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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 AUGUST 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25202
KITTY HAWK, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2564006
(State of Incorporation) (I.R.S. Employer
Identification No.)
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 [ ] No [x]
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 November 1, 1996, the aggregate market price of the voting stock held by
nonaffiliates of the registrant was approximately $36.2 million. (For purposes
of determination of the above stated amount, only directors, executive officers
and 10% or greater stockholders have been deemed affiliates).
On November 22, 1996, there were 10,450,000 outstanding shares of Common Stock,
par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
GENERAL
Kitty Hawk provides air freight charter services in the United States,
emphasizing highly-reliable, time- sensitive services. The Company's air
freight carrier owns 25 aircraft, 18 of which are currently used in scheduled
airport-to-airport freight service under contracts primarily with major freight
forwarders in North and Central America, the Pacific Rim and Europe. These
contracts generally require the Company to supply aircraft, crew, maintenance,
and insurance ("ACMI") and to meet certain on-time performance standards, while
its customers are responsible for substantially all other operating expenses,
including fuel. Additionally, Kitty Hawk provides same-day air logistics
charter services in North America. Through its advanced, proprietary computer
software, the Company manages delivery of extremely time-sensitive freight
utilizing the on-demand charter services of both third-party air freight
carriers and planes from the Company's fleet that are not then committed to ACMI
service. The Company's principal executive offices are located at 1515 West
20th Street, P.O. Box 612787, Dallas/Fort Worth International Airport, Texas
75261, its telephone number is (972) 456-2200 and its Internet address is
http://www.kha.com. Unless the context otherwise requires, the "Company" or
"Kitty Hawk" refers to Kitty Hawk, Inc., its predecessor and its subsidiaries.
AIR FREIGHT CARRIER
General
Kitty Hawk has owned and operated aircraft for on-demand air freight
charter services since 1985. In 1987, the Company's air freight carrier was
expanded to include ACMI contract charter service. Pursuant to ACMI contracts,
the Company's air freight carrier provides scheduled charters carrying
heavy-weight freight and mail for entities that engage primarily in next-day
and two-day delivery service to their customers.
Revenue Fleet
The Company owns and operates 23 aircraft in revenue service. In
addition, the Company owns one additional aircraft that it expects to place into
revenue service prior to January 1997. These aircraft do not include (i) two
Boeing 727-200 aircraft the Company recently entered into an agreement to
purchase from Intrepid Aviation Partners, LLC, (ii) one Boeing 727-200 aircraft
the Company recently entered into an agreement to purchase from International
Aero Components, Inc., (iii) one Boeing 727-200F aircraft the Company recently
entered into an agreement to purchase from International Technical Consultants,
Inc., and (iv) the Company's undivided one-third interest in four Falcon 20 jet
aircraft leased to a third-party operator. See "Item 1. Business --
Acquisition Program" and "Item 11. Executive Compensation -- Compensation
Committee Interlocks and Insider Participation."
ACMI Contracts
As an FAA Part 121 certificated carrier, the Company's air freight
carrier provides primary lift capacity as well as additional lift capacity for
overflow and seasonal freight transportation needs on an ACMI contract basis.
During fiscal year 1996, ACMI contracts accounted for approximately 21.1% of
the Company's total revenues.
As of November 22, 1996, Kitty Hawk was operating eight Boeing
727-200Fs, seven Convairs and three Douglas DC-9-15Fs under ACMI contracts
with Burlington Air Express, Inc., Ting Hong Oceanic Enterprises Co., Ltd.,
Pacific East Asia Cargo Airlines, Inc., DHL Airways, Inc., Emery Worldwide
Airlines, Inc., and Pan Air Lineas, S.A.
The Company's ACMI contracts typically require the Company to supply
aircraft, crew, maintenance, and insurance, while its customers are responsible
for substantially all other aircraft operating expenses, including fuel, fuel
servicing, airport freight handling fees, landing and parking fees, ground
handling expenses, and aircraft push-back costs. These ACMI contracts also
typically require the Company to operate specific aircraft and/or provide
minimum air freight capacity, and generally are terminable if the Company (i)
fails to meet certain minimum performance levels, (ii) otherwise breaches the
contract, or (iii) becomes subject to other customary events of default. The
ACMI contracts also provide that the Company has exclusive operating control
and direction of each aircraft the Company operates and that certain
foreign-based customers must obtain any government authorizations and permits
required to service the designated routes. Therefore, the Company's route
structure is limited to areas in which customers gain access from the relevant
governments. The Company is permitted under its ACMI Contracts to utilize,
and, in fact often does utilize, its aircraft in on-demand service in the
periods between ACMI contract flights.
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Burlington Air Express, Inc.
Burlington Air Express, Inc. ("Burlington") currently leases under one
ACMI contract five of the Company's Boeing 727-200Fs and under a separate ACMI
contract two of the Company's Convairs and one of the Company's Douglas DC-9-
15Fs. Under each contract, Burlington pays the Company a fixed fee for each
scheduled round-trip flown by the Company and a per hour charge for any
non-scheduled flight requested by Burlington.
The Burlington Boeing 727-200F ACMI contract is for a term expiring on
March 1, 1999, but pursuant to the terms of the contract, either party may upon
thirty days' written notice terminate the services of one Boeing 727-200F
aircraft immediately and one additional Boeing 727-200F aircraft on or after
each of March 1, 1997, March 1, 1998 and September 1, 1998. In addition,
Burlington may earlier terminate the contract if, among other reasons, the
Company fails to meet certain performance standards or if majority ownership or
control of the Company is acquired by a competitor of Burlington. The Company
operates two Convairs and one Douglas DC-9-15F on behalf of Burlington pursuant
to a contract between the parties on terms substantially similar to those set
forth in the Boeing 727-200F ACMI contract between the parties.
On-Demand Charter Service
The air freight carrier provides on-demand charter service for
customers of the Company's air logistics business. Approximately 7.1%, 8.7%,
and 9.0% of the on-demand charters managed by the Company during fiscal years
1994, 1995, and 1996, respectively, were flown by the air freight carrier.
These charters were flown mostly for GM. The Company also has flown its own
aircraft on certain of the seasonal charters it has managed for the U.S. Postal
Service.
Maintenance
The Company's aircraft require considerable maintenance in order to
remain in compliance with FAA regulations. The Company estimates that at
current rates of operation of its existing fleet, during the fiscal year 1997,
the next scheduled major overhaul maintenance checks for six Boeing 727-200Fs
will be completed and, during the fiscal year 1998, one will be completed. The
Company does not anticipate any of its aircraft, at current rates of operation,
requiring major overhaul maintenance checks during fiscal year 1999. The
Company estimates that the service life of each of its revenue aircraft extends
beyond the year 2000. Kitty Hawk historically has followed, and currently
intends to follow, a policy of retiring Convairs at the time of their next
scheduled major overhaul maintenance checks rather than expending the amounts
necessary for such checks.
Any equipment being placed on the Company's operating certificate is
inspected and repaired prior to being utilized by the Company for either
on-demand or ACMI contract charters. The Company's maintenance facilities
enable it to perform all required airframe maintenance and minor engine repairs
on the aircraft ranging from overnight "turnaround" checks to major airframe
overhauls. The Company performs all maintenance for its fleet, including line
maintenance, at its own maintenance facilities, except for repairs to avionics
and overhauls of engines and airframes. All contract maintenance is performed
by subcontracted FAA-approved maintenance facilities under the on-site
supervision and/or inspection of Company quality assurance personnel.
Management currently anticipates no difficulties in acquiring needed parts.
Acquisition Program
Kitty Hawk has embarked on a program of selective aircraft
acquisitions. In October 1996, the Company sold 2,700,000 shares of Common
Stock (the "Offering") raising net proceeds of approximately $30.1 million to
purchase and modify to cargo configuration five Boeing 727-200 aircraft.
Currently, the Company has entered into agreements to purchase four of these
five aircraft. Any jet aircraft not in use on an ACMI contract charter route
may be employed in on-demand service.
In September 1996, the Company entered into an agreement to purchase
from Intrepid Aviation Partners, LLC for an aggregate purchase price of $7.0
million two Boeing 727-200 aircraft, which aircraft represent two of the five
Boeing 727-200 aircraft the Company intends to purchase with the net proceeds
of the Offering. Both aircraft are currently utilized in passenger service
and the Company intends to commence noise suppression and cargo conversion
modifications
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immediately upon their delivery. Subject to fulfillment of customary final
inspections and closing conditions, both aircraft are to be delivered in
January 1997.
In November 1996, the Company entered into an agreement to purchase
from International Aero Components, Inc. for an aggregate purchase price of
$675,000 one Boeing 727-200 aircraft, which represents one of the five Boeing
727-200 aircraft the Company intends to purchase with the net proceeds of the
Offering. The purchase price does not include three P&W JT8D-7B aircraft
engines. The Company intends to commence cargo conversion modifications
immediately upon its delivery. Subject to fulfillment of customary final
inspections and closing conditions, this aircraft is to be delivered by the end
of November 1996.
In November 1996, the Company entered into an agreement to purchase
from International Technical Consultants, Inc., for an aggregate purchase price
of $4.7 million, one Boeing 727-200F aircraft, which also represents one of the
five Boeing 727-200 aircraft the Company intends to purchase with the net
proceeds of the Offering. Subject to fulfillment of customary final
inspections and closing conditions, this aircraft is to be delivered by the end
of November 1996.
The Company recently acquired an undivided one-third interest in
four Falcon 20 jet aircraft and pursuant to a co-ownership agreement leases
such aircraft to a third-party operator for cargo charter service. See
"Item 11. Executive Compensation -- Compensation Committee Interlocks and
Insider Participation."
AIR LOGISTICS
General
On-demand air charters of heavy-weight freight generally are used when
"next-flight-out" delivery services of commercial airlines or the next-day
delivery services of air freight companies or other service providers cannot
meet the customer's delivery deadline. Utilizing a proprietary computerized
database, the Company's air logistics services involve coordinating
"door-to-door" transportation by arranging for ground pick-up, loading, air
transportation, unloading, and ground delivery of the freight. The most
frequent use of on-demand charters is to deliver manufacturing or replacement
parts to avoid a work stoppage. Manufacturers who employ the "just-in-time"
methodology encourage the order and delivery of inventory just before it is
needed at the assembly plant. On-demand charters also are used to transport
replacement parts on an expedited basis so that critical equipment can be kept
operational or put back in service to avoid or minimize the length of a
shut-down. Firms that are reducing inventory and shortening product cycle
times through direct air shipments also use on-demand charters.
The customers of the Company's on-demand air logistics services
include companies that are engaged in industries such as automotive, chemical,
computer, mail and bulk package delivery, retail merchandising, and oil field
service and equipment. Typically, the premium costs incurred in utilizing
on-demand charters to achieve expedited same-day delivery are justified by the
Company's customers on the basis that greater costs would otherwise be incurred
as a result of a work stoppage or having to maintain greater inventory levels.
A significant portion of all on-demand, same-day air freight charters in North
America is accounted for by the automotive industry. The importance of the
automotive industry to on-demand air charters reflects the large number of
automobile parts, the complexity of an automotive manufacturer's supplier and
assembly plant network, and the high cost of shutting down production
facilities. Kitty Hawk believes that "just-in-time" inventory systems have
increased the use of on-demand air charters by the automotive industry and that
on-demand air charters are an integral cost of such "just-in-time" inventory
management systems. Because automotive manufacturers generally carry less
inventory than in the past, unanticipated parts shortages may occur more
frequently.
Delivery of Logistics Services
For fiscal year 1996, Kitty Hawk arranged an average of approximately
44 on-demand charters per day. Each transaction originates from a customer's
telephonic request to arrange a charter answered by one of the Company's 16
full-time account managers who are on duty 24 hours per day, 365 days per year.
The Company believes it provides dependable service on a cost-effective basis
because of its computerized database, information software, and tracking
systems, its training of account managers, and its standardized charter
management procedures.
Database, Information Software, and Tracking Systems
Database System. Kitty Hawk believes that its database is critical to
its ability to arrange on-demand air charters in a timely and reliable manner.
The Company maintains in its database a carrier profile for over 500 air
freight carriers that provide on-demand charter service. The Company has
developed and is testing an Internet system to provide its account managers
with real-time updates on available third party on-demand air charter aircraft
across North America. The most utilized carriers are visited by Company
representatives at least annually to inspect the carrier's facilities and
equipment and to update the carrier database. The database also contains
information concerning ground transportation and aircraft loading companies in
North America that is similar to its information concerning air carriers.
Information Software System. The Company's logistics system was
developed in 1990 to automate access to the Company's database and has been
frequently revised and improved. This system provides on-screen information
regarding air carriers, aircraft type and specifications, fuel suppliers, cargo
handlers, and surface carriers, along with relevant cost information. In
addition, Kitty Hawk is an on-line subscriber to Jeppesen's Flight Planning and
Kavouras Meteorological services. The flight planning services provided by
Jeppesen integrate airport analyses (comprised of runway lengths, altitudes,
hours of operation and noise abatement procedures) with the current weather
data and other information to
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provide an automated flight plan. This flight planning service then transmits
electronically the automated flight plan to the pilot and to the FAA
contemporaneously.
Tracking System. In December 1993, the Company began operation of its
HawkEye system, which was developed internally by its full time programming and
computer support staff. HawkEye allows account managers to track an aircraft's
progress from origin to destination on his or her computer screen and on the
main projection board of the control room. Aircraft icons show each flight,
its direction, and information about the flight including the type of aircraft,
the flight number, its current altitude, ground speed, distance to destination,
and times of departure and estimated arrival. The data supporting the HawkEye
System is a direct data feed obtained from the FAA's Air Traffic Control
computer system.
U. S. Postal Service
Of the Company's total revenues in fiscal year 1996, the U.S. Postal
Service accounted for $21.3 million (14.9%). Of these revenues, $19.7 million
(92.5%) were attributable to the Company's air logistics business in connection
with its management of seasonal Christmas charters flown by third-party air
cargo carriers, and $1.6 million (7.5%) were attributable to the air freight
carrier for ACMI contract charters flown by the Company on designated routes.
Of the Company's gross profits from air logistics in fiscal year 1996, the U.S.
Postal Service accounted for $3.8 million (40.6%).
Since 1986, Kitty Hawk has managed Christmas season charters for the
U.S. Postal Service utilizing third-party air freight carriers in order to
provide additional lift capacity for this peak period. Of the Company's total
revenues for fiscal year 1996, these Christmas season managed charters
accounted for $19.7 million (13.8%). The U.S. Postal Service awards contracts
periodically pursuant to a public bidding process that considers quality of
service and other factors. Bids for contracts to provide these Christmas
season charters generally are submitted in the summer of each year and are
typically awarded during the following fall. The Company recently was awarded
a contract with the U.S. Postal Service for the 1996 Christmas season peak
mailing period.
Relationship With GM
Under the terms of its agreement with GM (the "GM Agreement"), the
Company's air logistics business is encouraged to utilize the air freight
carrier but is prohibited from (i) placing with the Company's air freight
carrier in excess of 30% of the total number of air charters arranged for GM in
any calendar year and (ii) placing with the Company's air freight carrier
charters producing revenue in excess of 30% of the total revenue derived from
air charters arranged for GM in any calendar year. In fiscal year 1996, the
Company's air freight carrier flew 885 on-demand charters (or 8.7% of total
charters arranged for GM by the Company's air logistics business) resulting in
$11.8 million of revenues to the Company (or 20.2% of the total revenues
derived by the Company from GM). The GM Agreement does not provide for
automatic fuel price adjustments.
The term of the GM Agreement extends through May 1997 and thereafter
from month-to-month until terminated by thirty days' written notice. The GM
Agreement, however, stipulates that in the event of an irreconcilable
difference, either party may, with or without cause, terminate the agreement
following a quarterly review meeting by giving the other party at least 30
days' prior written notice thereof. Furthermore, GM may terminate the GM
Agreement on ten days' written notice if there is a change in (i) management of
Kitty Hawk Charters, Inc., the Company's wholly-owned subsidiary, through which
the Company's air logistics business is conducted, or (ii) the stock ownership
of the Company such that (a) Mr. Christopher no longer holds a majority of the
outstanding Common Stock of the Company or (b) a major automobile manufacturer
acquires more than 20% of the outstanding Common Stock of the Company, unless
such changes are communicated to GM at least 60 days prior to the effective
date and GM concurs with the changes.
Of the Company's total revenues in fiscal year 1996, GM accounted for
$58.4 million (41.0%). Of the revenues from GM, $46.6 million (79.8%) were
attributable to air logistics primarily in connection with on-demand charters
flown by third-party air cargo carriers, and $11.8 million (20.2%) were
attributable to on-demand charters flown by the Company's air freight carrier.
Of the Company's gross profits from air logistics in fiscal year 1996, GM
accounted for $3.5 million (37.3%). GM accounted for 61.1% of the total number
of on-demand charters that were flown by the air freight carrier in 1996. In
addition to GM, the Company believes approximately 16.3% of its total revenues
in fiscal year 1996 were generated from services provided to other participants
in the U.S. automotive industry, a substantial portion of which the Company
believes were GM suppliers.
SEASONALITY
Certain customers of the Company engage in seasonal businesses,
especially the U.S. Postal Service, GM, and other customers in the automotive
industry. As a result, Kitty Hawk's air logistics business has historically
experienced its highest quarterly revenues and profitability in its second
fiscal quarter due to the peak activity of the U.S. Postal
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Service during the Christmas season and in its first and fourth fiscal quarters
when production schedules of the automotive industry typically increase.
The following table reflects certain selected quarterly operating
results, which have not been audited or reviewed, for each quarter since the
fiscal quarter ended August 31, 1994. The information has been prepared on the
same basis as the audited Consolidated Financial Statements appearing elsewhere
in this Annual Report and includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the information
shown. The Company's results vary significantly from quarter to quarter and
the operating results for any quarter are not necessarily indicative of the
results that may be expected for any future period.
FISCAL QUARTER ENDED
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NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31,
1994 1995 1995 1995 1995 1996 1996 1996
----------- ----------- ------- --------- ----------- ---------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues $29,593 $31,743 $16,835 $25,539 $36,045 $48,577 $22,504 $35,289
Gross profit 5,210 6,290 2,310 4,368 5,936 8,190 3,265 6,124
Operating income loss 3,310 3,912 660 1,463 3,564 2,447 897 2,126
Net income (loss) 1,960 2,298 192 (34) 1,956 1,273 182 698
Net income (loss) per share $ 0.25 $ 0.29 $ 0.02 $(0.01) $ 0.25 $ 0.16 $ 0.02 $ 0.09
EMPLOYEES
At August 31, 1996, Kitty Hawk employed approximately 295 full-time
personnel, of which 49 were involved in sales and administrative functions and
246 in maintenance and flight operations (including 136 pilots). The Company
is not party to any collective bargaining agreements.
GOVERNMENT REGULATION
The Company's air freight carrier is subject to Title 49 of the United
States Code (formerly the Federal Aviation Act of 1958, as amended), under
which the DOT and the FAA exercise regulatory authority over air carriers. The
DOT is primarily responsible for regulating economic issues affecting air
service, including, among other things, air carrier certification and fitness,
insurance, consumer protection, unfair methods of competition, and
transportation of hazardous materials. The FAA is primarily responsible for
regulating air safety and flight operations, including, among other things,
airworthiness requirements for each type of aircraft the Company's air freight
carrier operates, pilot and crew certification, aircraft maintenance and
operational standards, noise abatement, airport slots, and other safety- related
factors. In addition, the Company's air freight carrier is subject to
regulation by various other federal, state, local and foreign authorities,
including the Department of Defense and the Environmental Protection Agency.
The Company's operations are subject to routine, and periodically more
intensive, inspections and oversight by the FAA. Following a review of safety
procedures at ValuJet, Inc., the FAA adopted changes to the FAA's and air
carriers' oversight of contract maintenance and training procedures. The Company
believes it is currently in compliance with such changes.
The FAA has proposed amendments to its flight and rest time
regulations which, if adopted as proposed, could restrict the ability of the
Company to respond to a shipper's request for same day delivery and/or would
require the Company to hire and train additional qualified pilots to perform
the Company's flight operations.
The adoption of new laws, policies, or regulations or changes in the
interpretation or application of existing laws, policies, or regulations,
whether by the FAA, the DOT, the United States government, or any foreign,
state, or local government, could have a material adverse impact on Kitty Hawk
and its operations.
The Company's revenue fleet is comprised of nine Boeing 727-200F
aircraft manufactured between 1969 and 1978, five Douglas DC-9-15F aircraft
manufactured during 1967 and 1968, and nine turbo-prop Convairs manufactured
between 1948 and 1957. Manufacturer's Service Bulletins ("Service Bulletins")
and FAA Airworthiness Directives ("Directives") issued under the FAA's "Aging
Aircraft" program or issued on an ad hoc basis cause certain of these aircraft
to be subject to extensive aircraft examinations and require certain of these
aircraft to undergo structural inspections and modifications to address problems
of corrosion and structural fatigue at specified times. It is possible that
additional Service Bulletins or Directives applicable to the types of aircraft
included in the Company's fleet could be issued in the future. The cost of
compliance with such Directives and Service Bulletins cannot currently be
estimated, but could be substantial.
Airline operators must comply with FAA noise standard regulations
primarily promulgated under the Airport Noise and Capacity Act of 1990 (the
"Noise Regulations"). The Noise Regulations affect the Company's five Douglas
DC-9-15Fs and its ten Boeing 727-200Fs (the "Jet Fleet"). Four of the aircraft
in the Jet Fleet are currently in compliance with Stage III noise control
standards. By the following deadlines, the Company must bring the Jet Fleet
into Stage III compliance to the extent indicated: December 31, 1996, 50%;
December 31, 1998, 75%; and January 1, 2000, 100%. Kitty Hawk intends to
comply with the next deadline of December 31, 1996 by modifying one of its
DC-9-15Fs and two of its Boeing 727-200Fs with noise suppression kits during
November and December of 1996 for a total cost of $6.8 million (FAA rules permit
rounding down to the next whole aircraft to determine 50% of fleet size). In
addition to three firm orders for noise suppression kits, the Company currently
holds an option for six noise suppression kits and their installation for Boeing
727-200Fs at a cost of $2.6 million for each aircraft modified. Certain airport
operations have adopted local regulations which, among other things, impose
curfews and other noise abatement requirements.
The DOT and the FAA have the authority to modify, amend, suspend, or
revoke the authority and licenses issued to the Company for failure to comply
with the provisions of law or applicable regulation. In addition, the DOT and
the FAA may impose civil or criminal penalties for violations of applicable
rules and regulations. Such actions by the FAA or the DOT, if taken, could
have a material adverse effect on Kitty Hawk. The DOT and the Environmental
Protection Agency exercise regulatory jurisdiction over the transportation of
hazardous materials. The Company may from time to time transport articles that
are subject to these regulations. Shippers of hazardous materials share
responsibility for compliance with these regulations and are responsible for
proper packaging and labeling. Substantial civil monetary penalties can be
imposed on both shippers and air carriers for infractions of these regulations.
Certain of the Company's air freight carrier operations are conducted
wholly between two or more points that are all located outside of the United
States. As with the certificates and license obtained from U.S. authorities,
the Company must comply with all applicable rules and regulations imposed by
these foreign aeronautical authorities or be subject to the suspension,
amendment or modification of its operating authorities.
On August 27, 1996, a 6.25% federal transportation excise tax
applicable to air freight transportation was reinstated through December 31,
1996. A Commission has been established to determine whether the excise tax
should be continued after December 31, 1996 or replaced with a user fee or
other funding device.
The Company understands the FAA has established an internal procedure
to review approvals for new and existing transport category airplane cargo door
and other modifications that could affect the Company's fleet of Boeing 727-200F
aircraft. The Company believes that as a result of this FAA review, refinements
to existing and future cargo door and other modifications may be required in
1997 or thereafter. While it is unknown at this time the precise nature of the
refinements that may be required, if any, or the impact of the refinements on
Kitty Hawk's fleet of Boeing 727-200F aircraft, compliance with any such
refinements could have a material adverse impact on Kitty Hawk and its
operations.
Under current federal aviation law, the Company's air freight carrier
could cease to be eligible to operate as an air freight carrier if more than
25% of the voting stock of the Company were owned or controlled by non-U.S.
citizens. Moreover, in order to hold an air freight carrier certificate, the
president and two-thirds of the directors and officers of an air carrier must
be U.S. citizens. All of the Company's directors and officers are U.S.
citizens. Furthermore, (i) the Certificate of Incorporation limits the
aggregate voting power of non-U.S. persons to 22 1/2% of the votes voting on or
consenting to any matter and (ii) the Bylaws do not permit non-U.S. citizens to
serve as directors or officers of the Company.
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INSURANCE
The Company is vulnerable to potential losses which may be incurred in
the event of an aircraft accident. Any such accident could involve not only
repair or replacement of a damaged aircraft and its consequent temporary or
permanent loss from service, but also potential claims involving injury to
persons or property. The Company is required
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by the DOT to carry liability insurance on each of its aircraft, and each of
the Company's aircraft leases and ACMI contracts also requires the Company to
carry such insurance. Any extended interruption of the Company's operations
due to the loss of an aircraft could have a material adverse effect on the
Company. The Company currently maintains public liability and property damage
insurance and aircraft liability insurance for each of the aircraft in the
revenue fleet in amounts consistent with industry standards. All-risk aircraft
hull insurance is maintained for all aircraft in the revenue fleet other than
the Convairs. The Company maintains baggage and cargo liability insurance if
not provided by its customers under ACMI contracts. Although the Company
believes that its insurance coverage is adequate, there can be no assurance
that the amount of such coverage will not be changed upon renewal or that the
Company will not be forced to bear substantial losses from accidents.
Substantial claims resulting from an accident could have a material adverse
effect on the Company's financial condition and could affect the ability of the
Company to obtain insurance in the future.
The Company attempts to monitor the amount of liability insurance
maintained by the third-party carriers utilized in its air logistics business
through, among other things, the obtaining of certificates of insurance.
COMPETITION
The market for air freight carrier services has been and is expected
to remain highly competitive. Kitty Hawk competes with other air freight
carriers with regard to furnishing on-demand charters and ACMI contract
charters. The Company believes that the basis for such competition is price,
quality of service, and the location and performance characteristics of
aircraft. The Company's air freight carrier is also subject to competition
from other modes of transportation including, but not limited to, railroads and
trucking. Numerous competitors of Kitty Hawk provide or coordinate
door-to-door air freight charters on an expedited basis. The market for air
logistics also has been and is expected to remain highly competitive. The
Company's principal competitors for on-demand air logistics services are other
air logistics companies, air freight carriers which seek to book charters
directly with customers, and air freight companies that offer expedited
service. During the last two years, each of Emery Worldwide, FedEx, and the
United Parcel Service have entered the expedited freight business by offering
"next-flight-out" service.
The Company's ability to attract and retain business also is affected
by the decisions of the transportation departments of commercial and industrial
businesses whether, and to what extent, to coordinate their own transportation
needs. Prior to 1990, GM conducted its air logistics business in-house. GM
and certain other customers maintain transportation departments that could be
expanded to manage charters in-house which could have a material adverse effect
on Kitty Hawk. With respect to the Company's ACMI contract charter business,
the Company could be adversely affected by the decision of certain of its
certificated customers to acquire additional aircraft, or by its uncertificated
customers to acquire and operate their own aircraft, to service routes
currently serviced by Company aircraft. Many of the Company's competitors and
customers have substantially greater financial resources than the Company.
ITEM 2. PROPERTIES
Kitty Hawk occupies a 40,000 square foot facility located at
Dallas/Fort Worth International Airport. This facility includes administrative
offices, maintenance work areas, and hangar and parts storage facilities as
well as flight operations and training facilities. The Company has an option
to purchase the building, subject to the consent of the Dallas/Fort Worth
Regional Airport Board, with an exercise price of $1.99 million at August 31,
1996, which option amount decreases by $5,000 per month, pursuant to a
five-year lease agreement that commenced March 1, 1993. The option to purchase
the property will expire on March 1, 1997. There is no stated renewal on the
lease. See "Item 11. Executive Compensation -- Compensation Committee
Interlocks and Insider Participation."
In addition, the Company maintains an approximately 20,000 square foot
secondary maintenance facility located in Ypsilanti, Michigan comprised of a
maintenance work area, hangar and an area for the storage of certain aircraft
repair parts and maintenance items. Additionally, Kitty Hawk rents small parts
storage spaces at a number of origin airports and apartments in various
locations for flight crew layovers.
ITEM 3. LEGAL PROCEEDINGS
ANET Litigation
The U.S. Postal Service selected the Company's air freight carrier in
September 1992 as the successful bidder on a contract for a multi-city network
of air transportation services supporting the U.S. Postal Service's Express
Mail system. Another air freight carrier (the "Co-Bidder") was associated with
the Company in the successful bid (the "ANET bid"). Two unsuccessful bidders,
including Emery Worldwide Airlines, Inc. ("Emery") (the incumbent), sued to
enjoin the award. This litigation (the "ANET Litigation") was settled in April
1993 by agreements under which the U.S. Postal Service terminated the Company's
contract for convenience and awarded the contract to Emery. In lieu of damages
for the contract's termination, the U.S. Postal Service paid $10.0 million into
an escrow account to be divided between the
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9
Company and the Co-Bidder. Also under the settlement, Emery delivered releases
of the Company's contractual obligations to purchase more than $40 million in
aircraft and equipment, paid $2.7 million into the escrow account, and agreed
to pay $162,500 into the escrow each quarter for up to 10 years so long as the
Emery contract remained in effect.
Before settling the ANET litigation, the Company, Mr. Christopher, the
Co-Bidder and the Co-Bidder's stockholder agreed, among other things, to hold
the escrowed funds in escrow until they had agreed upon an allocation and
distribution, or until the matter was resolved by binding arbitration.
Subsequent disagreements led to litigation and arbitration among the Company,
Mr. Christopher, the Co-Bidder and the Co-Bidder's stockholder that were
resolved pursuant to a comprehensive settlement reached in August 1994. Under
the comprehensive settlement, the Company received approximately $3.5 million
in cash from the escrowed funds, and obtained a Boeing 727-200. Also under the
comprehensive settlement agreement, Mr. Christopher received rights to one-half
of any future contingent quarterly payments from Emery.
Qui Tam Litigation
In March 1995, the Company was served with a complaint filed on behalf
of the U.S. government by a third-party plaintiff seeking to share a recovery
under the Federal False Claims Act (the "Act"). The suit, filed in May 1994 in
the federal district court for the District of Columbia, was filed under seal
in accordance with the Act, to enable the U.S. Government to review the claim
before its disclosure to the defendants. The U.S. Government declined to
pursue the claim, but the third-party plaintiff chose to continue. The suit
claimed that the Company and the Co-Bidder fraudulently failed to disclose to
the U.S. Postal Service, both in the ANET bid and in the settlement of the ANET
litigation, that some of the aircraft the Company proposed to purchase and use
to perform the contract were aging aircraft with high use, and claimed that the
Company, the Co-Bidder and Emery similarly fraudulently conspired in connection
with the settlement of the ANET litigation. The suit sought to recover treble
the $10 million settlement payment made by the U.S. Postal Service in settling
the ANET litigation, plus the third-party plaintiff's costs and fees.
In May 1996, the court granted the Company its motion to dismiss the
suit and awarded the Company its attorneys' fees and costs. The plaintiff has
asked the court to reconsider its ruling. The Company does not expect the
outcome to have a material adverse effect upon the Company's financial
condition or results of operations.
Litigation about Charter Agreement
The Company filed suit in the 14th Judicial District Court of Dallas
County, Texas against Express One International, Inc. ("Express One") in July
1992 claiming under a one-year aircraft charter by Express One to the Company
that Express One breached its obligations and seeking actual damages of
approximately $60,000. Express One counterclaimed that the Company wrongfully
repudiated the charter and fraudulently induced Express One to provide services
not required by the charter. Express One claimed damages of $356,718 for
services allegedly performed, $1,140,000 for additional fees it would have
received under the charter, an unspecified amount of punitive damages, and
additional amounts for its attorneys' fees and costs.
In February 1995, a jury verdict awarded the Company $25,000 in
damages plus its attorneys' fees and denied Express One's counterclaims. In
May 1995, the court entered judgment in favor of the Company for $25,000 in
damages, for $148,115 in attorneys' fees through trial, and for additional
attorneys' fees if Express One appealed. Before the time for appeal expired,
Express One filed a petition under Chapter 11 of the U.S. Bankruptcy Code in
the U.S. Bankruptcy Court for the Eastern District of Texas (Sherman
Division). The Company filed its claim based on the judgment in the bankruptcy
proceeding. In November 1995, Express One filed an appeal, to which the
Company responded. Kitty Hawk does not expect the outcome to have a material
adverse effect upon the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted under the symbol "KTTY" on the
Nasdaq National Market. Prior to the Company's initial public offering in
October 1996, there was no established public trading market for the Company's
Common Stock. According to the records of the Company's transfer agent, at
November 18, 1996, the Company had approximately twenty-one stockholders of
record. Because many of such shares are held by brokers and other institutions
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10
on behalf of stockholders, the Company is unable to estimate the total number
of stockholders represented by these record holders.
The Company's policy has been to reinvest earnings to fund future
growth. Accordingly, the Company has not paid dividends and does not
anticipate declaring dividends on its Common Stock in the foreseeable future.
In addition, the terms of the Company's Credit Agreement with Wells Fargo Bank,
National Association and Bank One, Texas, N.A. restrict Kitty Hawk's ability
to declare and pay dividends to its stockholders during any fiscal year to an
amount not to exceed 25% of the Company's net income during the immediately
preceding fiscal year.
The Company granted certain unregistered options to Mr. Tilmon J.
Reeves and Mr. Richard R. Wadsworth in October 1994. All such options were
issued in connection with employment or consulting services rendered pursuant to
Rule 701 and/or Section 4(2) of the Securities Act of 1933, as amended (the
"Act"). Both stock options were cancelled on June 12, 1996. See "Item 11.
Executive Compensation."
The Company granted certain unregistered options to Messrs. Reeves and
Wadsworth in December 1995 and June 1996, respectively. All such options were
issued in connection with employment or consulting services rendered pursuant
to Rule 701 and/or Section 4(2) of the Act, as amended. Both stock options
were exercised at an exercise price of $0.01 per share on June 26, 1996. The
unregistered common stock issued upon exercise of such options was issued to
Messrs. Reeves and Wadsworth pursuant to Rule 701, Section 4(2) and/or Section
3(a)(9) of the Act. See "Item 11. Executive Compensation."
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected financial and operating data
with respect to Kitty Hawk for each of the fiscal years indicated. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements, including the Notes thereto, appearing elsewhere in this
Form 10-K. The selected income statement and balance sheet data as of and for
each of the fiscal years ended August 31, 1992 through 1996 has been derived
from audited consolidated financial statements of the Company.
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11
FISCAL YEAR ENDED AUGUST 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------- ------
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
Revenues:
Air freight carrier $ 6,760 $ 12,939 $ 28,285 $ 41,117 $ 52,922
Air logistics 45,893 52,840 79,415 62,593 89,493
------- ------- ------- ------- -------
Total revenues 52,653 65,779 107,700 103,710 142,415
Total costs of revenues 48,465 55,201 92,951 85,532 118,900
------- ------- ------- ------- -------
Gross profit 4,188 10,578 14,749 18,178 23,515
General and administrative expenses 2,930 4,394 6,013 7,832 9,080
Non-qualified profit sharing expense -- 250 732 1,001 1,170
Stock option grants to executives -- -- -- -- 4,231(1)
------- ------- ------- ------- -------
Operating income 1,258 5,934 8,004 9,345 9,034
Interest expense (157) (134) (343) (1,185) (1,859)
Contract settlement income, net(2) -- 725 1,178 -- --
Loss on asset disposal -- -- -- -- (589)
Other income (expense) 287 193 (432) (601) 291
------- ------- ------- ------- -------
Income before income taxes 1,388 6,718 8,407 7,559 6,877
Income taxes 375 2,613 3,146 3,143 2,768
------- ------- ------- ------- -------
Net income $ 1,013 $ 4,105 $ 5,261 $ 4,416 $ 4,109(1)
======= ======= ======= ======= =======
Net income per share $0.12 $ 0.52 $ 0.66 $ 0.55 $ 0.52(1)
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 8,671 7,968 7,968 7,968 7,928
OPERATING DATA:
Air Freight Carrier
Revenue aircraft owned (at end of 11 10 15 21 22
period)
Flight hours flown(3) 3,567 7,030 11,795 15,183 20,237
Number of on-demand charters flown 292 752 1,182 1,238 1,448
Number of ACMI contract charters flown 655 1,314 1,734 2,601 3,493
Air Logistics
Number of on-demand charters managed(4) 8,708 9,748 16,713 14,198 16,043
BALANCE SHEET DATA (IN THOUSANDS):
Working capital $ 895 $ 4,679 $ 4,223 $ 1,747 $ (6,962)(5)
Total assets 9,874 18,598 37,911 47,954 79,828
Long-term debt, including current 2,367 976 9,145 16,981 36,912
maturities
Stockholders' equity 3,184 7,289 12,550 16,966 23,639
- ----------
- 11 -
12
(1) Results for fiscal year ended August 31, 1996, lack comparability to prior
periods because such period includes nonrecurring grants to two executive
officers of stock options that resulted in a charge to earnings of
approximately $4,231,000. Had these grants of stock options not occurred,
net income for fiscal year ended August 31, 1996 would have been
approximately $6,637,000 and net income per share would have been $0.84.
See "Item 11. Executive Compensation."
(2) Reflects sums received in settlement of litigation. See "Item 3. Legal
Proceedings -- ANET Litigation" and Note 5 of Notes to Consolidated
Financial Statements.
(3) As reported by the Company to the FAA.
(4) Includes on-demand charters flown by the Company's air freight carrier.
(5) Working capital includes a $10 million Revolving Credit Facility classified
as a current liability, that the Company is in negotiations to refinance
over a long-term period. Had this Revolving Credit Facility been
refinanced, working capital for fiscal year 1996 would have been
$3,038,000. See Note 2 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Revenues. The Company's revenues are derived from two related
businesses: (i) air freight carrier and (ii) air logistics. Air freight
carrier revenues are derived substantially from ACMI contract and on-demand
charters flown with Company aircraft. Air logistics revenues are derived
substantially from on-demand air freight charters arranged by Kitty Hawk for
its customers utilizing the flight services of third-party air freight
carriers. With respect to on-demand charters that are arranged by the Company
and flown by its air freight carrier, charges to the customer for air
transportation are accounted for as air freight carrier revenues and charges
for ground handling and transportation are accounted for as air logistics
revenues.
GM and the U.S. Postal Service have accounted for a substantial
majority of the Company's revenues for the last three fiscal years. A contract
with GM for on-demand charters produced revenues of $67.9 million, $48.9
million, and $58.4 million in fiscal years 1994, 1995, and 1996, respectively,
which represented 63.1%, 47.1%, and 41.0% of the Company's total revenues for
such periods. Of the revenues derived from GM for fiscal years 1994, 1995, and
1996, 15.4%, 20.8%, and 20.2%, respectively, were attributable to the air
freight carrier and 84.6%, 79.2%, and 79.8%, respectively, were attributable to
air logistics. Revenues derived from GM for fiscal years 1994, 1995, and 1996
constituted 36.9%, 24.7%, and 22.3%, respectively, of the revenues derived from
the air freight carrier business and 72.4%, 61.9%, and 52.1%, respectively, of
the revenues derived from the air logistics business. Of the Company's gross
profits from air logistics in fiscal years 1994, 1995, and 1996, GM accounted
for $3.0 million (50.4%), $1.4 million (27.1%), and $3.5 million (37.3%),
respectively.
The U.S. Postal Service accounted for revenues of $11.1 million, $10.0
million, and $21.3 million in fiscal years 1994, 1995, and 1996, respectively,
which represented 10.3%, 9.7%, and 14.9% of the Company's total revenues for
such periods, respectively. Of the revenues derived from the U.S. Postal
Service for fiscal years 1994, 1995, and 1996, 74.5%, 59.6%, and 92.5%,
respectively, were attributable to air logistics for seasonal Christmas
charters flown by third-party air freight carriers and 25.5%, 40.4%, and 7.5%,
respectively, were attributable to the air freight carrier for ACMI contract
charters. Revenues derived from the U.S. Postal Service for fiscal years 1994,
1995, and 1996, constituted 10.0%, 9.9%, and 3.0%, respectively, of the
revenues derived from the air freight carrier business and 10.4%, 9.6%, and
22.0%, respectively, of the revenues derived from the air logistics business.
Of the Company's gross profits from air logistics in fiscal years 1994, 1995,
and 1996, the U.S. Postal Service accounted for $2.0 million (33.8%), $1.0
million (18.9%), and $3.8 million (40.6%), respectively.
Burlington Air Express, Inc. accounted for revenues of $15.6 million
in fiscal year 1996, which represented 10.9% of the total revenues for such
period and constituted 28.5% of the revenues derived from the air freight
carrier business and 0.6% of the revenues derived from the air logistics
business. Of these revenues, 96.8% were attributable to the air freight
carrier for ACMI contract charters and 3.2% were attributable to air logistics.
Costs of Revenues. The principal components of the costs of revenues
attributable to the air freight carrier consist of the costs for the
maintenance and operation of its aircraft including the salaries of pilots and
maintenance personnel, charges for fuel, insurance and maintenance, and
depreciation of engines and airframes. Generally, charges for fuel are only
applicable for the on-demand charters flown by the air freight carrier because
fuel for the ACMI contract charters is generally provided by the customer or
billed to them on a direct pass-through basis. The principal components of the
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13
costs of revenues attributable to air logistics consist of sub-charter costs
paid to third-party air freight carriers and costs paid for ground handling and
transportation. With respect to on-demand charters that are flown by the air
freight carrier, all related air transportation expenses are allocated to the
air freight carrier and all related cargo ground handling and transportation
expenses are allocated to air logistics.
Under an earlier version of the Kitty Hawk, Inc. Amended and Restated
Annual Incentive Compensation Plan, the Company awarded semiannual cash bonuses
to its employees. The aggregate amount of the bonuses for each of fiscal years
1994, 1995, and 1996, have equaled 8.0%, 11.7%, and 9.5% of the Company's
income before the deduction of income taxes, stock option grant to executives
and the bonuses that were paid under the Kitty Hawk, Inc. Amended and Restated
Annual Incentive Compensation Plan.
Significant Events Affecting Comparability of Results of Operations.
Since September 1, 1993, several events have affected the comparability of
results of operations for each of the last three fiscal years. In fiscal year
1996, the Company granted Messrs. Reeves and Wadsworth options to purchase
390,707 and 153,567 shares of Common Stock, respectively, for an exercise price
of $0.01 per share, that resulted in a charge to earnings of approximately
$4,231,000. In fiscal year 1995, the Company expensed approximately $727,000
relating to the Company's attempted initial public offering. In fiscal year
1994, contract settlement income amounted to approximately $1,178,000. See Note
5 to Consolidated Financial Statements.
Recent Developments. Due to recent strikes and labor disruptions at
certain GM plants, there has been a decrease during the first quarter of fiscal
1997 in the number of charters flown by the Company's air logistics business.
The Company believes these strikes and labor disruptions have been settled and
does not anticipate the adverse impact of such strikes and labor disruptions to
extend beyond the end of the 1996 calendar year.
RESULTS OF OPERATIONS
The following table sets forth, on a comparative basis for the periods
indicated, the components of the Company's gross profit (in thousands) and the
gross profit margin by revenue type:
FISCAL YEAR ENDED AUGUST 31,
-----------------------------------------------------------
1994 1995 1996
----------------- ----------------- -----------------
Air freight carrier:
Revenues . . . . . . . $28,285 100.0% $41,117 100.0% $52,922 100.0%
Costs of revenues . . . 19,550 69.1 28,104 68.4 38,760 73.2
------- ------- ------- ------- ------- -------
Gross profit . . . . . . $ 8,735 30.9% $13,013 31.6% $14,162 26.8%
======= ======= ======= ======= ======= =======
Air logistics:
Revenues . . . . . . . $79,415 100.0% $62,593 100.0% $89,493 100.0%
Costs of revenues . . . 73,402 92.4 57,428 91.7 80,140 89.5
------- ------- ------- ------- ------- -------
Gross profit . . . . . . $ 6,013 7.6% $ 5,165 8.3% $ 9,353 10.5%
======= ======= ======= ======= ======= =======
The following table presents, for the periods indicated, consolidated
income statement data expressed as a percentage of total revenues:
FISCAL YEAR ENDED AUGUST 31,
-----------------------------
1994 1995 1996
-------- -------- ---------
Revenues:
Air freight carrier .............. 26.3% 39.6% 37.2%
Air logistics .................... 73.7 60.4 62.8
----- ----- -----
Total revenues ..................... 100.0 100.0 100.0
Total costs of revenues ............ 86.3 82.5 83.5
----- ----- -----
Gross profit ....................... 13.7 17.5 16.5
General and administrative expenses 5.6 7.6 6.4
Non-qualified profit sharing expense 0.7 0.9 .8
Stock option grants to executives .. -- -- 3.0
----- ----- -----
Operating income ................... 7.4 9.0 6.3
Interest expense ................... (0.3) (1.1) (1.3)
Contract settlement income, net .... 1.1 -- --
Loss on asset disposal ............. -- -- (0.4)
Other income (expense) ............. (0.4) (0.6) 0.2
----- ----- -----
Income before income taxes ......... 7.8 7.3 4.8
Income taxes ....................... 2.9 3.0 1.9
----- ----- -----
Net income ......................... 4.9% 4.3% 2.9%
===== ===== =====
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FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995
Revenues -- Air Freight Carrier. Air freight carrier on-demand and
ACMI contract charter revenues were $20.7 million and $30.1 million, or 39.2%
and 56.8%, respectively, of total air freight carrier revenues for fiscal year
1996, as compared to $18.1 million and $20.9 million, or 44.2% and 50.8%,
respectively, for fiscal year 1995. ACMI contract charter revenues for fiscal
year 1996, increased 44.0% over fiscal year 1995, primarily as the result of
additional Boeing 727-200F ACMI contract charters. Revenues from on-demand
charters flown by Company aircraft for fiscal year 1996 increased 14.0% from
the comparable prior year period. For fiscal year 1996, as compared to fiscal
year 1995, prices for the Company's on-demand and ACMI contract charters
remained relatively constant.
Revenues -- Air Logistics. Air logistics revenues increased $26.9
million, or 43.0%, to $89.5 million in fiscal year 1996, from $62.6 million in
fiscal year 1995. This increase was primarily due to increased demand for on-
demand charters from the automobile industry in the fourth quarter of calendar
year 1995 and a substantial increase in the number of managed charters for the
U.S. Postal Service during December 1995. For fiscal year 1996, as compared to
fiscal year 1995, prices for the Company's air logistics services remained
relatively constant.
Costs of Revenues -- Air Freight Carrier. Air freight carrier costs
of revenues increased $10.7 million, or 37.9%, to $38.8 million in fiscal year
1996, from $28.1 million in fiscal year 1995, reflecting the increased volume
of business from Boeing 727-200F ACMI contract charters. Gross profit margin
from the air freight carrier decreased to 26.8% in fiscal year 1996, from 31.6%
in the comparable prior year period. This decrease reflects the increase in
ACMI contract charters, which produce lower gross margins than on-demand
charters.
As reported to the FAA, overall aircraft utilization increased to
20,237 flight hours for fiscal year 1996, from 15,183 in fiscal year 1995, a
33.3% increase. This increase was primarily due to the increased hours flown
for ACMI contract charters.
Costs of Revenues -- Air Logistics. Air logistics costs of revenues
increased $22.7 million, or 39.5%, to $80.1 million in fiscal year 1996, from
$57.4 million in fiscal year 1995, reflecting the increased volume of business.
The gross profit margin from air logistics increased to 10.5% in fiscal year
1996, from 8.3% in the comparable prior year period, a 26.5% increase. This
increase was primarily due to the Company's success in reducing its costs paid
to third-party air freight carriers and ground service providers and increased
gross profit margin from the Company's U.S. Postal Service Christmas contract
in December 1995.
General and Administrative Expenses. General and administrative
expenses increased $1.2 million, or 15.9%, to $9.1 million in fiscal year 1996,
from $7.8 million in fiscal year 1995. This increase was primarily due to an
increase in support functions and administrative costs associated with the
growth in the aircraft fleet and the increased revenue volume for the air
freight carrier in fiscal year 1996. As a percentage of total revenues,
general and administrative expenses decreased to 6.4% in fiscal year 1996, from
7.6% in fiscal year 1995.
Non-qualified Employee Profit Sharing Expense. Employee profit
sharing expense increased $169,000, or 16.9%, to $1.2 million in fiscal year
1996, from $1.0 million in fiscal year 1995, reflecting the increased
profitability from operating activities of Kitty Hawk in fiscal year 1996.
Stock Option Grants to Executives. During fiscal year 1996, the
Company granted two executive officers options to purchase 544,274 shares of
Common Stock that resulted in a charge to earnings of approximately $4,231,000.
Operating Income. Operating income decreased $311,000, or 3.3%, to
$9.0 million in fiscal year 1996, from $9.3 million in fiscal year 1995.
Operating income margin decreased to 6.3% from 9.0%, for fiscal year 1996 and
1995, respectively.
Interest Expense. Interest expense increased to $1.9 million for
fiscal year 1996 from $1.2 million in fiscal year 1995, a 56.9% increase. The
increase was primarily the result of the incurrence of additional long-term
debt to finance the acquisition of two Boeing 727-200 aircraft in the second
half of fiscal year 1995 and two additional Boeing 727-200 aircraft in fiscal
year 1996.
Loss on Asset Disposal. Loss on asset disposal for fiscal year 1996
was $589,000, which resulted from write-downs associated with equipment
dispositions. There were no losses on asset disposal in fiscal year 1995.
Other Income (Expense). Other income increased to $291,000 in fiscal
year 1996, from an expense of $601,000 in the comparable prior year period.
The increase was primarily due to the write-off of costs associated with the
Company's attempted initial public offering in fiscal year 1995 and increased
interest income in fiscal year 1996.
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Income Taxes. Income taxes as a percentage of income before income
taxes decreased to 40.3% for fiscal year 1996, from 41.6% for the comparable
prior year period. The decrease was primarily due to decreased state income
taxes.
Net Income. As a result of the above, net income decreased to $4.1
million in fiscal year 1996, from $4.4 million in fiscal year 1995, a 7.0%
decrease. Net income as a percentage of total revenues decreased to 2.9% in
fiscal year 1996, from 4.3% in the comparable prior year period.
FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994
Revenues -- Air Freight Carrier. Air freight carrier on-demand and
ACMI contract charter revenues were $18.1 million and $20.9 million, or 44.2%
and 50.8%, respectively, of total air freight carrier revenues for fiscal year
1995, as compared to $15.4 million and $10.6 million, or 54.5% and 37.4%,
respectively, for fiscal year 1994. The increase in on-demand and ACMI
contract charter revenues for fiscal year 1995 over fiscal year 1994, was 17.9%
and 97.1%, respectively. These increases were primarily the result of
additional Boeing 727-200F ACMI contract charters and increased on-demand
charters flown by the Company's jet aircraft. For fiscal year 1995 as compared
to fiscal year 1994, prices for the Company's ACMI contract charter services
and U.S. Postal Service Christmas contracts remained relatively constant.
Revenues -- Air Logistics. Air logistics revenues decreased $16.8
million, or 21.2%, to $62.6 million in fiscal year 1995 from $79.4 million in
fiscal year 1994 primarily due to the substantial decline in volume of
on-demand charters for the automobile industry in the first half of calendar
1995 as compared to the same period in 1994. This decline was primarily the
result of the temporary decision by GM to significantly reduce use of expedited
transportation, including Kitty Hawk's air logistics services, as part of a
cost containment initiative. Prices for the Company's on-demand charters
decreased slightly due to a revenue rate reduction in the GM Agreement which
took effect on May 1, 1994.
Costs of Revenues -- Air Freight Carrier. Air freight carrier costs
of revenues increased $8.6 million, or 43.8%, to $28.1 million in fiscal year
1995 from $19.5 million in fiscal year 1994, reflecting the increased volume of
business from ACMI contract and on-demand charters flown by the Company's jet
aircraft. Gross profit margin from the air freight carrier increased slightly
to 31.6% in fiscal year 1995 from 30.9% in fiscal year 1994, a 2.3% increase.
As reported to the FAA, overall aircraft utilization increased to 15,183 flight
hours for fiscal year 1995 from 11,795 flight hours in fiscal year 1994, a
28.7% increase. This increase was primarily the result of the inclusion of an
additional four Boeing 727-200Fs, and two Douglas DC9-15F aircraft into the
Company's operations during fiscal year 1995.
Costs of Revenues -- Air Logistics. Air logistics costs of revenues
decreased $16.0 million, or 21.8%, to $57.4 million in fiscal year 1995 from
$73.4 million in fiscal year 1994, reflecting the decrease in the volume of
business. The gross profit margin from air logistics increased to 8.3% in
fiscal year 1995 from 7.6% in fiscal year 1994, a 9.2% increase. This increase
was primarily due to the Company's success in reducing its costs paid to third-
party air freight carriers and ground service providers in the second half of
fiscal year 1995.
General and Administrative Expenses. General and administrative
expenses increased $1.8 million, or 30.3%, to $7.8 million in fiscal year 1995
from $6.0 million in fiscal year 1994. As a percentage of total revenues,
general and administrative expenses increased to 7.6% in fiscal year 1995 from
5.6% in fiscal year 1994. This increase was primarily due to an increase in
support functions and number of personnel associated with the growth in the
aircraft fleet and the revenue volume for the air freight carrier in fiscal
year 1995.
Non-qualified Employee Profit Sharing Expense. Employee profit
sharing expense increased to $1.0 million in fiscal year 1995 from $732,000 in
fiscal year 1994, a 36.8% increase, reflecting the increased profitability from
operating activities of Kitty Hawk in fiscal year 1995.
Operating Income. Operating income increased $1.3 million, or 16.8%,
to $9.3 million in fiscal year 1995 from $8.0 million in fiscal year 1994.
Operating income margin increased to 9.0% from 7.4% for fiscal year 1995 and
1994, respectively.
Interest Expense. Interest expense increased to $1.2 million for
fiscal year 1995 from $343,000 in fiscal year 1994, a 246.0% increase. The
increase was primarily the result of the incurrence of additional long-term
debt to finance the acquisition of two Boeing 727-200 aircraft in the second
half of fiscal year 1994 and two Douglas DC9-15F aircraft and two Boeing
727-200 aircraft in fiscal year 1995.
Other Income (Expense). Other expense increased to $601,000 in fiscal
year 1995 from $432,000 in fiscal year 1994, a 39.1% increase. This increase
was primarily due to the write off of costs associated with the Company's
attempted initial public offering.
- 15 -
16
Income Taxes. Income taxes as a percentage of income before income
taxes increased to 41.6% for fiscal year 1995 from 37.4% in fiscal year 1994.
The increase was primarily due to higher state income taxes.
Net Income. As a result of the above, net income decreased to $4.4
million for fiscal year 1995 from $5.3 million in fiscal year 1994, a 16.0%
decrease. Net income as a percentage of total revenues was 4.3% in fiscal year
1995 compared to 4.9% for fiscal year 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for the acquisition
and modification of aircraft and working capital. In addition, Kitty Hawk has,
and will continue to have, capital requirements for the requisite periodic and
major overhaul maintenance checks for its air freight carrier fleet. The
Company's funding of its capital requirements historically has been from a
combination of internally generated funds and bank borrowings.
Cash provided by operating activities was $7.6 million, $9.1 million,
and $17.2 million in fiscal years 1994, 1995 and 1996, respectively. At the
end of fiscal years 1994, 1995, and 1996, the Company had working capital of
$4.2 million, $1.7 million, and $(7.0) million, respectively.
On August 14, 1996 Kitty Hawk entered into the Credit Agreement with
Wells Fargo Bank (Texas), National Association ("WFB"), successor in interest
to First Interstate Bank of Texas, N.A., and Bank One, Texas, N.A. ("BOT") for
a $15 million Revolving Credit Loans Facility (the "Revolving Credit
Facility"), an approximately $12.7 million Term Loans A Facility (the "Term
Loans A"), an approximately $11.2 million Term Loans B Facility (the "Term
Loans B") and a $10 million Term Loans C Facility (the "Term Loans C")
(collectively, the "Commitments"). As of November 22, 1996 approximately $11.9
million was outstanding under the Revolving Credit Facility, approximately
$12.2 million was outstanding under the Term Loans A, approximately $10.9
million was outstanding under the Term Loans B and $0 was outstanding under the
Term Loans C. The Commitments bear interest at WFB's prime rate or, at Kitty
Hawk's option, a Eurodollar rate plus 1.5% to 2.0% based upon a debt-to-cash
flow ratio of Kitty Hawk.
Under the Credit Agreement, $10 million of proceeds of the Revolving
Credit Facility are restricted to use from time to time for interim financing
of up to $6.5 million per aircraft for aircraft acquisitions by the Company;
the remaining $5 million of the Facility may be used for general corporate
purposes, including interim financing for acquired aircraft that exceeds the
limits that apply to the restricted portion. The outstanding balance of the
Revolving Credit Facility results from borrowing to pay revolving credit
indebtedness to WFB which was recently incurred by Kitty Hawk in connection
with purchasing two Boeing 727-200s that are being converted to freighter
configuration, and to fund such cargo conversion, noise abatement modifications
and maintenance on those two aircraft.
The Revolving Credit Facility expires on December 31, 1998. Any
advance under the portion of the Revolving Credit Facility that is restricted
to interim financing for aircraft acquisition must be repaid in full within 150
days of first advance for the acquired aircraft. All advances under the
commitment for Term Loans C must be made by April 29, 1998. The Term Loans A
matures on March 31, 2002 and the Term Loans B and C mature on March 31, 2003.
The Commitments are cross-collateralized and are secured by certain aircraft
owned by the Company, all aircraft acquired with advances under the restricted
portion of the Revolving Credit Facility while those advances are outstanding,
certain leases of aircraft and engines, accounts, chattel paper, general
intangibles and other personal property.
The Credit Agreement prohibits (i) the redemption or repurchase of the
Company's securities, (ii) the payment of dividends to Kitty Hawk's
stockholders in an amount over 25% of the Company's net income of the
immediately preceding fiscal year, (iii) certain investments, acquisitions of
stock, acquisitions of assets to the extent that the business acquired is not
in the present lines of business of the Company, and other business
combinations, (iv) certain transactions with affiliates and (v) the Company to
incur any additional indebtedness, liabilities or obligations other than debt
incurred (a) with the prior written consent of certain lenders, (b) with WFB or
BOT or (c) in the ordinary course of business not to exceed $25 million.
The Credit Agreement also contains certain other covenants, including
limitations on the ability of the Company to change its lines of business. If
a "Change of Control" occurs, WFB and BOT may accelerate or terminate the
Commitments. "Change of Control" includes (a) the failure of Kitty Hawk to own
all of the outstanding stock of certain of its subsidiaries, (b) Mr.
Christopher failing to own at least 51% of the outstanding stock of Kitty Hawk,
(c) Mr. Christopher ceasing to be Chief Executive Officer of Kitty Hawk or
active in the management of the Company or (d) if, after the consummation of a
public offering, any person (or two or more persons acting as a group)
acquiring beneficial ownership of 25% or more of the outstanding shares of
Common Stock. During fiscal years 1994, 1995, and 1996, similar restrictions
and prohibitions under the Company's other credit facilities did not have a
material impact on the Company's ability to meet its cash obligations and the
Company does not believe that the restrictions under the Credit Agreement will
have any such impact in the future.
- 16 -
17
In addition, the Company has a loan with 1st Source Bank. As of
November 22, 1996, the outstanding balance of this loan was approximately $1
million. The loan bears interest at 9.75%, is secured by a DC9-15F and matures
in May 2000. The 1st Source loan contains certain aircraft maintenance
covenants and provides that a change in the Company's business is an event of
default upon which 1st Source may declare all or any part of the remaining
unpaid principal.
In November 1996, in connection with the Company's recent acquisition
of a one-third undivided interest in four Falcon 20 jet aircraft, the Company
and the two other co-owners of such aircraft entered into a five year, $4.3
million term loan. The loan bears interest at a floating prime rate, is
secured by the four Falcon 20 jet aircraft and requires monthly payments of
principal and interest. The Company's liability under such loan is limited to
$2.0 million. See "Item 11. Executive Compensation -- Compensation Committee
Interlocks and Insider Participation."
In October 1996, the Company sold in an initial public offering
2,700,000 shares of Common Stock, raising net proceeds of approximately $30.1
million to purchase and modify to cargo configuration five Boeing 727-200
aircraft.
Capital expenditures were $13.9 million, $17.9 million, and $33.5
million for fiscal years 1994, 1995 and 1996, respectively. The $33.5 million
in capital expenditures for fiscal year 1996 were primarily for the purchase
of: (i) five Boeing 727-200 aircraft and the cargo and noise abatement
modification of four of these aircraft and (ii) six used JT8D-7/-9 jet engines.
The $17.9 million in capital expenditures for fiscal year 1995 were due
primarily to the purchase of: (i) two Boeing 727-200 aircraft and their cargo
modification, (ii) three JT8D-15 jet engines for installation on one of the
Boeing 727-200 aircraft, (iii) two Douglas DC9-15F aircraft in cargo
configuration, (iv) noise abatement equipment with respect to one of the
Douglas DC9-15F aircraft, (v) five used/overhauled Rolls Royce Dart Convair
engines, (vi) two used JT8D-7/-9 jet engines, (vii) a Westwind 1124 jet
aircraft to be used for corporate purposes only, and (viii) the cargo
modification of one Boeing 727-200 aircraft acquired at the end of fiscal year
1994. The $13.9 million in capital expenditures for fiscal year 1994 were
primarily for the purchase of: (i) two Boeing 727- 200 aircraft and the cargo
modification of these aircraft, (ii) two Douglas DC9-15F aircraft in cargo
configuration, (iii) three Convair 600/640 turbo-prop aircraft, and (iv) ground
handling equipment. Capital expenditures in fiscal year 1993 were primarily
for cargo containers and ground handling equipment. The acquisitions of all of
the Boeing 727- 200 aircraft and subsequent cargo conversions, the Douglas
DC9-15F aircraft and the JT8D-15 engines in the past three years were financed
by bank borrowings and internally generated funds, except for one Boeing
727-200 aircraft received in the settlement of the ANET litigation described in
"Item 3. Legal Proceedings." All other capital acquisitions were financed from
internally generated funds.
Kitty Hawk anticipates purchasing five Boeing 727-200s (including one
in cargo configuration) and modifying to cargo configuration four of these
Boeing 727-200s (including modifying two of these Boeing 727-200s with noise
abatement equipment for approximately $5.0 million) for an aggregate capital
expenditure of approximately $31.3 million in fiscal year 1997. The Company
further believes the $5.0 million amount for noise abatement modifications
proposed for fiscal year 1997 for two of these five aircraft proposed to be
purchased, together with an additional $6.8 million to modify currently owned
aircraft with noise abatement equipment during fiscal 1997, represents the total
capital expenditures that would currently be necessary to comply with the
requirements of existing applicable environmental regulations for such fiscal
year. In fiscal year 1998, the Company anticipates an aggregate capital
expenditure ranging from $9.0 million to $11.0 million for noise abatement
modifications to aircraft currently owned or proposed to be purchased. In the
event the Company acquires more aircraft than currently proposed, the Company's
anticipated aggregate capital expenditure for noise abatement modifications in
fiscal year 1998 could materially increase. See "Item 1. Business -- Government
Regulation."
The Company historically has followed, and currently intends to
follow, a policy of retiring Convairs at the time of their next scheduled major
overhaul maintenance checks rather than expending the amounts necessary for
such checks.
Kitty Hawk presently intends to purchase the facility it currently
occupies at Dallas/Fort Worth International Airport on or before March 1, 1997.
Based upon negotiations with the lessor of the facility, the Company expects to
purchase the facility for approximately $1.75 million.
The Company believes that the net proceeds from its initial public
offering, together with available funds, bank borrowings, and cash flows
expected to be generated by operations, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. Thereafter, if cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
sell additional equity or debt securities or obtain additional credit
facilities.
In March 1995, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company will adopt SFAS 121 in the
first quarter of fiscal year 1997 and, based on current circumstances, does not
believe that adopting SFAS No. 121 will affect materially its financial
statements.
The Company accounts for stock-based compensation utilizing the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation".
The Company is not required to adopt the provisions of SFAS No. 123 until
fiscal 1997. Under SFAS 123, companies are allowed to continue to apply
- 17 -
18
the provisions of APB Opinion No. 25 to their stock-based compensation
arrangements. As such, the Company will only be required to supplement its
financial statements with additional disclosures in fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages, and
positions are as follows:
Name Age Position with Company
---- --- ---------------------
M. Tom Christopher (1) . . . . . . . . . . . 49 Chairman of the Board of Directors and Chief
Executive Officer
Tilmon J. Reeves . . . . . . . . . . . . . . 57 President, Chief Operating Officer, and Director
Richard R. Wadsworth . . . . . . . . . . . . 49 Senior Vice President--Finance, Chief Financial
Officer, Secretary, and Director
Theodore J. Coonfield (2) . . . . . . . . . . 48 Director
James R. Craig . . . . . . . . . . . . . . . 58 Director
Robert F. Grammer (1) . . . . . . . . . . . . 60 Director
Lewis S. White (1)(2) . . . . . . . . . . . . 56 Director
- -----------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The Board of Directors consists of seven members, including four
independent directors. Executive officers are elected by the Board of
Directors and serve at its discretion.
M. TOM CHRISTOPHER has served as Chairman of the Board of Directors
and Chief Executive Officer of the Company since its inception in 1985, and
serves in the class of directors whose terms expire at the 1997 annual meeting
of stockholders. Prior to assuming these positions, he formed and managed
Kitty Hawk Charters, Inc. He has over 18 years of experience in the air
freight industry, including serving as an account manager for Burlington
Northern Airfreight from 1976 to 1978.
TILMON J. REEVES has served as President and Chief Operating Officer
of the Company since May 1993 and has over 30 years of aviation experience.
Prior to assuming his current positions, he served as Vice President of the
Company's air freight carrier from March 1992 to May 1993. Prior to joining
Kitty Hawk, Mr. Reeves served as Vice President (Sales) of Express One from
April 1991 to March 1992. Mr. Reeves served as the Managing Director -- Cargo
Services for American Airlines, Inc. from March 1989 to January 1991. Mr.
Reeves became a director in October 1994 and serves in the class of directors
whose terms expire at the 1998 annual meeting of stockholders.
RICHARD R. WADSWORTH has served as Senior Vice President -- Finance
since October 1992, Chief Financial Officer since September 1994, and Secretary
since October 1994. Prior to his current role, he served in a consulting
capacity to Kitty Hawk in the preparation of various bids for the Company's
contract air freight service from December 1991 to September 1992. Mr.
Wadsworth served as Senior Underwriter in the Dallas office of Stephens Inc.
from September 1989 until July 1991. Mr. Wadsworth filed for bankruptcy
protection in his individual capacity in February of 1992. Mr. Wadsworth
became a director in October 1994 and serves in the class of directors whose
terms expire at the 1999 annual meeting of stockholders.
- 18 -
19
THEODORE J. COONFIELD became a director of the Company in October 1994
and serves in the class of directors whose terms expire at the 1998 annual
meeting of stockholders. Since April 1996, Mr. Coonfield has been a consultant
with Performance Consulting Group, a firm specializing in change management
consulting primarily in the banking and insurance industry. From January 1993
to April 1996, Mr. Coonfield was a consultant with the Richard-Rogers Group, a
consulting firm specializing in total quality issues, where he primarily
engaged in consulting for firms in the transportation industry. From 1990 to
December 1992, Mr. Coonfield was the Special Assistant to the Director of the
Department of Human Resources for the State of Oregon. Since 1985, Mr.
Coonfield has been the President of Oregon Wine Designs, Inc., a wine
production and marketing firm.
JAMES R. CRAIG became a director of the Company in October 1994 and
serves in the class of directors whose terms expire at the 1997 annual meeting
of stockholders. Mr. Craig is an attorney who has served of counsel to Burke,
Wright & Keiffer, P.C. since 1990. Prior to his affiliation with Burke, Wright
& Keiffer, P.C., Mr. Craig was in private law practice in Dallas since 1971,
and in 1989 served as President of Whitehall Development Company, a real estate
development firm, of which he is now a director.
ROBERT F. GRAMMER became a director of the Company in October 1994 and
serves in the class of directors whose terms expire at the 1997 annual meeting
of stockholders. From 1986 to October 1993, Mr. Grammer was Chairman,
President and owner of R.G. Aviation, a provider of aircraft-related services.
Mr. Grammer retired from this position in October of 1993 to manage his
personal investments.
LEWIS S. WHITE became a director of the Company in October 1994 and
serves in the class of directors whose terms expire at the 1999 annual meeting
of stockholders. Since 1988, Mr. White has been President of L. S. White &
Co., a firm specializing in strategic planning, corporate finance,
acquisitions, and in business start-ups, turnarounds and restructurings. Prior
to 1988, he held senior financial positions with Paramount Communications Inc.
and Union Carbide Corporation. Mr. White is also a director of Whitehall
Corporation, a company principally involved in aircraft maintenance.
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and
long-term compensation for services in all capacities to Kitty Hawk for fiscal
years 1994, 1995, and 1996, with respect to those persons who were during
fiscal year 1996 (i) the Chief Executive Officer and (ii) the other two most
highly compensated executive officers of the Company (collectively, with the
Chief Executive Officer, the "Named Executive Officers").
- 19 -
20
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------------------ ------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Positions Year Salary Bonus Compensation Options Compensation
- ---------------------------- ---- ------- ----- ------------ ------- ------------
M. Tom Christopher 1994 $ 120,000 $ 512,000 -- -- $ 25,022(1)
Chairman of the Board of 1995 120,000 898,731 -- -- 352,163(2)
Directors
and Chief Executive Officer 1996 190,000 719,419 -- -- 376,844(3)
Tilmon J. Reeves 1994 101,000 225,000 -- -- 2,982(4)
President and Chief Operating 1995 125,000 108,335 -- 245,708(5) 2,310(4)
Officer 1996 125,000 85,000 $3,726,182(6) -- 2,375(4)
Richard R. Wadsworth 1994 110,000 96,000 -- -- 1,675(4)
Senior Vice 1995 110,000 70,000 -- 92,140(5) 2,262(4)
President--Finance, Chief
Financial Officer, and 1996 110,000 70,000 1,464,572(6) -- 2,375(4)
Secretary
- ------------
(1) Consists of (i) matching contributions of $2,975 to the Company's
401(k) Savings Plan for Mr. Christopher and (ii) life insurance
premiums of $22,047 paid on Mr. Christopher's behalf. Does not
include any contingent payments to Mr. Christopher under the ANET
litigation settlement made subsequent to fiscal year 1994. These
payments are contingent upon the Emery contract remaining in effect.
See "Item 3. Legal Proceedings -- ANET Litigation."
(2) Consists of (i) contingent payments in the amount of $325,000 received
by Mr. Christopher under the ANET litigation settlement during fiscal
year 1995, (ii) life insurance premiums of $25,500 paid on Mr.
Christopher's behalf, and (iii) matching contributions of $1,663 to
the Company's 401(k) Savings Plan for Mr. Christopher.
(3) Consists of (i) contingent payments in the amount of $325,000 received
by Mr. Christopher under the ANET litigation settlement during fiscal
year 1996, (ii) life insurance premiums of $48,397 paid on Mr.
Christopher's behalf, and (iii) matching contributions of $3,447 to the
Company's 401(k) Savings Plan for Mr. Christopher.
(4) Consists of matching contributions to the Company's 401(k) Savings
Plan.
(5) The option covering these shares was rescinded on June 12, 1996.
(6) Represents the difference between the exercise price and the fair
market value of the Common Stock underlying the stock options on June
26, 1996, the date of exercise, of the stock options granted in fiscal
year 1996. See "Item 11. Executive Compensation -- Stock Option
Exercises."
STOCK OPTION GRANTS
The following table sets forth certain information concerning options
granted in fiscal year 1996 to the Company's Named Executive Officers. The
Company has no outstanding stock appreciation rights and granted no stock
appreciation rights during fiscal year 1996. Messrs. Reeves and Wadsworth
fully exercised these options on June 26, 1996. No options for the purchase of
Common Stock are currently outstanding.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
------------------------------------------------------------ -----------------------------------
Percent of
Number of Total Exercise Fair
Securities Options or Value on
Underlying Granted to Base Date of
Options Employees in Price Grant Expiration
Name Granted Fiscal Year ($/sh) ($/sh) Date 5%($) 10%($) 0%($)
- ---------------------- ---------- ------------- ------ --------- ----------- -------- -------- ---------
December
Tilmon J. Reeves . 390,707 71.8% $0.01 $7.45 31, 2004 $4,511,648 $6,859,530 $2,910,665
Richard R. June 12,
Wadsworth . . . . . 153,567 28.2% $0.01 $8.63 2005 $2,054,414 $3,123,413 $1,325,732
- 20 -
21
STOCK OPTION EXERCISES
The following table sets forth certain information concerning options
exercised in fiscal year 1996 by certain of the Company's Named Executive
Officers. Messrs. Reeves and Wadsworth fully exercised these options on June
26, 1996. No options for the purchase of Common Stock are currently
outstanding.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
Name Shares Acquired on Exercise Value Realized ($)
---- --------------------------- -------------------
Tilmon J. Reeves . . . . . . . . . . . . . . 390,707(1) $3,726,182
Richard R. Wadsworth . . . . . . . . . . . . 153,567(2) $1,464,572
- ----------
(1) The Company withheld 156,283 of these shares in satisfaction of its
withholding obligations with respect to the exercise of these options.
(2) The Company withheld 61,427 of these shares in satisfaction of its
withholding obligations with respect to the exercise of these options.
DIRECTOR COMPENSATION
Pursuant to the Company's Bylaws, the members of the Board of
Directors may be compensated in a manner and at a rate determined from time to
time by the Board of Directors. Directors who are employees of Kitty Hawk do
not receive additional compensation for service as a director. Under the
Company's Omnibus Securities Plan, directors who are not employees of the
Company shall receive shares of Common Stock in an amount equal to their net
annual retainer (which is currently anticipated to be $10,000).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1996, Mr. Christopher determined executive officer
compensation.
During fiscal years 1994 and 1995, Martinaire East, Inc.
("Martinaire"), a Delaware corporation in which Mr. Christopher owned a minority
interest, leased a Learjet (the "Learjet"), 50% owned by Mr. Christopher, from
the Company and provided the Company with on-demand charter services utilizing
the Learjet. During fiscal years 1994 and 1995 the Company paid Martinaire
$982,000 and $232,000, respectively, for on-demand charter services rendered,
which amounts Mr. Christopher believed represented market rates. The Company's
charges to Martinaire for leasing the Learjet and related operating expenses (at
costs Mr. Christopher believed represented market rates) went largely unpaid
until October 1994. The balance owed to Kitty Hawk for the Learjet lease and
related operating expenses at fiscal year end 1994 was $481,297. In accordance
with Company policy, no interest was accrued on these amounts. On October 24,
1994, the owners of the Learjet, including Mr. Christopher, agreed to sell the
Learjet. In connection with this sale, Martinaire repaid the Company
approximately $636,000 representing all unpaid amounts owed to the Company at
that date for the Learjet lease and related operating expenses.
In August 1996, the Company acquired an undivided one-third interest
in two Falcon 20 jet aircraft with two co-owners (the "Co-Owners") who are
unaffiliated with the Company and who each hold a one-third interest in such
aircraft. An interim acquisition note in the amount of $1,700,000, covering
the purchase price and necessary maintenance, was executed by Mr. Christopher
and one of the Co-Owners. In November 1996, the Company and the Co-Owners each
acquired an undivided one-third interest in two additional Falcon 20 jet
aircraft using the proceeds of a new five-year, $4.3 million term loan that
also repaid the interim loan on the first two aircraft. The term loan is
secured by all four Falcon 20 jet aircraft, bears interest at a floating prime
rate, and is payable in monthly installments of principal and interest. The
Company's liability under the term loan is limited to $2.0 million.
The Company and the Co-Owners entered into a co-ownership and
contribution agreement (the "Co-Ownership Agreement") which requires the
parties to contribute equally to the payment of all amounts due under the term
loan, and under which the parties leased the four Falcon 20 jet aircraft to
Ameristar Jet Charters, Inc. ("Ameristar"), an air carrier affiliated with one
of the Co-Owners, for operation in cargo charter service. The lease calls for
monthly lease payments which exceed the installments on the term loan, and
requires Ameristar to maintain the aircraft and to carry appropriate hull
insurance on the aircraft and liability insurance of at least $50 million
combined single limit coverage, with the Company and the Co-Owners named as
loss payees and additional insureds.
- 21 -
22
Beginning in March 1993, Mr. Christopher, in his individual capacity,
subleased the Company's present facility at Dallas/Fort Worth International
Airport for a guaranteed minimum rent of $21,000 per month from Robert F.
Grammer, a director of the Company. During October 1994, Mr. Christopher
transferred his entire interest in this sublease to the Company, and the
Company assumed Mr. Christopher's obligations and liabilities to Mr. Grammer
under the sublease, including environmental liabilities, if any.
Other than the delay in collecting the Martinaire receivable, the
Company believes that the terms of each transaction discussed above were as
favorable to Kitty Hawk as would have been obtainable from unaffiliated parties
under similar circumstances.
Under the terms of the settlement allocating the benefits of the ANET
Litigation, Mr. Christopher received rights to certain contingent future
payments.
EMPLOYMENT AGREEMENTS
Mr. Christopher has an employment agreement with Kitty Hawk that
provides for an initial annual base salary of at least $125,000 and bonuses
determined by the Compensation Committee pursuant to the Company's Annual
Incentive Compensation Plan and otherwise. Mr. Christopher's employment
agreement contains (i) a confidentiality provision that prohibits disclosure of
the Company's proprietary information and (ii) a covenant not to compete that
provides upon Mr. Christopher's termination of employment with the Company for
any reason, Mr. Christopher shall not engage, directly or indirectly, in the
air logistics, charter brokerage, on-demand, or scheduled carriage business
under an FAA Part 121 or Part 135 certificate for five years following such
termination. The employment agreement may be terminated by either party with
or without cause. If the employment agreement is terminated by the Company
without a material breach by Mr. Christopher, he is entitled to six months of
compensation at his then-current salary.
Messrs. Reeves and Wadsworth have employment agreements with Kitty
Hawk that provide for an initial annual base salary of at least $115,000 and
$110,000, respectively, and annual bonuses determined by the Compensation
Committee pursuant to the Company's Annual Incentive Compensation Plan and
otherwise. These employment agreements provide that Mr. Reeves and Mr.
Wadsworth are prohibited from engaging in the air logistics, charter brokerage,
on-demand, or scheduled carriage business under an FAA Part 121 or Part 135
certificate for three and two years, respectively, following termination of
employment. These employment agreements also contain a confidentiality
provision that prohibits disclosure of the Company's proprietary information.
These employment agreements may be terminated by either party thereto with or
without cause. Mr. Reeves' employment agreement provides that if he is
terminated by the Company without material breach by Mr. Reeves, he shall be
entitled to 100% of his then-current salary in the year following termination
and 50% of such annual compensation in both the second and third year following
termination and all rights under the stock options and other benefits described
above. Mr. Wadsworth's employment agreement provides that if he is terminated
by the Company without material breach by Mr. Wadsworth, he shall be entitled
to 100% of his then-current salary in the year following termination and 50% of
such annual compensation in the second and third year following termination and
all rights under the stock options and other benefits described above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of November 22, 1996 by
(i) each person known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director of the Company, (iii) each executive
officer of the Company, and (iv) all of the directors and executive officers of
the Company as a group. All shares shown in the table below are held with sole
voting and investment power, subject to community property laws.
Shares Owned Beneficially
-------------------------
Name Number Percent
---- ----------- -------
M. Tom Christopher (1) . . . . . . . . . . . . . . . . . . 6,673,436 63.8%
Tilmon J. Reeves (1) . . . . . . . . . . . . . . . . . . . 234,424 2.2%
Richard R. Wadsworth (1) . . . . . . . . . . . . . . . . . 92,140 (2)
All directors and executive officers as a group . . . . . . 7,000,000 67.0%
- ---------
(1) The address for this stockholder is 1515 West 20th Street, P.O. Box
612787, Dallas/Fort Worth International Airport, Texas 75261.
(2) Less than 1%.
- 22 -
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Craig, a director of the Company, is of counsel to Burke, Wright &
Keiffer, P.C., counsel to the Company. During fiscal years 1994, 1995, and
1996, the Company paid an aggregate of approximately $813,000 to Burke, Wright &
Keiffer, P.C. for legal services rendered.
See "Item 11. Executive Compensation -- Compensation Committee
Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS -- see Index to Consolidated Financial Statements
on page F-1.
The following financial statements are filed as a part of this report:
Report of Independent Auditors
Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1995 and 1996
Consolidated Statements of Income for the years ended August 31,
1994, 1995, and 1996
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 1994, 1995, and 1996
Consolidated Statements of Cash Flows for the years ended August
31, 1994, 1995, and 1996
Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable or are not
required
(a) 3. EXHIBITS
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission.
EXHIBIT
NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
3.1 -- Certificate of Incorporation of the Company .(2)
3.2 -- Bylaws of the Company.(2)
3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company.(2)
3.4 -- Amendment No. 1 to the Bylaws of the Company.(2)
4.1 -- Specimen Common Stock Certificate.(3)
10.1 -- Master Agreement for Air Charter Transportation Services ("GM
Agreement") dated as of June 4, 1990 by and between General Motors
Corp. ("GM") and the Company.(2)
10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9, 1990 by and
between the Company and GM.(2)
10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4, 1991 by and
between the Company and GM.(2)
10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1, 1990 by and
between the Company and GM.(2)
10.5 -- Addendum No. 3 to the GM Agreement dated as of November 5, 1990 by
and between the Company and GM.(2)
10.6 -- Addendum No. 4 to the GM Agreement dated as of December 3, 1990 by
and between the Company and GM.(2)
10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7, 1991 by and
between the Company and GM.(2)
10.8 -- Addendum No. 6 to the GM Agreement dated as of February 4, 1991 by
and between the Company and GM.(2)
10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4, 1991 by and
between the Company and GM.(2)
10.10 -- Revision to Appendices and to Master Agreement for Air Charter
Transportation Services dated August 13, 1992 by and between the
Company and GM.(2)
10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1, 1994 by and
between the Company and GM.(2)
10.12 -- Aircraft Charter Agreement dated as of February 9, 1994 by and
between the Company and DHL Airways, Inc.(2)
10.13 -- Agreement to Furnish Three (3) CV-600 Aircraft and Air Cargo Services
dated as of May 15, 1995 by and between the Company and Burlington
Air Express Inc. ("Burlington").(3)
10.14 -- Agreement to Furnish Five (5) B727-200 Aircraft and Air Cargo
Services dated as of March 1, 1996 by and between the Company and
Burlington.(3)
10.15 -- Aircraft Operating Lease dated as of March 14, 1995 by and between
Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") and the
Company.(3)
10.16 -- Amendment and Extension of Aircraft Operating Lease dated April 24,
1996 by and between Ting Hong and the Company.(3)
10.17 -- Aircraft Operating Lease dated April 19, 1996 by and between the
Company and Pacific East Asia Cargo Airlines, Inc.(3)
10.18 -- Settlement Agreement dated as of August 22, 1994 by and between the
Company, Aircargo, Leasing, M. Tom Christopher, American
International Airways, Inc., and Conrad Kalitta.(2)
10.19 -- Sublease Agreement dated as of March 1, 1993 by and between Robert F.
Grammer and M. Tom Christopher.(2)
10.20 -- Transfer and Assignment of Sublease Agreement dated as of October 26,
1994 by and between the Company, M. Tom Christopher and Robert F.
Grammer.(2)
10.21 -- Salary Continuation Agreement dated as of June 15, 1993 by and
between the Company and M. Tom Christopher.(2)(4)
10.22 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and
between the Company and James R. Craig.(2)(4)
10.23 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and
between the Company and James R. Craig.(2)(4)
10.24 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, dated
as of September 3, 1996.(3)(4)
10.25 -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan,
dated as of September 3, 1996.(3)(4)
10.26 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation
Plan, dated as of September 3, 1996.(3)(4)
10.27 -- Kitty Hawk, Inc. 401(k) Savings Plan.(2)(4)
10.28 -- Employment Agreement dated as of October 27, 1994 by and between the
Company and M. Tom Christopher.(2)(4)
10.29 -- Amended and Restated Employment Agreement dated as of June 12, 1996
by and between the Company and Richard R. Wadsworth.(3)(4)
10.30 -- Amended and Restated Employment Agreement dated as of December 31,
1995 by and between the Company and Tilmon J. Reeves.(3)(4)
10.31 -- Request for written consent to expand ownership without management
change dated as of October 26, 1994 granted by GM.(2)
10.32 -- Request for written consent to certain disclosures of Master
Agreement and contractual relationship dated as of October 26, 1994
granted by GM.(2)
10.33 -- Kavouras Customer Order Acknowledgment.(2)
10.34 -- Kavouras Meteorological Services Agreement.(2)
10.35 -- Computer Flight Plan and Weather Service Agreement dated as of June
11, 1992 by and between Aircargo and Jeppesen DataPlan, Inc.(2)
10.36 -- Purchase Agreement between Federal Express Corporation and Postal
Air, Inc. (predecessor to the Company) dated as of October 22, 1992
(the "FEASI Agreement").(3)
10.37 -- Amendment No. 1 dated November 17, 1992 to the FEASI Agreement.(3)
10.38 -- Amendment No. 2 dated February 1993 to the FEASI Agreement.(3)
10.39 -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement.(3)
10.40 -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement.(3)
10.41 -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement.(3)
10.42 -- Amended and Restated Credit Agreement, dated as of August 14, 1996,
by and among the Company, Wells Fargo Bank (Texas), National
Association, and Bank One, Texas, N.A.(3)
10.43 -- Aircraft Purchase Agreement between the Company and Intrepid Aviation
Partners, LLC dated as of September 24, 1996.(3)
10.44 -- Purchase Agreement between the Company and International Aero Components,
Inc. dated as of November 15, 1996.(1)
10.45 -- Purchase Agreement between the Company and International Technical Consultants,
Inc. dated as of November 25, 1996.(1)
11.1 -- Statement of Computation of Net Income per Share.(1)
21.1 -- Subsidiaries of the Registrant.(3)
23.1 -- Consent of Ernst & Young LLP.(1)
27.1 -- Financial Data Schedule.(1)
- ---------------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996, and
incorporated herein by reference.
(4) The exhibit is a management contract or compensatory plan or
arrangement.
(b) REPORTS ON FORM 8-K
None.
- 23 -
24
KITTY HAWK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ................................... F-2
Consolidated Balance Sheets as of August 31, 1995 and 1996 ....... F-3
Consolidated Statements of Income for the years ended
August 31, 1994, 1995 and 1996 ........................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended August 31, 1994, 1995 and 1996 ..................... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1994, 1995 and 1996 ........................... F-6
Notes to Consolidated Financial Statements ....................... F-7
F-1
25
REPORT OF INDEPENDENT AUDITORS
Stockholders
Kitty Hawk, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Kitty Hawk,
Inc. and subsidiaries as of August 31, 1995 and 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended August 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kitty Hawk,
Inc. and subsidiaries at August 31, 1995 and 1996 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended August 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Dallas, Texas
October 31, 1996
F-2
26
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31,
-----------------------------
ASSETS 1995 1996
------------ ------------
Current assets
Cash and cash equivalents .................................. $ 3,801,378 $ 5,763,904
Trade accounts receivable .................................. 12,967,734 14,195,990
Deferred income taxes ...................................... 50,410 156,562
Income tax receivable ...................................... -- 765,395
Inventory and aircraft supplies ............................ 98,386 1,713,812
Prepaid expenses and other assets .......................... 797,825 918,929
------------ ------------
Total current assets .................................... 17,715,733 23,514,592
Property and equipment
Aircraft ................................................... 36,179,455 53,695,320
Aircraft work-in-progress .................................. -- 13,476,355
Machinery and equipment .................................... 1,425,272 1,776,319
Furniture and fixtures ..................................... 251,349 241,370
Transportation equipment ................................... 176,057 236,708
------------ ------------
38,032,133 69,426,072
Less: accumulated depreciation and amortization ........... (7,794,332) (13,112,786)
------------ ------------
Net property and equipment............................... 30,237,801 56,313,286
------------ ------------
Total assets ................................................... $ 47,953,534 $ 79,827,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ........................................... $ 9,327,109 $ 12,952,180
Accrued expenses ........................................... 1,336,696 1,580,465
Accrued maintenance reserves ............................... 2,026,255 2,323,466
Revolving Credit Facility for aircraft acquisitions
expected to be refinanced ................................ -- 10,000,000
Current maturities of long-term debt ....................... 3,278,553 3,620,240
------------ ------------
Total current liabilities................................ 15,968,613 30,476,351
Long-term debt ................................................. 13,702,652 23,291,302
Deferred income taxes .......................................... 1,316,365 2,421,480
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value: Authorized shares
--1,000,000, none issued ................................ -- --
Common stock, $.01 par value: Authorizedshares --
25,000,000; issued and outstanding
--7,423,436 and 7,967,710, respectively ................. 74,234 79,677
Additional paid in capital ................................. -- 4,635,524
Retained earnings .......................................... 16,891,670 20,999,846
Less common stock in treasury,
no shares and 217,710 shares, respectively............... -- (2,076,302)
------------ ------------
Total stockholders' equity............................... 16,965,904 23,638,745
------------ ------------
Total liabilities and stockholders' equity ..................... $ 47,953,534 $ 79,827,878
============ ============
See accompanying notes.
F-3
27
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED AUGUST 31,
-------------------------------------------------
1994 1995 1996
------------- ------------- -------------
Revenues:
Air freight carrier .......................... $ 28,284,894 $ 41,117,564 $ 52,921,762
Air logistics ................................ 79,414,952 62,592,819 89,492,974
------------- ------------- -------------
Total revenues .......................... 107,699,846 103,710,383 142,414,736
Costs of revenues:
Air freight carrier .......................... 19,549,833 28,104,280 38,760,430
Air logistics ................................ 73,401,606 57,428,344 80,139,570
------------- ------------- -------------
Total costs of revenues ................. 92,951,439 85,532,624 118,900,000
------------- ------------- -------------
Gross profit ..................................... 14,748,407 18,177,759 23,514,736
General and administrative expenses .............. 6,012,975 7,832,167 9,079,891
Non-qualified employee profit sharing expense .... 731,862 1,000,957 1,169,880
Stock option grants to executives ................ -- -- 4,230,954
------------- ------------- -------------
Operating income ................................. 8,003,570 9,344,635 9,034,011
Other income (expense):
Interest expense ............................. (342,502) (1,184,921) (1,859,284)
Contract settlement income, net .............. 1,177,742 -- --
Loss on asset disposal ....................... -- -- (589,049)
Other, net ................................... (431,957) (600,667) 291,255
------------- ------------- -------------
Income before income taxes ....................... 8,406,853 7,559,047 6,876,933
Income taxes ..................................... 3,146,157 3,142,653 2,767,744
------------- ------------- -------------
Net income ....................................... $ 5,260,696 $ 4,416,394 $ 4,109,189
============= ============= =============
Net income per share ............................. $ 0.66 $ 0.55 $ 0.52
============= ============= =============
Weighted average common and common
equivalent shares outstanding ............... 7,967,710 7,967,710 7,927,856
============= ============= =============
See accompanying notes.
F-4
28
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
NUMBER OF COMMON PAID IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
-----------------------------------------------------------------------------------------
Balance at August 31, 1993 ............. 10,604,908 $ 106,048 $ -- $ 7,243,766 $ (61,000) $ 7,288,814
Retirement of treasury stock in
connection with the Kitty Hawk,
Inc. merger ................... (3,181,472) (31,814) -- (29,186) 61,000 --
Net income ......................... -- -- -- 5,260,696 -- 5,260,696
-----------------------------------------------------------------------------------------
Balance at August 31, 1994 ............. 7,423,436 74,234 -- 12,475,276 -- 12,549,510
Net income ......................... -- -- -- 4,416,394 -- 4,416,394
-----------------------------------------------------------------------------------------
Balance at August 31, 1995 ............ 7,423,436 74,234 -- 16,891,670 -- 16,965,904
Stock option grants to executives .. -- -- 4,230,954 -- -- 4,230,954
Exercise of employee stock options
(See Note 1) .................... 544,274 5,443 -- (1,013) -- 4,430
Purchase of treasury stock,
217,710 shares at cost .......... -- -- -- -- (2,076,302) (2,076,302)
Tax benefit of stock option grants
to executives ................... -- -- 404,570 -- -- 404,570
Net income ......................... -- -- -- 4,109,189 -- 4,109,189
-----------------------------------------------------------------------------------------
Balance at August 31, 1996 ............. 7,967,710 $ 79,677 $ 4,635,524 $ 20,999,846 $ (2,076,302) $ 23,638,745
=========================================================================================
See accompanying notes.
F-5
29
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
Operating activities:
Net income ................................. $ 5,260,696 $ 4,416,394 $ 4,109,189
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............. 1,935,348 4,095,156 6,873,033
Loss disposal of property and
equipment ............................... 62,251 -- 589,049
Aircraft received in contract settlement ... (750,000) -- --
Deferred income taxes ...................... (638,568) 732,795 998,963
Stock option grants to executives .......... -- -- 4,230,954
Deferred income ............................ -- -- --
Changes in operating assets and liabilities:
Trade accounts receivable ................ (8,036,613) 2,673,139 (1,228,256)
Contract settlement receivable ........... 3,500,000 -- --
Receivables from affiliates .............. (53,035) 481,297 --
Income taxes receivable .................. -- -- (765,395)
Inventory and aircraft supplies .......... (19,778) 23,285 (1,615,426)
Prepaid expenses and other ............... 283,342 (532,693) (121,104)
Accounts payable and accrued expenses .... 4,063,034 (2,379,510) 3,868,840
Accrued maintenance reserves ............. 379,535 1,429,886 297,211
Income taxes payable ..................... 1,614,521 (1,883,898) --
------------ ------------ ------------
Net cash provided by operating activities ........... 7,600,733 9,055,851 17,237,058
Investing activities:
Capital expenditures ....................... (13,875,983) (17,929,106) (33,537,567)
------------ ------------ ------------
Net cash used in investing activities ............... (13,875,983) (17,929,106) (33,537,567)
Financing activities:
Proceeds from issuance of long-term debt ... 10,916,656 9,911,240 23,117,000
Repayments of long-term debt ............... (2,747,533) (2,074,970) (3,186,663)
Acquisition of treasury shares ............. -- -- (2,076,302)
Proceeds from issuance of common stock ..... -- -- 4,430
Tax benefit of stock option grant
to executives ........................... -- -- 404,570
------------ ------------ ------------
Net cash provided by financing
activities ................................. 8,169,123 7,836,270 18,263,035
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................... 1,893,873 (1,036,985) 1,962,526
Cash and cash equivalents at beginning of
period ..................................... 2,944,490 4,838,363 3,801,378
------------ ------------ ------------
Cash and cash equivalents at end of period .......... $ 4,838,363 $ 3,801,378 $ 5,763,904
============ ============ ============
F-6
30
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight
services through two related businesses: (i) an air freight carrier and (ii) an
air logistics service provider, all primarily in North America. The Company
provided air logistics services to one customer which accounted for
approximately 63%, 47% and 41% of its total revenues in fiscal years 1994, 1995
and 1996, respectively. Related accounts receivable from this customer at
August 31, 1995 and 1996, were approximately $5,089,000, and $4,915,000,
respectively. The contract for these services is effective through May 31,
1997; however, such contract may be canceled by either party with 30 days
notice. Another customer accounted for approximately 10%, 10% and 15% of the
Company's total revenues in fiscal years 1994, 1995 and 1996, respectively.
The Company generally sells on open accounts with 30-day terms and does not
require collateral for credit sales.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line and accelerated methods over estimated useful lives ranging
from three to ten years. Convair and DC-9 airframes are fully depreciated over
the period remaining to the next major airframe overhaul since the Company does
not expect to perform major airframe overhauls on these aircraft. Boeing
727-200 airframes are fully depreciated over an estimated useful life of ten
years.
Costs relating to major airframe overhauls are capitalized as incurred and
amortized over the estimated number of flight hours until the next overhaul
(the deferral method). No major airframe overhauls have been performed to
date.
Estimated costs relating to periodic jet airframe maintenance are accrued
over the flight hours remaining before such periodic maintenance must be
performed. Costs relating to non-jet periodic airframe maintenance are
expensed as incurred.
With respect to aircraft engines, the useful life is the estimated number of
flight hours remaining until the next required engine overhaul.
F-7
31
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Income taxes have been provided using the liability method in accordance
with the Financial Accounting Standards Board Statement No. 109, Accounting for
Income Taxes.
Revenue Recognition
Revenues are recognized as services are provided.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. The effect of options to purchase 390,707 and 153,567 shares of the
Company's common stock at $0.01 granted to certain executives in December 1995
and June 1996, respectively, have been included in the calculation of weighted
average common and common equivalent shares for all periods presented.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and held in banks, money market funds, and other investments with
original maturities of three months or less.
Inventory
Inventory consists of aircraft parts and is stated at the lower of average
cost or market.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Reorganization
In October, 1994, Kitty Hawk, Inc. was organized as a wholly owned
subsidiary of Kitty Hawk Group, Inc. ("Group"). Group subsequently merged with
Kitty Hawk, Inc. with Kitty Hawk, Inc. being the surviving entity. In
connection therewith, each outstanding share of Group common stock was
exchanged for 106,049 shares of Kitty Hawk, Inc. common stock. Additionally,
Group stock held in treasury was retired. The accompanying consolidated
financial statements present the effects of the merger on a retroactive basis.
F-8
32
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain amounts from prior years have been reclassified to conform to
current year presentation.
Stock Split
On June 28, 1996 the Company approved a 1.2285391-for-1 stock split effected
as a stock dividend. All references to common stock and per share data have
been restated to give effect to the split.
2. DEBT
Long-term debt consists of the following:
AUGUST 31,
-----------------------
1995 1996
---------- ----------
(1)Note payable, bearing interest at prime plus 1.75% (10.00% at August
31, 1996) payable in 48 monthly installments of $25,021 plus
interest, with a maturity date of December 1996; secured by a Douglas
DC-9 aircraft, with a carrying value of approximately $767,000 at
August 31, 1996 ........................................................... $ 350,291 $ 50,042
(2)Note payable, bearing interest at an adjusted Eurodollar rate plus
2.25% payable in 21 quarterly installments of $153,354 plus interest,
with a maturity date of September 1999. (See (8) below.) ................. 2,607,021 --
(3)Note payable, bearing interest at an adjusted Eurodollar rate plus
2.25% payable in 71 monthly installments of $76,891 plus interest,
with a maturity date of October 2000. (See (8) below.) .................... 4,767,245 --
(4)Note payable, bearing interest at an adjusted Eurodollar rate plus
2.00% payable in 72 monthly installments of $60,517 plus interest,
with a maturity date of March 2001. (See (8) below.) ...................... 4,054,641 --
(5)Note payable, bearing interest at an adjusted Eurodollar rate plus
2.00% payable in 72 monthly installments of $59,077 plus interest,
with a maturity date of July 2001. (See (8) below.) ....................... 4,201,507 --
(6)Note payable, bearing interest at 9.75% payable in 18 monthly
installments of interest only and 42 monthly installments of $28,212
including interest beginning December 1996, with a maturity date of
May 2000; secured by a Douglas DC-9 aircraft, with a carrying value
of approximately $767,000 at August 31, 1996 .............................. 1,000,500 1,000,500
F-9
33
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. DEBT (CONTINUED)
AUGUST 31,
-----------------------
1995 1996
---------- ----------
(7)Note payable, bearing interest at an adjusted Eurodollar rate
plus 1.50% to 2.00% based upon a fixed charge coverage ratio of the
Company (7.0625% at August 31, 1996), payable in 28 quarterly
installments plus interest beginning September 1996, with a
maturity date of June 2003; secured by two Boeing 727-200 aircraft,
with a carrying value of approximately $11,783,000 at
August 31,1996 .................................................... -- 11,225,000
(8)Note payable, bearing interest at an adjusted Eurodollar rate
plus 1.50% to 2.00% based upon a fixed charge coverage ratio of the
Company (7.07% at August 31, 1996), payable in 23 quarterly
installments of $531,000 plus interest beginning September 1996,
with a maturity date of June, 2002; secured by four Douglas DC-9
aircraft and four Boeing 727-200 aircraft, with a net carrying
value of approximately $18,398,000 at August 31, 1996 ............. -- 12,744,000
(9)Revolving Credit Facility for general corporate purposes .......... -- 1,892,000
----------- -----------
16,981,205 26,911,542
Less current portion ................................................. 3,278,553 3,620,240
----------- -----------
$13,702,652 $23,291,302
=========== ===========
Maturities of long-term debt at August 31, 1996 are as follows:
1997............................. $ 3,620,240
1998............................. 5,645,349
1999............................. 3,888,291
2000............................. 3,950,162
2001............................. 3,847,154
Thereafter....................... 5,960,346
-----------
$26,911,542
===========
During August 1996, the Company entered into a new Credit Agreement (notes
(7), (8) and (9) above) with a bank and refinanced a portion of the existing
notes payable. Proceeds of note (8) in the amount of $12,744,000 were used to
pay down the outstanding balances of notes (2), (3), (4) and (5).
The Credit Agreement subjects the Company to financial covenants, including
fixed charge coverage, cash flow and leverage ratios. The Credit Agreement
also limits the payment of dividends.
F-10
34
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At August 31, 1996 the Company has outstanding two interest rate swap
agreements with the commercial bank to whom note (7) is payable, having a total
notional principal amount of $11,225,000. These swap agreements effectively
change the interest rate exposure on note (7) to a fixed 7.75 percent. The
notional principal amounts of the interest rate swaps reduce in proportion to
required principal reductions on the related note. The Company is exposed to
credit loss in the event of nonperformance by the other party in the interest
rate swap agreements. However, the Company does not anticipate nonperformance
by the counterparty. Based on a quote provided by the bank, these swap
agreements could have been terminated at August 31, 1996 in exchange for a
payment to the Company of $343,408.
Under the Credit Agreement, the Company also has a $15 million Revolving
Credit Facility available, of which $10 million is restricted for interim
financing of up to $6.5 million per aircraft for aircraft acquisitions by the
Company; the remaining $5 million is for general corporate purposes, including
interim financing for acquired aircraft that exceeds the limits that apply to
the restricted portion. Any advance under the portion that is restricted to
interim financing for aircraft acquisition ($10 million at August 31, 1996)
must be repaid in full within 150 days of first advance for the acquired
aircraft. The outstanding balance of the Revolving Credit Facility results
from borrowings in connection with purchasing two Boeing 727-200s that are
being converted to freighter configuration, and to fund such cargo conversion,
noise abatement modifications and maintenance on those two aircraft. The
Revolving Credit Facility bears interest at an adjusted Eurodollar rate plus
1.50% to 2.00% based upon a fixed charge coverage ratio of the Company
(6.96875% at August 31, 1996). The Revolving Credit Facility expires on
December 31, 1998 and $3,108,000 was available to be borrowed by the Company at
August 31, 1996. The company is currently negotiating to refinance this debt
on a long-term basis.
Under the Credit Agreement, the Company has a $10 million facility
available. The funds will be available to the Company until April 29, 1998,
and any borrowings under this facility mature March 31, 2003. At August 31,
1996, the entire $10 million was available to the Company.
Based upon the variable interest rates provided for in the substantial
majority of the Company's long-term debt, management believes the fair value of
its long-term debt approximates its carrying value at August 31, 1996.
In connection with the Company's recent acquisition of a one-third undivided
interest in four Falcon 20 jet aircraft, the co-owners of the aircraft entered
into a five year, $4.3 million term loan, bearing interest at a floating prime
rate, which is secured by all four Falcon 20 aircraft and requires monthly
payments of principal and interest. The co-owners leased the aircraft to an air
carrier affiliated with one of the co-owners. The lease calls for monthly lease
payments which exceed the installments on the term loan. The Company's
liability under this term loan is limited to $2.0 million.
The Company made cash interest payments of $280,754, $1,088,928, and
$1,765,523 during fiscal years ended 1994, 1995 and 1996, respectively.
F-11
35
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
The provision for income taxes consists of the following:
Year ended August 31,
----------------------------------------
1994 1995 1996
----------- ----------- -----------
Current income tax:
Federal ........................ $ 3,434,725 $ 1,829,723 $ 1,352,390
State .......................... 350,000 580,135 416,391
----------- ----------- -----------
Total current income tax .... 3,784,725 2,409,858 1,768,781
----------- ----------- -----------
Deferred income tax:
Federal ........................ (608,460) 627,993 758,138
State .......................... (30,108) 104,802 240,825
----------- ----------- -----------
Total deferred income tax ... (638,568) 732,795 998,963
----------- ----------- -----------
$ 3,146,157 $ 3,142,653 $ 2,767,744
=========== =========== ===========
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:
Year ended August 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
Income tax computed at statutory rate ......... $ 2,858,330 $ 2,570,076 $ 2,338,157
State income taxes, net of federal benefit .... 211,129 452,058 433,763
Other, net .................................... 76,698 120,519 (4,176)
----------- ----------- -----------
Total ...................................... $ 3,146,157 $ 3,142,653 $ 2,767,744
=========== =========== ===========
The components of the net deferred tax liabilities recognized on the
accompanying balance sheets are as follows:
August 31,
--------------------------
1995 1996
----------- -----------
Deferred tax liabilities:
Depreciation .................... $(2,071,971) $(3,318,803)
Prepaid expenses ................ (117,440) (17,229)
----------- -----------
Total deferred tax liabilities .. (2,189,411) (3,336,032)
----------- -----------
Deferred tax assets:
Nondeductible accruals .......... 167,850 173,790
Airframe reserves ............... 755,606 897,324
----------- -----------
Total deferred tax assets ..... 923,456 1,071,114
----------- -----------
Net deferred tax liability ......... $(1,265,955) $(2,264,918)
=========== ===========
The Company made cash income tax payments of $2,170,203, $4,552,371, and
$2,078,673 during fiscal years 1994, 1995 and 1996 respectively.
F-12
36
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS
The Company leases its primary office and maintenance space under a
non-cancelable operating lease which expires in fiscal year 1998 from a party
who, effective October 1994, became a member of the Company's Board of
Directors. Rent expense under this lease was $260,970, $252,595, and $254,934
for fiscal years 1994, 1995 and 1996, respectively. The minimum annual rental
under the noncancelable operating lease is $252,000 and $126,000 for fiscal
year 1997 and 1998, respectively. Under the lease agreement, the Company has
the option to purchase the office facilities and the landlord's interest in the
associated ground lease at any time prior to March 1, 1997 for consideration of
$2,200,000 less $5,000 for each monthly rental payment made after March 1,
1993.
The Company leases its secondary maintenance space under a cancelable
operating lease which expires in May 1999. The lease can be canceled by either
party with 60 days notice. Rent expense under this lease was $59,853 and
$163,500 in fiscal years 1995 and 1996, respectively. The minimum annual
rental under this lease is $163,500, $163,500, and $122,625 fiscal year 1997,
1998 and 1999, respectively.
5. CONTRACT SETTLEMENT
In September 1992, the Company was awarded a contract by the United States
Postal Service (the "USPS"). An unaffiliated air freight carrier (the
"associated bidder") was associated with the Company in the successful bid.
Prior to the commencement of the contract, competing bidders filed suit against
the USPS seeking to set aside the award.
In April 1993, to avoid the expense and uncertainty of continued litigation,
the Company accepted a settlement. Under the settlement, the contract was
terminated for convenience and re-awarded to the incumbent. Additionally, the
Company received $12.7 million and the right to receive up to a total of $6.5
million over ten years in installments of $162,500 per quarter, contingent on
the re-awarded contract remaining in effect. Appropriate releases were
exchanged.
At August 31, 1993, the Company and the associated bidder had not agreed
upon the division of the settlement proceeds, which were held in escrow; but
the Company reasonably estimated its share of the proceeds, exclusive of the
$6.5 million to be paid in installments over ten years, to be at least $3.5
million. The Company therefore recorded the $3.5 million as a receivable in
current assets and, net of contract-related expense, settlement income of
$724,683 for fiscal year 1993.
During fiscal year 1994, the Company and the associated bidder agreed to a
division of the settlement proceeds and resolution of all their related claims.
Under that agreement, the Company received from escrow approximately $3.5
million cash, obtained title to a Boeing 727-200 aircraft, independently valued
and recorded by the Company at $750,000, and was relieved of $1.2 million of
previously accrued transportation costs. Additionally, one-half of the
contingent future quarterly installment payments were allocated to the
Company's majority stockholder. As a result of this settlement, for fiscal
year 1994, the Company recorded additional contract settlement income of
$1,177,742, which is net of approximately $730,000 in additional settlement
costs, principally legal fees. This amount also included both income and an
offsetting expense of $677,239, representing the estimated fair value of the
future quarterly installment payments that will be paid directly to the
Company's majority stockholder.
F-13
37
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LITIGATION
The Company filed suit against Express One International, Inc. ("Express
One") in July 1992 in Dallas County, Texas, claiming that Express One breached
an aircraft charter agreement and seeking actual damages of approximately
$60,000. Express One counterclaimed, asserting that the Company wrongfully
repudiated the lease agreement and seeking damages of $356,718 for services
performed, $1,140,000 for additional fees it would have received under the
contract, punitive damages and its attorney's fees and costs.
In February 1995, a jury verdict in the case granted the Company $25,000 in
damages plus its attorneys fees and denied Express One's claims. The court
entered judgment in favor of the Company for $25,000 in damages, for $148,115
in attorneys fees through trial and for additional attorneys fees if Express
One appeals. Before expiration of the time for appeal, Express One filed a
petition under Chapter 11 of the U.S. Bankruptcy Code. There is a dispute
about whether Express One has preserved a right to appeal and whether the
judgment has become final. Therefore, the judgment awarded to the Company has
not been recorded in the financial statements. The Company does not expect the
outcome to have a material adverse effect upon the Company's financial
condition or results of operations.
The USPS selected the Company's air freight carrier in September 1992 as the
successful bidder on a contract for a multi-city network of air transportation
services supporting the USPS Express Mail system. Two unsuccessful bidders
sued the USPS to enjoin the award. The Company intervened. This litigation
(the "ANET Litigation") was settled in April 1993 by agreements under which the
USPS terminated the Company's contract for convenience and awarded the contract
to the incumbent contractor, Emery Worldwide Airlines, Inc. ("Emery").
In March 1995, the Company was served with a complaint in a qui tam lawsuit
filed on behalf of the U.S. Government by a third-party plaintiff seeking to
share a recovery under the Federal False Claims Act (the "Act"). The suit,
filed in May 1994, was filed under seal in accordance with the Act, to enable
the U.S. Government to review the claim before its disclosure to the
defendants. The U.S. Government declined to pursue the claim, but the
third-party plaintiff chose to continue. The suit claimed that the Company and
another defendant fraudulently failed to disclose to the USPS, both in the
Company's successful bid and in the settlement of the ANET litigation, that
some of the aircraft the Company proposed to purchase and use to perform the
contract were aging aircraft with high use, and claimed that the Company and
Emery similarly fraudulently conspired in connection with the settlement of the
ANET litigation. The suit sought to recover treble the $10 million settlement
payment made by the USPS in settling the ANET litigation, plus the third party
plaintiff's costs and fees.
The Company moved to dismiss the suit with prejudice on grounds that it was
barred by the Act. The Company also sought to recover its attorneys' fees from
the plaintiff and to obtain sanctions against the plaintiff's attorneys. The
Company believes the suit was clearly frivolous because, among other things,
the Company in the ANET bid identified each aircraft by serial number, age,
hours and cycles, and made available use and maintenance records for each
aircraft as required by the request for proposal, and that the USPS reviewed
and inspected the aircraft, data and records and found them
F-14
38
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acceptable. In May 1996, the court dismissed the suit and awarded the Company
its attorneys' fees and costs. The plaintiff has asked the court to reconsider
its ruling. The Company does not expect the outcome to have a material adverse
effect upon the Company's financial condition or results of operations.
Additionally, in the normal course of business, the Company is a party to
matters of litigation, none of which, in the opinion of management, will have a
material adverse effect on the Company's financial condition or the results of
operations.
7. STOCK OPTIONS
In October 1994 the Company granted non-qualified options to two executives
to purchase a total of 337,848 shares of common stock at $7.81 per share.
In December 1995, the Company canceled 245,708 of the options outstanding
and granted to an executive a non-qualified option to purchase 390,707 shares
of common stock at $0.01 per share. The new option has a term of nine years
and is fully vested. In June 1996, the Company canceled the remaining 92,140
options outstanding and granted to another executive a non-qualifying option to
purchase 153,567 shares of common stock at $0.01 per share. The new option has
a term of nine years and is fully vested. On June 26, 1996, the executives
fully exercised their options. No options remain outstanding at August 31,
1996. Based on an independent appraisal commissioned by the Company, the fair
value of the options of $4,230,954 is reflected as a charge to earnings in the
accompanying statement of income for the year ended August 31, 1996.
8. RELATED PARTY TRANSACTIONS
The Company provided maintenance and other services as well as cash advances
to Martinaire East, Inc. ("Martinaire"), a company in which a minority interest
was owned by the Company's majority stockholder. Total sales to Martinaire for
fuel and services were approximately, $235,000 and $22,000 in fiscal years 1994
and 1995, respectively. Martinaire also flies charter service for the Company.
During fiscal years 1994 and 1995, Martinaire provided the Company services in
the amount of approximately, $982,000 and $232,000, respectively. At August
31, 1995 there were no amounts due from Martinaire. At August 31, 1996,
Martinaire is no longer considered to be a related party.
F-15
39
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS
The Company has a retirement savings plan under Section 401(k) of the
Internal Revenue Code. Established effective September 1, 1993, the plan
covers substantially all employees meeting minimum service requirements. Under
the plan, contributions are voluntarily made by employees and the Company
provides matching contributions based upon the employees' contribution. The
Company incurred $80,812, $121,217, and $159,967 in matching contributions
related to this plan during fiscal year 1994, 1995 and 1996, respectively.
The Company has adopted:
- -- An Omnibus Securities Plan (the Plan) under which 300,000 shares of its
common stock are reserved for issuance to its employees. The Plan will be
administered by the Company's Compensation Committee which may grant stock
based and non-stock based compensation to the Plan participants.
- -- An Annual Incentive Compensation Plan (the Compensation Plan) under which
the Compensation Committee will determine and award semiannual bonuses to
employees of the Company. The aggregate amount of bonuses available for
award is limited to 10% of the Company's income before income taxes and the
bonuses to be paid under the Compensation Plan. The Company may elect to
pay the full amount of the bonuses in common stock, which is limited to
total stock distributions of 200,000 shares of common stock.
- -- An Employee Stock Purchase Plan covering up to 100,000 shares of the
Company's common stock.
10. SUBSEQUENT EVENT
In October 1996, the Company sold in an initial public offering 2,700,000
shares of Common Stock, raising net proceeds of approximately $30.1 million to
purchase and modify to cargo configuration five Boeing 727-200 aircraft.
F-16
40
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 27th day of November,
1996.
KITTY HAWK, INC.
By: /s/ RICHARD R. WADSWORTH
---------------------------------------------
Richard R. Wadsworth
Senior Vice President -- Finance, Chief
Financial Officer, and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Company
and in the capacities indicated on the 27th day of November, 1996.
NAME CAPACITIES
---- ----------
/s/ M. TOM CHRISTOPHER Chairman of the Board of Directors and Chief
- ------------------------------------------- Executive Officer
M. Tom Christopher
/s/ TILMON J. REEVES President, Chief Operating Officer and Director
- -------------------------------------------
Tilmon J. Reeves
/s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief Financial
- ------------------------------------------- Officer, Secretary, Director and Principal Financial
Richard R. Wadsworth and Accounting Officer
/s/ TED J. COONFIELD Director
- -------------------------------------------
Ted J. Coonfield
/s/ JAMES R. CRAIG Director
- -------------------------------------------
James R. Craig
/s/ ROBERT F. GRAMMER Director
- -------------------------------------------
Robert F. Grammer
/s/ LEWIS S. WHITE Director
- -------------------------------------------
Lewis S. White
- 24 -
41
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
3.1 -- Certificate of Incorporation of the Company .(2)
3.2 -- Bylaws of the Company.(2)
3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company.(2)
3.4 -- Amendment No. 1 to the Bylaws of the Company.(2)
4.1 -- Specimen Common Stock Certificate.(3)
10.1 -- Master Agreement for Air Charter Transportation Services ("GM
Agreement") dated as of June 4, 1990 by and between General Motors
Corp. ("GM") and the Company.(2)
10.2 -- Addendum No. 1 to the GM Agreement dated as of August 9, 1990 by and
between the Company and GM.(2)
10.3 -- Addendum No. 1 to the GM Agreement dated as of June 4, 1991 by and
between the Company and GM.(2)
10.4 -- Addendum No. 2 to the GM Agreement dated as of October 1, 1990 by and
between the Company and GM.(2)
10.5 -- Addendum No. 3 to the GM Agreement dated as of November 5, 1990 by
and between the Company and GM.(2)
10.6 -- Addendum No. 4 to the GM Agreement dated as of December 3, 1990 by
and between the Company and GM.(2)
10.7 -- Addendum No. 5 to the GM Agreement dated as of January 7, 1991 by and
between the Company and GM.(2)
10.8 -- Addendum No. 6 to the GM Agreement dated as of February 4, 1991 by
and between the Company and GM.(2)
10.9 -- Addendum No. 7 to the GM Agreement dated as of March 4, 1991 by and
between the Company and GM.(2)
10.10 -- Revision to Appendices and to Master Agreement for Air Charter
Transportation Services dated August 13, 1992 by and between the
Company and GM.(2)
10.11 -- Addendum No. 5 to the GM Agreement dated as of May 1, 1994 by and
between the Company and GM.(2)
10.12 -- Aircraft Charter Agreement dated as of February 9, 1994 by and
between the Company and DHL Airways, Inc.(2)
10.13 -- Agreement to Furnish Three (3) CV-600 Aircraft and Air Cargo Services
dated as of May 15, 1995 by and between the Company and Burlington
Air Express Inc. ("Burlington").(3)
10.14 -- Agreement to Furnish Five (5) B727-200 Aircraft and Air Cargo
Services dated as of March 1, 1996 by and between the Company and
Burlington.(3)
10.15 -- Aircraft Operating Lease dated as of March 14, 1995 by and between
Ting Hong Oceanic Enterprises Co., Ltd. ("Ting Hong") and the
Company.(3)
10.16 -- Amendment and Extension of Aircraft Operating Lease dated April 24,
1996 by and between Ting Hong and the Company.(3)
10.17 -- Aircraft Operating Lease dated April 19, 1996 by and between the
Company and Pacific East Asia Cargo Airlines, Inc.(3)
10.18 -- Settlement Agreement dated as of August 22, 1994 by and between the
Company, Aircargo, Leasing, M. Tom Christopher, American
International Airways, Inc., and Conrad Kalitta.(2)
10.19 -- Sublease Agreement dated as of March 1, 1993 by and between Robert F.
Grammer and M. Tom Christopher.(2)
10.20 -- Transfer and Assignment of Sublease Agreement dated as of October 26,
1994 by and between the Company, M. Tom Christopher and Robert F.
Grammer.(2)
10.21 -- Salary Continuation Agreement dated as of June 15, 1993 by and
between the Company and M. Tom Christopher.(2)(4)
10.22 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and
between the Company and James R. Craig.(2)(4)
10.23 -- Split Dollar Insurance Agreement dated as of June 15, 1993 by and
between the Company and James R. Craig.(2)(4)
10.24 -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, dated
as of September 3, 1996.(3)(4)
10.25 -- Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan,
dated as of September 3, 1996.(3)(4)
10.26 -- Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation
Plan, dated as of September 3, 1996.(3)(4)
10.27 -- Kitty Hawk, Inc. 401(k) Savings Plan.(2)(4)
10.28 -- Employment Agreement dated as of October 27, 1994 by and between the
Company and M. Tom Christopher.(2)(4)
10.29 -- Amended and Restated Employment Agreement dated as of June 12, 1996
by and between the Company and Richard R. Wadsworth.(3)(4)
10.30 -- Amended and Restated Employment Agreement dated as of December 31,
1995 by and between the Company and Tilmon J. Reeves.(3)(4)
10.31 -- Request for written consent to expand ownership without management
change dated as of October 26, 1994 granted by GM.(2)
10.32 -- Request for written consent to certain disclosures of Master
Agreement and contractual relationship dated as of October 26, 1994
granted by GM.(2)
10.33 -- Kavouras Customer Order Acknowledgment.(2)
10.34 -- Kavouras Meteorological Services Agreement.(2)
10.35 -- Computer Flight Plan and Weather Service Agreement dated as of June
11, 1992 by and between Aircargo and Jeppesen DataPlan, Inc. (2)
10.36 -- Purchase Agreement between Federal Express Corporation and Postal
Air, Inc. (predecessor to the Company) dated as of October 22, 1992
(the "FEASI Agreement").(3)
10.37 -- Amendment No. 1 dated November 17, 1992 to the FEASI Agreement.(3)
10.38 -- Amendment No. 2 dated February 1993 to the FEASI Agreement.(3)
10.39 -- Amendment No. 3 dated June 11, 1993 to the FEASI Agreement.(3)
10.40 -- Amendment No. 4 dated May 10, 1994 to the FEASI Agreement.(3)
10.41 -- Amendment No. 5 dated September 29, 1995 to the FEASI Agreement.(3)
10.42 -- Amended and Restated Credit Agreement, dated as of August 14, 1996,
by and among the Company, Wells Fargo Bank (Texas), National
Association, and Bank One, Texas, N.A. (3)
10.43 -- Aircraft Purchase Agreement between the Company and Intrepid Aviation
Partners, LLC dated as of September 24, 1996.(3)
10.44 -- Purchase Agreement between the Company and International Aero Components,
Inc. dated as of November 15, 1996.(1)
10.45 -- Purchase Agreement between the Company and International Technical Consultants,
Inc. dated as of November 25, 1996.(1)
11.1 -- Statement of Computation of Net Income per Share.(1)
21.1 -- Subsidiaries of the Registrant.(3)
23.1 -- Consent of Ernst & Young LLP.(1)
27.1 -- Financial Data Schedule.(1)
- ---------------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996, and
incorporated herein by reference.
(4) The exhibit is a management contract or compensatory plan or
arrangement.