<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25202
KITTY HAWK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2564006
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1515 WEST 20TH STREET
P.O. BOX 612787
DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261
(972) 456-2200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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<PAGE> 2
The following paragraph amends and restates in its entirety the third
paragraph under the heading Liquidity and Capital Resources.
The Company has a $45.9 million outstanding Term Loan. The Term Loan is
due in quarterly installments of $2.25 million commencing in March 1999, with
the balance of $12.15 million due upon maturity in September 2002. Interest on
the Term Loan accrues at LIBOR plus 3% or a Base Rate plus 1.5%, subject to
reduction. The Base Rate is the higher of the Prime Rate of Wells Fargo Bank,
N.A. ("WFB") or the Federal Funds Rate plus .5%. The Term Loan is secured by
accounts receivable, all spare parts (including rotables), inventory,
intangibles and contract rights, cash, 16 Boeing 727s and related engines, the
stock of each of the Company's subsidiaries, not including the Company's 60%
interest in AIC. The Term Loan is guaranteed by all of the Company's
subsidiaries, other than AIC.
2
<PAGE> 3
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors............................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.............................. F-3
Consolidated Statements of Income for the years ended August 31, 1995 and
1996, and December 31, 1997 and for the four months ended December 31, 1995
(unaudited) and 1996 ................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended August 31,
1995 and 1996, and December 31, 1997 and for the four months ended December
31, 1996................................................................................ F-5
Consolidated Statements of Cash Flows for the years ended August 31, 1995 and
1996, and December 31, 1997 and for the four months ended December 31, 1995 (unaudited)
and 1996................................................................................ F-6
Notes to Consolidated Financial Statements................................................ F-7
</TABLE>
(a) 2. FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed as part of this Annual
Report on Form 10-K because the required information is included in the
financial statements, including the notes thereto, or circumstances requiring
the inclusion of such schedules are not present.
(a) 3. EXHIBITS
EXHIBIT NO. DESCRIPTION
23.1* -- Consent of Ernst & Young, LLP.
* Filed herewith.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 the 3rd day of
September, 1998.
KITTY HAWK, INC.
By: /s/ RICHARD R. WADSWORTH
------------------------------------
Richard R. Wadsworth
Senior Vice President -- Finance,
Chief Financial Officer and Secretary
4
<PAGE> 5
KITTY HAWK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended August
31, 1995 and 1996, and December 31, 1997 and for the four
months ended December 31, 1995 (unaudited) and 1996....... F-4
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1995 and 1996, and December 31,
1997 and for the four months ended December 31, 1996...... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1995 and 1996, and December 31, 1997 and for
the four months ended December 31, 1995 (unaudited) and
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 6
REPORT OF INDEPENDENT AUDITORS
Stockholders
Kitty Hawk, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Kitty Hawk,
Inc. and subsidiaries as of December 31, 1996 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended August 31, 1996, for the year ended
December 31, 1997 and for the four months ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kitty Hawk,
Inc. and subsidiaries at December 31, 1996 and 1997 and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended August 31, 1996, for the year ended December 31, 1997 and for the four
months ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Dallas, Texas
March 4, 1998
F-2
<PAGE> 7
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 27,320,402 $ 17,906,714
Restricted cash and short-term investments................ -- 58,629,084
Trade accounts receivable................................. 37,828,018 122,190,906
Deferred income taxes..................................... 107,564 15,798,161
Inventory and aircraft supplies........................... 2,789,982 37,158,207
Prepaid expenses and other current assets................. 1,143,989 25,146,064
Deposits on aircraft...................................... 5,438,628 450,000
------------ ------------
Total current assets.............................. 74,628,583 277,279,136
Property and equipment, net................................. 48,398,843 545,496,622
Other assets, net........................................... -- 13,970,168
------------ ------------
Total assets...................................... $123,027,426 $836,745,926
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 8,853,292 $ 43,646,806
Accrued expenses.......................................... 26,195,346 91,128,193
Accrued maintenance reserves.............................. 2,373,157 19,138,292
Revolving Credit Facility................................. 1,500,000 10,000,000
Current maturities of long-term debt...................... 2,187,888 2,395,208
------------ ------------
Total current liabilities......................... 41,109,683 166,308,499
Long-term debt.............................................. 21,080,452 392,248,252
Deferred income taxes....................................... 2,544,900 99,153,075
Minority interest........................................... -- 4,162,689
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value: Authorized
shares -- 1,000,000, none issued....................... -- --
Common stock, $.01 par value: Authorized
shares -- 25,000,000; issued and
outstanding -- 10,669,517 and 16,750,957 at December
31, 1996 and 1997, respectively........................ 106,695 167,510
Additional capital........................................ 33,968,700 130,522,885
Retained earnings......................................... 26,293,298 44,183,016
Less common stock in treasury, 217,710 shares............. (2,076,302) --
------------ ------------
Total stockholders' equity........................ 58,292,391 174,873,411
------------ ------------
Total liabilities and stockholders' equity........ $123,027,426 $836,745,926
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED FOUR MONTHS ENDED DECEMBER 31,
---------------------------- DECEMBER 31, ------------------------------
1995 1996 1997 1995 1996
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier......... $ 41,117,564 $ 52,921,762 $137,286,267 $17,994,371 $20,577,072
Air logistics............... 62,592,819 89,492,974 112,556,233 51,733,438 39,408,484
------------ ------------ ------------ ----------- -----------
Total revenues...... 103,710,383 142,414,736 249,842,500 69,727,809 59,985,556
Costs of revenues:
Air freight carrier......... 28,104,280 38,760,430 100,598,398 11,684,882 13,784,331
Air logistics............... 57,428,344 80,728,619 95,092,512 45,996,786 33,795,567
------------ ------------ ------------ ----------- -----------
Total costs of
revenues.......... 85,532,624 119,489,049 195,690,910 57,681,668 47,579,898
Gross profit.................. 18,177,759 22,925,607 54,151,590 12,046,141 12,405,658
General and administrative
expenses.................... 7,832,167 9,079,891 15,105,827 2,861,518 2,724,763
Non-qualified employee profit
sharing expense............. 1,000,957 1,169,880 2,428,934 889,046 962,263
Stock option grants to
executives.................. -- 4,230,954 -- -- --
------------ ------------ ------------ ----------- -----------
Operating income.............. 9,344,635 8,444,962 36,616,829 8,295,577 8,718,632
Other income (expense):
Interest expense............ (1,184,921) (1,859,284) (6,923,998) (481,670) (684,173)
Other, net.................. (600,667) 291,255 1,110,109 37,507 625,910
------------ ------------ ------------ ----------- -----------
Income before minority
interest and income taxes... 7,559,047 6,876,933 30,802,940 7,851,414 8,660,369
Minority interest............. -- -- (497,420) -- --
------------ ------------ ------------ ----------- -----------
Income before income taxes.... 7,559,047 6,876,933 30,305,520 7,851,414 8,660,369
Income taxes.................. 3,142,653 2,767,744 12,415,802 3,096,769 3,366,917
------------ ------------ ------------ ----------- -----------
Net income.................... $ 4,416,394 $ 4,109,189 $ 17,889,718 $ 4,754,645 $ 5,293,452
============ ============ ============ =========== ===========
Basic and diluted earnings per
share....................... $ 0.55 $ 0.52 $ 1.60 $ 0.60 $ 0.55
============ ============ ============ =========== ===========
Weighted average common shares
outstanding................. 7,967,710 7,927,856 11,193,899 7,967,710 9,609,920
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
---------- -------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1994..... 7,423,436 $ 74,234 $ -- $12,475,276 $ -- $ 12,549,510
Net income................... -- -- -- 4,416,394 -- 4,416,394
---------- -------- ------------ ----------- ----------- ------------
Balance at August 31, 1995..... 7,423,436 74,234 -- 16,891,670 -- 16,965,904
Stock option grants to
executives................ -- -- 4,230,954 -- -- 4,230,954
Exercise of employee stock
options................... 544,274 5,443 -- (1,013) -- 4,430
Purchase of treasury stock,
217,710 shares, at cost... -- -- -- -- (2,076,302) (2,076,302)
Tax benefit of stock option
grants to executives...... -- -- 404,570 -- -- 404,570
Net income................... -- -- -- 4,109,189 -- 4,109,189
---------- -------- ------------ ----------- ----------- ------------
Balance at August 31, 1996..... 7,967,710 79,677 4,635,524 20,999,846 (2,076,302) 23,638,745
Shares sold in initial public
offering.................. 2,700,000 27,000 29,311,510 -- -- 29,338,510
Shares issued to employees
under the Annual Incentive
Compensation Plan......... 1,807 18 21,666 -- -- 21,684
Net income for the four
months ended December 31,
1996...................... -- -- -- 5,293,452 -- 5,293,452
---------- -------- ------------ ----------- ----------- ------------
Balance at December 31, 1996... 10,669,517 106,695 33,968,700 26,293,298 (2,076,302) 58,292,391
Shares sold in secondary
offering, net of
expenses.................. 2,200,000 22,000 38,319,566 -- -- 38,341,566
Shares issued in connection
with acquisition (Note
2)........................ 4,099,150 40,992 60,308,744 -- -- 60,349,736
Retirement of treasury
shares.................... (217,710) (2,177) (2,074,125) -- 2,076,302 --
Net income................... -- -- -- 17,889,718 -- 17,889,718
---------- -------- ------------ ----------- ----------- ------------
Balance at December 31, 1997... 16,750,957 $167,510 $130,522,885 $44,183,016 $ -- $174,873,411
========== ======== ============ =========== =========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 10
KITTY HAWK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED AUGUST 31, YEAR ENDED DECEMBER 31,
--------------------------- DECEMBER 31, ---------------------------
1995 1996 1997 1995 1996
------------ ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income.............................. $ 4,416,394 $ 4,109,189 $ 17,889,718 $ 4,754,645 $ 5,293,452
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization......... 4,095,156 6,873,033 15,551,308 1,681,489 3,201,903
(Gain) loss on disposal of property
and equipment....................... -- 589,049 (1,461,449) -- --
Deferred income taxes................. 732,795 998,963 10,207,578 -- 172,418
Minority interest..................... -- -- 497,420 -- --
Stock option grants to executives..... -- 4,230,954 -- -- --
Changes in operating assets and
liabilities:
Trade accounts receivable........... 2,673,139 (1,228,256) (20,431,036) (27,954,848) (23,632,028)
Inventory and aircraft supplies..... 23,285 (1,615,426) (6,750,409) (298,872) (1,076,170)
Prepaid expenses and other.......... (51,396) (866,499) (3,960,795) (5,854,576) (4,898,293)
Accounts payable and accrued
expenses......................... (4,263,408) 3,868,840 3,090,555 22,405,693 20,515,993
Accrued maintenance reserves........ 1,429,886 297,211 5,961,327 281,184 49,691
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities.............................. 9,055,851 17,237,058 20,594,217 (4,985,285) (373,034)
Investing activities:
Purchase of Kalitta Companies, net of
cash acquired......................... -- -- (315,550,749) -- --
Proceeds from sale of assets............ -- -- 1,816,800 -- 18,508,431
Capital expenditures.................... (17,929,106) (33,537,567) (113,460,317) (174,697) (13,795,891)
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) investing
activities.............................. (17,929,106) (33,537,567) (427,194,266) (174,697) 4,712,540
Financing activities:
Proceeds from 9.95% Senior Secured
Notes, net............................ -- -- 329,069,351 -- --
Proceeds from issuance of common stock,
net................................... -- 4,430 38,341,566 -- 29,338,510
Proceeds from issuance of long-term
debt, net............................. 9,911,240 23,117,000 50,418,441 5,725,000 1,500,000
Borrowings on Revolving Credit
Facility.............................. -- -- 16,230,000 -- --
Repayments of debt...................... (2,074,970) (3,186,663) (36,511,857) (1,011,103) (13,643,202)
Acquisition of treasury shares.......... -- (2,076,302) -- -- --
Distributions to minority interest...... -- -- (320,000) -- --
Note receivable from shareholder........ -- -- (41,140) -- --
Shares issued under Annual Incentive
Compensation Plan..................... -- -- -- -- 21,684
Tax benefit of stock option grant to
executives............................ -- 404,570 -- -- --
------------ ------------ ------------- ------------ ------------
Net cash provided by financing
activities.............................. 7,836,270 18,263,035 397,186,361 4,713,897 17,216,992
------------ ------------ ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................. (1,036,985) 1,962,526 (9,413,688) (446,085) 21,556,498
Cash and cash equivalents at beginning of
period.................................. 4,838,363 3,801,378 27,320,402 3,801,378 5,763,904
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents at end of
period.................................. $ 3,801,378 $ 5,763,904 $ 17,906,714 $ 3,355,293 $ 27,320,402
============ ============ ============= ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 11
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight
services through two related businesses: (i) an air freight carrier and (ii) an
air logistics service provider. The air freight carrier provides ACMI scheduled
services (includes supplying the aircraft, crew, maintenance, and insurance for
the customer), passenger and freight charter services, an overnight freight
service and third party maintenance operations. The air logistics service
provider arranges the delivery of time sensitive freight utilizing third parties
as well as its own fleet.
In November 1997, the Company acquired the Kalitta Companies (see Note 2).
The results of operations of the Kalitta Companies are included in the
accompanying financial statements from November 19, 1997 to December 31, 1997.
On December 4, 1996, the Company elected to change its fiscal year end to
December 31. Operating results for the four month period ended December 31, 1996
and 1995 are not necessarily indicative of the results that may be expected for
a calendar year. Operating results for the four month period ended December 31,
1995 (unaudited) include all adjustments management believes are necessary for a
fair presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, which include Kitty Hawk Charters, Inc.,
Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., American International
Airways, Inc. ("AIA") (including a 60% limited partnership interest in American
International Cargo ("AIC")), Kalitta Flying Service, Inc. ("KFS"), Flight One
Logistics, Inc. ("FOL"), O.K. Turbines, Inc. ("OKT"), and American International
Travel, Inc. ("AIT"). All significant intercompany accounts and transactions
have been eliminated in consolidation. See Note 2.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and held in banks, money market funds, and other investments with
original maturities of three months or less.
Restricted Cash and Short-Term Investments
At December 31, 1997, restricted cash and short-term investments equaled
approximately $58.6 million. Of this amount, $56 million represents a portion of
the proceeds from the Notes (see Note 4) reserved for the acquisition and
subsequent modification of two Boeing 747 aircraft, which were acquired in
February 1998 at a cost of approximately $39.6 million. The balance of $2.6
million of restricted cash and short-term investments represents passenger cash
deposits held in escrow until charter services are provided.
Financial Instruments
The fair value of the 9.95% Senior Secured Notes is approximately $347.7
million based on the quoted price at December 31, 1997. Based on floating
interest rates provided therein, management believes the
F-7
<PAGE> 12
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded value of the remaining financial instruments included in the financial
statements approximates fair value.
Inventory and Aircraft Supplies
Inventory and aircraft supplies consist of aircraft parts and supplies and
are stated at the lower of cost (using the first-in, first-out or average cost
convention) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, with
estimated residual values of up to 10% for aircraft and core values of up to
$300,000 for engines. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Aircraft and engines
Boeing 747s............................................... 15 - 20 years
Lockheed L1011s........................................... 15 years
Douglas DC-8s............................................. 2 - 10 years
Boeing 727s............................................... 10 years
Douglas DC-9s............................................. 10 years
Other..................................................... 2 - 10 years
Machinery and equipment..................................... 3 - 12 years
Rotable aircraft parts...................................... 7 years
Buildings and leasehold improvements........................ 15 - 30 years
</TABLE>
Expenditures for additions, improvements, aircraft modifications, engine
overhauls and major maintenance costs are capitalized. Routine maintenance and
repairs are charged to expense when incurred. Costs of periodic airframe
maintenance (C-checks) are accrued. Major maintenance and engine overhauls are
depreciated on a straight line basis to the next scheduled major maintenance or
overhaul date.
Revenue Recognition
Revenues are recognized as services are provided.
Deferred Income Taxes
Deferred income taxes are recognized using the liability method and reflect
the tax impact of temporary differences between the recorded amounts of assets
and liabilities for financial reporting purposes and such amounts as measured by
existing tax laws and regulations.
Concentration of Credit Risk
The Company's air freight carrier business operates worldwide with
approximately 9.3% of 1997 revenues earned outside of North America (including
3.5% of 1997 revenues from operations within Asia). The air logistics service
provider principally operates in North America. Credit is extended based on an
evaluation of a customer's financial condition and, except in the case of
passenger charters, does not require a deposit or collateral. The Company's
allowance for doubtful accounts is based on current market conditions and
continuous evaluation of the customer's credit worthiness and has consistently
been within management's expectations.
Stock-Based Compensation
The Company accounts for stock-based compensation utilizing Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting
F-8
<PAGE> 13
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions
of SFAS No. 123, the Company has elected to continue to apply the provisions of
APB Opinion No. 25 to its stock-based compensation arrangements and provide
supplementary financial statement disclosures as required under SFAS No. 123.
Basic and Diluted Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share." SFAS
128 replaced the calculation of primary and fully diluted earnings per share
presentation with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of stock
options. Diluted earnings per share is similar to fully diluted earnings per
share. The adoption of SFAS 128 had no effect on previously reported amounts.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the
current year presentation.
Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"), both
effective for years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements and is not expected to have a significant
impact on the Company. SFAS 131 establishes standards for the manner that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Management
has not completed its review of SFAS 131 and, therefore, has not yet determined
the impact, if any, this statement will have on the Company's financial
reporting.
2. ACQUISITION OF THE KALITTA COMPANIES
On November 19, 1997, the Company acquired by merger all of the outstanding
common stock of AIA, KFS, FOL, OKT and AIT (collectively, the "Kalitta
Companies") in exchange for 4,099,150 shares of the Company's common stock
valued by an independent appraisal at approximately $60.3 million and $20
million in cash. The transaction has been accounted for as a purchase and
accordingly the results of operations for the year ended December 31, 1997
include the results of operations of the Kalitta Companies from November 19,
1997 through December 31, 1997. The purchase price allocation related to the
acquisition of the Kalitta Companies is based on available information and
management's best estimates and is subject to change as information becomes
available.
In accordance with the merger agreement, $3 million in cash and 650,000
shares of the Company's common stock issued to the former owner of the Kalitta
Companies are being held in escrow to secure certain indemnity obligations.
Generally the Company cannot bring any indemnification claims after May 19,
2000, except the Company may make indemnity claims for certain environmental
matters until May 19, 2001.
In September 1997, as an interim step to the acquisition of the Kalitta
Companies, the Company acquired sixteen Boeing 727s from AIA for approximately
$51 million cash. Of the $51 million, $45.9 million was financed with a note
payable under the Company's existing credit facility. This note payable was
subsequently refinanced upon the consummation of the acquisition of the Kalitta
Companies. See Note 4.
F-9
<PAGE> 14
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Aircraft and engines................................... $ 53,140,853 $498,516,927
Aircraft work in process............................... 6,732,878 28,536,343
Machinery and equipment................................ 2,680,692 20,618,486
Buildings and leasehold improvements................... 778,879 17,417,290
Rotable aircraft parts................................. -- 7,773,297
Construction in progress............................... -- 1,986,262
Other.................................................. 455,556 757,442
------------ ------------
63,788,858 575,606,047
Less accumulated depreciation.......................... (15,390,015) (30,109,425)
------------ ------------
Net property and equipment................... $ 48,398,843 $545,496,622
============ ============
</TABLE>
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt and Revolving Credit Facility consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
9.95% Senior Secured Notes............................... $ -- $340,000,000
Term Loan................................................ -- 45,900,000
Revolving Credit Facility................................ 1,500,000 10,000,000
Note payable, bearing interest at an adjusted Eurodollar
rate plus 1.50% to 2.00% based upon a fixed charge
coverage ratio of the Company. Note was paid in full in
November 1997.......................................... 10,605,923 --
Note payable, bearing interest at an adjusted Eurodollar
rate plus 1.50% to 2.00% based upon a fixed charge
coverage ratio of the Company. Note was paid in full in
November 1997.......................................... 11,682,000 --
Other notes payable due in monthly installments with
interest rates ranging from 7.5% to 10.5% with maturity
dates ranging from 1998 through 2009................... 980,417 8,743,460
----------- ------------
24,768,340 404,643,460
Less current portion..................................... 3,687,888 12,395,208
----------- ------------
$21,080,452 $392,248,252
=========== ============
</TABLE>
Maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 12,395,208
1999........................................................ 11,348,593
2000........................................................ 10,292,051
2001........................................................ 10,360,388
2002........................................................ 19,913,553
Thereafter.................................................. 340,333,667
------------
$404,643,460
============
</TABLE>
F-10
<PAGE> 15
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition of the Kalitta Companies in November
1997, the Company privately placed $340 million of 9.95% Senior Secured Notes
due 2004 (the "Notes") pursuant to Rule 144A of the Securities Act of 1933. Net
proceeds to the Company were $329.1 million. Costs incurred in issuing the Notes
are being amortized over seven years. The net proceeds of the Notes, along with
the net proceeds of the November 1997 common stock offering (see Note 8), were
used to refinance approximately $33 million of existing Kitty Hawk debt and to
pay off approximately $250 million of the Kalitta Companies' pre-Merger debt as
part of the acquisition of the Kalitta Companies, provide for $56 million of
cash to acquire and modify two Boeing 747s, provide for $20 million of cash to
acquire the Kalitta Companies, with the balance used for working capital and
expenses incurred in connection with the acquisition.
Interest on the Notes is due on May 15 and November 15. The Notes are
secured by a fleet of aircraft including nine Boeing 747s (including one in
cargo modification), eight Lockheed L1011s and 13 Boeing 727s. At December 31,
1997 the carrying value of the aircraft securing the Notes is approximately $338
million. Each of the Company's subsidiaries are guarantors on the Notes,
exclusive of the 60% limited partnership interest in AIC. In March 1998, the
Company concluded an exchange offer for the Notes thereby exchanging the Notes
for new 9.95% Senior Secured Notes due 2004 (the "New Notes"). The form and
terms of the New Notes are identical to the Notes, except the New Notes are
registered under the Securities Act of 1933 and therefore do not bear a legend
restricting their transfer.
The Notes and the New Notes provide for certain covenants which limit the
amount of indebtedness of the Company and its subsidiaries, restrict the payment
of dividends, restrict the selling of subsidiary stock and provide for an
interest coverage ratio. As of December 31, 1997, the Company was in compliance
with all applicable covenants.
The New Notes are due in full in November 2004. However, at any time after
November 15, 2001, the Company at its option may redeem the Notes based on a
percentage of the principal balance plus accrued and unpaid interest. The
redemption rates are: during the 12 month period beginning November 15, 2001,
104.975%, during the 12 month period beginning November 15, 2002, 102.488%, and
during the 12 month period beginning November 15, 2003, 100%. Additionally, any
time prior to November 15, 2000, the Company may redeem up to 35% of the
original principal amount of the New Notes with the proceeds of one or more
public offerings at a redemption price of 109.95% plus accrued and unpaid
interest, provided that at least $150 million of aggregate principal amount of
the New Notes remains outstanding after each redemption.
On November 19, 1997, the Company entered into a credit agreement (the
"Credit Agreement") with a bank which provides for a $45.9 million Term Loan
(the "Term Loan") and a $100 million Revolving Credit Facility (the "Revolver").
The proceeds of the Term Loan were used to fully refinance a note previously
entered into in September 1997, the proceeds of which were used to acquire
sixteen Boeing 727s from AIA prior to the acquisition of the Kalitta Companies
(see Note 2). The Term Loan is due in sixteen quarterly principal installments
of $2.25 million beginning in March 1999 with the balance due upon maturity in
November 2002. The Term Loan bears interest at the Company's option at either
prime plus 0% to 1.5% or LIBOR plus 0% to 3% (margins above prime and LIBOR are
based on certain financial covenant performance as defined in the Credit
Agreement). The applicable rate at December 31, 1997 was 8.97%.
Borrowings under the Revolver provide the Company with cash availability
for working capital and general corporate purposes. Advances under the Revolver
bear interest at the Company's option at either prime plus 0% to 1.25% or LIBOR
plus 0% to 2.75% (margins above prime and LIBOR are based on certain financial
covenant performance as defined in the Credit Agreement). The applicable rate at
December 31, 1997 was 9.75%. At December 31, 1997, $10 million was outstanding
under the Revolver which was subsequently paid off during January 1998. All
principal balances outstanding under the Revolver are due in full upon maturity
in November 2002. Balances drawn on the revolver are subject to certain
borrowing base provisions as defined. In January 1998, the borrowing base
provisions were amended to include additional eligible receivables and
inventory. Available borrowings, as amended, were approximately $44.3 million.
F-11
<PAGE> 16
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The balances outstanding under the Credit Agreement are secured by the
sixteen Boeing 727s acquired from AIA (see Note 2) with a carrying value of
approximately $55 million at December 31, 1997, cash, accounts receivable,
rotable parts, inventory, intangibles and contract rights of the Company, and
the stock of each of the Company's subsidiaries, not including the Company's 60%
interest in AIC. Each of the Company's subsidiaries are guarantors on the Credit
Agreement, exclusive of AIC. Fees incurred in connection with the Credit
Agreement of approximately $2.65 million are being amortized over a period of
five years. The Credit Agreement allows for up to $20 million of outstanding
letters of credit, subject to the borrowing base provisions, as defined. As of
December 31, 1997, the Company had approximately $5.2 million of unused letters
of credit available. Borrowings under the Credit Agreement are subject to
certain financial covenants, including a funded debt to EBITDA ratio, a minimum
net worth balance and cash flow coverage ratio.
The Company made cash interest payments of $1,088,928, $1,765,523,
$3,129,864 and $664,164 during fiscal years ended 1995, 1996, the year ended
December 31, 1997 and for the four months ended December 31, 1996, respectively.
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED AUGUST 31, YEAR ENDED ENDED
----------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Current income tax:
Federal............................. $1,829,723 $1,352,390 $ 1,340,293 $2,768,672
State............................... 580,135 416,391 867,931 425,827
---------- ---------- ----------- ----------
Total current income tax.... 2,409,858 1,768,781 2,208,224 3,194,499
---------- ---------- ----------- ----------
Deferred income tax:
Federal............................. 627,993 758,138 8,075,702 141,169
State............................... 104,802 240,825 2,131,876 31,249
---------- ---------- ----------- ----------
Total deferred income tax... 732,795 998,963 10,207,578 172,418
---------- ---------- ----------- ----------
$3,142,653 $2,767,744 $12,415,802 $3,366,917
========== ========== =========== ==========
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
income taxes are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED AUGUST 31, YEAR ENDED ENDED
------------------------ DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Income tax computed at
statutory rate............... $2,570,076 $2,338,157 $10,606,932 $3,031,129
State income taxes, net of
federal benefit.............. 452,058 433,763 1,968,123 297,928
Other, net..................... 120,519 (4,176) (159,253) 37,860
---------- ---------- ----------- ----------
Total................ $3,142,653 $2,767,744 $12,415,802 $3,366,917
========== ========== =========== ==========
</TABLE>
F-12
<PAGE> 17
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax liabilities recognized on the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.............................. $(3,461,603) $(100,183,240)
Other............................................... (66,228) (1,540,625)
----------- -------------
Total deferred tax liabilities.............. (3,527,831) (101,723,865)
----------- -------------
Deferred tax assets:
Airframe reserves................................... 916,705 6,973,906
Non deductible accruals and reserves................ 173,790 9,231,540
Other............................................... -- 2,091,076
----------- -------------
Total deferred tax assets................... 1,090,495 18,368,951
----------- -------------
Net deferred tax liability.................. $(2,437,336) $ (83,354,914)
=========== =============
</TABLE>
At December 31, 1997, the Company's net deferred tax liability has
increased from December 31, 1996 primarily as a result of the acquisition of the
Kalitta Companies. The acquisition resulted in approximately $70.7 million of
net deferred tax liabilities being recorded for the difference between the book
basis and tax basis of the assets acquired and the liabilities assumed.
The Company made cash income tax payments of $4,552,371, $2,078,673,
$3,629,043 and $571,420 during fiscal years 1995, 1996, the year ended December
31, 1997 and for the four months ended December 31, 1996, respectively.
6. COMMITMENTS AND CONTINGENCIES
In December 1996, the Company sold at cost two recently acquired and
modified Boeing 727 aircraft to a third party and entered into an operating
lease agreement for such aircraft commencing January 1, 1997, ending December
31, 1997, with monthly lease payments of approximately $252,000, with five
successive one year renewal options. The Company has an option to purchase the
aircraft at the end of each year, and guarantees to the lessor certain minimum
sale values if the Company elects not to renew the lease or exercise its
purchase option. On January 1, 1998, the Company elected to renew the lease for
another year. Lease expense during fiscal year 1997 was approximately $3.03
million.
The Company also leases a Boeing 727 aircraft in cargo configuration under
a seven year operating lease at a monthly rate of $50,000, which expires in
2003. Lease expense during 1997 was $450,000.
The Company's acquisition of the Kalitta Companies resulted in the Company
leasing office buildings, hangars, cargo storage, and related facilities under
noncancelable operating leases which expire on various dates through 2011. In
addition, the Company periodically leases aircraft and other equipment under
month-to-month lease agreements. Total rent expense incurred by the Kalitta
Companies included in the 1997 results of operations was approximately $809,000.
F-13
<PAGE> 18
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum annual rentals at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 6,653,010
1999........................................................ 2,489,278
2000........................................................ 2,284,762
2001........................................................ 2,068,724
2002........................................................ 2,025,517
Thereafter.................................................. 8,314,728
-----------
$23,836,019
===========
</TABLE>
The Company currently licenses its sorting space for its overnight freight
service at the Hulman Regional Airport in Terre Haute, Indiana from Roadway
Global Air for a term which will expire in August 1998. Because of the growth in
the volume of freight shipped in its domestic scheduled service, the lack of
available expansion space and the limited airport facilities in Terre Haute, the
Company plans to move this sorting center to Fort Wayne, Indiana in the spring
of 1999. The Company has entered into discussions with the Hulman Regional
Airport Authority to obtain an interim lease of its current space in Terre Haute
until it is able to move to Fort Wayne. There is no assurance that the Company
will be able to obtain an interim lease of its current space at Terre Haute.
The Company has firm purchase commitments to acquire hushkits for ten of
its Boeing 727 aircraft for a total purchase price of up to $22.1 million.
Airline operators must comply with Federal Aviation Administration noise
regulations primarily promulgated under the Airport Noise and Capacity Act of
1990 (the "Noise Regulations"). Currently, the Company is in compliance with the
Noise Regulations. The Company owns 73 aircraft and leases 5 aircraft which are
affected by the Noise Regulations of which 41 are currently in compliance with
Stage III noise control standards of the Noise Regulations or are currently
being modified to be in compliance with such standards by January 1, 2000. Any
aircraft not in compliance may not be operated in the United States until it
complies with such standards. European countries have similar regulations. The
estimated cost of modifications to bring the Company's entire fleet into
compliance is estimated to be between $80 million and $90 million including the
modification to the Boeing 727 aircraft noted above.
The Company may elect not to modify certain aircraft to meet the standards
because the estimated cost may exceed the economic benefits of such
modifications. If the Company elects not to modify these aircraft, they must be
removed from its fleet in the United States before January 1, 2000.
In February 1998, the Company purchased two Boeing 747s for approximately
$39.6 million with the exchange of restricted cash. See Note 1. Upon delivery,
the Company entered into a contract with a third party to modify the aircraft to
cargo configuration at an approximate total cost of $26 million. Modification is
expected to commence in June and August with completion scheduled in September
and November, respectively. Until such time, the aircraft will be used in the
passenger charter services operations. These two aircraft were pledged to secure
a portion of the Notes.
The Company is aware of the presence of environmental contamination on
properties that the Company acquired in connection with its acquisition of the
Kalitta Companies. Pursuant to the merger agreement, the former owner of the
Kalitta Companies, has agreed, subject to certain limitations, to indemnify the
Company until May 19, 2001 against any losses arising with respect to
environmental liabilities related to contamination at any of the Kalitta
Companies facilities. In the opinion of management, none of the costs of
responding to the presence of any such contamination that may be borne by the
Company will have a material adverse affect on the Company's financial position
or results of operations.
F-14
<PAGE> 19
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Service Bulletins and Directives issued under the FAA's "Aging Aircraft"
program or issued on an ad hoc basis cause certain of the Company's aircraft to
be subject to extensive aircraft examinations and require certain of the
Company's aircraft to undergo structural inspections and modifications to
address problems of corrosion and structural fatigue, among other things, at
specified times. It is possible that additional Service Bulletins or Directives
applicable to the Company's fleet could be issued in the future. The cost of
compliance with such Directives and Service Bulletins cannot currently be
estimated, but could be substantial.
The Company operates a fleet of 31 Boeing 727s, all of which were
previously converted from passenger configuration to cargo configuration by the
installation of a large cargo door and numerous interior modifications related
to the installation of cargo container handling systems. The FAA has issued a
proposed Directive, which if adopted, would limit the cargo capacity of 30 of
these Boeing 727s until certain modifications are made. The costs to make such
modifications and the amount of revenue that could be lost cannot currently be
estimated. However, the Company believes this Directive will not have a material
adverse effect on the Company.
7. LEGAL PROCEEDINGS
The United States Postal Service ("USPS") selected the Company's air
freight carrier in September 1992 as the successful bidder on a contract for a
multi-city network of air transportation services supporting the USPS Express
Mail system. Two unsuccessful bidders sued the USPS to enjoin the award. The
Company intervened. This litigation (the "ANET Litigation") was settled in April
1993 by agreements under which the USPS terminated the Company's contract for
convenience and awarded the contract to the incumbent contractor, Emery
Worldwide Airlines, Inc. ("Emery").
In March 1995, the Company was served with a complaint in a qui tam lawsuit
filed on behalf of the U.S. Government by a third-party plaintiff seeking to
share a recovery under the Federal False Claims Act (the "Act"). The suit, filed
in May 1994, was filed under seal in accordance with the Act, to enable the U.S.
Government to review the claim before its disclosure to the defendants. The U.S.
Government declined to pursue the claim, but the third-party plaintiff chose to
continue. The suit claimed that the Company and another defendant fraudulently
failed to disclose to the USPS, both in the Company's successful bid and in the
settlement of the ANET Litigation, that some of the aircraft the Company
proposed to purchase and use to perform the contract were aging aircraft with
high use, and claimed that the Company and Emery similarly fraudulently
conspired in connection with the settlement of the ANET Litigation. The suit
sought to recover treble the $10 million settlement payment made by the USPS in
settling the ANET Litigation, plus the third party plaintiff's costs and fees.
The Company moved to dismiss the suit with prejudice on grounds that it was
barred by the Act. The Company also sought to recover its attorneys' fees from
the plaintiff and to obtain sanctions against the plaintiff's attorneys. The
Company believes the suit was clearly frivolous because, among other things, the
Company in the ANET bid identified each aircraft by serial number, age, hours
and cycles, and made available use and maintenance records for each aircraft as
required by the request for proposal, and that the USPS reviewed and inspected
the aircraft, data and records and found them acceptable. In May 1996, the court
dismissed the suit and awarded the Company its attorneys' fees and costs. The
plaintiff has asked the court to reconsider its ruling. The Company does not
expect the outcome of this matter to have a material adverse effect upon the
Company's financial condition or results of operations.
In January 1996, the FAA issued a series of Airworthiness Directives (the
"Directives") on certain Boeing 747 aircraft which were modified for freight
hauling by GATX-Airlog Company, a subsidiary of General American Transportation
Corp. ("GATX"). The Directives, which became effective on January 30, 1996, were
issued because of concerns relating to the integrity of the cargo door and
surrounding floor area in the event the aircraft were operated at their maximum
cargo capacity of approximately 220,000 pounds. In spite of the fact that the
aircraft affected by the Directives have flown over 83,000 hours without
incident, the
F-15
<PAGE> 20
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Directives require certain modifications to be made to the aircraft. Absent such
modifications, the Directives limit the cargo capacity of these aircraft to
120,000 lbs., a limit which restricts the Company's ability to profitably
operate the aircraft.
One of each of the Company's Boeing 747-200 and Boeing 747-100 freighters
are affected by the Directives and have been out of service since January 1996.
GATX has proposed a solution to the problem identified by one of the Directives
which has been approved by the FAA. An appropriate means to test the proposed
solution, however, has not yet been identified. Currently, the Company
anticipates modifying one aircraft to be in compliance with a portion of the
Directive for which the FAA has approved a solution by the second half of 1998,
which will allow the Company to operate it with a reduced cargo capacity of
160,000 lbs. The Company is awaiting engineering solutions to address the
remaining Directives. If the cost necessary to fully implement these solutions
and return both the Boeing 747-100 and -200 to maximum cargo capacity is
uneconomical, the Company may either operate one or both of the aircraft at
limited loads or use one or both for spare parts. The Company is currently
involved in litigation against GATX to recover the cost to repair these aircraft
as well as revenues lost as a consequence of the aircraft downtime. Any amounts
which are recovered from the litigation are first to be applied to reimburse the
Company for its legal costs and then to correct the mechanical problems
associated with the Boeing 747s. Any additional amounts will be allocated 10% to
the Company and 90% to the former owner of the Kalitta Companies. In the event
the amounts recovered by the Company, if any, are insufficient to reimburse the
Company for its legal costs incurred in connection with this litigation, the
former owner of the Kalitta Companies will reimburse the Company for the
unreimbursed portion of its legal costs incurred after November 19, 1997.
Additionally, in the normal course of business, the Company is a party to
matters of litigation, none of which, in the opinion of management, will have a
material adverse effect on the Company's financial condition or the results of
operations.
8. STOCKHOLDERS' EQUITY
In October 1994 the Company granted non-qualified options to two executives
to purchase a total of 337,848 shares of common stock at $7.81 per share.
During the fiscal year ended August 31, 1996, the Company canceled 245,708
of the options outstanding and granted to an executive a non-qualified option to
purchase 390,707 shares of common stock at $0.01 per share. The new option had a
term of nine years and was fully vested. In June 1996, the Company canceled the
remaining 92,140 options outstanding and granted to another executive a
non-qualified option to purchase 153,567 shares of common stock at $0.01 per
share. The new option had a term of nine years and was fully vested. On June 26,
1996, the executives fully exercised their options. Based on an independent
appraisal commissioned by the Company, the fair value of the options of
$4,230,954 is reflected as a charge to earnings in the accompanying statement of
income for the year ended August 31, 1996. No additional options have been
issued. Accordingly, no supplemental disclosures under SFAS No. 123 are
necessary.
9. RELATED PARTY TRANSACTIONS
The Company leased its primary office and maintenance space in Dallas,
Texas under an operating lease from a party who was a member of the Company's
Board of Directors until August 1997. Rent expense under this lease was
$252,595, $254,934, $21,000 and $84,305 for fiscal years 1995, 1996, the year
ended December 31, 1997 and for the four months ended December 31, 1996,
respectively. Under the lease agreement, the Company had the option to purchase
the office facilities and the landlord's interest in the associated ground lease
at any time prior to March 1, 1997 for consideration of $2,200,000, less $5,000
for each monthly rental payment made after March 1, 1993. Effective February
1997, the Company exercised its option and purchased the facility for $1.76
million.
F-16
<PAGE> 21
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the acquisition of the Kalitta Companies, one of the
Company's vendors became a related party as the vendor is owned by a relative of
the former owner of the Kalitta Companies. The Kalitta Companies also lease
certain aircraft to this vendor as well as provide ground handling services in
certain locations. Additionally, the Company uses this related company for
subcharter flight and lift capacity for the Company's overnight scheduled cargo
service. Total revenues earned during 1997 (subsequent to the acquisition of the
Kalitta Companies) from this related company were approximately $379,000 with
related accounts receivable of approximately $813,000. Subsequent to the
acquisition of the Kalitta Companies, the Company incurred approximately $1.8
million of expenses with this related party and owed approximately $200,000 to
this related party at December 31, 1997.
The Company leases an office facility through May 2007 from a company which
is owned by the former owner of the Kalitta Companies and two of his relatives.
The annual rent on this facility is $713,000.
The Company has entered into an agreement to sponsor the racing activities
of a racing team owned by the former owner of the Kalitta Companies. The
agreement provides for annual payments of up to $2 million for two years.
10. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS
The Company has a retirement savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all employees meeting minimum
service requirements. Under the plan, voluntary contributions are made by
employees and the Company provides matching contributions based upon the
employees' contribution. The Company incurred $121,217, $159,967, $268,230 and
$56,378 in matching contributions related to this plan during fiscal years 1995,
1996, the year ended December 31, 1997 and for the four months ended December
31, 1996, respectively. The Kalitta Companies have two separate 401(k) employee
savings plans, covering substantially all employees. Company contributions are
discretionary and were $40,000 in 1997.
The Company has adopted:
- An Omnibus Securities Plan (the "Plan") under which 300,000 shares of its
common stock are reserved for issuance to its employees and members of
the board of directors. The Plan is administered by the Company's
Compensation Committee which may grant stock based and non-stock based
compensation to the Plan participants. In March 1998, 6,840 total shares
of common stock were issued to current and former members of the Board of
Directors for services performed during 1996 and 1997 leaving 293,160
shares available under the plan.
- An Annual Incentive Compensation Plan (the "Compensation Plan") under
which the Compensation Committee awards semiannual bonuses to employees
of the Company. The aggregate amount of bonuses available for award is
limited to 10% of the Company's income before income taxes and the
bonuses to be paid under the Compensation Plan. The Company may elect to
pay the full amount of the bonuses in common stock, which is limited to
total stock distributions of 200,000 shares of common stock. As of
December 31, 1996, 198,193 shares were available for distribution under
the Compensation Plan.
- An Employee Stock Purchase Plan under which up to 100,000 shares of the
Company's common stock are reserved for purchase by Company employees. In
January 1998, 9,084 shares were issued under the plan, leaving 90,916
shares available under the plan.
11. SIGNIFICANT CUSTOMERS
The Company provided air logistics services to one customer which accounted
for approximately 47%, 41%, 18% and 16% of its total revenues in fiscal years
1995, 1996, the year ended December 31, 1997 and for
F-17
<PAGE> 22
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the four months ended December 31, 1996, respectively. The contract for these
services is effective through May 31, 2000; however, such contract may be
canceled by either party with 30 days notice. Another customer accounted for
approximately 10%, 15%, 18% and 44% of the Company's total revenues in fiscal
years 1995, 1996, the year ended December 31, 1997 and for the four months ended
December 31, 1996, respectively. Related accounts receivable from this customer
at December 31, 1996 and 1997 were approximately $27,086,000 and $44,468,000,
respectively. The Company provided air freight carrier services to one customer
which accounted for approximately 18% and 12% of its total revenues in the year
ended December 31, 1997 and for the four months ended December 31, 1996.
12. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED AUGUST 31, YEAR ENDED DECEMBER 31,
----------------------- DECEMBER 31, ------------------------
1995 1996 1997 1995 1996
---------- ---------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per
share -- net
income:.............. $4,416,394 $4,109,189 $17,889,718 $4,754,645 $5,293,452
========== ========== =========== ========== ==========
Denominator for basic
and diluted earnings
per share -- weighted
average shares
outstanding.......... 7,967,710 7,927,856 11,193,899 7,967,710 9,609,920
========== ========== =========== ========== ==========
</TABLE>
The weighted average number of common shares outstanding during the years
ended August 31, 1995 and 1996 include the effect of options to purchase 390,707
and 153,567 shares of the Company's common stock at $0.01 granted to certain
executives in December 1995 and June 1996, respectively, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin 98.
On June 28, 1996 the Company approved a 1.2285391-for-1 stock split
effected as a stock dividend. All references to common stock and per share data
have been restated to give effect to the split.
13. COLLECTIVE BARGAINING AGREEMENTS
Approximately 15% of the Company's employees, consisting of pilots and
flight engineers, (as successor to the Kalitta Companies) are members of the
Teamsters Union and are employed pursuant to a Collective Bargaining Agreement.
The Collective Bargaining Agreement became amendable on August 29, 1997, but
remains in effect while the parties are in negotiations for a successor
collective bargaining agreement. Pilots and flight engineers subject to the
agreement are guaranteed pay based upon a minimum of 60 block hours per month.
The agreement requires that all flight crew personnel must meet minimum
qualifications and includes typical seniority, furlough, grievance, group health
insurance, sick leave and vacation provisions. The seniority provisions require
that the most senior flight crews have the opportunity to operate larger
aircraft or move to new crew positions as aircraft or crew positions become
available by reason of flight crew attrition or aircraft acquisitions. As a
consequence, the contract obligates to Company to incur costs to retrain crews
as they advance in seniority and progress to new aircraft or crew positions. In
addition, the Company may incur costs to train flight crews to fill positions
vacated by more senior flight crews. The Collective Bargaining Agreement
provides that so long as the agreement is in effect, the Teamsters Union will
not authorize a strike and the Company (as successor to the Kalitta Companies)
will not lockout union employees. Although the Company and the Teamsters Union
have commenced "interest-based" bargaining, there can be no assurance that a new
Collective Bargaining Agreement can be reached or that negotiations will not
result in work stoppages, substantial increases in salaries or wages, changes in
work rules or other changes adverse to the Company.
F-18
<PAGE> 23
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
The following sets forth the unaudited pro forma consolidated statement of
operations for each of the four quarters in the year ended December 31, 1997 and
for the years ended December 31, 1996 and 1997, in each case giving effect to
the acquisition of the Kalitta Companies, the issuance of the Notes, Term Loan,
and the acquisition of the sixteen Boeing 727s from the Kalitta Companies as if
each of the transactions had been consummated at the beginning of 1996 and 1997
for each of the respective years. This information is presented for illustrative
purposes only and does not purport to present the results of operations of the
Company had these transactions occurred on the dates indicated, nor are they
necessarily indicative of the consolidated results of operations which may be
expected to occur in the future.
No pro forma adjustments have been applied to reflect (i) revenues or
operating costs expected to be generated from the Boeing 747s recently purchased
and being modified with approximately $56 million of the net proceeds from the
Notes or (ii) operating efficiencies or cost savings (other than approximately
$1.5 million of insurance savings) expected to result from the Merger. In
addition, pro forma results have not been adjusted to eliminate abnormally high
engine maintenance expenses, costs incurred to add and maintain flight crews in
anticipation of increased air freight carrier business which has not yet
materialized in part due to delays in acquiring aircraft and start-up costs
associated with establishing the Kalitta Companies' wide-body passenger charter
business.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
QUARTER ENDED DECEMBER 31,
--------------------------------------------------- -------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 1997 1996
--------- -------- ------------- ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier.......... $100,421 $113,579 $138,588 $136,945 $489,533 $438,265
Air logistics................ 13,215 14,017 18,647 66,678 112,557 77,168
Maintenance and other........ 6,411 8,078 8,810 5,932 29,231 36,348
-------- -------- -------- -------- -------- --------
Total revenues....... 120,047 135,674 166,045 209,555 631,321 551,781
-------- -------- -------- -------- -------- --------
Costs of revenues:
Air freight carrier.......... 105,911 95,711 110,462 118,792 430,876 387,013
Air logistics................ 11,875 12,944 17,219 53,055 95,093 67,938
Maintenance and other........ 4,513 5,687 7,035 5,013 22,248 22,316
-------- -------- -------- -------- -------- --------
Total costs of
revenues........... 122,299 114,342 134,716 176,860 548,217 477,267
-------- -------- -------- -------- -------- --------
Gross profit (loss)............ (2,252) 21,332 31,329 32,695 83,104 74,514
General and administrative
expenses..................... 8,395 8,458 10,179 11,128 38,160 31,843
Stock option grant to
executives................... -- -- -- -- -- 4,231
Non-qualified employee profit
sharing expense.............. 271 400 490 1,268 2,429 1,243
-------- -------- -------- -------- -------- --------
Operating income (loss)........ (10,918) 12,474 20,660 20,299 42,515 37,197
Other income (expense):
Interest expense,
net................ (10,147) (9,993) (10,131) (9,813) (40,084) (40,859)
Other, net........... 1,793 123 (1,439) (832) (355) 1,557
-------- -------- -------- -------- -------- --------
</TABLE>
F-19
<PAGE> 24
KITTY HAWK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
QUARTER ENDED DECEMBER 31,
--------------------------------------------------- -------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 1997 1996
--------- -------- ------------- ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before minority
interest and income taxes.... (19,272) 2,604 9,090 9,654 2,076 (2,105)
Minority interest.............. 338 555 966 1,177 3,036 1,146
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................ (19,610) 2,049 8,124 8,477 (960) (3,251)
Income taxes (benefit)......... (7,460) 820 3,249 3,391 -- --
-------- -------- -------- -------- -------- --------
Net income (loss).............. $(12,150) $ 1,229 $ 4,875 $ 5,086 $ (960) $ (3,251)
======== ======== ======== ======== ======== ========
Income (loss) per common
share -- basic and diluted... $ (0.73) $ 0.07 $ 0.29 $ 0.30 $ (0.06) $ (0.22)
======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding.................. 16,751 16,751 16,751 16,751 16,751 14,776
======== ======== ======== ======== ======== ========
Other Pro Forma Information:
Adjusted EBITDA(1)........... $ 1,206 $ 24,082 $ 31,937 $ 31,089 $ 88,314 $ 82,293
======== ======== ======== ======== ======== ========
Depreciation and
amortization.............. $ 10,271 $ 11,272 $ 12,641 $ 11,485 $ 45,669 $ 39,308
======== ======== ======== ======== ======== ========
Capital expenditures......... $ 79,985 $ 37,066 $ 58,613 $ 38,692 $214,356 $141,635
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Adjusted EBITDA is calculated as income (loss) before minority interest,
income taxes, interest expense and depreciation and amortization. Adjusted
EBITDA excludes approximately $4,231 from stock options granted to
executives in 1996.
F-20
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
23.1* -- Consent of Ernst & Young, LLP.
</TABLE>
- ----------
* Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-15667) pertaining to the Kitty Hawk, Inc. Amended and Restated
Annual Incentive Compensation Plan, in the Registration Statement (Form S-8 No.
333-23597) pertaining to the Kitty Hawk, Inc. Amended and Restated Omnibus
Securities Plan and in the Registration Statement (Form S-8 No. 333-28553)
pertaining to the Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase
Plan of our report dated March 4, 1998, with respect to the consolidated
financial statements of Kitty Hawk, Inc. included in this Annual Report on Form
10-K/A for the year ended December 31, 1997.
ERNST & YOUNG LLP
Dallas, Texas
September 8, 1998
