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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM SEPTEMBER 1, 1996 TO DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-25202
KITTY HAWK, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2564006
(State of Incorporation) (I.R.S. Employer
Identification No.)
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1515 WEST 20TH STREET
P.O. BOX 612787
DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261
(972) 456-2200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On March 27, 1997, the aggregate market price of the voting stock held by
nonaffiliates of the registrant was approximately $42.3 million. (For purposes
of determination of the above stated amount, only directors, executive officers
and 10% or greater stockholders have been deemed affiliates).
On March 27, 1997, there were 10,451,807 outstanding shares of Common
Stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
GENERAL
Kitty Hawk provides air freight charter services, emphasizing
highly-reliable, time-sensitive services. The Company's air freight carrier's
revenue fleet is comprised of 25 owned and 3 leased aircraft, 17 of which are
currently used in scheduled airport-to-airport freight service under contracts
primarily with major freight forwarders in North and Central America and the
Pacific Rim. These contracts generally require the Company to supply aircraft,
crew, maintenance, and insurance ("ACMI") and to meet certain on-time
performance standards, while its customers are responsible for substantially all
other operating expenses, including fuel. Additionally, Kitty Hawk provides
same-day air logistics charter services in North America. Through its advanced,
proprietary computer software, the Company manages delivery of extremely time-
sensitive freight utilizing the on-demand charter services of both third-party
air freight carriers and planes from the Company's fleet that are not then
committed to ACMI service. The Company's principal executive offices are located
at 1515 West 20th Street, P.O. Box 612787, Dallas/Fort Worth International
Airport, Texas 75261, its telephone number is (972) 456-2200 and its Internet
address is http://www.kha.com. Unless the context otherwise requires, the
"Company" or "Kitty Hawk" refers to Kitty Hawk, Inc., its predecessor and its
subsidiaries.
On December 4, 1996, the Company changed its fiscal year end from August 31
to December 31. The following discussion presents results for a four month
interim period from September 1, 1996 to December 31, 1996 (the "Transition
Period").
AIR FREIGHT CARRIER
General
Kitty Hawk has owned and operated aircraft for on-demand air freight
charter services since 1985. In 1987, the Company's air freight carrier was
expanded to include ACMI contract charter service. Pursuant to ACMI contracts,
the Company's air freight carrier provides scheduled charters carrying
heavyweight freight and mail for entities that engage primarily in next-day and
two-day delivery service to their customers.
Revenue Fleet
Of the Company's revenue fleet of 28 aircraft, the Company operates 25
aircraft in active revenue service, is in the process of converting two Boeing
727-200 aircraft to cargo configuration, and anticipates converting an
additional Boeing 727-200 aircraft to cargo configuration during 1997. These
aircraft do not include the Company's undivided one-third interest in four
Falcon 20 jet aircraft leased to a third-party operator. See "Item 11. Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
ACMI Contracts
As an FAA Part 121 certificated carrier, the Company's air freight carrier
provides primary lift capacity as well as additional lift capacity for overflow
and seasonal freight transportation needs on an ACMI contract basis. During the
Transition Period, ACMI contracts accounted for approximately 28.2% of the
Company's total revenues.
As of March 24, 1997, Kitty Hawk was operating nine Boeing 727-200s, six
Convairs and two Douglas DC9-15Fs under ACMI contracts with Burlington Air
Express, Inc., Ting Hong Oceanic Enterprises Co., Ltd., Pacific East Asia Cargo
Airlines, Inc., DHL Airways, Inc., and Emery Worldwide Airlines, Inc.
The Company's ACMI contracts typically require the Company to supply
aircraft, crew, maintenance, and insurance, while its customers are responsible
for substantially all other aircraft operating expenses, including fuel, fuel
servicing, airport freight handling fees, landing and parking fees, ground
handling expenses, and aircraft push-back costs.
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These ACMI contracts also typically require the Company to operate specific
aircraft and/or provide minimum air freight capacity, and generally are
terminable if the Company (i) fails to meet certain minimum performance levels,
(ii) otherwise breaches the contract, or (iii) becomes subject to other
customary events of default. The ACMI contracts also provide that the Company
has exclusive operating control and direction of each aircraft the Company
operates and that certain foreign-based customers must obtain any government
authorizations and permits required to service the designated routes. Therefore,
the Company's route structure is limited to areas in which customers gain access
from the relevant governments. The Company is permitted under certain of its
ACMI contracts to utilize, and, in fact often does utilize, its aircraft in
on-demand service in the periods between ACMI contract flights.
Burlington Air Express, Inc.
Burlington Air Express, Inc. ("Burlington") currently leases under one ACMI
contract seven of the Company's Boeing 727-200s and under a separate ACMI
contract one of the Company's Convairs. Under each contract, Burlington pays the
Company a fixed fee for each scheduled round-trip flown by the Company and a per
hour charge for any nonscheduled flight requested by Burlington.
The Burlington Boeing 727-200 ACMI contract is for a term expiring on March
1, 1999, but pursuant to the terms of the contract, either party may upon thirty
days' written notice terminate the services of two Boeing 727-200 aircraft
immediately and one additional Boeing 727-200 aircraft on or after each of March
1, 1998 and September 1, 1998. In addition, Burlington may earlier terminate the
contract if, among other reasons, the Company fails to meet certain performance
standards or if majority ownership or control of the Company is acquired by a
competitor of Burlington. The Company operates one Convair on behalf of
Burlington pursuant to a contract between the parties on terms substantially
similar to those set forth in the Boeing 727-200 ACMI contract between the
parties.
On-Demand Charter Service
The air freight carrier provides on-demand charter service for customers of
the Company's air logistics business. Approximately 7.1%, 8.7%, 9.0% and 5.8% of
the on-demand charters managed by the Company during fiscal years 1994, 1995,
and 1996 and the Transition Period, respectively, were flown by the air freight
carrier. A substantial portion of these charters were flown for GM. The Company
also has flown its own aircraft on certain of the seasonal charters it has
managed for the U.S. Postal Service.
Maintenance
The Company's aircraft require considerable maintenance in order to remain
in compliance with FAA regulations. The Company estimates that at current rates
of operation of its existing fleet, during the remainder of fiscal year 1997,
the next scheduled major overhaul maintenance checks for five Boeing 727-200s
will be completed and, during the fiscal year 1998, one will be completed. The
Company does not anticipate any of its aircraft, at current rates of operation,
requiring major overhaul maintenance checks during fiscal year 1999. The Company
estimates that the service life of each of its revenue aircraft extends beyond
the year 2000. Kitty Hawk historically has followed, and currently intends to
follow, a policy of retiring Convairs at the time of their next scheduled major
overhaul maintenance checks rather than expending the amounts necessary for such
checks.
Any equipment being placed on the Company's operating certificate is
inspected and repaired prior to being utilized by the Company for either
on-demand or ACMI contract charters. The Company's maintenance facilities enable
it to perform all required airframe maintenance and minor engine repairs on the
aircraft ranging from overnight "turnaround" checks to major airframe overhauls.
The Company performs all maintenance for its fleet, including line maintenance,
at its own maintenance facilities, except for repairs to avionics and overhauls
of engines and airframes. All contract maintenance is performed by subcontracted
FAA-approved maintenance facilities under the on-site supervision and/or
inspection of Company quality assurance personnel. Management currently
anticipates no difficulties in acquiring needed parts.
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Acquisition Program
Kitty Hawk is engaged in a program of selective aircraft acquisitions. In
October 1996, the Company sold 2,700,000 shares of Common Stock (the "Offering")
raising net proceeds of approximately $29.3 million to purchase and modify to
cargo configuration five Boeing 727-200 aircraft. As of March 24, 1997, the
Company has purchased four of these five aircraft.
As of March 24, 1997, the Company has purchased from the net proceeds of
the Offering (i) one Boeing 727-200 freighter aircraft for $4.7 million, (ii)
one Boeing 727-200 aircraft for $2.31 million, which is currently being modified
to cargo configuration for an additional cost of approximately $3.1 million
(including approximately $1.82 million for noise abatement equipment which has
been purchased), (iii) one Boeing 727-200 aircraft for $3.5 million, which is
currently being modified to cargo configuration for an additional cost of
approximately $5.0 million (including approximately $2.45 million for noise
abatement equipment), and (iv) one Boeing 727-200 aircraft for $3.5 million,
which the Company anticipates modifying to cargo configuration in 1997 for an
additional cost of approximately $5.0 million (including approximately $2.45
million for noise abatement equipment). As of March 24, 1997, the Company has
used approximately $16.8 million of the net proceeds of the Offering to fund
these expenses.
The Company recently acquired an undivided one-third interest in four
Falcon 20 jet aircraft and pursuant to a co-ownership agreement leases such
aircraft to a third-party operator for cargo charter service. See "Item 11.
Executive Compensation -- Compensation Committee Interlocks and Insider
Participation."
AIR LOGISTICS
General
On-demand air charters of heavy-weight freight generally are used when
"next-flight-out" delivery services of commercial airlines or the next-day
delivery services of air freight companies or other service providers cannot
meet the customer's delivery deadline. Utilizing a proprietary computerized
database, the Company's air logistics services involve coordinating
"door-to-door" transportation by arranging for ground pick-up, loading, air
transportation, unloading, and ground delivery of the freight. The most frequent
use of on-demand charters is to deliver manufacturing or replacement parts to
avoid a work stoppage. Manufacturers who employ "just-in-time" inventory systems
encourage the order and delivery of inventory just before it is needed at the
assembly plant. On-demand charters also are used to transport replacement parts
on an expedited basis so that critical equipment can be kept operational or put
back in service to avoid or minimize the length of a shutdown. Firms that are
reducing inventory and shortening product cycle times through direct air
shipments also use on-demand charters.
The customers of the Company's on-demand air logistics services include
companies that are engaged in industries such as automotive, chemical, computer,
mail and bulk package delivery, retail merchandising, and oil field service and
equipment. Typically, the premium costs incurred in utilizing on-demand charters
to achieve expedited same-day delivery are justified by the Company's customers
on the basis that greater costs would otherwise be incurred as a result of a
work stoppage or having to maintain greater inventory levels. A significant
portion of all on-demand, same-day air freight charters in North America is
accounted for by the automotive industry. The importance of the automotive
industry to on-demand air charters reflects the large number of automobile
parts, the complexity of an automotive manufacturer's supplier and assembly
plant network, and the high cost of shutting down production facilities. Kitty
Hawk believes that "just-in-time" inventory systems have increased the use of
on-demand air charters by the automotive industry and that on-demand air
charters are an integral cost of such "just-in-time" inventory management
systems. Because automotive manufacturers generally carry less inventory than in
the past, unanticipated parts shortages may occur more frequently.
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Delivery of Logistics Services
During the Transition Period, Kitty Hawk arranged an average of
approximately 34 on-demand charters per day. Each transaction originates from a
customer's telephonic request to arrange a charter answered by one of the
Company's full-time account managers who are on duty 24 hours per day, 365 days
per year.
Database, Information Software, and Tracking Systems
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.
Database System. Kitty Hawk believes that its database is critical to its
ability to arrange on-demand air charters in a timely and reliable manner. The
Company maintains in its database a carrier profile for over 500 air freight
carriers that provide on-demand charter service. The Company has implemented an
Internet system to provide its account managers with real-time updates on
available third party on-demand air charter aircraft across North America. The
most utilized carriers are visited by Company representatives at least annually
to inspect the carrier's facilities and equipment and to update the carrier
database. The database also contains information concerning ground
transportation and aircraft loading companies in North America that is similar
to its information concerning air carriers.
Information Software System. The Company's logistics system was developed
in 1990 to automate access to the Company's database and has been frequently
revised and improved. This system provides on-screen information regarding air
carriers, aircraft type and specifications, fuel suppliers, cargo handlers, and
surface carriers, along with relevant cost information. In addition, Kitty Hawk
is an on-line subscriber to Jeppesen's Flight Planning and Kavouras
Meteorological services. The flight planning services provided by Jeppesen
integrate airport analyses (comprised of runway lengths, altitudes, hours of
operation and noise abatement procedures) with the current weather data and
other information to provide an automated flight plan. This flight planning
service then transmits electronically the automated flight plan to the pilot and
to the FAA contemporaneously.
Tracking System. In December 1993, the Company began operation of its
HawkEye system, which was developed internally by its full time programming and
computer support staff. HawkEye allows an account manager to track an aircraft's
progress from origin to destination on his or her computer screen and on the
main projection board of the control room. Aircraft icons show each flight, its
direction, and information about the flight including the type of aircraft, the
flight number, its current altitude, ground speed, distance to destination, and
times of departure and estimated arrival. The data supporting the HawkEye System
is a direct data feed obtained from the FAA's Air Traffic Control computer
system.
U. S. Postal Service
Since 1986, Kitty Hawk has managed Christmas season charters for the U.S.
Postal Service utilizing third-party air freight carriers in order to provide
additional lift capacity for this peak period. The U.S. Postal Service awards
contracts periodically pursuant to a public bidding process that considers
quality of service and other factors. Bids for contracts to provide these
Christmas season charters generally are submitted in the summer of each year and
are typically awarded during the following fall.
Of the Company's total revenues during the Transition Period, the U.S.
Postal Service accounted for $26.2 million (43.7%). Of these revenues, $23.3
million (88.9%) were attributable to the Company's air logistics business in
connection with its management of seasonal Christmas charters flown by
third-party air cargo carriers, and $2.9 million (11.1%) were attributable to
the air freight carrier for ACMI contract charters flown by the Company on
designated routes. Of the Company's gross profits from air logistics during the
Transition Period, the U.S. Postal Service accounted for $4.4 million (77.7%).
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Relationship With GM
Under the terms of its agreement with GM (the "GM Agreement"), the
Company's air logistics business is encouraged to utilize the air freight
carrier but is prohibited from (i) placing with the Company's air freight
carrier in excess of 30% of the total number of air charters arranged for GM in
any calendar year and (ii) placing with the Company's air freight carrier
charters producing revenue in excess of 30% of the total revenue derived from
air charters arranged for GM in any calendar year. During the Transition Period,
the Company's air freight carrier flew 115 on-demand charters (or 5.4% of total
charters arranged for GM by the Company's air logistics business) resulting in
$1.3 million of revenues to the Company (or 13.1% of the total revenues derived
by the Company from GM). The GM Agreement does not provide for automatic fuel
price adjustments.
The term of the GM Agreement extends through May 1997 and thereafter from
month-to-month until terminated by thirty days' written notice. The GM
Agreement, however, stipulates that in the event of an irreconcilable
difference, either party may, with or without cause, terminate the agreement
following a quarterly review meeting by giving the other party at least 30 days'
prior written notice thereof. Furthermore, GM may terminate the GM Agreement on
ten days' written notice if there is a change in (i) management of Kitty Hawk
Charters, Inc., the Company's wholly-owned subsidiary, through which the
Company's air logistics business is conducted, or (ii) the stock ownership of
the Company such that (a) Mr. Christopher no longer holds a majority of the
outstanding Common Stock of the Company or (b) a major automobile manufacturer
acquires more than 20% of the outstanding Common Stock of the Company, unless
such changes are communicated to GM at least 60 days prior to the effective date
and GM concurs with the changes.
Of the Company's total revenues during the Transition Period, GM accounted
for $9.8 million (16.3%). Of the revenues from GM, $8.5 million (86.9%) were
attributable to air logistics primarily in connection with on-demand charters
flown by third-party air cargo carriers, and $1.3 million (13.1%) were
attributable to on-demand charters flown by the Company's air freight carrier.
Of the Company's gross profits from air logistics during the Transition Period,
GM accounted for $573,000 (10.2%). GM accounted for 47.3% of the total number of
on-demand charters that were flown by the air freight carrier during the
Transition Period. In addition to revenues derived from GM, the Company believes
approximately 12.1% of its total revenues during the Transition Period were
generated from services provided to other participants in the U.S. automotive
industry, a substantial portion of which the Company believes were GM suppliers.
SEASONALITY
Certain customers of the Company engage in seasonal businesses, especially
the U.S. Postal Service, GM, and other customers in the automotive industry. As
a result, Kitty Hawk's air logistics business has historically experienced its
highest quarterly revenues and profitability 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 experiences its 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 August 31, 1994. The information has been prepared on the same
basis as the audited Consolidated Financial Statements appearing elsewhere in
this Form 10-K and includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the information shown. The
Company's results vary significantly from quarter to quarter and the operating
results for any quarter are not necessarily indicative of the results that may
be expected for any future period.
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FISCAL QUARTER ENDED
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NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 29,
1994 1995 1995 1995 1995 1996
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Total revenues........... $29,593 $31,743 $16,835 $25,539 $36,045 $48,577
Gross profit............. 5,210 6,290 2,310 4,368 5,936 8,190
Operating income......... 3,310 3,912 660 1,463 3,564 2,447
Net income (loss)........ 1,960 2,298 192 (34) 1,956 1,273
Net income (loss) per
share................... $ 0.25 $ 0.29 $ 0.02 $ (0.01) $ 0.25 $ 0.16
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FISCAL QUARTER ENDED ONE MONTH
----------------------------------- ENDED
MAY 31, AUGUST 31, NOVEMBER 30, DECEMBER 31,
1996 1996 1996 1996
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Total revenues........... $22,504 $35,289 $25,414 $34,571
Gross profit............. 3,265 6,124 5,118 7,287
Operating income......... 897 2,126 2,851 5,867
Net income (loss)........ 182 698 1,632 3,662
Net income (loss) per
share................... $ 0.02 $ 0.09 $ 0.18 $ 0.35
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EMPLOYEES
At March 24, 1997, Kitty Hawk employed approximately 306 full-time
personnel.
GOVERNMENT REGULATION
The Company's air freight carrier is subject to Title 49 of the United
States Code (formerly the Federal Aviation Act of 1958, as amended), under which
the DOT and the FAA exercise regulatory authority over air carriers. The DOT is
primarily responsible for regulating economic issues affecting air service,
including, among other things, air carrier certification and fitness, insurance,
consumer protection, unfair methods of competition, and transportation of
hazardous materials. The FAA is primarily responsible for regulating air safety
and flight operations, including, among other things, airworthiness requirements
for each type of aircraft the Company's air freight carrier operates, pilot and
crew certification, aircraft maintenance and operational standards, noise
abatement, airport slots, and other safety-related factors. In addition, the
Company's air freight carrier 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 operations are subject to routine, and periodically more
intensive, inspections and oversight by the FAA. Following a review of safety
procedures at ValuJet, Inc., the FAA adopted changes to the FAA's and air
carriers' oversight of contract maintenance and training procedures. The Company
believes it is currently in compliance with such changes.
The FAA has proposed amendments to its flight and rest time regulations
which, if adopted as proposed, could restrict the ability of the Company to
respond to a shipper's request for same day delivery and/or would require the
Company to hire and train additional qualified pilots to perform the Company's
flight operations.
The adoption of new laws, policies, or regulations or changes in the
interpretation or application of existing laws, policies, or regulations,
whether by the FAA, the DOT, the United States government, or any foreign,
state, or local government, could have a material adverse impact on Kitty Hawk
and its operations.
The Company's revenue fleet is comprised of fifteen Boeing 727-200 aircraft
manufactured between 1969 and 1978, five Douglas DC9-15F aircraft manufactured
during 1967 and 1968, and eight turbo-prop Convairs manufactured between 1948
and 1957. Manufacturer's Service Bulletins ("Service Bulletins") and FAA
Airworthiness Directives ("Directives") issued under the FAA's "Aging Aircraft"
program or issued on an ad hoc basis cause certain of these aircraft to be
subject to extensive aircraft examinations and require certain of these aircraft
to undergo structural inspections and modifications to address problems of
corrosion and structural fatigue at specified times. It is possible that
additional Service Bulletins or Directives applicable to the types of aircraft
included in the Company's fleet could be issued in the future. The cost of
compliance with such Directives and Service Bulletins cannot currently be
estimated, but could be substantial.
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 the Company's five Douglas DC9-15Fs
and its fifteen Boeing 727-200s (the "Jet Fleet"). Nine of the aircraft in the
Jet Fleet are currently in compliance with Stage III noise control standards. By
the following deadlines, the Company must bring the Jet Fleet into Stage III
compliance to the extent indicated: January 1, 1999, 75%; and January 1, 2000,
100%. Certain airport operations have adopted local regulations which, among
other things, impose curfews and other noise abatement requirements.
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In December 1996, the Company amended its agreement with its supplier of
noise abatement equipment for Boeing 727-200 aircraft to increase the number of
hushkits it has firmly committed to purchase and to establish fixed prices. In
connection with this amendment, the Company paid the vendor an additional
$350,000 in deposits on seven future, firm orders that will cost the Company
between $13 and $17.5 million, depending on the type selected.
The DOT and the FAA have the authority to modify, amend, suspend, or revoke
the authority and licenses issued to the Company for failure to comply with the
provisions of law or applicable regulation. In addition, the DOT and the FAA may
impose civil or criminal penalties for violations of applicable rules and
regulations. Such actions by the FAA or the DOT, if taken, could have a material
adverse effect on Kitty Hawk. The DOT 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.
Certain of the Company's air freight carrier operations are conducted
wholly between two or more points that are all located outside of the United
States. As with the certificates and license obtained from U.S. authorities, the
Company must comply with all applicable rules and regulations imposed by these
foreign aeronautical authorities or be subject to the suspension, amendment or
modification of its operating authorities.
On March 7, 1997, a 6.25% federal transportation excise tax applicable to
air freight transportation was reinstated through September 30, 1997.
Reinstatement of the tax by the government will result in higher costs to
shippers of air freight and air freight carriers, which may have a material
adverse effect on freight traffic, yields, revenue, and margins.
The Company has been advised by the FAA that it is reexamining the
supplemental type certificates previously issued to certain companies approving
main deck cargo door and interior modifications to Boeing 727-200 passenger
category aircraft of the type operated by the Company. The Company's Boeing
727-200 aircraft all have been modified in reliance upon the FAA's prior
approval of these cargo-related modifications. As a result of the reexamination,
the FAA will likely require structural changes to the previously installed
modifications which may be costly to perform and require significant aircraft
down time. Before such changes can be completed, the FAA will likely impose
operating limitations on the Boeing 727-200 aircraft which will reduce the
effective payload of the Company's Boeing 727-200 aircraft which could have a
material adverse effect on Kitty Hawk and its operations.
Under current federal aviation law, the Company's air freight carrier could
cease to be eligible to operate as an air freight carrier if more than 25% of
the voting stock of the Company were owned or controlled by non-U.S. citizens.
Moreover, in order to hold an air freight carrier certificate, the president and
two-thirds of the directors and officers of an air carrier must be U.S.
citizens. All of the Company's directors and officers are U.S. citizens.
Furthermore, (i) the Certificate of Incorporation limits the aggregate voting
power of non-U.S. persons to 22 1/2% of the votes voting on or consenting to any
matter and (ii) the Bylaws do not permit non-U.S. citizens to serve as directors
or officers of the Company.
INSURANCE
The Company is vulnerable to potential losses which may be incurred in the
event of an aircraft accident. Any such accident could involve not only repair
or replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also potential claims involving injury to persons or
property. The Company is required by the DOT to carry liability insurance on
each of its aircraft, and each of the Company's aircraft leases and ACMI
contracts also requires the Company to carry such insurance. Any extended
interruption of the Company's operations due to the loss of an aircraft could
have a material adverse effect on the Company. 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
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Convairs. The Company maintains baggage and cargo liability insurance if not
provided by its customers under ACMI contracts. Although the Company believes
that its insurance coverage is adequate, there can be no assurance that the
amount of such coverage will not be changed upon renewal or that the Company
will not be forced to bear substantial losses from accidents. Substantial claims
resulting from an accident could have a material adverse effect on the Company's
financial condition and could affect the ability of the Company to obtain
insurance in the future.
The Company attempts to monitor the amount of liability insurance
maintained by the third-party carriers utilized in its air logistics business
through, among other things, the obtaining of certificates of insurance.
COMPETITION
The market for air freight carrier services has been and is expected to
remain highly competitive. Kitty Hawk competes with other air freight carriers
with regard to furnishing on-demand charters and ACMI contract charters. The
Company believes that the basis for such competition is price, quality of
service, and the location and performance characteristics of aircraft. The
Company's air freight carrier is also subject to competition from other modes of
transportation including, but not limited to, railroads and trucking. Numerous
competitors of Kitty Hawk provide or coordinate door-to-door air freight
charters on an expedited basis. The market for air logistics also has been and
is expected to remain highly competitive. The Company's principal competitors
for on-demand air logistics services are other air logistics companies, air
freight carriers which seek to book charters directly with customers, and air
freight companies that offer expedited service. Each of Emery Worldwide, FedEx,
and the United Parcel Service compete in the expedited freight business by
offering "next-flight-out" service.
The Company's ability to attract and retain business also is affected by
the decisions of the transportation departments of commercial and industrial
businesses whether, and to what extent, to coordinate their own transportation
needs. Prior to 1990, GM conducted its air logistics business in-house. GM and
certain other customers maintain transportation departments that could be
expanded to manage charters in-house which could have a material adverse effect
on Kitty Hawk. With respect to the Company's ACMI contract charter business, the
Company could be adversely affected by the decision of certain of its
certificated customers to acquire additional aircraft, or by its uncertificated
customers to acquire and operate their own aircraft, to service routes currently
serviced by Company aircraft. Many of the Company's competitors and customers
have substantially greater financial resources than the Company.
ITEM 2. PROPERTIES
Kitty Hawk occupies a 40,000 square foot facility (the "Facility") located
at Dallas/Fort Worth International Airport. The Facility includes administrative
offices, maintenance work areas, and hangar and parts storage facilities as well
as flight operations and training facilities. In February 1997, the Company
purchased the lease to the Facility from the sublessor for approximately $1.76
million. The lease expires on December 31, 2007. See "Item 11. Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
In addition, the Company maintains an approximately 20,000 square foot
secondary maintenance facility located in Ypsilanti, Michigan comprised of a
maintenance work area, hangar and an area for the storage of certain aircraft
repair parts and maintenance items. Additionally, Kitty Hawk rents small parts
storage spaces at a number of origin airports and apartments in various
locations for flight crew layovers.
ITEM 3. LEGAL PROCEEDINGS
ANET Litigation
The U.S. Postal Service selected the Company's air freight carrier in
September 1992 as the successful bidder on a contract for a multi-city network
of air transportation services supporting the U.S. Postal Service's Express Mail
system. Another air freight carrier (the "Co-Bidder") was associated with the
Company in the
9
<PAGE> 10
successful bid (the "ANET bid"). Two unsuccessful bidders, including Emery
Worldwide Airlines, Inc. ("Emery") (the incumbent), sued to enjoin the award.
This litigation (the "ANET litigation") was settled in April 1993 by agreements
under which the U.S. Postal Service terminated the Company's contract for
convenience and awarded the contract to Emery. In lieu of damages for the
contract's termination, the U.S. Postal Service paid $10.0 million into an
escrow account to be divided between the Company and the Co-Bidder. Also under
the settlement, Emery delivered releases of the Company's contractual
obligations to purchase more than $40 million in aircraft and equipment, paid
$2.7 million into the escrow account, and agreed to pay $162,500 into the escrow
each quarter for up to 10 years so long as the Emery contract remained in
effect.
Before settling the ANET litigation, the Company, Mr. Christopher, the
Co-Bidder and the Co-Bidder's stockholder agreed, among other things, to hold
the escrowed funds in escrow until they had agreed upon an allocation and
distribution, or until the matter was resolved by binding arbitration.
Subsequent disagreements led to litigation and arbitration among the Company,
Mr. Christopher, the Co-Bidder and the Co-Bidder's stockholder that were
resolved pursuant to a comprehensive settlement reached in August 1994. Under
the comprehensive settlement, the Company received approximately $3.5 million in
cash from the escrowed funds, and obtained a Boeing 727-200. Also under the
comprehensive settlement agreement, Mr. Christopher received rights to one-half
of any future contingent quarterly payments from Emery.
Qui Tam Litigation
In March 1995, the Company was served with a complaint filed on behalf of
the U.S. government by a third-party plaintiff seeking to share a recovery under
the Federal False Claims Act (the "False Claims Act"). The suit, filed in May
1994 in the federal District Court for the District of Columbia, was filed under
seal in accordance with the False Claims Act, to enable the U.S. Government to
review the claim before its disclosure to the defendants. The U.S. Government
declined to pursue the claim, but the third-party plaintiff chose to continue.
The suit claimed that the Company and the Co-Bidder fraudulently failed to
disclose to the U.S. Postal Service, both in the ANET bid and in the settlement
of the ANET litigation, that some of the aircraft the Company proposed to
purchase and use to perform the contract were aging aircraft with high use, and
claimed that the Company, the Co-Bidder and Emery similarly fraudulently
conspired in connection with the settlement of the ANET litigation. The suit
sought to recover treble the $10 million settlement payment made by the U.S.
Postal Service in settling the ANET litigation, plus the third-party plaintiff's
costs and fees.
In May 1996, the court granted the Company its motion to dismiss the suit
and awarded the Company its attorneys' fees and costs. The plaintiff has asked
the court to reconsider its ruling. The Company does not expect the outcome to
have a material adverse effect upon the Company's financial condition or results
of operations.
Litigation about Charter Agreement
The Company filed suit in the 14th Judicial District Court of Dallas
County, Texas against Express One International, Inc. ("Express One") in July
1992 claiming under a one-year aircraft charter by Express One to the Company
that Express One breached its obligations and seeking actual damages of
approximately $60,000. Express One counterclaimed that the Company wrongfully
repudiated the charter and fraudulently induced Express One to provide services
not required by the charter. Express One claimed damages of $356,718 for
services allegedly performed, $1,140,000 for additional fees it would have
received under the charter, an unspecified amount of punitive damages, and
additional amounts for its attorneys' fees and costs.
In February 1995, a jury verdict awarded the Company $25,000 in damages
plus its attorneys' fees and denied Express One's counterclaims. In May 1995,
the court entered judgment in favor of the Company for $25,000 in damages, for
$148,115 in attorneys' fees through trial, and for additional attorneys' fees if
Express One appealed. Before the time for appeal expired, Express One filed a
petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court for the Eastern District of Texas (Sherman Division). The Company filed
its claim based on the judgment in the bankruptcy proceeding. In November 1995,
Express
10
<PAGE> 11
One filed an appeal, to which the Company responded. Kitty Hawk does not expect
the outcome to have a material adverse effect upon the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 3, 1996, the Company held its 1996 Annual Meeting of
Stockholders. The only matter voted on at this meeting was the re-election of
two persons, Mr. Richard R. Wadsworth and Mr. Lewis S. White, as Class 2
directors to serve as members of the Company's Board of Directors for terms of
three years ending at the 1999 Annual Meeting of Stockholders, or until their
successors are duly elected and qualified. With respect to each nominee,
7,750,000 shares were voted for such nominee and no shares were voted against or
withheld. There were no abstentions or broker non-votes. Each Class 1 and 3
director continued as a member of the Company's Board of Directors after the
meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "KTTY". The range of high and low bid information for the Company's
Common Stock during the three months ended November 30, 1996 and the one month
ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Three Months Ended November 30, 1996(1)..................... $14.75 $10.00
One Month Ended December 31, 1996........................... 13.50 8.00
</TABLE>
- ---------------
(1) Does not include the period prior to the Offering.
At March 12, 1997, the Company had approximately 1,431 holders of record
and beneficial owners of the Company's Common Stock.
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its Common Stock in the foreseeable future. In addition,
the terms of the Company's Credit Agreement ("Credit Agreement") with Wells
Fargo Bank, National Association and Bank One, Texas, N.A. restrict Kitty Hawk's
ability to declare and pay dividends to its stockholders during any fiscal year
to an amount not to exceed 25% of the Company's net income during the
immediately preceding fiscal year.
The Company granted certain unregistered options to Mr. Tilmon J. Reeves
and Mr. Wadsworth in October 1994. All such options were issued in connection
with employment or consulting services rendered pursuant to Rule 701 and/or
Section 4(2) of the Securities Act of 1933, as amended (the "Act"). Both stock
options were canceled on June 12, 1996. See "Item 11. Executive Compensation."
The Company granted certain unregistered options to Messrs. Reeves and
Wadsworth in December 1995 and June 1996, respectively. All such options were
issued in connection with employment or consulting services rendered pursuant to
Rule 701 and/or Section 4(2) of the Act, as amended. Both stock options were
exercised at an exercise price of $0.01 per share on June 26, 1996. The
unregistered Common Stock issued upon exercise of such options was issued to
Messrs. Reeves and Wadsworth pursuant to Rule 701, Section 4(2) and/or Section
3(a)(9) of the Act. See "Item 11. Executive Compensation."
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected financial and operating data with
respect to Kitty Hawk for each of the fiscal years indicated and for the four
months ended December 31, 1995 and December 31, 1996. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements,
including the Notes thereto, appearing elsewhere in this Form 10-K. 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 the
Company. Operating results for the four months ended December 31, 1996 are not
necessarily indicative of results that may be expected for a calendar year. In
the opinion of management of the Company, the selected income statement and
balance sheet data presented as of and for the four months ended December 31,
1995, which are derived from the Company's unaudited consolidated financial
statements, reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for such period.
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31,
------------------------------------------------------ ----------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- -------- -------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Air freight carrier............. $ 6,760 $12,939 $ 28,285 $ 41,117 $ 52,922 $17,994 $20,577
Air logistics................... 45,893 52,840 79,415 62,593 89,493 51,734 39,408
------- ------- -------- -------- -------- ------- -------
Total revenues.................... 52,653 65,779 107,700 103,710 142,415 69,728 59,985
Total costs of revenues........... 48,465 55,201 92,951 85,532 118,900 57,682 47,580
------- ------- -------- -------- -------- ------- -------
Gross profit...................... 4,188 10,578 14,749 18,178 23,515 12,046 12,405
General and administrative
expenses........................ 2,930 4,394 6,013 7,832 9,080 2,862 2,725
Non-qualified profit sharing
expense......................... -- 250 732 1,001 1,170 889 962
Stock option grants to
executives...................... -- -- -- -- 4,231(1) -- --
------- ------- -------- -------- -------- ------- -------
Operating income.................. 1,258 5,934 8,004 9,345 9,034 8,295 8,718
Interest expense.................. (157) (134) (343) (1,185) (1,859) (482) (684)
Contract settlement income,
net(2).......................... -- 725 1,178 -- -- -- --
Loss on asset disposal............ -- -- -- -- (589) -- --
Other income (expense)............ 287 193 (432) (601) 291 38 626
------- ------- -------- -------- -------- ------- -------
Income before income taxes........ 1,388 6,718 8,407 7,559 6,877 7,851 8,660
Income taxes...................... 375 2,613 3,146 3,143 2,768 3,097 3,367
------- ------- -------- -------- -------- ------- -------
Net income........................ $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293
======= ======= ======== ======== ======== ======= =======
Net income per share.............. $ 0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55
======= ======= ======== ======== ======== ======= =======
Weighted average common and common
equivalent shares outstanding... 8,671 7,968 7,968 7,968 7,928 7,968 9,610
OPERATING DATA:
Air Freight Carrier
Revenue Fleet (at end of
period)....................... 11 10 15 21 22 21 26
Flight hours flown(3)........... 3,567 7,030 11,795 15,183 20,237 6,320 7,670
Number of on-demand charters
flown......................... 292 752 1,182 1,238 1,448 827 243
Number of ACMI contract charters
flown......................... 655 1,314 1,734 2,601 3,493 1,002 1,488
Air Logistics
Number of on-demand charters
managed(4).................... 8,708 9,748 16,713 14,198 16,043 9,356 4,185
BALANCE SHEET DATA (IN THOUSANDS):
Working capital................... $ 895 $ 4,679 $ 4,223 $ 1,747 $ (6,962)(5) $12,722 $33,519
Total assets...................... 9,874 18,598 37,911 47,954 79,828 80,109 123,027
Long-term debt, including current
maturities...................... 2,367 976 9,145 16,981 36,912 21,695 24,768
Stockholders' equity.............. 3,184 7,289 12,550 16,966 23,639 21,721 58,292
</TABLE>
12
<PAGE> 13
- ---------------
(1) Results for fiscal year ended August 31, 1996, lack comparability to prior
periods because such period includes nonrecurring grants to two executive
officers of stock options that resulted in a charge to earnings of
approximately $4,231,000. Had these grants of stock options not occurred,
net income for fiscal year ended August 31, 1996 would have been
approximately $6,637,000 and net income per share would have been $0.84. See
"Item 11. Executive Compensation."
(2) Reflects sums received in settlement of litigation. See "Item 3. Legal
Proceedings -- ANET litigation" and Note 5 of Notes to Consolidated
Financial Statements.
(3) As reported by the Company to the FAA.
(4) Includes on-demand charters flown by the Company's air freight carrier.
(5) Working capital includes a $10 million Revolving Credit Facility classified
as a current liability that has subsequently been repaid.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
General
On December 4, 1996, the Company changed its fiscal year end from August 31
to December 31. The following discussion is of the Company's financial condition
and results of operations (i) for the four months ended December 31, 1995 and
December 31, 1996, and (ii) for the fiscal years ended 1994, 1995, 1996.
Revenues. The Company's revenues are derived from two related businesses:
(i) air freight carrier and (ii) air logistics. Air freight carrier revenues are
derived substantially from ACMI contract and on-demand charters flown with
Company aircraft. Air logistics revenues are derived substantially from
on-demand air freight charters arranged by Kitty Hawk for its customers
utilizing the flight services of third-party air freight carriers. With respect
to on-demand charters that are arranged by the Company and flown by its air
freight carrier, charges to the customer for air transportation are accounted
for as air freight carrier revenues and charges for ground handling and
transportation are accounted for as air logistics revenues.
GM and the U.S. Postal Service have accounted for a substantial majority of
the Company's revenues for the last three fiscal years and the Transition
Period. A contract with GM for on-demand charters produced revenues of $67.9
million, $48.9 million, $58.4 million, and $9.8 million in fiscal years 1994,
1995, and 1996 and the Transition Period, respectively, which represented 63.1%,
47.1%, 41.0%, and 16.3% of the Company's total revenues for such periods. Of the
revenues derived from GM for fiscal years 1994, 1995, and 1996 and the
Transition Period, 15.4%, 20.8%, 20.2%, and 13.1%, respectively, were
attributable to the air freight carrier and 84.6%, 79.2%, 79.8%, and 86.9%,
respectively, were attributable to air logistics. Revenues derived from GM for
fiscal years 1994, 1995, and 1996 and the Transition Period constituted 36.9%,
24.7%, 22.3%, and 6.2%, respectively, of the revenues derived from the air
freight carrier business and 72.4%, 61.9%, 52.1%, and 21.6%, respectively, of
the revenues derived from the air logistics business. Of the Company's gross
profits from air logistics in fiscal years 1994, 1995, and 1996 and the
Transition Period, GM accounted for $3.0 million (50.4%), $1.4 million (27.1%),
$3.5 million (37.3%), and $573,000 (10.2%), respectively.
The U.S. Postal Service accounted for revenues of $11.1 million, $10.0
million, 21.3 million, and $26.2 million in fiscal years 1994, 1995, and 1996
and the Transition Period, respectively, which represented 10.3%, 9.7%, 14.9%,
and 43.7%, respectively, of the Company's total revenues for such periods. Of
the revenues derived from the U.S. Postal Service for fiscal years 1994, 1995,
and 1996 and the Transition Period, 74.5%, 59.6%, 92.5%, and 88.9%,
respectively, were attributable to air logistics for seasonal Christmas charters
flown by third-party air freight carriers and 25.5%, 40.4%, 7.5%, and 11.1%,
respectively, were attributable to the air freight carrier for ACMI contract
charters. Revenues derived from the U.S. Postal Service for fiscal years 1994,
1995, and 1996 and the Transition Period, constituted 10.0%, 9.9%, 3.0%, and
14.1%, respectively, of the revenues derived from the air freight carrier
business and 10.4%, 9.6%, 22.0%, and 59.1%, respectively, of the revenues
derived from the air logistics business. Of the Company's gross profits from air
logistics in fiscal years 1994, 1995, and 1996 and the Transition Period, the
U.S. Postal Service accounted for $2.0 million (33.8%), $1.0 million (18.9%),
$3.8 million (40.6%), and $4.4 million (77.7%), respectively.
Burlington accounted for revenues of $15.6 million and $7.1 million in
fiscal year 1996 and the Transition Period, respectively, which represented
10.9% and 11.9%, respectively, of the total revenues for such period and
constituted 28.5% and 33.8%, respectively, of the revenues derived from the air
freight carrier business and 0.6% and 0.4%, respectively, of the revenues
derived from the air logistics business. Of these revenues, 96.8% and 97.7%,
respectively, were attributable to the air freight carrier for ACMI contract
charters and 3.2% and 2.3%, respectively, were attributable to air logistics.
Costs of Revenues. The principal components of the costs of revenues
attributable to the air freight carrier consist of the costs for the maintenance
and operation of its aircraft including the salaries of pilots and maintenance
personnel, charges for fuel, insurance and maintenance, and depreciation of
engines and airframes. Generally, charges for fuel are only applicable for the
on-demand charters flown by the air freight carrier because fuel for the ACMI
contract charters is generally provided by the customer or billed to them on
14
<PAGE> 15
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 by the air freight carrier, all
related air transportation expenses are allocated to the air freight carrier and
all related cargo ground handling and transportation expenses are allocated to
air logistics.
Under an earlier version of the Kitty Hawk, Inc. Amended and Restated
Annual Incentive Compensation Plan, the Company awarded semiannual cash bonuses
to its employees. The aggregate amount of the bonuses for each of fiscal years
1994, 1995, and 1996 and the Transition Period, have equaled 8.0%, 11.7%, 9.5%,
and 10.0%, respectively, of the Company's income before the deduction of income
taxes, stock option grants to executives and the bonuses that were paid under
the Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan.
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, the
Company 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, the Company expensed approximately $727,000 relating to the
Company's 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.
Recent Developments. Due to strikes and labor disruptions at certain GM
plants during the Transition Period, there was a decrease in the number of
charters flown by the Company's air logistics business. These strikes and labor
disruptions have been settled as of December 31, 1996.
RESULTS OF OPERATIONS
The following table sets forth, on a comparative basis for the periods
indicated, the components of the Company's gross profit (in thousands) and the
gross profit margin by revenue type:
<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,
------------------------------------
1995 1996
---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Air freight carrier:
Revenues.............................................. $17,995 100.0% $20,577 100.0%
Costs of revenues..................................... 11,685 64.9 13,784 67.0
------- ----- ------- -----
Gross profit.......................................... $ 6,309 35.1% $ 6,793 33.0%
======= ===== ======= =====
Air logistics:
Revenues.............................................. $51,733 100.0% $39,408 100.0%
Costs of revenues..................................... 45,997 88.9 33,795 85.8
------- ----- ------- -----
Gross profit.......................................... $ 5,736 11.1% $ 5,613 14.2%
======= ===== ======= =====
</TABLE>
15
<PAGE> 16
The following table presents, for the periods indicated, consolidated
income statement data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOUR MONTHS ENDED
AUGUST 31, DECEMBER 31,
----------------------- --------------------
1994 1995 1996 1995 1996
----- ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier.......................... 26.3% 39.6% 37.2% 25.8% 34.3%
Air logistics................................ 73.7 60.4 62.8 74.2 65.7
----- ----- ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0 100.0
Total costs of revenues........................ 86.3 82.5 83.5 82.7 79.3
----- ----- ----- ----- -----
Gross profit................................... 13.7 17.5 16.5 17.3 20.7
General and administrative expenses............ 5.6 7.6 6.4 4.1 4.5
Non-qualified profit sharing expense........... 0.7 0.9 .8 1.3 1.6
Stock option grants to executives.............. -- -- 3.0 -- --
----- ----- ----- ----- -----
Operating income............................... 7.4 9.0 6.3 11.9 14.6
Interest expense............................... (0.3) (1.1) (1.3) (0.7) (1.2)
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
----- ----- ----- ----- -----
Income before income taxes..................... 7.8 7.3 4.8 11.3 14.4
Income taxes................................... 2.9 3.0 1.9 4.4 5.6
----- ----- ----- ----- -----
Net income..................................... 4.9% 4.3% 2.9% 6.9% 8.8%
===== ===== ===== ===== =====
</TABLE>
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 Company 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 the Company's on-demand
and ACMI contract charters remained relatively constant.
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 the Company'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.
16
<PAGE> 17
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 the Company's additional revenues and increased
gross profit margin from the Company'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 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 Company 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 the Company's on-demand and ACMI contract charters remained
relatively constant.
17
<PAGE> 18
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 the Company'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 the Company's success in reducing its costs paid
to third-party air freight carriers and ground service providers and increased
gross profit margin from the Company's U.S. Postal Service Christmas contract in
December 1995.
General and Administrative Expenses. General and administrative expenses
increased $1.2 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, the Company
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 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 the
Company'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.
18
<PAGE> 19
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
the Company's jet aircraft. For fiscal year 1995 as compared to fiscal year
1994, prices for the Company's ACMI contract charter services and U.S. Postal
Service Christmas contracts remained relatively constant.
Revenues -- Air Logistics. Air logistics revenues decreased $16.8 million,
or 21.2%, to $62.6 million in fiscal year 1995 from $79.4 million in fiscal year
1994 primarily due to the substantial decline in volume of on-demand charters
for the automobile industry in the first half of calendar 1995 as compared to
the same period in 1994. This decline was primarily the result of the temporary
decision by GM to significantly reduce use of expedited transportation,
including Kitty Hawk's air logistics services, as part of a cost containment
initiative. Prices for the Company's on-demand charters decreased slightly due
to a revenue rate reduction in the GM Agreement which took effect on May 1,
1994.
Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $8.6 million, or 43.8%, to $28.1 million in fiscal year 1995
from $19.5 million in fiscal year 1994, reflecting the increased volume of
business from ACMI contract and on-demand charters flown by the Company's jet
aircraft. Gross profit margin from the air freight carrier increased slightly to
31.6% in fiscal year 1995 from 30.9% in fiscal year 1994, a 2.3% increase. As
reported to the FAA, overall aircraft utilization increased to 15,183 flight
hours for fiscal year 1995 from 11,795 flight hours in fiscal year 1994, a 28.7%
increase. This increase was primarily the result of the inclusion of an
additional four Boeing 727-200s, and two Douglas DC9-15F aircraft into the
Company's operations during fiscal year 1995.
Costs of Revenues -- Air Logistics. Air logistics costs of revenues
decreased $16.0 million, or 21.8%, to $57.4 million in fiscal year 1995 from
$73.4 million in fiscal year 1994, reflecting the decrease in the volume of
business. The gross profit margin from air logistics increased to 8.3% in fiscal
year 1995 from 7.6% in fiscal year 1994, a 9.2% increase. This increase was
primarily due to the Company's success in reducing its costs paid to third party
air freight carriers and ground service providers in the second half of fiscal
year 1995.
General and Administrative Expenses. General and administrative expenses
increased $1.8 million, or 30.3%, to $7.8 million in fiscal year 1995 from $6.0
million in fiscal year 1994. As a percentage of total revenues, general and
administrative expenses increased to 7.6% in fiscal year 1995 from 5.6% in
fiscal year 1994. This increase was primarily due to an increase in support
functions and number of personnel associated with the growth in the aircraft
fleet and the revenue volume for the air freight carrier in fiscal year 1995.
Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased to $1.0 million in fiscal year 1995 from $732,000 in fiscal
year 1994, a 36.8% increase, reflecting the increased profitability from
operating activities of Kitty Hawk in fiscal year 1995.
Operating Income. Operating income increased $1.3 million, or 16.8%, to
$9.3 million in fiscal year 1995 from $8.0 million in fiscal year 1994.
Operating income margin increased to 9.0% from 7.4% for fiscal year 1995 and
1994, respectively.
Interest Expense. Interest expense increased to $1.2 million for fiscal
year 1995 from $343,000 in fiscal year 1994, a 246.0% increase. The increase was
primarily the result of the incurrence of additional long-term debt to finance
the acquisition of two Boeing 727-200 aircraft in the second half of fiscal year
1994 and two Douglas DC9-15F aircraft and two Boeing 727-200 aircraft in fiscal
year 1995.
19
<PAGE> 20
Other Income (Expense). Other expense increased to $601,000 in fiscal year
1995 from $432,000 in fiscal year 1994, a 39.1% increase. This increase was
primarily due to the write off of costs associated with the Company's attempted
initial public offering.
Income Taxes. Income taxes as a percentage of income before income taxes
increased to 41.6% for fiscal year 1995 from 37.4% in fiscal year 1994. The
increase was primarily due to higher state income taxes.
Net Income. As a result of the above, net income decreased to $4.4 million
for fiscal year 1995 from $5.3 million in fiscal year 1994, a 16.0% decrease.
Net income as a percentage of total revenues was 4.3% in fiscal year 1995
compared to 4.9% for fiscal year 1994.
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company 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.
The Company's capital requirements are primarily for the acquisition and
modification of aircraft and working capital. In addition, Kitty Hawk has, and
will continue to have, capital requirements for the requisite periodic and major
overhaul maintenance checks for its air freight carrier fleet. The Company's
funding of its capital requirements historically has been from a combination of
internally generated funds and bank borrowings. In addition, the Company has
leased aircraft and entered into a sale leaseback for aircraft acquisition and
may do so in the future.
Cash used in operating activities was $5.0 million and $373,000 in the four
months ended December 31, 1995 and December 31, 1996, respectively. At the end
of the four months ended December 31, 1995 and December 31, 1996, the Company
had working capital of $12.7 million and $33.6 million, respectively.
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"), and a $10 million Term Loan Facility (the "Term Loan")
(collectively, the "Commitments"). As of March 28, 1997 approximately $2.65
million was outstanding under the Revolving Credit Facility and $2.2 million was
outstanding under the Term Loan. 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, $10.0 million of proceeds of the Revolving
Credit Facility are restricted to use from time to time for interim financing of
up to $6.5 million per aircraft for aircraft acquisitions by the Company; the
remaining $5 million of the 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. The Term Loan must be
used to finance the purchase of one DC9-15F 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 be repaid in full within 150 days of
first advance for the acquired aircraft. All advances under the Term Loan must
be made by April 29, 1998. The Term Loan matures on March 31, 2003. The
Commitments are cross-collateralized and are secured by certain aircraft owned
by the Company, all aircraft acquired with advances under the restricted portion
of the Revolving Credit Facility while those advances are outstanding, certain
leases of aircraft and engines, accounts, chattel paper, general intangibles and
other personal property.
The Credit Agreement prohibits (i) the redemption or repurchase of the
Company's securities, (ii) the payment of dividends to Kitty Hawk's stockholders
in an amount over 25% of the Company's net income of the immediately preceding
fiscal year, (iii) certain investments, acquisitions of stock, acquisitions of
assets to the extent that the business acquired is not in the present lines of
business of the Company, and other business combinations, and (iv) certain
transactions with affiliates. In addition, the Credit Agreement prohibits the
Company from incurring any additional indebtedness, liabilities or obligations
other than debt incurred
20
<PAGE> 21
(a) with the prior written consent of WFB or BOT or (b) in the ordinary course
of business not to exceed $25 million.
The Credit Agreement also contains certain other covenants, including
limitations on the ability of the Company to change its lines of business. If a
"Change of Control" occurs, WFB and BOT may accelerate or terminate the
Commitments. "Change of Control" includes (a) the failure of Kitty Hawk to own
all of the outstanding stock of certain of its subsidiaries, (b) Mr. Christopher
failing to own at least 51% of the outstanding stock of Kitty Hawk, (c) Mr.
Christopher ceasing to be Chief Executive Officer of Kitty Hawk or active in the
management of the Company, or (d) if, after the consummation of a public
offering, any person (or two or more persons acting as a group) acquiring
beneficial ownership of 25% or more of the outstanding shares of Common Stock.
During the Transition Period, these restrictions and prohibitions did not have a
material impact on the Company's ability to meet its cash obligations and the
Company does not believe that the restrictions under the Credit Agreement will
have any such impact in the future.
In addition, the Company has a loan with 1st Source Bank. As of March 24,
1997, the outstanding balance of this loan was approximately $900,000. The loan
bears interest at 9.75%, is secured by a DC9-15F and matures in May 2000. The
1st Source loan contains certain aircraft maintenance covenants Company's
business is an event of default upon which 1st Source Bank may declare all or
any part of the remaining unpaid principal due and payable.
In November 1996, in connection with the Company's recent acquisition of a
one-third undivided interest in four Falcon 20 jet aircraft, the Company 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.
The Company's liability under such loan is limited to $2.0 million. See "Item
11. Executive Compensation -- Compensation Committee Interlocks and Insider
Participation."
Capital expenditures were $13.9 million, $17.9 million, $33.5 million, and
$13.8 million for fiscal years 1994, 1995 and 1996 and the Transition Period,
respectively. Capital expenditures for the Transition Period were primarily for
the purchase of: (i) one Boeing 727-200 aircraft, (ii) cargo and noise abatement
modifications for two Boeing 727-200 aircraft, (iii) one used JT8D-7 jet engine,
(iv) various equipment and (v) leasehold improvements to a Boeing 727-200
aircraft. The $33.5 million in capital expenditures for fiscal year 1996 were
primarily for the purchase of: (i) five Boeing 727-200 aircraft and the cargo
and noise abatement modification of four of these aircraft and (ii) six used
JT8D-7/-9 jet engines. The $17.9 million in capital expenditures for fiscal year
1995 were due primarily to the purchase of: (i) two Boeing 727-200 aircraft and
their cargo modification, (ii) three JT8D15 jet engines for installation on one
of the Boeing 727-200 aircraft, (iii) two Douglas DC9-15F aircraft in cargo
configuration, (iv) noise abatement equipment with respect to one of the Douglas
DC9-15F aircraft, (v) five used/overhauled Rolls Royce Dart Convair engines,
(vi) two used JT8D7/-9 jet engines, (vii) a Westwind 1124 jet aircraft to be
used for corporate purposes only, and (viii) the cargo modification of one
Boeing 727-200 aircraft acquired at the end of fiscal year 1994. The $13.9
million in capital expenditures for fiscal year 1994 were primarily for the
purchase of: (i) two Boeing 727- 200 aircraft and the cargo modification of
these aircraft, (ii) two Douglas DC9-15F aircraft in cargo configuration, (iii)
three Convair 600/640 turbo-prop aircraft, and (iv) ground handling equipment.
The acquisitions of all of the Boeing 727-200 aircraft and subsequent cargo
conversions, the Douglas DC9-15F aircraft and the JT8D-15 engines in the past
three years were financed by bank borrowings and internally generated funds,
except for one Boeing 727-200 aircraft received in the settlement of the ANET
litigation described in "Item 3. Legal Proceedings." All other capital
acquisitions were financed from internally generated funds.
Kitty Hawk anticipates modifying to cargo configuration three of four
recently purchased Boeing 727-200s (including modifying two of these Boeing
727-200s with noise abatement equipment for approximately $4.9 million) for an
aggregate capital expenditure of approximately $10.0 million in fiscal year
1997. The Company further believes the $4.9 million amount for noise abatement
modifications proposed for fiscal year 1997 for two of four recently purchased
aircraft, together with an additional $1.4 million to modify currently owned
aircraft with noise abatement equipment during fiscal 1997, represents the total
capital expenditures
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<PAGE> 22
that would currently be necessary to comply with the requirements of existing
applicable environmental regulations for such fiscal year. In fiscal year 1998,
the Company anticipates an aggregate capital expenditure ranging from $9.0
million to $11.0 million for noise abatement modifications to aircraft currently
owned or proposed to be purchased. In the event the Company acquires more
aircraft than currently proposed, the Company's anticipated aggregate capital
expenditure for noise abatement modifications in fiscal year 1998 could
materially increase. See "Item 1. Business -- Government Regulation."
The Company historically has followed, and currently intends to follow, a
policy of retiring Convairs at the time of their next scheduled major overhaul
maintenance checks rather than expending the amounts necessary for such checks.
In February 1997, the Company acquired the lease to the Facility for
approximately $1.76 million. See "Item 2. Properties" and "Item 11. Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages, and
positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH 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(2)........................ 48 Director
James R. Craig............................. 58 Director
Robert F. Grammer(1)....................... 61 Director
Lewis S. White(1)(2)....................... 57 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The Board of Directors consists of seven members, including four
independent directors. Executive officers are elected by the Board of Directors
and serve at its discretion.
M. TOM CHRISTOPHER has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since its inception in 1985, and serves
in the class of directors whose terms expire at the 1997 annual meeting of
stockholders. Prior to assuming these positions, he formed and managed Kitty
Hawk Charters, Inc. He has over 20 years of experience in the air freight
industry, including serving as an account manager for Burlington Northern
Airfreight from 1976 to 1978.
TILMON J. REEVES has served as President and Chief Operating Officer of the
Company since May 1993 and has over 30 years of aviation experience. Prior to
assuming his current positions, he served as Vice
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<PAGE> 23
President of the Company's air freight carrier from March 1992 to May 1993.
Prior to joining Kitty Hawk, Mr. Reeves served as Vice President (Sales) of
Express One from April 1991 to March 1992. Mr. Reeves served as the Managing
Director -- Cargo Services for American Airlines, Inc. from March 1989 to
January 1991. Mr. Reeves became a director in October 1994 and serves in the
class of directors whose terms expire at the 1998 annual meeting of
stockholders.
RICHARD R. WADSWORTH has served as Senior Vice President -- Finance since
October 1992, Chief Financial Officer since September 1994, and Secretary since
October 1994. Prior to his current role, he served in a consulting capacity to
Kitty Hawk in the preparation of various bids for the Company's contract air
freight service from December 1991 to September 1992. Mr. Wadsworth became a
director in October 1994 and serves in the class of directors whose terms expire
at the 1999 annual meeting of stockholders.
TED J. COONFIELD became a director of the Company in October 1994 and
serves in the class of directors whose terms expire at the 1998 annual meeting
of stockholders. Since April 1996, Mr. Coonfield has been a consultant with
Performance Consulting Group, a firm specializing in change management
consulting primarily in the banking and insurance industry. From January 1993 to
April 1996, Mr. Coonfield was a consultant with the Richard-Rogers Group, a
consulting firm specializing in total quality issues, where he primarily engaged
in consulting for firms in the transportation industry. From 1990 to December
1992, Mr. Coonfield was the Special Assistant to the Director of the Department
of Human Resources for the State of Oregon. Since 1985, Mr. Coonfield has been
the President of Oregon Wine Designs, Inc., a wine production and marketing
firm.
JAMES R. CRAIG became a director of the Company in October 1994 and serves
in the class of directors whose terms expire at the 1997 annual meeting of
stockholders. Mr. Craig is an attorney who has served of counsel to Burke,
Wright & Keiffer, P.C. since 1990. Prior to his affiliation with Burke, Wright &
Keiffer, P.C., Mr. Craig was in private law practice in Dallas since 1971, and
in 1989 served as President of Whitehall Development Company, a real estate
development firm, of which he is now a director.
ROBERT F. GRAMMER became a director of the Company in October 1994 and
serves in the class of directors whose terms expire at the 1997 annual meeting
of stockholders. From 1986 to October 1993, Mr. Grammer was Chairman, President
and owner of R.G. Aviation, a provider of aircraft-related services. Mr. Grammer
retired from this position in October of 1993 to manage his personal
investments.
LEWIS S. WHITE became a director of the Company in October 1994 and serves
in the class of directors whose terms expire at the 1999 annual meeting of
stockholders. 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.
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<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and longterm
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 the Company (collectively, with the Chief Executive Officer, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
---------------------------- ----------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
M. Tom Christopher 1994 $120,000 $512,000 -- -- 25,022(1)
Chairman of the Board of 1995 120,000 898,731 -- -- 352,163(2)
Directors and Chief Executive 1996 190,000 719,419 -- -- 376,844(3)
Officer 1996(5) 80,000 -- -- -- 81,250(4)
Tilmon J. Reeves 1994 101,000 225,000 -- -- 2,982(6)
President and Chief 1995 125,000 108,335 -- 245,708(7) 2,310(6)
Operating Officer 1996 125,000 85,000 $3,726,182(8) 390,707 2,375(6)
1996(5) 41,667 15,000 -- -- --
Richard R. Wadsworth 1994 110,000 96,000 -- -- 1,675(6)
Senior Vice President 1995 110,000 70,000 -- 92,140(7) 2,262(6)
Finance, Chief Financial 1996 110,00 70,000 1,464,572(8) 153,567 2,375(6)
Officer, and Secretary 1996(5) 36,664 15,000 -- -- 583(6)
</TABLE>
- ---------------
(1) Consists of (i) matching contributions of $2,975 to the Company's 401(k)
Savings Plan for Mr. Christopher and (ii) life insurance premiums of $22,047
paid on Mr. Christopher's behalf. Does not include any contingent payments
to Mr. Christopher under the ANET litigation settlement made subsequent to
fiscal year 1994. These payments are contingent upon the Emery contract
remaining in effect. See "Item 3. Legal Proceedings -- ANET litigation."
(2) Consists of (i) contingent payments in the amount of $325,000 received by
Mr. Christopher under the ANET litigation settlement during fiscal year
1995, (ii) life insurance premiums of $25,500 paid on Mr. Christopher's
behalf, and (iii) matching contributions of $1,663 to the Company's 401(k)
Savings Plan for Mr. Christopher.
(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 $48,397 paid on Mr. Christopher's
behalf, and (iii) matching contributions of $3,447 to the Company's 401(k)
Savings Plan for Mr. Christopher.
(4) Consists of contingent payments received by Mr. Christopher under the ANET
litigation settlement during the four months ended December 31, 1996.
(5) Represents the four months ended December 31, 1996.
(6) Consists of matching contributions to the Company's 401(k) Savings Plan.
(7) The option covering these shares was rescinded on June 12, 1996.
(8) Represents the difference between the exercise price and the fair market
value of the Common Stock underlying the stock options on June 26, 1996, the
date of exercise, of the stock options granted in fiscal year 1996. See
"Item 11. Executive Compensation -- Stock Option Exercises."
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<PAGE> 25
STOCK OPTION GRANTS
The following table sets forth certain information concerning options
granted in fiscal year 1996 to the Company's Named Executive Officers. Messrs.
Reeves and Wadsworth fully exercised these options on June 26, 1996. The Company
did not grant any options to the Company's Named Executive Officers in the four
months ended December 31, 1996. No options for the purchase of Common Stock are
currently outstanding. The Company has no outstanding stock appreciation rights
and granted no stock appreciation rights during fiscal year 1996 or the four
months ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR FAIR VALUE ON
OPTIONS EMPLOYEES IN BASE PRICE DATE OF GRANT
NAME GRANTED FISCAL YEAR ($/SH) ($/SH) EXPIRATION DATE
---- ---------- ------------ ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Tilmon J. Reeves 390,707 71.8% $0.01 $7.45 December 31, 2004
Richard R. Wadsworth 153,567 28.2% $0.01 $8.63 June 12, 2005
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM
------------------------------------
NAME 5%($) 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 $1,325,732
</TABLE>
STOCK OPTION EXERCISES
The following table sets forth certain information concerning options
exercised in fiscal year 1996 by certain of the Company's Named Executive
Officers. Messrs. Reeves and Wadsworth fully exercised these options on June 26,
1996. No options for the purchase of Common Stock were outstanding during the
four months ended December 31, 1996 and none are currently outstanding.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED($)
---- --------------- -----------
<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.
DIRECTOR COMPENSATION
Pursuant to the Company's Bylaws, the members of the Board of Directors may
be compensated in a manner and at a rate determined from time to time by the
Board of Directors. Directors who are employees of Kitty Hawk do not receive
additional compensation for service as a director. Under the Company's Omnibus
Securities Plan, directors who are not employees of the Company may receive
shares of Common Stock in an amount equal to their net annual retainer (which is
currently $10,000).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, Mr. Christopher determined executive officer
compensation. Subsequent to the Offering and prior to November 6, 1996, Messrs.
Grammer, 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
25
<PAGE> 26
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 year 1996 and the four
months ended December 31, 1996, the Company paid an aggregate of approximately
$506,000 to Burke, Wright & Keiffer, P.C. for legal services rendered.
In August 1996, the Company acquired an undivided one-third interest in two
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, the Company 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.
During fiscal year 1996 and the four months ended December 31, 1996, Mr.
Grammer, a director of the Company, subleased the Facility to the Company.
During such period, the Company paid an aggregate of approximately $339,000 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.
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.
EMPLOYMENT AGREEMENTS
Mr. Christopher has an employment agreement with Kitty Hawk that provides
for an initial annual base salary of at least $125,000 and bonuses determined by
the Compensation Committee pursuant to the Company's Annual Incentive
Compensation Plan and otherwise. Mr. Christopher's employment agreement contains
(i) a confidentiality provision that prohibits disclosure of the Company's
proprietary information and (ii) a covenant not to compete that provides upon
Mr. Christopher's termination of employment with the Company for any reason, Mr.
Christopher shall not engage, directly or indirectly, in the air logistics,
charter brokerage, on-demand, or scheduled carriage business under an FAA Part
121 or Part 135 certificate for five years following such termination. The
employment agreement may be terminated by either party with or without cause. If
the employment agreement is terminated by the Company without a material breach
by Mr. Christopher, he is entitled to six months of compensation at his
then-current salary.
Messrs. Reeves and Wadsworth have employment agreements with Kitty Hawk
that provide for an initial annual base salary of at least $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 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
26
<PAGE> 27
material breach by Mr. Reeves, he shall be entitled to 100% of his then-current
salary in the year following termination and 50% of such annual compensation in
both the second and third year following termination and all rights under the
stock options and other benefits described above. Mr. Wadsworth's employment
agreement provides that if he is terminated by the Company without material
breach by Mr. Wadsworth, he shall be entitled to 100% of his then-current salary
in the year following termination and 50% of such annual compensation in the
second and third year following termination and all rights under the stock
options and other benefits described above.
ITEM 12. CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of March 17, 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
BENEFICIALLY
--------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- --------- -------
<S> <C> <C>
EXECUTIVE OFFICERS:
M. Tom Christopher(1)....................................... 6,673,436 63.8%
Tilmon J. Reeves(1)......................................... 234,424 2.2%
Richard R. Wadsworth(1)..................................... 92,140 (2)
DIRECTORS:
Ted J. Coonfield(1)......................................... 700 (2)
James R. Craig(1)........................................... 0 (2)
Robert F. Grammer(1)........................................ 2,000 (2)
Lewis S. White(1)........................................... 0 (2)
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (7
PERSONS).................................................. 7,002,700 67.0%
RCM Capital Management, L.L.C.(3)........................... 616,900 5.9%
Four Embarcadero Center, Suite 2900
San Francisco, California 94111
</TABLE>
- ---------------
(1) The address for this stockholder is 1515 West 20th Street, Dallas/Fort Worth
International Airport, Texas 75261.
(2) Less than 1%.
(3) Based upon a Schedule 13G filed with the Securities and Exchange Commission
by such beneficial owner on February 6, 1997. RCM Capital Management, L.L.C.
("RCM Capital"), an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, holds sole dispositive power with respect
to all such shares and sole voting power with respect to 525,900 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 11. Executive Compensation -- Compensation Committee Interlocks
and Insider Participation."
27
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS -- see Index to Consolidated Financial Statements on
page F-1.
The following financial statements are filed as a part of this report:
Report of Independent Auditors
Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1995 and 1996 and
December 31, 1996
Consolidated Statements of Income for the years ended August 31, 1994,
1995 and 1996 and the four months ended December 31, 1995 (unaudited) and
1996
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 1994, 1995 and 1996 and the four months ended December 31, 1996
Consolidated Statements of Cash Flows for the years ended August 31,
1994, 1995 and 1996 and the four months ended December 31, 1995 (unaudited)
and 1996
Notes to Consolidated Financial Statements
(a)2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable or are not required
(a)3. EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation of the Company.(2)
3.2 -- Bylaws of the Company.(2)
3.3 -- Amendment No. 1 to the Certificate of Incorporation of
the Company.(2)
3.4 -- Amendment No. 1 to the Bylaws of the Company.(2)
4.1 -- Specimen Common Stock Certificate.(3)
10.1 -- Master Agreement for Air Charter Transportation Services
("GM Agreement") dated as of June 4, 1990 by and between
General Motors Corp. ("GM") and the Company.(2)
10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9,
1990 by and between the Company and GM.(2)
10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4,
1991 by and between the Company and GM.(2)
10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1,
1990 by and between the Company and GM.(2)
10.5 -- Addendum No. 3 to the GM Agreement dated as of November
5, 1990 by and between the Company and GM.(2)
10.6 -- Addendum No. 4 to the GM Agreement dated as of December
3, 1990 by and between the Company and GM.(2)
10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7,
1991 by and between the Company and GM.(2)
10.8 -- Addendum No. 6 to the GM Agreement dated as of February
4, 1991 by and between the Company and GM.(2)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4,
1991 by and between the Company and GM.(2)
10.10 -- Revision to Appendices and to Master Agreement for Air
Charter Transportation Services dated August 13, 1992 by
and between the Company and GM.(2)
10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1,
1994 by and between the Company and GM.(2)
10.12 -- Aircraft Charter Agreement dated as of February 9, 1994
by and between the Company and DHL Airways, Inc.(2)
10.13 -- Agreement to Furnish Three (3) CV-600 Aircraft and Air
Cargo Services dated as of May 15, 1995 by and between
the Company and Burlington Air Express Inc.
("Burlington").(3)
10.14 -- Agreement to Furnish Five (5) B727-200 Aircraft and Air
Cargo Services dated as of March 1, 1996 by and between
the Company and Burlington.(3)
10.15 -- Aircraft Operating Lease dated as of March 14, 1995 by
and between Ting Hong Oceanic Enterprises Co., Ltd.
("Ting Hong") and the Company.(3)
10.16 -- Amendment and Extension of Aircraft Operating Lease dated
April 24, 1996 by and between Ting Hong and the
Company.(3)
10.17 -- Aircraft Operating Lease dated April 19, 1996 by and
between the Company and Pacific East Asia Cargo Airlines,
Inc.(3)
10.18 -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Aircargo, Leasing, M. Tom
Christopher, American International Airways, Inc., and
Conrad Kalitta.(2)
10.19 -- Sublease Agreement dated as of March 1, 1993 by and
between Robert F. Grammer and M. Tom Christopher.(2)
10.20 -- Transfer and Assignment of Sublease Agreement dated as of
October 26, 1994 by and between the Company, M. Tom
Christopher and Robert F. Grammer.(2)
10.2 -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher.(2)(4)
10.22 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig.(2)(4)
10.23 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig.(2)(4)
10.24 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996.(3)(4)
10.25 -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996.(3)(4)
10.26 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996.(3)(4)
10.27 -- Kitty Hawk, Inc. 401(k) Savings Plan.(2)(4)
10.28 -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher.(2)(4)
10.29 -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth.(3)(4)
10.30 -- Amended and Restated Employment Agreement dated as of
December 31, 1995 by and between the Company and Tilmon
J. Reeves.(3)(4)
10.31 -- Request for written consent to expand ownership without
management change dated as of October 26, 1994 granted by
GM.(2)
10.32 -- Request for written consent to certain disclosures of
Master Agreement and contractual relationship dated as of
October 26, 1994 granted by GM.(2)
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.33 -- Kavouras Customer Order Acknowledgment.(2)
10.34 -- Kavouras Meteorological Services Agreement.(2)
10.35 -- Computer Flight Plan and Weather Service Agreement dated
as of June 11, 1992 by and between Aircargo and Jeppesen
DataPlan, Inc.(2)
10.36 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement").(3)
10.37 -- Amendment No. 1 dated November 7, 1992 to the FEASI
Agreement.(3)
10.38 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement.(3)
10.39 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement.(3)
10.40 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement.(3)
10.41 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement.(3)
10.42 -- Amendment No. 6 dated December 1996 to the FEASI
Agreement.(5)
10.43 -- Amended and Restated Credit Agreement, dated as of August
4, 1996, by and among the Company, Wells Fargo Bank
(Texas), National Association, and Bank One, Texas,
N.A.(3)
10.44 -- Aircraft Lease (N751US) between the Company and Fleet
Capital Corporation ("Fleet") dated December 27, 1996.(5)
10.45 -- Aircraft Lease Agreement between the Company and Pegasus
Capital Corporation dated as of November 25, 1996.(5)
10.46 -- Aircraft Lease (N750US) between the Company and Fleet
dated December 27, 1996.(5)
10.47 -- Agreement for Sale of Leasehold between the Company and
Robert F. Grammer dated December 6, 1996.(1)
11.1 -- Statement of Computation of Net Income per Share.(1)
21.1 -- Subsidiaries of the Registrant.(3)
23.1 -- Consent of Ernst & Young LLP.(1)
27.1 -- Financial Data Schedule.(1)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 33-85698) dated as of December 1994, and incorporated
herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-8307) dated as of October 1996, and incorporated
herein by reference.
(4) The exhibit is a management contract or compensatory plan or arrangement.
(5) Previously filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ended November 30, 1996, and incorporated herein by
reference.
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K dated December 17, 1996. The Form 8-K reported
a change in fiscal year end (Item 8) from August 31 to December 31.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 27th day of March, 1997.
KITTY HAWK, INC.
By: /s/ RICHARD R. WADSWORTH
----------------------------------
Richard R. Wadsworth
Senior Vice President -- Finance,
Chief
Financial Officer, and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities indicated on the 27th day of March, 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, Director and Principal
Richard R. Wadsworth Financial and Accounting Officer
/s/ TED J. COONFIELD Director
- -----------------------------------------------------
Ted J. Coonfield
/s/ JAMES R. CRAIG Director
- -----------------------------------------------------
James R. Craig
/s/ ROBERT F. GRAMMER Director
- -----------------------------------------------------
Robert F. Grammer
/s/ LEWIS S. WHITE Director
- -----------------------------------------------------
Lewis S. White
</TABLE>
31
<PAGE> 32
KITTY HAWK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<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
</TABLE>
F-1
<PAGE> 33
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> 34
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> 35
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, FOUR MONTHS ENDED 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> 36
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> 37
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> 38
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 to date.
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> 39
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> 40
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 -- --
(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 -- --
</TABLE>
F-9
<PAGE> 41
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>
(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 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 DC9-15F hushkit and up to seven major
maintenance checks for jet aircraft. The funds will be
F-10
<PAGE> 42
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
YEAR ENDED AUGUST 31, ENDED
------------------------------------ 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>
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>
F-11
<PAGE> 43
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-12
<PAGE> 44
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-13
<PAGE> 45
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-14
<PAGE> 46
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 47
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) 58 477 796 1,240
Stock option grants to executives.... 0 4,232 (1) 0 4,231
------- ------- ------- ------- --------
Operating income..................... 663 (1,757) 3,474 7,080 9,460
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 7,166 7,689
Income taxes......................... 95 (927) 1,096 2,769 3,033
------- ------- ------- ------- --------
Net income (loss).................... $ 150 $(1,298) $ 1,407 $ 4,397 $ 4,656
======= ======= ======= ======= ========
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> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation of the Company.(2)
3.2 -- Bylaws of the Company.(2)
3.3 -- Amendment No. 1 to the Certificate of Incorporation of
the Company.(2)
3.4 -- Amendment No. 1 to the Bylaws of the Company.(2)
4.1 -- Specimen Common Stock Certificate.(3)
10.1 -- Master Agreement for Air Charter Transportation Services
("GM Agreement") dated as of June 4, 1990 by and between
General Motors Corp. ("GM") and the Company.(2)
10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9,
1990 by and between the Company and GM.(2)
10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4,
1991 by and between the Company and GM.(2)
10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1,
1990 by and between the Company and GM.(2)
10.5 -- Addendum No. 3 to the GM Agreement dated as of November
5, 1990 by and between the Company and GM.(2)
10.6 -- Addendum No. 4 to the GM Agreement dated as of December
3, 1990 by and between the Company and GM.(2)
10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7,
1991 by and between the Company and GM.(2)
10.8 -- Addendum No. 6 to the GM Agreement dated as of February
4, 1991 by and between the Company and GM.(2)
10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4,
1991 by and between the Company and GM.(2)
10.10 -- Revision to Appendices and to Master Agreement for Air
Charter Transportation Services dated August 13, 1992 by
and between the Company and GM.(2)
10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1,
1994 by and between the Company and GM.(2)
10.12 -- Aircraft Charter Agreement dated as of February 9, 1994
by and between the Company and DHL Airways, Inc.(2)
10.13 -- Agreement to Furnish Three (3) CV-600 Aircraft and Air
Cargo Services dated as of May 15, 1995 by and between
the Company and Burlington Air Express Inc.
("Burlington").(3)
10.14 -- Agreement to Furnish Five (5) B727-200 Aircraft and Air
Cargo Services dated as of March 1, 1996 by and between
the Company and Burlington.(3)
10.15 -- Aircraft Operating Lease dated as of March 14, 1995 by
and between Ting Hong Oceanic Enterprises Co., Ltd.
("Ting Hong") and the Company.(3)
10.16 -- Amendment and Extension of Aircraft Operating Lease dated
April 24, 1996 by and between Ting Hong and the
Company.(3)
10.17 -- Aircraft Operating Lease dated April 19, 1996 by and
between the Company and Pacific East Asia Cargo Airlines,
Inc.(3)
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.18 -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Aircargo, Leasing, M. Tom
Christopher, American International Airways, Inc., and
Conrad Kalitta.(2)
10.19 -- Sublease Agreement dated as of March 1, 1993 by and
between Robert F. Grammer and M. Tom Christopher.(2)
10.20 -- Transfer and Assignment of Sublease Agreement dated as of
October 26, 1994 by and between the Company, M. Tom
Christopher and Robert F. Grammer.(2)
10.2 -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher.(2)(4)
10.22 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig.(2)(4)
10.23 -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig.(2)(4)
10.24 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996.(3)(4)
10.25 -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996.(3)(4)
10.26 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996.(3)(4)
10.27 -- Kitty Hawk, Inc. 401(k) Savings Plan.(2)(4)
10.28 -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher.(2)(4)
10.29 -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth.(3)(4)
10.30 -- Amended and Restated Employment Agreement dated as of
December 31, 1995 by and between the Company and Tilmon
J. Reeves.(3)(4)
10.31 -- Request for written consent to expand ownership without
management change dated as of October 26, 1994 granted by
GM.(2)
10.32 -- Request for written consent to certain disclosures of
Master Agreement and contractual relationship dated as of
October 26, 1994 granted by GM.(2)
10.33 -- Kavouras Customer Order Acknowledgment.(2)
10.34 -- Kavouras Meteorological Services Agreement.(2)
10.35 -- Computer Flight Plan and Weather Service Agreement dated
as of June 11, 1992 by and between Aircargo and Jeppesen
DataPlan, Inc.(2)
10.36 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement").(3)
10.37 -- Amendment No. 1 dated November 7, 1992 to the FEASI
Agreement.(3)
10.38 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement.(3)
10.39 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement.(3)
10.40 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement.(3)
10.41 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement.(3)
10.42 -- Amendment No. 6 dated December 1996 to the FEASI
Agreement.(5)
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.43 -- Amended and Restated Credit Agreement, dated as of August
4, 1996, by and among the Company, Wells Fargo Bank
(Texas), National Association, and Bank One, Texas,
N.A.(3)
10.44 -- Aircraft Lease (N751US) between the Company and Fleet
Capital Corporation ("Fleet") dated December 27, 1996.(5)
10.45 -- Aircraft Lease Agreement between the Company and Pegasus
Capital Corporation dated as of November 25, 1996.(5)
10.46 -- Aircraft Lease (N750US) between the Company and Fleet
dated December 27, 1996.(5)
10.47 -- Agreement for Sale of Leasehold between the Company and
Robert F. Grammer dated December 6, 1996.(1)
11.1 -- Statement of Computation of Net Income per Share.(1)
21.1 -- Subsidiaries of the Registrant.(3)
23.1 -- Consent of Ernst & Young LLP.(1)
27.1 -- Financial Data Schedule.(1)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 33-85698) dated as of December 1994, and incorporated
herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-8307) dated as of October 1996, and incorporated
herein by reference.
(4) The exhibit is a management contract or compensatory plan or arrangement.
(5) Previously filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ended November 30, 1996, and incorporated herein by
reference.
<PAGE> 1
EXHIBIT 10.47
AGREEMENT FOR SALE OF LEASEHOLD
This Agreement ("Agreement") is made by and between Robert F. Grammer
("Seller"), a resident of Dallas County, Texas, and Kitty Hawk, Inc. ("Buyer"),
a Texas corporation, as follows:
R E C I T A L S
A. Seller is the owner and holder of a certain lease of real
property and improvements, including without limitation, an
aircraft hangar, located on the promises of Dallas/Fort Worth
International Airport, bearing D/FW Airport Lease No. 23555
and known generally as 1515 W. 20th Street, Dallas/Fort Worth
Airport, Texas 75261. Such lease, together with all
amendments and supplements thereto is hereafter referred to as
the "Lease." A true copy of the Lease is attached to this
Agreement as Exhibit "A" and incorporated herein by reference
for all purposes. A legal description of the leased land is
attached hereto as Exhibit "B" and incorporated herein by
reference for all purposes. The leased land and all
improvements and fixtures located thereon are hereafter
referred to as the "Leased Property."
B. Buyer is the current Sublessee of the Leased Property (the
"Sublease") and has been in possession of such Property since
March 1, 1993, and has all knowledge of the condition of the
Leased Property, including without limitation, the building
and all fixtures attached thereto, that it deems necessary to
make this Agreement. A true copy of the Sublease is attached
hereto as Exhibit "C" and incorporated herein by reference.
C. Buyer desires to purchase and acquire all of Seller's right,
title and interest in the Leased Property, and Seller desires
to sell, assign and convey to Buyer all of Seller's right,
title and interest to the Leased Property, all on the
following terms and conditions:
1. Subject to the approval of the Dallas/Fort Worth
Airport Board, Seller hereby sells, assigns,
transfers and conveys to Buyer, and Buyer hereby
accepts from Seller, effective the date of Closing,
all of Seller's right, title and interest in and to
the Lease, and the Leased Property, including without
limitation, all improvements, fixtures and personal
property located thereon owned by Seller, subject to
the terms and conditions herein set forth. Pending
the Closing of this Agreement,
AGREEMENT FOR SALE OF LEASEHOLD - PAGE 1 February 19, 1997
<PAGE> 2
Buyer's Sublease shall continue pursuant to its
terms.
2. The purchase price shall be $1,760,000 payable at
Closing in cash or by wire transfer received in
Seller's account on the day of Closing.
3. Except as specifically provided in paragraph 4
below, the Leased Property is being conveyed by
Seller and accepted by Buyer "AS IS, WHERE IS",
without warranty, express or implied, as to
condition, habitability, suitability for occupancy,
use or fitness for any particular purpose.
4. Seller warrants and represents to Buyer that:
a. Exhibit "A" is a true copy of the Ground
Lease of the land that is a part of the
Leased Property, between Dallas/Fort Worth
Regional Airport Board (the "Ground Lessor"),
and Seller as Successor-in-Interest of
Sedalia-Marshall-Boonville Stage Line, Inc.;
the Ground Lease is in full force and effect,
and to Seller's knowledge, without default or
notice of default, and without any condition
known to Seller that would result in a
default with the passage of time;
b. Seller holds all rights and interests of
Lessee of the Premises under the Lease; and
has full right and authority to execute and
perform this Agreement, subject only to the
approvals required by the Dallas/Fort Worth
Airport Board;
c. There are no liens or encumbrances upon
Seller's interest in the Leased Property; and
d. Seller knows of no condition of the Leased
Property that might violate environmental
laws, except as disclosed in the Sublease.
Buyer acknowledges that in or around December
31, 1993, Seller caused to be removed four
underground storage tanks from the Leased
land.
5. Buyer hereby agrees to indemnify and hold Seller
harmless from any and all claims based on or arising
out of any State or Federal environmental rule and
regulation, including claims based on "hazardous
substances" as defined in Section 5.03
AGREEMENT FOR SALE OF LEASEHOLD - PAGE 2 February 19, 1997
<PAGE> 3
of Buyer's Sublease, save and except any such claim
based on or arising out of the four underground
storage tanks referenced in paragraph 4d above.
6. The Closing shall take place on February 1, 1997, or
as soon thereafter as Buyer and Seller shall obtain
the approval of the Assignment of the Lease from the
Dallas/Fort Worth Airport authority. If such
approval is not obtained by _____________, 1997, and
prior to receipt of such approval at any time after
such date either Buyer or Seller may terminate this
Agreement by written notice to the other.
7. This transaction is subject to receipt by Buyer and
Seller in form reasonably acceptable to them, that
the Dallas/Fort Worth International Airport Board
consents and agrees to the Assignment from Seller to
Buyer, and will release Seller from any further
obligations or liability under the Lease. In
connection with such consent, Buyer and Seller agree
to execute an "Agreement and Assumption of Lease" and
submit it to the Dallas/Fort Worth International
Airport Board for its approval, and to make such
modifications thereto as shall be required by the
Board and as shall be reasonably acceptable to both
Buyer and Seller. The form of the proposed Agreement
and Assumption of Lease is attached hereto as Exhibit
"D" and incorporated herein by reference for all
purposes.
8. Buyer and Seller shall each bear their own legal
expenses incurred in connection with this Agreement.
Buyer shall have the right, at its sole expense, to
obtain a Title Policy and/or Survey of the Leased
Property.
9. Upon Closing of this Agreement, the Sublease between
Buyer and Seller shall terminate, but neither the
Closing of this Agreement nor the termination of the
Sublease shall affect any provision of the Sublease
that is, by its terms, to survive termination.
10. Seller is also the owner and holder of a certain
Lease of Real Property and improvements at the D/FW
International Airport bearing D/FW Airport's Lease
No. _________________, and known generally as
________________________ Street, Dallas/Fort Worth
Airport, Texas 75261, which is currently subleased to
GTE (the "GTE Lease"). Seller hereby grants to
AGREEMENT FOR SALE OF LEASEHOLD - PAGE 3 February 19, 1997
<PAGE> 4
Buyer a nonassignable option to purchase and acquire
the GTE Lease on the following terms:
a. The option must be exercised by notice in
writing from Buyer to Seller, received by
Seller within 180 days from the date of
Closing of this Agreement;
b. Sale must be closed with 3 months after
receipt of the notice of exercise;
c. The purchase price shall be $860,000 paid at
Closing in cash or by wire transfer received
by Seller on the date of Closing;
d. The property is sold "AS IS, WHERE IS"
without warranty, express or implied;
e. Seller must be released from all further
liability under the Lease by the D/FW Airport
Board, and the Tenant of the GTE Property, if
any; and
f. The sale and assignment is subject to the
approval of the D/FW Airport Board.
11. This Agreement may not be transferred or assigned by
Buyer without the express written consent of Seller,
which may be denied in Seller's sole discretion.
12. At Buyer's request, Seller has begun negotiations to
acquire from Sky Chefs, Inc., an assignment of lease
of a 20-foot strip of land out of D/FW Airport Lease
No. 25210, contiguous to the Eastern boundary of the
Leased Property described in this Agreement for
$10,000, plus expenses for relocating a fence on the
property line and legal costs of preparation of the
documents in form acceptable to D/FW Airport Board,
including the preparation of Surveyor- prepared
legal descriptions of both tracts, giving effect to
such transfer. Buyer and Seller each acknowledge and
agree that Seller is under no obligation to acquire
such assignment, but if he does acquire such
assignment, he will transfer it to Buyer "AS IS,
WHERE IS", without warranty, of any nature, express
or implied, subject only to D/FW Airport Board
approval, at his actual cost for such assignment,
including purchase money, and related attorneys'
fees, surveyor legal description fees and any related
costs of Sky Chefs
AGREEMENT FOR SALE OF LEASEHOLD - PAGE 4 February 19, 1997
<PAGE> 5
or D/FW which he pays; and Buyer hereby agrees to
purchase and acquire such Leasehold and land on such
terms if this Agreement is closed, and to lease such
property on the terms of the Sublease, if this
Agreement is not closed.
13. This Agreement together with any exhibits constitutes
the entire understanding of the parties with respect
to the subject matter hereof and shall not be amended
or modified except by written instrument signed by
all parties. All prior agreements or understandings
concerning the subject matter of this Agreement are
superseded hereby.
14. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective
successors, assigns, heirs, representatives and
estates, but no party may assign or delegate any of
their obligations or liabilities hereunder without
the prior written consent of the other party hereto.
EXECUTED this 6th day of December, 1996.
BUYER:
KITTY HAWK, INC.:
By: /s/ RICHARD R. WADSWORTH
-------------------------------
Its: Vice President
Address: 1515 W. 20th Street
D/FW Airport, TX 75261
SELLER:
/s/ ROBERT F. GRAMMER
-----------------------------------
Robert F. Grammer
Address: 201 Tampico
Irving, TX 75062
AGREEMENT FOR SALE OF LEASEHOLD - PAGE 5 February 19, 1997
<PAGE> 6
Airport Board
Lease Agreement No. 23555H
EXHIBIT A
AGREEMENT OF LEASE
Between
Dallas/Fort Worth Regional Airport Board
And
Sedalia-Marshall-Boonville Stage Line, Inc.
<PAGE> 7
Airport Board
Lease Agreement No. 23555H
AGREEMENT OF LEASE
State of Texas )
County of Dallas )
County of Tarrant )
This Agreement of Lease, made as of the 1st day of February, 1983 by
and between Dallas/Fort Worth Regional Airport Board (hereinafter called the
"Board") having an office at East Airfield Drive, Dallas/Fort Worth Airport,
Texas 75261; and Sedalia-Marshall-Boonville Stage Line, Inc. (hereinafter
called the "Lessee"), a corporation of the State of Missouri, having an office
and place of business at ) 1060 East Northwest Highway, Grapevine, Texas 76051,
evidences the following:
WHEREAS, Lessee desires to construct and operate a maintenance hanger,
office building, and airfreight complex at the Dallas/Fort Worth Regional
Airport (hereinafter called the "Airport"); and
WHEREAS, Lessee desires to lease land from Board for the construction
of such maintenance hanger, office building, and airfreight complex as
aforesaid; and
WHEREAS, Board desires to lease to Lessee certain land at the Airport
for the purpose of Lessee's constructing and operating a maintenance hangar,
office building, and airfreight complex together with ancillary services; and
WHEREAS, Lessee desires to have facilities at the site financed by
mortgagees/lenders or other secure parties on the security of the leasehold
interests of Lessee.
<PAGE> 8
NOW, THEREFORE, for and in consideration of the premises, mutual
promises and other good and valuable consideration the parties hereto do hereby
agree as follows:
Section 1. Letting, Conditions of Letting, Property Description and
Height Description.
Board hereby lets to Lessee and Lessee hereby hires and takes from
Board at the Airport, the tract of land containing approximately 7.299 acres
such tract being described by metes and bounds on Exhibit A hereof and such
tract being hereinafter referred to as the "premises" together with the right
to the use and enjoyment of all improvements now or hereafter placed thereon by
the Lessee.
Except to the extent required for the performance of the obligation of
Lessee hereunder, nothing contained in this Agreement of Lease (hereinafter
called the "Agreement") shall grant to Lessee any rights whatsoever in the
airspace above the premises in excess of 100 feet above the present ground
level thereof.
Section 2. Term, Rental, Charges and Options.
This Agreement shall become effective as of December 6, 1982 (the
"Effective Date"), and unless otherwise terminated shall expire on December 31,
2007. Lessee shall pay Board an annual rental equal to the rental per acre paid
by Board's Signatory Airlines under the formula set forth in the Use Agreement
in effect between Board and such Signatories. The formula in such Use Agreement
provides that the rental per acre is computed by dividing the "Airport Services
Cost" (as defined therein) projected to be incurred by the Board during the
next succeeding fiscal year by the "Total Developed Acreage of the Airport" (as
defined therein) projected for the first day of the next succeeding fiscal
year. This present annual rental per acre is Eight Thousand Seventy-Six Dollars
($8,076.00), but as shown by such formula, it is subject
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to change from year to year. Rental shall be payable by Lessee to Board in
advance, the first installment to be payable on the first day of the month
following the date the premises, as developed property are furnished to Lessee
in accordance with Section 3 hereof, and on the first day of each month
thereafter throughout the Term hereof,
Lessee shall store its garbage, debris and other waste materials in a
clean and sanitary condition in trash receptacles, which Board shall provide at
the premises, the size, number and location of which shall be at the discretion
of the Board, but which shall in all events be adequate to meet the reasonable
needs of Lessee, and Board further agrees to periodically remove such trash
from THE receptacles. In consideration for the services hereinabove described,
Lessee shall pay a standard Airport fee, such fee to be periodically adjusted
in accordance with the debt service on the capital investment required, as well
as the operation and maintenance expenses incurred in the furnishing of such
service. The cost to Lessee for such service shall be reasonable and consistent
with other tenants on the Airport. Any Increase in such fee to Lessee shall be
preceded by thirty (30) days written notice.
Lessee shall have the option to extend the Term of this Agreement upon
the same terms and conditions herein stated for either one (1) or two (2)
periods of five (5) years each, provided Lessee shall notify Board of same not
less than six (6) months prior to the expiration of the initial Term herein,
and not less than six (6) months prior to expiration of First Extension, if
once extended.
Section 3. Construction
Lessee shall have the right to erect and construct improvements on the
premises, but prior to the commencement of construction, Lessee shall submit
preliminary plans, elevations,
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specifications and renderings, if necessary, descriptive of the proposed
construction to Board for approval of Board's Director of Planning and
Engineering (hereinafter referred to as the "Director"). The preliminary
submission by Lessee shall employ essentials of aesthetics, convenience,
function and design, and shall be compatible in such respect with those of the
Airport. Upon approval of such preliminary plans, Lessee shall prepare
complete plans and specifications of the proposed construction. A Construction
Application, final plans and specifications, when rendered, shall be submitted
to the Director for approval, or for required changes.
Lessee shall include in all construction contracts entered into by it,
in connection with any or all of the construction work aforesaid, a provision
requiring the contractor, or, in the alternative, Lessee, to indemnify, hold
harmless, defend and insure Board, the Cities of Dallas and Fort Worth, and
their directors, officers, agents and employees against the risk of legal
liability for death, injury or damage to persons or property, direct or
consequential, arising out of or in connection with the performance of any or
all of such construction work against the risk of claims and demands, whether
such claims and demands are just or unjust, when made by third persons arising
or alleged to arise out of the performance of the construction work, unless
same are caused by the negligence or willful act of Board, and Lessee shall
require the contractor to furnish liability Insurance in such reasonable
amounts as may be approved by the Executive Director of the Board.
Lessee shall also include in any construction contract such provisions
as may be reasonably required by the Board or its Executive Director relating
to the operations of the
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contractor on the Airport; such provisions interalia, may include the
requirement for a Payment Bond for any work in excess of $25,000.00 to be
performed by the contractor,
Prior to entering into any contract for construction work, Lessee
shall submit to the Director for approval the name of the contractor or
construction manager to whom Lessee proposes to award the contract for the
construction work. Director shall have the right to approve or disapprove any
such contractor.
Lessee further agrees that all construction work to be performed by it
or its contractor, including all workmanship or materials, shall be of first
class quality and shall be substantially in accordance with the plans and
specifications approved by Director. As used herein, the term "first class
quality" shall mean of the same quality as buildings for offices or training
already constructed on the Airport. Lessee agrees that it shall deliver to
Director "as built" transparencies of the improvements constructed by it and
all other construction which may be performed by it as aforesaid and shall,
during the term of this Agreement, keep said transparencies, if any, current,
showing therein any changes or modifications which may be made in or to the
improvements.
It is understood and agreed that the Premises are to be delivered to
Lessee by Board on or before effective date. The Board assures the Lessee that
adequate streets and necessary utilities (water, telephone, electricity, and
sanitary sewer), adequate to enable Lessee to conduct its business are in
reasonable proximity to the premises. Lessee, at its sole expense, shall make
such connections with the streets and utilities in a manner approved by
Director.
Board agrees that in the event it or its contractor shall engage in or
perform any construction work on the Premises, during the term of this
Agreement, Board, to the extent of its
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statutory liabilities, shall indemnify and hold harmless Lessee, its officers,
agents and employees against the risk of death, personal injury or property
damage, direct or consequential, arising out of or in connection with the
negligent performance of any or all such construction work performed by Board
or its Independent contractors. However, except as to any rights granted
herein to a Mortgagee (as defined herein) of the Lessee's leasehold estate
created hereunder, nothing in this Agreement shall be construed for the benefit
of third parties or to expand Board's limitation of liability for injuries or
damages in tort under the laws and court decisions of the State of Texas.
When the construction work hereinabove provided has been completed,
Lessee shall, within a reasonable time thereafter, deliver to Board a
certificate, certifying that the Premises and such other construction has been
constructed substantially in accordance with the approved plans and
specifications and in compliance with all laws, rules, ordinances and
governmental rules, regulations and orders. When Director is satisfied that
such construction is so in compliance, he shall deliver a Certificate of
Occupancy to Lessee.
All Improvements constructed on, installed upon, or affixed to the
Premises by Lessee as permitted by this Agreement shall be owned by Lessee
until expiration of the term or sooner termination of this Agreement, at which
time title to all of such improvements shall vest in the Airport and the Cities
of Dallas and Fort Worth. Notwithstanding the foregoing, the Lessee shall have
the right but not the obligation to remove its trade fixtures in accordance
with Section 24 hereof. Lessee shall have the right to claim the depreciation
deductions and investment tax credit under this Agreement, and on the
improvements constructed on the Premises and the equipment installed therein,
and Board shall in no event claim such deductions and credits.
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Lessee shall designate areas not to exceed twenty (20) feet in width
along the periphery of the Premises for use and to be maintained as landscaped
areas.
Lessee shall furnish to Board, within sixty (60) days after completion
of any construction on the Premises, a statement certified by an officer of
Lessee, showing the total cost of the capital Improvements, including
architects' and engineers' fees.
Section 4. Lessee Financing
Lessee shall have the right at any time and from time-to-time during
the Term hereof and during any Extended Term to mortgage, encumber, or
hypothecate the leasehold estate of Lessee created hereby and all right, title
and interest of Lessee therein. In the event that Lessee, pursuant to a
mortgage, deed of trust, or other instrument, mortgages or otherwise encumbers,
conveys, or transfers an interest in the leasehold estate of Lessee created
hereby, the mortgagee or other secured party or pledgee (the "Mortgagee") shall
in no event become liable to perform the obligations of the Lessee under this
Agreement unless and until said Mortgagee becomes the owner of the leasehold
estate pursuant to foreclosure, assignment in lieu of foreclosure, or
otherwise; and thereafter, said Mortgagee shall remain liable for such
obligations only so long as such Mortgagee remains the owner of the leasehold
estate. Any purchase money, mortgage or deed of trust delivered in connection
with any assignment of this Agreement by such a leasehold Mortgagee shall be
entitled to the benefit of all of the provisions of this Agreement with respect
to a leasehold mortgage.
If any Mortgagee requests any changes in this Agreement as a condition
to funding any loan to Lessee, Board agrees to cooperate in amending this
Agreement so long as the changes
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requested do not materially increase the obligations of, or decrease the rental
payable to, Board under this Agreement.
Section 5. Rights of User
Lessee may use the Premises for the following purposes only and for no
purposes whatsoever:
(a) For the maintenance. upkeep, repair and storage of aircraft
parts, and related equipment.
(b) For all purposes related to the gathering, receiving, storing,
delivery and shipping of property, freight, and cargo by air and ground
transportation systems.
(c) For a business office.
(d) For the parking of automobiles operated by the officers,
employees and business visitors of Lessee; and
(e) For any other purposes or activity for which the Airport Board
expressly, in writing, authorizes the Premises to be used.
Section 6. Ingress and Egress
(a) Lessee, its sublessees, its contractors, suppliers of
materials and furnishers of services, and employees and business invitees of
Lessee or its sublessees, shall have the right of ingress and egress between
the premises and a public right-of-way outside the Airport by means of an
existing access road known as West Airfield Drive, the same to be used in
common with others having rights of passage within the Airport, provided that
Board may from time to time substitute other means herein provided. If Board
does so substitute other means of paved and improved ingress or egress to the
premises herein provided, Board shall pay to Lessee, upon demand, all costs and
expenses incurred by Lessee in the redesigning and reconstruction of roadway,
or driveway and parking areas on the premises.
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(b) The use of such roadway shall be subject to the Rules and
Regulations of Board uniformly applicable to lessees of the Board at the
Airport.
Section 7. Governmental and Other Requirements
(a) Lessee shall procure from all governmental authorities having
jurisdiction of the operations of Lessee hereunder all licenses, franchises,
certificates, permits or other authorization which may be necessary for the
conduct of such operations.
(b) Lessee shall promptly observe, comply with, and execute the
provisions of any and all present and future governmental laws, ordinance,
rules, regulations, requirements, orders and directions which may pertain or
apply to its operations or the use and occupancy of the Premises hereunder and,
in addition, shall make all structural and nonstructural improvements, repairs
and alterations to any and all facilities located on the premises which may be
necessary. Where any such improvements, repairs, and alterations cannot be
amortized over the remaining Term or Extended Term of this Agreement, Lessee
shall have the right to seek an extension of this Agreement. Lessee shall have
the right, after written notice to Board, to contest by appropriate legal
proceedings, diligently conducted in good faith, the validity or application of
any such law, ordinance, rule, regulation, requirement, order, and direction,
and, with the exception of any such law, rule, regulation, requirement, order,
and direction of Board, to delay compliance therewith pending the prosecution
of such proceedings, provided no civil damages or criminal penalty would be
incurred by Board and no lien or, charge would be imposed upon or satisfied out
of the Premises by reason of such delay, and the Lessee shall indemnify and
hold Board harmless from any such damages, penalty, lien, or charge.
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(c) Lessee agrees that it shall not enter into any contracts of a
type which would permit a lien or liens to become attached to the remainder
interests of Board and the Cities of Dallas and Fort Worth. Lessee further
agrees to pay, as they become due and payable, and before they become
delinquent, all ad valorem taxes, both general and special assessments, and
governmental charges lawfully levied or assessed against the leasehold
interest, or any part thereof, and upon all the improvements; provided, Lessee
shall have the right, upon posting security as required by law, to contest the
amount or legality of any tax or assessment levied or assessed against it by
any taxing authority.
(d) The Lessee covenants and agrees to observe and obey the
reasonable Rules and Regulations of Board for the government of the conduct and
operations of Lessee as may from time to time during the letting be
promulgated by Board to promote (i) air traffic safety and security and (ii)
compatible operations with other activities of the Airport.
Section 8. Prohibited Acts
(a) Lessee shall neither install in any public area any vending
machine or device designed to dispense or sell food, beverages, tobacco,
tobacco products or merchandise of any kind, nor operate any restaurant,
cafeteria, kitchen stand, or other establishment for the purpose of dispensing
or selling such products to any member of the public other than Lessee's
students, employees, officers and invitees, without the approval in advance of
the Executive Director.
(b) Lessee shall commit no nuisance on the premises and shall not
do or permit to be done anything which may result in the creation or commission
or maintenance of a nuisance on the premises.
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(c) Lessee shall not fuel or defuel its automobile vehicles or
other equipment in the enclosed space on the premises without the prior
approval of the Executive Director.
(d) Lessee shall not start or operate any engine or any item or
automotive equipment in any enclosed space on the Premises unless such engine
is equipped with a proper spark-arresting device.
Section 9. Maintenance and Repairs
Lessee shall at all times keep in a clean and orderly condition and
appearance the Premises and improvements, equipment and personal property
thereon.
Except as otherwise provided in Section 3, Section 11, and Section 25,
Lessee shall maintain, repair, replace and paint all or any part of the
improvements on the Premises including therein, without limitations thereto,
walls, partitions, floors, ceilings, columns, windows, doors, glass of every
kind, fixtures, systems for the furnishing of a fire alarm, fire protection
sprinkler, sewerage, drainage and telephone service, including lines, pipes,
mains, wires, conduits, and other equipment connected with or appurtenant to
all such systems which may be damaged or destroyed by the acts or omissions of
the Lessee, its sublessees, employees, agents, representatives, contractors,
customers, guests or invitees. Lessee is responsible for, and shall peform at
its own cost, all such repairs and replacements. Where any such repairs or
replacements cannot be amortized over the remaining Term or Extended Term of
this Agreement, Lessee shall have the right to seek an extension of this
Agreement.
In the event Lessee fails to commence so to make or do repairs,
replacements or painting within a period of thirty (30) days after written
notice from Board so to do or falls to diligently continue to complete the
repair, replacement or painting of the premises and improvements
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thereon required to be repaired, replaced or painted by Lessee, Board may, at
its option, repair, replace or paint all or any part thereof included in the
said notice, the cost thereof to be paid by the Lessee on demand.
Board assumes no responsibility for any property placed in the
premises or any part thereof, and Board is hereby expressly released and
discharged from any and all liability for any loss, injury or damage to persons
or property that may be sustained by reason of the occupancy of said Premises
under this Agreement, unless caused by the negligence or willful act of Board.
Section 10. Insurance
Lessee shall, during the term of this Agreement, cover and keep
insured, to the extent of not less than eighty percent (80%) of the insurable
value thereof, all buildings, structures, fixtures and equipment on the
Premises against fire and other hazards of extended coverage policies and all
risks against loss by windstorm, cyclone, tornado, hail, explosion (including
boiler explosion, if applicable), riot, civil commotion, aircraft, vehicles and
smoke. Such policy shall be in amounts and in carriers as shall be satisfactory
to Board's Executive Director.
The aforesaid policy of fire and extended coverage insurance and
renewal thereof shall Insure Board, the Cities of Dallas and Fort Worth, Lessee
and any Mortgagee as their interests may appear. If requested by a Mortgagee,
such policy of Insurance shall provide (a) that a duplicate original policy be
delivered to and retained by such Mortgagee, (b) that the payment of proceeds
from losses insured under such policy be made to an insurance trustee for
disbursement in accordance with the provisions of this Agreement, and (c) that
no adjustment of losses or settlement of claims under such policy shall be made
without the consent of such Mortgagee.
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In the event the improvements erected or constructed by Lessee are
damaged or destroyed by fire or other casualty to the extent that the
reasonable cost to repair or restore is sixty percent (60%) or more of the
original total cost thereof, Lessee shall have the right, at its election, to
repair and replace such improvements to substantially the same condition they
were in prior to such damage or destruction, or to terminate this Lease. As
used herein, the term "original total cost" shall not include the cost of the
construction of the foundation, footings, site preparations (unless such
portions of.the improvements were actually damaged), and other costs which
would not be incurred in reconstructing the damaged improvements. Lessee shall
give Board notice of its election hereunder within sixty (60) days next
following after the adjustment by the insurer of such loss by damage or
destruction. If Lessee elects to repair or reconstruct the improvements, the
insurance proceeds, to the extent a Mortgagee does not require the application
of such proceeds to Lessee's obligation to such Mortgagee, shall be made
available to Lessee for that purpose; if the insurance proceeds made available
to Lessee are not sufficient, Lessee agrees to bear and pay the deficiency. If
the insurance proceeds are more than sufficient to pay the cost of such repair
and reconstruction, then such excess proceeds shall be paid to any such
Mortgagee to be applied against the loan. If Lessee shall elect not to repair
or reconstruct the improvements, this Agreement and all of Lessee's and Board's
unaccrued obligations hereunder shall terminate, including Board's obligation
to reimburse Lessee for other parties' utilization of the extended utility and
road systems. The insurance proceeds, after payment of the balance owing to the
Mortgagee, shall be divided between Board and Lessee according to the following
formula: first, such proceeds shall be paid to Lessee for payment of any
deficiency between the proceeds and the amount needed to pay the cost of repair
and reconstruction and, second, Board shall
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receive an amount equal to two percent (2%) of such remaining proceeds times
the number of years elapsed in the Term of this Agreement, and the Lessee shall
receive the balance.
If the reasonable cost to repair or restore the damage or destruction
to the improvements should be less than sixty percent (60%) of the original
total cost of the Improvements. and provided this Agreement has a remaining
term of not less than forty-eight (48) months, Lessee shall be obligated to
repair and replace such damage at its sole cost and expense and shall have the
right to apply the insurance proceeds to the cost thereof. If less than
forty-eight (48) months remains on the Term of this Agreement at the time of
any such damage or destruction. Lessee may elect to repair or replace at its
cost and apply the insurance proceeds to such cost, or Lessee may elect to not
repair and terminate this Agreement. Such election shall be made in writing to
Board not more than sixty (60) days after the date of the fire or other
casualty. If Lessee elects to terminate this Agreement. Board and Lessee shall
be relieved and released of all unaccrued liability under this Agreement and
the insurance proceeds shall be paid first to the Mortgagee, if any, to the
extent of the balance owing to such Mortgagee, and the balance of such proceeds
shall be paid to the parties as follows: Board shall receive an amount equal to
two percent (2%) of such proceeds times the number of years elapsed in the Term
of this Agreement, and the Lessee shall receive the balance.
In the event of damage or destruction to any of the improvements upon
the premises, Board shall have no obligation to repair or rebuild the
improvements or any fixtures, equipment or other personal property installed by
Lessee pursuant to this Agreement, provided that such damage or destruction was
not caused by the negligence or willful act of Board.
Section 11. Indemnity; Liability Insurance
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Lessee covenants and agrees to indemnify and hold harmless Board, the
Cities of Dallas and Fort Worth, their directors, officers, agents and
employees from and against any and all claims for damages or injuries,
including death, to persons or property (other than the premises) arising out
of or incident to the leasing of, or the use and occupancy of, the Premises by
Lessee unless caused by the negligence or willful act of Board.
Lessee further covenants and agrees to obtain and keep in force during
the term of this Agreement a policy of liability insurance providing for bodily
injury (including death) and property damage to third persons in amounts not
less than $250,000.00 for any one person and $500,000.00 for any one accident
for bodily injury and death and $500,000.00 for property damage. Such coverage
shall be in an insurance carrier licensed to do business in Texas and
satisfactory to Board, and Board shall receive a copy of such policy of
insurance or a certificate, validly executed by or on behalf of the insurance
company, certifying that such insurance is in full force and effect.
Section 12. Signs
(a) Except with the prior approval of the Director, Lessee shall
not erect, maintain or display any advertising, signs, posters or similar
devices at or on the Premises or elsewhere at the Airport.
(b) Upon demand by Board, Lessee shall remove, obliterate or paint
out any and all advertising, signs, posters and similar devices placed by
Lessee on the Premises or elsewhere on the Airport without the prior approval
of the Director. In the event of a failure on the part of Lessee so to remove,
obliterate, or paint out each and every sign or piece of advertising, Board may
perform the necessary work and Lessee shall pay the costs thereof to Board on
demand.
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Section 13. Assignment and Subletting
Any Mortgagee (or its nominee) may sell, convey, transfer, assign, or
sublet, in whole or in part, this Agreement and all of Lessee's right, title
and interest hereunder, without the approval of Board, and such right shall not
be affected by any foreclosure by, or conveyance in lieu of foreclosure
received by, any Mortgagee (or its nominee). Lessee shall not assign, sell,
convey or transfer (except to Mortgagees or their nominees), or sublet (except
to subtenants in the ordinary course of Lessee's business) this Agreement, in
whole or in part, or the right, title and interest of Lessee hereunder, without
the written approval of Board, provided, however, that the approval of Board
shall not be required for any such assignment, sale, conveyance, transfer or
subletting to an individual, corporation or other entity having (or, in the
case of a partnership, one or more of whose partners have) a net worth in an
amount at least equal to ten (10) times the annual rent payable hereunder at
the time of such assignment, sale, conveyance, transfer or subletting.
Where an assignment, sale, conveyance, transfer or subletting
described in the preceding sentence occurs, Lessee shall give Board thirty (30)
days advance written notice of such transaction. No assignment, sale,
conveyance, transfer, pledge or subletting shall in anywise affect the terms,
conditions, covenants, agreements and provisions herein set forth. In the event
of a total assignment of this Agreement to an assignee approved by Board,
Lessee shall be released from any and all liability arising or accruing under
this Agreement after the date of such assignment, provided that the assignee
executes, acknowledges and delivers to Lessee and Board a valid, binding and
sufficient instrument in writing, directly enforceable by Board; containing the
assignee's assumption and agreement to pay all rent and other amounts reserved
in this
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Agreement and to perform all of the covenants, provisions and conditions of
the Agreement to be performed by Lessee.
In no event shall Board's consent be required for subleases entered
into in the ordinary course of Lessee's business. Board agrees upon request of
Lessee from time to time to execute and deliver to any permitted subtenant an
agreement in form and substance reasonably acceptable to Lessee providing that
Board will not disturb the possession of such subtenant under the terms of its
sublease in the event of any termination (or exercise of any remedies) in
connection with any default by Lessee hereunder, so long as such subtenant is
not in default under its sublease and provided the subtenant agrees to attorn
to Board under the terms of the sublease upon any termination of this Lease;
provided, however, no subtenant shall be entitled to possession of the Premises
after the expiration date of this Lease, or, if the Lease is extended, the
expiration date of any extended term hereof and provided further, that the
terms and provisions of such sublease shall be satisfactory to Board.
Section 14. Additional Construction by the Lessee
Except as hereinbefore provided in Section 3 hereof or as permitted by
Sections 10, 11, and 25, Lessee shall not, without the prior written approval
of the Director, erect any structures, make any improvements or do any other
construction work on the premises or alter, modify, or make additions,
improvements or repairs to or replacements of, any structure now existing or
built at any time during the letting, or install any fixtures (other than trade
fixtures, removable without material damage to the freehold, any such damage to
be immediately repaired by Lessee). Notwithstanding the foregoing, Lessee
shall have the right without the prior approval of the Director to replace or
repair floor and wall coverings and to make nonstructural repairs
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and additions to the Premises the cost of which does not exceed Five Thousand
Dollars ($5,000.00) per project.
Section 15. Rights of Entry Reserved
(a) Board, its officers and employees shall have the right during
normal business hours, after notice to Lessee and when accompanied by a
representative of Lessee, to enter upon the Premises for the purpose of
inspecting same, and for the doing of any act or thing which Board may be
obligated to do or have the right to do under this Agreement.
(b) Without limiting the generality of the foregoing, Board shall
have the right, for its own benefit, for the benefit of Lessee, or for the
benefit of others than Lessee at the Airport, to maintain existing and future
utilities systems, other systems, or portions thereof on the Premises,
including, without limitation, systems for the supply of heat, water, gas fuel
and electricity and for the furnishing of fire alarm, fire protection,
sprinkler, sewerage, drainage, telephone and telegraph service, including all
lines, pipes, mains, wires, conduits, and equipment connected with or
appurtenant to such to make such repairs, replacements or alterations as may,
in the opinion of Board, be deemed necessary or advisable; provided, however,
that such systems and ingress and egress thereto shall not unreasonably
interfere with Lessee's facilities nor with clearances therefor. Board shall
indemnify and hold Lessee harmless from and against any cost, expense,
liability, or action caused by or arising out of the actions taken by Board
pursuant to this Section 16(b).
Section 16. Place of Payments
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All payments required of the Lessee by this Agreement shall be made at
the office of the Director of Finance, Dallas/Fort Worth Regional Airport
Board, P. O. Drawer DFW, Dallas/Fort Worth Airport, Texas 75261, or to such
other office or address as may be substituted therefor.
Section 17. Default; Termination
(a) Board, subject to the provisions of subparagraphs (b), (c),
and (d) hereafter, may declare this Agreement to be in default upon the
occurrence of any one or more of the following events:
(1) When any Lien shall be filed against the Premises
(except for a lien for a mortgage, or other instrument used to secure
financing, or a lien for taxes, assessments or other governmental charges so
long as such taxes, assessments or charges are not delinquent or are being
contested in accordance with the provisions of Section 8(c) hereof and not
released or otherwise removed or bonded within sixty (60) days after written
notice to the Lessee of the filing thereof; or
(2) When Lessee shall fail to pay the rental or to make
any other payment required hereunder to Board within thirty (30) days after the
due date; or
(3) When Lessee shall fail to keep, perform and observe
each and every covenant and agreement set forth in this Agreement on its part
to be kept, performed or observed within thirty (30) days after written notice
to the Lessee of such failure.
(b) In the event Board has declared this Agreement to be in default
pursuant to the provisions of subparagraph (a) above, Board may enforce the
performance of this Agreement in any method provided by law, and this Agreement
may be terminated at Board's discretion if such default continues for a period
of sixty (60) days after Board notifies Lessee and any Mortgagee
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in writing of such default and of Board's intention to declare this Agreement
terminated; and thereupon (unless Lessee or any Mortgagee shall have completely
removed or cured said default or unless,the provisions of subparagraphs (c) and
(d) below are applicable), this Agreement shall cease and come to an end as if
it were the day originally fixed herein for the expiration of the term hereof;
and Board, its agents and attorneys shall have the right, without further
notice or demand, to re-enter and remove all persons and property therefrom
without being deemed guilty of any manner of trespass, and without prejudice to
any remedies for arrears of rent or breach of covenant.
(c) Irrespective of the provisions of subparagraph (b) above, if
any default set forth in Board's notice is other than an uncured failure to pay
rent and the payment of rent is continued and the Lessee or any Mortgagee or
permitted assignee is diligently attempting to cure the default complained of
(even though the Lessee or such Mortgagee or permitted assignee is unable to do
so within sixty (60) days after such notice), this Agreement shall not
terminate so long as the Lessee or any Mortgagee or permitted assignee
continues diligently to attempt to cure the default.
(d) If the leasehold estate is encumbered by a mortgage. deed of
trust, or other instrument used to secure financing, and there is an uncured
default, Board may not terminate this Agreement by reason of such default, if a
Mortgagee, within sixty (60) days after receipt of such notice of default, as
provided herein, shall commence to cure such default or shall commence
foreclosure or similar proceedings under the mortgage or deed of trust, for the
purpose of acquiring Lessee's interest in this Agreement and thereafter
diligently prosecutes the same and upon the completion of such foreclosure
proceedings, the Mortgagee shall diligently
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attempt to cure such default. Any default by Lessee, not reasonably susceptible
of being cured by the Mortgagee, shall be deemed to have been waived by Board
upon completion of such foreclosure proceedings or upon such acquisition of
Lessee's interest in this Agreement, except that any of such events of default
which are reasonably susceptible of being cured after such completion and
acquisition shall then be cured with reasonable diligence.
(e) A Mortgagee or its nominee may become the legal owner and
holder of the leasehold estate under this Agreement by foreclosure or similar
proceedings under its mortgage or deed of trust or as a result of the
assignment of this Agreement in lieu of foreclosure.
(f) It is understood and agreed that in the event there is a
default hereunder and Board has sent the sixty (60) day notice as provided in
subparagraph (d) above, then and in such event Board shall have the right and
option, but not the obligation, to pay in full the indebtedness, including any
penalties arising from such prepayment, owing to the Mortgagee by Lessee and
secured by a mortgage or deed of trust upon the leasehold estate; and upon such
payment Board shall be subrogated to all of the rights, liens, interests and
remedies of the Mortgagee. Board shall exercise its option, if at all, by
written notice to Lessee and the Mortgagee, and by payment of such indebtedness
at any time prior to the completion of such foreclosure or similar proceedings.
Section 18. Obstruction Lights
Lessee shall furnish such obstruction lights as Board shall direct, of
the type and design approved by the Director, and shall install said lights in
the locations of the Premise, designated by Board and furnish and install the
bulbs and furnish the electricity necessary for the operation of said lights,
and shall operate the same in accordance with the directions of Board. Board
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<PAGE> 28
hereby directs that all obstruction lights shall, until further notice, be
operated daily for a period commencing thirty (30) minutes before sunset and
ending thirty (30) minutes after sunrise (as sunset and sunrise may vary from
day to day throughout the year) and for such other periods as may be directed
or requested by the Control Tower of the Airport.
Section 19. Services to Lessee
(a) Board, at its sole cost and expense, covenants and agrees
promptly at all times during the term of this Agreement to maintain, replace
and repair the existing access road referred to in Section 7(a) of this
Agreement and any and all improvements constructed by it pursuant to the terms
of this Agreement, including, but not limited to, the streets, all utilities
(water, electricity, telephone, and sanitary sewers), all outside of and to the
exterior boundary of the premises and to furnish police and fire protection to
the premises.
(b) Except as may otherwise be expressly provided herein, Board
shall have no obligation to furnish or supply for or on behalf of Lessee, any
services whatsoever on the Premises. Lessee shall have the obligation to
arrange with the appropriate utility or service companies, municipalities, or
other supplier, including Board, supplying utilities and services in the area
for the supply of all other services including electric power. Lessee shall
have the responsibility to arrange for the maintenance and good repair of all
such service lines on the Premises furnished to it by such utility companies
and for all water mains and sewers constructed and installed within Lessee's
Premises by Lessee.
(c) Except as provided in this Agreement, no failure, delay or
interruption in any service or services, whether such service or services shall
be supplied by Board or by others, shall relieve Lessee of any of its
obligations hereunder, or shall be construed to be an eviction of
22
<PAGE> 29
Lessee, or of the rental payable under this Agreement, or grounds for any
claims by Lessee for damages, consequential or otherwise, unless caused by the
negligence or willful act of Board.
Section 20. Brokerage
Board and Lessee shall indemnify and save harmless each other of and
from any claim or commission or brokerage made by any broker when such claim is
based in whole or in part upon any act or omission of Lessee of Board.
Section 21. Termination of Agreement by Lessee
Lessee, with the written consent of all Mortgagees, if any, may
terminate this Agreement upon the default by Board in the performance of any
covenant or agreement herein required to be performed by Board, if such default
is not cured within sixty (60) days following written notice thereof from
Lessee to Board; provided, however, if such condition of default is not
reasonably susceptible to cure within such sixty (60) day period, Lessee may
not terminate this Agreement by reason of such condition of default, if Board
commenced its effort to cure such condition of default within such sixty (60)
day period, so long as Board proceeds with reasonable diligence to the cure of
such condition of default; provided, further, as to.any such condition of
default which continues beyond sixty (60) days, after such sixty (60) day
period, Lessee shall be entitled to a reasonable abatement of rent commensurate
with the extent to which such condition of default substantially interferes
with Lessee's use of the premises.
Section 22. Non-Discrimination
Without limiting the generality of any of the provisions of this
Agreement, Lessee, in its operations at the Airport, and also as a part of the
consideration hereof, shall maintain and operate its facilities and provide its
services in compliance with and pursuant to Title 49, Part 21
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<PAGE> 30
(Non-Discrimination in federally-assisted programs of the Department of
Transportation - Effectuation of Title VI) of the Civil Rights Act of 1964, and
as said Regulations may be amended; and shall not on the grounds of race.
creed, color or national origin discriminate against any person or group of
persons in any manner whatsoever. Lessee shall indemnify and hold harmless
Board and the Cities of Dallas and Fort Worth from any claims and demands of
third persons, including the United States of America, resulting from Lessee's
non-compliance with any of the provisions of this Section; and Lessee shall
reimburse Board for any loss or expense incurred by reason of such
non-compliance.
Section 23. Removal of Property
Upon termination of this Agreement by lapse of time or otherwise,
Lessee shall have the right but not the obligation to remove from said Premises
its trade fixtures, including display signs, counters, furniture, equipment,
and other items of personal property installed and place in and upon the
premises, and in any event shall clean up the debris and leave said premises in
a safe, sanitary and sightly condition.
Section 24. Condemnation
(a) In the event that title to or use of the premises, or a
substantial part thereof, shall be taken or condemned in any eminent domain,
condemnation, compulsory acquisition or like proceeding or by any competent
authority or conveyed under the threat thereof, for any public or quasi-public
use or purpose (hereinafter called "by the power of eminent domain") the
following provisions shall be applicable:
(1) If at any time of the taking Lessee requests,
with the consent of all Mortgagees, that the improvements be rebuilt elsewhere
and if land suitable for such purpose is
24
<PAGE> 31
available elsewhere, such improvements shall be rebuilt elsewhere and paid for
with the proceeds of condemnation allocable to Board's reversionary interest in
the improvements taken, and the proceeds of condemnation allocable to the fair
market value of Lessee's lost leasehold estate for the then remaining Term of
the Agreement and any extension thereof to which Lessee may be entitled
hereunder ("Lessee's Proceeds"), and if such proceeds are insufficient for such
purposes Lessee shall pay the deficiency. If Lessee's Proceeds are in excess
of the amount necessary for such purpose, any such excess, after first repaying
the indebtedness owing to any Mortgage in order of priority, shall be paid to
Lessee if the condemning authority is Board or either the City of Dallas or
Fort Worth. If, however, the condemning authority is other than Board or the
Cities of Dallas or Fort Worth, such excess, after first repaying the
indebtedness owing to any Mortgagees in order of priority, shall be paid to
Board and deposited by it as a credit to the next due payment(s) of rentals,
with such credit to continue until the amount thereof is exhausted. The
rebuilding of such improvements shall be in accordance with the original plans
and specifications, together with alterations or modifications made or agreed
upon prior to the taking, or in accordance with the original plans and
specifications, together with alterations or modifications made or agreed upon
prior to the taking, or in accordance with new or modified plans and
specifications, the alternative to be determined by the Lessee.
(2) If (A) Lessee elects not to have the improvements
rebuilt elsewhere (in which event Lessee will advise Board of such decision
within one hundred twenty (120) days after the date of the taking), or (B) all
Mortgagees do not consent to the rebuilding of improvements, or (C) Lessee's
Proceeds are insufficient for such purpose and Lessee fails to agree to bear
and pay the deficiency, or (D) land suitable for such purpose is not available
25
<PAGE> 32
elsewhere, this Agreement and all unaccrued obligations hereunder shall
thereupon be terminated and all condemnation proceeds, after first repaying the
indebtedness owing to all Mortgagees, shall be divided between Board and Lessee
as their respective interests appear at the time of the taking, with Lessee
being entitled to the present fair market value of its lost leasehold estate
(less the amount of proceeds paid to Mortgagees, if any) together with any
allowance receivable for relocation or removal. Notwithstanding any other
provision hereof or any right of Lessee or Mortgagee herein contained, as
between Board, Lessee and any Mortgagee, Board shall be entitled to be paid out
of the proceeds of condemnation not less than the present fair market value of
its lost reversionary interest in the Premises taking into consideration any
right of Lessee to extend the term of this Agreement, but exclusive of the
value of improvements constructed by Lessee thereon.
(3) For purpose of this Section 25(a), "land suitable
for such purpose available elsewhere" shall mean other land on Airport property
managed by Board. If the improvements are rebuilt elsewhere, this Agreement
shall continue in force and effect, unchanged, as to the rebuilt improvements
and substitute land. Rental shall abate from the time of the taking until
rebuilding is completed.
(b) In the event that title to or use of less than a substantial
part of the Premises is taken by the power of eminent domain (that is, if the
primary use of the improvements is not substantially impaired by deletion of
the part taken) Lessee shall restore, repair or refurbish the remainder of the
improvements to the Premises following the taking to the extent Board may
reasonably require. Such restoration, repair or refurbishment shall be at
Lessee's sole cost and expense; provided, however, with the consent of all
Mortgagees, the cost of such restoration,
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<PAGE> 33
repair or refurbishment may be paid for with Lessee's Proceeds (as defined in
Section 25(a)(l). Any of Lessee's Proceeds not used for the purposes of
rebuilding shall first be used to repay the indebtedness owing to any
Mortgagees in order of priority and then shall be applied until exhausted in
reduction of the rentals payable hereunder. The rentals payable hereunder shall
be reduced for the remainder of the term hereof because of the taking in a
manner that is fair and equitable under the circumstances.
(c) Before any reconstruction or repair under this Section, Lessee
shall submit a Construction Application and plans and specifications to the
Director for approval and construction shall be substantially in accordance
therewith subject to such changes as may be reasonably requested by Lessee and
approved by the Director; the Director reserves the right specifically to
approve the contractor and/or the architect/engineer selected by Lessee for
such reconstruction or repair work.
Section 25. Recording - Memorandum of Lease
Board and Lessee agree, upon the request of either of them, to execute
a short form of memorandum of this Agreement in recordable form for recordation
in the deed records of the County where the Premises are situated. The cost of
recording shall be borne by the party requesting it.
Section 26. Estoppel Certificates
Board agrees to execute and deliver, from time to time, such estoppel
certificates or other instruments to the Mortgagee, assignees and sublessees of
Lessee which certificates, to the extent the facts recited therein are true,
shall certify to such Mortgagee, assignees and sublessees that this Agreement
is in full force and effect, that there are no defaults existing, the date
through
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<PAGE> 34
which the rental has been paid and such other matters as may be reasonably
requested by such assignees, sublessees and the Mortgagee, it being intended
that any such statement delivered pursuant to this Section may be relied upon
by any prospective purchaser, assignee, sublessee or mortgagee of the leasehold
estate.
Section 27. Leasehold Title Certification
Board agrees to furnish to Lessee, if requested, at Board's expense an
Abstractor's Certification covering the Premises.
Section 28. Quiet Enjoyment
Board agrees that, on payment of rentals, fees and charges herein
provided for and the performance hereunder, Lessee shall peaceably have and
enjoy the Premises, appurtenances, facilities, licenses and privileges granted
herein,
Section 29. Force Majeure
Neither Board nor Lessee nor any assignee or sublessee shall be deemed
in violation of this Agreement if it is prevented from performing any of its
obligations hereunder by reasons of strikes, boycotts, labor disputes,
embargoes, shortages of material, acts of God, acts of the public enemy, acts
of superior governmental authority, weather conditions, floods, riots,
rebellions, acts of sabotage, or any other circumstances for which it is not
responsible or which area not in its control; provided, however, that this
section shall not apply to failures by Lessee to pay the rentals, fees and
charges hereinbefore specified or to the obligations of Board under Section 29
hereof. All assertions of force majeure interference by a party places the
burden of proof of same as a reason for failure to perform upon the party
claiming same.
Section 30. Severability
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<PAGE> 35
Should any provision of this Agreement be finally declared to be
invalid by a court of competent jurisdiction, provided such provision is not
material to the performance of the contract, it is the intention of the parties
that the remaining portions of this Agreement shall remain in full force and
effect.
Section 31. Non-Liability
No member, director, officer, or employee of either party shall be
charged personally or held contractually liable by or to the other part under
any term or provision of this Agreement, or of any supplement, modification or
amendment of this Agreement, or because of any breach thereof, or because of
its or their execution or attempted execution of same.
Section 32. Notices to Leasehold Mortgagees
Upon execution and recordation in the Deed of Trust Records of Dallas
County, Texas of any leasehold mortgage, the leasehold Mortgagee shall notify
Board in writing that a leasehold Mortgage has been given and executed by
Lessee, and shall furnish to Board at the same time the address to which it
desires copies of notices to be mailed, or, designate some person or
corporation in the City of Dallas, Texas, as its agent and representative for
the purpose of receiving copies of notices. Board hereby agrees that it will
thereafter mail to each leasehold Mortgagee from whom it has received such
notice, or to the agent or representative so designated by each such leasehold
Mortgagee, at the address so given, duplicate copies of any and all notices in
writing which Board may from time to time give or serve upon Lessee under and
pursuant to the terms and provisions of this Agreement. No notice to Lessee
under the terms and provisions of this Agreement shall be effective unless a
duplicate copy thereof is mailed in
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<PAGE> 36
the manner provided for the giving of notices in Section 38 hereof to each
leasehold Mortgagee of whom Board has been notified as aforesaid.
Section 33. Leasehold Mortgagees May perform Covenants
To the extent that Lessee may grant the right to any such leasehold
Mortgagee or same may be provided for herein, any such leasehold Mortgagee may,
at its option, at any time before the rights of Lessee hereunder shall have
been terminated, pay any rental due hereunder, effect any insurance, pay any
taxes, discharge any lien, make any repairs and improvements, make any
deposits, or make any other payment required of Lessee by the terms of this
Agreement, or do any act or thing which may be necessary and proper to be done
in the observance of the covenants and conditions of this Agreement, or to
prevent the termination of this Agreement; and all payments so made and all
things so done and performed by any such leasehold Mortgagee shall be as
effective to prevent a forfeiture of the rights of Lessee hereunder as the
same would have been if done and performed by Lessee instead of by any such
leasehold Mortgagee. Any leasehold mortgage so given by Lessee may, if Lessee
desires, be so conditioned as to provide that, as between any leasehold
Mortgagee and Lessee, the leasehold Mortgagee shall, on making good any such
default or defaults on the part of Lessee, be thereby subrogated to or put in
the position of assignee of any or all of the rights of Lessee under the terms
and provisions of this Agreement.
Section 34. Leasehold Mortgagees Not Liable
No leasehold Mortgagee of Lessee hereunder shall be or become liable
to Board, as an assignee of this Agreement or otherwise, for the payment or
performance of any obligation of Lessee until it expressly assumes the payment
or performance of such obligation, by written
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<PAGE> 37
instrument; and no assumption of liability shall be inferred or result from
foreclosure or other appropriate proceedings in the nature thereof or as the
result of any other action or remedy provided for by any leasehold estate to
such leasehold Mortgagee in lieu of foreclosure, or pursuant to which any
purchaser at foreclosure shall acquire the rights and interest of Lessee under
the terms of this Agreement.
Section 35. Parties' Authority
Each party represents and warrants that it has the full right, power
and authority to make this Agreement and that no other persons need to join in
the execution of this instrument in order for this Agreement to be binding on
all parties having an interest in the subject matters; and each party agrees to
execute or procure any further necessary assurances of title that may be
reasonably required for the protection of the other party. Further, Board
warrants that it has good and merchantable title to the Premises.
Section 36. Approval of Parties
In any case in this Agreement where approval or consent or
satisfaction is required to be obtained by one party from the other, it is
understood and agreed that any such approval or consent or satisfaction shall
not be unreasonably withheld, conditioned, or delayed. Failure of Board either
to give written notice of approval or disapproval (specifying the basis for any
such disapproval with particularity) within thirty (30) days following
submittal by Lessee of any request for approval (accompanied by appropriate
plans, specifications or other materials) shall conclusively be deemed approval
thereof. The party alleging that such approval, consent, or satisfaction is
withheld without good reason shall have the burden of proof that allegation in
any adversary proceeding, provided the reasons for the failure by the other
party are stated in writing.
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<PAGE> 38
Section 37. Notices
(a) Any notice, request or demand to be given or served under the
terms and provisions of this Agreement must be in writing, and shall be deemed
to have been given and received 48 hours after a certified or registered letter
containing such notice, request or demand, with postage prepaid, return receipt
requested, is deposited in a United States Postal Service depository, addressed
as follows:
If to the Airport Board: Dallas/Fort Worth Regional Airport Board
East Airfield Drive
P. O, Drawer DFW
Dallas/Fort Worth Airport, Texas 75261
Attention: Executive Director
If to Lessee: Sedalia-Marshall-Boonville Stage Line, Inc.
1060 East Northwest Highway
Grapevine, Texas 75261
with copy to each leasehold Mortgagee of which Board has notice; provided,
however that any party may at any time change the place of receiving notices,
requests or demands by ten (10) days' written notice of such change of address
to the other.
(b) If and when included in the terms "Board" or "Lessee" as used
in this Agreement there shall at any time be more than one person, firm or
corporation, they shall arrange among themselves for the joint execution of
such notice, specifying one of their number for the receipt of notices,
requests, demands and payments, and any notices, requests, demands and payments
made by either Board or Lessee in accordance with each such notice from the
other (such arrangements for notices, requests, demands and payments being
subject to change by the delivery of a different notice) shall constitute
notice, request, demand or payment to all persons, firms and corporations
included within the terms "Board" or "Lessee," as the case may be.
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<PAGE> 39
Section 38. Mineral Rights
It is agreed and understood that all water, gravel, rock, earth, gas,
oil and all other minerals or materials and the rights thereto, in and under
the soil (with the exception of gravel, rock, earth, and other materials
removed in the course of construction of Lessee's improvements on the
premises), are expressly reserved to Board, but Board hereby waives and
covenants not to grant, sell, or convey any right to enter upon the surface of
the premises to conduct any drilling or exploration activities during the term
of this Agreement for the purpose of producing any such water, gravel, rock,
earth, gas, oil or all other minerals or materials.
Section 39. Successors and Assigns
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto.
Section 40. Entire Agreement
This Agreement constitutes the entire agreement of the parties on the
subject matter hereof and may not be changed, modified, discharged, voluntarily
surrendered or terminated or extended except by a written instrument duly
executed by Board, Lessee and any Mortgagee. The parties agree that no
representations or warranties shall be binding upon either party unless
expressed in writing in this Agreement or by Supplements thereto.
Section 41. Venue
Venue on any suit brought hereunder shall lie exclusively in Dallas or
Tarrant County, Texas.
Section 42. Right of First Refusal
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<PAGE> 40
Board agrees to use its best efforts to cause a right of first refusal
to be granted to Lessee in the event the Premises are sold, provided, that
Board shall have no such obligation up a sale of the entire Airport.
IN WITNESS WHEREOF, the parties hereto have executed this instrument
at East Airfield Drive, Dallas/Fort Worth Airport, Texas 75261, as of the day
and year first above written.
DALLAS/FORT WORTH REGIONAL AIRPORT BOARD
By: ___________________________________
Executive Director
ATTEST:
_________________________________
Staff Secretary to the Board
APPROVED:
__________________________________
Legal Counsel to the Board
SEDALIA-MARSHALL-B00NVILLE STAGE LINE, INC.
By: ___________________________________
Its: ___________________________________
ATTEST:
By: ______________________________
34
<PAGE> 41
EXHIBIT B
LEGAL DESCRIPTION
BEING a 4.557 acre tract of land situated in the Morgan Hood Survey, Abstract
No. 698, Tarrant County, Texas, and within the boundary of the Dallas/Forth
Worth Airport, and being all of that called 4.460 acre tract described in DFW
Airport Lease No. 23555 and the westerly most 20 feet of that called 4.89 acre
tract described in DFW Lease No. 25210, and being more particularly described
as follows:
COMMENCING at the airport reference point, which is located at Texas Lambert
coordinates of north 447,856.04 and east 2,140,991.46 and is the basis for a
plane grid established for the Dallas/Fort Worth Airport;
THENCE West a distance of 7,586.46 feet to a point for corner;
THENCE North a distance of 3,808.78 feet to a point in the east right-of-way
line of a 50 foot access easement (unrecorded) and the north right-of-way of'
West 20th Street (Hangar Road) (70 foot right-of-way); for the POINT OF
BEGINNING of the herein described tract of land, said point also being the
southeast corner of said 4.460 acre tract;
THENCE West along the north right-of-way line of Hangar Road, a distance of
322.29 feet to a point for corner;
THENCE North a distance of 457.68 feet to a point in a concrete apron;
THENCE East, at 272.29 feet pass the west line of aforementioned 50 foot access
easement, and continue in all a total distance of 312.29 feet to a point for
corner;
THENCE North 45 degrees 00 minutes 00 seconds East, at 14.14 feet past the east
line of said 50 foot access easement, and continue in all a total distance of
197.99 feet to a point for corner;
THENCE South a distance of 110.00 feet to a point for corner;
THENCE East a distance of 155.87 feet to a point for corner;
THENCE South 45 degrees 00 minutes 00 seconds West, a distance of 376.00 feet
to a point for corner located 20 feet east of the east right-of-way line of
aforementioned 50 foot access easement;
THENCE South along a line 20 feet east of and parallel to the east right-of-way
line of said 50 foot access easement, a distance of 221 .81 feet to a point of
the said north line of Hanger Road;
THENCE West along said north line, a distance of 20.00 feet to the POINT OF
BEGINNING AND CONTAINING 198,503 square feet or 4.557 acres of land, more or
less.
This description was prepared solely from existing lease documents, with
closure verified by coordinate geometry. No field work was performed to locate
this property on the ground.
Basis of bearing is the referenced DFW Airport Lease No. 23555.
<PAGE> 42
EXHIBIT 10.19
EXHIBIT C
SUBLEASE AGREEMENT
Dated: March 1, 1993
By and Between
ROBERT F. GRAMMER
("Landlord")
and
M. TOM CHRISTOPHER
("Tenant")
<PAGE> 43
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - PREMISES
Section 1.01 - Premises 1
Section 1.02 - Landlord Repairs 1
Section 1.03 - Landlord's Representations and Warranties 1-2
ARTICLE II - TERM
Section 2.01 - Term 2
ARTICLE III - RENT
Section 3.01 - Base Monthly Rent 2-3
Section 3.02 - Ground Rent 3
Section 3.03 - Security Deposit 3-4
ARTICLE IV - USE OF PREMISES
Section 4.01 - Permitted Use 4
Section 4.02 - Prohibited Uses 4-5
Section 4.03 - Non-Discrimination 5
ARTICLE V - TENANT'S COMPLIANCE WITH GROUND LEASE,
RULES AND REGULATIONS
Section 5.01 - Ground Lease 6
Section 5.02 - Compliance with Laws, Rules and Regulations 6
Section 5.03 - Hazardous Substances 6-7
ARTICLE VI - IMPROVEMENTS AND ALTERATIONS
Section 6.01 - Improvements and Alterations 7-8
Section 6.02 - Liens 8-9
ARTICLE VII - INDEMNITY
Section 7.01 - Indemnity 9-10
ARTICLE VIII - INSURANCE
Section 8.01 - Insurance 10
Section 8.02 - Waiver of Right of Recovery 10-11
Section 8.03 - Certificates of Insurance 11
ARTICLE IX - COMMON AREAS
Section 9.01 - License 11
ARTICLE X - ASSIGNMENT OR SUBLEASE
Section 10.01 - Assignment or Sublease by Tenant 11-12
Section 10.02 - Request for Assignment of Sublease by Tenant 12
Section 10.03 - Assignment by Landlord 12
</TABLE>
<PAGE> 44
<TABLE>
<S> <C>
ARTICLE XI - TAXES AND UTILITIES
Section 11.01 - Taxes 13
Section 11.02 - Utilities 13
ARTICLE XII - REPAIR AND MAINTENANCE
Section 12.01 - Repair and Maintenance by Tenant 13-14
Section 12.02 - Repair and Maintenance by Landlord 14
Section 12.03 - Condition of Premises at Surrender 14
Section 12.04 - Acceptance of Premises 14-15
Section 12.05 - Entry for Repairs and Inspection 15
ARTICLE XIII - DEFAULT AND REENTRY. 15-17
ARTICLE XIV - CONDEMNATION
Section 14.01 - Total Taking 18
Section 14.02 - Partial Taking 18
Section 14.03 - Temporary 18-19
Section 14.04 - Awards 19
ARTICLE XV - CASUALTY 19
ARTICLE XVI - INABILITY TO PERFORM. 20
ARTICLE XVII -SUBORDINATION AND ESTOPPEL
Section 17,01 - Subordination 20
Section 17.02 - Attornment 20-21
Section 17.03 - Estoppel 21
Section 17.04 - Notice to Mortgagee 21
ARTICLE XVIII - SIGNS 21-22
ARTICLE XIX - QUIET ENJOYMENT . 22
ARTICLE XX - SURRENDER OF PREMISES
Section 20.01 - Surrender of Premises 22
Section 20.02 - Environmental Inspection 22
ARTICLE XXI - HOLDING OVER. 23
ARTICLE XXII - NET LEASE 23
ARTICLE XXIII - NOTICES 23-24
ARTICLE XXIV - MISCELLANEOUS
Section 24.01 - Easements 24
Section 24.02 - Access 24-25
</TABLE>
<PAGE> 45
<TABLE>
<S> <C>
Section 24.03 - Late Charges 25
Section 24.04 - Waiver 25
Section 24.05 - Captions 25
Section 24.06 - Severability 25
Section 24.07 - Entire Agreement 25-26
Section 24.08 - Limitation of Liability of Landlord 26
Section 24.09 - Construction 26
Section 24.10 - Authority. 26
Section 24.11 - Joint and Several Liability 26
Section 24.12 - Costs and Attorney's 26
Section 24.13 - Sublease Subject to Consent of Ground Lessor 26-27
Section 24.14 - Successors and Assigns 27
Section 24.15 - Financial Information 27
Section 24.16 - Submission of Sublease 27
Section 24.17 - Exhibits 27
Section 24.18 - Purchase Option 27-28
ARTICLE XXV - RECORD OF MEMORANDUM
Section 25.01 - Memorandum of Lease 28
SIGNATURE PAGE 29
</TABLE>
<PAGE> 46
SUBLEASE AGREEMENT
This SUBLEASE AGREEMENT ("Sublease") is made and entered into as of
this 1st day of March, 1993, by and between Robert F. Grammar ("Landlord") and
M. Tom Christopher ("Tenant").
W I T N E S S E T H:
For and in consideration of the covenants and agreements hereinafter
set forth to be performed by Landlord and Tenant, Landlord hereby subleases to
Tenant and Tenant hereby subleases from Landlord the Premises hereinafter
described, for the term, at the rental, and subject to all of the terms,
covenants and conditions hereinafter set forth.
ARTICLE I
PREMISES
Section 1.01 Premises. Landlord hereby subleases to Tenant and
Tenant hereby subleases from Landlord that certain parcel of land and all of
its improvements and appurtenances (all hereinafter, the "Premises"), including
without limitation, an aircraft hangar and offices; containing approximately
40,000 square feet of floor space including office space, all of which is
located on that certain parcel of land containing approximately 4.460 acres,
located at 1515 W. 20th Street, Dallas/Fort Worth Airport, Texas 75261, the
legal description of which is set forth in Exhibit "A" attached hereto and
incorporated herein for all purposes. Nothing contained in this Sublease shall
grant Tenant any rights in the air space above the Premises.
Section 1.02 Landlord Repairs. On or before December 31, 1993,
Landlord shall repair or remove the four underground storage tanks to the
extent, if any, required to bring such tanks into compliance with applicable
environmental requirements. Subject only to these repairs, the Premises is
subleased "AS IS."
<PAGE> 47
Section 1.03 Landlord's Representations and Warranties. Landlord
represents and warrants to Tenant that:
(A) Landlord knows of no condition of the Premises that might
violate Environmental Laws, except those identified in Section 1.02;
(B) Exhibit B is a true copy of the Ground Lease of the land that
is a part of the premises, between Dallas/Fort Worth Regional Airport Board
(the "Ground Lessor") and Sedalia-Marshall-Boonville Stage Line, Inc., dated
February 1, 1983 (the "Ground Lease"), with all of its currently-effective
amendments; and as so amended the Ground Lease is in full force and effect,
without default or notice of default, and without any condition known to
Landlord that would result in default with the passage of time;
(C) Landlord holds all rights and interests as Lessee of the
Premises under the Ground Lease; and has full right and authority to execute
and perform under this Sublease, subject only to the approvals required by the
Dallas/Fort Worth Airport Board under this Sublease; and all prior rights in
the Premises have been fully, lawfully and finally extinguished;
(D) There are no liens or encumbrances upon Landlord's interests
in the Premises; and
(E) No adverse person or entity possesses any interest in any
portion of the Premises.
ARTICLE II
TERM
Section 2.01 Term. Subject to and upon the terms and conditions
set forth herein, or in any exhibit or addendum hereto, the term of this
Sublease shall have a 5-year term commencing as of March 1, 1993 (the
"Effective Date") and ending February 28 1998 (the "Expiration Date"), unless
sooner terminated pursuant to the terms and provisions of this Sublease (the
"Sublease Term").
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ARTICLE III
RENT
Section 3.01 Base Monthly Rent. Tenant covenants and agrees to pay
to Landlord a net lease rental as follows:
Beginning the Effective Date of this Sublease and continuing on the
same day of each month thereafter during the term and any extension or renewals
of this Sublease, Tenant shall pay Landlord a monthly "Base Rent" of $21,000
per month in advance.
Tenant shall also pay with the Base Rent, as additional rent, all
other sums of money that shall become due from and payable by Tenant to
Landlord under this Sublease. Landlord shall also have the same remedies for
default for the payment of additional rent as are available to Landlord in the
case of default in the payment Base Rent. The Base Rent, together with any
adjustments of rent provided for herein then in effect, shall be due and
payable on the first day of each calendar month during the Sublease Term and
any extensions or renewals thereof. Tenant hereby agrees to so pay such rent to
Landlord at Landlord's address herein provided (or such other address as
Landlord may designate to Tenant in writing from time to time) monthly in
advance, without demand, counterclaim or offset except as provided herein. If
the Sublease Term, as heretofore established, commences on other than the first
day of a month or terminates on other than the last day of the month, then the
installment of Base Rent for such month or months shall be prorated based on
the number of days in such month which are a part of the Sublease Term and the
installment(s) so prorated shall be paid in advance on either the Commencement
Date or the first day of the last month of the Sublease Term, as the case may
be.
Section 3.02 Ground Rent. The Base Rent which Tenant is obligated
to pay hereunder includes Tenant's proportionate share of the ground rental
which Landlord is obligated to pay as of
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the Effective Date of this Sublease under the Ground Lease. The Tenant's share
of the ground rental rate under the Ground Lease which is in effect as of the
Effective Date of this Sublease is $5,500.67 per month. The initial Base Rent
has been calculated based upon the ground rental rate in effect as of the
Effective Date of this Sublease. However, said Ground Lease provides for
potential periodic increases of ground rental payable by Landlord to the Ground
Lessor, and for potential charges for the cost of construction, relocation or
extension of any utilities or improvements in the future. In the event of any
such increase in the ground rental, or the imposition of any additional charges
by Ground Lessor under the Ground Lease, Tenant agrees to pay to Landlord in
monthly installments, as additional rent, such increase in said ground rental,
as well as any other charges payable under the Ground Lease by Landlord to
Ground Lessor in addition to those currently being charged.
Section 3.03 Security Deposit. Concurrent with Tenant's execution
of this Sublease, Tenant shall deposit with Landlord the sum of $21,000 cash
(the "Security Deposit"). Said sum shall be held by Landlord as a security
deposit for the faithful performance by Tenant of all terms, covenants and
conditions of this Sublease to be kept and performed by Tenant during the term
hereof. If Tenant defaults with respect to any provision of this Sublease,
including but not limited to, the provisions relating to the payment of rent
and any of the monetary sums due therewith, Landlord may (but shall not be
required to) use, apply or retain all or any part of the Security Deposit for
the payment of any sum which Landlord may spend or become obligated to spend by
reason of Tenant's default or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default. If any portion
of said Security Deposit is so applied, Tenant shall, within ten (10) days
after written demand therefor, deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to its original amount; Tenant's
failure to do so within said ten (10) day period shall be a material breach of
this Sublease. Landlord shall not be required to keep the Security Deposit
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separate from its general funds, and Tenant shall not be entitled to interest
on said Security Deposit. If Tenant shall fully and faithfully perform each and
all of its obligations under this Sublease, the Security Deposit or any balance
thereof shall be returned to Tenant (or, at Landlord's option, to the last
assignee of Tenant's interest hereunder) within thirty (30) days after the
expiration of the Sublease Term (or any renewal term) and after Tenant has
vacated the Premises. Tenant shall not offset its last month's rent against the
Security Deposit.
ARTICLE IV
USE OF PREMISES
Section 4.01 Permitted Use. The Premises shall be used and
occupied by Tenant only for the following specific purposes and for no other
purposes whatsoever without obtaining the prior written consent of Landlord
which may be withheld in Landlord's sole discretion: office and aircraft
maintenance, together with aircraft handling, fueling, de-icing, lubrication
and parking associated therewith, and other lawful uses incidental and
necessary to such specific uses. Tenant warrants and represents to Landlord
that the Premises shall be used and occupied only for the purpose set forth in
this Section 4.01.
Section 4.02 Prohibited Uses.
(A) Tenant shall not use the Premises or permit anything to be
done in or about the Premises which will in any way conflict with or cause a
breach under the Ground Lease or conflict with or violate any law, statute,
zoning restriction, deed restriction, ordinance, or any environmental,
hazardous waste or governmental rules or regulations or requirements now in
force or which may hereafter be enacted or promulgated. Tenant shall at its
sole cost and expense promptly comply with all said laws, rules and regulations
to the extent that they relate to Tenant's use of the premises.
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Tenant shall not use the Premises for any purpose which is illegal, or which in
Landlord's reasonable opinion, creates a factual or legal nuisance, or which
violates the Ground Lease.
(B) Tenant shall not do or permit anything to be done in or about
the Premises which will increase the existing rate of insurance upon the
Premises (but Tenant shall pay such increased premiums as additional Rent, and
the payment thereof shall not give Tenant the right to continue such activity
nor waive the restrictions of this Section 4.02) or cause the cancellation or
reduction of coverage of any insurance policy covering said Premises or any
building of which the Premises may be a part, nor shall Tenant sell or permit
to be kept, used or sold in or about said premises, any articles which may be
prohibited by a standard form policy of fire insurance.
(C) Tenant shall not do or permit anything to be done in or about
the Premises which will in any way obstruct or interfere with the rights of
other tenants, users or occupants of other property located on D/FW
International Airport property, including, without limitation, the open taxiway
on the North side of the Premises. Tenant shall not commit, or suffer to be
committed, any waste in or upon the Premises.
(D) Tenant shall not install in the Premises or in any public area
any vending machine or device designed to dispense or sell food, beverages,
tobacco, tobacco products or merchandise of any kind to the general public, nor
operate any restaurant, cafeteria, kitchen, stand or other establishment for
the purpose of dispensing or selling such products to any member of the general
public, other than to Tenant's employees, officers and business invitees,
without the prior express written approval of Landlord and Ground Lessor.
(E) Tenant shall not violate any provision of the Airport Building
Code or the Airport Fire Code, or any other Code or Regulation promulgated by
D/FW International Airport Board.
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(F) Tenant shall not permit the accumulation of paper, cans,
bottles, wrappers, rags, trash, junk or debris on the Premises. Tenant agrees
to promptly comply with any notices concerning any such accumulation, given to
Tenant by either Landlord or Ground Lessor. Failure by Tenant to comply with
any such clean-up notice within 10 business days after receipt of such notice
shall constitute a material default by Tenant under this Sublease entitling
Landlord to exercise any remedy set forth in Article XIII hereof.
Section 4.03 Non-Discrimination. Tenant, in its operations at the
Airport, and as part of the consideration hereof, shall maintain and operate
its facilities and provide its services in compliance with and pursuant to
Title 49, Part 21 (Non-Discrimination in Federally-Assisted Programs of the
Department of Transportation-Effectuation of Title VI) of the Code of Federal
Regulations, as said Regulations may be amended and all other applicable
non-discrimination laws. Further, Tenant shall not unlawfully discriminate in
its operations at the Premises against any person or group of persons on the
grounds stated therein. Tenant shall indemnify and hold harmless Landlord and
Ground Lessor from any claims and demands of third persons and the United
States of America resulting from Tenant's non-compliance with the provisions of
this Section 4.03, and Tenant shall reimburse Ground Lessor and Landlord for
any loss or expense incurred by reason of such non-compliance.
ARTICLE V
TENANT'S COMPLIANCE WITH GROUND LEASE
RULES AND REGULATIONS
Section 5.01 Ground Lease. Tenant agrees to not cause any breach
of Landlord's covenants under the Ground Lease, and to be bound by all the
terms and provisions of the Ground Lease. Tenant shall indemnify Landlord
against: all actions, expenses, claims and demands made,
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suffered or sustained by the Landlord as a result of breach by the Tenant of
the covenants as aforesaid. Landlord shall not consent to any amendment to the
Ground Lease without Tenant' s prior consent, which shall not be withheld
unreasonably.
Section 5.02 Compliance with Laws, Rules and Regulations. Tenant
agrees to comply and cause its employees, agents, invitees and licensees to
comply, with reasonable promptness after being advised thereof, with all
applicable rules, regulations, orders and directives, pertaining to the
Airport, now in existence or hereafter promulgated by any governmental
authority or agency having jurisdiction thereover in the interest of health,
safety, sanitation and good order at the Airport, and to cause its various
tenants, invitees and licensees to comply with all present and future federal,
state and municipal laws, statutes, ordinances and regulations hereafter
enacted or promulgated, which may apply to the Airport or to the use of the
Premises and the Airport by Tenant. Tenant agrees to promptly make all
nonstructural improvements, repairs and alterations to any and all facilities
located in the Premises when required by law, ordinance, rule, order or
regulation, except to the extent that they relate to matters required by
environmental laws as to conditions preceding this Sublease. Further, Tenant
shall also comply and cause its employees, agents, invitees and licensees to
comply with all valid and applicable rules, orders and regulations of (i) the
police, health and fire departments, and (ii) the National Board of Fire
Underwriters or similar organizations for the prevention of fire or for the
correction of unhealthy or hazardous conditions.
Section 5.03 Hazardous Substances. As used below, "Hazardous
Substances" shall mean threshold quantities of any substances, or materials
which are categorized or defined as hazardous or toxic under any present or
future local, state or federal law, rule or regulation pertaining to
environmental regulation, contamination, cleanup or disclosure, including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as now or
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hereafter amended ("CERCLA"), the Resources Conservation and Recovery Act
(including, without limitation, the Hazardous and Solid Waste Amendments), as
now or hereafter amended ("RCRA"), Superfund Amendments and Re-authorization
Act of 1986, as now or hereafter amended ("TSCA"), or state super lien or
environmental cleanup or disclosure statutes (including, without limitation,
the Texas Substances Control Act, the Texas Solid Waste Disposal Act, the Texas
Hazardous Substance Spill Prevention and Control Act, and the Texas Underground
Storage Tanks Act) (all such laws, rules and regulations, whether listed above
or not, being referred to collectively as "Environmental Laws"). Tenant
warrants, represents and covenants as follows:
(A) Neither the Tenant, the Premises, nor the Building shall
become subject to any private or governmental lien or judicial or
administrative notice, order or action relating to Hazardous Substances or
subject to any public or governmental lien or judicial or administrative
notice, order or action relating to any environmental problems, impairments or
liabilities with respect to the Building or the Premises, as a result of
Tenant's violation of any environmental laws.
(B) Tenant shall immediately notify Landlord should Tenant become
aware of (i) any Hazardous Substance in the Premises or the Building or on the
property on which the Building is situated, (ii) any lien, action or notice of
the nature described in subparagraph (A) above, or (iii) any litigation or
threat of litigation relating to any alleged unauthorized release of any
Hazardous Substance or the existence of any Hazardous Substance therein or
thereon.
(C) Tenant hereby covenants and agrees not to do or take any
action or omit or fail to take any such action which will violate any
Environmental Laws.
ARTICLE VI
IMPROVEMENTS AND ALTERATIONS
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Section 6.01 Improvements and Alterations. After occupance by
Tenant pursuant to the terms of this Sublease, Tenant shall make no
alterations, additions, or improvements in or to the Premises without the prior
written consent of Landlord, which shall not be withheld unreasonably. Landlord
may require Tenant to provide a Completion Bond and a Bond against liens in
connection with the construction of any such improvements. Tenant shall be
solely responsible for any alterations required to bring the Leased Premises
into compliance with, or maintain such compliance with any applicable State or
Federal law or regulation, including, without limitation, the Americans With
Disabilities Act, except to the extent that they relate to matters required by
environmental laws as to conditions preceding this Sublease. Any permitted
alterations, additions or improvements prior to Tenant's occupancy or after
occupancy shall be at Tenant's sole expense. Tenant shall secure any and all
governmental permits required in connection with any such work, and shall hold
Landlord harmless from any and all liability (including reasonable attorney' s
fees) resulting therefrom. All alterations, additions and improvements (except
trade fixtures, appliances and equipment which shall not be deemed a part of
the Premises), shall immediately become the property of Landlord without any
obligation to pay Tenant therefor and shall not be removed by Tenant except as
hereinafter provided. Upon the expiration or sooner termination of the term
hereof, Tenant shall, upon written demand by Landlord which shall be given at
least ten (10) days prior to the end of the term, at Tenant's sole cost and
expense forthwith and with all due diligence remove any alterations, additions
or improvements made by Tenant which are designated by Landlord for removal,
repair any damage to the Premises caused by such removal and, if requested by
Landlord, restore the altered Premises to its original condition.
Section 6.02 Liens. Tenant agrees that it shall not create or permit
to be created any lien against the Premises or any part thereof. Further,
Tenant agrees that it shall not enter into any
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contracts of a type which would attempt to permit a lien or liens to become
attached to the remainder interests of Ground Lessor in the Premises . At
Landlord' s request, Tenant shall furnish written proof of payment of any items
which would or might constitute the basis for such a lien on the Premises if
not paid, and if an item is being contested by Tenant, evidence satisfactory to
the Landlord that Tenant is contesting the validity thereof in good faith and
has the financial ability to discharge the debt if the matter is decided
adversely to Tenant. Nothing herein or elsewhere in this Sublease shall imply,
and it is not intended, that the Ground Lessor's fee title, Landlord's
leasehold title, or other interest in the Premises may in any manner whatsoever
be subordinated to any lien or other encumbrance. In the event that any such
lien is filed against the Premises or the Building, or any portion thereof, or
any interest therein, Tenant shall cause the same to be canceled or discharged
of record by payment, bonding or otherwise within twenty (20) days of the
filing thereof. In the event that any such lien, claim or claims exceed,
individually or in the aggregate, the sum of $10,000, bonding by Tenant with
respect to such excess amount shall not be sufficient to comply with Tenant's
obligations hereunder; and Tenant shall cause any such lien to be canceled or
discharged of record by payment within twenty (20) days after the filing
thereof, or at such earlier time as shall be necessary to prevent foreclosure
thereof. In the event that any such lien is attached to the Premises, the
Building or any portion thereof or interest therein, and Tenant shall fail to
obtain the cancellation, discharge or bonding of the same within the time
period provided hereinabove, then, in addition to any other right or remedy of
Landlord, Landlord may, but shall not be obligated to, discharge the same, and
any amount paid by Landlord for any of the aforesaid purposes shall be paid by
Tenant to Landlord on demand as additional rent. Tenant shall indemnify and
hold Landlord harmless from all costs, damage, claims and expense (including
reasonable attorneys' fees) occasioned by the filing of any such lien.
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ARTICLE VII
INDEMNITY
Section 7.01 Indemnity. Tenant agrees that Landlord shall not be
liable for injury to any person, or for the loss of, or for the damage to, any
property (including, without limitation, property of Tenant and claims for
consequential or special damages) occurring in or about the Premises,
including, without limitation, the ordinary negligence of Landlord or his
agents, employees or representatives. Subject to Section 8.01, Tenant hereby
indemnifies and holds harmless Landlord from and against same and agrees to
defend Landlord against: any and all claims, charges, liabilities, obligations,
penalties, damages, costs and expenses (including reasonable attorneys' fees)
arising, claimed, charged, or incurred against or by Landlord from any matter
or thing arising from Tenant's use of the Premises, the conduct of its business
or from any activity, work or other things done, permitted, or suffered by the
Tenant in or about the Premises, including without limitation, ordinary
negligence of Landlord and his agents and representatives. Tenant shall
further indemnify and hold harmless Landlord from and against any and all
claims arising from any breach or default in the performance of any obligation
on Tenant's part, or arising from any act or negligence of Tenant, or any
officer, agent, employee, guest, or invitee of Tenant, and from all costs,
reasonable attorney's fees, and liabilities incurred in or about the defense of
any such claim or any action or proceeding brought thereon. In case any action
or proceeding be brought against Landlord by reason of any such claim Tenant
shall defend the same at Tenant's sole expense. Subject to Section 8.01, the
indemnification provided in this section shall survive any termination or
expiration of this Sublease. Without limiting the generality of the above,
Landlord and its agents shall not be liable for any loss or damage to persons
or property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water or rain which may leak from any part of the Premises, or
from pipes, appliances
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or plumbing works therein or from the roof, parking area, street or subsurface
or from any other place resulting from dampness or any other cause whatsoever,
unless caused by or due to the gross negligence or willful act or omission of
Landlord, its agents, servants or employees. Landlord and its agents shall not
be liable for consequential damages or special damages of any nature, whether
foreseeable or not, nor for interference with the utilities, light or air on
the Premises. Tenant shall give prompt notice to Landlord in case of casualty
or accidents on the Premises.
ARTICLE VIII
INSURANCE
Section 8.01 Insurance. Tenant shall, at its own expense, maintain
at all times during the Sublease Term adequate comprehensive liability
insurance with an insurance company or companies acceptable to Ground Lessor
and Landlord with minimum Combined Single Limit Coverage of TWO MILLION AND
NO/100 DOLLARS ($2,000,000.00) (including, but not limited to, personal injury
broad form contractual liability, products liability, broad form property
damage and contractor's protective), to insure Landlord, Tenant and Ground
Lessor against any such claims, demands, losses, damages, liabilities and
expenses. So long as Tenant maintains such insurance, with Landlord as an
additional insured and otherwise as provided below, Landlord shall look first
to such insurance for Tenant's indemnity under Section 7.01. Tenant shall, at
its own expense, also maintain at all times during the Sublease Term (a)
Worker's Compensation insurance, and (b) comprehensive automobile liability
insurance covering all owned, non-owned and hired motor vehicles with a
Combined Single Limit of not less than TWO MILLION AND NO/100 DOLLARS
($2,000,000.00) . Landlord and Ground Lessor shall be named as additional
Insureds as their interests may appear and waiver of subrogation among named
insured in all of said policies referred to in this Section 8.01 (except for
any policy of insurance covering Worker's Compensation), when
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applicable, each such policy shall have deductibles of not more than $2,000 per
occurrence or such other amounts as may be acceptable to Landlord, and Landlord
and Ground Lessor shall each be furnished with a certificate of insurance which
shall bear an endorsement that same shall not be canceled, terminated or
materially changed without thirty (30) days prior written notice to Ground
Lessor and Landlord. If Tenant fails to maintain such insurance, Landlord may
(but is not obligated to) maintain the same on behalf of Tenant, and any
premiums paid by Landlord shall be deemed additional rent and shall be due on
the payment date of the next installment of rental hereunder. Tenant may
maintain Fire and Extended Coverage insurance in Tenant's discretion on
Tenant's property on the Leased Premises and on Tenant's interest in the
Leasehold estate, and Landlord shall have no obligation to Tenant regarding
such insurance.
Section 8.02 Waiver of Right of Recovery. Landlord and Tenant
hereby mutually release each other from liability and waive all right of
recovery against each other for any property loss in or about the Premises from
perils insured against under their respective prior insurance policies to the
extent covered by such prior insurance policies (but not the policies as
provided pursuant to paragraph 8.01 above) including any extended coverage
endorsements thereof, whether due to negligence or any other cause; provided
that this section shall be inapplicable if it would have the effect, but only
to the extent that it would have such effect, of invalidating any insurance
coverage of Landlord or Tenant.
Section 8.03 Certificates of Insurance. A certificate issued by
the insurance carrier for each policy of insurance required to be maintained by
Tenant under the provisions of this Sublease shall be delivered to Landlord on
or before the Effective Date of this Sublease and thereafter, at time of policy
renewals, within thirty (30) days prior to the expiration of the term of each
such policy. Each of said certificates of insurance and each such policy of
insurance required to be maintained
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by Tenant hereunder shall expressly evidence insurance coverage as required by
this Sublease. All such policies shall be written as primary policies not
contributing with and not in excess of coverage which Landlord may carry.
ARTICLE IX
COMMON AREAS
Section 9.01 License. Not applicable.
ARTICLE X
ASSIGNMENT OR SUBLEASE
Section 10.01 Assignment or Sublease by Tenant. Tenant shall have
the right, without notice to or consent of Landlord, to sublease or rent any
portion or all of the Premises to any one or more entities in which Kitty Hawk
Group, Inc., or Tenant hold a majority interest; the right with Landlord's
reasonable approval to assign, sublease or rent to any other person or entity,
A transfer of tenant's rights in the Sublease to his executor or heirs in the
event of Tenant's death is a permitted assignment. Tenant shall not otherwise
assign, sublease, mortgage, sell and lease back, hypothecate, or transfer all
or any part of this Sublease, or any interest therein . Tenant acknowledges
that , pursuant to the provisions of the Ground Lease, any assignment or
sublease is also subject to obtaining the prior written approval of the Ground
Lessor and also subject to certain other conditions set forth in the Ground
Lease. If Tenant assigns or transfers all or any part of its interest in this
Sublease or subleases the Premises, or any portion thereof, without first
obtaining Ground Lessor's prior written approval and Landlord's prior written
consent, such assignment, transfer or sublease shall be construed to be a
material default by Tenant hereunder; however, Landlord may collect rent from
such party in possession and apply the amount collected to the rent hereby
reserved, but no such collection and application shall be considered a waiver
of the requirements of this paragraph
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the acceptance of such party as tenant, nor the consent of Landlord to such
assignment, sublease or transaction. Any collection of rent directly by
Landlord from any such assignee or sublessee shall not be construed to
constitute a novation or a release of Tenant or any guarantor from the further
performance of their respective obligations under this Sublease. Tenant agrees
to reimburse Landlord for Landlord's reasonable attorney's fees incurred in
conjunction with the processing and documentation of any requested transfer or
sublease pursuant to this Section 10.01.
Section 10.02 Request for Assignment or Sublease by Tenant. If
Tenant desires to assign, sublease or rent any portion of the Premises in a
transaction that requires notice to or consent of Landlord under Section 10.01,
it shall notify Landlord at least thirty (30) days in advance of the date on
which Tenant desires to make such assignment or sublease. Tenant shall provide
Landlord a copy of the proposed assignment or sublease and such reasonable
information as Ground Lessor or Landlord might request concerning the proposed
assignee or sublessee to allow Ground Lessor and Landlord to make informed
judgments as to the financial condition, operations expertise and management
ability of the proposed assignee or sublease. In the event Landlord consents to
any assignment, transfer or sublease, Tenant shall remain fully liable for the
performance of all obligations under this Sublease unless expressly released
from such liabilities in writing by Landlord.
Section 10.03 Assignment by Landlord. Landlord shall have the
absolute right to assign or otherwise transfer its interest hereunder and/or in
the Premises or any portion thereof without the consent of Tenant, provided
that Landlord shall give Tenant notice of such transaction and provided further
that any such transaction shall not affect Tenant's right to possession and use
of the Premises or its rights under this Sublease so long as Tenant is not in
default under any of the terms and conditions of this Sublease. Tenant shall
attorn to any assignee of Landlord, but assignment by
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Landlord shall not in any way diminish Landlord's obligations under this
Sublease for any matter preceding the assignment. The covenants and obligations
contained in this Sublease on the part of Landlord shall, subject as aforesaid,
be binding on Landlord, its successors and assigns, only during and in respect
to their respective periods of ownership, except as may be expressly otherwise
stated in this Sublease. Any estate, right, title or interest of Landlord
assigned hereunder may be assigned in like manner by any assignee thereof.
ARTICLE XI
TAXES AND UTILITIES
Section 11.01 Taxes. Tenant shall pay or cause to be paid before
delinquency all income and personal property taxes, assessments, license fees
and public charges levied, assessed or imposed upon or measured by the value of
its business operation, including, but not limited to, the furniture, fixtures,
leasehold improvements, equipment and other property of Tenant at any time
situated on or installed in the Premises. If at any time during the term of
this Sublease any of the foregoing are assessed as part of the real property of
which the Premises are a part, Tenant shall pay to Landlord upon demand, as
rent in addition to the Base Rent, the amount of such additional taxes as may
be levied against said real property by reason thereof. For the purpose of
determining said amount, the determination by the Dallas County or Tarrant
County Tax Assessor, or other taxing authority, as applicable, as to amount so
assessed shall be conclusive. Landlord shall pay any real property taxes levied
against the Premises.
Section 11.02 Utilities. Tenant shall pay throughout the term of
this Sublease for all charges charged to the Premises for utilities including,
but not limited to, electricity, heat, oil, gas, water, sewage, garbage,
disposal, telephone and telegraph. Tenant shall also provide its own
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janitorial services, replacement of lightbulbs and tubes and all washroom and
toilet supplies, and parking area maintenance.
ARTICLE XII
REPAIR AND MAINTENANCE
Section 12.01 Repair and Maintenance by Tenant. Tenant shall at
all times throughout the term of this Sublease at its sole cost and expense
keep the Premises (including exterior doors and entrances, all windows and
molding and trim of all doors and windows) , and appurtenances thereof
(including, without limitation, all heating, air conditioning, plumbing and
electrical systems as well as the fire protection alarm and sprinkler systems
of the Premises) in good order, condition and repair, damage by unavoidable
casualty and Landlord's obligations under Section 12.02 excepted. Without
limiting the general requirements contained herein, Tenant shall keep the glass
of all windows and doors unbroken, in good repair, clean and presentable, at
reasonable intervals paint or refinish the interior of the Premises and keep
same free from uncleanliness or obstruction. Tenant shall give Landlord or its
agents prompt written notice of any accident to or defects in the plumbing
systems, electrical systems, and heating and air conditioning systems and fire
protection alarm and sprinkler systems. Any damage to same resulting from
misuse, acts or omissions of Tenant, its employees, agents, or invitees shall
be repaired at Tenant's sole cost.
Section 12.02 Repair and Maintenance by Landlord. Landlord shall
at all times throughout the term of this Sublease keep the roof (both interior
and exterior), exterior walls, foundations and building structure of the
Premises in as good a state of repair as at the commencement of this Sublease,
reasonable wear excepted, and shall promptly accomplish such repairs as may be
needed. Tenant shall immediately inform Landlord of any necessary repairs, but
make no such repairs without Landlord's prior written consent. Landlord shall
make such repairs to
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the roof, exterior walls, foundations and building structure of the Premises,
without liability to Tenant for any loss or damage which may result in Tenant's
stock or business by reason of such repairs and maintenance. Landlord shall
have the right, without liability, to enter the Premises for the purpose of
inspection or making those repairs required under this Section 12.02. Except
as otherwise specifically provided herein, there shall be no liability of
Landlord (including, without limitation, consequential or special damages or
ordinary negligence of Landlord, his agents, employees or representatives) by
reason of any injury to or interference with Tenant's business arising from the
making of, or failure to make, any repairs, alterations or improvements in or
to any portion of the Premises or in or to fixtures, appurtenances and
equipment therein.
Section 12.03 Condition of Premises at Surrender. At the
expiration or sooner termination of this Sublease, Tenant shall return the
Premises to Landlord in the same condition as the Premises existed at the
commencement of this Sublease (or, if altered by Landlord or Tenant with
Landlord's consent, then the Premises shall be returned in such altered
condition subject to Landlord's right to require removal of such alterations),
with reasonable wear and tear excepted. Tenant shall remove all trade fixtures,
appliances and equipment which do not become a part of the Premises together
with those alterations which Landlord designates to be removed, and subject
thereto, Tenant shall restore the Premises to the original condition existing
prior to the installation of said items. Tenant's obligation to perform this
covenant shall survive the expiration or termination of this Sublease.
Section 12.04 Acceptance of Premises. By entry thereon, but
subject to the completion of the items set forth in Section 1.02 of this
Sublease, Tenant shall be deemed to have accepted the Premises "AS IS" except
for latent defects known to Landlord but not disclosed, and except for
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the existing environmental issue described in Section 1.02 and as being in good
and sanitary order, condition and repair, and suitable for the uses permitted
by this Sublease.
Section 12.05 Entry for Repairs and Inspection. Tenant covenants
and agrees to permit Landlord or its agents or representatives to enter into
and upon any part of the Premises at all reasonable hours to inspect the same,
make repairs, alterations or additions thereto; and to show the Premises to
prospective purchasers, mortgagees and tenants (but only during the last six
(6) months of the Sublease Term or any renewal term with respect to prospective
tenants), and Tenant shall not be entitled to any abatement or reduction of
rent by reason thereof; provided however, that Landlord agrees not to
unreasonably interfere with Tenant's business operations in connection with any
such entry.
ARTICLE XIII
DEFAULT AND REENTRY
Time is of the essence of this Sublease. In the event any of the
following events occur:
(1) Tenant fails to timely pay Landlord any installment of rent
or other payments required under Article III hereof or any other payment
required under the provisions of this Sublease and such default shall not have
been remedied within 10 days after notice from Landlord to Tenant for such
default, provided that Landlord shall not be required to give more than two
such notices in any calendar year; or
(2) The Premises are deserted or vacated by Tenant for a period of
fifteen (15) consecutive days without prior written consent of Landlord; or
(3) A voluntary petition in bankruptcy is filed against Tenant
under any chapter of the Bankruptcy Code, 11 U.S.C. Paragraph 101 et seq., or
Tenant makes an assignment for the benefit of creditors, or becomes insolvent;
or
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(4) There shall be an involuntary bankruptcy or receivership
petition filed with respect to Tenant, or any attachment, execution or other
judicial seizure of, or affecting, the properties and assets of Tenant, or
affecting the Premises, or any part thereof, unless Tenant causes such petition
to be dismissed, or dissolves, bonds against, or otherwise eliminates such
attachment, execution or seizure within thirty (30) days of its occurrence; or
(5) There is a transfer, hypothecation, assignment, sublease or
conveyance of the Premises or any portion thereof or interest therein by Tenant
in violation of Section 10.01 of this Sublease or without Ground Lessor's prior
written approval; or
(6) Tenant shall default in the observance or performance
of any term, covenant (including, without limitation , the covenant to provide
an estoppel certificate as required by Section 17.03 of this Sublease),
condition or provision of this Sublease, or the Ground Lease, and such default
shall not have been remedied within ten (10) days after notice from Landlord to
Tenant such default, provided that the l0-day cure period shall be applicable
only to the first occurrence of each such event during the term of this
Sublease.
THEN, AND IN SUCH EVENT, in addition to any other remedies conferred
upon Landlord at law or in equity, Landlord shall have the absolute right, at
its election any time after such event, and to the extent permitted by
applicable laws, without further notice or demand, to exercise any one or more
of the following remedies:
(A) Landlord may terminate this Sublease and forthwith repossess
the Premises and be entitled to recover forthwith as damages, a sum of (i) all
rents and other indebtedness accrued to the date of such termination, (ii) the
reasonable cost of recovering the Premises, (iii) the cost of removing and
storing Tenant's and any other occupant's property located therein, (iv) the
cost of reletting the Premises (including, without limitation, reasonable
brokerage commissions and the
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amount of Rent lost from the time of recovery of the Premises to the beginning
date of any reletting thereof), (v) the cost of repairs, changes, alterations
and additions to the Premises whether accomplished in one or more steps or
phases, (vi) the reasonable cost of collecting such amounts from Tenant
hereunder and (vii) any other reasonable sums of money or damages that may be
owed to Landlord as a result of a default by Tenant or the exercise of
Landlord's rights at law or in equity. If upon such reentry there remains any
personal property of Tenant or any other person upon the Premises, the Landlord
may, but is without obligation to do so, remove such personal property and hold
it for the owner thereof or place the same in a public garage or warehouse in
Tenant's name, all at the expense and risk of the owner thereof, and Tenant
shall reimburse Landlord for any expenses incurred in connection with such
removal and storage. Landlord shall have the right to sell such stored property
provided it has given Tenant not less than thirty (30) days prior written
notice of such intended sale. The proceeds of such sale shall be applied first
to the cost of sale (including without limitation, attorneys' fees and court
costs, second to payment of storage charges, third to payment of any other
amounts then due from Tenant to Landlord, and the balance, if any, shall be
paid to Tenant.
(B) Landlord may terminate Tenant's right of possession (but not
this Sublease) and may repossess the Premises by forcible entry or detainer
suit or otherwise, without demand or notice of any kind to Tenant and without
terminating this Sublease, in which event Landlord may, but shall be under no
obligation to do so, relet the Premises or any portion thereof for the account
of Tenant for such rent and upon such terms as shall be satisfactory to
Landlord. If Landlord shall fail or refuse to relet the Premises, or if the
same are relet and a sufficient sum shall not be realized from such reletting
to satisfy the rent provided for in this Sublease to be paid, then Tenant shall
pay to Landlord as damages a sum equal to the amount of the rental reserved in
this Sublease for such
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period or periods, or if the Premises have been relet, the Tenant shall satisfy
and pay any such deficiency upon written demand therefor from time to time.
Landlord shall also be entitled to recover forthwith as damages, a sum of (i)
all rents and other indebtedness accrued to the date of such termination, (ii)
the reasonable cost of recovering the Premises, (iii) the cost of removing and
storing Tenant's and any other occupant's property located therein, (iv) the
cost of reletting the Premises (including, without limitation, reasonable
brokerage commissions), (v) the cost of repairs, changes, alterations, and
additions to the Premises whether accomplished in one or more steps or phases,
(vi) the reasonable cost of collecting such amounts from Tenant hereunder and
(vii) any other sums of money or damages that may be owed to Landlord as a
result of a default by Tenant or the exercise of Landlord's rights at law or
in equity, including without limitation, attorneys' fees and court costs.
Tenant agrees that Landlord may file suit to recover any sums falling due under
the terms of this subparagraph (B) from time to time, and that no delivery or
recovery of any portion due Landlord hereunder shall be any defense to any
subsequent action brought for any amount not theretofore reduced to judgment in
election on the part of Landlord to terminate this Sublease unless a written
notice of such intention be given to Tenant by Landlord. Notwithstanding any
such reletting without termination, Landlord may at any time thereafter elect
to terminate this Sublease for such previous breach.
ARTICLE XIV
CONDEMNATION
Section 14.01 Total Taking. If the entire Premises are taken
under the power of eminent domain or conveyed under the threat of the exercise
of said power or otherwise pursuant to the Ground Lease (all of which is
hereafter referred to as "condemnation"), this Sublease shall terminate
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as of the date the condemning authority is entitled to possession. All Base
Rent, additional rent and other charges payable by Tenant hereunder shall be
apportioned and paid to the date of such taking.
Section 14.02 Partial Taking. If a portion of the Premises should
be taken by a governmental authority, corporation or other entity under the
right of eminent domain, condemnation, pursuant to the Ground Lease or similar
right, this Sublease shall nevertheless continue in effect as to the remainder
of the Premises unless, in Ground Lessor's judgment, so much of the Premises
shall have been taken so as to make it economically unsound to use the
remainder of the Premises for the uses and purposes contemplated by this
Sublease. If the Ground Lessor determines that so much of the Premises has been
taken as to make it economically unsound to use the remainder of the Premises
for the uses and purposes contemplated by this Sublease, this Sublease shall
terminate as of the date of the taking of possession by the condemning
authority, and all Base Rent, additional rent and other charges payable by
Tenant hereunder shall be apportioned and paid to the date of such taking. In
the event of a partial taking where this Sublease is not terminated, then to
the extent of the condemnation proceeds received by Landlord, Landlord shall
proceed promptly to restore the remaining portion of the Premises to a safe
integral unit resembling, so far as practicable, the Premises prior to such
taking, and the Base Rent, additional rent and other charges payable by Tenant
hereunder during the remainder of the Sublease Term after taking of possession
by the condemning authority shall be reduced on a just and proportionate basis
having due regard for the relative value and square footage of the portion of
the Premises thus taken as compared to the remainder thereof and taking into
consideration the extent, if any, to which Tenant's use of the remainder of the
Premises shall have been impaired or interfered with by reason of such partial
taking.
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Section 14.03 Temporary Taking. If the whole or any portion of
the Premises shall be taken for temporary use or occupancy, the Sublease Term
shall not be reduced or affected and the Base Rent, additional rent and other
charges payable by Tenant hereunder shall be abated in proportion to the
portion of the Premises taken. Except to the extent Tenant is prevented from so
doing pursuant to the terms of the order of the condemning authority, Tenant
shall continue to perform and observe all of the other covenants, agreements,
terms and provisions of this Sublease.
Section 14.04 Awards. All awards for the taking of any part of
the Premises or any payment made under threat of exercise of power of eminent
domain, condemnation or pursuant to the Ground Lease shall be the sole property
of Landlord, whether made as compensation for diminution in value of the
leasehold or severance damages or any other costs. Neither Landlord nor Ground
Lessor shall have any liability whatsoever to Tenant for said condemnation and
Tenant waives all rights to claim damages or awards for loss of its leasehold
interest or to seek recovery of any condemnation award or settlement.
ARTICLE XV
CASUALTY
In the event the Premises are damaged or destroyed to such an extent
as to render the same untenantable in whole or in substantial part, the Base
Rent, additional rent and other charges payable by Tenant hereunder shall abate
during the time Tenant is unable to use the Premises, Landlord shall, within
thirty (30) days of receipt of notice from Tenant of said damage or
destruction, advise Tenant in writing of Landlord's determination of whether to
repair or rebuild same, which shall be at the sole election of Landlord. In the
event that Landlord has determined to repair the damage but the Premises are
incapable of being repaired within one hundred thirty-five (135) days from date
of Landlord's notice to Tenant, this Sublease may be terminated by Tenant by
written notice given by
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the terminating party to the other party. If Landlord elects not to repair or
rebuild, or if repair and rebuilding will require more than 135 days from
Landlord's notice, Tenant may by notice to Landlord within 30 days after
Landlord's notice elect to purchase the Premises under the option in section
24.18, in which case the Premises shall include all proceeds of casualty
insurance received or receivable by Landlord with respect to the damage or
destruction. On such termination date, Tenant shall immediately surrender the
Premises and all interest therein to Landlord, and Tenant shall pay Base Rent,
additional rent and other charges payable by Tenant hereunder only to the date
of termination or the date the Premises are surrendered, whichever occurs
later. Landlord shall at all times maintain adequate fire and casualty
insurance upon the Premises up to $1,700,000. Tenant may maintain such fire
and casualty insurance on its leasehold interest as it chooses pursuant to
paragraph 8.01.
ARTICLE XVI
INABILITY TO PERFORM
This Sublease and the obligation of Tenant to pay Base Rent,
additional rent and the other charges payable by Tenant hereunder and to
perform all of the other covenants and agreements set forth herein shall in no
event be affected, impaired or excused because either the Ground Lessor or the
Landlord is unable to supply, or is delayed in supplying, any service to be
supplied by Ground Lessor under the Ground Lease or Landlord under this
Sublease or is unable to make or is delayed in making, any repairs required of
such party, if either the Ground Lessor or Landlord is prevented or delayed
from so doing by reason of strikes or labor troubles or for any cause beyond
the control of Ground Lessor or Landlord, including, but not limited to,
governmental preemption in connection with a National Emergency, or by reason
of any rule, order or regulation of any department or
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subdivision of any other government agency or by reason of the conditions of
supply and demand which have been or are affected by war, natural disaster or
other emergency.
ARTICLE XVII
SUBORDINATION AND ESTOPPEL
Section 17.01 Subordination. This Sublease is subject and hereby
subordinated to all present and future mortgages, deeds of trust and other
encumbrances of the Landlord, his successors or assigns , affecting the
Premises or the property described in Exhibit "A" of which the Premises are a
part, provided that such subordination shall not affect the Tenant's right to
possession and use of the Premises so long as Tenant is not in default under
any of the terms and conditions of this Sublease. Tenant will, promptly upon
Landlord's request, execute such instruments as may be reasonably required from
time to time to subordinate the rights and interest of Tenant under this
Sublease to the lien of any mortgage or deed of trust which may at any time be
placed upon the land or Building of which the Premises are a part; provided,
however, such subordination shall not affect the Tenant's option to purchase
pursuant to 24.18 below nor the Tenant's right to possession, use and
occupancy of the Premises as long as Tenant is not in default under any of the
terms and conditions of this Sublease or the Ground Lease.
Section 17.02 Attornment. Tenant agrees that any such
subordination agreement will contain a provision satisfactory to Landlord's
lender whereby Tenant will agree, in the event of foreclosure of any such
mortgage or deed of trust, to attorn to and recognize as its Landlord under the
terms of this Sublease said lender, any purchaser of this Leasehold at a
foreclosure sale, or their successors or assigns.
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Section 17.03 Estoppel Certificate. Tenant agrees that it will
upon request execute and deliver to Landlord, Landlord's lender, or to the
Ground Lessor, an estoppel certificate in the form requested by Landlord or
such party.
Section 17.04 Notice to Mortgagee. Tenant agrees to give any
present or future mortgagee of the Premises or the property described in
Exhibit "A" of which the Premises are a part, a copy of any notice of default
served upon Landlord by Tenant. Tenant further agrees that if Landlord shall
have failed to cure such default within the time provided for in this Sublease,
then any such mortgagee shall have an additional fifteen (15) days within which
to cure such default or if such default cannot be cured within such time, then
such additional period of time as may be necessary to cure such default if
within such fifteen (15) days the mortgagee has commenced and is diligently
pursuing the remedies necessary to cure such default, in which event this
Sublease shall not be terminated while such remedies are being so diligently
pursued.
ARTICLE XVIII
SIGNS
Tenant shall have the right, as limited herein, to install and
maintain signs in and on the Premises identifying it and its operations;
provided, however, that all such signs shall conform to all applicable
governmental and Airport regulations and requirements as to design, placement,
erection, repair and maintenance and shall be subject to the prior written
approval of Landlord and the Director of Planning and Engineering (the
"Director") for Ground Lessor as to content, color, size, design and location.
Further, upon demand, written or oral, by Ground Lessor, Tenant shall remove,
obliterate or paint out any and all advertising, signs, poster and similar
devices that were placed by Tenant on the Premises or elsewhere on the Airport
without the prior written approval of the Director. In the event of a failure
on the part of the Tenant to so remove, obliterate or paint out
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each and every sign or piece of advertising within seven (7) days after receipt
of such demand, Tenant acknowledges that the Ground Lessor has the right under
the Ground Lease to perform the necessary work and demand that Landlord pay the
cost thereof to Ground Lessor on demand as additional rental under the Ground
Lease, all of which shall be immediately paid by Tenant to Landlord as
additional Rent, upon Tenant's receipt of Landlord's notice thereof. Tenant
agrees to indemnify and hold harmless Landlord from any and all costs and
expenses incurred by Landlord by reason of Tenant's failure to comply with the
provisions of this Article XVIII. If any such charge is not paid by Tenant to
Ground Lessor or Landlord within thirty (30) days after the date of completion
of Ground Lessor's work, Landlord shall have the right, but not the obligation,
to pay for such work and Tenant shall reimburse to Landlord such amounts as
have been advanced by Landlord to Ground Lessor within ten (10) days after
demand therefor.
ARTICLE XIX
QUIET ENJOYMENT
Landlord agrees that, upon payment of rental and performance of all
covenants and agreements on the part of Tenant to be performed hereunder,
Tenant shall peaceably have and enjoy the Premises and all rights and
privileges granted herein. Tenant agrees that temporary inconveniences,
including as illustration and not limitation, such occurrences as reasonable
noise, reasonable disturbance, reasonable traffic detours caused or associated
with Airport or Building operations as well as those caused by or associated
with the construction of Airport or Building improvements, shall not constitute
a breach of this paragraph.
ARTICLE XX
SURRENDER OF PREMISES
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Section 20.01 Surrender of Premises. At the expiration or sooner
termination of this Sublease, Tenant shall promptly surrender possession of the
Premises broom clean to Landlord and shall deliver to Landlord all keys that it
may have to any and all parts of the Premises and the Building.
Section 20.02 Environmental Inspection. At the expiration or sooner
termination of this Sublease, Tenant shall have conducted, at Tenant's expense,
a Phase I Environmental Inspection and any additional inspection such Phase I
Inspection indicates is appropriate or necessary. Upon receipt of such
environmental reports, Tenant shall, at its sole cost and expense, bring the
Leased Premises into compliance with all applicable State and Federal
Environmental Laws, as reflected in such environmental inspections. In the
event Tenant fails to have such inspections completed within 30 days subsequent
to the termination of the Sublease, Landlord may, but shall not be required, to
conduct such inspections and remedy such deficiencies, and Tenant shall be
fully liable for the total cost.
ARTICLE XXI
HOLDING OVER
If Tenant shall, with the consent of Landlord, hold over after the
expiration or sooner termination of the term of this Sublease, the resulting
tenancy shall be a month-to-month tenancy, which tenancy may be terminated upon
thirty (30) days' written notice by Tenant to Landlord, or by seven (7) days'
written notice from Landlord to Tenant. Notwithstanding the foregoing, any
holding over by Tenant after termination of this Sublease without Landlord's
consent or while Tenant is in default hereunder shall be terminable at will by
Landlord. During such tenancy, Tenant agrees to pay to Landlord rental at a
rate equal to one hundred twenty-five percent (125%) of the rental applicable
for the last month of term of this Sublease unless a different rate is agreed
upon in
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writing, and to be bound by all of the terms, covenants, and conditions as
herein specified to the extent applicable.
ARTICLE XXII
NET LEASE
This Sublease is a "net" Lease and Tenant shall (except as expressly
provided to the contrary herein) pay all costs, taxes and assessments which are
connected with or arise out of the possession, use or occupancy of the Premises
or any portion thereof. All amounts payable by Tenant to Landlord hereunder
shall be paid by Tenant without notice or demand (except as herein otherwise
expressly provided) and without any set-off, counterclaim, deduction, defense,
abatement, suspension, diminution or reduction of any kind or for any reason.
ARTICLE XXIII
NOTICES
Any notice required or permitted to be given hereunder shall be in
writing and shall be considered properly given if mailed by first class United
States mail, postage prepaid, certified with return receipt requested, or by
delivering same in person to the intended addressee. For purposes of notice,
the addresses of the parties hereto shall be as set forth below:
LANDLORD :
Robert F. Grammer
201 Tampico
Irving, Texas 75062
TENANT:
M. Tom Christopher
700 Villa Wood Circle
Coppell, Texas 75019
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Any party hereto shall have the right to change such party's address for notice
hereunder by the giving of ten (10) days' notice to all other parties in the
manner set forth hereinabove. Notices sent by certified mail shall be deemed to
have been given five (5) business days following the date of mailing. Notices
given in any other manner shall be effective only if and when received by the
addressee.
ARTICLE XXIV
MISCELLANEOUS
Section 24.01 Easements. Tenant acknowledges that the Premises are
subject to easements reserved by the applicable public utilities for water
mains and other utilities and the right to operate, repair, maintain,
construct, reconstruct and alter said utility lines and construct new and
additional lines within said easement areas. Tenant agrees to release Landlord
from any and all liability of every kind and nature resulting from the exercise
by said public utilities of their rights under said retained easements.
Section 24.02 Access. Landlord, its employees, agents, and
contractors, shall have the right to enter the Premises at any reasonable time
to examine same, make such repairs, alterations, improvements or additions as
Landlord may deem necessary or desirable, and to show the Premises to
prospective tenants, insurance representatives and such other persons who in
the judgment of the Landlord have a legitimate and appropriate interest in
viewing the Premises. In addition, Tenant acknowledges and agrees that Ground
lessor, its officers and employees, have the right under the Ground Lease,
during business hours (and at any time in the case of an emergency), to enter
upon the Premises for the purposes of inspecting the Premises or doing any act
or thing which either the Ground Lessor or Landlord may be obligated to do, or
have the right to do, under the Ground Lease. If Tenant is not present to
permit entry and entry is necessary, Landlord may, in case of emergency,
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forcibly enter the Premises without rendering Landlord liable therefor, except
for the gross negligence or willful acts of Landlord, its agents or employees .
Nothing contained herein shall be construed to impose upon Landlord any duty of
inspection or repair of the premises or the Building of which the Premises are
a part except as otherwise specifically provided herein,
Section 24.03 Late Charges. If any installment of rent or other
sum due from Tenant is not received by Landlord or its designee within ten (10)
days after such amount is due, Tenant shall pay to Landlord a late charge equal
to five percent (5%) of such overdue amount as partial compensation for
additional costs incurred by Landlord due to payment delinquency. Acceptance of
such late charge by Landlord shall in no event constitute a waiver of Tenant's
default, if any, with respect to such overdue amount, nor prevent Landlord from
exercising any other rights granted herein.
Section 24.04 Waiver. The failure of Landlord to insist upon
strict performance of any of the covenants or conditions of this Sublease, or
to exercise any option herein conferred in any one or more instances, shall not
be construed to be a waiver or relinquishment of any covenant or condition, but
the same shall be and remain in full force and effect.
Section 24.05 Captions. The captions in this Sublease are for
convenience only and do not in any manner limit or amplify the provisions of
this Sublease.
Section 24.06 Severability. If any term or provision of this
Sublease or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Sublease or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby and shall continue in full force and effect, provided, however, if
Landlord, in his sole discretion, shall determine such unenforceable provision
to be material to this Sublease, Landlord shall have the right to terminate the
Sublease on 30-days' prior written notice to Tenant.
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Section 24.07 Entire Agreement. IT IS EXPRESSLY AGREED BY LANDLORD
AND TENANT, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS SUBLEASE,
THAT THIS SUBLEASE, WITH ITS SPECIFIC REFERENCES TO WRITTEN EXTRINSIC
DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES; THAT THERE ARE, AND WERE,
NO VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS
OR PROMISES PERTAINING TO THIS SUBLEASE OR TO THE EXPRESSLY MENTIONED WRITTEN
EXTRINSIC DOCUMENTS NOT INCORPORATED IN WRITING IN THIS SUBLEASE. NO
MODIFICATION OR AMENDMENT OF THIS SUBLEASE SHALL BE VALID OR EFFECTIVE UNLESS
EVIDENCED BY AN AGREEMENT IN WRITING EXECUTED BY LANDLORD AND TENANT.
Section 24.08 Limitation of Liability of Landlord.
Notwithstanding anything to the contrary contained in this Sublease, in the
event of any default or breach by Landlord with respect to any of the terms,
covenants and conditions of this Sublease to be observed, honored or performed
by Landlord, Tenant shall look solely to the estate and property of Landlord in
the leasehold estate and Building owned by Landlord for the collection of any
judgment (or any other judicial procedures requiring the payment of money by
Landlord), it being agreed that Landlord shall never be personally liable for
any such judgment and no other property or assets of Landlord shall be subject
to levy, execution, or other procedures for satisfaction of Tenant's remedies.
Landlord shall not be liable to Tenant under any circumstances for
consequential or special damages, including, without limitation, claims arising
out of or based on the ordinary negligence of Landlord, his agents, employees
or representatives.
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Section 24.09 Construction. This Sublease shall be deemed to be
made in and construed in accordance with the laws of the State of Texas.
Section 24.10 Authority. If Tenant is a corporation, each
individual executing this Sublease on behalf of said corporation represents and
warrants that he/she is duly authorized to execute and deliver this Sublease in
accordance with a duly adopted resolution of the Board of Directors of said
corporation and in accordance with its terms.
Section 24.11 Joint and Several Liability. If Tenant consists of
more than one person or entity, all terms, covenants and conditions contained
in this Sublease shall be deemed to be the joint and several responsibility of
each party, and all rights and remedies of the Landlord shall be cumulative and
nonexclusive of any other remedy at law or in equity.
Section 24.12 Costs and Attorney's Fees. If, by reason of any
default on the part of Tenant or Landlord, it becomes necessary for the other
to employ an attorney to take any action to collect rent or other sums due
hereunder or cure any breach or to bring suit in court to recover any rent or
other sums due hereunder, or for the breach of any provision of this Sublease,
or to recover possession of the Premises, the prevailing party shall recover
all reasonable costs and expenses (including, without limitation, reasonable
attorneys' fees) expended or incurred in addition to other relief granted
therein.
Section 24.13 Sublease Subject to Consent of Ground Lessor, The
parties hereto recognize and agree that this Sublease shall not become
effective until approved by Ground Lessor pursuant to certain rights reserved
by Ground Lessor in the Ground Lease. In connection with obtaining such
approval, Tenant agrees to provide to the Ground Lessor such information as may
be required by the Ground Lessor in considering a request for its approval of
this Sublease. Consent by the Ground Lessor to any of the provisions of this
Sublease which may be inconsistent with the Ground Lease
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does not constitute an amendment to the Ground Lease. The Ground Lease shall
supersede this Sublease in the event of any inconsistency or contradiction
between the two and this Sublease is in all things subordinate to the Ground
Lease.
Section 24.14 Successors and assigns. This Sublease shall extend to
and bind the successors, heirs and assigns of the respective parties hereto,
provided that this provision shall not authorize or permit any assignment or
other transfer of this Sublease or any part thereof, except as expressly
permitted in Article X hereof.
Section 24.15 Financial Information. Within twenty (20) days after
written request from Landlord, Tenant shall deliver to Landlord or lender
designated by Landlord such financial information as is reasonably required.
This financial information shall be kept confidential.
Section 24.16 Submission of Sublease. Submission of this Sublease
to Tenant for signature does not constitute a reservation of space or an option
to lease. In addition to any other conditions to the effectiveness of this
Sublease set forth herein, this Sublease shall not become effective until fully
executed by, and delivered to, both Landlord and Tenant and approved in writing
by Ground Lessor.
Section 24.17 Exhibits. All exhibits referred to herein and any
exhibits which may be referred to in any amendment hereto are by such reference
incorporated herein and shall be deemed a part of this Sublease as fully as if
set forth herein. The following numbered or lettered exhibits are attached
hereto and made a part hereof for all purposes:
Exhibit "A" - Legal Description of Land
Exhibit "B" - Ground Lease No. 23555-H, Supplemental Agreements Nos.
23555-H1 and 23555-H2, 4.460 acres more or less
36
<PAGE> 82
Section 24.18 Purchase Option. Tenant is hereby granted an Option
to purchase Landlord's interest in the Leased Premises and Ground Lease on the
following terms and conditions:
(a) The Option must be exercised and closed within four years from
the Effective Date of this Lease;
(b) Notice of the exercise of the Option shall be given by Tenant
to Landlord in writing at least 60 days prior to the proposed closing date;
(c) The purchase price shall be $2,200,000, payable in cash at
closing. The purchase price shall be reduced by the sum of $5,000 for each
month prior to closing that Tenant has leased the Premises and paid its full
monthly rent according to this Sublease;
(d) Such Sale is expressly subject to the consent of Ground Lessor
and Ground Lessor's further agreement to release Landlord from any further
obligations or liability to it arising out of the Ground Lease. The obligation
to obtain such consent shall be Tenant's. Landlord shall give his reasonable
cooperation in obtaining such consent but shall not be required to expend any
money or assume any obligations in connection with obtaining the consent of
Ground Lessor or assigning Landlord's interest;
(e) Tenant shall purchase the Property "AS IS" without warranty,
express or implied other than that Landlord transfers to Tenant good and
unencumbered title to all interest in the Premises under the Ground Lease. Any
survey or title policy shall be at Tenant's cost. Ad valorem taxes on the
Leased Property for the year in which the sale is closed shall be pro rated to
date of closing. Tenant shall pay all other costs of closing, the Purchase
Price set forth in paragraph 24.18(c) being net to Landlord less only
Landlord's pro rated portion of taxes for the year of closing; and
(f) All closing documents shall be in form reasonably acceptable to
Landlord.
37
<PAGE> 83
ARTICLE XXV
RECORD OF MEMORANDUM
25.01 Memorandum of Lease. Landlord and Tenant shall execute and
acknowledge an appropriate record memorandum of this Sublease, which shall give
notice of the existence of the Sublease and of the purchase option in Section
23.18.
EXECUTED as of this 15th day of March, 1993.
LANDLORD :
ROBERT F. GRAMMER:
__________________________________________
Robert F. Grammer
TENANT:
M. TOM CHRISTOPHER
__________________________________________
M. Tom Christopher
38
<PAGE> 84
EXHIBIT A
Commencing at the Airport reference point which is located at Texas Lambert
coordinates of North 447,356.04 and East 2,140,991.46 and is the basis for a
plane grid established for the Dallas/Fort Worth Airport;
Thence West 7,586.46 feet to a point for corner;
Thence North 3,808.78 feet to a 5/8 inch iron pin in the east right-of-way line
of a 50 foot access easement (unrecorded) and the north right-of-way of Hangar
Road (a 70 foot public right-of-way) said iron pin having Dallas/Fort Worth
Regional Airport coordinates of North 451,664.82 and East 2,133,405.00
(coordinates not Lambert) said iron pin also being the point of beginning of
the herein described tract of land;
Thence West along the north right-of-way line of Hangar Road 322.29 feet to a
5/8 inch iron pin with plastic cap stamped "Carter & Burgess" (set);
Thence North 457.63 feet to an "X" cut in concrete apron (set) at base of
fence;
Thence East at 272.29 feet pass the west line of aforementioned 50 foot access
easement and continue on in all a total distance of 312.29 feet to a point;
Thence N 45degrees00'00" E, at 14.14 feet past the east line of said 50 foot
access easement and continue on in all a total distance of 197.99 feet to a
point;
Thence South 110.00 feet to a point;
Thence East 155.37 feet to a point;
Thence S 45degrees00'00" W, 404.28 feet to a point, said point being in the
east right-of-way line of aforementioned 50 foot access easement;
Thence South along the east right-of-way line of said 50 foot access easement
201.81 feet to the point of beginning and containing 194,277.60 square feet or
4.460 acres of land, more or less.
<PAGE> 85
EXHIBIT D
AGREEMENT AND ASSUMPTION OF LEASE
This Agreement and Assumption of Lease ("Agreement") is made by and
between the Dallas/Fort Worth International Airport Board (the "Board"), Kitty
Hawk, Inc. ("KHI: "), and Robert F. Grammar ("Grammar") on the following terms
and conditions:
WHEREAS, by Agreement of Lease bearing D/FW Airport Lease No. 23555,
dated as of February 1, 1983, the Board as Lessor leased certain real property
located on D/FW Regional Airport (the "Property") to Sedalia-Marshall-Boonville
Stage Line, Inc. ("SMB") as Lessee, incorporated herein by reference; and
WHEREAS, by Supplemental Agreements of March 6, 1984 and April 1, 1986
the leased acreage was reduced to 4.460 acres more or less, said Supplemental
Agreements being incorporated herein by reference) (said Agreement of Lease and
Supplemental Agreements being referred to herein collectively as the "Lease");
and
WHEREAS, by Letter Agreement dated January 17, 1997, Grammar and Sky
Chefs, Inc. jointly requested this Board to transfer a 20-foot strip of
property from D/FW Lease No. 25210 to Grammar D/FW Lease No. 23555, and such
action is pending for approval of the Board (hereinafter referred to as the
"20-foot strip"); and
WHEREAS, SMB with the consent of the Board caused an aircraft hangar
(the "Hangar") to be built on the leased Property, which hangar was financed
with one certain $1,500,000 Grapevine Industrial Development Corporation
Industrial Development Revenue Bond, Series 1982 (Sedalia-Marshall-Boonville
Stage Line, Incorporated Project) (the "Bond"), and said Bond was secured by a
Deed of Trust, Assignment of Rents and Financing Statement dated December 1,
1982 and recorded in Volume 7421, Page 269, of the Deed of Trust Records of
Tarrant County, Texas (the "Deed of Trust"), creating a first lien on the
Hanger and other Mortgaged Property as defined therein; and
WHEREAS, the Lease permits the mortgagee to become the legal owner and
holder of the leasehold estate under the Lease by foreclosure or similar
proceedings; and
AGREEMENT AND ASSUMPTION OF LEASE - Page 1 January 31, 1997
<PAGE> 86
WHEREAS, Grammar lawfully and for good consideration, as represented
to the Board, did purchase and acquire all rights and interests of the original
mortgagee, Mercantile National Bank at Dallas; and
WHEREAS, SMB filed for bankruptcy in BK No. 390-33170-HCA-ll in the
United States Bankruptcy Court for the Northern District of Texas, Dallas
Division, and Grammar thereafter obtained an Order Modifying Automatic Stay
which granted Grammar the right to foreclose the Deed of Trust; and
WHEREAS, on August 7, 1990 Grammar, as owner and holder of the Bond
and Deed of Trust Lien securing the Bond, after having first given notice as
required by Texas law, did foreclose said Deed of Trust, as amended, at the
Courthouse of Tarrant County, Texas, at which sale Grammar purchased the
Mortgaged Property including the Hangar; and
WHEREAS, on October 1, 1990 Grammar and the Board as "Lessor" entered
into an "Assignment and Assumption of Lease" whereby, on the terms and
conditions contained therein, the Board allowed Grammar to assume the Lease;
and
WHEREAS, KHI and Grammar desire to have the Board recognize KHI as the
Lessee under the Lease (including, without limitation, the 20-foot strip of
land referenced above) and release Grammar from all further obligations
thereunder, and the Board is willing to accept KHI as such Lessee and release
Grammar, all on the terms and conditions hereinafter set forth;
NOW THEREFORE, the Board, KHI and Grammar agree as follows:
1. As of the effective date of this Agreement, KHI hereby assumes
and agrees to be bound by and comply with all of the terms, conditions and
covenants of the Lease and Supplements thereto arising on or after the date of
this Agreement (including, without limitation, the 20-foot strip of land
referenced above), and the Board hereby consents to KHI as Lessee under said
Lease, and hereby releases Grammar from all obligations of the Lease, and the
October 1, 1990 Agreement and Assumption of Lease, together with all
Supplements and modifications thereto through the effective date of this
Agreement (including, without limitation, the 20-foot strip of land referenced
above). The Board agrees to be bound by and honor its obligations as Lessor
under said Lease. The legal description of said lease as supplemented by the
addition
AGREEMENT AND ASSUMPTION OF LEASE - Page 2 January 31, 1997
<PAGE> 87
of the 20-foot strip is attached hereto as Exhibit "A," with a separate
description of the 20-foot strip attached as Exhibit "B."
2. Except as modified by this Agreement, all of the terms, rents,
conditions and provisions of the Lease as amended or supplemented through the
effective date of this Agreement are hereby ratified and confirmed.
3. This Agreement (together with its Exhibits which are
incorporated herein by reference) represents the entire understanding and
agreement of the parties hereto and may not be amended or modified except in
writing signed by the parties affected thereby. All prior agreements and
understandings between the parties with regard to the subject matter hereof,
are merged herein and superseded hereby. Further, all rights and obligations of
the Mortgagee under the Lease are hereby merged into KHI as Lessee, and Grammar
is released therefrom.
4. This Agreement shall be construed in accordance with the laws
of the State of Texas. Venue for any suit brought hereunder shall lie
exclusively in Dallas or Tarrant County, Texas.
5. Any notice to be given to Lessee pursuant to the Lease or this
Agreement shall be given to Kitty Hawk, Inc., 1515 W. 20th Street, D/FW
Airport, Texas 75261, Attention: M. Tom Christopher, with copy to: James Craig,
Attorney, 2900 Renaissance Tower, 1201 Elm Street, Dallas, Texas 75270-2102,
until such address is changed by written notice given in compliance with the
terms of the Lease.
(THIS SPACE INTENTIONALLY LEFT BLANK)
AGREEMENT AND ASSUMPTION OF LEASE - Page 3 January 31, 1997
<PAGE> 88
EXECUTED as of this _____ day of ______________, 1997.
LESSOR:
DALLAS/FORT WORTH INTERNATIONAL
AIRPORT BOARD:
By: __________________________________
Executive Director
ATTEST:
________________________________
Secretary to the Board
APPROVED:
_________________________________
Legal Counsel to the Board
LESSEE:
KITTY HAWK, INC.:
By : __________________________________
Its: __________________________________
ATTEST:
By: __________________________
ASSIGNOR:
__________________________________
Robert F. Grammar
AGREEMENT AND ASSUMPTION OF LEASE - Page 4 January 31, 1997
<PAGE> 1
EXHIBIT 11.1
KITTY HAWK, INC.
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED AUGUST 31, DECEMBER 31,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Primary net income per share(1):
Weighted average number of common shares
outstanding........................... 7,423,436 7,423,436 7,481,999 7,423,436 9,609,920
Common shares related to SAB No.
83(2)................................. 544,274 544,274 445,857(3) 544,274 --(3)
---------- ---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding...... 7,967,710 7,967,710 7,927,856 7,967,710 9,609,920
========== ========== ========== ========== ==========
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
========== ========== ========== ========== ==========
Fully diluted net income per share:
Weighted average number of common shares
outstanding........................... 7,423,436 7,423,436 7,481,999 7,423,436 9,609,920
Common shares related to SAB No.
83(2)................................. 544,274 544,274 445,857(3) 544,274 --(3)
---------- ---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding...... 7,967,710 7,967,710 7,927,856 7,967,710 9,609,920
========== ========== ========== ========== ==========
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
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) The Company reports primary net income per share as the effect of dilutive
securities is less than 3%.
(2) Stock options granted to executives within 12 months of the filing date have
been included in this line item through the date of exercise. See Note 1 of
Notes to Consolidated Financial Statements.
(3) Stock option grants were exercised on June 26, 1996.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-15667) pertaining to the Kitty Hawk, Inc. Amended
and Restated Annual Incentive Compensation Plan and in the Registration
Statement (Form S-8 No. 333-23597) pertaining to the Kitty Hawk, Inc. Amended
and Restated Omnibus Securities Plan of our report dated February 7, 1997, with
respect to the consolidated financial statements of Kitty Hawk, Inc. included
in the Transition Report (Form 10-K) for the four months ended December 31,
1996.
Ernst & Young LLP
Dallas, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,320,402
<SECURITIES> 0
<RECEIVABLES> 37,828,018
<ALLOWANCES> 0
<INVENTORY> 2,789,982
<CURRENT-ASSETS> 74,628,583
<PP&E> 63,788,858
<DEPRECIATION> (15,390,015)
<TOTAL-ASSETS> 123,027,426
<CURRENT-LIABILITIES> 41,109,683
<BONDS> 0
0
0
<COMMON> 106,695
<OTHER-SE> 58,185,696
<TOTAL-LIABILITY-AND-EQUITY> 123,027,426
<SALES> 0
<TOTAL-REVENUES> 59,985,556
<CGS> 0
<TOTAL-COSTS> 47,579,898
<OTHER-EXPENSES> 336,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 684,173
<INCOME-PRETAX> 8,660,369
<INCOME-TAX> 3,366,917
<INCOME-CONTINUING> 5,293,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,293,452
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
