##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 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.
  Delaware
    
    75-2564006(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1515 West 20th StreetP.O. Box 612787Dallas/Fort Worth International Airport, Texas
    
    75261(Address of principal executive offices)
    
    (Zip Code)
 
 þ o
  o o þ
 o þ
 þ o




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##### 



PAGE NUMBERPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statement of Stockholders Deficit for the six months ended
June 30, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2007 and 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37Certificate of Principal Executive Officer Pursuant to Section 302Certificate of Principal Financial Officer Pursuant to Section 302Certificate Pursuant to Section 906
  2




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June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    394
    
    
    $
    9,589Restricted cash and short-term investments
    
    
    3,059
    
    
    
    250Trade accounts receivable, net of allowance for doubtful
accounts of $500
    
    
    21,461
    
    
    
    26,252Inventory and aircraft supplies, net of reserve of $200
    
    
    1,162
    
    
    
    2,240Deposits and prepaid expenses
    
    
    6,272
    
    
    
    3,732Prepaid aircraft fuel
    
    
    638
    
    
    
    1,171Other current assets, net
    
    
    121
    
    
    
    282Total current assets
    
    
    33,107
    
    
    
    43,516Property and equipment, net
    
    
    5,789
    
    
    
    7,411Other long-term assets
    
    
    5,377
    
    
    
    2,896Total assets
    
    $
    44,273
    
    
    $
    53,823LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Liabilities:Current liabilities:Accounts payable  trade
    
    $
    5,359
    
    
    $
    7,235Accrued wages and compensation related expenses
    
    
    2,434
    
    
    
    2,293Other accrued expenses
    
    
    8,794
    
    
    
    15,973Taxes payable, other than income taxes
    
    
    935
    
    
    
    890Current debt
    
    
    14,318
    
    
    
    257Total current liabilities
    
    
    31,840
    
    
    
    26,648Other long-term liabilities
    
    
    710
    
    
    
    135Total liabilities
    
    
    32,550
    
    
    
    26,783Commitments and contingenciesSeries B Redeemable Preferred Stock, $0.01 par value: Authorized
shares  15,000; issued and outstanding  14,550 at June 30,
2007 and December 31, 2006; cumulated dividends of $1,100 at
June 30, 2007 and $900 at December 31, 2006, respectively
    
    
    12,142
    
    
    
    12,142Stockholders deficit:Preferred stock, $0.01 par value: Authorized shares 
9,985,000; none issued
    
    
    
    
    
    
    Common stock, $0.000001 par value: Authorized shares 
100,000,000 at June 30, 2007 and December 31, 2006; issued
and outstanding  53,543,034 and 52,827,853 at June 30, 2007
and December 31, 2006, respectively
    
    
    
    
    
    
    Additional capital
    
    
    31,399
    
    
    
    26,425Retained deficit
    
    
    (31,818
    )
    
    
    (11,527
    )Total stockholders equity (deficit)
    
    
    (419
    )
    
    
    14,898Total liabilities and stockholders equity (deficit)
    
    $
    44,273
    
    
    $
    53,823
  3




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Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Scheduled freight network
    
    $
    40,780
    
    
    $
    44,263
    
    
    $
    79,708
    
    
    $
    84,350ACMI
    
    
    881
    
    
    
    930
    
    
    
    1,189
    
    
    
    930Miscellaneous
    
    
    2,764
    
    
    
    275
    
    
    
    5,493
    
    
    
    275Total revenue
    
    
    44,425
    
    
    
    45,468
    
    
    
    86,390
    
    
    
    85,555Cost of revenue:Flight expense
    
    
    7,590
    
    
    
    8,189
    
    
    
    15,347
    
    
    
    16,757Transportation expense
    
    
    12,887
    
    
    
    12,707
    
    
    
    26,649
    
    
    
    21,815Fuel expense
    
    
    12,007
    
    
    
    14,150
    
    
    
    22,732
    
    
    
    27,354Maintenance expense
    
    
    3,697
    
    
    
    3,877
    
    
    
    7,349
    
    
    
    7,611Freight handling expense
    
    
    7,857
    
    
    
    8,953
    
    
    
    16,260
    
    
    
    16,953Depreciation and amortization
    
    
    822
    
    
    
    776
    
    
    
    1,704
    
    
    
    1,529Operating overhead expense
    
    
    4,494
    
    
    
    3,298
    
    
    
    9,138
    
    
    
    6,319Total cost of revenue
    
    
    49,354
    
    
    
    51,950
    
    
    
    99,179
    
    
    
    98,338Gross loss
    
    
    (4,929
    )
    
    
    (6,482
    )
    
    
    (12,789
    )
    
    
    (12,783
    )General and administrative expense
    
    
    3,007
    
    
    
    2,276
    
    
    
    6,519
    
    
    
    4,578Operating loss
    
    
    (7,936
    )
    
    
    (8,758
    )
    
    
    (19,308
    )
    
    
    (17,361
    )Other (income) expense:Interest expense
    
    
    625
    
    
    
    73
    
    
    
    695
    
    
    
    142Other, net
    
    
    (20
    )
    
    
    (194
    )
    
    
    (115
    )
    
    
    (482
    )Net loss
    
    
    (8,541
    )
    
    
    (8,637
    )
    
    
    (19,888
    )
    
    
    (17,021
    )Preferred stock dividends accreted
    
    
    291
    
    
    
    296
    
    
    
    582
    
    
    
    592Net loss allocable to common stockholders
    
    $
    (8,832
    )
    
    $
    (8,933
    )
    
    $
    (20,470
    )
    
    $
    (17,613
    )Basic loss per share
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.38
    )
    
    $
    (0.34
    )Diluted loss per share
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.38
    )
    
    $
    (0.34
    )Weighted average common shares
outstanding  basic
    
    
    54,543,740
    
    
    
    52,024,419
    
    
    
    54,269,435
    
    
    
    51,849,914Weighted average common shares
outstanding  diluted
    
    
    54,543,740
    
    
    
    52,024,419
    
    
    
    54,269,435
    
    
    
    51,849,914
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Common StockNumber of
    
    
    
    
    
    
    Additional
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at December 31, 2006
    
    
    52,827,853
    
    
    $
    
    
    
    $
    26,425
    
    
    $
    (11,527
    )
    
    $
    14,898Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,888
    )
    
    
    (19,888
    )Dividends declared for Series B
Redeemable Preferred Stock
    
    
    375,167
    
    
    
    
    
    
    
    319
    
    
    
    (403
    )
    
    
    (84
    )Compensation expense associated
with stock option and restricted
stock unit grants
    
    
    
    
    
    
    
    
    
    
    315
    
    
    
    
    
    
    
    315Issuance of warrants associated
with revolving facility
    
    
    
    
    
    
    
    
    
    
    4,298
    
    
    
    
    
    
    
    4,298Issuance of common stock related
to exercise of options to
acquire stock and conversion of
restricted stock units
    
    
    340,014
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    42Balance at June 30, 2007
    
    
    53,543,034
    
    
    $
    
    
    
    $
    31,399
    
    
    $
    (31,818
    )
    
    $
    (419
    )
  5




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Six months ended June 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (19,888
    )
    
    $
    (17,021
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization expense
    
    
    1,945
    
    
    
    1,689Gain on disposal of property and equipment
    
    
    (266
    )
    
    
    (570
    )Compensation expense related to stock options and
restricted stock units
    
    
    315
    
    
    
    388Write off debt issuance costs
    
    
    470
    
    
    
    Provision for allowance for doubtful accounts
    
    
    54
    
    
    
    42Changes in operating assets and liabilities:Trade accounts receivable
    
    
    4,736
    
    
    
    (4,974
    )Inventory and aircraft supplies
    
    
    (268
    )
    
    
    (240
    )Prepaid expenses and other
    
    
    768
    
    
    
    (698
    )Accounts payable and accrued expenses
    
    
    (9,303
    )
    
    
    5,461Net cash used in operating activities
    
    
    (21,437
    )
    
    
    (15,923
    )Investing activities:Proceeds from sale of assets
    
    
    3,631
    
    
    
    1,006Assets acquired from Air Container Transport, Inc.
    
    
    (530
    )
    
    
    (2,987
    )Change in restricted cash
    
    
    (2,809
    )
    
    
    Capital expenditures
    
    
    (263
    )
    
    
    (1,170
    )Net cash provided by (used in) investing activities
    
    
    29
    
    
    
    (3,151
    )Financing activities:Dividends paid on Series B Redeemable Preferred Stock
    
    
    (84
    )
    
    
    (407
    )Net borrowing on revolving facility
    
    
    13,490
    
    
    
    Debt issuance costs
    
    
    (1,604
    )
    
    
    Borrowings on current debt
    
    
    924
    
    
    
    Payments on current debt
    
    
    (555
    )
    
    
    (75
    )Proceeds from exercise of stock options
    
    
    42
    
    
    
    71Net cash provided by (used in) financing activities
    
    
    12,213
    
    
    
    (411
    )Net decrease in cash and cash equivalents
    
    
    (9,195
    )
    
    
    (19,485
    )Cash and cash equivalents at beginning of period
    
    
    9,589
    
    
    
    26,650Cash and cash equivalents at end of period
    
    $
    394
    
    
    $
    7,165Non-cash activities:Common stock issued in lieu of cash dividends
    
    $
    319
    
    
    $
    
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7




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Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Flight expense
    
    $
    33
    
    
    $
    29
    
    
    $
    65
    
    
    $
    60Maintenance expense
    
    
    4
    
    
    
    6
    
    
    
    7
    
    
    
    13Freight handling expense
    
    
    13
    
    
    
    21
    
    
    
    28
    
    
    
    43Operating overhead expense
    
    
    28
    
    
    
    29
    
    
    
    59
    
    
    
    57General and administrative expense
    
    
    65
    
    
    
    110
    
    
    
    156
    
    
    
    215Total compensation expense
    
    $
    143
    
    
    $
    195
    
    
    $
    315
    
    
    $
    388
   June 30, 2007
    
    
    December 31, 2006(In thousands)Freight handling expense
    
    $
    1,765
    
    
    $
    8,235Deferred gain on sale of assets
    
    
    905
    
    
    
    Trucking expense
    
    
    1,919
    
    
    
    863Maintenance expense
    
    
    753
    
    
    
    771Landing and parking expenses
    
    
    906
    
    
    
    714Equipment lease expense
    
    
    90
    
    
    
    1,990Other
    
    
    2,456
    
    
    
    3,400Total other accrued expenses
    
    $
    8,794
    
    
    $
    15,973
     8




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##### Table of Contents



GroundScheduled
    
    TransportationFreight
    
    Services
    
    Cargo
    
    
    
    
    
    
    
    
    
    ConsolidatedNetwork
    
    Company
    
    Airline
    
    Other
    
    Eliminations
    
    Balance(In thousands)Three months ended June 30, 2007:Revenue from external customers
    
    $
    40,780
    
    
    $
    2,620
    
    
    $
    1,025
    
    
    $
    
    
    
    $
    
    
    
    $
    44,425Revenue from intersegment operations
    
    
    
    
    
    
    13,734
    
    
    
    10,568
    
    
    
    
    
    
    
    (24,302
    )
    
    
    Depreciation and amortization
    
    
    143
    
    
    
    372
    
    
    
    307
    
    
    
    107
    
    
    
    
    
    
    
    929Operating income (loss)
    
    
    (7,634
    )
    
    
    (362
    )
    
    
    129
    
    
    
    (69
    )
    
    
    
    
    
    
    (7,936
    )Interest expense
    
    
    4
    
    
    
    20
    
    
    
    
    
    
    
    601
    
    
    
    
    
    
    
    625Other (income) loss
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    (20
    )Net income (loss)
    
    $
    (7,638
    )
    
    $
    (386
    )
    
    $
    129
    
    
    $
    (646
    )
    
    $
    
    
    
    $
    (8,541
    )Total assets
    
    $
    14,456
    
    
    $
    6,649
    
    
    $
    8,250
    
    
    $
    57,240
    
    
    $
    (42,322
    )
    
    $
    44,273Three months ended June 30, 2006:Revenue from external customers
    
    $
    44,263
    
    
    $
    275
    
    
    $
    930
    
    
    $
    
    
    
    $
    
    
    
    $
    45,468Revenue from intersegment operations
    
    
    
    
    
    
    895
    
    
    
    12,763
    
    
    
    
    
    
    
    (13,658
    )
    
    
    Depreciation and amortization
    
    
    134
    
    
    
    
    
    
    
    642
    
    
    
    81
    
    
    
    
    
    
    
    857Operating income (loss)
    
    
    (9,103
    )
    
    
    16
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    (8,758
    )Interest expense
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    73Other income
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    (162
    )
    
    
    
    
    
    
    (194
    )Net income (loss)
    
    $
    (9,113
    )
    
    $
    16
    
    
    $
    361
    
    
    $
    99
    
    
    $
    
    
    
    $
    (8,637
    )Total assets
    
    $
    24,952
    
    
    $
    6,290
    
    
    $
    9,734
    
    
    $
    37,387
    
    
    $
    (28,120
    )
    
    $
    50,243Six months ended June 30, 2007:Revenue from external customers
    
    $
    79,708
    
    
    $
    5,114
    
    
    $
    1,568
    
    
    $
    
    
    
    $
    
    
    
    $
    86,390Revenue from intersegment operations
    
    
    
    
    
    
    26,682
    
    
    
    22,004
    
    
    
    
    
    
    
    (48,686
    )
    
    
    Depreciation and amortization
    
    
    287
    
    
    
    724
    
    
    
    693
    
    
    
    241
    
    
    
    
    
    
    
    1,945Operating income (loss)
    
    
    (18,509
    )
    
    
    (1,198
    )
    
    
    468
    
    
    
    (69
    )
    
    
    
    
    
    
    (19,308
    )Interest expense
    
    
    9
    
    
    
    23
    
    
    
    
    
    
    
    663
    
    
    
    
    
    
    
    695Other income
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    (115
    )Net income (loss)
    
    $
    (18,518
    )
    
    $
    (1,222
    )
    
    $
    468
    
    
    $
    (616
    )
    
    $
    
    
    
    $
    (19,888
    )Total assets
    
    $
    14,456
    
    
    $
    6,649
    
    
    $
    8,250
    
    
    $
    57,240
    
    
    $
    (42,322
    )
    
    $
    44,273Six months ended June 30, 2006:Revenue from external customers
    
    $
    84,350
    
    
    $
    275
    
    
    $
    930
    
    
    $
    
    
    
    $
    
    
    
    $
    85,555Revenue from intersegment operations
    
    
    
    
    
    
    895
    
    
    
    26,235
    
    
    
    
    
    
    
    (27,130
    )
    
    
    Depreciation and amortization
    
    
    263
    
    
    
    
    
    
    
    1,266
    
    
    
    160
    
    
    
    
    
    
    
    1,689Operating income (loss)
    
    
    (17,868
    )
    
    
    16
    
    
    
    513
    
    
    
    (22
    )
    
    
    
    
    
    
    (17,361
    )Interest expense
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    142Other income
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    (450
    )
    
    
    
    
    
    
    (482
    )Net income (loss)
    
    $
    (17,889
    )
    
    $
    16
    
    
    $
    545
    
    
    $
    307
    
    
    $
    
    
    
    $
    (17,021
    )Total assets
    
    $
    24,952
    
    
    $
    6,290
    
    
    $
    9,734
    
    
    $
    37,387
    
    
    $
    (28,120
    )
    
    $
    50,243
   9




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Three months ended June 30,
    
    Six months ended June 30,2007
    
    2006
    
    2007
    
    2006Weighted average shares outstanding  basic
    
    
    54,543,740
    
    
    
    52,024,419
    
    
    
    54,269,435
    
    
    
    51,849,914Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding  diluted
    
    
    54,543,740
    
    
    
    52,024,419
    
    
    
    54,269,435
    
    
    
    51,849,914Securities excluded from computation due to
antidilutive effect:Due to net loss
    
    
    2,656,352
    
    
    
    6,117,986
    
    
    
    2,711,615
    
    
    
    21,573,231Due to out-of-the-money
    
    
    28,606,780
    
    
    
    17,100,578
    
    
    
    28,551,517
    
    
    
    1,645,333
    Three months ended
    
    Six months endedJune 30, 2006
    
    June 30, 2006(in thousands, except per share data)Revenue
    
    $
    56,077
    
    
    $
    107,319Net loss
    
    $
    (9,792
    )
    
    $
    (18,899
    )Basic and diluted loss per share
    
    $
    (0.18
    )
    
    $
    (0.36
    )
       10




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11




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Recent Developments
  Executive Overview
  Scheduled Freight Network.
    12




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Ground
Transportation.
 Cargo Airline.
 Fuel Costs.
   13




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##### Table of Contents



Seasonality.
  Fixed Costs.
 Capital Requirements, Capital Resources and Liquidity
 Capital Requirements.
 Capital Resources.
 Revolving Facility.
 14




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##### Table of Contents



Liquidity.
  15




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##### Table of Contents



Explanation of Statement of Operations Items
 Revenue.
 
    
    Scheduled Freight Network Revenue,which is generated from our expedited air and ground
freight products provided by our scheduled freight network. We consider expedited freight
service as freight transported on our air product on an overnight or second-morning basis or
on our ground product on a time-definite basis as determined by our schedules. It also
includes revenue generated from our fuel and security surcharges. The fuel surcharge seeks
to mitigate the increases in our fuel expense resulting from higher fuel prices. The
security surcharge seeks to mitigate the increased costs of security measures that have been
implemented as a result of regulations adopted by the Transportation Security
Administration;
    
    ACMI Revenue,which is generated from contracts with third parties by our cargo airline
under which we generally provide the aircraft, crew, maintenance and insurance; and
    
    Miscellaneous Revenue,which is generated from ad-hoc charters provided by our cargo
airline, maintenance revenue, freight handling services provided for third parties,
providing EUV or contracted service to third parties and local transportation trucking
services.
 16




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##### Table of Contents



Cost of Revenue.
 
    
    Flight Expense,which consists of costs related to the flight operations of our cargo airline, including:
 
    
    flight crew member wages, benefits, training and travel;
    
    leased aircraft and engines operated and flown by Kitty Hawk Aircargo;
    
    insurance costs related to aircraft operated and flown by Kitty Hawk Aircargo; and
    
    flight operations and airline management costs, including associated wages and benefits.
 
    
    Transportation Expense,which consists of costs related to the physical movement of
freight within our network and which is not otherwise classified as flight expense,
including:
 
    
    third party aircraft charter expense;
    
    aircraft ground operating costs, such as landing and parking fees charged by
airports and the cost of deicing aircraft;
    
    leased trucks operated by Kitty Hawk Ground and leased trailers;
    
    driver wages and benefits;
    
    contracted trucking expenses between cities in our scheduled network, including
owner operator costs and surcharges for diesel fuel not purchased by us; and
    
    pickup and/or final delivery expenses as directed by customers.
 
    
    Fuel Expense,which consists of the all-inclusive cost of all aircraft fuel consumed in
our expedited scheduled air network and on ad-hoc charters that include aircraft fuel in the
charter service, the cost of all taxes, fees and surcharges necessary to deliver the
aircraft fuel into the aircraft and the cost of diesel fuel and all related taxes, fees and
surcharges for trucks operated by our employees.
    
    Maintenance Expense,which consists of costs to maintain airframes and aircraft engines
operated by our cargo airline and trucks operated by our ground transportation company,
including:
 
    
    payments related to the Boeing 737-300SF cargo aircraft power-by-the-hour maintenance contract;
    
    wages and benefits for maintenance, records and maintenance management personnel;
    
    costs for third party maintenance; and
    
    costs of aircraft and truck parts and supplies.
 
    
    Freight Handling Expense,which consists of the costs of loading and unloading freight on
aircraft and trucks operating within our scheduled freight network, including:
 
    
    wages and benefits for our Fort Wayne, Indiana hub sort and ramp operations
personnel;
    
    contract services to warehouse, load and unload aircraft and trucks principally
at outstation cargo facilities; and
    
    wages and benefits for our regional hub personnel, other company operated
outstations and field operations managers.
 
    
    Depreciation and Amortization,which consists of depreciation and amortization expense
for our previously owned airframes and aircraft engines, trucks, trailers, freight-handling
equipment and capitalized software as
 17




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##### Table of Contents



well as the amortization of certain intangible assets associated with the acquisition of the
operating assets of ACT.
 
    
    Operating Overhead Expense,which consists of direct overhead costs related to operating
our scheduled freight network, ground transportation company and cargo airline, including:
 
    
    wages and benefits for operational managers, sales representatives and customer
service personnel of Kitty Hawk Cargo and Kitty Hawk Ground;
    
    scheduled freight network sales and marketing expenses;
    
    rent and utilities;
    
    bad debt expense; and
    
    general operational office expenses.
 General and Administrative Expenses.
 Critical Accounting Policies
  Valuation of Long-Lived Assets
    18




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##### Table of Contents



Results of Operations
   Three months ended June 30,2007
    
    2006Revenue:Scheduled freight
    
    
    91.8
    %
    
    
    97.3
    %Other
    
    
    8.2
    
    
    
    2.7Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    111.1
    
    
    
    114.3Gross loss
    
    
    (11.1
    )
    
    
    (14.3
    )General and administrative expenses
    
    
    6.8
    
    
    
    5.0Operating loss
    
    
    (17.9
    )
    
    
    (19.3
    )Other (income) expense:Interest expense
    
    
    1.4
    
    
    
    0.1Other income
    
    
    (0.1
    )
    
    
    (0.4
    )Total interest and other (income) expense
    
    
    1.3
    
    
    
    (0.3
    )Net loss
    
    
    (19.2
    )%
    
    
    (19.0
    )%
  General.
 Three months ended June 30,2007
    
    
    2006
    
    
    Dollar
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    Change
    
    
    Changeof Total
    
    
    
    
    
    
    of Total
    
    
    from 2006
    
    
    from 2006Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2007
    
    
    to 2007(Dollars in thousands)Scheduled freight
    
    $
    40,780
    
    
    
    91.8
    %
    
    $
    44,263
    
    
    
    97.3
    %
    
    $
    (3,483
    )
    
    
    (7.9
    )%Other:ACMI
    
    
    881
    
    
    
    2.0
    
    
    
    930
    
    
    
    2.1
    
    
    
    (49
    )
    
    
    (5.3
    )Miscellaneous
    
    
    2,764
    
    
    
    6.2
    
    
    
    275
    
    
    
    0.6
    
    
    
    2,489
    
    
    
    905.1Total revenue
    
    $
    44,425
    
    
    
    100.0
    %
    
    $
    45,468
    
    
    
    100.0
    %
    
    $
    (1,043
    )
    
    
    (2.3
    )%
 Scheduled Freight Network.
 19




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ACMI.
 Miscellaneous.
  General.
 Three months ended June 30,2007
    
    
    2006
    
    
    Dollar
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage of
    
    
    Change of
    
    
    ChangeCost of
    
    
    of Total
    
    
    Cost of
    
    
    Total
    
    
    from 2006
    
    
    from 2006Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2007
    
    
    to 2007(Dollars in thousands)Flight expense
    
    $
    7,590
    
    
    
    17.1
    %
    
    $
    8,189
    
    
    
    18.0
    %
    
    $
    (599
    )
    
    
    (7.3
    )%Transportation expense
    
    
    12,887
    
    
    
    29.0
    
    
    
    12,707
    
    
    
    28.0
    
    
    
    180
    
    
    
    1.4Fuel expense
    
    
    12,007
    
    
    
    27.0
    
    
    
    14,150
    
    
    
    31.1
    
    
    
    (2,143
    )
    
    
    (15.1
    )Maintenance expense
    
    
    3,697
    
    
    
    8.3
    
    
    
    3,877
    
    
    
    8.5
    
    
    
    (180
    )
    
    
    (4.6
    )Freight handling expense
    
    
    7,857
    
    
    
    17.7
    
    
    
    8,953
    
    
    
    19.7
    
    
    
    (1,096
    )
    
    
    (12.2
    )Depreciation and amortization
    
    
    822
    
    
    
    1.9
    
    
    
    776
    
    
    
    1.7
    
    
    
    46
    
    
    
    5.9Operating overhead expense
    
    
    4,494
    
    
    
    10.1
    
    
    
    3,298
    
    
    
    7.3
    
    
    
    1,196
    
    
    
    36.3Total cost of revenue
    
    $
    49,354
    
    
    
    111.1
    %
    
    $
    51,950
    
    
    
    114.3
    %
    
    $
    (2,596
    )
    
    
    (5.0
    )%
 Flight Expense.
  Transportation Expense.
 20




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Fuel Expense.
   Maintenance Expense.
 Freight Handling Expense.
 Depreciation and Amortization.
 Operating Overhead Expense.
   21




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Six months ended June 30,2007
    
    2006Revenue:Scheduled freight
    
    
    92.3
    %
    
    
    98.6
    %Other
    
    
    7.7
    
    
    
    1.4Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    114.8
    
    
    
    114.9Gross loss
    
    
    (14.8
    )
    
    
    (14.9
    )General and administrative expenses
    
    
    7.5
    
    
    
    5.4Operating loss
    
    
    (22.3
    )
    
    
    (20.3
    )Other (income) expense:Interest expense
    
    
    0.8
    
    
    
    0.2Other income
    
    
    (0.1
    )
    
    
    (0.6
    )Total interest and other (income) expense
    
    
    (0.7
    )
    
    
    (0.4
    )Net loss
    
    
    (23.0
    )%
    
    
    (19.9
    )%
 22




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##### Table of Contents



General.
 Six months ended June 30,2007
    
    
    2006
    
    
    Dollar
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    Change
    
    
    Changeof Total
    
    
    
    
    
    
    of Total
    
    
    from 2006
    
    
    from 2006Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2007
    
    
    to 2007(Dollars in thousands)Scheduled freight
    
    $
    79,708
    
    
    
    92.3
    %
    
    $
    84,350
    
    
    
    98.6
    %
    
    $
    (4,642
    )
    
    
    (5.5
    )%Other:ACMI
    
    
    1,189
    
    
    
    1.4
    
    
    
    930
    
    
    
    1.1
    
    
    
    259
    
    
    
    27.8Miscellaneous
    
    
    5,493
    
    
    
    6.3
    
    
    
    275
    
    
    
    0.3
    
    
    
    5,218
    
    
    
    1,897.5Total revenue
    
    $
    86,390
    
    
    
    100.0
    %
    
    $
    85,555
    
    
    
    100.0
    %
    
    $
    835
    
    
    
    1.0
    %
 Scheduled Freight Network.
 ACMI.
 Miscellaneous.
  General.
 Six months ended June 30,2007
    
    
    2006
    
    
    Dollar
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage of
    
    
    Change
    
    
    ChangeCost of
    
    
    of Total
    
    
    Cost of
    
    
    Total
    
    
    from 2006
    
    
    from 2006Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2007
    
    
    to 2007(Dollars in thousands)Flight expense
    
    $
    15,347
    
    
    
    17.7
    %
    
    $
    16,757
    
    
    
    19.6
    %
    
    $
    (1,410
    )
    
    
    (8.4
    )%Transportation expense
    
    
    26,649
    
    
    
    30.9
    
    
    
    21,815
    
    
    
    25.5
    
    
    
    4,834
    
    
    
    22.2Fuel expense
    
    
    22,732
    
    
    
    26.3
    
    
    
    27,354
    
    
    
    31.9
    
    
    
    (4,622
    )
    
    
    (16.9
    )Maintenance expense
    
    
    7,349
    
    
    
    8.5
    
    
    
    7,611
    
    
    
    8.9
    
    
    
    (262
    )
    
    
    (3.4
    )Freight handling expense
    
    
    16,260
    
    
    
    18.8
    
    
    
    16,953
    
    
    
    19.8
    
    
    
    (693
    )
    
    
    (4.1
    )Depreciation and amortization
    
    
    1,704
    
    
    
    2.0
    
    
    
    1,529
    
    
    
    1.8
    
    
    
    175
    
    
    
    11.4Operating overhead expense
    
    
    9,138
    
    
    
    10.6
    
    
    
    6,319
    
    
    
    7.4
    
    
    
    2,819
    
    
    
    44.6Total cost of revenue
    
    $
    99,179
    
    
    
    114.8
    %
    
    $
    98,338
    
    
    
    114.9
    %
    
    $
    841
    
    
    
    0.9
    %
 23




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##### Table of Contents



Flight Expense.
  Transportation Expense.
 Fuel Expense.
   Maintenance Expense.
 Freight Handling Expense.
 Depreciation and Amortization.
 24




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Operating Overhead Expense.
           Forward-Looking Statements
   25




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##### Table of Contents




    
    the ability to raise additional debt or equity on economic terms or at all;
    
    loss of key suppliers, significant customers or key management personnel;
    
    increased competition, including the possible impact of any mergers, alliances or
combinations of competitors;
    
    increases in the cost and/or decreases in the availability of aircraft fuel and/or diesel
fuel and our ability to recapture increases in the cost of such fuel through the use of fuel
surcharges and/or price increases;
    
    with respect to our scheduled freight network, the continuing high cost of aircraft and
diesel fuel leading to a higher total price for our services which impacts the freight
purchasing decision for our customers and/or shippers resulting in a shift to less expensive
modes of transportation;
    
    limitations upon financial and operating flexibility due to the terms of our Revolving Facility;
    
    changes in our capital resources and liquidity;
    
    financial costs and operating limitations imposed by both the current and potential
additional future unionization of our workforce;
    
    payment defaults by our customers;
    
    write-downs of the value of the assets acquired by us from ACT;
    
    changes in the cost of Boeing 737-300SF and Boeing 727-200 cargo aircraft maintenance
outside the scope of our power-by-the-hour maintenance agreements;
    
    changes in general economic conditions;
    
    changes in the cost and availability of ground handling and storage services;
    
    changes in the cost and availability of aircraft or replacement parts;
    
    changes in our business strategy or development plans;
    
    changes in government regulation and policies, including regulations affecting
maintenance requirements for, and availability of, aircraft and airworthiness directives or
service bulletins;
    
    foreign political instability and acts of war or terrorism;
    
    adverse litigation judgments or awards;
    
    the ability to attract and retain customers and freight volumes for our scheduled freight network;
    
    findings of environmental contamination and/or the cost of remediation;
    
    limitations in our ability to find, acquire and integrate replacement aircraft for our
Boeing 727-200 cargo aircraft under terms and conditions that are satisfactory to us; and
    
    limitations in our ability to offset income with our future deductible tax attributes.
 26




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Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls.
  
  
   27




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##### Table of Contents



Risks Relating to Our Business
 We have liquidity issues and need to raise additional funding, however, further financing
cannot be guaranteed.
   The as-needed nature of our scheduled freight business and the types of industries we serve
subject our business to significant market fluctuations that are beyond our control, and a downward
market fluctuation could have a material adverse effect on our results of operations.
  Our inability to execute upon our plans to increase sales of our ground freight product,
or to manage or to generate sufficient revenues from that line of business, could have a material
adverse effect on our results of operations.
  28




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##### Table of Contents



Our inability to attract and retain sufficient business from customers at economical
prices for our air and ground freight products could impair our ability to compete and could have a
material adverse effect on our results of operations.
  We derive a significant portion of our revenues from a limited number of customers, and
the loss of their business or payment defaults by one or more of them could have a material adverse
effect on our results of operations.
   The terms of our Revolving Facility could restrict our operations.
  Our failure to comply with certain covenants in the Revolving Facility could result in an
event of default that could cause acceleration of the repayment of our indebtedness.
  29




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##### Table of Contents



The U.S. freight transportation industry is highly competitive and, if we cannot successfully
compete, our results of operations and profitability may be materially adversely affected.
     We have experienced recent changes in senior management that could adversely affect the
operation of our business.
  30




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##### Table of Contents



ACT has been operated as a private company that is not subject to Sarbanes-Oxley Act
regulations and, therefore, may lack the internal controls and procedures of a public company.
  Writedowns of the value of our long-lived assets could have a material adverse effect on our
results of operations.
  If we lose access to, or sustain damage to, our Fort Wayne, Indiana facilities, our business
would be interrupted, which could materially adversely affect our business and results of
operations.
    Increases in the cost, or a reduction in the availability, of airframe or aircraft engine
maintenance may result in increased costs.
  31




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##### Table of Contents



Increases in the cost, or decreases in the supply, of aircraft and/or diesel fuel could have a
material adverse effect on our results of operations.
       Increases in the cost, or decreases in the supply, of ground handling and storage services
could significantly disrupt our business.
  The unavailability of aircraft due to unscheduled maintenance, accidents and other events may
result in the loss of revenue and customers.
  32




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##### Table of Contents



The unavailability of trucks, drivers and owner operators, or increases in the cost of
trucking services, may materially adversely affect our results of operations.
  Financial costs and operating limitations imposed by the unionization of our workforce could
create material labor problems for our business.
   A failure of our computer systems could significantly disrupt our business.
  Aircraft or truck accidents and the resulting repercussions could have a material adverse
effect on our business.
  33




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##### Table of Contents



Risks Relating to Government Regulation
 If we lose our authority to conduct flight operations, we will be unable to run our air
freight business.
  FAA safety, training and maintenance regulations may hinder our ability to conduct operations
or may result in fines or increased costs.
   Our trucking operations are highly regulated, and increased direct and indirect costs of
compliance with, or liability for violation of, existing or future regulations could have a
material adverse effect on our business.
   34




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##### Table of Contents



If we improperly ship hazardous materials or contraband, we could incur substantial fines
or damages.
  Our operations are subject to various environmental laws and regulations, the violation
of which could result in substantial fines or penalties.
   Department of Homeland Security and Transportation Security Administration regulations may
result in unanticipated costs.
   Stock ownership by non-U.S. citizens could prevent us from operating our business.
  35




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##### Table of Contents



Risks Related to Our Common Stock
 The market price for our common stock may be volatile.
  
    
    our performance and prospects;
    
    the performance and prospects of our major customers;
    
    the limited depth and liquidity of the market for our common stock;
    
    investor perception of us and the industry in which we operate;
    
    general financial and other market conditions;
    
    the cost and supply of fuel; and
    
    domestic and international economic conditions.
  The interests of our principal stockholders may be inconsistent with the interests of our
other equity holders and may have an adverse effect on our stock price.
  Other companies may have difficulty acquiring us, even if doing so would benefit our
stockholders.
  
    
    a limitation on who may call stockholder meetings;
    
    a prohibition on stockholder action by written consent; and
    
    advance notification procedures for matters to be brought before stockholder meetings.
  36




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##### Table of Contents



We do not anticipate paying cash dividends to our stockholders in the foreseeable future.
  
   
   
   
   
   Exhibit No.
    
    
    
    EXHIBIT31.1*
    
    
    
    Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2*
    
    
    
    Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1*
    
    
    
    Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Each document marked with an asterisk is filed or furnished herewith. 37




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##### Table of Contents



KITTY HAWK, INC.By:
    
    /s/ JAMES R. KUPFERSCHMIDJames R. KupferschmidVice President  Finance and Chief FinancialOfficer (Authorized officer and principalfinancial officer)
 38