) financing activities......... 3,911,098 9,264,443
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 649,869 (18,368,260)
Cash and cash equivalents at beginning of period............ 3,355,293 27,320,402
------------ ------------
Cash and cash equivalents at end of period.................. $ 4,005,162 $ 8,952,142
============ ============
</TABLE>

See accompanying notes.

F-20
<PAGE> 120

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements, which should
be read in conjunction with the consolidated financial statements and footnotes
appearing elsewhere herein are unaudited, but have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included.

Operating results for the six month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.

Net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common and common equivalent shares outstanding
during the period. The effect of options to purchase 390,707 and 153,567 shares
of the Company's common stock at $0.01 granted to certain executives in December
1995 and June 1996, respectively, have been included in the calculation of
weighted average common and common equivalent shares for the six month period
ended June 30, 1996.

2. REGISTRATION OF STOCK OFFERING

In October 1996, the Company sold in an initial public offering 2,700,000
shares of Common Stock.

3. LITIGATION

In February 1995, a jury awarded the Company $25,000 in damages plus its
attorneys' fees and denied Express One's counterclaims. The court entered
judgment in favor of the Company for $25,000 in damages, for $148,115 in
attorney's fees through trial and for additional attorneys fees if Express One
appeals. Before expiration of the time for appeal, Express One filed a petition
under Chapter 11 of the U.S. Bankruptcy Code. There is a dispute about whether
Express One has preserved a right to appeal and whether the judgment has become
final. Therefore, the judgment awarded to the Company has not been recorded in
the financial statements. The Company does not expect the outcome of this matter
to have a material adverse effect on the Company's financial condition or
results of operations.

The U.S. Postal Service ("USPS") selected the Company's air freight carrier
in September 1992 as the successful bidder on a contract for a multi-city
network of air transportation services supporting the USPS Express Mail system.
Two unsuccessful bidders sued the USPS to enjoin the award. The Company
intervened.

This litigation (the "ANET Litigation") was settled in April 1993 by
agreements under which the USPS terminated the Company's contract for
convenience and awarded the contract to the incumbent contractor, Emery
Worldwide Airlines, Inc. ("Emery").

F-21
<PAGE> 121

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

pursue the claim, but the third party plaintiff chose to continue. The suit
claimed that the Company and another defendant fraudulently failed to disclose
to the USPS, both in the Company's successful bid and in the settlement of the
ANET litigation, that certain of the aircraft the Company proposed to purchase
and use to perform the contract were aging aircraft with high use and claimed
that the Company and Emery similarly fraudulently conspired in connection with
the settlement of the ANET litigation. The suit sought to recover treble the $10
million settlement payment made by the USPS in settling the ANET litigation,
plus the third party plaintiff's costs and fees. In May 1996, the court
dismissed the suit and awarded the Company its attorneys' fees and costs. The
plaintiff has asked the court to reconsider its ruling. The Company does not
expect the outcome of this matter to have a material adverse effect on the
Company's financial condition or results of operations.

4. EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. Early adoption of the new standard is not permitted. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. The new standard eliminates primary
and fully diluted earnings per share and requires presentation of basic and
diluted earnings per share together with disclosure of how the per share amounts
were computed. Because the application of SAB No. 83, in calculation of per
share amounts under FAS 128 is presently uncertain, the Company is unable to
determine the effect of this new standard on per share amounts prior to 1997.
The effect on 1997 per share amounts is not expected to be material.

5. SUBSEQUENT EVENTS

On August 1, 1997 the Company announced that it had reached an agreement
(the "727 Purchase Agreement") with American International Airways, Inc. ("AIA")
and certain of its affiliates to purchase sixteen Boeing 727-200 aircraft,
fifteen of which are in freighter configuration, for approximately $51 million.
The purchase of these aircraft is subject to financing, other customary closing
conditions and receipt of certain regulatory approvals. If the purchase closes,
the Company will perform AIA's ACMI contracts under which some of the aircraft
are now operating.

In addition, the Company, Conrad Kalitta ("Kalitta"), AIA and Kalitta
Flying Services, Inc. ("KFS") have entered into a non-binding letter of intent
(the "Letter of Intent") relating to the proposed acquisition of AIA, KFS,
Flight One Logistics, Inc., OK Turbines, Inc. and American International Travel,
Inc. (collectively, the "Kalitta Companies") with the Company. It is anticipated
that under a proposed combination, Kalitta, the sole stockholder of the Kalitta
Companies, would receive both cash and Kitty Hawk common stock and that after
closing, Kalitta would be a significant stockholder of the combined companies
and would maintain a significant management role. Any combination would be
conditioned on negotiation and execution of a mutually satisfactory definitive
agreement, obtaining of financing by the Company, satisfaction of customary
closing conditions and receipt of certain regulatory approvals. It is
anticipated that the management and operations of the Kalitta Companies,
including operations of American International Freight and American
International Cargo, would continue without material change before and after
closing of a combination.

The 727 Purchase Agreement contains short-term put/call options terminating
no later than March 31, 1998, under which AIA could repurchase thirteen of the
aircraft under certain conditions if a combination does not occur.

AIA, KFS and Kalitta have also agreed under the 727 Purchase Agreement that
until March 31, 1998 none of them, except as contemplated under the Letter of
Intent, will solicit, discuss, negotiate or agree to the sale of any stock or
other equity interest in any of the Kalitta Companies, the merger,
consolidation, share

F-22
<PAGE> 122

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exchange, or other combination involving any of the Kalitta Companies, or the
sale or disposition of any of the business or principal segments of any of the
Kalitta Companies other than in the normal course of business.

Wells Fargo Bank (Texas), National Association ("WFB"), as Agent under the
existing Amended and Restated Credit Agreement dated as of August 14, 1996, as
amended (the "Agreement"), has issued a commitment for financing a portion of
the Company's acquisition of the sixteen Boeing 727 aircraft. The Facility of
$45.9 million bears interest at a Eurodollar rate plus 1.5% to 2.0% based upon a
Debt-to-Cash Flow ratio of Kitty Hawk plus an additional 1.0% beginning in 1999
and 1.5% beginning in 2000, with maturity on June 30, 2001.

F-23
<PAGE> 123

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
American International Airways, Inc. and Related Companies
Ypsilanti, Michigan

We have audited the accompanying combined balance sheets of American
International Airways, Inc. and related companies as of December 31, 1996 and
1995, and the related combined statements of operations, stockholder's equity
and cash flows for each of the three years in the period ended December 31,
1996. The combined financial statements include the accounts of American
International Airways, Inc. and its 60% owned partnership, American
International Cargo; and related companies Kalitta Flying Services, Inc., O.K.
Turbines, Inc., American International Travel, Inc. and Flight One Logistics,
Inc. (collectively, the "Companies"). These Companies are under common ownership
and common management. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of American International Airways,
Inc. and related companies as of December 31, 1996 and 1995, and the results of
their combined operations and cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Companies will continue as a going concern. As discussed in Note 11 to the
financial statements, the Companies (1) are experiencing difficulty in
generating sufficient cash flows to meet their obligations and sustain their
operations, (2) failed to make certain principal payments and are not in
compliance with certain covenants of their long-term debt agreements (3) have
negative working capital and (4) have incurred substantial losses subsequent to
December 31, 1996, which raises substantial doubt about their ability to
continue as a going concern. Management's plans concerning these matters are
described in Note 11. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

ANN ARBOR, MICHIGAN
September 17, 1997 DELOITTE & TOUCHE LLP

F-24
<PAGE> 124

AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES

COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 1,091,960 $ 2,324,353 $ 2,700,753
Restricted cash........................................... 795,030 2,867,933
Accounts receivable, net (Notes 1 and 3).................. 88,273,823 67,081,125 54,699,709
Accounts receivable -- related parties.................... 4,390,261 2,960,778 2,641,938
Expendable parts and supplies............................. 12,330,854 20,742,140 23,212,703
Aircraft held for resale (Note 4)......................... 6,593,069 6,117,266 5,402,466
Deposits, prepaid expenses and other assets............... 4,914,056 8,018,273 7,696,102
Prepaid fuel.............................................. 4,080,373 5,828,047 5,944,772
Notes receivable, current................................. 186,085 186,085 186,085
------------ ------------ ------------
Total current assets.................................... 121,860,481 114,053,097 105,352,461
PROPERTY AND EQUIPMENT:
Land and improvements..................................... 228,678 228,678 228,678
Building and leasehold improvements (Note 4).............. 9,347,825 12,752,356 13,974,397
Rotable parts (Note 3).................................... 14,560,287 16,779,386 17,397,571
Equipment (Note 3)........................................ 19,685,442 23,677,640 25,395,893
Aircraft (Note 3)......................................... 264,266,383 320,276,140 326,179,416
------------ ------------ ------------
Total............................................... 308,088,615 373,714,200 383,175,955
Less accumulated depreciation............................. 81,246,881 109,707,512 124,989,977
------------ ------------ ------------
Net................................................. 226,841,734 264,006,688 258,185,978
Aircraft in modification (Note 3)......................... 25,557,078 988,541 1,561,611
Construction in progress.................................. 3,152,560 923,150 868,912
------------ ------------ ------------
Total property and equipment, net................... 255,551,372 265,918,379 260,616,501
NOTES RECEIVABLE, LESS CURRENT PORTION...................... 184,968 131,805 131,805
RECEIVABLE FROM AFFILIATED COMPANY.......................... -- -- 747,284
------------ ------------ ------------
TOTAL ASSETS (Notes 3 and 4)................................ $377,596,821 $380,103,281 $366,848,051
============ ============ ============

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade (Note 1).......................................... $ 62,125,228 $ 46,070,230 $ 52,207,904
Related parties......................................... 4,421,143 77,450 56,619
Accrued liabilities....................................... 20,342,988 24,172,883 24,685,595
Deferred revenue.......................................... -- 795,030 2,867,933
Notes payable to bank, reclassified as current (Note 3)... -- 47,105,413 56,482,835
Long term debt, reclassified as current (Note 4).......... -- 155,910,954 144,959,737
Notes payable to bank (Note 3)............................ 12,226,496 1,024,035 2,691,056
Current maturities of long-term debt (Note 4)............. 42,444,612 34,310,440 43,822,404
------------ ------------ ------------
Total current liabilities........................... 141,560,467 309,466,435 327,774,083
NOTES PAYABLE, NONCURRENT (Note 3).......................... 34,983,000 -- --
LONG-TERM DEBT, LESS CURRENT PORTION (Note 4)............... 130,717,485 -- --
NOTE PAYABLE TO STOCKHOLDER (Note 8)........................ 100,000 -- 300,462
------------ ------------ ------------
Total liabilities................................... 307,360,952 309,466,435 328,074,545
COMMITMENTS AND CONTINGENCIES
(Notes 6 and 9)
MINORITY INTEREST IN AMERICAN INTERNATIONAL CARGO........... 3,944,070 3,551,735 3,242,145
STOCKHOLDERS EQUITY (Note 5):
Common stock, par value $1 per share, authorized 275,000
shares in 1995, 1996 and 1997, issued and outstanding
53,000 shares in 1995, 1996 and 1997.................... 53,000 53,000 53,000
Additional paid-in capital.................................. 14,062,669 17,839,157 17,839,157
Retained earnings........................................... 52,176,130 49,192,954 17,639,204
------------ ------------ ------------
Total stockholders equity........................... 66,291,799 67,085,111 35,531,361
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY................... $377,596,821 $380,103,281 $366,848,051
============ ============ ============
</TABLE>

See notes to combined financial statements.

F-25
<PAGE> 125

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 9):
Air transportation services..... $298,080,850 $359,404,248 $388,192,479 $177,431,725 $182,351,799
Maintenance and other........... 7,448,982 14,278,793 36,348,245 13,163,678 14,487,759
------------ ------------ ------------ ------------ ------------
Total revenues........... 305,529,832 373,683,041 424,540,724 190,595,403 196,839,558
Operating Costs and Expenses:
Flight.......................... 115,613,706 168,774,779 150,255,587 68,663,478 82,229,134
Maintenance..................... 64,722,079 103,388,710 115,081,955 50,336,936 69,120,548
Fuel............................ 57,361,888 54,538,321 82,717,539 40,616,342 35,497,840
Depreciation.................... 13,809,281 20,971,405 32,091,119 15,845,819 17,467,008
Selling, general and
administrative................ 13,272,361 21,676,079 21,889,355 10,088,173 11,284,404
Provision for doubtful
accounts...................... 2,231,485 1,862,283 1,010,663 1,436,966 684,004
------------ ------------ ------------ ------------ ------------
Total cost and
expenses............... 267,010,800 371,211,577 403,046,218 186,987,714 216,282,938
------------ ------------ ------------ ------------ ------------
Income (Loss) from Operations..... 38,519,032 2,471,464 21,494,506 3,607,689 (19,443,380)
Other Income (Expense):
Interest expense, net........... (8,007,389) (14,748,611) (21,632,389) (10,186,510) (12,098,100)
Gain on disposition of property
and equipment, net............ 3,389,881 11,707,673 130,934 395,019 948,504
Gain on contract settlement..... -- -- 1,123,200 1,123,200 --
Gain on insurance
reimbursement................. -- 8,147,878 -- -- 542,302
Net, miscellaneous.............. (550,000) (110) 13,116 13,214 --
------------ ------------ ------------ ------------ ------------
Total other (expense)
income................. (5,167,508) 5,106,830 (20,365,139) (8,655,077) (10,607,294)
------------ ------------ ------------ ------------ ------------
Income (Loss) Before Minority
Interest in American
International Cargo............. 33,351,524 7,578,294 1,129,367 (5,047,388) (30,050,674)
Minority Interest in American
International Cargo............. (2,758,372) (3,092,513) (1,146,019) (510,528) (892,524)
------------ ------------ ------------ ------------ ------------
Net Income (Loss)................. $ 30,593,152 $ 4,485,781 $ (16,652) $ (5,557,916) $(30,943,198)
============ ============ ============ ============ ============

Unaudited Pro forma Data (Note 1):
Income (loss) before provision
for income taxes.............. $ 30,593,152 $ 4,485,781 $ (16,652) $ (5,557,916) $(30,943,198)
Provision for income taxes...... 11,625,398 1,704,597 -- -- --
------------ ------------ ------------ ------------ ------------
Pro forma net income (loss)....... $ 18,967,754 $ 2,781,184 $ (16,652) $ (5,557,916) $(30,943,198)
============ ============ ============ ============ ============
</TABLE>

See notes to combined financial statements.

F-26
<PAGE> 126

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE
30, 1997
<TABLE>
<CAPTION>
AMERICAN KALITTA AMERICAN FLIGHT
INTERNATIONAL FLYING O.K. GRAND INTERNATIONAL ONE
AIRWAYS SERVICES, TURBINES, HOLDINGS, TRAVEL, LOGISTICS
INC. INC. INC. INC. INC. INC. TOTAL
------------- --------- --------- --------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993..... $25,000 $25,000 $1,000 $ -- $ -- $ -- $51,000
Acquisition of Grand
Holdings, Inc. (Note 2).... -- -- -- 100 -- -- 100
Distributions to
stockholder................ -- -- -- -- -- -- --
Net income................... -- -- -- -- -- -- --
------- ------- ------ ----- ------ ------ -------
Balance, December 31, 1994..... 25,000 25,000 1,000 100 -- -- 51,100
Issuance of common stock..... -- -- -- -- 1,000 1,000 2,000
Disposal of Grand Holdings,
Inc. (Note 2).............. -- -- -- (100) -- -- (100)
Contributions by stockholder
(Note 2)................... -- -- -- -- -- -- --
Distributions to
stockholder................ -- -- -- -- -- -- --
Net income................... -- -- -- -- -- -- --
------- ------- ------ ----- ------ ------ -------
Balance, December 31, 1995..... 25,000 25,000 1,000 -- 1,000 1,000 53,000
Contributions by
stockholder................ -- -- -- -- -- -- --
Distributions to
stockholder................ -- -- -- -- -- -- --
Net loss..................... -- -- -- -- -- -- --
------- ------- ------ ----- ------ ------ -------
Balance, December 31, 1996..... 25,000 25,000 1,000 -- 1,000 1,000 53,000
Distributions to stockholder
(unaudited)................ -- -- -- -- -- -- --
Net loss (unaudited)......... -- -- -- -- -- -- --
------- ------- ------ ----- ------ ------ -------
Balance, June 30, 1997
(Unaudited).................. $25,000 $25,000 $1,000 $ -- $1,000 $1,000 $53,000
======= ======= ====== ===== ====== ====== =======

ADDITIONAL
PAID-IN RETAINED
CAPITAL EARNINGS
----------- ------------
<S> <C> <C>
Balance, December 31, 1993..... $ 7,054,995 $ 39,354,622
Acquisition of Grand
Holdings, Inc. (Note 2).... 8,875,000 --
Distributions to
stockholder................ -- (8,830,125)
Net income................... -- 30,593,152
----------- ------------
Balance, December 31, 1994..... 15,929,995 61,117,649
Issuance of common stock..... -- --
Disposal of Grand Holdings,
Inc. (Note 2).............. (8,875,000) 303,411
Contributions by stockholder
(Note 2)................... 7,007,674 --
Distributions to
stockholder................ -- (13,730,711)
Net income................... -- 4,485,781
----------- ------------
Balance, December 31, 1995..... 14,062,669 52,176,130
Contributions by
stockholder................ 3,776,488 --
Distributions to
stockholder................ -- (2,966,524)
Net loss..................... -- (16,652)
----------- ------------
Balance, December 31, 1996..... 17,839,157 49,192,954
Distributions to stockholder
(unaudited)................ -- (610,552)
Net loss (unaudited)......... -- (30,943,198)
----------- ------------
Balance, June 30, 1997
(Unaudited).................. $17,839,157 $ 17,639,204
=========== ============
</TABLE>

See notes to combined financial statements.

F-27
<PAGE> 127

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 30,593,152 $ 4,485,781 $ (16,652) $ (5,557,916) $(30,943,198)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation................................. 13,809,281 20,971,405 32,091,119 15,845,819 17,467,008
Provision for doubtful accounts.............. 2,231,485 1,862,283 1,010,663 1,436,966 684,004
Gain (loss) on disposition of property and
equipment.................................. (3,389,881) (11,707,673) (130,934) (395,019) (948,504)
Minority interest in American International
Cargo...................................... 2,758,372 3,093,262 1,143,637 510,528 892,524
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable........................ (20,725,807) (17,819,263) 21,611,518 35,453,786 12,591,252
Expendable parts and supplies.............. (4,454,286) (3,470,152) (7,034,678) (5,013,941) (2,782,230)
Deposits, prepaid expenses and other
assets................................... (1,845,978) (3,740,088) (3,972,997) (3,732,762) (88,458)
Aircraft held for resale................... (6,975,000) 21,754,521 (1,702,354) 40,867 (1,263,843)
Accounts payable........................... 17,099,346 26,128,641 (20,398,691) (19,081,144) 6,691,843
Accrued liabilities........................ 4,742,342 7,956,796 (3,829,895) 3,180,360 512,712
------------ ------------ ------------ ------------ ------------
Total adjustments........................ 3,249,874 45,029,732 26,447,178 28,245,460 33,756,308
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities............................. 33,843,026 49,515,513 26,430,526 22,687,544 2,813,110
Cash flows from investing activities:
Purchase of property and equipment............. (77,831,613) (153,719,347) (53,413,262) (29,697,122) (14,100,804)
Proceeds from disposition of property and
equipment.................................... 5,250,000 33,603,329 11,008,725 9,833,763 4,274,697
Collections on note receivable................. 139,620 119,324 53,163 53,163 --
Issuance of notes receivable to affiliated
company...................................... -- -- -- -- (747,284)
Disposal of Grand Holdings, Inc., net of
cash......................................... -- (948,818) -- -- --
Acquisition of Grand-Holdings, Inc. net of cash
acquired..................................... (97,077) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities.... (72,539,070) (120,945,512) (42,351,374) (19,810,196) (10,573,391)
Cash flows from financing activities:
Repayments of notes and long-term debt......... (21,997,617) (36,899,953) (52,117,964) (25,893,535) (21,635,491)
Borrowings under notes and long-term debt
agreements................................... 74,466,207 119,952,548 70,097,213 27,585,104 31,282,262
Net (repayments) borrowings under note payable
to stockholder............................... -- 14,000 (100,000) 340,462 300,462
Issuance of common stock....................... -- 2,000 -- -- --
Contribution of capital by stockholder......... -- 554,102 3,776,488 53,923 --
Distributions to American International Cargo
minority stockholder......................... (1,367,328) (2,106,000) (1,535,972) (1,100,000) (1,200,000)
Distributions to stockholder................... (8,830,125) (13,730,711) (2,966,524) (2,572,286) (610,552)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities............................. 42,271,137 67,785,986 17,153,241 (1,586,332) 8,136,681
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash...................... 3,575,093 (3,644,013) 1,232,393 1,291,016 376,400
Cash, beginning of period........................ 1,160,880 4,735,973 1,091,960 1,091,960 2,324,353
------------ ------------ ------------ ------------ ------------
Cash, end of period.............................. $ 4,735,973 $ 1,091,960 $ 2,324,353 $ 2,382,976 $ 2,700,753
============ ============ ============ ============ ============
Supplemental disclosure of cash flow
information -- Cash paid during the period for
interest....................................... $ 7,677,452 $ 16,334,750 $ 21,806,688 $ 10,124,254 $ 11,014,595
============ ============ ============ ============ ============
</TABLE>

F-28
<PAGE> 128

Noncash operating and investing activities:

In 1994, the Companies transferred assets with a net book value of $738,094
from property and equipment to aircraft held for resale.

In 1995, the sole stockholder sold 80% of Grand Holdings, Inc. The nonmonetary
combining effect on the Companies was $8,193,747.

In 1995, the Companies refinanced $680,000 of notes payable to a bank on a
long-term basis.

In 1995, the sole stockholder of the Companies contributed property and
equipment of $6,453,572.

In 1996, the Companies transferred assets with a net book value of $1,436,000
from aircraft held for resale to property and equipment.

In 1996, the Companies transferred assets with a net book value of $1,376,608
from property and equipment to inventory.

In 1996, the Companies received $795,030 in restricted cash from customers for
deposit.

In 1996, the Companies deferred a $878,894 loss on the sale-leaseback of an
aircraft held for resale.

In 1997 (unaudited), the Companies sold certain assets held for resale for
$1,150,000 in exchange for accounts receivable and reduction of outstanding
liabilities.

In 1997 (unaudited), the Companies received $2,073,000 in restricted cash from
customers for deposit.

In 1997 (unaudited), the Companies transferred assets with a net book value of
$137,000 from inventory to property and equipment.

See notes to combined financial statements.

F-29
<PAGE> 129

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description -- American International Airways, Inc. and its
related companies (the "Companies") provide worldwide scheduled air cargo and
charter services. The scheduled air cargo delivery business includes an
overnight freight service operating within a network of North American cities.
By integrating their scheduled and charter freight business and scheduled air
cargo from the United States to the Far East, the Companies are able to provide
air express delivery of virtually any type of air freight throughout the world.
The Companies also provide a wide variety of aviation services, including ground
handling support and airframe and engine maintenance and overhaul for their own
aircraft and for other aircraft operators, travel services for the Companies'
flight crews and maintenance personnel, and air charter management and services
for the Companies.

Significant Accounting Policies:

Principles of Combined Financial Statements -- The combined financial
statements include the accounts of American International Airways, Inc. and its
60% owned partnership, American International Cargo ("AIA"); and related
companies Kalitta Flying Services, Inc. ("KFS"), O.K. Turbines, Inc. ("O.K."),
American International Travel, Inc. ("AIT") and Flight One Logistics, Inc.
("FOL") (collectively referred to as the "Companies"). Combined financial
statements are presented because AIA and the related companies are owned by the
same individual and are operated by common management. All significant
intercompany accounts and transactions have been eliminated.

Interim Financial Statement -- The combined financial statements as of and
for the six months ended June 30, 1996 and 1997 reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods.

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. Actual results could differ from those estimates.

Financial Instruments of the Companies consist principally of accounts
receivable, accounts payable, notes payable to stockholder, debt and letters of
credit. The recorded value of financial instruments included in the financial
statements approximates fair value.

Restricted Cash represents passenger customer deposits held in escrow with
a corresponding credit to deferred revenue until the charter services are
provided.

Accounts Receivable are net of an allowance of $2,062,000 and $2,389,000
for the years ended December 31, 1995 and 1996 and $2,529,000 for the six months
ended June 30, 1997 (unaudited), respectively.

Expendable Parts and Supplies are carried at the lower of cost (using the
first-in, first-out method or average cost convention) or market.

Aircraft Held for Resale -- The Companies may periodically purchase
aircraft for resale. These aircraft are carried at the lower of cost or net
realizable value. The long-term portion of debt associated with these aircraft
is classified as current (Note 4). The sale of such assets is expected within
twelve months.

F-30
<PAGE> 130

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:

<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Building and leasehold improvements......................... 5 - 40
Aircraft.................................................... 5 - 14
Equipment................................................... 3 - 10
Rotable parts............................................... 3 - 7
</TABLE>

During 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to these assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 is required to be adopted for the
Companies' 1996 fiscal year. The Companies have completed the process of
evaluating the impact on the combined financial statements that will result from
adopting SFAS 121 and does not believe the effect to be material.

Rotable Parts are net of an allowance of $1,016,667 and $816,667 for the
years ended December 31, 1995 and 1996 and $941,667 for the six months ended
June 30, 1997 (unaudited), respectively.

Aircraft In Modification includes aircraft in the process of being
converted from passenger to freighter configuration.

Accounts Payable Trade includes bank overdrafts of $4,954,225 and
$4,812,147 at December 31, 1995 and 1996 and $6,898,895 at June 30, 1997
(unaudited), respectively.

Revenue Recognition -- Revenue from scheduled and chartered services
represent charges for movement of air cargo and passengers and is recognized
when movement is complete. Revenue for maintenance, overhaul and repair services
is recognized when services are rendered.

Export Sales -- The Companies consider sales of services to unaffiliated
customers in foreign countries as export sales.

Taxes on Income -- The Companies have elected to be taxed as S Corporations
under the Internal Revenue Code. As S Corporations, the income of the Companies
is taxable to the sole stockholder and, accordingly, these combined financial
statements do not include a provision for corporate income taxes.

Approximately $3,390,000 of the Companies' retained earnings at December
31, 1996 was earned prior to the S Corporation elections and would be taxed to
the sole stockholder in the event of distribution.

The unaudited pro forma provision for income taxes reported on the combined
statements of operations shows the approximate federal and state income taxes
(by applying statutory rates) that would have been incurred if the Companies had
been subject to tax as a C Corporation. No tax benefit has been provided for the
year ended December 31, 1996 and for the six months ended June 30, 1996 and 1997
due to the uncertainty of the Companies' ability to recover such benefits.

Interest Costs -- Interest on funds used to finance the acquisition and
modification of aircraft up to the date the asset is placed in service is
capitalized and included in the cost of the asset. Interest capitalized during
the years ended December 31, 1994, 1995 and 1996 and for the six months ended
June 30, 1996 was $668,000, $1,692,000, $562,000 and $321,000, respectively. No
interest cost was capitalized for the six months ended June 30, 1997
(unaudited).

F-31
<PAGE> 131

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Foreign Transactions -- All significant monetary transactions of the
Companies are denominated in U.S. currency.

Reclassifications -- Certain reclassifications were made to the 1994, 1995
and 1996 financial statements to conform with the classifications used in 1997.

2. ACQUISITION AND DISPOSAL OF RELATED COMPANY

On December 31, 1994, the sole stockholder of the Companies acquired all
outstanding shares of Grand Holdings, Inc. ("GHI") for $8,875,100 in cash and
notes. GHI operated a charter passenger service. The acquisition was accounted
for under the purchase method of accounting and, accordingly, the purchase price
was allocated to the fair value of assets acquired and liabilities assumed. The
primary assets acquired from the transaction were three aircraft.

On June 30, 1995, the sole stockholder of the Companies sold 80% of his
share in Grand Holdings, Inc. ("GHI"). Prior to June 30, 1995, the aircraft of
GHI were distributed to the sole stockholder and in turn contributed to AIA.

3. NOTES PAYABLE TO BANK

Notes payable to banks consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Outstanding borrowings on a bridge loan with a bank
(Note 10), at the bank's prime rate plus 2%
(10.25% effective rate at December 31, 1996),
expires December 9, 1999. Under the terms of the
bridge loan, the Companies may borrow up to
$14,250,000 to cover the purchase and
modification of certain aircraft until permanent
financing is obtained. The principal collateral
for the bridge loan is the related aircraft. The
loan is also secured by all assets of KFS and the
assignment of a life insurance policy on the
stockholder and the guaranty of the
stockholder...................................... $ 9,456,496 $ -- $ --
Outstanding borrowings on a note payable with a bank
at 8.7%, expires February 4, 1998................ -- -- 36,056
Outstanding borrowings on a $3,000,000 revolving
credit agreement with a bank under which the
Companies may borrow up to 75% on eligible
accounts receivable. The agreement calls for
interest at the bank's prime rate plus .5% (8.75%
effective rate at December 31, 1996). Security
consists of accounts receivable and the guaranty
of the stockholder and the minority interest
holder of American International Cargo........... 2,770,000 1,024,035 2,655,000
----------- ----------- -----------
Total....................................... $12,226,496 $ 1,024,035 $ 2,691,056
=========== =========== ===========
</TABLE>

F-32
<PAGE> 132

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-term, reclassified as current:
Outstanding borrowings on a $60,000,000 revolving
credit agreement with a bank under which the
Companies may borrow on eligible accounts
receivable, a percentage of eligible rotable and
consumable parts and 50% of the fair value of
eligible aircraft. The agreement calls for
interest at the bank's prime rate plus 1.25%
(9.5% effective at December 31, 1996). The
agreement expires December 9, 1999 at which time
the entire amount outstanding is due. At December
31, 1996 and June 30, 1997 (unaudited), the
credit available was $4,521,537 and $208,000,
respectively. Security consists of accounts
receivable and aircraft spare parts as well as an
assignment of life insurance policy on the
stockholder. Also secured by all assets of KFS
and guaranteed by the stockholder................ $ -- $47,105,413 $56,482,835
=========== =========== ===========
Long-Term:
Outstanding borrowings on a $40,000,000 revolving
credit agreement with a bank under which the
Companies may borrow on eligible accounts
receivable. The agreement calls for interest at
the bank's prime rate plus .5% (9.0% effective at
December 31, 1995). The agreement expires June 1,
1997 at which time the entire amount outstanding
is due. Security consists of accounts receivable
and aircraft spare parts as well as an assignment
of life insurance policy on the stockholder. The
note is also secured by all assets of KFS and
guaranteed by the stockholder.................... $34,983,000 $ -- $ --
=========== =========== ===========
</TABLE>

These credit agreements include certain restrictive covenants. At December
31, 1996, the Companies were in violation of the following covenants: (1)
maintaining a combined fixed charge ratio of 1 to 1 and (2) certain cross
collateralization covenants. As a result of these and other non-financial loan
covenant violations, all debt has been classified as current.

At June 30, 1997 (unaudited), the Companies had failed to make certain
principal payments and were in violation of the following covenants: (1)
maintaining a minimum tangible net worth of not less than $60 million; (2)
maintaining a minimum debt to net worth ratio of not more than 5.0 to 1.0 and
(3) certain cross collateralization covenants. As a result of these and other
non-financial loan covenant violations, all debt has been classified as current.

F-33
<PAGE> 133

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Various notes payable with interest rates ranging
from 7.49% to 12.0%. Certain interest rates are
at prime plus 1% to 2.5% (9.25% to 10.75%
effective rates at December 31, 1996). The notes
are secured by property and equipment with a net
book value of $216,578,406. Certain notes are
also secured by substantially all of the
Companies' assets, and the personal guaranty of
the stockholder.................................. $173,162,097 $190,221,394 $188,782,141
Less:
Current maturities of long-term debt............. 37,608,059 31,568,769 41,430,734
Outstanding debt on aircraft held for resale..... 4,836,553 2,741,671 2,391,670
------------ ------------ ------------
Total.................................... 42,444,612 34,310,440 43,822,404
------------ ------------ ------------
Net long-term debt, reclassified as current........ -- 155,910,954 144,959,737
------------ ------------ ------------
Net long-term debt................................. $130,717,485 $ -- $ --
============ ============ ============
</TABLE>

Without regard to the lenders exercising their right to demand payment, the
aggregate amount of required payments on long-term debt and notes payable to
bank (Note 3) as of December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997................................................... $ 35,334,475
1998................................................... 69,298,498
1999................................................... 75,547,575
2000................................................... 23,925,286
2001................................................... 19,417,825
Thereafter............................................. 14,827,183
------------
Total........................................ $238,350,842
============
</TABLE>

These credit agreements include certain restrictive covenants. At December
31, 1996, the Companies were in violation of the following covenants: (1)
maintaining a minimum net worth of not less than $78 million; (2) maintaining a
debt service coverage ratio of not less than 1.2 to 1; (3) maintaining a maximum
debt to net worth ratio of not more than 4.0 to 1; (4) maintaining an EBITDA
ratio of not less than 1.1 to 1; and (5) certain cross collateralization
covenants. As a result of these and other non-financial loan covenant
violations, all debt has been classified as current.

At June 30, 1997 (unaudited), the Companies had failed to make certain
principal payments on indebtedness and were in violation of the following
covenants: (1) ratio of earnings to fixed charges; (2) ratio of cash flow to
fixed charges; (3) cash flow to coverage; (4) minimum net income; (5) current
ratio; (6) tangible net worth; (7) shareholder's equity; (8) debt service
coverage; (9) fixed charge coverage; (10) debt to net worth ratios; (11) certain
cross collateralization covenants as well as restrictions relating to
encumbering their assets. As a result of these and other non-financial loan
covenant violations, all debt has been classified as current.

F-34
<PAGE> 134

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Effective in July and August 1997, the Companies entered into agreements
with certain lenders for the deferment of principal payments for a period of one
to eight months. The aggregate monthly deferrals range from $693,000 to
$2,824,000. The Companies are to make interest payments only during this period.
At the end of the deferral periods, the Companies will resume principal payments
in accordance with the terms of the loan agreement.

5. COMMON STOCK

Common stock of the Companies is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------ -----------
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
American International Airways, Inc., $1 par value;
25,000 shares authorized, 25,000 shares issued and
outstanding........................................ $25,000 $25,000 $25,000
Kalitta Flying Services, Inc., $1 par value; 100,000
shares authorized, 25,000 shares issued and
outstanding........................................ 25,000 25,000 25,000
O.K. Turbines, Inc., $1 par value; 50,000 shares
authorized, 1,000 shares issued and outstanding.... 1,000 1,000 1,000
American International Travel, Inc., $1 par value;
50,000 shares authorized, 1,000 shares issued and
outstanding........................................ 1,000 1,000 1,000
Flight One Logistics, Inc., $1 par value; 50,000
shares authorized, 1,000 shares issued and
outstanding........................................ 1,000 1,000 1,000
------- ------- -------
Total...................................... $53,000 $53,000 $53,000
======= ======= =======
</TABLE>

6. OPERATING LEASES

The Companies lease office building, hangars, cargo storage, and related
facilities under noncancelable operating leases which expire on various dates
through 2011. In addition, the Companies periodically lease aircraft and other
equipment under month-to-month lease agreements. Lease expense for all operating
leases was $15,659,000, $24,095,000, $10,815,000, $3,989,000 and $3,466,000, for
the years ended December 31, 1994, 1995 and 1996 and for the six months ended
June 30, 1996 and 1997 (unaudited), respectively.

Aggregate future minimum rental payments required under noncancelable
operating leases at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Years Ending December 31:
1997.................................................. $ 3,177,000
1998.................................................. 1,950,000
1999.................................................. 1,620,000
2000.................................................. 1,006,000
2001.................................................. 789,000
Thereafter............................................ 5,685,000
-----------
Total minimum rental payments................. $14,227,000
===========
</TABLE>

F-35
<PAGE> 135

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

7. EMPLOYEE SAVINGS PLAN

The Companies have three separate 401(k) employee savings plans, covering
substantially all employees. The Companies' contributions to the plans are
discretionary and were $133,000, $158,000, $353,000, $4,430 and $74,918, for the
years ended December 31, 1994, 1995 and 1996 and for the six months ended June
30, 1996 and 1997 (unaudited), respectively.

8. RELATED PARTY TRANSACTIONS

The Companies lease certain aircraft to a company owned and operated by a
relative of the sole stockholder of the Companies. In addition to providing
services to unrelated third parties, the related company flies subcharter
flights for the Companies and also provides lift capacity for the Companies'
overnight scheduled cargo service. The Companies perform ground handling for the
related company in certain locations. The related company also reimburses the
Companies for certain applicable fuel, parking and landing and ground handling
paid on the related company's behalf.

The Companies also have certain transactions with an affiliated company
that is partially owned by the Companies' sole stockholder. The remaining
ownership of this affiliated company are relatives of the sole stockholder of
the Companies. The Companies lease an office facility from this affiliated
company for an annual rent of approximately $713,000. The lease expires May 14,
2007.

Transactions and balances with related parties were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Transactions and balances
with sole stockholder:
Note payable, noninterest
bearing................ $ -- $ 100,000 $ -- $ -- $ 300,462
Contribution of cash...... -- 473,972 2,266,630 -- --
Contribution of aircraft
and equipment.......... -- 6,453,572 -- -- --
Transactions with a company
owned by a relative of the
sole stockholder:
Revenues.................. 352,800 11,582,257 5,176,150 2,674,911 1,468,768
Cost of revenues.......... 2,366,288 6,097,447 28,727 23,680 121,511
Sale of DC8............... -- 5,200,000 -- -- --
Transactions and balances
with an affiliated
company:
Receivable from affiliated
company................... -- -- -- -- 747,284
Rental expense............ -- -- -- -- 88,142
Transactions with GHI --
Purchase of three DC8
engines................... -- 1,950,000 -- -- --
Transactions with sole
stockholder and relatives
of the sole stockholder --
Promotional expenses...... 2,602,038 3,643,611 3,096,724 1,094,020 1,478,415
</TABLE>

F-36
<PAGE> 136

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES

Purchase Commitments -- In March 1997, the Companies committed to purchase
three Boeing 747-200 aircraft and associated engines, four additional spare
engines and certain other related spare parts for approximately $63,000,000. The
Companies have made a deposit against the purchase of $1,500,000 which is
refundable upon the occurrence of certain events, including a casualty loss
involving the aircraft. In connection with these purchase commitments, the
Companies intend to modify these aircraft for approximately $24,000,000. The
Companies were to have taken delivery of the first of the three aircraft not
later than June 14, 1997 and the remaining two not later than November 30, 1997.
However, the Companies have not yet taken delivery of the first of the aircraft
due to liquidity problems and a lack of capital resources and is currently
renegotiating an extension of the agreement. If the Companies fail to complete
the purchase of the aircraft, the seller may retain the deposit.

In July 1997, the Companies purchased two L1011 aircraft for a total
purchase price of $7,000,000. In connection with this purchase, the Companies
have a commitment for the modification of these aircraft for $11,400,000.

In addition, the Companies have a nonrefundable deposit of $320,000 with
respect to a purchase commitment of $1,400,000. The realization of this deposit
is dependent upon the Companies' ability to fulfill this purchase commitment.

Letters of Credit -- The Companies' banks have issued to various airports
and suppliers letters of credit totaling $5,071,000, $3,088,000, and $3,160,032,
at December 31, 1995 and 1996 and June 30, 1997, respectively, against which
accounts receivable are pledged as collateral. The last of the letters of credit
expires in 1998.

Legal Proceedings, Claims and Other -- The Companies are subject to legal
proceedings and claims which have arisen in the ordinary course of business.
Management intends to vigorously defend against these legal proceedings and
believes, based upon the advice of legal counsel, that the outcome will not have
a materially adverse effect on the Companies' financial position, results of
operations, or cash flows.

In January 1996, the FAA issued a series of Directives on certain Boeing
747 aircraft which were modified for freight hauling by GATX-Airlog Company, a
subsidiary of General American Transportation Corp ("GATX"). The Directives,
which became effective on January 30, 1996, were issued because of concerns
relating to the integrity of the cargo door and surrounding floor area in the
event the aircraft were operated at their maximum cargo capacity of
approximately 220,000 pounds. In spite of the fact that the aircraft affected by
the Directives have flown over 83,000 hours without incident, the Directives
require certain modifications to be made to the aircraft. Absent such
modifications, the Directives limit the cargo capacity of these aircraft to
120,000 lbs., a limit which restricts the Companies' ability to profitably
operate the aircraft.

One of each of the Companies' Boeing 747-200 and Boeing 747-100 freighters
are affected by these Directives and have been out of service since January
1996. GATX has proposed a solution to the problem identified by one of the
Directives which has been approved by the FAA. An appropriate means to test the
proposed solution, however, has not yet been identified. Currently, the
Companies anticipate modifying the Boeing 747-100 to be in compliance with a
portion of the Directive for which the FAA has approved a solution by the latter
half of 1998, which will allow the Companies to operate it with a reduced cargo
capacity of 160,000 lbs. The Companies are awaiting engineering solutions to
address the remaining Directives. If the cost necessary to fully implement these
solutions and return both the Boeing 747-100 and -200 to maximum cargo capacity
is uneconomical, the Companies may either operate one or both of the aircraft at
limited load or use one or both for spare parts. The Companies are currently
involved in litigation against GATX to recover the cost to repair these aircraft
as well as revenues lost as a consequence of the aircraft downtime.

F-37
<PAGE> 137

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In September 1996 pursuant to the FAA's National Aviation Safety Inspection
Program, the Companies underwent a broad but routine inspection of all of the
Companies' aircraft and maintenance operations. This inspection resulted in a
report from the FAA citing the Companies with a number of regulatory
infractions, none of which were sufficiently serious to cause the FAA to curtail
or otherwise restrict any of the Companies' operations. As a consequence of the
FAA's inspection, however, the FAA and the Companies entered into a Consent
Order in January 1997 which required the Companies to revise certain internal
policies and procedures to address the regulatory violations noted in the
inspection report as well as enforcement actions that had been pending prior to
the inspection. Without admitting any fault, the Companies agreed to pay a fine
of $450,000, one-third of which is suspended and will be forgiven if the
Companies comply with all the terms of the Consent Order. At this time,
management believes the Companies are in compliance with the Consent Order and
expect the FAA to conduct another inspection of similar scope in the fourth
quarter of 1997 to verify such compliance. The Consent Order also provides that
it is a full and conclusive settlement of any civil penalties the Companies
could incur for regulatory violations occurring before January 1, 1997, but does
not preclude the FAA from taking enforcement action to revoke the Companies' air
carrier operating certificate.

Only six of the Companies' twenty Douglas DC-8 aircraft comply with the FAA
Stage III noise control standards. The Companies may elect not to modify the
fourteen remaining Douglas DC-8 aircraft to meet the Stage III noise control
standards because the anticipated cost of approximately $3.5 million per
aircraft (not including aircraft downtime) may exceed the economic benefits of
such modifications. If the Companies cannot or do not modify these fourteen
Douglas DC-8 aircraft, the Companies will have to remove these aircraft from
service in the United States before January 1, 2000 and may have to replace them
with other aircraft. In addition, thirteen of the Companies' Boeing 727 aircraft
currently do not comply with the Stage III noise control standards. The
Companies currently anticipate modifying their Boeing 727 fleet (at an
anticipated cost of approximately $24 million) to be in compliance with the
Stage III noise control standards by the applicable deadlines. However, there
can be no assurance that the Companies will have sufficient funds or be able to
obtain financing to cover the costs of these modifications or to replace such
aircraft.

10. MAJOR CUSTOMERS

The Companies had sales to two major customers which are entities of the
United States Government, representing approximately 28%, 17%, 21%, 6% and 8% of
combined revenues for the years ended December 31, 1994, 1995, 1996 and for the
six months ended June 30, 1996 and 1997 (unaudited), respectively. Accounts
receivable from these customers were approximately $45,118,000, $12,024,000 and
$2,295,000 at December 31, 1995, 1996 and June 30, 1997 (unaudited),
respectively.

11. MANAGEMENT'S PLANS -- SALE OF AIRCRAFT AND PROPOSED MERGER

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Companies (1) are experiencing
difficulty in generating sufficient cash flows to meet their obligations and
sustain their operations, (2) failed to make certain principal payments and are
not in compliance with certain covenants of their long-term debt agreements (3)
have negative working capital and (4) have incurred substantial losses
subsequent to December 31, 1996. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Companies be unable to continue as a going concern. The Companies'
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet their obligations on a timely basis, to comply with
the terms and covenants of their financing agreements, to obtain additional
financing or refinancing as may be required, and ultimately to attain successful
operations. Management is continuing its efforts to obtain additional funds so
that the Company can meet its obligations and sustain operations from sources
that are described below.

F-38
<PAGE> 138

AMERICAN INTERNATIONAL AIRWAYS, INC.
AND RELATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The Companies, the sole stockholder of the Companies, and Kitty Hawk, Inc.
("Kitty Hawk") are negotiating a proposed merger agreement, under which each of
the respective Companies will be merged with separate subsidiaries of Kitty
Hawk, with each of the Companies surviving the merger as a direct, wholly owned
subsidiary of Kitty Hawk. At the effective time of the proposed Merger, the
outstanding shares of capital stock of four Companies (AIA, AIT, FOL and O.K.)
will be converted, into the right to receive their prorata portion of 5,099,150
shares of Kitty Hawk common stock. The outstanding shares of capital stock of
KFS will be converted into the right to receive $20,000,000.

Concurrent with the consummation of the proposed merger agreement will be
the closing of a proposed common stock offering of 4,000,000 shares of Kitty
Hawk common stock and the consummation of a proposed note offering under Rule
144A of the Securities Act for $340,000,000 aggregate principal amount of 10%
senior notes of Kitty Hawk. The proceeds of the notes and a portion of the
proceeds of the sale of shares will be used to pay the cash portion of the
acquisition of the Companies and to refinance and restructure the outstanding
debt of the Companies and Kitty Hawk.

As an interim step toward the merger, on August 27, 1997, the Companies
entered into an agreement to sell to Kitty Hawk sixteen Boeing 727-200 aircraft
constituting the Companies' 727-200 fleet for approximately $51 million. This
interim transaction is deemed necessary in order to generate cash to be used to
pay for the acquisition of a Boeing 747 aircraft from an unrelated third party
(see Note 9), to acquire an L-1011 aircraft and provide the Companies with
working capital. As part of the transaction, the Companies assigned to Kitty
Hawk all of its customer contracts relating to the aircraft sold. The purchase
agreement provides the Companies the option to repurchase, no later than March
31, 1998, all except three of the 727-200 aircraft from Kitty Hawk at Kitty
Hawk's purchase price, less $14 million for the three aircraft not subject to
the option, plus any costs incurred by Kitty Hawk to maintain the repurchased
aircraft. Similarly, Kitty Hawk has the option to require the Companies to
repurchase, no later than December 31, 1997, all except three of the 727-200
aircraft at Kitty Hawk's purchase price less $14 million for the three aircraft
not subject to the option, plus any costs incurred by Kitty Hawk to maintain the
repurchased aircraft.

F-39
<PAGE> 139

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Estimated expenses payable solely by the Company in connection with the
issuance and distribution of the securities to be registered, other than
underwriting discounts and expenses, are as follows:

<TABLE>
<S> <C>
SEC registration fee........................................ $
NASD filing fee.............................................
Nasdaq application fee......................................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue sky fees and expenses..................................
Transfer agent and registrar fees...........................
Miscellaneous expenses......................................
----------
Total............................................. $
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or any of its stockholders for
monetary damages arising from the director's breach of fiduciary duty as a
director. However, this does not apply with respect to any action in which the
director would be liable under Section 174 of the General Corporation Law of the
State of Delaware ("Delaware Code") nor does it apply with respect to any
liability in which the director (i) breached his duty of loyalty to the Company
or its stockholders; (ii) did not act in good faith or, in failing to act, did
not act in good faith; (iii) acted in a manner involving intentional misconduct
or a knowing violation of law or, in failing to act, shall have acted in a
manner involving intentional misconduct or a knowing violation of law; or (iv)
derived an improper personal benefit.

The Certificate of Incorporation of the Company provides that the Company
shall indemnify its directors and officers and former directors and officers to
the fullest extent permitted by the Delaware Code. Pursuant to the provisions of
Section 145 of the Delaware Code, the Company has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was a director, officer, employee, or agent of the Company, against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit, or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or not opposed to the
best interest, of the Company and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.

The power to indemnify applies to actions brought by or in the right of the
Company as well, but only to the extent of defense and settlement expenses and
not to any satisfaction of a judgment or settlement of the claim itself and with
the further limitation that in such actions no indemnification shall be made in
the event of any adjudication of negligence or misconduct unless the court, in
its discretion, believes that in light of all the circumstances indemnification
should apply.

The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been

II-1
<PAGE> 140

advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The Company granted certain options to Messrs. Reeves and Wadsworth in
December of 1995 and June of 1996, respectively. See "Management -- Employee
Compensation Plans and Arrangements." All such options were issued in connection
with employment or consulting services rendered pursuant to Rule 701 and/or
Section 4(2) of the Securities Act and were exercised on June 27, 1996. In
connection with the consummation of the Merger, the Company will issue 5,099,150
shares of Common Stock to Mr. Kalitta. All of such shares issued to Mr. Kalitta
will be issued pursuant to Section 4(2) of the Securities Act and/or Regulation
D promulgated pursuant to the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
<C> <S>
1.1** -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the
"Company"), filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
3.2 -- Bylaws of the Company, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 33-85698) dated as of December 1994,
which exhibit is incorporated herein by reference.
3.3 -- Amendment No. 1 to the Certificate of Incorporation of
the Company, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
3.4 -- Amendment No. 1 to the Bylaws of the Company, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
4.1 -- Specimen Common Stock Certificate, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
5.1** -- Opinion of Haynes and Boone, LLP, regarding legality of
the Common Stock being issued.
10.1 -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Aircargo, Leasing, M. Tom
Christopher, American International Airways, Inc. and
Conrad Kalitta, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
10.2 -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.3 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
</TABLE>

II-2
<PAGE> 141
<TABLE>
<CAPTION>
<C> <S>
10.4 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.5 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
10.6 -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
10.7 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.8 -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
10.9 -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
10.10 -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.11 -- Amended and Restated Employment Agreement dated as of
December 31, 1995 by and between the Company and Tilmon
J. Reeves, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.12 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement"), filed as
an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.13 -- Amendment No. 1 dated November 17, 1992 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.14 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.15 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
</TABLE>

II-3
<PAGE> 142
<TABLE>
<CAPTION>
<C> <S>
10.16 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.17 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.18 -- Amended and Restated Credit Agreement, dated as of August
14, 1996, by and among the Company, Wells Fargo Bank
(Texas), National Association and Bank One, Texas, N.A.,
filed as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.19** -- Agreement, dated July 20, 1995, between American
International Airways, Inc. and the Pilots, Co-Pilots and
Flight Engineers in the service of American International
Airways, Inc., as represented by The International
Brotherhood of Teamsters -- Airline Division.
10.20** -- Agreement for Transitional Operations, dated September
19, 1997, between American International Airways, Inc.
and Kitty Hawk Aircargo, Inc.
10.21** -- Aircraft ACMI Operating Agreement, dated September 17,
1997, between American International Airways, Inc. and
Kitty Hawk Aircargo, Inc.
10.22** -- Aircraft ACMI Operating Agreement, dated September 17,
1997, between American International Cargo and Kitty Hawk
Aircargo, Inc.
12.1* -- Statement of Computation of ratio of earnings to fixed
charges.
21.1 -- Subsidiaries of the Registrant, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
23.1* -- Consent of Ernst & Young LLP.
23.2* -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Haynes and Boone, LLP (contained in legal
opinion).
24.1 -- The power of attorney of officers and directors of the
Company is set forth on the signature page hereto.
</TABLE>

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

* Filed herewith.

** To be filed by amendment.

(b) Financial Statement Schedule and Auditors' Report on Schedule:

Schedules filed

The Kalitta Companies -- Schedule II Valuation and Qualifying Accounts

No other financial statement schedules are filed as part of this
Registration Statement since the required information is included in the
financial statements, including the notes thereto, or circumstances requiring
the inclusion of such schedules are not present.

II-4
<PAGE> 143

ITEM 17. UNDERTAKINGS

The undersigned Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

II-5
<PAGE> 144

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 22nd day of September, 1997.

KITTY HAWK, INC.

By: /s/ RICHARD R. WADSWORTH

----------------------------------
Richard R. Wadsworth
Senior Vice President -- Finance,
Chief
Financial Officer and Secretary

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of Kitty Hawk, Inc. (the "Company") hereby constitutes and appoints,
M. Tom Christopher and Richard R. Wadsworth, or either of them (with full power
to each of them to act alone), his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and on his behalf and in his name,
place and stead, in any and all capacities, to sign, execute and file any and
all documents relating to this Registration Statement, including any and all
amendments, exhibits and supplements thereto and including any Registration
Statement filed pursuant to Rule 462(b) of the Securities Act of 1933, with any
regulatory authority, granting unto said attorneys, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he himself might or could do if
personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 22nd day of September, 1997.

<TABLE>
<CAPTION>
NAME CAPACITIES
---- ----------
<C> <S>

/s/ M. TOM CHRISTOPHER Chairman of the Board of Directors and
- ----------------------------------------------------- Chief Executive Officer
M. Tom Christopher

/s/ TILMON J. REEVES President, Chief Operating Officer and
- ----------------------------------------------------- Director
Tilmon J. Reeves

/s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief
- ----------------------------------------------------- Financial Officer, Secretary and
Richard R. Wadsworth Director and Principal Financial and
Accounting Officer

/s/ TED J. COONFIELD Director
- -----------------------------------------------------
Ted J. Coonfield

/s/ JAMES R. CRAIG Director
- -----------------------------------------------------
James R. Craig

/s/ LEWIS S. WHITE Director
- -----------------------------------------------------
Lewis S. White
</TABLE>

II-6
<PAGE> 145

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
American International Airways, Inc. and Related Companies
Ypsilanti, Michigan

We have audited the combined financial statements of American International
Airways, Inc. and related companies as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, and have issued
our report thereon dated September 17, 1997 (which report expresses an
unqualified opinion and includes an explanatory paragraph which indicates that
there are matters that raise substantial doubt about the Companies' ability to
continue as a going concern); such financial statements and report are included
elsewhere in this Form S-1. Our audits also included the financial statement
schedule of the Companies, listed in Item 16. This financial statement schedule
is the responsibility of the Companies' management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic combined financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.

Ann Arbor, Michigan
September 17, 1997 DELOITTE & TOUCHE LLP

S-1
<PAGE> 146

AMERICAN INTERNATIONAL AIRWAYS, INC. AND RELATED COMPANIES

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
--------------------------
CHARGED DEDUCTIONS-
CHARGED TO TO OTHER WRITE-OFFS
BALANCE COSTS AND ACCOUNTS- AND BALANCE
JANUARY 1 EXPENSES ACQUISITIONS DISPOSALS DECEMBER 31
--------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
DOUBTFUL ACCOUNTS RESERVES
For the Year Ended December 31,
1996............................ $2,062 $1,011 $ (684) $2,389
1995............................ 1,950 1,862 (1,750) 2,062
1994............................ 1,363 2,231 (1,644) 1,950
</TABLE>

S-2
<PAGE> 147

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM
------- ----
<C> <S>
1.1** -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the
"Company"), filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
3.2 -- Bylaws of the Company, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 33-85698) dated as of December 1994,
which exhibit is incorporated herein by reference.
3.3 -- Amendment No. 1 to the Certificate of Incorporation of
the Company, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
3.4 -- Amendment No. 1 to the Bylaws of the Company, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
4.1 -- Specimen Common Stock Certificate, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
5.1** -- Opinion of Haynes and Boone, LLP, regarding legality of
the Common Stock being issued.
10.1 -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Aircargo, Leasing, M. Tom
Christopher, American International Airways, Inc. and
Conrad Kalitta, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
10.2 -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.3 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.4 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.5 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
10.6 -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM
------- ----
<C> <S>
10.7 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.8 -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
10.9 -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
10.10 -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.11 -- Amended and Restated Employment Agreement dated as of
December 31, 1995 by and between the Company and Tilmon
J. Reeves, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.12 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement"), filed as
an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.13 -- Amendment No. 1 dated November 17, 1992 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.14 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.15 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.16 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.17 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.18 -- Amended and Restated Credit Agreement, dated as of August
14, 1996, by and among the Company, Wells Fargo Bank
(Texas), National Association and Bank One, Texas, N.A.,
filed as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM
------- ----
<C> <S>
10.19** -- Agreement, dated July 20, 1995, between American
International Airways, Inc. and the Pilots, Co-Pilots and
Flight Engineers in the service of American International
Airways, Inc., as represented by The International
Brotherhood of Teamsters -- Airline Division.
10.20** -- Agreement for Transitional Operations, dated September
19, 1997, between American International Airways, Inc.
and Kitty Hawk Aircargo, Inc.
10.21** -- Aircraft ACMI Operating Agreement, dated September 17,
1997, between American International Airways, Inc. and
Kitty Hawk Aircargo, Inc.
10.21** -- Aircraft ACMI Operating Agreement, dated September 17,
1997, between American International Cargo and Kitty Hawk
Aircargo, Inc.
12.1* -- Statement of Computation of ratio of earnings to fixed
charges.
21.1 -- Subsidiaries of the Registrant, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
23.1* -- Consent of Ernst & Young LLP.
23.2* -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Haynes and Boone, LLP (contained in legal
opinion).
24.1 -- The power of attorney of officers and directors of the
Company is set forth on the signature page hereto.
</TABLE>

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

* Filed herewith.

** To be filed by amendment.

<PAGE> 1

EXHIBIT 12.1

KITTY HAWK, INC.

CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
12 MONTHS FOUR MONTHS
ENDED ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, DECEMBER 31,
---------------------------------------------- ------------ ----------------
1992 1993 1994 1995 1996 1996 1995 1996
------ ------ ------ ------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings
Income before income taxes... $1,388 $6,718 $8,407 $7,559 $6,877 $7,686 $7,851 $8,660
Add: Fixed charges........... 202 206 430 1,289 1,998 2,109 528 730
------ ------ ------ ------ ------ ------ ------ ------
Total.................. $1,590 $6,924 $8,837 $8,848 $8,875 $9,795 $8,379 $9,390
====== ====== ====== ====== ====== ====== ====== ======
Fixed charges
Interest expense............. $ 157 $ 134 $ 343 $1,185 $1,859 $2,062 $ 482 $ 684
Add: Interest factor of
operating lease expense.... 45 72 87 104 139 47 46 46
------ ------ ------ ------ ------ ------ ------ ------
Total.................. $ 202 $ 206 $ 430 $1,289 $1,998 $2,109 $ 528 $ 730
====== ====== ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges...................... 7.9x 33.6x 20.6x 6.9x 4.4x 4.6 15.9x 12.9
====== ====== ====== ====== ====== ====== ====== ======

<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
---------------------
1996 1997
------- ------
<S> <C> <C>
Earnings
Income before income taxes... $(1,980) $6,625
Add: Fixed charges........... 1,092 1,643
------- ------
Total.................. $ (888) $8,268
======= ======
Fixed charges
Interest expense............. $ 1,023 $1,049
Add: Interest factor of
operating lease expense.... 69 594
------- ------
Total.................. $ 1,092 $1,643
======= ======
Ratio of earnings to fixed
charges...................... --(1) 5.0
======= ======
</TABLE>

THE KALITTA COMPANIES

CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Income (loss) before minority interest......... $ 5,585 $18,001 $33,351 $ 7,578 $ 1,129 $(5,047) $(30,050)
Add: Fixed charges............................. 5,688 12,485 14,009 24,788 26,179 12,053 13,526
Less: Capitalized interest..................... -- -- (668) (1,692) (562) (321) --
------- ------- ------- ------- ------- ------- --------
Total.................................... $11,273 $30,486 $46,692 $30,674 $26,743 $ 6,685 $(16,524)
======= ======= ======= ======= ======= ======= ========
Fixed charges
Interest expense............................... 4,396 6,781 8,121 15,064 22,012 10,402 12,371
Add: Interest factor of operating lease
expense...................................... 1,292 5,704 5,220 8,032 3,605 1,330 1,155
Add: Capitalized interest...................... -- -- 668 1,692 562 321 --
------- ------- ------- ------- ------- ------- --------
Total.................................... $ 5,688 $12,485 $14,009 $24,788 $26,179 $12,053 $ 13,526
======= ======= ======= ======= ======= ======= ========
Ratio of earnings to fixed charges............... 2.0x 2.4x 3.3x 1.2x 1.0x --(2) --(2)
======= ======= ======= ======= ======= ======= ========
</TABLE>

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

(1) Earnings of Kitty Hawk were not sufficient to cover fixed charges by $1,980
for the six month period ended June 30, 1996.

(2) Earnings of The Kalitta Companies were not sufficient to cover fixed charges
by approximately $5,368 and $30,050 for the six months ended June 30, 1996
and 1997, respectively.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 1997 in the Registration Statement (Form
S-1) and related Prospectus of Kitty Hawk, Inc. dated September 17, 1997.

/s/ ERNST & YOUNG LLP

Dallas, Texas
September 15, 1997

<PAGE> 1

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Kitty Hawk, Inc. on
Form S-1 of our report relating to the combined financial statements of American
International Airways, Inc. and related companies (collectively the "Companies")
dated September 17, 1997 (which report expresses an unqualified opinion and
includes an explanatory paragraph which indicates that there are matters that
raise substantial doubt about the Companies' ability to continue as a going
concern) appearing in the Prospectus, which is part of this Registration
Statement, and of our report dated September 17, 1997 relating to the financial
statement schedule of the Companies appearing elsewhere in this Registration
Statement.

We also consent to the reference to us under the heading "Experts" in such
Prospectus.

DELOITTE & TOUCHE LLP

Ann Arbor, Michigan
September 17, 1997