<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 of Incorporation) (I.R.S. Employer 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)
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 [ ]
Number of shares outstanding of the registrant's common stock, $0.01 par value,
as of November 12, 1999: 17,057,071.
<PAGE> 2
KITTY HAWK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998............................ 3
Condensed Consolidated Statements of Income
Three months ended September 30, 1999 and 1998 and
Nine months ended September 30, 1999 and 1998....................... 4
Condensed Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1999................................ 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998....................... 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 2. Changes in Securities.............................................. 18
Item 3. Defaults upon Senior Securities.................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................ 18
Item 5. Other Information.................................................. 18
Item 6. Reports on Form 8-K and Exhibits................................... 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
KITTY HAWK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents ....................... $ 986 $ 15,077
Restricted cash and short-term investments ...... -- 1,964
Trade accounts receivable ....................... 100,152 140,014
Deferred income taxes ........................... 16,088 16,088
Inventory and aircraft supplies ................. 47,626 50,135
Prepaid expenses and other current assets ....... 25,989 22,871
------------ ------------
Total current assets ........................ 190,841 246,149
Property and equipment, net .......................... 739,175 720,808
Other assets, net .................................... 16,210 15,628
------------ ------------
Total assets ......................................... $ 946,226 $ 982,585
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................ $ 38,315 $ 53,967
Accrued expenses ................................ 92,288 104,278
Accrued maintenance reserves .................... 20,967 22,382
Current maturities of long-term debt ............ 13,283 20,564
------------ ------------
Total current liabilities ................... 164,853 201,191
Revolving credit facility ............................ 89,100 86,900
Long-term debt ....................................... 373,845 382,287
Deferred income taxes ................................ 113,261 113,261
Minority interest .................................... -- 4,749
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
-17,057,071 and 16,927,942, respectively ..... 170 169
Additional capital .............................. 134,210 133,166
Retained earnings ............................... 70,787 60,862
------------ ------------
Total stockholders' equity .................. 205,167 194,197
------------ ------------
Total liabilities and stockholders' equity ........... $ 946,226 $ 982,585
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
KITTY HAWK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Air freight carrier ............................. $ 62,380 $ 82,220 $ 188,334 $ 229,496
Air logistics ................................... 52,115 39,515 123,228 95,140
Scheduled freight ............................... 59,662 43,842 158,837 120,520
Maintenance and other ........................... 9,191 6,332 19,448 24,967
------------ ------------ ------------ ------------
Total revenues .............................. 183,348 171,909 489,847 470,123
Costs of revenues:
Flight expense .................................. 86,913 80,442 216,206 219,662
Maintenance expense ............................. 31,235 39,713 101,270 104,668
Aircraft fuel expense ........................... 21,579 15,599 51,634 46,955
Depreciation expense ............................ 18,575 13,011 53,267 35,444
------------ ------------ ------------ ------------
Total costs of revenues ..................... 158,302 148,765 422,377 406,729
------------ ------------ ------------ ------------
Gross profit ......................................... 25,046 23,144 67,470 63,394
General and administrative expenses .................. 9,019 8,322 25,311 23,933
Non-qualified employee profit sharing expense ........ 1,347 408 1,654 990
------------ ------------ ------------ ------------
Operating income ..................................... 14,680 14,414 40,505 38,471
Other income (expense):
Interest expense ................................ (12,172) (9,581) (36,447) (28,882)
Other, net ...................................... 10,959 296 12,677 1,362
------------ ------------ ------------ ------------
Income before minority interest and income taxes ..... 13,467 5,129 16,735 10,951
Minority interest .................................... -- 1,042 196 2,473
------------ ------------ ------------ ------------
Income before income taxes ........................... 13,467 4,087 16,539 8,478
Income tax expense ................................... 5,386 1,550 6,614 3,306
------------ ------------ ------------ ------------
Net income ........................................... $ 8,081 $ 2,537 $ 9,925 $ 5,172
============ ============ ============ ============
Basic and diluted income per share ................... $ 0.47 $ 0.15 $ 0.58 $ 0.30
============ ============ ============ ============
Weighted average common shares outstanding ........... 17,047 16,925 17,008 16,820
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
KITTY HAWK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ............. 16,927,942 $ 169 $ 133,166 $ 60,862 $ 194,197
Shares issued in connection with the
Employee Stock Purchase Plan ........... 129,129 1 1,044 -- 1,045
Net income ............................... -- -- -- 9,925 9,925
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1999 ............ 17,057,071 $ 170 $ 134,210 $ 70,787 $ 205,167
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
KITTY HAWK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income .............................................. $ 9,925 $ 5,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 55,460 37,658
Gain on sales of assets ............................... (11,553) (1,130)
Minority interest ..................................... 196 2,472
Changes in operating assets and
liabilities:
Trade accounts receivable ........................... 40,456 45,878
Inventory and aircraft supplies ..................... (11,405) (31,173)
Prepaid expenses and other current assets............ (1,874) (5,161)
Accounts payable and accrued expenses ............... (31,199) 5,178
Accrued maintenance reserves ........................ (1,806) 1,413
------------ ------------
Net cash provided by operating activities .................. 48,200 60,307
Investing activities:
Capital expenditures .................................... (72,659) (161,854)
Redemption of short term investments .................... -- 56,847
Proceeds from sales of assets ........................... 26,246 6,444
------------ ------------
Net cash used in investing activities ...................... (46,413) (98,563)
Financing activities:
Proceeds from issuance of long-term debt ................ 2,965 5,880
Repayments of long-term debt ............................ (21,043) (3,060)
Net borrowings on revolving credit facility ............. 2,200 35,000
Distributions to minority interest ...................... -- (2,420)
------------ ------------
Net cash (used in) provided by financing activities......... (15,878) 35,400
------------ ------------
Net decrease in cash and cash equivalents .................. (14,091) (2,856)
Cash and cash equivalents at beginning of period ........... 15,077 17,907
------------ ------------
Cash and cash equivalents at end of period ................. $ 986 $ 15,051
============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
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, 1998, are unaudited
(except for the December 31, 1998 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
generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Operating results for the three month period and nine month period ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999.
2. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's financial position or results of operations.
3. RECLASSIFICATIONS
Certain balances from the prior year have been reclassified to conform to
the current year presentation.
4. SEGMENT REPORTING
The Company derives revenue from four related lines of business: air freight
carrier services, air logistics services, scheduled freight services and
maintenance services. Each of these is considered a business segment, with its
respective financial performance detailed below. Included in each are
intersegment transactions for revenues and costs of revenues that generally
approximate market prices. Each business segment is currently evaluated by the
Company's chief operating decision maker on financial performance at the
operating income line.
The Company's air freight carrier line of business is conducted by the
Company's two FAA Part 121 airlines: a wide-body airline (Kitty Hawk
International, Inc., formerly American International Airways, Inc.) and a
narrow-body airline (Kitty Hawk Aircargo, Inc.). For reporting purposes,
however, the air freight carrier business is reported and referred to herein as
one unit. The Company's air freight carrier provides services to third parties
and the Company's scheduled freight service provider under contractual
arrangements where the Company provides the aircraft, crew, maintenance and
insurance (ACMI). Additionally, the air freight carrier performs ad hoc charters
for the Company's air logistics service provider and other governmental and
commercial customers. The air freight carrier also provided passenger charters
during fiscal years 1997 and 1998. The Company eliminated its passenger charter
division in January 1999.
The Company's air logistics services line of business is conducted by the
Company's FAA Part 135 small aircraft airline, Kitty Hawk Charters, Inc.
(formerly Kalitta Flying Service, Inc.). The air logistics service provider
arranges the delivery of time sensitive freight within North America,
principally the United States. The air logistics service provider utilizes third
party aircraft as well as its own fleet of small aircraft and the fleet of the
Company's two FAA Part 121 air freight carriers.
The Company's scheduled freight service, Kitty Hawk Cargo, Inc. (formerly
American International Cargo and American International Freight), consists of an
overnight freight service provider operating in a network of over 40 North
American cities utilizing a central hub location at Fort Wayne, Indiana, as well
as a service between Los Angeles, the Hawaiian islands and several Pacific Rim
countries.
The Company's maintenance operation has in the past provided JT8 engine
overhauls for third parties as well as for certain of the
7
<PAGE> 8
Company's aircraft. On August 13, 1999, the Company completed the sale of
certain maintenance-related assets and parts to a third party and at September
30, 1999 only provided engine overhauls on JT3 engines for Douglas DC-8s and
small aircraft engines. (See Note 7).
The other category consists of corporate activities as well as the
activities of Longhorn Solutions, Inc., the Company's wholly-owned software
developer/reseller and in-house management information systems service supplier.
Business assets are owned by or allocated to each of the business segments.
Assets included in other include cash, investment in subsidiaries and
intercompany receivables.
<TABLE>
<CAPTION>
ACMI ACMI TOTAL
WIDE- NARROW- AIR FREIGHT AIR SCHEDULED
BODY BODY CARRIER LOGISTICS FREIGHT OTHER
---------- ---------- ----------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Quarter ended September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $ 20,319 $ 46,872 $ 67,191 $ 56,445 $ 59,662 $ 50
Revenue from intersegment operations 37,067 10,492 47,559 770 468 232
Operating income (loss) 7,401 3,210 10,611 2,279 4,177 (2,387)
Interest expense
Other income (expense)
Income before minority interest
and taxes
Total assets $ 309,497 $ 284,912 $ 594,409 $ 85,753 $ 79,076 $ 704,879
Quarter ended September 30, 1998
Revenue from external customers $ 50,125 $ 35,078 $ 85,203 $ 42,864 $ 43,842 $ --
Revenue from intersegment operations 27,720 7,386 35,106 2,669 464 --
Operating income (loss) 1,929 3,677 5,606 3,345 5,918 (455)
Interest expense
Other income (expense)
Income before minority interest
and taxes
Total assets $ 630,118 $ 172,951 $ 803,069 $ 84,524 $ 27,761 $ 520,233
Nine months ended September 30,
Revenue from external customers $ 69,482 $ 128,252 $ 197,734 $ 133,081 $ 158,837 $ 195
Revenue from intersegment operations 104,814 33,355 138,169 1,675 979 495
Operating income (loss) 14,086 7,531 21,617 12,691 10,466 (4,269)
Interest expense
Other income (expense)
Income before minority interest
and taxes
Total assets $ 309,497 $ 284,912 $ 594,409 $ 85,753 $ 79,076 $ 704,879
Nine months ended September 30,
Revenue from external customers $ 165,550 $ 80,028 $ 245,578 $ 104,025 $ 120,520 $ --
Revenue from intersegment operations 64,339 24,517 88,856 8,420 1,104 --
Operating income (loss) 9,421 12,361 21,782 8,246 9,045 (603)
Interest expense
Other income (expense)
Income before minority interest
and taxes
Total assets $ 630,118 $ 172,951 $ 803,069 $ 84,524 $ 27,761 $ 520,233
<CAPTION>
INTERSEGMENT CONSOLIDATED
ELIMINATIONS BALANCE
------------ ------------
(AMOUNTS IN THOUSANDS)
Quarter ended September 30, 1999
<S> <C> <C>
Revenue from external customers $ -- $ 183,348
Revenue from intersegment operations (48,609) --
Operating income (loss) -- 14,680
Interest expense (12,172)
Other income (expense) 10,959
Income before minority interest
and taxes $ 13,467
Total assets $ (517,891) $ 946,226
Quarter ended September 30, 1998
Revenue from external customers $ -- $ 171,909
Revenue from intersegment operations (38,239) --
Operating income (loss) -- 14,414
Interest expense (9,581)
Other income (expense) 296
Income before minority interest
and taxes $ 5,129
Total assets $ (536,630) $ 898,957
Nine months ended September 30,
1999
Revenue from external customers $ -- $ 489,847
Revenue from intersegment operations (141,318) --
Operating income (loss) -- 40,505
Interest expense (36,447)
Other income (expense) 12,677
Income before minority interest
and taxes $ 16,735
Total assets $ (517,891) $ 946,226
Nine months ended September 30,
1998
Revenue from external customers $ -- $ 470,123
Revenue from intersegment operations (98,380) --
Operating income (loss) -- 38,471
Interest expense (28,882)
Other income (expense) 1,362
Income before minority interest
and taxes $ 10,951
Total assets $ (536,630) $ 898,957
</TABLE>
The Company does not separately report results of its maintenance operation
and related asset information to the Company's chief operating decision maker.
Accordingly, financial data for the maintenance operation is included under the
ACMI Wide-Body, ACMI Narrow-Body and Air Logistics captions above. Third party
maintenance revenue included under the ACMI Wide-Body, ACMI Narrow-Body and Air
Logistics captions above amounted to $2.9 million, $1.9 million and $4.3
million, respectively, for the quarter ended September 30, 1999; $3 million, $0
and $3.3 million, respectively, for the quarter ended September 30, 1998; $6
million, $3.4 million and $9.9 million, respectively, for the nine months ended
September 30, 1999; and $16.1 million, $0 and $8.9 million,
8
<PAGE> 9
respectively, for the nine months ended September 30, 1998.
5. SUPPLEMENTAL GUARANTOR INFORMATION
In November 1997, the Company issued $340 million of 9.95% Senior Secured
Notes (the "Notes"). Each of the Company's subsidiaries (collectively, the
"Guarantors") have fully and unconditionally and jointly and severally
guaranteed (the "Guarantees") on a senior basis, the full and prompt performance
of the Company's obligations under the Notes. The Guarantees are limited to the
largest amount that would not render such Guarantees subject to avoidance under
any applicable federal or state fraudulent conveyance or similar law. The
Guarantees rank senior in right of payment to any subordinated indebtedness and,
except with respect to collateral, pari passu with all existing and future
unsubordinated indebtedness of the Guarantors. Each of the Guarantors is a
wholly owned subsidiary of the Company.
The Company has not presented separate financial statements and other
disclosures concerning the Guarantors because the Company's management believes
that such information is not material to investors. Summary financial
information is presented for Kitty Hawk, Inc., the Parent, and the Guarantors.
<TABLE>
<CAPTION>
KITTY HAWK, SUBSIDIARIES
INC. (PARENT) (GUARANTORS) ELIMINATIONS TOTAL
------------- ------------ ------------ ------------
(amounts in thousands)
<S> <C> <C> <C> <C>
As of September 30, 1999
Current assets $ 14,202 $ 176,639 $ -- $ 190,841
Non-current assets 687,364 891,663 (823,642) 755,385
Current liabilities 169,328 719,758 (724,233) 164,853
Non-current liabilities 430,750 145,456 -- 576,206
Minority interest -- -- -- --
Stockholders' equity 101,490 203,087 (99,410) 205,167
As of December 31, 1998
Current assets $ 18,273 $ 227,876 $ -- $ 246,149
Non-current assets 519,434 736,824 (519,822) 736,436
Current liabilities 10,065 620,948 (429,822) 201,191
Non-current liabilities 426,900 155,548 -- 582,448
Minority interest -- -- 4,749 4,749
Stockholders' equity 100,742 188,204 (94,749) 194,197
For the three months ended September 30, 1999
Revenue $ -- $ 183,499 $ (151) $ 183,348
Gross profit -- 25,197 (151) 25,046
Operating income (loss) (2,280) 16,960 -- 14,680
Net income 209 7,872 -- 8,081
For the nine months ended September 30, 1999
Revenue $ -- $ 490,246 $ (399) $ 489,847
Gross profit -- 67,869 (399) 67,470
Operating income (loss) (3,967) 44,472 -- 40,505
Net income (loss) (290) 10,411 (196) 9,925
For the three months ended September 30, 1998
Revenue $ -- $ 171,909 $ -- $ 171,909
Gross profit -- 23,144 -- 23,144
Operating income (loss) (455) 14,869 -- 14,414
Net income (loss) 153 3,426 (1,042) 2,537
For the nine months ended September 30, 1998
Revenue $ -- $ 470,123 $ -- $ 470,123
Gross profit -- 63,394 -- 63,394
Operating income (loss) (667) 39,138 -- 38,471
Net income (loss) (61) 7,706 (2,473) 5,172
</TABLE>
6. EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average number of
shares outstanding during the period, taking into consideration the dilutive
effect of the Company's outstanding options issued to its employees and
directors to acquire the Company's common stock. As of September 30, 1999,
690,000 options were outstanding with a weighted average exercise price of
$14.50 per share. As the weighted average exercise price of the outstanding
options exceeded the average market price of the Company's
9
<PAGE> 10
common stock for each of the three and nine month periods ended September 30,
1999, the effect of the stock options was excluded from the Company's diluted
earnings per share calculation.
7. SALE OF MAINTENANCE FACILITIES
On August 13, 1999, the Company and certain of its wholly-owned
subsidiaries completed the sale of its Oscoda, Michigan-based JT8 engine and
aircraft maintenance operations to TIMCO Engine Center, Inc., a wholly-owned
indirect subsidiary of Aviation Sales Company. At closing, the Company received
approximately $21.4 million of consideration, consisting of approximately $17.9
million of cash and $3.5 million of purchase credits. The Company and certain of
its wholly-owned subsidiaries also entered into 3-year exclusive maintenance
agreements with subsidiaries of Aviation Sales Company for heavy maintenance of
the Company's fleet of Boeing 727s and off-wing maintenance of the Company's JT8
engines. The Company recognized a gain of approximately $8.3 million on the sale
of this maintenance facility. Upon consummation of the sale, the Company ceased
providing third party overhaul services on JT8 engines for Boeing 727s and
Douglas DC9s.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Revenues. The Company's revenues are derived from four related lines of
business: (i) air freight carrier services, (ii) air logistics services, (iii)
scheduled freight services and (iv) maintenance services. The Company's air
freight carrier line of business is conducted by the Company's two FAA Part 121
airlines: a wide-body airline (Kitty Hawk International, Inc., formerly American
International Airways, Inc.) and a narrow-body airline (Kitty Hawk Aircargo,
Inc.). For reporting purposes, however, the air freight carrier business is
reported and referred to herein as one unit. The Company's air logistics
services line of business is conducted by the Company's FAA Part 135 small
aircraft airline.
Air freight carrier revenues are derived substantially from aircraft, crew,
maintenance, and insurance ("ACMI") contract charters. In addition, revenues
from the Company's passenger charter service (which was eliminated in January
1999) are also included in air freight carrier revenues. Air logistics revenues
are derived substantially from on-demand air freight charters arranged by the
Company for its customers utilizing the flight services of third party air
freight carriers as well as the Company's own fleet of small jet and prop
aircraft and the fleet of the Company's two FAA Part 121 air freight carriers.
Scheduled freight service revenues are generated through an overnight
airport-to-airport freight service to over 40 North American cities and an
international service between Los Angeles and Honolulu, among the Hawaiian
islands and once a week through Melbourne, Hong Kong and other Pacific Rim
locations. Maintenance revenue was previously generated from third party
maintenance work performed on engines and airframes. During the fourth quarter
of 1998, the Company stopped providing third party airframe repairs and engine
overhaul services, other than on JT3 engines used on Douglas DC-8s and JT8
engines used on Boeing 727s and Douglas DC-9s. In August 1999, in connection
with the sale of its Oscoda, Michigan-based JT8 engine and aircraft maintenance
operations to Aviation Sales Company, the Company stopped providing third party
engine overhaul services on JT8 engines.
The principal factors that have contributed to revenue growth over the past
several years have been increases in the Company's fleet from 10 aircraft at
December 31, 1993 to 96 aircraft at September 30, 1999, the general U.S.
economic expansion and the increased global demand for time sensitive air
freight services.
Costs of Revenues. The principal components of the costs of revenues are
flight expense, maintenance expense, aircraft fuel expense and depreciation
expense. Flight expense includes the salaries and expenses for pilots and flight
operations personnel, insurance, sub-charter costs paid to third party air
freight carriers and costs paid for ground handling and transportation.
Maintenance expense includes salaries and expenses for maintenance personnel and
maintenance on the aircraft. Aircraft fuel expense is generally applicable only
to the air logistics service provider and the scheduled freight services
provider because fuel for the ACMI contract charters is generally provided by
the customer or billed to the customer on a direct pass-through basis.
Depreciation expense includes depreciation on airframes and engines and all
other property and equipment associated with the operation of each business
segment.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, condensed
consolidated statement of operations data expressed as a percentage of total
revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues:
<S> <C> <C> <C> <C>
Air freight carrier ....................... 34.0% 47.8% 38.4% 48.8%
Air logistics ............................. 28.4 23.0 25.2 20.2
Scheduled freight service ................. 32.6 25.5 32.4 25.7
Maintenance and other ..................... 5.0 3.7 4.0 5.3
-------- -------- -------- --------
Total revenues ........................ 100.0 100.0 100.0 100.0
Costs of revenues:
Flight expense ............................ 47.4 46.8 44.1 46.7
Maintenance expense ....................... 17.0 23.1 20.7 22.3
Aircraft fuel expense ..................... 11.8 9.1 10.5 10.0
Depreciation expense ...................... 10.1 7.5 10.9 7.5
-------- -------- -------- --------
Total costs of revenues ................ 86.3 86.5 86.2 86.5
-------- -------- -------- --------
Gross profit ................................... 13.7 13.5 13.8 13.5
General and administrative expenses ............ 4.9 4.9 5.2 5.1
Non-qualified employee profit sharing
expense ...................................... 0.8 0.2 0.3 0.2
-------- -------- -------- --------
Operating income ............................... 8.0 8.4 8.3 8.2
Interest expense ............................... (6.6) (5.6) (7.5) (6.2)
Other income ................................... 5.9 0.2 2.6 0.3
-------- -------- -------- --------
Income before minority interest and
income taxes ................................. 7.3 3.0 3.4 2.3
Minority interest .............................. -- 0.6 -- 0.5
-------- -------- -------- --------
Income before income taxes ..................... 7.3 2.4 3.4 1.8
Income tax expense ............................. 2.9 0.9 1.4 0.7
-------- -------- -------- --------
Net income ..................................... 4.4% 1.5% 2.0% 1.1%
======== ======== ======== ========
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
Revenues - Air Freight Carrier. Air freight carrier revenues decreased $19.8
million, or 24.1%, to $62.4 million in the quarter ended September 30, 1999,
from $82.2 million in the quarter ended September 30, 1998. This decrease was
primarily attributable to (i) the elimination of the Company's passenger charter
division, which contributed $18 million of revenue in the quarter ended
September 30, 1998, (ii) the shift of one Boeing 747 aircraft from air freight
carrier service to scheduled freight service and (iii) a reduction in block
hours flown by Douglas DC-8s as the Company positions itself to retire 13 of
these aircraft due to FAA noise abatement regulations. This decrease was
partially offset by revenue from two additional Boeing 747s added to the fleet
after September 30, 1998. Additionally, the Company shifted six Boeing 727
aircraft from scheduled freight service to air freight carrier service with the
award of the United States Postal Service ("USPS") W-Net contract in August
1999. The Company also implemented selective price increases for some of its
ACMI contract charters.
Revenues - Air Logistics. Air logistics revenues increased $12.6 million, or
31.9%, to $52.1 million in the quarter ended September 30, 1999, from $39.5
million in the quarter ended September 30, 1998. Although prices for the
Company's air logistics services remained relatively constant, the average
revenue per trip increased from $6,286 for the quarter ended September 30, 1998,
to $8,631 for the quarter ended September 30, 1999, due to a change in the mix
of aircraft used. The overall number of trips managed by the air logistics
service provider decreased from 6,286 in the quarter ended September 30, 1998 to
6,038 in the quarter ended September 30, 1999, a 3.9% decrease.
Revenues - Scheduled Freight. Scheduled freight revenues increased $15.8
million, or 36%, to $59.7 million in the quarter ended September 30, 1999, from
$43.8 million in the quarter ended September 30, 1998. This increase was
primarily due to (i) several price increases since September 30, 1998, (ii)
adding another Boeing 747 into international scheduled service in May 1999 and
(iii) adding a fifth night to certain domestic scheduled routes effective June
1, 1999. Freight volumes in the scheduled freight operation increased
approximately 11.4% from the quarter ended September 30, 1998, as compared to
the quarter ended September 30, 1999 due to the additional flight activity. The
average yield per pound increased 22%, from $0.54 per pound for the quarter
ended September 30, 1998 to $0.66 per pound for the quarter ended September 30,
1999.
11
<PAGE> 12
Revenues - Maintenance and Other. Maintenance and other revenues increased
$2.9 million, or 45.2%, to $9.2 million in the quarter ended September 30, 1999,
from $6.3 million in the quarter ended September 30, 1998. The increase is due
to increased activity in the JT3 engine shop and the small engine shop as well
as a push to complete the open JT8 engine work prior to the sale of the Oscoda,
Michigan maintenance operations.
Costs of Revenues - Flight Expense. Flight expense increased 8% to $86.9
million in the quarter ended September 30, 1999, from $80.4 million in the
quarter ended September 30, 1998. As a percent of revenues, flight expense
increased to 47.4% for the quarter ended September 30, 1999, as compared to
46.8% for the quarter ended September 30, 1998. This increase as a percent of
revenues was primarily due to a $15.3 million increase in flight expense
attributable to the Company's air logistics service provider due to an increase
in the number of large aircraft trips during the quarter ended September 30,
1999. This increase was offset by (i) the elimination of the passenger charter
division (which resulted in reduced wages, catering expense, subcharter expense
and ground handling costs, a savings of $5.7 million), (ii) a general reduction
in crew travel costs and (iii) an overall reduction in subcharter expense as
fewer Company aircraft were out of service for maintenance activities.
Costs of Revenues - Maintenance Expense. Maintenance expense decreased $8.5
million, or 21.4%, to $31.2 million in the quarter ended September 30, 1999,
from $39.7 million in the quarter ended September 30, 1998. The decrease is
primarily due to a decrease of approximately $5 million in personnel costs,
parts expense and facility expense associated with the sale of the maintenance
operation in Oscoda, Michigan and an overall decrease in maintenance related to
the parking of the four passenger aircraft in January 1999 and five Douglas DC-8
aircraft during the first nine months of 1999. As a percent of revenues,
maintenance expense decreased from 23.1% for the quarter ended September 30,
1998 to 17.0% for the quarter ended September 30, 1999.
Costs of Revenues - Aircraft Fuel Expense. Aircraft fuel expense increased
$6 million, or 38.3%, to $21.6 million in the quarter ended September 30, 1999,
from $15.6 million in the quarter ended September 30, 1998. As a percent of
revenues, aircraft fuel expense increased from 9.1% for the quarter ended
September 30, 1998 to 11.8% for the quarter ended September 30, 1999. This
increase is primarily due to a 34% increase in fuel prices from an average price
of $0.59 per gallon for the quarter ended September 30, 1998 as compared to an
average price of $0.79 per gallon for the quarter ended September 30, 1999. Fuel
expense has also increased due to increased flight activity for the Company's
scheduled freight and air logistics operations and two USPS contracts, where
fuel costs are not directly passed through to the USPS. The increase in fuel
expense was partially offset by the elimination of the Company's passenger
charter business, which resulted in a savings of $2.9 million in the quarter
ended September 30, 1999.
Costs of Revenues - Depreciation Expense. Depreciation expense increased
$5.6 million, or 42.8%, to $18.6 million in the quarter ended September 30,
1999, from $13 million in the quarter ended September 30, 1998. As a percent of
revenues, depreciation expense increased from 7.6% for the quarter ended
September 30, 1998 to 10.2% for the quarter ended September 30, 1999. This
increase is primarily due to the depreciation of capital expenditures of
approximately $129 million since September 30, 1998, consisting principally of
(i) cargo modifications to two Boeing 747s and two Boeing 727s, (ii) engine
overhauls and (iii) noise abatement modifications to the Company's Boeing 727
fleet.
General and Administrative Expenses. General and administrative expenses
increased $0.7 million, or 8.4%, to $9 million in the quarter ended September
30, 1999, from $8.3 million in the quarter ended September 30, 1998. As a
percentage of total revenues, general and administrative expenses increased to
4.9% in the quarter ended September 30, 1999, as compared to 4.8% for the
quarter ended September 30, 1998, principally reflecting an increase in
administrative personnel and professional fees.
Operating Income. As a result of the above, operating income increased $0.3
million to $14.7 million in the quarter ended September 30, 1999, from $14.4
million in the quarter ended September 30, 1998. Operating income margin
decreased to 8% in the quarter ended September 30, 1999, from 8.4% in the
quarter ended September 30, 1998.
Interest Expense. Interest expense increased to $12.2 million for the
quarter ended September 30, 1999, from $9.6 million for the quarter ended
September 30, 1998, a 27% increase. The increase was primarily the result of
increased borrowings on the Company's Credit Facility, an increase of $44.1
million from September 30, 1998, and an overall increase in the interest rate
under the December 10, 1998 amendment to the Credit Facility. Additionally,
approximately $1.4 million of interest expense was capitalized during the
quarter ended September 30, 1998 in connection with funds used in the cargo
modification of one Boeing 747.
Other income increased from $0.3 million for the quarter ended September 30,
1998, to $11 million for the quarter ended September 30, 1999. The increase was
primarily the result of $8.3 million of gain recognized on the sale of the
Company's maintenance facility in Oscoda, Michigan and $2.3 million of gain
recognized on the sale of the Company's 1/3 interest in four Falcon aircraft.
12
<PAGE> 13
Income Tax Expense. Income tax expense as a percentage of income before
income taxes was 40% for the quarter ended September 30, 1999, as compared to
38% for the quarter ended September 30, 1998. This increase reflects a change in
the mix of state income taxes payable and the impact of non-deductible crew
travel costs.
Net Income. As a result of the above, the Company's net income increased to
$8.1 million in the quarter ended September 30, 1999, as compared to net income
of $2.5 million in the quarter ended September 30, 1998. Net income as a
percentage of total revenues increased to 4.4% in the quarter ended September
30, 1999, from 1.5% in the quarter ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues - Air Freight Carrier. Air freight carrier revenues decreased $41.2
million, or 18%, to $188.3 million in the nine months ended September 30, 1999,
from $229.5 million in the nine months ended September 30, 1998. This decrease
was primarily attributable to (i) the elimination of the Company's passenger
charter division, which contributed $46.8 million of revenue in the nine months
ended September 30, 1998, (ii) the shift of one Boeing 747 from air freight
carrier service to scheduled freight service and (iii) an overall reduction in
block hours flown by Douglas DC-8s as the Company positions itself to retire 13
of these aircraft due to FAA noise abatement regulations. This decrease was
partially offset by two additional Boeing 747s placed into cargo service after
September 30, 1998 and increased utilization of aircraft during non-peak cargo
hours. Additionally, the Company shifted six Boeing 727 aircraft from scheduled
freight service to air freight carrier service with the award of the USPS W-Net
contract in August 1999. The Company also implemented selective price increases
for some of its ACMI contract charters.
Revenues - Air Logistics. Air logistics revenues increased $28.1 million, or
29.5%, to $123.2 million in the nine months ended September 30, 1999, from $95.1
million in the nine months ended September 30, 1998. This increase was primarily
due to an increase in the number of trips managed from 15,317 in the nine months
ended September 30, 1998 to 18,065 in the nine months ended September 30, 1999,
a 17.9% increase. Although prices for the Company's air logistics services
remained relatively constant, the average revenue per trip increased 9.8% due to
the mix of the aircraft used for the trips.
Revenues - Scheduled Freight. Scheduled freight revenues increased $38.3
million, or 31.8%, to $158.8 million in the nine months ended September 30,
1999, from $120.5 million in the nine months ended September 30, 1998. This
increase was primarily due to (i) several price increases since September 30,
1998, (ii) adding another Boeing 747 aircraft into international scheduled
service in May 1999 and (iii) adding a fifth night to certain domestic scheduled
routes effective June 1, 1999. Freight volumes in the scheduled freight
operation increased 7.3% in the nine months ended September 30, 1999 as compared
to the nine months ended September 30, 1998 due to the additional flight
activity. The average yield per pound increased 21.6%, from $0.51 per pound for
the nine months ended September 30, 1998, to $0.62 per pound for the nine months
ended September 30, 1999.
Revenues - Maintenance and Other. Maintenance and other revenues decreased
$5.5 million, or 22.1%, to $19.4 million in the nine months ended September 30,
1999, from $25 million in the nine months ended September 30, 1998. This
decrease was primarily due to the Company's discontinuation of providing third
party airframe repairs and engine overhaul services (other than on JT3 engines
used on Douglas DC-8s) on JT8 engines used on Boeing 727s and Douglas DC-9s. In
August 1999, the Company sold the maintenance facility used to overhaul JT8
engines.
Costs of Revenues - Flight Expense. Flight expense decreased $3.5 million,
or 1.6%, to $216.2 million in the nine months ended September 30, 1999, from
$219.7 million in the nine months ended September 30, 1998. As a percent of
revenues, flight expense decreased to 44.1% for the nine months ended September
30, 1999 as compared to 46.7% for the nine months ended September 30, 1998. This
decrease was primarily due to (i) the elimination of the passenger charter
division (which resulted in reduced wages, catering expenses, subcharter
expenses and ground handling costs, a savings of $14.8 million), (ii) a general
reduction in crew travel costs and (iii) an overall reduction in subcharter
expense as fewer Company aircraft were out of service for maintenance
activities. These decreases were partially offset by a $23.4 million increase in
flight expense attributable to the air logistics service due to an increase in
the number of trips.
Costs of Revenues - Maintenance Expense. Maintenance expense decreased $3.4
million, or 3.2%, to $101.3 million in the nine months ended September 30, 1999,
from $104.7 million in the nine months ended September 30, 1998. The decrease is
primarily due to a decrease of approximately $5 million in personnel costs,
parts expense, and facility expense associated with the sale of the maintenance
operation in Oscoda, Michigan and an overall decrease in maintenance related to
the parking of the four passenger aircraft in January 1999 and five Douglas DC-8
aircraft during the first nine months of 1999. As a percent of revenues,
maintenance expense decreased from 22.3% for the nine months ended September 30,
1998, to 20.7% for the nine months ended September 30, 1999.
13
<PAGE> 14
Costs of Revenues - Aircraft Fuel Expense. Aircraft fuel expense increased
$4.7 million, or 10%, to $51.6 million in the nine months ended September 30,
1999, from $47 million in the nine months ended September 30, 1998. As a percent
of revenues, aircraft fuel expense increased from 10% for the nine months ended
September 30, 1998, to 10.6% for the nine months ended September 30, 1999.
Average fuel prices remained fairly consistent at $0.68 per gallon for the nine
months ended September 30, 1999 as compared to $0.67 per gallon for the nine
months ended September 30, 1998. The increase in fuel expense is primarily due
to increased flight activity for the Company's scheduled freight service during
the middle of 1999 (adding one additional Boeing 747 and the fifth night of
service for some domestic routes), increased number of trips in the air
logistics service provider, and two USPS contracts, where fuel costs are not
directly passed through to the USPS. This increase is offset by the Company no
longer incurring aircraft fuel expense from its passenger charter business,
which resulted in a savings of $7 million in the nine months ended September 30,
1999.
Costs of Revenues - Depreciation Expense. Depreciation expense increased
$17.8 million, or 50.3%, to $53.3 million in the nine months ended September 30,
1999, from $35.4 million in the nine months ended September 30, 1998. As a
percent of revenues, depreciation expense increased from 7.5% for the nine
months ended September 30, 1998 to 10.9% for the nine months ended September 30,
1999. This increase is primarily due to the depreciation of capital expenditures
of approximately $129 million since September 30, 1998, consisting principally
of (i) cargo modifications to two Boeing 747s and two Boeing 727s, (ii) engine
overhauls and (iii) noise abatement modifications to the Company's Boeing 727
fleet.
General and Administrative Expenses. General and administrative expenses
increased $1.4 million, or 5.8%, to $25.3 million in the nine months ended
September 30, 1999, from $23.9 million in the nine months ended September 30,
1998. As a percentage of total revenues, general and administrative expenses
increased to 5.2% in the nine months ended September 30, 1999, as compared to
5.1% for the nine months ended September 30, 1998. The increase was principally
due to an increase in administrative personnel and professional fees.
Operating Income. As a result of the above, operating income increased $2
million to $40.5 million in the nine months ended September 30, 1999, from $38.5
million in the nine months ended September 30, 1998. Operating income margin
increased to 8.3% in the nine months ended September 30, 1999, from 8.2% in the
nine months ended September 30, 1998.
Interest Expense. Interest expense increased to $36.4 million for the nine
months ended September 30, 1999, from $28.9 million for the nine months ended
September 30, 1998, a 26.2% increase. The increase was primarily the result of
increased borrowings on the Company's Credit Facility, an increase of $44.1
million from September 30, 1998, and an overall increase in the interest rate
under the December 10, 1998 amendment to the Credit Facility. Additionally,
approximately $3 million of interest expense was capitalized during the nine
months ended September 30, 1998 in connection with funds used in the cargo
modification of one Boeing 747.
Other income increased from $1.4 million for the nine months ended September
30, 1998, to $12.7 million for the nine months ended September 30, 1999. The
increase was primarily the result of $8.3 million of gain recognized on the sale
of the Company's maintenance facility in Oscoda, Michigan and $2.3 million of
gain recognized on the sale of the Company's 1/3 interest in four Falcon
aircraft.
Income Tax Expense. Income tax expense as a percentage of income before
income taxes was 40% for the nine months ended September 30, 1999, as compared
to 39% for the nine months ended September 30, 1998. This increase reflects a
change in the mix of state income taxes payable and the impact of non-deductible
crew travel costs.
Net Income. As a result of the above, the Company's net income increased to
$9.9 million in the nine months ended September 30, 1999, compared to a net
income of $5.2 million in the nine months ended September 30, 1998. Net income
as a percentage of total revenues increased to 2.0% in the nine months ended
September 30, 1999, from 1.1% in the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for the acquisition and
modification of aircraft and working capital. In addition, the Company has, and
will continue to have, capital requirements for the requisite periodic and major
overhaul maintenance checks for its fleet and for debt service. The Company also
has seasonal working capital needs, because it generates higher revenue in the
fourth calendar quarter and lower revenue in the first calendar quarter. Funding
requirements have historically been met through internally generated funds, bank
borrowings and aircraft and other asset sales and from public and private
offerings of equity and debt securities. From time to time, the Company has
entered into sale/leaseback transactions to acquire aircraft and may do so in
the future.
14
<PAGE> 15
In November 1997, the Company issued $340 million of 9.95% Senior Secured
Notes (the "Notes"), resulting in net proceeds to the Company of approximately
$329.1 million. The Notes provide for semi-annual interest payments of
approximately $16.9 million on each May 15 and November 15 and mature in
November 2004. The Notes are secured by a fleet of 30 aircraft, including nine
Boeing 747s, eight Lockheed L-1011s and 13 Boeing 727s. The Notes are guaranteed
by all of the Company's subsidiaries.
The Company has a $38.7 million outstanding Term Loan. The Term Loan is due
in quarterly installments of $2.25 million, with the balance of $12.5 million
due upon maturity in September 2002. Except as noted below, 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. (Texas)
("WFB") or the Federal Funds Rate plus 0.5%. As of September 30, 1999, the
interest rate was 8.8%. Except as provided below, the Term Loan is secured by
accounts receivable, all spare parts (including rotables), inventory,
intangibles and contract rights, cash, 15 Boeing 727s and related engines and
the stock of each of the Company's subsidiaries. The Term Loan is guaranteed by
all of the Company's subsidiaries.
In addition, to fund ongoing capital requirements, including possible
acquisitions, the Company has entered into a Credit Facility with WFB,
individually and as agent for various lenders. The Credit Facility provides the
Company with up to $100 million in revolving loans (subject to a current
borrowing base limitation of $100 million, including an increase of $30 million
to the borrowing base as a result of an amendment to the Credit Facility (the
"Amendment") on December 10, 1998) that is secured by the same collateral as the
Term Loan. Except as provided below, the Credit Facility bears interest at LIBOR
plus 2.75% or a Base Rate plus 1.25%, subject to adjustment. The Base Rate is
the higher of WFB's Prime Rate or the Federal Funds Rate plus 0.5%. Borrowings
under the Credit Facility are subject to borrowing base limitations based on
eligible inventory and accounts receivable. The Credit Facility matures in
November 2002. As of September 30, 1999, the Company had a balance of $89.1
million outstanding under the Credit Facility bearing interest at a weighted
average rate of 9% and available borrowings under the Credit Facility of
approximately $10.5 million. Borrowings under the Credit Facility and Term Loan
are subject to certain financial covenants. As of September 30, 1999, the
Company was in compliance with all such financial covenants.
In connection with the Amendment, the Company pledged 11 Douglas DC-8-60s
and eight Douglas DC-8-50s under the Credit Facility and the Term Loan. The
Company can request WFB to release its liens on the Douglas DC-8-50 aircraft at
any time in connection with a sale of the aircraft for full and fair
consideration. With respect to the Douglas DC-8-60 aircraft, the Company can
request WFB to release its liens on the Douglas DC-8-60s after first repaying
the amount borrowed, if any, under the Amendment's $30 million increase to the
borrowing base. Prior to December 31, 1999, WFB is not obligated to release its
liens on the Douglas DC-8-60s except in connection with a sale of the aircraft
for full and fair consideration. After December 31, 1999, WFB is not obligated
to release its liens on the Douglas DC-8-60s unless the Company meets specified
financial criteria.
The Amendment's increase in the borrowing base is available through January
1, 2000, subject to earlier termination by the Company (the "Loan Pricing
Increase Period"). During the Loan Pricing Increase Period, the interest rate of
the Term Loan and the Credit Facility is either the Prime Rate of WFB plus 1.75%
or LIBOR plus 3.25%, regardless of financial covenant performance. Upon
termination of this borrowing base increase, the interest rates on the Term Loan
and the Credit Facility revert to those stated above. The Company is currently
working to convert the $30 million increase in the borrowing base availability
to a 5 year term loan or to enter into a sale/leaseback arrangement with the
assets securing the $30 million increased borrowing base availability.
Capital expenditures were $72.6 million and $161.9 million for the nine
months ended September 30, 1999 and 1998, respectively. Capital expenditures for
the nine months ended September 30, 1999 were primarily for (i) modification of
one Boeing 727 to cargo configuration, (ii) noise abatement modifications for
six Boeing 727s, (iii) engine overhauls, (iv) heavy maintenance checks on three
Boeing 727s and (v) purchase of rotable aircraft parts. Capital expenditures for
the nine months ended September 30, 1998 were primarily for (i) the purchase of
two Boeing 747s, (ii) cargo modifications to two Boeing 747s and one Boeing 727,
(iii) heavy maintenance checks on three Boeing 727s, (iv) noise abatement
modifications for ten Boeing 727s, (v) engine overhauls, (vi) the purchase of 15
engines, (vii) improvements to new office space at Dallas/Fort Worth
International Airport and (viii) the purchase of rotable aircraft parts.
During the remainder of 1999, the Company estimates that capital
expenditures will be, in the aggregate, between $20 and $25 million and that it
will make substantial capital expenditures thereafter.
During the remainder of 1999, the Company anticipates capital expenditures
of approximately $5 million for noise abatement modifications to one Douglas
DC-9 and three Boeing 727 aircraft currently owned. The entire fleet must comply
with Federal Aviation Administration ("FAA") noise regulations by the year 2000.
In the event more aircraft are acquired, anticipated capital expenditures for
noise abatement modifications could materially increase.
15
<PAGE> 16
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/or structural inspections and
modifications to address problems of corrosion and structural fatigue, among
other things. Directives applicable to the Company's fleet can be issued at any
time. The cost of complying with such potential future directives cannot
currently be estimated, but could be substantial.
The Company operates a fleet of 32 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
Directive which limits the cargo capacity of these Boeing 727s from
approximately 8,000 pounds per cargo position to 4,000 pounds per cargo position
until certain modifications are made. The Company received approval from the FAA
to modify its fleet of Boeing 727s to increase their cargo capacity to
approximately 6,000 pounds per cargo position. The modifications are expected to
take from three to four days to complete and to cost between $25,000 and $50,000
per aircraft, not including aircraft downtime. The costs incurred to modify the
aircraft are expensed as incurred. As of October 31, 1999, the Company had 16
aircraft left to modify.
In October 1999, Kitty Hawk International, Inc. ("KHII") and the pilots and
flight engineers in the service of KHII, represented by the International
Brotherhood of Teamsters, entered into a Collective Bargaining Agreement (the
"CBA") governing the terms and conditions of employment of KHII's pilots and
flight engineers for a period of four years. The CBA calls for an increase in
the pilot's and flight engineer's pay, however, KHII expects the increased
salary expenses will be partially offset by reduced expenses attributable to
better work rules and pilot productivity. The Company does not believe that the
net increase in flight expenses resulting from the CBA will have a material
adverse effect on the Company and its financial results.
The Company believes that available funds, bank borrowings and cash flows
expected to be generated by operations and through planned asset sales will be
sufficient to meet its anticipated cash needs for working capital, debt service
and capital expenditures for at least the next 12 months. Thereafter, if cash
generated by operations is insufficient to satisfy the Company's liquidity
requirements, the Company may sell additional equity or debt securities or
obtain additional credit facilities. However, there can be no assurance that the
Company will be able to sell any additional equity or debt securities or obtain
additional credit facilities. Notwithstanding the foregoing, the Company may
sell additional equity or debt securities or obtain additional credit facilities
at any time.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
Based on recent assessments, the Company determined that it will be required
to modify or replace portions of its software so that those systems will
properly utilize dates beyond December 31, 1999. The Company presently believes
that with modifications or replacements of existing software the Year 2000 issue
can be mitigated. However, if such modifications and replacements are not made,
or are not completed timely, the Year 2000 issue could have a material impact on
the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Company has completed its assessment of all systems that could be significantly
affected by the Year 2000. The assessment indicates that most of the Company's
significant information technology systems could be affected. The Company has
determined that most of the services it has sold and will continue to sell do
not require remediation to be Year 2000 compliant. Accordingly, the Company does
not believe that the Year 2000 presents a material exposure as it relates to the
Company's services. In addition, the Company has substantially completed
gathering information about the Year 2000 compliance status of its significant
suppliers and subcontractors and will continue to monitor their compliance.
With regard to the Company's information technology exposure, to date the
Company has completed the assessment phase and has completed substantially all
of the necessary software reprogramming and replacement (remediation). The
testing and implementation phases of the replaced or reprogrammed software have
been running concurrently for different systems. The testing and remediation
phase for all significant systems is expected to be completed by the end of
November 1999.
The Company has substantially completed working with third party vendors to
ensure that any of the Company's systems that interface directly with third
parties are Year 2000 compliant by November 30, 1999.
16
<PAGE> 17
The Company has substantially completed querying its significant suppliers
and subcontractors that do not share information systems with the Company
("external agents"). To date, the Company is not aware of any external agent
with a Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources although the Company understands
that certain fuel refiners may be particularly susceptible to disruption caused
by non-compliant embedded chips and that certain electrical power suppliers may
be similarly affected. The Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of certain external agents, such as the
FAA, fuel refiners and suppliers generally, and electrical power suppliers, to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by external agents is not
determinable.
The Company is utilizing both internal and external resources to reprogram
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at less
than $500,000 and is being funded through operating cash flows. As of October 1,
1999, the Company has incurred approximately $390,000 related to all phases of
the Year 2000 project. The remaining project costs relate to repair of hardware
and software and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, it is possible that the
Company's or third parties' systems and equipment could fail and result in the
reduction or suspension of the Company's operations. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. Disruptions
in the economy generally resulting from Year 2000 issues could materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program or for dealing with the most
reasonably likely worst case scenario. The Company plans to evaluate the status
of completion in November 1999 and determine whether such a plan is necessary.
If the Company's expectations or assessments of the impact of the Year 2000
issue prove to be incorrect, the Company's business may be materially affected.
SEASONALITY
Certain of the Company's customers engage in seasonal businesses, especially
the USPS and customers in the automotive industry. As a result, the Company has
historically experienced its highest quarterly revenues and profitability during
the fourth quarter of the calendar year due to the peak Christmas season
activity of the USPS and during the period from June 1 to November 30 when
production schedules of the automotive industry typically increase.
Consequently, the Company experiences its lowest quarterly revenue and
profitability during the first quarter of the calendar year.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements, which can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "could,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. These forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those referred to in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results" of
the Company's 1998 Annual Report on Form 10-K. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. We undertake no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents we file from time to time with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended September 30, 1999, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's 1998 Annual Report on Form
10-K.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
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.
ITEM 6. REPORTS ON FORM 8-K AND EXHIBITS
(a) Reports on Form 8-K:
Not applicable.
(b) Exhibits:
The following exhibits are filed herewith or are incorporated by reference from
previous filings with the Securities and Exchange Commission.
EXHIBIT NO. DESCRIPTION
3.1 - Certificate of Incorporation of the Company.(2)
3.2 - Amended and Restated Bylaws of the Company.(4)
3.3 - Amendment No. 1 to the Certificate of Incorporation of the
Company.(2)
4.1 - Specimen Common Stock Certificate.(3)
4.3 - Specimen Global Note in respect of 9.95% Senior Secured
Notes due 2004.(4)
4.4 - Indenture, dated November 17, 1997, in regard to 9.95%
Senior Secured Notes due 2004 by and among the Company and
certain of its subsidiaries and Bank One, N.A. as Trustee and
Collateral Trustee.(4)
4.5 - First Supplemental Indenture, dated February 5, 1998, in
regard to 9.95% Senior Secured Notes due 2004 by and among the
Company and certain of its subsidiaries and Bank One, N.A. as
Trustee and Collateral Trustee.(4)
10.1 - Agreement dated October 30, 1999, between Kitty Hawk
International, Inc. and the Pilots and Flight Engineers in the
service of Kitty Hawk International, Inc. as represented by
the International Brotherhood of Teamsters.(5)
18
<PAGE> 19
21.1 - Subsidiaries of the Registrant.(4)
27.1 - Financial Data Schedule.(5)
- -----------------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 33-85698) dated as of December 1994, and incorporated
herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-8307) dated as of October 1996, and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (Reg. No. 333-43645) dated as of February 1998, and incorporated
herein by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1999 and incorporated herein by
reference.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 23, 1999.
KITTY HAWK, INC.
By: /s/ Richard R. Wadsworth
------------------------------
Richard R. Wadsworth, Jr.
Senior Vice President -
Finance,
Chief Financial Officer,
and Secretary
(Authorized officer and
principal financial and
accounting officer)
