##### 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, 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
    
    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
 þ o
 þ o




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##### 



PAGE NUMBERPART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three months ended
September 30, 2006 and 2005 and the nine months ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the nine months ended
September 30, 2006
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATION
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32Certification of Principal Executive OfficerCEO Certification Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350
  2




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September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,395
    
    
    $
    26,650Restricted cash and short-term investments
    
    
    437
    
    
    
    250Trade accounts receivable, net of allowance for doubtful
accounts of $0.4 million and $0.1 million
    
    
    24,972
    
    
    
    15,672Assets held for sale
    
    
    40
    
    
    
    135Inventory and aircraft supplies
    
    
    2,993
    
    
    
    2,932Deposits and prepaid expenses
    
    
    3,873
    
    
    
    2,000Prepaid aircraft fuel
    
    
    1,420
    
    
    
    1,727Other current assets, net
    
    
    979
    
    
    
    89Total current assets
    
    
    37,109
    
    
    
    49,455Property and equipment, net
    
    
    8,439
    
    
    
    7,479Other long-term assets
    
    
    3,025
    
    
    
    Total assets
    
    $
    48,573
    
    
    $
    56,934LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Current liabilities:Accounts payable  trade
    
    $
    7,841
    
    
    $
    4,551Accrued wages and compensation related expenses
    
    
    2,416
    
    
    
    1,981Other accrued expenses
    
    
    8,591
    
    
    
    7,273Taxes payable, other than income taxes
    
    
    1,119
    
    
    
    1,068Current debt
    
    
    9,855
    
    
    
    1,949Total current liabilities
    
    
    29,822
    
    
    
    16,822Other long-term liabilities
    
    
    518
    
    
    
    355Total liabilities
    
    
    30,340
    
    
    
    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
September 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 September 30, 2006 and December 31, 2005;
issued and outstanding  52,777,228 and 50,310,061 at
September 30, 2006 and December 31, 2005, respectively
    
    
    
    
    
    
    Additional capital
    
    
    26,232
    
    
    
    24,094Retained earnings (deficit)
    
    
    (20,141
    )
    
    
    3,313Total stockholders equity
    
    
    6,091
    
    
    
    27,407Total liabilities and stockholders equity
    
    $
    48,573
    
    
    $
    56,934
  3




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Scheduled freight network
    
    $
    55,093
    
    
    $
    39,724
    
    
    $
    139,443
    
    
    $
    108,028ACMI
    
    
    19
    
    
    
    400
    
    
    
    949
    
    
    
    932Miscellaneous
    
    
    2,809
    
    
    
    566
    
    
    
    3,084
    
    
    
    1,810Total revenue
    
    
    57,921
    
    
    
    40,690
    
    
    
    143,476
    
    
    
    110,770Cost of revenue:Flight expense
    
    
    8,465
    
    
    
    8,134
    
    
    
    25,222
    
    
    
    21,415Transportation expense
    
    
    16,863
    
    
    
    3,381
    
    
    
    38,678
    
    
    
    10,226Fuel expense
    
    
    15,869
    
    
    
    13,874
    
    
    
    43,223
    
    
    
    39,059Maintenance expense
    
    
    4,136
    
    
    
    3,219
    
    
    
    11,747
    
    
    
    8,271Freight handling expense
    
    
    9,718
    
    
    
    6,472
    
    
    
    26,671
    
    
    
    19,277Depreciation and amortization
    
    
    1,041
    
    
    
    966
    
    
    
    2,570
    
    
    
    2,791Operating overhead expense
    
    
    5,001
    
    
    
    3,152
    
    
    
    11,320
    
    
    
    8,974Total cost of revenue
    
    
    61,093
    
    
    
    39,198
    
    
    
    159,431
    
    
    
    110,013Gross profit (loss)
    
    
    (3,172
    )
    
    
    1,492
    
    
    
    (15,955
    )
    
    
    757General and administrative expense
    
    
    2,713
    
    
    
    1,898
    
    
    
    7,291
    
    
    
    5,974Operating loss
    
    
    (5,885
    )
    
    
    (406
    )
    
    
    (23,246
    )
    
    
    (5,217
    )Other (income) expense:Interest expense
    
    
    169
    
    
    
    66
    
    
    
    311
    
    
    
    209Other, net
    
    
    (28
    )
    
    
    (63
    )
    
    
    (510
    )
    
    
    (750
    )Net loss
    
    
    (6,026
    )
    
    
    (409
    )
    
    
    (23,047
    )
    
    
    (4,676
    )Preferred stock dividends
    
    
    291
    
    
    
    
    
    
    
    881
    
    
    
    Net loss allocable to common stockholders
    
    $
    (6,317
    )
    
    $
    (409
    )
    
    $
    (23,928
    )
    
    $
    (4,676
    )Basic loss per share
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.46
    )
    
    $
    (0.09
    )Diluted loss per share
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.46
    )
    
    $
    (0.09
    )Weighted average common shares
outstanding  basic
    
    
    53,853,833
    
    
    
    51,582,032
    
    
    
    52,517,887
    
    
    
    51,403,186Weighted average diluted common shares
outstanding  diluted
    
    
    53,853,833
    
    
    
    51,582,032
    
    
    
    52,517,887
    
    
    
    51,403,186
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##### Table of Contents



Common Stock
    
    
    
    
    
    
    RetainedNumber of
    
    
    
    
    
    
    Additional
    
    
    EarningsShares
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    TotalBalance at December 31, 2005
    
    
    50,310,061
    
    
    $
    
    
    
    $
    24,094
    
    
    $
    3,313
    
    
    $
    27,407Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,047
    )
    
    
    (23,047
    )Dividends paid for Series B
Redeemable Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (407
    )
    
    
    (407
    )Compensation expense associated
with stock option and restricted
stock unit grants
    
    
    
    
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    599Issuance 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 September 30, 2006
    
    
    52,777,228
    
    
    $
    
    
    
    $
    26,232
    
    
    $
    (20,141
    )
    
    $
    6,091
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##### Table of Contents



Nine months ended September 30,2006
    
    
    2005Operating activities:Net loss
    
    $
    (23,047
    )
    
    $
    (4,676
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization expense
    
    
    2,814
    
    
    
    3,052Gain on disposal of property and equipment
    
    
    (539
    )
    
    
    (649
    )Compensation expense related to stock options and
restricted stock units
    
    
    599
    
    
    
    53(Reversal of) provision for allowance for doubtful accounts
    
    
    227
    
    
    
    (2
    )Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (9,527
    )
    
    
    (3,388
    )Inventory and aircraft supplies
    
    
    (60
    )
    
    
    (250
    )Prepaid expenses and other
    
    
    (1,582
    )
    
    
    (2,199
    )Accounts payable and accrued expenses
    
    
    4,074
    
    
    
    120Accrued maintenance reserves
    
    
    
    
    
    
    (89
    )Net cash used in operating activities
    
    
    (27,041
    )
    
    
    (8,028
    )Investing activities:Proceeds from sale of assets
    
    
    1,058
    
    
    
    1,316Assets acquired from Air Container Transport, Inc.
    
    
    (3,197
    )
    
    
    Change in restricted cash
    
    
    (187
    )
    
    
    971Capital expenditures
    
    
    (1,535
    )
    
    
    (2,878
    )Net cash used in investing activities
    
    
    (3,861
    )
    
    
    (591
    )Financing activities:Net borrowings on Credit Facility
    
    
    7,293
    
    
    
    Dividends paid on Series B Redeemable Preferred Stock
    
    
    (407
    )
    
    
    Payments on current debt
    
    
    (310
    )
    
    
    Proceeds from exercise of stock options
    
    
    71
    
    
    
    122Net cash provided by financing activities
    
    
    6,647
    
    
    
    122Net decrease in cash and cash equivalents
    
    
    (24,255
    )
    
    
    (8,497
    )Cash and cash equivalents at beginning of period
    
    
    26,650
    
    
    
    16,284Cash and cash equivalents at end of period
    
    $
    2,395
    
    
    $
    7,787
  6




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th th
    7




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2006(in thousands)Flight expense
    
    $
    30
    
    
    $
    90Maintenance expense
    
    
    4
    
    
    
    16Freight handling expense
    
    
    19
    
    
    
    62Operating overhead expense
    
    
    50
    
    
    
    107General and administrative expense
    
    
    106
    
    
    
    324Total compensation expense
    
    $
    209
    
    
    $
    599
  8




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##### Table of Contents



Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2006
    
    September 30, 2006Risk free interest rate
    
    
    4.57
    %
    
    
    4.67
    %Expected term (years)
    
    
    6
    
    
    
    6Volatility
    
    
    67.63
    %
    
    
    66.09
    %Dividend yield
    
    
    
    
    
    
    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
$0.57)
    
    
    (343,500
    )
    
    
    343,500
    
    
    $
    0.84RSUs granted (weighted-average fair value $0.79).
    
    
    (595,472
    )
    
    
    595,472
    
    
    
    Exercised (total intrinsic value of $0.2 million)
    
    
    
    
    
    
    (237,675
    )
    
    $
    0.30Canceled (weighted average grant date fair value
$0.82)
    
    
    272,675
    
    
    
    (272,675
    )
    
    $
    1.00Outstanding at September 30, 2006
    
    
    1,599,664
    
    
    
    4,974,349
    
    
    $
    0.66
  Weighted AverageFair Value atOptions/RSUs
    
    
    Grant DateUnvested at January 1, 2006
    
    
    2,343,383
    
    
    $
    0.65Vested during the period (total fair value
of $0.7 million)
    
    
    (1,191,626
    )
    
    $
    0.56Granted
    
    
    938,972
    
    
    $
    0.71Forfeited
    
    
    (257,792
    )
    
    $
    0.79Unvested at September 30, 2006
    
    
    1,832,937
    
    
    $
    0.72
  WeightedWeighted
    
    
    AverageAverage
    
    
    ExerciseNumber of
    
    
    Remaining
    
    
    Price of
    
    
    Aggregate IntrinsicOptions/RSUs
    
    
    Life (Years)
    
    
    Options/RSUs
    
    
    Value atExercise Prices
    
    Outstanding
    
    
    Outstanding
    
    
    Outstanding
    
    
    September 30, 2006$ 
    
    
    898,872
    
    
    
    
    
    
    
    $0.30
    
    
    2,358,527
    
    
    
    6.83
    
    
    $
    0.30$0.77  $0.95
    
    
    281,500
    
    
    
    9.74
    
    
    $
    0.80$1.04  $1.105
    
    
    682,000
    
    
    
    9.32
    
    
    $
    1.05$1.14  $1.17
    
    
    274,000
    
    
    
    8.82
    
    
    $
    1.16$1.40  $1.43
    
    
    229,666
    
    
    
    8.04
    
    
    $
    1.40$1.62
    
    
    250,000
    
    
    
    7.67
    
    
    $
    1.62Outstanding at September 30, 2006
    
    
    4,974,565
    
    
    
    8.20
    
    
    $
    0.66
    
    
    $
    1,800,639
 9




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##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    ExerciseNumber of
    
    
    Remaining
    
    
    Price of
    
    
    Aggregate IntrinsicOptions/RSUs
    
    
    Contractual
    
    
    Vested
    
    
    Value atExercise Prices
    
    Vested(1)
    
    
    Terms
    
    
    Options/RSUs
    
    
    September 30, 2006$ 
    
    
    263,476
    
    
    
    
    
    
    
    $0.30
    
    
    2,229,985
    
    
    
    6.83
    
    
    $
    0.30$0.77  $0.95
    
    
    
    
    
    
    9.74
    
    
    $
    0.80$1.04  $1.105
    
    
    210,000
    
    
    
    9.25
    
    
    $
    1.05$1.14  $1.17
    
    
    92,000
    
    
    
    8.31
    
    
    $
    1.16$1.40  $1.43
    
    
    158,667
    
    
    
    8.03
    
    
    $
    1.40$1.62
    
    
    187,500
    
    
    
    7.67
    
    
    $
    1.43Exercisable at September 30, 2006
    
    
    3,141,628
    
    
    
    7.82
    
    
    $
    0.56
    
    
    $
    1,250,970
 
 (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)Three months ending December 31, 2006
    
    $
    188Year ending December 31, 2007
    
    
    622Year ending December 31, 2008
    
    
    321Year ending December 31, 2009
    
    
    122Year ending December 31, 2010
    
    
    41Total
    
    $
    1,294
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2006(in thousands, except per share amounts)Income from continuing operations before
income taxes
    
    $
    130
    
    
    $
    388Income from continuing operations
    
    
    130
    
    
    
    388Net loss
    
    
    130
    
    
    
    388Basic and diluted loss per common share
    
    $
    0.00
    
    
    $
    (0.01
    )
 10




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##### Table of Contents



Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2005
    
    September 30, 2005Risk free interest rate
    
    
    4.12
    %
    
    
    4.11
    %Expected term (years)
    
    
    6
    
    
    
    6Volatility
    
    
    58
    %
    
    
    57
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005(In thousands,except per share data)Net loss, as reported
    
    $
    (409
    )
    
    $
    (4,676
    )Add: Total stock-based employee
compensation expense determined
under the intrinsic method for all
awards
    
    
    31
    
    
    
    53Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (154
    )
    
    
    (373
    )Pro forma net loss
    
    $
    (532
    )
    
    $
    (4,996
    )Basic loss per share  as reported
    
    $
    (0.01
    )
    
    $
    (0.09
    )Basic loss per share  pro forma
    
    $
    (0.01
    )
    
    $
    (0.10
    )Diluted loss per share  as reported
    
    $
    (0.01
    )
    
    $
    (0.09
    )Diluted loss per share  pro forma
    
    $
    (0.01
    )
    
    $
    (0.10
    )
   September 30, 2006
    
    
    December 31, 2005(In thousands)Freight handling expenses
    
    $
    1,641
    
    
    $
    1,686Landing and parking expenses
    
    
    710
    
    
    
    1,178Trucking expenses
    
    
    3,303
    
    
    
    1,064Other
    
    
    2,937
    
    
    
    3,345Total other accrued expenses
    
    $
    8,591
    
    
    $
    7,273
    11




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##### Table of Contents



GroundScheduled
    
    TransportationFreight
    
    Services
    
    Cargo
    
    
    
    
    
    
    
    
    
    ConsolidatedNetwork
    
    Company
    
    Airline
    
    Other
    
    Eliminations
    
    Balance(in thousands)Three months ended September 30, 2006:Revenue from external customers
    
    $
    55,093
    
    
    $
    2,809
    
    
    $
    19
    
    
    $
    
    
    
    $
    
    
    
    $
    57,921Revenue from intersegment operations
    
    
    
    
    
    
    18,550
    
    
    
    12,927
    
    
    
    
    
    
    
    (31,477
    )
    
    
    Depreciation and amortization
    
    
    144
    
    
    
    395
    
    
    
    502
    
    
    
    89
    
    
    
    
    
    
    
    1,130Operating income (loss)
    
    
    (6,073
    )
    
    
    227
    
    
    
    (31
    )
    
    
    (8
    )
    
    
    
    
    
    
    (5,885
    )Interest expense
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    169Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Net income (loss)
    
    $
    (6,103
    )
    
    $
    227
    
    
    $
    (31
    )
    
    $
    (119
    )
    
    
    
    
    
    $
    (6,026
    )Total assets
    
    $
    44,403
    
    
    $
    26,011
    
    
    $
    8,740
    
    
    $
    48,922
    
    
    $
    (79,503
    )
    
    $
    48,573Three 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
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (63
    )Net income (loss)
    
    $
    122
    
    
    
    
    
    
    $
    (529
    )
    
    $
    (2
    )
    
    
    
    
    
    $
    (409
    )Total assets
    
    $
    20,791
    
    
    $
    
    
    
    $
    15,595
    
    
    $
    24,590
    
    
    $
    (16,283
    )
    
    $
    44,693Nine months ended September 30, 2006:Revenue from external customers
    
    $
    139,443
    
    
    $
    3,084
    
    
    $
    949
    
    
    $
    
    
    
    $
    
    
    
    $
    143,476Revenue from intersegment operations
    
    
    
    
    
    
    37,710
    
    
    
    39,162
    
    
    
    
    
    
    
    (76,872
    )
    
    
    Depreciation and amortization
    
    
    407
    
    
    
    395
    
    
    
    1,768
    
    
    
    244
    
    
    
    
    
    
    
    2,814Operating income (loss)
    
    
    (23,949
    )
    
    
    252
    
    
    
    483
    
    
    
    (32
    )
    
    
    
    
    
    
    (23,246
    )Interest expense
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    311Other income
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    (478
    )
    
    
    
    
    
    
    (510
    )Net income (loss)
    
    $
    (24,000
    )
    
    $
    252
    
    
    $
    515
    
    
    $
    186
    
    
    
    
    
    
    $
    (23,047
    )Total assets
    
    $
    44,403
    
    
    $
    26,011
    
    
    $
    8,740
    
    
    $
    48,922
    
    
    $
    (79,503
    )
    
    $
    48,573Nine months ended September 30, 2005:Revenue from external customers
    
    $
    108,838
    
    
    $
    
    
    
    $
    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
    
    
    (151
    )
    
    
    
    
    
    
    (10
    )
    
    
    (589
    )
    
    
    
    
    
    
    (750
    )Net income (loss)
    
    $
    (3,513
    )
    
    
    
    
    
    $
    (1,520
    )
    
    $
    357
    
    
    
    
    
    
    $
    (4,676
    )Total assets
    
    $
    20,791
    
    
    $
    
    
    
    $
    15,595
    
    
    $
    24,590
    
    
    $
    (16,283
    )
    
    $
    44,693
 12




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Weighted average shares
outstanding  basic
    
    
    53,853,833
    
    
    
    51,582,032
    
    
    
    52,517,887
    
    
    
    51,403,186Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares
outstanding  diluted
    
    
    53,853,833
    
    
    
    51,582,032
    
    
    
    52,517,887
    
    
    
    51,403,186Securities excluded from
computation due to
antidilutive effect:Due to net loss
    
    
    2,757,427
    
    
    
    3,464,727
    
    
    
    6,618,683
    
    
    
    3,750,672Due to
out-of-the-money 
Preferred Stock
    
    
    18,759,693
    
    
    
    
    
    
    
    15,149,937
    
    
    
    Due to
out-of-the-money 
Stock options and RSUs
    
    
    2,217,141
    
    
    
    1,157,945
    
    
    
    1,965,621
    
    
    
    872,000
     13




---



##### Table of Contents



September 30, 2006(in thousands)Current assets
    
    $
    120Property and equipment
    
    
    2,483Other long-term assets
    
    
    3,092Total assets acquired
    
    
    5,695Current liabilities
    
    
    (128
    )Other long-term liabilities
    
    
    (444
    )Total liabilities
    
    
    (572
    )Net assets acquired
    
    $
    5,123
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005(in thousands, except per share data)Revenue
    
    $
    57,921
    
    
    $
    52,043
    
    
    $
    165,241
    
    
    $
    143,268Net loss allocable to common stockholders
    
    $
    (6,317
    )
    
    $
    (307
    )
    
    $
    (24,789
    )
    
    $
    (5,181
    )Basic and diluted loss per share
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.46
    )
    
    $
    (0.10
    )
    USPS
Contract
   Amendment
to Credit Facility
   14




---



##### Table of Contents



Base Rate Margin if
    
    Base Rate Margin ifFiscal Period
    
    Condition
    
    Condition Satisfied
    
    Condition Not SatisfiedMarch 31, 2007
    
    The Company shall
have maintained a
Fixed Charge
Coverage Ratio
which is greater
than or equal to
1.5 to 1 for the
six months then
ended
    
    
    1.5
    %
    
    
    2.0
    %June 30, 2007
    
    The Company shall
have maintained a
Fixed Charge
Coverage Ratio
which is greater
than or equal to
1.5 to 1 for the
nine months then
ended
    
    
    1.25
    %
    
    
    2.0
    %September 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    The Company shall
have maintained a
Fixed Charge
Coverage Ratio
which is greater
than or equal to
1.5 to 1, but less
than 2.0 to 1, for
the twelve months
then ended
    
    
    1.0
    %
    
    
    2.0
    %September 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    The Company shall
have maintained a
Fixed Charge
Coverage Ratio
which is greater
than or equal to
2.0 to 1 for the
twelve months then
ended
    
    
    0
    %
    
    
    N/A
    15




---



##### Table of Contents



Reserve Amount If
    
    Reserve Amount IfTesting Date
    
    Condition
    
    Condition Satisfied
    
    Condition Not SatisfiedMarch 31, 2007
    
    The Company shall
have maintained a
Fixed Charge
Coverage Ratio
which is greater
than or equal to
1.5 to 1 for the
six months then
ended
    
    $5.0 million
    
    $7.5 millionJune 30, 2007
    
    Company shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1
for the nine months
then ended
    
    $3.5 million
    
    $7.5 millionSeptember 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    Company shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1,
but less than 2.0
to 1, for the
twelve months then
ended
    
    $2.0 million
    
    $7.5 millionSeptember 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    Company shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 2.0 to 1
for the twelve
months then ended
    
    $
    0
    
    
    N/A
  16




---



##### Table of Contents



Executive Overview
  Scheduled Freight Network.
     17




---



##### Table of Contents



Ground Transportation.
 Cargo Airline.
 Fuel Costs.
   18




---



##### Table of Contents



Seasonality.
  Fixed Costs.
 Capital Requirements, Capital Resources and Liquidity
 Capital Requirements.
 Capital Resources.
 19




---



##### Table of Contents



Credit Facility.
    Base Rate Margin ifBase Rate Margin if
    
    Condition NotFiscal Period
    
    Condition
    
    Condition Satisfied
    
    SatisfiedMarch 31, 2007
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1
for the six months
then ended
    
    
    1.5
    %
    
    
    2.0
    %June 30, 2007
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1
for the nine months
then ended
    
    
    1.25
    %
    
    
    2.0
    %September 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1,
but less than 2.0
to 1, for the
twelve months then
ended
    
    
    1.0
    %
    
    
    2.0
    %September 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 2.0 to 1
for the twelve
months then ended
    
    
    0
    %
    
    
    N/A
    Reserve Amount IfReserve Amount If
    
    Condition NotTesting Date
    
    Condition
    
    Condition Satisfied
    
    SatisfiedMarch 31, 2007
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1
for the six months
then ended
    
    $5.0 million
    
    $7.5 millionJune 30, 2007
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1
for the nine months
then ended
    
    $3.5 million
    
    $7.5 millionSeptember 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 1.5 to 1,
but less than 2.0
to 1, for the
twelve months then
ended
    
    $2.0 million
    
    $7.5 millionSeptember 30, 2007,
and at the end of
any fiscal quarter
thereafter
    
    We shall have
maintained a Fixed
Charge Coverage
Ratio which is
greater than or
equal to 2.0 to 1
for the twelve
months then ended
    
    $
    0
    
    
    N/A
  Liquidity.
   Results of Operations
 Revenue.
 
    
    Scheduled freight 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 the customer. 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.
 20




---



##### Table of Contents




    
    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:
 
    
    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.
 21




---



##### Table of Contents




    
    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.
 General and Administrative Expenses.
 Critical Accounting Policies
  Recent Accounting Pronouncements
   Fair Value Measurements
  22




---



##### Table of Contents



Three Months Ended September 30,2006
    
    2005Revenue:Scheduled freight network
    
    
    95.1
    %
    
    
    97.6
    %Other
    
    
    4.9
    
    
    
    2.4Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    105.5
    
    
    
    96.3Gross profit (loss)
    
    
    (5.5
    )
    
    
    3.7General and administrative expenses
    
    
    4.7
    
    
    
    4.7Operating loss from continuing operations
    
    
    (10.2
    )
    
    
    (1.0
    )Other (income) expense:Interest expense
    
    
    0.3
    
    
    
    0.1Other income
    
    
    (0.1
    )
    
    
    (0.1
    )Total interest and other (income) expense
    
    
    0.2
    
    
    
    Net loss
    
    
    (10.4
    )%
    
    
    (1.0
    )%
 Revenue
 General.
 Three Months Ended September 30,2006
    
    
    2005
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    Changeof Total
    
    
    
    
    
    
    of Total
    
    
    from 2005Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2006(Dollars in thousands)Scheduled freight network
    
    $
    55,093
    
    
    
    95.1
    %
    
    $
    39,724
    
    
    
    97.6
    %
    
    
    38.7
    %Other:ACMI
    
    
    19
    
    
    
    0.1
    
    
    
    400
    
    
    
    1.0
    
    
    
    (95.3
    )Miscellaneous
    
    
    2,809
    
    
    
    4.8
    
    
    
    566
    
    
    
    1.4
    
    
    
    396.3Total revenue
    
    $
    57,921
    
    
    
    100.0
    %
    
    $
    40,690
    
    
    
    100.0
    %
    
    
    42.3
    %
 23




---



##### Table of Contents



Scheduled Freight Network.
 ACMI
 Miscellaneous
 Cost of Revenue
 General.
 Three Months Ended September 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
    
    $
    8,465
    
    
    
    14.6
    
    
    $
    8,134
    
    
    
    20.0
    
    
    
    4.1
    %Transportation expense
    
    
    16,863
    
    
    
    29.1
    
    
    
    3,381
    
    
    
    8.3
    
    
    
    398.8Fuel expense
    
    
    15,869
    
    
    
    27.4
    
    
    
    13,874
    
    
    
    34.1
    
    
    
    14.4Maintenance expense
    
    
    4,136
    
    
    
    7.1
    
    
    
    3,219
    
    
    
    7.9
    
    
    
    28.5Freight handling expense
    
    
    9,718
    
    
    
    16.8
    
    
    
    6,472
    
    
    
    15.9
    
    
    
    50.2Depreciation and amortization
    
    
    1,041
    
    
    
    1.8
    
    
    
    966
    
    
    
    2.4
    
    
    
    7.8Operating overhead expense
    
    
    5,001
    
    
    
    8.6
    
    
    
    3,152
    
    
    
    7.7
    
    
    
    58.7Total cost of revenue
    
    $
    61,093
    
    
    
    105.4
    %
    
    $
    39,198
    
    
    
    96.3
    %
    
    
    55.9
    %
 Flight Expense.
  24




---



##### Table of Contents



Transportation Expense.
 Fuel Expense.
   Maintenance Expense.
 Freight Handling Expense.
 Depreciation and Amortization.
 Operating Overhead Expense.
 25




---



##### Table of Contents



Gross Loss
  General and Administrative Expense
  Interest Expense
  Income Taxes
    Nine Months Ended September 30,2006
    
    2005Revenue:Scheduled freight network
    
    
    97.2
    %
    
    
    97.5
    %Other
    
    
    2.8
    
    
    
    2.5Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    111.1
    
    
    
    99.3Gross profit (loss)
    
    
    (11.1
    )
    
    
    0.7General and administrative expenses
    
    
    5.1
    
    
    
    5.4Operating loss from continuing operations
    
    
    (16.2
    )
    
    
    (4.7
    )Other (income) expense:Interest expense
    
    
    0.2
    
    
    
    0.2Other income
    
    
    (0.4
    )
    
    
    (0.7
    )Total interest and other (income) expense
    
    
    (0.2
    )
    
    
    (0.5
    )Net loss
    
    
    (16.0
    )%
    
    
    (4.2
    )%
 26




---



##### Table of Contents



Revenue
 General.
 Nine Months Ended September 30,2006
    
    
    2005
    
    
    PercentagePercentage
    
    
    
    
    
    
    Percentage
    
    
    Changeof Total
    
    
    
    
    
    
    of Total
    
    
    from 2005Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    to 2006(Dollars in thousands)Scheduled freight network
    
    $
    139,443
    
    
    
    97.2
    %
    
    $
    108,028
    
    
    
    97.5
    %
    
    
    29.1
    %Other:ACMI
    
    
    949
    
    
    
    0.6
    
    
    
    932
    
    
    
    0.9
    
    
    
    1.8Miscellaneous
    
    
    3,084
    
    
    
    2.2
    
    
    
    1,810
    
    
    
    1.6
    
    
    
    70.4Total revenue
    
    $
    143,476
    
    
    
    100.0
    %
    
    $
    110,770
    
    
    
    100.0
    %
    
    
    29.5
    %
 Scheduled Freight Network.
 ACMI
 Miscellaneous
 Cost of Revenue
 General.
 Nine Months Ended September 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
    
    $
    25,222
    
    
    
    17.6
    %
    
    $
    21,415
    
    
    
    19.3
    %
    
    
    17.8
    %Transportation expense
    
    
    38,678
    
    
    
    27.0
    
    
    
    10,226
    
    
    
    9.2
    
    
    
    278.2Fuel expense
    
    
    43,223
    
    
    
    30.1
    
    
    
    39,059
    
    
    
    35.3
    
    
    
    10.7Maintenance expense
    
    
    11,747
    
    
    
    8.2
    
    
    
    8,271
    
    
    
    7.5
    
    
    
    42.0Freight handling expense
    
    
    26,671
    
    
    
    18.6
    
    
    
    19,277
    
    
    
    17.4
    
    
    
    38.4Depreciation and amortization
    
    
    2,570
    
    
    
    1.8
    
    
    
    2,791
    
    
    
    2.5
    
    
    
    (7.9
    )Operating overhead expense
    
    
    11,320
    
    
    
    7.8
    
    
    
    8,974
    
    
    
    8.1
    
    
    
    26.1Total cost of revenue
    
    $
    159,431
    
    
    
    111.1
    %
    
    $
    110,013
    
    
    
    99.3
    %
    
    
    44.9
    %
 27




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##### Table of Contents



Flight Expense.
  Transportation Expense.
 Fuel Expense.
   Maintenance Expense.
 28




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##### Table of Contents



Freight Handling Expense.
 Depreciation and Amortization.
 Operating Overhead Expense.
 Gross Loss
  General and Administrative Expense
  Interest Expense
  Other Income
  29




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##### Table of Contents



Income Taxes
  Forward-Looking Statements
    
    
    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;
    
    the ability to attract sufficient customers and freight volumes for our expedited ground network;
    
    decreases 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;
 30




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##### Table of Contents




    
    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;
    
    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.
 31




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##### Table of Contents



General Motors. th
 Other.
 
   
   
   
   
   
   32




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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. 33




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##### Table of Contents



KITTY HAWK, INC.By:
    /s/ JAMES R. KUPFERSCHMIDJames R. KupferschmidVice President - Finance and Chief Financial
Officer (Authorized officer and principal
financial officer) 34