##### 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 September 30, 2005
  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 Street
P.O. Box 612787
Dallas/Fort Worth International Airport, Texas
(Address of principal executive offices)
    
    75261
(Zip Code)
 
 þ o
 o þ
 o þ
 þ o




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##### Table of Contents



PAGE NUMBERPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004 and the nine months ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 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
    
    
    31Item 6. Exhibits
    
    
    31Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to 18 U.S.C. Section 1350
 2




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September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,787
    
    
    $
    16,284Restricted cash and short-term investments
    
    
    250
    
    
    
    1,221Trade accounts receivable, net of allowance for doubtful accounts of $0.7 million
    
    
    17,125
    
    
    
    13,158Assets held for sale
    
    
    160
    
    
    
    65Inventory and aircraft supplies, net
    
    
    4,970
    
    
    
    4,720Deposits and prepaid expenses
    
    
    2,865
    
    
    
    1,750Prepaid fuel
    
    
    3,379
    
    
    
    2,310Other current assets, net
    
    
    1
    
    
    
    201Total current assets
    
    
    36,537
    
    
    
    39,709Property and equipment, net
    
    
    8,156
    
    
    
    8,961Other assets, net
    
    
    
    
    
    
    400Total assets
    
    $
    44,693
    
    
    $
    49,070LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Current liabilities:Accounts payable  trade
    
    $
    2,554
    
    
    $
    1,775Accrued wages and compensation related expenses
    
    
    1,979
    
    
    
    3,123Other accrued expenses
    
    
    6,766
    
    
    
    5,501Taxes payable, other than income
    
    
    1,418
    
    
    
    1,711Current portion of accrued maintenance reserves
    
    
    
    
    
    
    89Current debt
    
    
    1,949
    
    
    
    1,949Total current liabilities
    
    
    14,666
    
    
    
    14,148Other long-term liabilities
    
    
    412
    
    
    
    806Total liabilities
    
    
    15,078
    
    
    
    14,954Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred
stock, $0.01 par value: Authorized shares  10,000,000; none issued
    
    
    
    
    
    
    Common stock, $0.000001 par value: Authorized shares - 100,000,000; issued and
outstanding  50,310,061 and 46,620,883 at September 30, 2005 and December 31,
2004, respectively
    
    
    
    
    
    
    Additional capital
    
    
    22,468
    
    
    
    22,293Retained earnings
    
    
    7,147
    
    
    
    11,823Total stockholders equity
    
    
    29,615
    
    
    
    34,116Total liabilities and stockholders equity
    
    $
    44,693
    
    
    $
    49,070
  3




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Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Scheduled freight
    
    $
    39,724
    
    
    $
    40,603
    
    
    $
    108,028
    
    
    $
    110,991ACMI
    
    
    400
    
    
    
    1,197
    
    
    
    932
    
    
    
    1,837Miscellaneous
    
    
    566
    
    
    
    702
    
    
    
    1,810
    
    
    
    1,291Total revenue
    
    
    40,690
    
    
    
    42,502
    
    
    
    110,770
    
    
    
    114,119Cost of revenue:Flight expense
    
    
    8,134
    
    
    
    6,955
    
    
    
    21,415
    
    
    
    21,525Transportation expense
    
    
    3,381
    
    
    
    4,254
    
    
    
    10,226
    
    
    
    10,504Fuel expense
    
    
    13,874
    
    
    
    12,102
    
    
    
    39,059
    
    
    
    32,181Maintenance expense
    
    
    3,219
    
    
    
    2,446
    
    
    
    8,271
    
    
    
    8,623Freight handling expense
    
    
    6,472
    
    
    
    7,234
    
    
    
    19,277
    
    
    
    20,584Depreciation and amortization
    
    
    966
    
    
    
    790
    
    
    
    2,791
    
    
    
    2,290Operating overhead expense
    
    
    3,152
    
    
    
    2,924
    
    
    
    8,974
    
    
    
    8,421Total cost of revenue
    
    
    39,198
    
    
    
    36,705
    
    
    
    110,013
    
    
    
    104,128Gross profit
    
    
    1,492
    
    
    
    5,797
    
    
    
    757
    
    
    
    9,991General and administrative expense
    
    
    1,898
    
    
    
    2,733
    
    
    
    5,974
    
    
    
    8,087Operating income (loss)
    
    
    (406
    )
    
    
    3,064
    
    
    
    (5,217
    )
    
    
    1,904Other (income) expense:Interest expense
    
    
    66
    
    
    
    72
    
    
    
    209
    
    
    
    240Other, net
    
    
    (63
    )
    
    
    25
    
    
    
    (750
    )
    
    
    (100
    )Income (loss) before income taxes
    
    
    (409
    )
    
    
    2,967
    
    
    
    (4,676
    )
    
    
    1,764Income taxes
    
    
    
    
    
    
    644
    
    
    
    
    
    
    
    644Net income (loss)
    
    $
    (409
    )
    
    $
    2,323
    
    
    $
    (4,676
    )
    
    $
    1,120Basic income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.02Weighted average common shares outstanding
    
    
    51,582,032
    
    
    
    50,791,723
    
    
    
    51,403,186
    
    
    
    50,688,309Diluted income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    (0.09
    )
    
    $
    0.02Weighted average diluted common shares outstanding
    
    
    51,582,032
    
    
    
    54,405,449
    
    
    
    51,403,186
    
    
    
    54,206,167
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Common StockNumber of
    
    
    
    
    
    
    Additional
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalance at December 31, 2004
    
    
    46,620,883
    
    
    $
    
    
    
    $
    22,293
    
    
    $
    11,823
    
    
    $
    34,116Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,676
    )
    
    
    (4,676
    )Compensation expense associated
with stock option grants
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    53Issuance of common stock related
to exercise of warrants to
acquire stock
    
    
    3,281,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock related
to exercise of options to
acquire stock
    
    
    407,757
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    122Balance at September 30, 2005
    
    
    50,310,061
    
    
    $
    
    
    
    $
    22,468
    
    
    $
    7,147
    
    
    $
    29,615
  5




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Nine months ended September 30,2005
    
    
    2004Operating activities:Net income (loss)
    
    $
    (4,676
    )
    
    $
    1,120Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization expense
    
    
    3,052
    
    
    
    2,520Gain on disposal of property and equipment
    
    
    (649
    )
    
    
    (143
    )Compensation expense related to stock options and restricted stock units
    
    
    53
    
    
    
    70Tax expense allocated to additional capital
    
    
    
    
    
    
    644(Recovery) provision for doubtful accounts
    
    
    (2
    )
    
    
    286Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (3,388
    )
    
    
    (5,698
    )Settlement receivable
    
    
    
    
    
    
    1,500Inventory and aircraft supplies
    
    
    (250
    )
    
    
    (57
    )Prepaid expenses and other assets
    
    
    (2,199
    )
    
    
    (1,314
    )Accounts payable and accrued expenses
    
    
    120
    
    
    
    1,467Accrued lease return provision
    
    
    
    
    
    
    (2,459
    )Accrued maintenance reserves
    
    
    (89
    )
    
    
    (1,264
    )Net cash used in operating activities
    
    
    (8,028
    )
    
    
    (3,328
    )Investing activities:Proceeds from sale of assets
    
    
    1,316
    
    
    
    446Change in restricted cash
    
    
    971
    
    
    
    (800
    )Capital expenditures
    
    
    (2,878
    )
    
    
    (2,677
    )Net cash used in investing activities
    
    
    (591
    )
    
    
    (3,031
    )Financing activities:Borrowings of long-term debt
    
    
    
    
    
    
    1,949Repurchase restricted common stock
    
    
    
    
    
    
    (31
    )Cash received on exercise of stock options
    
    
    122
    
    
    
    131Loan origination costs
    
    
    
    
    
    
    (109
    )Repayments of long-term debt
    
    
    
    
    
    
    (2,382
    )Net cash provided by (used in) financing activities
    
    
    122
    
    
    
    (442
    )Net decrease in cash and cash equivalents
    
    
    (8,497
    )
    
    
    (6,801
    )Cash and cash equivalents at beginning of period
    
    
    16,284
    
    
    
    15,729Cash and cash equivalents at end of period
    
    $
    7,787
    
    
    $
    8,928
  6




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7




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Risk free interest rate
    
    
    4.12
    %
    
    
    4.32
    %
    
    
    4.11
    %
    
    
    4.48
    %Expected life (years)
    
    
    6
    
    
    
    10
    
    
    
    6
    
    
    
    10Volatility
    
    
    58
    %
    
    
    50
    %
    
    
    57
    %
    
    
    50
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)Net income (loss), as reported
    
    $
    (409
    )
    
    $
    2,323
    
    
    $
    (4,676
    )
    
    $
    1,120Add: Total stock-based employee compensation
expense determined under the intrinsic
method for all awards
    
    
    31
    
    
    
    11
    
    
    
    53
    
    
    
    70Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (154
    )
    
    
    (103
    )
    
    
    (373
    )
    
    
    (271
    )Pro forma net income (loss)
    
    $
    (532
    )
    
    $
    2,231
    
    
    $
    (4,996
    )
    
    $
    919Basic income (loss) per share  as reported
    
    $
    (0.01
    )
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.02Basic income (loss) per share  pro forma
    
    $
    (0.01
    )
    
    $
    0.05
    
    
    $
    (0.10
    )
    
    $
    0.02Diluted income (loss) per share  as reported
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    (0.09
    )
    
    $
    0.02Diluted income (loss) per share  pro forma
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    (0.10
    )
    
    $
    0.02
   8




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##### Table of Contents



WeightedAvailable for
    
    
    Options/RSUs
    
    
    AverageGrant
    
    
    Outstanding
    
    
    Exercise PriceBalance at December 31, 2004
    
    
    1,189,041
    
    
    
    4,030,404
    
    
    $
    0.54Authorized for grant
    
    
    500,000
    
    
    
    
    
    
    
    Granted (weighted-average fair value $0.80)
    
    
    (1,414,400
    )
    
    
    1,414,400
    
    
    $
    0.85Exercised
    
    
    
    
    
    
    (407,757
    )
    
    $
    0.30Canceled
    
    
    414,375
    
    
    
    (414,375
    )
    
    $
    1.10Balance at September 30, 2005
    
    
    689,016
    
    
    
    4,622,672
    
    
    $
    0.61
  Weighted
    
    
    Weighted AverageNumber of
    
    
    Average
    
    
    Exercise Price
    
    
    Number of
    
    
    Weighted AverageOptions/RSUs
    
    
    Remaining
    
    
    of Options/RSUs
    
    
    Options/RSUs
    
    
    Exercise Price ofExercise Prices
    
    Outstanding
    
    
    Life (Years)
    
    
    Outstanding
    
    
    Vested (1)
    
    
    Vested Options/RSUs$    
    
    
    320,400
    
    
    
    2.3
    
    
    $
    
    
    
    
    
    
    
    $
    $  0.30
    
    
    2,674,327
    
    
    
    7.8
    
    
    $
    0.30
    
    
    
    1,707,660
    
    
    $
    0.30$  1.05
    
    
    760,000
    
    
    
    10.0
    
    
    $
    1.05
    
    
    
    
    
    
    $
    1.05$  1.08
    
    
    10,000
    
    
    
    9.8
    
    
    $
    1.08
    
    
    
    10,000
    
    
    $
    1.08$1.105
    
    
    6,945
    
    
    
    8.3
    
    
    $
    1.105
    
    
    
    2,778
    
    
    $
    1.105$  1.14
    
    
    129,000
    
    
    
    9.8
    
    
    $
    1.14
    
    
    
    
    
    
    $
    1.14$  1.17
    
    
    150,000
    
    
    
    9.8
    
    
    $
    1.17
    
    
    
    
    
    
    $
    1.17$  1.40
    
    
    277,000
    
    
    
    9.0
    
    
    $
    1.40
    
    
    
    92,333
    
    
    $
    1.40$  1.43
    
    
    45,000
    
    
    
    9.5
    
    
    $
    1.43
    
    
    
    
    
    
    $
    1.43$  1.62
    
    
    250,000
    
    
    
    8.7
    
    
    $
    1.62
    
    
    
    150,000
    
    
    $
    1.624,622,672
    
    
    
    8.9
    
    
    $
    0.61
    
    
    
    1,962,771
    
    
    $
    0.46
 
 (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.   September 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Freight handling expenses
    
    $
    2,511
    
    
    $
    2,342Landing and parking expenses
    
    
    1,235
    
    
    
    998Other
    
    
    3,020
    
    
    
    2,161Total other accrued expenses
    
    $
    6,766
    
    
    $
    5,501
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ScheduledFreight
    
    Air Freight
    
    
    
    
    
    
    
    
    
    ConsolidatedNetwork
    
    Carrier
    
    Other
    
    Eliminations
    
    Balance(in thousands)Three months ended September 30, 2005:Revenue from external customers
    
    $
    39,724
    
    
    $
    966
    
    
    $
    
    
    
    $
    
    
    
    $
    40,690Revenue from intersegment operations
    
    
    
    
    
    
    11,888
    
    
    
    
    
    
    
    (11,888
    )
    
    
    Depreciation and amortization
    
    
    129
    
    
    
    837
    
    
    
    89
    
    
    
    
    
    
    
    1,055Operating income (loss)
    
    
    129
    
    
    
    (529
    )
    
    
    (6
    )
    
    
    
    
    
    
    (406
    )Interest expense
    
    
    13
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    66Other (income) expense
    
    
    (6
    )
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (63
    )Net income (loss)
    
    $
    122
    
    
    $
    (529
    )
    
    $
    (2
    )
    
    $
    
    
    
    $
    (409
    )Total assets
    
    $
    20,791
    
    
    $
    15,595
    
    
    $
    24,590
    
    
    $
    (16,283
    )
    
    $
    44,693Three months ended September 30, 2004:Revenue from external customers
    
    $
    40,603
    
    
    $
    1,899
    
    
    $
    
    
    
    $
    
    
    
    $
    42,502Revenue from intersegment operations
    
    
    
    
    
    
    9,521
    
    
    
    
    
    
    
    (9,521
    )
    
    
    Depreciation and amortization
    
    
    122
    
    
    
    668
    
    
    
    114
    
    
    
    
    
    
    
    904Operating income (loss)
    
    
    2,988
    
    
    
    288
    
    
    
    (212
    )
    
    
    
    
    
    
    3,064Interest expense
    
    
    25
    
    
    
    3
    
    
    
    44
    
    
    
    
    
    
    
    72Other (income) expense
    
    
    (27
    )
    
    
    91
    
    
    
    (39
    )
    
    
    
    
    
    
    25Income tax expense (benefit)
    
    
    840
    
    
    
    (22
    )
    
    
    (174
    )
    
    
    
    
    
    
    644Net income (loss)
    
    $
    2,150
    
    
    $
    216
    
    
    $
    (43
    )
    
    $
    
    
    
    $
    2,323Total assets
    
    $
    20,930
    
    
    $
    15,835
    
    
    $
    22,406
    
    
    $
    (12,815
    )
    
    $
    46,356
 10




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##### Table of Contents



ScheduledFreight
    
    Air Freight
    
    
    
    
    
    
    
    
    
    ConsolidatedNetwork
    
    Carrier
    
    Other
    
    Eliminations
    
    Balance(in thousands)Nine months ended September 30, 2005:Revenue from external customers
    
    $
    108,848
    
    
    $
    1,932
    
    
    $
    
    
    
    $
    
    
    
    $
    110,770Revenue from intersegment operations
    
    
    
    
    
    
    32,247
    
    
    
    
    
    
    
    (32,247
    )
    
    
    Depreciation and amortization
    
    
    389
    
    
    
    2,402
    
    
    
    261
    
    
    
    
    
    
    
    3,052Operating loss
    
    
    (3,616
    )
    
    
    (1,528
    )
    
    
    (73
    )
    
    
    
    
    
    
    (5,217
    )Interest expense
    
    
    48
    
    
    
    2
    
    
    
    159
    
    
    
    
    
    
    
    209Other (income) expense
    
    
    (151
    )
    
    
    (10
    )
    
    
    (589
    )
    
    
    
    
    
    
    (750
    )Net income (loss)
    
    $
    (3,513
    )
    
    $
    (1,520
    )
    
    $
    357
    
    
    $
    
    
    
    $
    (4,676
    )Total assets
    
    $
    20,791
    
    
    $
    15,595
    
    
    $
    24,590
    
    
    $
    (16,283
    )
    
    $
    44,693Nine months ended September 30, 2004:Revenue from external customers
    
    $
    110,991
    
    
    $
    3,128
    
    
    $
    
    
    
    $
    
    
    
    $
    114,119Revenue from intersegment operations
    
    
    
    
    
    
    31,862
    
    
    
    
    
    
    
    (31,862
    )
    
    
    Depreciation and amortization
    
    
    322
    
    
    
    1,968
    
    
    
    230
    
    
    
    
    
    
    
    2,520Operating income (loss)
    
    
    2,290
    
    
    
    34
    
    
    
    (420
    )
    
    
    
    
    
    
    1,904Interest expense
    
    
    69
    
    
    
    6
    
    
    
    165
    
    
    
    
    
    
    
    240Other (income) expense
    
    
    (82
    )
    
    
    89
    
    
    
    (107
    )
    
    
    
    
    
    
    (100
    )Income tax expense (benefit)
    
    
    840
    
    
    
    (22
    )
    
    
    (174
    )
    
    
    
    
    
    
    644Net income (loss)
    
    $
    1,463
    
    
    $
    (39
    )
    
    $
    (304
    )
    
    $
    
    
    
    $
    1,120Total assets
    
    $
    20,930
    
    
    $
    15,835
    
    
    $
    22,406
    
    
    $
    (12,815
    )
    
    $
    46,356
        11




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##### Table of Contents



Series B Convertible Redeemable Preferred Stock.
      12




---



##### Table of Contents



Warrants.
 Amendment to Credit Facility.
  Period
    
    Pre-Tax Net Income (Loss)January 1,
2005  December 31, 2005
    
    $
    (9,000,000
    )January 1, 2006  March 31, 2006
    
    $
    (8,000,000
    )January 1, 2006  June 30, 2006
    
    $
    (8,000,000
    )January 1, 2006  September 30, 2006
    
    $
    (7,000,000
    )January 1, 2006  December 31, 2006
    
    $
    (5,000,000
    )
   13




---



##### Table of Contents



Executive Overview
  Scheduled Freight Network.
    14




---



##### Table of Contents



Cargo Airline.
    Jet Fuel Costs.
 15




---



##### Table of Contents



Fixed Costs
 Recent Developments
 Series B Convertible
Redeemable Preferred Stock.
  16




---



##### Table of Contents



Warrants.
 Amendment to Credit Facility.
 17




---



##### Table of Contents



Period
    
    Pre-Tax Net Income (Loss)January 1,
2005  December 31, 2005
    
    $
    (9,000,000
    )January 1, 2006  March 31, 2006
    
    $
    (8,000,000
    )January 1, 2006  June 30, 2006
    
    $
    (8,000,000
    )January 1, 2006  September 30, 2006
    
    $
    (7,000,000
    )January 1, 2006
 December 31, 2006
    
    $
    (5,000,000
    )
   Capital Requirements, Capital Resources and Liquidity
 Capital Requirements.
 Capital Resources.
 Credit Facility.
    Liquidity.
 18




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##### Table of Contents



Results of Operations
 Revenue.
 
    
    Scheduled freight revenue,which is generated from freight transportation services
provided by our scheduled freight network. 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 and freight handling services provided for third
parties.
 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 between our cargo facilities 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;
    
    trucking expenses for cities in our expedited or deferred scheduled freight networks; and
 19




---



##### Table of Contents




    
    pickup and/or final delivery expenses as directed by customers.
 
    
    Fuel Expense,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.
    
    Maintenance Expense,which consists of costs to maintain airframes and aircraft
engines operated by our cargo airline, including:
 
    
    payments related to the Boeing 737-300SF cargo aircraft power-by-the-hour maintenance contracts;
    
    wages and benefits for maintenance, records and maintenance management personnel;
    
    costs for contract mechanics at cargo facility outstations;
    
    costs of aircraft parts and supplies; and
    
    accruals for maintenance of airframes and engines.
 
    
    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 principally at outstation cargo facilities; and
    
    wages and benefits for our outstation cargo facility personnel and field operations managers.
 
    
    Depreciation and Amortization,which consists of depreciation and amortization
expenses for our owned airframes and aircraft engines and freight-handling equipment.
    
    Operating Overhead Expense,which consists of direct overhead costs related to
operating our scheduled freight network and cargo airline, including:
 
    
    wages and benefits for operational managers and customer service personnel of Kitty Hawk Cargo;
    
    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.
 General and Administrative Expenses.
 20




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##### Table of Contents



Critical Accounting Policies
  Recent Accounting Pronouncements
    Three months ended September 30,2005
    
    
    2004Revenue:Scheduled freight
    
    
    97.6
    %
    
    
    95.5
    %Other
    
    
    2.4
    
    
    
    4.5Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    96.3
    
    
    
    86.4Gross profit
    
    
    3.7
    
    
    
    13.6General and administrative expenses
    
    
    4.7
    
    
    
    6.4Operating income (loss)
    
    
    (1.0
    )
    
    
    7.2Other (income) expense:Interest expense
    
    
    0.1
    
    
    
    0.1Other (income) expense
    
    
    (0.1
    )
    
    
    0.1Total other (income) expense
    
    
    
    
    
    
    0.2Income (loss) before taxes
    
    
    (1.0
    )
    
    
    7.0Income taxes
    
    
    
    
    
    
    1.5Net income (loss)
    
    
    (1.0
    )%
    
    
    5.5
    %
 21




---



##### Table of Contents



Revenue
 General
 Three months ended September 30,2005
    
    
    2004Percentage
    
    
    
    
    
    
    Percentage
    
    
    Percentageof Total
    
    
    
    
    
    
    of Total
    
    
    Change fromRevenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    2004 to 2005(dollars in thousands)Scheduled freight
    
    $
    39,724
    
    
    
    97.6
    %
    
    $
    40,603
    
    
    
    95.5
    %
    
    
    (2.2
    )%Other:ACMI
    
    
    400
    
    
    
    1.0
    
    
    
    1,197
    
    
    
    2.8
    
    
    
    (66.6
    )Miscellaneous
    
    
    566
    
    
    
    1.4
    
    
    
    702
    
    
    
    1.7
    
    
    
    (19.4
    )Total revenue
    
    $
    40,690
    
    
    
    100.0
    %
    
    $
    42,502
    
    
    
    100.0
    %
    
    
    (4.3
    )%
 Scheduled Freight.
   ACMI.
 Miscellaneous.
 22




---



##### Table of Contents



Cost of Revenue
 General.
 Three months ended September 30,2005
    
    
    
    
    
    
    2004Cost
    
    
    Percentage
    
    
    Cost
    
    
    Percentage
    
    
    Percentageof
    
    
    of Total
    
    
    of
    
    
    of Total
    
    
    Change fromRevenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    2004 to 2005(dollars in thousands)Flight expense
    
    $
    8,134
    
    
    
    20.0
    %
    
    $
    6,955
    
    
    
    16.4
    %
    
    
    17.0
    %Transportation expense
    
    
    3,381
    
    
    
    8.3
    
    
    
    4,254
    
    
    
    10.0
    
    
    
    (20.5
    )Fuel expense
    
    
    13,874
    
    
    
    34.1
    
    
    
    12,102
    
    
    
    28.5
    
    
    
    14.6Maintenance expense
    
    
    3,219
    
    
    
    7.9
    
    
    
    2,446
    
    
    
    5.8
    
    
    
    31.6Freight handling expense
    
    
    6,472
    
    
    
    15.9
    
    
    
    7,234
    
    
    
    17.0
    
    
    
    (10.5
    )Depreciation and amortization
    
    
    966
    
    
    
    2.4
    
    
    
    790
    
    
    
    1.8
    
    
    
    22.3Operating overhead expense
    
    
    3,152
    
    
    
    7.7
    
    
    
    2,924
    
    
    
    6.9
    
    
    
    7.8Total cost of revenue
    
    $
    39,198
    
    
    
    96.3
    %
    
    $
    36,705
    
    
    
    86.4
    %
    
    
    6.8
    %
 Flight Expense.
  Transportation Expense.
 Fuel Expense.
 Maintenance Expense.
 23




---



##### Table of Contents



Freight Handling Expense.
 Depreciation and Amortization.
 Operating Overhead Expense.
 Gross Profit
  General and Administrative Expense
  Other (Income) Expense
  Income Taxes
  24




---



##### Table of Contents



Nine months ended September 30,2005
    
    2004Revenue:Scheduled freight
    
    
    97.5
    %
    
    
    97.3
    %Other
    
    
    2.5
    
    
    
    2.7Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    99.3
    
    
    
    91.3Gross profit
    
    
    0.7
    
    
    
    8.7General and administrative expenses
    
    
    5.4
    
    
    
    7.3Operating (income) loss
    
    
    (4.7
    )
    
    
    1.4Other (income) expense:Interest expense
    
    
    0.2
    
    
    
    0.2Other (income) expense
    
    
    (0.7
    )
    
    
    (0.3
    )Total other (income) expense
    
    
    (0.5
    )
    
    
    (0.1
    )Income (loss) before income taxes
    
    
    (4.2
    )
    
    
    1.5Income taxes
    
    
    
    
    
    
    0.6Net income (loss)
    
    
    (4.2
    )%
    
    
    0.9
    %
  General
 Nine months ended September 30,2005
    
    
    2004Percentage
    
    
    
    
    
    
    Percentage
    
    
    Percentageof Total
    
    
    
    
    
    
    of Total
    
    
    Change fromRevenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    2004 to 2005(dollars in thousands)Scheduled freight
    
    $
    108,028
    
    
    
    97.5
    %
    
    $
    110,991
    
    
    
    97.3
    %
    
    
    (2.7
    )%Other:ACMI
    
    
    932
    
    
    
    0.9
    
    
    
    1,837
    
    
    
    1.6
    
    
    
    (49.3
    )Miscellaneous
    
    
    1,810
    
    
    
    1.6
    
    
    
    1,291
    
    
    
    1.1
    
    
    
    40.2Total revenue
    
    $
    110,770
    
    
    
    100.0
    %
    
    $
    114,119
    
    
    
    100.0
    %
    
    
    (2.9
    )
 Scheduled Freight.
   25




---



##### Table of Contents



ACMI.
 Miscellaneous.
 Cost of Revenue
 General.
 Nine months ended September 30,2005
    
    
    2004Cost
    
    
    Percentage
    
    
    Cost
    
    
    Percentage
    
    
    Percentageof
    
    
    of Total
    
    
    of
    
    
    of Total
    
    
    Change fromRevenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    2004 to 2005(dollars in thousands)Flight expense
    
    $
    21,415
    
    
    
    19.3
    %
    
    $
    21,525
    
    
    
    18.9
    %
    
    
    (0.5
    )%Transportation expense
    
    
    10,226
    
    
    
    9.2
    
    
    
    10,504
    
    
    
    9.2
    
    
    
    (2.6
    )Fuel expense
    
    
    39,059
    
    
    
    35.3
    
    
    
    32,181
    
    
    
    28.2
    
    
    
    21.4Maintenance expense
    
    
    8,271
    
    
    
    7.5
    
    
    
    8,623
    
    
    
    7.6
    
    
    
    (4.1
    )Freight handling expense
    
    
    19,277
    
    
    
    17.4
    
    
    
    20,584
    
    
    
    18.0
    
    
    
    (6.3
    )Depreciation and amortization
    
    
    2,791
    
    
    
    2.5
    
    
    
    2,290
    
    
    
    2.0
    
    
    
    21.9Operating overhead expense
    
    
    8,974
    
    
    
    8.1
    
    
    
    8,421
    
    
    
    7.4
    
    
    
    6.6Total cost of revenue
    
    $
    110,013
    
    
    
    99.3
    %
    
    $
    104,128
    
    
    
    91.3
    %
    
    
    5.7
    %
 Flight Expense.
  Transportation Expense.
 26




---



##### Table of Contents



Fuel Expense.
 Maintenance Expense.
   Freight Handling Expense.
 Depreciation and Amortization.
 Operating Overhead Expense.
 Gross Profit
  27




---



##### Table of Contents



General and Administrative Expense
  Other (Income) Expense
  Income Taxes
  Contractual Obligations
  Three Months
    
    
    Two Years
    
    
    Two YearsEnding
    
    
    Ending
    
    
    EndingContractual Obligations
    
    Total
    
    
    December 31, 2005
    
    
    December 31, 2007
    
    
    December 31, 2009
    
    
    Thereafter(in thousands)Debt
    
    $
    2,882
    
    
    $
    2,076
    
    
    $
    806
    
    
    $
    
    
    
    $
    Non-aircraft operating
leases
    
    
    33,230
    
    
    
    667
    
    
    
    4,765
    
    
    
    4,448
    
    
    
    23,350Aircraft operating
leases and use
agreements (1)
    
    
    131,517
    
    
    
    6,069
    
    
    
    34,283
    
    
    
    24,410
    
    
    
    66,755Total contractual cash
obligations
    
    $
    167,629
    
    
    $
    8,812
    
    
    $
    39,854
    
    
    $
    28,858
    
    
    $
    90,105
 
 (1)
    
    Includes minimum contractual obligations under the third-party power-by-the-hour maintenance
contracts related to the Boeing 737-300SF cargo aircraft. 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;
    
    changes in the cost and availability of jet fuel and diesel fuel and our ability to recapture
increases in the cost of jet 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 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 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 parts, airframes or aircraft engines
    
    changes in the cost of Boeing 727-200 cargo airframe or aircraft engine maintenance;
    
    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;
    
    foreign political instability and acts of war or terrorism;
    
    adverse litigation judgments or awards;
    
    the ability to successfully integrate and operate our LTL ground network;
    
    the ability to attract sufficient customers and freight volumes for our LTL ground network;
    
    findings of environmental contamination; and
    
    limitations in our ability to offset income with our future deductible tax attributes.
  29




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##### Table of Contents



Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls.
  
  
   Other.
 30




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##### Table of Contents



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. 31




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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)
 32