##### 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, 2006
 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
(State or other jurisdiction of
incorporation or organization)
    
    75-2564006
(I.R.S. Employer
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, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three months ended
June 30, 2006 and 2005 and the six months ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the six months ended
June 30, 2006
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906
  2




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June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,165
    
    
    $
    26,650Restricted cash and short-term investments
    
    
    250
    
    
    
    250Trade accounts receivable, net of allowance for doubtful
accounts of $0.1 million
    
    
    20,604
    
    
    
    15,672Assets held for sale
    
    
    40
    
    
    
    135Inventory and aircraft supplies
    
    
    3,173
    
    
    
    2,932Deposits and prepaid expenses
    
    
    4,752
    
    
    
    2,000Prepaid aircraft fuel
    
    
    1,322
    
    
    
    1,727Other current assets, net
    
    
    699
    
    
    
    89Total current assets
    
    
    38,005
    
    
    
    49,455Property and equipment, net
    
    
    9,077
    
    
    
    7,479Other long-term assets
    
    
    3,161
    
    
    
    Total assets
    
    $
    50,243
    
    
    $
    56,934LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Current liabilities:Accounts payable  trade
    
    $
    6,392
    
    
    $
    4,551Accrued wages and compensation related expenses
    
    
    2,114
    
    
    
    1,981Other accrued expenses
    
    
    13,200
    
    
    
    7,273Taxes payable, other than income taxes
    
    
    1,175
    
    
    
    1,068Current debt
    
    
    2,784
    
    
    
    1,949Total current liabilities
    
    
    25,665
    
    
    
    16,822Other long-term liabilities
    
    
    530
    
    
    
    355Total liabilities
    
    
    26,195
    
    
    
    17,177Commitments and contingenciesSeries B Redeemable Preferred Stock, $0.01 par value: Authorized
shares  15,000; issued and outstanding  14,550 and 14,800 at
June 30, 2006 and December 31, 2005, respectively
    
    
    12,142
    
    
    
    12,350Stockholders equity: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, 2006 and December 31, 2005; issued
and outstanding  52,777,228 and 50,310,061 at June 30, 2006
and December 31, 2005, respectively
    
    
    
    
    
    
    Additional capital
    
    
    26,021
    
    
    
    24,094Retained earnings (deficit)
    
    
    (14,115
    )
    
    
    3,313Total stockholders equity
    
    
    11,906
    
    
    
    27,407Total liabilities and stockholders equity
    
    $
    50,243
    
    
    $
    56,934
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Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Scheduled freight network
    
    $
    44,263
    
    
    $
    35,462
    
    
    $
    84,350
    
    
    $
    68,304ACMI
    
    
    930
    
    
    
    12
    
    
    
    930
    
    
    
    532Miscellaneous
    
    
    275
    
    
    
    977
    
    
    
    275
    
    
    
    1,244Total revenue
    
    
    45,468
    
    
    
    36,451
    
    
    
    85,555
    
    
    
    70,080Cost of revenue:Flight expense
    
    
    8,189
    
    
    
    6,675
    
    
    
    16,757
    
    
    
    13,281Transportation expense
    
    
    12,707
    
    
    
    3,917
    
    
    
    21,815
    
    
    
    6,845Fuel expense
    
    
    14,150
    
    
    
    13,244
    
    
    
    27,354
    
    
    
    25,185Maintenance expense
    
    
    3,877
    
    
    
    2,505
    
    
    
    7,611
    
    
    
    5,052Freight handling expense
    
    
    8,953
    
    
    
    6,546
    
    
    
    16,953
    
    
    
    12,805Depreciation and amortization
    
    
    776
    
    
    
    1,002
    
    
    
    1,529
    
    
    
    1,825Operating overhead expense
    
    
    3,298
    
    
    
    2,873
    
    
    
    6,319
    
    
    
    5,822Total cost of revenue
    
    
    51,950
    
    
    
    36,762
    
    
    
    98,338
    
    
    
    70,815Gross loss
    
    
    (6,482
    )
    
    
    (311
    )
    
    
    (12,783
    )
    
    
    (735
    )General and administrative expense
    
    
    2,276
    
    
    
    1,856
    
    
    
    4,578
    
    
    
    4,076Operating loss
    
    
    (8,758
    )
    
    
    (2,167
    )
    
    
    (17,361
    )
    
    
    (4,811
    )Other (income) expense:Interest expense
    
    
    73
    
    
    
    73
    
    
    
    142
    
    
    
    143Other, net
    
    
    (194
    )
    
    
    (85
    )
    
    
    (482
    )
    
    
    (687
    )Net loss
    
    $
    (8,637
    )
    
    $
    (2,155
    )
    
    $
    (17,021
    )
    
    $
    (4,267
    )Preferred stock dividends
    
    
    296
    
    
    
    
    
    
    
    592
    
    
    
    Net loss allocable to common stockholders
    
    $
    (8,933
    )
    
    $
    (2,155
    )
    
    $
    (17,613
    )
    
    $
    (4,267
    )Basic loss per share
    
    $
    (0.17
    )
    
    $
    (0.04
    )
    
    $
    (0.34
    )
    
    $
    (0.08
    )Diluted loss per share
    
    $
    (0.17
    )
    
    $
    (0.04
    )
    
    $
    (0.34
    )
    
    $
    (0.08
    )Weighted average common shares
outstanding  basic
    
    
    52,024,419
    
    
    
    51,439,964
    
    
    
    51,849,914
    
    
    
    51,313,764Weighted average diluted common shares
outstanding  diluted
    
    
    52,024,419
    
    
    
    51,439,964
    
    
    
    51,849,914
    
    
    
    51,313,764
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Common Stock
    
    
    
    
    
    
    RetainedNumber of
    
    
    
    
    
    
    Additional
    
    
    EarningsShares
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    TotalBalance at December 31, 2005
    
    
    50,310,061
    
    
    $
    
    
    
    $
    24,094
    
    
    $
    3,313
    
    
    $
    27,407Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,021
    )
    
    
    (17,021
    )Dividends paid for Series B
Redeemable Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (407
    )
    
    
    (407
    )Compensation expense associated
with stock option and restricted
stock unit grants
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    
    
    
    
    388Issuance of common stock related
to asset purchase agreement
    
    
    1,773,818
    
    
    
    
    
    
    
    1,260
    
    
    
    
    
    
    
    1,260Issuance of common stock related
to conversion of Series B
Redeemable Preferred Stock
    
    
    260,308
    
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    208Issuance of common stock related
to exercise of options to
acquire stock
    
    
    237,675
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    71Issuance of common stock related
to exercise of warrants to
acquire stock
    
    
    195,366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    52,777,228
    
    
    $
    
    
    
    $
    26,021
    
    
    $
    (14,115
    )
    
    $
    11,906
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##### Table of Contents



Six months ended June 30,2006
    
    
    2005Operating activities:Net loss
    
    $
    (17,021
    )
    
    $
    (4,267
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization expense
    
    
    1,689
    
    
    
    1,996Gain on disposal of property and equipment
    
    
    (570
    )
    
    
    (470
    )Compensation expense related to stock options and
restricted stock units
    
    
    388
    
    
    
    23(Reversal of) provision for allowance for doubtful accounts
    
    
    42
    
    
    
    (1
    )Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (4,974
    )
    
    
    87Inventory and aircraft supplies
    
    
    (240
    )
    
    
    (306
    )Prepaid expenses and other
    
    
    (698
    )
    
    
    (643
    )Accounts payable and accrued expenses
    
    
    5,461
    
    
    
    (406
    )Accrued maintenance reserves
    
    
    
    
    
    
    (27
    )Net cash used in operating activities
    
    
    (15,923
    )
    
    
    (4,014
    )Investing activities:Proceeds from sale of assets
    
    
    1,006
    
    
    
    998Assets acquired from Air Container Transport, Inc.
    
    
    (2,987
    )
    
    
    Change in restricted cash
    
    
    
    
    
    
    971Capital expenditures
    
    
    (1,170
    )
    
    
    (2,375
    )Net cash used in investing activities
    
    
    (3,151
    )
    
    
    (406
    )Financing activities:Dividends paid on Series B Redeemable Preferred Stock
    
    
    (407
    )
    
    
    Payments on current debt
    
    
    (75
    )
    
    
    Proceeds from exercise of stock options
    
    
    71
    
    
    
    122Net cash provided by (used in) financing activities
    
    
    (411
    )
    
    
    122Net decrease in cash and cash equivalents
    
    
    (19,485
    )
    
    
    (4,298
    )Cash and cash equivalents at beginning of period
    
    
    26,650
    
    
    
    16,284Cash and cash equivalents at end of period
    
    $
    7,165
    
    
    $
    11,986
  6




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th
    7




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2006(in thousands)Flight expense
    
    $
    29
    
    
    $
    60Maintenance expense
    
    
    6
    
    
    
    13Freight handling expense
    
    
    21
    
    
    
    43Operating overhead expense
    
    
    29
    
    
    
    57General and administrative expense
    
    
    110
    
    
    
    215Total compensation expense
    
    $
    195
    
    
    $
    388
  8




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Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2006Risk free interest rate
    
    
    5.01
    %
    
    
    4.76
    %Expected term (years)
    
    
    6
    
    
    
    6Volatility
    
    
    65.35
    %
    
    
    64.56
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Annual forfeiture rate
    
    
    4.00
    %
    
    
    4.00
    %
  WeightedAvailable for
    
    
    Options/RSUs
    
    
    AverageGrant
    
    
    Outstanding
    
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    765,961
    
    
    
    4,545,727
    
    
    $
    0.60Authorized for grant
    
    
    1,500,000
    
    
    
    
    
    
    
    Options granted (weighted-average fair value
$0.61)
    
    
    (172,000
    )
    
    
    172,000
    
    
    $
    0.92RSUs granted (weighted-average fair value $0.90)
    
    
    (72,444
    )
    
    
    72,444
    
    
    
    Exercised (total intrinsic value of $0.2 million)
    
    
    
    
    
    
    (237,675
    )
    
    $
    0.30Canceled (weighted average grant date fair value
$0.84)
    
    
    93,625
    
    
    
    (93,625
    )
    
    $
    1.10Outstanding at June 30, 2006
    
    
    2,115,142
    
    
    
    4,458,871
    
    
    $
    0.67
  Weighted AverageFair Value atOptions/RSUs
    
    
    Grant DateUnvested at January 1, 2006
    
    
    2,343,383
    
    
    $
    0.65Vested during the period (total fair value
of $0.2 million)
    
    
    (497,464
    )
    
    $
    0.41Granted
    
    
    244,444
    
    
    $
    0.70Forfeited
    
    
    (75,625
    )
    
    $
    0.75Unvested at June 30, 2006
    
    
    2,014,738
    
    
    $
    0.69
  WeightedWeighted
    
    
    AverageAverage
    
    
    Exercise
    
    
    AggregateNumber of
    
    
    Remaining
    
    
    Price of
    
    
    IntrinsicOptions/RSUs
    
    
    Life (Years)
    
    
    Options/RSUs
    
    
    Value atExercise Prices
    
    Outstanding
    
    
    Outstanding
    
    
    Outstanding
    
    
    June 30, 2006$-
    
    
    401,344
    
    
    
    
    
    
    
    
    
    
    $
    325,089$0.30
    
    
    2,358,527
    
    
    
    7.08
    
    
    $
    0.30
    
    
    
    1,910,407$0.81 - $0.95
    
    
    140,000
    
    
    
    9.70
    
    
    $
    0.85
    
    
    
    113,400$1.04 - $1.105
    
    
    772,000
    
    
    
    9.50
    
    
    $
    1.05
    
    
    
    625,320$1.14 - $1.17
    
    
    274,000
    
    
    
    9.07
    
    
    $
    1.16
    
    
    
    221,940$1.40 - $1.43
    
    
    263,000
    
    
    
    8.31
    
    
    $
    1.40
    
    
    
    213,030$1.62
    
    
    250,000
    
    
    
    7.92
    
    
    $
    1.62
    
    
    
    202,500Outstanding at June 30, 2006
    
    
    4,458,871
    
    
    
    8.14
    
    
    $
    0.67
    
    
    $
    3,611,686
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WeightedWeighted
    
    
    AverageAverage
    
    
    Exercise
    
    
    AggregateNumber of
    
    
    Remaining
    
    
    Price of
    
    
    IntrinsicOptions/RSUs
    
    
    Contractual
    
    
    Vested
    
    
    Value atExercise Prices
    
    Vested(1)
    
    
    Terms
    
    
    Options/RSUs
    
    
    June 30, 2006$-
    
    
    109,897
    
    
    
    
    
    
    
    
    
    
    $
    89,017$0.30
    
    
    2,038,110
    
    
    
    7.08
    
    
    $
    0.30
    
    
    
    1,650,869$0.81 - $0.95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $1.04 - $1.105
    
    
    10,001
    
    
    
    9.00
    
    
    $
    1.08
    
    
    
    8,100$1.14 - $1.17
    
    
    20,333
    
    
    
    9.00
    
    
    $
    1.14
    
    
    
    16,470$1.40 - $1.43
    
    
    87,667
    
    
    
    8.31
    
    
    $
    1.40
    
    
    
    71,010$1.62
    
    
    178,125
    
    
    
    7.92
    
    
    $
    1.62
    
    
    
    144,281Exercisable at June 30, 2006
    
    
    2,444,133
    
    
    
    7.71
    
    
    $
    0.43
    
    
    $
    1,979,747
 
 (1)
    
    Each of the outstanding options is currently exercisable. Option
holders who exercise unvested options will receive restricted stock for such
unvested options. The restrictions on such restricted stock will lapse on the
same schedule that the underlying options would have vested.  Compensation expense(in thousands)Six months ending December 31, 2006
    
    $
    324Year ending December 31, 2007
    
    
    474Year ending December 31, 2008
    
    
    265Year ending December 31, 2009
    
    
    51Year ending December 31, 2010
    
    
    3Total
    
    $
    1,117
  Three Months ended
    
    Six Months endedJune 30, 2006
    
    June 30, 2006(in thousands, except per share amounts)Income from continuing operations before
income taxes
    
    $
    129
    
    
    $
    261Income from continuing operations
    
    
    129
    
    
    
    261Net loss
    
    
    129
    
    
    
    261Basic and diluted loss per common share
    
    $
    0.00
    
    
    $
    0.01
  Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2005
    
    June 30, 2005Risk free interest rate
    
    
    3.70
    %
    
    
    4.02
    %Expected term (years)
    
    
    5.85
    
    
    
    7.63Volatility
    
    
    47.85
    %
    
    
    47.85
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 10




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005(In thousands,except per share data)Net loss, as reported
    
    $
    (2,155
    )
    
    $
    (4,267
    )Add: Total stock-based employee
compensation expense determined
under the intrinsic method for all
awards
    
    
    11
    
    
    
    23Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (130
    )
    
    
    (260
    )Pro forma net loss
    
    $
    (2,274
    )
    
    $
    (4,504
    )Basic loss per share  as reported
    
    $
    (0.04
    )
    
    $
    (0.08
    )Basic loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.09
    )Diluted loss per share  as reported
    
    $
    (0.04
    )
    
    $
    (0.08
    )Diluted loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.09
    )
   June 30, 2006
    
    
    December 31, 2005(In thousands)Freight handling expenses
    
    $
    5,572
    
    
    $
    1,686Landing and parking expenses
    
    
    943
    
    
    
    1,178Trucking expenses
    
    
    1,756
    
    
    
    1,064Other
    
    
    4,929
    
    
    
    3,345Total other accrued expenses
    
    $
    13,200
    
    
    $
    7,273
     11




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##### Table of Contents



ScheduledFreight
    
    Cargo
    
    
    
    
    
    
    
    
    
    ConsolidatedNetwork
    
    Airline
    
    Other
    
    Eliminations
    
    Balance(in thousands)Three months ended June 30, 2006:Revenue from external customers
    
    $
    44,538
    
    
    $
    930
    
    
    $
    
    
    
    $
    
    
    
    $
    45,468Revenue from intersegment operations
    
    
    
    
    
    
    12,763
    
    
    
    
    
    
    
    (12,763
    )
    
    
    Depreciation and amortization
    
    
    134
    
    
    
    642
    
    
    
    81
    
    
    
    
    
    
    
    857Operating loss
    
    
    (9,087
    )
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    (8,758
    )Interest expense
    
    
    10
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    73Other income
    
    
    
    
    
    
    (32
    )
    
    
    (162
    )
    
    
    
    
    
    
    (194
    )Net income (loss)
    
    $
    (9,097
    )
    
    $
    361
    
    
    $
    99
    
    
    $
    
    
    
    $
    (8,637
    )Total assets
    
    $
    31,242
    
    
    $
    9,734
    
    
    $
    37,387
    
    
    $
    (28,120
    )
    
    $
    50,243Three months ended June 30, 2005:Revenue from external customers
    
    $
    36,054
    
    
    $
    397
    
    
    $
    
    
    
    $
    
    
    
    $
    36,451Revenue from intersegment operations
    
    
    
    
    
    
    10,353
    
    
    
    
    
    
    
    (10,353
    )
    
    
    Depreciation and amortization
    
    
    128
    
    
    
    874
    
    
    
    87
    
    
    
    
    
    
    
    1,089Operating loss
    
    
    (1,504
    )
    
    
    (645
    )
    
    
    (18
    )
    
    
    
    
    
    
    (2,167
    )Interest expense
    
    
    13
    
    
    
    1
    
    
    
    59
    
    
    
    
    
    
    
    73Other income
    
    
    (15
    )
    
    
    (2
    )
    
    
    (68
    )
    
    
    
    
    
    
    (85
    )Net loss
    
    $
    (1,502
    )
    
    $
    (644
    )
    
    $
    (9
    )
    
    $
    
    
    
    $
    (2,155
    )Total assets
    
    $
    16,647
    
    
    $
    14,983
    
    
    $
    25,157
    
    
    $
    (12,202
    )
    
    $
    44,585Six months ended June 30, 2006:Revenue from external customers
    
    $
    84,625
    
    
    $
    930
    
    
    $
    
    
    
    $
    
    
    
    $
    85,555Revenue from intersegment operations
    
    
    
    
    
    
    26,235
    
    
    
    
    
    
    
    (26,235
    )
    
    
    Depreciation and amortization
    
    
    263
    
    
    
    1,266
    
    
    
    160
    
    
    
    
    
    
    
    1,689Operating loss
    
    
    (17,852
    )
    
    
    513
    
    
    
    (22
    )
    
    
    
    
    
    
    (17,361
    )Interest expense
    
    
    21
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    142Other income
    
    
    
    
    
    
    (32
    )
    
    
    (450
    )
    
    
    
    
    
    
    (482
    )Net income (loss)
    
    $
    (17,873
    )
    
    $
    545
    
    
    $
    307
    
    
    $
    
    
    
    $
    (17,021
    )Total assets
    
    $
    31,242
    
    
    $
    9,734
    
    
    $
    37,387
    
    
    $
    (28,120
    )
    
    $
    50,243Six months ended June 30, 2005:Revenue from external customers
    
    $
    69,123
    
    
    $
    957
    
    
    $
    
    
    
    $
    
    
    
    $
    70,080Revenue from intersegment operations
    
    
    
    
    
    
    20,359
    
    
    
    
    
    
    
    (20,359
    )
    
    
    Depreciation and amortization
    
    
    259
    
    
    
    1,564
    
    
    
    173
    
    
    
    
    
    
    
    1,996Operating income (loss)
    
    
    (3,745
    )
    
    
    (999
    )
    
    
    (67
    )
    
    
    
    
    
    
    (4,811
    )Interest expense
    
    
    35
    
    
    
    2
    
    
    
    106
    
    
    
    
    
    
    
    143Other income
    
    
    (145
    )
    
    
    (10
    )
    
    
    (532
    )
    
    
    
    
    
    
    (687
    )Net income (loss)
    
    $
    (3,635
    )
    
    $
    (991
    )
    
    $
    359
    
    
    $
    
    
    
    $
    (4,267
    )Total assets
    
    $
    16,647
    
    
    $
    14,983
    
    
    $
    25,157
    
    
    $
    (12,202
    )
    
    $
    44,585
   12




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##### Table of Contents



Three Months ended June 30,
    
    
    Six Months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average shares
outstanding  basic
    
    
    52,024,419
    
    
    
    51,439,964
    
    
    
    51,849,914
    
    
    
    51,313,764Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares
outstanding  diluted
    
    
    52,024,419
    
    
    
    51,439,964
    
    
    
    51,849,914
    
    
    
    51,313,764Securities excluded from
computation due to
antidilutive effect:Due to net loss
    
    
    6,117,986
    
    
    
    2,542,174
    
    
    
    21,573,231
    
    
    
    2,542,174Due to out-of-the-money
    
    
    17,100,578
    
    
    
    872,000
    
    
    
    1,645,333
    
    
    
    872,000
      June 30, 2006(in thousands)Current assets
    
    $
    120Property and equipment
    
    
    2,458Other long-term assets
    
    
    3,161Total assets acquired
    
    
    5,739Current liabilities
    
    
    (128
    )Other long-term liabilities
    
    
    (444
    )Total liabilities
    
    
    (572
    )Net assets acquired
    
    $
    5,167
  13




---



##### Table of Contents



Three
months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    2006
    
    2005(in
thousands, except per share data)Revenue
    
    $
    56,077
    
    
    $
    47,180
    
    
    $
    107,319
    
    
    $
    91,225Net loss
    
    $
    (9,792
    )
    
    $
    (2,492
    )
    
    $
    (18,899
    )
    
    $
    (5,301
    )Basic and diluted loss per share
    
    $
    (0.18
    )
    
    $
    (0.05
    )
    
    $
    (0.36
    )
    
    $
    (0.10
    )
           14




---



##### Table of Contents



15




---



##### Table of Contents



Executive Overview
  Scheduled Freight Network.
     16




---



##### Table of Contents



Ground Transportation.
 Cargo Airline.
 Fuel Costs.
    17




---



##### Table of Contents



Seasonality.
  Fixed Costs.
 Capital Requirements, Capital Resources and Liquidity
 Capital Requirements.
 Capital Resources.
 Credit Facility.
  18




---



##### Table of Contents



Liquidity.
  19




---



##### Table of Contents



Results of Operations
 Revenue.
 
    
    Scheduled freight revenue,which is generated from expedited air and ground freight
services provided by our scheduled freight network. We consider expedited freight service
as freight transported within our network on an overnight, two-day, three-day, four-day or
five-day basis. 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 short to medium-term 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 full-truckload, contracted service to third parties and local pick up and
delivery trucking services.
 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;
    
    operating usage and lease expense under an aircraft and engine use agreement and
leased aircraft 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:
 20




---



##### Table of Contents




    
    third party aircraft charter expense;
 
    
    aircraft ground operating costs, such as landing and parking fees charged by
airports and the cost of deicing aircraft;
    
    driver wages and benefits;
    
    contracted trucking expenses for cities in our scheduled network, including
owner-operator costs and 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 owned trucks operated by our employees.
    
    Maintenance Expense,which consists of costs to maintain airframes and aircraft engines
operated by our cargo airline and owned 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;
    
    costs of aircraft and truck parts and supplies.
 
    
    Freight Handling Expense,which consists of costs to handle the loading and unloading
of 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 expenses
for our owned airframes and aircraft engines, trucks, trailers and freight-handling
equipment and capitalized software.
    
    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 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;
    
    general operational office expenses; and
    
    induction costs related to the Boeing 737-300SF cargo aircraft during 2005.
 21




---



##### Table of Contents



General and Administrative Expenses.
 Critical Accounting Policies
    Three months ended June 30,2006
    
    2005Revenue:Scheduled freight network
    
    
    97.3
    %
    
    
    97.3
    %Other
    
    
    2.7
    
    
    
    2.7Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    114.3
    
    
    
    100.8Gross loss
    
    
    (14.3
    )
    
    
    (0.8
    )General and administrative expenses
    
    
    5.0
    
    
    
    5.1Operating loss from continuing operations
    
    
    (19.3
    )
    
    
    (5.9
    )Other (income) expense:Interest expense
    
    
    0.1
    
    
    
    0.2Other income
    
    
    (0.4
    )
    
    
    (0.2
    )Total interest and other (income) expense
    
    
    (0.3
    )
    
    
    Net loss
    
    
    (19.0
    )%
    
    
    (5.9
    )%
 Revenue
 General.
 Three months ended June 30,2006
    
    
    2005
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    Changeof Total
    
    
    
    
    
    
    of Total
    
    
    from 2005Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2006(Dollars in thousands)Scheduled freight network
    
    $
    44,263
    
    
    
    97.3
    %
    
    $
    35,462
    
    
    
    97.3
    %
    
    
    24.8
    %Other:ACMI
    
    
    930
    
    
    
    2.1
    
    
    
    12
    
    
    
    
    
    
    
    7,650.0
    %Miscellaneous
    
    
    275
    
    
    
    0.6
    
    
    
    977
    
    
    
    2.7
    
    
    
    (71.9
    )Total revenue
    
    $
    45,468
    
    
    
    100.0
    %
    
    $
    36,451
    
    
    
    100.0
    %
    
    
    24.7
    %
 Scheduled Freight Network.
 22




---



##### Table of Contents



ACMI
 Miscellaneous
 Cost of Revenue
 General.
 Three months ended June 30,2006
    
    
    2005
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    ChangeCost of
    
    
    of Total
    
    
    Cost of
    
    
    of Total
    
    
    from 2005Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2006(Dollars in thousands)Flight expense
    
    $
    8,189
    
    
    
    18.0
    %
    
    $
    6,675
    
    
    
    18.3
    %
    
    
    22.7
    %Transportation expense
    
    
    12,707
    
    
    
    28.0
    
    
    
    3,917
    
    
    
    10.8
    
    
    
    224.4Fuel expense
    
    
    14,150
    
    
    
    31.1
    
    
    
    13,244
    
    
    
    36.3
    
    
    
    6.8Maintenance expense
    
    
    3,877
    
    
    
    8.5
    
    
    
    2,505
    
    
    
    6.9
    
    
    
    54.8Freight handling expense
    
    
    8,953
    
    
    
    19.7
    
    
    
    6,546
    
    
    
    17.9
    
    
    
    36.8Depreciation and amortization
    
    
    776
    
    
    
    1.7
    
    
    
    1,002
    
    
    
    2.7
    
    
    
    (22.6
    )Operating overhead expense
    
    
    3,298
    
    
    
    7.3
    
    
    
    2,873
    
    
    
    7.9
    
    
    
    14.8Total cost of revenue
    
    $
    51,950
    
    
    
    114.3
    %
    
    $
    36,762
    
    
    
    100.8
    %
    
    
    41.3
    %
 Flight Expense.
  Transportation Expense.
 23




---



##### Table of Contents



Fuel Expense.
   Maintenance Expense.
 Freight Handling Expense.
 Depreciation and Amortization.
 Operating Overhead Expense.
 24




---



##### Table of Contents



Gross Loss
  General and Administrative Expense
  Other Income
  Income Taxes
    Six months ended June 30,2006
    
    
    2005Revenue:Scheduled freight network
    
    
    98.6
    %
    
    
    97.5
    %Other
    
    
    1.4
    
    
    
    2.5Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    114.9
    
    
    
    101.1Gross loss
    
    
    (14.9
    )
    
    
    (1.1
    )General and administrative expenses
    
    
    5.4
    
    
    
    5.8Operating loss from continuing operations
    
    
    (20.3
    )
    
    
    (6.9
    )Other (income) expense:Interest expense
    
    
    0.2
    
    
    
    0.2Other income
    
    
    (0.6
    )
    
    
    (1.0
    )Total interest and other (income) expense
    
    
    (0.4
    )
    
    
    (0.8
    )Net loss
    
    
    (19.9
    )%
    
    
    (6.1
    )%
 25




---



##### Table of Contents



Revenue
 General.
 Six months ended June 30,2006
    
    
    2005
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    Changeof Total
    
    
    
    
    
    
    of Total
    
    
    from 2005Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2006(Dollars in thousands)Scheduled freight network
    
    $
    84,350
    
    
    
    98.6
    %
    
    $
    68,304
    
    
    
    97.5
    %
    
    
    23.5
    %Other:ACMI
    
    
    930
    
    
    
    1.1
    
    
    
    532
    
    
    
    0.7
    
    
    
    74.8Miscellaneous
    
    
    275
    
    
    
    0.3
    
    
    
    1,244
    
    
    
    1.8
    
    
    
    (77.9
    )Total revenue
    
    $
    85,555
    
    
    
    100.0
    %
    
    $
    70,080
    
    
    
    100.0
    %
    
    
    22.1
    %
 Scheduled Freight Network.
 ACMI
 Miscellaneous
 Cost of Revenue
 General.
 Six months ended June 30,2006
    
    
    2005
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    ChangeCost of
    
    
    of Total
    
    
    Cost of
    
    
    of Total
    
    
    from 2005Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2006(Dollars in thousands)Flight expense
    
    $
    16,757
    
    
    
    19.6
    %
    
    $
    13,281
    
    
    
    19.0
    %
    
    
    26.2
    %Transportation expense
    
    
    21,815
    
    
    
    25.5
    
    
    
    6,845
    
    
    
    9.8
    
    
    
    218.7Fuel expense
    
    
    27,354
    
    
    
    31.9
    
    
    
    25,185
    
    
    
    35.9
    
    
    
    8.6Maintenance expense
    
    
    7,611
    
    
    
    8.9
    
    
    
    5,052
    
    
    
    7.2
    
    
    
    50.7Freight handling expense
    
    
    16,953
    
    
    
    19.8
    
    
    
    12,805
    
    
    
    18.3
    
    
    
    32.4Depreciation and amortization
    
    
    1,529
    
    
    
    1.8
    
    
    
    1,825
    
    
    
    2.6
    
    
    
    (16.2
    )Operating overhead expense
    
    
    6,319
    
    
    
    7.4
    
    
    
    5,822
    
    
    
    8.3
    
    
    
    8.5Total cost of revenue
    
    $
    98,338
    
    
    
    114.9
    %
    
    $
    70,815
    
    
    
    101.1
    %
    
    
    38.9
    %
 26




---



##### Table of Contents



Flight Expense.
  Transportation Expense.
 Fuel Expense.
   Maintenance Expense.
 Freight Handling Expense.
 27




---



##### Table of Contents



Depreciation and Amortization.
 Operating Overhead Expense.
 Gross Loss
  General and Administrative Expense
  Other Income
  Income Taxes
  Forward-Looking Statements
  28




---



##### Table of Contents




    
    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 diesel
fuel and our ability to recapture increases in the cost of aircraft fuel and diesel 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;
    
    with respect to our expansion of our freight transportation network to include
scheduled airport-to-airport expedited ground freight transportation services, potential
competitive reactions from other ground freight transportation carriers;
    
    limitations upon financial and operating flexibility due to the terms of our Credit Facility;
    
    changes in our capital resources and liquidity;
    
    financial costs and operating limitations imposed by both the current and the potential
additional future unionization of our workforce;
    
    payment defaults by our customers;
    
    write-downs of the value of our aircraft parts, airframes or aircraft engines;
    
    changes in the cost of Boeing 737-300SF cargo aircraft maintenance outside the scope of
our power-by-the-hour maintenance agreement and/or changes in the cost of Boeing 727-200
cargo aircraft maintenance;
    
    changes in general, regional or local 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;
    
    foreign political instability and acts of war or terrorism;
    
    adverse litigation judgments or awards;
    
    the ability to successfully integrate and operate our expedited ground network;
 29




---



##### Table of Contents




    
    the ability to attract sufficient customers and freight volumes for our expedited ground network;
    
    findings of environmental contamination;
    
    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.
  
   
  Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls.
  
  
  General Motors.
 30




---



##### Table of Contents



Other.
 
   
   
   
   
    
    approve granting the authority to the Companys Board of Directors, in their discretion,
to amend the Companys Second Amended and Restated Certificate of Incorporation to increase
the Companys authorized common stock from 100,000,000 shares to 125,000,000 shares
prior to the 2007 Annual Meeting of Stockholders;
    
    approve an increase in the number of shares of the Companys common stock authorized for
issuance under the Kitty Hawk 2003 Long Term Equity Incentive Plan from 7,000,000 shares to
8,500,000 shares; and
    
    ratify the selection by the Audit Committee of Grant Thornton LLP as independent
registered public accountants for the Company for 2006.
  31




---



##### Table of Contents



Director
    
    For
    
    WithheldRobert W. Zoller, Jr.
    
    59,402,569
    
    
    66,723Gerald L. Gitner
    
    59,360,850
    
    
    108,442Raymond B. Greer
    
    59,365,322
    
    
    103,970Myron Kaplan
    
    59,361,072
    
    
    108,220Melvin L. Keating
    
    59,375,022
    
    
    94,270Joseph D. Ruffolo
    
    59,358,850
    
    
    110,442Laurie M. Shahon
    
    59,365,768
    
    
    103,524
  For
    
    
    Against
    
    
    Abstain
    
    
    Broker Non-Vote59,584,720
    
    
    246,877
    
    
    
    2,476
    
    
    
    0The proposal to approve an increase in the number of shares of the Companys common stock
authorized for issuance under the Kitty Hawk 2003 Long Term Equity Incentive Plan from 7,000,000
shares to 8,500,000 shares:For
    
    
    Against
    
    
    Abstain
    
    
    Broker Non-Vote39,877,206
    
    
    2,595,630
    
    
    
    31,178
    
    
    
    17,330,059The proposal to ratify the selection by the Audit Committee of Grant Thornton LLP as
independent registered public accountants for the Company for
2006:For
    
    
    Against
    
    
    Abstain
    
    
    Broker Non-Vote59,752,146
    
    
    37,210
    
    
    
    44,717
    
    
    
    0
 
   
   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. 32




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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 principal financial officer)
 33