-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D4Li3BFpD/lMgKZnEqNU7ONeSAQkD4kT+4mDtGydaPBF38NxcYbLmzPQdes7KbK3 GOBuyk9vcxBMXN0Sb7huyg== 0000950134-99-007506.txt : 19990817 0000950134-99-007506.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950134-99-007506 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KITTY HAWK INC CENTRAL INDEX KEY: 0000932110 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, NONSCHEDULED [4522] IRS NUMBER: 752564006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25202 FILM NUMBER: 99691515 BUSINESS ADDRESS: STREET 1: P O BOX 612787 STREET 2: 1515 W 20TH ST CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 BUSINESS PHONE: 2144562220 MAIL ADDRESS: STREET 1: P O BOX 612787 CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 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 August 13, 1999: 17,057,071. 2 KITTY HAWK, INC. AND SUBSIDIARIES
PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets June 30, 1999 and December 31, 1998....................... 3 Condensed Consolidated Statements of Income Three months ended June 30, 1999 and 1998 and Six months ended June 30, 1999 and 1998................... 4 Condensed Consolidated Statement of Stockholders' Equity Six months ended June 30, 1999............................ 5 Condensed Consolidated Statements of Cash Flows Six months ended June 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................................................. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................ 17 Item 2. Changes in Securities.................................... 17 Item 3. Defaults upon Senior Securities.......................... 17 Item 4. Submission of Matters to a Vote of Security Holders...... 17 Item 5. Other Information........................................ 17 Item 6. Reports on Form 8-K and Exhibits......................... 17
2 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)
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ ASSETS (UNAUDITED) Current assets Cash and cash equivalents.............. $ 2,343 $ 15,077 Restricted cash and short-term investments.......................... -- 1,964 Trade accounts receivable.............. 97,051 140,014 Deferred income taxes.................. 16,088 16,088 Inventory and aircraft supplies........ 52,562 50,135 Prepaid expenses and other current assets............................... 20,510 22,871 -------- -------- Total current assets............... 188,554 246,149 Property and equipment, net................. 742,067 720,808 Other assets, net........................... 16,784 15,628 -------- -------- Total assets................................ $947,405 $982,585 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable....................... $ 65,760 $ 53,967 Accrued expenses....................... 68,050 104,278 Accrued maintenance reserves........... 20,651 22,382 Current maturities of long-term debt... 14,054 20,564 -------- -------- Total current liabilities.......... 168,515 201,191 Revolving credit facility................... 91,900 86,900 Long-term debt.............................. 377,053 382,287 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 -16,995,987 and 16,927,942, respectively............... 170 169 Additional capital....................... 133,801 133,166 Retained earnings........................ 62,705 60,862 -------- -------- Total stockholders' equity......... 196,676 194,197 -------- -------- Total liabilities and stockholders' equity.. $947,405 $982,585 ======== ========
See accompanying notes. 3 4 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Revenues: Air freight carrier................. $ 60,899 $ 74,852 $125,954 $147,276 Air logistics....................... 44,765 27,935 71,113 55,625 Scheduled freight................... 56,184 40,497 99,175 76,678 Maintenance and other............... 6,146 9,917 10,257 18,635 -------- -------- -------- -------- Total revenues.................. 167,994 153,201 306,499 298,214 Costs of revenues: Flight expense...................... 70,073 70,030 129,293 139,220 Maintenance expense................. 35,438 30,747 70,035 64,955 Aircraft fuel expense............... 18,269 15,906 30,055 31,356 Depreciation expense................ 17,908 11,552 34,692 22,432 -------- -------- -------- -------- Total costs of revenues......... 141,688 128,235 264,075 257,963 -------- -------- -------- -------- Gross profit............................. 26,306 24,966 42,424 40,251 General and administrative expenses...... 7,882 7,812 16,293 15,613 Non-qualified employee profit sharing expense................................ 307 52 307 582 -------- -------- -------- -------- Operating income......................... 18,117 17,102 25,824 24,056 Other income (expense): Interest expense.................... (12,093) (9,602) (24,275) (19,301) Other, net.......................... 382 391 1,718 1,066 -------- -------- -------- -------- Income before minority interest and income taxes........................... 6,406 7,891 3,267 5,821 Minority interest........................ -- 619 196 1,430 -------- -------- -------- -------- Income before income taxes............... 6,406 7,272 3,071 4,391 Income tax expense....................... 2,562 2,909 1,228 1,756 -------- -------- -------- -------- Net income............................... $ 3,844 $ 4,363 $ 1,843 $ 2,635 ======== ======== ======== ======== Basic and diluted income per share....... $ 0.23 $ 0.26 $ 0.11 $ 0.16 ======== ======== ======== ======== Weighted average common shares outstanding............................ 16,996 16,792 16,989 16,767 ======== ======== ======== ========
See accompanying notes. 4 5 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share data) (unaudited)
NUMBER OF COMMON ADDITIONAL RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL ----------- ------ ---------- -------- -------- 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......... 68,045 1 635 -- 636 Net income............................. -- -- -- 1,843 1,843 ----------- ------ ---------- -------- -------- Balance at June 30, 1999............... 16,995,987 $ 170 $ 133,801 $ 62,705 $ 196,676 =========== ====== ========== ======== =========
See accompanying notes. 5 6 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------ 1999 1998 --------- --------- Operating activities: Net income .......................................... $ 1,843 $ 2,635 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................... 36,186 23,572 Gain on sales of assets ........................... (864) (713) Minority interest ................................. 196 1,430 Changes in operating assets and liabilities: Trade accounts receivable ....................... 43,473 50,032 Inventory and aircraft supplies ................. (7,539) (11,060) Prepaid expenses and other current assets ....... 41 (11,865) Accounts payable and accrued expenses ........... (26,774) (17,668) Accrued maintenance reserves .................... (2,122) (103) --------- --------- Net cash provided by operating activities .............. 44,440 36,260 Investing activities: Capital expenditures ................................ (49,314) (124,661) Redemption of short term investments ................ -- 46,507 Proceeds from sales of assets ....................... 1,234 4,222 --------- --------- Net cash used in investing activities .................. (48,080) (73,932) Financing activities: Proceeds from issuance of long-term debt ............ 2,965 11,880 Repayments of long-term debt ........................ (17,059) (7,438) Net borrowings on revolving credit facility ......... 5,000 31,000 Distributions to minority interest .................. -- (1,420) Note receivable issued to stockholder ............... -- 41 --------- --------- Net cash (used in) provided by financing activities .... (9,094) 34,063 --------- --------- Net decrease in cash and cash equivalents .............. (12,734) (3,609) Cash and cash equivalents at beginning of period ....... 15,077 17,907 --------- --------- Cash and cash equivalents at end of period ............. $ 2,343 $ 14,298 ========= =========
See accompanying notes. 6 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 six month period ended June 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 which 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 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 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. 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 consists of an overnight freight service provider operating in a network of over 40 North American cities, as well as a service between Los Angeles, the Hawaiian islands and several Pacific Rim countries. The Company's maintenance operation provides engine overhauls for third parties as well as for certain of the Company's aircraft. The Company recently curtailed its third party maintenance operation and at June 30, 1999 only provided engine overhauls on JT3 engines for Douglas DC8s and JT8 engines for Boeing 727s and Douglas DC9s. On August 13, 1999, the Company further curtailed its maintenance operation when it completed the sale of certain maintenance-related assets and parts to a third party. (See Note 7). The other category consists of corporate activities as well as the activities of Longhorn Solutions, Inc., the Company's wholly- 7 8 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.
ACMI ACMI TOTAL WIDE- NARROW- AIR FREIGHT AIR SCHEDULED INTERSEGMENT CONSOLIDATED BODY BODY CARRIER LOGISTICS FREIGHT OTHER ELIMINATIONS BALANCE -------- -------- ----------- --------- --------- -------- ------------ ------------ (AMOUNTS IN THOUSANDS) Quarter ended June 30, 1999 Revenue from external customers $ 21,810 $ 42,470 $ 64,280 $ 47,479 $ 56,184 $ 51 $ -- $ 167,994 Revenue from intersegment 37,941 11,376 49,317 305 310 152 (50,084) -- operations Operating income 6,345 1,361 7,706 7,473 4,090 (1,152) -- 18,117 Interest expense (12,093) Other income (expense) 382 Income before minority interest and taxes $ 6,406 Total assets $735,624 $264,848 $ 1,000,472 $ 84,370 $ 34,302 $572,172 $ (743,911) $ 947,405 Quarter ended June 30, 1998 Revenue from external customers $ 58,437 $ 23,490 $ 81,927 $ 30,777 $ 40,497 $ -- $ -- $ 153,201 Revenue from intersegment 19,706 9,510 29,216 2,608 306 -- (32,130) -- operations Operating income 7,989 4,403 12,392 2,747 2,401 (438) -- 17,102 Interest expense (9,602) Other income (expense) 391 Income before minority interest and taxes $ 7,891 Total assets $591,123 $153,750 $ 744,873 $ 73,174 $ 25,283 $506,070 $ (489,191) $ 860,209 Six months ended June 30, 1999 Revenue from external customers $ 49,163 $ 81,380 $ 130,543 $ 76,637 $ 99,175 $ 144 $ -- $ 306,499 Revenue from intersegment 67,747 22,863 90,610 905 511 264 (92,290) -- operations Operating income 6,685 4,321 11,006 10,413 6,289 (1,884) -- 25,824 Interest expense (24,275) Other income (expense) 1,718 Income before minority interest and taxes $ 3,267 Total assets $735,624 $264,848 $ 1,000,472 $ 84,370 $ 34,302 $572,172 $ (743,911) $ 947,405 Six months ended June 30, 1998 Revenue from external customers $115,423 $ 44,949 $ 160,372 $ 61,164 $ 76,678 $ -- $ -- $ 298,214 Revenue from intersegment 36,619 17,131 53,750 5,751 640 -- (60,141) -- operations Operating income 7,491 8,684 16,175 4,900 3,127 (146) -- 24,056 Interest expense (19,301) Other income (expense) 1,066 Income before minority interest and taxes $ 5,821 Total assets $591,123 $153,750 $ 744,873 $ 73,174 $ 25,283 $506,070 $ (489,191) $ 860,209
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 $2.4 million, $1.0 million and $2.7 million for the quarter ended June 30, 1999, respectively; $7.1 million, $0 and $2.8 million for the quarter ended June 30, 1998, respectively; $3.1 million, $1.5 million and $5.5 million for the six months ended June 30, 1999, respectively; and $13.1 million, $0 and $5.5 million for the six months ended June 30, 1998, respectively. 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 8 9 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.
KITTY HAWK, SUBSIDIARIES INC. (PARENT) (GUARANTORS) ELIMINATIONS TOTAL ------------- ------------ ------------ --------- (amounts in thousands) As of June 30, 1999 Current assets $ 5,169 $ 183,385 $ -- $ 188,554 Non-current assets 538,907 749,767 (529,823) 758,851 Current liabilities 9,654 604,444 (445,583) 168,515 Non-current liabilities 433,550 148,664 -- 582,214 Minority interest -- -- -- -- Stockholders' equity 100,872 180,044 (84,240) 196,676 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 June 30, 1999 Revenue $ -- $ 168,130 $ (136) $ 167,994 Gross profit -- 26,442 (136) 26,306 Operating income (1,018) 19,135 -- 18,117 Net income (421) 4,265 -- 3,844 For the six months ended June 30, 1999 Revenue $ -- $ 306,747 $ (248) $ 306,499 Gross profit -- 42,672 (248) 42,424 Operating income (1,688) 27,512 -- 25,824 Net income (500) 2,539 (196) 1,843 For the three months ended June 30, 1998 Revenue $ -- $ 153,201 $ -- $ 153,201 Gross profit -- 24,966 -- 24,966 Operating income 4 17,098 -- 17,102 Net income (49) 5,031 (619) 4,363 For the six months ended June 30, 1998 Revenue $ -- $ 298,214 $ -- $ 298,214 Gross profit -- 40,251 -- 40,251 Operating income (212) 24,268 -- 24,056 Net income (214) 4,279 (1,430) 2,635
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 June 30, 1999, 280,000 options were outstanding with a weighted average exercise price of $11.56 per share. As the weighted average exercise price of the outstanding options exceeded the average market price of the Company's common stock for the three and six month periods ended June 30, 1999, the effect of the stock options was excluded from the Company's diluted earnings per share calculation. 7. SUBSEQUENT EVENTS On August 13, 1999, the Company completed the sale of its Oscoda, Michigan-based JT8 engine and Boeing 727 aircraft maintenance operations to 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 also entered into exclusive maintenance agreements with Aviation Sales Company for maintenance of the Company's fleet of Boeing 727s and JT8 engines. Upon consummation of the sale, the Company ceased providing third party maintenance on JT8 engines for Boeing 727s and Douglas DC9s. 9 10 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 air logistics service provider's 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 U.S. 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, 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 113 aircraft at June 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. RESULTS OF OPERATIONS The following table presents, for the periods indicated, condensed consolidated statement of operations data expressed as a percentage of total revenues:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------ ------ ------ ------ Revenues: Air freight carrier................. 36.3% 48.9% 41.1% 49.4% Air logistics....................... 26.6 18.2 23.2 18.7 Scheduled freight service........... 33.4 26.4 32.4 25.7 Maintenance and other............... 3.7 6.5 3.3 6.2 ------ ------ ------ ------ Total revenues.................. 100.0 100.0 100.0 100.0 Costs of revenues: Flight expense...................... 41.7 45.7 42.2 46.7 Maintenance expense................. 21.1 20.1 22.9 21.8 Aircraft fuel expense............... 10.9 10.4 9.8 10.5 Depreciation expense................ 10.6 7.5 11.3 7.5 ------ ------ ------ ------ Total costs of revenues.......... 84.3 83.7 86.2 86.5 ------ ------ ------ ------ Gross profit............................. 15.7 16.3 13.8 13.5 General and administrative expenses...... 4.7 5.1 5.3 5.2 Non-qualified employee profit sharing expense................................ 0.2 0.0 0.1 0.2 ------ ------ ------ ------ Operating income......................... 10.8 11.2 8.4 8.1 Interest expense......................... (7.2) (6.3) (7.9) (6.5) Other income............................. 0.2 0.2 0.6 0.4 ------ ------ ------ ------ Income before minority interest and income taxes........................... 3.8 5.1 1.1 2.0 Minority interest........................ -- 0.4 0.1 0.5 ------ ------ ------ ------ Income before income taxes............... 3.8 4.7 1.0 1.5 Income tax expense....................... 1.5 1.9 0.4 0.6 ------ ------ ------ ------ Net income............................... 2.3% 2.8% 0.6% 0.9% ====== ====== ====== ======
10 11 QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998 Revenues - Air Freight Carrier. Air freight carrier revenues decreased $14 million, or 18.6%, to $60.9 million in the quarter ended June 30, 1999, from $74.9 million in the quarter ended June 30, 1998. This decrease was primarily attributable to (i) the elimination of the Company's passenger charter division, which contributed $15 million of revenue in the quarter ended June 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 sell this aircraft type. This decrease was partially offset by revenue from four additional Boeing 727s and two additional Boeing 747s added to the fleet after June 30, 1998. The Company has also implemented selective price increases for some of its ACMI contract charters. Revenues - Air Logistics. Air logistics revenues increased $16.8 million, or 60.3%, to $44.8 million in the quarter ended June 30, 1999, from $27.9 million in the quarter ended June 30, 1998. This increase was primarily due to an increase in the number of trips managed from 4,623 in the quarter ended June 30, 1998 to 7,117 in the quarter ended June 30, 1999, an increase of 54%. Although prices for the Company's air logistics services remained relatively constant, the average revenue per trip increased due to the mix of aircraft used. Revenues - Scheduled Freight. Scheduled freight revenues increased $15.7 million, or 38.7%, to $56.2 million in the quarter ended June 30, 1999, from $40.5 million in the quarter ended June 30, 1998. This increase was primarily due to several price increases since June 30, 1998, as well as adding another Boeing 747 into international scheduled service in May 1999 and adding a fifth night to certain domestic scheduled routes effective June 1, 1999. Freight volumes in the scheduled freight operation increased approximately 11.2% from the quarter ended June 30, 1998 as compared to the quarter ended June 30, 1999 due to the additional flight activity. The average yield per pound increased 25.5%, from $0.51 per pound for the quarter ended June 30, 1998 to $0.64 per pound for the quarter ended June 30, 1999. Revenues - Maintenance and Other. Maintenance and other revenues decreased $3.8 million, or 38%, to $6.1 million in the quarter ended June 30, 1999, from $9.9 million in the quarter ended June 30, 1998. This decrease was primarily due to the Company's decision to stop 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. Costs of Revenues - Flight Expense. Flight expense increased less than 1% to $70.1 million in the quarter ended June 30, 1999, from $70 million in the quarter ended June 30, 1998. As a percent of revenues, flight expense decreased to 41.7% for the quarter ended June 30, 1999 as compared to 45.7% for the quarter ended June 30, 1998. This decrease as a percent of revenues was primarily due to (i) the elimination of the passenger charter division (which resulted in reduced wages, catering expense, subcharter expense and ground handling costs, a savings of $4.4 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 offset by a $10.7 million increase in flight expense attributable to the air logistics service due to an increase in the number of trips during the quarter ended June 30, 1999. Costs of Revenues - Maintenance Expense. Maintenance expense increased $4.7 million, or 15.3%, to $35.4 million in the quarter ended June 30, 1999, from $30.7 million in the quarter ended June 30, 1998. The increase is primarily due to the increased parts expense and labor costs associated with maintaining an aging fleet and an overall increase in the use of the Company's aircraft. Additionally, the Company incurred an additional $1.1 million in maintenance expense for the quarter ended June 30, 1999 for several C-checks that exceeded the reserves established for the aircraft. As a percent of revenues, maintenance expense increased slightly from 20.1% for the quarter ended June 30, 1998 as compared to 21.1% for the quarter ended June 30, 1999. Costs of Revenues - Aircraft Fuel Expense. Aircraft fuel expense increased $2.4 million, or 14.9%, to $18.3 million in the quarter ended June 30, 1999, from $15.9 million in the quarter ended June 30, 1998. As a percent of revenues, aircraft fuel expense increased from 10.4% for the quarter ended June 30, 1998 to 10.9% for the quarter ended June 30, 1999. This increase is primarily due to an 11.6% increase in fuel prices from an average price of $0.60 per gallon for the quarter ended June 30, 1998 as compared to an average price of $0.67 per gallon for the quarter ended June 30, 1999. Fuel expense has also increased due to increased flight activity for the Company's scheduled freight operation and two United States Postal Service ("USPS") contracts, where fuel costs are not directly passed through to the USPS. The increase in fuel expense was offset by the elimination of the Company's passenger charter business, which resulted in a savings of $1.9 million in the quarter ended June 30, 1999. Costs of Revenues - Depreciation Expense. Depreciation expense increased $6.4 million, or 55%, to $17.9 million in the quarter ended June 30, 1999, from $11.6 million in the quarter ended June 30, 1998. As a percent of revenues, depreciation expense increased 11 12 from 7.5% for the quarter ended June 30, 1998 to 10.7% for the quarter ended June 30, 1999. This increase is primarily due to the depreciation of capital expenditures of approximately $170 million since June 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 ten Boeing 727s and one Douglas DC-9. General and Administrative Expenses. General and administrative expenses increased less than 1% to $7.9 million in the quarter ended June 30, 1999, from $7.8 million in the quarter ended June 30, 1998. As a percentage of total revenues, general and administrative expenses decreased to 4.7% in the quarter ended June 30, 1999, as compared to 5.1% for the quarter ended June 30, 1998, principally reflecting an increase in the Company's revenues. Operating Income. As a result of the above, operating income increased $1 million to $18.1 million in the quarter ended June 30, 1999, from $17.1 million in the quarter ended June 30, 1998. Operating income margin decreased to 10.8% in the quarter ended June 30, 1999, from 11.2% in the quarter ended June 30, 1998. Interest Expense. Interest expense increased to $12.1 million for the quarter ended June 30, 1999, from $9.6 million for the quarter ended June 30, 1998, a 25.9% increase. The increase was primarily the result of increased borrowings on the Company's Credit Facility, an increase of $50.9 million from June 30, 1998, and an overall increase in the interest rate under the December 10, 1998 amendment to the Credit Facility. Additionally, approximately $0.8 million of interest expense was capitalized during the quarter ended June 30, 1998 in connection with funds used in the cargo modification of one Boeing 747. Income Tax Expense. Income tax expense as a percentage of income before income taxes remained consistent at 40% for the quarters ended June 30, 1999 and 1998. Net Income. As a result of the above, the Company's net income decreased to $3.8 million in the quarter ended June 30, 1999, as compared to net income of $4.4 million in the quarter ended June 30, 1998. Net income as a percentage of total revenues decreased to 2.3% in the quarter ended June 30, 1999, from 2.8% in the prior year period. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Revenues - Air Freight Carrier. Air freight carrier revenues decreased $21.3 million, or 14.5%, to $126 million in the six months ended June 30, 1999, from $147.3 million in the six months ended June 30, 1998. This decrease was primarily attributable to (i) the elimination of the Company's passenger charter division, which contributed $28.8 million of revenue in the six months ended June 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. This decrease was partially offset by placing four additional Boeing 727s and two additional Boeing 747s into cargo service after June 30, 1998 and increased utilization of aircraft during non-peak cargo hours. The Company has also implemented selective price increases for some of its ACMI contract charters. Revenues - Air Logistics. Air logistics revenues increased $15.5 million, or 27.8%, to $71.1 million in the six months ended June 30, 1999, from $55.6 million in the six months ended June 30, 1998. This increase was primarily due to an increase in the number of trips managed from 9,031 in the six months ended June 30, 1998 to 12,027 in the six months ended June 30, 1999, a 33% increase. Although prices for the Company's air logistics services remained relatively constant, the average revenue per trip decreased 4% due to the mix of the aircraft used for the trips. Revenues - Scheduled Freight. Scheduled freight revenues increased $22.5 million, or 29.3%, to $99.2 million in the six months ended June 30, 1999, from $76.7 million in the six months ended June 30, 1998. This increase was primarily due to (i) several price increases since June 30, 1998, (ii) adding a Boeing 747 into international scheduled freight 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 5.1% in the six months ended June 30, 1999 as compared to the six months ended June 30, 1998 due to the additional flight activity. The average yield per pound increased 24.5%, from $0.49 per pound for the six months ended June 30, 1998 to $0.61 per pound for the six months ended June 30, 1999. Revenues - Maintenance and Other. Maintenance and other revenues decreased $8.4 million, or 45%, to $10.2 million in the six months ended June 30, 1999, from $18.6 million in the six months ended June 30, 1998. This decrease was primarily due to the Company's decision to stop 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. 12 13 Costs of Revenues - Flight Expense. Flight expense decreased $9.9 million, or 7%, to $129.3 million in the six months ended June 30, 1999, from $139.2 million in the six months ended June 30, 1998. As a percent of revenues, flight expense decreased to 42.2% for the six months ended June 30, 1999 as compared to 46.7% for the six months ended June 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 $9.1 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 offset by a $8.3 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 increased $5 million, or 7.8%, to $70 million in the six months ended June 30, 1999, from $65 million in the six months ended June 30, 1998. The increase is primarily due to the increased parts expense and labor costs associated with maintaining an aging fleet and increased flight activity. Additionally, the Company incurred an additional $1.9 million in maintenance expense in the six months ended June 30, 1999 for several C-checks that exceeded the reserves established for the aircraft. Costs of Revenues - Aircraft Fuel Expense. Aircraft fuel expense decreased $1.3 million, or 4%, to $30 million in the six months ended June 30, 1999, from $31.4 million in the six months ended June 30, 1998. As a percent of revenues, aircraft fuel expense decreased from 10.5% for the six months ended June 30, 1998 to 9.8% for the six months ended June 30, 1999. This decrease is primarily due to a 1.6% decline in fuel prices from an average price of $0.62 per gallon for the six months ended June 30, 1998 as compared to an average price of $0.61 per gallon for the six months ended June 30, 1999. Additionally, the Company is no longer incurring aircraft fuel expense from its passenger charter business, which resulted in a savings of $4.1 million in the six months ended June 30, 1999. This decrease was partially offset by fuel expense increases due to increased flight activity for the Company's scheduled freight service and two USPS contracts, where fuel costs are not directly passed through to the USPS. Costs of Revenues - Depreciation Expense. Depreciation expense increased $12.3 million, or 54.7%, to $34.7 million in the six months ended June 30, 1999, from $22.4 million in the six months ended June 30, 1998. As a percent of revenues, depreciation expense increased from 7.5% for the six months ended June 30, 1998 to 11.3% for the six months ended June 30, 1999. This increase is primarily due to the depreciation of capital expenditures of approximately $170 million since June 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 ten Boeing 727s and one Douglas DC-9. General and Administrative Expenses. General and administrative expenses increased $0.7 million, or 4.4%, to $16.3 million in the six months ended June 30, 1999, from $15.6 million in the six months ended June 30, 1998. As a percentage of total revenues, general and administrative expenses increased to 5.3% in the six months ended June 30, 1999, as compared to 5.2% for the six months ended June 30, 1998. Operating Income. As a result of the above, operating income increased $1.8 million to $25.8 million in the six months ended June 30, 1999, from $24.1 million in the six months ended June 30, 1998. Operating income margin increased to 8.4% in the six months ended June 30, 1999, from 8.1% in the six months ended June 30, 1998. Interest Expense. Interest expense increased to $24.3 million for the six months ended June 30, 1999, from $19.3 million for the six months ended June 30, 1998, a 25.8% increase. The increase was primarily the result of increased borrowings on the Company's Credit Facility, an increase of $50.9 million from June 30, 1998, and an overall increase in the interest rate under the December 10, 1998 amendment to the Credit Facility. Additionally, approximately $1.5 million of interest expense was capitalized during the six months ended June 30, 1998 in connection with funds used in the cargo modification of one Boeing 747. Income Tax Expense. Income tax expense as a percentage of income before income taxes remained consistent at 40% for the six months ended June 30, 1999 and 1998. Net Income. As a result of the above, the Company's net income decreased to $1.8 million in the six months ended June 30, 1999, compared to a net income of $2.6 million in the six months ended June 30, 1998. Net income as a percentage of total revenues decreased to 0.6% in the six months ended June 30, 1999, from 0.9% in the prior year period. 13 14 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. 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 $40.9 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. ("WFB") or the Federal Funds Rate plus 0.5%. As of June 30, 1999, the interest rate was 8.4%. 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 June 30, 1999, the Company had a balance of $91.9 million outstanding under the Credit Facility bearing interest at a weighted average rate of 8.7% and available borrowings under the Credit Facility of approximately $7.7 million. Borrowings under the Credit Facility and Term Loan are subject to certain financial covenants. As of June 30, 1999, the Company was in compliance with all 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. Capital expenditures were $49.3 million and $124.7 million for the six months ended June 30, 1999 and 1998, respectively. Capital expenditures for the six months ended June 30, 1999 were primarily for (i) modification of one Boeing 727 to cargo configuration, (ii) noise abatement modifications for three Boeing 727s, (iii) engine overhauls, (iv) heavy maintenance checks on two Boeing 727s and (v) purchase of rotable aircraft parts. Capital expenditures for the six months ended June 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 seven Boeing 727s, (v) engine overhauls, (vi) the purchase of 12 engines, (vii) improvements to new office space at Dallas/Fort Worth International Airport and (viii) the purchase of rotable aircraft parts. 14 15 During the remainder of 1999, the Company estimates that capital expenditures will aggregate approximately $60 million and that it will make substantial capital expenditures thereafter. During the remainder of 1999, the Company anticipates capital expenditures of approximately $10 million for noise abatement modifications to one Douglas DC-9 and six Boeing 727 aircraft currently owned by the Company. 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. 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 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 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.. Recently, 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 of July 31, 1999, the Company has 19 aircraft left to modify. 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 digits 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 nearly completed its assessment of all systems that could be significantly affected by the Year 2000. The assessment completed to date 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 will continue to gather 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 expects to complete software reprogramming and replacement (remediation) no later than August 31, 1999. Once software is reprogrammed or replaced, the Company will begin testing and implementation. These phases will run concurrently for different systems. The testing and remediation phase for all significant systems is expected to be completed by the end of the third quarter of 1999. The Company is in the process of 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 September 30, 1999. 15 16 The Company has launched a program to query 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 Company's Year 2000 compliance effort is estimated at less than $0.5 million and is being funded through operating cash flows. As of August 1, 1999, the Company has incurred approximately $310,000 related to all phases of the Year 2000 compliance effort. The remaining costs of compliance relate to repair of hardware and software and will be expensed as incurred. The costs of the Company's Year 2000 identification, assessment, remediation and testing efforts and the date by which the Company believes it will complete such efforts are based upon management's best estimates, which are derived utilizing numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans and other factors. However, there can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that might cause such material differences include but are not limited to the availability and cost of personnel trained in year 2000 issues, the ability to identify, assess, remediate and test all relevant computer codes and embedded technology and similar uncertainties. Management of the Company believes it has an effective program in place to identify, assess, remediate and test problems related to 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 compliance effort. Disruptions in the economy generally resulting from the Year 2000 issue could also 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 for dealing with the most likely worst case scenario in the event it does not complete all phases of the Year 2000 compliance effort. The Company plans to evaluate the status of completion in October 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," "believes," "plans," "intends," "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 June 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. 16 17 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 On May 28, 1999, the Company held its 1999 Annual Meeting of Stockholders. At the Meeting, the following proposals were considered and voted upon: (i) the election of two Class II directors, each for a three-year term expiring in 2002; (ii) the approval of the Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan; (iii) the approval of Amendment No. 1 to the Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan; (iv) the approval of the Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan; (v) the approval of Amendment No. 1 to the Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan; (vi) the approval of the Kitty Hawk, Inc. 1999 Executive Stock Option Plan; and (vii) the ratification of the appointment of Ernst & Young LLP as the Company's independent public accountants for 1999. With respect to the election Tilmon J. Reeves as a Class II director, 14,703,822 shares were voted for the proposal and 249,502 shares were withheld. With respect to the election of Philip J. Sauder as a Class II director, 14,713,091 shares voted for the proposal and 240,233 shares were withheld. With respect to the approval of the Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, 12,132,988 shares were voted for the proposal, 520,026 shares were voted against and 15,450 shares abstained from voting. With respect to the approval of Amendment No. 1 to the Kitty Hawk, Inc. Amended and Restated Omnibus Securities Plan, 10,922,534 shares were voted for the Amendment, 1,731,580 shares were voted against and 14,350 shares abstained from voting. With respect to the approval of the Kitty Hawk, Inc. Amended and Restated Annual Incentive Compensation Plan, 12,142,329 shares were voted for the proposal, 564,252 shares were voted against and 15,771 shares abstained from voting. With respect to approval of Amendment No. 1 to the Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase Plan, 12,540,585 shares voted for the Amendment, 168,197 shares were voted against and 13,570 shares abstained from voting. With respect to the approval of the Kitty Hawk, Inc. 1999 Executive Stock Option Plan, 11,146,475 shares were voted for the proposal, 1,561,589 shares were voted against and 14,288 shares abstained from voting. With respect to the ratification of Ernst & Young LLP, 14,935,042 shares were voted for the proposal, 8,874 shares were voted against and 9,358 shares abstained from voting. ITEM 5. OTHER INFORMATION On August 13, 1999, the Company completed the sale of its Oscoda, Michigan-based JT8 engine and Boeing 727 aircraft maintenance operations to 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 also entered into exclusive maintenance agreements with Aviation Sales Company for maintenance of the Company's fleet of Boeing 727s and JT8 engines. Upon consummation of the sale, the Company ceased providing third party maintenance on JT8 engines for Boeing 727s and Douglas DC9s. 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. 17 18
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) 21.1 - Subsidiaries of the Registrant.(4) 27.1 - Financial Data Schedule.(1)
- ----------------- (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. 18 19 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 August 13, 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) 19 20 INDEX TO EXHIBITS
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) 21.1 - Subsidiaries of the Registrant.(4) 27.1 - Financial Data Schedule.(1)
- ----------------- (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. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 2,343 0 97,051 0 52,562 188,554 857,150 (115,083) 947,405 168,515 0 0 0 170 196,506 947,405 167,994 167,994 141,688 141,688 382 0 12,093 6,406 2,562 3,844 0 0 0 3,844 0.23 0.23
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