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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2002

or

For the transition period from      to      

Commission File Number 0-25202

          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.

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

          The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 28, 2002 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $0. In connection with the registrant’s plan of reorganization, all of the registrant’s common equity was cancelled without consideration on September 30, 2002.  (For purposes of determination of the above stated amount, only directors, executive officers and 10% or greater stockholders have been deemed affiliates).

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

          Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

          At March 25, 2003, there were 37,744,655 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

          None.

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KITTY HAWK, INC.
2002 ANNUAL REPORT ON FORM 10-K
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Glossary of Selected Aviation Industry Terms

          The following are definitions of terms commonly used in the aviation industry and this annual report:

          “ACMI”  means providing air transportation service consisting of the aircraft, crew, maintenance and insurance.

          “Aircraft”  means an airframe and attached aircraft engines.

          “Airframe”  means the structure of an aircraft, including the fuselage, wings, stabilizers, flight control surfaces and landing gear, but excluding the aircraft engines.

          “Block hour”  means the time that an aircraft begins moving under its own power at its origination airport to the time it comes to rest at its destination airport.

          “C-check”  means a thorough inspection and overhaul of an airframe and its components, not including aircraft engines, to ensure the airframe is airworthy.  A “light C-check” is generally performed every 3,000 flight hours and a “heavy C-check” is generally performed every 14,000 flight hours.

          “Engine overhaul”  means a heavy shop visit, which includes disassembly, inspection, repair or replacement of worn and life-limited parts, reassembly and testing of an aircraft engine.

          “Flight hour”  means the portion of aircraft operation time commencing at takeoff and ending at landing.

          “Heavy maintenance”  means with respect to an airframe, a light C-check or heavy C-check, or with respect to an aircraft engine, an engine overhaul.

          “Rotable part”  means an aircraft part that can be repaired and reinstalled on an aircraft.

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PART I

ITEM 1.  BUSINESS

General

          Through our wholly-owned subsidiary Kitty Hawk Cargo, Inc., we operate a major independent city-to-city expedited scheduled freight network among approximately 50 cities in the U.S. and one city in Canada providing next-morning, two-day and three-day delivery services.  As an independent freight network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients.  As a result, we primarily provide freight services to freight forwarders who either transport the freight to and from our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services.  On occasion, we arrange for the initial pick up of freight from our customers as well as the final delivery to recipients.

          We use aircraft and trucks to transport freight on scheduled routes between the cities in our independent freight network and our hub in Fort Wayne, Indiana.  We transport large freight that generally cannot be physically handled by a person due to its size or weight.  We also carry small package freight and other freight that cannot be transported readily in other freight systems or on passenger aircraft. In 2002, we generated approximately 95.5% of our revenue from expedited scheduled freight services.

          Through our wholly-owned subsidiary Kitty Hawk Aircargo, Inc., we also provide dedicated air freight transportation services in North America using owned or leased Boeing 727-200 freighter aircraft. We primarily provide these services to our expedited scheduled freight business and provide these services to third parties on an on-demand basis as well as through medium- and long-term charter arrangements.

          We were incorporated on October 20, 1994, as a Delaware corporation.  Kitty Hawk Aircargo was incorporated on January 11, 1989, as a Texas corporation, and Kitty Hawk Cargo was incorporated on April 13, 1999, as a Delaware corporation.  Our principal executive offices are located at 1515 West 20th Street, P.O. Box 612787, DFW International Airport, Texas 75261, and our main telephone number is (972) 456-2200.  Currently, Kitty Hawk, Inc. does not have any operations separate and apart from those conducted by its subsidiaries.

          Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports will be made available free of charge through the Investor Relations section of our Internet website, http://www.khcargo.com, as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.  The information contained on or linked to our website does not constitute part of this Form 10-K.

Bankruptcy Reorganization

          Proceedings under Chapter 11 of the Bankruptcy Code.  On or about May 1, 2000, we and all nine of our subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division. These proceedings were jointly administered under case No. 400-42141-BJH-11.

          On August 5, 2002, the bankruptcy court entered an order, confirming our final joint plan of reorganization dated August 2, 2002, with certain modifications. 

          Subsequent Modification of the Plan of Reorganization. We filed a motion with the bankruptcy court on December 23, 2002, requesting an order modifying the plan of reorganization to allow us to:

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          On January 29, 2003, the bankruptcy court granted our motion and entered an order on January 31, 2003 modifying our plan of reorganization in the manner described above. 

          Summary of Principal Effects of the Plan of Reorganization.  The principal effects of our plan of reorganization are summarized below:

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Changes in Our Business Operations Since 2000

          Since January 1, 2000, our business has changed dramatically, primarily as a result of restructuring our operations to emerge from bankruptcy.  In 1999, we generated $731.3 million of revenue, and at December 31, 1999, we had over 2,800 employees and more than 100 aircraft in operation worldwide.  By comparison, in 2002, we generated $121.8 million in revenue, and at December 31, 2002, we had approximately 700 employees and approximately 20 aircraft operating solely in the U.S. and Canada.  The following paragraphs summarize the most significant changes in our business operations from January 1, 2000 to December 31, 2002. 

          Termination of Wide-Body Operations (April 2000).  In April 2000, we suspended the flight operations of Kitty Hawk International, Inc., our former wide-body aircraft air freight carrier, and parked all of its aircraft.  At the same time, we ceased the non-continental U.S. operations of Kitty Hawk Cargo, which were generally serviced by Kitty Hawk International’s aircraft.  We also terminated the employment of 914 employees, including 287 pilots.  In September 2000, we transferred Kitty Hawk International’s DOT certificate of public necessity and convenience and its FAR Part 121 air carrier operating certificate issued by the Federal Aviation Administration, or FAA, for $200,000 to an entity controlled by one of our former directors.  In connection with the sale of Kitty Hawk International’s operating certificate, by operation of law, the purchaser assumed our future obligations under our collective bargaining agreement with the International Brotherhood of Teamsters, who represented the pilots and flight engineers formerly employed by Kitty Hawk International.

          Termination of General Motors Contract (May 2000).  In May 2000, General Motors terminated its contract with us to arrange the delivery of air freight on an expedited basis, referred to as air logistics.  In 1999, General Motors accounted for approximately $128.7 million, or 17.6%, of our total revenue and 74.2% of our air logistics services revenue.  In 2002, we did not generate any significant revenue directly from General Motors.

          U.S. Postal Service Contract (January 2001).  In January 2001, the U.S. Postal Service announced a six year, $7 billion contract with a package delivery company pursuant to which the package delivery company would provide the U.S. Postal Service with air lift for the U.S. Postal Service’s priority and first class mail nationwide.  As a result of this contract and our bankruptcy proceedings, the U.S. Postal Service has dramatically reduced the amount and type of business it conducts with us.  In 2000, the U.S. Postal Service accounted for $158 million, or 43.1%, of our total revenue, substantially all of which was generated from dedicated air freight services and management of peak season operations.  In 2002, the U.S. Postal Service only accounted for $2.1 million, or 1.7%, of our total revenue, of which $1.2 million was generated from mail transported in our expedited scheduled freight network and $0.9 million was generated from dedicated air freight services.

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          Termination for Convenience of W-Net Contract (August 2001).  In August 1999, the U.S. Postal Service awarded us a contract for air transportation and ground handling for the majority of the mail delivered to the Western US, referred to as the W-Net contract.  Pursuant to this contract, we established a hub and spoke network for receiving, sorting and delivering mail and generally operated nine aircraft in the W-Net Network six days a week.  In August 2001, the US Postal Service terminated the W-Net contact for convenience, which required the US Postal Service to pay us for certain of our start-up costs, sunk costs and expected profits associated with the contract.  In August 2002, we received a payment of $30.9 million from the US Postal Service related to the US Postal Services’ August 2001 termination for convenience of the W-Net contract and in settlement of specified claims between us and the US government.

          Sale of Air Logistics Business and Small Aircraft Assets (December 2001).   In late December 2001, we sold the operations of our air logistics business as well as the small aircraft owned and operated by Kitty Hawk Charters, our former FAR Part 135 small aircraft airline.  Our air logistics business involved coordinating door-to-door transportation of freight by arranging for ground pick-up, loading, air transportation, unloading and ground delivery.  We also sold the operations of OK Turbines, Inc., our small aircraft jet engine parts distributor.

          Expiration of ACMI Contract with BAX Global.  Historically, we have provided BAX Global with dedicated air freight transportation services under a long term ACMI contract.  In 2000, we provided BAX Global with 14 Boeing 727s through June 2000 and seven Boeing 727s from June through December 2000.  In 2001, we provided BAX Global with six Boeing 727s.  In 2001, BAX Global accounted for approximately $28.9 million, or 11.7%, of our total revenue.  Of this amount, dedicated air freight transportation services accounted for approximately $26.0 million, or 23.2%, of our revenue from dedicated air freight transportation services, and expedited scheduled freight services accounted for $2.9 million, or 2.2%, of our revenue from expedited scheduled freight services.  In December 2001, our ACMI contract with BAX Global expired.  In 2002, BAX Global accounted for approximately $4.7 million, or 3.9%, of our total revenue.  Of this amount, dedicated air freight transportation services accounted for approximately $1.4 million, or 24.9%, of our revenue from dedicated air freight transportation services, and expedited scheduled freight services accounted for $3.3 million, or 2.8%, of our revenue from expedited scheduled freight services.  In December 2002, we entered into a new one-year ACMI contract to provide BAX Global with three Boeing 727–200 freighter aircraft. This new agreement may be terminated by either party upon 30 days' written notice to the other party.

          Non-Renewal of C-Net (September 2002).  From 1993 to 2001, we were a prime contractor for managing the US Postal Service’s primary Christmas Network hub, or C-Net. C-Net provided for air transportation and ground handling services primarily for priority mail among a network of domestic cities during the December holiday rush.  In 2001, we generated $24.9 million of revenue from managing C-Net. In September 2002, the US Postal Service announced that it did not intend to renew our contract to manage the primary C-Net hub, which the US Postal Service did not operate during the December 2002 holiday season.

Industry Overview

          General.  The US freight transportation industry is extremely large and encompasses a broad range of transportation modes and service levels.  Much of the freight shipped in the US is transported on an expedited or “time-definite” basis.  Expedited freight transit times vary from a few hours or overnight to as long as two, three or four days.  Expedited freight includes freight of varying sizes and weights, from as small as envelopes to heavy weight or oversized freight requiring dedicated aircraft or trucks and weighing in excess of 200,000 pounds. 

          In the expedited freight segment, there is generally an inverse relationship between cost per pound transported and transit time.  As a result, shippers typically pay the highest cost per pound for the quickest transit times.  As transit times increase, the cost per pound transported generally decreases.

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          The expedited freight market is generally served by:

          We generally compete in the inter-city, heavy weight expedited freight segment of the U.S. freight transportation industry.  This segment of the industry is highly competitive and very fragmented.  The ability to effectively compete in this segment depends on price, frequency of service, cargo capacity, ability to track freight, extent of geographic coverage and reliability. 

          A number of expedited freight transportation companies, including us, provide a combination of delivery services. Specifically, our expedited scheduled freight business provides regularly scheduled freight delivery services between various cities, and our dedicated air freight transportation business provides charter services to our customers needing dedicated air lift for a specified period of time.

          Industry Trends.  The demand for expedited freight services in the U.S. is primarily influenced by the health of the U.S. economy, which is cyclical in nature.  Domestic durable goods manufacturing and corporate capital expenditures in the U.S. have a significant impact on the amount of freight that is transported on an expedited basis. 

          We believe the activity level of the following domestic industries, listed in decreasing order of influence, have the most significant impact on demand for our expedited scheduled freight services:

          The general downturn in the U.S. economy started in late 2000.  During 2001, the demand for our expedited scheduled freight services generally trended downward the entire year.  In 2002, the demand for our expedited scheduled freight services stabilized, but at a level that was approximately 40% below the level in 2000.

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Expedited Scheduled Freight Services

          General.  We operate a scheduled city-to-city expedited freight service that provides time-definite transportation of predominantly heavy weight freight to and from approximately 50 cities in the U.S. and one city in Canada through a hub and spoke network.  Most of the freight in our network is transported from its city of origination to our hub and sorting facility in Fort Wayne, Indiana before being routed to its destination city.

          The sorting facility in Fort Wayne, Indiana is a 239,000 square foot facility constructed to meet the specific requirements of our expedited scheduled freight service and was completed in June 1999.  We began operating the facility in early July 1999.  We believe the sorting facility is capable of handling well over 2.0 million pounds on a given operational night, or about three times as much freight as we handled on an average operational night in 2002.

          Our expedited scheduled freight service currently transports freight by aircraft to and from airports located in 26 cities.  In addition, we contract with third parties to provide ground transportation to 25 other cities at which we receive and deliver freight at scheduled times.  We also contract with third parties to provide ground handling and storage services at most of the cities we serve.  We continually evaluate the cities in our expedited scheduled freight network and add and remove cities as circumstances warrant.

          In general, we transport the following types of freight:

          Our expedited scheduled freight service caters primarily to freight forwarders that typically arrange transportation from the shipper in the city of origin to our cargo facility and from our cargo facility in the city of destination to the recipient.  We offer our customers three levels of delivery services, including overnight or next-day morning, second-day morning and third-day morning delivery to our cargo facility in the city of destination.  Freight received each evening is available at our cargo facility in the city of destination on the morning specified by our customer, Tuesday through Saturday, throughout the year.  In 2002, we generated $116.3 million of revenue, or 95.5% of our total revenue, from expedited scheduled freight services.

          Customers.  We currently have over 400 active freight forwarder customers.  In 2002, our top 25 customers accounted for over two-thirds of our expedited scheduled freight revenue, and our top four customers accounted for over one-third of our expedited scheduled freight revenue.

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          The following table lists each customer that accounted for at least 5% of our expedited scheduled freight revenue in 2002 and the percentage of our expedited scheduled freight revenue derived from those customers in 2002 and 2001.

          We generally maintain a close operating relationship with our most significant customers.  We offer our customers discount programs based upon volume of freight shipped in our network and timely payment of invoices.  Each of our significant customers participate in this discount program.  We have no material minimum shipping contracts with our customers, including our most significant customers.  As a result, our customers generally book expedited scheduled freight services with us on an as-needed basis.

          Competition.  We generally compete with FedEx, United Parcel Service, other integrated freight transportation companies, regional delivery firms and commercial passenger airlines that provide freight service on their scheduled flights.  Many of our competitors have substantially larger freight networks, serve significantly more cities, have more freight system capacity and more capital and financial resources than us.

          Fuel and Other Costs.  In this business, we absorb increases in fuel costs, landing charges and other variable costs.  We periodically increase our prices or implement temporary surcharges to offset some of our increased costs. 

          During 2002, we purchased jet fuel from various suppliers at then current market prices.  We do not currently have any short or long-term contracts for jet fuel, nor do we currently have any agreements to hedge against changes in the price of jet fuel.  From time to time, we review the price and availability of jet fuel.  If we have the opportunity and ability to enter into supply contracts for jet fuel or arrangements to hedge against changes in jet fuel prices, we may enter into such agreements or arrangements.  During 2002, our jet fuel averaged $0.90 per gallon and we used between 2.1 million and 3.0 million gallons of jet fuel per month, depending on the mix of aircraft employed in our network and the amount of freight shipped.  The following table shows our total jet fuel expense and percentage of total operating expenses of our expedited scheduled freight network represented by jet fuel during 2002, 2001 and 2000.

Dedicated Air Freight Transportation Services

          General.  Currently, Kitty Hawk Aircargo primarily provides dedicated air freight transportation services for our expedited scheduled freight business.  In addition, Kitty Hawk Aircargo provides dedicated air freight transportation services for a limited number of customers.

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          ACMI Contracts. Our contracts with third parties for dedicated air freight transportation services vary, but typically require us to provide the aircraft, crew, maintenance and insurance, referred to as ACMI.  In a typical ACMI contract, our customers are responsible for substantially all aircraft operating expenses, other than ACMI expenses, including fuel, fuel servicing, airport freight handling, landing and parking fees, ground handling expenses and aircraft push-back costs. ACMI contracts vary in duration from short to long-term and typically require us to operate specific aircraft and/or provide minimum air freight capacity.  In general, ACMI contracts are terminable upon 30 days’ prior written notice or if we fail to meet certain minimum performance levels, otherwise breach the contract or become subject to other customary events of default.

          Under our ACMI contracts, we are permitted to use, and occasionally do use, our aircraft for other services between ACMI contract flights.  By offering ACMI and charter services in addition to our expedited freight services, we are able to improve the utilization of our fleet and generate additional revenue.

          In December 2002, we entered into a new one-year ACMI contract to provide BAX Global with three Boeing 727–200 freighter aircraft.  This agreement may be terminated by either party upon 30 days’ written notice to the other party.

Aircraft Fleet

          Owned Aircraft.  At March 15, 2003, we owned 13 Boeing 727-200 freighter aircraft of which eight were available for operation in revenue service.  Of the remaining five aircraft, we temporarily parked three aircraft which require heavy maintenance, but expect to place one or more of these aircraft back into operation when needed, and we permanently parked two aircraft.  We do not currently expect to operate these two aircraft again.

          Of the 13 aircraft we own, two are pledged as collateral for a loan from 1^st Source Bank and two are pledged as collateral for loans from an affiliate of Pegasus Aviation.  The liens on the two aircraft pledged to Pegasus Aviation will be released when our final loan payments are made in April 2003.

          Aircraft Subject to Leases or the Aircraft and Engine Use Agreement.  At March 15, 2003, we held 17 Boeing 727–200 freighter aircraft under operating leases or the Aircraft and Engine Use Agreement, of which 15 aircraft are currently available for operation in revenue service.  Under the terms of our W-Net settlement with the U.S. Postal Service, two of the 17 aircraft are currently unavailable for revenue service despite being economically viable to be operated.  We do not currently anticipate using these two aircraft in revenue service in the future.  Under the terms of the Aircraft and Engine Use Agreement governing these two aircraft, we pay only the storage, ground risk insurance and incidental costs for these aircraft unless we are allowed to, and actually do, operate them in revenue service.

          In December 2000, we amended an existing operating lease for one Boeing 727-200 freighter aircraft with an affiliate of Wren Equipment Finance Limited.  We make monthly lease payments of $115,000 and monthly maintenance reserve payments based upon actual flight hours during the previous month.  The lease provides that we must return the aircraft in a certain specified condition. We have recorded a reserve for the estimated cost to meet the return conditions, less estimated maintenance reserves to be paid to Wren Equipment over the life of the lease. This lease expires in December 2003.

          In October 2002, we entered into four new operating leases for Boeing 727-200 freighter aircraft with affiliates of Pegasus Aviation with monthly lease rates ranging from $65,000 to $85,000.  These new leases replaced leases with affiliates of Pegasus Aviation that we originally entered into during May 1999, September 1999 and November 1999.  Each of these new leases expires in May 2004.  In addition to lease payments, we make monthly maintenance reserve payments in an amount determined by the flight hours or cycles of utilization during the previous month. When the new leases expire, we must return each aircraft to the lessor with the same number of available flight hours or cycles on the airframe, engines, landing gear and auxiliary power units until the next scheduled maintenance event as were available at the time we

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originally took delivery of each of the aircraft. Each of the airframes had just undergone light or heavy maintenance when we originally took delivery of them. Under the new leases, instead of performing heavy maintenance on each of the airframes prior to returning them, we may instead pay the lessor $750,000 per airframe. The $750,000 payment will be reduced by the amount of maintenance reserves paid to the lessor under the original leases and the new leases.

          Future Aircraft Needs.  We currently project that we will need 18 operational aircraft through 2003 to meet our projected needs for our expedited scheduled freight service business and our current ACMI contractual obligations.  While some owned and leased aircraft will require heavy maintenance during 2003, we believe that the combined pool of owned and leased aircraft available to us will provide us with enough aircraft to meet our projected aircraft needs in 2003.

          Three of the aircraft subject to the Aircraft and Engine Use Agreement will require heavy maintenance in 2003 to remain airworthy.  Neither we nor the Kitty Hawk Collateral Liquidating Trust are required to perform this heavy maintenance.  As we do not intend to pay for this heavy maintenance, if the Kitty Hawk Collateral Liquidating Trust decides not to perform the required heavy maintenance on these aircraft, we will not be able to operate them after they come due for heavy maintenance.

          As a consequence, we may need to use financing arrangements, lease contracts or other operational agreements to replace air lift capacity in the future.  Currently, we believe that a sufficient number of Boeing 727-200 freighter aircraft are on the market and currently available if such a need arises.  Without adequate aircraft at an economically viable cost, we may not be able to continue to operate our businesses or generate operating income or profits.

          From time to time, we evaluate the number and type of aircraft in our fleet and may add or remove aircraft or add new types of aircraft as circumstances warrant.

          Aircraft Dispositions.  As part of our plan of reorganization, we disposed of a number of aircraft, aircraft engines and related parts.  Some of these aircraft and most of the engines and uninstalled parts were sold at auction.  The numbers and types of aircraft and the year in which they were sold or effectively transferred through the bankruptcy process are as follows:

          In October 2001, as part of our plan of reorganization, we transferred ownership of 12 Boeing 727-200 freighter aircraft to the Kitty Hawk Collateral Liquidating Trust.  Because these aircraft are still generally available for operation by us, they are not reflected in the table above.

          Aircraft Acquisitions.  As a part of our plan of reorganization, we acquired two Boeing 727-200 freighter aircraft from affiliates of Pegasus Aviation.  We acquired one aircraft in June 2002 and the other aircraft in December 2002.  The financing for the purchase of these aircraft was provided by an affiliate of Pegasus Aviation, and the debt will be retired in April 2003.

          In December 2000, we acquired two aircraft from 1^st Source Bank.  We previously operated these aircraft pursuant to an operating lease covering three aircraft.  We returned one aircraft, a Boeing 727-100 freighter aircraft, and purchased the two remaining aircraft in settlement and satisfaction of the operating lease.  The seller provided financing for these purchases.  See“Item 7. Management’s Discussion and

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Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for more information about the 1^st Source Bank loan.

Flight Operations and Control

          Our aircraft operations are coordinated by our personnel at our headquarters at the Dallas/Fort Worth International Airport.  Our dispatch and flight operations personnel plan and control our flight operations, including aircraft dispatching, flight tracking and crew scheduling.  In addition, our personnel provide varying amounts of logistical support necessary for operating into airports served by our flights.

          To enhance the reliability of our service, we generally maintain at least one operational spare aircraft at all times.  The spare aircraft can be dispatched on short notice to most locations we serve when a substitute aircraft is needed.  Maintaining one or more operational spare aircraft allows us to better ensure the availability of aircraft for our expedited scheduled freight operations and to provide our ACMI customers with high dispatch reliability.

Maintenance

          We perform line maintenance with our own employees, contract employees and third-party contractors.  Heavy airframe maintenance and aircraft engine overhauls are provided by third-party FAA approved FAR Part 145 repair stations.  We do not have any long-term maintenance contracts for our airframes or aircraft engines.

Training and Safety

          We believe that high quality personnel and intensive training programs are keys to our success and the maintenance of a good safety record. As a result, we hire experienced flight crews and maintenance personnel and ensure that both receive ongoing training through educational workshops, enhanced training curriculums, on the job training and, in the case of pilots, extensive simulator use.  In January 2003, the FAA awarded us a third consecutive Certificate of Excellence – Diamond Award because the majority of our eligible mechanics received aviation maintenance technician awards from the FAA for 2002. The Diamond Award is the highest award given to aviation maintenance technicians by the FAA and recognizes individuals as well as airlines for their efforts in training.

          We have an ongoing safety program that employs an industry standard database to track safety performance. Open facsimile and phone lines are available for employees to report safety problems, which are entered into the database and monitored for any recurrence. Direct communication between flight crews, maintenance and management is available at all times through our dispatch system.

Sales and Marketing

          Our current marketing focus is on users of air freight transportation services.  We use different sales and marketing approaches to meet the unique needs of different users within our target market and to achieve our goal of maintaining long-term relationships with our customers.  We promote our business through trade specific publications and trade shows, but do not engage in mass media advertising.  We believe that retaining existing customers is as equally important as generating new clients and is a direct result of customer satisfaction.  We continue to upgrade our database, information software and tracking systems to maintain high quality service. 

          We use account managers with geographic sales responsibilities to reach all of our current and prospective customers. Each account manager is responsible for educating current and prospective customers about our service capabilities, ensuring quality service and determining how we can best serve the customer. Some account managers are also responsible for large national accounts that would not necessarily be best served by multiple regional account managers.

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Employees

          General. At March 15, 2003, we employed approximately 670 full-time and part-time employees.  Of this total, approximately 60 employees were involved in sales, general and administrative functions, approximately 310 employees were involved in our Fort Wayne, Indiana hub operations and approximately 300 employees were involved in maintenance and flight operations, including approximately 132 flight crew members.  Other than our flight crew members, our employees are not currently represented by labor unions or subject to collective bargaining agreements.  We believe we have good relationships with our employees.

          Kitty Hawk Pilots’ Association.  Our flight crew members are represented by the Kitty Hawk Pilots’ Association, which was certified under the Railway Labor Act in September 2000.  Currently, no collective bargaining agreement is in place, and interest-based bargaining negotiations for a collective bargaining agreement with the Kitty Hawk Pilots’ Association are in the preliminary stages.  We executed a letter agreement with the Kitty Hawk Pilots’ Association whereby dues are collected from the salaries of crew members who are members of the Kitty Hawk Pilots’ Association and remitted to the Kitty Hawk Pilots’ Association.  Additionally, through the interest-based bargaining negotiations, we have reached some interim and tentative agreements with our flight crew members, such as interim furlough and recall agreements, pilots reaching age 60 having the option of continuing as a flight engineer and other issues concerning Kitty Hawk Aircargo’s operations.

          Although we believe we have good relations with our flight crew members, the unionization of our workforce could result in higher employee compensation, reduce our flexibility in dealing with our employees and other restraints that could increase our operating costs or constrain our operating and competitive flexibility and which could have a material adverse effect on our business.

Environmental

          Our operations must comply with numerous environmental laws, ordinances and regulations. Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or clean up of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.

          Our business includes operations that require the use, storage and disposal of certain chemicals in small quantities.  These chemicals are classified as “hazardous materials” under, and their use, storage and disposal are regulated by, various federal, state and local environmental protection laws.  These laws generally require us to eliminate or mitigate the impact of these substances on the environment.  In response to these requirements, we have upgraded facilities and implemented programs to detect and minimize contamination.  Due to the small quantities of chemicals used and the current programs in place, we do not anticipate any material environmental liabilities or significant capital expenditures will be incurred in the future related to these operations to comply or remain in compliance with existing environmental regulations.  As a result, we do not have any reserves for environmental liabilities.

          In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly clean up such contaminated property, may adversely affect the ability of the owner of the property to use such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated and may impose remedial or compliance costs.

          We are subject to the regulations of the Environmental Protection Agency and state and local governments regarding air quality and other matters. We lease office space, hangar space, ramp space and unimproved areas at various airport locations throughout the U.S.  Most of these leases require us to indemnify the lessor for any environmental contamination caused by us.

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          Currently, we are not aware of any material environmental contamination for which we are liable for the cost of removal or cleanup that we believe would have a material adverse effect on our business. In part because of the highly industrialized nature of many of the locations at which we currently operate or previously operated, there can be no assurance that we have discovered all environmental contamination for which we may be responsible. 

Government Regulation

          General. We are subject to Title 49 of the United States Code, formerly the Federal Aviation Act of 1958, under which the DOT and the FAA exercise regulatory authority over air carriers. The DOT and the FAA have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with the provisions of law or applicable regulations. In addition, the DOT and the FAA may impose civil or criminal penalties for violations of applicable rules and regulations. In addition, we are subject to regulation by various other federal, state, local and foreign authorities, including the Department of Homeland Security, through the Transportation Security Administration, the Department of Defense and the Environmental Protection Agency.  For example, the Transportation Security Administration has adopted recent regulations requiring our employees with access to aircraft operations areas to pass criminal background checks, and we are required to limit access to aircraft operations areas.

          Safety, Training and Maintenance Regulations. Virtually every aspect of our air carrier operations is subject to extensive regulation by the FAA, including the areas of safety, training and maintenance. To ensure compliance with FAA rules and regulations, the FAA routinely inspects air carrier operations and aircraft and can impose civil monetary penalties in the event of non-compliance.

          Periodically, the FAA focuses on particular aspects of air carrier operations occasioned as a result of a major incident. These types of inspections and regulations often impose additional burdens on air carriers and increase their operating costs. We cannot predict when we will be subject to such inspections or regulations, nor the impact of such inspections or regulations.

          Other regulations promulgated by state and federal Occupational Safety and Health Administrations, dealing with the health and safety of our employees, impact our operations. This extensive regulatory framework, coupled with federal, state and local environmental laws, imposes significant compliance burdens and risks that substantially affect our operational costs.

          Hazardous Materials Regulations. The FAA exercises regulatory jurisdiction over transporting hazardous materials. From time to time, we transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility with the air carrier for compliance with these regulations and are primarily responsible for proper packaging and labeling. If we fail to discover any undisclosed hazardous materials or mislabel or otherwise ship hazardous materials, we may suffer possible aircraft damage or liability as well as substantial monetary penalties.

          Other FAA Regulations. All of our aircraft are subject to FAA directives issued at any time, including directives issued under the FAA’s “Aging Aircraft” program, or directives issued on an ad hoc basis. These directives can cause us to conduct extensive examinations and structural inspections of our aircraft and to make modifications to our aircraft to address or prevent problems of corrosion and structural fatigue.  In addition, the FAA may mandate installation of additional equipment on our aircraft, the cost of which may be substantial.  For example, we will have to install collision avoidance systems on our aircraft by October 2003 and may be required to reinforce cockpit doors sometime in the future.  Apart from these aircraft related regulations, the FAA may adopt regulations involving other aspects of our air carrier operations, such as training, cargo loading, ground facilities and communications.

          Department of Homeland Security; Transportation Security.  As a result of the passage of the Aviation and Transportation Security Act, the Congress created the Transportation Security Administration, or TSA.   By law, the TSA is directed to adopt regulations for the screening of cargo transported on cargo aircraft.  Once these new requirements are adopted, they could have an impact on our ability to efficiently process cargo or otherwise increase our operating costs.

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          The Department of Homeland Security has also taken over many departments and functions that regulate various aspects of our business, such as the U.S. Customs Service, and has formed a Border and Transportation Directorate.  The ability of the Department of Homeland Security to efficiently structure these combined operations and functions may affect us in ways that cannot be predicted at this time.

          Stock Ownership by Non-U.S. Citizens. Under current federal law, our air freight carrier could cease to be eligible to operate as an air freight carrier if more than 25% of our voting stock were owned or controlled by non-U.S. citizens. Moreover, in order to hold an air carrier certificate, our president and two-thirds of our directors and officers must be U.S. citizens.

          All of our directors and officers are U.S. citizens. Our Second Amended and Restated Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22.5% of the votes voting on or consenting to any matter, and our Amended and Restated Bylaws do not permit non-U.S. citizens to serve as directors or officers.

Insurance

          We are vulnerable to potential losses that may be incurred in the event of an aircraft accident. Any such accident could involve not only repair or replacement of a damaged aircraft and its consequent temporary or permanent loss from revenue service, but also potential claims involving injury to persons or property.

          We are required by the DOT to carry liability insurance on each of our aircraft and many of our aircraft leases and contracts also require us to carry such insurance. We currently maintain public liability and property damage insurance and aircraft liability insurance for each aircraft in the revenue fleet in amounts consistent with industry standards. All-risk aircraft hull and war risk insurance is maintained for all aircraft in the revenue fleet. This all-risk hull insurance is subject to substantial deductibles, but such deductibles are common in the industry.  We maintain minimum cargo liability insurance if not provided by our customers under contracts.  In the aggregate, we currently believe that we will be able to renew our insurance policies at comparable premium levels and with the same levels of coverage.

          Although we believe that our insurance coverage is adequate, there can be no assurance that the amount of such coverage will not be changed upon renewal or that we will not be forced to bear substantial losses from accidents. We do not maintain business interruption insurance if an aircraft is damaged, but we believe this lack of coverage is standard in the industry. Substantial claims resulting from an accident could have a material adverse effect on our business. We attempt to monitor the amount of liability insurance maintained by the third-party providers of ground handling services and operators of chartered aircraft and trucks used in our expedited scheduled freight network through, among other things, the obtaining of certificates of insurance.

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ITEM 2.  PROPERTIES

          Our facilities generally consist of office space, crew lounge, hangars, sorting facilities, maintenance facilities and warehouse and storage space. All of our operating facilities are constructed on property leased from airport owners. As a result, the improvements to these facilities revert to the owner when the ground lease expires.

          We also have various agreements with municipalities and governmental authorities that own and operate airports throughout the U.S. and Canada.  These agreements generally relate to our use of general airport facilities, but may also include leases or licenses to use ramp areas and hangar and maintenance space. In addition, at March 15, 2003, we owned 13 Boeing 727-200 freighter aircraft, various aircraft engines and various ground handling and sorting equipment.

          The following is a summary of our major operating facilities:

(1)     We own the building and improvements and lease the land from the airport.

ITEM 3.  LEGAL PROCEEDINGS

          Bankruptcy Reorganization.  A discussion of our bankruptcy proceedings is set forth in “Item 1.  Business – Bankruptcy Reorganization” and is incorporated herein by reference.

          Eagle Global Logistics.  In July 2002, we filed a demand for binding arbitration against EGL, Inc. d/b/a Eagle Global Logistics with the American Arbitration Association to resolve our claim to collect for freight transportation services rendered to EGL in the amount of approximately $4.0 million plus all interest, attorneys’ fees and costs allowable by law.  In August 2002, EGL filed an answer and counter-claim in the arbitration proceeding denying our claim and asserting a counter-claim for consequential damages in an unspecified amount, but in excess of $1.0 million plus costs and attorney’s fees, for an alleged breach of a contract by us.  The arbitration proceeding, which will resolve both parties’ claims, is currently scheduled to begin in June 2003.

          Other Proceedings. We are also subject to various other legal proceedings and claims which have arisen in the ordinary course of business.

          While the outcome of the legal proceedings and claims described above 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 our business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          No matters were submitted to a vote of security holders during 2002.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          As part of implementing our plan of reorganization, we issued our new common stock during March 2003.  The new common stock has CUSIP number 498326 20 6, and at March 25, 2003, there were approximately 14 record holders of our new common stock.

          In September 30, 2002, as part of our plan of reorganization, our old common stock was cancelled. The old common stock had CUSIP number 498326 10 7.

          Our new common stock is eligible for trading in the over-the-counter market and has been assigned the symbol “KTHK”.  As of March 25, 2003, no established trading market for our common stock has emerged.

          We have never declared or paid any cash dividends on our common stock.  Payment of future dividends, if any, will be at the discretion of our board of directors, after taking into account various factors, including our earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations, and there can be no assurance that dividends will be declared or paid now or any time in the future.

ITEM 6. SELECTED FINANCIAL DATA

          The following table summarizes selected financial information that has been derived from our audited consolidated financial statements.  You should read the information set forth below in conjunction with “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

          We emerged from bankruptcy on September 30, 2002 and implemented Fresh Start Accounting.  In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to reflect their respective fair values as of September 30, 2002.  Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002.  However, for purposes of this discussion, the successor results for the three months ended December 31, 2002 have been combined with the predecessor results for the nine months ended September 30, 2002. The numbers in the following table are in thousands, except per share data, average yield per chargeable weight — pounds moved and fuel — average cost per gallon.

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ITEM 7.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

          We operate through our two wholly owned subsidiaries, Kitty Hawk Cargo and Kitty Hawk Aircargo.  In 2002, we generated approximately 95.5% of our revenue from our expedited scheduled freight network, which is operated by Kitty Hawk Cargo.  Kitty Hawk Aircargo, our air freight carrier airline, primarily supports Kitty Hawk Cargo’s expedited scheduled freight network by transporting cargo in its fleet of Boeing 727-200 freighter aircraft.  In addition, Kitty Hawk Aircargo also provides dedicated air freight transportation services for a variety of customers.

          We operate a major independent city-to-city expedited scheduled freight network solely in the U.S. and Canada providing next-morning delivery service.  As an independent freight network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients. As a result, we primarily provide freight services to freight forwarders who either transport the freight to and from our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services.  On occasion, we arrange for the initial pick up of freight from our customers as well as the final delivery to recipients.

          We emerged from bankruptcy on September 30, 2002 and implemented Fresh Start Accounting.  In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to reflect their respective fair values as of September 30, 2002.  Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002.  However, for purposes of this discussion, the successor results for the three months ended December 31, 2002 have been combined with the predecessor results for the nine months ended September 30, 2002 and then compared to the predecessor results for the fiscal year ended December 31, 2001.  Differences between periods due to Fresh Start Accounting are explained when necessary.

          Revenue.   Scheduled freight revenue is generated from freight transportation services provided by our expedited scheduled freight network.  Other revenue includes:

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          General and Administrative Expenses.  General and administrative expenses consist of salaries, benefits and expenses for executive management, other than management of Kitty Hawk Aircargo and Kitty Hawk Cargo, information technology, human resources, accounting, finance, legal and corporate communications personnel.  In addition, costs for strategic planning, financial planning and asset acquisitions are included in general and administrative expenses.  Also included are legal and professional fees and consulting fees.

          Discontinued Operations.  Our discontinued operations consist of Kitty Hawk International, the non-continental U.S. operations of Kitty Hawk Cargo, Kitty Hawk Charters, OK Turbines and Longhorn Solutions.  All of these businesses ceased operating or were disposed of during our bankruptcy proceedings.

Critical Accounting Policies

          Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires us to use estimates and assumptions to determine the value of our assets and certain liabilities and the amount of certain expenses.  We base these estimates and assumptions upon the best information available to us at the time we make the estimates or assumptions.  Our estimates and

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assumptions could change materially as conditions within and beyond our control change.  As a result, our actual results could differ materially from our estimates.  The most significant accounting policies include:

          The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary for determining the value of related assets, liabilities or expenses.  A full description of all of our significant accounting policies is included in note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

          Valuations Pursuant to Fresh Start Accounting.  When we exited bankruptcy on September 30, 2002, we adopted the provisions of Statement of Position 90-7 entitled, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”, or Fresh Start Accounting.  Under Fresh Start Accounting, we recorded adjustments to our assets, liabilities and stockholders’ equity because:

          Under Fresh Start Accounting, all of our assets and liabilities were adjusted to their estimated fair market value as of September 30, 2002. We determined the fair market values through a combination of appraisals done by third-parties, our management’s best estimate of value based on current knowledge of the industry and sales transactions for similar assets which have occurred over the prior twelve months.

          We also hired financial advisors to determine the estimated reorganization equity value of our company. The financial advisors based their valuation on two customary methods: a discounted cash flows method using our projected operating results and a comparable company analysis method. The results of their valuation determined that the fair market value of our reorganized company was between $12.9 million and $16.6 million.

          The fair market value of our net assets exceeded the high end of the estimated reorganization equity value by $2.9 million. As a result, we further reduced the value of our property and equipment and certain other assets on a proportionate basis by $2.9 million.

          Airframe and Aircraft Engine Maintenance Reserves.  To keep our airframes and aircraft engines in airworthy condition, we must perform scheduled heavy maintenance on them.  Accounting guidelines allow us to spread the cost of this heavy maintenance over the period of time that elapses between heavy maintenance events.  We accrue maintenance reserves for light C-checks on airframes and engine overhauls on aircraft engines, and we capitalize the cost of heavy C-checks on airframes.  In 2002, each light C-check costs approximately $700,000 to $850,000.  Although we did not perform a heavy C-check in 2002 and we do not currently expect to perform a heavy C-check on any airframes in our existing fleet, other than the airframe leased from Wren Equipment Finance. We currently estimate a heavy C-check to cost $1.2 million or more depending on the airframe.

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          For owned airframes and aircraft engines, we only record maintenance reserves for the airframes and aircraft engines on which we intend to perform light C-checks and engine overhauls in the future.  From our owned aircraft fleet, we have identified three airframes and 37 aircraft engines that we believe are economically viable to maintain in the future. For the remaining owned airframes and aircraft engines, we plan to take them out of service permanently when they come due for their next scheduled heavy maintenance.  As a result, we do not record maintenance reserves for them. 

          We also lease five airframes and 15 aircraft engines on which we are obligated to perform heavy maintenance and for which we record maintenance reserves.  For leased airframes and aircraft engines on which we are not obligated to perform heavy maintenance, we do not record maintenance reserves.

          For owned airframes and aircraft engines for which we are recording maintenance reserves, we increase our reserves for each flight hour logged at a rate equal to our estimate of the hourly cost for the next scheduled light C-check or engine overhaul.  For leased airframes and aircraft engines for which we are recording maintenance reserves, we generally make a payment to the lessor for a contractual rate per hour or cycle flown.  In addition, for leased airframes and aircraft engines on which we expect to perform a scheduled heavy maintenance event prior to returning them to the lessor, we also record maintenance reserves for each flight hour logged at a rate equal to our estimate of the hourly cost for the next scheduled light C-check or engine overhaul.  We estimate the hourly rate for maintenance reserves based on historical data and quotes received from our maintenance vendors. We review these rates annually for significant changes.

          If we perform a light C-check or engine overhaul on an airframe or aircraft engine that we previously expected to retire at the next scheduled heavy maintenance event, we would be required to expense the light C-check or engine overhaul in full when it is performed because we were not recording maintenance reserves on the airframe or aircraft engine.

          Allowance for Doubtful Accounts.  We extend credit to our customers based upon an evaluation of the following factors: