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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

o

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

For the transition period from _______________ to _______________

Commission file number:  0-25202

KITTY HAWK, INC.

(Exact name of registrant as specified in its charter)

(972) 456-2200
(Registrant’s telephone number, including area code)

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 o No x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes x No o

The number of shares of common stock, par value $0.000001 per share, outstanding at May 14, 2003 was 37,744,655.

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KITTY HAWK, INC.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

The accompanying notes are an integral part of these financial statements.

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2002, are unaudited (except for the December 31, 2002 condensed consolidated balance sheet, which was derived from the Company’s audited consolidated balance sheet included in the aforementioned Form 10-K), but have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments and incorporates any changes in such estimates and judgments into the accounting records underlying the Company’s consolidated financial statements. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company emerged from bankruptcy on September 30, 2002. Therefore, operating results for the three month period ended March 31, 2003 are for the successor company, and the operating results shown for the three month period ended March 31, 2002 are for the predecessor company. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

2. LEGAL PROCEEDINGS

In July 2002, the Company filed a demand for binding arbitration against EGL, Inc. d/b/a Eagle Global Logistics with the American Arbitration Association to resolve its claim to collect for freight transportation services rendered to EGL in the amount of approximately $4.0 million plus all interest, attorneys’ fees and costs allowable by law. In August 2002, EGL filed an answer and counter-claim in the arbitration proceeding denying the Company’s claim and asserting a counter-claim for consequential damages in an unspecified amount, but in excess of $1.0 million plus costs and attorney’s fees, for an alleged breach of a contract by the Company. The arbitration proceeding, which will resolve both parties’ claims, is currently scheduled to begin in June 2003.

The Company is also subject to various other legal proceedings and claims which have arisen in the ordinary course of business.

While the outcome of the legal proceedings and claims described above cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s business.

3. BANKRUPTCY PROCEEDINGS

On or about May 1, 2000 (the “Petition Date”), Kitty Hawk, Inc. and all nine of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”). These proceedings were jointly administered under case No. 400-42141-BJH-11.

On August 5, 2002, the Bankruptcy Court entered an order dated August 5, 2002 (the “Confirmation Order”) confirming the Debtors’ Final Joint Plan of Reorganization dated August 2, 2002, with certain modifications (as so modified, the “Plan of Reorganization”). On September 30, 2002, the Plan of Reorganization became effective (the “Effective Date”).

Kitty Hawk, Inc. and its two wholly-owned subsidiaries, Kitty Hawk Cargo, Inc. (hereafter “Cargo”) and Kitty Hawk Aircargo, Inc. (hereafter “Aircargo”), emerged from bankruptcy on the Effective Date. Prior to the Effective Date, the seven other subsidiaries of Kitty Hawk, Inc. that filed for bankruptcy were merged with and

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consolidated into Kitty Hawk, Inc. pursuant to the Plan of Reorganization. As a result, Kitty Hawk, Inc., Cargo and Aircargo are the surviving corporate entities pursuant to the Plan of Reorganization.

Kitty Hawk, Inc. is a holding company and does not currently have any independent operations. Cargo operates an expedited scheduled freight network through its hub in Fort Wayne, Indiana. Aircargo is a FAR Part 121 certificated air carrier and operates a fleet of Boeing 727-200 freighter aircraft for Cargo and third-party customers.

Pursuant to the Plan of Reorganization, all of Kitty Hawk, Inc.’s previously issued common stock and 9.95% Senior Secured Notes due 2004 (the “Senior Notes”) were cancelled as of the Effective Date. Holders of Kitty Hawk, Inc.’s previously issued common stock received no consideration in connection with the cancellation of their shares of common stock.

On or about the Effective Date, in addition to payment of certain administrative claims arising from the Company’s bankruptcy proceedings, the Company delivered $29.1 million to HSBC Bank USA, as successor Trustee and Collateral Trustee (the “Trustee”), for the benefit of the holders of its Senior Notes (the “Noteholders”). The Plan of Reorganization provides for the Company’s former general unsecured trade creditors to receive only shares of common stock in exchange for their claims. In addition, the Plan of Reorganization provides for Aircargo to purchase two aircraft and related engines from affiliates of Pegasus Aviation, Inc. (“Pegasus”) and to continue to lease four aircraft and related engines from affiliates of Pegasus under modified operating leases as a settlement of claims.

On December 23, 2002, the Company filed a motion with the Bankruptcy Court requesting an order modifying the Plan of Reorganization to allow the Company to:

•

amend its Second Amended and Restated Certificate of Incorporation to reduce the par value of its common stock (the “New Stock”) from $0.01 per share to $0.000001 per share;

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modify its Plan of Reorganization to provide that the non-U.S. citizen holders of the former 9.95% Senior Secured Notes would share ratably in a distribution of 21.5% of the common stock to be issued under the Plan of Reorganization and, to the extent the non-U.S. citizen holders are entitled to more than 21.5% of the common stock to be issued under the Plan of Reorganization, the non-U.S. citizen holders would receive warrants to purchase the remaining shares of common stock that they would have otherwise been entitled to receive if they were U.S. citizens; and

•

issue warrants under the Bankruptcy Code that would be exempt from federal, state or local laws requiring registration of the warrants or New Stock to be issued upon exercise of the warrants.

On January 29, 2003, the Bankruptcy Court granted the Company’s motion and entered an order on January 31, 2003 modifying the Plan of Reorganization in the manner described above.

As of December 31, 2002, the Company had completed most of the significant cash payments required by the Plan of Reorganization to be made at or near the Effective Date, other than (i) certain priority claim payments due to employees of a former subsidiary of the Company in the amount of approximately $1.8 million, (ii) payments to bankruptcy-related professionals in connection with the final fee applications filed with the Bankruptcy Court in the amount of approximately $304,000, and (iii) payments to other administrative and priority claimants, the amount of whose claims is disputed and has not yet been resolved by the Bankruptcy Court.

Because none of the New Stock was issued as of December 31, 2002, the consolidated financial statements at December 31, 2002 reflect no common stock as being issued or outstanding. In return for debt forgiveness, settlements and other compromises, which were settled in September 2002, the Company issued New Stock and warrants to purchase New Stock to the Company’s former creditors in March 2003 in the following amounts:

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The warrants have an exercise price of $0.000001 per share, a term of 10 years and are exercisable only by a citizen of the U.S. as defined in 49 U.S.C. § 40102(a)(15). The 7,000,000 shares of New Stock to be issued to the Company’s former general unsecured trade creditors were issued initially to two trusts. These trusts will hold the shares for the benefit of the Company’s former general unsecured trade creditors and will distribute the shares once all claims are allowed or dismissed.

4. DISCONTINUED OPERATIONS

Since May 1, 2000, the Company has undergone a significant number of changes in its operations as it entered and prepared to emerge from bankruptcy. In accordance with SFAS 144, the operations that ceased, or were disposed of, in the last three years have been presented as discontinued operations and include the operations of the Company’s wide-body air freight carrier, the non-continental U.S. operations of its expedited scheduled freight network and its air logistics service provider (including a small aircraft maintenance operation). The results of these operations and the related assets and liabilities of these operations have been segregated in the accompanying consolidated financial statements for the quarter ended March 31, 2002. There are no discontinued operations for the quarter ended March 31, 2003.

On May 1, 2000, the Company ceased operations of its wide-body air freight carrier and the non-continental U.S. operations of its expedited scheduled freight network. The property and equipment and other assets (inventory and aircraft supplies, airline operating certificates, etc.) related to these operations were taken out of service and either sold in a series of auctions, sold in individual transactions, or title was relinquished to parties with a secured interest in the assets.

Any assets of the discontinued operations which were not sold or otherwise disposed of as of August 31, 2002 became property of the parent company when its subsidiaries merged into Kitty Hawk, Inc. prior to the Effective Date and are included in the accompanying balance sheets as continuing operations. These assets are comprised mainly of accounts receivable, various deposits and an office building complex in Michigan and are not revenue producing. Any residual liabilities associated with these operations were treated in accordance with the Company’s Plan of Reorganization.

The following table summarizes the financial performance of the Company’s discontinued operations:

5. SEGMENT REPORTING

The Company’s continuing operations are comprised of two main businesses – an expedited scheduled freight network and an air freight carrier airline, which primarily supports the expedited scheduled freight network by transporting cargo in its fleet of Boeing 727-200 aircraft. Each of these is a business segment, with its respective financial performance detailed below. Each business segment is currently evaluated on financial performance at the operating income line.

The Company operates a major independent city-to-city expedited scheduled freight network in the United States and Canada providing next-morning, two-day and three-day delivery service. As an independent freight network, the Company does not typically provide ground transportation from shippers to the cargo facilities or from

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the cargo facilities to recipients. As a result, the Company primarily provides freight services to freight forwarders who arrange pick up from shippers and final delivery to recipients. On occasion, the Company arranges for the initial pick up of freight from its customers as well as the final delivery to recipients.

In addition to supporting the expedited scheduled freight network, the air freight carrier airline also provides dedicated air freight carrier services for a variety of third parties. These services are provided under contractual arrangements where the Company provides the aircraft, crew, maintenance and insurance (ACMI). Additionally, ad hoc charters are performed. In support of the expedited scheduled freight network, the air freight carrier allocates its cost on a block hour basis, which is reflected as revenue from intersegment operations in the following table.

The column labeled “other” consists of corporate activities. Business assets are owned by or allocated to each of the business segments. Assets included in the column labeled “other” include cash, allowance for doubtful accounts and the corporate headquarters building.

6. EARNINGS PER SHARE

Predecessor: Basic loss per share, for the quarter ended March 31, 2002, is based upon the weighted average number of common shares outstanding during the period. There were no dilutive shares outstanding during the period presented. All predecessor shares were cancelled pursuant to the Plan of Reorganization (see Note 3).

Successor: Pursuant to the Plan of Reorganization (see Note 3), in March 2003, the Company issued common shares and warrants to purchase common shares to its former creditors. Because the exercise price of the warrants is nominal, such warrants are treated as outstanding common shares for purposes of calculating loss per share. These shares are deemed to be outstanding for the entire period presented. Other than the warrants, at March 31, 2003, the Company had no dilutive securities outstanding.

7. RELATED PARTY TRANSACTIONS

The Company has long-term agreements with Pegasus and the Kitty Hawk Collateral Liquidating Trust (the “Trust”) to lease or use aircraft and engines. Each of Pegasus and certain beneficiaries of the Trust own more than 5.0% of the outstanding New Stock. Additionally, a member of the Company's board of directors is a managing director of one of the beneficiaries of the Trust. See “Item 13. Certain Relationships and Related Transactions” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 for more information related to these agreements.

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Kitty Hawk operates through its two wholly-owned subsidiaries, Kitty Hawk Cargo and Kitty Hawk Aircargo. For the three months ended March 31, 2003, we generated approximately 91.8% of our revenue from our expedited scheduled freight network, which is operated by Kitty Hawk Cargo. Kitty Hawk Aircargo, our air freight carrier airline, primarily supports Kitty Hawk Cargo’s expedited scheduled freight network by transporting cargo in its fleet of Boeing 727-200 freighter aircraft. In addition, Kitty Hawk Aircargo also provides dedicated air freight transportation services for a variety of customers.

We operate a major independent city-to-city expedited scheduled freight network solely in the U.S. and Canada providing next-morning, two-day and three-day delivery service. As an independent freight network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients. As a result, we primarily provide freight services to freight forwarders who either transport the freight to and from our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services. On occasion, we arrange for the initial pick up of freight from our customers as well as the final delivery to recipients.

We emerged from bankruptcy on September 30, 2002 and adopted Statement of Position 90-7, or Fresh Start Accounting. In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to reflect their respective fair market values as of September 30, 2002. Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002. Differences between periods due to Fresh Start Accounting are explained as necessary. The discussion that follows represents the operating results of the successor company as compared to the predecessor company and should be read in conjunction with the information set forth under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2002.

Revenue. Scheduled freight revenue is generated from freight transportation services provided by our expedited scheduled freight network. Other revenue includes:

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Postal contracts revenue, which is generated from contracts with the U.S. Postal Service under which we generally provide the aircraft, crew, maintenance and insurance, known as ACMI, ground handling and sorting services contracts related thereto and management of peak season operations;

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ACMI revenue, which is generated from ACMI contracts with third-parties and ad hoc charter revenue generated by our air freight carrier airline; and

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Miscellaneous revenue, which is generated from freight handling services provided for third-parties, other than the U.S. Postal Service.

Cost of Revenue. Included in our cost of revenue are the following major categories:

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Flight Expense, which consists of costs related to the flight operations of our air freight carrier airline, including:

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crew member wages, benefits, training and travel;

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operating lease expense for leased aircraft operated by us;

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insurance costs related to aircraft operated by us; and

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flight operations and airline management costs, wages and benefits.

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Transportation Expense, which consists of costs related to the physical movement of freight between our cargo facilities and which is not otherwise classified as flight expense, including:

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third-party aircraft charter expense;

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aircraft ground operating costs, such as landing and parking fees charged by airports and cost of deicing aircraft;

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trucking expenses for cities in our expedited scheduled freight network that are not served by our aircraft; and

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pickup and/or final delivery expenses as directed by customers.

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Fuel, which consists of the all-inclusive cost of all jet fuel consumed in our expedited scheduled freight network and on ad hoc charters that include jet fuel in the charter service, and the cost of all taxes, fees and surcharges necessary to deliver the jet fuel into the aircraft.

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Maintenance Expense, which consists of costs to maintain aircraft and aircraft engines operated by our air freight carrier airline, including:

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wages and benefits for maintenance and records personnel;

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costs for contract mechanics at cargo facility outstations;

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costs of aircraft parts and supplies; and

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accruals for light C-checks and heavy shop visits for engines.

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Freight Handling Expense, which consists of costs to handle the loading and unloading of freight on aircraft and trucks operating within our expedited scheduled freight network, including:

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wages and benefits for our Fort Wayne, Indiana hub sort and ramp operations personnel;

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contract services to warehouse, load and unload aircraft principally at cargo facility outstations; and

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wages and benefits for our outstation cargo facility personnel.

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Depreciation and Amortization, which consists of depreciation and amortization expenses for our owned airframes and aircraft engines and freight-handling equipment.

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Operating Overhead, which consists of direct overhead costs related to operating our expedited scheduled freight network and air freight carrier airline, including:

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wages and benefits for operational managers of Kitty Hawk Cargo;

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expedited scheduled freight network sales and marketing expenses;

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wages and benefits for customer service personnel;

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rent and utilities;

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bad debt expense; and

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general operational office expenses.

General and Administrative Expenses. General and administrative expenses consist of salaries, benefits and expenses for executive management (other than management of Kitty Hawk Aircargo and Kitty Hawk Cargo), information technology, human resources, accounting, finance, legal and corporate communications personnel. In addition, costs for strategic planning, financial planning and asset acquisitions are included in general and administrative expenses. Also included are legal and professional fees and consulting fees.

Discontinued Operations. Discontinued operations consist of the activities in the quarter ended March 31, 2002 related to disposing of the assets of Kitty Hawk International, our wide-body air freight carrier airline. This business ceased operating during the bankruptcy proceedings. See “Item 1. Business – Changes in Our Business Operations Since 2000” in our Annual Report on Form 10-K for the year ended December 31, 2002.

Critical Accounting Policies. For a discussion of our critical accounting policies refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2002. There have been no material changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2002.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, condensed consolidated statement of operations data expressed as a percentage of total revenue:

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QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002

REVENUE

General. The following table presents, for the periods indicated, the components of our revenue in dollars and as a percentage of our total revenue and the percentage change from period-to-period:

Scheduled Freight. In the first quarter of 2003, the increase in our scheduled freight revenue was primarily due to an increase of 5.5% in the chargeable weight carried in our expedited scheduled freight network, which was partially due to adding two cities to our network. In addition, our total yield increased by 12% due to several price increases beginning in the second quarter of 2002, including a fuel surcharge to mitigate the increase in our fuel expense.

ACMI. In December 2002, we entered into a one-year ACMI contract to provide BAX Global with three Boeing 727-200 freighter aircraft. This contract may be cancelled by either party with thirty days' notice.

Miscellaneous. During the first quarter of 2003, our miscellaneous revenue resulted from flying ad-hoc charter services for several customers. During the first quarter of 2002, our miscellaneous revenue resulted from providing aircraft ground handling for customers at one of our company operated outstations. This activity ceased in July 2002 when we contracted with a third-party to provide our aircraft ground handling services at this same outstation.

COST OF REVENUE

General. The following table presents, for the periods indicated, the components of our cost of revenue in dollars and as a percentage of total revenue and the percentage change from period-to-period:

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