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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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 or other jurisdiction of (I.R.S. employer
Incorporation or organization) 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 24, 1999, the aggregate market price of the voting stock held by
non-affiliates of the registrant was approximately $52.7 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 24, 1999, there were 16,995,987 outstanding shares of common
stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III -- Portions of the registrant's definitive proxy statement to be
issued in conjunction with the registrant's 1999 Annual Meeting of Stockholders
to be held on May 28, 1999.
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KITTY HAWK, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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Item 1 Business.................................................... 3
Item 2 Properties.................................................. 13
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 15
Item 4A Executive Officers of the Registrant........................ 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 37
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 38
Item 13. Certain Relationships and Related Transactions.............. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 38
Signatures.................................................. 44
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements, which can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "could,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. These forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those referred to in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future Results."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
undertake no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents we file from time
to time with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
GENERAL
We have four main businesses. First, we are a leading U.S. and
international provider of air freight carrier services, which means that we
transport air freight in airplanes that we charter to third parties. In this
business, we charge customers for the use of the entire airplane, regardless of
the amount of freight we transport for them, and each airplane flies for only
one customer at a time. Second, we are a leading provider of scheduled freight
services in the U.S., which means that we transport air freight on scheduled
routes, and each airplane generally transports the freight of multiple customers
at the same time. In this business, we charge customers by the size and the
weight of the freight shipped. Third, we are a leading provider of air logistics
services in the U.S., which means that we arrange the delivery of air freight on
an expedited basis, whether on our airplanes or those of a third party. Finally,
we provide engine overhaul services on JT3 engines used on Douglas DC-8s and JT8
engines used on Boeing 727s, Douglas DC-9s and other aircraft. We also provide
engine overhaul services for our fleet of Boeing 727s and Douglas DC-8s and
DC-9s and airframe repair services for our fleet of Boeing 727s and Douglas
DC-9s.
Our principal executive offices are located at 1515 West 20th Street, P.O.
Box 612787, Dallas/Fort Worth International Airport, Texas 75261, and our main
telephone number is (972) 456-2200. We maintain a web site at
http://www.kha.com.
INDUSTRY OVERVIEW
Air Freight Delivery Services. The market for air freight delivery services
is served by an industry which is composed of:
(1) air freight carriers that contract with "freight-forwarders" to
provide them with short-term and long-term contract charters;
(2) air freight carriers that provide on-demand charters, as opposed
to short-term and long-term charters;
(3) air freight carriers that provide scheduled air freight delivery
services; and
(4) "door-to-door" express package delivery companies such as Federal
Express and United Parcel Service.
The air freight delivery services industry provides same-day, next-day and/or
two-day delivery services. A number of air freight carriers, including us,
provide a combination of these services. Specifically, our air freight carrier
services business provides on-demand charters and short-term and long-term
contract
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charters, and our scheduled freight services business provides regularly
scheduled freight delivery services between various airports.
Air Logistics Services. Demand for air logistics services is driven by
demand for same-day delivery of time sensitive freight. In contrast to the
market for next-day and two-day freight delivery services, we believe that the
U.S. market for on-demand charters is served by hundreds of air freight
carriers, the vast majority of which are privately held, operate from only one
location and do not coordinate "door-to-door" charter delivery services to the
extent we do.
AIR FREIGHT CARRIER SERVICES
General. We provide air freight carrier services on a contractual basis for
a variety of customers, including freight forwarders, other airlines, the U.S.
Postal Service and the U.S. Military. In addition, we provide air freight
carrier services on an on-demand basis. Kitty Hawk International, Inc. is our
wide-body aircraft air freight carrier and Kitty Hawk Aircargo, Inc. is our
narrow-body aircraft air freight carrier.
ACMI Domestic. The terms of our contract charters vary, but they typically
require us to supply aircraft, crew, maintenance and insurance ("ACMI"), while
our customers are responsible for substantially all other aircraft operating
expenses, including fuel, fuel servicing, airport freight handling, landing and
parking fees, ground handling expenses and aircraft push-back costs. These ACMI
contracts also typically require us to operate specific aircraft and/or provide
minimum air freight capacity and generally are terminable if we:
(1) fail to meet certain minimum performance levels;
(2) otherwise breach the contract; or
(3) become subject to other customary events of default.
Under our ACMI contracts, we are permitted to utilize and, in fact often do
utilize, our aircraft in on-demand service in the periods between ACMI contract
flights.
ACMI International. We operate ACMI contracts of varying durations in
foreign countries as well as between the U.S. and foreign countries. These ACMI
contracts provide that we have exclusive operating control and direction over
each aircraft we operate. We have operating authority for Brazil, Colombia,
Costa Rica and Ecuador. Where we do not have our own operating authority, our
foreign-based customers must obtain foreign government authorizations and
permits required for us to fly the designated routes. Our international ACMI
contracts traditionally have been concentrated in the South and Central American
markets. Currently, we operate one Boeing 747 for AeroFloral and one Boeing 747
for Fast Air between the U.S. and various destinations in South America.
On-Demand. The aircraft of our air freight carrier business also fly
on-demand charters for customers of our air logistics services business. In
1998, approximately 21.5% of the on-demand charters managed by our air logistics
services business were flown on the aircraft of our air freight carrier
business. On-demand charters flown on the aircraft of our air freight carrier
business generate a higher gross margin to us than charters subcontracted to
third party carriers.
U.S. Postal Service. We have historically performed a variety of services
for the U.S. Postal Service, ranging from regularly scheduled delivery
throughout the year to special contracts to meet increased demand during the
Christmas holiday season. Similar to an ACMI contract, our contracts with the
U.S. Postal Service generally allow us to pass-through our fuel costs, landing
charges and other variable costs. Accordingly, we are not generally at risk of
loss in the event these variable costs increase during the term of these
fixed-price arrangements.
Since 1993, we have been the prime contractor for the "Christmas Network"
established by the U.S. Postal Service. The Christmas Network supplies air
transportation and ground handling services primarily for second-day mail among
a network of domestic cities during the December holiday rush. The U.S. Postal
Service awards contracts pursuant to a public bidding process that considers
quality of service
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and other factors, including, to a lesser extent, price. The Christmas Network
contract is put up for bid each year.
Of our total revenues for 1998, the U.S. Postal Service accounted for
approximately $120 million or 16.8%. All of this revenue was attributable to air
freight carrier services and represented 19.9% of the air freight carrier
business' total revenues.
BAX Global. BAX Global leases under an ACMI contract 14 of our Boeing 727s
for varying terms through March 31, 2003. BAX Global may earlier terminate the
contract if, among other reasons, we do not meet certain on-time performance
standards or if majority ownership or control of the Company is acquired by a
competitor of BAX Global. Of our total revenues in 1998, BAX Global accounted
for approximately $71.5 million or 10%. All of this revenue was attributable to
air freight carrier services and represented 11.9% of the air freight carrier
business' total revenues.
U.S. Military. We have historically provided air freight carrier services
for the U.S. Military.
SCHEDULED FREIGHT SERVICES
Domestic. We operate a scheduled airport-to-airport air freight service
which provides overnight delivery to and from approximately 46 cities in the
U.S. Freight received each evening is delivered the next morning, Tuesday
through Friday, throughout the year. The majority of overnight deliveries are
routed through our 90,000 square foot sorting center located at the Hulman
Regional Airport in Terre Haute, Indiana. In July 1999, we expect to relocate
our sorting operation from the Hulman Regional Airport to the Fort Wayne-Allen
County Airport in Fort Wayne, Indiana. This new 239,000 square foot sorting
facility will permit us to handle more than double the sorting capacity of the
Terre Haute facility. In addition, the facility is designed to improve
productivity by reducing the time to load and unload aircraft and decreasing
sorting times. See "Item 2. Properties."
Our overnight operation caters primarily to freight-forwarders and other
cargo airlines that either handle ground transport themselves or contract with
others to do so. Our competition includes the United Parcel Service, Emery Air
Freight and FedEx, as well as commercial passenger airlines that provide freight
service on their scheduled flights.
Our scheduled freight service currently transports air freight to and from
airports located in approximately 22 cities. In addition, we contract with third
parties to provide ground transportation between those 22 airports and 24 other
airport locations at which we receive and deliver freight at scheduled times.
International. We also operate a scheduled airport-to-airport freight
service between Los Angeles and Honolulu, among the Hawaiian Islands and once a
week through Melbourne, Hong Kong and other Pacific Rim locations. American
International Cargo ("AIC"), a general partnership, conducts this operation. As
part of a recent litigation settlement, we recently became the sole owner of
AIC. See "Item 3. Legal Proceedings -- Litigation Concerning American
International Cargo."
AIR LOGISTICS SERVICES
General. We are a leading provider of same-day air logistics services in
the U.S. We arrange the delivery of time sensitive freight utilizing aircraft of
third party air freight carriers as well as the aircraft of our air freight
carrier business. On-demand air freight charters generally are used when the
same day or next-day 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. Our 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. We
provide air logistics services 24 hours per day, 365 days per year.
Our air logistics services customers historically include companies that
are engaged in industries such as automotive, chemical, computer, mail and bulk
package delivery, retail merchandising and oil field
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service and equipment. Typically, the premium costs incurred in utilizing
on-demand charters to achieve expedited same-day delivery are justified by our
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.
Database, Information Software and Tracking Systems. We believe that our
database is critical to our air logistics services business arranging on-demand
air charters in a timely and reliable manner. We maintain detailed carrier
profiles for over 500 air freight carriers that provide on-demand charter
service and information concerning ground transportation and aircraft loading
companies in North America. We have implemented an Internet system to provide
our account managers with real-time updates on available third party on-demand
charter aircraft across North America. We believe that this system enables us to
meet customer demands more efficiently and quickly.
We developed our logistics information system in 1990 to automate access to
our database and have frequently revised and improved it. 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, we subscribe to Jeppesen's Flight Planning and
Kavouras Meteorological services. The Jeppesen flight planning services
integrate airport information such as runway lengths, altitudes, hours of
operation and noise abatement procedures with current weather data and other
information necessary to provide an automated flight plan. This flight planning
service then electronically transmits the automated flight plan to the pilot and
the Federal Aviation Administration (the "FAA") contemporaneously.
Our HawkEye software system allows our account managers to track an
aircraft's progress from origin to destination on his or her computer screen and
on the control room's main projection board. Aircraft icons show each flight,
its direction and information about the flight including the type of aircraft,
the flight number, current altitude, ground speed, distance to destination and
times of departure and estimated arrival. The data supporting HawkEye is a
direct data feed obtained from the FAA's Air Traffic Control computer system. We
believe that our computer systems are generally year 2000 compliant. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
MAINTENANCE
We are one of the few dedicated air freight carriers in the world with
extensive maintenance capabilities. We have extensive maintenance facilities in
Oscoda and Ypsilanti, Michigan and Dallas, Texas. Maintenance services at these
facilities operate 24 hours per day, seven days per week.
We provide comprehensive airframe repairs and engine overhaul services for
our fleet of Boeing 727s, Douglas DC-9s and our fleet of small aircraft. In
addition, we provide comprehensive engine overhaul services for our fleet of
Douglas DC-8s and light maintenance checks on our fleet of Boeing 747s, Lockheed
L-1011s and Douglas DC-8s. We also provide third party engine overhauls for JT3
engines used on Douglas DC-8s and JT8 engines used on Boeing 727s, Douglas DC-9s
and other aircraft. We have entered into agreements to outsource a majority of
our major maintenance on our fleet of Boeing 747s, Lockheed L-1011s and Douglas
DC-8s, other than engine overhauls on JT3 engines.
AIRCRAFT FLEET
We currently own 108 aircraft and lease seven aircraft, not including our
undivided one-third interest in four Falcon 20C jet aircraft. Of these aircraft,
we operate 102 aircraft in revenue service, including seven Boeing 747s, six
Lockheed L-1011s, 16 Douglas DC-8s, 31 Boeing 727s, 5 Douglas DC-9s, 21 Lear
jets and eight Beechcraft BE8Ts. For economic reasons, we currently intend to
retire all but six of our Douglas DC-8s prior to January 1, 2000. See
"-- Government Regulation -- Noise Abatement Regulations."
Additional Boeing 747s. During 1998, we acquired two Boeing 747-200s and
had them converted to cargo configuration by Boeing. Boeing redelivered the
first aircraft to us in October 1998, and it entered revenue service. Boeing
redelivered the other aircraft to us in November 1998, and it entered revenue
service.
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In July 1998, our Oscoda, Michigan maintenance facility completed the cargo
conversion of a Boeing 747-200 that we acquired in September 1997. The FAA
approved the cargo conversion, and the aircraft entered revenue service. During
the approval process, the FAA determined that the structure that connects the
wings to the body of the aircraft had not been modified in certain respects and
decided to limit the maximum payload of the aircraft to 200,000 pounds rather
than the anticipated 240,000 pounds. The reduction in payload capacity could
reduce the hourly revenue rate for the aircraft by as much as 6% from the
anticipated hourly revenue rate. The FAA has also asked us to voluntarily reduce
the maximum payload of two other Boeing 747-200s that have a similar issue.
These two other Boeing 747s were converted to cargo configuration prior to our
acquisition of the Kalitta Companies. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors that May
Affect Future Results -- Integrating the Kalitta Companies." Former management
of the Kalitta Companies did not disclose this issue to our management, who did
not know of the issue until the FAA raised it. We currently intend to fix each
of these Boeing 747s in the second half of 1999 at a cost not expected to exceed
$150,000 per aircraft, not including aircraft downtime. Pending modification of
these aircraft, we have decided not to voluntarily reduce the maximum payload of
the other two Boeing 747s affected by this problem.
Additional Boeing 727s. Recently, we entered into an agreement to lease
nine Boeing 727s for a period of seven years each with an option to renew each
lease for an additional two year term. We expect three of these aircraft will
enter revenue service in 1999 and the other six aircraft will enter revenue
service in 2000. The lessor will pay the cost to modify the aircraft to cargo
configuration and to bring the aircraft into compliance with Stage 3 of the
Noise Regulations. See "-- Government Regulation -- Noise Abatement
Regulations."
RESTRUCTURING OF KITTY HAWK INTERNATIONAL
Recently we changed the name of American International Airways, Inc.
("AIA") to Kitty Hawk International, Inc. Due to continued losses at Kitty Hawk
International, we are in the process of restructuring Kitty Hawk International
to focus on its core business of air freight transportation in wide-body
aircraft. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future
Results -- Continued Losses at Kitty Hawk International."
Therefore, we have eliminated our passenger charter division and have
parked the two passenger Boeing 747s and two passenger Lockheed L-1011s in that
division. We are currently deciding whether to sell the aircraft, convert them
to cargo configuration or employ them in other uses. Because all four of these
aircraft are collateral under our 9.95% Senior Secured Notes due 2004 (the
"Notes"), any sales must be made in compliance with the indenture related to the
Notes.
Further, we have stopped providing third party airframe repair and engine
overhaul services, other than on JT3 engines, which are used on Douglas DC-8s,
and JT8 engines, which are used on Boeing 727s, Douglas DC-9s and other
aircraft. In addition, we have entered into agreements to outsource a majority
of our major maintenance on our fleet of Boeing 747s, Lockheed L-1011s and
Douglas DC-8s, other than engine overhauls on JT3 engines.
In connection with these changes, we eliminated approximately 450 jobs at
Kitty Hawk International in 1998 and intend to eliminate approximately 1,050
additional jobs at Kitty Hawk International in 1999. In addition, we intend to
close surplus portions of our Oscoda, Michigan maintenance facility. Further, we
intend to reduce Kitty Hawk International's owned and leased operating fleet
from 36 aircraft at December 31, 1998 to 19 aircraft at December 31, 1999,
consisting of seven Boeing 747s, six Lockheed L-1011s and six Douglas DC-8s.
These aircraft numbers do not include our owned and leased Boeing 727s and
Douglas DC-9s operated by Kitty Hawk Aircargo, Inc., our air freight carrier
that operates narrow-body aircraft, or the small aircraft owned and operated by
Kitty Hawk Charters, Inc., our small aircraft operator.
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RESIGNATION OF MR. KALITTA AND SEPARATION AGREEMENT
On April 17, 1998, Conrad A. Kalitta resigned from his position as our Vice
Chairman and from all other officer and employee positions of the Company,
including his position as Chief Executive Officer and President of Kitty Hawk
International. Mr. Kalitta joined the Company upon the consummation of our
November 1997 acquisition (the "Acquisition") of the Kalitta Companies from Mr.
Kalitta.
In connection with his resignation, the Company, Mr. Kalitta and certain
other affiliated parties entered into a Separation Agreement dated April 17,
1998, which was subsequently amended on June 5, 1998 (as amended, the
"Separation Agreement"). Since that time, the parties to the Separation
Agreement entered into an Agreement dated January 21, 1999 that modified certain
provisions of the Separation Agreement.
Under these agreements, the Company, M. Tom Christopher (our Chairman of
the Board and Chief Executive Officer) and Mr. Kalitta terminated all voting and
other agreements entered into in connection with the Acquisition that ensured
Mr. Christopher and Mr. Kalitta certain rights to hold and fill officer and
director positions of the Company and its subsidiaries. Pursuant to these
agreements, the Company granted Mr. Kalitta certain rights to demand
registration ("Demand Registration Rights") of up to 2,900,000 shares of common
stock until June 30, 2000. In addition, Mr. Kalitta granted Mr. Christopher the
right to vote all shares of common stock owned by Mr. Kalitta until June 30,
2000.
Pursuant to the terms of the Separation Agreement, Mr. Kalitta amended his
employment agreement with Kitty Hawk International to provide that he will not
engage in the air cargo charter management or charter brokerage business, or in
the business of ad hoc or scheduled carriage of air freight under FAA Part 121
or Part 135 certificates, within the United States, until April 17, 2001, either
directly or indirectly, whether as an employee, agent, consultant, broker,
partner, principal, owner, stockholder or otherwise (provided that he shall be
permitted to purchase up to a 5% interest in any publicly traded company in any
such businesses). Until April 17, 2001, Mr. Kalitta agreed:
(1) not to serve as an employee, officer or director of, consultant
to, or independent contractor for, Trans Continental Airlines, Inc.
("TransCon") or TransCon's affiliates. TransCon is an air freight carrier
owned by Scott Kalitta, Mr. Kalitta's son;
(2) to cause his affiliates not to, capitalize, make loans to or
otherwise finance TransCon in excess of an aggregate principal amount of
$7,500,000 outstanding at any one time; and
(3) to cause his affiliates not to, lease more than an aggregate of
three aircraft of all types to TransCon at any one time.
Under the terms of his amended employment agreement, Mr. Kalitta and any
affiliate of Mr. Kalitta may:
(1) buy, modify, sell and lease aircraft, aircraft engines and
aircraft equipment;
(2) deal in or with STCs, except that neither Mr. Kalitta, nor any
affiliate of Mr. Kalitta, may use his or such affiliate's STCs to modify
Boeing 727 aircraft from passenger to freighter configuration until April
17, 2001.
Additionally, until April 17, 1999, without our prior written approval, neither
Mr. Kalitta nor any of his affiliates shall, directly or indirectly, employ or
contract with any individual employed by Kitty Hawk International or any of its
affiliates as of April 17, 1998 or at any time within such one year period.
Mr. Kalitta also has agreed to, among other things, repay certain loans
owed to us by his affiliates, purchase certain non-airline related assets, pay
future legal fees and costs associated with the litigation of certain claims we
have against GATX-Airlog Company (in exchange for the receipt of all recoveries
from such litigation) and abide by certain customary standstill provisions for a
three year period.
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TRAINING AND SAFETY
We believe that high quality personnel and intensive training programs are
key to our success and the maintenance of a good safety record. As a result, we
hire experienced flight crews and maintenance personnel and ensure that both
receive ongoing training. We maintain our own Douglas DC-8 simulator in Miami,
Florida which we use to train our own pilots and hire out for use by other
airlines. We also make use of the training facilities of other major airlines.
We have an ongoing safety program that employs an industry standard
database to track safety performance. Open facsimile and phone lines are
available for crews to report safety problems which are entered into the
database and monitored for any re-occurrence. Direct communication between
flight crews and management is available at all times through our dispatch
system.
SALES AND MARKETING
Our marketing focus is on major users of air freight transportation
services and other logistics providers. In connection with our emphasis on
developing and maintaining long-term relationships with major customers, we
employ 31 account managers who are dedicated to major accounts. An account
manager is responsible for educating the client about our service capabilities,
ensuring quality service and determining how we can best serve the customer. The
marketing effort on behalf of the air freight carrier business is primarily
focused on selected freight forwarders and integrators and existing customers.
We do not engage in mass media advertising. We, however, do promote our business
through trade specific publications and trade shows.
EMPLOYEES
General. At March 1, 1999, we employed approximately 3,500 full-time
personnel, of which approximately 280 were involved in sales and administrative
functions and approximately 3,220 in maintenance and flight operations
(including approximately 915 pilots).
Collective Bargaining Agreement with Certain Employees. The pilots and
flight engineers employed by Kitty Hawk International are members of the
International Brotherhood of Teamsters and are employed pursuant to a collective
bargaining agreement. We are in the process of renegotiating this collective
bargaining agreement with representatives of the Teamsters. These pilots and
flight engineers have rejected one proposed new collective bargaining agreement.
The pilots and flight engineers subject to the collective bargaining
agreement are guaranteed pay based upon a minimum of 60 block hours per month.
The collective bargaining agreement requires that all flight crew personnel must
meet minimum qualifications and includes typical seniority, furlough, grievance,
group health insurance, sick leave and vacation provisions. The seniority
provisions require that the most senior flight crews have the opportunity to
operate larger aircraft or move to new crew positions as aircraft or crew
positions become available by reason of flight crew attrition or aircraft
acquisitions. As a consequence, the contract obligates us to incur costs to
retrain crews as they advance in seniority and progress to new aircraft or crew
positions. In addition, we may incur costs to train flight crews to fill
positions vacated by more senior flight crews. The collective bargaining
agreement provides that so long as it is in effect, the Teamsters will not
authorize a strike and we will not lockout union employees.
While we intend to negotiate with the Teamsters in good faith, we cannot
assure you that we will be able to enter into a new collective bargaining
agreement. In addition, negotiations could result in work stoppages, a
substantial increase in salaries or wages, changes in work rules or other
changes adverse to our business. Also, we cannot assure you that our non-union
cockpit crews will remain non-union.
ENVIRONMENTAL
Our operations must comply with numerous environmental laws, ordinances and
regulations. Under current federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or clean up of hazardous or
toxic
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substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
contamination from hazardous or toxic substances, or the failure to clean up
such contaminated property properly, may adversely affect the ability of the
owner of the property to use such property as collateral for a loan or to sell
such property. Environmental laws also may impose restrictions on the manner in
which a property may be used or transferred or in which businesses may be
operated and may impose remedial or compliance costs.
We are subject to the regulations of the Environmental Protection Agency
and state and local governments regarding air quality and other matters. We
lease office space, hangar space, ramp space and unimproved areas at various
airport locations throughout the U.S. See "Item 2. Properties." Most of these
leases require us to indemnify the lessor for any environmental contamination
caused by us. In particular, we lease an underground fuel storage facility from
Wayne County, Michigan at Willow Run Airport. If the soil or groundwater in the
vicinity of this underground facility is found to be contaminated, we will lose
our right to continue to use the facility. Moreover, the lease provides that we
will be solely responsible for the costs to remediate any such contamination. If
such contamination occurs or is otherwise discovered by governmental authorities
during the term of the lease with Wayne County, we may incur significant expense
to effect either or both of the required relocation of operations or the
required clean-up.
Currently, we are not aware of any environmental contamination for which we
are liable for the cost of removal or cleanup. Until May 2001, Mr. Kalitta has
agreed, subject to certain limitations, to indemnify us against any losses
arising from any environmental liability at any of the Kalitta Companies'
facilities.
In part because of the highly industrialized nature of many of the
locations at which we operate, there can be no assurance that we have discovered
all environmental contamination for which we may be responsible.
GOVERNMENT REGULATION
General. We are subject to Title 49 of the United States Code (formerly the
Federal Aviation Act of 1958, as amended), under which the Department of
Transportation ("DOT") and the FAA exercise regulatory authority over air
carriers. The DOT and the FAA have the authority to modify, amend, suspend or
revoke the authority and licenses issued to us for failure to comply with the
provisions of law or applicable regulations. In addition, the DOT and the FAA
may impose civil or criminal penalties for violations of applicable rules and
regulations. In addition, we are subject to regulation by various other federal,
state, local and foreign authorities, including the Department of Defense and
the Environmental Protection Agency.
Our international operations are governed by air services agreements
between the U.S. and foreign countries where we operate. Under some of these air
services agreements, traffic rights in those countries are available to only a
limited number of and in some cases only one or two, U.S. air carriers and are
subject to approval by the applicable foreign regulators, limiting growth
opportunities in such countries.
Safety, Training and Maintenance Regulations. Virtually every aspect of our
air carrier operations are subject to extensive FAA regulation, including the
areas of safety, training and maintenance. To ensure compliance with FAA rules
and regulations, the FAA routinely inspects air carrier operations and aircraft
and proposes civil monetary penalties in the event of non-compliance.
Periodically, the FAA focuses on particular aspects of air carrier
operations. For example, after the Valujet accident, the FAA adopted new
procedures concerning oversight of contract maintenance, and after the Fine Air
crash, the FAA conducted extensive inspections of procedures for loading cargo
aircraft. These types of inspections and regulations often impose additional
burdens on air carriers and increase their operating costs. We cannot predict
when we will be subject to such inspections or regulations, nor the impact of
such inspections or regulations.
Noise Abatement Regulations. Airline operators must comply with FAA noise
control regulations primarily promulgated under the Airport Noise and Capacity
Act of 1990 (the "Noise Regulations").
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<PAGE> 11
Currently, we are in compliance with the Noise Regulations. We own 71 aircraft
and lease seven aircraft that are affected by the Noise Regulations, consisting
of 11 Boeing 747s (two of which are grounded due to a series of FAA
Airworthiness Directives unrelated to the Noise Regulations), eight Lockheed
L-1011s, 19 Douglas DC-8s, 35 Boeing 727s and five Douglas DC-9-15Fs
(collectively, the "Jet Fleet").
Each aircraft in the Jet Fleet must comply with Stage 3 of the Noise
Regulations by January 1, 2000. Any aircraft not complying with Stage 3 of the
Noise Regulations on January 1, 2000 may not be operated in the U.S. until it
complies with Stage 3 of such regulations. Of the 78 aircraft in the Jet Fleet,
55 aircraft currently comply with Stage 3 of the Noise Regulations or are
currently being modified to comply with Stage 3 of such regulations, including
all of our Boeing 747s and Lockheed L-1011s.
Only six of our 19 Douglas DC-8s comply with Stage 3 of the Noise
Regulations. Because we cannot currently justify the cost to bring the 13
remaining Douglas DC-8s into compliance with Stage 3 of the Noise Regulations,
we do not intend to modify these 13 Douglas DC-8s to meet Stage 3 of the Noise
Regulations. We currently intend to dispose of these 13 Douglas DC-8s. Because
these Douglas DC-8s are collateral under one of our debt agreements, any sale of
these aircraft must be made in compliance with the debt agreement, which may
include repaying a portion of the loan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
In addition, eight of our Boeing 727s do not comply with Stage 3 of the
Noise Regulations, not including two Boeing 727s currently being modified to
comply with Stage 3 of such regulations and one Boeing 727 currently parked.
Other than the parked Boeing 727, we currently anticipate modifying our
remaining Boeing 727s to comply with Stage 3 of the Noise Regulations by January
1, 2000. We anticipate the aggregate cost of these modifications to be
approximately $14.4 million, not including aircraft downtime. In addition, one
of our Douglas DC-9-15Fs does not comply with Stage 3 of the Noise Regulations.
We currently intend to modify this Douglas DC-9-15F to comply with Stage 3 of
the Noise Regulations by January 1, 2000 at a cost of $1.5 million, not
including aircraft downtime.
Some airport operators have adopted local regulations which, among other
things, impose curfews and other noise limiting requirements and other airport
operators may do so in the future. Finally, our international operations are
affected by noise regulations in foreign countries that may be stricter than
those in effect in the U.S.
Cargo Door and Floor Modifications Regulations. We currently operate 31
Boeing 727s which were converted from passenger configuration to freighter
configuration by installing a large cargo door and various cargo container
handling systems. The FAA issued authorizations, called Supplemental Type
Certificates ("STCs"), to four companies to convert Boeing 727s from passenger
configuration to freighter configuration. All of these 31 Boeing 727s were
converted to freighter configuration pursuant to three of the four STCs.
The FAA has reevaluated these STCs and has determined that they do not meet
FAA standards in several respects. The FAA has issued an Airworthiness Directive
(a "Directive") to address the first of its concerns -- the structural strength
of the aircraft floor. Other areas of concern relate to the strength of various
cargo-handling systems and are expected to be addressed later.
Pursuant to the Directive, each operator of Boeing 727 freighter aircraft
modified pursuant to any of the four STCs must limit the weight of each cargo
container position and adopt other operating restrictions, until the operator
can demonstrate that the floor strength meets the FAA's standards. Under the
Directive, until we can demonstrate that the floor strength meets the FAA's
standards, we must limit the weight of each cargo container position to
approximately 4,000 pounds and after June 2001, we must limit the weight of each
cargo container position to approximately 3,000 pounds. Currently, the maximum
weight of each cargo container position is approximately 8,000 pounds. Most of
our Boeing 727s have 12 cargo container positions.
To address this problem, during the first half of 1998, we purchased one of
these four STCs. Of the 31 Boeing 727s we currently operate, five were converted
to cargo configuration pursuant to this STC. As the owner of this STC, we were
able to receive authority from the FAA to modify these five Boeing 727s
11
<PAGE> 12
to raise the permissible weight of each cargo container position to
approximately 6,000 pounds. We expect these modifications to take three to four
days to complete and to cost between $25,000 to $50,000 per aircraft, not
including aircraft downtime. We expect to perform all of these modifications at
our maintenance facilities.
We have also applied to the FAA for authority to modify our remaining
Boeing 727s to raise the permissible weight per cargo container position to
approximately 6,000 pounds. We do not expect this Directive to have a material
adverse effect on our business.
The FAA is now reviewing the structural integrity of other types of cargo
aircraft, including Douglas DC-8s and DC-9s. We are currently working with the
FAA and other industry groups to analyze these issues and propose solutions, if
any. We do not expect this matter to have a material adverse effect on our
business.
Aging Aircraft Regulations; Potential Compliance Costs. All of our aircraft
are subject to FAA Directives issued at any time under the FAA's "Aging
Aircraft" program or issued on an ad hoc basis. These Directives can cause us to
conduct extensive examinations and structural inspections of our aircraft and to
make modifications to our aircraft to address or prevent problems of corrosion
and structural fatigue.
For example, the FAA has issued a Directive requiring certain modifications
to the engine pylons on all Boeing 747-100s and -200s by March 2000. Three of
our Boeing 747s must be modified pursuant to this Directive at an anticipated
cost of between $1 million and $1.5 million per aircraft, not including downtime
of approximately 45 days per aircraft. We currently intend to modify two of
these Boeing 747s in 1999 and the remaining Boeing 747 in 2000. We expect to
modify one Boeing 747 during regularly scheduled maintenance to minimize the
impact of its downtime and will seek to have the other two aircraft modified
during scheduled maintenance to the extent practicable.
Hazardous Materials Regulations. The FAA exercises regulatory jurisdiction
over transporting hazardous materials. From time to time, we transport articles
that are subject to these regulations. Shippers of hazardous materials share
responsibility with the air carrier for compliance with these regulations and
are primarily responsible for proper packaging and labeling. If we fail to
discover any undisclosed hazardous materials or mislabel or otherwise ship
hazardous materials, we may suffer possible aircraft damage or liability, as
well as, substantial monetary penalties. The FAA has recently increased its
monitoring of shipments of hazardous materials.
Contraband Risks. Although required to do so, customers may fail to inform
us about cargo that must be processed by applicable customs authorities. If we
fail to properly process cargo through customs, our aircraft could be seized
and/or we may suffer substantial monetary penalties.
In addition, some of our aircraft fly to and from countries, such as
Colombia, where substantial quantities of illegal drugs are manufactured. In the
past, without our prior knowledge, individuals have tried to smuggle illegal
drugs into the U.S. on our aircraft. If we fail to discover any illegal drugs or
other illegal cargo on our aircraft, the aircraft could be seized and/or we may
suffer substantial monetary penalties.
Foreign Operations Regulated. Some of our operations are conducted between
the U.S. and foreign countries, as well as between two or more points located
outside the U.S. As with the certificates and licenses obtained from U.S.
authorities, we must comply with all applicable rules and regulations imposed by
foreign aeronautical authorities or risk having our foreign operating
certificates or licenses revoked, suspended, amended or modified.
Stock Ownership by Non-U.S. Citizens. Under current federal aviation law,
our air freight carriers could cease to be eligible to operate as air freight
carriers if more than 25% of our voting stock 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 must be
U.S. citizens. All of our directors and officers are U.S. citizens. Furthermore,
the Certificate of Incorporation limits the aggregate voting power of non-
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<PAGE> 13
U.S. persons to 22 1/2% of the votes voting on or consenting to any matter, and
our Bylaws do not permit non-U.S. citizens to serve as directors or officers.
INSURANCE
We are vulnerable to potential losses that 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.
We are required by the DOT to carry liability insurance on each of our aircraft
and many of our aircraft leases and contracts also require us to carry such
insurance. We currently maintain public liability and property damage insurance
and aircraft liability insurance for each 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 some small aircraft.
We maintain baggage and cargo liability insurance if not provided by our
customers under contracts. Although we believe that our insurance coverage is
adequate, there can be no assurance that the amount of such coverage will not be
changed upon renewal or that we will not be forced to bear substantial losses
from accidents. Substantial claims resulting from an accident could have a
material adverse effect on our business. We attempt to monitor the amount of
liability insurance maintained by the third party carriers utilized in our air
logistics business through, among other things, the obtaining of certificates of
insurance.
ITEM 2. PROPERTIES
General. Our facilities consist of office space, hangars, maintenance
facilities and warehouse and storage space. Some of our hangar facilities are
constructed on property ground leased from airport owners. Accordingly, the
hangar improvements revert to the owner when the ground lease expires. We also
have various agreements with municipalities and governmental authorities that
own and operate airports throughout the U.S. These agreements generally relate
to our use of general airport facilities, but may also include leases or
licenses to use hangar and maintenance space. In addition, we own a number of
aircraft. See "Item 1. Business -- Aircraft Fleet."
The following is a summary of our major facilities:
<TABLE>
<CAPTION>
OWNED/
LOCATION USE OF SPACE LEASED
- -------- ------------ ------
<S> <C> <C>
Dallas/Fort Worth International Company headquarters Owned(1)
Airport
Dallas/Fort Worth International Offices and warehouse Leased
Airport
Willow Run Airport, Ypsilanti, MI Office, hangar, maintenance, fuel
farm and storage Leased
N. I-94 Service Drive, Ypsilanti, MI Office, storage and maintenance Owned
Oscoda, MI Office, hangar, maintenance,
housing, fuel farm and storage Leased
Hulman Regional Airport, Office, hangar and sorting space
Terre Haute, IN Leased
Los Angeles International Airport Office, hangar and ramp Leased
Honolulu International Airport(2) Office and warehouse Leased
Miami International Airport Office, hangar, ramp and maintenance Leased
</TABLE>
- ---------------
(1) We own the building and improvements and lease the land from the Dallas/Fort
Worth International Airport.
(2) We have constructed a warehouse at the Honolulu International Airport which
we lease to AIC.
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<PAGE> 14
New Sorting Facility. We currently lease our 90,000 square foot sorting
space at the Hulman Regional Airport in Terre Haute, Indiana. Because of the
lack of available expansion space and the limited airport facilities in Terre
Haute, we plan to move this sorting center to Fort Wayne, Indiana in July 1999.
We have entered into a 20 year lease with the Fort Wayne-Allen County Airport
Authority for a 239,000 square foot sorting facility. This new sorting facility
will more than double the current sorting capacity of our scheduled freight
business, to approximately 2 million pounds per day. A separate area of the
facility will be dedicated to serving the U.S. Postal Service. We also lease
ramp space, a 30,000 square foot maintenance building for aircraft and ground
support equipment maintenance and a 15,000 square foot facility for crew
quarters and flight operations. In addition, we have access to a 12,000 foot
lighted runway equipped for full instrument approach.
Oscoda Base. We sublease our maintenance facility at the former Wurtsmith
Air Force Base in Oscoda, Michigan from the Oscoda-Wurtsmith Airport Authority
pursuant to a prime lease from the U.S. Government. These subleases vary in
duration from month-to-month to long-term and are subject to earlier termination
upon termination of the prime lease between the U.S. Government and the
Wurtsmith Authority. Under the subleases, we have access to an 11,800 foot
lighted runway equipped for full instrument approach, as well as office, hangar,
maintenance and storage space. Until 2011, the Oscoda facility is part of a
"renaissance" zone which means that we do not pay real or personal property
taxes on our facilities and equipment in Oscoda. In connection with the
restructuring of Kitty Hawk International, we are closing surplus portions of
our Oscoda facility.
ITEM 3. LEGAL PROCEEDINGS
Litigation Concerning American International Cargo. As a result of our
acquisition of AIA (now Kitty Hawk International), we acquired a 60% interest in
AIC. Pacific Aviation Logistics, Inc. ("PAL") owned the remaining 40% interest
in AIC and was the managing partner of AIC. Beti Ward, who owns PAL, was the
general manager of AIC. AIC operates a scheduled air freight service between Los
Angeles, Honolulu and various destinations in the Pacific. AIC does not own any
aircraft and currently leases all of its aircraft and facilities from us.
In August 1998, we called a partnership meeting to designate AIA as the
managing partner of AIC and to replace Ms. Ward as general manager. In response,
Ms. Ward and PAL filed suit to prevent these actions and requested the court to
dissolve AIC. While these issues were being addressed in court, we reached a
settlement with Ms. Ward and PAL. The terms of the settlement are:
(1) AIC will pay PAL a $5.4 million cash distribution from PAL's
capital account in AIC.
(2) We will give Ms. Ward and PAL a promissory note for an additional
$2.35 million, payable in three annual installments of $700,000 each and
one final payment of $250,000. This promissory note bears interest at a
rate of 9.98%, and interest is payable semi-annually.
(3) Ms. Ward and PAL will transfer to us all of their interest in AIC
and its business.
(4) Ms. Ward and PAL will broadly covenant not to compete in the Los
Angeles and Honolulu air freight markets for a period of three and one-half
years.
(5) Ms. Ward and PAL will return approximately $180,000 worth of AIC's
property.
(6) All the parties will exchange mutual releases, but we will retain
the right to pursue audit actions and seek other limited recoveries against
Ms. Ward and PAL.
As a result of the settlement, we now have full ownership and control of
AIC and its business is being conducted without interruption. Currently, we
anticipate dissolving AIC and combining its operations with our domestic
scheduled freight services business.
Routine Litigation. We are subject to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be
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<PAGE> 15
predicted with certainty, management does not believe that the outcome of any of
these legal matters will have a material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are:
<TABLE>
<CAPTION>
NAME OFFICES
- ---- -------
<S> <C>
M. Tom Christopher.................... Chairman of the Board of Directors and Chief
Executive Officer
James R. Craig........................ Vice President and General Counsel
Tilmon J. Reeves...................... President and Chief Operating Officer
Richard R. Wadsworth.................. Senior Vice President -- Finance, Chief Financial
Officer and Secretary
</TABLE>
M. Tom Christopher has served as our Chairman of the Board of Directors and
Chief Executive Officer since our inception in 1985 and serves in the class of
directors whose terms expire at the 2000 Annual Meeting of Stockholders. He has
over 20 years of experience in the air freight industry.
James R. Craig has served as our Vice President and General Counsel since
April 1, 1998. From October 1994 to November 1997, Mr. Craig served on our Board
of Directors. Prior to April 1998, Mr. Craig was of counsel to Burke, Wright &
Keiffer, P.C. 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.
Tilmon J. Reeves has served as our President since May 1993 and as our
Chief Operating Officer from May 1993 to November 1997 and from April 1998 until
the present. Mr. Reeves has over 30 years of aviation experience. Mr. Reeves
became a director in October 1994 and serves in the class of directors whose
terms expire at the 1999 Annual Meeting of Stockholders.
Richard R. Wadsworth has served as our Senior Vice President -- Finance
since October 1992, Chief Financial Officer since September 1994 and Secretary
since October 1994. Mr. Wadsworth served on our Board of Directors from October
1994 to November 1997 and from April 1998 to the present. Mr. Wadsworth serves
in the class of directors whose terms expire at the 2001 Annual Meeting of
Stockholders.
MODIFICATION OF REEVES EMPLOYMENT AGREEMENT AND GRANT OF OPTIONS
In April 1998, we entered into a Modified and Restated Employment Agreement
(the "Employment Agreement") with Mr. Reeves. The Employment Agreement modifies
and supercedes Mr. Reeves' prior employment agreement in its entirety. The terms
of the Employment Agreement are substantially similar to those of Mr. Reeves'
prior employment agreement, except for the following:
(1) Mr. Reeves' annual base salary was increased from $115,000 to
$400,000.
(2) in the event we terminate Mr. Reeves' employment other than as a
result of Mr. Reeves' material breach of the Employment Agreement, Mr.
Reeves' guaranteed post-termination compensation was increased from one
year at 100% of his then-current salary and two additional years at 50% of
his then-current salary to five years at 100% of his then-current salary,
payable at the time he would have received it absent termination; and
(3) Mr. Reeves was granted a non-qualified stock option (the "Old
Option") to acquire 400,000 shares of common stock at an exercise price of
$16.75 per share. The option vested as to
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<PAGE> 16
100,000 shares on each of April 27, 1999, 2000, 2001 and 2002. However, in
general, in the event of our dissolution or liquidation, our
reorganization, merger or consolidation where we were not the surviving
entity, or our sale of substantially all of our property, the option became
immediately exercisable in full. In addition, upon our termination of Mr.
Reeves' employment without cause or upon Mr. Reeves' death or disability,
the option became immediately exercisable in full. The option terminated on
the earlier of December 31, 2005 or the 12 month anniversary of Mr. Reeves'
death. In addition, if we terminated Mr. Reeves' employment for cause or if
Mr. Reeves voluntarily terminated his employment before reaching age 65,
other than for disability, the option terminated immediately. Further, we
could have immediately terminated the option if during or after Mr. Reeves'
employment, Mr. Reeves directly or indirectly engaged in competition with
us or disclosed any of our proprietary and confidential business
information in breach or violation of any agreement. The option generally
provided for customary anti-dilution protection for Mr. Reeves and granted
Mr. Reeves rights to register shares he received under the option at the
same time and in the same proportion as Mr. Christopher registered shares
of common stock. Neither Messrs. Christopher or Reeves have contractual
rights to cause us to register shares of common stock.
In February 1999, we replaced the Old Option with a non-qualified stock
option (the "New Option") to acquire 400,000 shares of common stock at an
exercise price of $16.75 per share. The New Option was granted under the Kitty
Hawk, Inc. 1999 Executive Stock Option Plan (the "Option Plan") and is subject
to stockholder approval of the Option Plan at the 1999 Annual Meeting of
Stockholders. In connection with the grant of the New Option, Mr. Christopher
irrevocably agreed to vote all shares of common stock he is entitled to vote in
favor of approving the Option Plan at the 1999 Annual Meeting of Stockholders.
Mr. Christopher currently has the right to vote approximately 58.2% of the
common stock, which is greater than the majority approval required to approve
the Option Plan. The terms of the New Option are substantially the same as the
terms of the Old Option, except that the New Option vests as to 200,000 shares
on February 24, 1999 and an additional 100,000 shares on each of February 24,
2000 and 2001 and fully vests immediately upon a change of control of the
Company. In addition, the term of the New Option was extended from December 31,
2005 to February 24, 2009.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market System under the
symbol "KTTY". The following table sets forth the range of high and low closing
sale prices of the common stock for the periods shown below.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
QUARTER ENDED HIGH LOW
- ------------- ------ ------
<S> <C> <C>
March 31, 1997.............................................. $12.63 $10.00
June 30, 1997............................................... 17.13 11.88
September 30, 1997.......................................... 20.25 15.13
December 31, 1997........................................... 22.75 17.00
March 31, 1998.............................................. 24.25 18.00
June 30, 1998............................................... 21.00 15.00
September 30, 1998.......................................... 19.00 11.50
December 31, 1998........................................... $14.50 $10.00
</TABLE>
At March 24, 1999, we had approximately 69 record holders of our common
stock. Based upon our last determination of the number of beneficial owners of
common stock, we had approximately 3,500 beneficial owners.
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<PAGE> 17
We have never declared or paid any cash dividends on the common stock. We
presently intend to retain earnings, if any, for development and growth of our
business and do not anticipate paying cash dividends on the common stock in the
foreseeable future. Our debt agreements contain significant limitations on our
ability to pay dividends. Payment of future dividends, if any, will be at the
discretion of our Board of Directors, after taking into account various factors,
including our earnings, capital requirements and surplus, financial position,
contractual restrictions and other relevant business considerations, and there
can be no assurance that dividends will be paid. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
On December 4, 1996, the Company changed its fiscal year end from August 31
to December 31.
The following table sets forth selected financial and operating data with
respect to the Company for each of the fiscal years indicated and for the four
months ended December 31, 1995 and 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 statement
of operations data for the fiscal year ended August 31, 1996, for the four
months ended December 31, 1996 and for each of the fiscal years ended December
31, 1997 and 1998 and the selected balance sheet data as of December 31, 1997
and 1998 have been derived from audited consolidated financial statements of the
Company appearing elsewhere in this Form 10-K. The selected balance sheet data
as of August 31, 1994, 1995 and 1996 and December 31, 1996 have been derived
from audited consolidated financial statements of the Company not appearing in
this Form 10-K. The selected statement of operations data for the fiscal years
ended August 31, 1994 and 1995 has been derived from audited consolidated
financial statements of the Company not appearing in this Form 10-K. Operating
results for the four months ended December 31, 1995 and 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 statement of operations data for the
four months ended December 31, 1995, which are derived from the Company's
unaudited consolidated financial statements appearing elsewhere in this Form
10-K, reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for such periods. In November 1997, the Company acquired the Kalitta
Companies. Accordingly, the results of operations of the Kalitta Companies are
included in the financial and operating data from their date of acquisition.
Also included in the following table are the Companies' unaudited pro forma
consolidated statement of operations data for the fiscal year ended December 31,
1997, giving effect to (i) the November 1997 acquisition of the Kalitta
Companies, (ii) the issuance of the Notes, (iii) the incurrence of a $45.9
million term loan and (iv) the September 1997 acquisition of 16 Boeing 727s from
the Kalitta Companies, each as if they occurred on January 1, 1997. This
information is presented for illustrative purposes only and does not purport to
present the Company's results of operations had these transactions occurred on
the date indicated, nor are they necessarily indicative of the consolidated
results of operations which may be expected to occur in the future. No pro forma
adjustments have been applied to reflect (i) revenues or operating costs
generated from two Boeing 747s purchased in February 1998 and modified with
approximately $56 million of the net proceeds from the sale of the Notes and
other internally generated funds or (ii) operating efficiencies or cost savings
(other than approximately $1.5 million of insurance savings) resulting from the
acquisition of the Kalitta Companies. In addition, pro forma results have not
been adjusted to eliminate (i) abnormally high engine maintenance expenses
previously incurred in response to certain Directives, (ii) costs previously
incurred to add and maintain flight crews in anticipation of increased air
freight carrier business which had not yet materialized in part due to delays in
acquiring aircraft and (iii) start-up costs previously incurred to establish the
Company's wide-body passenger charter business, which was recently terminated.
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<PAGE> 18
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, 1997
------------------------------ ----------------- PRO
1994 1995 1996 1995 1996 1997 FORMA 1998
-------- -------- -------- ------- ------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Air freight carrier revenues...... $36,563 $47,106 $72,605 $37,437 $43,867 $177,159 $531,551 $602,918
Air logistics revenues............ 71,137 56,604 69,810 32,291 16,119 70,539 70,539 80,757
Maintenance and other............. -- -- -- -- -- 2,145 29,231 31,262
------- ------- ------- ------- ------- -------- -------- --------
Total revenues.................... 107,700 103,710 142,415 69,728 59,986 249,843 631,321 714,937
Total costs of revenues........... 92,951 85,532 119,489 57,682 47,580 195,691 548,217 598,797
------- ------- ------- ------- ------- -------- -------- --------
Gross profit...................... 14,749 18,178 22,926 12,046 12,406 54,152 83,104 116,140
General and administrative
expenses........................ 6,013 7,832 9,080 2,862 2,725 15,106 38,160 43,037
Non-qualified profit sharing
expense......................... 732 1,001 1,170 889 962 2,429 2,429 2,797
Stock option grants to
executives...................... -- -- 4,231(1) -- -- -- -- --
------- ------- ------- ------- ------- -------- -------- --------
Operating income.................. 8,004 9,345 8,445 8,295 8,719 36,617 42,515 70,306
Interest expense.................. (343) (1,185) (1,859) (482) (684) (6,924) (40,084) (40,004)
Contract settlement income,
net(2).......................... 1,178 -- -- -- -- -- -- --
Other income (expense)............ (432) (601) 291 38 625 1,110 (355) 674
------- ------- ------- ------- ------- -------- -------- --------
Income (loss) before minority
interest and income taxes....... 8,407 7,559 6,877 7,851 8,660 30,803 2,076 30,976
Minority interest................. -- -- -- -- -- (497) (3,036) (3,006)
------- ------- ------- ------- ------- -------- -------- --------
Income (loss) before income
taxes........................... 8,407 7,559 6,877 7,851 8,660 30,306 (960) 27,970
Income taxes...................... 3,146 3,143 2,768 3,097 3,367 12,416 -- 11,328
------- ------- ------- ------- ------- -------- -------- --------
Net income (loss)................. $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293 $ 17,890 $ (960) $ 16,642
======= ======= ======= ======= ======= ======== ======== ========
Basic and diluted earnings (loss)
per share....................... $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55 $ 1.60 $ (0.06) $ 0.99
======= ======= ======= ======= ======= ======== ======== ========
Weighted average common shares
outstanding..................... 7,968 7,968 7,928 7,968 9,610 11,194 16,751 16,855
OTHER FINANCIAL DATA:
Capital expenditures.............. $13,876 $17,929 $33,538 $ 175 $13,796 $115,014 $ 24,356 $217,179
Adjusted EBITDA(3)................ $ 9,507 $12,839 $19,840 $10,014 $12,546 $ 53,278 $ 88,314 $126,462
Ratio of adjusted EBITDA to total
interest expense................ 27.7x 10.8x 10.7x 20.8x 18.3x 7.7x 2.2x 3.16x
Ratio of earnings to fixed
charges(4)...................... 20.6x 6.9x 4.4x 15.9x 12.9x 4.4x 1.1x 1.6x
OPERATING DATA:
Air freight carrier
Aircraft owned (at end of
period)....................... 15 22 25 22 25 124 124 117
Flight hours(5)................. 11,795 15,183 20,237 6,320 7,670 46,198 127,548 134,577
Air freight charter logistics
Number of on-demand charters
managed(6).................... 16,713 14,198 19,578 9,356 4,185 15,402 15,402 17,743
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, DECEMBER 31,
--------------------------- ------------------------------
1994 1995 1996 1996 1997 1998
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................. $ 4,223 $ 1,747 $(6,962) $ 33,519 $117,930 $ 44,958
Total assets........................................... 37,911 47,954 79,827 123,028 836,746 982,585
Total debt............................................. 9,145 16,981 36,912 24,768 404,643 489,751
Stockholders' equity................................... $12,550 $16,966 $23,639 $ 58,292 $174,873 $194,197
</TABLE>
- ---------------
(1) Results for the fiscal year ended August 31, 1996 lack comparability to
other periods because such periods include nonrecurring grants to two
executive officers of stock options that resulted in a charge to earnings of
approximately $4,231. Had these grants of stock options not occurred, net
income for the fiscal year ended August 31, 1996 would have been
approximately $6,648 and net income per share would have been $0.84.
(2) Reflects sums received in settlement of litigation.
(3) Adjusted EBITDA represents net income before minority interest, income tax
expense, interest expense, depreciation, amortization and certain items
described below. Adjusted EBITDA excludes
18
<PAGE> 19
approximately $4,231 from stock options granted to executives in 1996 and
approximately $1,178 in contract settlements in fiscal 1994, respectively.
Adjusted EBITDA is presented because it is a financial indicator of the
Company's ability to incur and service debt. However, adjusted EBITDA is not
calculated under generally accepted accounting principles (GAAP), is not
necessarily comparable to similarly titled measures of other companies and
should not be considered in isolation, as a substitute for operating income,
net income or cash flow data prepared in accordance with GAAP or as a
measure of the Company's profitability or liquidity.
(4) In calculating the ratio of earnings to fixed charges, earnings consist of
income before minority interest and income tax expense and fixed charges
(less capitalized interest). Fixed charges consist of capitalized interest,
interest expense, amortization of debt expense and one-third of rental
payments on operating leases (such factor having been deemed by the Company
to represent the interest portion of such payments).
(5) As reported by the Company to the Federal Aviation Administration. Flight
hours reported are less than block hours, which also include the time an
aircraft is operating under its own power whether or not airborne. The
Company generally bills its customers on a block hour basis.
(6) Includes on-demand charters flown by the Company's aircraft.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Acquisition of the Kalitta Companies. On November 19, 1997, the Company
acquired all of the outstanding stock of the Kalitta Companies. The results of
operations for fiscal year 1997 include the results of operations of the Kalitta
Companies for the period November 19, 1997 to December 31, 1997, which is
generally the highest volume and most profitable period of the year.
Revenues. The Company's revenues are derived from four related businesses
(i) an air freight carrier, (ii) a scheduled freight service provider, (iii) an
air logistics service provider and (iv) a maintenance operation. Air freight
carrier revenues are derived substantially from ACMI contract charters,
on-demand charters flown with the Company's aircraft and the Company's passenger
charter service. Scheduled freight services revenues are generated through an
overnight airport-to-airport air freight service to approximately 46 U.S. cities
and an international service between Los Angeles and Honolulu, among the
Hawaiian islands and once a week through Melbourne, Hong Kong and other Pacific
Rim locations. Revenue for the scheduled freight service is included in the air
freight carrier. Air logistics revenues are derived substantially from on-demand
air freight charters arranged by the Company 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 with its own aircraft,
charges to the customer for air transportation are accounted for as air freight
carrier revenues and charges for ground handling and transportation are
accounted for as air logistics revenues. Maintenance revenue is generated from
third party maintenance work performed on engines and airframes.
The Company recently eliminated its passenger charter division and parked
the four passenger planes in that division. In addition, the Company has stopped
providing third party airframe repairs and engine overhaul services, other than
on JT3 engines used on Douglas DC-8s and JT8 engines used on Boeing 727s and
Douglas DC-9s. See "Item 1. Business -- Restructuring of Kitty Hawk
International."
The principal factors that have contributed to revenue growth over the past
several years have been increases in the size of the Company's fleet from 10
aircraft at December 31, 1993 to 117 aircraft at December 31, 1998, the general
U.S. economic expansion since 1992 and increased global demand for time
sensitive air freight services.
Costs of Revenues. The principal components of the costs of revenues
attributable to the air freight carrier business consist of the costs for
maintenance and operation of 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 and
operations of the Company's scheduled freight services because fuel for the ACMI
contract charters is generally provided by the customer or billed to the
customer on a direct pass-through basis. The principal components of the costs
of revenues attributable to air logistics consist of sub-charter costs paid to
third party air freight carriers and costs paid for ground handling and
transportation. With respect to on-demand charters that are flown on the
Company's aircraft, all related air transportation expenses are allocated to the
air freight carrier business and all related cargo ground handling and
transportation are allocated to the air logistics business. The principal
components of the costs of revenues attributable to maintenance consist of costs
related to the provision of third party maintenance services.
Under the Company's Amended and Restated Annual Incentive Compensation
Plan, the Company awards semiannual cash bonuses to its employees. The aggregate
amount of bonuses for the fiscal year ended August 31, 1996, the fiscal years
ended December 31, 1997 and 1998 and the four months ended December 31, 1996
have equaled 9.5%, 7.3%, 10% and 10%, respectively, of the Company's income
before the deduction of income taxes, stock option grants to executives and the
bonuses that were expensed under this plan.
The Company's gross margins have been substantially higher in its air
freight carrier business (which uses Company aircraft) than in its air logistics
business (which principally uses third party aircraft). In
20
<PAGE> 21
addition, the air freight carrier business historically has provided a more
predictable revenue base. Accordingly, the Company allocates its aircraft to
ACMI contracts prior to allocating them to on-demand service.
Significant Events Affecting Comparability of Results of Operations. Since
September 1, 1995, several events have affected the comparability of results of
operations for the fiscal years ended August 31, 1996 and December 31, 1997. 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 1997, the Company acquired the Kalitta Companies
and included their results of operations for the period November 19, 1997 to
December 31, 1997 in the Company's results of operations, which increased
revenues by approximately $58.9 million, costs of revenues by approximately
$49.4 million and income before interest, minority interest and income taxes by
approximately $6.5 million.
Dependence of Significant Customers. The U.S. Postal Service accounted for
revenues of $21.3 million, $44.9 million, $120 million and $26.2 million, or
14.9%, 17.9%, 16.8% and 43.7% of total revenues, for the fiscal year ended
August 31, 1996, the years ended December 31, 1997 and 1998 and the four months
ended December 31, 1996. BAX Global accounted for revenues of $15.6 million,
$44.7 million, $71.5 million and $7.1 million, or 10.9%, 17.9%, 10% and 11.9% of
total revenues, for the fiscal year ended August 31, 1996, the years ended
December 31, 1997 and 1998 and the four months ended December 31, 1996. Revenues
from these two customers are generated by the air freight carrier.
Change in Fiscal Year. On December 4, 1996, the Company changed its fiscal
year end from August 31 to December 31.
RESULTS OF OPERATIONS
The following tables set forth, on a comparative basis for the periods
indicated, the components of the Company's gross profit and the gross profit
margin by revenue type:
<TABLE>
<CAPTION>
FISCAL YEAR FOUR MONTHS ENDED DECEMBER 31,
ENDED AUGUST 31, ---------------------------------
1996 1995 1996
----------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AIR FREIGHT CARRIER:
Revenues.................................. $72,605 100.0% $37,437 100.0% $43,867 100.0%
Costs of revenues......................... 54,648 75.3 27,385 73.1 32,714 74.6
------- ----- ------- ----- ------- -----
Gross profit.............................. $17,957 24.7% $10,052 26.9% $11,153 25.4%
======= ===== ======= ===== ======= =====
AIR LOGISTICS:
Revenues.................................. $69,810 100.0% $32,291 100.0% $16,119 100.0%
Costs of revenues......................... 64,841 92.9 30,297 93.8 14,866 92.2
------- ----- ------- ----- ------- -----
Gross profit.............................. $ 4,969 7.1% $ 1,994 6.2% $ 1,253 7.8%
======= ===== ======= ===== ======= =====
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1997 1997 PRO FORMA 1998
--------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AIR FREIGHT CARRIER:
Revenues.............. $78,793 100.0% $177,159 100.0% $531,551 100.0% $602,918 100.0%
Costs of revenues..... 60,378 76.6 127,957 72.2 460,048 86.5 501,825 83.2
------- ----- -------- ----- -------- ----- -------- -----
Gross profit.......... $18,415 23.4% $ 49,202 27.8% $ 71,503 13.5% $101,093 16.8%
======= ===== ======== ===== ======== ===== ======== =====
AIR LOGISTICS:
Revenues.............. $53,879 100.0% $ 70,539 100.0% $ 70,539 100.0% $ 80,757 100.0%
Costs of revenues..... 49,008 91.0 65,921 93.5 65,921 93.5 73,862 91.5
------- ----- -------- ----- -------- ----- -------- -----
Gross profit.......... $ 4,871 9.0% $ 4,618 6.5% $ 4,618 6.5% $ 6,895 8.5%
======= ===== ======== ===== ======== ===== ======== =====
MAINTENANCE AND OTHER:
Revenues.............. -- -- $ 2,145 100.0% $ 29,231 100.0% $ 31,262 100.0%
Costs of revenues..... -- -- 1,813 85.5 22,248 76.1 23,110 73.9
------- ----- -------- ----- -------- ----- -------- -----
Gross profit.......... -- -- $ 332 15.5% $ 6,983 23.9% $ 8,152 26.1%
======= ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table presents, for the periods indicated, consolidated
income statement data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED DECEMBER 31,
FISCAL YEAR ENDED ---------------------------------
ENDED DECEMBER 31,
AUGUST 31, ------------- 1997
1996 1995 1996 1996 1997 PRO FORMA 1998
----------- ----- ----- ----- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Air freight carrier........................ 51.0% 53.7% 73.1% 59.4% 70.9% 84.2% 84.3%
Air logistics.............................. 49.0 46.3 26.9 40.6 28.2 11.2 11.3
Maintenance and other...................... -- -- -- -- 0.9 4.6 4.4
----- ----- ----- ----- ----- ----- -----
Total revenues............................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total costs of revenues.................... 83.9 82.7 79.3 82.4 78.3 86.8 83.8
----- ----- ----- ----- ----- ----- -----
Gross profit............................... 16.1 17.3 20.7 17.6 21.7 13.2 16.2
General and administrative expenses........ 6.4 4.1 4.5 6.8 6.0 6.1 6.0
Non-qualified profit sharing expense....... 0.8 1.3 1.6 0.9 0.9 0.4 0.4
Stock option grants to executives.......... 3.0 -- -- 3.2 -- -- --
----- ----- ----- ----- ----- ----- -----
Operating income........................... 5.9 11.9 14.6 6.7 14.8 6.7 9.8
Interest expense........................... (1.3) (0.7) (1.2) (1.6) (2.8) (6.3) (5.6)
Other income (expense)..................... 0.2 0.1 1.0 0.7 0.4 (0.1) 0.1
----- ----- ----- ----- ----- ----- -----
Income before minority interest and income
taxes.................................... 4.8 11.3 14.4 5.8 12.4 0.3 4.3
Minority interest.......................... -- -- -- -- (0.2) (0.5) (0.4)
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes.......... 4.8 11.3 14.4 5.8 12.2 (0.2) 3.9
Income taxes............................... 1.9 4.4 5.6 2.3 5.0 -- 1.6
----- ----- ----- ----- ----- ----- -----
Net income (loss).......................... 2.9% 6.9% 8.8% 3.5% 7.2% (0.2)% 2.3%
===== ===== ===== ===== ===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE PRO FORMA YEAR ENDED DECEMBER 31,
1997
Due to the impact the acquisition of the Kalitta Companies and related
transactions have had on the financial position and results of operations of the
Company, management has determined that the historical results of operations for
the year ended December 31, 1997 lack meaningful comparability to the results of
operations for the year ended December 31, 1998. As a result, the Company has
provided a comparison of the pro forma year ended December 31, 1997 to the year
ended December 31, 1998, which the Company believes provides the most relevant
and useful information to investors. Other than the information
22
<PAGE> 23
provided above, no further comparison of the historical results of operations
for the year ended December 31, 1997 to the year ended December 31, 1998 is
provided herein.
Revenues -- Air Freight Carrier. Air freight carrier revenues for 1998
increased to $602.9 million, or 13.4%, from $531.6 million for pro forma 1997.
Air freight carrier on-demand, ACMI contract charter, and scheduled freight
revenues were $75.5 million, $358.8 million and $166.5 million, or 12.5%, 59.5%
and 27.6%, respectively, of total air freight carrier revenues for 1998, as
compared to $80.3 million, $283.2 million and $164.1 million, or 15.1%, 53.3%
and 30.9%, respectively, of total air freight carrier revenues for pro forma
1997. Revenues from on-demand charters flown by Company aircraft for 1998
decreased 6% as a percent of air freight carrier revenues from pro forma 1997.
This was due to aircraft being allocated to ACMI contract charter service rather
than on-demand service, consistent with the Company's strategy of using more of
its fleet in ACMI business which produces relatively stable revenues. Revenues
from the Company's ACMI contracts increased $75.6 million, or 26.7%, during
1998, in part due to a $22.9 million increase in passenger charters from the
acquisition of two Boeing 747 passenger aircraft early in 1998 which were
subsequently converted to cargo configuration in the fall of 1998. The remaining
increase in ACMI contract charter revenue was generated through the addition of
three Boeing 727s in August 1998, the conversion of the three Boeing 747
aircraft from passenger to cargo configuration during 1998 (including two of
which flew passenger charters for the first half of the year), as well as an
overall increase of $12.7 million in the Company's December 1998 ACMI contract
with the United States Postal Service (USPS). Scheduled freight service revenue
increased $2.5 million, or 1.5%, principally due to higher volumes in the last
half of 1998. Prices for the Company's on-demand charters remained relatively
constant during this period. The Company implemented selective price increases
for its ACMI contract charters and scheduled freight services during 1998.
Revenues -- Air Logistics. Air logistics revenues in 1998 increased $10.2
million, or 14.5%, to $80.8 million from $70.5 million in pro forma 1997. The
number of on-demand charters managed increased by 2,341 charters, or 15.2%, to
17,743 charters for 1998 from 15,402 charters for pro forma 1997. Prices for the
Company's air logistics services have remained relatively constant.
Revenues -- Maintenance and other. Maintenance and other revenues in 1998
increased $2 million, or 6.9%, to $31.2 million from $29.2 million in pro forma
1997. The increase was principally due to a large third party project started
and completed in 1998. This increase was offset by an overall effort begun in
late 1998 to reduce third party maintenance as the Company shifts its efforts to
performing maintenance on its own fleet.
Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues in 1998 increased $41.8 million, or 9.1%, to $501.8 million, from $460
million in pro forma 1997, reflecting increased air freight carrier business.
The gross profit margin from the air freight carrier business increased from
13.5% for pro forma 1997 to 16.8% for 1998. The increase in margins was
primarily the result of lower maintenance costs resulting from operational
efficiencies associated with performing maintenance with internal resources,
higher utilization of aircraft during 1998 and lower average fuel prices in 1998
as compared to pro forma 1997. Fuel prices may increase during 1999 due to
reduced oil exports by certain countries.
Costs of Revenues -- Air Logistics. Air logistics costs of revenues in 1998
increased $7.9 million, or 12%, to $73.9 million, from $66 million in pro forma
1997. The gross profit margin from air logistics increased from 6.5% for pro
forma 1997 to 8.5% for 1998. The increased margin is a result of directing a
larger percentage of on-demand charters to the Company's aircraft (including
aircraft acquired as a result of the Kalitta Companies acquisition) rather than
to third party aircraft, which results in a higher gross margin to the Company.
Costs of Revenues -- Maintenance and other. Maintenance and other costs of
revenues in 1998 increased $861,000, or 3.9%, to $23.1 million, from $22.2
million in pro forma 1997. The gross profit margin increased from 23.9% in pro
forma 1997 to 26.1% in 1998 as a result of greater cost efficiencies from third
party maintenance.
23
<PAGE> 24
General and Administrative Expenses. General and administrative expenses in
1998 increased $4.9 million, or 12.8%, to $43 million from $38.1 million in pro
forma 1997. The increase was principally due to an increase in support functions
and administrative costs associated with the growth of the Company and the
increase in its air freight carrier and air logistics businesses. As a
percentage of revenues, general and administrative expenses decreased to 6% in
1998 from 6.1% for pro forma 1997.
Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense in 1998 increased $368,000, or 15.2%, to $2.8 million from $2.4 million
in pro forma 1997, reflecting the increase of net income before taxes for 1998.
Operating Income. As a result of the above, operating income in 1998
increased $27.8 million, or 65.4%, to $70.3 million from $42.5 million in pro
forma 1997. Operating margin increased to 9.8% in 1998 from 6.7% in pro forma
1997.
Income Taxes. The Company's effective tax rate increased to 40.5% in 1998
from 0% in pro forma 1997. The pro forma operating results included no provision
for income taxes due to the Company's overall net loss position for the pro
forma 1997 operating results. The 1998 effective tax rate is higher than in past
years due to an overall increase in non-deductible expenses, principally meals
for flight crews.
Net Income. As a result of the above, net income in 1998 increased to $16.6
million from a net loss of $960,000 for pro forma 1997. Net income as a
percentage of total revenues increased to 2.3% in 1998 from a net loss of (0.2)%
for pro forma 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE UNAUDITED YEAR ENDED DECEMBER 31,
1996
Because of the change in year end described above, the following discussion
compares the results of operations for the year ended December 31, 1997 to the
unaudited 12 month period ended December 31, 1996.
The results of operations data for 1996 referred to below, are taken from
the Company's unaudited financial statements, which are not separately presented
herein, and are presented for comparative purposes only. In the opinion of
management, the 1996 results of operations include all adjustments management
believes are necessary for a fair presentation.
Revenues -- Air Freight Carrier. Air freight carrier revenues increased to
$177.2 million, or 124.9%, for 1997 from $78.8 million for 1996, principally due
to an increase in fleet size and the acquisition of the Kalitta Companies.
Approximately $56.8 million of the increase was due to revenues generated by the
Kalitta Companies from November 19, 1997 to December 31, 1997, which is the
highest volume and most profitable portion of the year. See "-- Seasonality."
The remaining increase of approximately $120.4 million is primarily attributable
to the growth in the Company's aircraft fleet from 25 aircraft at December 31,
1996 to 42 aircraft immediately prior to the acquisition of the Kalitta
Companies and a $18.5 million revenue increase in the Company's December 1997
ACMI contract with the USPS. Air freight carrier on-demand, ACMI contract
charter, and scheduled freight services revenues were $22.9 million, $131.9
million and $19.9 million, or 13%, 74.5% and 11.2%, respectively, of total air
freight carrier revenues for 1997, as compared to $15.9 million, $61.1 million
and $0, or 20.2%, 77.5% and 0%, respectively, of total air freight carrier
revenues for 1996. Revenues from on-demand charters flown by Company aircraft
for 1997 decreased 25.8% as a percent of air freight carrier revenues from the
prior year due to aircraft being shifted from on-demand to ACMI contract charter
service, consistent with the Company's strategy of using more of its fleet in
ACMI business which produces relatively stable revenues. Prices for the
Company's on-demand and ACMI contract charters remained relatively constant
during this period. Scheduled freight services began when the Company acquired
the Kalitta Companies' scheduled freight operations.
Revenues -- Air Logistics. Air logistics revenues increased $16.7 million,
or 31%, to $70.5 million in 1997 from $53.8 million in 1996. The increase was
primarily due to increased demand for on-demand charters generally and
specifically for charters that require larger aircraft, which generate greater
revenues. Prices for the Company's air logistics services remained relatively
constant during this period. The number
24
<PAGE> 25
of on-demand charters managed increased by 995 charters, or 6.9%, to 15,402
charters for 1997 from 14,407 charters for 1996.
Revenues -- Maintenance. Maintenance revenues were $2.1 million for 1997.
Third party maintenance work began when the Company acquired the Kalitta
Companies' maintenance operations. In 1997, the Company performed maintenance on
airframes and engines for third parties.
Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $67.8 million, or 111.9%, to $127.9 million in 1997, from
$60.4 million in 1996, reflecting increased costs associated with increased
fleet. Maintenance expenses increased $17.2 million, or 150%, to $28.7 million
in 1997 from $11.5 million in 1996. Maintenance expenses increased as a
percentage of air freight carrier revenues to 16.2% from 14.6%. The increase was
primarily attributable to adding the aircraft fleet of the Kalitta Companies
which generally have greater maintenance costs as a percentage of revenue.
During 1997, the Kalitta Companies accounted for $15.5 million of these
maintenance expenses. The gross profit margin from the air freight carrier
business increased from 23.4% for 1996 to 27.8% for 1997. The Kalitta Companies
and their fleet of aircraft contributed $9.4 million, or 19.1%, of gross profit
for 1997 with the remainder of the fleet of the Company contributing $27.2
million, or 80.9%, of gross profit. The increase in margins related to the
remainder of the fleet was primarily the result of lower maintenance costs
resulting from operational efficiencies associated with increased fleet size,
higher utilization of aircraft during 1997 and lower average fuel prices in 1997
as compared to 1996. Fuel prices may increase during 1998 due to reduced oil
exports by certain countries.
Costs of Revenues -- Air Logistics. Air logistics costs of revenues
increased $16.9 million, or 34.5%, to $65.9 million for 1997, from $49 million
for 1996. The gross profit margin from air logistics decreased from 9% for 1996
to 6.5% for 1997. The decrease in margin is attributable to the increase in
charters using larger aircraft hired from third party carriers which have a
higher cost than charters flown in the Company's aircraft.
Costs of Revenues -- Maintenance. Maintenance costs of revenues are
associated with services provided for third parties on airframe and engine
maintenance. Gross margin for December 31, 1997 was 15.5%. No third party
maintenance services were provided prior to the acquisition of the Kalitta
Companies.
General and Administrative Expenses. General and administrative expenses
increased $6.2 million, or 68.9%, to $15.1 million for 1997 from $8.9 million
for 1996. The acquisition of the Kalitta Companies contributed approximately $3
million to the increase in general and administrative expenses for 1997,
representing costs for administrative support after the acquisition of the
Kalitta Companies. Excluding the effect of the acquisition of the Kalitta
Companies, the Company experienced an increase in general and administrative
expenses from $8.9 million for 1996 to $12.2 million for 1997 primarily as a
result of an increase in support functions and administrative costs associated
with the growth in the aircraft fleet (from 25 aircraft at December 31, 1996 to
42 aircraft at November 18, 1997) and the increased volume of business of the
air freight carrier. As a percentage of revenues, general and administrative
expenses decreased to 6% in 1997 from 6.7% for 1996.
Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased $1.2 million, or 95.9%, to $2.4 million for 1997 from $1.2
million for 1996, reflecting the increase of net income before taxes for 1997.
Operating Income. As a result of the above, operating income increased
$27.7 million, or 312.8%, to $36.6 million for 1997 from $8.9 million for 1996.
Operating margin increased to 14.7% for 1997 from 6.7% for 1996.
Interest Expense. Interest expense increased to $6.9 million for 1997, as
compared to $2.1 million for 1996, an increase of $4.9 million, or 235.8%. The
increase is primarily a result of incurring $45.9 million of debt under the Term
Loan for the acquisition of 16 Boeing 727 aircraft in September 1997 and issuing
the Notes in November 1997 in connection with the acquisition of the Kalitta
Companies. Because these borrowings are expected to remain outstanding, interest
expense for 1998 will be substantially higher.
25
<PAGE> 26
Other Income. Other income increased to $1.1 million for 1997 from $0.9
million for 1996. The increase was primarily due to increased interest income
during 1997 from the investment of net proceeds from the Company's initial
public offering and of approximately $56 million of net proceeds from the Note
Offering.
Minority Interest. Minority interest represents the earnings attributable
to the 40% interest in AIC owned by a third party, which was approximately
$497,000. The results are for the period November 19, 1997 to December 31, 1997,
which is generally the highest volume and most profitable portion of the year.
See "-- Seasonality."
Income Taxes. The Company's effective tax rate increased to 41% for 1997 as
compared to 39.4% for 1996. The increase is primarily due to increased state
income taxes.
Net Income. As a result of the above, net income increased to $17.9 million
for 1997, compared to $4.7 million for 1996. Net income as a percentage of total
revenues increased to 7.2% for 1997 from 3.5% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for the acquisition and
modification of aircraft and working capital. In addition, the Company has, and
will continue to have, capital requirements for the requisite periodic and major
overhaul maintenance checks for its fleet and for debt service. The Company also
has seasonal working capital needs, because it generates higher revenue in the
fourth calendar quarter and lower revenue in the first calendar quarter. Funding
requirements have historically been met through internally generated funds, bank
borrowings and aircraft sales and from public and private offerings of equity
and debt securities. From time to time, the Company has entered into
sale/leaseback transactions to acquire aircraft and may do so in the future.
In November 1997, the Company issued $340 million of 9.95% Senior Secured
Notes, resulting in net proceeds to the Company of approximately $329.1 million.
The Notes provide for semi-annual interest payments of approximately $16.9
million on each May 15 and November 15 and mature in November 2004. The Notes
are secured by a fleet of 30 aircraft, including nine Boeing 747s, eight
Lockheed L-1011s and 13 Boeing 727s. The Notes are guaranteed by all of the
Company's subsidiaries, other than AIC.
The Company has a $45.9 million outstanding term loan (the "Term Loan").
The Term Loan is due in quarterly installments of $2.25 million commencing in
March 1999, with the balance of $12.15 million due upon maturity in September
2002. Except as provided below, interest on the Term Loan accrues at LIBOR plus
3% or a Base Rate plus 1.5%, subject to reduction. The Base Rate is the Prime
Rate of Wells Fargo Bank, N.A. ("WFB") or the Federal Funds Rate plus 0.5%. At
December 31, 1998, the interest rate on the Term Loan was 8.5%. Except as
provided below, the Term Loan is secured by accounts receivable, all spare parts
(including rotables), inventory, intangibles and contract rights, cash, 15
Boeing 727s and related engines, the stock of each of the Company's
subsidiaries, not including the Company's interest in AIC. The Term Loan is
guaranteed by all of the Company's subsidiaries, not including AIC.
In addition, to fund ongoing capital requirements, including possible
acquisitions, the Company has entered into a Credit Facility with WFB (the
"Credit Facility"), individually and as agent for various lenders to provide the
Company with up to $100 million in revolving loans (subject to a current
borrowing base limitation of approximately $90.2 million, including an increase
of $30 million to the borrowing base as a result of an amendment to the Credit
Facility (the "Amendment") on December 10, 1998) that is secured by the same
collateral as the Term Loan. Except as provided below, the Credit Facility bears
interest at LIBOR plus 2.75% or a Base Rate plus 1.25%, subject to adjustment.
The Base Rate is WFB's Prime Rate or the Federal Funds Rate plus 0.5%. At
December 31, 1998, the interest rate on the Credit Facility was 9.5%. Borrowings
under the Credit Facility are subject to borrowing base limitations based on
eligible inventory and accounts receivable. The Credit Facility matures in
November 2002. As of March 26, 1999, the Company had a balance of approximately
$71.9 million outstanding under the Credit
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Facility and available borrowings under the Credit Facility of approximately
$18.3 million. Borrowings under the Credit Facility and Term Loan are subject to
certain financial covenants. As of December 31, 1998, the Company was in
compliance with all financial covenants.
In connection with the Amendment, the Company pledged 11 Douglas DC-8-60s
and eight Douglas DC-8-50s under the Credit Facility and Term Loan. The Company
can request WFB to release its liens on the Douglas DC-8-50 aircraft at any time
in connection with a sale of the aircraft for full and fair consideration. With
respect to the Douglas DC-8-60 aircraft, the Company can request WFB to release
its liens on the Douglas DC-8-60s after first repaying the amount it borrowed,
if any, under the Amendment's $30 million increase to the borrowing base. Prior
to December 31, 1999, WFB is not obligated to release its liens on the Douglas
DC-8-60s except in connection with a sale of the aircraft for full and fair
consideration. After December 31, 1999, WFB is not obligated to release its
liens on the Douglas DC-8-60s unless the Company meets specified financial
criteria.
The Amendment's increase in the borrowing base is available through January
1, 2000, subject to earlier termination by the Company (the "Loan Pricing
Increase Period"). During the Loan Pricing Increase Period, the interest rate of
the Term Loan and the Credit Facility is either the Prime Rate of WFB plus 1.75%
or LIBOR plus 3.25%, regardless of financial covenant performance. Upon
termination of this borrowing base increase, the interest rates on the Term Loan
and Credit Facility revert to those stated above.
Capital expenditures were $217.2 million and $115 million for 1998 and
1997, respectively. Capital expenditures for 1998 were primarily for (i) the
purchase of two Boeing 747s, (ii) cargo modifications to three Boeing 747s and
one Boeing 727, (iii) heavy maintenance checks on four Boeing 727s, (iv) noise
abatement modifications for eleven Boeing 727s and one DC-9-15F aircraft, (v)
purchase of six JT8D engines, three JT9D engines, one JT3D engine and five GE CJ
610-6 engines, (vi) engine overhauls, (vii) additional office and operational
space at Dallas/Fort Worth International Airport and (viii) the purchase of
rotable aircraft parts. Capital expenditures for 1997 were primarily for (i) the
purchase of 20 Boeing 727 aircraft (including 16 Boeing 727s acquired from the
Kalitta Companies), (ii) cargo and noise abatement modifications for three
Boeing 727 aircraft and cargo modifications to one Boeing 747 aircraft, (iii)
noise abatement equipment purchases for two Douglas DC-9 aircraft, (iv)
leasehold improvements to three Boeing 727 aircraft, including a cargo
conversion, (v) the purchase of the Company's 40,000 square foot headquarters
facility and related ground sublease at Dallas/Fort Worth International Airport,
(vi) five major maintenance checks on Boeing 727s, (vii) overhauls on seven JT8D
engines and acquisition of 11 JT8D engines and (viii) the purchase of ground
service equipment.
During 1999, the Company estimates that capital expenditures will aggregate
approximately $110 million and that subsequent years capital expenditures will
be substantial as well.
During 1999, the Company anticipates capital expenditures of approximately
$16 million for noise abatement modifications to one Douglas DC-9 and eight
Boeing 727 aircraft currently in its fleet. The entire fleet must be Stage 3
compliant by the year 2000. In the event more aircraft are acquired, anticipated
capital expenditures for noise abatement modifications could materially
increase. See "Item 1. Business -- Government Regulation -- Noise Abatement
Regulations."
Directives issued under the FAA's "Aging Aircraft" program or issued on an
ad hoc basis may cause certain of the Company's aircraft to be subject to
extensive aircraft examinations and/or structural inspections and modifications
to address problems of corrosion and structural fatigue among other things.
Directives applicable to the Company's fleet can be issued at any time in the
future. The cost of complying with such potential future Directives cannot
currently be estimated, but could be substantial. See "Item 1. Business
-- Government Regulation -- Aging Aircraft Regulations; Potential Compliance
Costs."
The Company operates a fleet of 31 Boeing 727s, all of which were
previously converted from passenger configuration to cargo configuration by the
installation of a large cargo door and numerous interior modifications related
to the installation of cargo container handling systems. The FAA has issued a
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Directive which limits the cargo capacity of these Boeing 727s until certain
modifications are made. During 1998, the Company purchased an STC used to modify
five of the Company's aircraft to cargo configuration. Recently, the Company
received approval from the FAA to modify these five aircraft to increase their
cargo capacity. The modifications are expected to take from three to four days
to complete and to cost between $25,000 and $50,000 per aircraft, not including
aircraft downtime. The Company is currently seeking approval to modify the rest
of its Boeing 727 fleet. See "Item 1. Business -- Government Regulation -- Cargo
Door and Floor Modifications Regulations."
The Company believes that available funds, bank borrowings and cash flows
expected to be generated by operations will be sufficient to meet its
anticipated cash needs for working capital, debt service and capital
expenditures for at least the next 12 months. Thereafter, if cash generated by
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may sell additional equity or debt securities or obtain additional
credit facilities. However, there can be no assurance that the Company will be
able to sell any additional equity or debt securities or obtain additional
credit facilities. Notwithstanding the foregoing, the Company may sell
additional equity or debt securities or obtain additional credit facilities at
any time.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace portions of its software so that those systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with modifications or replacements of existing software the Year
2000 issue can be mitigated. However, if such modifications and replacements are
not made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has nearly completed its assessment of all systems that could be
significantly affected by the Year 2000. The assessment completed to date
indicates that most of the Company's significant information technology systems
could be affected. The Company has determined that most of the services it has
sold and will continue to sell do not require remediation to be Year 2000
compliant. Accordingly, the Company does not believe that the Year 2000 presents
a material exposure as it relates to the Company's services. In addition, the
Company has plans to gather information about the Year 2000 compliance status of
its significant suppliers and subcontractors and will continue to monitor their
compliance.
With regard to the Company's information technology exposure, to date the
Company is approximately 90% complete on the assessment phase and expects to
complete software reprogramming and replacement no later than May 31, 1999. Once
software is reprogrammed or replaced, the Company will begin testing and
implementation. These phases will run concurrently for different systems.
Completion of the testing phase for all significant systems is expected by July
31, 1999, with all remediated systems fully tested and implemented by August 31,
1999, with 100% completion targeted for September 30, 1999.
The Company is in the process of working with third party vendors to ensure
that any of the Company's systems that interface directly with third parties are
Year 2000 compliant by May 31, 1999.
The Company has launched a program to query its significant suppliers and
subcontractors that do not share information systems with the Company ("external
agents"). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of
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operations, liquidity, or capital resources although the Company understands
that certain fuel refiners may be particularly susceptible to disruption caused
by non-compliant embedded chips, and that certain electrical power suppliers may
be similarly affected. The Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of certain external agents, such as the
FAA, fuel refiners and suppliers generally, and electrical power suppliers, to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by external agents is not
determinable.
The Company will utilize both internal and external resources to reprogram
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at less
than $0.5 million and is being funded through operating cash flows. As of March
31, 1999, the Company has incurred approximately $150,000 related to all phases
of the Year 2000 project. The remaining project costs relate to repair of
hardware and software and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, it is possible that the
Company's or third parties' systems and equipment could fail and result in the
reduction or suspension of the Company's operations. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. Disruptions
in the economy generally resulting from Year 2000 issues could materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in May 1999 and determine whether such a plan
is necessary.
If the Company's expectations or assessments of the impact of the Year 2000
issue prove to be incorrect, the Company's business may be materially affected.
SEASONALITY
Certain customers of the Company engage in seasonal businesses, especially
the U.S. Postal Service and customers in the U.S. automotive industry. As a
result, the Company'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 U.S. automotive industry typically increase. Consequently, the
Company experiences its lowest quarterly revenue and profitability during the
first quarter of the calendar year.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a rapidly changing environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights some
of these risks.
Substantial Debt and Interest Payments. In November 1997, we incurred
substantial debt through:
(1) the issuance of $340 million of 9.95% Senior Secured Notes due
2004; and
(2) entering into the Credit Facility, which currently allows us to
borrow up to $90.2 million.
In addition, we entered into a $45.9 million Term Loan to refinance a $45.9
million loan incurred in September 1997. At December 31, 1998, our total debt
was approximately $489.8 million. At December 31, 1998, we had borrowed $86.9
million under the Credit Facility and owed approximately $45.9 million under the
Term Loan. In addition to the debt we have outstanding, the indenture pursuant
to which the Notes were issued (the "Indenture") permits us to incur substantial
amounts of additional debt for certain specified purposes, including to acquire
aircraft and aircraft-related assets.
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Our significant debt could have important consequences, including:
(1) we may be unable to obtain additional financing in the future;
(2) we will have to dedicate a substantial portion of our cash flow to
principal and interest payments, which will reduce funds available for
other purposes;
(3) we may be at a competitive disadvantage to competitors with less
debt;
(4) we may be unable to adjust rapidly to changing market conditions;
and
(5) we may be more vulnerable to:
(A) downturns in general economic conditions;
(B) downturns in our business; and
(C) the temporary or permanent loss of business from one or more of
our customers.
Our ability to make scheduled principal and interest payments or to
refinance our debt will depend on our future financial performance, which to a
certain extent will be subject to economic, financial, competitive and other
factors beyond our control. We cannot assure you that our business will generate
sufficient cash flow to make principal and interest payments on time and to make
necessary capital expenditures. If we cannot do this, we may be required to seek
to refinance all or a portion of our debt, to sell assets or to obtain
additional financing, any of which we may be unable to do on acceptable terms.
Restrictive Covenants. Our existing debt agreements contain a number of
significant covenants. These covenants generally limit our ability, among other
things, to:
(1) pay dividends;
(2) incur additional debt, except for certain specified purposes;
(3) encumber or sell assets;
(4) enter into transactions with stockholders and affiliates;
(5) guarantee debt;
(6) merge or consolidate with another entity; and
(7) transfer or lease all or substantially all of our assets.
These covenants also require us to meet certain financial tests. As of the date
hereof, we are in compliance with these covenants. Our ability to comply with
these covenants in the future will depend on our future financial performance.
If we are unable to comply with these covenants, there would be a default under
our debt agreements. If the lender did not waive such a default, the default
could result in acceleration of our debt and our bankruptcy.
Integrating the Kalitta Companies. On November 19, 1997, we acquired five
companies (collectively, the "Kalitta Companies"):
(1) American International Airways, Inc., which has been renamed Kitty
Hawk International, Inc.;
(2) American International Travel, Inc.;
(3) Flight One Logistics, Inc.;
(4) Kalitta Flying Service, Inc., which has been renamed Kitty Hawk
Charters, Inc.; and
(5) O.K. Turbines, Inc.
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Over the last 16 months, we have been integrating the Kalitta Companies'
operations with our pre-acquisition operations. We cannot assure you that we
will be able to successfully complete integrating the Kalitta Companies'
operations or achieve the goals that motivated us to acquire the Kalitta
Companies, either of which could have a material adverse effect on our business
and the value of the common stock.
Continued Losses at Kitty Hawk International. From the period January 1,
1997 through November 18, 1997, Kitty Hawk International, then owned by Mr.
Kalitta under the name American International Airways, Inc., suffered
substantial net losses. Although Kitty Hawk International's 1998 financial
results improved from its 1997 financial results, Kitty Hawk International still
suffered a net loss of $4.8 million in 1998. In an effort to make Kitty Hawk
International profitable, we recently have:
(1) stopped providing third party airframe repair and engine overhaul
services, other than for JT3 and JT8 engines;
(2) stopped passenger charters and parked the two Boeing 747s and two
Lockheed L-1011s that flew passenger charters pending their disposition,
possible cargo conversion or employment in other uses;
(3) outsourced the majority of our major maintenance on our Boeing
747, Lockheed L-1011 and Douglas DC-8 aircraft, except for the overhaul of
JT3 engines used on Douglas DC-8 aircraft; and
(4) eliminated approximately 450 jobs at Kitty Hawk International.
In addition, we intend to:
(1) eliminate approximately 1,050 additional jobs at Kitty Hawk
International;
(2) close surplus portions of our Oscoda, Michigan maintenance
facility; and
(3) reduce Kitty Hawk International's owned and leased operating fleet
from 36 aircraft at December 31, 1998 to 19 aircraft at December 31, 1999,
consisting of seven Boeing 747s, six Lockheed L-1011s and six Douglas
DC-8s.
Failure to make Kitty Hawk International profitable could have a material
adverse effect on our business and the value of the common stock.
Dependence on Significant Customers. Our two largest customers are the U.S.
Postal Service and BAX Global. Of our total revenues in 1997, the U.S. Postal
Service accounted for $44.9 million, or 17.9%, and BAX Global accounted for
$44.7 million, or 17.9%. Of our total revenues in 1998, the U.S. Postal Service
accounted for $120 million, or 16.8%, and BAX Global accounted for $71.5
million, or 10%.
The U.S. Postal Service awards contracts periodically pursuant to a public
bidding process which considers quality of service and other factors, including,
to a lesser extent, price. Bids for contracts to provide Christmas season
charters generally are submitted in the summer of each year and are typically
awarded during the following fall. These contracts are typically for one year or
less. Our inability to remain competitive with respect to price and quality of
service would have a material adverse effect on our ability to obtain such
contracts. Our inability to obtain such contracts in the future would have a
material adverse effect on our business and the value of the common stock. Our
contracts with the U.S. Postal Service are subject to termination at the
convenience of the U.S. Postal Service.
BAX Global leases under an ACMI contract 14 of our Boeing 727s for varying
terms through March 31, 2003. BAX Global may earlier terminate the contract if,
among other reasons, we do not meet specified on-time performance standards or
if majority ownership or control of the Company is acquired by a competitor of
BAX Global. The loss of this customer, or a reduction in this customer's use of
our services, could have a material adverse effect on our business and the value
of the common stock.
Dependence on Aircraft Availability. Our revenues are dependent on having
aircraft available for revenue service. In the past, we have experienced
unanticipated FAA Airworthiness Directives that have made aircraft unavailable
for revenue service. In the event one or more of our aircraft are out of service
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for an extended period of time, whether due to Directives, accidents or
otherwise, we may be forced to lease or purchase replacement aircraft and may be
unable to fulfill our obligations under customer contracts. We cannot assure you
that if necessary, we could locate suitable replacement aircraft on acceptable
terms. We do not maintain business interruption insurance to cover these risks.
Loss of revenue from any such business interruption, damages for non-performance
under customer contracts or costs to replace aircraft could have a material
adverse effect on our business and the value of the common stock.
Cyclicality and Seasonality. We provide services to numerous industries and
customers that experience significant fluctuations in demand based on economic
conditions and other factors beyond our control. Demand for our services could
be materially adversely affected by downturns in our customers' businesses. We
believe a significant percentage of our revenues will continue to be generated
from services provided to the U.S. automotive industry, which has historically
been a cyclical industry. A contraction in the U.S. automotive industry, a
prolonged work stoppage or other significant labor dispute involving that
industry, or a reduction in the use of air freight charters by that industry,
could have a material adverse effect on our business and the value of the common
stock.
Certain of our customers engage in seasonal businesses too, especially the
U.S. Postal Service and customers in the U.S. automotive industry. As a result,
our air carrier business and air freight charter logistics business have
historically experienced their highest quarterly revenues and profitability
during the last three months of the 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 U.S. automotive industry typically
increase. Consequently, we historically experience our lowest quarterly revenue
and profitability during the first three months of the year.
Dependence on Key Personnel. We believe that our success depends on, and
will continue to depend on, the services of:
(1) M. Tom Christopher, our founder and our Chairman of the Board of
Directors and Chief Executive Officer;
(2) Tilmon J. Reeves, our President and Chief Operating Officer; and
(3) Richard R. Wadsworth, our Senior Vice President -- Finance, Chief
Financial Officer and Secretary.
If we lose the services of any of them, and in particular Mr. Christopher, our
business and the value of the common stock could be materially adversely
affected. Each of Messrs. Christopher, Reeves and Wadsworth have employment
agreements with the Company.
Employee Relations. The pilots and flight engineers employed by Kitty Hawk
International are members of the International Brotherhood of Teamsters and are
employed pursuant to a collective bargaining agreement. We are in the process of
renegotiating this collective bargaining agreement with representatives of the
Teamsters. These pilots and flight engineers have rejected one proposed new
collective bargaining agreement.
We believe the current collective bargaining agreement's system for
scheduling pilots and flight engineers is inefficient, which results in higher
costs to us. While we are negotiating to make this scheduling system more
efficient, we cannot assure you that we will be successful in these
negotiations. Failure to negotiate a more efficient scheduling system could have
a material adverse effect on our business and the value of the common stock.
While we intend to negotiate with the Teamsters in good faith, we cannot
assure you that we will be able to enter into a new collective bargaining
agreement. In addition, negotiations could result in work stoppages, a
substantial increase in salaries or wages, changes in work rules or other
changes adverse to our business. Also, we cannot assure you that our non-union
cockpit crews will remain non-union. Unionization of our non-union cockpit
crews, work stoppages, increased wages or other labor-related matters could have
a material adverse effect on our business and the value of the common stock.
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Dependence on Computer Systems. We utilize a number of computer systems to
schedule flights and personnel, track aircraft and freight, bill customers, pay
expenses and monitor a variety of our activities, ranging from maintenance and
safety compliance to financial performance. The failure of the hardware or
software that support these computer systems, or the loss of data contained in
any of them, could significantly disrupt our operations, which could have a
material adverse effect on our business and the value of the common stock.
While we believe our computer systems are generally year 2000 compliant,
the computer systems of the FAA and our customers, suppliers, vendors, bankers,
maintenance providers and air logistics service providers may not be year 2000
compliant. Failure of the computer systems of the FAA or one or more of our
significant customers, suppliers, vendors or air logistics service providers to
correctly record, manipulate or retrieve dates from the year 2000 and beyond
could have a material adverse effect on our business and the value of the common
stock. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000."
Certain Anti-Takeover Provisions; Preferred Stock. Our Certificate of
Incorporation, as amended, and Bylaws, as amended, include certain provisions
that have anti-takeover effects and that could make it more difficult for a
third party to acquire control of the Company, even if such change in control
would be beneficial to our stockholders. In addition, 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 prohibits non-U.S.
citizens from serving as directors or officers of the Company.
The Certificate of Incorporation allows us to issue up to 1,000,000 shares
of preferred stock without stockholder approval. In addition, we could issue
preferred stock with voting and conversion rights that could adversely affect
the voting power of holders of common stock. The issuance of preferred stock
could also result in a series of securities outstanding that would have
preferences over the common stock with respect to dividends and in liquidation.
Any of the foregoing could have a material adverse effect on the value of the
common stock.
Effects of a Change of Control. Holders of the Notes have the right to
require us to repurchase the Notes upon a Change of Control (as defined in the
Indenture) and all debt under the Credit Facility and Term Loan must be repaid
upon a Change of Control (as defined in the Credit Facility). Any of the
foregoing provisions could have a material adverse effect on our business and
the value of the common stock.
Government Regulation. We are subject to Title 49 of the United States Code
(formerly the Federal Aviation Act of 1958, as amended), under which the DOT and
the FAA exercise regulatory authority over air carriers. The DOT and the FAA
have the authority to modify, amend, suspend or revoke the authority and
licenses issued to us for failure to comply with the provisions of law or
applicable regulations. In addition, the DOT and the FAA may impose civil or
criminal penalties for violations of applicable rules and regulations. Such
actions by the FAA or the DOT, if taken, could have a material adverse effect on
our business and the value of the common stock.
The adoption of new laws, policies or regulations or changes in the
interpretation or application of existing laws, policies or regulations, whether
by the FAA, the DOT, the U.S. government or any foreign, state or local
government, could have a material adverse effect on our business and the value
of the common stock. In addition, we are subject to regulation by various other
federal, state, local and foreign authorities, including the Department of
Defense and the Environmental Protection Agency.
Our international operations are governed by air services agreements
between the U.S. and foreign countries where we operate. Under some of these air
services agreements, traffic rights in those countries are available to only a
limited number of and in some cases only one or two, U.S. air carriers and are
subject to approval by the applicable foreign regulators, limiting growth
opportunities in such countries.
Safety, Training and Maintenance Regulations. Virtually every aspect of our
air carrier operations are subject to extensive FAA regulation, including the
areas of safety, training and maintenance. To ensure compliance with FAA rules
and regulations, the FAA routinely inspects air carrier operations and aircraft
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and proposes civil monetary penalties in the event of non-compliance. The
imposition of civil penalties by the FAA could have a material adverse effect on
our business and the value of the common stock.
Periodically, the FAA focuses on particular aspects of air carrier
operations. For example, after the Valujet accident, the FAA adopted new
procedures concerning oversight of contract maintenance, and after the Fine Air
crash, the FAA conducted extensive inspections of procedures for loading cargo
aircraft. These types of inspections and regulations often impose additional
burdens on air carriers and increase their operating costs. We cannot predict
when we will be subject to such inspections or regulations, nor the impact of
such inspections or regulations. Any such inspections or regulations could have
a material adverse effect on our business and the value of the common stock.
Aging Aircraft Regulations; Potential Compliance Costs. All of our aircraft
are subject to FAA Directives issued at any time under the FAA's "Aging
Aircraft" program or issued on an ad hoc basis. These Directives can cause us to
conduct extensive examinations and structural inspections of our aircraft and to
make modifications to our aircraft to address or prevent problems of corrosion
and structural fatigue.
Our cost to comply with FAA Directives issued under the Aging Aircraft
program cannot currently be estimated, but could be substantial and could have a
material adverse effect on our business and the value of the common stock.
Hazardous Materials Regulations. The FAA exercises regulatory jurisdiction
over transporting hazardous materials. From time to time, we transport articles
that are subject to these regulations. Shippers of hazardous materials share
responsibility with the air carrier for compliance with these regulations and
are primarily responsible for proper packaging and labeling. If we fail to
discover any undisclosed hazardous materials or mislabel or otherwise ship
hazardous materials, we may suffer possible aircraft damage or liability, as
well as, substantial monetary penalties. Any of these events could have a
material adverse effect on our business and the value of the common stock. The
FAA has recently increased its monitoring of shipments of hazardous materials.
Contraband Risks. Although required to do so, customers may fail to inform
us about cargo that must be processed by applicable customs authorities. If we
fail to properly process cargo through customs, our aircraft could be seized
and/or we may suffer substantial monetary penalties. Any of these events could
have a material adverse effect on our business and the value of the common
stock.
In addition, some of our aircraft fly to and from countries, such as
Colombia, where substantial quantities of illegal drugs are manufactured. In the
past, without our prior knowledge, individuals have tried to smuggle illegal
drugs into the U.S. on our aircraft. If we fail to discover any illegal drugs or
other illegal cargo on our aircraft, the aircraft could be seized and/or we may
suffer substantial monetary penalties. Any of these events could have a material
adverse effect on our business and the value of the common stock.
Competition. The market for air freight services is highly competitive. Our
air freight carrier services are also subject to competition from other modes of
transportation, including, but not limited to, railroads and trucking.
Additional demand for air freight carrier services over the last few years has
resulted in numerous new entrants in this business. We believe there are limited
barriers to entry into this business and that increased demand may stimulate
additional competition.
The market for air logistics also has been and is expected to remain highly
competitive. Our 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.
Our ability to attract and retain business also is affected by whether and
to what extent our customers decide to coordinate their own transportation
needs. With respect to our contract charter business, it could be adversely
affected by the decision of our air carrier customers to acquire additional
aircraft or by our non-air carrier customers to acquire and operate their own
aircraft. In this regard, many of our competitors and customers have
substantially greater financial resources than us.
34
<PAGE> 35
Environmental Matters. Our operations must comply with numerous
environmental laws, ordinances and regulations. Under current federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
clean up of hazardous or toxic substances on, under or in such property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to clean up such contaminated property properly, may adversely
affect the ability of the owner of the property to use such property as
collateral for a loan or to sell such property. Environmental laws also may
impose restrictions on the manner in which a property may be used or transferred
or in which businesses may be operated and may impose remedial or compliance
costs. The costs of defending against claims of liability or cleaning up
contaminated property and the cost of complying with environmental laws could
have a material adverse effect on our business and the value of the common
stock.
Currently, we are not aware of any environmental contamination for which we
are liable for the cost of removal or cleanup. Until May 2001, Mr. Kalitta has
agreed, subject to certain limitations, to indemnify us against any losses
arising from any environmental liability at any of the Kalitta Companies'
facilities.
In part because of the highly industrialized nature of many of the
locations at which we operate, there can be no assurance that we have discovered
all environmental contamination for which we may be responsible.
Capital Intensive Nature of Aircraft Ownership. Our air freight carrier
business is highly capital intensive. In order to expand our air freight carrier
business, we intend to purchase new or used jet aircraft. Used jet aircraft
typically require certain modifications, including reconfiguring the aircraft
from passenger to cargo use and installing equipment to comply with the Noise
Regulations. The market for used jet aircraft is volatile and can be adversely
affected by limited supply, increased demand and other market factors. We cannot
assure you that we will be able to purchase and, if necessary, modify additional
aircraft at favorable prices or that we will have or be able to obtain
sufficient resources with which to make such purchases and, if necessary,
modifications. The capital intensive nature of our business could adversely
impact the value of the common stock.
In the future, we may acquire domestic and/or international air freight
carriers as a means of acquiring used jet aircraft. Such an acquisition would
involve substantial risks, including overvaluing the acquired business and
inadequately or unsuccessfully integrating the acquired business. In addition,
the terms of the Credit Facility and Term Loan restrict our ability to make
certain acquisitions. Further, acquisitions can result in increased amortization
which would reduce earnings per share in the future. We may finance future
acquisitions, if any, by issuing shares of common stock. Any future issuance of
common stock may result in substantial dilution to you.
Operating Costs. The operation of our air freight carrier business involves
considerable operational, maintenance, fuel and personnel costs. Our financial
results can be adversely affected by unexpected engine or airframe repairs,
compliance with Directives and regulations of the FAA and associated aircraft
downtime. In addition, spare or replacement parts and components may not be
readily available in the marketplace. Failure to obtain necessary parts or
components in a timely manner or at favorable prices could have a material
adverse effect on our business and the value of the common stock.
Fuel is a significant cost of operating aircraft. Both the cost and
availability of fuel are subject to many economic and political factors and
events occurring throughout the world and recently the cost of fuel has
fluctuated markedly and may rise in 1999. We have no agreement with any fuel
supplier assuring the availability or price stability of fuel and such
agreements are generally not available in the industry. We generally pass on
fuel cost increases to our customers under ACMI charter contracts. However,
under some of our contracts and in our scheduled operations, we absorb increased
fuel costs. Accordingly, the future cost and availability of fuel to us cannot
be predicted and substantial price increases in, or the unavailability of
adequate supplies of, fuel may have a material adverse effect on our business
and the value of the common stock.
35
<PAGE> 36
Volatility of Air Freight Services Market. The demand for air freight
services is highly dependent on the strength of both the domestic and global
economy. Although the air freight services industry has experienced strong
growth over the last several years, general economic downturns could have a
material adverse effect on our business and the value of the common stock.
Utilization of Aircraft. Our operating results are highly dependent on our
ability to effectively utilize our diverse fleet of aircraft. There can be no
assurance, however, that operation of any of the various types of aircraft in
our fleet will prove to be profitable. Inability to keep our aircraft in revenue
service or achieve an acceptable level of aircraft utilization could have a
material adverse effect on our business and the value of the common stock.
Risk of Accident; Insurance Coverage and Expenses. Our operations involve
risks of potential liability against us in the event of aircraft accidents and,
in the case of our air ambulance services, for medical malpractice. We are
required by the DOT to carry liability insurance on each of our aircraft. We
also carry medical liability insurance for our air ambulance business. Although
we believe our current insurance coverage is adequate and consistent with
current industry practice, we cannot assure you that our coverage will not be
changed or that we will not suffer substantial losses and lost revenues from
accidents. See "-- Dependence on Aircraft Availability." Substantial claims
resulting from an accident in excess of our insurance coverage could have a
material adverse effect on our business and the value of the common stock. In
addition, any significant increase in our current insurance expense could have a
material adverse effect on our business and the value of the common stock.
Moreover, any aircraft accident, even if fully insured, could result in
Directives or investigations or could cause a public perception that some of our
aircraft are less safe or reliable than other aircraft, which could have a
material adverse effect on our business and the value of the common stock.
International Business Risk. We expect to continue to derive a substantial
portion of our revenues from providing air freight carrier services to customers
in South and Central America and the Pacific Rim. The risks of doing business in
foreign countries include:
(1) potential adverse changes in the diplomatic relations between
foreign countries and the U.S.;
(2) hostility from local populations directed at a U.S. flag carrier;
(3) government policies against foreign-owned businesses;
(4) adverse effects of currency exchange controls;
(5) restrictions on the withdrawal of foreign investment and earnings;
and
(6) the risk of expropriation and insurrections that could result in
losses against which we are not insured.
Our international operations also are subject to economic uncertainties,
including risks of renegotiation or modification of existing agreements or
arrangements with exchange restrictions and changes in taxation. Any of these
events could have a material adverse effect on our business and the value of the
common stock.
Nearly all of our revenue is in U.S. dollars. However, a meaningful portion
of our revenue is from customers whose revenue is not in U.S. dollars.
Therefore, any significant devaluation in our customers' currencies relative to
the U.S. dollar could adversely effect their ability to pay us in U.S. dollars
or to continue to use our services, which could have a material adverse effect
on our business and the value of the common stock.
36
<PAGE> 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In 1997, the Securities and Exchange Commission issued new rules (Item 305
of Regulation S-K) which require disclosure of material risks, as defined in
Item 305, related to market risk sensitive financial instruments. The rules
apply to the Company for the first time in 1998. The Company has market risk
sensitive instruments related to interest rates.
Airline operators are inherently capital intensive. The vast majority of
the Company's assets are aircraft, which are long lived. The Company has
maintained a B+, B1 or equivalent credit ratings on its Notes with three rating
agencies (Standard & Poor's, Moody's and Duff & Phelps).
As disclosed in Note 4 to the Consolidated Financial Statements, the
Company had outstanding debt of $489.8 million and $404.6 million at December
31, 1998 and 1997, respectively. This debt represents 49.8% and 48.3% of total
assets at December 31, 1998 and 1997, respectively. The Company's long-term debt
currently has an average maturity of 5.4 years and interest rates averaging
9.7%.
At December 31, 1998, the Company operated six aircraft under operating
leases at rates that are substantially fixed. As defined in Item 305, leases are
not market risk sensitive financial instruments and, therefore, are not included
in the interest rate sensitivity analysis below. Commitments related to leases
are disclosed in Note 6 to the Consolidated Financial Statements.
The Company does not have significant exposure to changing interest rates
on its $340 million 9.95% Senior Secured Notes because the interest rate on the
Notes is fixed. The interest rates on its Term Loan and Credit Facility are
variable with interest rates based on prime plus 1.75% or LIBOR plus 3.25%, and
can be locked in for a period of three months. At December 31, 1998, the Company
had approximately $45.9 million outstanding under the Term Loan and
approximately $86.9 million outstanding under the Credit Facility.
Additionally, the Company does not have significant exposure to changing
interest rates on invested cash, which was approximately $17 million and $75
million at December 31, 1998 and 1997, respectively. The Company invests its
cash mainly in money market accounts.
The Company has not undertaken any additional actions to cover interest
rate market risk and is not a party to any interest rate market risk management
activities.
A hypothetical 10% decline in market interest rates over the next year
would impact the Company's earnings or cash flow by less than $1 million because
the interest rate on the Notes is fixed and its cash investments are short-term.
A hypothetical 10% decline in market interest rates over the next year would
increase the fair value of the Notes by approximately $15 million.
The Company does not purchase or hold any derivative financial instruments
for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to Item 8 is submitted as a separate section of this Form
10-K. See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by Item 10 is incorporated by
reference from our definitive proxy statement for our 1999 Annual Meeting of
Stockholders to be held on May 28, 1999. The information regarding executive
officers required by Item 10 is submitted as a separate section of this Form
10-K. See "Item 4A. Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our
definitive proxy statement for our 1999 Annual Meeting of Stockholders to be
held on May 28, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated by reference from our
definitive proxy statement for our 1999 Annual Meeting of Stockholders to be
held on May 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from our
definitive proxy statement for our 1999 Annual Meeting of Stockholders to be
held on May 28, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Income for the years ended August
31, 1996 and December 31, 1997 and 1998 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, 1996 and December 31, 1997 and 1998
and for the four months ended December 31, 1996........... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1996 and December 31, 1997 and 1998 and for the
four months ended December 31, 1995 (unaudited) and
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
(A) 2. FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed as part of this Annual Report on
Form 10-K because the required information is included in the financial
statements, including the notes thereto, or circumstances requiring the
inclusion of such schedules are not present.
38
<PAGE> 39
(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. EXHIBIT
----------- -------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated September 22, 1997
(the "Merger Agreement"), by and among Kitty Hawk and
certain of its subsidiaries, M. Tom Christopher, the
Kalitta Companies and Conrad A. Kalitta, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-36125), which Exhibit
is herein incorporated by reference.
2.2 -- Amendment No. 1 to the Merger Agreement, dated October
23, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, the Kalitta Companies
and Conrad A. Kalitta, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 333-36125), which Exhibit is herein
incorporated by reference.
2.3 -- Amendment No. 2 to the Merger Agreement, dated October
29, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, the Kalitta Companies
and Conrad Kalitta, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 333-36125), which Exhibit is herein
incorporated by reference.
2.4 -- Amendment No. 3 to the Merger Agreement, dated November
14, 1997 by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, the Kalitta Companies
and Conrad Kalitta, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-4 (Reg. No. 333-43645), which Exhibit is herein
incorporated by reference.
3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the
"Company"), filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which Exhibit is
incorporated herein by reference.
3.2 -- Amendment No. 1 to the Certificate of Incorporation of
the Company, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which Exhibit is
incorporated herein by reference.
3.3 -- Amended and Restated Bylaws of Kitty Hawk, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-4 (Reg. No. 333-43645), which Exhibit
is herein incorporated by reference.
4.1 -- Specimen Common Stock Certificate, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
4.2 -- Stockholders' Agreement dated November 1997 among the
Company, M. Tom Christopher and Conrad A. Kalitta, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-4 (Reg. No. 333-43645),
which Exhibit is herein incorporated by reference.
4.3 -- Specimen Global Note in respect of 9.95% Senior Secured
Notes due 2004, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-4 (Reg.
No. 333-43645), which Exhibit is herein incorporated by
reference.
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
4.4 -- Indenture, dated November 15, 1997, in regard to 9.95%
Senior Secured Notes due 2004 by and among the Company
and certain of its subsidiaries and Bank One, N.A. as
Trustee and Collateral Trustee, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-4 (Reg. No. 333-43645), which Exhibit is herein
incorporated by reference.
4.5 -- First Supplemental Indenture, dated February 5, 1998, in
regard to 9.95% Senior Secured Notes due 2004 by and
among the Company and certain of its subsidiaries and
Bank One, N.A. as Trustee and Collateral Trustee, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-4 (Reg. No. 333-43645),
which Exhibit is herein incorporated by reference.
10.1** -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Kitty Hawk Aircargo, Inc., Airport
Leasing, Inc., M. Tom Christopher, American International
Airways, Inc. and Conrad Kalitta, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
10.2** -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.3** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.4** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.5** -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
10.6** -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
10.7** -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.8** -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
10.9** -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
10.10** -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.11 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement"), filed as
an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.12 -- Amendment No. 1 dated November 17, 1992 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.13 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.14 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.15 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.16 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.17 -- Amendment No. 6 dated December 6, 1996 to the FEASI
Agreement, filed as an Exhibit to the Company's Form 10-Q
for the quarter ended November 30, 1996, which exhibit is
incorporated herein by reference.
10.18 -- Second Amended and Restated Credit Agreement, dated as of
November 19, 1997, by and among the Company (as borrower)
and Wells Fargo Bank (Texas), National Association (as
agent), filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-4 (Reg.
No. 333-43645), which Exhibit is herein incorporated by
reference.
10.19* -- Third Amended Agreement, dated as of December 10, 1998,
by and among the Company (as borrower) and Wells Fargo
Bank (Texas), National Association (as agent).
10.20 -- Agreement, dated July 20, 1995, between American
International Airways, Inc. and the Pilots, Co-Pilots and
Flight Engineers in the service of American International
Airways, Inc., as represented by The International
Brotherhood of Teamsters -- Airline Division, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-36125), which Exhibit
is herein incorporated by reference.
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
10.21** -- Employment Agreement by and between Conrad A. Kalitta and
AIA, filed as an Exhibit to the Registrant's previously
filed Registration Statement on Form S-1 (Reg. No.
333-36125), which Exhibit is herein incorporated by
reference.
10.22 -- Amended and Restated Consulting Agreement by and between
Conrad A. Kalitta and AIA, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 333-36125), which Exhibit is herein
incorporated by reference.
10.23 -- Separation Agreement, dated as of April 17, 1998, by and
among the Company, M. Tom Christopher, Conrad A. Kalitta
and certain subsidiaries of the Company, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-3 (Reg. No. 333-74469), which Exhibit
is herein incorporated by reference.
10.24 -- Amendment No. 1 to Separation Agreement, dated as of June
5, 1998, by and among the Company, M. Tom Christopher,
Conrad A. Kalitta and certain subsidiaries of the
Company, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-3 (Reg.
No. 333-74469), which Exhibit is herein incorporated by
reference.
10.25 -- Agreement, dated as of January 21, 1999, by and among the
Company, M. Tom Christopher, Conrad A. Kalitta and
certain subsidiaries of the Company, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-3 (Reg. No. 333-74469), which Exhibit
is herein incorporated by reference.
10.26** -- Modified and Restated Employment Agreement, dated as of
April 27, 1998 by and between the Company and Tilmon J.
Reeves, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-3 (Reg.
No. 333-74469), which Exhibit is herein incorporated by
reference.
10.27** -- Stock Option Agreement, dated as of April 27, 1998, by
and between the Company and Tilmon J. Reeves, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-3 (Reg. No. 333-74469), which Exhibit
is herein incorporated by reference.
10.28** -- Non-Qualified Stock Option Agreement, dated as of
February 24,1999, by and among the Company, M. Tom
Christopher and Tilmon J. Reeves, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-3 (Reg. No. 333-74469), which Exhibit is herein
incorporated by reference.
10.29** -- 1999 Kitty Hawk, Inc. Executive Stock Option Plan, dated
as of February 24, 1999, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-3 (Reg. No. 333-74469), which Exhibit is herein
incorporated by reference.
10.30* -- Ground Lease, dated as of April 13, 1998, by and between
the Fort Wayne-Allen County Airport Authority and Kitty
Hawk, Inc.
10.31* -- Building Lease, dated as of April 13, 1998, by and
between the Fort Wayne-Allen County Airport Authority and
Kitty Hawk, Inc.
12.1* -- Statement of computation of ratio of earnings to fixed
charges.
21.1 -- Subsidiaries of the Registrant, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-3 (Reg. No. 333-74469), which Exhibit is herein
incorporated by reference.
23.1* -- Consent of Ernst & Young LLP.
27.1* -- Financial Data Schedule.
</TABLE>
42
<PAGE> 43
- ---------------
* Filed herewith.
** This exhibit is a management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
None.
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
our behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 1999.
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 below by the following persons on behalf of the
registrant and in the capacities indicated on the 30th day of March, 1999.
<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 Chief Operating Officer, President and
- ----------------------------------------------------- Director
Tilmon J. Reeves
/s/ CONRAD A. KALITTA Director
- -----------------------------------------------------
Conrad A. Kalitta
/s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief
- ----------------------------------------------------- Financial Officer, Secretary and Principal
Richard R. Wadsworth Financial and Accounting Officer and
Director
/s/ PHILIP J. SAUDER Director
- -----------------------------------------------------
Philip J. Sauder
/s/ TED J. COONFIELD Director
- -----------------------------------------------------
Ted J. Coonfield
/s/ LEWIS S. WHITE Director
- -----------------------------------------------------
Lewis S. White
</TABLE>
44
<PAGE> 45
KITTY HAWK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Income for the years ended August
31, 1996 and December 31, 1997 and 1998 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, 1996 and December 31, 1997 and 1998
and for the four months ended December 31, 1996........... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1996 and December 31, 1997 and 1998 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> 46
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 December 31, 1997 and 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year ended August 31, 1996, for each of the two years in the period ended
December 31, 1998 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 December 31, 1997 and 1998 and the consolidated results
of their operations and their cash flows for the year ended August 31, 1996, for
each of the two years in the period ended December 31, 1998 and for the four
months ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Dallas, Texas
March 26, 1999
F-2
<PAGE> 47
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 17,907 $ 15,077
Restricted cash and short-term investments................ 58,629 1,964
Trade accounts receivable, net............................ 122,191 140,014
Deferred income taxes..................................... 15,798 16,088
Inventory and aircraft supplies........................... 34,118 50,135
Prepaid expenses and other current assets................. 25,596 22,871
-------- --------
Total current assets.............................. 274,239 246,149
Property and equipment, net................................. 548,537 720,808
Other assets, net........................................... 13,970 15,628
-------- --------
Total assets...................................... $836,746 $982,585
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 43,647 $ 53,967
Accrued expenses.......................................... 91,128 104,278
Accrued maintenance reserves.............................. 19,139 22,382
Current maturities of long-term debt...................... 2,395 20,564
-------- --------
Total current liabilities......................... 156,309 201,191
Revolving credit facility................................... 10,000 86,900
Long-term debt.............................................. 392,248 382,287
Deferred income taxes....................................... 99,153 113,261
Minority interest........................................... 4,163 4,749
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 -- 16,750,957 and 16,927,942 at December
31, 1997 and 1998, respectively........................ 167 169
Additional capital........................................ 130,523 133,166
Retained earnings......................................... 44,183 60,862
-------- --------
Total stockholders' equity........................ 174,873 194,197
-------- --------
Total liabilities and stockholders' equity........ $836,746 $982,585
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 48
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31,
AUGUST 31, ----------------------- ---------------------
1996 1997 1998 1995 1996
---------- ---------- ---------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier................... $ 72,605 $177,159 $602,918 $37,437 $43,867
Air logistics......................... 69,810 70,539 80,757 32,291 16,119
Maintenance and other................. -- 2,145 31,262 -- --
-------- -------- -------- ------- -------
Total revenues................ 142,415 249,843 714,937 69,728 59,986
Costs of revenues:
Air freight carrier................... 54,648 127,957 501,825 27,385 32,714
Air logistics......................... 64,841 65,921 73,862 30,297 14,866
Maintenance and other................. -- 1,813 23,110 -- --
-------- -------- -------- ------- -------
Total costs of revenues....... 119,489 195,691 598,797 57,682 47,580
-------- -------- -------- ------- -------
Gross profit............................ 22,926 54,152 116,140 12,046 12,406
General and administrative expenses..... 9,080 15,106 43,037 2,862 2,725
Non-qualified employee profit sharing
expense............................... 1,170 2,429 2,797 889 962
Stock option grants to executives....... 4,231 -- -- -- --
-------- -------- -------- ------- -------
Operating income........................ 8,445 36,617 70,306 8,295 8,719
Other income (expense):
Interest expense...................... (1,859) (6,924) (40,004) (482) (684)
Other, net............................ 291 1,110 674 38 625
-------- -------- -------- ------- -------
Income before minority interest and
income taxes.......................... 6,877 30,803 30,976 7,851 8,660
Minority interest....................... -- (497) (3,006) -- --
-------- -------- -------- ------- -------
Income before income taxes.............. 6,877 30,306 27,970 7,851 8,660
Income taxes............................ 2,768 12,416 11,328 3,097 3,367
-------- -------- -------- ------- -------
Net income.............................. $ 4,109 $ 17,890 $ 16,642 $ 4,754 $ 5,293
======== ======== ======== ======= =======
Basic and diluted net income per
share................................. $ 0.52 $ 1.60 $ 0.99 $ 0.60 $ 0.55
======== ======== ======== ======= =======
Weighted average common shares
outstanding........................... 7,928 11,194 16,855 7,968 9,610
======== ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 49
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
---------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1995...... 7,423,436 $ 74 $ -- $16,892 $ -- $ 16,966
Stock option grants to
executives................. -- -- 4,231 -- -- 4,231
Exercise of employee stock
options.................... 544,274 5 -- (1) -- 4
Purchase of treasury stock,
217,710 shares, at cost.... -- -- -- -- (2,076) (2,076)
Tax benefit of stock option
grants to executives....... -- -- 405 -- -- 405
Net income.................... -- -- -- 4,109 -- 4,109
---------- ---- -------- ------- ------- --------
Balance at August 31, 1996...... 7,967,710 79 4,636 21,000 (2,076) 23,639
Shares sold in initial public
offering................... 2,700,000 27 29,312 -- -- 29,339
Shares issued to employees
under the Annual Incentive
Compensation Plan.......... 1,807 -- 21 -- -- 21
Net income for the four months
ended December 31, 1996.... -- -- -- 5,293 -- 5,293
---------- ---- -------- ------- ------- --------
Balance at December 31, 1996.... 10,669,517 106 33,969 26,293 (2,076) 58,292
Shares sold in secondary
offering, net of
expenses................... 2,200,000 22 38,319 -- -- 38,341
Shares issued in connection
with acquisition (Note
2)......................... 4,099,150 41 60,309 -- -- 60,350
Retirement of treasury
shares..................... (217,710) (2) (2,074) -- 2,076 --
Net income.................... -- -- -- 17,890 -- 17,890
---------- ---- -------- ------- ------- --------
Balance at December 31, 1997.... 16,750,957 167 130,523 44,183 -- 174,873
Shares issued in connection
with acquisition (Note
2)......................... 150,000 1 2,249 37 -- 2,287
Shares issued in connection
with the Employee Stock
Purchase Plan.............. 20,145 1 282 -- -- 283
Shares issued in connection
with the Omnibus Securities
Plan....................... 6,840 -- 112 -- -- 112
Net income.................... -- -- -- 16,642 -- 16,642
---------- ---- -------- ------- ------- --------
Balance at December 31, 1998.... 16,927,942 $169 $133,166 $60,862 $ -- $194,197
========== ==== ======== ======= ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 50
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FOUR MONTHS ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
---------- ------------------- -------------------
1996 1997 1998 1995 1996
---------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income.............................................. $ 4,109 $ 17,890 $ 16,642 $ 4,754 $ 5,293
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 6,873 15,551 55,482 1,682 3,202
(Gain) loss on disposal of property and equipment..... 589 (1,461) (886) -- --
Deferred income taxes................................. 999 10,208 12,558 -- 172
Minority interest..................................... -- 497 3,006 -- --
Stock option grants to executives..................... 4,231 -- -- -- --
Changes in operating assets and liabilities:
Trade accounts receivable........................... (1,228) (20,431) (18,597) (27,955) (23,632)
Inventory and aircraft supplies..................... (1,615) (5,196) (15,004) (299) (1,076)
Prepaid expenses and other.......................... (887) (3,961) (5,756) (5,854) (4,898)
Accounts payable and accrued expenses............... 3,869 3,090 26,300 22,406 20,516
Accrued maintenance reserves........................ 297 5,961 813 281 50
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities..... 17,237 22,148 74,558 (4,985) (373)
Investing activities:
Purchase of Kalitta Companies, net of cash acquired... -- (315,551) -- -- --
Proceeds from sale of assets.......................... -- 1,817 6,916 -- 18,508
Redemption of restricted cash......................... -- -- 56,847 -- --
Capital expenditures.................................. (33,538) (115,014) (217,179) (175) (13,795)
-------- -------- -------- -------- --------
Net cash (used in) provided by investing activities..... (33,538) (428,748) (153,416) (175) 4,713
Financing activities:
Proceeds from 9.95% Senior Secured Notes, net......... -- 329,069 -- -- --
Proceeds from issuance of common stock, net........... 5 38,342 -- -- 29,338
Proceeds from issuance of long-term debt, net......... 23,117 50,418 5,880 5,725 1,500
Borrowings on Revolving Credit Facility, net.......... -- 16,230 76,900 -- --
Repayments of debt.................................... (3,187) (36,512) (4,373) (1,011) (13,643)
Acquisition of treasury shares........................ (2,076) -- -- -- --
Distributions to minority interest.................... -- (320) (2,420) -- --
Note receivable from shareholder...................... -- (41) 41 -- --
Shares issued under Annual Incentive Compensation
Plan................................................ -- -- -- -- 22
Tax benefit of stock option grant to executives....... 405 -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by financing activities............... 18,264 397,186 76,028 4,714 17,217
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 1,963 (9,414) (2,830) (446) 21,557
Cash and cash equivalents at beginning of period........ 3,801 27,321 17,907 3,801 5,764
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period.............. $ 5,764 $ 17,907 $ 15,077 $ 3,355 $ 27,321
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 51
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight
services through four related businesses: (i) an air freight carrier, (ii) a
scheduled freight service provider, (iii) an air logistics service provider and
(iv) a maintenance operation. The air freight carrier provides ACMI services
(includes supplying the aircraft, crew, maintenance, and insurance for the
customer), passenger and freight charter services. The air logistics service
provider arranges the delivery of time sensitive freight utilizing third parties
as well as its own fleet of wide-body and narrow-body jet aircraft and small jet
and prop aircraft. The scheduled freight service provides an overnight freight
service within a network of approximately 46 North American cities and a service
between Los Angeles, the Hawaiian islands and several Pacific Rim countries
utilizing its own aircraft. The maintenance operation provides engine overhaul
services to third parties on JT3 engines used on Douglas DC8s and JT8 engines
used on Boeing 727s, Douglas DC9s and other aircraft. Revenues and costs of
revenues related to the scheduled freight services and its small aircraft
operations are currently reported as a component of the air freight carrier in
the accompanying statements of income. The Company has discontinued its
passenger charter operations and curtailed its third party maintenance
operations. See Notes 14 and 19.
In November 1997, the Company acquired the Kalitta Companies (see Note 2).
The results of operations of the Kalitta Companies are included in the
accompanying financial statements from November 19, 1997, the date of their
acquisition by the Company.
On December 4, 1996, the Company elected to change its fiscal year end to
December 31. Operating results for the four month periods ended December 31,
1996 and 1995 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, which include Kitty Hawk Charters, Inc.,
Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., Kitty Hawk International,
Inc. (formerly named American International Airways, Inc. ("AIA")), (including
its partnership interest in American International Cargo ("AIC"), which at
December 31, 1998 was a 60% interest), Flight One Logistics, Inc. ("FOL"), O.K.
Turbines, Inc. ("OKT"), American International Travel, Inc. ("AIT") and Longhorn
Solutions, Inc. ("LSI"). All significant intercompany accounts and transactions
have been eliminated in consolidation. See Note 2.
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.
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.
F-7
<PAGE> 52
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Cash and Short-Term Investments
At December 31, 1997 and 1998, restricted cash and short-term investments
equaled approximately $58.6 million and $2 million, respectively. Of the balance
at the end of 1997, $56 million represents a portion of the proceeds from the
issuance of $340 million of 9.95% Senior Secured Notes due 2004 (the "Notes")
(see Note 4) reserved for the acquisition and subsequent modification of two
Boeing 747 aircraft, which were acquired and modified to cargo configuration
during 1998 at a cost of approximately $75 million. These two aircraft are
pledged to secure the Notes. The remaining $2.6 million at the end of 1997 of
and the balance of $2 million at the end of 1998 represents passenger cash
deposits held in escrow until charter services are provided. The Company has
subsequently discontinued its passenger charter operations.
Financial Instruments
The fair value of the 9.95% Senior Secured Notes is approximately $333.2
million based on the quoted price at December 31, 1998. Based on floating
interest rates provided in the remaining financial instruments, management
believes the recorded value of the remaining financial instruments included in
the financial statements approximates fair value.
Inventory and Aircraft Supplies
Inventory and aircraft supplies consist of aircraft parts and supplies and
are stated at the lower of cost (using the first-in, first-out or average cost
convention) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, with
estimated residual values of up to 10% for aircraft and core values of up to
$300,000 for engines. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Aircraft and engines:
Boeing 747s............................................... 15-20 years
Lockheed L-1011s.......................................... 15 years
Douglas DC-8s............................................. 2-10 years
Boeing 727s............................................... 10 years
Douglas DC-9s............................................. 10 years
Other..................................................... 2-10 years
Machinery and equipment..................................... 3-12 years
Rotable aircraft parts...................................... 7 years
Buildings and leasehold improvements........................ 15-30 years
</TABLE>
Expenditures for additions, improvements, aircraft modifications, engine
overhauls and major maintenance costs are capitalized. Routine maintenance and
repairs are charged to expense when incurred. Costs of periodic airframe
maintenance (C-checks) are accrued. Major maintenance and engine overhauls are
depreciated on a straight line basis to the next scheduled major maintenance or
overhaul date.
Revenue Recognition
Revenues are recognized as services are provided.
F-8
<PAGE> 53
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
Credit is extended based on an evaluation of a customer's financial
condition and, except in the case of passenger charters, the Company does not
require a deposit or collateral. The Company's allowance for doubtful accounts
is based on current market conditions and continuous evaluation of the
customer's credit worthiness and has consistently been within management's
expectations.
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. See Note 8.
Comprehensive Income
In 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130") "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
in a full set of financial statements. The Company's comprehensive income equals
its net income as the Company has no elements of other comprehensive income.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the
current year presentation, including the reclassification of revenues and
related costs of revenues for the Company's Christmas work for the United States
Postal Service from air logistics to air freight carrier.
Pending Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which is effective for fiscal years beginning after June 15, 1999.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company is assessing the impact that the
adoption of SFAS 133 will have on its consolidated financial statements.
2. ACQUISITIONS
On November 19, 1997, the Company acquired by merger all of the outstanding
common stock of AIA, Kalitta Flying Service, Inc., FOL, OKT and AIT
(collectively, the "Kalitta Companies") in exchange for 4,099,150 shares of the
Company's common stock valued by an independent appraisal at approximately $60.3
million and $20 million in cash. The transaction has been accounted for as a
purchase and accordingly the results of operations of the Kalitta Companies are
included in the accompanying financial statements from November 19, 1997. See
Note 18. Since then, AIA has been renamed Kitty Hawk International, Inc. and
Kalitta Flying Service, Inc. has been renamed Kitty Hawk Charters, Inc.
In accordance with the merger agreement, $3 million in cash and 650,000
shares of the Company's common stock issued to the former owner of the Kalitta
Companies are being held in escrow to secure certain indemnity obligations.
Generally the Company cannot bring any indemnification claims after
F-9
<PAGE> 54
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
May 19, 2000, except the Company may make indemnity claims for certain
environmental matters until May 19, 2001.
In September 1997, as an interim step to the acquisition of the Kalitta
Companies, the Company acquired 16 Boeing 727s from AIA for approximately $51
million cash. Of the $51 million, $45.9 million was financed with a note payable
under the Company's existing credit facility. This note payable was subsequently
refinanced upon the consummation of the acquisition of the Kalitta Companies.
See Note 4.
On June 26, 1998, the Company acquired all the outstanding stock of LSI in
exchange for 150,000 shares of the Company's common stock, valued at $15 per
share, which approximated market value at the date of acquisition. The
transaction was accounted for as a purchase and accordingly the results of
operations for the year ended December 31, 1998 include the results of
operations of LSI from June 26, 1998. LSI has developed and markets an aircraft
maintenance software package. No pro forma financial statements are provided for
the acquisition of LSI due to the immateriality of the acquisition.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Aircraft and engines........................................ $498,517 $720,981
Aircraft work in process.................................... 31,576 27,639
Machinery and equipment..................................... 20,619 23,664
Buildings and leasehold improvements........................ 17,417 17,701
Rotable aircraft parts...................................... 7,773 10,058
Construction in progress.................................... 1,986 147
Other....................................................... 758 1,809
-------- --------
578,646 801,999
Less accumulated depreciation............................... (30,109) (81,191)
-------- --------
Net property and equipment........................ $548,537 $720,808
======== ========
</TABLE>
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt and Revolving Credit Facility consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
9.95% Senior Secured Notes.................................. $340,000 $340,000
Term Loan................................................... 45,900 45,900
Revolving Credit Facility................................... 10,000 86,900
Other notes payable due in monthly installments with
interest rates ranging from 6.6% to 10.5% with maturity
dates ranging from 1999 through 2009...................... 8,743 16,951
-------- --------
404,643 489,751
Less current portion........................................ 2,395 20,564
-------- --------
$402,248 $469,187
======== ========
</TABLE>
F-10
<PAGE> 55
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999.................................................. $ 20,564
2000.................................................. 11,727
2001.................................................. 10,393
2002.................................................. 106,733
2003.................................................. 55
Thereafter............................................ 340,279
--------
$489,751
========
</TABLE>
In connection with the acquisition of the Kalitta Companies in November
1997, the Company privately placed the Notes pursuant to Rule 144A of the
Securities Act of 1933. Net proceeds to the Company were $329.1 million. Costs
incurred in issuing the Notes are being amortized over seven years. The net
proceeds of the Notes, along with the net proceeds of a November 1997 3,000,000
share common stock offering, were used to (i) refinance approximately $33
million of existing Kitty Hawk debt and to pay off approximately $250 million of
the Kalitta Companies' pre-acquisition debt, (ii) provide for $56 million of
cash to acquire and modify two Boeing 747s and (iii) provide for $20 million of
cash to acquire the Kalitta Companies. The balance was used for working capital
and expenses incurred in connection with the acquisition.
Interest on the Notes is due on May 15 and November 15. The Notes are
secured by a fleet of aircraft including nine Boeing 747s, eight Lockheed
L-1011s and 13 Boeing 727s. At December 31, 1998 the carrying value of the
aircraft securing the Notes is approximately $415 million. Each of the Company's
subsidiaries are guarantors of the Notes, excluding the Company's interest in
AIC. The Company is in the process of dissolving AIC. Once AIC is dissolved, all
of the Company's subsidiaries will be guarantors of the Notes. In March 1998,
the Company concluded an exchange offer for the Notes thereby exchanging the
Notes for new 9.95% Senior Secured Notes due 2004 (the "New Notes"). The form
and terms of the New Notes are identical to the Notes, except the New Notes are
registered under the Securities Act of 1933 and therefore do not bear a legend
restricting their transfer.
The New Notes provide for certain covenants which limit the amount of
indebtedness of the Company and its subsidiaries, restrict the payment of
dividends, restrict the selling of subsidiary stock and provide for an interest
coverage ratio. As of December 31, 1998, the Company was in compliance with all
applicable covenants.
The New Notes are due in full in November 2004. However, at any time after
November 15, 2001, the Company at its option may redeem the New Notes based on a
percentage of the principal balance plus accrued and unpaid interest. The
redemption rates are: (i) during the 12 month period beginning November 15,
2001, 104.975%, (ii) during the 12 month period beginning November 15, 2002,
102.488% and (iii) during the 12 month period beginning November 15, 2003, 100%.
Additionally, any time prior to November 15, 2000, the Company may redeem up to
35% of the original principal amount of the New Notes with the proceeds of one
or more public offerings at a redemption price of 109.95% plus accrued and
unpaid interest, provided that at least $150 million of aggregate principal
amount of the New Notes remains outstanding after each redemption.
On November 19, 1997, the Company entered into a credit agreement (the
"Credit Agreement") with a bank which provides for a $45.9 million Term Loan
(the "Term Loan") and a $100 million Revolving Credit Facility (the "Revolver").
The proceeds of the Term Loan were used to fully refinance a note previously
entered into in September 1997, the proceeds of which were used to acquire 16
Boeing 727s from AIA prior to the acquisition of the Kalitta Companies (see Note
2). The Term Loan is
F-11
<PAGE> 56
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
due in 16 quarterly principal installments of $2.25 million each beginning in
March 1999, with the balance due upon maturity in November 2002. Except as
provided below, the Term Loan bears interest at the Company's option at either
prime plus 0% to 1.5% or LIBOR plus 1.25% to 3% (margins above prime and LIBOR
are based on certain financial covenant performance as defined in the Credit
Agreement). The applicable rate at December 31, 1998 was 8.5%.
Borrowings under the Revolver provide the Company with cash availability
for working capital and general corporate purposes. Except as provided below,
advances under the Revolver bear interest at the Company's option at either
prime plus 0% to 1.25% or LIBOR plus 1.25% to 2.75% (margins above prime and
LIBOR are based on certain financial covenant performance as defined in the
Credit Agreement). The applicable rate at December 31, 1998 was 9.5%. All
principal balances outstanding under the Revolver are due in full upon maturity
in November 2002. Balances drawn on the Revolver are subject to certain
borrowing base provisions as defined. The borrowing base at December 31, 1998
was $93.9 million (including an increase of $30 million to the borrowing base as
a result of an amendment to the Credit Agreement ("the Amendment") on December
10, 1998). Available borrowings as of December 31, 1998 were approximately $6.1
million.
In connection with the Amendment, the Company pledged 11 Douglas DC-8-60s
and eight Douglas DC-8-50s under the Credit Facility and Term Loan. The Company
can request WFB to release its liens on the Douglas DC-8-50 aircraft at any time
in connection with a sale of the aircraft for full and fair consideration. With
respect to the Douglas DC-8-60 aircraft, the Company can request WFB to release
its liens on the Douglas DC-8-60s after first repaying the amount it borrowed,
if any, under the Amendment's $30 million increase to the borrowing base. Prior
to December 31, 1999, WFB is not obligated to release its liens on the Douglas
DC-8-60s except in connection with a sale of the aircraft for full and fair
consideration. After December 31, 1999, WFB is not obligated to release its
liens on the Douglas DC-8-60s unless the Company meets specified financial
criteria.
The Amendment's increase in the borrowing base is available through January
1, 2000, or until earlier terminated by the Company ("Loan Pricing Increase
Period"). During the Loan Pricing Increase Period, the interest rate of the Term
Loan and the Revolver is either prime plus 1.75% or LIBOR plus 3.25%, regardless
of financial covenant performance. Upon termination of this borrowing base
increase, the interest rates on the Term Loan and the Revolver revert to those
stated above.
The balances outstanding under the Credit Agreement are secured by 15
Boeing 727s and 19 Douglas DC-8s with a total combined carrying value of
approximately $134 million at December 31, 1998, cash, accounts receivable,
rotable parts, inventory, intangibles and contract rights of the Company, and
the stock of each of the Company's subsidiaries, not including the Company's
interest in AIC. Each of the Company's subsidiaries are guarantors on the Credit
Agreement, exclusive of AIC. Costs incurred in connection with the Credit
Agreement are being amortized over a period of five years. The Credit Agreement
allows for up to $20 million of outstanding letters of credit, subject to the
borrowing base provisions, as defined. As of December 31, 1998, the Company had
approximately $0.9 million of letters of credit outstanding. Borrowings under
the Credit Agreement are subject to certain financial covenants, including a
funded debt to EBITDA ratio, a minimum debt service coverage ratio and
limitations on capital expenditures. As of December 31, 1998, the Company was in
compliance with all covenants under the Credit Agreement.
The Company made total cash interest payments of $1.8 million, $3.1
million, $40.7 million and $664,000 during fiscal year ended August 31, 1996,
the fiscal years ended December 31, 1997 and 1998 and for the four months ended
December 31, 1996, respectively. Interest expense capitalized during fiscal
years ended December 31, 1997 and 1998, was $325,000 and $3.4 million,
respectively.
F-12
<PAGE> 57
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FOUR MONTHS ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
---------- ----------------- -----------------
1996 1997 1998 1996
---------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current income tax provision (benefit):
Federal.............................. $1,352 $ 1,340 $ (544) $2,769
State................................ 417 868 (686) 426
------ ------- ------- ------
Total current income tax
provision (benefit)........ 1,769 2,208 (1,230) 3,195
------ ------- ------- ------
Deferred income tax:
Federal.............................. 758 8,076 10,890 141
State................................ 241 2,132 1,668 31
------ ------- ------- ------
Total deferred income tax.... 999 10,208 12,558 172
------ ------- ------- ------
$2,768 $12,416 $11,328 $3,367
====== ======= ======= ======
</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>
YEAR ENDED YEAR ENDED FOUR MONTHS ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
---------- ----------------- -----------------
1996 1997 1998 1996
---------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income tax computed at statutory
rate................................. $2,338 $10,607 $ 9,790 $3,031
State income taxes, net of federal
benefit........................... 434 1,968 638 298
Non-deductible expenses, principally
meals............................. -- -- 1,244 --
Other, net........................... (4) (159) (344) 38
------ ------- ------- ------
Total........................ $2,768 $12,416 $11,328 $3,367
====== ======= ======= ======
</TABLE>
The components of the net deferred tax liabilities recognized on the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.................................... $(100,183) $(131,890)
Other..................................................... (1,541) (9,015)
--------- ---------
Total deferred tax liabilities.................... (101,724) (140,905)
--------- ---------
Deferred tax assets:
Airframe reserves......................................... 6,974 7,155
Non deductible accruals................................... 9,232 8,749
Net operating loss carryforward........................... 441 24,878
Other..................................................... 1,722 2,950
--------- ---------
Total deferred tax assets......................... 18,369 43,732
--------- ---------
Net deferred tax liability........................ $ (83,355) $ (97,173)
========= =========
</TABLE>
F-13
<PAGE> 58
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the Company has approximately $69 million of federal
net operating loss carryforwards which begin to expire in 2018. The Company has
approximately $1.2 million of state net operating losses as of December 31,
1998.
The Company made cash income tax payments of $2.1 million, $3.6 million,
$817,000 and $571,000 during fiscal year ended August 31, 1996, the fiscal years
ended December 31, 1997 and 1998 and for the four months ended December 31,
1996, respectively.
6. COMMITMENTS AND CONTINGENCIES
In December 1996, the Company sold at cost two recently acquired and
modified Boeing 727 aircraft to a third party and entered into a 12 month
operating lease agreement for such aircraft commencing January 1, 1997. The
lease provided for monthly lease payments of approximately $252,000, and 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. On each of January 1, 1998 and 1999, the Company elected to
renew the lease for another year. Lease expense during 1997 and 1998 was
approximately $3.03 million for each year.
The Company also leases a Boeing 727 aircraft in cargo configuration under
a seven year operating lease at a monthly rate of $50,000. The lease expires in
2003. Lease expense during 1997 and 1998 was $450,000 and $600,000,
respectively.
In August 1998, the Company leased 3 Boeing 727 aircraft in cargo
configuration under a six year operating lease at a monthly rate of $184,000.
The lease expires in 2004. Lease expense during 1998 was $921,000.
The Company also leases office buildings, hangars, cargo storage and
related facilities under noncancelable operating leases which expire on various
dates through 2011. See also Note 9. In addition, the Company periodically
leases aircraft and other equipment under month-to-month lease agreements. Total
rent expense during 1997 (including lease expense incurred from the acquisition
of the Kalitta Companies from November 19, 1997 through December 31, 1997) and
1998 was approximately $809,000 and $7.7 million, respectively.
Minimum annual rentals at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................... $ 7,824
2000................................................... 3,990
2001................................................... 3,730
2002................................................... 3,695
2003................................................... 3,702
Thereafter............................................. 5,869
-------
$28,810
=======
</TABLE>
The Company currently leases its sorting space for its overnight freight
service at the Hulman Regional Airport in Terre Haute, Indiana on a month to
month basis until the Company relocates its sorting center to Fort Wayne,
Indiana in the summer of 1999. The move to Fort Wayne is due to the lack of
available expansion space and the limited airport facilities in Terre Haute.
During fiscal years 1997 and 1998, the Company incurred rent expense in Terre
Haute of $60,000 and $499,000, respectively.
F-14
<PAGE> 59
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Airline operators must comply with Federal Aviation Administration noise
regulations primarily promulgated under the Airport Noise and Capacity Act of
1990 (the "Noise Regulations"). Currently, the Company is in compliance with the
Noise Regulations. The Company owns 71 aircraft and leases 6 aircraft which are
affected by the Noise Regulations of which 55 are currently in compliance with
Stage III noise control standards of the Noise Regulations or are currently
being modified to be in compliance with such standards. Any aircraft not in
compliance with the Noise Regulations by January 1, 2000 may not be operated in
the United States until it complies with such standards. European countries have
similar regulations.
The Company has elected not to modify 13 of its Douglas DC-8 aircraft to
meet the Noise Regulation standards because the estimated cost exceeds the
economic benefits of such modifications. These aircraft will be removed from its
fleet in the United States before January 1, 2000.
The Company currently has eight Boeing 727 aircraft and one Douglas DC-9
aircraft which do not comply with the Noise Regulation standards. The Company
intends to modify these aircraft during 1999 at an approximate aggregate cost of
$15.9 million, not including aircraft downtime.
The Company is currently unaware of any environmental contamination for
which the Company is liable for the cost of removal or cleanup. Until May 2001,
Conrad A. Kalitta, the former owner of the Kalitta Companies, has agreed,
subject to certain limitations, to indemnify the Company against any losses
arising from any environmental liability at any of the Kalitta Companies
facilities which were acquired in November 1997.
Directives issued under the FAA's "Aging Aircraft" program or issued on an
ad hoc basis may cause certain of the Company's aircraft to be subject to
extensive aircraft examinations and/or structural inspections and modifications
to address problems of corrosion and structural fatigue, among other things.
Directives applicable to the Company's fleet can be issued at any time in the
future. The cost of complying with such potential future Directives and Service
Bulletins cannot currently be estimated, but could be substantial.
The Company operates a fleet of 31 Boeing 727s, all of which were
previously converted from passenger configuration to cargo configuration by the
installation of a large cargo door and numerous interior modifications related
to the installation of cargo container handling systems. The FAA has issued a
Directive, directed at the structural strength of the aircraft floor, which
limits the cargo capacity of these Boeing 727s until certain modifications are
made. The weight limitations involve lowering the average capacity of the cargo
positions from 8,000 pounds to 4,000 pounds and after June 2001, to 3,000
pounds.
To address this problem, during 1998, the Company purchased one of the
Supplemental Type Certificates ("STCs") which was used to convert five of the
Company's aircraft from passenger to cargo configuration. The Company has
received authority from the FAA to modify these five Boeing 727 aircraft to
raise the permissible weight of each cargo container position to approximately
6,000 pounds. The modifications will occur in the Company's maintenance
facilities and will take approximately three to four days with an anticipated
cost between $25,000 and $50,000, not including aircraft downtime. The Company
has applied to the FAA for the authority to modify the remaining fleet of Boeing
727 aircraft to raise the permissible weight per cargo container position to
approximately 6,000 pounds. These modifications are not expected to have a
material adverse effect of the Company's results of operations or financial
position.
7. LEGAL PROCEEDINGS
In the normal course of business, the Company is a party to various matters
of litigation. In the opinion of management, none of these matters will have a
material adverse effect on the Company's financial condition or results of
operations.
F-15
<PAGE> 60
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY
During the fiscal year ended August 31, 1996, the Company canceled 245,708
of the options outstanding and granted to an executive a non-qualified option to
purchase 390,707 shares of common stock at $0.01 per share. The new option had a
term of nine years and was fully vested. In June 1996, the Company canceled the
remaining 92,140 options outstanding and granted to another executive a non-
qualified option to purchase 153,567 shares of common stock at $0.01 per share.
The new option had a term of nine years and was fully vested. On June 26, 1996,
the executives fully exercised their options. Based on an independent appraisal
commissioned by the Company, the fair value of the options of $4.2 million is
reflected as a charge to earnings in the accompanying statement of income for
the year ended August 31, 1996.
The Company has an Annual Incentive Compensation Plan (the "Compensation
Plan") under which the Compensation Committee awards semi-annual 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, 1998, 198,193 shares were
available for distribution under the Compensation Plan.
The Company also has an Employee Stock Purchase Plan under which up to
100,000 shares of the Company's common stock are reserved for purchase by
Company employees. The Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1% to 15% of their gross earnings subject
to specified limitations. Shares are purchased by participants at the lower of
85 percent of the fair market value per share at the beginning or end of each
offering period. During 1998 and in January 1999, 20,145 shares and 68,045
shares, respectively, were issued under the plan, leaving 11,810 shares
available under the plan.
Additionally, the Company has an Omnibus Securities Plan (the "Omnibus
Plan") under which 300,000 shares of its common stock are reserved for issuance
to its employees and members of its board of directors. The Omnibus Plan is
administered by the Company's Compensation Committee which may grant stock based
and non-stock based compensation to the Omnibus Plan participants. In March
1998, 6,840 total shares of common stock were issued to current and former
members of the Board of Directors for services performed during 1996 and 1997.
During 1998, stock options covering 280,000 shares of common stock were granted
to employees and directors with an exercise price equal to the fair value of the
common stock on the date of grant. All of the options issued under the Omnibus
Plan have a 10 year term and vest over no more than four years.
Transactions during 1998 under the Omnibus Plan were as follows:
<TABLE>
<CAPTION>
WEIGHTED
OMNIBUS AVERAGE
SECURITIES EXERCISE
PLAN PRICE
---------- --------
<S> <C> <C>
Balance, December 31, 1997.................................. -- --
Granted................................................... 280,000 $11.56
Forfeited................................................. -- --
Expired................................................... -- --
Exercised................................................. -- --
------- ------
Balance, December 31, 1998.................................. 280,000 $11.56
======= ======
</TABLE>
In accordance with the terms of APB No. 25, the Company records no
compensation expense for its stock option awards issued with exercise prices at
least equal to the current market value on the date of
F-16
<PAGE> 61
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant. As required by SFAS No. 123, the Company provides the following
disclosure of hypothetical values for these awards. The weighted-average grant
date value of options granted during 1998 was estimated to be $6.36 under the
Omnibus Plan and $6.05 under the Employee Stock Purchase Plan. This value was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions: expected volatility of 0.67, risk free interest
rate of 5.5%, expected life of 4 years (Omnibus Plan) and 6 months (Employee
Stock Purchase Plan) and expected dividend yield of 0%.
In April 1998, the Company granted its President options to purchase
400,000 shares of common stock outside any of the Company's established plans
with an exercise price of $16.75 per share, the market value of the Company's
common stock on the date of the grant. In February 1999, the Company canceled
these options and granted its President options to purchase 400,000 shares of
common stock with an exercise price of $16.75 pursuant to the Kitty Hawk, Inc.
1999 Executive Stock Option Plan. The grant date value of these options was
estimated to be $3.39 using the Black-Scholes option pricing model with the
following assumptions: expected volatility of .67, risk free interest rate of
5.50%, expected life of 4 years and expected dividend yield of 0%.
Had compensation expense been recorded based on these hypothetical values,
the Company's 1998 net income would have been $15.5 million, or $.92 per share
on a diluted basis. Because options vest over several years and additional
option grants are expected, the effects of these hypothetical calculations are
not likely to be representative of similar future calculations. Because no
options were granted or outstanding during 1997 and the options granted during
1996 were compensatory, no supplemental disclosures under FAS 123 are necessary
for 1997 and 1996.
Summarized information about stock options outstanding under the Omnibus
Plan at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
- --------------- ------------ ----------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
$10.31 to $11.63..................... 230,000 9.86 years $10.43 7,500 $10.31
$16.75............................... 50,000 9.32 16.75 50,000 16.75
-------- ------
$10.31 to $16.75..................... 280,000 9.76 years $11.56 57,500 $15.91
======== ======
</TABLE>
At December 31, 1998, 13,160 shares were available for future grants under the
Omnibus Plan.
9. RELATED PARTY TRANSACTIONS
Until February 1997, the Company leased its primary office and maintenance
space in Dallas, Texas under an operating lease from a person who was at the
time a member of the Company's Board of Directors until August 1997. Rent
expense under this lease was, $255,000, $21,000 and $84,000 for the fiscal year
ended August 31, 1996, the year ended December 31, 1997 and for the four months
ended December 31, 1996, respectively. Under the lease agreement, the Company
had 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. In February
1997, the Company exercised its option and purchased the facility and the
interest in the ground lease for $1.76 million.
As a result of the acquisition of the Kalitta Companies, one of the
Company's vendors became a related party as the vendor is owned by a relative of
the former owner of the Kalitta Companies. The Kalitta Companies also leased
certain aircraft to this vendor as well as provided ground handling services in
certain locations. Additionally, the Company used this related company for
subcharter flight and lift
F-17
<PAGE> 62
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capacity for the Company's overnight scheduled cargo service. Total revenues
earned during 1997 (subsequent to the acquisition of the Kalitta Companies) were
approximately $379,000 with related accounts receivable of approximately
$813,000 as of December 31, 1997. Subsequent to the acquisition of the Kalitta
Companies, the Company incurred approximately $1.8 million of expenses with this
related party during 1997 and owed approximately $200,000 to this related party
at December 31, 1997. In 1998, the Company sold a DC-8 to this company for $1
million. The Company recognized no gain or loss on the transaction.
In September 1998, the Company leased 4 JT9 engines from a company owned by
the former owner of the Kalitta Companies. The lease expired in January 1999.
Total lease expense incurred during 1998 was $834,000. At December 31, 1998, the
Company owed $343,000 to the leasing company.
Prior to December 31, 1998, the Company leased an office facility from a
company owned by the former owner of the Kalitta Companies and two of his
relatives. The Company terminated the lease during October 1998. Rent expense
incurred from November 19, 1997 through December 31, 1997 and for fiscal year
1998 was $143,000 and $295,000, respectively.
In connection with the acquisition of the Kalitta Companies, the Company
entered into an agreement to sponsor the racing activities of a racing team
owned by the former owner of the Kalitta Companies. The agreement provides for
annual payments of up to $2 million for two years and expires in November 1999.
10. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS
The Company has three retirement savings plan under Section 401(k) of the
Internal Revenue Code which cover substantially all employees meeting minimum
service requirements. Under the plans, voluntary contributions are made by
employees and the Company provides matching contributions based upon the
employees' contribution. The Company incurred $160,000, $308,000, $841,000 and
$56,000 in matching contributions related to this plan during fiscal year ended
August 31, 1996, the fiscal years ended December 31, 1997 and 1998 and for the
four months ended December 31, 1996, respectively.
11. SIGNIFICANT CUSTOMERS
The Company provided air logistics services to one customer which accounted
for approximately 41%, 18%, 7.7% and 16.8% of its total revenues in the fiscal
year ended August 31, 1996, the years ended December 31, 1997 and 1998 and for
the four months ended December 31, 1996, respectively. The contract for these
services is effective through May 31, 2000; however, such contract may be
canceled by either party with 30 days notice. The Company provided air freight
carrier services to one customer which accounted for approximately 10.8%, 18%,
10% and 11.9% of its total revenues in the fiscal year ended August 31, 1996,
the years ended December 31, 1997 and 1998 and for the four months ended
December 31, 1996, respectively. Another air freight carrier customer accounted
for approximately 15%, 18%, 16.8% and 44% of the Company's total revenues in the
fiscal year ended August 31, 1996, the years ended December 31, 1997 and 1998
and for the four months ended December 31, 1996, respectively. Related accounts
receivable from this customer at December 31, 1997 and 1998 were approximately
$44.5 million and $68.7 million, respectively.
F-18
<PAGE> 63
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31,
AUGUST 31, ----------------------- ---------------------
1996 1997 1998 1995 1996
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Numerator for basic and diluted net
income per share (in thousands)... $ 4,109 $ 17,890 $ 16,642 $ 4,754 $ 5,293
========= ========== ========== ========= =========
Denominator:
Denominator for basic net income per
share -- weighted-average shares
outstanding....................... 7,927,856 11,193,899 16,846,712.. 7,967,710 9,609,920
Effect of dilutive employee stock
options........................... -- -- 7,793 -- --
--------- ---------- ---------- --------- ---------
Denominator for diluted net income
per share -- adjusted
weighted-average shares
outstanding....................... 7,927,856 11,193,899 16,854,505.. 7,967,710 9,609,920
========= ========== ========== ========= =========
Basic net income per share.......... $ 0.52 $ 1.60 $ 0.99 $ 0.60 $ 0.55
========= ========== ========== ========= =========
Diluted net income per share........ $ 0.52 $ 1.60 $ 0.99 $ 0.60 $ 0.55
========= ========== ========== ========= =========
</TABLE>
The weighted average number of common shares outstanding during the year
ended August 31, 1996 includes 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, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin 98. The weighted
average number of common shares outstanding at December 31, 1998 excludes the
effect of options to purchase 460,000 shares of the Company's common stock
because their exercise prices were higher than the market price of the common
stock.
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.
13. COLLECTIVE BARGAINING AGREEMENTS
Approximately 13% of the Company's employees, consisting of pilots and
flight engineers are members of the International Brotherhood of Teamsters
("Teamsters") and are employed pursuant to a Collective Bargaining Agreement.
The Collective Bargaining Agreement became amendable on August 29, 1997, but
remains in effect while the parties are in negotiations for a successor
collective bargaining agreement. Although the Company and the Teamsters have
commenced "interest-based" bargaining, there can be no assurance that a new
Collective Bargaining Agreement can be reached or that negotiations will not
result in work stoppages, substantial increases in salaries or wages, changes in
work rules or other changes adverse to the Company.
14. BUSINESS SEGMENT DATA
The Company operates four principal businesses: an air freight carrier, a
scheduled freight service provider, an air logistics service provider and a
maintenance operation. Each of these is a business segment, with its respective
financial performance detailed below. Included in each are intersegment
transactions for revenues and costs of revenues which generally approximate
market prices. Each business segment is currently evaluated on financial
performance at the operating income line.
F-19
<PAGE> 64
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's air freight carrier provides services to third parties under
contractual arrangements where the Company provides the aircraft, crew,
maintenance and insurance (ACMI). Additionally, the air freight carrier performs
ad hoc charters for the air logistics service provider. The air freight carrier
is further divided into a wide-body division (Kitty Hawk International, Inc.,
formerly AIA) and a narrow-body division (Kitty Hawk Aircargo, Inc.). The air
freight carrier also provided passenger charters during fiscal years 1997 and
1998. The Company has recently eliminated its passenger charter division.
The Company's scheduled freight service consists of an overnight freight
service provider operating in a network of approximately 46 North American
cities, as well as a service between Los Angeles, the Hawaiian Islands and
several Pacific Rim countries.
The Company's air logistics service provider arranges the delivery of time
sensitive freight within North America principally the United States. Also
included in this segment is the Company's fleet of small jet and prop aircraft.
The air logistics service provider utilizes third party aircraft as well as its
own fleet of small aircraft and the fleet of the air freight carrier.
The Company's maintenance operation provides engine overhauls for third
parties as well as for the Company's aircraft. The Company has recently
curtailed its third party maintenance operation to provide only engine overhauls
on JT3 engines for Douglas DC8s and JT8 engines for Boeing 727s and Douglas
DC9s. The Company's maintenance operation also provides airframe repairs for the
Company's Boeing 727s and Douglas DC-9s.
The other category consists of corporate activities as well as activities
of LSI.
Business assets are owned by or allocated to each of the business segments.
Assets included in other include cash, investment in subsidiaries and deferred
income taxes.
<TABLE>
<CAPTION>
ACMI ACMI TOTAL
WIDE- NARROW- AIR FREIGHT AIR SCHEDULED INTERSEGMENT CONSOLIDATED
BODY BODY CARRIER LOGISTICS FREIGHT OTHER ELIMINATIONS BALANCE
-------- -------- ----------- --------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER
31, 1998
Revenue from external
customers.................. $219,799 $170,298 $390,097 $158,136 $166,533 $ 171 $714,937
Revenue for intersegment
operations................. 144,328 36,019 180,347 2,690 1,454 56 $(184,547) --
Depreciation and
amortization............... 32,504 18,051 50,555 1,919 544 2,464 55,482
Operating income............. 12,988 33,156 46,144 13,125 14,252 (3,215) 70,306
Interest expense............. (40,004)
Other income (expense)....... 674
Income before minority
interest and taxes......... $ 30,976
Total assets................. $677,068 $238,369 $915,437 $101,210 $ 30,549 $566,111 $(630,722) $982,585
Total capital expenditures... $159,030 $ 55,016 $214,046 $ 2,253 $ 666 $ 214 $217,179
FISCAL YEAR ENDED DECEMBER
31, 1997
Revenue from external
customers.................. $ 27,299 $112,522 $139,821 $ 91,151 $ 18,871 $ -- $249,843
Revenue for intersegment
operations................. 20,128 16,205 36,333 1,366 118 -- $ (37,817) --
Depreciation and
amortization............... 3,048 11,787 14,835 474 107 135 15,551
Operating income............. 4,493 30,775 35,268 4,410 1,270 (4,331) 36,617
Interest expense............. (6,924)
Other income (expense)....... 1,110
Income before minority
interest and taxes......... $ 30,803
Total assets................. $490,444 $146,712 $637,156 $ 63,186 $ 28,527 $472,788 $(364,911) $836,746
Total capital expenditures... $ 6,616 $107,856 $114,472 $ 541 $ 1 $ -- $115,014
</TABLE>
F-20
<PAGE> 65
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ACMI ACMI TOTAL
WIDE- NARROW- AIR FREIGHT AIR SCHEDULED INTERSEGMENT CONSOLIDATED
BODY BODY CARRIER LOGISTICS FREIGHT OTHER ELIMINATIONS BALANCE
-------- -------- ----------- --------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED AUGUST 31,
1996
Revenue from external
customers.................. $ -- $ 51,870 $ 51,870 $ 90,545 $ -- $ -- $142,415
Revenue for intersegment
operations................. -- 18,750 18,750 -- -- -- $ (18,750) --
Depreciation and
amortization............... -- 6,755 6,755 118 -- -- 6,873
Operating income............. -- 9,497 9,497 4,864 -- (5,916) 8,445
Interest expense............. (1,859)
Other income (expense)....... 291
Income before minority
interest and taxes......... $ 6,877
Total assets................. $ -- $115,653 $115,653 $ 24,199 $ -- $ 7,050 $ (67,075) $ 79,827
Total capital expenditures... $ -- $ 33,369 $ 33,369 $ 169 $ -- $ -- $ 33,538
FOUR MONTHS ENDED DECEMBER
31, 1996
Revenue from external
customers.................. $ -- $ 40,881 $ 40,881 $ 19,105 $ -- $ -- $ 59,986
Revenue for intersegment
operations................. -- 2,648 2,648 -- -- -- $ (2,648) --
Depreciation and
amortization............... -- 3,138 3,138 64 -- -- 3,202
Operating income............. -- 9,117 9,117 708 -- (1,106) 8,719
Interest expense............. (684)
Other income (expense)....... 625
Income before minority
interest and taxes......... $ 8,660
Total assets................. $ -- $147,282 $147,282 $ 20,753 $ -- $ 37,597 $ (82,604) $123,028
Total capital expenditures... $ -- $ 13,584 $ 13,584 $ 211 $ -- $ -- $ 13,795
FOUR MONTHS ENDED DECEMBER
31, 1995 (UNAUDITED)
Revenue from external
customers.................. $ -- $ 29,659 $ 29,659 $ 40,069 $ -- $ -- $ 69,728
Revenue for intersegment
operations................. -- 7,073 7,073 -- -- -- $ (7,073) --
Depreciation and
amortization............... -- 1,637 1,637 45 -- -- 1,682
Operating income............. -- 7,674 7,674 1,738 -- (1,117) 8,295
Interest expense............. (482)
Other income (expense)....... 38
Income before minority
interest and taxes......... $ 7,851
Total assets................. $ -- $ 80,303 $ 80,303 $ 22,235 $ -- $ 2,203 $ (24,631) $ 80,110
Total capital expenditures... $ -- $ 173 $ 173 $ 2 $ -- $ -- $ 175
</TABLE>
The Company does not separately report results of its maintenance operation
and related asset information to the Company's chief operating decision maker.
Accordingly, financial data for the maintenance operation is included under the
ACMI Wide-Body and Air Logistics caption above. Third party maintenance revenue
included under the ACMI Wide-Body and Air Logistics captions above amounted to
$18.4 million and $12.7 million for the fiscal year ended December 31, 1998,
respectively, and $2.1 million and $0 for the fiscal year ended December 31,
1997, respectively.
The Company's air freight carrier and scheduled freight services operate
internationally. The air logistics service operates mainly in North America,
principally the United States. The following table breaks out total revenues
earned in North America, principally the United States, and the rest of the
F-21
<PAGE> 66
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
world, as revenues from no one country, other than the United States, exceeded
10% of the Company's total revenues.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, FOUR MONTHS
YEAR ENDED ------------------- ENDED
AUGUST 31, 1996 1997 1998 DECEMBER 31, 1996
--------------- -------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
North America............................ $136,410 $226,591 $555,007 $54,828
Rest of the world........................ 6,005 23,252 159,930 5,158
-------- -------- -------- -------
$142,415 $249,843 $714,937 $59,986
======== ======== ======== =======
</TABLE>
All of the Company's long-lived assets are based in North America.
15. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the issuance of the Notes in November 1997, each of the
Company's subsidiaries, with the exception of AIC, (collectively, the
"Guarantors") have fully and unconditionally and jointly and severally
guaranteed (the "Guarantees") on a senior basis, the full and prompt performance
of the Company's obligations under the Notes. The Guarantees are limited to the
largest amount that would not render such Guarantees subject to avoidance under
any applicable federal or state fraudulent conveyance or similar law. The
Guarantees rank senior in right of payment to any subordinated indebtedness and,
except with respect to collateral, pari passu with all existing and future
unsubordinated indebtedness of the Guarantors. Each of the Guarantors is a
wholly-owned subsidiary of the Company.
Supplemental financial information is presented for the fiscal years ended
December 31, 1997 and 1998. No supplemental financial information is provided
for the fiscal year ended August 31, 1996 and the four months ended December 31,
1996 because AIC, the only non-guarantor subsidiary, was not acquired by the
Company until November 1997. the outstanding debt of the Company. The Company
has not presented separate financial statements and other disclosures concerning
the Guarantors because the Company's management believes that such information
is not material to investors because the guarantees did not exist until 1997.
F-22
<PAGE> 67
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KITTY HAWK, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
KITTY HAWK, SUBSIDIARIES AIC
INC. EXCLUDING AIC (NON-
(PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL
----------- ------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 6,620 $ 10,005 $ 1,282 -- $ 17,907
Restricted cash and short-term
investments...................... 56,000 2,629 -- -- 58,629
Trade accounts receivable.......... -- 114,395 9,632 $ (1,836) 122,191
Deferred income taxes.............. -- 15,798 -- -- 15,798
Inventory and aircraft supplies.... -- 34,118 -- -- 34,118
Prepaid expenses and other current
assets........................... 646 24,860 90 -- 25,596
-------- -------- ------- --------- --------
Total current assets..... 63,266 201,805 11,004 (1,836) 274,239
Property and equipment, net........ -- 547,976 561 -- 548,537
Intercompany receivable............ 312,553 17,820 (330,373) --
Investment in Guarantors........... 81,879 -- (81,879) --
Investment in AIC.................. -- 6,271 -- (6,271) --
Other assets, net.................. 13,329 641 -- -- 13,970
-------- -------- ------- --------- --------
Total assets............. $471,027 $774,513 $11,565 $(420,359) $836,746
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................... $ 366 $ 44,058 $ 587 $ (1,364) $ 43,647
Accrued expenses................... 4,084 86,946 572 (474) 91,128
Intercompany payable............... 17,820 312,553 -- (330,373) --
Accrued maintenance reserves....... -- 19,139 -- -- 19,139
Current maturities of long-term
debt............................. -- 2,395 -- -- 2,395
-------- -------- ------- --------- --------
Total current
liabilities............ 22,270 465,091 1,159 (332,211) 156,309
Revolving Credit Facility.......... 10,000 -- -- -- 10,000
Long-term debt..................... 340,000 52,248 -- -- 392,248
Deferred income taxes.............. -- 99,153 -- -- 99,153
-------- -------- ------- --------- --------
Total liabilities........ 372,270 616,492 1,159 (332,211) 657,710
-------- -------- ------- --------- --------
Minority interest in AIC........... -- -- -- 4,163 4,163
Stockholders' equity
Preferred stock.................. -- -- -- -- --
Common stock..................... 167 -- -- -- 167
Additional capital............... 130,523 81,879 2,817 (84,696) 130,523
Retained earnings................ (31,933) 76,142 7,589 (7,615) 44,183
-------- -------- ------- --------- --------
Total stockholders'
equity................. 98,757 158,021 10,406 (92,311) 174,873
-------- -------- ------- --------- --------
Total liabilities and
stockholders' equity... $471,027 $774,513 $11,565 $(420,359) $836,746
======== ======== ======= ========= ========
</TABLE>
F-23
<PAGE> 68
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KITTY HAWK, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
KITTY HAWK, SUBSIDIARIES AIC
INC. EXCLUDING AIC (NON-
(PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL
------------ ------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenue
Air freight carrier................... $ -- $174,576 $8,234 $(5,651) $177,159
Air logistics......................... -- 70,539 -- -- 70,539
Maintenance........................... -- 2,145 -- -- 2,145
------- -------- ------ ------- --------
Total revenues................ -- 247,260 8,234 (5,651) 249,843
Costs of revenues
Air freight carrier................... -- 126,832 6,776 (5,651) 127,957
Air logistics......................... -- 65,921 -- -- 65,921
Maintenance........................... -- 1,813 1,813
------- -------- ------ ------- --------
Total costs of revenues....... -- 194,566 6,776 (5,651) 195,691
------- -------- ------ ------- --------
Gross profit............................ -- 52,694 1,458 -- 54,152
General and administrative expenses..... 1,903 12,969 234 -- 15,106
Non-qualified employee profit sharing
expense............................... (444) 2,873 -- -- 2,429
------- -------- ------ ------- --------
Operating income........................ (1,459) 36,852 1,224 -- 36,617
Other income (expense):
Interest expense...................... (3,716) (3,208) -- -- (6,924)
Other, net............................ 735 356 19 -- 1,110
------- -------- ------ ------- --------
Income before minority interest and
income taxes.......................... (4,440) 34,000 1,243 -- 30,803
Minority interest in AIC................ -- -- -- (497) (497)
------- -------- ------ ------- --------
Income before income taxes.............. (4,440) 34,000 1,243 (497) 30,306
Income taxes............................ (1,776) 14,192 -- -- 12,416
------- -------- ------ ------- --------
Net income.............................. $(2,664) $ 19,808 $1,243 $ (497) $ 17,890
======= ======== ====== ======= ========
</TABLE>
F-24
<PAGE> 69
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KITTY HAWK, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
KITTY HAWK, SUBSIDIARIES AIC
INC. EXCLUDING AIC (NON-
(PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL
----------- ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash provided by operating
activities........................... $(78,433) $ 99,040 $1,044 $497 $ 22,148
Investing Activities:
Purchase of Kalitta Companies, net of
cash acquired..................... (315,551) -- -- -- (315,551)
Proceeds from sale of assets......... -- 1,811 6 -- 1,817
Investment in AIC.................... -- 977 -- (977) --
Capital expenditures................. -- (115,014) -- -- (115,014)
-------- --------- ------ ---- ---------
Net cash provided by (used
in) investing activities... (315,551) (112,226) 6 (977) (428,748)
Financing Activities
Proceeds from 9.95% Senior Secured
Notes, net........................ 329,069 -- -- -- 329,069
Proceeds from issuance of common
stock, net........................ 38,342 -- -- -- 38,342
Proceeds from issuance of long-term
debt, net......................... -- 50,418 -- -- 50,418
Borrowings on Revolving Credit
facility.......................... 10,000 6,230 -- -- 16,230
Repayments of debt................... -- (36,512) -- -- (36,512)
Net partner withdrawals.............. -- -- (800) 800 --
Distributions to minority interest... -- -- -- (320) (320)
Note receivable from shareholder..... -- (41) -- -- (41)
-------- --------- ------ ---- ---------
Net cash provided by (used
in) investing activities... 377,411 20,095 (800) 480 397,186
-------- --------- ------ ---- ---------
Increase (decrease) in cash............ (16,573) 6,909 250 -- (9,414)
Cash and cash equivalents, beginning of
period............................... 23,193 3,096 1,032 -- 27,321
-------- --------- ------ ---- ---------
Cash and cash equivalents, end of
period............................... $ 6,620 $ 10,005 $1,282 $ -- $ 17,907
======== ========= ====== ==== =========
</TABLE>
F-25
<PAGE> 70
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KITTY HAWK, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
KITTY HAWK, SUBSIDIARIES AIC
INC. EXCLUDING AIC (NON-
(PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL
----------- ------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 14,317 $ (4,739) $ 5,499 $ -- $ 15,077
Restricted cash and short-term
investments...................... -- 1,964 -- -- 1,964
Trade accounts receivable.......... -- 129,938 10,618 (542) 140,014
Deferred income taxes.............. -- 16,088 -- -- 16,088
Inventory and aircraft supplies.... -- 50,135 -- -- 50,135
Prepaid expenses and other current
assets........................... 3,955 18,852 64 -- 22,871
-------- -------- ------- --------- --------
Total current assets..... 18,272 212,238 16,181 (542) 246,149
Property and equipment, net........ 211 719,697 900 -- 720,808
Intercompany receivable............ 425,562 4,261 -- (429,823) --
Investment in Guarantors........... 81,975 -- -- (81,975) --
Investment in AIC.................. -- 8,024 -- (8,024) --
Other assets, net.................. 11,687 3,941 -- -- 15,628
-------- -------- ------- --------- --------
Total assets............. $537,707 $948,161 $17,081 $(520,364) $982,585
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................... $ 528 $ 50,992 $ 2,989 $ (542) $ 53,967
Accrued expenses................... 5,276 98,283 719 -- 104,278
Intercompany payables.............. 4,261 425,562 -- (429,823) --
Accrued maintenance reserves....... -- 22,382 -- -- 22,382
Current maturities of long-term
debt............................. -- 20,564 -- -- 20,564
-------- -------- ------- --------- --------
Total current
liabilities............ 10,065 617,783 3,708 (430,365) 201,191
Revolving Credit Facility.......... 86,900 -- -- -- 86,900
Long-term debt..................... 340,000 42,287 -- -- 382,287
Deferred income taxes.............. -- 113,261 -- -- 113,261
-------- -------- ------- --------- --------
Total liabilities........ 436,965 773,331 3,708 (430,365) 783,639
Minority interest in AIC........... -- -- -- 4,749 4,749
Stockholders' equity
Preferred stock.................. -- -- -- -- --
Common stock..................... 169 -- -- -- 169
Additional capital............... 133,166 81,975 5,857 (87,832) 133,166
Retained earnings................ (32,593) 92,855 7,516 (6,916) 60,862
-------- -------- ------- --------- --------
Total stockholders'
equity................. 100,742 174,830 13,373 (94,748) 194,197
-------- -------- ------- --------- --------
Total liabilities and
stockholders' equity... $537,707 $948,161 $17,081 $(520,364) $982,585
======== ======== ======= ========= ========
</TABLE>
F-26
<PAGE> 71
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KITTY HAWK, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
KITTY HAWK, SUBSIDIARIES AIC
INC. EXCLUDING AIC (NON-
(PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL
----------- ------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier.............. $ -- $579,206 $62,935 $(39,223) $602,918
Air logistics.................... -- 80,757 -- -- 80,757
Maintenance and other............ -- 31,262 -- -- 31,262
------- -------- ------- -------- --------
Total revenues........... -- 691,225 62,935 (39,223) 714,937
Costs of revenues:
Air freight carrier.............. -- 487,068 53,980 (39,223) 501,825
Air logistics.................... -- 73,862 -- -- 73,862
Maintenance and other............ -- 23,110 -- -- 23,110
------- -------- ------- -------- --------
Total costs of
revenues............... -- 584,040 53,980 (39,223) 598,797
------- -------- ------- -------- --------
Gross profit....................... -- 107,185 8,955 -- 116,140
General and administrative
expenses......................... (122) 41,522 1,637 -- 43,037
Non-qualified employee profit
sharing expense.................. 2,797 -- -- -- 2,797
------- -------- ------- -------- --------
Operating income (loss)............ (2,675) 65,663 7,318 -- 70,306
Other income (expense):
Interest expense................. 897 (40,901) -- -- (40,004)
Other, net....................... 206 270 198 -- 674
------- -------- ------- -------- --------
Income (loss) before minority
interest and income taxes........ (1,572) 25,032 7,516 -- 30,976
Minority interest in AIC........... -- -- -- (3,006) (3,006)
------- -------- ------- -------- --------
Income (loss) before income
taxes............................ (1,572) 25,032 7,516 (3,006) 27,970
Income tax expense (benefit)....... (1,374) 12,702 -- -- 11,328
------- -------- ------- -------- --------
Net income (loss).................. $ (198) $ 12,330 $ 7,516 $ (3,006) $ 16,642
======= ======== ======= ======== ========
</TABLE>
F-27
<PAGE> 72
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KITTY HAWK, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
KITTY HAWK, SUBSIDIARIES AIC
INC. EXCLUDING AIC (NON-
(PARENT) (GUARANTORS) GUARANTOR) ELIMINATIONS TOTAL
----------- ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in)
operating activities............ $(124,968) $ 193,276 $ 9,256 $(3,006) $ 74,558
Investing Activities:
Capital expenditures............ (215) (216,475) (489) -- (217,179)
Redemption of short term
investments.................. 55,979 868 -- -- 56,847
Investment in AIC............... -- 124 -- (124) --
Proceeds from sale of assets.... -- 6,916 -- -- 6,916
--------- --------- ------- ------- ---------
Net cash provided by
(used in) investing
activities............ 55,764 (208,567) (489) (124) (153,416)
Financing Activities
Repayments of debt.............. -- (4,373) -- -- (4,373)
Net borrowings.................. 76,900 5,880 -- -- 82,780
Net partner withdrawals......... -- -- (4,550) 4,550 --
Note receivable from
shareholder.................. -- 41 -- -- 41
Distributions to minority
interest..................... -- (1,000) -- (1,420) (2,420)
--------- --------- ------- ------- ---------
Net cash provided by
(used in) investing
activities............ 76,900 548 (4,550) 3,130 76,028
--------- --------- ------- ------- ---------
Increase (decrease) in cash....... 7,696 (14,743) 4,217 -- (2,830)
Cash and cash equivalents,
beginning of period............. 6,620 10,005 1,282 -- 17,907
--------- --------- ------- ------- ---------
Cash and cash equivalents, end of
period.......................... $ 14,316 $ (4,738) $ 5,499 $ -- $ 15,077
========= ========= ======= ======= =========
</TABLE>
F-28
<PAGE> 73
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table reflects selected quarterly operating results, which
have not been audited or reviewed. The information has been prepared on the same
basis as the consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the information shown. The Company's results may vary
significantly from quarter to quarter and the operating results for any quarter
are not necessarily indicative of the results that may be expected for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
--------------------------------------------------- ---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues....... $28,102 $32,366 $41,199 $148,176 $147,353 $155,794 $175,081 $236,709
Gross profit......... 5,355 7,451 8,748 32,598 16,918 26,914 25,413 46,895
Operating income..... 2,571 4,679 5,593 23,774 6,954 17,103 14,414 31,835
Net income (loss).... 1,414 2,561 2,993 10,922 (1,729) 4,364 2,537 11,470
Basic and diluted net
income (loss) per
share.............. $ 0.14 $ 0.25 $ 0.29 $ 0.82 $ (0.10) $ 0.26 $ 0.15 $ 0.68
</TABLE>
17. SUBSEQUENT EVENTS
During January 1999, the Company entered into an operating lease agreement
to lease nine Boeing 727 aircraft for a period of seven years each. The lessor
will pay all costs associated with modifying the aircraft to cargo configuration
and to bring the aircraft into compliance with the FAA Noise Regulations. The
Company expects to place three of these aircraft into revenue service during
1999 with the remainder placed into revenue service during 2000. The monthly
aggregate lease expense for all nine aircraft will be approximately $1 million.
As a result of the acquisition of AIA, the Company acquired a 60% interest
in the AIC general partnership. Pacific Aviation Logistics ("PAL") owned the
remaining 40% interest in AIC and was the managing partner of AIC. Beti Ward,
who owned PAL, was the general manager of AIC. AIC operates a scheduled air
freight service between Los Angeles, Honolulu and various destinations in the
Pacific. AIC does not own any aircraft and currently leases all of its aircraft
and facilities from the Company.
In August 1998, the Company called a partnership meeting to designate AIA
as the managing partner of AIC and to replace Ms. Ward as general manager. In
response, Ms. Ward and PAL filed suit to prevent these actions and requested the
court to dissolve AIC. While these issues were being addressed in court, the
Company reached a settlement with Ms. Ward and PAL. The terms of the settlement
are (i) AIC will pay PAL a $5.4 million cash distribution from PAL's capital
account in AIC, (ii) the Company will give Ms. Ward and PAL a promissory note
for an additional $2.35 million, payable in three annual installments of
$700,000 each and one final payment of $250,000 (the note bears interest at
9.98% and is payable semi-annually), (iii) Ms. Ward and PAL will transfer to the
Company all of their interest in AIC and its business, (iv) Ms. Ward and PAL
will broadly covenant not to compete in the Los Angeles and Honolulu air freight
markets for a period of three and one-half years, (v) Ms. Ward and PAL will
return approximately $180,000 worth of AIC's property and (vi) all the parties
will exchange mutual releases, but the Company will retain the right to pursue
audit actions and seek other limited recoveries against Ms. Ward and PAL. As a
result of the settlement, the Company now has full ownership and control of AIC
and its business in being conducted without interruption.
F-29
<PAGE> 74
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
The following sets forth the unaudited pro forma consolidated statement of
operations for the years ended December 31, 1996 and 1997, in each case giving
effect to the acquisition of the Kalitta Companies, the issuance of the Notes,
Term Loan, and the acquisition of 16 Boeing 727s from the Kalitta Companies as
if each of the transactions had been consummated at the beginning of 1996 and
1997 for each of the respective years. This information is presented for
illustrative purposes only and does not purport to present the results of
operations of the Company had these transactions occurred on the dates
indicated, nor are they necessarily indicative of the consolidated results of
operations which may be expected to occur in the future.
No pro forma adjustments have been applied to reflect (i) revenues or
operating costs expected to be generated from the Boeing 747s purchased during
1998 and modified to cargo configuration with approximately $56 million of the
net proceeds from the Notes or (ii) operating efficiencies or cost savings
(other than approximately $1.5 million of insurance savings) expected to result
from the acquisition of the Kalitta Companies. In addition, pro forma results
have not been adjusted to eliminate abnormally high engine maintenance expenses,
costs incurred to add and maintain flight crews in anticipation of increased air
freight carrier business which had not yet materialized in part due to delays in
acquiring aircraft and start-up costs associated with establishing the Kalitta
Companies' wide-body passenger charter business, which has recently been
discontinued.
F-30
<PAGE> 75
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain reclassifications have been made consistent with the
reclassifications on the Company's statement of operations.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(UNAUDITED)
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues:
Air freight carrier....................................... $531,551 $461,795
Air logistics............................................. 70,539 53,638
Maintenance and other..................................... 29,231 36,348
-------- --------
Total revenues.................................... 631,321 551,781
-------- --------
Costs of revenues:
Air freight carrier....................................... 460,048 406,131
Air logistics............................................. 65,921 48,820
Maintenance and other..................................... 22,248 22,316
-------- --------
Total costs of revenues........................... 548,217 477,267
-------- --------
Gross profit................................................ 83,104 74,514
General and administrative expenses......................... 38,160 31,843
Stock option grant to executives............................ -- 4,231
Non-qualified employee profit sharing expense............... 2,429 1,243
-------- --------
Operating income............................................ 42,515 37,197
Other income (expense):
Interest expense, net..................................... (40,084) (40,859)
Other, net................................................ (355) 1,557
-------- --------
Income (loss) before minority interest and income taxes..... 2,076 (2,105)
Minority interest........................................... 3,036 1,146
-------- --------
Loss before income taxes.................................... (960) (3,251)
Income taxes................................................ -- --
-------- --------
Net loss.................................................... $ (960) $ (3,251)
======== ========
Net loss per common share -- basic and diluted.............. $ (0.06) $ (0.22)
======== ========
Weighted average common shares outstanding.................. 16,751 14,776
======== ========
Other Pro Forma Information:
Adjusted EBITDA(1)........................................ $ 88,314 $ 82,293
======== ========
Depreciation and amortization............................. $ 45,669 $ 39,308
======== ========
Capital expenditures...................................... $214,356 $141,635
======== ========
</TABLE>
- ---------------
(1) Adjusted EBITDA is calculated as income (loss) before minority interest,
income taxes, interest expense and depreciation and amortization. Adjusted
EBITDA excludes approximately $4,231 from stock options granted to
executives in 1996.
F-31
<PAGE> 76
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. 1999 REPORTING (UNAUDITED)
Subsequent to the acquisition of the Kalitta Companies and pursuant to the
integration of these companies into Kitty Hawk, the Company has refined its
financial reporting. Throughout this transition and reorganization of common
business segments under common management, the Company has developed a
corresponding methodology for its financial reporting. Beginning in the first
quarter of 1999, the Company expects to report operating results in its
statement of income in a manner consistent with the presentation below.
Differences in revenue from the prior presentation include the following:
(i) revenues from charters performed by the Company's small aircraft will be
reported as a component of air logistics revenue instead of the 1998
presentation as air freight carrier revenues, (ii) revenues from the Company's
scheduled freight services will be reported separate from air freight carrier
revenues, and (iii) charters arranged by the air logistics service provider
which are flown in the air freight carrier will no longer be reported as a
component of air freight carrier revenues; they will be included in air
logistics revenue. Differences in costs of revenues include breaking each
component of air logistics, air freight carrier and scheduled freight costs of
revenues into their respective components which include flight expense,
maintenance expense, aircraft fuel expense, depreciation expense and other
expense. The following information is provided for informational purposes only.
F-32
<PAGE> 77
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
--------------------------------------------------- ---------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998 1998 1998 1997
--------- -------- ------------- ------------ ------------ ------------
(PRO FORMA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier........ $74,764 $77,445 $85,393 $134,088 $371,690 $314,814
Air logistics.............. 27,690 27,935 39,515 50,312 145,452 122,924
Scheduled freight.......... 36,181 40,497 43,842 46,013 166,533 164,352
Maintenance and other...... 8,718 9,917 6,331 6,296 31,262 29,231
------- ------- ------- -------- -------- --------
Total revenues..... 147,353 155,794 175,081 236,709 714,937 631,321
Costs of revenues:
Flight expense............. 69,558 70,073 80,571 107,568 327,770 281,863
Maintenance expense........ 33,967 30,472 39,406 46,517 150,362 148,527
Aircraft fuel expense...... 16,226 17,033 17,065 19,235 69,559 78,242
Depreciation expense....... 10,684 11,302 12,626 16,441 51,053 39,585
Other...................... -- -- -- 53 53 --
------- ------- ------- -------- -------- --------
Total costs of
revenues......... 130,435 128,880 149,668 189,814 598,797 548,217
Gross profit................. 16,918 26,914 25,413 46,895 116,140 83,104
General and administrative
expenses................... 9,434 9,759 10,591 13,253 43,037 38,160
Profit sharing expense....... 530 52 408 1,807 2,797 2,429
------- ------- ------- -------- -------- --------
Operating income............. 6,954 17,103 14,414 31,835 70,306 42,515
Interest expense............. (9,699) (9,602) (9,581) (11,122) (40,004) (40,084)
Other income (expense)....... 675 391 296 (688) 674 (355)
------- ------- ------- -------- -------- --------
Income (loss) before
minority interest and
taxes................... (2,070) 7,892 5,129 20,025 30,976 2,076
Minority interest............ (812) (619) (1,042) (533) (3,006) (3,036)
------- ------- ------- -------- -------- --------
Income (loss) before taxes... (2,882) 7,273 4,087 19,492 27,970 (960)
Income taxes................. (1,153) 2,909 1,550 8,022 11,328 --
------- ------- ------- -------- -------- --------
Net income (loss)............ $(1,729) $ 4,364 $ 2,537 $ 11,470 $ 16,642 $ (960)
======= ======= ======= ======== ======== ========
Basic and diluted net income
(loss) per share........... $ (0.10) $ 0.26 $ 0.15 $ 0.68 $ 0.99 $ (0.06)
======= ======= ======= ======== ======== ========
Weighted average shares
outstanding................ 16,759 16,775 16,925 16,940 16,855 16,751
======= ======= ======= ======== ======== ========
</TABLE>
F-33
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated September 22, 1997
(the "Merger Agreement"), by and among Kitty Hawk and
certain of its subsidiaries, M. Tom Christopher, the
Kalitta Companies and Conrad A. Kalitta, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-36125), which Exhibit
is herein incorporated by reference.
2.2 -- Amendment No. 1 to the Merger Agreement, dated October
23, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, the Kalitta Companies
and Conrad A. Kalitta, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 333-36125), which Exhibit is herein
incorporated by reference.
2.3 -- Amendment No. 2 to the Merger Agreement, dated October
29, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, the Kalitta Companies
and Conrad Kalitta, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 333-36125), which Exhibit is herein
incorporated by reference.
2.4 -- Amendment No. 3 to the Merger Agreement, dated November
14, 1997 by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, the Kalitta Companies
and Conrad Kalitta, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-4 (Reg. No. 333-43645), which Exhibit is herein
incorporated by reference.
3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the
"Company"), filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which Exhibit is
incorporated herein by reference.
3.2 -- Amendment No. 1 to the Certificate of Incorporation of
the Company, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which Exhibit is
incorporated herein by reference.
3.3 -- Amended and Restated Bylaws of Kitty Hawk, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-4 (Reg. No. 333-43645), which Exhibit
is herein incorporated by reference.
4.1 -- Specimen Common Stock Certificate, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
4.2 -- Stockholders' Agreement dated November 1997 among the
Company, M. Tom Christopher and Conrad A. Kalitta, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-4 (Reg. No. 333-43645),
which Exhibit is herein incorporated by reference.
4.3 -- Specimen Global Note in respect of 9.95% Senior Secured
Notes due 2004, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-4 (Reg.
No. 333-43645), which Exhibit is herein incorporated by
reference.
4.4 -- Indenture, dated November 15, 1997, in regard to 9.95%
Senior Secured Notes due 2004 by and among the Company
and certain of its subsidiaries and Bank One, N.A. as
Trustee and Collateral Trustee, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-4 (Reg. No. 333-43645), which Exhibit is herein
incorporated by reference.
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
4.5 -- First Supplemental Indenture, dated February 5, 1998, in
regard to 9.95% Senior Secured Notes due 2004 by and
among the Company and certain of its subsidiaries and
Bank One, N.A. as Trustee and Collateral Trustee, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-4 (Reg. No. 333-43645),
which Exhibit is herein incorporated by reference.
10.1** -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Kitty Hawk Aircargo, Inc., Airport
Leasing, Inc., M. Tom Christopher, American International
Airways, Inc. and Conrad Kalitta, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
10.2** -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.3** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.4** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
10.5** -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
10.6** -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-8307) dated as of
October 1996, which exhibit is incorporated herein by
reference.
10.7** -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996, filed
as an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.8** -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
10.9** -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 33-85698) dated as of
December 1994, which exhibit is incorporated herein by
reference.
10.10** -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
10.11 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement"), filed as
an Exhibit to the Registrant's previously filed
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.12 -- Amendment No. 1 dated November 17, 1992 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.13 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.14 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.15 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.16 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
10.17 -- Amendment No. 6 dated December 6, 1996 to the FEASI
Agreement, filed as an Exhibit to the Company's Form 10-Q
for the quarter ended November 30, 1996, which exhibit is
incorporated herein by reference.
10.18 -- Second Amended and Restated Credit Agreement, dated as of
November 19, 1997, by and among the Company (as borrower)
and Wells Fargo Bank (Texas), National Association (as
agent), filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-4 (Reg.
No. 333-43645), which Exhibit is herein incorporated by
reference.
10.19* -- Third Amended Agreement, dated as of December 10, 1998,
by and among the Company (as borrower) and Wells Fargo
Bank (Texas), National Association (as agent).
10.20 -- Agreement, dated July 20, 1995, between American
International Airways, Inc. and the Pilots, Co-Pilots and
Flight Engineers in the service of American International
Airways, Inc., as represented by The International
Brotherhood of Teamsters -- Airline Division, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-1 (Reg. No. 333-36125), which Exhibit
is herein incorporated by reference.
10.21** -- Employment Agreement by and between Conrad A. Kalitta and
AIA, filed as an Exhibit to the Registrant's previously
filed Registration Statement on Form S-1 (Reg. No.
333-36125), which Exhibit is herein incorporated by
reference.
10.22 -- Amended and Restated Consulting Agreement by and between
Conrad A. Kalitta and AIA, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-1 (Reg. No. 333-36125), which Exhibit is herein
incorporated by reference.
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
10.23 -- Separation Agreement, dated as of April 17, 1998, by and
among the Company, M. Tom Christopher, Conrad A. Kalitta
and certain subsidiaries of the Company, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-3 (Reg. No. 333-74469), which Exhibit
is herein incorporated by reference.
10.24 -- Amendment No. 1 to Separation Agreement, dated as of June
5, 1998, by and among the Company, M. Tom Christopher,
Conrad A. Kalitta and certain subsidiaries of the
Company, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-3 (Reg.
No. 333-74469), which Exhibit is herein incorporated by
reference.
10.25 -- Agreement, dated as of January 21, 1999, by and among the
Company, M. Tom Christopher, Conrad A. Kalitta and
certain subsidiaries of the Company, filed as an Exhibit
to the Registrant's previously filed Registration
Statement on Form S-3 (Reg. No. 333-74469), which Exhibit
is herein incorporated by reference.
10.26** -- Modified and Restated Employment Agreement, dated as of
April 27, 1998 by and between the Company and Tilmon J.
Reeves, filed as an Exhibit to the Registrant's
previously filed Registration Statement on Form S-3 (Reg.
No. 333-74469), which Exhibit is herein incorporated by
reference.
10.27** -- Stock Option Agreement, dated as of April 27, 1998, by
and between the Company and Tilmon J. Reeves, filed as an
Exhibit to the Registrant's previously filed Registration
Statement on Form S-3 (Reg. No. 333-74469), which Exhibit
is herein incorporated by reference.
10.28** -- Non-Qualified Stock Option Agreement, dated as of
February 24,1999, by and among the Company, M. Tom
Christopher and Tilmon J. Reeves, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-3 (Reg. No. 333-74469), which Exhibit is herein
incorporated by reference.
10.29** -- 1999 Kitty Hawk, Inc. Executive Stock Option Plan, dated
as of February 24, 1999, filed as an Exhibit to the
Registrant's previously filed Registration Statement on
Form S-3 (Reg. No. 333-74469), which Exhibit is herein
incorporated by reference.
10.30* -- Ground Lease, dated as of April 13, 1998, by and between
the Fort Wayne-Allen County Airport Authority and Kitty
Hawk, Inc.
10.31* -- Building Lease, dated as of April 13, 1998, by and
between the Fort Wayne-Allen County Airport Authority and
Kitty Hawk, Inc.
12.1* -- Statement of computation of ratio of earnings to fixed
charges.
21.1 -- Subsidiaries of the Registrant, filed as an Exhibit to
the Registrant's previously filed Registration Statement
on Form S-3 (Reg. No. 333-74469), which Exhibit is herein
incorporated by reference.
23.1* -- Consent of Ernst & Young LLP.
27.1* -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** This exhibit is a management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 10.19
THIRD AMENDMENT AGREEMENT
This THIRD AMENDMENT AGREEMENT (this "Amendment") is made and entered
into as of December 10, 1998 by and among KITTY HAWK, INC., a Delaware
corporation ("Kitty Hawk"), KITTY HAWK AIRCARGO, INC., a Texas corporation
("Aircargo"), AIRCRAFT LEASING, INC., a Texas corporation ("Leasing"), KITTY
HAWK CHARTERS, INC., a Texas corporation ("Charters"), AMERICAN INTERNATIONAL
AIRWAYS, INC., a Michigan corporation ("AIA"), AMERICAN INTERNATIONAL TRAVEL,
INC., a Michigan corporation ("AIT"), FLIGHT ONE LOGISTICS, INC., a Michigan
corporation ("FOL"), KALITTA FLYING SERVICE, INC., a Michigan corporation
("KFS"), O. K. TURBINES, INC., a Michigan corporation ("OK"), LONGHORN
SOLUTIONS, INC., a Texas corporation ("Longhorn"), WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION ("Wells Fargo"), BANK ONE, TEXAS, N.A. ("Bank One"),
COMERICA BANK ("Comerica"), HELLER FINANCIAL, INC. ("Heller"), TORONTO DOMINION
(TEXAS), INC. ("Toronto Dominion") and WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, a national banking association, as agent for itself and the other
Lenders (in such capacity, together with its successors and assigns in such
capacity, "Agent").
R E C I T A L S:
A. Pursuant to that certain Second Amended and Restated Credit
Agreement dated as of November 19, 1997, by and among Kitty Hawk, Aircargo,
Leasing, Charters, Skyfreighters Corporation, AIA, AIT, FOL, KFS, OK, Wells
Fargo (as a Lender) and Agent (as amended, the "Credit Agreement"), Wells Fargo
and the other Lenders (of which there were then none, other than Wells Fargo)
agreed to provide a $100,000,000 Revolving Credit Loans facility to Kitty Hawk
(for use by Kitty Hawk and its Subsidiaries) and a $45,900,000 Term Loans
facility to Kitty Hawk.
B. The Credit Agreement was amended in certain respects pursuant to
that certain First Amendment Agreement dated as of January 1, 1998 and that
certain Second Amendment Agreement dated as of February 6, 1998.
C. Each of Bank One, Comerica, Heller and Toronto Dominion have
previously purchased interests in the Loans and have become Lenders under the
Credit Agreement.
D. The parties to the Credit Agreement desire to further amend the
Credit Agreement as provided in this Amendment to, among other things, (i)
amend the Borrowing Base and (ii) provide for the grant of security interests
in additional aircraft as security for the Obligations.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
THIRD AMENDMENT AGREEMENT - Page 1
<PAGE> 2
ARTICLE 1
Definitions
Section 1.1 Definitions. Unless otherwise defined in this Amendment,
each capitalized term used in this Amendment has the meaning given to such term
in the Credit Agreement (as amended by this Amendment).
ARTICLE 2
Amendments to Credit Agreement
Section 2.1 New Terms and Definitions. The following new terms and
definitions thereof are hereby added to Section 1.1 of the Credit Agreement,
which terms shall appear in alphabetical order in such Section 1.1:
"'AIA Aircraft Appraisal' means an appraisal, dated on or
about or after the Third Amendment Date, in form and substance
satisfactory to Agent prepared by Pro-Tech Advisors Inc. which sets
forth the appraised value of the AIA Aircraft, other than Aircraft X."
"'Aircraft AE' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-61 airframe, United States Aircraft Registration
Number N24UA, Manufacturer's Serial No. 45963, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 669524, (iii) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 669663, (iv) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 645059, and (v) one Pratt & Whitney
JT3D-3B Engine, Manufacturer's Serial No. 643331."
"'Aircraft AF' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-62 airframe, United States Aircraft Registration
Number N801MG, Manufacturer's Serial No. 45986, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 669415, (iii) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 644533, (iv) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 669772, and (v) one Pratt & Whitney
JT3D-3B Engine, Manufacturer's Serial No. 643562."
"'Aircraft AG' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-62 airframe, United States Aircraft Registration
Number N802MG, Manufacturer's Serial No. 46098, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or
THIRD AMENDMENT AGREEMENT - Page 2
<PAGE> 3
appurtenant to such airframe, (ii) one Pratt & Whitney JT3D-7 Engine,
Manufacturer's Serial No. 671327, (iii) one Pratt & Whitney JT3D-7
Engine, Manufacturer's Serial No. 678966, (iv) one Pratt & Whitney
JT3D-7 Engine, Manufacturer's Serial No. 671140, and (v) one Pratt &
Whitney JT3D-7 Engine, Manufacturer's Serial No. 668044."
"'Aircraft AH' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-62 airframe, United States Aircraft Registration
Number N803CK, Manufacturer's Serial No. 46085, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's
Serial No. 669692, (iii) one Pratt & Whitney JT3D-7 Engine,
Manufacturer's Serial No 671383, (iv) one Pratt & Whitney JT3D-7
Engine, Manufacturer's Serial No. 671064, and (v) one Pratt & Whitney
JT3D-7 Engine, Manufacturer's Serial No. 678961."
"'Aircraft AI' means, collectively, (i) one McDonnell
Douglas Model #DC-8- 63F airframe, United States Aircraft Registration
Number N811CK, Manufacturer's Serial No. 46147, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's
Serial No. 678985, (iii) one Pratt & Whitney JT3D-7 Engine,
Manufacturer's Serial No. 669723, (iv) one Pratt & Whitney JT3D-7
Engine, Manufacturer's Serial No. 645304, and (v) one Pratt & Whitney
JT3D-7 Engine, Manufacturer's Serial No. 642467."
"'Aircraft AJ' means, collectively, (i) one McDonnell
Douglas Model #DC-8- 61 airframe, United States Aircraft Registration
Number N812CK, Manufacturer's Serial No. 45890, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 669498, (iii) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 644485, (iv) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 644408, and (v) one Pratt & Whitney
JT3D-3B Engine, Manufacturer's Serial No. 645300."
"'Aircraft AK' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-61 airframe, United States Aircraft Registration
Number N813CK, Manufacturer's Serial No. 45893, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 642298, (iii) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 645184, (iv) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 632811, and (v) one Pratt & Whitney
JT3D-3B Engine, Manufacturer's Serial No. 644949."
THIRD AMENDMENT AGREEMENT - Page 3
<PAGE> 4
"'Aircraft AL' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-63F airframe, United States Aircraft Registration
Number N815CK, Manufacturer's Serial No. 46151, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-7 Engine, Manufacturer's
Serial No. 678969, (iii) one Pratt & Whitney JT3D-7 Engine,
Manufacturer's Serial No. 671217, (iv) one Pratt & Whitney JT3D-7
Engine, Manufacturer's Serial No. 671326, and (v) one Pratt & Whitney
JT3D-7 Engine, Manufacturer's Serial No. 678986."
"'Aircraft AM' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-61 airframe, United States Aircraft Registration
Number N816CK, Manufacturer's Serial No. 45892, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 669406, (iii) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 643688, (iv) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 645442, and (v) one Pratt & Whitney
JT3D-3B Engine, Manufacturer's Serial No. 645398."
"'Aircraft AN' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-61 airframe, United States Aircraft Registration
Number N817CK, Manufacturer's Serial No. 45887, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 642691, (iii) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 642387, (iv) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 644992, and (v) one Pratt & Whitney
JT3D-3B Engine, Manufacturer's Serial No. 669668."
"'Aircraft AO' means, collectively, (i) one McDonnell
Douglas Model #DC- 8-62F airframe, United States Aircraft Registration
Number N818CK, Manufacturer's Serial No. 45961, together with any and
all parts, appliances, components, instruments, accessories,
accessions, equipment, and avionics installed in or appurtenant to
such airframe, (ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 667718, (iii) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 669639, (iv) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 669221, and (v) one Pratt & Whitney
JT3D-3B Engine, Manufacturer's Serial No. 669542."
"'Aircraft AP' means, collectively, (i) one Douglas Model
#DC-8E-55 airframe, United States Aircraft Registration Number N6161C,
Manufacturer's Serial No. 45856, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial
THIRD AMENDMENT AGREEMENT - Page 4
<PAGE> 5
No. 644999, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 642686, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 642464, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 644451."
"'Aircraft AQ' means, collectively, (i) one Douglas Model
#DC-8F-55 airframe, United States Aircraft Registration Number N6161M,
Manufacturer's Serial No. 45762, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No.
644852, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 645507, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 645997, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 669356."
"'Aircraft AR' means, collectively, (i) one Douglas Model
#DC-8F-55 airframe, United States Aircraft Registration Number N801CK,
Manufacturer's Serial No. 45816, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No.
644561, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 645540, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 669167, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 678971."
"'Aircraft AS' means, collectively, (i) one Douglas Model
#DC-8F-54 airframe, United States Aircraft Registration Number N8052U,
Manufacturer's Serial No. 46009, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No.
643803, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 644121, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 643521, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 642507."
"'Aircraft AT' means, collectively, (i) one Douglas Model
#DC-8-54 airframe, United States Aircraft Registration Number N806CK,
Manufacturer's Serial No. 45932, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No.
642294, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 669286, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 669638, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 670988."
THIRD AMENDMENT AGREEMENT - Page 5
<PAGE> 6
"'Aircraft AU' means, collectively, (i) one Douglas Model
#DC-8-55 airframe, United States Aircraft Registration Number N807CK,
Manufacturer's Serial No. 45767, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No.
643274, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 669545, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 644898, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 669252."
"'Aircraft AV' means, collectively, (i) one Douglas Model
#DC-8-55 airframe, United States Aircraft Registration Number N809CK,
Manufacturer's Serial No. 45803, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No.
669494, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 643623, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 645762, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 669313."
"'Aircraft AW' means, collectively, (i) one Douglas Model
#DC-8-52 airframe, United States Aircraft Registration Number N810CK,
Manufacturer's Serial No. 45814, together with any and all parts,
appliances, components, instruments, accessories, accessions,
equipment, and avionics installed in or appurtenant to such airframe,
(ii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's Serial No.
645251, (iii) one Pratt & Whitney JT3D-3B Engine, Manufacturer's
Serial No. 644842, (iv) one Pratt & Whitney JT3D-3B Engine,
Manufacturer's Serial No. 669787, and (v) one Pratt & Whitney JT3D-3B
Engine, Manufacturer's Serial No. 644454."
"'Aircraft Related Collateral' means the AIA Aircraft, the
Sixty Series Aircraft and the Fifty Series Aircraft (other than such
aircraft as may have been expressly released from Liens securing the
Obligations pursuant to the Loan Documents)."
"'Appraised Orderly Liquidation Value of Parts' means the
appraised value of the Parts of the Companies pursuant to the Parts
Appraisal."
"'Appraised Value of the AIA Aircraft' means the appraised
value of the AIA Aircraft pursuant to the AIA Aircraft Appraisal."
"'Appraised Value of the Sixty Series Aircraft' means
$65,620,602.00, the appraised value of the Sixty Series Aircraft
pursuant to the Sixty Series Aircraft Appraisal."
THIRD AMENDMENT AGREEMENT - Page 6
<PAGE> 7
"'Cash Generated Report' means a report in the form of
Exhibit G attached hereto which has been appropriately and accurately
completed in all respects and executed by Kitty Hawk and as to which
the adjustments referred to therein have been approved by Agent."
"'Collateral Aircraft' means the AIA Aircraft, the Sixty
Series Aircraft and the Fifty Series Aircraft if and to the extent
that, at the relevant time of determination, such aircraft are either
subject to a Lien in favor of Agent securing any Obligation or are
required to be subject to any such Lien in accordance with any Loan
Document."
"'Fifty Series Aircraft' means Aircraft AP, Aircraft AQ,
Aircraft AR, Aircraft AS, Aircraft AT, Aircraft AU, Aircraft AV and
Aircraft AW. The term 'Fifty Series Aircraft' shall also mean and
refer to any replacement aircraft which is required or permitted,
under this Agreement or an Aircraft Mortgage, to replace a Fifty
Series Aircraft as Collateral and with respect to which the Companies
comply with each of the applicable requirements contained in this
Agreement and the applicable Aircraft Mortgage."
"'Increase Termination Date' means the earliest to occur of
(a) the date upon which Kitty Hawk notifies the Agent in writing that
it elects to terminate the increase in the Borrowing Base attributable
to the Sixty Series Aircraft, (b) the date upon which any Lien with
respect to any Sixty Series Aircraft is released by Agent, or (c)
January 1, 2000."
"'Loan Pricing Increase Period' means the period from and
after the Third Amendment Date to the Calculation Date immediately
succeeding the later to occur of the Increase Termination Date or the
date upon which the Sixty Series Aircraft Release Amount has been paid
in full."
"'Parts Appraisal' means an appraisal, dated on or about or
after the Third Amendment Date, in form and substance satisfactory to
Agent prepared by MB Valuations of Dallas, Texas which sets forth the
orderly liquidation value of the Parts inventory of the Companies."
"'Sixty Series Aircraft' means Aircraft AE, Aircraft AF,
Aircraft AG, Aircraft AH, Aircraft AI, Aircraft AJ, Aircraft AK,
Aircraft AL, Aircraft AM, Aircraft AN and Aircraft AO. The term 'Sixty
Series Aircraft' shall also mean and refer to any replacement aircraft
which is required or permitted, under this Agreement or an Aircraft
Mortgage, to replace a Sixty Series Aircraft as Collateral and with
respect to which the Companies comply with each of the applicable
requirements contained in this Agreement and the applicable Aircraft
Mortgage."
"'Sixty Series Aircraft Appraisal' means the appraisal,
dated November 23, 1998, in form and substance satisfactory to Agent
and Lenders prepared by Pro-Tech
THIRD AMENDMENT AGREEMENT - Page 7
<PAGE> 8
Advisors Inc. which sets forth the appraised value of the Sixty Series
Aircraft based upon physical and complete record reviews of both
airframes and engines."
"'Sixty Series Aircraft Release Amount' means, at any time
of determination, an amount equal to the portion of the Borrowing Base
then in effect which is attributable to clause (c) of the definition
of the term "Borrowing Base."
"'Third Amendment Agent's Letter' means that certain letter
agreement dated December 10, 1998 between Wells Fargo and Kitty Hawk,
accepted and agreed to by Kitty Hawk as of December 10, 1998, relating
to certain fees payable by Kitty Hawk in connection with the Third
Amendment."
"'Third Amendment Date' means December 10, 1998."
"'Third Amendment Projections' means the financial
projections of Kitty Hawk and its Subsidiaries for the fiscal years
1998 through 2002 dated as of November 3, 1998 prepared by Kitty Hawk
and delivered to Agent."
Section 2.2 Amendments to Certain Definitions. Each of the following
terms and definitions thereof contained in Section 1.1 of the Credit Agreement
is hereby amended and restated to read in its entirety as follows:
"'Advance Rate' means (a) for Eligible Receivables, 80% and
(b) for Eligible Parts, 50% (subject to the succeeding proviso);
provided, however, that, in the event that the product of (i) 90%
multiplied by (ii) the quotient (expressed as a percentage) of the
Appraised Orderly Liquidation Value of Parts (calculated with respect
to the Eligible Parts only) divided by the Companies' cost of the
Eligible Parts appraised pursuant to the Parts Appraisal, is less than
50%, then the Advance Rate for Eligible Parts shall not exceed such
product (expressed as a percentage) at any time after January 1,
1999."
"'Airframes' means those certain airframes identified in the
definitions of Aircraft O, Aircraft P, Aircraft Q, Aircraft R,
Aircraft S, Aircraft T, Aircraft U, Aircraft V, Aircraft W, Aircraft
X, Aircraft Y, Aircraft Z, Aircraft AA, Aircraft AB, Aircraft AC,
Aircraft AD, Aircraft AE, Aircraft AF, Aircraft AG, Aircraft AH,
Aircraft AI, Aircraft AJ, Aircraft AK, Aircraft AL, Aircraft AM,
Aircraft AN, Aircraft AO, Aircraft AP, Aircraft AQ, Aircraft AR,
Aircraft AS, Aircraft AT, Aircraft AU, Aircraft AV and Aircraft AW,
together with any and all parts, appliances, components, instruments,
accessories, accessions, attachments, equipment or avionics
(including, without limitation, communications, radar, navigation
systems or other electronic equipment) installed in, appurtenant to or
delivered with or in respect of such airframes. The term 'Airframes'
shall also mean and refer to any replacement airframe which is
required or permitted, under this Agreement or an Aircraft Mortgage,
to replace an Airframe as Collateral and with respect to which the
THIRD AMENDMENT AGREEMENT - Page 8
<PAGE> 9
Companies comply with each of the applicable requirements contained in
this Agreement and the applicable Aircraft Mortgage."
"'Applicable Base Rate Margin' means, for the period
commencing with the Closing Date and thereafter, the rate per annum
set forth in the table below under the heading 'Applicable Base Rate
Margin' that corresponds to the ratio of Funded Debt to Adjusted
EBITDA for the four fiscal quarters of Kitty Hawk and its Subsidiaries
on a consolidated basis then most recently ended, provided, however,
that the Applicable Base Rate Margin during the Loan Pricing Increase
Period shall be 1.75% per annum as set forth in the table below under
the heading 'Applicable Base Rate Margin during Loan Pricing Increase
Period':
<TABLE>
<CAPTION>
Applicable
Funded Debt Applicable Base Rate Margin
to Base Rate during Loan Pricing
Adjusted EBITDA Ratio Margin Increase Period
--------------------- ------ ---------------
<S> <C> <C>
Greater than 4.25 to 1.00 1.25% 1.75%
Greater than 4.00 to 1.00,
but equal to or less than 4.25 to 1.00 1.00% 1.75%
Greater than 3.50 to 1.00,
but equal to or less than 4.00 to 1.00 0.75% 1.75%
Greater than 3.00 to 1.00,
but equal to or less than 3.50 to 1.00 0.50% 1.75%
Greater than 2.50 to 1.00,
but equal to or less than 3.00 to 1.00 0.25% 1.75%
Greater than 2.00 to 1.00,
but equal to or less than 2.50 to 1.00 0.00% 1.75%
Equal to or less than 2.00 to 1.00 0.00% 1.75%
</TABLE>
For purposes hereof and notwithstanding the preceding sentence, the
Applicable Base Rate Margin for the period from the Closing Date to
May 19, 1998 shall be deemed to be 1.25% for Revolving Credit Loans
and 1.50% for Term Loans and shall thereafter be calculated on each
Calculation Date based upon the preceding table and the financial
statements delivered by Kitty Hawk pursuant to Section 8.1(b) and the
certificate delivered by Kitty Hawk pursuant to Section 8.1(c);
provided, that (a) if Kitty Hawk fails to deliver to Agent such
financial statements or certificate at least five Business Days before
the relevant Calculation Date, the Applicable Base Rate Margin shall
be deemed to be 1.25% for Revolving Credit Loans and 1.50% for Term
Loans until five Business Days after such statements and certificate
are delivered by Kitty Hawk to Agent, after which the Applicable Base
Rate Margin shall be determined as otherwise provided herein and (b)
the Applicable Base Rate Margin
THIRD AMENDMENT AGREEMENT - Page 9
<PAGE> 10
during the Loan Pricing Increase Period shall be as set forth in the
preceding sentence."
"'Applicable Commitment Fee Rate' means, for the period
commencing with the Closing Date and thereafter, the rate per annum
set forth in the table below under the heading 'Applicable Commitment
Fee Rate' that corresponds to the ratio of Funded Debt to Adjusted
EBITDA for the four fiscal quarters of Kitty Hawk and its Subsidiaries
on a consolidated basis then most recently ended, provided, however,
that the Applicable Commitment Fee Rate during the Loan Pricing
Increase Period shall be 0.50% per annum as set forth in the table
below under the heading 'Applicable Commitment Fee Rate during Loan
Pricing Increase Period':
<TABLE>
<CAPTION>
Applicable
Funded Debt Applicable Commitment Fee Rate
to Commitment during Loan Pricing
Adjusted EBITDA Ratio Fee Rate Increase Period
--------------------- -------- ---------------
<S> <C> <C>
Greater than 4.25 to 1.00 0.50% 0.50%
Greater than 4.00 to 1.00,
but equal to or less than 4.25 to 1.00 0.50% 0.50%
Greater than 3.50 to 1.00,
but equal to or less than 4.00 to 1.00 0.50% 0.50%
Greater than 3.00 to 1.00,
but equal to or less than 3.50 to 1.00 0.375% 0.50%
Greater than 2.50 to 1.00,
but equal to or less than 3.00 to 1.00 0.375% 0.50%
Greater than 2.00 to 1.00,
but equal to or less than 2.50 to 1.00 0.375% 0.50%
Equal to or less than 2.00 to 1.00 0.250% 0.50%
</TABLE>
For purposes hereof and notwithstanding the preceding sentence, the
Applicable Commitment Fee Rate for the period from the Closing Date to
May 19, 1998 shall be deemed to be 0.50% and shall thereafter be
calculated on each Calculation Date based upon the preceding table and
the financial statements delivered by Kitty Hawk pursuant to Section
8.1(b) and the certificate delivered by Kitty Hawk pursuant to Section
8.1(c); provided, that (a) if Kitty Hawk fails to deliver to Agent
such financial statements or certificate at least five Business Days
before the relevant Calculation Date, the Applicable Commitment Fee
Rate shall be deemed to be 0.50% until five Business Days after such
statements and certificate are delivered by Kitty Hawk to Agent, after
which the Applicable Commitment Fee Rate shall be determined as
otherwise provided herein, and (b) the Applicable Commitment Fee Rate
during the Loan Pricing Increase Period shall be as set forth in the
preceding sentence."
THIRD AMENDMENT AGREEMENT - Page 10
<PAGE> 11
"'Applicable Eurodollar Margin' means, for the period
commencing with the Closing Date and thereafter, the rate per annum
set forth in the table below under the heading 'Applicable Eurodollar
Margin' that corresponds to the ratio of Funded Debt to Adjusted
EBITDA for the four fiscal quarters of Kitty Hawk and its Subsidiaries
on a consolidated basis then most recently ended, provided, however,
that the Applicable Eurodollar Margin during the Loan Pricing Increase
Period shall be 3.25% per annum as set forth under the heading
'Applicable Eurodollar Margin during Loan Pricing Increase Period':
<TABLE>
<CAPTION>
Applicable
Funded Debt Applicable Eurodollar Margin
to Eurodollar during Loan Pricing
Adjusted EBITDA Ratio Margin Increase Period
--------------------- ------ ---------------
<S> <C> <C>
Greater than 4.25 to 1.00 2.75% 3.25%
Greater than 4.00 to 1.00,
but equal to or less than 4.25 to 1.00 2.50% 3.25%
Greater than 3.50 to 1.00,
but equal to or less than 4.00 to 1.00 2.25% 3.25%
Greater than 3.00 to 1.00,
but equal to or less than 3.50 to 1.00 2.00% 3.25%
Greater than 2.50 to 1.00,
but equal to or less than 3.00 to 1.00 1.75% 3.25%
Greater than 2.00 to 1.00,
but equal to or less than 2.50 to 1.00 1.50% 3.25%
Equal to or less than 2.00 to 1.00 1.25% 3.25%
</TABLE>
For purposes hereof and notwithstanding the preceding sentence, the
Applicable Eurodollar Margin for the period from the Closing Date to
May 19, 1998 shall be deemed to be 2.75% for Revolving Credit Loans
and 3.00% for Term Loans and shall thereafter be calculated on each
Calculation Date based upon the preceding table and the financial
statements delivered by Kitty Hawk pursuant to Section 8.1(b) and the
certificate delivered by Kitty Hawk pursuant to Section 8.1(c);
provided, that (a) if Kitty Hawk fails to deliver to Agent such
financial statements or certificate at least five Business Days before
the relevant Calculation Date, the Applicable Eurodollar Margin shall
be deemed to be 2.75% for Revolving Credit Loans and 3.00% for Term
Loans until five Business Days after such statements and certificate
are delivered by Kitty Hawk to Agent, after which the Applicable
Eurodollar Margin shall be determined as otherwise provided herein,
and (b) the Applicable Eurodollar Margin during the Loan Pricing
Increase Period shall be as set forth in the preceding sentence."
THIRD AMENDMENT AGREEMENT - Page 11
<PAGE> 12
"'Borrowing Base' means, as of any date of determination in
accordance with this Agreement, the sum of (a) the product of the
Advance Rate for Eligible Receivables multiplied by the amount of
Eligible Receivables, plus (b) the lesser of the product of the
Advance Rate for Eligible Parts multiplied by the amount of Eligible
Parts or $25,000,000, plus (c) (i) at any time prior to the Increase
Termination Date, the lesser of 50% of the Appraised Value of the
Sixty Series Aircraft or $30,000,000 and (ii) at any time on or after
the Increase Termination Date, zero."
"'Eligible Parts' means, at any date of determination, the
value of all Parts then owned by, and in the possession of, Aircargo,
Leasing, AIA, KFS or OK and held for use in the ordinary course of
business, in which Agent has a perfected, first priority Lien pursuant
to the Security Documents as security for payment and performance of
the Obligations, valued at cost in accordance with GAAP. Eligible
Parts shall not include (i) Parts with respect to which a claim exists
disputing any such Company's title to or right to possession of such
Parts, (ii) Parts that are not in good condition or do not comply with
any Governmental Requirement with respect to manufacture, use or sale,
(iii) Parts that are located outside of the U.S., (iv) Parts produced
in violation of the Fair Labor Standards Act, (v) Parts that are
evidenced by a negotiable or non-negotiable document of title, and
(vi) Parts that have become obsolete or have been damaged or are not
usable in their present state for the use for which they were
manufactured or purchased."
"'Engines' means those certain aircraft engines identified
in the definitions of Aircraft A, Aircraft O, Aircraft P, Aircraft Q,
Aircraft R, Aircraft S, Aircraft T, Aircraft U, Aircraft V, Aircraft
W, Aircraft X, Aircraft Y, Aircraft Z, Aircraft AA, Aircraft AB,
Aircraft AC, Aircraft AD, Aircraft AE, Aircraft AF, Aircraft AG,
Aircraft AH, Aircraft AI, Aircraft AJ, Aircraft AK, Aircraft AL,
Aircraft AM, Aircraft AN, Aircraft AO, Aircraft AP, Aircraft AQ,
Aircraft AR, Aircraft AS, Aircraft AT, Aircraft AU, Aircraft AV and
Aircraft AW, together with any and all parts, appliances, components,
accessories, accessions, attachments or equipment (collectively, 'such
equipment') installed on, appurtenant to, or delivered with or in
respect of such engines prior to the time when such equipment is
replaced by replacement equipment in accordance with this Agreement.
The term 'Engines' shall also mean and refer to any replacement
aircraft engine which is required or permitted, under this Agreement
or an Aircraft Mortgage, to be installed upon the Airframes and with
respect to which the Companies comply with each of the applicable
requirements contained in this Agreement and the applicable Aircraft
Mortgage."
"'Kitty Hawk Aircraft' means, collectively, the Collateral
Aircraft and the Non-Collateral Aircraft."
In addition, the term "AIA Aircraft" contained in clause (ii) of the proviso at
the end of the definition of the term "Permitted Liens" in Section 1.1 of the
Credit Agreement is hereby amended to mean and refer to the "Collateral
Aircraft".
THIRD AMENDMENT AGREEMENT - Page 12
<PAGE> 13
Section 2.3 Amendment to Section 2.7. Section 2.7 of the Credit
Agreement is hereby amended as follows:
(a) A new clause (e) is hereby added to Section 2.7, which clause (e)
shall read in its entirety as follows:
"(e) Loan to Value Ratio. If, upon receipt of the AIA
Aircraft Appraisal, the quotient (expressed as a percentage) of (i)
the aggregate outstanding principal amount of the Term Loans divided
by (ii) the Appraised Value of the AIA Aircraft, is greater than
72.63%, then Kitty Hawk shall, within one Business Day thereafter, pay
to Agent an amount of the principal of the Term Loans such that, after
giving effect to such prepayment, such quotient does not exceed
72.63%."
(b) Existing (i.e., prior to giving effect to this Amendment) clause
(e) is hereby amended to be clause (f) and to read in its entirety as follows:
"(f) Application of Mandatory Prepayments. All prepayments
pursuant to clauses (a), (b) and (c) preceding, if and to the extent
the same are required to be applied to the Term Loans in accordance
with such clauses, shall be applied pro rata to the then remaining
installments of principal of the Term Loans. All prepayments pursuant
to clause (e) preceding shall be applied to the then remaining
installments of the Term Loans in the inverse order of the maturities
of such installments."
Section 2.4. Amendment to Section 2.11. A new clause (d) is hereby
added to Section 2.11 of the Credit Agreement, which clause (d) shall read in
its entirety as follows:
"(d) Subject to Section 13.12, Kitty Hawk agrees to pay to
Agent on the Third Amendment Date, for the account of each Lender, a
restructure fee in an amount equal to the product of (i) 0.0007
multiplied by (ii) the sum of the Revolving Credit Loans Commitment of
such Lender plus the outstanding principal amount of the Term Loans
owed to such Lender. In addition, Kitty Hawk agrees to pay to Agent on
the Third Amendment Date, for its own account, the additional fee set
forth in the Third Amendment Agent's Letter."
Section 2.5. Amendment to Section 5.1. Section 5.1 of the Credit
Agreement is hereby amended to add the following sentence thereto immediately
succeeding the first sentence of Section 5.1:
"In addition, to secure the full and complete payment and performance
of the Obligations, AIA shall, on or before the Third Amendment Date,
grant to Agent and Lenders a perfected, first priority Lien on all of
its right, title and interest in and to all Sixty Series Aircraft and
all Fifty Series Aircraft and all engines, appliances and spare parts
installed in or appurtenant to any such Sixty Series Aircraft or Fifty
Series Aircraft and all products and proceeds thereof, whether now
owned or hereafter acquired, pursuant to additional Aircraft
Mortgages; provided, however, that the
THIRD AMENDMENT AGREEMENT - Page 13
<PAGE> 14
following Liens affecting the following engines shall not be required
to be released of record until on or before February 28, 1999 or, if
not so released on or before such date and in lieu of such release,
AIA shall, on or before February 28, 1999 and to secure the full and
complete payment and performance of the Obligations, grant to Agent
and Lenders (pursuant to additional Aircraft Mortgages) a perfected,
first priority Lien on all of its right, title and interest in and to
substitute engines owned by AIA having a value equal to or greater
than the value of the following engines:
<TABLE>
<CAPTION>
Engine Manufacturer's
Description Serial Number Lien Lienholder
----------- ------------- ---- ----------
<S> <C> <C> <C>
1. Pratt & Whitney 669639 Aircraft Chattel De Nationale
JT3D-3B Mortgage and Security Investeringsbank
Agreement dated 3/3/93 N.V.
recorded as document
#AA49895
2. Pratt & Whitney 671217 Security Agreement Electrospace
JT3D-7 dated 5/23/90 recorded Systems, Inc., et al.
as document
#CC000780
3. Pratt & Whitney 671326 Hire Purchase Bail Leasing Limited,
JT3D-7 Agreement dated et al.
4/30/90 recorded as
document #WW31973
and related documents
4. Pratt & Whitney 642294 Security Agreement Bell Atlantic Tricon
JT3D-3B dated 1/22/90 recorded Leasing Corporation
as document #G77371
5. Pratt & Whitney 669638 Aircraft Chattel De Natioinale
JT3D-3B Mortgage and Security Investeringsbank
Agreement dated 3/3/93 N.V.
recorded as document
#AA49895
6. Pratt & Whitney 643521 Lien Notice dated Deutsche Credit
JT3D-3B 12/29/92 recorded as Corporation
document #U65100
7. Pratt & Whitney 642507 Security Agreement Bell Atlantic Triton
JT3D-3B dated 1/22/90 recorded Leasing Corporation"
as document #G77371
</TABLE>
Section 2.6 Amendment to Section 5.3. Section 5.3 of the Credit Agreement
is hereby amended and restated to read in its entirety as follows:
"Section 5.3 New Aircraft Related Collateral. Kitty Hawk and its
Subsidiaries shall, promptly (and, in any event within ten Business Days)
after any request made by Agent after the
THIRD AMENDMENT AGREEMENT - Page 14
<PAGE> 15
acquisition of any equipment or enhancement to any Aircraft Related
Collateral, execute, acknowledge and deliver to Agent, in favor of Agent for
the benefit of Agent and Lenders, such agreements, documents and instruments,
including, without limitation, Aircraft Mortgages or Security Agreements or
amendments or modifications to Aircraft Mortgages or Security Agreements,
covering such acquired equipment or enhancements as may reasonably be
requested by Agent, together with evidence reasonably satisfactory to Agent
and its counsel of Agent's valid, first priority Lien on the equipment and
enhancements acquired as security for the payment and performance of the
Obligations."
Section 2.7 Amendment to Section 5.5. A new clause (d) is hereby added to
Section 5.5 of the Credit Agreement, which clause (d) shall read in its
entirety as follows:
"(d) Release Provisions Non-Application to Other Aircraft Related
Collateral. The terms and provisions of this Section 5.5 shall not apply to
any Sixty Series Aircraft or Fifty Series Aircraft or any engines or Parts
forming a part thereof or relating thereto."
Section 2.8 Amendment to Section 5.7. Section 5.7 of the Credit Agreement is
hereby amended and restated to read in its entirety as follows:
"Section 5.7 Title Insurance. Aircargo (with respect to the AIA
Aircraft) and AIA (with respect to the Sixty Series Aircraft) shall (at
their sole cost and expense) purchase and maintain owner and mortgagee
policies of title insurance (or, if acceptable to Required Lenders,
amendments or endorsements to existing polices of title insurance) insuring
that Aircargo and AIA have indefeasible title to each of the AIA Aircraft
and the Sixty Series Aircraft, respectively, and that Agent, for the benefit
of Agent and Lenders, holds a perfected, first priority Lien on each of the
AIA Aircraft and the Sixty Series Aircraft pursuant to the Loan Documents as
security for the payment and performance of the Obligations. The mortgagee
policy of title insurance in favor of Agent shall be in the amount of
$45,900,000 with respect to the AIA Aircraft and shall be in the amount of
$30,000,000 with respect to the Sixty Series Aircraft and shall be issued by
the Title Company or another title insurance company reasonably acceptable
to Agent and shall contain such terms and provisions as are reasonably
acceptable to Agent."
Section 2.9 Release of Sixty Series Aircraft. A new Section 5.8 is hereby
added to the Credit Agreement, which Section shall read in its entirety as
follows:
"Section 5.8 Release of Sixty Series Aircraft. Agent and Lenders agree
that, upon five Business Days prior written request from Kitty Hawk if (but
only if) Kitty Hawk, on or before the date of such release, prepays the
outstanding principal amount of the Revolving Credit Loans by an aggregate
amount equal to the Sixty Series Aircraft Release Amount (calculated with
respect to all Sixty Series Aircraft whether or not less than all Sixty
Series Aircraft are then proposed to be released), Agent shall (at Kitty
Hawk's expense) release its Lien on any one or more of the Sixty Series
Aircraft; provided, however, that Agent shall have no obligation to release
its Lien on any Sixty Series Aircraft (a) except concurrently with (or
thereafter) and in connection with a sale or exchange of such aircraft for
full and fair consideration during calendar
THIRD AMENDMENT AGREEMENT - Page 15
<PAGE> 16
years 1998 or 1999 in accordance with and as permitted by Section 9.8 or (b)
after December 31, 1999, unless either (i) the audited financial statements
of Kitty Hawk and its Subsidiaries delivered pursuant to Section 8.1 reflect
that Adjusted EBITDA of Kitty Hawk and its consolidated Subsidiaries was
$149,000,000 or more for the fiscal year ending December 31, 1999 or (ii)
the Funded Debt to Adjusted EBITDA ratio of Kitty Hawk and its Subsidiaries
for the four fiscal quarters then most recently ended on or after December
31, 1999, as calculated pursuant to Section 10.1, does not exceed 3.00 to
1.00. Notwithstanding the foregoing provisions of this Section 5.8 or
anything to the contrary contained herein, Agent shall have no obligation to
release its Lien on any Sixty Series Aircraft if a Default shall have
occurred and be continuing. Furthermore, and notwithstanding anything to the
contrary contained herein, Agent shall not be required to execute any
document effectuating any release of a Lien on terms which, in Agent's
reasonable judgment, would expose Agent to liability or create any
obligation not reimbursed by Kitty Hawk or entail any warranty by Agent
(other than that Agent holds the Lien and enforceably releases it) or would,
in any manner, discharge, affect or impair any of the Obligations or any of
Agent's Liens on any Collateral not required to be so released or any
proceeds thereof."
Section 2.10 Release of Fifty Series Aircraft. A new Section 5.9 is hereby
added to the Credit Agreement, which Section shall read in its entirety as
follows:
"Section 5.9 Release of Fifty Series Aircraft. Agent and Lenders agree
that, upon five Business Days prior written request from Kitty Hawk, Agent
shall (at Kitty Hawk's expense) release its Lien on any one or more of the
Fifty Series Aircraft; provided, however, that Agent shall have no
obligation to release its Lien on any Fifty Series Aircraft except
concurrently with (or thereafter) and in connection with a sale or exchange
of such aircraft for full and fair consideration in accordance with and as
permitted by Section 9.8. Notwithstanding the foregoing provisions of this
Section 5.9 or anything to the contrary contained herein, Agent shall have
no obligation to release its Lien on any Fifty Series Aircraft if a Default
shall have occurred and be continuing. Furthermore, and notwithstanding
anything to the contrary contained herein, Agent shall not be required to
execute any document effectuating any release of a Lien on terms which, in
Agent's reasonable judgment, would expose Agent to liability or create any
obligation not reimbursed by Kitty Hawk or entail any warranty by Agent
(other than that Agent holds the Lien and enforceably releases it) or would,
in any manner, discharge, affect or impair any of the Obligations or any of
Agent's Liens on any Collateral not required to be so released or any
proceeds thereof."
Section 2.11 Third Amendment Projections. Section 7.2 of the Credit
Agreement is hereby amended to add a new subsection (d) thereto, which
subsection (d) shall read in its entirety as follows:
"(d) The Third Amendment Projections were prepared by Kitty Hawk on a
basis substantially consistent with the financial statements referred to in
Section 7.2(a). The Third Amendment Projections represent, as of the Third
Amendment Date, the good faith estimate of Kitty Hawk and its senior
management concerning the probable financial condition and
THIRD AMENDMENT AGREEMENT - Page 16
<PAGE> 17
performance of Kitty Hawk and its Subsidiaries based on assumptions believed
to be reasonable at the time made."
Section 2.12 Rights in Properties; Liens. Section 7.6 of the Credit
Agreement is hereby amended to add the following two sentences to the end of
Section 7.6:
"AIA is the true and lawful owner of each of the Sixty Series Aircraft and
the Fifty Series Aircraft and is the registered owner of each of such
aircraft pursuant to proper registrations under the Federal Aviation Act.
AIA is an air carrier certified by the FAA and qualifies in all respects as
a citizen of the U.S. as defined in the Federal Aviation Act."
Section 2.13 Monthly Financial Statements. Section 8.1 of the Credit
Agreement is hereby amended to delete the word "and" at the end of clause (r)
of Section 8.1, to delete the period at the end of clause (s) of Section 8.1
and to add a semi-colon in lieu thereof and to add the following after clause
(s):
"(t) Monthly Financial Statements. As soon as available, and in any event
within 30 days after the end of each calendar month, beginning with the
calendar month ending November 30, 1998, (i) an unaudited financial report
of Kitty Hawk and its Subsidiaries as of the end of such month and for the
portion of the fiscal year then ended containing, on a consolidated basis,
balance sheets and statements of income, shareholders' equity and sources
and uses of cash, in each case setting forth in comparative form the figures
for the corresponding period of the preceding fiscal year, all in reasonable
detail certified by a Responsible Officer of Kitty Hawk to have been
prepared in accordance with GAAP and to fairly and accurately present
(subject to year-end audit adjustments) the financial condition and results
of operations of Kitty Hawk and its Subsidiaries, on a consolidated and
consolidating basis, at the date and for the periods indicated therein; and
(u) Monthly Cash Generated Reports. As soon as available, and in any
event within 30 days after the end of each calendar month, beginning with
the calendar month commencing January 1999 and continuing through December
1999, a Cash Generated Report in the form of Exhibit G attached hereto,
appropriately and accurately completed in all respects and executed by Kitty
Hawk."
Section 2.14 Maintenance of Existence; Conduct of Business. The last
sentence of Section 8.2 of the Credit Agreement is amended and restated to read
in its entirety as follows:
"All AIA Aircraft and Sixty Series Aircraft will be maintained as ready and
available for regular, uninterrupted revenue generating operation in
compliance with all laws and FAA regulations."
Section 2.15 Maintenance of Properties; Hush Kits. Section 8.3 of the Credit
Agreement is hereby amended such that each reference therein to the term "AIA
Aircraft" shall mean and refer to "AIA Aircraft and Sixty Series Aircraft".
THIRD AMENDMENT AGREEMENT - Page 17
<PAGE> 18
Section 2.16 Insurance. Section 8.5 of the Credit Agreement is hereby
amended such that each reference therein to the term "AIA Aircraft" shall mean
and refer to "Collateral Aircraft".
Section 2.17 Aircraft Registration, Maintenance, Operation, Insignia.
Section 8.12 of the Credit Agreement is hereby amended such that each reference
therein to the term "AIA Aircraft" shall mean and refer to "AIA Aircraft and
Sixty Series Aircraft"; provided, however, that clause (i) of Section 8.12(a)
of the Credit Agreement is hereby amended and restated to read in its entirety
as follows:
"(i) cause the AIA Aircraft and the Sixty Series Aircraft and Fifty
Series Aircraft to be duly registered in the name of Aircargo and AIA,
respectively, and to remain duly registered in such name under the Federal
Aviation Act;".
Section 2.18 Replacement of Parts; Alterations, Modifications and Additions.
Section 8.13 of the Credit Agreement is hereby amended such that each reference
therein to the term "AIA Aircraft" shall mean and refer to "Collateral
Aircraft".
Section 2.19 Appraisals. A new Section 8.16 is hereby added to the Credit
Agreement, which Section 8.16 shall read in its entirety as follows:
"Section 8.16 Delivery of Appraisals. Kitty Hawk shall deliver, or cause
to be delivered, to Agent the following, all of which must be in form and
substance satisfactory to Agent and Required Lenders:
(a) on or before the Third Amendment Date, the Sixty Series Aircraft
Appraisal;
(b) on or before December 28, 1998, the AIA Aircraft Appraisal; and
(c) on or before December 31, 1998, the Parts Appraisal.
In addition, in the event that Agent or Required Lenders in their sole
discretion require any modification, amendment or supplement to any such
appraisal, Kitty Hawk shall cause such modification, amendment or supplement
to be prepared and delivered to Agent promptly after any request therefor
made by Agent to Kitty Hawk. Assuming such appraisals are timely received by
Agent, Agent and Lenders shall review the AIA Aircraft Appraisal and the
Parts Appraisal by no later than January 15, 1999 and shall inform Kitty
Hawk as to whether such appraisals have been approved by Agent and Lenders
by such date."
Section 2.20 Amendment to Section 9.1. Clause (c) of Section 9.1 of the
Credit Agreement is hereby amended and restated to read in its entirety as
follows:
"(c) Debt (in addition to the Debt referred to in clauses (a) and (b)
preceding) incurred in the ordinary course of business (including, without
limitation, Debt incurred to finance the acquisition of additional aircraft)
not to exceed $75,000,000 in aggregate principal amount at
THIRD AMENDMENT AGREEMENT - Page 18
<PAGE> 19
any time outstanding, provided, however, that no Debt may be incurred
pursuant to this clause (c) on or after the Third Amendment Date until the
later to occur of the Increase Termination Date or the date upon which the
Sixty Series Aircraft Release Amount has been paid in full."
Section 2.21 Amendment to Section 9.3. Section 9.3 of the Credit Agreement
is hereby amended to delete the period at the end of Section 9.3 and to add a
semi-colon in lieu thereof and to add the following new clause to the end of
Section 9.3:
"and provided, further, however, that AIC may be dissolved and wound-up in
accordance with applicable law."
Section 2.22 Amendment to Section 9.8. Section 9.8 of the Credit Agreement
is hereby amended to delete the word "and" at the end of clause (a), to delete
the period at the end of clause (b) and to add a semi-colon in lieu thereof and
to add the following new clause (c):
"(c) with respect to Sixty Series Aircraft and Fifty Series Aircraft,
dispositions of such aircraft for full and fair consideration, provided,
however, that the Lien in favor of Agent as security for the Obligations
shall not be released in connection with any such disposition except as
provided pursuant to Sections 5.8 and 5.9."
Section 2.23 Lines of Business. Section 9.9 of the Credit Agreement is
hereby amended such that the reference therein to the term "AIA Aircraft" shall
mean and refer to "Collateral Aircraft".
Section 2.24 Modification of Other Agreements. Section 9.13 of the Credit
Agreement is hereby amended such that the reference therein to the term "AIA
Aircraft" shall mean and refer to "Collateral Aircraft".
Section 2.25 Territorial Restrictions. Section 9.15 of the Credit Agreement
is hereby amended such that each reference therein to the term "AIA Aircraft"
shall mean and refer to "Collateral Aircraft".
Section 2.26 Amendment to Section 10.1. Section 10.1 of the Credit Agreement
is hereby amended and restated to read in its entirety as follows:
"Section 10.1 Maximum Funded Debt to Adjusted EBITDA Ratio. Kitty Hawk
and its Subsidiaries will not permit the ratio, calculated as of the end of
each fiscal quarter of Kitty Hawk commencing with the fiscal quarter ending
December 31, 1997, of (a) Funded Debt to (b) Adjusted EBITDA for the four
fiscal quarters of Kitty Hawk then ended, to be greater than the ratio set
forth below for the applicable fiscal quarter end:
THIRD AMENDMENT AGREEMENT - Page 19
<PAGE> 20
<TABLE>
<CAPTION>
Fiscal Quarter Ending Maximum Ratio
- --------------------- -------------
<S> <C>
December 31, 1997 through and
including December 31, 1998 4.25 to 1.00
March 31, 1999 through and
including December 31, 1999 4.00 to 1.00
March 31, 2000 through and
including June 30, 2000 3.50 to 1.00
September 30, 2000 3.25 to 1.00
December 31, 2000 through and
including December 31, 2001 3.00 to 1.00
March 31, 2002 and each fiscal
quarter ending thereafter 2.50 to 1.00"
</TABLE>
Section 2.27 Amendment to Section 10.3. Section 10.3 of the Credit Agreement
is hereby amended and restated to read in its entirety as follows:
"Section 10.3 Minimum Debt Service Coverage. Kitty Hawk and its
Subsidiaries will not permit the ratio, calculated as of the end of each
fiscal quarter of Kitty Hawk commencing with the fiscal quarter ending March
31, 1998, of (a) Adjusted EBITDA to (b) the sum of (i) Interest Expense,
plus (ii) Capital Lease Obligations, plus (iii) the aggregate amount of all
payments of Funded Debt paid by Kitty Hawk or any of its Subsidiaries during
the 12-month period ending on the date of determination, in each case for
the four fiscal quarters of Kitty Hawk then ended, to be less than 2.00 to
1.00."
Section 2.28 Capital Expenditures. Section 10.4 of the Credit Agreement is
hereby amended and restated to read in its entirety as follows:
"Section 10.4 Capital Expenditures. Kitty Hawk and its Subsidiaries will
not permit the aggregate of Capital Expenditures (a) during fiscal year 1998
to exceed $160,000,000, (b) during fiscal year 1999 to exceed $115,000,000,
and (c) during fiscal year 2000 and each fiscal year thereafter to exceed
$65,000,000; provided, however, that, for purposes of clause (a) preceding,
Capital Expenditures shall exclude the cost of the acquisition of two model
747 aircraft from Middle Eastern Airlines during January or February 1998."
THIRD AMENDMENT AGREEMENT - Page 20
<PAGE> 21
Section 2.29 Minimum Cash Generated Requirement. A new Section 10.5 is
hereby added to the Credit Agreement, which Section 10.5 shall read in its
entirety as follows:
"Section 10.5 Minimum Cash Generated Requirement. Kitty Hawk and its
Subsidiaries will:
(a) as of March 31, 1999 and based upon the Cash Generated Report as
of March 31, 1999, have 'Total Cash Generated Year-to-Date' (as such term
is used and reflected in such report) equal to or greater than 22.8959%
of the 'Adjusted Required Cash' (as such term is used and reflected in
such report), in each case as reflected in such Cash Generated Report;
(b) as of June 30, 1999 and based upon the Cash Generated Report as of
June 30, 1999, have 'Total Cash Generated Year-to-Date' (as such term is
used and reflected in such report) equal to or greater than 68.6876% of
the 'Adjusted Required Cash' (as such term is used and reflected in such
report), in each case as reflected in such Cash Generated Report; and
(c) as of September 30, 1999 and based upon the Cash Generated Report
as of September 30, 1999, have 'Total Cash Generated Year-to-Date' (as
such term is used and reflected in such report) equal to or greater than
100% of the 'Adjusted Required Cash' (as such term is used and reflected
in such report), in each case as reflected in such Cash Generated
Report."
Section 2.30 Term Loans to Value Ratio. A new Section 10.6 is hereby added
to the Credit Agreement, which Section shall read in its entirety as follows:
"Section 10.6 Term Loans to Value Ratio. Kitty Hawk and its Subsidiaries
will not, as of September 30, 1999, permit the quotient (expressed as a
percentage) of (a) the aggregate outstanding principal amount of the Term
Loans divided by (b) the Appraised Value of the AIA Aircraft, to exceed
50%."
Section 2.31 Form of Borrowing Base Report. Exhibit B to the Credit
Agreement, the form of Borrowing Base Report, is hereby amended and restated to
read as set forth in Third Amendment Exhibit A attached hereto.
Section 2.32 Form of Cash Generated Report. A new Exhibit G is hereby added
to the Credit Agreement, which Exhibit G shall read as set forth in Third
Amendment Exhibit B attached hereto.
THIRD AMENDMENT AGREEMENT - Page 21
<PAGE> 22
ARTICLE 3
Conditions Precedent
Section 3.1 Conditions Precedent. Except as provided in Section 3.2, the
effectiveness of this Amendment is subject to the satisfaction of each of the
following conditions precedent.
(a) Agent shall have received all of the following, each dated (unless
otherwise indicated) the Third Amendment Date, in form and substance
satisfactory to Agent:
(i) Amendment Documents. This Amendment, Aircraft Mortgages covering
the Sixty Series Aircraft and the Fifty Series Aircraft, UCC-1 financing
statements relating to the Aircraft Mortgages, the Sixty Series Aircraft
Appraisal, mortgagee policies of title insurance relating to the Sixty
Series Aircraft and any other agreement, instrument, document or
certificate required by this Amendment or reasonably required by Agent to
be executed or delivered by Kitty Hawk or any of its Subsidiaries in
connection with this Amendment, in each case duly executed by all parties
thereto (the "Amendment Documents");
(ii) Resolutions. Resolutions of the Board of Directors of each of
Kitty Hawk and its Subsidiaries certified by the Secretary or an
Assistant Secretary of each such Person which authorize the execution,
delivery and performance by such Person of this Amendment and the other
Amendment Documents to which it is or is to be a party;
(iii) Fees, Costs and Expenses. The fees payable by Kitty Hawk on the
Third Amendment Date in accordance with Section 2.4 of this Amendment
shall have been paid in full by Kitty Hawk, and all fees, costs and
expenses (including, without limitation, attorneys' fees and expenses)
incurred by Agent incident to this Amendment and the Amendment Documents
or required to be paid in accordance with Section 13.1 of the Credit
Agreement, to the extent incurred and submitted to Kitty Hawk, shall have
been paid in full by Kitty Hawk; and
(iv) Additional Information. Such additional agreements, documents,
instruments and information as Agent or its legal counsel, Jenkens &
Gilchrist, a Professional Corporation, may reasonably request to effect
the transactions contemplated hereby.
(b) Agent and Lenders shall have approved the Appraised Value of the
Sixty Series Aircraft.
(c) The representations and warranties contained herein and in all other
Loan Documents, as amended hereby, shall be true and correct as of the date
hereof as if made again on and as of the date hereof (except to the extent
that such representations and warranties were expressly, in the Loan
Documents, made only in reference to a specific date).
(d) No Default or Event of Default shall have occurred and be continuing
(after giving effect to this Amendment).
THIRD AMENDMENT AGREEMENT - Page 22
<PAGE> 23
(e) All corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all other agreements, documents and
instruments executed and/or delivered pursuant hereto, and all legal matters
incident thereto, shall be satisfactory to Agent and its legal counsel,
Jenkens & Gilchrist, a Professional Corporation.
Section 3.2 Failure of Conditions Precedent. In the event that any of the
conditions precedent referred to in Section 3.1 of this Amendment are not fully
and timely satisfied on or before December 31, 1998, except as stated in the
proviso below, this Amendment (including all terms and provisions hereof) shall
be of no force or effect as if this Amendment were never executed; provided,
however, that the Aircraft Mortgages granting Liens on the Sixty Series
Aircraft and the Fifty Series Aircraft shall be valid, enforceable and of full
force and effect whether or not such conditions precedent are satisfied.
ARTICLE 4
Miscellaneous
Section 4.1 Fees, Costs and Expenses. Kitty Hawk shall pay all reasonable
fees, costs and expenses incurred by Agent (including, without limitation,
attorneys fees and expenses) in connection with the negotiation, preparation,
execution and consummation of this Amendment and the other Amendment Documents
and transactions contemplated hereby and thereby. Kitty Hawk shall pay to
Agent, on the Third Amendment Date and for the account of Agent and/or Lenders
(as applicable), the fees referred to in Section 2.4 of this Amendment.
Section 4.2 Headings. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
Section 4.3 Effect of this Amendment. The Credit Agreement, as amended by
this Amendment, shall remain in full force and effect except that any reference
therein, or in any other Loan Document, to the Credit Agreement shall be deemed
to mean and refer to the Credit Agreement as amended by this Amendment.
Section 4.4 Counterparts. This Amendment may be executed in one or more
counterparts, by means of facsimile or otherwise, each of which shall be deemed
an original, but all of which together shall constitute one and the same
Amendment.
SECTION 4.5 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES) AND APPLICABLE LAWS OF THE UNITED STATES.
SECTION 4.6 NO ORAL AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS
AMENDMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL, ENTIRE
AGREEMENT BETWEEN AND AMONG THE PARTIES HERETO, AND MAY NOT BE CONTRADICTED OR
VARIED BY EVIDENCE
THIRD AMENDMENT AGREEMENT - Page 23
<PAGE> 24
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES.
Section 4.7 Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid, illegal or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision held to be invalid, illegal or unenforceable.
Section 4.8 Representations and Warranties. Each of Kitty Hawk and its
Subsidiaries hereby represents and warrants to Agent and Lenders that, as of
the date of and after giving effect to this Amendment, (a) the execution,
delivery and performance of this Amendment and any and all other Amendment
Documents executed and/or delivered in connection herewith have been duly
authorized by all requisite corporate action on the part of such Person and
will not violate such Person's corporate charter or bylaws, (b) the term Loan
Documents as defined in the Credit Agreement and as used in any of the Loan
Documents includes, without limitation, the Amendment Documents, (c) all
representations and warranties set forth in the Credit Agreement and the other
Loan Documents are true and correct as if made again on and as of such date
(except to the extent that such representations and warranties were expressly
therein made only in reference to a specific date), (d) no Default or Event of
Default has occurred and is continuing, (e) the Credit Agreement and the other
Loan Documents (as amended by this Amendment) are and remain legal, valid,
binding and enforceable obligations of Kitty Hawk and its Subsidiaries, and (f)
to the best of their knowledge, all indebtedness, liabilities and obligations
secured by the Liens affecting the seven engines referred to in the table
contained in Section 2.5 of this Amendment have been paid in full. Without
limiting the generality of the foregoing, (i) the Liens granted by AIA covering
the Sixty Series Aircraft and the Fifty Series Aircraft are permitted pursuant
to clause (vii) of Section 4.09 of the Indenture, (ii) the Adjusted
Consolidated Net Tangible Assets of Kitty Hawk and its "Restricted
Subsidiaries" (as defined in the Indenture) is not less than $700,000,000 as of
the Third Amendment Date, and (iii) the fair market value of the Sixty Series
Aircraft and the Fifty Series Aircraft does not exceed $80,000,000 as of the
Third Amendment Date.
Section 4.9 Credit Agreement Remains in Effect; No Waiver. Except as
expressly provided herein, all terms and provisions of the Credit Agreement and
the other Loan Documents shall remain unchanged and in full force and effect
and are hereby ratified and confirmed. No waiver by Agent or any Lender of any
Default or Event of Default shall be deemed to be a waiver of any other Default
or Event of Default. No delay or omission by Agent or any Lender in exercising
any power, right or remedy shall impair such power, right or remedy or be
construed as a waiver thereof or an acquiescence therein, and no single or
partial exercise of any such power, right or remedy shall preclude other or
further exercise thereof or the exercise of any other power, right or remedy
under the Credit Agreement, the Loan Documents or otherwise.
Section 4.10 Survival of Representations and Warranties. All representations
and warranties made in this Amendment or any other Loan Document shall survive
the execution and delivery of this Amendment and the other Loan Documents, and
no investigation by Agent or any
THIRD AMENDMENT AGREEMENT - Page 24
<PAGE> 25
Lender or any closing shall affect the representations and warranties or the
right of Agent and Lenders to rely upon them.
Section 4.11 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Agent and Lenders and the Amending Parties and
their respective successors and assigns, except that none of the Amending
Parties may assign or transfer any of its rights or obligations hereunder
without the prior written consent of Agent and Lenders.
THIRD AMENDMENT AGREEMENT - Page 25
<PAGE> 26
IN WITNESS WHEREOF, the undersigned parties hereto have duly executed this
Amendment effective as of the dates first above written.
KITTY HAWK:
KITTY HAWK, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AIRCARGO:
KITTY HAWK AIRCARGO, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
LEASING:
AIRCRAFT LEASING, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
CHARTERS:
KITTY HAWK CHARTERS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AIA:
AMERICAN INTERNATIONAL AIRWAYS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THIRD AMENDMENT AGREEMENT - Page 26
<PAGE> 27
AIT:
AMERICAN INTERNATIONAL TRAVEL, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
FOL:
FLIGHT ONE LOGISTICS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
KFS:
KALITTA FLYING SERVICE, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
OK:
O. K. TURBINES, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
LONGHORN:
LONGHORN SOLUTIONS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THIRD AMENDMENT AGREEMENT - Page 27
<PAGE> 28
AGENT AND A LENDER:
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, as Agent and as a Lender
By:
---------------------------------
Name: Drew Keith
Title: Vice President
ADDITIONAL LENDERS:
BANK ONE, TEXAS, N.A.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
COMERICA BANK
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
HELLER FINANCIAL, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
TORONTO DOMINION (TEXAS), INC.
By:
---------------------------------
Name:
-------------------------------
Title:
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THIRD AMENDMENT AGREEMENT - Page 28
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EXHIBIT 10.30
FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY
GROUND LEASE
This Ground Lease, made and entered into as of the 13th day of April,
1998, by and between FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY, an Indiana
municipal corporation ("Landlord"), and KITTY HAWK, INC., a Delaware corporation
duly admitted to do business in the State of Indiana, ("Tenant");
WITNESSETH THAT, in consideration of the rents, covenants and
agreements hereinafter set forth, such parties enter into the following
agreement:
ARTICLE I
DEFINITIONS AND EXHIBITS
Section 1.1 Definitions.
In addition to the words and terms elsewhere defined in this Lease, the
following words and terms as used in this Lease shall have the following
meanings unless the context or use indicates another or different meaning or
intent and such definitions shall be equally applicable to both the singular and
plural forms of any of the words and terms herein defined.
"Airport Use and Lease Agreement" shall mean the agreement from time to
time in effect between the Landlord and all Signatory Airlines.
"Bonds" means the Fort Wayne International Airport Air Trade Center
Building Corp. First Mortgage Improvement Bonds, Series 1998.
"Building Corp." means the Fort Wayne International Airport Air Trade
Center Building Corp.
"Buildings" means all of the improvements to be constructed pursuant to
Article IV of the Building Lease.
"Building Lease" means that certain building lease entered into by and
between Landlord and Tenant on even date herewith.
"Project" means the American International Freight Central Cargo Hub,
consisting in part of aircraft maintenance, cargo sort, and related facilities,
the real, personal or real and personal property identified in Exhibit "C"
hereto or in or pursuant to any amendments hereto or in the certificate given
pursuant to Section 4.3 hereof, or acquired, constructed or installed as
replacement or substitution therefor or addition thereto.
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"Operating Agreement" means that certain operating agreement entered
into by and between Landlord and Tenant on even date herewith.
"Use and Lease Agreement" means that certain use and lease agreement
entered into by and between Landlord and Tenant on even date herewith.
Section 1.2 Exhibits.
The exhibits listed below and attached to this Lease are incorporated
herein by this reference:
Exhibit "A" Description of the premises herein demised to Tenant.
Exhibit "B" Phase I Environmental Site Assessment Report with respect
to the Premises to be furnished by the Landlord.
Exhibit "C" Description of the Expansion Real Estate, as described in
Article III herein.
ARTICLE II
LEASED PREMISES AND TERM
Section 2.1 Leased Premises.
Landlord herein leases to Tenant and Tenant hereby rents from Landlord
the real property described in Exhibit "A" to this Lease (hereinafter called
"the Premises"), under the terms set forth in this Lease.
Section 2.2 Lease Term.
The term of this Lease (the "Lease Term") shall commence on the earlier
of the following dates:
(a) The Completion Date as provided for in the Building Lease,
or
(b) The date upon which the Tenant takes possession of the
Premises,
which date is hereinafter referred to as the "Commencement Date."
Notwithstanding the foregoing, in no event, other than upon the occurrence of an
event described in Section 22.6 below, shall the Commencement Date be later than
July 1, 1999.
The term of this Lease shall cease at the termination of the term of
the Building Lease.
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Section 2.3 Possession Prior to Commencement Date.
If, by mutual consent of the parties, Tenant takes possession of the
Premises prior to the Commencement Date, then during such pre-term period,
Tenant shall pay the rent as herein established on a pro-rata basis and such
occupancy shall be under all of the terms and conditions of this Lease, but such
pre-term occupancy shall not affect the Lease Term as herein otherwise
established.
ARTICLE III
TENANT OPTIONS
Section 3.1 Tenant's Option to Expand the Leased Premises.
At any time during the first ten (10) years of the initial lease term
and so long as Tenant is not in default under the terms of the Ground Lease, the
Building Lease, the Operating Agreement, or the Airport Use and Lease Agreement,
and subject to the condition that the tenant is then operating an aeronautically
related activity on the Real Estate, the Tenant shall have an option to lease an
expansion area of real estate which consists of the Northeast one-half (1/2) of
Lot A-9, as described in Exhibit "C" attached hereto, to the Fort Wayne
International Airport Air Trade Center, consisting of 14 acres, more or less, in
order to permit the Tenant to expand their ramp and sort hub facility and to
connect with Taxiway Tango when constructed by the Landlord (the "Expansion Real
Estate"). The right of the Tenant to exercise the option to lease is conditioned
upon the payment by the Tenant to the Landlord of the sum of Six Thousand Seven
Hundred Dollars ($6,700) on July 1, 1999, and a like sum on or before the first
day of July of each and every year thereafter through July 1, 2009.
Any portion of the Expansion Real Estate which is acquired by the
Tenant pursuant to this Section 3.1 shall become part of the Premises leased to
the Tenant under this Agreement and shall be added to and incorporated as a part
of Exhibit "A" hereto. In such event, the Minimum Monthly Rent shall be
adjusted, as of the date said notice is received by the Landlord. Said
adjustment shall be calculated by dividing the Minimum Monthly Rent at that time
by 1,603,704.90. The quotient shall be multiplied by the number of square feet
in the Expansion Real Estate. The product will then be added to the Minimum
Monthly Rent then in effect to produce the new Minimum Monthly Rent. Such
adjusted Minimum Monthly Rent shall then be effective until the next adjustment
pursuant to this Section 4.1.
Section 3.2 Rights of First Refusal.
Tenant shall have the following rights of first refusal:
(a) Tenant has made each of the ten (10) payments contemplated
by Section 3.1 above, and so long as Tenant is not in default under the
terms of the Ground Lease, the Building Lease, the Operating Agreement,
or the Airport Use and Lease Agreement, and subject to the condition
that the tenant is then operating an
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aeronautically related activity on the Real Estate, Tenant shall have,
during the second ten (10) years of the Lease Term, a right of first
refusal to lease the Expansion Real Estate. In the event that the
Landlord receives a written initial proposal for the lease of the
Expansion Real Estate to any third party, the Landlord shall forthwith
notify the Tenant of the terms and conditions of such initial proposal
to lease and, thereafter for a period of forty-five (45) days, the
Tenant shall have the right of first refusal to lease the Expansion
Real Estate upon terms and conditions which are mutually acceptable.
(b) If Tenant fails to make any of the ten (10) payments
contemplated by Section 3.1 above, Tenant shall have, during the first
ten (10) years of the Initial Lease Term, a right of first refusal to
lease the Expansion Real Estate. In the event that the Landlord
receives a written initial proposal for the lease of the Expansion Real
Estate to any third party, the Landlord shall forthwith notify the
Tenant of the terms and conditions of such initial proposal to lease
and, thereafter for a period of forty-five (45) days, the Tenant shall
have the right of first refusal to lease the Expansion Real Estate upon
terms and conditions which are mutually acceptable.
ARTICLE IV
RENT AND DEPOSIT
Section 4.1 Minimum Rent.
Tenant covenants and agrees to pay Landlord, without deduction,
abatement or setoff of any nature whatsoever, as rent for the Premises only, the
sum of One Hundred Seventy-six Thousand Four Hundred Eight Dollars ($176,408)
per year (36.816 acres x 43,560 square feet x .11 per square foot) (hereinafter
"Minimum Term Rent"). Minimum Term Rent shall be payable in equal monthly
installments of Fourteen Thousand Seven Hundred One Dollars ($14,701) in advance
without demand on the first day of each and every calendar month throughout the
term of this Lease (hereinafter referred to as "Minimum Monthly Rent"). If the
Commencement Date is not the first day of a calendar month, then Tenant shall
pay rent at the rate herein established on a pro-rata basis for the number of
days' tenancy during such initial month and shall thereafter make rent payments
on the first day of each calendar month, with a like adjustment for the final
month of the Lease Term, if applicable. The rent shall be payable without relief
from valuation and appraisement laws at the office of the Landlord, whose
address is stated in Section 22.18.
On each anniversary date of the Lease during the Lease Term, the
Minimum Monthly Rent shall be adjusted, based upon the adjustment in the
Consumer Price Index (All Urban Consumers) or, if there shall be no such
Consumer Price Index, then in the successor of the most nearly comparable
successor index thereto ("Index Figure") by multiplying the Minimum Monthly Rent
by a fraction, the numerator being the Index Figure for the month of December
preceding the anniversary date of the Lease, and the denominator being the Index
Figure for the month of December preceding the Commencement Date. This figure,
as calculated, shall become the
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Minimum Monthly Rent for the Lease Term, subject to additional annual adjustment
as described below.
Thereafter, on each succeeding anniversary date, the Minimum Monthly
Rent shall be adjusted by multiplying the Minimum Monthly Rent by a fraction,
the numerator being the Index Figure for the month of December, preceding the
current anniversary date, and the denominator being the Index Figure for the
month of December preceding the previous anniversary date.
Section 4.2 Additional Rent.
All amounts required or provided to be paid by Tenant under this Lease
other than Minimum Monthly Rent shall be deemed Additional Rent. If Landlord
pays any monies or incurs any expense to correct a breach of this Lease by
Tenant or to do anything in this Lease required to be done by Tenant, all
amounts so paid or incurred shall, upon notice to Tenant, be considered
Additional Rent. Also, any amounts which Tenant must pay to Landlord under the
Fort Wayne-Allen County Airport Authority Rules and Regulations, as may be
amended from time to time, shall become Additional Rent upon notice to Tenant.
Additional Rent shall be payable by Tenant under the same terms in this
Lease as Minimum Monthly Rent. Additional Rent shall be payable with the first
Minimum Monthly Rent installment thereafter becoming due and payable, and may be
collected as provided as in the case of Minimum Monthly Rent.
Section 4.3 Failure to Pay Rent.
It is agreed by Tenant and Landlord that Landlord may terminate the
tenancy of Tenant without demand or notice if Tenant fails to pay any Minimum
Monthly Rent within thirty (30) days of the date it is due.
Minimum Monthly Rent and Additional Rent shall each bear interest from
and after thirty (30) days after the due date, until paid, at the rate of
Eighteen percent (18%) per annum.
ARTICLE V
TAXES AND FEES
Section 5.1 Real Estate Taxes and User Fees.
Tenant shall pay, as Additional Rent, all real property taxes, user
fees, and other such charges levied upon its leasehold interests and/or upon the
Premises and the Buildings , if any, but Tenant shall pay only such Taxes and
Fees which are payable after the Commencement Date of this Lease as provided for
above, and it is the intent of the parties hereto that Tenant shall pay only
such Taxes and Fees which are payable in the period covered by Tenant's term of
possession. All Taxes and Fees shall become Additional Rent at the time Tenant
receives notice of such charges from Landlord.
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Section 5.2 Other Taxes.
Tenant shall pay, during the Lease Term, all license fees and
occupation taxes applicable to the business conducted by Tenant on the Premises,
and all taxes on any and all personal property owned by Tenant and located upon
the Premises.
ARTICLE VI
PARKING AREAS, COMMON AREAS AND FACILITIES
Section 6.1 Common Areas.
All public parking areas, access roads, and facilities furnished, made
available or maintained by Landlord in or near the Premises, including (where
applicable) truck ways, driveways, loading docks and areas, delivery areas,
pedestrian sidewalks, landscaped areas, retaining walls, stairways, lighting
facilities, sanitary systems, utility lines, water filtration and treatment
facilities, and other areas and improvements provided by Landlord for the
general use in common of Tenants and their customers (all of which are
hereinafter called "Common Areas") shall at all times be subject to the
exclusive control and management of Landlord, and Landlord shall have the right,
from time to time, to establish, modify and enforce reasonable rules and
regulations with respect to all Common Areas.
Section 6.2 Use of Common Areas.
Tenant and its business invitees, employees and customers shall have
the non-exclusive right, in common with Landlord and all others to whom Landlord
has granted or may hereafter grant rights, to use the Common Areas subject to
such reasonable regulations as Landlord may from time to time impose in the
rights of Landlord set forth above. Landlord may at any time close temporarily
any Common Areas to make repairs or changes or for other reasonable purposes.
Tenant shall not interfere with Landlord's or other tenants' rights to use any
part of the Common Areas.
Section 6.3 Landlord's Obligations.
Landlord shall keep the common areas in good condition and readily
accessible to the Tenant.
ARTICLE VII
ENVIRONMENTAL COMPLIANCE
Tenant makes the following representations and warranties to Landlord
regarding compliance with environmental laws:
(a) Environmental Laws and Hazardous Substances. For purposes herein,
the term "Environmental Law(s)" shall mean any federal, state or local statute,
law, ordinance, code, rule, regulation, order or decree regulating, relating to,
or imposing liability or standards of conduct concerning any Hazardous
Substance, as now or at any time hereafter in effect. For purposes herein,
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the term "Hazardous Substance(s)" shall have the meaning ascribed in and shall
include those substances listed under the Comprehensive Environmental Response,
Compensation and Liability Act, 41 U.S.C. 9601 et seq. and the regulations
promulgated thereunder (as amended from time to time) and the Clean Air Act, 41
U.S.C. 7401 et seq. and the regulations promulgated thereunder (as amended from
time to time) and includes oil, waste oil, and used oil as those terms are
defined in the Clean Water Act, 33 U.S.C. 1251 et seq. and regulations
promulgated thereunder (as amended from time to time) and the Resource,
Conservation and Recovery Act, 41 U.S.C. 6901 et seq. and regulations
promulgated thereunder (as amended from time to time) and the Oil Pollution Act
of 1990, 33 U.S.C. 2701 et seq. and regulations promulgated thereunder (as
amended from time to time) and shall include any other pollutant or contaminant
designated as such by Congress or the United States Environmental Protection
Agency (EPA) or defined by any other federal, state or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to, or
imposing liability or standards of conduct concerning any hazardous, toxic or
dangerous waste, substance or material, as now or at any time hereafter in
effect.
(b) Compliance with Environmental Laws. The Tenant warrants and
represents that (i) Tenant will not violate, in connection with the use,
ownership, lease, maintenance or operation of the Premises and the conduct of
the business related thereto, any Environmental Laws, (ii) Tenant, its agent,
employees, lessees and independent contractors will operate the Premises and
will receive, handle, use, store, treat, transport and dispose of all Hazardous
Substances in strict and timely compliance with all Environmental Laws.
(c) Environmental Permits and Licenses. The Tenant will obtain all
necessary environmental permits, licenses and approvals required under any
Environmental Law. The Tenant further certifies and represents that Tenant is
not in violation of any such permits, licenses and approvals.
(d) Notices, Orders and Complaints. If Tenant receives any notice of
(i) the happening of any event involving any Hazardous Substances or (ii) any
complaint which lists any noncompliance with regard to any environmental, health
or safety matter affecting Tenant (an "Environmental Complaint") from any person
or entity (including without limitation the EPA), then Tenant shall immediately
notify the Landlord orally and in writing of said event and provide the Landlord
with copies of any such Environmental Complaint.
(e) Right of Mitigation. The Landlord in cooperation with the Tenant
shall have the right, but not the obligation and without limitation of the
Landlord's rights under this Lease, to enter onto the Premises or to take such
other actions as it deems necessary or advisable to assess, investigate,
cleanup, remove, resolve, or minimize the impact of, or otherwise deal with, any
Hazardous Substances or Environmental Complaint which, in the sole opinion of
the Landlord, could result in an order, suit or other action against the
Landlord. All reasonable costs and expenses incurred by the Landlord in the
exercise of any such rights shall be payable by the Tenant as additional rent
upon demand, provided that Tenant shall not be liable for costs or expenses
where Tenant is not at fault.
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(f) Indemnification. The Tenant hereby agrees to indemnify the Landlord
and hold the Landlord harmless from and against any and all losses, liabilities,
including strict liability, damages, injuries, expenses, including reasonable
attorney's fees, claims for damage to the environment, claims for fines or civil
penalties, costs of any settlement or judgment and claims of any and every kind
whatsoever paid, incurred or suffered by, or asserted against the Landlord by
any person or entity or governmental agency for, with respect to, or as a direct
or indirect result of, the presence on or under, or the escape, seepage,
leakage, spillage, discharge, emission, or release from the Premises of any
Hazardous Substances or arising under any Environmental Law, if caused by or
within the control of Tenant, except that the Landlord shall be fully
responsible for the condition of the Premises prior to the Commencement Date and
shall indemnify and hold the Tenant harmless from any claim against the Tenant
arising out of the condition of the Premises prior to the Commencement Date or
caused by the Landlord.
(g) Agreement to Update. The Tenant shall advise the Landlord in
writing as soon as Tenant becomes aware of any condition or circumstance which
makes the environmental warranties, representations or certifications contained
in this Article VII incomplete or inaccurate.
(h) Breach. If any representation or warranty or certification made in
this Article VII by the Tenant shall prove untrue or the Tenant shall violate or
fail to comply with any of the provisions of this paragraph, a breach of this
Lease Agreement shall have occurred and the Landlord shall be entitled to
exercise its remedies for breach under this Lease Agreement.
(i) Inducement. The Tenant acknowledges that the representations and
warranties contained in this Article VII are being relied upon to induce the
Landlord to enter into the Lease Agreement with the Tenant.
ARTICLE VIII
UTILITIES
Tenant shall be responsible for the cost of providing any and all
utility service to the Premises. Tenant shall be solely responsible for and
promptly pay all charges for use or consumption of sewer, gas, electricity,
water, and all other utility service on the Premises.
ARTICLE IX
CONDUCT OF BUSINESS BY TENANT
Section 9.1 Use of Premises.
The Premises shall be occupied and used by Tenant solely for the
purposes of operating the American International Freight Central Cargo Hub,
consisting of aircraft maintenance facilities, aircraft hangars, and related
facilities and other aeronautical uses, except to the extent as may be permitted
pursuant to Section 10.1 of the Building Lease.
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Section 9.2 Operation by Tenant.
Tenant covenants and agrees that it will comply with all recorded
restrictions, if any, and all laws, recommendations, ordinances, rules, and
regulations of governmental, public, private and other authorities and agencies,
with respect to the use or occupancy of the Premises, and including but not
limited to the Fort Wayne-Allen County Airport Authority Rules and Regulations,
as may be amended from time to time, provided, however, that no such Rules and
Regulations shall apply specifically to or discriminate specifically against
Tenant.
Section 9.3 Alteration, Additions and Improvements.
Tenant shall not make alterations, additions, or improvements without
the prior written consent of the Landlord, which consent shall not be
unreasonably withheld. Any alteration, addition or improvement made by the
Tenant after such consent shall have been obtained, shall be made strictly in
accordance with the plans as approved by Landlord and all applicable building
codes and governmental authority regulations. Upon the expiration or other
sooner termination of this Lease, unless the Landlord and the Tenant shall
otherwise agree, Landlord, at its option, may either require the Tenant to
remove the alteration, addition or improvement and to restore the Premises to
their original condition or elect to retain the alteration, addition or
improvement as its own property.
Section 9.4 Representations and Covenants of the Authority.
The Authority represents and warrants as follows:
(a) It is a duly organized and existing municipal corporation under the
laws of the State and is not in default under any of the provisions contained in
the laws of the State in any manner which would impair its ability to carry out
its obligations hereunder.
(b) The Authority has caused to be furnished to Kitty Hawk an
acceptable title insurance policy showing the status of title to the Real
Property as of the date of acquisition of the Real Property by Building Corp.
The Authority and the Building Corp. warrant that the Building Corp. has good
title to the Leased Premises and that the Authority has the authority to enter
into this Ground Lease.
(c) The Authority covenants not to take any action, within its power
and control, nor to fail to take any action with respect to the Bonds that would
result in the loss of the exclusion from gross income for federal income tax
purposes of interest on the Bonds pursuant to Section 103 of the Code.
Section 9.5 Operation as a Public Airport.
Landlord covenants and agrees that at all times it will operate and
maintain the Airport as a public airport consistent with and pursuant to the
sponsor's assurances given by the Landlord to the United States Government under
the Federal Airport and Airways Act.
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Section 9.6 Ingress and Egress.
Tenant shall have the right of ingress to and egress from the Leased
Premises for Tenant, its officers, employees, agents, servants, customers,
vendors, suppliers, patrons, and invitees over the roadway provided by Landlord
serving the Leased Premises. Landlord's roadway shall be used jointly with other
tenants on the Airport, and Tenant shall not interfere with the non-exclusive
rights and privileges of other persons or firms using said roadway and shall be
subject to such weight and use restrictions promulgated in Landlord's rules and
regulations.
Section 9.7 Quiet Employment.
The Building Corporation shall covenant to Landlord and the Landlord
covenants that it will not take any action to prevent Tenant, on paying the Rent
and Additional Payments and performing the covenants and agreements herein on
Tenant's part to be performed, from peaceably and quietly holding and enjoying
the Leased Premises for the Lease Term and any extension thereof and that
Landlord will, at Tenant's request and the Landlord's expense, defend Tenant's
enjoyment and possession of the Leased Premises against all parties or permit
Tenant in its own or, to the extent lawful, in Landlord's name, to defend such
enjoyment and possession.
ARTICLE X
CONDITION AND MAINTENANCE OF PREMISES
Section 10.1 Condition of Premises on Commencement Date.
Landlord shall furnish the Premises in good condition and free of any
contamination and Tenant shall have no responsibility for the condition of the
Premises prior to the Commencement Date.
Landlord has retained a competent specialist to conduct a Phase I
Environmental Site Assessment with respect to the Premises. The report of said
assessment, when completed, shall be attached hereto as Exhibit "B" and made a
part of this Lease (hereinafter the "Phase I Report").
Landlord and Tenant agree that the Phase I Report shall be deemed to be
conclusive evidence of the environmental condition of the Premises at the
Commencement Date. Upon expiration of the term of this Lease, Landlord shall
obtain an environmental site assessment by an independent professional. Tenant
shall be responsible for the cost of all mitigation required to return the
Premises to the environmental condition which existed at the Commencement Date.
This requirement shall be in addition to the terms and conditions contained in
Article VII of this Lease.
Section 10.2 Maintenance by Tenant.
Tenant shall keep the Premises neat, clean and in good order at all
times, and shall yield the same back to Landlord upon termination of the Lease,
whether such termination shall occur by expiration of the term hereof, or in any
other manner whatsoever, in the same condition of repair as
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at the date of the execution hereof. Tenant shall at all times keep the Premises
free of derelict aircraft and equipment. Tenant shall not permit any waste or
misuse of the Premises. If Tenant fails to perform its obligations hereunder,
Landlord without notice may, but shall not be obligated to, perform Tenant's
obligations or perform work resulting from Tenant's acts, actions or omissions,
and the cost of the same shall be Additional Rent payable with the next
installment of Minimum Monthly Rent due hereunder.
Section 10.3 Maintenance of Improvements.
The maintenance of the Buildings shall be covered by Article V of the
Building Lease.
Section 10.4 Signs. Awnings and Canopies.
All Tenant signs shall conform to the area control ordinances and all
other applicable laws, and Tenant will not place or permit on the Premises any
sign, awning, canopy, advertising matter, decoration, lettering or other thing
of any kind which has not been approved in writing by Landlord, which approvals
shall not be unreasonably withheld.
ARTICLE XI
LIENS
Tenant shall exert its best efforts not to suffer any mechanics' or
materialmen's lien to be filed against the fee of the Premises or against the
Tenant's leasehold interest in the Premises by reason of work, labor, services
or materials supplied or claimed to have been supplied to the Tenant or anyone
holding the Premises through or under the Tenant. If any such lien shall at any
time be filed as aforesaid, and Tenant shall fail to remove same within thirty
(30) days thereafter, it shall constitute a default under the provisions of this
Lease. However, it shall not be an event of default so long as such lien is
being defended in good faith with reasonable diligence by the Tenant, and such
defense is, in Landlord's reasonable opinion, likely to be successful.
ARTICLE XII
WAIVER
Section 12.1 Non-Liability and Indemnification.
(a) The Tenant, the Landlord and the Building Corp., hereinafter
sometimes called "Party" or collectively the Parties", each agree that it shall
be responsible for its own acts of carelessness and negligence, and each agree
to hold the Tenant, the Landlord and the Building Corp. harmless against any
loss or damage to property, or injury to or death of any person, that may be
occasioned by or caused by any failure to act whatsoever pertaining to the
Leased Premises or the use thereof by the other parties; provided, that the
indemnity in this sentence shall be effective only to the extent any loss that
may be sustained by the Tenant, the Landlord or the Building Corp. is in excess
of the net proceeds received by the Tenant, the Landlord or the Building Corp.
from any
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insurance carried with respect to the loss sustained. Each further agree to
indemnify and save harmless the Tenant, the Landlord and the Building Corp.
against and from any and all cost, liability, expenses and claims arising from
any breach or default in the performance of any covenant or agreement to be
performed pursuant to the terms of this Lease, or arising from any act or
negligence of or failure to act by such Party, or any of its agents,
contractors, servants, employees or licensees, or arising from any accident,
injury or damage whatsoever caused to any person, firm or corporation occurring
during the Lease Term, in or about the Leased Premises, and from and against all
costs, liability and expenses incurred in or in connection with any such claim
or action or proceeding brought thereon; and in case any action or proceeding be
brought against the Authority, Building Corp. or Kitty Hawk by reason of any
such claim, upon notice from the other Party covenants to resist or defend such
action or proceedings at its own expense.
Notwithstanding the foregoing, neither Party shall have any obligation
to indemnify with respect to the following:
(1) Liabilities arising out of damages to employees of any
Party, or any third person, if such employee or third person is covered
or should have been covered by worker's compensation insurance;
(2) Losses occasioned by the negligence or willful misconduct
of such Party, such Party's agents or representatives; or
(3) Insured losses with respect to which rights of subrogation
have been waived.
(b) Landlord shall not be responsible or liable to Tenant or to those
claiming by, through or under Tenant for any loss or damage to either the person
or property of Tenant that may be occasioned by or through the acts or omissions
of persons occupying adjacent, connecting or adjoining premises.
(c) In case Landlord shall without fault on its part be made a party to
any litigation commenced by or against Tenant, then Tenant shall protect and
hold Landlord harmless and pay all costs, expenses and reasonable attorneys'
fees.
Section 12.2
Notwithstanding the foregoing, neither party shall have obligation to
indemnify with respect to the following:
(a) Liabilities arising out of damages to employees of any
party, or any third person, if such employee or third person is covered
or should have been covered by worker's compensation insurance;
(b) Losses occasioned by the negligence or willful misconduct
of such party, such party's agents or representatives; or
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(c) Insured losses with respect to which rights of subrogation
have been waived.
ARTICLE XIII
INSURANCE
Section 13.1 Insurance on Improvements.
Insurance on Buildings shall be governed by Article XIII of the
Building Lease.
Section 13.2 Other Insurance.
Tenant agrees to carry Public liability insurance on the Premises
during the Lease Term, covering the Tenant and naming the Landlord as an
additional named insured, with terms and companies satisfactory to Landlord, in
accordance with the requirements of the Airport Use and Lease Agreement.
Tenant shall provide Landlord a certificate evidencing that said
insurance is in full force and effect and stating the terms thereof, on an
annual basis.
Tenant acknowledges that it shall bear the risk of loss for all of the
personal property, including trade fixtures, located on the Premises, as well as
the risk of loss associated with business interruption due to casualty to the
Premises.
Section 13.3 Rental Value Insurance.
Tenant shall obtain a rent or rental value insurance policy in amounts
as required by the Building Lease. Such policy shall insure against loss of
Minimum Monthly Rent during a period in which the Minimum Monthly Rent of
Landlord is abated as a result of physical loss or damage to the Buildings on
the Premises, however caused, with such exceptions only as are ordinarily
required by insurers of buildings or facilities of a similar type.
Section 13.4 Mutual Waiver of Subrogation Rights.
Landlord and Tenant and all parties claiming under them mutually
release and discharge each other from all claims and liabilities arising from or
caused by any casualty or hazard covered or required hereunder to be covered in
whole or in part by insurance on the Premises or in connection with property on
or activities conducted on the Premises, and waive any right of subrogation
which might otherwise exist in or accrue to any person on account thereof.
Provided, however, that such release shall not operate in any case where the
effect is to invalidate or increase the costs of such insurance coverage
(provided, that in the case of increased costs, the other party shall have the
right, within thirty (30) days following written notice, to pay such increased
costs, thereby keeping such release and waiver in full force and effect) .
Provided, further, that such mutual waiver shall apply only to the extent of the
insurance coverage or the required coverage, whichever is greater.
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ARTICLE XIV
DAMAGE AND DESTRUCTION
In the event that damage and destruction to the Buildings pursuant to
Section 6.1 of the Building Lease results in abatement of rent pursuant to
Section 6.4 of the Building Lease, then Minimum Monthly Rent hereunder shall
abate to the same extent and under the same terms and conditions as set forth in
Section 6.4 of the Building Lease.
ARTICLE XV
ASSIGNMENTS AND SUBLEASES
Kitty Hawk may assign or sublet all or any part of the Leased Premises
to American International Airways, Inc. ("AIA"), a subsidiary of Kitty Hawk.
Such assignment or sublease shall not release Kitty Hawk from the obligations to
perform all of the terms and conditions of the Lease.
Thereafter, this Lease may be assigned in whole or in part, and the
Leased Premises may be subleased as a whole or in part by AIA or Kitty Hawk only
with the prior written consent of the Landlord and Building Corp., which consent
will not be unreasonably withheld. The assignment to AIA, consent by the
Landlord and Building Corp., or the acceptance of an assignee or subtenant shall
not release Kitty Hawk from the further performance by Kitty Hawk of the
covenants of this Lease or be construed to relieve Kitty Hawk from obtaining the
consent, in writing, of the Landlord and Building Corp. to any further
assignment or subletting and Kitty Hawk shall remain primarily liable on this
Lease for the entire term hereof and shall not be released from the full and
complete performance of all of the terms, conditions and agreements herein
contained.
ARTICLE XVI
DAMAGE, DESTRUCTION AND CONDEMNATION
In the event of the damage, destruction or condemnation of the
Premises, then all of the terms and conditions of Article VI of the Building
Lease shall apply in their entirety to this Lease.
ARTICLE XVII
EVENTS OF DEFAULT
Section 17.1 Events of Default by Tenant.
The following events shall be deemed to be events of default by a
Tenant under this Lease:
(a) Failure of Tenant to pay any rent or other amount within thirty
(30) days of the date it is due;
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(b) Failure of Tenant to perform or observe any other of the terms,
provisions, conditions and covenants of this Lease, the Building Lease, the
Operating Agreement, and/or the Lease and Use Agreement for more than thirty
(30) days after written notice of such failure;
(c) Tenant's insolvency, bankruptcy, admission in writing of its
inability to pay its debts as they mature, assignment for the benefit of
creditors, or application for or consent to the appointment of a trustee or
receiver for Tenant or for the major part of its property;
(d) Appointment of trustee or receiver for Tenant or for the major part
of its property and failure to cause said trustee or receiver to be discharged
within thirty (30) days after such appointment;
(e) Institution of any proceeding for relief under any bankruptcy law,
or similar law for the relief of debtors, by or against Tenant, and, if
instituted against Tenant or allowed against it or consented to by it, or not
dismissed within sixty (60) days after such institution;
(f) The levy and execution upon or the attachment by legal process of
the leasehold interest of Tenant, or the filing or creation of a lien in respect
to such leasehold interest to which the Landlord has not consented in writing
and which Tenant does not discharge in thirty (30) days; or
Section 17.2 Events of Default by the Landlord.
The following shall be "events of default" by the Landlord under this
Lease and the terms "event of default" or "default" shall mean, wherever they
are used in this Lease, any one or more of the following events:
(a) The FAA or other proper Federal Agency shall withdraw its
approval from the Airport and restrict the use of the Airport in such a
manner as to prevent the use of same by Tenant for its business
operations.
(b) An order is issued by any court of competent jurisdiction
restricting the use of the Airport in such a manner as to prevent the
use of same by Tenant for its business operations.
(c) The airfield shall be closed by lawful authority
restricting the use of the Airport in such a manner as to prevent the
use of the same by Tenant for its business operations hereunder.
(d) If a court of competent jurisdiction issues an injunction
against the Landlord or any successor body to the Landlord preventing
or restraining the use of the Airport in its entirety or of any part of
the Airport substantially necessary to Tenant for its operations, and
if such injunction remains in force for at least ninety (90) days.
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(e) If the Landlord fails to provide and maintain reasonable
means for ingress and egress to and from the Leased Premises in
accordance with the provisions of this Agreement or fails to fulfill
its obligations under Section 9.7 in respect of Tenant's right of quiet
enjoyment granted thereby.
(f) If by reason of any willful act, willful omission
wrongfully done or wrongfully omitted to be done in violation of this
Agreement; the Landlord prevents the use of the Leased Premises for the
purposes for which the use thereof is authorized by this Agreement.
Section 17.3 Remedies of Authority on Default.
Upon the occurrence of any such event of default, Landlord may pursue
any one or more of the following remedies, as well as any other remedies
provided by law, at its sole option, without any notice or demand whatsoever:
(a) Landlord may declare immediately due and payable the entire amount
of the rent then remaining to be paid under this Lease for the balance of the
Lease Term;
(b) Landlord may enter upon and take possession of the Premises without
terminating this Lease and without relieving Tenant of its obligation to make
the monthly payments of rent herein reserved, expel or remove Tenant and any
other person who may be occupying said Premises or any part thereof and any
personal property or trade fixtures located therein (including changing or
alternating the locks and other security devices), and relet the Premises in the
name of Landlord or Tenant at any rental readily obtainable and receive the rent
therefor. In such event, Tenant shall pay to Landlord, on demand, any deficiency
that may arise by reason of such reletting and the expenses, including, but not
limited to, realtors' commission, appraisers' fees, and reasonable attorneys'
fees, of such reletting, for the residue of the term of this Lease. In no event
shall Landlord have a duty to relet the Premises until such time as all other
available space owned and controlled by Landlord has been leased.
(c) Landlord may forfeit and terminate this Lease forthwith. In the
event of such a termination, Tenant shall immediately surrender the Premises to
Landlord and if Tenant fails to do so, Landlord may enter upon and take
possession of the Premises and expel or remove Tenant and any other person who
may be occupying the Premises or any part thereof, and any personal property or
trade fixtures located therein.
Pursuit by Landlord of any of the foregoing remedies or any other
remedy provided by law shall not constitute a waiver of any rent due to Landlord
hereunder or of any damages occurring to Landlord by reason of the violation by
Tenant of any of the terms, provisions and covenants of this Lease. In no event
shall Tenant be relieved from its obligation to pay rental specified in this
Lease by reason of a surrender of possession, termination of this Lease, or in
any other manner whatsoever unless specifically agreed to, in writing, by
Landlord. Further, any agreement by Tenant as to unconditional payments shall
not be construed to prevent Tenant, after complying with the payment
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provision, from pursuing any claim it may have against the Landlord or any other
person in such court of law or otherwise as Tenant may deem appropriate.
Section 17.4 Remedies of Tenant on Default.
Whenever any event of default under Section 17.2 of this Lease shall
have happened or be subsisting, any one or more of the following remedial steps
may be taken:
(a) Tenant may terminate this Lease.
(b) Tenant may take whatever action at law or in equity may
appear necessary or desirable to pursue in order to enforce performance
and observance of any obligation, agreement or covenant of the
Authority under this Lease.
Provided, however, if before the expiration of 60 days from the date of
which an event of default under Section 17.2 of this Lease shall have happened,
Landlord shall have cured the event of default, then: (i) Tenant shall waive the
event of default and its consequence and shall rescind and annul that
declaration, (ii) the Lease, if it has been terminated pursuant to Subparagraph
(a) above, shall be reinstated, and (iii) the Lease shall continue in full force
and effect.
Section 17.5 Tenant's Waiver.
Tenant hereby waives demand for rent, demand for possession, notice of
forfeiture, notice of termination and any and all other demands or notices
required by law.
Section 17.6 Arbitration.
In the event of any dispute between Tenant and Landlord with respect to
the terms and conditions of this Ground Lease, the Building Lease or the
operating Agreement, Tenant and Landlord shall first appoint a single
representative of each to attempt to reasonably negotiate a settlement of such
dispute and make recommendations with respect to such settlement to Tenant and
to Landlord. Tenant and Landlord may, if they so desire, submit such issue to
mediation. In the event that such dispute continues to be unsettled for
forty-five (45) days following the receipt of formal notification by certified
mail, return receipt requested, that a dispute subject to arbitration exists,
then both Tenant and Landlord shall appoint an independent arbitrator, who shall
appoint a third arbitrator, and the matters in dispute shall be submitted to
arbitration by this panel of arbitrators in accordance with the commercial
arbitration rules then existing by the American Arbitration Association, whose
determination, following the exhaustion of all administrative and judicial
appeals, shall become final, subject to appeal only on the basis of collusion,
fraud, or manifest disregard for the law. The panel of arbitrators shall have
the authority to enter equitable and legal orders and interim and final orders.
Such arbitration shall occur in Allen County, Indiana, and shall be binding upon
the parties, their representatives and assigns, provided, further, that all
parties shall be obliged to observe and comply with all the terms of the Ground
Lease, the Building Lease and the Operating Agreement, including the obligation
to make all rental payments and other payments, until the arbitration process
has been completed and becomes binding on all of the parties.
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Notwithstanding the foregoing, no arbitration decision shall affect
Kitty Hawk's obligation to pay rent or make other payments to Landlord required
by the terms of this Lease.
ARTICLE XVIII
DEFAULT BY LANDLORD
Landlord shall in no event be charged with default in any of its
obligations hereunder, either affirmatively or as a defense, unless and until
Landlord shall have failed to perform such obligations within sixty (60) days
(or such additional time as is reasonably required to correct any such default),
after written notice to Landlord and to Fort Wayne National Bank ("Bond
Trustees") by Tenant, specifically describing such failure.
ARTICLE XIX
RIGHTS RESERVED TO LANDLORD
Section 19.1 Inspection and Repair.
Landlord, and its duly authorized agents, employees and contractors,
shall have access to the Premises at all reasonable times for the purposes of
inspecting the same and making necessary repairs or replacements as called for
hereunder or as the Landlord shall elect to undertake for the safety,
preservation, benefit or welfare of the building of which the Premises
constitute a part or of other tenants thereof.
Section 19.2 Right to Show Premises.
Landlord shall have the right to show the Premises to prospective
tenants or brokers during the last one hundred eighty (180) days of the term of
this Lease, including any renewal terms, at all reasonable times.
Section 19.3 Right to Relocate and Grant Easements.
Landlord shall have the right to relocate existing utility easements in
the Premises, as well as the right to grant new utility easements in the
Premises. Tenant's rights in the Premises shall be subordinate to the rights of
any grantee(s) of such easements. The location, relocation and placement of all
utilities will be made only with the cooperation of the Landlord and Tenant. In
the event Landlord requires such a location or relocation, Landlord shall be
responsible to repair and restore any damage caused thereby.
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ARTICLE XX
HOLDING OVER
If Tenant or any party holder under Tenant holds over or occupies the
Premises beyond the Lease Term (it being agreed there shall be no such holding
over or occupancy without Landlord's written consent), Tenant shall pay Landlord
for each day of such holding over a sum equal to twice the Minimum Monthly Rent
prorated for the number of days of such holding over, plus any Additional Rent,
as set forth in the Lease. If Tenant holds over with Landlord's written consent,
Tenant shall occupy the Premises on a tenancy from month to month, and all other
terms and provisions of this Lease shall be applicable to such period.
ARTICLE XXI
QUIET ENJOYMENT
If Tenant pays the rents and other amounts herein provided, observes
and performs all the covenants, terms and conditions hereof, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Lease Term without
interruption by Landlord or any person or persons claiming by, through or under
Landlord, subject, nevertheless, to the terms and conditions of this Lease.
ARTICLE XXII
MISCELLANEOUS
Section 22.1 Waiver.
No waiver by Landlord or Tenant of any breach of any term, covenant, or
condition hereof shall be deemed a waiver of the same, or any subsequent breach
of the same, or any other term, covenant or condition. The acceptance of rent by
Landlord shall not be deemed a waiver of any earlier breach by Tenant of any
term, covenant, or condition hereof, regardless of Landlord's knowledge of such
breach when such rent is accepted. No covenant, term or condition of this Lease
shall be deemed waived by Landlord or Tenant unless waived in writing.
Section 22.2 Relationship of Parties.
Nothing contained in this Lease shall be construed to create a
partnership or joint venture between the Landlord and the Tenant or between the
Landlord and any other party, or cause the Landlord to be responsible in any way
for the debts or obligations of the Tenant or any other party.
Section 22.3 Accord and Satisfaction.
Landlord is entitled to accept, receive and cash or deposit any payment
made by Tenant for any reason or purpose or in any amount whatsoever, and apply
the same at Landlord's option to any obligation of Tenant and the same shall not
constitute payment of any amount owed except that to
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which Landlord has applied the same. No endorsement or statement on any check or
letter of Tenant shall be deemed an accord and satisfaction or otherwise
recognized for any purpose whatsoever. The acceptance of any such check or
payment shall be without prejudice to Landlord's right to recover any and all
amounts owed by Tenant hereunder, and Landlord's right to pursue any other
available remedy.
Section 22.4 Attorneys' Fees.
Tenant shall pay, as Additional Rent, all of the costs, charges and
expenses, including court costs and reasonable attorneys' fees incurred by
Landlord in enforcing its rights under this Lease or incurred by Landlord in any
litigation, negotiation or transactions relating to, or arising out of, this
Lease in which Landlord, without fault, becomes involved or concerned.
Section 22.5 Entire Agreement.
There are no representations, covenants, warranties, promises,
agreements, conditions or undertakings, oral or written, between Landlord and
Tenant other than herein set forth. Except as herein otherwise provided, no
subsequent alteration, amendment, change or addition to this Lease shall be
binding upon Landlord or Tenant unless in writing and signed by them.
Section 22.6 Force Majeure.
If either party hereto shall be delayed or hindered in or prevented
from the performance of any act required hereunder by reason of strikes,
lockouts, labor troubles, inability to procure material, failure of power,
restrictive governmental laws or regulations (other than those enacted by
Landlord), riots, insurrection, war, or other reason of a like nature not the
fault of the party delayed in performing work or doing acts required under this
Lease, the period for the performance of any such act shall be extended for a
period equivalent to the period of such delay, provided, however, that this
provision shall not apply to the payment of Minimum Rent or Additional Rent by
Tenant. Accordingly, Minimum Rent or Additional Rent shall not abate under this
provision.
Notwithstanding the foregoing, in the event that Kitty Hawk, shall
defease the Bonds in accordance with the Trust Indenture, and any other
indebtedness of the Authority which was issued to finance infrastructure and any
indebtedness which was issued to refinance or advance refund any such
indebtedness, and remediate any environmental cleanup, then the Lease Term shall
be extended only upon the mutual agreement of Landlord and Tenant.
Section 22.7 Captions and Section Numbers.
This Lease shall be construed without reference to titles of articles
and sections, which are inserted only for convenience of reference.
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Section 22.8 Number and Gender.
The use herein of a singular term shall include the plural and use of
the masculine, feminine or neutral gender shall include all others.
Section 22.9 Joint and Several Liability.
If Tenant is a partnership or other business organization, the members
of which are subject to personal liability, the liability of each such member
shall be deemed to be joint and several.
Section 22.10 Partial Invalidity.
If any provision of this Lease or the application thereof to any person
or circumstance shall to any extent be invalid or unenforceable, the remainder
of this Lease, or the application of such provision to persons or circumstances
other than those as to which it is invalid or unenforceable, shall not be
affected thereby and each provision of this Lease shall be valid and enforceable
to the fullest extent permitted by law.
Section 22.11 Recording.
The parties agree not to place this Lease of record but each party
shall, at the request of the other, execute and acknowledge, so that the same
may be recorded, a Short Form Lease or Memorandum of Lease, indicating a lease
term, but omitting rent and other terms, and an Agreement specifying the date of
commencement and termination of the lease term; provided, however, that the
failure to record said Short Form Lease, Memorandum of Lease or Agreement shall
not affect to impair the validity and effectiveness of this Lease. Tenant shall
pay all costs, taxes, fees and other expenses in connection with or prerequisite
to recording.
Section 22.12 Successors.
This Lease shall inure to the benefit of and be binding upon the
Landlord or Tenant and their respective heirs, executors, administrators,
successors and such assigns and subtenants as may be permitted hereunder.
Section 22.13 Corporate Tenants.
Each individual executing this Lease on behalf of a corporation
represents and warrants that he has the authority to do so.
Section 22.14 Compliance with Federal Law.
(a) The Tenant, for himself, his heirs, personal representatives,
successors in interest, and assigns, as a part of the consideration hereof, does
hereby covenant and agree, as a covenant running with the land, that in the
event facilities are constructed, maintained or otherwise operated on the
Premises for a purpose for which a United States Department of Transportation
program or activity
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is extended or for another purpose involving the provision of similar services
or benefits, the Tenant shall maintain and operate such facilities and services
in compliance with all other requirements imposed pursuant to 49 C.F.R. Part 21,
Nondiscrimination in Federally Assisted Programs of the Department of
Transportation, and as said Regulations may be amended.
(b) The Tenant, for himself, his personal representatives, successors
in interest, and assigns, as a part of the consideration hereof, does hereby
covenant and agree, as a covenant running with the land that:
(1) No person, on the grounds of race, color, or national
origin, shall be excluded from participation in, denied the benefits
of, or be otherwise subjected to discrimination in the use of said
facilities;
(2) That in the construction of any improvements on, over or
under such land and the furnishing of services thereon, no person, on
the grounds of race, color or national origin shall be excluded from
participation in, denied the benefits of, or otherwise be subjected to
discrimination;
(3) That the Tenant shall use the Premises in compliance with
all other requirements imposed by or pursuant to 49 C.F.R. Part 21,
Nondiscrimination in Federally Assisted Programs of the Department of
Transportation, and as said Regulations may be amended.
(c) Tenant assures that it will comply with pertinent statutes,
executive orders and such rules as are promulgated to assure that no person
shall, on the grounds of race, creed, color, national origin, sex, age, or
handicap, be excluded from participating in any activity conducted with or
benefitting from Federal assistance. This provision obligates Tenant or its
assignee for the period during which Federal assistance is extended to the
airport programs, except where Federal assistance is to provide, or is in the
form of personal property or real property or interest therein or structures or
improvements thereon. In these cases, this provision obligates Tenant or its
assignee for the longer of the following periods:
(1) The period during which the property is used by Landlord
or any transferee for a purpose for which Federal assistance is
extended, or for another purpose involving the provision of similar
services or benefits; or
(2) The period during which Landlord or any transferee retains
ownership or possession of the property
(d) Tenant shall comply with all laws, orders or regulations of any
governmental authority relating to the use and occupancy of the Premises,
including, but not limited to, the regulations and rules adopted by Landlord, in
its Airport Security Program, the Federal Aviation Administration (and
specifically, without limitation, Federal Aviation Regulations, Parts 107 and
139), and any other entity having authority applying to or affecting Baer Field.
Any violation by Tenant, its employees, suppliers, guests, business invitees, or
agents of any rule or regulation which results in the
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assessment of a fine against Landlord by the Federal Aviation Administration
shall be the responsibility of Tenant, and the fine shall be paid by Tenant as
additional rent.
Section 22.15 Master Lease.
It is hereby acknowledged by Tenant that the Landlord does not have
legal title to the premises, but, rather, leases the Premises from the Building
Corp. (the "Master Lease"). Tenant acknowledges that its right in the premises
derives from and is subordinate to the Master Lease. The Master Lease shall
require, in the event that the Building Corp. evicts the Landlord from the
Leased Premises, this Lease shall continue in full force and effect, so long as
Tenant is not in default of this Lease. In such event, Tenant hereby agrees to
attorn to and acknowledge the Building Corp. as Landlord.
Section 22.16 Right of Flight.
Landlord reserves for the use and benefit of the public a right of
flight for the passage of aircraft in the air space over-lying the Premises,
together with the right to cause in that air space such noise as is inherent in
the operation of aircraft using the air space for landing at, taking off from,
or operating at Baer Field. Tenant shall not erect or allow the erection or
maintenance of any structure or object or permit any growth which violates
federal or state law regarding tall structures, including, but not limited to,
14 C.F.R. Part 77 and Ind. Code Section 8-21-10-1, et seq., and any amendments
thereto.
Section 22.17 Applicable Law.
This Lease shall be construed under the laws of the State of Indiana.
Section 22.18 Notices.
All notices from Tenant to Landlord required or permitted by any
provision of this Lease shall be directed to Landlord as follows:
Fort Wayne-Allen County Airport Authority
Fort Wayne International Airport
Lt. Paul Baer Terminal, Suite 209
Fort Wayne, Indiana 46809
Attention: Executive Director of Airports
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All notices from Landlord to Tenant required or permitted hereunder
shall be directed as follows:
KITTY HAWK, INC.
BY:
---------------------------
M. Tom Christopher,
Chairman of the Board and
Chief Executive Officer
STATE OF INDIANA )
)
COUNTY OF ALLEN )
Before me, a Notary Public in and for said County and State, personally
appeared DANIEL F. WEAVER and KEITH R. SPITLER, the President and Assistant
Secretary, respectively, of the Fort Wayne-Allen County Airport Authority Board,
who acknowledged the execution of the above and foregoing Ground Lease, for and
on behalf of the Fort Wayne-Allen County Airport Authority.
WITNESS my hand and Notarial Seal this 13th day of April, 1998.
-------------------------------------------
Thomas D. Logan, Notary Public
Residing in Allen County, Indiana
My Commission Expires:
- -----------------------------------
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STATE OF TEXAS )
)
COUNTY OF )
Before me, a Notary Public in and for said County and State, personally
appeared M. TOM CHRISTOPHER, Chairman of the Board and Chief Executive Officer
of KITTY HAWK, INC., who acknowledged the execution of the above and foregoing
Ground Lease, for and on behalf of said corporation.
WITNESS my hand and Notarial Seal this day of April, 1998.
---------------------------------
, Notary Public
-----------------
Residing in County, Texas
---------
My Commission Expires:
- -------------------------------------
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Kitty Hawk, Inc.
1515 West 20th Street
P.O. Box 612787
Dallas/Fort Worth International Airport, Texas 75261
Attention: M. Tom Christopher,
Chairman of the Board and Chief Executive Officer
All notices to be given hereunder by either party shall be written and
sent by certified mail, return receipt requested, postage prepaid, addressed to
the party intended to be notified at the address set forth above. Either party
may, at any time, or from time to time, notify the other in writing of a
substitute address or substitute person to whose attention the notice is to be
sent for that set forth above, and, thereafter, notices shall be directed to
such substituted address or substituted person. Notice given as aforesaid shall
be sufficient service thereof and shall be deemed given as of the date received,
as evidenced by the return receipt of the registered or certified mail.
Section 22.19 Landlord's Consent.
In each case under this Lease in which Landlord's consent shall not be
unreasonably withheld, Landlord shall notify Tenant of its decision within
ninety (90) days if Tenant's request is made under Section 9.3 or Article XV
hereunder, and within sixty (60) days if Tenant's request is made under any
other provision hereunder. Landlord's consent shall be deemed granted if
Landlord has not given written notice of its refusal to grant such consent,
setting forth with specificity the bases for such refusal.
IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this
Lease as of the day and year first above written.
FORT WAYNE-ALLEN COUNTY
AIRPORT AUTHORITY
BY:
----------------------------
Daniel F. Weaver, President
Fort Wayne-Allen County
Airport Authority Board
ATTEST:
- -----------------------------------
Keith R. Spitler
Assistant Secretary
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EXHIBIT 10.31
BUILDING LEASE
FORT WAYNE-ALLEN COUNTY AIRPORT AUTHORITY
TO
KITTY HAWK, INC.
THIS CONTRACT OF LEASE (hereinafter called "Lease") made and entered
into as of the 13th day of April, 1998, between FORT WAYNE-ALLEN COUNTY AIRPORT
AUTHORITY, an Indiana municipal corporation, (hereinafter with its successors
and assigns as provided by this Lease called ("Authority"), a municipal
corporation duly organized and existing under the laws of the State of Indiana,
and KITTY HAWK, INC., a corporation duly organized and existing under the laws
of the State of Delaware and qualified to do business in the State of Indiana
(hereinafter called "Kitty Hawk").
WITNESSETH:
WHEREAS, I.C. 8-22-3.6 provides for the leasing of Airport projects to
the Airport Authority, under certain terms and conditions provided in said Act,
including the provision for the title to the Airport Project leased by the
Authority to vest in said Authority at the conclusion of the lease term with the
Authority required to make an annual appropriation and a tax levy at a rate to
provide sufficient money to pay the rental payments under such lease; and
WHEREAS, pursuant to I.C. 8-22-3.6, the Authority has entered into a
Lease with the Fort Wayne International Airport Air Trade Center Building Corp.,
(hereinafter referred to as "Building Corp.") pursuant to which Building Corp.
will construct and lease the the Authority the American International Freight
Central Cargo Hub, which project the Authority is, in this Lease, leasing to
Kitty Hawk.
WHEREAS, the plans and specifications referenced to in Section 4.2 of
this Lease have been or will hereafter be received and approved by Kitty Hawk
and have heretofore been or will be submitted to and approved by such state and
local agencies as are designated by law to pass on plans and specifications for
such structures; and
WHEREAS, Kitty Hawk and the Authority each have full right and lawful
authority to enter into this Lease (hereinafter when the context permits,
references herein to this Lease shall be deemed to include amendments hereto)
and to perform and observe the provisions hereof on their respective parts to be
performed and observed.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto covenant, agree and bind
themselves as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
In addition to the words and terms elsewhere defined in this Lease, the
following words and terms as used in this Lease shall have the following
meanings unless the context or use indicates another or different meaning or
intent and such definitions shall be equally applicable to both the singular and
plural forms of any of the words and terms herein defined.
"Act" means I.C. 8-22-3.6.
"Additional Payments" means the amounts required to be paid by the
provisions of Section 3.2 hereof.
"Administrative Fees" means the sum of $1,000,000, which is included in
the Original Purchase Price and which is to be used to pay for additional
administrative expenses required for any purpose.
"Airport Act" means I.C. 8-22-3, as amended and in effect on the date
hereof.
"Architect" means R. W. Armstrong & Associates! Inc., who have prepared
the plans and specifications for the construction of the Project.
"Authorized Kitty Hawk Representative" means the person at the time
designated to act on behalf of Kitty Hawk by written certificate furnished to
the Authority, containing the specimen signature of such person and signed on
behalf of Kitty Hawk by its President or a Vice President or Secretary. Such
certificate may designate an alternate or alternates who shall have the same
authority, duties and powers as the Authorized Kitty Hawk Representative.
"Authorized Authority Representative" means the person at the time
designated to act on behalf of the Authority by written certificate furnished to
Kitty Hawk, containing the specimen signature of such person and signed on
behalf of the Authority by the President or Secretary of the Legislative
Authority. Such certificate may designate an alternate or alternates who shall
have the same authority, duties and powers as the Authorized Authority
Representative.
"Bonds" means the Fort Wayne International Airport Air Trade Center
Building Corp. First Mortgage Improvement Bonds, Series 1998.
"Building Corp." means the Fort Wayne International Airport Air Trade
Center Building Corp.
"Completion Date" for the Project means the date specified in the
certificate of the Authorized Authority Representative to be furnished pursuant
to Section 4.3 hereof.
"Engineer" means an engineer or engineering firm or an architect or
architectural firm qualified to practice the profession of engineering or
architecture under the laws of the State and who or which is not a full-time
employee of Kitty Hawk or the Authority.
"FAA" means the Federal Aviation Administration or its successors.
"Ground Lease" means that certain ground lease entered into by and
between Authority and Kitty Hawk on even date herewith.
"I.C." means the Indiana Code as amended to the date hereof.
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"Indenture" means the Trust Indenture dated as of April 1, 1998, by and
between Building Corp. and Trustee, together with any supplements or amendments
thereto.
"Independent Counsel" means any attorney duly admitted to practice law
before the highest court of any state and not a full-time employee of Kitty Hawk
or the Authority.
"Insurance Consultant" means a recognized independent insurance
consultant qualified under the laws of the State and satisfactory to the
Authority and Kitty Hawk.
"Interest Rate for Advances" means a rate which is three percent (3%)
in excess of the interest rate then charged by the Trustee to its most
creditworthy commercial borrowers in its lending capacity as a bank.
"Lease Purposes" means the construction and equipping of the American
International Freight Central Cargo Hub, consisting in part of aircraft
maintenance, cargo sort, and related facilities (the "Project") at Fort Wayne
International Airport including the site, parking facilities and roadways
associated therewith as further described in Exhibit B hereto.
"Leased Premises" means the Buildings to be constructed as part of the
Project, as further described in Exhibit "B".
"Lease Term" means the period commencing on the date of occupation by
Kitty Hawk or completion of the Project and ending on the Termination Date.
"Legislative Authority" means the Board of Directors of the Authority.
"Letter Agreement" means the agreement between Building Corp. and the
Authority dated as of May 12, 1997, in the form of a letter acceptable to Kitty
Hawk from Building Corp. accepted by the Authority(1) setting forth Building
Corp.'s proposal to construct and lease the Project and formulae for reducing
Option Price and Rent.
"Master Lease" means the lease of the Leased Premises executed by and
between the Building Corp. and the Authority, dated July 2, 1997.
"Net Proceeds" means the proceeds of the 1998 Bonds and shall include
any amounts of such proceeds paid by Building Corp. to the Authority for the
acquisition and construction of the Leased Premises.
"Notice Address" means:
(a) As to the Authority:
Fort Wayne-Allen County Airport Authority
Room 209, Lt. Paul Baer Terminal
Fort Wayne, Indiana 46809
Attention: Executive Director of Airports
(b) As to Kitty Hawk:
Kitty Hawk, Inc.
1515 West 20th Street
P.O. Box 612787
Dallas/Fort Worth International Airport, Texas 75261
Attention: M. Tom Christopher,
Chairman of the Board and
Chief Executive Officer
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(c) As to Building Corp.:
Fort Wayne International Airport
Air Trade Center Building Corp. -
701 South Calhoun Street
Fort Wayne, Indiana 46802
Attention: O. Roderick Wilson, President
(d) As to Trustee:
Fort Wayne National Bank
110 West Berry Street
Fort Wayne, Indiana 46802
Attention: Teresa Tracey
"Original Purchase Price" as shown on Exhibit A hereto means the sum of
$33,105,000.
"Plans and Specifications" means the plans and specifications for the
Project prepared by the Architect and now on file with the Authority, as changed
from time to time as in this Lease provided.
"Project" means the American International Freight Central Cargo Hub,
consisting in part of aircraft maintenance, cargo sort, and related facilities,
the real, personal or real and personal property identified in Exhibit C hereto
or in or pursuant to any amendments hereto or in the certificate given pursuant
to Section 4.3 hereof, or acquired, constructed or installed as replacement or
substitution therefor or addition thereto.
"Real Property" means the interests in real estate described in Exhibit
B hereto, together with any substitutions or additions thereto but less any
removals therefrom from time to time as provided for in this Lease.
"Rent" means the rent payable pursuant to Section 3.1 hereof and as set
forth in Exhibit A hereto. Rent may be reduced in accordance with the terms of
the Letter Agreement. Rent, as reduced, shall be set forth in the applicable
space in Exhibit A hereto.
"Rent Cure Period" means a period of one calendar day commencing with
the day on which the Authority, the Building Corp., or their designee gives
notice to Kitty Hawk of failure of Kitty Hawk to pay the Rent.
"Rental Payment Date" means the fifth day of March, 1999, and the fifth
day of every month thereafter; or, if agreed to by the parties, the Completion
Date, whichever is later; and each March and September thereafter as set forth
on Exhibit A hereto; and for any other part of the Project, such dates as are
described in the Amendment to Lease.
"Required Property Insurance Coverage" means a policy or policies of
insurance against physical loss or damage to the Leased Premises, however
caused, with such exceptions only as are ordinarily required by insurers of
buildings or facilities of a similar type, in the lesser of (i) an amount equal
to 105% of the full replacement cost of the Leased Premises, or (ii) a sum equal
to the full amount necessary to fully redeem and repay the Bonds at the next
convenient and reasonable call date, plus a sum necessary to fully fund the net
interest cost on the Bonds to the next reasonable and convenient call date, and
plus a sum reasonably necessary in order to remediate any environmental cleanup
costs. In the event that there is any dispute with respect to what constitutes
necessary remedial costs, such amount will be arbitrated in accordance with
Section 12.8 of this Lease. The full replacement cost of the Leased Premises
shall be certified by an Insurance Consultant at Kitty Hawk's expense on or
before the effective date of this Lease, and thereafter, if requested by the
Authority on or before the first day of January of each year, shall be certified
by the Authorized Kitty Hawk Representative at Kitty Hawk's expense and setting
forth the method
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or methods by which such replacement cost was determined. If approved by the
Authority, such policy or policies may provide for such deductible amounts as
are then customary for corporations leasing buildings under leases similar to
this Lease.
"Required Public Liability Insurance" means such insurance as is
required in the Airport Use and Lease Agreement for liability protection for
death, bodily injury or property damage resulting from each occurrence,
provided, however, the policy or policies of such insurance may provide for such
deductible amounts as are then customary for corporations leasing buildings
under leases similar to this Lease, and further provided that the minimum
amounts of coverage shall be, and any deductible amount may be, increased as
recommended by an Insurance Consultant who shall annually, or for such longer
interval specified by the Authority and approved by the Authority, review such
coverage and-advise Kitty Hawk of increases in the amount of coverage required
therein in order to protect adequately the financial position of Kitty Hawk and
the Authority.
"Required Rental Value Insurance Coverage" means a rent or rental value
insurance policy (i) in an amount equal to the ensuing four semiannual Rent
payments and (ii) to the extent that the Kitty Hawk, using its best efforts, can
obtain such coverage, in an additional amount equal to the expenses, as
estimated by the Authority, of operating and maintaining the Leased Premises for
a period of two years. Such policy shall insure against loss of Rent and the
expenses of the Authority operating and maintaining the Leased Premises during a
period in which the Rent of the Authority is abated as a result of physical loss
or damage to the Leased Premises, however caused, with such exceptions only as
are ordinarily required by insurers of buildings or facilities of a similar
type.
"State" means the State of Indiana.
"Termination Date" means the earlier of (i) the date of termination of
this Lease by the Authority and/or Building Corp. pursuant to Section 8.11
hereof, (ii) thirty (30) years from the date of occupation by Kitty Hawk or
completion of the Project as may be extended as provided in Section 6.4, or such
lesser term as shall be required under Section 142(b) (1) (B) of the Internal
Revenue Code which requires that the term of the Lease shall not exceed eighty
percent (80%) of the expected life of the facilities financed with the Bonds or
(iii) such earlier date as shall be fixed by Kitty Hawk under Article XI of this
Lease Agreement. As soon as practical after completion of the Project, Bond
Counsel shall calculate the exact Termination Date of the Lease, and such
calculation shall be attached to and annexed as a part of this Building Lease
Agreement.
"Trustee" means Fort Wayne National Bank, Fort Wayne, Indiana, and its
successors in trust.
"1998 Bonds" means the Fort Wayne International Airport Air Trade
Center Building Corp. First Mortgage Improvement Bonds, Series 1998.
Any reference herein to the Authority or its Legislative Authority
shall include those which succeed to their functions, duties or responsibilities
pursuant to or by operation of law or who are lawfully performing their
functions. Any reference herein to Building Corp. shall include any individual,
corporation, association, partnership or other entity which succeeds to Building
Corp.'s rights and obligations under this Lease by reason of conveyance,
assignment or other transfer or by operation of law. Any reference to a section
or provision of the Constitution of the State or to a section, provision or
chapter of the Indiana Code shall include such section or provision or chapter
as from time to time amended, modified, revised, supplemented or superseded.
ARTICLE II
LEASED PREMISES - TERM OF LEASE - PURPOSES
Section 2.1. Leased Premises and Possession. The Authority, in
consideration of the rents, covenants and agreements herein stated, agrees to
and does hereby lease to Kitty Hawk, and Kitty Hawk does hereby lease from the
Authority, for the Lease Term subject to the provisions of this Lease, the
Leased Premises.
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TO HAVE AND TO HOLD the Leased Premises unto Kitty Hawk for the Lease
Term.
Possession of the Leased Premises shall be delivered to and accepted by
Kitty Hawk on delivery of the 1998 Bonds and Kitty Hawk recognizes and agrees
that prior to delivery of Building Corp.'s Certificate pursuant to Section 4.3,
construction of the Project will be ongoing.
Section 2.2. Use of Leased Premises. Kitty Hawk will use and occupy the
Leased Premises for the Lease Purposes except to the extent as may be permitted
pursuant to Section 10.1 hereof. Kitty Hawk does not now know of any reason why
the Leased Premises will not be so used and occupied by it from receipt of
possession to the Termination Date and any extensions and renewals of this Lease
and now anticipates that it will be so used and occupied. Failure to use and
occupy as aforesaid shall in no way abate or reduce Rent payable under this
Lease and shall not be deemed a breach of this Lease in any respect so long as
the other agreements and covenants of this Lease are fulfilled and so long as
such use is an aeronautical use.
ARTICLE III
RENT AND ADDITIONAL PAYMENTS
Section 3.1. Rent. Kitty Hawk shall pay Rent in advance on each Rental
Payment Date in the amount set forth after the applicable Rental Payment Date in
Exhibit A hereto; provided, however, that the amount of Rent payable on each
Rental Payment Date may be reduced by virtue of the reduction of Rent in
accordance with the terms of the Letter Agreement subject to Kitty Hawk's right
to review and approve any modification of the Letter Agreement. Kitty Hawk shall
be entitled to a credit against the installment of Rent next required to be paid
to the extent that moneys in any fund created under the Indenture are available
for that purpose.
Section 3.2. Additional Payments. Kitty Hawk agrees to make Additional
Payments to the Authority and/or Building Corp. as follows:
(a) As reimbursement for any and all costs, expenses and
liabilities paid by the Authority and/or Building Corp. in
satisfaction of any obligation of Kitty Hawk hereunder not
performed in accordance with the terms hereof by Kitty Hawk.
(b) As reimbursement for or prepayment of expenses paid or to be
paid by the Authority and/or Building Corp. and requested by
Kitty Hawk or required by this Lease (including, but not
limited to, taxes, utility charges, assessments and
maintenance expenses) and not otherwise required to be paid by
Kitty Hawk under this Lease.
(c) As reimbursement for or prepayment of any amounts derived
under this Lease or the Master Lease which are paid or to be
paid by the Authority and/or Building Corp. to the United
States of America pursuant to Section 148 of the Internal
Revenue Code of 1986, as amended.
The Indenture shall specifically require that Kitty Hawk be provided
with Trustee reports relating to investments and expenditures and that Kitty
Hawk be apprized of the Authority's investment strategy at the time of the
issuance of the Bonds.
Section 3.3. Place of Payments. The Rent and any Additional Payments
shall be paid directly to Building Corp. at its Notice Address or to any bank or
other financial institution designated by the Authority and/or Building Corp. in
a notice to Kitty Hawk.
Section 3.4. Kitty Hawk's Obligations. The obligations of Kitty Hawk to
pay Rent and Additional Payments and to perform and observe the other agreements
on its part contained herein shall be absolute and unconditional, except as
expressly provided in this Building Lease. For the period of the Lease Term,
Kitty Hawk (i) will not suspend or discontinue payment of Rent or Additional
Payments pursuant to this Lease, except as provided in this Building Lease, (ii)
will
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perform and observe all of its other agreements contained in this Lease, and
(iii) except upon exercise of its rights of termination as herein provided in
this Building Lease will not terminate this Lease. Nothing contained in this
Section shall be construed to release the Authority from the performance of any
of the agreements on its part contained in this Lease, and in the event the
Authority should fail to perform any such agreement on its part, Kitty Hawk may
institute such action against the Authority as Kitty Hawk may deem necessary to
compel performance or recover its damages for nonperformance so long as such
action shall not impair the agreements on the part of Kitty Hawk contained in
the preceding sentence. Kitty Hawk may, however, at its own cost and expense and
in its own name or, to the extent lawful, in the name of the Authority,
prosecute or defend any action or proceeding or take any other action involving
third persons which Kitty Hawk deems reasonably necessary in order-to secure or
protect its right of possession, occupancy and use hereunder, and in such event
the Authority hereby agrees to cooperate fully with Kitty Hawk, but at Kitty
Hawk's expense, and to take all action necessary to effect the substitution of
Kitty Hawk for the Authority in any such action or proceeding if Kitty Hawk
shall so request.
Section 3.5. Prepayment of Rent and Additional Payments. There is
expressly reserved to Kitty Hawk the right, and Kitty Hawk is authorized and
permitted, at any time it may choose, to prepay without penalty all or any part
of the Rent, or any Additional Payments, and the Authority agrees to accept such
prepayment of Rent or of any Additional Payments when the same are tendered by
Kitty Hawk. All Rent or Additional Payments so prepaid shall be credited on the
Rent or Additional Payments, as the case may be, in the order in which they are
payable.
Section 3.6. Past Due Rent and Additional Pavements. In the event Kitty
Hawk should fail to make any Rent payment or pay any Additional Payments, the
payment in default shall continue as an obligation of Kitty Hawk until the
amount in default shall have been fully paid and during the default period shall
bear interest at the Interest Rate for Advances.
Section 3.7. Additional Rent. In the event that a change in the use of
the Leased Premises occurs by reason of the action of Kitty Hawk, its
subsidiaries, or its successors and assigns pursuant to Section 10.1 of the
Building Lease and such change in use, in the opinion of bond counsel of
nationally recognized standing, results in the loss of the exclusion from income
tax purposes of the interest on the Bonds pursuant to Section 103 of the Code,
then, in addition to the rent due pursuant to Section 3.1 of this Building
Lease, Kitty Hawk shall pay additional rent in advance on each Rental Payment
Date, following the receipt of the opinion of such bond counsel, in the amount
set forth after the applicable Rental Payment Date set forth in Exhibit A-i
hereto. Kitty Hawk shall be entitled to a credit against the installment of Rent
next required to be paid to the extent that monies in any fund created under the
indenture are available for that purpose.
ARTICLE IV
CONSTRUCTION
Section 4.1. Construction. The Authority agrees to cause the Project to
be constructed and equipped on the Real Property as promptly as is feasible in
accordance with the Plans and Specifications as developed by Kitty Hawk. The
Authority agrees to cause completion of the Project to be diligently prosecuted
in accordance with the Plans and Specifications and in such a manner as to
conform with all applicable zoning, planning, building, environmental and other
regulations of governmental authorities having jurisdiction.
Section 4.2. Plans and Specifications. The Plans and Specifications
have been developed and approved by Kitty Hawk and are at the date hereof on
file with Kitty Hawk and the Authority and may be changed from time to time by
mutual agreement of the Building Corp., the Authority and Kitty Hawk, provided
that the Plans and Specifications shall not be changed to such an extent that
the Lease Purposes are such as are not permitted under the Act or would
otherwise permit Kitty Hawk to avoid its agreement under this Lease. The cost of
completing the Project shall be the responsibility of the Building Corp. only to
the extent of the Budget which is attached to the Memorandum of Understanding of
May 12, 1997, which Budget includes a fund for Contingencies
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of One Million Dollars (the "Budget") . To the extent costs of completing the
Project exceed the Budget, such costs shall be the responsibility of Kitty Hawk,
but only to the extent such costs are pursuant to written change orders
authorized in writing by Kitty Hawk.
Section 4.3. Completion Date. Completion of the construction and
equipping of the Project shall be evidenced to Kitty Hawk by a certificate
signed by the Authorized Authority Representative stating that (i) construction
and equipping have been substantially completed in accordance with the Plans and
Specifications and all costs then due and payable in connection therewith have
been paid, (ii) construction and equipping have been substantially accomplished
in such a manner as to conform with all applicable zoning, planning, building,
environmental and other regulations of all governmental authorities having
jurisdiction, and (iii) construction and equipping have been substantially
completed to its satisfaction so as to make the Project ready for operation for
the Lease Purposes. Said certificate shall also specify the date by which the
foregoing three events have occurred. Notwithstanding the foregoing such
certificate shall state that it is given without prejudice to any rights against
third parties which then exist or may subsequently come into being. Section 4.4.
Accounting. Authority covenants that it will cause Building Corp. to keep and
maintain a strict accounting of all charges incurred in relation to the items
properly included as part of the Administrative Fees. As soon as practical after
all settlements in relation to the Project are completed, a copy of said
accounting shall be furnished to Kitty Hawk. Should such accounting show total
charges relating to said items to be less than the amount of the Administrative
Fees, then the next succeeding payment of Rent shall be reduced by the amount of
the excess of the Administrative Fees over said items.
Section 4.5. Remedies Against Contractors, Subcontractors and Sureties.
In the event of default of any contractor or subcontractor under any contract
made by Building Corp. in connection with construction and equipping of the
Project or in the event of a breach of warranty with respect to any materials,
workmanship or performance guaranty in connection with the Project, the
Authority and/or Building Corp. will promptly inform Kitty Hawk of the steps
the Building Corp. intends to take in connection with any such default, either
separately or in conjunction with others, against the contractor or
subcontractor so in default and against each such surety for the performance of
such contract. If the Authority and/or Building Corp. shall so inform Kitty
Hawk, the Authority and/or Building Corp. may, in their own names or, to the
extent lawful, in the name of Kitty Hawk, prosecute or defend any action or
proceeding or take any other action involving any such contractor, subcontractor
or surety that the Authority and/or Building Corp. deems reasonably necessary,
and in such event Kitty Hawk hereby agrees to cooperate fully with the Authority
and/or Building Corp. and to take all action necessary to effect the
substitution of the Authority and/or Building Corp. for Kitty Hawk in any such
action or proceeding.
Section 4.6. Installation of Kitty Hawk's Own Personal Property. Kitty
Hawk may from time to time, in its sole discretion and at its own expense,
install personal property including without limitation that which when installed
becomes in whole or in part a fixture, on or upon the Leased Premises. All such
property so installed by Kitty Hawk shall remain the sole property of Kitty Hawk
in which, except to the extent provided in Section 5.3 hereof, the Authority
shall have no interest, and may be purchased by Kitty Hawk on conditional sale,
installment purchase or lease sale contract, or subject to vendor's lien or
security agreement, as security for the unpaid portion of the purchase price
thereof; provided no such lien or security interest shall attach to any part of
the Leased Premises. Kitty Hawk shall pay as due the purchase price of, and all
costs and expenses with respect to, the acquisition and installation of any such
personal property installed by it pursuant to this Section.
ARTICLE V
MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE
Section 5.1. Maintenance and Modifications of Leased Premises by Kitty
Hawk. Kitty Hawk during the Lease Term shall keep and maintain the Leased
Premises including all
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appurtenances thereto and any personal property and fixtures which have become a
part of the Leased Premises in good repair and good operating condition at its
own cost.
Kitty Hawk shall have the privilege of remodeling the Project or making
additions, modifications and improvements thereto or to the Real Property, from
time to time as it, in its discretion, may deem to be desirable for its uses and
purposes, the cost of which remodeling, additions, modifications and
improvements shall be paid by Kitty Hawk and, unless the Authority and Kitty
Hawk shall otherwise agree in writing, the same shall be the property of the
Authority and be included under the terms of this Lease as part of the Leased
Premises.
Section 5.2. Removal of Portions of the Project. The Authority shall
not be under any obligation to renew, repair or replace any inadequate,
obsolete, worn out, unsuitable, undesirable or unnecessary portions of the
Project. Kitty Hawk shall have the privilege from time to time of substituting
personal property or fixtures for any portions of the Project, provided that the
personal property or fixtures so substituted shall not impair the character or
significance of the Leased Premises as furthering the purposes of the Act. Any
such substituted property or fixtures shall, unless the Authority and Kitty Hawk
otherwise agree in writing, become the property of the Authority and shall be
included under the terms of this Lease, and the replaced portions of the Project
shall become the property of the Authority.
Section 5.3. Removal of Kitty Hawk's Own Personal Property. Kitty Hawk
may at any time while it is not in default under this Lease remove from the
Leased Premises any property purchased and installed by it pursuant to Section
4.6 of this Lease and not included as part of the Project.
In the event any removal of property pursuant to this Section 5.3
causes damage to any portion of the Leased Premises, Kitty Hawk shall restore
the same or repair such damage at its sole expense.
Section 5.4. Documents to be Provided. Kitty Hawk shall file with
Authority during the first two weeks of the calendar month succeeding each
anniversary of the Completion Date, commencing with the month succeeding the
first anniversary of the Completion Date, a certificate of the Authorized Kitty
Hawk Representative setting forth the description of each item of personal
property or fixtures which has become a part of the Leased Premises and of any
other additions, remodeling, modification, substitution or improvements to the
Leased Premises which have been made during the twelve calendar months preceding
the first of the month in which such certificate is filed, if such additions,
remodeling, modifications substitutions or improvements during such twelve
months have an aggregate cost in excess of $500,000.
Kitty Hawk shall execute and deliver such documents (if any) as the
Authority may properly request in connection with any action taken by Kitty Hawk
in conformity with Section 5.1, 5.2 or 5.3 of this Article. Any action taken by
Kitty Hawk pursuant to Sections 5.1, 5.2 or 5.3 of this Article shall not
entitle Kitty Hawk to any abatement or diminution of the Rent or Additional
Payments payable hereunder
Section 5.5. Taxes, Other Governmental Charges and Utility Charges.
Kitty Hawk shall pay, as the same respectively become due, all taxes,
assessments, whether general or special, and governmental charges of any kind
whatsoever that may at any time be lawfully assessed or levied against or on
account of or with respect to the Leased Premises or any personal property or
fixtures installed or brought by Kitty Hawk therein or thereon and all utility
and other charges incurred in the operation, maintenance, use, occupancy and
upkeep of the Leased Premises; provided, that with respect to taxes, special
assessments or other governmental charges that may lawfully be paid in
installments over a period of years, Kitty Hawk shall be obligated to pay only
such installments as are required to be paid during the Lease Term.
Kitty Hawk may, at its expense and in its own name and behalf or, to
the extent lawful, in the name and behalf of the Authority and/or Building Corp,
in good faith contest any such taxes,
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assessments and other charges and, in the event of any such contest, may permit
the taxes, assessments or other charges so contested to remain unpaid during the
period of such contest and any appeal therefrom unless the Authority and/or
Building Corp. shall notify Kitty Hawk that, in the opinion of Independent
Counsel, by nonpayment of any such items the interests of the Authority and/or
Building Corp. or Kitty Hawk in the Leased Premises will be materially
endangered or the Leased Premises or any part thereof will be subject to loss or
forfeiture, in which event such taxes, assessments or charges shall be paid
promptly by Kitty Hawk. The Authority will cooperate fully with Kitty Hawk, but
at Kitty Hawk's expense, in any such contest. The Authority will also cooperate
fully with Kitty Hawk, but at Kitty Hawk's expense, in exempting the Leased
Premises from taxation.
Section 5.6. Property Insurance. After the commencement date of the
Building Lease, Kitty Hawk agrees to insure the Leased Premises in the amount
and with the coverage of the Required Property Insurance Coverage by means of
policies issued by reputable insurance companies. Kitty Hawk may also insure
such property under a blanket insurance policy or policies which cover not only
such property but other properties.
Section 5.7. Rental Value Insurance. Kitty Hawk agrees to insure, from
and after the Completion Date(1) the Leased Premises in the amount and with the
coverage at least equal to the Required Rental Value Insurance Coverage by means
of a policy or policies issued by reputable insurance companies, notwithstanding
the premium costs or in the event at any time such policies are not available,
then either (a) such insurance with such limits or amounts or other provisions
as then obtainable for corporations of the State leasing buildings under leases
similar to this Lease, or (b) a plan, in compliance with the law of the State
and satisfactory to the Authority and Building Corp., which provides protection
similar to the protection provided herein against the inability of Kitty Hawk to
meet liabilities of Kitty Hawk that would otherwise have been satisfied by the
proceeds of the rent or rental value insurance. In the case of either clause (a)
or (b) of the preceding sentence, the limits, amounts and other provisions of
such insurance or plan shall be such as are recommended by a recognized
qualified independent Insurance Consultant satisfactory to the Authority and
Building Corp. and who shall annually, or for such longer interval specified the
Authority and/or Building Corp., review such plan and advise the Authority and
Building Corp. of changes required therein in order to adequately protect the
financial position of Kitty Hawk, and the Authority and Building Corp. shall be
entitled to rely upon such advice to make its determination as to what is
obtainable or most nearly provides protection similar to that herein required.
Kitty Hawk may also insure such property under a blanket insurance policy or
policies which cover not only such property but other properties. After
completion of the Project, Kitty Hawk shall be responsible for all insurance
obligations required under the terms of this Building Lease.
Section 5.8. Additional Provisions Respecting Insurance. Any insurance
policy issued pursuant to Sections 5.6 and 5.7 hereof shall be so written or
endorsed, and any plan in substitution thereof shall be so written, as to make
losses, if any, payable directly to Building Corp. or to such other person or
persons as the Authority and/or Building Corp. may designate. Each insurance
policy provided for in Sections 5.6, 5.7, and 5.9 hereof shall contain a
provision to the effect that the insurance company shall not cancel or
substantially modify the same without first giving written notice thereof to the
Authority and Building Corp. at least thirty (30) days in advance of such
cancellation or substantial modification. Kitty Hawk shall deliver to the
Authority evidence of the insurance procured under said Sections by Kitty Hawk
and agrees to keep such evidence up to date. Such insurance policies shall be
countersigned by an agent of the insurer who is authorized to countersign
policies in the State of Indiana, and such policies, together with a certificate
of the insurance commissioner certifying that the persons countersigning such
policies are duly qualified in the State as resident agents of the insurers on
whose behalf they have signed (or a certificate of insurance and proof of
payment of premium satisfactory to the Authority and Building Corp.) shall be
deposited with the Authority. After completion of the Project, Kitty Hawk shall
be responsible for all insurance obligations required under the terms of this
Building Lease.
Section 5.9. Public Liability Insurance. Kitty Hawk agrees that it will
carry Required Public Liability Insurance with reference to the Leased Premises
with one or more reputable insurance companies. The Authority and Building Corp.
and such other person or persons as the
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Authority and/or Building Corp. may designate shall be named as an additional
insured under such policies, as their interests may appear. The insurance
provided by this Section 5.9 may be by blanket insurance policy or policies. The
proceeds of insurance required by this Section (after payment of expenses
incurred in the collection of such proceeds) shall be applied toward
extinguishment or satisfaction of the liability with respect to which such
insurance proceeds are paid.
Section 5.10. Workers' Compensation Coverage. During the period from
commencement of construction of the Project until delivery of the certificate of
the Authorized Authority Representative to Kitty Hawk pursuant to Section 4.3
hereof, the Authority and/or Building Corp. shall cause each contractor for each
contract made by Building Corp. in connection with the construction and
equipping of the Project to maintain the workers' compensation coverage required
by the applicable laws of the State; and, throughout the Lease Term, Kitty Hawk,
the Authority and the Building Corp. shall cause to be maintained the worker's
compensation coverage required by the applicable laws of the State or cause the
same to be maintained for their respective employees. Such policies shall
include a waiver of subrogation.
ARTICLE VI
DAMAGE, DESTRUCTION AND CONDEMNATION
Section 6.1. (a) Damage and Destruction. If the Leased Premises shall
be damaged or partially or totally destroyed by fire, flood, windstorm, or other
casualty at any time during the Lease Term, (i) all or that portion of the
Leased Premises damaged or destroyed shall be promptly repaired, rebuilt or
restored with such changes, alterations and modifications (including the
substitution and addition of other property) as may be designated by Kitty Hawk
and as shall not impair the character and significance of the Leased Premises as
furthering the purposes of the Act, and (ii) there shall be applied for such
purpose so much as may be necessary of any net proceeds of insurance policies
resulting from claims for such losses as well as any additional moneys of Kitty
Hawk necessary therefor. In the event that such net proceeds are insufficient to
pay in full the costs of such repair, rebuilding or restoration, Kitty Hawk
shall complete such repair, rebuilding or restoration and shall provide for
payment of the costs of such completion from its own moneys.
Section 6.1. (b) Defeasance. In the alternative, in the event that
Kitty Hawk, within sixty (60) days, shall deposit sufficient funds, which funds
shall include proceeds of any insurance, in order to (1) defease the Bonds in
accordance with the Trust Indenture authorizing them, and any other indebtedness
of the Authority (in accordance with the terms of any other resolution or
indenture authorizing them) which was issued to finance infrastructure and any
indebtedness which was issued to refinance or advance refund any such
indebtedness, and (2) remediate any environmental cleanup, then the above
paragraph shall not be effective. The lease shall terminate in such event.
Section 6.2. Eminent Domain. If title to or the temporary use of the
Leased Premises, or any part thereof, shall be taken under the exercise of the
power of eminent domain by any governmental body or by any person, firm or
corporation acting under governmental authority, any net proceeds received from
any award made in such eminent domain proceedings (after payment of expenses
incurred in such collections) shall be paid to and held by Kitty Hawk.
Kitty Hawk and the Authority shall agree as to how proceeds shall be
applied in one or both of the following ways:
(a) The restoration of the Leases Premises to substantially the
same condition as they existed prior to the exercise of said
power of eminent domain, or
(b) The acquisition, by construction or otherwise, of other
improvements suitable for Kitty Hawk's operation on the Leased
Premises and which are in furtherance of the purposes of the
Act (which improvements shall be deemed a part of the Leased
Premises and available for use and occupancy by Kitty Hawk
without the payment
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of any Rent other than as herein provided, to the same extent
as if such other improvements were specifically described
hereby).
Any balances of the net proceeds of the award in such eminent domain
proceedings not required to be applied for the purposes specified in subsections
(a) or (b) above shall, after deducting of expenses and costs, become the
property of the Authority subject to the provisions of Section 8.12 hereof.
The parties shall cooperate fully in the handling and conduct of any
prospective or pending condemnation proceedings with respect to the Leased
Premises or any part thereof and Kitty Hawk will to the extent it may lawfully
do so permit the Authority to litigate in any such proceedings in its own name
or in the name and on behalf of Kitty Hawk, at the Authority's expense. In no
event will either the Authority or Kitty Hawk voluntarily settle or consent to
the settlement of any prospective or pending condemnation proceedings with
respect to the Leased Premises or any part thereof without the written consent
of the other party, which consent will not be unreasonably withheld.
Section 6.3. Condemnation of Kitty Hawk-Owned Property. Kitty Hawk
shall be entitled to the proceeds of any condemnation award or portion thereof
made for damages to or takings of its own sole property.
Section 6.4. Rent Abatement. In the event that the Leased Premises or a
portion thereof are damaged or destroyed or are taken under the exercise of the
power of eminent domain, the Rent payable by Kitty Hawk shall (i) be totally
abated during that portion of the Lease Term that the Leased Premises are
totally unfit for use or occupancy, and (ii) partially abated during that
portion of the Lease Term that the Leased Premises are partially unfit for
occupancy in the same proportion that the area of the Leased Premises so unfit
for use or occupancy bears to the total area of the Leased Premises; provided,
however, that Kitty Hawk shall pay an amount equal to the difference between the
Rent payable in such year and the proceeds received by the Authority from the
rent or rental value insurance required to be maintained by Kitty Hawk under
Section 5.7 hereof. In the event that Rent is abated pursuant to this Section,
the Lease Term may be extended, at Kitty Hawk's option, for a period of time
equal to the period of time during which the Rent is so abated; provided,
however, that in no event shall the Lease Term exceed a period of thirty years.
Rent payable during such extended period of time shall be reduced by an amount
equal to the proceeds of the aforesaid insurance policy actually received by the
Authority and by an amount equal to Rent actually paid by Kitty Hawk during the
period of abatement of Rent. Alternatively, in the event the Leased Premises are
damaged or destroyed, the Authority and Kitty Hawk may agree that Kitty Hawk
shall be provided substitute property of equal or acceptable value and the
Authority shall exercise its best efforts to provide Kitty Hawk with such
suitable alternative. In the event the Leased Premises are taken in their
entirety by eminent domain, then, subject to the condition that either:
(a) all of the net proceeds received from any award in such
eminent domain proceedings (after the payment of expenses incurred in
such collection) are applied as payment of rents under Section 3.5, or,
in the alternative,
(b) the Bonds are defeased under the provisions of Section
6.1(b) of this Article VI,
the Building Lease shall be terminable at Kitty Hawk's option.
ARTICLE VII
MECHANICS AND OTHER LIENS
Section 7.1. Mechanics' and Other Liens. The Building Corp. Kitty Hawk
and the Authority shall not suffer or permit any mechanics' or other liens to be
filed or exist against the
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Leased Premises, nor against Kitty Hawk's leasehold interest in the Leased
Premises, nor against any special fund or account provided for in this Lease or
the Master Lease or any Rent paid or payable hereunder, by reason of work,
labor, services or materials supplied or claimed to have been supplied to, for
or in connection with the Leased Premises or to the Authority or Kitty Hawk or
anyone holding the Leased Premises or any part thereof through or under Kitty
Hawk. If any such liens shall at any time be filed, the Authority or Kitty Hawk,
as appropriate, shall within one hundred twenty days after notice of the filing
thereof but subject to the right to contest hereinafter set forth, cause the
same to be discharged of record by payment, deposit, bond, order of a court of
competent jurisdiction or otherwise. Kitty Hawk shall have the right in its or,
to the extent lawful, the Authority's name, or both, but at Kitty Hawk's own
cost and expense, to contest the validity or the amount of any such lien by
appropriate proceedings timely instituted. The Authority will cooperate fully
with Kitty Hawk, but at Kitty Hawk's expense, in any such contest (except as any
such lien is asserted by the Authority and/or Building Corp. in which event
Kitty Hawk shall have the right to contest such lien as if it were the owner of
the Leased Premises). If Kitty Hawk shall fail to cause such lien to be
discharged, or to contest the validity or amount thereof, within the period
aforesaid, then, in addition to any other right or remedy of the Authority, the
Authority may, but shall not be obligated to, discharge the same either by
paying the amount claimed to be due or by procuring the discharge of such lien
by deposit or by bonding. Any amount paid by the Authority shall be reimbursed
by Kitty Hawk on demand, and if not so reimbursed on demand may be treated as
Additional Payments as provided in Article III hereof and shall be paid by Kitty
Hawk with interest on the amount so paid by the Authority at the Interest Rate
for Advances.
Notwithstanding any other provisions of this Section 7.1, Kitty Hawk
shall not be responsible for the actions or inactions of the Authority or the
Building Corp. that may result in any lien described in this Section 7.1.
ARTICLE VIII
REPRESENTATIONS AND SPECIAL COVENANTS AND CONDITIONS
Section 8.1. Representations and Covenants of Kitty Hawk.
(a) Kitty Hawk warrants and represents that it is and during the Lease
Term will be a duly organized and existing corporation under the laws of the
State of Delaware and duly qualified to do business in the State of Indiana,
that it is not in default under any of the provisions contained in the laws of
the State in any manner which would impair its ability to carry out its
obligations hereunder, that it has power to enter into the transactions
contemplated by this Lease, that it has been duly authorized to execute this
Lease and that it will do all things required of it in order to maintain its
existence.
(b) Kitty Hawk shall not take any action, within its power or control,
nor fail to take any action with respect to the Bonds that would result in the
loss of the exclusion from gross income for federal income tax purposes of
interest on the bonds pursuant to Section 103 of the Code; provided, however,
that no Event of Default shall result by reason of a change in the use of the
Leased Premises by Kitty Hawk, its subsidiaries, or its successors and assigns,
pursuant to Section 10.1 of this Building Lease.
Section 8.2. Representations and Covenants of the Authority. The
Authority warrants and represents as follows:
(a) It is a duly organized and existing municipal corporation
under the laws of the State and is not in default under any of
the provisions contained in the laws of the State in any
manner which would impair its ability to carry out its
obligations hereunder.
(b) Construction and equipping shall be completed in accordance
with the Plans and Specifications and will be accomplished in
such manner as to conform with all
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applicable zoning, planning, building, environmental and other
regulations of all governmental authorities having
jurisdiction of the Leased Premises.
(c) The Authority covenants not to take any action, within its
power and control, nor to fail to take any action with respect
to the Bonds that would result in the loss of the exclusion
from gross income for federal income tax purposes of interest
on the Bonds pursuant to Section 103 of the Code.
Section 8.3. Maintenance of Kitty Hawk. Kitty Hawk agrees that from the
date of delivery of this Lease to the Termination Date there will always be a
corporation duly organized and existing under the laws of the State of Delaware
and qualified to do business in the State, acting as lessee under this Lease,
and the Lessee shall not dissolve or otherwise dispose of all or substantially
all of its assets and shall not consolidate with or merge with another entity
which would adversely affect the creditworthiness of Kitty Hawk without the
expressed written consent of the Airport Authority, which written consent shall
not be unreasonably withheld. provided, however, that Kitty Hawk may consolidate
with or merge with another entity, so long as Kitty Hawk provides to Landlord a
written opinion of Ernst & Young, or a comparable national accounting firm, to
the effect that such consolidation or merger will not materially affect Kitty
Hawk or the successor entity's ability to perform its obligations under this
Lease. The Building Corp. and the Authority shall be notified, in writing, of
any change in the identity of Kitty Hawk under the Lease.
Section 8.4. Title of Real Property. The Authority has caused to be
furnished to Kitty Hawk an acceptable title insurance policy showing the status
of title to the Real Property as of the date of acquisition of the Real Property
by Building Corp. The Authority and the Building Corp. warrant that the Building
Corp. has good title to the Leased Premises and that the Authority has the
authority to enter into this Building Lease.
It is hereby acknowledged by Tenant that the Landlord does not have
legal title to the premises, but, rather, leases the Premises from the Building
Corp. (the "Master Lease"). Tenant acknowledges that its right in the premises
derives from and is subordinate to the Master Lease. The Master Lease shall
require, in the event that the Building Corp. evicts the Landlord from the
Leased Premises, this Lease shall continue in full force and effect, so long as
Tenant is not in default of this Lease. In such event, Tenant hereby agrees to
attorn to and acknowledge the Building Corp. as Landlord.
Section 8.5. No Warranty of Suitability. The Authority does not make
any warranty, either express or implied, as to the suitability or utilization of
the Leased Premises for the Leased Purposes, or that they are or will be
suitable for Kitty Hawk's purposes or needs. Kitty Hawk agrees that the Leased
Premises as contemplated by the Plans and Specifications are useful to it.
Section 8.6. Operation as a Public Airport. The Authority covenants and
agrees that at all times it will operate and maintain the Airport as a public
airport consistent with and pursuant to the sponsor's assurances given by the
Authority to the United States Government under the Federal Airport and Airways
Act.
Section 8.7. Ingress and Egress. Kitty Hawk shall have the right of
ingress to and egress from the Leased Premises for Kitty Hawk, its officers,
employees, agents, servants, customers, vendors, suppliers, patrons, and
invitees over the roadway provided by the Authority serving the Leased Premises.
The Authority's roadway shall be used jointly with other tenants on the Airport,
and Kitty Hawk shall not interfere with the rights and privileges of other
persons or firms using said roadway and shall be subject to such weight and use
restrictions promulgated in the Authority's rules and regulations.
Section 8.8. Quiet Enjoyment. The Building Corporation shall covenant
to the Authority and the Authority covenants that it will not take any action to
prevent Kitty Hawk, on paying the Rent and Additional Payments and performing
the covenants and agreements herein on Kitty Hawk's part to be performed, from
peaceably and quietly holding and enjoying the Leased Premises for the Lease
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Term and any extension thereof and that the Authority will, at Kitty Hawk's
request and the Authority's expense, defend Kitty Hawk's enjoyment and
possession of the Leased Premises against all parties or permit Kitty Hawk in
its own or, to the extent lawful, in the Authority's name, to defend such
enjoyment and possession.
Section 8.9. Right of Access. Kitty Hawk agrees that subject to
reasonable security and safety regulations and to reasonable requirements as to
notice, the Authority and Building Corp., and their duly authorized agents shall
have the right at all reasonable times to enter upon the Leased Premises and to
examine and inspect the same. Kitty Hawk further agrees that the Authority and
Building Corp. and their duly authorized agents shall have such rights of access
to the Project as may be reasonably necessary to cause to be completed the
construction and equipping provided for herein, and thereafter for the proper
maintenance of the Project in the event of failure by Kitty Hawk to perform its
obligations.
Section 8.10. Indemnity. Kitty Hawk, the Authority and Building Corp.,
hereinafter sometimes called "Party" or collectively the "Parties", each agrees
it they shall be responsible for its own acts of carelessness and negligence,
and each agrees that the Authority, Building Corp. and Kitty Hawk shall not be
liable for such negligence, and agrees to hold the Authority, Building Corp. and
Kitty Hawk harmless against, any loss or damage to property, or any injury to or
death of any person, that may be occasioned by any cause or by any failure to
act whatsoever pertaining to the Leased Premises or the use thereof by acts of
the other Party; provided, that the indemnity in this sentence shall be
effective only to the extent of any loss that may be sustained by the Authority,
Building Corp. or Kitty Hawk in excess of the net proceeds received by the
Authority, Building Corp. or Kitty Hawk from any insurance carried with respect
to the loss sustained. Such Party further agrees to indemnify and save harmless
the Authority, Building Corp. or Kitty Hawk against and from any and all cost,
liability, expenses and claims arising from any breach or default in the
performance of any covenant or agreement to be performed pursuant to the terms
of this Lease, or arising from any act or negligence of or failure to act by
such Party, or any of its agents, contractors, servants, employees or licensees,
or arising from any accident, injury or damage whatsoever caused to any person,
firm or corporation occurring during the Lease Term, in or about the Leased
Premises, and from and against all costs, liability and expenses incurred in or
in connection with any such claim or action or proceeding brought thereon; and
in case any action or proceeding be brought against the Authority, Building
Corp. or Kitty Hawk by reason of any such claim, upon notice from one Party, the
other Party covenants to resist or defend such action or proceedings at its own
expense.
Notwithstanding the foregoing, neither Party shall have any obligation
to indemnify with respect to the following:
(a) Liabilities arising out of damages to employees of any
Party, or any third person, if such employee or third person is covered
or should have been by worker's compensation insurance;
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(b) Losses occasioned by the negligence or willful
misconduct of such Party, such Party's agents or representatives; or
(c) Insured losses with respect to which rights of subrogation
have been waived.
Section 8.11. Termination. Prior to the delivery of any securities
secured hereby, this Lease may be terminated immediately by the Authority and/or
Building Corp., should any of the following events occur:
(a) there exists any final nonappealable order or
adjudication which declares the Lease or the Master Lease or any of its
terms and conditions invalid or which enjoins the performance of any
of the terms and conditions of the Lease or the Master Lease;
(b) the Authority shall have failed to authorize agreements
to require completion of the aeronautical and land side projects
required to be completed by the Authority under Paragraph 2 and 3 of
the Memorandum of Understanding between the Authority and Kitty Hawk
dated May 12, 1997; or
(c) the rental payments which are required under the Lease in
order to pay the principal and interest on the Bonds exceed the rental
payments set forth on Exhibit "A" to the Lease.
Section 8.12. Covenant to Comply with Tax Reform Act of 1986 and to
Restrict Use of Funds. If and to the extent such action is within the control of
the respective parties, the Authority and Kitty Hawk each covenant to restrict
the use of the proceeds realized under this Lease in such manner and to such
extent, if any, as may be necessary so that this Lease and any securities
including Bonds and participation certificates evidencing proportionate
interests in the payments to be made under this Lease will not constitute
arbitrage bonds under Section 148 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Authorized Kitty Hawk Representative and any officer
of the Authority, respectively, and any other appropriate officers shall each
give an appropriate certificate for inclusion in the transcript of proceedings
for the Lease, setting forth the reasonable expectations of Kitty Hawk and the
Authority, respectively, regarding the amount and use of all the proceeds of the
Lease, the facts, circumstances and estimates on which they are based, and other
facts and circumstances relevant to the tax treatment of the interest component
of payments under the Lease.
Kitty Hawk and the Authority each covenant that each of them (a) will
take or cause to be taken such actions as the Authority or Bond counsel shall
instruct which may be required of it for the interest component of payments
under the Lease to be and remain excluded from gross income for federal income
tax purposes, and (b) will not take or permit to be taken any actions as the
Authority or Bond counsel shall instruct which would adversely affect that
exclusion, and that the Authority, or persons acting for it, will, and to the
extent such actions are within its control, Kitty Hawk will, among other acts of
compliance, (i) apply the proceeds of the Lease to the governmental purpose of
the Lease, (ii) restrict the yield on investment property acquired with those
proceeds, (iii) make timely rebate payments to the federal government, (iv)
maintain books and records and make calculations and reports, and (v) refrain
from certain uses of proceeds, all in such manner and to the extent necessary to
assure such exclusion of that interest under the Code. The Authorized Kitty Hawk
Representative and any officer of the Authority, respectively, and other
appropriate officers are each hereby authorized and directed to take any and all
actions, make calculations and rebate payments, and make or give reports and
certifications, as may be appropriate to assure such exclusion of the interest
component of payments under the Lease.
Section 8.13. Covenant to Supply Financial Information. Kitty Hawk
hereby covenants to provide annually, within ninety (90) days of the close of
each calendar year during the Lease Term, and when requested in a timely manner,
to the Authority, or its assigns, annual financial data, including all tax and
other income, receipts and disbursements, budgets, collections and
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delinquencies, and amortization schedules of all bond or lease transactions, and
to advise of all matters, actions or causes of action to which Kitty Hawk may or
has become obligated and all other pertinent information and changes thereto
relative to the financial condition of Kitty Hawk and its continuing ability to.
make the Rental Payments due and payable under this Lease. As a condition for
obtaining Kitty Hawk's financial information, the Authority agrees that such
information is proprietary to Kitty Hawk and that the Authority shall not
disclose such information to third parties.
Section 8.14. Tax Covenants. Kitty Hawk hereby makes an irrevocable
election not to claim depreciation or an investment tax credit with respect to
the Special Facilities in accordance with Section 142(b)(1)(B)(i) of the
Code, such that the Bonds shall qualify under Section 142(a)(1) of the Code.
ARTICLE IX
Kitty Hawk shall have the right to approve any releases of the Leased
Premises under Article IX of the Master Lease.
ARTICLE X
ASSIGNMENT, AMENDMENT AND SUBLEASING
Section 10.1. Assignment and Subleasing by Kitty Hawk.
(a) Kitty Hawk may assign the Building Lease and the Ground Lease (the
"Leases") or sublet all or any part of the Leased Premises to any subsidiary of
Kitty Hawk without the consent of the Authority.
(b) Kitty Hawk may sublet up to ten percent (10%) of the floor space of
the Leased Premises for a term not to exceed one (1) year without the consent of
the Authority.
(c) It is the intention of Kitty Hawk to permanently use the Leased
Premises for its presently existing air cargo hub. In the event, however, that
Kitty Hawk and all of its subsidiaries, and their successors and assigns, and
any transferee to whom Kitty Hawk transfers its scheduled air freight operations
(herein collectively called "Kitty Hawk"), should elect to permanently withdraw
from the business of conducting scheduled air freight operations within the
continental United States and no longer intend to operate an air cargo hub at
any location within the continental United States, then Kitty Hawk shall notify
the Authority within thirty (30) days of such determination (the "Notification
Date"). Kitty Hawk and the Authority thereupon agree to exert a good faith
effort to assign the Leases or sublease the Leased Premises to a scheduled air
freight operation or to another aeronautically related operation. In the event
that no such aeronautically related operation can be found, then no sooner than
two (2) years after the commencement date of Leases, or six (6) months from the
Notification Date, whichever event last occurs, the Leases may be assigned or
the Leased Premises may be subleased as a whole or in part by Kitty Hawk, or the
Leased Premises may be used by Kitty Hawk for any lawfully permitted commercial
use, so long as the use of the Leased Premises will not interfere with the
operation of the Fort Wayne International Airport, violate the terms and
conditions of. any applicable federal, state or local law, ordinance or
regulation.
(d) Notwithstanding the foregoing subparagraph (c), at any time after
the Notification Date, Kitty Hawk agrees to assign the Leases or to sublet the
Leased Premises to any assignee or sub-lessee designated by the Authority who
meets the following qualifications (a "Qualified Assignee")
i) Agrees to conduct an aeronautical related activity on the
Leased Premises;
ii) Agrees to assume and demonstrates a reasonable financial
capability to perform and discharge all of the obligations under the
Leases;
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iii) Makes a proposal to accept an assignment of the Leases or
a sublease of the Leases Premises which is not substantially less
advantageous than any financial proposal to accept an assignment of the
Leases or to sublet the Leased Premises than any other proposal
received by Kitty Hawk and communicated to the Authority; and
iv) Proposes an assignment of the Leases or a sublease of the
Leased Premises which is not in conflict with any then-existing
covenant, agreement or commitment of Kitty Hawk.
In order to induce the acceptance of a Qualified Assignee, the
Authority agrees to reduce the obligations of Kitty Hawk for the payment of
Rent, and Additional Payments due by Kitty Hawk under Article III of the
Building Lease to an amount equal to the actual Rent and Additional Payments
which are assumed and agreed to be paid by the Qualified Lessee under the terms
and conditions of the proposed Assignment or Sublease.
(e) Other than as permitted in subparagraphs (a), (b), (c), or (d) the
Leases may be assigned in whole or in part, and the Leased Premises may be
subleased as a whole or in part by Kitty Hawk or such subsidiary of Kitty
Hawk(1) only with the prior written consent of the Authority and Building Corp.,
which consent will not be unreasonably withheld.
(f) Other than to the extent specified in subparagraph (d) the
assignment or sublease of all or any part of the Leased Premises, or the use of
the Leased Premises for any lawfully permitted commercial use, the consent by
the Authority and Building Corp. to the assignment or sublease, or the
acceptance of an assignee or subtenant shall not release Kitty Hawk from the
further performance by Kitty Hawk of the covenants of the Leases or be construed
to relieve Kitty Hawk from obtaining the consent, in writing, of the Authority
and Building Corp. to any further assignment or subletting and Kitty Hawk shall
remain primarily liable on this Lease for the entire term hereof and shall not
be released from the full and complete performance of all of the terms,
conditions and agreements herein contained.
Section 10.2. Assignment and Mortgaging by the Authority and Building
Corp. For the purposes of constructing, erecting and equipping the Project or
the financing thereof, the Authority and Building Corp. may mortgage the Leased
Premises and assign its rights under and interest in, and pledge any moneys
receivable under or pursuant to, this Lease and the Master Lease, respectively,
but each such mortgage, assignment or pledge shall be subordinate and subject to
this Lease.
Section 10.3. Covenants to Bind Successors. Notwithstanding Section
10.1 and 10.2 of this Lease, all successors and assigns of either Kitty Hawk or
the Authority shall be bound by all covenants and representations of Kitty Hawk
or the Authority, respectively, herein contained and, without limiting the
generality of the foregoing, including particularly those contained in Section
8.12 hereof.
Section 10.4. Amendment. In order to construct, erect or equip
additions to or renovations of the Leased Premises ("Improvements"), Kitty Hawk
and the Authority may enter into one or more amendments to the Lease
("Amendment"). Any such Amendment shall be effective only upon delivery to the
Trustee of the following:
(a) an original counterpart of the Amendment fully executed by
the Authority and Kitty Hawk.
(b) an opinion of counsel acceptable to the Trustee (who may
be Counsel to the Authority) that the Lease and the Amendment will each
be valid and binding upon the parties thereto following delivery
thereof.
(c) an opinion of counsel acceptable to the Trustee that the
Amendment will not affect the tax exempt status of any outstanding
bonds.
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(d) authorization and approval by all requisite governmental
agencies of the plans and specifications of such improvements to the
Leased Premises; approval of the legal of ad valorem taxes (pursuant to
the Act) in any amount necessary by the State Tax Control Board or its
successors to make any payments of Rent required pursuant to the Lease
and the Amendment.
(e) evidence of the authority of the respective officers of
Kitty Hawk and the Authority who execute such Amendment.
In such event, the parties shall include revisions to each of the
Exhibits of the Lease providing for revised Rent schedules, Purposes, and Leased
Premises. The supplemental trust indenture authorizing securities pursuant to
said Amendment to raise funds for financing such Improvements shall provide that
any Rent Payments due under the Lease as in effect prior to the delivery of the
Amendment are not available for payment of any such securities or the interest
thereon prior to the delivery of the Authority's Certificate pursuant to Section
4.3 hereof.
ARTICLE XI
RIGHT OF CANCELLATION
After the expiration of the initial twenty (20) years of the Lease Term
and so long as Kitty Hawk is not in default under the terms of the Ground Lease,
the Building Lease, the Operating Agreement, or the Airport Use and Lease
Agreement, Kitty Hawk shall have a one time only right to terminate the Ground
Lease, the Building Lease, and the Operating Agreement upon one hundred eighty
(180) days written notice to the Airport Authority. No such termination shall,
however, be effective unless and until the Bonds shall have been paid in full.
ARTICLE XII
EVENTS OF DEFAULT AND REMEDIES
Section 2.1. Events of Default by Kitty Hawk. The following shall be
"events of default" by Kitty Hawk under this Lease and the terms "events of
default" or "default" shall mean, whenever they are used in this Lease, any one
or more of the following events:
(a) Failure by Kitty Hawk to pay the Rent required to be
paid hereunder on or prior to the Rental Payment Date and continuing
for the Rent Cure Period except as provided in Section 6.4 hereto.
(b) Failure by Kitty Hawk to observe and perform any
covenant, condition or agreement on its part to be observed or
performed under this Lease, other than as referred to in paragraph (a)
of this Section, for a period of sixty days after notice of such
failure requesting such failure to be remedied, given to Kitty Hawk by
the Authority unless the Authority shall agree in writing to an
extension of such time prior to its expiration; provided, however, that
if and so long as Kitty Hawk is proceeding with due diligence to cure
the default such period shall be extended to such period as is required
to permit Kitty Hawk's proceeding with due diligence to cure such
default.
The provisions of paragraph (b) of this Section are subject to the following
limitations: If by reason of acts of God; fires; epidemics; landslides; floods;
strikes; lockouts or other industrial disturbances; acts of public enemies; acts
or orders of any kind of any governmental authority; insurrections; riots; civil
disturbances; explosions; Kitty Hawk is unable in whole or in part to carry Out
the agreements on its part herein contained, other than the obligations on the
part of Kitty Hawk to pay Rent, Additional Payments and taxes and to carry
insurance, Kitty Hawk shall not be deemed in default
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during the continuance of such inability. Kitty Hawk shall, however, use its
best efforts to remedy with all reasonable dispatch the cause or causes
preventing Kitty Hawk from carrying out its agreements; provided, that Kitty
Hawk shall in no event be required to settle strikes, lockouts or other
disturbances be acceding to the demands of the opposing party or parties when
such course is, in the judgment of Kitty Hawk, unfavorable to Kitty Hawk.
Section 12.2 Events of Default by the Authority. The following shall be
"events of default" by the Authority under this Lease, and the term "events of
default" or "default" shall mean, wherever they are used in this Lease, any one
or more of the following events:
(a) The FAA or other proper Federal Agency shall withdraw
its approval from the Airport and restrict the use of the Airport in
such a manner as to prevent the use of same by Kitty Hawk for its
business operations.
(b) An order is issued by any court of competent
jurisdiction restricting the use of the Airport in such a manner as to
prevent the use of same by Kitty Hawk for its business operations.
(c) The airfield shall be closed by lawful authority
restricting the use of the Airport in such a manner as to prevent the
use of the same by Kitty Hawk for its business operations hereunder.
(d) If a court of competent jurisdiction issues an
injunction against the Authority or any successor body to the Authority
preventing or restraining the use of the Airport in its entirety or of
any part of the Airport substantially necessary to Kitty Hawk for its
operations, and if such injunction remains in force for at least ninety
(90) days.
(e) If the Authority fails to provide and maintain
reasonable means for ingress and egress to and from the Leased Premises
in accordance with the provisions of this Agreement or fails to fulfill
its obligations under Section 8.8 in respect of Kitty Hawk's right of
quiet enjoyment granted thereby.
(f) If by reason of any willful act, willful omission
wrongfully done or wrongfully omitted to be done in violation of this
Agreement, the Authority prevents the use of the Leased Premises for
the purposes for which the use thereof is authorized by this Agreement.
Section 12.3. Remedies of the Authority on Default. Whenever any event
of default under Section 12.1 of this Lease shall have happened and be
subsisting, any one or more of the following remedial steps may be taken:
(a) The Authority may reenter and take possession of the
Leased Premises without terminating this Lease, sublease the Leased
Premises for the account of Kitty Hawk, holding Kitty Hawk liable for
costs, if any, not reimbursed to the Authority from the difference
between the rent and other amount payable by such subleasing in such
subleasing and the Rent, Additional Payments and other amount payable
by Kitty Hawk hereunder.
20
<PAGE> 21
(b) The Authority may terminate this Lease, exclude Kitty Hawk
from possession of the Leased Premises, and lease the Leased Premises
to another, but holding Kitty Hawk liable for costs, if any, not
reimbursed to the Authority from the proceeds for all Rent and other
payments due up to the effective date of such leasing.
(c) The Authority may take whatever action at law or in equity
may appear necessary or desirable to collect the Rent and Additional
Payments then due and thereafter to become due, or to enforce
performance and observance of any obligation, agreement or covenant of
Kitty Hawk under this Lease.
Provided, however, if before the expiration of 120 days from the date
of which an event of default under Section 12.1 of this Lease shall have
happened, Kitty Hawk shall have cured the event of default and shall have paid
all surplus payable hereunder, (including all accrued unpaid Rent, Additional
Payments and any and all other costs and expenses incurred by the Authority as a
result of the event of default), then, (i) the Authority shall waive the event
of default and its consequences and shall rescind and annul that declaration,
(ii) the Lease, if it has been terminated pursuant to subparagraph (b) above
shall be reinstated, and (iii) Kitty Hawk shall be restored to the use,
occupancy and possession of the Lease Premises.
Notwithstanding anything contained in this Section 12.2 to the
contrary, all subleases or alternate lessees shall be bound by all covenants and
representations of Kitty Hawk herein contained and, without limiting the
generality of the foregoing, including particularly those contained in Section
8.12 hereof.
Section 12.4 Remedies of Kitty Hawk on Default. Whenever any event of
default under Section 12.2 of this Lease shall have happened or be subsisting,
any one or more of the following remedial steps may be taken:
(a) Kitty Hawk may terminate this Lease.
(b) Kitty Hawk may take whatever action at law or in equity
may appear necessary or desirable to pursue in order to enforce
performance and observance of any obligation, agreement or covenant of
the Authority under this Lease.
Provided, however, if before the expiration of 60 days from the date of
which an event of default under Section 12.2 of this Lease shall have happened,
the Authority shall have cured the event of default, then: (i) Kitty Hawk shall
waive the event of default and its consequence and shall rescind and annul that
declaration, (ii) the Lease, if it has been terminated pursuant to Subparagraph
(a) above, shall be reinstated, and (iii) the Lease shall continue in full force
and effect.
Section 12.5. No Remedy Exclusive. No remedy conferred upon or reserved
to the Authority or Kitty Hawk by this Lease is intended to be exclusive of any
other available remedy or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this Lease
or now and hereafter existing at law or in equity or by statute. No delay or
omission to exercise any right or power accruing upon any default shall impair
any such right or power or shall be construed to be a waiver thereof, but any
such right and power may be exercised from time to time and as often as may be
deemed expedient. In order to entitle the Authority or Kitty Hawk to exercise
any remedy reserved to it in this Article, it shall not be necessary to give any
notice other than such notice as may be expressly required herein.
Section 12.6. Agreement to Pay Attorneys' Fees and Expenses. In the
event Kitty Hawk or the Authority should default under any of the provisions of
this Lease and the Authority or Kitty Hawk should employ attorneys or incur
other expenses for the collection of Rent or the enforcement of performance or
observance of any obligation or agreement on the part of Kitty Hawk or the
Authority contained in this Lease, Kitty Hawk or the Authority shall on demand
thereof or reimburse the reasonable fees of such attorneys and such other
expenses so incurred.
21
<PAGE> 22
Section 12.7. No Additional Waiver Implied by One Waiver. In the event
any agreement contained in this Lease should be breached by either party, and
thereafter waived by the other party, such waiver shall be limited to the
particular breach so waived and shall not be deemed to waive any other breach
hereunder.
Section 12.8. Waiver of Appraisement. Valuation, Etc. In the event
Kitty Hawk or the Authority should default under any of the provisions of this
Lease, Kitty Hawk or the Authority agrees to waive the benefit of all
appraisement, valuation, stay, extension or redemption laws now or hereafter in
force, and all right of appraisement and redemption to which it may be entitled.
Section 12.9. Reinstatement. Notwithstanding any termination of this
Lease in accordance with the provisions of Section 12.2 hereof, unless and until
the Authority shall have entered into a valid and binding agreement providing
for the reletting of the Leased Premises, Kitty Hawk may at any time after such
termination pay all accrued unpaid Rent plus any costs to the Authority and
fully cure all other defaults then capable of being cured. Upon such payment and
cure, this Lease shall be fully reinstated, as if it had never been terminated,
and Kitty Hawk shall be restored to the use, occupancy and possession of the
Leased Premises.
Section 12.10. Settlement of Disputes. In the event of any dispute
between Kitty Hawk and the Authority with respect to the terms and conditions of
this Building Lease, Kitty Hawk and the Authority shall first appoint a single
representative of each to attempt to reasonably negotiate a settlement of such
dispute and make recommendations with respect to such settlement to Kitty Hawk
and to the Authority Kitty Hawk and the Authority may, if they so desire, submit
such issue to mediation. In the event that such dispute continues to be
unsettled for a period of forty-five (45) days following the receipt of formal
notification by certified mail, return receipt requested, that a dispute subject
to arbitration exists, then both Kitty Hawk and the Authority shall appoint an
independent arbitrator, who shall appoint a third arbitrator, and the matters in
dispute shall be submitted to arbitration by this panel of arbitrators in
accordance with the commercial arbitration rules then existing by the American
Arbitration Association, whose determination, following the exhaustion of all
administrative and judicial appeals, shall become final, subject to appeal only
on the basis of collusion, fraud or manifest disregard for the law. The panel of
arbitrator shall have the authority to enter equitable and legal orders and
interim and final orders. Such arbitration shall occur in Allen County, Indiana,
and shall be binding upon the parties, their representatives and assigns,
provided that all parties shall be obliged to observe and comply with all the
terms of the Ground Lease, the Building Lease and the Operating Agreement,
including the obligation to make all rental payments and other payments, until
the arbitration process has been completed and becomes binding on all of the
parties.
Notwithstanding the foregoing, no arbitration decision shall affect
Kitty Hawk's obligation to pay rent or make other payments to Landlord required
by the terms of this Lease.
ARTICLE XIII MISCELLANEOUS
Section 13.1. Surrender of Leased Premises. In the event Kitty Hawk
should default under this Lease and this Lease is terminated or if this Lease is
terminated by the Authority pursuant to Section 8.9 hereof, Kitty Hawk agrees to
surrender, subject to reinstatement pursuant to Section 12.7 of this Lease,
possession of the Leased Premises peaceably and promptly to the Authority in as
good condition as prevailed at the time Kitty Hawk was put in full possession
thereof, loss by fire and other casualty covered by insurance or by eminent
domain, ordinary wear and tear, obsolescence and acts of God excepted.
Section 13.2. Notices. All notices, certificates, requests or other
communications hereunder shall be sufficiently given and shall be deemed given
when mailed by registered or certified mail, postage prepaid, addressed to the
appropriate Notice Address return receipt requested. The Authority, the Building
Corp. and Kitty Hawk may, by notice given hereunder, designate any
22
<PAGE> 23
further and different addresses to which subsequent notices, certificates,
requests or other communications shall be sent.
Section 13.3. Net Lease. This Lease shall be deemed and construed to be
a "net lease," and Kitty Hawk shall pay absolutely net during the Lease Term the
Rent, Additional Payments and all other payments required hereunder, free of any
deductions, and without abatement, deduction or setoff other than those herein
expressly provided.
Section 13.4. ______________ This Lease shall be a firm and binding
agreement between the Authority and Kitty Hawk and shall be non-applicable. This
Lease shall inure to the benefit of and shall be binding upon the Authority,
Kitty Hawk and their respective successors and assigns, subject, however, to the
specific provisions hereof.
Section 13.5. Execution in Counterparts. This Lease may be executed in
several counterparts, each of which shall be regarded as an original and all of
which shall constitute but one and the same Lease.
Section 13.6. Construction of Covenants. The Authority has corporate
power as required for the purpose of causing the Project to be constructed and
erected and leasing the same to Kitty Hawk under the provisions of the Act. All
provisions herein contained shall be construed in accordance with the provisions
of the Act and to the extent of inconsistencies, if any, between the covenants
and agreements in this Lease and the provisions of the Act, the provisions of
the Act shall be deemed to be controlling and binding upon the Authority and
Kitty Hawk.
Section 13.7. Severability. In case any section or provision of this
Lease, or any covenant, stipulation, obligation, agreement, act or action or
part thereof, made, assumed, entered into or taken thereunder or any application
thereof, is for any reason held to be illegal or invalid, such illegality or
invalidity shall not affect the remainder thereof or any other section or
provision thereof or any other covenant, stipulation, obligation, agreement, act
or action, or part thereof, made, assumed, entered into or taken thereunder,
which shall be construed and enforced as if such illegal or invalid portion were
not contained therein, nor shall such illegality or invalidity of any
application thereof affect any legal and valid application thereof, and each
such section, provision, covenant, stipulation, obligation, agreement, act or
action, or part thereof, shall be deemed to be effective, operative, made,
entered into or taken in the manner and to the full extent permitted by law.
Section 13.8. Letter Agreement. The terms of the Letter Agreement are
incorporated herein as if entirely rewritten in this Lease.
Section 13.9. Conditions. The captions or heading in this Lease are for
convenience only and in no way define, limit or describe the scope or intent of
any provisions or sections of this Lease.
Section 13.10 Landlord's Consent. In each case under this Lease in
which Authority's consent shall not be unreasonably withheld, Authority shall
notify Kitty Hawk of its decision within ninety (90) days if Kitty Hawk's
request is made under Section 10.1 hereunder, and within sixty (60) days if
Kitty Hawk's request is made under any other provision hereunder. Authority's
consent shall be deemed granted if Authority has not given written notice of its
refusal to grant such consent, setting forth with specificity the bases for such
refusal.
23
<PAGE> 24
IN WITNESS WHEREOF, the Authority and Kitty Hawk have caused this Lease
to be executed in their respective names by their duly authorized officers, all
as of the date hereinbefore written.
FORT WAYNE-ALLEN COUNTY AIRPORT
AUTHORITY
BY:
Daniel F. Weaver, President
Fort Wayne-Allen County
Airport Authority Board
ATTEST:
Keith R. Spitler
Assistant Secretary
KITTY HAWK, INC.
BY:
Chairman of the Board and
Chief Executive Officer
<PAGE> 25
STATE OF INDIANA )
)
COUNTY OF ALLEN )
Before me, a Notary Public in and for said County and State, personally
appeared DANIEL F. WEAVER and KEITH R. SPITLER, the President and Assistant
Secretary, respectively, of the Fort Wayne-Allen County Airport Authority Board,
who acknowledged the execution of the above and foregoing Building Lease, for
and on behalf of the Fort Wayne-Allen County Airport Authority.
WITNESS my hand and Notarial Seal this 13th day of April, 1998.
-------------------------------------
Thomas D. Logan, Notary Public
Residing in Allen County, Indiana
My Commission Expires:
Thomas D. Logan, Esquire
ROTHBERG & LOGAN
Suite 2100, 110 West Berry Street
Fort Wayne, Indiana 46802
<PAGE> 26
STATE OF )
)
COUNTY OF TEXAS )
Before me, a Notary Public in and for said County and State, personally
appeared M. TOM CHRISTOPHER, Chairman of the Board and Chief Executive Officer
of KITTY HAWK, INC., who acknowledged the execution of the above and foregoing
Building Lease, for and on behalf of said corporation.
WITNESS my hand and Notarial Seal this day of , 1999.
Notary Public
Residing in County, Texas
Thomas D. Logan, Esquire
ROTHBERG & LOGAN
Suite 2100, 110 West Berry Street
Fort Wayne, Indiana 46802
My Commission Expires:
<PAGE> 1
EXHIBIT 12.1
KITTY HAWK, INC.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR YEAR FOUR MONTHS
ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
----------- -------------------- -------------------
1996 1997 1998 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings
Income before income taxes..... $ 6,877 $ 30,803 $ 27,970 $ 7,851 $ 8,660
Add: Fixed charges ............ 1,998 8,971 47,654 528 730
-------- -------- -------- -------- --------
Total .................... $ 8,875 $ 39,774 $ 75,624 $ 8,379 $ 9,390
======== ======== ======== ======== ========
Fixed charges
Interest expense .............. $ 1,859 $ 7,495 $ 40,004 $ 482 $ 684
Add: Interest factor of
operating lease expense ..... 139 1,476 4,250 46 46
Capitalized interest .......... -- -- 3,400 -- --
-------- -------- -------- -------- --------
Total .................... $ 1,998 $ 8,971 $ 47,654 $ 528 $ 730
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges .......................... 4.4x 4.4x 1.6x 15.9x 12.9x
======== ======== ======== ======== ========
</TABLE>
<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, in the Registration Statement
(Form S-8 No. 333-23597) pertaining to the Kitty Hawk, Inc. Amended and Restated
Omnibus Securities Plan and in the Registration Statement (Form S-8 No.
333-28553) pertaining to the Kitty Hawk, Inc. Amended and Restated Employee
Stock Purchase Plan of our report dated March 26, 1999, with respect to the
consolidated financial statements of Kitty Hawk, Inc. included in this Annual
Report on Form 10-K for the year ended December 31, 1998.
/s/ ERNST & YOUNG
Dallas, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,041
<SECURITIES> 0
<RECEIVABLES> 140,014
<ALLOWANCES> 0
<INVENTORY> 50,135
<CURRENT-ASSETS> 246,149
<PP&E> 801,999
<DEPRECIATION> 81,191
<TOTAL-ASSETS> 982,585
<CURRENT-LIABILITIES> 201,191
<BONDS> 0
0
0
<COMMON> 169
<OTHER-SE> 194,028
<TOTAL-LIABILITY-AND-EQUITY> 982,582
<SALES> 714,937
<TOTAL-REVENUES> 714,937
<CGS> 598,797
<TOTAL-COSTS> 598,797
<OTHER-EXPENSES> 2,797
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,004
<INCOME-PRETAX> 27,970
<INCOME-TAX> 11,328
<INCOME-CONTINUING> 16,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,642
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
</TABLE>
