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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 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 Street
P.O. Box 612787
Dallas/Fort Worth International Airport, Texas
(Address of principal executive offices)
    
    75261
(Zip Code)
 (972) 456-2200
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ Indicate by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court. Yes þ No o The number of shares of common stock, par value $0.000001 per share, outstanding at May
5, 2005 was 50,041,603.




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KITTY HAWK, INC. INDEX  
 PAGE NUMBERPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statement of Stockholders Equity for three months ended March 31, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    23Full Service Aircraft Services AgreementCertification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification Pursuant to Section 906
 2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS KITTY HAWK, INC. AND SUBSIDIARIES  
   March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,285
    
    
    $
    16,284Restricted cash and short-term investments
    
    
    486
    
    
    
    1,221Trade accounts receivable, net of allowance for doubtful accounts of $0.6
million and $0.7 million, respectively
    
    
    12,135
    
    
    
    13,158Assets held for sale
    
    
    65
    
    
    
    65Inventory and aircraft supplies
    
    
    4,854
    
    
    
    4,720Deposits and prepaid expenses
    
    
    1,602
    
    
    
    1,750Prepaid fuel
    
    
    2,765
    
    
    
    2,310Other current assets, net
    
    
    522
    
    
    
    201Total current assets
    
    
    35,714
    
    
    
    39,709Property and equipment, net
    
    
    9,972
    
    
    
    8,961Other assets, net
    
    
    
    
    
    
    400Total assets
    
    $
    45,686
    
    
    $
    49,070LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Current liabilities:Accounts
payable - trade
    
    $
    1,551
    
    
    $
    1,775Accrued wages and compensation related expenses
    
    
    2,050
    
    
    
    3,123Other accrued expenses
    
    
    5,989
    
    
    
    5,501Taxes payable, other than income
    
    
    1,415
    
    
    
    1,711Current portion of accrued maintenance reserves
    
    
    
    
    
    
    89Current maturities of long-term debt
    
    
    1,949
    
    
    
    1,949Total current liabilities
    
    
    12,954
    
    
    
    14,148Other long-term liabilities
    
    
    676
    
    
    
    806Total liabilities
    
    
    13,630
    
    
    
    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  50,041,603 and 46,620,883 at March 31, 2005 and December
31, 2004, respectively
    
    
    
    
    
    
    Additional capital
    
    
    22,345
    
    
    
    22,293Retained earnings
    
    
    9,711
    
    
    
    11,823Total stockholders equity
    
    
    32,056
    
    
    
    34,116Total liabilities and stockholders equity
    
    $
    45,686
    
    
    $
    49,070
 The accompanying notes are an integral part of these financial statements. 3




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KITTY HAWK, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited) Three months ended March 31,2005
    
    
    2004Revenue:Scheduled freight
    
    $
    32,842
    
    
    $
    33,224ACMI
    
    
    520
    
    
    
    Miscellaneous
    
    
    267
    
    
    
    518Total revenue
    
    
    33,629
    
    
    
    33,742Cost of revenue:Flight expense
    
    
    6,606
    
    
    
    7,189Transportation expense
    
    
    2,928
    
    
    
    2,825Fuel expense
    
    
    11,941
    
    
    
    9,203Maintenance expense
    
    
    2,547
    
    
    
    3,380Freight handling expense
    
    
    6,259
    
    
    
    6,488Depreciation and amortization
    
    
    823
    
    
    
    812Operating overhead expense
    
    
    2,949
    
    
    
    2,655Total cost of revenue
    
    
    34,053
    
    
    
    32,552Gross profit (loss)
    
    
    (424
    )
    
    
    1,190General and administrative expense
    
    
    2,220
    
    
    
    2,921Operating loss
    
    
    (2,644
    )
    
    
    (1,731
    )Other (income) expense:Interest expense
    
    
    70
    
    
    
    96Other, net
    
    
    (602
    )
    
    
    (39
    )Net loss
    
    $
    (2,112
    )
    
    $
    (1,788
    )Basic loss per share
    
    $
    (0.04
    )
    
    $
    (0.04
    )Weighted average common shares outstanding
    
    
    51,187,563
    
    
    
    50,574,970Diluted loss per share
    
    $
    (0.04
    )
    
    $
    (0.04
    )Weighted average diluted common shares outstanding
    
    
    51,187,563
    
    
    
    50,574,970
 The accompanying notes are an integral part of these financial statements. 4




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KITTY HAWK, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands, except share data)
(unaudited) Common StockNumber of
    
    
    
    
    
    
    Additional
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalance at December 31, 2004
    
    
    46,620,883
    
    
    $
    
    
    
    $
    22,293
    
    
    $
    11,823
    
    
    $
    34,116Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,112
    )
    
    
    (2,112
    )Compensation expense associated
with stock option grants
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Issuance of common stock related
to exercise of options to
acquire stock
    
    
    139,299
    
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    41Issuance of common stock related
to exercise of warrants to
acquire stock
    
    
    3,281,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2005
    
    
    50,041,603
    
    
    $
    
    
    
    $
    22,345
    
    
    $
    9,711
    
    
    $
    32,056
 The accompanying notes are an integral part of these financial statements. 5




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KITTY HAWK, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) Three months ended March 31,2005
    
    
    2004Operating activities:Net loss
    
    $
    (2,112
    )
    
    $
    (1,788
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization expense
    
    
    908
    
    
    
    914(Gain) loss on disposal of property and equipment
    
    
    (51
    )
    
    
    5Compensation expense related to stock options
    
    
    11
    
    
    
    10(Recovery) provision for doubtful accounts
    
    
    (54
    )
    
    
    118Changes in operating assets and liabilities:Trade accounts receivable
    
    
    1,077
    
    
    
    (1,618
    )Settlement receivable
    
    
    
    
    
    
    500Inventory and aircraft supplies
    
    
    (135
    )
    
    
    (230
    )Prepaid expenses and other
    
    
    (242
    )
    
    
    (733
    )Accounts payable and accrued expenses
    
    
    (1,304
    )
    
    
    (139
    )Accrued maintenance reserves
    
    
    (89
    )
    
    
    128Net cash used in operating activities
    
    
    (1,991
    )
    
    
    (2,833
    )Investing activities:Proceeds from sale of assets
    
    
    123
    
    
    
    42Change in restricted cash
    
    
    735
    
    
    
    (735
    )Capital expenditures
    
    
    (1,907
    )
    
    
    (282
    )Net cash used in investing activities
    
    
    (1,049
    )
    
    
    (975
    )Financing activities:Borrowings of long-term debt
    
    
    
    
    
    
    1,886Issue common stock related to exercise of stock options
    
    
    41
    
    
    
    Loan origination cost
    
    
    
    
    
    
    (118
    )Repayments of long-term debt
    
    
    
    
    
    
    (2,382
    )Net cash provided by (used in) financing activities
    
    
    41
    
    
    
    (614
    )Net decrease in cash and cash equivalents
    
    
    (2,999
    )
    
    
    (4,422
    )Cash and cash equivalents at beginning of period
    
    
    16,284
    
    
    
    15,729Cash and cash equivalents at end of period
    
    $
    13,285
    
    
    $
    11,307
 The accompanying notes are an integral part of these financial statements. 6




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KITTY HAWK, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements, which should be read in
conjunction with the consolidated financial statements and footnotes included in the Companys
Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2004, are unaudited (except for the December 31, 2004 condensed consolidated balance
sheet, which was derived from the Companys audited consolidated balance sheet included in the
aforementioned Form 10-K), but have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation have
been included. The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. On an ongoing basis, management evaluates its estimates and judgments and
incorporates any changes in such estimates and judgments into the accounting records underlying the
Companys consolidated financial statements. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates. 2. LEGAL PROCEEDINGS General Motors and Delphi Automotive were sued in Wayne County, Michigan by a number of air
charter carriers in connection with air transportation services we arranged with them on behalf of
General Motors and Delphi Automotive and for which the air charter carriers were not paid as a
result of our bankruptcy. The air charter carriers are seeking to recover approximately $4.6
million from General Motors and Delphi Automotive. General Motors has named us as a third party
defendant in the litigation and is seeking indemnification of up to $4.6 million against us. The
parties agreed that the indemnification claim will be heard in the bankruptcy court in Fort Worth,
Texas and that we will be dismissed from the litigation in Wayne County, Michigan. On November 3,
2004, the bankruptcy court granted our motion that General Motors claim for indemnification be
denied in its entirety. General Motors has appealed the bankruptcy courts dismissal of their
claim. While we cannot predict the outcome of the appeal at this time, we believe this claim should
have been discharged when our plan of reorganization was confirmed by the bankruptcy court. We will
vigorously defend against General Motors appeal. No amounts have been accrued for this
contingency. We are also subject to various legal proceedings and other claims which have arisen in the
ordinary course of business. While the outcome of such legal proceedings and other claims cannot be
predicted with certainty, our management does not believe that the outcome of any of these matters
will have a material adverse effect on our business. 3. STOCK OPTIONS In September 2003, the Companys stockholders approved the Kitty Hawk 2003 Long Term Equity
Incentive Plan (the Plan). Options granted under the Plan are accounted for under the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. 7




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The Company is required to disclose the pro forma effect of accounting for stock options based
on the fair value method. The Company uses the Black-Scholes option pricing model to calculate the
fair value of options. The following weighted average assumptions have been used in determining the
fair value of the options granted during the periods noted: Three MonthsEndedMarch 31,2005
    
    
    2004Risk free interest rate
    
    
    4.44
    %
    
    
    4.05
    %Expected life (years)
    
    
    10
    
    
    
    10Volatility
    
    
    47.85
    %
    
    
    50.00
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 Some of these assumptions are judgmental and highly sensitive in the determination of pro
forma compensation expense. The following table illustrates the effect on net income and earnings
per share if the Company had applied fair value accounting. Three MonthsEndedMarch 31,2005
    
    
    2004(In thousands,except per share data)Net loss, as reported
    
    $
    (2,112
    )
    
    $
    (1,788
    )Add: Total stock-based employee
compensation expense determined under the
intrinsic method for all awards
    
    
    11
    
    
    
    10Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (102
    )
    
    
    (78
    )Pro forma net loss
    
    $
    (2,203
    )
    
    $
    (1,856
    )Basic loss per share  as reported
    
    $
    (0.04
    )
    
    $
    (0.04
    )Basic loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.04
    )Diluted loss per share  as reported
    
    $
    (0.04
    )
    
    $
    (0.04
    )Diluted loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.04
    )
 The Plan provides for the issuance of up to 6,500,000 shares of common stock. In July 2004,
the Companys stockholders approved an additional 500,000 shares of common stock for grant under
the Plan effective June 2005. The options granted generally have an exercise price equal to the
quoted market price of the stock on the date of grant. The options granted vest over periods of 36
to 48 months. The options expire ten years from the date of grant, subject to earlier forfeiture
provisions. The following table summarizes the stock option activity under the Plan for the three months
ended March 31, 2005: WeightedAvailable for
    
    
    Options
    
    
    AverageGrant
    
    
    Outstanding
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    1,189,041
    
    
    
    4,030,404
    
    
    $
    0.54Authorized for grant
    
    
    
    
    
    
    
    
    
    
    Granted (weighted-average fair value $0.924)
    
    
    (45,000
    )
    
    
    45,000
    
    
    $
    1.43Exercised
    
    
    
    
    
    
    (139,299
    )
    
    $
    0.30Canceled
    
    
    20,000
    
    
    
    (20,000
    )
    
    $
    0.30Outstanding at March 31, 2005
    
    
    1,164,041
    
    
    
    3,916,105
    
    
    $
    0.56
 8




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The following table summarizes information about the stock options outstanding at March 31,
2005: Weighted
    
    
    Weighted AverageNumber of
    
    
    Average
    
    
    Exercise Price
    
    
    Number of
    
    
    Weighted AverageOptions
    
    
    Remaining
    
    
    of Options
    
    
    Options
    
    
    Exercise PriceExercise Prices
    
    Outstanding
    
    
    Life (Years)
    
    
    Outstanding
    
    
    Vested (1)
    
    
    of Vested Options$  0.30
    
    
    3,037,160
    
    
    
    8.33
    
    
    $
    0.30
    
    
    
    1,485,909
    
    
    $
    0.30$1.105
    
    
    6,945
    
    
    
    8.83
    
    
    $
    1.105
    
    
    
    1,112
    
    
    $
    1.105$  1.40
    
    
    377,000
    
    
    
    9.50
    
    
    $
    1.40
    
    
    
    
    
    
    $
    1.40$  1.41
    
    
    200,000
    
    
    
    8.92
    
    
    $
    1.41
    
    
    
    77,778
    
    
    $
    1.41$  1.43
    
    
    45,000
    
    
    
    10.00
    
    
    $
    1.43
    
    
    
    
    
    
    $
    1.43$  1.62
    
    
    250,000
    
    
    
    9.17
    
    
    $
    1.62
    
    
    
    93,750
    
    
    $
    1.623,916,105
    
    
    
    9.05
    
    
    $
    0.56
    
    
    
    1,658,549
    
    
    $
    0.43
   (1)
    
    Each of the outstanding options are 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. 4. OTHER ACCRUED EXPENSES Other accrued expenses consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Freight handling expenses
    
    $
    1,677
    
    
    $
    2,342Landing and parking expenses
    
    
    1,036
    
    
    
    998Other
    
    
    3,276
    
    
    
    2,161Total other accrued expenses
    
    $
    5,989
    
    
    $
    5,501
 5. SEGMENT REPORTING The Companys operations are comprised of two segments  an expedited scheduled freight
network and a cargo airline. Each segments respective financial performance is detailed below.
Each segment is currently evaluated on financial performance at the operating income line. The column labeled other consists of corporate activities. Business assets are owned by or
allocated to each of the business segments. Assets included in the column labeled other include
cash, allowance for doubtful accounts and the corporate headquarters building. The accounting
policies of each segment are the same as those reported in Note 2 of the Annual Report on Form 10-K
for the year ended December 31, 2004. 9




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ScheduledFreight
    
    
    Air Freight
    
    
    
    
    
    
    
    
    
    
    ConsolidatedNetwork
    
    
    Carrier
    
    
    Other
    
    
    Eliminations
    
    
    Balance(in thousands)Three months ended March 31, 2005:Revenue from external customers
    
    $
    33,069
    
    
    $
    560
    
    
    $
    
    
    
    $
    
    
    
    $
    33,629Revenue from intersegment operations
    
    
    
    
    
    
    10,006
    
    
    
    
    
    
    
    (10,006
    )
    
    
    Depreciation and amortization
    
    
    131
    
    
    
    692
    
    
    
    85
    
    
    
    
    
    
    
    908Operating loss
    
    
    (2,241
    )
    
    
    (354
    )
    
    
    (49
    )
    
    
    
    
    
    
    (2,644
    )Interest expense
    
    
    22
    
    
    
    1
    
    
    
    47
    
    
    
    
    
    
    
    70Other (income) expense
    
    
    (130
    )
    
    
    (8
    )
    
    
    (464

    )
    
    
    
    
    
    
    (602
    )Net loss
    
    $
    (2,133
    )
    
    $
    (347
    )
    
    $
    368
    
    
    $
    
    
    
    $
    (2,112
    )Total assets
    
    $
    15,875
    
    
    $
    15,911
    
    
    $
    24,585
    
    
    $
    (10,685
    )
    
    $
    45,686Three months ended March 31, 2004:Revenue from external customers
    
    $
    33,224
    
    
    $
    518
    
    
    $
    
    
    
    $
    
    
    
    $
    33,742Revenue from intersegment operations
    
    
    
    
    
    
    11,495
    
    
    
    
    
    
    
    (11,495
    )
    
    
    Depreciation and amortization
    
    
    93
    
    
    
    719
    
    
    
    104
    
    
    
    
    
    
    
    914Operating income (loss)
    
    
    (1,610
    )
    
    
    6
    
    
    
    (127
    )
    
    
    
    
    
    
    (1,731
    )Interest expense
    
    
    23
    
    
    
    2
    
    
    
    71
    
    
    
    
    
    
    
    96Other (income) expense
    
    
    (28
    )
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (39
    )Net loss
    
    $
    (1,605
    )
    
    $
    4
    
    
    $
    (187
    )
    
    
    
    
    
    $
    (1,788
    )Total assets
    
    $
    16,896
    
    
    $
    14,606
    
    
    $
    21,011
    
    
    $
    (7,755
    )
    
    $
    44,758
 6. EARNINGS PER SHARE In March 2003, the Company issued shares of common stock and warrants to purchase 9,814,886
shares of common stock to its former creditors in accordance with its Plan of Reorganization. Such
warrants are treated as outstanding common shares for purposes of calculating loss per share
because the exercise price of the warrants is nominal. As of March 31, 2005, warrants to purchase
1,271,971 shares of common stock remain outstanding. These warrants expire in 2013. For the three months ended March 31, 2005, the Company did not include outstanding options to
purchase 3,916,105 shares of common stock in the diluted loss per share calculation since their
effect was antidilutive due to the reported net loss. For the three months ended March 31, 2004,
the Company did not include outstanding options to purchase 4,528,750 shares of common stock in the
diluted loss per share calculation since their effect was antidilutive due to the reported net
loss. 7. RELATED PARTY TRANSACTIONS The Company has various agreements and relationships with beneficial owners of 5% or more of
the Companys common stock. See Item 13. Certain Relationships and Related Transactions of the
Companys Annual Report of Form 10-K for the year ended December 31, 2004 for information on these
agreements and relationships. 10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in Managements Discussion and Analysis of Financial Condition and Results of
Operations in this Form 10-Q complements the information in Managements Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year
ended December 31, 2004. Please refer to the information in Managements Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year
ended December 31, 2004 for additional information regarding our financial condition, changes in
financial condition and results of operations. Executive Overview Kitty Hawk is a holding company and currently operates through its two wholly-owned
subsidiaries, Kitty Hawk Cargo and Kitty Hawk Aircargo. During the three months ended March 31,
2005, we generated 97.7% of our revenue from Kitty Hawk Cargos scheduled freight network and 2.3%
of our revenue from Kitty Hawk Aircargos cargo airline. Scheduled Freight Network.Through Kitty Hawk Cargo, we operate a major independent
city-to-city scheduled freight network serving selected cities in the continental U.S. and Canada
and San Juan, Puerto Rico, providing expedited and time-definite freight services. In addition, we
have business alliances that allow us to provide expedited freight services to Alaska, Hawaii and
Mexico. Expedited freight includes freight of varying sizes and weights and includes freight transit
times from a few hours or overnight to as long as two, three or four days. We generally compete in
the heavy weight and oversized, next-morning and two-day expedited freight segment of the U.S.
freight transportation industry. As an independent freight network, we typically do not transport freight from shippers to our
cargo facilities or from our cargo facilities to recipients. As a result, we primarily provide
freight services to freight forwarders and logistics companies who either transport the freight to
and from our cargo facilities in the origin and destination cities we serve or arrange for others
to provide these services. For an additional fee, we also offer on a limited basis an
airport-to-door delivery option to our customers and occasionally arrange for the initial pick up
of freight from shippers by contracting with local cartage agents in major metropolitan areas of
the continental U.S. Our scheduled freight network business relies on customers who need expedited or time-definite
delivery on an as-needed basis. As the freight is shipped on an as-needed basis, we do not have
long-term contracts with our customers. Without long-term customer contracts, the overall demand
for our expedited freight services is primarily influenced by the health of the U.S. economy which
is cyclical in nature, the seasonality of the industries generating the freight we transport in our
network and the availability and cost of alternative expedited freight services. Because of the
foregoing factors, the amount of freight shipped in our scheduled freight network can fluctuate
significantly. A significant portion of the freight transported in our network relates to the automotive,
electronics, telecom and related infrastructure equipment, apparel and other durable goods and
equipment industries. The demand for the products produced by these industries and, in turn, the
demand for our scheduled freight network services for the transportation of freight from these
industries has historically trended in relationship to the strength of the U.S. economy.
Furthermore, these industries tend to be seasonal in nature and, as a result, our business is also
seasonal with the third and fourth quarters historically being the highest demand and strongest
revenue quarters. In addition, the demand for our expedited freight services is impacted by the availability and
cost of other expedited freight transportation alternatives including services provided by
integrated freight carriers and trucking networks. In general, our competitors are impacted by the
same economic cyclicality and seasonality trends as we experience in our scheduled freight network.
As a result, we believe we experience similar demand and supply relationships as our competitors.
To the extent our customers can secure expedited freight services with acceptable service levels at
a lower cost than the freight services provided by our scheduled freight network, the demand for
our scheduled freight network can be materially adversely affected. 11




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Cargo Airline.Kitty Hawk Aircargo, our cargo airline, provides air freight transportation
services for Kitty Hawk Cargos scheduled freight network. During the three months ended March 31,
2005, Kitty Hawk Aircargo provided 100% of the revenue block hours flown in Kitty Hawk Cargos
scheduled freight network. In addition, when Kitty Hawk Aircargos aircraft are not being used in our scheduled freight
network, Kitty Hawk Aircargo provides air freight transportation services which include the
aircraft, crew, maintenance and insurance, also known as ACMI, and ad-hoc charters for a variety of
customers. By providing such operations, Kitty Hawk Aircargo improves the utilization of its
aircraft and generates additional revenue when its aircraft would otherwise be idle. During the
three months ended March 31, 2005, ACMI and ad-hoc charters generated approximately 2.3% of our
revenues. On May 5, 2005, Kitty Hawk Aircargo operated six owned Boeing 727-200 cargo aircraft and 11
Boeing 727-200 cargo aircraft available under an aircraft and engine use agreement. On May 4, 2004,
Kitty Hawk Aircargo entered into ten year operating leases for seven Boeing 737-300SF cargo
aircraft. We took delivery of the first Boeing 737-300SF cargo aircraft in March 2005 and placed it
into revenue service during May 2005. We took delivery of the second Boeing 737-300SF cargo
aircraft in April 2005 and expect to place it into revenue service during May 2005. We expect to
take delivery of the remaining five aircraft during the remainder of 2005. Our current fleet
composition plan assumes that the seven Boeing 737-300SF leased aircraft will replace certain of
our currently operating Boeing 727-200 cargo aircraft which we expect to remove from revenue
service as these Boeing 727-200 cargo aircraft come due for their next heavy maintenance event. The Boeing 737-300SF cargo aircraft has higher ownership costs in the form of lease costs and
insurance costs than our current fleet of Boeing 727-200 cargo aircraft. In addition, the Boeing
737-300SF cargo aircraft has approximately 30% less cargo capacity as compared to our current fleet
of Boeing 727-200 cargo aircraft. We believe the Boeing 737-300SF cargo aircraft generally has
lower operating costs than our Boeing 727-200 cargo aircraft as a result of significantly lower jet
fuel consumption rates, lower crew costs from operating with a two person crew instead of three as
well as lower landing fees and reduced long-term maintenance costs. We intend to deploy the Boeing 737-300SF cargo aircraft in situations in which we can take
advantage of its lower operating cost and improved performance characteristics and in situations
for which its capacity is better suited than the Boeing 727-200 cargo aircraft. Furthermore, our
objective is to develop a fleet operating and utilization schedule that largely offsets the higher
lease and insurance costs of the Boeing 737-300SF cargo aircraft by achieving higher average
utilization per cargo aircraft in our operations as compared to the Boeing 727-200 cargo aircraft.
During 2005, as we transition our scheduled freight network operations to include the Boeing
737-300SF cargo aircraft, we expect the utilization levels and lower operating costs of our Boeing
737-300SF cargo aircraft will likely not fully offset the higher lease and insurance costs of the
Boeing 737-300SF cargo aircraft as compared to our Boeing 727-200 cargo aircraft. Our inability to
achieve sufficient utilization of the Boeing 737-300SF cargo aircraft in our operations could have
a material adverse effect on our results of operations. Jet Fuel Costs.One of our most significant and variable costs is jet fuel. Our scheduled
freight network bears the increases in jet fuel costs. Therefore, we seek to recapture the increase
in jet fuel costs through increasing our prices to our customers and/or through temporary fuel
surcharges. We include these fuel surcharges in our scheduled freight revenue. Historically, we
have been able to largely offset the rising costs of jet fuel through these fuel surcharges and/or
by raising our prices to our customers. However, if due to competitive pressures or other reasons,
we are unable to raise our fuel surcharge and/or our prices, we may be forced to absorb increases
in jet fuel costs. In addition, as we attempt to recapture the increase in jet fuel costs through
increasing our prices to our customers and/or through temporary fuel surcharges, our customers may
seek lower cost freight transportation alternatives to our scheduled freight network. If jet fuel
prices remain at recent historically high levels for an extended period, and we are unable to
continue to maintain or raise our fuel surcharge and/or our prices sufficiently and/or customers
seek lower cost freight transportation alternatives, our financial condition and results of
operations could be materially adversely affected. The rising cost of jet fuel increases our
working capital requirements because we pay for fuel in advance of providing air freight
transportation services and typically do not recover these increases through our fuel surcharges or
raising prices to our customers until the billing for the air freight transportation service is
collected, which averages between 30 to 45 days after the service is performed. 12




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We purchase jet fuel from various suppliers at current market prices. We do not currently have
any long-term contracts for jet fuel, nor do we currently have any agreements to hedge against
increases in the price of jet fuel. From time to time, we review the price and availability of jet
fuel. If we have the opportunity and ability to enter into long-term supply contracts for jet fuel
or arrangements to hedge against changes in jet fuel prices, we may enter into such agreements or
arrangements. During the three months ended March 31, 2005, our jet fuel averaged $1.56 per gallon
as compared to $1.17 per gallon for the three months ended March 31, 2004. Jet fuel costs per
gallon include the cost of jet fuel and the cost of all taxes, fees and surcharges necessary to
deliver the jet fuel into the aircraft. During the three months ended March 31, 2005, we used
between 2.3 million and 2.8 million gallons of jet fuel per month, depending on the mix of aircraft
employed in our network and the amount, origin and destination of freight shipped and the number of
days the network operated during each month. At current levels of operations in our expedited
scheduled freight business, each $0.01 change in the price per gallon of jet fuel results in a
change in our annual fuel cost of approximately $309,000. Seasonality.Our business is seasonal in nature. In a typical year, demand for our expedited
freight services is highest in the third and fourth quarters of the year and weakest in the first
and second quarters. Since November 2004, we believe our expedited freight services have been negatively impacted
by the rapidly changing and record high cost of jet fuel which has resulted in our charging our
customers higher total prices as we increased the existing fuel surcharge and raised our prices to
offset these costs. In addition, we believe our expedited freight services were also negatively
impacted by the overall record high price of energy which may have had a dampening effect upon the
U.S. economy and, in particular, industries which produce the type of freight transported in our
scheduled freight network such as the automotive industry. We believe these factors contributed to
lower customer demand for our expedited freight services and downward pressure on our yields. In
response to this decrease in demand for freight in our scheduled freight network, we reduced our
planned capacity in the scheduled freight network where feasible and implemented other cost
containment measures. During the first month of the second quarter of 2005, we believe our
expedited scheduled freight business continued to be negatively impacted by these factors. Fixed Costs. Our scheduled freight network and cargo airline have significant fixed costs
which cannot be materially reduced in the short term. Operating the scheduled freight network
requires the operation of the scheduled freight network hub with a certain minimum amount of
aircraft and trucking operations. Once chargeable weight and corresponding revenue reaches the
break-even point, each additional dollar of revenue contributes a relatively high percentage to
operating income. However, if chargeable weight and corresponding revenue does not reach the
break-even point, the operations will sustain losses which could be significant depending on the
amount of the deficit. Therefore, we typically have seasonal working capital needs in the first and
second quarters of the year to the extent that our revenues do not allow us to cover our costs.
Since our expedited freight business is both seasonal and tied to the economic trends of the U.S.
economy, we may also incur additional working capital needs during the third and fourth quarters of
the year. Capital Requirements, Capital Resources and Liquidity Capital Requirements.In addition to our normal operating cash requirements, we believe our
cash requirements for the remainder of 2005 include, but are not limited to, projected capital
expenditures of $2.1 million, including complying with FAA Airworthiness Directives on our fleet of
Boeing 727-200 cargo aircraft and investments in information technology. We also expect to have
approximately $2.5 million of cash requirements for integration expenses, capital expenditures, and
additional lease deposits during the remainder of 2005 to integrate the Boeing 737-300SF cargo
aircraft into our fleet. Our working capital is also affected by the rising cost of jet fuel
because we pay for fuel in advance of providing air freight transportation services and typically
do not recover these increases through our fuel surcharge until the billing for the air freight
transportation service is collected, which is usually between 30 to 45 days after the service is
performed. Capital Resources.At March 31, 2005, our net working capital was $22.8 million as compared
to $25.6 million at December 31, 2004. The decrease in working capital was primarily due to the
$2.1 million net loss generated during the quarter ended March 31, 2005 and $1.9 million of capital
expenditures during the quarter ended March 31, 2005. 13




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Credit Facility.We have a $10.0 million revolving credit facility with Wells Fargo Business
Credit, or WFB. Unless earlier terminated, the Credit Facility matures on March 22, 2007 and
automatically renews for successive one-year periods thereafter unless terminated by us or WFB by
giving the other party 90 days written notice prior to the next maturity date. The Credit Facility
bears interest at an annual rate equal to WFBs prime rate plus a margin of 1.0%. In addition we
incur a fee computed at an annual rate of 2.0% of the face amount of each letter of credit issued
under the Credit Facility. The Credit Facility is secured by substantially all of our receivables
and personal property, other than airframes, aircraft engines and aircraft parts. Availability under the Credit Facility is subject to a borrowing base equal to the lesser of
$10.0 million and 85% of eligible receivables. WFB may reject any receivable deemed ineligible in
the exercise of its business judgment. On May 5, 2005, we had $1.9 million borrowed under the
Credit Facility and $1.4 million of outstanding letters of credit, and a borrowing base of $10.0
million. The Credit Facility provides for specified events of default that allow WFB to terminate the
Credit Facility and accelerate any payments due by us, including if we suffer a material adverse
change in our business or financial condition. In addition, the Credit Facility requires us to meet
certain financial and operating covenants, limits capital expenditures other than required
maintenance on our aircraft, and restricts our ability to commit to or enter into any new aircraft
operating leases unless certain financial covenants are met. Effective as of January 31, 2005, we entered into an amendment to the Credit Facility that
eliminated the monthly net loss covenant, modified the minimum quarterly year-to-date net income
(loss) covenant levels and the minimum quarterly year-to-date net worth covenant and established a
minimum liquidity requirement that requires us to maintain $3.0 million in liquid assets at all
times. We are in compliance with all requirements of the Credit Facility as of March 31, 2005. Although the Credit Facility has a final maturity date of March 22, 2007, we classify any
balances outstanding under the Credit Facility as current pursuant to EITF Issue 95-22, as the
agreement contains a subjective acceleration clause if in the opinion of the lenders there is a
material adverse change in our business, and provides the lenders direct access to our cash
receipts. Liquidity.Currently, our primary source of liquidity is our cash and cash equivalents and
cash flow from operations. In addition, we may supplement our liquidity by accessing our $10.0
million Credit Facility with WFB. At March 31, 2005, cash and cash equivalents were $13.3 million as compared to $16.3 million
at December 31, 2004 and we had $6.8 million of unused availability under the Credit Facility
compared to $7.7 million at December 31, 2004. Of the $13.3 million in cash and cash equivalents at
March 31, 2005, a minimum of $3.0 million is required to be maintained at all times under the
current covenants of the Credit Facility. The decrease in cash and cash equivalents of $3.0 million
is a result of using $2.0 million to fund our operations and a net $1.1 million used in investing
activities, which included $1.9 million for the acquisition of operating assets offset by $0.1
million of proceeds from the sale of idle assets and $0.7 million recovery of restricted cash. In
addition, we generated $0.1 million from the exercise of outstanding stock options and warrants to
acquire stock in the first quarter of 2005. At May 5, 2005, we had $10.7 million of cash and cash
equivalents on hand, of which we are required to maintain a minimum balance of $3.0 million in
liquid assets at all times, and $6.6 million of unused availability under our Credit Facility. We believe that our cash flow from operations, availability under our Credit Facility and cash
on hand will be sufficient to meet our anticipated cash requirements for the next 12 months.
However, if the demand for our expedited freight services continues to be negatively impacted by
our having to charge our customers higher total prices due to the record high cost of jet fuel or
by a continuing general dampening of the U.S. economy, and in particular the industries which
produce the type of freight transported in our scheduled fright network, we may need to supplement
our current sources of liquidity over the next 12 months and/or we may need to seek modifications
to our Credit Facility. All of our assets besides aircraft and aircraft parts are encumbered under
the Credit Facility, and our owned aircraft and aircraft parts have limited value and
marketability. There can be no assurance that we will be able to supplement our existing sources of
liquidity or make modifications to our Credit Facility if such actions become necessary. 14




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Results of Operations Revenue.Included in our revenue are the following major categories:  
    Scheduled freight revenue,which is generated from freight transportation services
provided by our expedited 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 TSA.
    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.Included in our cost of revenue are the following major categories:  
    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 for Trust 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 scheduled freight network that
are not served by our aircraft; and
    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:  
    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 during 2004. 15




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
    Freight Handling Expense,which consists of costs to handle the loading and
unloading of freight on aircraft and trucks operating within our expedited scheduled
freight network, including:  
    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 expedited scheduled freight network and cargo airline, including:  
    wages and benefits for operational managers and customer service personnel of Kitty Hawk Cargo;
    expedited 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.General and administrative expenses consist of salaries,
benefits and expenses for executive management (other than operational management of Kitty Hawk
Aircargo and Kitty Hawk Cargo), information technology, human resources, accounting, finance, legal
and corporate communications personnel. In addition, costs for corporate governance, strategic
planning, financial planning and asset management are included in general and administrative
expenses. Also included are costs associated with the performance based compensation program, legal
and professional fees and consulting fees. Critical Accounting Policies For a discussion of our critical accounting policies refer to Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies
included in our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no
material changes to the critical accounting policies discussed in our Annual Report on Form 10-K
for the year ended December 31, 2004. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, Share-Based Payment, which
replaces Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of FAS 123. SFAS 123R
addresses the accounting for share-based payment transactions in which a company receives employee
services in exchange for either equity instruments of the company or liabilities that are based on
the fair value of the companys equity instruments or that may be settled by the issuance of such
equity instruments. SFAS 123R addresses all forms of share-based payment awards, including shares
issued under employee stock purchase plans, stock options, restricted stock and stock appreciation
rights. SFAS 123R eliminates
the ability to account for share-based compensation transactions using the intrinsic method
and generally would require that such transactions be accounted for using a fair-value-based method
and recognized as expense over the period during which an employee is required to provide services
in exchange for the award. SFAS 123R is effective for annual periods beginning after June 15, 2005.
Although we have not yet determined the impact of applying the 16




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various provisions of SFAS 123R, we
expect our reported earnings will be lower than they would have been if SFAS 123R did not apply. QUARTER ENDED MARCH 31, 2005 COMPARED TO QUARTER ENDED MARCH 31, 2004 The following table presents, for the periods indicated, condensed consolidated statement of
operations data expressed as a percentage of total revenue: Three months ended March 31,2005
    
    
    2004Revenue:Scheduled freight
    
    
    97.7
    %
    
    
    98.5
    %Other
    
    
    2.3
    
    
    
    1.5Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue
    
    
    101.3
    
    
    
    96.5Gross profit (loss)
    
    
    (1.3
    )
    
    
    3.5General and administrative expenses
    
    
    6.6
    
    
    
    8.6Operating loss
    
    
    (7.9
    )
    
    
    (5.1
    )Other (income) expense:Interest expense
    
    
    0.2
    
    
    
    0.3Other (income) expense
    
    
    (1.8
    )
    
    
    (0.1
    )Total other (income) expense.
    
    
    (1.6
    )
    
    
    0.2Net loss
    
    
    (6.3
    )%
    
    
    (5.3
    )%
 Revenue General. The following table presents, for the periods indicated, the components of our
revenue in dollars and as a percentage of our total revenue and the percentage change from
period-to-period: Three months ended March 31,2005
    
    
    2004Percentage
    
    
    
    
    
    
    Percentage
    
    
    Percentageof Total
    
    
    
    
    
    
    of Total
    
    
    Change fromRevenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    2004 to 2005(dollars in thousands)Scheduled freight
    
    $
    32,842
    
    
    
    97.7
    %
    
    $
    33,224
    
    
    
    98.5
    %
    
    
    (1.1
    )%Other:ACMI
    
    
    520
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    100.0Miscellaneous
    
    
    267
    
    
    
    0.8
    
    
    
    518
    
    
    
    1.5
    
    
    
    (48.5
    )Total revenue
    
    $
    33,629
    
    
    
    100.0
    %
    
    $
    33,742
    
    
    
    100.0
    %
    
    
    (0.3
    )%
 Scheduled Freight.For the quarter ended March 31, 2005, the $0.4 million decrease in our
scheduled freight revenue was due to a 6.6% decrease in our chargeable weight offset by an increase
of 5.9% in our average yield as compared to the quarter ended March 31, 2004. Our yield increase was due to an increase in the fuel
surcharge, the implementation of a
security surcharge and a revised pricing structure. The gross yield increase resulting from the increase in fuel and security
surcharges and the revised pricing structure was partially offset by competitive pricing pressures and a higher proportion of our
chargeable weights from lower yielding markets. Our chargeable weight decrease was due to reduced demand during the quarter ended March 31,
2005 as compared to the quarter ended March 31, 2004. We believe the decrease in demand
experienced during the quarter ended March 31, 2005 as compared the quarter ended March 31, 2004
was primarily due to the high cost of jet fuel which resulted in our charging our customers higher
total prices as we increased the existing fuel surcharge and/or
prices to offset these costs and a general dampening of the U.S. economy, and in particular,
the industries which produce the type of freight transported in our scheduled freight network.
This general decrease in demand experienced during the quarter ended March 31, 2005 as compared to
the quarter ended March 31, 2004 was 17




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partially offset by an increase in chargeable weight resulting
from our second quarter 2004 expansion into San Juan, Puerto Rico. ACMI.For the quarter ended March 31, 2005, we generated $0.5 million of ACMI revenue while we
generated no ACMI revenue for the quarter ended March 31, 2004. Miscellaneous.For the quarter ended March 31, 2005, our miscellaneous revenue resulted from
flying ad-hoc charter services for several customers which generated $0.3 million of revenue. Our
miscellaneous revenue for the quarter ended March 31, 2004 included $0.5 million from flying ad-hoc
charter services. Cost of Revenue General.The following table presents, for the periods indicated, the components of our cost
of revenue in dollars and as a percentage of total revenue and the percentage change from
period-to-period: Three months ended March 31,2005
    
    
    2004Cost
    
    
    Percentage
    
    
    Cost
    
    
    Percentage
    
    
    Percentageof
    
    
    of Total
    
    
    of
    
    
    of Total
    
    
    Change fromRevenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    2004 to 2005(dollars in thousands)Flight expense
    
    $
    6,606
    
    
    
    19.6
    %
    
    $
    7,189
    
    
    
    21.3
    %
    
    
    (8.1
    )%Transportation expense
    
    
    2,928
    
    
    
    8.7
    
    
    
    2,825
    
    
    
    8.4
    
    
    
    3.6Fuel
    
    
    11,941
    
    
    
    35.5
    
    
    
    9,203
    
    
    
    27.3
    
    
    
    29.8Maintenance expense
    
    
    2,547
    
    
    
    7.6
    
    
    
    3,380
    
    
    
    10.0
    
    
    
    (24.6
    )Freight handling expense
    
    
    6,259
    
    
    
    18.6
    
    
    
    6,488
    
    
    
    19.2
    
    
    
    (3.5
    )Depreciation and amortization
    
    
    823
    
    
    
    2.5
    
    
    
    812
    
    
    
    2.4
    
    
    
    1.4Operating overhead
    
    
    2,949
    
    
    
    8.8
    
    
    
    2,655
    
    
    
    7.9
    
    
    
    11.1Total cost of revenue
    
    $
    34,053
    
    
    
    101.3
    %
    
    $
    32,552
    
    
    
    96.5
    %
    
    
    4.6
    %
 Flight Expense.For the quarter ended March 31, 2005, flight expense decreased $0.6 million,
or 8.1%, compared to the quarter ended March 31, 2004. This decrease was primarily a result of a
lower aircraft lease expense and lower aircraft insurance expense offset by higher crew costs per
revenue block hour flown. Our aircraft lease expense decreased $1.0 million and our aircraft insurance costs decreased
$0.1 million due to the expiration of four aircraft leases on May 8, 2004. Our aircraft flew a
total of 0.1%, or 9 less revenue block hours for the quarter ended March 31, 2005 as compared to
the quarter ended March 31, 2004. Our cargo airline flew 55, or 0.9%, less block hours for the
scheduled freight network offset by 46, or 28.6%, more block hours for our ACMI and ad-hoc charter
customers for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004.
Crew costs increased $0.5 million due in part to higher travel, longevity pay increases, and
slightly higher paid versus flown hours. Transportation Expense.For the quarter ended March 31, 2005, transportation expense increased
$0.1 million, or 3.6%, from the quarter ended March 31, 2004. This increase is comprised of a $0.3
million increase in trucking expense incurred due to additional road feeder markets, the offering
of our new airport-to-door delivery option, and higher fuel surcharges assessed by the truck
carriers offset in part by a $0.2 million decrease in aircraft ground operating costs during the
quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004. Fuel Expense.For the quarter ended March 31, 2005, fuel expense increased $2.7 million, or
29.8%, as compared to the quarter ended March 31, 2004. Fuel expense is comprised of two elements:
our average cost per gallon and the number of gallons consumed. Our average cost per gallon of fuel
increased $0.39, or 33.9%, for the quarter ended March 31, 2005 as compared to the quarter ended
March 31, 2004. The number of gallons used for the quarter ended March 31, 2005 decreased by
approximately 0.1 million gallons, or 1.9%, as compared to the quarter
ended March 31, 2004. The decrease in fuel consumption is primarily due to slightly fewer
block hours flown and a higher relative usage of aircraft which consume less fuel per block hour
flown. 18




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##### Table of Contents



Maintenance Expense.For the quarter ended March 31, 2005, maintenance expense decreased $0.8
million, or 24.6%, as compared to the quarter ended March 31, 2004. Included in maintenance expense for the quarter ended March 31, 2004 is a $1.2 million charge
to maintenance expense at March 31, 2004 to meet the estimated additional lease return obligations
on four Boeing 727-200 cargo aircraft which were returned during the second and third quarters of
2004, an increase of $0.2 million related to Pratt Whitney JT8D-9A engine maintenance reserves and
a $0.5 million reversal of excess airframe maintenance reserves at March 31, 2004 on one Boeing
727-200 cargo airframe that completed a heavy maintenance event in March 2004. If not for the net $0.9 million increase from the items listed above in 2004, maintenance
expense would have increased $0.1 million, or 5.0%, for the quarter ended March 31, 2005 as
compared to the quarter ended March 31, 2004. Freight Handling Expense.For the quarter ended March 31, 2005, freight handling expense
decreased $0.2 million, or 3.5%, as compared to the quarter ended March 31, 2004. The decrease in
freight handling expense was due to a 6.6% decrease in chargeable weight. Freight handling expense
increased 3.6% on a chargeable weight basis for the quarter ended March 31, 2005 as compared to the
quarter ended March 31, 2004 due to the fixed cost components of our aircraft and freight handling
contracts. Depreciation and Amortization.For the quarter ended March 31, 2005, depreciation and
amortization expense was flat as compared to the quarter ended March 31, 2004. We incurred lower
depreciation expense for engines during the quarter ended March 31, 2005 as compared to March 31,
2004 due to a number of engines becoming fully depreciated during 2004. This decrease in engine
depreciation expense was offset by higher airframe depreciation expense for the quarter ended March
31, 2005 as compared to the quarter ended March 31, 2004 due to the investment in 2004 and 2005 of
capitalized airframe maintenance events and airworthiness directives. Operating Overhead Expense.For the quarter ended March 31, 2005, operating overhead increased
$0.3 million, or 11.1%, as compared to the quarter ended March 31, 2004. During the quarter ended
March 31, 2005 as compared to the quarter ended March 31, 2004, we incurred $0.5 million of costs
related to the induction of the Boeing 737-300SF cargo aircraft. This increase was offset by a $0.1
million reduction in our bad debt expense due to the collection of a previously reserved receivable
and a $0.1 million reduction in our allowance for doubtful accounts as compared to March 31, 2004
based on our estimate of uncollectible accounts receivable. Gross Profit As a result of the foregoing, for the quarter ended March 31, 2005, we recognized a gross loss
of $0.4 million compared to a gross profit of $1.2 million for the quarter ended March 31, 2004. General and Administrative Expense General and administrative expense decreased $0.7 million, or 24.0%, for the quarter ended
March 31, 2005 as compared to the quarter ended March 31, 2004. The decrease is primarily due to
incurring $0.4 million less in performance based compensation for eligible employees and executive
officers, and $0.3 million in lower professional fees related to tax return preparation, bankruptcy
proceedings and the shareholder rights agreement. Other (Income) Expense Other income for the quarter ended March 31, 2005 resulted primarily from $0.4 million related
to the recovery of retroactive adjustments on our workers compensation policy related to the 1998
and 1999 policy years which were pre-bankruptcy and resulted partially from our discontinued
operations and $0.1 million related to the recovery of a 2001 customer accounts receivable balance
which was reserved during their bankruptcy proceedings. Other income for the quarter ended March
31, 2004 relates primarily to interest income on notes receivable and our invested cash balances. 19




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Income Taxes For the quarter ended March 31, 2005, we recognized no tax benefit because we continue to
provide a full valuation allowance on our deferred tax assets. Contractual Obligations The following table sets forth our contractual obligations as of May 5, 2005 for the periods
shown (dollars in thousands): Nine Months
    
    
    Two Years
    
    
    Two YearsEnding
    
    
    Ending
    
    
    EndingContractual Obligations
    
    
    Total
    
    
    December 31, 2005
    
    
    December 31, 2007
    
    
    December 31, 2009
    
    
    ThereafterDebt, including lease
deferrals
    
    $
    3,133
    
    
    $
    2,327
    
    
    $
    806
    
    
    $
    
    
    
    $
    Non-aircraft operating
leases
    
    
    34,600
    
    
    
    2,010
    
    
    
    4,792
    
    
    
    4,448
    
    
    
    23,350Aircraft operating
leases and use
agreements
    
    
    136,044
    
    
    
    13,369
    
    
    
    33,547
    
    
    
    23,809
    
    
    
    65,319Total contractual cash
obligations
    
    $
    173,777
    
    
    $
    17,706
    
    
    $
    39,145
    
    
    $
    28,257
    
    
    $
    88,669
 Forward-Looking Statements This quarterly report on Form 10-Q contains forward-looking statements concerning our
business, operations and financial performance and condition. When we use the words estimates,
expects, forecasts, anticipates, projects, plans, intends, believes and variations of
such words or similar expressions, we intend to identify forward-looking statements. We have based our forward-looking statements on our current assumptions and expectations about
future events. We have expressed our assumptions and expectations in good faith, and we believe
there is a reasonable basis for them. However, we cannot assure you that our assumptions or
expectations will prove to be accurate. A number of risks and uncertainties could cause our actual results to differ materially from
the forward-looking statements contained in this quarterly report on Form 10-Q. Important factors
that could cause our actual results to differ materially from the forward-looking statements are
set forth in this quarterly report on Form 10-Q. These risks, uncertainties and other important
factors include, among others:  
    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 our ability to recapture increases in the cost
of jet fuel through the use of fuel surcharges;
    limitations upon financial and operating flexibility due to the terms of our credit facility;
    change 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; 20




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##### Table of Contents




    writedowns of the value of our parts, airframes or aircraft engines
    changes in the cost of airframe or aircraft engine maintenance and in our maintenance reserves;
    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;
    foreign political instability and acts of war or terrorism;
    adverse litigation judgments or awards;
    the ability to integrate efficiently the Boeing 737-300SF cargo aircraft into our operations;
    future delays in receiving or placing the Boeing 737-300SF cargo aircraft into revenue service;
    the ability to negotiate reasonably economical maintenance agreements to maintain our cargo aircraft;
    findings of environmental contamination; and
    limitations in our ability to offset income with our future deductible tax attributes. The impact of any terrorist activities or international conflicts on the U.S. and global
economies in general, or the transportation industry in particular, could have a material adverse
effect on our business and liquidity. Other factors may cause our actual results to differ
materially from the forward-looking statements contained in this quarterly report on Form 10-Q.
These forward-looking statements speak only as of the date of this quarterly report on Form 10-Q
and, except as required by law, we do not undertake any obligation to publicly update or revise our
forward-looking statements. We caution you not to place undue reliance on these forward-looking
statements. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have not experienced any significant changes in our market risk since the disclosures made
in Item 7A: Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on
Form 10-K for the year ended December 31, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures.The term disclosure controls and
procedures is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, or the Exchange
Act. This term refers to the controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this quarterly report,
and they have
concluded that as of that date, our disclosure controls and procedures were effective at
ensuring that required information will be disclosed on a timely basis in our reports filed under
the Exchange Act. Changes in Internal Controls.We maintain a system of internal controls that are designed to
provide reasonable assurance that our books and records accurately reflect our transactions and
that our established policies and procedures are followed. There were no changes to our internal
controls that have materially affected, or are likely 21




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to materially affect, internal controls
subsequent to the date of their evaluation by our Chief Executive Officer and our Chief Financial
Officer, including any corrective actions with regard to significant deficiencies and material
weaknesses. We are currently undergoing a comprehensive effort to ensure compliance with the new
regulations under Section 404 of the Sarbanes-Oxley Act that take effect for our fiscal year ending
December 31, 2005 if we become an accelerated filer in fiscal year 2005 or for our fiscal year
ending December 31, 2006 if we do not become an accelerated filer in fiscal year 2005. This effort
includes internal control documentation and review under the direction of senior management. In the
course of its ongoing evaluation, our management has identified certain areas requiring
improvement, which we are addressing. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS General Motors.General Motors and Delphi Automotive were sued in Wayne County, Michigan by a
number of air charter carriers in connection with air transportation services we arranged with them
on behalf of General Motors and Delphi Automotive and for which the air charter carriers were not
paid as a result of our bankruptcy. The air charter carriers are seeking to recover approximately
$4.6 million from General Motors and Delphi Automotive. General Motors has named us as a third
party defendant in the litigation and is seeking indemnification of up to $4.6 million against us.
The parties agreed that the indemnification claim will be heard in the bankruptcy court in Fort
Worth, Texas and that we will be dismissed from the litigation in Wayne County, Michigan. On
November 3, 2004, the bankruptcy court granted our motion that General Motors claim for
indemnification be denied in its entirety. General Motors has appealed the bankruptcy courts
dismissal of their claim. While we cannot predict the outcome of the appeal at this time, we
believe this claim should have been discharged when our plan of reorganization was confirmed by the
bankruptcy court. We will vigorously defend against General Motors appeal. No amounts have been
accrued for this contingency. Other.We are also subject to various legal proceedings and other claims which have arisen in
the ordinary course of business. While the outcome of such legal proceedings and other claims
cannot be predicted with certainty, our management does not believe that the outcome of any of
these matters will have a material adverse effect on our business. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 
 ITEM 5. OTHER INFORMATION Not applicable. 22




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ITEM 6. EXHIBITS The following exhibits are filed herewith or are incorporated by reference to exhibits
previously filed with the Securities and Exchange Commission. Exhibit No.
    
    
    
    EXHIBIT10.1*
    
    
    
    Full Service Aircraft Services Agreement between
Kitty Hawk Aircargo, Inc. and Aviation Services
International, LLC dated as of March 7, 2005
(confidential treatment has been requested for
certain portions of this exhibit pursuant to Rule
24b-2 under the Securities Exchange Act of 1934.
In accordance with Rule 24b-2, these confidential
portions have been omitted from this exhibit and
filed separately with the SEC).31.1*
    
    
    
    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. 23




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May
9, 2005. KITTY HAWK, INC.By:
    /s/ RANDY S. LEISERRandy S. LeiserVice President - Finance and Chief Financial
Officer (Authorized officer and principal
financial officer) 24