UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
--------------------------------FORM
10-K Annual Report Pursuant to Section10-K/A(Amendment No. 1)
ANNUAL REPORT
PURSUANT TO SECTION 13
or 15(d) ofOR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934
For the
Securities Exchange Act of 1934
For the fiscal year ended Commission file number December 31, 1996 1-6512----------------------------------fiscal year ended December 31, 2002Commission file number 1-6512
AIRBORNE,
FREIGHT CORPORATION (ExactINC.(Exact name of registrant as specified in its charter)
Delaware (State of Incorporation) | 91-2065027 (I.R.S. Employer Identification No.) |
3101 Western Avenue
P.O. Box 662
Seattle, WA 98111
(Address
(Address of principal executive offices)
Registrant's
206-285-4600
Registrant’s telephone number, including area code: 206-285-4600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which | |
Common Stock, Par Value | New York Stock Exchange | |
$1.00 per share | Pacific |
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 ___
YESx NO¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’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)
As of February 24, 1997, 21,308,812 shares (net of 315,150 treasury
shares)x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the registrant's Common Stock were outstanding andAct). YESx NO¨
State the aggregate market value of the voting stockand non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the registrant
(based on the closing price on that date on the New York Stock Exchange)
was approximately $600,367,932.(1)
Documents Incorporated by Reference
Portionslast business day of the 1996 Annual Report to Shareholders are incorporated by
reference into Part I and Part II.
Portionsregistrant’s most recently completed second fiscal quarter. $921,414,000 (1)
As of February 18, 2003, 48,448,291 shares (net of 3,228,526 treasury shares) of the Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held April 22, 1997 are incorporated by reference into
Part III.
registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
(1) Excludes value of shares of Common Stockcommon stock held of record by non-
employeenon-employee directors and executive officers at February 24, 1997.June 30, 2002. Includes shares held by certain depository organizations. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or is under common control with the registrant.
AIRBORNE, FREIGHT CORPORATION
1996INC.
2002 FORM 10-K ANNUAL REPORT
Table of Contents
PART I | ||||
Page | ||||
Item 1. | 1 | |||
Item 2. | 12 | |||
Item 3. | 12 | |||
Item 4. | 12 | |||
PART II | ||||
Item 5. | Market for | 13 | ||
Item 6. | 14 | |||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 7A. | 24 | |||
Item 8. | 26 | |||
PART III | ||||
Item 10. | 65 | |||
Item 11. | 67 | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 71 | ||
Item 13. | 72 | |||
Item 14. | 72 | |||
PART IV | ||||
Item 15. | Exhibits, Financial Statement Schedules, and | 73 |
PART I
Statements contained in this annual report on Form 10-K, which are not historical facts, are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described below in “Risk Factors.”
EXPLANATORY STATEMENT
Airborne, Inc. is filing this Amendment No. 1 to its annual report on Form 10-K to include the information required by Part III (Items 10, 11, 12 and 13) of Form 10-K that was previously omitted pursuant to general instruction G(3) thereof and to add to Items 1, 7 and 8 thereof certain information relating to certain recent events, including our proposed merger with an affiliate of DHL Worldwide Express B.V. There are no other changes to our annual report on Form 10-K filed on March 14, 2003, although the remaining items included therein have been restated here in their entirety for convenience of reference.
ITEM 1. BUSINESS
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a)
General Development of Business
-------------------------------
Airborne, Freight Corporation (herein referred to as "Airborne Express"
or the "Company"Inc., which reference shall includea Delaware corporation formed in 1999 is a holding company operating through its subsidiaries and their
assets and operations, unless the context clearly indicates otherwise) was
incorporated in Delaware on May 10, 1968. The Company isas an air express company and air freight forwarder thatairfreight forwarder. Airborne expedites shipments of all sizes to destinations throughout the United States and most foreign countries. The CompanyWhen we refer to “we”, “our”, “us”, the “Company” or “Airborne” in this Form 10-K, we mean Airborne, Inc. and all of its direct and indirect subsidiaries and their assets and operations, unless the context clearly indicates otherwise.
Our wholly-owned operating subsidiaries include Airborne Express, Inc. (“AEI”), ABX Air, Inc. (“ABX”) and Sky Courier, Inc. AEI provides domestic and international delivery services in addition to customer service, sales and marketing activities. ABX provides domestic express cargo service and cargo service to Canada and Puerto Rico in addition to sort and linehaul services. AEI is the sole customer of ABX for these services. ABX also offers limited charter services. Sky Courier provides delivery service on an expedited basis. Airborne holds a certificate of registration issued by the United States Patent and Trademark Office for the service mark AIRBORNE EXPRESS. Most public presentationpresentations of the Company carriesour business carry this name. The purpose of
using this trade name is to more clearly communicate to the market place
the primary nature of the business of the Company.
ABX Air, Inc., the Company's principal wholly-owned subsidiary (herein
referred to as "ABX"), was incorporated in Delaware on January 22, 1980.
ABX provides domestic
Business Description
We provide door-to-door express cargo service and cargo service to Canada.
The Company is the sole customer of ABX for this service. ABX also offers
limited charter service.
In 1996, the Company commemorated its first 50 years of service.
Founded in 1946 in San Francisco, Airborne Flower Association of California
began as a transporter of fresh flowers from Hawaii and California to East
Coast markets. As Airborne Flower grew and offered other expanded service
options and capabilities, it changed its name in 1956 to Airborne Freight
Corporation. In 1968, the Company was formed when its predecessor
consolidated with Pacific Air Freight, a freight forwarder founded in
Seattle in 1949, to transport perishables to Alaska. The Company retained
the name Airborne Freight Corporation. The Company is proud of its 50
years of successes and looks forward to the future.
b) Financial Information about Industry Segments
---------------------------------------------
None
c) Narrative Description of Business
---------------------------------
Airborne Express provides door-to-door expressdeferred delivery of small packages and documents throughout the United States and to and from most foreign countries. The CompanyWe also actsact as an international and domestic freight forwarder for shipments of any size. The Company'sOur strategy is to be theprovide business customers with highly reliable, competitively priced, time definite delivery services while maintaining a low cost providerstructure. Our combination of quality service, flexible delivery options and competitive pricing positions us as a high value alternative to other industry leaders.
Merger
On March 25, 2003, we entered into a definitive merger agreement with DHL Worldwide Express B.V. (“DHL”) and Atlantis Acquisition Corporation, a wholly owned indirect subsidiary of DHL (“Atlantis”). A copy of the merger agreement was included as an exhibit to a Form 8-K that we filed with the Securities and Exchange Commission (the “SEC”) on April 4, 2003. Under the terms of the agreement, (1) Airborne’s air operations will be separated from the ground operations and retained in ABX, (2) DHL will acquire the ground operations (including all operations currently conducted by AEI, including its book of business, customer service, express and deferred services and products, and pick up and delivery network) through a merger of Airborne and Atlantis, and (3) Airborne shareholders will receive, for high volume corporate
customers.
each share of Airborne common stock held, $21.25 in cash (representing total cash consideration in the transaction of $1.05 billion) and one share of common stock of ABX. Upon closing of the transaction, Airborne will operate as a wholly owned indirect subsidiary of DHL, and ABX will become an independent public company wholly owned by Airborne’s former shareholders (although under certain circumstances, in accordance with the merger agreement, DHL could purchase all of Airborne’s operations and Airborne shareholders would receive alternative consideration of $21.65 per share in cash). The transaction, which is subject to shareholder and regulatory approvals, is targeted to be completed in the third quarter of 2003.
Upon closing of the transaction, the net assets of the ground portion of ABX (including its central and regional sort facilities, runways, taxiways, aprons, buildings serving as aircraft and equipment maintenance facilities, storage facilities, a training center and both operations and administrative offices) will be transferred to Airborne as part of the ground operations to be merged with Atlantis. Additionally, in connection with the transaction, ABX will enter into a number of commercial agreements with Airborne, including an ACMI (aircraft, crew, maintenance and insurance) agreement and a hub and line-haul services agreement. Under these agreements, ABX will provide air transportation, line-haul, hub and maintenance services to Airborne and receive compensation generally based on cost plus a specified mark-up percentage. For additional information regarding this transaction, see Note U of the notes to our consolidated financial statements.
Available Information
We maintain an internet website atwww.airborne.com where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available, without charge, as soon as reasonably practicable following the time they are filed with or furnished to the SEC.
Domestic Operations
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The Company'sProducts and Services
Our domestic operations, supported by approximately 280310 facilities, primarily involve express and deferred door-to-door delivery of shipments weighing less than 100 pounds. Shipments consist primarily of business documents and other printed matter, computer hardware and parts, software, electronic and computer parts,
software, machine parts, health carehealthcare items, films and videotapes, and other items for which speed and reliability of delivery are important.
The Company's
A primary express service is its overnight expressour Overnight Express product. This product, which comprised approximately 58%46% of the Company'sour domestic shipments during 1996,2002, generally provides fordelivery before noon delivery on the next business day to most metropolitan cities in the United States. The
CompanyWe also providesprovide Saturday, Sunday and holiday pickup and delivery service for mostmany cities.
-1-
Beginning
We offer a 10:30 a.m. express delivery option, within our Overnight Express product, to selected zip codes (for shipment volume reporting purposes, the Overnight Express category includes our 10:30 a.m. product). This option, which was introduced in 1995 and continuing into 1996, the Company redefined its
deferredApril 2001, allows customers to designate that their package be delivered by 10:30 a.m. for a surcharge of up to $5.00 per package. This service product through the creation of two distinct levels of
service. The services,option does not require us to incur significant incremental costs since it utilizes our existing delivery infrastructure.
We also provide customers several express service products when delivery times are less sensitive. Our Next Afternoon Service (NAS) and(“NAS”) generally provides overnight delivery by 3:00 p.m. on the next business day. Our Second Day Service (SDS) replaced Select Delivery Service, which had been(“SDS”) generally provides delivery service by 5:00 p.m. on the Company's
deferred service product since 1990. NAS is available for shipments
weighing five pounds or less and SDS is offered for shipments of all
weights. Select Delivery Service provided next afternoon service for
shipments weighing five pounds or less, with shipments weighing more than
five pounds delivered on a second day basis. Deferred service shipments,business day. These express products, which comprised approximately 42%35% of domestic shipments during 1996,2002, are lower priced than the overnight expressOvernight Express product reflecting the less time sensitive nature of the shipments. NAS rates are generally higher than SDS rates.
rates for comparably sized shipments.
Ourairborne@home deferred service product serves the residential delivery market and targets primarily e-commerce businesses and catalog markets. This product, which comprised approximately 8% of domestic shipments during 2002, offers shippers a competitive combination of delivery service and pricing, while providing us an effective way to accomplish residential deliveries. These shipments are sorted and routed similarly to SDS shipments. We pick up, sort, and deliver airborne@home shipments to any one of 21,600 U.S. Postal Service Destination Delivery Units serving 31,100 zip codes for delivery to residences via USPS Parcel Select Service. Transit times for this delivery service are generally two to four days.
Our Ground Delivery Service (“GDS”) deferred product, introduced in April 2001, expanded our product line and allowed us to gain product parity with our competitors. We now offer both air and ground services to attract and retain customers utilizing a bundled marketing approach. GDS is a door-to-door, one to seven-day ground transit service that leverages our existing sort, linehaul, and pickup and delivery infrastructure. This deferred service targets primarily corporate shippers who also provide us express and other shipment volumes. GDS is generally priced less than express services, reflecting the less time sensitive nature of ground shipments. GDS accounted for approximately 12% of domestic shipments during 2002 and approximately 15% of domestic shipments in the fourth quarter of 2002.
We offer a number of special logistics programs to customers through Airborne Logistics Services (“ALS”), a division of ABX. ALS operates our Stock Exchange, Hub Warehousing and other logistics programs. These programs provide customers the ability to maintain centralized inventories that can be managed by either ALS or customer personnel. Items inventoried at or near our main sort facility, located in Wilmington, Ohio, can be delivered utilizing our airline system or, if required, commercial airlines on a next-flight-out basis.
Our Sky Courier subsidiary provides expedited next-flight-out domestic and international services at premium prices. Sky Courier also offers limited local intercity courier services as well as a Field Stock Exchange program where customer inventories are managed at our locations around the United States and Canada.
While the Company'sour domestic airline system is designed primarily to handle express shipments,small packages, any available capacity is also utilized to carry heavier weight shipments which the Companythat we would normally move on other carriers in itsour role as an air freight forwarder.
Communications System
- - ---------------------
FOCUS (Freight On-line Control and Update System) is a proprietary
communications system which provides real time information for purposes of
tracking and providing the status of customer's shipments as well as
monitoring the performance of the Company's operational systems. The
Company's facilities and international agents are linked to FOCUS and
provide inputs to the system, in part through the driver's use of hand-held
scanners which read bar-codes on the shipping documents, with information
necessary to determine the status and location of customer shipments 24
hours a day. FOCUS allows for direct customer access to shipment
information through the use of their own computer systems.
FOCUS provides the Company's personnel with important information for
use in coordinating its operational activities. Information regarding
Company-operated aircraft arrivals and departures, weather, and
documentation requirements for shipments destined to foreign locations are
several examples of the information maintained and provided by FOCUS.
Domestic Operations
Pickup and Delivery
- - -------------------
The Company accomplishes its
We accomplish our door-to-door pickup and delivery service using approximately 13,300 radio-dispatched15,300 delivery vans and trucks, of
which approximately 5,100trucks. Approximately, 5,900 are ownedoperated by the Company.us with employee drivers. Independent contractors under contract with the Company provide the balance of theour pickup and delivery services.
Because convenience is an important factor in attracting business from less frequent shippers, the Company haswe have an ongoing program to place drop boxes in convenient locations. The Company hasDrop boxes allow customers the flexibility to tender shipments to us without scheduling a pickup. We have approximately 11,10015,100 boxes in service.
Sort Facilities
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The Company's
Our main sort center is located in Wilmington, Ohio. As
express delivery volume has increased, the mainThe sort center has been
expanded. In 1995, the sort center was expanded and currently has the capacity to handle approximately 980,0001.2 million pieces during the primary 2-1/23 1/4 hour nightly sort operation. On average, approximately 835,0001.0 million pieces were sorted each weekday night at the sort center during the fourth quarter of 1996.
2002.
In addition to the main sort facility at Wilmington, tenwe have eleven regional hub facilities have been establishedthat primarily to sort shipments originating and having a destination within approximately a 300 mile radius of athe regional hub.
The Company
We also conductsconduct a day sort operation at Wilmington whichthat services SDS, airborne@home and GDS shipments. The day sort generally receives these shipments weighing five
poundsthrough a combination of flights and trucks originating from regional hubs, station facilities or less from flights
-2-
arriving during the previous night sort operation. Shipments weighing more
than five pounds are either trucked or flown to the day sort from the
regional hub facilities.
customer sites.
The operation of the Wilmington facility is critical to the Company'sour business. The inability to use the Wilmington airport, because of bad weather or other factors, would have a serious adverse effect on our service. We have invested in sophisticated instrument landing and radar systems and other equipment that are intended to minimize the Company's service. However, contingency plans, including landing at nearby
airports and transporting packages to and from the sort center by truck,
can be implemented to address, in part, temporary inaccessibility of the
Wilmington airport.
effect bad weather may have on our operations.
In the fourth quarter of 1996, approximately 54% and 19% of total
shipment weight was handled through2002, the night sort and day sort operations at Wilmington handled approximately 34% and 30% of total shipment weight, respectively, with the regional hubs handling the remaining 27% being handled
exclusively by the regional hubs.
36%.
Shipment Routing
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The logistics of moving a shipment from its origin to destination isare determined by several factors. Shipments are routed differently depending on shipment product type and weight, geographic distances between origin and destination, and locations of Companyour stations relative to the locations of sort facilities. Shipments generally are moved between stations and sort facilities on either Company aircraft or contracted trucks. A limited number of shipments are transported airport-to-airport on commercial air carriers.
Overnight expressExpress shipments and NAS shipments and SDS shipments weighing
five pounds or less are picked up by local stations and generally consolidated with other stations'stations’ shipments at Companyour airport facilities. Shipments that are not serviced through regional hubs are loaded on Companyour aircraft departing each weekday evening from various points within the United States, Canada and Canada.Puerto Rico. These aircraft may stop at other airports to permit additional locations and feeder aircraft to consolidate their cargo onto the larger aircraft before completing the flight to the Wilmington hub. The aircraft are scheduled to arrive at Wilmington between approximately 11:10:30 p.m. and 3:002:30 a.m., at which time the shipments are sorted and reloaded. The aircraft are scheduled to depart before 6:00 a.m. and return to their applicable destinations in time to complete scheduled
next business morning or deferred service commitments. The Wilmington hub also receives shipments via truck from selected stations in the vicinity of the Wilmington hub for integration with the nightly sort process.
For the
The day sort operation handlingfor SDS and GDS shipments weighing over five
pounds, generally 12is supported by nine aircraft that return to Wilmington from overnight service destinations on Tuesday through Thursday. These aircraft, and trucks from six regional hubs, arrive at Wilmington between 10:8:00 a.m. and 2:001:30 p.m., at which time shipments are sorted and reloaded on the aircraft or trucks by 3:30 p.m. for departure and return to their respective destinations.
The Company
We also performsperform weekend sort operations at Wilmington to accommodate Saturday pickups and Monday deliveries of both overnight
express and deferred service shipments. This sort is supported by 14
Company16 of our aircraft and by trucks.
Aircraft
- - --------
The Company
We currently utilizes usedutilize pre-owned Boeing 767 aircraft manufactured in the late
1960s and early 1970s. UponMcDonnell Douglas DC-8 and DC-9 aircraft. After acquisition, the aircraft are modified by the
Company.for use within our cargo operation. At the end of 1996, the Company's2002, our in-service fleet consisted of a total of 110116 aircraft, including 3522 Boeing 767-200s, 20 McDonnell Douglas DC-8s (consisting of 13six series 61 6and 14 series 6263 aircraft) and 16 series 63), 6674 DC-9s (consisting of 2two series 10, 43 series 30, and 2129 series 40),40 aircraft). We own 113 of these aircraft and 9 YS-11 turboprop aircraft.
The Company owns the majority of thelease two 767 aircraft it operates, but has
completed sale-leaseback transactions with respect to six DC-8 and sixone DC-9 aircraft. In addition, each night we charter approximately 6560 smaller aircraft are chartered
nightly to connect to small cities with Companyour own aircraft, thatwhich then operate to and from Wilmington.
-3-
In
During 2002, two additional 767 aircraft were placed into service, bringing the total number of 767 aircraft in service at December 1995, the Company announced an agreement31, 2002 to purchase 12
used Boeing 767-200's between the years 1997 and 2000 and its plans to
pursue the acquisition of 10 to 15 additional used 767-200's between the
years 2000 and 2004. This22. With this newer generation and more operationally efficient aircraft, the less economical DC-8 aircraft can be placed into shorter lane segments, transferred to backup or charter operation roles, or removed from service. We plan to place two additional 767s into service in 2003, and to remove up to four DC-8s from service by the end of 2003. One DC-8 aircraft should increase
operating efficiencyis dedicated to our charter service operations, and allowadditional DC-8s could be deployed as charters depending on prospective business opportunities. However, the Company to meet anticipated demand for additional lift capacity. There are no planscharters declined in 2002 compared to retire any aircraft2001 and 2000 as a result of these acquisitions, although retirement is an option ifthe weak economic climate. We have commitments to acquire six additional 767s by the first half of 2005. Depending on various factors including shipment growth does not requireand capacity requirements, we may initiate negotiations to defer some of these deliveries, as we have done in the added capacity.
At year end 1996,past, but there is no assurance that any deferrals will be achieved. Future DC-8 aircraft retirements will be determined based on shipment growth, capacity requirements, charter service demand and the timing of placing future 767s into service.
During 2002, we decreased the nightly lift capacity of theour system was about
3.8 millionby approximately 55,000 pounds versus approximately 3.5 million pounds and 3.1to 4.1 million pounds at the end of 1995 and 1994, respectively.December 31, 2002. During 1996, the
Company's2002, our average utilization of available lift capacity approximated 74%.
75% compared to 70% in 2001.
In response to increased public awareness regarding the operation of older aircraft, the Federal Aviation Administration ("FAA"(“FAA”) periodically mandates additional maintenance requirements for certain aircraft, including the type operated by the Company.we operate. In recent years, the Company
haswe have completed, and continuescontinue to perform, a number of inspection and maintenance programs pertaining to various Airworthiness Directives issued by the FAA. The FAA could, in the future, impose additional maintenance requirements for aircraft and engines of the type operated by the Companywe operate or interpret existing rules in a manner whichthat could have a material effect on the Company'sour operations and financial position. In accordanceSee “Regulation”.
Communications Technology
FOCUS (Freight On-line Control and Update System) is our proprietary communications system that provides real time information for purposes of tracking and providing the status of customer shipments as well as monitoring the performance of our operational systems. Our facilities and international agents are linked to FOCUS and provide information on the status and location of customer shipments 24 hours a day. Some information is provided to FOCUS through the use of hand-held scanners that read bar codes on the shipping documents. FOCUS allows customers access to shipment information through either direct dial-in capabilities or through our Internet website.
FOCUS provides our personnel with federal lawimportant information for use in coordinating our operational activities. Information regarding arrivals and FAA regulations, only subsonic
turbojetdepartures of our aircraft, classified as Stage 2 or 3 by the FAA may be operated in
the United States. Generally, Stage 3 aircraft produce less noise than a
comparable Stage 2 aircraft.
In 1990, Congress passed the Airport Noiseweather and Capacity Act of 1990
(the "Noise Act"). Among other things, the Noise Act generally requires
turbojet aircraft weighing in excess of 75,000 pounds and operating in the
United States (the type of DC-8 and DC-9 aircraft operated by the Company)documentation requirements for shipments destined to comply with Stage 3 noise emission standards on or before December 31,
1999. The Company's YS-11 turboprop aircraftforeign locations are not subject to these
requirements. In accordance with the Noise Act, the FAA has issued
regulations establishing interim compliance deadlines. These rules
required air carriers to reduce the base level of Stage 2 aircraft they
operate 50% by December 31, 1996; and 75% by December 31, 1998. As of
December 31, 1996, the Company has complied with interim compliance
deadline and expects to meet or exceed the December 31, 1998 interim
compliance deadline. As of December 31, 1996, 61%several examples of the Company's
turbojet aircraft (25 DC-8information maintained and 37 DC-9 aircraft) were Stage 3 aircraft,provided by FOCUS.
In 2001, we began installing new digital hand-held scanning technology into our domestic pickup and delivery operations. This technology, based on the balance being Stage 2 aircraft. Inuse of integrated driver scanners, combines text messaging and scanning functionality into a single device, and replaces previous voice communications systems and dispatch processes. The new scanners benefit customers through more rapid transfers of shipment pickup and delivery data into FOCUS in addition to FAA regulation, certain
local airportsfunctionality that allows for the digital capture of consignee signatures. We also regulate noise compliance. See "Business -
Regulation".
The Company, in conjunction with several other companies, has
developed noise suppression technology knowngain productivity and cost improvements through centralization of dispatch functions and driver efficiencies. We had deployed approximately 12,300 scanners as hush kits for its DC-9
series aircraft which have been certifiedof the end of 2002 and plan to meet FAA Stage 3 requirements.
The capital cost for Stage 3 hush kits is approximately $1.4 million for
each DC-9 series aircraft. The Company has installed hush kits which
satisfy Stage 3 compliance requirements on all of its DC-8-62 and DC-8-63
series aircraft and three of its DC-8-61 series aircraft. The capital costdeploy 5,700 additional scanners by July 2003 to modifycomplete the Company's remaining DC-8-61 aircraftrollout to meet Stage 3 noise
standards is approximately $5.7 million per aircraft.
our domestic stations.
International Operations
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The Company provides
We provide international express door-to-door delivery and a variety of freight services. These services are provided in most foreign countries on an inbound and outbound basis through a network of Airborneour offices and independent agents. Most international deliveries are
accomplished within 24 to 96 hours of pickup.
The Company's
Our domestic stations are staffed and equipped to handle international shipments to or from almost anywhere in the world. In addition to itsour extensive domestic network, the Company operates itswe operate our own offices in the Far East,Taipei, Hong Kong, Singapore, Australia, New Zealand, France, the Netherlands, Sweden and
-4- the United Kingdom. The Company'sOur freight and express agents worldwide are connected to FOCUS, Airborne'sour on-line communication network, through which the Companywe can provide itsour customers with immediate access to the status of shipments almost anywhere in the world.
The Company's
Our international air express service is intended for the movementdoor-to-door delivery of non dutiablenon-dutiable and certain dutiable shipments weighing less than
99 pounds. The Company's150 pounds or less. Most international express deliveries are accomplished within 24 to 96 hours of pickup. Our international air freight service handles heavier weight shipments on either an airport-to-airport, door-to-airport or door-
to-doordoor-to-door basis. The CompanyWe also offersoffer ocean service capabilities for customers who want a lower costlower-cost shipping option.
The Company's
Our strategy is to use a variable-cost approach in delivering and expanding international services to itsour customers. This strategy uses existing commercial airline lift capacity in connection with the Company'sour domestic network to move shipments to and from overseas destinations and origins. Additionally, we have service arrangements with independent freight and express agents have been entered into to accommodate shipments in locations not currently served by Company-owned
operations. The Company currently believes there are no significant
service advantages which would justify the operation of itsour own aircraft on
international routes, or making significant investment in additional
offshore facilities or ground operations. In order to expand itsour business at a reasonable cost, the Company continueswe have, from time to explore possibletime, entered into joint venture agreements whichthat combine the Company'sour management expertise, domestic express system and information systems with local business knowledge and market reputation of suitable partners. Joint ventures have
been formedventure operations currently exist in Japan, Thailand, Malaysia the Netherlands, and South Africa.
Customers and Marketing
- - -----------------------
The Company's
Our primary domestic strategy focuses on expressproviding highly reliable, competitively priced, time definite delivery services for high volume corporatebusiness customers. Most high volume customers have entered into service agreements providing for specified rates or rate schedules for expresstime definite deliveries. As of December 31, 1996, the Company2002, we serviced approximately 460,000450,000 active customer shipping locations.
The Company determines
We determine prices for any particular domestic express
customer based on competitive factors, service type, anticipated costs, shipment volume and weight, and other considerations. The Company believesWe believe that itwe generally offersoffer prices that are competitive with, or lower than, prices quoted by itsour principal competitors for comparable services.
Internationally, the Company'sour marketing strategy is to target the outbound express and freight shipments of U.S. corporatebusiness customers, and to sell the inbound service of the Company'sour distribution capabilities in the United States.
Both in the international and domestic markets, the Company believes
that itswe believe customers are most effectively reached by a direct sales force, and accordingly, doeswe do not currently engage in extensive mass media advertising. Domestic sales representatives are responsible for selling both domestic and international express shipments. In addition, the International Division has its own dedicated direct sales organization for selling international freight service.
The Company'sservices.
Our sales force currently consistsconsisted of approximately 300480 domestic representatives and approximately 80 international specialists.
The Company'sspecialists as of December 31, 2002. Our sales efforts are supported by the Marketing and International Divisions, based at the Companyour headquarters. Senior management is also active in marketing the Company'sour services to major accounts.
Value-added services
Customer Automation
Customer technology and automation continue to be important factors in attracting and retaining customers. Accordingly,We continue to enhance automation of the Company is automating more of
its operationsshipping process to make the serviceit easier for customers to use our services and to
provide them withobtain valuable management information. The Company believesWe believe that it iswe are generally competitive with other express carriers in terms of customer automation, reliability value-added services and convenience.
-5-
For many of its high volumeour high-volume customers, the Company offerswe offer a metering device, called LIBRA II,(SM), which is installed at the customer'scustomer’s place of business. With minimum data entry, the metering device weighs the package, calculates the shipping charges, generates the shipping labels, provides custom shipping reports and provides
a dailyenables the customer to track the status of shipments in our FOCUS shipping report.and tracking system. At year end 1996,2002, the system was in use at approximately 9,300 domestic customer locations and 900 international10,900 customer locations. Use of LIBRA II not only benefits the customer, directly, but also lowers the Company'sour operating costs, since LIBRA II shipment data is transferred into the Airborne FOCUS shipment tracking system automatically, thus avoiding duplicate data entry.
"Customer Linkage"
“Customer Linkage”, an electronic data interchange ("EDI"(“EDI”) program developed for Airborne'sour highest volume shippers, allows customers, with their computers, to create shipping documentation at the same time they are entering orders for their goods. At the end of each day, shipping activities are transmitted electronically to the Airborne FOCUS system where information is captured for shipment tracking and billing purposes. Customer Linkage benefits the customer by eliminating repetitive data entry and paperwork and also lowers the Company'sour operating costs by eliminating manual data entry. EDI also includes electronic invoicing and payment remittance processing. The CompanyWe also hashave available a software program known as Quicklink,QUICKLINK, which significantly reduces programming time required by customers to take advantage of linkage benefits.
In 1995, the Company unveiled "LIGHTSHIP TRACKER", a
We offer customers PC-based tracking
software which was the first in a series of software products designed to improve customertheir productivity and provide convenient access to the
Company'sour various services. LIGHTSHIP TRACKER“Ship Exchange” is an internet shipping system available through our website, www.airborne.com. Ship Exchange allows customers working
from their PCs, to view the status of and receive information regarding
their shipments through access to the Airborne FOCUS system.
In 1997, the Company will provide customers with additional
flexibility and productivity opportunities through the introduction of its
PC-based software program, "LIGHTSHIP SHIPPER". Through personal or office
computers via modem connection to the Airborne FOCUS system, customers will
be able to obtain estimated shipping rates and delivery times, fill out and
printprepare shipping labels schedule pickups, as well asfor domestic and international shipments, track the status of their shipments.
The Company offersshipments, store frequent ship-to locations in a numberpersonal address book, prepare shipping reports, in addition to other convenient features.
“Corporate Exchange” is a web-based software that provides companies control over their shipping environment. In addition to the variety of special logistics programs toshipping features, Corporate Exchange allows customers through Airborne Logistics Services ("ALS"),centralized administration of employee shipping permissions and restrictions, maintenance of a division of ABX Air, Inc.
ALS operates the Company's Stock Exchangeshared address book, reference information and Hub Warehousing and other
logistics programs. These programs provide customers the ability to maintain inventories whichcreate custom reports.
Our “Small Business Center”, featured on our website, provides enhanced marketing and functionality. With this feature, customers can be managed either by Company orgo online to compare competitive rates, set up a new account with us, order supplies and initiate shipping.
Our website, www.airborne.com, provides customers a global connection to our services. The website allows customers to track the status of their shipments, contact customer personnel. Items inventoried at Wilmington can be delivered utilizing
either the Company's airline system or, if required, commercial airlines on
a next-flight-out basis. ALS' Central Print program allowsservice representatives, locate drop boxes, compare rates and obtain other useful information to
be sent electronically to customer computers located at Wilmington where
Company personnel monitor printed outputabout our business, such as our service offerings, documentation requirements and ship the material according to
customer instructions.
In addition, the Company's Sky Courier business provides expedited
next-plane-out service at premium prices. Sky Courier also offers a
Regional Warehousing program where customer inventories are managed at any
of over 60 locations around the United States and Canada.
The Company has obtained ISO 9000 certification for its Chicago,
Philadelphia and London stations and its Seattle Headquarters. ISO 9000 is
a program developed by the International Standards Organization ("ISO"),
based in Geneva, Switzerland. This organization provides a set of
international standards on quality management and quality assurance
presently recognized in over 90 countries. The certification is an asset
in doing business worldwide and provides evidence of the Company's
commitment to excellence and quality.
-6-
transit times.
Competition
- - -----------
The market for the Company'sour services has been and is expected to remain highly competitive. The principal competitive factors in both domestic and international markets are price, the ability to provide reliable pickup and delivery, frequency and capacity of scheduled service and value-added services.
Federal Express Corporation (“FedEx”) continues to be the dominant competitor in the domestic air express business, followed by United Parcel Service. Airborne
Express ranksService, Inc. (“UPS”). We rank third in shipment volume behind these two companies in the domestic air express business. Other domestic air express competitors include the U.S. Postal Service'sService’s Express and Priority Mail Service andServices, as well as several other transportation companies offering next morning or next-plane-out delivery service. The
CompanyWe also competescompete to some extent with companies offering ground transportation services and with facsimile and other forms of electronic transmission.
Our Ground Delivery Service, introduced in April 2001, has allowed us to gain product parity substantially consistent with our competitors and is an area for future growth. UPS is the dominant competitor in the domestic deferred ground business, followed by FedEx. The Company believesaddition of our deferred ground service provides us a more competitive platform to sell our express air and other products by allowing us to bundle these with the ground product.
We believe it is important to maintain an activemake capital expansion programinvestments to increase capacity, improve and maintain service and increase productivity as its volume of shipments increases.productivity. However, the Company
haswe have significantly less capital resources than itsour two primary competitors.
In the international markets, in addition to Federal ExpressFedEx and United Parcel Service, the Company competesUPS, we compete with DHL Worldwide Express, TNT and otherExpress, air freight forwarders orand carriers, and most commercial airlines.
Employees
- - ---------
As of December 31, 1996, the Company and its subsidiaries2002, we had approximately 12,70015,200 full-time employees and 8,0007,300 part-time and casual employees. Approximately 6,0007,400 full-time employees (including the
Company's 715our 745 pilots) and 3,2002,800 part-time and casual employees are employed under union contracts, primarilycontracts.
Labor Agreements
Labor agreements with locals of the International Brotherhood of Teamsters and Warehousemen.
LaborWarehousemen cover most of our union ground personnel. Agreements - - ----------------
Most labor agreements covering the Company's73% and 25% of our union ground personnel are for
a four-year term expiringexpire in 1998. The Company's2003 and 2004, respectively.
Our pilots are covered by a contract whichthat became amendable on July 31, 1995. The Company2001. This contract is governed by the Railway Labor Act, which provides that an amendable contract continues in effect upon the expiration of its stated term while the parties negotiate an amended contract. We are in the mediation phase of negotiations with the International Brotherhood of Teamsters. Under the Railway Labor Act, mediation is conducted by the National Mediation Board, which has sole discretion as to how long the mediation will last and when it will end. In addition to direct negotiations and mediation, the Railway Labor Act provides for potential arbitration of unsolved issues and a 30-day “cooling off” period before either party can resort to self-help. Self-help remedies include, among others, a strike by the members of the labor union and the imposition of proposed contract amendments and hiring of replacement workers by Airborne. Because the terms of new labor agreements will be determined by collective bargaining, we cannot predict the outcome of the remaining negotiations at this time or the effect of the terms of a new contract on our business or results of operations. If we are unable to successfully renegotiate a new labor agreement, our pilots may strike or institute a work stoppage or slowdown. Although we have not experienced any significant disruption from labor disputes in the past.
However, negotiations withpast, there can be no assurance that disputes will not arise in the pilots are in mediation, and the Company
cannot predict whether the contract with the pilots will be amended without
experiencing any work disruption.
Subsidiaries
- - ------------
The Company has the following wholly-owned subsidiaries:
1. ABX Air, Inc., a Delaware corporation, is a certificated air
carrierfuture, which owns and operates the Company's domestic express
cargo service. Its wholly-owned subsidiaries are as follows:
a) Wilmington Air Park, Inc., an Ohio corporation, is the owner
of the Wilmington airport property (Airborne Air Park).
b) Airborne FTZ, Inc., an Ohio corporation, is the holder of a
foreign trade zone certificate at the Wilmington airport
property and owns and manages the Company's expendable
aircraft parts inventory.
c) Aviation Fuel, Inc., an Ohio corporation, purchases and
sells aviation and other fuels.
-7-
d) Advanced Logistics Services Corp., an Ohio corporation,
provided customized warehousing, inventory management and
shipping services, through late 1996. Logistics services
are currently provided by Airborne Logistic Services, a
division of ABX Air, Inc.
e) Sound Suppression, Inc., an Ohio corporation with no
current operating activities.
2. Awawego Delivery, Inc., a New York corporation, holds trucking
rights in New York and Connecticut.
3. Airborne Forwarding Corporation, a Delaware corporation doing
business as Sky Courier, provides expedited courier service.
4. Airborne Freight Limited, a New Zealand corporation, provides
air express and air freight services.
could disrupt service to customers.
Regulation
- - ----------
The Company's
Our operations are regulated by the United States Department of Transportation ("DOT"(“DOT”), the FAA, and various other federal, state, local and foreign authorities.
The DOT, under federal transportation statutes, grants air carriers the right to engage in domestic and international air transportation. The DOT issues certificates to engage in air transportation and has the authority to modify, suspend or revoke such certificates for cause, including failure to comply with federal law or the DOT regulations. The
Company believes it possessesWe believe we possess all necessary DOT-issued certificates to conduct itsour operations.
As a result of the events of September 11, 2001, the United States Congress enacted the Aviation and Transportation Security Act that required the creation of a new administration, now a part of the Department of Homeland Security, known as the Transportation Security Administration (“TSA”). The FAA’s security related responsibilities have been transferred to the TSA, which has overall responsibility for the screening of passengers, baggage and cargo and the security of aircraft and airports. The TSA has adopted and may in the future adopt security related regulations, including new requirements for the screening of cargo, which could have an impact on our ability to efficiently process cargo or otherwise increase costs. In addition, we may have to reimburse the TSA for the cost of security services it may provide us in the future. We believe that we are in compliance with all applicable security regulations.
The FAA regulates aircraft safety and flight operations generally, including equipment, ground facilities, maintenance, flight dispatch, security procedures, training, communications, the carriage of hazardous materials and communications.other matters affecting air safety. The FAA issues operating certificates and operations specifications to carriers whothat possess the technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each aircraft whichthat meets the requirements for aircraft design and maintenance. The
Company believes it holdsWe believe we hold all airworthiness and other FAA certificates required for the conduct of itsour business and operation of our aircraft, although the FAA has the power to suspend or revoke such certificates for cause, including failure to comply with federal law.
law and FAA regulations.
The FAA has authority to issue maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft and replacement of aircraft structures, components and parts, based on the age of the aircraft and other factors. For example, the FAA has required us to perform inspections of our DC-9 and DC-8 aircraft to determine if certain of the aircraft structures and components meet all aircraft certification requirements. If the FAA were to determine that the aircraft structures or components are not adequate, it could order operators to either reduce cargo loads, strengthen any structure or component shown to be inadequate, or make other modifications to the aircraft. New mandatory directives could also be issued requiring us to inspect and replace aircraft components based on their age or condition.
In addition to the issuance of mandatory directives, the FAA from time to time may amend its regulations thereby increasing regulatory burdens on air carriers. For example, the FAA can order the installation or enhancement of safety related aircraft equipment. Recent legislation requires the FAA to mandate the installation of collision avoidance systems in all cargo aircraft by October 2003. We estimate the cost to comply with this legislation to be approximately $10 million, of which $8 million had been spent through the end of 2002. In addition, we must install over the next few years additional collision avoidance and navigational related equipment on our aircraft (to the extent such equipment is not already installed), which we estimate will collectively cost approximately $10 million, of which $5 million had been spent through the end of 2002. Depending on the scope of the FAA’s orders or amended regulations, these requirements may cause us to incur expenditures substantially in excess of our estimates.
The federal government generally regulates aircraft engine noise at its source. However, local airport operators may, under certain circumstances, regulate airport operations based on aircraft noise considerations. The Airport Noise and Capacity Act of 1990 provides that, in the case of Stage 23 aircraft restrictions, the airport operator must notify air carriers(all of its
intention to propose rules andour operating aircraft satisfy the requirements of federal statutes
before implementation of the rules or in the case of Stage 3 aircraft, thenoise compliance requirements), an airport operator must obtain the carriers'carriers’ or the governments'government’s approval of the rule prior to its adoption. The Company believesWe believe the operation of itsour aircraft either complies with or is exempt from compliance with currently applicable local airport rules. However, ifsome airport authorities are considering adopting local noise regulations and, to the extent more stringent aircraft operating regulations wereare adopted on a widespread basis, the Companywe might be required to expendspend substantial sums, make schedule changes or take other actions.
The Company'sactions to comply with such local rules. In addition, the United States, working through the International Civil Aviation Organization, is considering the adoption of more stringent aircraft noise and emissions regulations which, if adopted, could impose additional requirements on us to mitigate aircraft noise and emissions, including making substantial modifications to our aircraft. If our aircraft cannot be modified to comply with any new requirements, we could be required to retire certain aircraft before the end of their useful economic lives.
Our aircraft currently meet all known requirements for emission levels. However, under the Clean Air Act, individual states or the Federal Environmental Protection Agency (the "EPA") may adopt regulations requiring the reduction in emissions for one or more localities based on the measured air quality at such localities. The EPA has proposedSuch regulations for portions of California calling for emission reductionsmay seek to limit or restrict emissions through restricting the use of emission producing ground service equipment or aircraft auxiliary power units. There can be no assurance that, if such regulations are adopted in the future or changes in existing laws or regulations are promulgated, such laws or rules would not have a material adverse effect on the Company.
-8-
our financial condition or results of operations.
Under currently applicable federal aviation law, the Company's airline
subsidiaryABX could cease to be eligible to operate as an all-cargo carrier if more than 25% of theAirborne’s voting stock of the Company were owned or controlled by non-U.S. citizens or the airline were not effectively controlled by U.S. citizens. Moreover, in order to hold an all-cargo air carrier certificate, the president and at least two-thirds of the directors and officers of an air carrier must be U.S. citizens. To the best of the Company'sour knowledge, foreign stockholdersnon-U.S. citizens do not own or control more than 25% of theour outstanding voting stock. TwoOne of the Company's 42our 37 officers areis not a U.S. citizens.
The Company believescitizen.
We believe that itsour current operations are substantially in compliance with the numerous regulations to which itsour business is subject; however, various regulatory authorities have jurisdiction over significant aspects of the Company'sour business, and it is possible that new laws or regulations or changes in existing laws or regulations or the interpretations thereof could have a material adverse effect on our operations.
Risk Factors
The current economic climate may adversely affect our business and results of operations.
Businesses are the Company'sprimary customers for our various services, and our success is therefore highly dependent on the level of business activity and overall economic conditions in the markets in which we operate. The United States economy rebounded very modestly in 2002 from the earlier recession, but it continues to be characterized by sluggish output growth, tightly limited capital expenditures and substantial uncertainty among businesses about the outlook. Many foreign economies are experiencing similar conditions. Although our business improved in 2002, we are cautious about the prospects for sustained economic growth. Accordingly, there can be no assurance that our business and results of operations will not be adversely affected by the current economic climate.
Intensified geopolitical risks and the resulting government responses may harm our business, reduce our revenues and increase our costs.
The world is experiencing a very high level of geopolitical uncertainty due to the threat of war in Iraq, the continued war on terrorism, erosion of relations between the United States and certain of its allies, continued conflict in the Middle East, turmoil in Venezuela and elsewhere, and many other factors. The terrorist acts of September 11, 2001 adversely impacted our business due to the FAA’s temporary grounding of all U.S. air traffic, increased security and other costs and reduced capacity utilization. Further terrorist attacks involving aircraft, or the threat of such attacks, could result in another grounding of our fleet, and would likely result in additional reductions in capacity utilization, along with increased security and other costs. In addition, terrorist attacks not involving aircraft, or the general increase in hostilities as a result of the onset of a war in Iraq or reprisals against terrorist organizations or otherwise, could adversely affect our business.
The intensification of geopolitical risks diminishes the visibility of the prospects of our business. To the extent these risks do not diminish, our business and results of operations may be adversely affected by a number of factors, including:
If we are unable to compete successfully, our business will be materially harmed.
The market for our services has been and is expected to remain highly competitive. FedEx is our dominant competitor in the domestic air express business, followed by UPS. We rank third in shipment volume behind these two companies in the domestic air express business. Other domestic air express competitors include the U.S. Postal Service’s Express and Priority Mail Services and several other transportation companies offering next morning or next-plane-out delivery service. We also compete with companies offering domestic ground transportation services, including UPS and FedEx, and with facsimile and other forms of electronic transmission. In the international markets, in addition to FedEx and UPS, we compete with DHL Worldwide Express, TNT Express, air freight forwarders and carriers and most commercial airlines. We have significantly less capital and other resources than our two primary competitors. If we are unable to compete successfully with these competitors, our business and results of operations will be adversely affected.
We are dependent on growth of our Ground Delivery Service (GDS) and airborne@home product to offset potential declines in our core express products.
Shipment volumes of our higher-margin express products declined in 2002, and we expect shipment volumes for these products to be flat or lower in 2003. Our revenue growth and profitability depend in part on our ability to increase shipment volumes and improve yields on our GDS and airborne@home products (our arrangement with the U.S. Postal Service regarding the airborne@home product is terminable at will). If we do not achieve these objectives, our business and results of operations will suffer.
Strikes, work stoppages and slowdowns by our employees can negatively affect our results of operations.
Financial Information Regarding
Our business depends to a significant degree on our ability to avoid strikes and other work stoppages and slowdowns by our employees. The International Brotherhood of Teamsters and Domestic Operations
- - ---------------------------------------------------------------------
Financial informationother unions represent about 7,400, including our 745 pilots, or about 49%, of our full-time employees, and 2,800, or about 38%, of our part-time and casual employees. Collective bargaining agreements covering most of our union ground personnel were renegotiated in 1998 or 1999 and expire in either 2003 or 2004.
Our pilots are covered by a contract that became amendable on July 31, 2001. This contract is governed by the Railway Labor Act, which provides that an amendable contract continues in effect upon the expiration of its stated term while the parties negotiate a new contract. We are in the mediation phase of negotiations with the International Brotherhood of Teamsters. Because the terms of new labor agreements will be determined by collective bargaining, we cannot predict the outcome of the remaining negotiations at this time or the effect of the terms of a new contract on our business or results of operations. If we are unable to successfully renegotiate a new labor agreement, our pilots may strike or institute a work stoppage or slowdown. Any prolonged strike or work stoppage or slowdown by our pilots or other employees would have a material adverse effect on our business, results of operations and financial condition.
If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer, and we may be unable to satisfy our obligations.
We require significant capital to fund our business. As of December 31, 2002, we had approximately:
Approximately $260.7 million of the above obligations are due in 2003. In addition, we are required to fund between approximately $60.0 and $70.0 million of our pension plan liabilities in 2003 and anticipate our capital expenditures to be approximately $150.0 million in 2003, which includes unconditional purchase obligations of approximately $66.5 million for committed aircraft and aircraft related acquisitions. While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for 2003, circumstances could arise that would materially affect our liquidity. For example, cash flows from our operations could be affected by deterioration in shipment volumes caused by another slowdown in the economy, by our inability to successfully implement sales growth initiatives in a cost effective manner, or by war or further terrorist attacks. Our operating results could also be negatively impacted by prolonged labor disputes, adverse weather conditions or changes in our cost structure such as from a significant increase in fuel prices. If available cash on hand and cash flows from our operations are not sufficient to fund our obligations, it may be necessary for us to secure alternative financing. We may be unsuccessful in securing alternative financing when needed, on terms that we consider acceptable, or at all.
Our level of earnings depends on our ability to match our fixed costs, including aircraft, vehicles and sort capacity, with customer shipment volumes.
We are subject to a high degree of operating leverage. The revenues that we generate from a particular delivery route, flight or truck linehaul vary directly with the amount of shipments that we carry on that segment. However, since fixed costs comprise a high proportion of the operating costs of each segment, the expenses of each segment do not vary proportionately with the amount of shipments that we carried. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses would basically remain the same.
Increases in jet and motor fuel prices can negatively affect our results of operations.
We require significant quantities of gasoline, diesel fuel and jet fuel for our aircraft and delivery vehicles. We therefore are exposed to commodity price risk associated with variations in the market price for petroleum products. Although we historically have implemented fuel surcharges to mitigate the earnings impact of unusually high fuel prices, competitive and other pressures may prevent us from passing these costs on to our customers. We cannot assure you that our supply of these products will continue uninterrupted, that rationing will not be imposed or that the prices of, or taxes on, these products will not increase significantly in the future. We have at times partially hedged exposure to fuel price increases through call options on heating oil or other mechanisms. There can be no assurance that such hedges will be available to us in the future on reasonable terms. Increases in prices that we are unable to pass on to our customers will adversely affect our results of operations.
Our inability to comply with, or the costs of complying with, government regulations could negatively affect our results of operations.
Our operations are subject to complex aviation, transportation, environmental, labor, employment and other laws and regulations. These laws and regulations generally require us to maintain and comply with a wide variety of certificates, permits, licenses and other approvals. Our inability to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations, could result in substantial fines or, in the case of DOT and FAA requirements, possible revocation of our authority to conduct our operations.
In addition to compliance with existing laws and regulations, new laws and regulations may be enacted requiring us to take additional steps to comply with them. In addition, agencies of the government have announced their intention to adopt new regulations, which if adopted, could become applicable to us. For example:
We cannot assure you that existing laws or regulations will not be revised or that new laws or regulations, which could have an adverse impact on our operations, will not be adopted or become applicable to us. We also cannot assure you that we will be able to recover any or all increased costs of compliance from our customers or that our business and financial condition will not be adversely affected by future changes in applicable laws and regulations.
In addition to the need to comply with new laws and regulations, we must now interface with the newly created Department of Homeland Security. This Department has taken over many departments and functions which regulate various aspects of our business (such as the Customs Service) and formed the Department’s Border and Transportation Directorate. The ability of this new Department to efficiently structure these combined operations and functions may impact us in ways that cannot be accurately determined at this time.
Economic and other conditions in the international markets in which we operate can affect demand for our services and our results of operations.
A key component of our business is our operations outside of the United States. For the year ended December 31, 1996 is presented2002, we derived approximately 11% of our revenues from international operations. If we are unable to compete successfully in Note J (Segment Information)these markets, our results of operations will be adversely affected. Operations in international markets present currency exchange, inflation, governmental and other risks. In some countries where we operate, economic and monetary conditions could affect our ability to convert our earnings to United States dollars or to remove funds from those countries. We may experience adverse tax consequences as we attempt to repatriate funds to the NotesUnited States from other countries.
The price of our stock may be subject to Consolidated Financial
Statements appearingwide fluctuations.
The stock market has recently experienced significant price and volume fluctuations that have affected the market prices of virtually all public companies. The market price of our common stock may be subject to wide fluctuations in response to the factors discussed above as well as the following factors, some of which are beyond our control:
ITEM 2. PROPERTIES
- - --------------------
The Company leases
We lease our general and administrative office facilities located in Seattle, Washington.
At year end the CompanyDecember 31, 2002 we maintained approximately 280310 domestic and 4045 foreign stations, most of which are leased. The majority of the facilities are located at or near airports.
The Company owns the
We own our airport at the Airborne Air Park, in Wilmington, Ohio. The airport currently consists of two runways, taxi-ways, aprons, buildings serving as aircraft and equipment maintenance facilities, sort facilities, storage facilities, a training center and both operations and administrative offices. The Company believes itsIn addition, we lease eleven regional hub facilities located in Centralia, Washington; Fresno, California; Waco, Texas; Allentown, Pennsylvania; Orlando, Florida; South Bend, Indiana; Columbia, Missouri; Atlanta, Georgia; Providence, Rhode Island; Roanoke, Virginia; and Vista, California .
We believe our existing facilities are adequate to meet our current needs.
Information regarding collateralization of certain property and lease
commitments of the Company is set forth in Notes E and F of the Notes to
Consolidated Financial Statements appearing in the 1996 Annual Report to
Shareholders and is incorporated herein by reference.
reasonably foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
- - ---------------------------
None
We are not involved in any legal proceedings that we believe will have a material adverse effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -------------------------------------------------------------
None
-9-
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
- - ----------------------------------------------
PART II
ITEM 5. MARKET FOR THE REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED - - ---------------------------------------------------------------
STOCKHOLDERSSTOCKHOLDER MATTERS
- - --------------------
Common Stock and Dividends
Our common stock is traded on the New York Stock Exchange and the Pacific Exchange, Inc., under the symbol “ABF”. The responsefollowing is a summary of the cash dividends paid and the high and low closing prices of our common stock as reported by the New York Stock Exchange for 2002 and 2001:
Quarter | High | Low | Dividend | ||||||
2002: | |||||||||
Fourth | $ | 15.43 | $ | 10.54 | $ | .04 | |||
Third |
| 18.39 |
| 10.92 |
| .04 | |||
Second |
| 23.05 |
| 16.34 |
| .04 | |||
First |
| 20.67 |
| 13.97 |
| .04 | |||
2001: | |||||||||
Fourth | $ | 14.97 | $ | 9.04 | $ | .04 | |||
Third |
| 14.20 |
| 8.25 |
| .04 | |||
Second |
| 11.80 |
| 8.54 |
| .04 | |||
First |
| 13.61 |
| 9.56 |
| .04 |
On February 18, 2003, the closing price of Airborne’s common stock was $14.59 and there were 1,130 shareholders of record.
We are restricted from declaring or paying dividends on our common stock in excess of $2,000,000 during any calendar quarter under provisions of our bank revolving credit agreement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following is a summary as of December 31, 2002 of all of our equity compensation plans that provide for the issuance of equity securities as compensation. See Note J to this Item is containedthe consolidated financial statements for additional discussion.
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a)) | ||||||
Equity compensation plans approved by security holders | 3,975,960 | $ | 21.67 | 2,985,203 | (1) | |||
Equity compensation plans not approved by security holders(2) | 200,000 | $ | 15.60 | — |
| |||
Total | 4,175,960 | $ | 23.94 | 2,985,203 | (1) |
(1) | Includes 6,115 shares remaining available for future issuance to outside directors under the Company’s Director Stock Bonus Plan. |
(2) | Consists of the shares issuable upon exercise of the options granted under the Company’s 2002 Executive Stock Option Plan dated February 5, 2002, as discussed in Note J to the consolidated financial statements. |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the 1996 Annual Report to
Shareholdersconsolidated financial statements and the notes thereto and the information contained therein is incorporated by
reference.
On February 24, 1997 there were 1,298 shareholdersherein in Item 7 of recordPart II, “Management’s Discussion and Analysis of the
Common StockFinancial Condition and Results of the Company based on information provided by the Company's
transfer agent.
ITEM 6. SELECTED FINANCIAL DATA
- - ---------------------------------
The response to this Item is contained in the 1996 Annual Report to
Shareholders and the information contained therein is incorporated herein
by reference.
Operations.” Historical results are not necessarily indicative of future results.
As of and for the years ended December 31 | ||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
(In thousands except per share data) | ||||||||||||||||||||
OPERATING RESULTS: | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Domestic | $ | 2,978,242 |
| $ | 2,859,514 |
| $ | 2,902,002 |
| $ | 2,778,654 |
| $ | 2,719,206 |
| |||||
International |
| 365,494 |
|
| 360,291 |
|
| 380,132 |
|
| 366,342 |
|
| 361,440 |
| |||||
Total |
| 3,343,736 |
|
| 3,219,805 |
|
| 3,282,134 |
|
| 3,144,996 |
|
| 3,080,646 |
| |||||
Operating Expenses |
| 3,286,034 |
|
| 3,232,136 |
|
| 3,239,516 |
|
| 2,987,275 |
|
| 2,848,314 |
| |||||
Earnings (Loss) From Operations |
| 57,702 |
|
| (12,331 | ) |
| 42,618 |
|
| 157,721 |
|
| 232,332 |
| |||||
Other, Net |
| (30,731 | ) |
| (16,573 | ) |
| (19,392 | ) |
| (10,333 | ) |
| (10,747 | ) | |||||
Earnings (Loss) Before Income Taxes and Change in Accounting |
| 26,971 |
|
| (28,904 | ) |
| 23,226 |
|
| 147,388 |
|
| 221,585 |
| |||||
Income Tax (Expense) Benefit |
| (12,128 | ) |
| 9,446 |
|
| (8,940 | ) |
| (56,187 | ) |
| (84,300 | ) | |||||
Earnings (Loss) Before Change in Accounting |
| 14,843 |
|
| (19,458 | ) |
| 14,286 |
|
| 91,201 |
|
| 137,285 |
| |||||
Cumulative Effect of Change in Accounting |
| — |
|
| — |
|
| 14,206 |
|
| — |
|
| — |
| |||||
Net Earnings (Loss) | $ | 14,843 |
| $ | (19,458 | ) | $ | 28,492 |
| $ | 91,201 |
| $ | 137,285 |
| |||||
Earnings (Loss) Per Share: | ||||||||||||||||||||
Basic(1) | $ | .31 |
| $ | (.40 | ) | $ | .30 |
| $ | 1.88 |
| $ | 2.77 |
| |||||
Diluted(1) | $ | .31 |
| $ | (.40 | ) | $ | .30 |
| $ | 1.85 |
| $ | 2.72 |
| |||||
Dividends Per Share | $ | .16 |
| $ | .16 |
| $ | .16 |
| $ | .16 |
| $ | .16 |
| |||||
Diluted Average Shares Outstanding |
| 48,632 |
|
| 48,105 |
|
| 48,647 |
|
| 49,269 |
|
| 50,561 |
| |||||
FINANCIAL STRUCTURE: | ||||||||||||||||||||
Property and Equipment, Net |
| $1,181,430 |
| $ | 1,247,373 |
| $ | 1,324,345 |
| $ | 1,115,712 |
| $ | 1,010,721 |
| |||||
Total Assets |
| 1,879,086 |
|
| 1,746,844 |
|
| 1,745,919 |
|
| 1,643,250 |
|
| 1,501,577 |
| |||||
Long-term Obligations |
| 370,091 |
|
| 218,053 |
|
| 322,230 |
|
| 314,707 |
|
| 249,149 |
| |||||
Shareholders’ Equity |
| 839,163 |
|
| 834,216 |
|
| 862,855 |
|
| 858,207 |
|
| 769,152 |
| |||||
NUMBER OF SHIPMENTS: | ||||||||||||||||||||
Domestic |
| 350,241 |
|
| 322,960 |
|
| 322,493 |
|
| 316,391 |
|
| 316,590 |
| |||||
International |
| 5,836 |
|
| 6,285 |
|
| 6,558 |
|
| 7,038 |
|
| 6,451 |
| |||||
Total |
| 356,077 |
|
| 329,245 |
|
| 329,051 |
|
| 323,429 |
|
| 323,041 |
| |||||
(1) | For 2000, earnings per common share is shown exclusive of the cumulative effect of a change in accounting for major engine overhaul costs. Basic and diluted earnings per share inclusive of the change was $.59. |
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - - -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
Results of Operations
We achieved our goal of returning the Company to profitability in 2002. We accomplished this despite a difficult economic environment by building on initiatives that were launched in 2001. These initiatives included growing our new Ground Delivery Service (GDS), improving sales productivity, enhancing shipment yields through rate and fee initiatives, and optimizing labor productivity and operating cost efficiencies through continued cost controls and technology investments. Additionally, accomplishments included returning our international segment to profitability and enhancing our financial liquidity position.
We had net income in 2002 of $14.8 million or $.31 per diluted share. Our results for 2002 included after-tax, non-recurring restructuring and impairment charges of $3.9 million or $.08 per share, and securities gains of $1.0 million or $.02 per share. In 2001, we had a net loss of $19.5 million or $.40 per share, including restructuring charges of $2.9 million or $.04 per share, after-tax. 2001 operating results also included after-tax, non-recurring gains of $7.1 million or $.15 per share, from the sales of certain securities and FCC-licensed radio frequencies and from compensation provided under the Air Transportation Safety and System Stabilization Act of $8.1 million, after tax, or $.17 per share. Net income in 2000 was $28.5 million or $.59 per share, including a credit from a change in accounting for certain major engine overhaul costs of $14.2 million, after-tax, or $.29 per share.
The responsefollowing table is an overview of our shipments, revenue and weight trends for the last three years:
2002 | 2001 | 2000 | |||||||
Number of Shipments (in thousands): | |||||||||
Domestic | |||||||||
Overnight |
| 159,887 |
| 170,462 |
| 185,596 | |||
Next Afternoon Service |
| 52,011 |
| 52,016 |
| 54,213 | |||
Second Day Service |
| 71,084 |
| 72,793 |
| 73,700 | |||
Ground Delivery Service |
| 40,416 |
| 4,993 |
| — | |||
airborne@home |
| 26,843 |
| 22,696 |
| 8,984 | |||
Total Domestic |
| 350,241 |
| 322,960 |
| 322,493 | |||
International | |||||||||
Express |
| 5,483 |
| 5,894 |
| 6,157 | |||
Freight |
| 353 |
| 391 |
| 401 | |||
Total International |
| 5,836 |
| 6,285 |
| 6,558 | |||
Total Shipments |
| 356,077 |
| 329,245 |
| 329,051 | |||
Average Pounds Per Shipment: | |||||||||
Domestic |
| 4.9 |
| 4.3 |
| 4.3 | |||
International |
| 59.9 |
| 54.7 |
| 51.8 | |||
Average Revenue Per Pound: | |||||||||
Domestic | $ | 1.70 | $ | 2.02 | $ | 2.03 | |||
International | $ | 1.01 | $ | 1.03 | $ | 1.10 | |||
Average Revenue Per Shipment: | |||||||||
Domestic | $ | 8.46 | $ | 8.79 | $ | 8.94 | |||
International | $ | 62.63 | $ | 57.33 | $ | 57.96 |
Total revenues increased 3.8% to $3.34 billion in 2002, compared to a decline of 1.9% in 2001 and an increase of 4.4% in 2000. Shipment volumes increased 8.1% to 356.1 million in 2002 compared to 329.2 million in 2001 and 329.1 million in 2000. We were negatively impacted in 2001 by the disruption to business and closure of the U.S. air system for two days as a result of the September 11 terrorist attacks. This impacts shipment, revenue and operating comparisons to 2001.
We have taken actions over the last two years to increase rates on both domestic and international services to improve revenue per shipment yields. Further yield strategies included implementation of a number of ancillary fees and migrating from a flat rate to zone-based pricing structure. In January 2003, we took additional fee actions and increased rates for most domestic and international services commensurate with rate increases announced by other major carriers.
Domestic revenues increased 4.2% to $2.98 billion in 2002, compared to a domestic revenue decline of 1.5% in 2001 and growth of 4.4% in 2000. Revenue per shipment in our core express products has experienced improvement over the past year, increasing to $9.04 per shipment in 2002 compared to $8.90 in 2001. Core express products include our Overnight, Next Afternoon (NAS) and Second Day (SDS) services. This improvement in core express product revenue per shipment is due to the rate and fee actions mentioned above. Average revenue per domestic shipment was $8.46 in 2002 compared to $8.79 in 2001 and $8.94 for 2000. The decline in total domestic revenue per shipment in 2002 was due to a higher percentage of total shipments being from lower-yielding deferred products and lower fuel surcharge levels. Also included in domestic revenues are charter service revenues that totaled $14.3 million in 2002, $21.1 million in 2001 and $18.9 million in 2000.
Domestic revenues in 2002, 2001 and 2000 included fuel surcharge revenues which were used to help offset the historically high prices of fuel affecting costs in our air and surface operations. Fuel surcharge revenues declined by $19.1 million to $74.9 million in 2002 compared to $94.0 million in 2001 and $77.6 million in 2000. In February 2000, a fuel surcharge on
core products of 3% was implemented with an additional 1% added in October 2000. The resulting 4% fuel surcharge on core products was in effect for the entire 2001 period. 2001 was also aided by a 1.2% fuel surcharge on the GDS product since the products’ introduction in April 2001. The fuel surcharge rates were reduced to 2.9% on core express business and 1% on deferred business effective January 2002. Due to escalating fuel prices during 2002, we increased the fuel surcharge in October 2002 and again in November 2002 to 4.3% on core express products and 1.3% on deferred products. Due to fuel prices escalating even higher in 2003, we increased the fuel surcharge to 5.1% and 1.8% respectively, effective March 3, 2003. We continue to monitor fuel cost trends and will make changes to the surcharges as warranted.
Domestic shipments increased 8.4% in 2002 to 350.2 million compared to 323.0 million in 2001 and 322.5 million in 2000. Core express product shipment volumes, which comprised 80.8% of our domestic shipment volumes in 2002, have declined over the last three years, a trend seen throughout the express industry. We believe this Itemtrend has been due to the difficult economic environment, which tends to see customers shift their business to lower yielding express and deferred services. Core express product shipment volumes decreased 4.2% in 2002, compared to declines of 5.8% and .9% in 2001 and 2000, respectively. Higher yielding Overnight shipments decreased 6.2% in 2002 compared to decreases of 8.2% in 2001 and .5% in 2000. NAS shipment volumes were flat in 2002 compared to decreases of 4.1% in 2001 and 3.5% in 2000. SDS shipment volumes declined 2.3% in 2002 compared to a decline of 1.2% in 2001 and growth of .1% in 2000.
We expanded our product service portfolio by introducing our Ground Delivery Service (GDS) in April 2001. GDS was initially marketed to a targeted customer base to establish customer credibility. Marketing of GDS was expanded in 2002 to encompass a broader customer segment of major ground shippers in addition to small and medium-sized customers. GDS has shown strong growth since its introduction, producing 40.4 million shipments in 2002 compared to 5.0 million shipments in 2001. Having achieved this higher level of volume, we began focusing on a more balanced approach of yield management and volume growth in the latter part of 2002. GDS continues to be an important growth initiative that offers us the opportunity not only to generate revenues from the deferred ground segment, where we had not previously participated, but also to leverage and bundle GDS with higher-yielding core express shipments.
Our airborne@home product grew 18.3% to 26.8 million shipments in 2002 compared to 22.7 million in 2001 and 9.0 million in 2000. This deferred service, introduced in 1999, is intended to capture primarily business-to-consumer shipments from e-commerce and catalog fulfillment providers. The airborne@home service utilizes an arrangement with the U.S. Postal Service to provide final delivery of the product. We have been pleased with this product’s acceptance and growth since its inception.
Our international segment showed improved results in 2002, aided by steps taken to reduce operating costs, improve productivity and increase product yields. Additionally, in the fourth quarter of 2002, we achieved strong revenue growth in our freight product, in part due to the West Coast port lockout which prompted customers to shift from ocean to air transportation. The international segment recorded operating income of $6.8 million in the fourth quarter of 2002 and $3.9 million for all of 2002. We attributed approximately $2.0 million of segment operating income to the positive effects of the port lockout. In 2001 and 2000, the international segment reported losses of $3.1 million and $7.3 million, respectively. International revenues increased 1.4% in 2002 compared to a decrease of 5.2% in 2001 and an increase of 3.8% in 2000. Total international shipments decreased 7.1%, 4.2% and 6.8% in 2002, 2001 and 2000, respectively. Our lower-yielding, small package international express shipments declined 7.0% in 2002, 4.3%, and 7.3% in 2001 and 2000, respectively. The higher-yielding, heavy-weight international freight shipments declined 9.7% and 2.5% in 2002 and 2001, respectively, and increased 0.5% in 2000. In 2002, international revenues were aided by an increase in average weight per shipment to 59.9 pounds, compared to 54.7 pounds in 2001 and 51.8 pounds in 2000.
In June 2002, we acquired our service partner, Pagtrans SA, a French international transportation services company providing air express, airfreight, ocean freight, logistics and customs brokerage services. The acquisition price was $700,000, including direct costs. Revenues recorded in 2002 since the acquisition date were $7.2 million. Operating earnings recorded since the date of acquisition were not material to the international segments’ performance in 2002.
We aggressively managed our costs in 2002 and 2001 to improve operating results. We have reduced or combined airline flight segments, resulting in reduced fuel consumption and maintenance cost savings. Discretionary expenses were also cut to achieve cost efficiencies. Measuring cost performance on a per shipment basis, operating expense per shipment declined 6.0% in 2002 to $9.23 compared to $9.82 in 2001 and $9.85 in 2000. This improvement was made more difficult due to higher corporate costs resulting from outside market factors, which negatively impacted operating expenses in 2002. These corporate costs, including pension, workers’ compensation, employee healthcare and other insurance related expenses, increased by $25 million in 2002 over 2001. In 2002 and 2001, through several announced reductions in force and stringent management of labor hours, we improved our labor productivity. Productivity, measured by shipments handled per paid employee hour, improved 9.4% in 2002 compared to an improvement of 3.9% in 2001 and a decline of .9% in 2000.
Transportation purchased as a percentage of revenues increased to 33.0% in 2002 as compared to 32.5% in 2001 and 31.8% in 2000. Total transportation purchased increased 5.4% in 2002 compared to 0.4% in 2001 and 7.9% in 2000. The increase in costs as a percentage of revenues in 2002 was due to incremental costs associated with higher GDS and @home shipment volumes. Pickup and delivery costs paid to independent contractors and surface linehaul costs increased due to the higher volumes of deferred services. Delivery costs paid to the U.S. Postal Service increased from higher volumes of airborne@home shipments. International airline costs have also increased due to additional weight transported and security-related costs charged by airlines on most lane segments.
Station and ground expense as a percentage of revenues was 32.9% in 2002 compared to 33.4% in 2001 and 32.1% in 2000. Total station and ground expense increased 2.1% in 2002 compared to increases of 2.0% and 8.1% for 2001 and 2000, respectively. The relatively low percentage increases in 2002 and 2001 expense in comparison to 2000 was a result of productivity improvements achieved in our station and sort operations. The positive impact of the productivity improvements offset higher wage, benefit and workers compensation costs and costs incurred to service higher shipment volumes. Workers compensation costs in 2002 increased as we revised our estimated reserves to reflect higher claim loss estimates contained in a recently completed independent actuarial analysis report. While we have containment programs in place to actively manage costs in this area, workers compensation reserve estimates have been impacted by negative claim severity trends, including time-loss and medical cost components.
Flight operations and maintenance expense, as a percentage of revenues, was 15.7% in 2002 compared to 17.3% in 2001 and 17.9% in 2000. Costs in this category declined 5.6% and 5.3% in 2002 and 2001, respectively, and increased 14.7% in 2000. Fuel costs declined $19.7 million in 2002 compared to 2001 and $40.7 million in 2001 compared to 2000 due to reduced fuel consumption and lower comparative jet fuel prices. In 2000, fuel costs increased $69.8 million in comparison to 1999. The average aviation fuel price was $.83 per gallon in 2002 compared to $.91 per gallon in 2001 and to $1.02 per gallon in 2000. However, average jet fuel prices over this three-year period were still substantially higher than historical averages. While average aviation fuel prices for the 1996 Annual Reportfull year 2002 declined compared to Shareholders2001 and 2000, prices increased steadily throughout 2002. In the fourth quarter of 2002 the average price per gallon was $.93 and increased to an average of $1.05 per gallon in the first two months of 2003. We increased the revenue fuel surcharge twice in the fourth quarter of 2002 and again effective March 3, 2003 to help mitigate this price escalation. Also, to mitigate potential exposure from extreme price increases in jet fuel, we entered into call option contracts on heating oil to hedge a significant portion of our projected jet fuel requirements. In September 2002, we entered into contracts for a six-month period extending through March 2003, and in February 2003 we entered into contracts for the three-month period extending through June 2003. These contracts would mitigate fuel price exposure on most of our consumption if prices were to rise approximately 50% above the average price for 2002. No fuel hedge contracts were entered into during 2001 or 2000.
Aviation fuel consumption decreased 4.9% in 2002 to 153.0 million gallons compared to a consumption decrease of 12.7% in 2001 and a 1.8% increase in consumption in 2000 over 1999. The decrease in consumption in 2002 and 2001 was primarily due to our efforts to reduce and combine certain flight segments beginning in the second quarter of 2001. Also, we continued our program of placing 767 aircraft into service, which has allowed less fuel-efficient DC-8 aircraft to be moved to shorter lane segments or backup status or removed from service. Two 767 aircraft were placed in service in 2002, three in 2001 and nine were placed in service in 2000.
Aircraft maintenance expense decreased 3.9% in 2002 compared to an increase of 1.1% in 2001 and an increase of 1.2% in 2000. Maintenance expense decreased in 2002 due to the removal and retirement, over the past several years, of maintenance intensive DC-8 aircraft. Aircraft maintenance expense is expected to increase in 2003, as the scheduled maintenance increases for the 767 aircraft placed into service over the past few years.
Effective January 1, 2000, we changed our method of accounting for major engine overhaul costs on DC-9 aircraft from the accrual method to the direct expense method where costs are expensed as incurred. A $14.2 million or $.29 per share non-cash credit, net of tax, was recorded in 2000 for this change.
General and administrative expense as a percentage of revenues was 8.2% in 2002, 8.2% in 2001 and 8.1% in 2000. Total general and administrative costs increased 3.3% in 2002 compared to increases of 0.4% and 7.5% in 2001 and 2000, respectively. Included in this expense category were non-recurring charges of $3.2 million and $2.9 million, recorded in 2002 and 2001, respectively. These charges were for severance and restructuring costs associated with the reduction in force and facility closure related to certain domestic and international realignment actions taken. Of these costs, $0.9 million had not been paid as of December 31, 2002. We aggressively managed costs in this category of expense and continued to employ strong cost controls over labor and discretionary costs. These cost reduction efforts have helped to mitigate wage, employee healthcare, bad debt and pension cost pressures.
Pension costs associated with Company-sponsored defined benefit pension plans, which are included in the general and administrative expense category, have increased significantly over the past several years. The increases are primarily market-driven and caused by negative investment returns on plan assets and lower discount rates applied to future pension obligations. Defined benefit plan pension expense, on our qualified plans, was $45.3 million, $38.3 million and $27.6 million in 2002, 2001 and 2000, respectively.
Sales and marketing expense as a percentage of revenues was 2.7% in 2002 compared to 2.8% in 2001 and 2.5% in 2000. This category of expense has increased over the past two years relative to levels incurred in 2000 due, in part, to specific actions taken to improve our selling effectiveness, which included increasing our sales personnel as well as expanding marketing efforts to attract new business.
Depreciation and amortization expense totaled 5.7% of revenues in 2002 compared to 6.5% and 6.3% in 2001 and 2000, respectively. Depreciation and amortization expense decreased 8.1% in 2002 compared to an increase of 0.9% in 2001, and a decrease of 1.4% in 2000. In 2002, this category of expense included a $3.1 million impairment charge on an unscheduled retirement of a DC-8 aircraft. A routine maintenance check on this aircraft revealed the need for extensive, unanticipated repairs. Rather than incur the additional maintenance costs, we decided to retire the aircraft. The non-cash charge is associated with adjusting the aircraft’s net book value to its fair value, which is the equivalent of an estimated parts value. The decline in depreciation expense for 2002 is due to the relatively lower levels of capital expenditures made in 2002 and 2001 in relation to expenditures in 2000 and prior years, coupled with the timing of certain aircraft assets becoming fully depreciated.
We recorded compensation of $13.0 million in 2001 provided to us under the Air Transportation Safety and System Stabilization Act (“Act”). The Act provided eligible cargo carriers compensation for certain direct losses associated with the closure of the national air system for a two-day period following the terrorist attacks of September 11, 2001 and incremental losses through December 31, 2001. The compensation amounts have been recorded based on our interpretation of the Act and related rules. In April 2002, the Department of Transportation (“DOT”) issued final rules governing the process and content of final filings that support carriers’ compensation claims. We completed and filed our final filing along with required audit schedules and have had discussions with applicable government agencies regarding these filings. While we believe we have complied with the provisions of the Act, these agencies have raised exceptions concerning the treatment of certain compensation items. The final amount of proceeds we will realize is subject to resolution of the exceptions and possible completion of further review and audit procedures by the DOT or other applicable government agencies. We cannot be assured of the ultimate outcome of these reviews, but it is possible that a reduction to the amount of compensation previously recognized could occur. We estimate the range of compensation ultimately realized will be between $11.0 million and $15.0 million.
Interest income increased to $5.1 million in 2002 compared to $1.7 million in 2001 and $.4 in 2000. The increase in interest income in 2002 and 2001 was due to higher average levels of cash equivalent short-term investments resulting from liquidity actions we have taken over the past several years.
Interest expense increased to $34.7 million in 2002 compared to $21.6 million in 2001 and $23.8 million in 2000. The increase was primarily due to higher levels of average outstanding indebtedness incurred upon the issuance of $150 million in senior convertible notes in March 2002 and the financing of five 767 aircraft in August 2001. The level of interest expense in 2002 was not materially impacted by the payoff of our $100 million, 8.875% senior notes, since these notes matured in December 2002. The lower level of interest expense in 2001 in comparison to 2000 was due in part to decreased borrowings that occurred as a result of the securitization of $200 million of accounts receivable under a facility that was implemented in December 2000. Interest capitalized, primarily on the acquisition and modification of 767 aircraft, was $1.4 million in 2002 compared to $2.4 million and $6.8 million in 2001 and 2000, respectively.
Discounts on the sales of receivables associated with recording the obligation to fund the purchaser’s costs under our accounts receivable securitization facility were $4.0 million in 2002, $9.3 million in 2001 and $0.1 million in 2000. Lower expense levels in 2002 in comparison to 2001 were due to a lower interest rate environment and lower average amounts outstanding under the facility. As the facility was implemented in late December 2000, discounts recorded were not material in 2000. Because of the sales recognition treatment associated with these securitization transactions, the cost is recorded separate from interest expense.
Included in other income in 2002 was a non-recurring gain of $1.8 million from the sale of a minority equity interest in one of our international agents. Included in other income in 2001 were non-recurring gains of $9.3 million from the sale of FCC-licensed radio frequencies resulting from a change to digital from voice pickup and delivery communication technology.
Additionally, in 2001, a non-recurring gain of $2.1 million resulted from the sale of our shares of Equant N.V. These shares were acquired through our participation in SITA, a cooperative of major airline companies, which primarily provides data communication services to the air transport industry. In 2000, we recorded a $1.9 million non-recurring gain from the sale of securities of Metropolitan Life. We, as policyholder, received these securities when the insurance company demutualized.
Our effective tax expense rate of 45.0% in 2002 compares to a tax benefit rate of 32.7% for 2001 and a tax expense rate on earnings before a change in accounting of 38.5% in 2000. The level of tax expense or benefit is impacted by our level of non-deductible expenses and state income taxes in relation to the level of earnings recorded in 2002 and 2000 and losses recorded in 2001.
Outlook
The performance of the U.S. and global economies will have an impact on our operating results in 2003 and beyond. As the economy does not appear to be showing signs of sustained growth, we are cautious regarding the prospects of shipment growth in our core express products. Our core express products have experienced volume declines during the first two months of 2003 compared to 2002 due to adverse weather conditions and continued economic weakness. Accordingly, shipment volumes of these products are expected to be lower in 2003 compared to 2002. We are focused on balancing growth with yield improvement in the GDS product going forward. We are targeting 200,000 to 210,000 shipments per day for GDS in the first quarter of 2003, with 3% to 5% sequential quarterly growth during 2003. We are targeting @home volumes of 100,000 to 110,000 shipments per day in the first quarter with 2% to 4% sequential quarterly growth during 2003. Both deferred product lines are expected to realize some seasonal spike in volumes in the fourth quarter of 2003.
The actions we have taken to reduce international operating costs, improve productivity and increase revenue yields should assist in maintaining profitability in the international segment. While we were pleased with the peak season performance of our international segment in the fourth quarter of 2002, certain market-related events that benefited the international segment in the fourth quarter have not carried over into 2003. Accordingly, in 2003 it will be difficult to achieve the level of profitability achieved in the international segment in 2002.
We expect pressure on our operating costs in 2003, due in part to higher deferred shipment volumes and increased pension, insurance and fuel costs. Further, costs in the first two months of 2003 have been negatively impacted by adverse weather conditions. Higher shipment volumes, driven primarily by growth in our GDS product, will result in increased truck linehaul, pickup, and delivery costs. Wage and benefit pressures will offset some of the benefits of anticipated labor productivity gains. Our pension costs are estimated to increase approximately $9 million in 2003 to $54 million as a result of lower investment returns on plan assets and lower discount rates. We expect Company-sponsored employee healthcare plan costs to increase approximately $13 million, or 15%, in 2003. Fuel prices have continued to increase to levels higher than the fourth quarter of 2002, and will likely remain high until the conflict in the Middle East has been resolved. Also, there is no assurance that any increases in the level of fuel surcharge will completely offset rising fuel costs if prices spike up further.
Subsequent Event
On March 25, 2003, we entered into a definitive merger agreement with DHL Worldwide Express B.V. (“DHL”) and Atlantis Acquisition Corporation, a wholly owned indirect subsidiary of DHL (“Atlantis”). A copy of the merger agreement was included as an exhibit to a Form 8-K that we filed with the SEC on April 4, 2003. Under the terms of the agreement, (1) Airborne’s air operations will be separated from the ground operations and retained in ABX, (2) DHL will acquire the ground operations (including all operations currently conducted by AEI, including its book of business, customer service, express and deferred services and products, and pick up and delivery network) through a merger of Airborne and Atlantis, and (3) Airborne shareholders will receive, for each share of Airborne common stock held, $21.25 in cash (representing total cash consideration in the transaction of $1.05 billion) and one share of common stock of ABX. Upon closing of the transaction, Airborne will operate as a wholly owned indirect subsidiary of DHL, and ABX will become an independent public company wholly owned by Airborne’s former shareholders (although under certain circumstances, in accordance with the merger agreement, DHL could purchase all of Airborne’s operations and Airborne shareholders would receive alternative consideration of $21.65 per share in cash). The transaction, which is subject to shareholder and regulatory approvals, is targeted to be completed in the third quarter of 2003.
Upon closing of the transaction, the net assets of the ground portion of ABX (including its central and regional sort facilities, runways, taxiways, aprons, buildings serving as aircraft and equipment maintenance facilities, storage facilities, a training center and both operations and administrative offices) will be transferred to Airborne as part of the ground operations to be merged with Atlantis. Additionally, in connection with the transaction, ABX will enter into a number of commercial agreements with Airborne, including an ACMI (aircraft, crew, maintenance and insurance) agreement and a hub and line-haul services agreement.
Under these agreements, ABX will provide air transportation, line-haul, hub and maintenance services to Airborne and receive compensation generally based on cost plus a specified mark-up percentage. For additional information regarding this transaction, see Note U of the notes to our consolidated financial statements.
Financial Condition
We accomplished our financial objectives for 2002, which were to increase our liquidity sources and cash reserves and stringently manage capital expenditures to achieve free cash flow.
Capital expenditures and financing associated with those expenditures are significant factors that affected our financial condition over each of the last three years. Capital spending was reduced significantly in 2002 and 2001 in comparison to 2000 and prior years due to aggressive efforts to reduce spending to a level below the level of cash flow generated from operations. Total capital expenditures, net of dispositions, were $108.4 million in 2002, compared to $125.7 million in 2001 and $367.9 million in 2000. In addition, we financed $18.5 million in 2002 and $15.8 million in 2001 in delivery vehicles and shipment scanning equipment through operating and capital leases.
A significant portion of capital expenditures relates to the acquisition and modification of aircraft and related flight equipment. We have continued our program to acquire and deploy Boeing 767 aircraft, which provide a higher level of operating efficiency than the DC-8 aircraft. We acquired three additional 767 aircraft in both 2002 and 2001 after acquiring nine 767s in 2000. At the end of 2002, we had 116 aircraft in service, consisting of 22 767s, 20 DC-8s and 74 DC-9s. Other capital expenditures in 2002 included facilities and package handling equipment, leasehold improvements for new or expanded facilities, computer equipment and software.
The level of capital spending for 2003 is anticipated to increase to approximately $150 million, primarily as a result of sort facility expansion and improvements and technology investments. We anticipate taking delivery of three additional 767 aircraft in 2003, the same number of aircraft deliveries as in 2002, and incurring other capital expenditures that maintain or enhance service. Additionally, assets procured in 2003 through capital or operating leases for delivery vehicles and pickup and delivery scanning technology are anticipated to be approximately $35 million. Included in the above capital spending and leasing plans are investments of approximately $54 million for delivery vehicles and expansion of our sort facilities in support of our GDS product.
As we place additional 767 aircraft into service over the next few years, we may remove additional DC-8 aircraft from service depending on factors such as overall capacity requirements and the need for aircraft in our charter operations. During 2002, we removed four DC-8 aircraft from service.
We have commitments to acquire six additional 767 aircraft, three in 2003, two in 2004 and one in 2005. Additionally, four of these aircraft are committed to be modified to a freighter configuration from their original passenger configuration. Over the past two years we have been successful in negotiating deferrals of aircraft deliveries and may request deferrals of future deliveries. However, there is no assurance any deferral of planned deliveries will be achieved.
Liquidity and Capital Resources
Our operating cash flow is a major source of our liquidity. Cash provided by operating activities, which excludes increases in restricted cash was $206.8 million in 2002 compared to $234.9 million in 2001 and $263.3 million in 2000. Additional liquidity of $50 million in 2001 and $150 million in 2000 was generated from advances under a receivable securitization facility. These sources of cash coupled with specific borrowing transactions, net of investing and other financing activities, resulted in an increase of cash and cash equivalents to $339.9 million as of December 31, 2002 compared to $201.5 and $40.4 million as of December 31, 2001 and 2000, respectively. As of December 31, 2002, $36.3 million of cash and cash equivalents were restricted from general use and held in an insurance trust to support a portion of outstanding self-insured casualty liabilities, including workers compensation, automobile and general liability coverages.
We generated free cash flow, measured as cash from operating activities net of capital expenditures, of $98.4 million in 2002 compared to $109.1 million in 2001. In 2000 we had negative cash flow of $104.5 million, primarily due to the capital investment related to the acquisition of nine 767 aircraft.
In March 2002, we completed a private placement offering of $150 million of 5.75% convertible senior notes. The notes are for a five-year term maturing in April 2007. The proceeds from the sale were used, in part, to fund the repayment of $100.0 million of 8.875% senior notes at maturity in December 2002.
In addition to our cash and cash equivalent reserves, we had $142.8 million in available borrowing capacity under our bank credit agreement at December 31, 2002. We had no borrowings outstanding under this facility as of December 31, 2002. This agreement, which expires in June 2004, also supports $97.3 million of outstanding letters of credit and is collateralized by a substantial majority of our assets and contains certain restrictive covenants. We were in compliance with all restrictive covenants as of December 31, 2002. Certain covenants require us to maintain minimum levels of earnings before interest, taxes, depreciation and amortization (EBITDA), both on a quarterly and trailing four-quarter basis that sequentially increase over the remaining term of the agreement. These covenants may not be met for the March 31, 2003 reporting date and accordingly, we are pursuing strategies to ensure the borrowing commitment under the facility is maintained. These strategies include obtaining covenant waivers or renegotiating the minimum levels of required EBITDA. If we are unsuccessful in obtaining waivers or renegotiating terms we may not have access to any borrowing capacity under this agreement.
Our accounts receivable securitization facility, which expires in June 2004, provides for a maximum of $250 million in available proceeds from the sale of eligible receivables. The facility is accounted for as a sale of assets and, accordingly, receivables sold and the amounts outstanding under the facility are not reflected on the consolidated balance sheet. At December 31, 2002, we had received $200 million of sales proceeds and had eligible receivables to support the maximum available under the facility.
Our ratio of long-term obligations to total capitalization was 27.3% at December 31, 2002, compared to 18.2% at December 31, 2001. The higher ratio at the end of 2002 was primarily due to the issuance of $150 million of convertible senior notes in March 2002. Our ratio of long-term obligations to total capitalization, including the amounts outstanding under the accounts receivable securitization, was 36.6% and 30.0% at December 31, 2002 and 2001, respectively.
In our opinion, existing cash and cash equivalents coupled with anticipated cash flow from operations and available capacity under our accounts receivable securitization facility should provide adequate flexibility for financing operations and capital expenditures in 2003.
While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for 2003, certain circumstances could arise that would materially affect liquidity. Cash flows from operations could be affected by deterioration in core shipment volumes caused by a further slowdown in the economy, impacts resulting from the conflict in the Middle East, further terrorist attacks, or our inability to successfully implement sales growth initiatives in a cost effective manner. Operating results could also be negatively impacted by prolonged labor disputes or changes in our cost structure from areas such as a significant rise in fuel prices. Weakening operating performance also could result in our inability to remain in compliance with financial covenants contained thereinin our revolving credit and accounts receivable securitization agreements, thereby reducing liquidity sources and potentially requiring the use of cash collateral to support outstanding letters of credit. Lower revenues could also cause amounts currently drawn under the securitization facility to be reduced.
Disclosures About Contractual Obligations and Commercial Commitments
Information regarding contractual obligations and commercial commitments is incorporatedas follows (in thousands):
Payments due by Period | |||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 2-3 | 4-5 | After 5 Years | ||||||||||
Long-Term Debt | $ | 327,550 | $ | 5,267 | $ | 111,798 | $ | 163,194 | $ | 47,291 | |||||
Capital Lease Obligations |
| 52,913 |
| 5,105 |
| 11,274 |
| 11,259 |
| 25,275 | |||||
Operating Leases |
| 334,800 |
| 86,591 |
| 123,473 |
| 65,233 |
| 59,503 | |||||
Unconditional Purchase Obligations |
| 147,900 |
| 66,500 |
| 81,400 |
| — |
| — | |||||
Total Contractual Cash Obligations | $ | 863,163 | $ | 163,463 | $ | 327,945 | $ | 239,686 | $ | 132,069 | |||||
Amount of Commitment Expiration Per Period | |||||||||||||||
Other Commercial Commitments | Total Amounts Committed | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||
Standby Letters of Credit | $ | 97,275 | $ | 97,275 | $ | — | $ | — | $ | — | |||||
Surety Bonds |
| 20,947 |
| — |
| — |
| — |
| 20,947 | |||||
Total Commercial Commitments | $ | 118,222 | $ | 97,275 | $ | — | $ | — | $ | 20,947 | |||||
Inflation
The rate of inflation has been relatively constant over the past several years, and so has its impact on our results of operations and financial condition. The effects of inflation have been considered in management’s discussion where considered pertinent.
Critical Accounting Policies and Estimates
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as disclosures included elsewhere in the Form 10-K, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In certain cases, there are alternative policies or estimation techniques which could be selected. On an on-going basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, postretirement liabilities, bad debts, self-insurance reserves, accruals for labor contract settlements, valuation of spare-parts inventory, useful lives and impairments of property and equipment, income taxes, Federal stabilization compensation, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of the consolidated financial statements.
Revenue Recognition
We recognize revenue when shipments are delivered to the customer. For shipments picked up but not delivered, direct costs are deferred and recognized upon delivery. We estimate the amount of direct costs to be deferred utilizing recent shipment level cost trends applied to the actual shipments in transit as of a particular reporting date.
Asset Valuation
We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
We continually evaluate the useful lives and fair values of our property and equipment. Acceleration of depreciation expense or the recording of significant impairment losses could result from changes in the estimated useful lives of assets due to a number of factors, such as a determination that excess capacity exists in our air or ground networks, or changes in regulations grounding the use of our aircraft. When an asset is considered impaired, as was the case with a DC-8 aircraft that was removed from service in 2002, the asset is adjusted to its fair value.
We value our aircraft spare parts inventory at weighted-average cost and maintain a related obsolescence reserve. A provision for spare parts obsolescence is recorded over the estimated useful life of our aircraft and considers the amount of spare parts expected to be on hand on the date the aircraft are anticipated to be removed from service. Should changes occur regarding expected spare parts to be on hand or anticipated useful lives of aircraft, revisions to the estimated obsolescence reserve may be required.
We have not recorded a valuation allowance to reduce our deferred tax assets, as we believe it is more likely than not that the deferred tax asset will be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Should we determine that we will not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
Self-Insurance
We self-insure certain claims relating to workers compensation, automobile, general liability, healthcare and loss and damage on customer shipments. We record a liability for reported claims and an estimate for incurred claims that have not yet been reported. Accruals for these claims are estimated utilizing historical paid claims data, recent claims trends and, in the case of workers compensation and healthcare, independent actuarial reports. Changes in claim severity and frequency could result in actual claims being materially different than the amounts provided for in our annual results of operations.
Contingencies
We are involved in legal matters that have a degree of uncertainty associated with them. We continually assess the likely outcomes of these matters and the adequacy of amounts, if any, provided for these matters. There can be no assurance that the ultimate outcome of those matters will not differ materially from our assessment of them. There also can be no assurance that we know all matters that may be brought against us at any point in time.
Postretirement Obligations
We sponsor qualified defined benefit pension plans and healthcare plans that provide postretirement benefits for certain union and a substantial portion of our non-union employees. Additionally, we have unfunded excess plans for certain employees, including our executive management, that provide benefits in addition to amounts permitted to be paid under provisions of the tax law to participants in our qualified plans.
The accounting and valuation for these postretirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long-term nature of these benefit payouts increases the sensitivity of certain estimates on our postretirement costs. In actuarially valuing our pension obligations and determining related expense amounts, assumptions we consider most sensitive are discount rates, expected long-term investment returns on plan assets and future salary increases. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. For our postretirement healthcare plans, consideration of future medical cost trend rates is a critical assumption in valuing these obligations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our annual results of operations.
In selecting the interest rate to discount estimated future benefit payments that have been earned to date to their net present value (defined as the projected benefit obligation), we consider Moody’s Aa published long-term corporate bond yield as of our reporting date (December 31). We believe utilizing this published rate, as a benchmark, would be similar to the results that would be obtained through selective matching of the plan’s funding obligations to specific corresponding bonds of similar quality and maturities. The selection of the discount rate not only affects the reported funded status information as of December 31 (as shown in Note I to the consolidated financial statements) but also affects the succeeding years’ pension and postretirement healthcare costs. The discount rate selected for December 31, 2002, based on the method described above, was 6.75% compared to 7.25% at December 31, 2001. This 50-basis-point decrease will negatively affect and increase our pension and postretirement healthcare expense by approximately $6.6 million in 2003.
In evaluating our assumption regarding expected long-term investment returns on plan assets, we consider a number of factors. These include our historical plan returns in connection with our asset allocation policies and assistance from investment consultants hired to provide oversight over our actively managed investment portfolio and long-term inflation assumptions. The selection of the expected return rate materially affects our pension costs. We selected an expected rate of return of 8% for 2002 and will continue to use this rate for valuation and determining pension costs in 2003. We continue to believe that 8% is a reasonable long-term rate of return despite the market down-turn that has resulted in negative returns over the past three years. Due to the negative investment returns experienced in 2002, our 2003 pension costs will be negatively affected by $7.1 million. If we were to lower our long-term rate of return assumption by a hypothetical 100 basis points, expense in 2002 would have increased by approximately $2.6 million. We do not use a calculated value method in determining asset values as of the measurement date.
The assumed future increase in salaries and wages is also a significant estimate in determining pension costs. In selecting this assumption we consider our historical wage increases, future wage increase projections and inflation. We used a 5% salary increase assumption (6.5% for our pilots) in 2002 and in 2003 will lower these assumptions to a 4% salary increase assumption (5% for our pilots). In 2002, had we used a salary increase assumption which was 100 basis points higher than that used, pension costs would have increased by approximately $5.2 million.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs will be capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for our fiscal year beginning on January 1, 2003 will not have a significant impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 requires that only certain extinguishments of debt be classified as extraordinary items. Further, this statement requires a capital lease that is modified so that the resulting lease agreement is classified as an operating lease to be accounted for under the sale-leaseback provisions of SFAS No. 98. The provisions of the statement pertaining to debt extinguishments are effective for our fiscal year beginning on January 1, 2003. The provision of the statement pertaining to lease modifications is effective for transactions consummated after May 15, 2002. Implementation of this statement did not have a significant impact on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force Issue 94-3, required an exit cost liability to be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for our exit or disposal activities that are initiated on or after January 1, 2003. Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. Additionally, this interpretation clarifies the requirements for recognizing a liability at the inception of the guarantee equal to the fair value of the obligation undertaken in issuing the guarantee and incorporates the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”. Disclosures under Interpretation No. 45 are effective for us on December 31, 2002. The disclosure and recognition provisions of this interpretation did not have a significant impact on our financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in our annual and interim consolidated financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We currently plan to follow the provisions of Accounting Principles Board (APB) Opinion No. 25 in accounting for our stock option plans until such time new accounting rules are adopted which require recognition of the fair value of stock options as compensation. Accordingly, implementation of this statement will currently not have a significant impact on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. We sell our receivables to a commercial paper conduit. Since the fair value of our receivables are less than half of the overall conduit’s assets, we do not have a variable interest in the conduit under this interpretation and therefore, no consolidation is required. This interpretation is effective for us on January 1, 2003 and will not have a material impact on our financial position, results or operations or cash flows.
Forward Looking Statements
Statements contained herein and in other parts of this report, which are not historical facts, are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described above in “Risk Factors.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks include interest rate, fuel price and foreign exchange risks. The following is a description of these risks and a discussion of our exposure to changes in market rates and prices and related effects on fair values, earnings and cash flows.
Interest Rate Risk
As described in Note G to the consolidated financial statements, we have various debt instruments, including debt issued at fixed and variable rates of interest. The debt issued at fixed interest rates is exposed to fluctuations in fair value resulting from changes in market interest rates. Variable interest rate debt exposes us to differences in future cash flows resulting from changes in market interest rates. As of December 31, 2002 and 2001, we had approximately $309.7 and $250.6 million of fixed interest rate exposure and $70.8 and $74.9 million of variable interest rate exposure, respectively.
Variable interest rate risk can be quantified by reference.
estimating the change in annual cash flows resulting from a hypothetical 20% increase in interest rates. As of December 31, 2002, a 20% increase in interest rates would have resulted in an increase in interest expense of approximately $1.0 million for the year ended December 31, 2002.
In addition to our variable rate debt instruments, we are exposed to fluctuations in the projected financing costs associated with our accounts receivable securitization facility. The discount on these continuous sales is based on LIBOR rates. As of December 31, 2002 and 2001, we had received $200 million in proceeds from the sale of an undivided interest in our receivables. A 20% increase in the discount rate would have resulted in an increase in discount costs of approximately $1.0 million for the year ended December 31, 2002.
Fixed interest rate risk can be quantified by estimating the decrease in fair value of our long-term debt through a hypothetical 20% increase in interest rates. As of December 31, 2002, a 20% increase in interest rates would have decreased fair value of our long-term debt by approximately $10.4 million. The underlying fair value before performing the hypothetical calculation was estimated principally from quoted market prices for the same securities.
We use an interest rate swap to manage the exposure to future cash flow changes related to our floating interest rate debt. This swap was entered into in connection with the issuance of the debt that it was intended to modify. The notional amount, interest payment, and maturity dates of the swap match the terms of the associated debt.
The fair value of the interest rate swap at December 31, 2002 was a liability of approximately $3.6 million compared to a deferred gain of $1.0 million at December 31, 2001. The potential decrease in fair value resulting from a hypothetical 20% shift downward in interest rates would be approximately $1.6 million. This sensitivity analysis assumes a parallel shift in the yield curve. Although certain assets and liabilities may have similar maturities or periods to re-pricing, they may not react correspondingly to changes in market interest rates.
Foreign Currency Risk
We have foreign currency risks related to our revenue and operating costs in currencies other than the U.S. dollar. We currently use forward contracts to hedge Yen cash flow currency exposures. As of December 31, 2002, the net fair value of the $1.1 million notional forward contracts was approximately $37,000. The potential loss in fair value on these forward contracts from a hypothetical 10% adverse change in quoted foreign currency exchange rates would not be significant.
We do not believe movements in the foreign currencies in which we transact will significantly affect future pretax earnings.
Jet Fuel Price Risk
We are dependent on jet fuel to operate our fleet of aircraft, and our earnings are impacted by changes in jet fuel prices. For the year ended December 31, 2002, we consumed 153.0 million gallons of jet fuel at an average price of $.83 per gallon.
Jet fuel price sensitivity can be quantified by estimating the decrease in earnings as a result of a uniform increase in average jet fuel prices applied against consumption. If jet fuel prices had increased 10%, fuel costs for the year ended December 31, 2002 would have increased approximately $12.7 million. We historically have implemented fuel surcharges to mitigate the earnings impact of unusually high fuel prices and thus, the increase in costs shown above resulting from a 10% increase in the price of fuel may not affect net income in an equal amount. Further, to mitigate potential exposure from extreme price increases in jet fuel, in September 2002, we entered into a call option contract on heating oil to hedge a significant portion of our projected jet fuel requirements for a six-month period extending through March 2003, and in February 2003 entered for a three-month period contract extending through June 2003. These contracts would mitigate fuel price exposure on most of our consumption if prices were to rise approximately 50% above the average price for 2002. No fuel hedge contracts were entered into during 2001 or 2000. We may enter into additional contracts in future periods depending on pricing and market conditions.
We do not use derivative financial instruments for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - -----------------------------------------------------
Index to Consolidated Financial Statements
Page | ||
Report on Management’s Responsibility for Financial Reporting | 27 | |
Independent Auditors’ Report | 28 | |
Consolidated Statements of Operations | 29 | |
Consolidated Balance Sheets | 30 | |
Consolidated Statements of Cash Flows | 31 | |
Consolidated Statements of Shareholders’ Equity | 32 | |
Notes to Consolidated Financial Statements | 33 |
REPORT ON MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL REPORTING
The responsemanagement of Airborne, Inc. has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The consolidated financial statements have been prepared by the management of Airborne in accordance with accounting principles generally accepted in the United States of America using management’s best estimates and judgment where necessary. Financial information appearing throughout this annual report is consistent with that in the consolidated financial statements.
To help fulfill its responsibility, management maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that transactions are executed in accordance with management’s authorizations and are reflected accurately in Airborne’s records. The concept of reasonable assurance is based on the recognition that the cost of maintaining a system of internal accounting controls should not exceed benefits expected to be derived from the system. We believe that our long-standing emphasis on the highest standards of conduct and ethics set forth in comprehensive written policies serves to reinforce our system of internal controls.
Deloitte & Touche LLP, independent auditors, audited the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America to independently assess the fair presentation of Airborne’s financial position, results of operations and cash flows.
The Audit Committee of Airborne’s board of directors, composed entirely of outside directors, oversees the fulfillment by management of its responsibilities over financial controls and the preparation of financial statements. The Audit Committee meets with the independent auditors during the year to review audit plans and audit results. This provides the auditors direct access to the board of directors.
Management recognizes its responsibility to conduct the business of Airborne in accordance with high ethical standards. This responsibility is reflected in key policy statements that, among other things, address potentially conflicting outside business interests of Airborne’s employees and specify proper conduct of business activities. Ongoing communications and review programs are designed to help ensure compliance with these policies.
/s/ CARL D. DONAWAY | /s/ LANNY H. MICHAEL | |||||
Carl D. Donaway Chief Executive Officer and | Lanny H. Michael Executive Vice President and |
INDEPENDENT AUDITORS’ REPORT
Board of Directors
Airborne, Inc. and Subsidiaries
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Airborne, Inc. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note A to the financial statements, the Company changed its method of accounting for major engine overhaul costs on DC-9 aircraft effective January 1, 2000.
/s/ DELOITTE & TOUCHE LLP | ||||||
DELOITTE & TOUCHE LLP February 25, 2003 (April 25, 2003 as to Notes G, I, and U) Seattle, Washington |
AIRBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
(In thousands except per share data) | ||||||||||||
REVENUES: | ||||||||||||
Domestic | $ | 2,978,242 |
| $ | 2,859,514 |
| $ | 2,902,002 |
| |||
International |
| 365,494 |
|
| 360,291 |
|
| 380,132 |
| |||
| 3,343,736 |
|
| 3,219,805 |
|
| 3,282,134 |
| ||||
OPERATING EXPENSES: | ||||||||||||
Transportation purchased |
| 1,103,823 |
|
| 1,046,954 |
|
| 1,042,541 |
| |||
Station and ground operations |
| 1,099,422 |
|
| 1,076,623 |
|
| 1,055,142 |
| |||
Flight operations and maintenance |
| 526,346 |
|
| 557,412 |
|
| 588,582 |
| |||
General and administrative |
| 274,067 |
|
| 265,402 |
|
| 264,333 |
| |||
Sales and marketing |
| 90,952 |
|
| 90,390 |
|
| 82,512 |
| |||
Depreciation and amortization |
| 191,424 |
|
| 208,355 |
|
| 206,406 |
| |||
Federal legislation compensation |
| — |
|
| (13,000 | ) |
| — |
| |||
| 3,286,034 |
|
| 3,232,136 |
|
| 3,239,516 |
| ||||
EARNINGS (LOSS) FROM OPERATIONS |
| 57,702 |
|
| (12,331 | ) |
| 42,618 |
| |||
OTHER INCOME (EXPENSE): | ||||||||||||
Interest income |
| 5,132 |
|
| 1,696 |
|
| 371 |
| |||
Interest expense |
| (34,685 | ) |
| (21,564 | ) |
| (23,796 | ) | |||
Discount on sales of receivables |
| (4,050 | ) |
| (9,293 | ) |
| (96 | ) | |||
Other |
| 2,872 |
|
| 12,588 |
|
| 4,129 |
| |||
EARNINGS (LOSS) BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING |
| 26,971 |
|
| (28,904 | ) |
| 23,226 |
| |||
INCOME TAX (EXPENSE) BENEFIT |
| (12,128 | ) |
| 9,446 |
|
| (8,940 | ) | |||
EARNINGS (LOSS) BEFORE CHANGE IN ACCOUNTING |
| 14,843 |
|
| (19,458 | ) |
| 14,286 |
| |||
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF TAX |
| — |
|
| — |
|
| 14,206 |
| |||
NET EARNINGS (LOSS) | $ | 14,843 |
| $ | (19,458 | ) | $ | 28,492 |
| |||
EARNINGS (LOSS) PER SHARE: | ||||||||||||
BASIC— | ||||||||||||
Before change in accounting | $ | .31 |
| $ | (.40 | ) | $ | .30 |
| |||
Cumulative effect of change in accounting |
| — |
|
| — |
|
| .29 |
| |||
Earnings (loss) per basic share | $ | .31 |
| $ | (.40 | ) | $ | .59 |
| |||
DILUTED— | ||||||||||||
Before change in accounting | $ | .31 |
| $ | (.40 | ) | $ | .30 |
| |||
Cumulative effect of change in accounting |
| — |
|
| — |
|
| .29 |
| |||
Earnings (loss) per diluted share | $ | .31 |
| $ | (.40 | ) | $ | .59 |
| |||
DIVIDENDS PER SHARE | $ | .16 |
| $ | .16 |
| $ | .16 |
| |||
See notes to consolidated financial statements.
AIRBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 | ||||||||
2002 | 2001 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 339,900 |
| $ | 201,500 |
| ||
Restricted cash |
| 36,333 |
|
| — |
| ||
Accounts receivable, less allowance of $13,616 and $11,509 |
| 169,880 |
|
| 126,040 |
| ||
Spare parts and fuel inventory |
| 36,223 |
|
| 38,413 |
| ||
Refundable income taxes |
| 627 |
|
| 27,161 |
| ||
Deferred income tax assets |
| 32,444 |
|
| 30,572 |
| ||
Prepaid expenses and other |
| 31,404 |
|
| 28,021 |
| ||
TOTAL CURRENT ASSETS |
| 646,811 |
|
| 451,707 |
| ||
PROPERTY AND EQUIPMENT, NET |
| 1,181,430 |
|
| 1,247,373 |
| ||
EQUIPMENT DEPOSITS AND OTHER ASSETS |
| 50,845 |
|
| 47,764 |
| ||
TOTAL ASSETS | $ | 1,879,086 |
| $ | 1,746,844 |
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 160,772 |
| $ | 141,873 |
| ||
Salaries, wages and related taxes |
| 94,581 |
|
| 75,458 |
| ||
Accrued expenses |
| 132,744 |
|
| 145,997 |
| ||
Income taxes payable |
| 4,912 |
|
| — |
| ||
Current portion of long-term obligations |
| 10,372 |
|
| 107,410 |
| ||
TOTAL CURRENT LIABILITIES |
| 403,381 |
|
| 470,738 |
| ||
LONG-TERM OBLIGATIONS |
| 370,091 |
|
| 218,053 |
| ||
DEFERRED INCOME TAX LIABILITIES |
| 146,321 |
|
| 143,526 |
| ||
POSTRETIREMENT LIABILITIES |
| 59,720 |
|
| 39,423 |
| ||
OTHER LIABILITIES |
| 60,410 |
|
| 40,888 |
| ||
COMMITMENTS AND CONTINGENCIES (Note H) | ||||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Preferred stock, without par value— | ||||||||
Authorized 6,000,000 shares, no shares issued | ||||||||
Common stock, par value $1 per share— | ||||||||
Authorized 120,000,000 shares, issued 51,657,886 and 51,375,711 |
| 51,658 |
|
| 51,376 |
| ||
Additional paid-in capital |
| 308,813 |
|
| 304,984 |
| ||
Retained earnings |
| 547,409 |
|
| 540,544 |
| ||
Accumulated other comprehensive loss |
| (8,859 | ) |
| (2,820 | ) | ||
| 899,021 |
|
| 894,084 |
| |||
Treasury stock, 3,234,526 and 3,240,526 shares, at cost |
| (59,858 | ) |
| (59,868 | ) | ||
| 839,163 |
|
| 834,216 |
| |||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,879,086 |
| $ | 1,746,844 |
| ||
See notes to consolidated financial statements.
AIRBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
(In thousands) | ||||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net earnings (loss) | $ | 14,843 |
| $ | (19,458 | ) | $ | 28,492 |
| |||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization |
| 191,424 |
|
| 208,355 |
|
| 206,406 |
| |||
Deferred income taxes |
| 923 |
|
| 16,348 |
|
| 20,679 |
| |||
Postretirement obligations |
| (7,203 | ) |
| 21,507 |
|
| 19,224 |
| |||
Casualty insurance |
| 20,876 |
|
| 9,893 |
|
| 5,967 |
| |||
Cumulative effect of change in accounting |
| — |
|
| — |
|
| (14,206 | ) | |||
Other |
| (4,036 | ) |
| (12,921 | ) |
| 2,513 |
| |||
Change in assets and liabilities, net of effects of business acquisition: | ||||||||||||
Proceeds from receivable securitization facility |
| 100,000 |
|
| 80,000 |
|
| 150,000 |
| |||
Reduction in receivables sold |
| (100,000 | ) |
| (30,000 | ) |
| — |
| |||
Restricted cash |
| (36,333 | ) |
| — |
|
| — |
| |||
Accounts receivables |
| (38,708 | ) |
| 42,645 |
|
| (29,641 | ) | |||
Inventory and prepaid expenses |
| (891 | ) |
| (2,394 | ) |
| 4,679 |
| |||
Refundable income taxes |
| 26,534 |
|
| (5,566 | ) |
| (19,916 | ) | |||
Accounts payable |
| 18,899 |
|
| (38,750 | ) |
| 38,536 |
| |||
Accrued expenses, salaries and taxes payable |
| 20,495 |
|
| 15,224 |
|
| 588 |
| |||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
| 206,823 |
|
| 284,883 |
|
| 413,321 |
| |||
INVESTING ACTIVITIES: | ||||||||||||
Additions to property and equipment |
| (108,413 | ) |
| (125,740 | ) |
| (367,862 | ) | |||
Proceeds from sale of securities |
| 3,778 |
|
| 2,117 |
|
| 1,913 |
| |||
Proceeds from sale of radio frequencies |
| — |
|
| 9,295 |
|
| — |
| |||
Cash acquired in business acquisition, net of purchase price paid |
| 1,027 |
|
| — |
|
| — |
| |||
Other |
| 2,114 |
|
| (1,693 | ) |
| (16,061 | ) | |||
NET CASH USED BY INVESTING ACTIVITIES |
| (101,494 | ) |
| (116,021 | ) |
| (382,010 | ) | |||
FINANCING ACTIVITIES: | ||||||||||||
Issuance of debt, net of issuance costs |
| 145,125 |
|
| 1,597 |
|
| — |
| |||
Principal payments on long-term obligations |
| (108,197 | ) |
| (2,627 | ) |
| (442 | ) | |||
Proceeds (payments) on bank notes, net |
| — |
|
| (103,000 | ) |
| 8,000 |
| |||
Issuance of aircraft loan |
| — |
|
| 61,975 |
|
| — |
| |||
Proceeds from sale-leaseback of aircraft |
| — |
|
| 40,800 |
|
| — |
| |||
Exercise of stock options |
| 4,121 |
|
| 1,201 |
|
| 1,259 |
| |||
Dividends paid |
| (7,736 | ) |
| (7,698 | ) |
| (7,754 | ) | |||
Shareholder rights redemption |
| (242 | ) |
| — |
|
| — |
| |||
Repurchase of common stock |
| — |
|
| — |
|
| (20,662 | ) | |||
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES |
| 33,071 |
|
| (7,752 | ) |
| (19,599 | ) | |||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
| 138,400 |
|
| 161,110 |
|
| 11,712 |
| |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
| 201,500 |
|
| 40,390 |
|
| 28,678 |
| |||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 339,900 |
| $ | 201,500 |
| $ | 40,390 |
| |||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
Restricted cash at end of year | $ | 36,333 |
| $ | — |
| $ | — |
| |||
Cash paid during the year— | ||||||||||||
Interest, net of amount capitalized |
| 35,261 |
|
| 21,091 |
|
| 24,066 |
| |||
Income taxes paid (refunded) |
| 25,180 |
|
| (22,307 | ) |
| 10,604 |
| |||
Non-cash financing activities— | ||||||||||||
Capital lease transactions |
| 13,197 |
|
| 3,361 |
|
| — |
| |||
Contribution of treasury stock to profit sharing plans |
| — |
|
| — |
|
| 4,367 |
|
See notes to consolidated financial statements.
AIRBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||
(In thousands) | ||||||||||||||||||||||
BALANCE AT JANUARY 1, 2000 | $ | 51,176 | $ | 298,742 | $ | 546,962 |
| $ | 918 |
| $ | (39,591 | ) | $ | 858,207 |
| ||||||
Comprehensive income: | ||||||||||||||||||||||
Net earnings |
| 28,492 |
|
| 28,492 |
| ||||||||||||||||
Other comprehensive income, | ||||||||||||||||||||||
Unrealized securities losses |
| (769 | ) |
| (769 | ) | ||||||||||||||||
Foreign currency translation adjustments |
| (285 | ) |
| (285 | ) | ||||||||||||||||
Total comprehensive income (loss) |
| 28,492 |
|
| (1,054 | ) |
| 27,438 |
| |||||||||||||
Common stock dividends paid |
| (7,754 | ) |
| (7,754 | ) | ||||||||||||||||
Repurchase of common stock |
| (20,662 | ) |
| (20,662 | ) | ||||||||||||||||
Exercise of stock options |
| 104 |
| 1,155 |
| 1,259 |
| |||||||||||||||
Contribution of treasury stock to profit sharing plans |
| 3,988 |
| 379 |
|
| 4,367 |
| ||||||||||||||
BALANCE AT DECEMBER 31, 2000 |
| 51,280 |
| 303,885 |
| 567,700 |
|
| (136 | ) |
| (59,874 | ) |
| 862,855 |
| ||||||
Comprehensive income: | ||||||||||||||||||||||
Net loss |
| (19,458 | ) |
| (19,458 | ) | ||||||||||||||||
Other comprehensive income, | ||||||||||||||||||||||
Unrealized securities losses |
| (379 | ) |
| (379 | ) | ||||||||||||||||
Foreign currency translation adjustments |
| (384 | ) |
| (384 | ) | ||||||||||||||||
Unrealized interest rate swap gains |
| 626 |
|
| 626 |
| ||||||||||||||||
Minimum pension liabilities |
| (2,547 | ) |
| (2,547 | ) | ||||||||||||||||
Total comprehensive loss |
| (19,458 | ) |
| (2,684 | ) |
| (22,142 | ) | |||||||||||||
Common stock dividends paid |
| (7,698 | ) |
| (7,698 | ) | ||||||||||||||||
Exercise of stock options |
| 96 |
| 1,099 |
| 6 |
|
| 1,201 |
| ||||||||||||
BALANCE AT DECEMBER 31, 2001 |
| 51,376 |
| 304,984 |
| 540,544 |
|
| (2,820 | ) |
| (59,868 | ) |
| 834,216 |
| ||||||
Comprehensive income: | ||||||||||||||||||||||
Net earnings |
| 14,843 |
|
| 14,843 |
| ||||||||||||||||
Other comprehensive income, | ||||||||||||||||||||||
Unrealized securities losses |
| (1,298 | ) |
| (1,298 | ) | ||||||||||||||||
Foreign currency translation adjustments |
| 144 |
|
| 144 |
| ||||||||||||||||
Unrealized interest rate swap losses |
| (2,830 | ) |
| (2,830 | ) | ||||||||||||||||
Minimum pension liabilities |
| (1,895 | ) |
| (1,895 | ) | ||||||||||||||||
Unrealized fuel hedge losses |
| (160 | ) |
| (160 | ) | ||||||||||||||||
Total comprehensive income (loss) |
| 14,843 |
|
| (6,039 | ) |
| 8,804 |
| |||||||||||||
Common stock dividends paid |
| (7,736 | ) |
| (7,736 | ) | ||||||||||||||||
Shareholder rights redemption |
| (242 | ) |
| (242 | ) | ||||||||||||||||
Exercise of stock options |
| 282 |
| 3,829 |
| 10 |
|
| 4,121 |
| ||||||||||||
BALANCE AT DECEMBER 31, 2002 | $ | 51,658 | $ | 308,813 | $ | 547,409 |
| $ | (8,859 | ) | $ | (59,858 | ) | $ | 839,163 |
| ||||||
See notes to consolidated financial statements.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 2002
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company’s revenues are primarily derived from domestic and international transportation of shipments. The Company provides door-to-door express and deferred delivery of small packages and documents throughout the United States and to and from most foreign countries. The Company also acts as an international and domestic freight forwarder for shipments of any size. Most domestic shipments are transported on the Company’s own airline and a fleet of ground transportation vehicles through its Company-owned airport and central sorting facilities, or one of eleven regional hubs. International shipments are transported utilizing a combination of the Company’s domestic network, commercial airline lift capacity, and a network of offshore Company offices and independent agents.
As of December 31, 2002, the Company had approximately 10,200 employees (45% of total employees), including approximately 745 pilots, employed under collective bargaining agreements with various locals of the International Brotherhood of Teamsters and Warehousemen. The pilots are covered by an agreement that became amendable on July 31, 2001. Most labor agreements covering 73% and 25% of the Company’s ground personnel expire in 2003 and 2004, respectively. Although the Company has not experienced any significant disruptions from labor disputes in the past, there can be no assurance that disputes will not arise in the future.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned aircraft finance subsidiary. Intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Estimates and assumptions are used to record allowances for bad debts, self-insurance reserves, spare-parts inventory, depreciation and impairments of property and equipment, labor contract settlements, postretirement obligations, Federal stabilization compensation, income taxes, contingencies and litigation and other accruals. Changes in these estimates and assumptions may have a material impact on the financial statements.
Cash and Cash Equivalents
Cash and cash equivalents shown on the consolidated balance sheets included short-term commercial paper or money market fund investments of $307,812,000 and $127,968,000 as of December 31, 2002 and 2001, respectively. The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
Restricted cash at December 31, 2002 included $35,505,000 of money market fund investments that were restricted from general use and held in an insurance trust to support a portion of outstanding self-insured casualty liabilities, including workers compensation, automobile and general liability coverages.
The Company has a cash management system under which a cash overdraft exists for uncleared checks in the Company’s primary disbursement accounts. Cash and cash equivalents shown on the consolidated balance sheet includes balances in other accounts prior to being transferred to the primary disbursement accounts. Uncleared checks of $29,705,000 and $25,531,000 were included in accounts payable at December 31, 2002 and 2001, respectively.
Spare Parts and Fuel Inventory
Spare parts are stated at average cost and fuel inventory is stated at cost on a first-in, first-out basis. An obsolescence reserve is maintained for the Company’s aircraft spare parts. A provision is recorded over the estimated useful life of the related aircraft that considers the spare parts expected to be on hand on the date the aircraft is anticipated to be removed from service.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment is stated at cost. The cost and accumulated depreciation of property and equipment disposed of are removed from the accounts with any related gain or loss reflected in earnings from operations.
For financial reporting purposes, depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s useful life or lease term. The Company periodically evaluates the estimated service lives and residual values used to depreciate its property and equipment. This evaluation may result in changes in estimated loss and residual values. Depreciable lives are as follows:
Flight equipment | 5 to 18 years | |
Buildings, runways, and leasehold improvements | 5 to 40 years | |
Package handling and ground support equipment | 3 to 10 years | |
Vehicles and other equipment | 3 to 8 years |
DC-9 aircraft generally carry residual values of 15% of asset cost. All other property and equipment have no assigned residual values.
When an aircraft is removed from service and considered impaired, as was the case with a DC-8 aircraft removed from domestic operations in 2002, the assets residual value is adjusted to its fair value, which is the equivalent of an estimated parts value in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. A fair value adjustment charge of $3,068,000 was included in depreciation and amortization expense in 2002.
Major engine overhauls as well as ordinary engine maintenance and repairs for DC-8 and 767 aircraft are performed by third-party service providers under long-term contracts. In July 2001, a third party service provider began performing major engine overhauls on the Company’s DC-9 aircraft. Service costs under the contracts are based upon hourly rates for engine usage and are charged to expense in the period utilization occurs.
The Company adopted SFAS No. 144 on January 1, 2002. Adoption of this statement did not have a significant effect on the Company’s financial position or results of operations.
Capitalized Interest
Interest incurred during the construction period of certain facilities and on aircraft purchase and modification costs is capitalized until the date the asset is placed in service as an additional cost of the asset. Capitalized interest was $1,447,000, $2,377,000 and $6,770,000 for 2002, 2001 and 2000, respectively.
Income Taxes
The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates.
The Company believes that it is more likely than not that certain deferred tax assets will be realized from future income. Accordingly, no valuation allowance was provided as of December 31, 2002 or 2001.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income which consists of changes in equity arising during the period from available for sale marketable securities, foreign currency translation adjustments, minimum pension liabilities, and from adjusting interest rate swaps and fuel hedge contracts to fair value.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Revenues are recognized when shipments are delivered to the customer. For shipments picked up but not yet delivered, direct costs are deferred and recognized upon delivery. The Company estimates the amount of direct costs to be deferred utilizing historical shipment level cost trends applied to the actual shipments in transit as of a particular reporting date.
Foreign Currency Instruments, Interest Rate Swap Agreements and Fuel Hedge Contracts
The Company accounts for its derivative instruments under the provisions of SFAS No. 133, as amended. This statement requires that each derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The statement also establishes criteria for a derivative to qualify as a hedge for accounting purposes. Changes in fair value of derivatives designated as hedges of forecasted transactions will be deferred and recorded as a component of accumulated other comprehensive income (loss) until the hedged forecasted transaction occurs and is recognized in earnings. In addition, all derivatives used in hedge relationships must be designated, reassessed and documented pursuant to provisions of SFAS No. 133.
The Company utilizes forward foreign exchange contracts to manage the risk associated with currency fluctuations on certain receivables and payables denominated in Japanese yen. The contracts are for terms consistent with the settlement of underlying transactions, which are generally three months or less. Changes in the contract values on these cash flow hedges and the changes in fair values of the underlying hedged receivable or payable are recognized currently in earnings. The Company had $1,079,000 and $1,014,000 in notional forward contracts outstanding with unrealized gains recorded of $37,000 and unrealized losses recorded of $52,000 as of December 31, 2002 and 2001, respectively.
The Company entered into an interest rate swap agreement to manage its exposure to interest rate movements by effectively converting debt incurred on certain aircraft financings from variable to fixed rates. Maturity dates, interest rate reset dates, and notional amounts of the interest rate swap match those of the underlying debt. The differential between the variable and fixed rates to be paid or received is accrued as interest rates change and recorded as an adjustment to interest expense. The notional principal amount of the interest rate swap was $54,439,000 and $58,923,000 as of December 31, 2002 and 2001, respectively.
The fair value of the interest rate swap agreement and the amount of hedging losses deferred on the interest rate swap was $3,582,000 at December 31, 2002 compared to a deferred gain of $1,019,000 at December 31, 2001. Changes in fair value of the interest rate swap are reported, net of related income taxes, in accumulated other comprehensive income (loss). This amount is reclassified into interest expense as a yield adjustment in the same period in which the related interest on the aircraft financings affects earnings. Because the critical terms of the interest rate swap and the underlying obligation are the same, there was no ineffectiveness recorded in the consolidated statements of operations. Incremental interest expense incurred as a result of the interest rate swap was $1,628,000 and $166,000 in 2002 and 2001, respectively. Based on the current expectations for interest rates, the Company expects approximately $1,720,000 to be reclassified to interest expense during 2003.
The Company has utilized fuel contract hedges with financial institutions to limit its exposure to volatility in jet fuel prices. In September 2002, the Company entered into a call option contract on heating oil to hedge a significant portion of its projected jet fuel requirements for a six-month period extending through March 2003 and in February 2003, entered into a three-month contract extending through June 2003. The Company accounts for its fuel contracts at fair value with corresponding changes in fair value included as a component of accumulated other comprehensive income (loss) on the consolidated balance sheet. No proceeds were received under these contracts during 2002. Proceeds received under the contracts, if any, are based on a monthly 30-day forward delivery price index with settlement the subsequent month. Any proceeds received would be recorded as a decrease to fuel expense upon settlement. As of December 31, 2002, a deferred charge of $160,000, net of tax, had been recorded in accumulated other comprehensive income (loss).
The Company had no fuel contract hedges outstanding at December 31, 2001 and 2000. There were no settlement payments made or received on fuel contract hedges during 2001 or 2000.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill
Effective January 2002, the Company implemented the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. As required by provisions of the statement, the Company completed its transitional tests and determined no impairment adjustments were necessary. Further, the Company no longer amortizes its goodwill. The total amount of goodwill recorded and included in equipment deposits and other assets on the consolidated balance sheet was $2,600,000 and $2,200,000 as of December 31, 2002 and 2001, respectively. Net earnings (loss) and basic and diluted net earnings (loss) per share for 2001 and 2000, excluding goodwill amortization expense, would not have been materially different from amounts reported. Goodwill amortization recorded in 2001 and 2000 was $130,000.
Stock-Based Compensation
The Company has elected to follow APB Opinion No. 25 in accounting for its stock option plans. No compensation expense was recorded in 2002, 2001 or 2000. Had expense been measured under the fair value provisions of SFAS No. 123, the Company’s net earnings (loss) and earnings (loss) per basic and diluted share for 2002, 2001 and 2000 would have been reduced (increased) to the pro forma amounts as follows (in thousands except per share data):
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Net earnings (loss): | ||||||||||||
As reported | $ | 14,843 |
| $ | (19,458 | ) | $ | 28,492 |
| |||
Add: Stock-based employee compensation expense determined under fair value based methods for all awards, net of tax effects |
| (4,202 | ) |
| (5,426 | ) |
| (5,368 | ) | |||
Pro forma | $ | 10,641 |
| $ | (24,884 | ) | $ | 23,124 |
| |||
Net earnings (loss) per basic share: | ||||||||||||
As reported | $ | 0.31 |
| $ | (.40 | ) | $ | .59 |
| |||
Pro forma |
| 0.22 |
|
| (.52 | ) |
| .48 |
| |||
Net earnings (loss) per diluted share: | ||||||||||||
As reported | $ | 0.31 |
| $ | (.40 | ) | $ | .59 |
| |||
Pro forma |
| 0.22 |
|
| (.52 | ) |
| .48 |
|
The weighted average fair value for options granted in 2002, 2001 and 2000 computed utilizing the Black-Scholes option-pricing model, was $7.24, $5.36 and $8.99, respectively. Significant assumptions used in the estimation of fair value and compensation expense are as follows:
Year Ended December 31 | |||||||||
2002 | 2001 | 2000 | |||||||
Weighted expected life (years) | 6.5 |
| 6.9 |
| 6.3 |
| |||
Weighted risk-free interest rate | 4.6 | % | 5.1 | % | 6.7 | % | |||
Weighted volatility | 45.0 | % | 43.0 | % | 42.0 | % | |||
Dividend yield | 1.0 | % | 1.3 | % | 0.8 | % |
Change in Accounting
Effective January 1, 2000, the Company changed its method of accounting for major engine overhaul costs on DC-9 aircraft from the accrual method to the direct expense method where costs are expensed as incurred. Previously, these costs were accrued in advance of the next scheduled overhaul based upon engine usage and estimates of overhaul costs. The Company believes that this new method is preferable because it is more consistent with industry practice and appropriate given the relatively large size of its DC-9 fleet.
The cumulative effect of this change in accounting resulted in a non-cash credit in 2000 of $14,206,000 net of taxes, or $.29 per diluted share. Excluding the cumulative effect, this change increased net earnings for 2000 by approximately $3,687,000, net of tax, or $.08 per diluted share.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs will be capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for the Company on January 1, 2003, will not have a significant impact on the Company’s financial position or results of operations.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 requires that only certain extinguishments of debt be classified as extraordinary items. Further, this statement requires a capital lease that is modified so that the resulting lease agreement is classified as an operating lease to be accounted for under the sale-leaseback provisions of SFAS No. 98. The provisions of the statement pertaining to debt extinguishments are effective for the Company’s beginning on January 1, 2003. The provision of the statement pertaining to lease modifications is effective for transactions consummated after May 15, 2002. Implementation of this statement did not have a significant impact on the Company’s financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force Issue 94-3, required an exit cost liability to be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for the Company’s exit or disposal activities that are initiated on or after January 1, 2003. Implementation of this statement is not anticipated to have a significant impact on the Company’s financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. Additionally, this interpretation clarifies the requirements for recognizing a liability at the inception of the guarantee equal to the fair value of the obligation undertaken in issuing the guarantee and incorporates the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”. Disclosures under Interpretation No. 45 are effective for the Company on December 31, 2002. The disclosure and recognition provisions of this interpretation did not have a significant impact on the Company’s financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim consolidated financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company currently plans to follow the provisions of Accounting Principles Board (APB) Opinion No. 25 in accounting for its stock option plans until such time new accounting rules are adopted which require recognition of the fair value of stock options as compensation. Accordingly, implementation of this statement will currently not have a significant impact on the Company’s financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. The Company sells its receivables to a commercial paper conduit, as further discussed in Note C. Since the fair value of the Company’s receivables are less than half of the overall conduit’s assets, the Company does not have a variable interest in the conduit under this interpretation and therefore, no consolidation is required. This interpretation is effective for the Company on January 1, 2003, and will not have a material impact on the Company’s financial position, results of operations or cash flows.
Reclassifications
Certain amounts for prior years have been reclassified in the consolidated financial statements to conform to the classification used in 2002.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B—FAIR VALUE INFORMATION
The carrying amounts and related fair values of the Company’s financial instruments are as follows (in thousands):
December 31 | ||||||||||||||||
2002 | 2001 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Marketable securities | $ | 12,394 |
| $ | 12,394 |
| $ | 15,441 |
| $ | 15,441 |
| ||||
Long-term debt |
| 327,550 |
|
| 336,260 |
|
| 282,393 |
|
| 278,001 |
| ||||
Derivatives (liability) asset: | ||||||||||||||||
Interest rate swap |
| (3,582 | ) |
| (3,582 | ) |
| 1,019 |
|
| 1,019 |
| ||||
Foreign exchange contracts |
| 37 |
|
| 37 |
|
| (52 | ) |
| (52 | ) |
Marketable securities consist primarily of commingled investment funds that may be used for funding non-qualified pension plan obligations and, in 2001, an equity interest in an international agent which was disposed of during 2002. These securities are considered available-for-sale securities for financial reporting purposes and are classified with equipment deposits and other assets on the consolidated balance sheets. Fair value for these investments is based on quoted market prices for the securities underlying the investment funds or the same securities. Unrealized losses on these securities, which are included in other comprehensive income (loss), were $1,035,000, $616,000, and $1,248,000 for 2002, 2001, and 2000, respectively. Realized gains recognized in 2002, 2001 and 2000 were $1,829,000, $197,000, and $1,117,000, respectively.
Discussion regarding the fair value of the Company’s long-term debt and interest rate swap is disclosed in the respective notes to the consolidated financial statements. Fair value of the Company’s interest rate swap is based on the current LIBOR interest rate swap yield curve. Fair value for the Company’s forward foreign exchange contracts is based on the estimated amount at which the contracts could be settled based upon forward market exchange rates. Carrying amounts for cash and cash equivalents, restricted cash, trade accounts receivable and current liabilities approximate fair value.
NOTE C—ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
December 31 | ||||||||
2002 | 2001 | |||||||
Retained interest in securitized accounts receivable: | ||||||||
Securitized trade accounts receivable | $ | 341,813 |
| $ | 306,497 |
| ||
Less: Proceeds from sale of undivided interest in receivables |
| (200,000 | ) |
| (200,000 | ) | ||
Less: Allowance for doubtful accounts |
| (11,588 | ) |
| (9,220 | ) | ||
Retained interest in securitized accounts receivable, net |
| 130,225 |
|
| 97,277 |
| ||
Other accounts receivable: | ||||||||
Other trade accounts receivable |
| 41,683 |
|
| 31,052 |
| ||
Less: Allowance for doubtful accounts |
| (2,028 | ) |
| (2,289 | ) | ||
Other trade accounts receivable, net |
| 39,655 |
|
| 28,763 |
| ||
Accounts receivable on consolidated balance sheets | $ | 169,880 |
| $ | 126,040 |
| ||
The Company entered into an agreement with a financial institution in December 2000 to finance the sale, on a continuous basis, of an undivided interest in all eligible U.S. trade accounts receivables through an accounts receivable securitization facility. This financing agreement is accounted for as a sale of assets under the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.
To facilitate the sales, the Company formed Airborne Credit, Inc. (“ACI”), a wholly-owned, special purpose, bankruptcy-remote subsidiary consolidated by the Company. The Company transfers substantially all of its U.S. trade account receivables
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to ACI, whose sole purpose, in turn, is to sell an undivided interest in receivables to an unrelated commercial paper conduit and receive proceeds of up to $250,000,000. The facility is for a three-year term expiring June 2004. The Company retains the servicing of the receivables transferred to ACI. The Company had eligible receivables to support the maximum of $250,000,000 in sales proceeds at December 31, 2002 and receivables to support $232,500,000 in proceeds at December 31, 2001.
To the extent that customers default on the receivables, losses will first reduce the Company’s retained interest in the receivables prior to reducing the interests sold through the facility. Any increase in actual defaults above the recorded amount of allowance for doubtful accounts would decrease the value of the Company’s retained interest.
Upon the sale of the undivided interest in the receivables, the Company incurs a liability to fund the purchaser’s costs of financing the proceeds. This liability is recorded at the time of sale and is estimated based on projected financing costs over the projected life of the receivable interests sold. Discounts associated with the sale of receivables, primarily related to recording the obligation to fund the purchaser’s costs, were $4,050,000, $9,293,000 and $96,000 for 2002, 2001, and 2000, respectively, and are shown as discounts on sales of receivables in the consolidated statements of operations. The Company does not believe any difference between the projected and actual financing costs would have a material effect on the financial condition or results of operations.
NOTE D—PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31 | ||||||||
2002 | 2001 | |||||||
Flight equipment | $ | 1,882,447 |
| $ | 1,850,304 |
| ||
Land, buildings and leasehold improvements |
| 266,127 |
|
| 266,758 |
| ||
Package handling and ground support equipment |
| 225,756 |
|
| 217,507 |
| ||
Vehicles and other equipment |
| 302,804 |
|
| 320,030 |
| ||
| 2,677,134 |
|
| 2,654,599 |
| |||
Accumulated depreciation and amortization |
| (1,495,704 | ) |
| (1,407,226 | ) | ||
Total property and equipment | $ | 1,181,430 |
| $ | 1,247,373 |
| ||
NOTE E—ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31 | ||||||
2002 | 2001 | |||||
Self insurance | $ | 53,339 | $ | 49,273 | ||
Retirement plans |
| 35,637 |
| 53,991 | ||
Unearned revenues |
| 22,429 |
| 20,274 | ||
Property and other taxes |
| 11,555 |
| 12,318 | ||
Interest |
| 4,596 |
| 2,636 | ||
Other |
| 5,188 |
| 7,505 | ||
Total accrued expenses | $ | 132,744 | $ | 145,997 | ||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F—INCOME TAXES
Deferred income tax assets and liabilities consist of the following (in thousands):
December 31 | ||||||||
2002 | 2001 | |||||||
Self insurance | $ | 16,289 |
| $ | 14,155 |
| ||
Employee benefits |
| 14,440 |
|
| 13,206 |
| ||
Bad debts, sales reserves and other |
| 1,715 |
|
| 3,211 |
| ||
Current net deferred income tax assets |
| 32,444 |
|
| 30,572 |
| ||
Depreciation |
| 168,835 |
|
| 157,493 |
| ||
Employee benefits |
| (11,687 | ) |
| (13,715 | ) | ||
Self insurance |
| (17,629 | ) |
| (13,377 | ) | ||
Internally developed systems |
| 6,422 |
|
| 6,680 |
| ||
Other |
| 380 |
|
| 6,445 |
| ||
Noncurrent net deferred income tax liabilities |
| 146,321 |
|
| 143,526 |
| ||
Net deferred income tax liabilities | $ | 113,877 |
| $ | 112,954 |
| ||
The sources of pretax earnings (loss) consist of the following:
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Domestic | $ | 27,085 |
| $ | (23,794 | ) | $ | 31,893 |
| |||
Foreign |
| (114 | ) |
| (5,110 | ) |
| (8,667 | ) | |||
Total pretax earnings (loss) | $ | 26,971 |
| $ | (28,904 | ) | $ | 23,226 |
| |||
Income tax expense (benefit) consists of the following (in thousands):
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Current: | ||||||||||||
Federal | $ | 5,652 |
| $ | (25,385 | ) | $ | (12,445 | ) | |||
State |
| 1,790 |
|
| (2,000 | ) |
| (210 | ) | |||
Foreign |
| (18 | ) |
| (53 | ) |
| 256 |
| |||
| 7,424 |
|
| (27,438 | ) |
| (12,399 | ) | ||||
Deferred: | ||||||||||||
Depreciation |
| 11,342 |
|
| 10,816 |
|
| 23,702 |
| |||
Employee benefits |
| 794 |
|
| 5,125 |
|
| (1,684 | ) | |||
Self insurance |
| (6,386 | ) |
| (1,925 | ) |
| (4,352 | ) | |||
Internally developed systems |
| (258 | ) |
| 3,010 |
|
| 3,671 |
| |||
Alternative minimum tax credit |
| — |
|
| 639 |
|
| (639 | ) | |||
Aircraft engine overhaul accrual |
| — |
|
| — |
|
| 6,163 |
| |||
Cumulative effect of change in accounting |
| — |
|
| — |
|
| (8,707 | ) | |||
Other |
| (788 | ) |
| 327 |
|
| 3,185 |
| |||
| 4,704 |
|
| 17,992 |
|
| 21,339 |
| ||||
Total income tax expense (benefit) | $ | 12,128 |
| $ | (9,446 | ) | $ | 8,940 |
| |||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The income tax expense (benefit) rate on earnings (loss) from continuing operations differed from the Federal statutory rate as follows:
Year Ended December 31 | |||||||||
2002 | 2001 | 2000 | |||||||
Taxes computed at statutory rate | 35.0 | % | (35.0 | %) | 35.0 | % | |||
State and foreign income taxes, net of federal benefit | 5.0 | % | (2.5 | %) | 3.0 | % | |||
Tax effect of nondeductible expenses | 5.1 | % | 5.0 | % | 6.7 | % | |||
Tax credits | — |
| — |
| (3.5 | %) | |||
Other | (0.1 | %) | (0.2 | %) | (2.7 | %) | |||
45.0 | % | (32.7 | %) | 38.5 | % | ||||
NOTE G—LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
December 31 | ||||||||
2002 | 2001 | |||||||
Convertible senior notes, 5.75%, due April 2007 | $ | 150,000 |
| $ | — |
| ||
Senior notes, 7.35%, due September 2005 |
| 100,000 |
|
| 100,000 |
| ||
Senior notes, 8.875%, due December 2002 |
| — |
|
| 100,000 |
| ||
Aircraft loan |
| 57,558 |
|
| 61,651 |
| ||
Refunding revenue bonds, 1.55% as of December 31, 2002, due June 2011 |
| 13,200 |
|
| 13,200 |
| ||
Other |
| 6,792 |
|
| 7,542 |
| ||
Total long-term debt |
| 327,550 |
|
| 282,393 |
| ||
Capital lease obligations |
| 52,913 |
|
| 43,070 |
| ||
Total long-term obligations |
| 380,463 |
|
| 325,463 |
| ||
Less current portion |
| (10,372 | ) |
| (107,410 | ) | ||
Total long-term obligations, net | $ | 370,091 |
| $ | 218,053 |
| ||
The $100,000,000 of outstanding 7.35% senior notes are collateralized by assets of the Company.
As of December 31, 2002 the Company had a revolving bank credit agreement that provided for a total commitment of $275,000,000 and expires in June 2004. The agreement was collateralized by a substantial majority of the Company’s assets and contained restrictions that reduce the amount of available borrowing capacity by the amount of outstanding letters of credits and by amounts based on leverage limitation provisions and the level of eligible collateral. With the level of eligible collateral at December 31, 2002, available capacity under the agreement, net of $97,275,000 outstanding letters of credit and leverage limitations, was $142,800,000. At December 31, 2002, no borrowings were outstanding under the agreement and the Company was in compliance with restrictive covenants including covenants requiring the maintenance of minimum levels of earnings before interest, taxes, depreciation and amortization (EBITDA), leverage and debt service coverage ratios and required levels of liquidity. The agreement also restricts the Company from declaring or paying dividends on its common stock in excess of $2,000,000 during any calendar quarter. The agreement did permit a one-time payment of $242,000 ($.005 per share) made in May 2002 to shareholders upon redemption and termination of the Company’s shareholder rights plan.
In April 2003, the Company amended its revolving credit agreement. The amendment reduced the total facility to $200,000,000 from $275,000,000 and revised most financial covenants. The agreement requires a periodic appraisal of the Company’s aircraft to remeasure the level of eligible collateral. An appraisal is in process and the Company estimates the results will support outstanding letters of credit of between $30,000,000 and $55,000,000. Support for the remaining outstanding letters of credit will require the pledge of additional collateral (e.g. cash, cash equivalents or accounts receivable resulting from reduction of amounts sold through the accounts receivable securitization facility). The Company does not anticipate any capacity will exist under the agreement for general borrowing purposes unless additional collateral is pledged.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has an aircraft loan, collateralized by three 767 aircraft, which has an outstanding balance of $57,558,000 as of December 31, 2002. The loan is scheduled to fully amortize in 2017 and carries a variable interest rate of LIBOR plus 2.5% (3.94% at December 31, 2002). The three aircraft have been sold to a majority-owned and consolidated subsidiary. The net carrying value of the three aircraft was $73,803,000 at December 31, 2002. As discussed in Note A, the Company has entered into an interest rate swap agreement effectively converting the loan from a variable to a fixed rate of 4.72%.
In March 2002, the Company issued $150,000,000 of 5.75% convertible senior notes due April 2007. The proceeds of the sale were used, in part, to fund the repayment of $100,000,000 of 8.875% senior notes due on December 15, 2002 at their stated maturity. The notes are convertible into shares of the Company’s common stock, at the option of the holder, at a conversion rate of 42.7599 shares per each $1,000 principal amount of notes held, subject to adjustment in certain circumstances. This is equivalent to a conversion price of $23.39 per share. At the current conversion price, a total of 6,413,985 shares are issuable upon full conversion of the notes. The Company incurred issue costs of $4,875,000 in connection with this transaction.
The Company’s tax-exempt airport facilities refunding bonds carry no sinking fund requirements and bear interest at weekly adjustable rates. The average interest rate on these borrowings was 1.43% during 2002. Payment of principal and interest is secured by an irrevocable bank letter of credit that is collateralized by a mortgage on certain airport properties which had a net carrying value of $38,874,000 at December 31, 2002.
The scheduled annual principal payments on long-term debt, exclusive of capital lease obligations are $5,267,000, $5,673,000, $106,125,000, $6,480,000 and $156,714,000 for 2003 through 2007, respectively.
NOTE H—COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various long-term capital and operating lease agreements for certain aircraft and equipment and for a substantial portion of its facilities. These leases expire at various dates through 2016.
Rental commitments under long-term capital and operating leases at December 31, 2002, are as follows (in thousands):
Capital Leases | Operating Leases | ||||||
2003 | $ | 9,227 |
| $ | 86,591 | ||
2004 |
| 9,142 |
|
| 71,298 | ||
2005 |
| 9,142 |
|
| 52,175 | ||
2006 |
| 9,025 |
|
| 38,013 | ||
2007 |
| 7,409 |
|
| 27,220 | ||
2008 and beyond |
| 34,679 |
|
| 59,503 | ||
Total minimum lease payments | $ | 78,624 |
| $ | 334,800 | ||
Amount representing interest |
| (25,711 | ) | ||||
Obligations under capital leases |
| 52,913 |
| ||||
Obligations due within one year |
| (5,105 | ) | ||||
Long-term obligations under capital leases | $ | 47,808 |
| ||||
Property and equipment includes $57,879,000 and $44,250,000 and accumulated depreciation and amortization includes $5,583,000 and $1,229,000 applicable to capital leases as of December 31, 2002 and 2001, respectively.
Rental expense under operating leases for 2002, 2001 and 2000 was $97,555,000, $92,969,000 and $95,559,000, respectively.
Commitments
The Company has entered into firm agreements to purchase six used Boeing 767s at various dates through 2005. Additionally, four of these aircraft are committed to be converted to a freighter configuration from their original passenger configuration. Payments for the aircraft and conversions will approximate $66,500,000, $57,500,000 and $23,900,000 for
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2003, 2004 and 2005, respectively. There are currently no aircraft related commitments extending beyond 2005. Over the past two years the Company has been successful in negotiating deferrals of aircraft deliveries and may request deferrals of future deliveries. However, there is no assurance any deferral of planned deliveries will be achieved.
Contingencies
In the normal course of business, the Company has various legal claims and other contingent matters outstanding. Management believes that any ultimate liability arising from these actions would not have a material adverse effect on the Company’s financial condition or results of operations as of and for the year ended December 31, 2002.
NOTE I—PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors defined benefit and defined contribution pension plans and postretirement healthcare plans. These plans are generally provided to employees who are not covered by multi-employer plans to which the Company contributes under terms of various collective bargaining agreements.
Information regarding the Company’s qualified defined benefit pension plans and postretirement healthcare plans is as follows (in thousands):
Pension Plans | Postretirement Healthcare Plans | |||||||||||||||
Year Ended December 31 | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Reconciliation of projected benefit obligation: | ||||||||||||||||
Obligation as of January 1 | $ | 278,159 |
| $ | 220,605 |
| $ | 14,222 |
| $ | 11,125 |
| ||||
Service cost |
| 24,607 |
|
| 22,616 |
|
| 1,126 |
|
| 898 |
| ||||
Interest cost |
| 21,279 |
|
| 17,353 |
|
| 987 |
|
| 917 |
| ||||
Plan transfers |
| 1,666 |
|
| — |
|
| — |
|
| — |
| ||||
Benefits paid |
| (3,137 | ) |
| (2,611 | ) |
| (325 | ) |
| (481 | ) | ||||
Actuarial loss |
| 8,923 |
|
| 20,196 |
|
| 238 |
|
| 1,763 |
| ||||
Plan amendments |
| 15,252 |
|
| — |
|
| — |
|
| — |
| ||||
Obligation as of December 31 | $ | 346,749 |
| $ | 278,159 |
| $ | 16,248 |
| $ | 14,222 |
| ||||
Accumulated benefit obligation | $ | 217,554 |
| $ | 151,960 |
| ||||||||||
Reconciliation of fair value of plan assets: | ||||||||||||||||
Plan assets as of January 1 | $ | 114,596 |
| $ | 102,567 |
| $ | — |
| $ | — |
| ||||
Actual loss on plan assets |
| (9,998 | ) |
| (5,130 | ) |
| — |
|
| — |
| ||||
Plan transfers |
| 1,666 |
|
| — |
|
| — |
|
| — |
| ||||
Employer contributions |
| 51,889 |
|
| 19,770 |
|
| 325 |
|
| 481 |
| ||||
Benefits paid |
| (3,137 | ) |
| (2,611 | ) |
| (325 | ) |
| (481 | ) | ||||
Plan assets as of December 31 | $ | 155,016 |
| $ | 114,596 |
| $ | — |
| $ | — |
| ||||
Funded status: | ||||||||||||||||
Funded status as of December 31 | $ | (191,733 | ) | $ | (163,563 | ) | $ | (16,248 | ) | $ | (14,222 | ) | ||||
Unrecognized prior service cost (income) |
| 50,898 |
|
| 41,914 |
|
| (198 | ) |
| (318 | ) | ||||
Unrecognized net actuarial loss |
| 86,025 |
|
| 60,272 |
|
| 2,850 |
|
| 2,765 |
| ||||
Accrued benefit cost | $ | (54,810 | ) | $ | (61,377 | ) | $ | (13,596 | ) | $ | (11,775 | ) | ||||
Amounts recognized in consolidated balance sheet at | ||||||||||||||||
Accrued benefit liability | $ | (54,810 | ) | $ | (61,377 | ) | $ | (13,596 | ) | $ | (11,775 | ) | ||||
Additional minimum liability |
| (7,756 | ) |
| — |
|
| — |
|
| — |
| ||||
Intangible asset |
| 7,756 |
|
| — |
|
| — |
|
| — |
| ||||
Accrued benefit cost | $ | (54,810 | ) | $ | (61,377 | ) | $ | (13,596 | ) | $ | (11,775 | ) | ||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accrued expenses on the consolidated balance sheets include accrued qualified defined benefit pension plan liabilities of $35,196,000 and $53,991,000 as of December 31, 2002 and 2001, respectively. Long-term postretirement liabilities include postretirement healthcare and remaining qualified defined benefit pension plan liabilities and additional minimum liabilities of $40,966,000 and $19,161,000 as of December 31, 2002 and 2001, respectively. Intangible assets of $7,756,000 are included in equipment deposits and other assets as of December 31, 2002. No additional minimum liabilities or intangible assets were recorded for these plans as of December 31, 2001.
Net periodic benefit cost consists of the following components (in thousands):
Pension Plans | Postretirement Healthcare Plans | |||||||||||||||||||||
Year Ended December 31 | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||||||
Service cost | $ | 24,607 |
| $ | 22,616 |
| $ | 17,309 |
| $ | 1,126 | $ | 898 | $ | 948 |
| ||||||
Interest cost |
| 21,279 |
|
| 17,353 |
|
| 13,379 |
|
| 987 |
| 917 |
| 700 |
| ||||||
Expected return on plan assets |
| (10,341 | ) |
| (8,752 | ) |
| (7,926 | ) |
| — |
| — |
| — |
| ||||||
Net amortization and deferral |
| 9,777 |
|
| 7,107 |
|
| 4,828 |
|
| 34 |
| 157 |
| (101 | ) | ||||||
Net periodic benefit cost | $ | 45,322 |
| $ | 38,324 |
| $ | 27,590 |
| $ | 2,147 | $ | 1,972 | $ | 1,547 |
| ||||||
Assumptions used in determining pension and postretirement healthcare obligations were as follows:
Pension Plans | Postretirement Healthcare Plans | |||||||||||
2002 | 2001 | 2000 | 2002 | 2001 | 2000 | |||||||
Discount rate (for qualified and nonqualified plans) | 6.75% | 7.25% | 7.25% | 6.75% | 7.25% | 7.25% | ||||||
Expected return on plan assets | 8.00% | 8.00% | 8.00% | — | — | — | ||||||
Rate of compensation increase (pilots) | 5.00% | 6.50% | 6.50% | — | — | — | ||||||
Rate of compensation increase (non-pilots) | 4.00% | 5.00% | 5.00% | — | — | — |
Effective January 1, 2002, the Company amended its qualified retirement plans to incorporate the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). EGTRRA, among other things, increased the limits of covered compensation considered under the qualified plans benefit formulas. The effect of the amendment is to increase benefit obligations funded through the qualified plans and reduce obligations funded through Company sponsored non-qualified plans.
The projected benefit obligation (“PBO”) as of a date is the actuarial present value of all benefits attributed to a plan’s benefit formula to employee service rendered to that date, including the effects of estimated future compensation increases. Alternatively, the accumulated benefit obligation (“ABO”) is the actuarial present value of benefits attributed by a plan’s benefit formula to employee service rendered prior to a date and is based on current and past compensation levels and does not consider future compensation increases. The Company considers the ABO a more meaningful measure of accrued liabilities for purposes of determining funding adequacy. As of December 31, 2002, the Company’s qualified plans had funded plan assets plus accrued liabilities at least equal to the ABO but less than the PBO.
In addition to qualified defined benefit plans, the Company has a defined contribution profit sharing plan. Retirement income has historically been provided to employees through the coordination of benefits accumulated and funded through the combination of the defined benefit and profit sharing plans. Generally, benefit levels calculated under defined benefit plan formulas are offset by amounts contributed and earned in an employee’s profit sharing account. In 2000, plan amendments were adopted that provided for an increase in retirement income levels provided under the defined benefit plans and discontinued future contributions to an employee’s account (with the exception of contributions for the Company’s pilots) in the profit sharing plan. Previous contributions and earnings accumulated under the profit sharing plan prior to the amendments as well as future account earnings will continue to be coordinated with benefits accrued under the defined benefit plans. These amendments had the effect of increasing accumulated and projected benefit obligations under the defined benefit plans. Qualified plan assets and accumulated and projected benefit obligation amounts shown above exclude $116,614,000 and $133,480,000 as of December 31, 2002 and 2001, respectively, of assets held and obligations
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accrued under the profit sharing plan. If these assets and obligations were combined with the defined benefit plans, the Company’s funded ratio, as measured by the sum of the fair value of qualified defined benefit and profit sharing plan assets divided by the sum of projected benefit obligations and profit sharing obligations, would be 58.6% and 60.3% at December 31, 2002 and 2001, respectively. The Company’s funded ratio when substituting accumulated benefit obligations for projected benefit obligations in the above calculation, would be 81.3% and 86.9% at December 31, 2002 and 2001, respectively.
The Company also sponsors several non-qualified defined benefit pension plans. The accumulated benefit obligation of these plans was $18,884,000 and $20,444,000 as of December 31, 2002 and 2001, respectively. Postretirement liabilities include accruals relating to these plans of $10,805,000 and $14,504,000 as of December 31, 2002 and 2001, respectively. The Company has invested in certain commingled investment funds that may be used for funding non-qualified pension plan obligations.
The Company also recorded additional minimum liabilities associated with its non-qualified defined benefit pension plans. Additional minimum liabilities of $8,079,000 and $5,942,000 are included in postretirement liabilities and an intangible asset of $858,000 and $1,800,000 is included in other assets as of December 31, 2002 and 2001, respectively. Other comprehensive income and accumulated other comprehensive income (loss) include charges of $3,081,000 and $4,142,000 for the years ended December 31, 2002 and 2001, respectively. No additional minimum liabilities or other comprehensive income charges were recorded for the year ended December 31, 2000.
The assumed healthcare cost trend rate used in measuring postretirement healthcare benefit costs was 10.0% for 2002, decreasing each year by 1.0% until it reaches a 5.0% annual growth rate in 2007. A 1% increase or decrease in the assumed healthcare cost trend rate for each year would not have a material effect on the accumulated postretirement benefit obligation or cost as of or for the year ended December 31, 2002. Postretirement healthcare plan obligations have not been funded.
The Company maintains defined contribution capital accumulation plans (401k) that are funded by both voluntary employee salary deferrals of up to 20% of annual compensation and by employer matching contributions on employee salary deferrals of up to 6% of annual compensation. The Company also has a defined contribution profit sharing plan which is coordinated and used to offset obligations accrued under the qualified defined benefit plans. Contributions to this Itemplan, except for the Company’s pilots, were discontinued in 2000. The profit sharing plans hold 1,078,382 shares of the Company’s common stock at December 31, 2002, representing 2% of outstanding shares. Expense for these plans is as follows (in thousands):
Year Ended December 31 | |||||||||
2002 | 2001 | 2000 | |||||||
Capital accumulation plans | $ | 8,041 | $ | 7,919 | $ | 7,970 | |||
Profit sharing plans |
| 441 |
| — |
| 380 | |||
Defined contribution plans | $ | 8,482 | $ | 7,919 | $ | 8,350 | |||
The Company contributes to multi-employer defined benefit pension plans and health and welfare plans for substantially all employees covered under collective bargaining agreements. Expense for these plans is as follows (in thousands):
Year Ended December 31 | |||||||||
2002 | 2001 | 2000 | |||||||
Multi-employer defined benefit pension plans | $ | 48,341 | $ | 46,454 | $ | 45,668 | |||
Multi-employer health and welfare plans |
| 52,263 |
| 51,215 |
| 49,113 | |||
Multi-employer plans | $ | 100,604 | $ | 97,669 | $ | 94,781 | |||
NOTE J—STOCK OPTIONS
The Company has four shareholder approved stock option plans for the issuance of qualified and nonqualified stock options. Three of these plans, approved by the shareholders in 1989, 1994 and 1998 (the “1989 Plan”, “1994 Plan” and “1998
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Plan”), reserve shares of the Company’s common stock for issuance to officers and key employees. Options granted under the 1994 Plan vest over a three-year period. A nominal number of fully vested options are outstanding under the 1989 Plan. Options granted under the 1998 Plan include options which vest over a four year period and performance options issued to the Company’s executive officers which vest upon attainment of specified market price targets of the Company’s common stock. A fourth plan, the 2000 Directors’ Stock Option Plan, provides for annual grants to the Company’s non-employee directors of options for 2,000 shares that vest fully on the date of grant. A fifth plan, effective in 2002 and not approved by shareholders, provided for a one-time grant to each of two retiring executive officers of a fully vested five-year option to acquire 100,000 shares. The options granted under these five plans have exercise prices equal to the fair market value of the Company’s stock on the date of grant and terms of up to ten years. A total of 7,907,250 shares may be granted under these plans. There were 2,979,088 shares available for future grants as of December 31, 2002.
A summary of the Company’s stock option activity and related information is as follows:
Year Ended December 31 | |||||||||
2002 | 2001 | 2000 | |||||||
Outstanding at beginning of year | 3,738,935 |
| 3,332,317 |
| 2,819,847 |
| |||
Granted | 936,000 |
| 731,000 |
| 746,200 |
| |||
Exercised | (332,627 | ) | (101,447 | ) | (116,485 | ) | |||
Canceled | (166,348 | ) | (222,935 | ) | (117,245 | ) | |||
Outstanding at end of year | 4,175,960 |
| 3,738,935 |
| 3,332,317 |
| |||
Exercisable at end of year | 2,765,443 |
| 2,216,602 |
| 1,977,390 |
| |||
Weighted average exercise price information is as follows:
Year Ended December 31 | |||||||||
2002 | 2001 | 2000 | |||||||
Outstanding at beginning of year | $ | 22.40 | $ | 24.44 | $ | 25.35 | |||
Granted |
| 15.60 |
| 12.00 |
| 18.94 | |||
Exercised |
| 13.18 |
| 11.60 |
| 10.74 | |||
Canceled |
| 28.06 |
| 23.68 |
| 25.07 | |||
Outstanding at end of year |
| 21.38 |
| 22.40 |
| 24.44 | |||
Exercisable at end of year |
| 23.94 |
| 23.63 |
| 21.65 |
Information related to the number of options outstanding, weighted average price per share and remaining life of significant option groups outstanding at December 31, 2002, is as follows:
Outstanding | Exercisable | |||||||||||||
Price Range | Number | Average Price | Life in Years | Number | Average Price | Life in Years | ||||||||
$11.13-$12.00 | 849,471 | $ | 11.91 | 6.91 | 430,976 | $ | 11.81 | 5.75 | ||||||
$13.00-$18.94 | 2,117,828 |
| 16.31 | 6.56 | 1,211,888 |
| 16.31 | 5.62 | ||||||
$31.06-$38.13 | 1,208,661 |
| 36.93 | 5.59 | 1,122,579 |
| 36.84 | 5.56 |
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K—EARNINGS PER SHARE
Net earnings (loss) and average shares used in basic and diluted earnings per share calculations were as follows (in thousands except per share data):
Year Ended December 31 | ||||||||||
2002 | 2001 | 2000 | ||||||||
NET EARNINGS (LOSS): | ||||||||||
Earnings (loss) before cumulative effect of change in accounting principle | $ | 14,843 | $ | (19,458 | ) | $ | 14,286 | |||
SHARES: | ||||||||||
Basic weighted average shares outstanding |
| 48,360 |
| 48,105 |
|
| 48,396 | |||
Stock options |
| 272 |
| — |
|
| 251 | |||
Diluted weighted average shares outstanding |
| 48,632 |
| 48,105 |
|
| 48,647 | |||
EARNINGS (LOSS) PER SHARE (before cumulative effect of change in accounting): | ||||||||||
Basic | $ | .31 | $ | (.40 | ) | $ | .30 | |||
Diluted | $ | .31 | $ | (.40 | ) | $ | .30 | |||
The above calculations of earnings (loss) per diluted share for 2002, 2001 and 2000 exclude 2,458,000, 3,797,000 and 2,131,000, respectively, of common shares issuable under stock option plans because the options’ exercise price was greater than the average market price of the common shares. Additionally, the 6,413,985 common shares issuable upon conversion of the Company’s convertible senior notes were excluded from earnings per diluted share calculations in 2002 because they were anti-dilutive.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L—SEGMENT INFORMATION
The Company has organized its business into domestic and international operating segments. The domestic segment derives its revenues from the door-to-door delivery of small packages and documents throughout the United States, Canada and Puerto Rico. Domestic operations are supported principally by Company operated aircraft and facilities. The international segment derives its revenues from express door-to-door delivery and a variety of freight services. International revenues are recognized on shipments where the origin and/or destination is outside of locations supported by the domestic segment. The Company uses a variable cost approach in delivering international services through use of existing commercial airline capacity in connection with its domestic network and independent express and freight agents in locations not currently served by Company-owned foreign operations.
The following is a summary of key segment information (in thousands):
Domestic | International | Total | ||||||||||
2002 | ||||||||||||
Revenues | $ | 2,978,242 |
| $ | 365,494 |
| $ | 3,343,736 |
| |||
Depreciation and amortization |
| 190,127 |
|
| 1,297 |
|
| 191,424 |
| |||
Segment earnings from operations |
| 53,774 |
|
| 3,928 |
|
| 57,702 |
| |||
Segment assets |
| 1,787,761 |
|
| 91,325 |
|
| 1,879,086 |
| |||
Expenditures for property and equipment |
| 107,409 |
|
| 1,004 |
|
| 108,413 |
| |||
2001 | ||||||||||||
Revenues | $ | 2,859,514 |
| $ | 360,291 |
| $ | 3,219,805 |
| |||
Depreciation and amortization |
| 206,808 |
|
| 1,547 |
|
| 208,355 |
| |||
Segment loss from operations |
| (9,224 | ) |
| (3,107 | ) |
| (12,331 | ) | |||
Segment assets |
| 1,668,736 |
|
| 78,108 |
|
| 1,746,844 |
| |||
Expenditures for property and equipment |
| 124,769 |
|
| 971 |
|
| 125,740 |
| |||
2000 | ||||||||||||
Revenues | $ | 2,902,002 |
| $ | 380,132 |
| $ | 3,282,134 |
| |||
Depreciation and amortization |
| 204,913 |
|
| 1,493 |
|
| 206,406 |
| |||
Segment earnings (loss) from operations |
| 49,915 |
|
| (7,297 | ) |
| 42,618 |
| |||
Segment assets |
| 1,661,075 |
|
| 84,844 |
|
| 1,745,919 |
| |||
Expenditures for property and equipment |
| 365,604 |
|
| 2,258 |
|
| 367,862 |
|
International operations are supported in the United States by pickup and delivery, customer service and airline capabilities provided by the domestic segment. Management allocates these costs, generally on a per shipment basis, to the international segment.
Management considers other income and expense, and income taxes as corporate items and, accordingly, does not allocate these amounts to the operating segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
A substantial portion of international revenue is associated with shipments originating within the United States ($164,858,000 in 2002, $184,516,000 in 2001 and $211,835,000 in 2000). Long lived assets located within the United States and included within the international segment were $4,293,000, $5,188,000 and $6,382,000 as of December 31, 2002, 2001 and 2000, respectively.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M—FEDERAL LEGISLATION COMPENSATION
In the aftermath of the terrorist attacks of September 11, Congress passed the Air Transportation Safety and System Stabilization Act (“Act”), an emergency economic assistance package designed to help air carriers mitigate losses resulting from the two-day closure of the national air system. The Act provided $5 billion in compensation to eligible passenger and cargo air carriers for certain direct losses incurred due to the air system closure and incremental losses incurred through December 31, 2001. Cargo air carriers were allocated $500,000,000 of the total compensation provided by the Act, with individual carriers eligible to receive amounts to the extent of the lesser of actual losses or a formula allocation based upon revenue ton-miles flown. The Company, as an eligible air carrier under the Act, recognized compensation of $13,000,000 in 2001 and included this amount under a separate caption in the statement of operations as an offset to operating expenses. Proceeds received under the Act totaled $8,800,000 as of December 31, 2002. In April 2002, the Department of Transportation (“DOT”) issued final rules governing the process and content of final filings that support carriers’ compensation claims. The Company completed and filed its final filing along with required audit schedules and has had discussions with applicable government agencies regarding these filings. While the Company believes it has complied with the provisions of the Act, these agencies have raised exceptions concerning the treatment of certain compensations items. The final amount of proceeds the Company realizes is subject to resolution of the exceptions and possible completions of further review and audit procedures by the DOT or other applicable government agencies. The Company cannot be assured of the ultimate outcome of these reviews, but it is possible that a reduction of the amount of compensation previously recognized could occur. The Company estimates the range of compensation ultimately realized will be between $11.0 million and $15.0 million.
NOTE N—OTHER INCOME
In 2002, the Company sold its entire equity interest in one of its international agents and realized a gain of $1,656,000. The gain is included in other income on the consolidated statement of operations.
The Company recorded gains of $9,295,000 in 2001 from the sales of FCC licensed radio frequencies which are included in other income on the consolidated statements of operations. The Company is in the process of converting from voice to digital pickup and delivery communications technology that has allowed it to sell these frequencies.
The Company is a participating member of SITA, a cooperative of major airline companies, which primarily provides data communication services to the air transport industry. Through this membership the Company held depository certificates in The SITA Foundation (“Foundation”) whose principal asset was an equity interest in Equant, N.V. (“Equant”), an international data network services company. The Company sold its interest in Equant in two transactions completed in July 2001 and December 1999. The Company recognized a gain of $2,117,000 in 2001 on the completion of the second transaction and recorded the amount in other income on the consolidated statements of operations.
NOTE O—RESTRUCTURING CHARGE
In 2002, the Company announced it was taking steps to reduce costs through realignment of operations and reduction of personnel and overhead expenses both in the U.S. and overseas. The Company recorded a restructuring charge of $3,217,000 in general and administrative expense in connection with such realignment. A total of approximately 230 employees located at the Company’s station operations were terminated and provided severance benefits totaling $1,975,000, of which $1,755,000 had been paid at December 31, 2002. An additional $1,242,000 was accrued for lease costs, net of estimated sublease income, for the closure of certain facilities, of which $494,000 had been paid at December 31, 2002.
NOTE P—BUSINESS ACQUISITION
In June 2002, the Company acquired 100% of the outstanding common stock of Pagtrans SA, a French international transportation service company providing air express, air freight, ocean freight, logistics and customs brokerage services. Since 1997, Pagtrans SA has been the Company’s independent service agent in France. The acquisition price was $700,000, including direct costs, of which $108,000 has been paid as of December 31, 2002.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recorded assets and liabilities (primarily current assets and liabilities) of approximately $6,649,000 and $6,586,000, respectively, as of the purchase date in connection with the transaction and goodwill of approximately $415,000. The operating results of Pagtrans have been included in the Company’s results of operations since the acquisition date. Revenues recorded in 2002 since the acquisition date were $7,177,000. The proforma effects of this acquisition on the Company’s results of operations for 2002 and 2001 were immaterial.
NOTE Q—OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes the following transactions and tax effects for the years ended December 31, 2002, 2001 and 2000, respectively (in thousands):
Before Tax | Income Tax (Expense) or Benefit | Net of Tax | ||||||||||
2002 | ||||||||||||
Unrealized securities losses arising during the period | $ | (606 | ) | $ | 234 |
| $ | (372 | ) | |||
Less: Reclassification adjustment for gains realized in net earnings |
| (1,506 | ) |
| 580 |
|
| (926 | ) | |||
Net unrealized securities losses |
| (2,112 | ) |
| 814 |
|
| (1,298 | ) | |||
Unrealized loss on interest rate swap arising during the periods |
| (6,229 | ) |
| 2,398 |
|
| (3,831 | ) | |||
Less: Reclassification adjustment for losses realized in net earnings |
| 1,628 |
|
| (627 | ) |
| 1,001 |
| |||
Net unrealized loss on interest rate swap |
| (4,601 | ) |
| 1,771 |
|
| (2,830 | ) | |||
Foreign currency translation adjustments |
| 234 |
|
| (90 | ) |
| 144 |
| |||
Minimum pension liabilities |
| (3,081 | ) |
| 1,186 |
|
| (1,895 | ) | |||
Fuel hedge option |
| (260 | ) |
| 100 |
|
| (160 | ) | |||
Other comprehensive loss | $ | (9,820 | ) | $ | 3,781 |
| $ | (6,039 | ) | |||
2001 | ||||||||||||
Unrealized securities losses arising during the period | $ | (584 | ) | $ | 225 |
| $ | (359 | ) | |||
Less: Reclassification adjustment for gains realized in net loss |
| (32 | ) |
| 12 |
|
| (20 | ) | |||
Net unrealized securities losses |
| (616 | ) |
| 237 |
|
| (379 | ) | |||
Unrealized gain on interest rate swap arising during the periods |
| 853 |
|
| (329 | ) |
| 524 |
| |||
Less: Reclassification adjustment for losses realized in net loss |
| 166 |
|
| (64 | ) |
| 102 |
| |||
Net unrealized gain on interest rate swap |
| 1,019 |
|
| (393 | ) |
| 626 |
| |||
Foreign currency translation adjustments |
| (588 | ) |
| 204 |
|
| (384 | ) | |||
Minimum pension liabilities |
| (4,142 | ) |
| 1,595 |
|
| (2,547 | ) | |||
Other comprehensive loss | $ | (4,327 | ) | $ | 1,643 |
| $ | (2,684 | ) | |||
2000 | ||||||||||||
Unrealized securities losses arising during the period | $ | (132 | ) | $ | 50 |
| $ | (82 | ) | |||
Less: Reclassification adjustment for gains realized in net earnings |
| (1,117 | ) |
| 430 |
|
| (687 | ) | |||
Net unrealized securities losses |
| (1,249 | ) |
| 480 |
|
| (769 | ) | |||
Foreign currency translation adjustments |
| (465 | ) |
| 180 |
|
| (285 | ) | |||
Other comprehensive loss | $ | (1,714 | ) | $ | 660 |
| $ | (1,054 | ) | |||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE R—QUARTERLY RESULTS (Unaudited)
The following is a summary of quarterly results of operations (in thousands except per share data):
2002 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||
Revenues | $ | 790,592 |
| $ | 811,923 |
| $ | 844,389 |
| $ | 896,832 | ||||
Earnings from operations |
| 15,193 |
|
| 9,135 |
|
| 3,384 |
|
| 29,990 | ||||
Net earnings (loss) |
| 5,268 |
|
| 457 |
|
| (3,058 | ) |
| 12,176 | ||||
Earnings (loss) per share: | |||||||||||||||
Basic | $ | .11 |
| $ | .01 |
| $ | (.06 | ) | $ | .25 | ||||
Diluted | $ | .11 |
| $ | .01 |
| $ | (.06 | ) | $ | .25 | ||||
2001 | |||||||||||||||
Revenues | $ | 825,662 |
| $ | 814,721 |
| $ | 774,899 |
| $ | 804,523 | ||||
Earnings (loss) from operations |
| (18,285 | ) |
| (5,160 | ) |
| 1,423 |
|
| 9,691 | ||||
Net earnings (loss) |
| (16,995 | ) |
| (6,361 | ) |
| 1,713 |
|
| 2,185 | ||||
Earnings (loss) per share: | |||||||||||||||
Basic | $ | (.35 | ) | $ | (.13 | ) | $ | .04 |
| $ | .05 | ||||
Diluted | $ | (.35 | ) | $ | (.13 | ) | $ | .04 |
| $ | .05 |
NOTE S—SUPPLEMENTAL GUARANTOR INFORMATION—SENIOR NOTES
In connection with the issuance of $100,000,000 of 7.35% Senior Notes (Notes) by Airborne Express, Inc. (AEI), certain subsidiaries (collectively, “Guarantors”) of the Company have fully and unconditionally guaranteed, on a joint and several basis, the obligations to pay principal, premium, if any, and interest with respect to the Notes. The Guarantors are ABX Air Inc. (“ABX”) and Sky Courier, Inc. (“SKY”), which are wholly-owned subsidiaries of the Company, and Airborne FTZ Inc. (“FTZ”) and Wilmington Air Park Inc. (“WAP”), which are wholly-owned subsidiaries of ABX.
AEI provides domestic and international delivery services in addition to performing customer service, sales and marketing activities. ABX is a certificated air carrier that owns and operates the domestic express cargo services for which AEI is the sole customer. ABX also offers air charter services on a limited basis to third-party customers. FTZ owns certain aircraft parts inventories that it sells primarily to ABX but also has limited sales to third-party customers. FTZ is also the holder of a foreign trade zone certificate at Wilmington airport property. WAP is the owner of the Wilmington airport property, which includes the Company’s main sort facility, aircraft maintenance facilities, runways and related airport facilities and airline administrative and training facilities. ABX is the only occupant and customer of WAP. SKY provides expedited courier services and regional logistics warehousing primarily to third-party customers.
Revenues and net earnings recorded by ABX, FTZ, and WAP are controlled by the Company and are based on various discretionary factors. Investment balances and revenues between Guarantors have been eliminated for purposes of presenting the financial information below. Intercompany advances and liabilities represent net amounts due between the various entities. The Company provides its subsidiaries with a majority of the cash necessary to fund operating and capital expenditure requirements.
The Company’s revolving bank credit agreement imposes certain restrictions on loans made by the Company, AEI and ABX to certain nonguarantor subsidiaries. Loans to these subsidiaries must be approved by the agent for such credit agreement to the extent that these loans, together with certain other non-permitted investments, exceed $20.0 million.
Further, the agreement governing the Company’s accounts receivable securitization facility prohibits Airborne Credit, Inc. (“ACI”), the subsidiary of the Company that sells accounts receivable under that facility, from making any loans. The agreement generally allows ACI to pay dividends to the Company, so long as ACI maintains minimum net worth levels ($21.5 million as of December 31, 2002).
Except as described above, there are no contractual restrictions on the ability of the Company, AEI or any of the Guarantors to borrow money or receive dividends from any of their respective subsidiaries, or on the ability of such subsidiaries to make loans or pay dividends to their respective parents.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following are consolidating condensed statements of operations of the Company for the years ended December 31, 2002, 2001 and 2000, the consolidating condensed balance sheets as of December 31, 2002 and 2001, and the consolidating condensed statements of cash flows for the years ended December 31, 2002, 2001 and 2000.
Statements of Operations Information:
Year ended December 31, 2002 | Airborne Express, Inc. | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | 3,282,252 |
| $ | — |
| $ | 61,484 |
| $ | — |
| $ | 3,343,736 |
| |||||
Operating expenses: | ||||||||||||||||||||
Transportation purchased |
| 2,006,038 |
|
| — |
|
| (902,215 | ) |
| — |
|
| 1,103,823 |
| |||||
Station and ground operations |
| 924,100 |
|
| — |
|
| 175,322 |
|
| — |
|
| 1,099,422 |
| |||||
Flight operations and maintenance |
| (745 | ) |
| — |
|
| 529,502 |
|
| (2,411 | ) |
| 526,346 |
| |||||
General and administrative |
| 200,714 |
|
| 1,388 |
|
| 71,799 |
|
| 166 |
|
| 274,067 |
| |||||
Sales and marketing |
| 90,117 |
|
| — |
|
| 835 |
|
| — |
|
| 90,952 |
| |||||
Depreciation and amortization |
| 44,903 |
|
| — |
|
| 146,194 |
|
| 327 |
|
| 191,424 |
| |||||
| 3,265,127 |
|
| 1,388 |
|
| 21,437 |
|
| (1,918 | ) |
| 3,286,034 |
| ||||||
Earnings (loss) from operations |
| 17,125 |
|
| (1,388 | ) |
| 40,047 |
|
| 1,918 |
|
| 57,702 |
| |||||
Other income (expense): | ||||||||||||||||||||
Interest income |
| 5,132 |
|
| — |
|
| — |
|
| — |
|
| 5,132 |
| |||||
Interest expense |
| (27,143 | ) |
| — |
|
| (7,542 | ) |
| — |
|
| (34,685 | ) | |||||
Discount on sales of receivables |
| (4,007 | ) |
| — |
|
| (1 | ) |
| (42 | ) |
| (4,050 | ) | |||||
Other |
| 2,872 |
|
| — |
|
| — |
|
| — |
|
| 2,872 |
| |||||
Earnings (loss) before income taxes |
| (6,021 | ) |
| (1,388 | ) |
| 32,504 |
|
| 1,876 |
|
| 26,971 |
| |||||
Income tax benefit (expense) |
| 43 |
|
| 486 |
|
| (13,342 | ) |
| 685 |
|
| (12,128 | ) | |||||
Net earnings (loss) | $ | (5,978 | ) | $ | (902 | ) | $ | 19,162 |
| $ | 2,561 |
| $ | 14,843 |
| |||||
Year ended December 31, 2001 | Airborne Express, Inc. | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | 3,135,276 |
| $ | — |
| $ | 84,529 |
| $ | — |
| $ | 3,219,805 |
| |||||
Operating expenses: | ||||||||||||||||||||
Transportation purchased |
| 1,969,341 |
|
| — |
|
| (922,387 | ) |
| — |
|
| 1,046,954 |
| |||||
Station and ground operations |
| 919,955 |
|
| — |
|
| 156,668 |
|
| — |
|
| 1,076,623 |
| |||||
Flight operations and maintenance |
| (852 | ) |
| — |
|
| 560,716 |
|
| (2,452 | ) |
| 557,412 |
| |||||
General and administrative |
| 184,873 |
|
| 668 |
|
| 79,696 |
|
| 165 |
|
| 265,402 |
| |||||
Sales and marketing |
| 89,170 |
|
| — |
|
| 1,220 |
|
| — |
|
| 90,390 |
| |||||
Depreciation and amortization |
| 49,570 |
|
| 163 |
|
| 158,298 |
|
| 324 |
|
| 208,355 |
| |||||
Federal legislation compensation |
| (13,000 | ) |
| — |
|
| — |
|
| — |
|
| (13,000 | ) | |||||
| 3,199,057 |
|
| 831 |
|
| 34,211 |
|
| (1,963 | ) |
| 3,232,136 |
| ||||||
Earnings (loss) from operations |
| (63,781 | ) |
| (831 | ) |
| 50,318 |
|
| 1,963 |
|
| (12,331 | ) | |||||
Other income (expense): | ||||||||||||||||||||
Interest income |
| 1,696 |
|
| — |
|
| — |
|
| — |
|
| 1,696 |
| |||||
Interest expense |
| 837 |
|
| — |
|
| (22,401 | ) |
| — |
|
| (21,564 | ) | |||||
Dividend income |
| — |
|
| 20,000 |
|
| (20,000 | ) |
| — |
|
| — |
| |||||
Discount on sales of receivables |
| (11,375 | ) |
| — |
|
| — |
|
| 2,082 |
|
| (9,293 | ) | |||||
Other |
| 12,588 |
|
| — |
|
| — |
|
| — |
|
| 12,588 |
| |||||
Earnings (loss) before income taxes |
| (60,035 | ) |
| 19,169 |
|
| 7,917 |
|
| 4,045 |
|
| (28,904 | ) | |||||
Income tax benefit (expense) |
| 21,139 |
|
| 291 |
|
| (11,942 | ) |
| (42 | ) |
| 9,446 |
| |||||
Net earnings (loss) | $ | (38,896 | ) | $ | 19,460 |
| $ | (4,025 | ) | $ | 4,003 |
| $ | (19,458 | ) | |||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Operations Information:
Year ended December 31, 2000 | Airborne Express, Inc. | Guarantors | Non- guarantors | Elimination | Consolidated | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | 3,204,626 |
| $ | 1,187,164 |
| $ | 246 |
| $ | (1,109,902 | ) | $ | 3,282,134 |
| |||||
Operating expenses: | ||||||||||||||||||||
Transportation purchased |
| 1,966,993 |
|
| 185,293 |
|
| — |
|
| (1,109,745 | ) |
| 1,042,541 |
| |||||
Station and ground operations |
| 906,583 |
|
| 148,559 |
|
| — |
|
| — |
|
| 1,055,142 |
| |||||
Flight operations and maintenance |
| 1,025 |
|
| 590,455 |
|
| (2,741 | ) |
| (157 | ) |
| 588,582 |
| |||||
General and administrative |
| 202,110 |
|
| 62,066 |
|
| 157 |
|
| — |
|
| 264,333 |
| |||||
Sales and marketing |
| 81,287 |
|
| 1,225 |
|
| — |
|
| — |
|
| 82,512 |
| |||||
Depreciation and amortization |
| 52,638 |
|
| 153,485 |
|
| 283 |
|
| — |
|
| 206,406 |
| |||||
| 3,210,636 |
|
| 1,141,083 |
|
| (2,301 | ) |
| (1,109,902 | ) |
| 3,239,516 |
| ||||||
Earnings (loss) from operations |
| (6,010 | ) |
| 46,081 |
|
| 2,547 |
|
| — |
|
| 42,618 |
| |||||
Other income (expense): | ||||||||||||||||||||
Interest income |
| 371 |
|
| — |
|
| — |
|
| — |
|
| 371 |
| |||||
Interest expense |
| (11,247 | ) |
| (12,549 | ) |
| — |
|
| — |
|
| (23,796 | ) | |||||
Discount on sales of receivables |
| (145 | ) |
| — |
|
| 49 |
|
| — |
|
| (96 | ) | |||||
Other |
| 4,129 |
|
| — |
|
| — |
|
| — |
|
| 4,129 |
| |||||
Earnings (loss) before income taxes and change in accounting |
| (12,902 | ) |
| 33,532 |
|
| 2,596 |
|
| — |
|
| 23,226 |
| |||||
Income tax benefit (expense) |
| 4,208 |
|
| (12,238 | ) |
| (910 | ) |
| — |
|
| (8,940 | ) | |||||
Net earnings (loss) before change in accounting |
| (8,694 | ) |
| 21,294 |
|
| 1,686 |
|
| 14,286 |
| ||||||||
Cumulative effect of change in accounting |
| — |
|
| 14,206 |
|
| — |
|
| — |
|
| 14,206 |
| |||||
Net earnings (loss) | $ | (8,694 | ) | $ | 35,500 |
| $ | 1,686 |
| $ | — |
| $ | 28,492 |
| |||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balance Sheet Information:
December 31, 2002 | Airborne Express, Inc. | Airborne, Inc. | Guarantors | Non- guarantors | Elimination | Consolidated | |||||||||||||||||
(in thousands) | |||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 338,517 |
| $ | — |
| $ | 73 |
| $ | 1,310 | $ | — |
| $ | 339,900 |
| ||||||
Restricted cash |
| 36,333 |
|
| — |
|
| — |
|
| — |
| — |
|
| 36,333 |
| ||||||
Accounts receivable, less allowance |
| 31,314 |
|
| — |
|
| 8,314 |
|
| 130,252 |
| — |
|
| 169,880 |
| ||||||
Spare parts and fuel inventory |
| — |
|
| — |
|
| 33,600 |
|
| 2,623 |
| — |
|
| 36,223 |
| ||||||
Refundable income taxes |
| 627 |
|
| — |
|
| — |
|
| — |
| — |
|
| 627 |
| ||||||
Deferred income tax assets |
| 32,444 |
|
| — |
|
| — |
|
| — |
| — |
|
| 32,444 |
| ||||||
Prepaid expenses and other |
| 16,494 |
|
| — |
|
| 14,647 |
|
| 263 |
| — |
|
| 31,404 |
| ||||||
Total current assets |
| 455,729 |
|
| — |
|
| 56,634 |
|
| 134,448 |
| — |
|
| 646,811 |
| ||||||
Property and equipment, net |
| 92,401 |
|
| — |
|
| 1,085,093 |
|
| 3,936 |
| — |
|
| 1,181,430 |
| ||||||
Intercompany advances |
| — |
|
| 230,137 |
|
| 34,818 |
|
| 89,498 |
| (354,453 | ) |
| — |
| ||||||
Equipment deposits and other assets |
| 31,565 |
|
| 225,532 |
|
| 8,850 |
|
| 10 |
| (215,112 | ) |
| 50,845 |
| ||||||
Total assets | $ | 579,695 |
| $ | 455,669 |
| $ | 1,185,395 |
| $ | 227,892 | $ | (569,565 | ) | $ | 1,879,086 |
| ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable | $ | 106,826 |
| $ | — |
| $ | 50,934 |
| $ | 3,045 | $ | (33 | ) | $ | 160,772 |
| ||||||
Salaries, wages and related taxes |
| 57,507 |
|
| — |
|
| 37,074 |
|
| — |
| — |
|
| 94,581 |
| ||||||
Accrued expenses |
| 123,972 |
|
| 2,181 |
|
| 5,678 |
|
| 913 |
| — |
|
| 132,744 |
| ||||||
Income taxes payable |
| 4,912 |
|
| — |
|
| — |
|
| — |
| — |
|
| 4,912 |
| ||||||
Current portion of long-term obligations |
| 3,306 |
|
| — |
|
| 7,066 |
|
| — |
| — |
|
| 10,372 |
| ||||||
Total current liabilities |
| 296,523 |
|
| 2,181 |
|
| 100,752 |
|
| 3,958 |
| (33 | ) |
| 403,381 |
| ||||||
Long-term obligations |
| 113,014 |
|
| 150,000 |
|
| 107,077 |
|
| — |
| — |
|
| 370,091 |
| ||||||
Intercompany liabilities |
| 39,652 |
|
| — |
|
| 314,768 |
|
| — |
| (354,420 | ) |
| — |
| ||||||
Deferred income tax liabilities |
| (4,183 | ) |
| — |
|
| 149,972 |
|
| 532 |
| — |
|
| 146,321 |
| ||||||
Postretirement liabilities |
| 27,567 |
|
| — |
|
| 32,153 |
|
| — |
| — |
|
| 59,720 |
| ||||||
Other liabilities |
| 60,410 |
|
| — |
|
| — |
|
| — |
| — |
|
| 60,410 |
| ||||||
Common stock |
| 1 |
|
| 51,658 |
|
| (9 | ) |
| 120 |
| (112 | ) |
| 51,658 |
| ||||||
Additional paid-in capital |
| — |
|
| 308,813 |
|
| (753 | ) |
| 215,753 |
| (215,000 | ) |
| 308,813 |
| ||||||
Retained earnings |
| 55,570 |
|
| 2,875 |
|
| 481,435 |
|
| 7,529 |
| — |
|
| 547,409 |
| ||||||
Accumulated other comprehensive loss |
| (8,859 | ) |
| — |
|
| — |
|
| — |
| — |
|
| (8,859 | ) | ||||||
Treasury stock |
| — |
|
| (59,858 | ) |
| — |
|
| — |
| — |
|
| (59,858 | ) | ||||||
Total shareholders’ equity |
| 46,712 |
|
| 303,488 |
|
| 480,673 |
|
| 223,402 |
| (215,112 | ) |
| 839,163 |
| ||||||
Total liabilities and shareholders’ equity | $ | 579,695 |
| $ | 455,669 |
| $ | 1,185,395 |
| $ | 227,892 | $ | (569,565 | ) | $ | 1,879,086 |
| ||||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balance Sheet Information:
December 31, 2001 | Airborne Express, Inc. | Airborne, Inc. | Guarantors | Non- guarantors | Elimination | Consolidated | |||||||||||||||||
(in thousands) | |||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 191,629 |
| $ | — |
| $ | 607 |
| $ | 9,264 | $ | — |
| $ | 201,500 |
| ||||||
Accounts receivable, less allowance |
| 18,706 |
|
| — |
|
| 10,113 |
|
| 97,289 |
| (68 | ) |
| 126,040 |
| ||||||
Spare parts and fuel inventory |
| — |
|
| — |
|
| 36,272 |
|
| 2,141 |
| — |
|
| 38,413 |
| ||||||
Refundable income taxes |
| 27,161 |
|
| — |
|
| — |
|
| — |
| — |
|
| 27,161 |
| ||||||
Deferred income tax assets |
| 30,572 |
|
| — |
|
| — |
|
| — |
| — |
|
| 30,572 |
| ||||||
Prepaid expenses and other |
| 13,918 |
|
| — |
|
| 13,627 |
|
| 476 |
| — |
|
| 28,021 |
| ||||||
Total current assets |
| 281,986 |
|
| — |
|
| 60,619 |
|
| 109,170 |
| (68 | ) |
| 451,707 |
| ||||||
Property and equipment, net |
| 109,622 |
|
| — |
|
| 1,133,490 |
|
| 4,261 |
| — |
|
| 1,247,373 |
| ||||||
Intercompany advances |
| 157,681 |
|
| 187,278 |
|
| 12,949 |
|
| 12,884 |
| (370,972 | ) |
| — |
| ||||||
Equipment deposits and other assets |
| 31,078 |
|
| 120,964 |
|
| 16,224 |
|
| 10 |
| (120,512 | ) |
| 47,764 |
| ||||||
Total assets | $ | 580,367 |
| $ | 308,242 |
| $ | 1,223,282 |
| $ | 126,325 | $ | (491,372 | ) | $ | 1,746,844 |
| ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable | $ | 84,867 |
| $ | — |
| $ | 53,146 |
| $ | 4,552 | $ | (692 | ) | $ | 141,873 |
| ||||||
Salaries, wages and related taxes |
| 46,976 |
|
| — |
|
| 28,482 |
|
| — |
| — |
|
| 75,458 |
| ||||||
Accrued expenses |
| 139,132 |
|
| — |
|
| 6,261 |
|
| 604 |
| — |
|
| 145,997 |
| ||||||
Current portion of long-term obligations |
| 100,877 |
|
| — |
|
| 6,533 |
|
| — |
| — |
|
| 107,410 |
| ||||||
Total current liabilities |
| 371,852 |
|
| — |
|
| 94,422 |
|
| 5,156 |
| (692 | ) |
| 470,738 |
| ||||||
Long-term obligations |
| 103,951 |
|
| — |
|
| 114,102 |
|
| — |
| — |
|
| 218,053 |
| ||||||
Intercompany liabilities |
| — |
|
| — |
|
| 370,168 |
|
| — |
| (370,168 | ) |
| — |
| ||||||
Deferred income tax liabilities |
| (6,967 | ) |
| — |
|
| 150,164 |
|
| 329 |
| — |
|
| 143,526 |
| ||||||
Postretirement liabilities |
| 11,905 |
|
| — |
|
| 27,518 |
|
| — |
| — |
|
| 39,423 |
| ||||||
Other liabilities |
| 40,888 |
|
| — |
|
| — |
|
| — |
| — |
|
| 40,888 |
| ||||||
Common stock |
| 1 |
|
| 51,376 |
|
| (9 | ) |
| 120 |
| (112 | ) |
| 51,376 |
| ||||||
Additional paid-in capital |
| 8 |
|
| 304,976 |
|
| 3,171 |
|
| 115,753 |
| (118,924 | ) |
| 304,984 |
| ||||||
Retained earnings |
| 61,549 |
|
| 11,758 |
|
| 463,746 |
|
| 4,967 |
| (1,476 | ) |
| 540,544 |
| ||||||
Accumulated other comprehensive loss |
| (2,820 | ) |
| — |
|
| — |
|
| — |
| — |
|
| (2,820 | ) | ||||||
Treasury stock |
| — |
|
| (59,868 | ) |
| — |
|
| — |
| — |
|
| (59,868 | ) | ||||||
Total shareholders’ equity |
| 58,738 |
|
| 308,242 |
|
| 466,908 |
|
| 120,840 |
| (120,512 | ) |
| 834,216 |
| ||||||
Total liabilities and shareholders’ equity | $ | 580,367 |
| $ | 308,242 |
| $ | 1,223,282 |
| $ | 126,325 | $ | (491,372 | ) | $ | 1,746,844 |
| ||||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Cash Flows Information:
Year ended December 31, 2002 | Airborne Express, Inc. | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | |||||||||||||||
(in thousands) | ||||||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||||||
Net earnings (loss) | $ | (5,978 | ) | $ | (902 | ) | $ | 19,162 |
| $ | 2,561 |
| $ | 14,843 |
| |||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||||||
Non-cash operating activities |
| 155,762 |
|
| (219,568 | ) |
| 166,148 |
|
| 99,642 |
|
| 201,984 |
| |||||
Change in current assets and liabilities |
| 106,899 |
|
| 74,807 |
|
| (81,555 | ) |
| (110,155 | ) |
| (10,004 | ) | |||||
Net cash provided (used) by operating activities |
| 256,683 |
|
| (145,663 | ) |
| 103,755 |
|
| (7,952 | ) |
| 206,823 |
| |||||
INVESTING ACTIVITIES: | ||||||||||||||||||||
Net cash used by investing activities |
| (3,695 | ) |
| — |
|
| (97,797 | ) |
| (2 | ) |
| (101,494 | ) | |||||
FINANCING ACTIVITIES: | ||||||||||||||||||||
Net cash provided (used) by financing activities |
| (106,100 | ) |
| 145,663 |
|
| (6,492 | ) |
| — |
|
| 33,071 |
| |||||
Net increase (decrease) in cash and cash equivalents |
| 146,888 |
|
| — |
|
| (534 | ) |
| (7,954 | ) |
| 138,400 |
| |||||
Cash and cash equivalents at January 1 |
| 191,629 |
|
| — |
|
| 607 |
|
| 9,264 |
|
| 201,500 |
| |||||
Cash and cash equivalents at December 31 | $ | 338,517 |
| $ | — |
| $ | 73 |
| $ | 1,310 |
| $ | 339,900 |
| |||||
Year ended December 31, 2001 | Airborne Express, Inc. | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | |||||||||||||||
(in thousands) | ||||||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||||||
Net earnings (loss) | $ | (38,896 | ) | $ | 19,460 |
| $ | (4,025 | ) | $ | 4,003 |
| $ | (19,458 | ) | |||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||||||
Non-cash operating activities |
| 42,313 |
|
| 187 |
|
| 201,209 |
|
| (527 | ) |
| 243,182 |
| |||||
Change in current assets and liabilities |
| 196,511 |
|
| 62,311 |
|
| (200,893 | ) |
| 3,230 |
|
| 61,159 |
| |||||
Net cash provided (used) by operating activities |
| 199,928 |
|
| 81,958 |
|
| (3,709 | ) |
| 6,706 |
|
| 284,883 |
| |||||
INVESTING ACTIVITIES: | ||||||||||||||||||||
Net cash used by investing activities |
| (18,937 | ) |
| (163 | ) |
| (96,663 | ) |
| (258 | ) |
| (116,021 | ) | |||||
FINANCING ACTIVITIES: | ||||||||||||||||||||
Net cash provided (used) by financing activities |
| (26,885 | ) |
| (81,795 | ) |
| 100,928 |
|
| — |
|
| (7,752 | ) | |||||
Net increase in cash and cash equivalents |
| 154,106 |
|
| — |
|
| 556 |
|
| 6,448 |
|
| 161,110 |
| |||||
Cash and cash equivalents at January 1 |
| 37,523 |
|
| — |
|
| 51 |
|
| 2,816 |
|
| 40,390 |
| |||||
Cash and cash equivalents at December 31 | $ | 191,629 |
| $ | — |
| $ | 607 |
| $ | 9,264 |
| $ | 201,500 |
| |||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Cash Flows Information:
Year ended December 31, 2000 | Airborne Express, Inc. | Guarantors | Non- guarantors | Consolidated | ||||||||||||
(in thousands) | ||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net earnings (loss) | $ | (8,694 | ) | $ | 35,500 |
| $ | 1,686 |
| $ | 28,492 |
| ||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||
Non-cash operating activities |
| 84,304 |
|
| 155,996 |
|
| 283 |
|
| 240,583 |
| ||||
Change in current assets and liabilities |
| (32,245 | ) |
| 172,001 |
|
| 4,490 |
|
| 144,246 |
| ||||
Net cash provided by operating activities |
| 43,365 |
|
| 363,497 |
|
| 6,459 |
|
| 413,321 |
| ||||
INVESTING ACTIVITIES: | ||||||||||||||||
Net cash used by investing activities |
| (15,323 | ) |
| (363,102 | ) |
| (3,585 | ) |
| (382,010 | ) | ||||
FINANCING ACTIVITIES: | ||||||||||||||||
Net cash used by financing activities |
| (19,157 | ) |
| (442 | ) |
| — |
|
| (19,599 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
| 8,885 |
|
| (47 | ) |
| 2,874 |
|
| 11,712 |
| ||||
Cash and cash equivalents at January 1 |
| 28,638 |
|
| 99 |
|
| (59 | ) |
| 28,678 |
| ||||
Cash and cash equivalents at December 31 | $ | 37,523 |
| $ | 52 |
| $ | 2,815 |
| $ | 40,390 |
| ||||
NOTE T—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES
In March 2002, the Company issued $150 million of 5.75% convertible Senior notes due April 2007 (“Notes”). In connection with the issuance of these Notes, the Company and certain subsidiaries (collectively, “Guarantors”) have fully and unconditionally guaranteed, on a joint and several basis, the obligations to pay principal, premium, if any, and interest with respect to the Notes. The Guarantors are AEI, ABX, SKY, WAP, FTZ, Aviation Fuel, Inc. (“AFI”) and Sound Suppression, Inc. (“SSI”). AFI purchases and sells aviation and other fuels. SSI retrofits company aircraft with hush kits to meet noise regulations. A description of the operating activities of the other guarantors and their relationship to the Company is contained in Note S. Note S also contains a description of the 1996 Annual Reportintercompany loan and dividend restrictions that apply to Shareholdersthe Company and its subsidiaries.
The following are consolidating condensed statements of operations of the Company for the years ended December 31, 2002, 2001 and 2000, the consolidating condensed balance sheets as of December 31, 2002 and 2001, and the informationconsolidating condensed statements of cash flows for the years ended December 31, 2002, 2001 and 2000. A description regarding the basis of presenting these statements is contained thereinin Note S.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Operations Information:
Year ended December 31, 2002 | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | ||||||||||||
Revenues | $ | — |
| $ | 3,343,736 |
|
| — |
| $ | 3,343,736 |
| ||||
Operating expenses: | ||||||||||||||||
Transportation purchased |
| — |
|
| 1,103,823 |
|
| — |
|
| 1,103,823 |
| ||||
Station and ground operations |
| — |
|
| 1,099,422 |
|
| — |
|
| 1,099,422 |
| ||||
Flight operations and maintenance |
| — |
|
| 526,346 |
|
| — |
|
| 526,346 |
| ||||
General and administrative |
| 1,388 |
|
| 272,679 |
|
| — |
|
| 274,067 |
| ||||
Sales and marketing |
| — |
|
| 90,952 |
|
| — |
|
| 90,952 |
| ||||
Depreciation and amortization |
| — |
|
| 191,424 |
|
| — |
|
| 191,424 |
| ||||
| 1,388 |
|
| 3,284,646 |
|
| — |
|
| 3,286,034 |
| |||||
Earnings (loss) from operations |
| (1,388 | ) |
| 59,090 |
|
| — |
|
| 57,702 |
| ||||
Other income (expense): | ||||||||||||||||
Interest income |
| — |
|
| 5,132 |
|
| — |
|
| 5,132 |
| ||||
Interest expense |
| — |
|
| (34,685 | ) |
| — |
|
| (34,685 | ) | ||||
Discount on sales of receivables |
| — |
|
| (4,008 | ) |
| (42 | ) |
| (4,050 | ) | ||||
Other |
| — |
|
| 2,872 |
|
| — |
|
| 2,872 |
| ||||
Earnings (loss) before income taxes |
| (1,388 | ) |
| 28,401 |
|
| (42 | ) |
| 26,971 |
| ||||
Income tax benefit (expense) |
| 486 |
|
| (12,629 | ) |
| 15 |
|
| (12,128 | ) | ||||
Net earnings (loss) | $ | (902 | ) | $ | 15,772 |
| $ | (27 | ) | $ | 14,843 |
| ||||
Year ended December 31, 2001 | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | ||||||||||||
(in thousands) | ||||||||||||||||
Revenues | $ | — |
| $ | 3,219,805 |
| $ | — |
| $ | 3,219,805 |
| ||||
Operating expenses: | ||||||||||||||||
Transportation purchased |
| — |
|
| 1,046,954 |
|
| — |
|
| 1,046,954 |
| ||||
Station and ground operations |
| — |
|
| 1,076,623 |
|
| — |
|
| 1,076,623 |
| ||||
Flight operations and maintenance |
| — |
|
| 557,412 |
|
| — |
|
| 557,412 |
| ||||
General and administrative |
| 668 |
|
| 264,734 |
|
| — |
|
| 265,402 |
| ||||
Sales and marketing |
| — |
|
| 90,390 |
|
| — |
|
| 90,390 |
| ||||
Depreciation and amortization |
| 163 |
|
| 208,192 |
|
| — |
|
| 208,355 |
| ||||
Federal legislation compensation |
| — |
|
| (13,000 | ) |
| — |
|
| (13,000 | ) | ||||
| 831 |
|
| 3,231,305 |
|
| — |
|
| 3,232,136 |
| |||||
Loss from operations |
| (831 | ) |
| (11,500 | ) |
| — |
|
| (12,331 | ) | ||||
Other income (expense): | ||||||||||||||||
Interest income |
| — |
|
| 1,696 |
|
| — |
|
| 1,696 |
| ||||
Interest expense |
| — |
|
| (21,564 | ) |
| — |
|
| (21,564 | ) | ||||
Dividend income |
| 20,000 |
|
| (20,000 | ) |
| — |
|
| — |
| ||||
Discount on sales of receivables |
| — |
|
| (11,375 | ) |
| 2,082 |
|
| (9,293 | ) | ||||
Other |
| — |
|
| 12,588 |
|
| — |
|
| 12,588 |
| ||||
Earnings (loss) before income taxes |
| 19,169 |
|
| (50,155 | ) |
| 2,082 |
|
| (28,904 | ) | ||||
Income tax benefit (expense) |
| 291 |
|
| 9,884 |
|
| (729 | ) |
| 9,446 |
| ||||
Net earnings (loss) | $ | 19,460 |
| $ | (40,271 | ) | $ | 1,353 |
| $ | (19,458 | ) | ||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Operations Information:
Year ended December 31, 2000 | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | |||||||||||
(in thousands) | |||||||||||||||
Revenues | $ | — | $ | 3,282,134 |
| $ | — |
| $ | 3,282,134 |
| ||||
Operating expenses: | |||||||||||||||
Transportation purchased |
| — |
| 1,042,541 |
|
| — |
|
| 1,042,541 |
| ||||
Station and ground operations |
| — |
| 1,055,142 |
|
| — |
|
| 1,055,142 |
| ||||
Flight operations and maintenance |
| — |
| 588,582 |
|
| — |
|
| 588,582 |
| ||||
General and administrative |
| — |
| 264,333 |
|
| — |
|
| 264,333 |
| ||||
Sales and marketing |
| — |
| 82,512 |
|
| — |
|
| 82,512 |
| ||||
Depreciation and amortization |
| — |
| 206,406 |
|
| — |
|
| 206,406 |
| ||||
| — |
| 3,239,516 |
|
| — |
|
| 3,239,516 |
| |||||
Earnings from operations |
| — |
| 42,618 |
|
| — |
|
| 42,618 |
| ||||
Other income (expense): | |||||||||||||||
Interest income |
| — |
| 371 |
|
| — |
|
| 371 |
| ||||
Interest expense |
| — |
| (23,796 | ) |
| — |
|
| (23,796 | ) | ||||
Discount on sales of receivables |
| — |
| (145 | ) |
| 49 |
|
| (96 | ) | ||||
Other |
| — |
| 4,129 |
|
| — |
|
| 4,129 |
| ||||
Earnings before income taxes and change in accounting |
| — |
| 23,177 |
|
| 49 |
|
| 23,226 |
| ||||
Income tax expense |
| — |
| (8,923 | ) |
| (17 | ) |
| (8,940 | ) | ||||
Net earnings before change in accounting |
| — |
| 14,254 |
|
| 32 |
|
| 14,286 |
| ||||
Cumulative effect of change in accounting |
| — |
| 14,206 |
|
| — |
|
| 14,206 |
| ||||
Net earnings | $ | — | $ | 28,460 |
| $ | 32 |
| $ | 28,492 |
| ||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balance Sheet Information:
December 31, 2002 | Airborne Inc. | Guarantors | Non- | Elimination | Consolidated | ||||||||||||||
(in thousands) | |||||||||||||||||||
ASSETS | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | — |
| $ | 338,550 |
| $ | 1,350 | $ | — |
| $ | 339,900 |
| |||||
Restricted cash |
| — |
|
| 36,333 |
|
| — |
| — |
|
| 36,333 |
| |||||
Accounts receivable, less allowance |
| — |
|
| 39,655 |
|
| 130,225 |
| — |
|
| 169,880 |
| |||||
Spare parts and fuel inventory |
| — |
|
| 36,223 |
|
| — |
| — |
|
| 36,223 |
| |||||
Refundable income taxes |
| — |
|
| 627 |
|
| — |
| — |
|
| 627 |
| |||||
Deferred income tax assets |
| — |
|
| 32,444 |
|
| — |
| — |
|
| 32,444 |
| |||||
Prepaid expenses and other |
| — |
|
| 31,176 |
|
| 228 |
| — |
|
| 31,404 |
| |||||
Total current assets |
| — |
|
| 515,008 |
|
| 131,803 |
| — |
|
| 646,811 |
| |||||
Property and equipment, net |
| — |
|
| 1,181,430 |
|
| — |
| — |
|
| 1,181,430 |
| |||||
Intercompany advances |
| 230,137 |
|
| (500 | ) |
| 85,164 |
| (314,801 | ) |
| — |
| |||||
Equipment deposits and other assets |
| 225,532 |
|
| 40,425 |
|
| — |
| (215,112 | ) |
| 50,845 |
| |||||
Total assets | $ | 455,669 |
| $ | 1,736,363 |
| $ | 216,967 | $ | (529,913 | ) | $ | 1,879,086 |
| |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | — |
| $ | 160,805 |
| $ | — | $ | (33 | ) | $ | 160,772 |
| |||||
Salaries, wages and related taxes |
| — |
|
| 94,581 |
|
| — |
| — |
|
| 94,581 |
| |||||
Accrued expenses |
| 2,181 |
|
| 129,953 |
|
| 610 |
| — |
|
| 132,744 |
| |||||
Income taxes payable |
| — |
|
| 4,912 |
|
| — |
| — |
|
| 4,912 |
| |||||
Current portion of long-term obligations |
| — |
|
| 10,372 |
|
| — |
| — |
|
| 10,372 |
| |||||
Total current liabilities |
| 2,181 |
|
| 400,623 |
|
| 610 |
| (33 | ) |
| 403,381 |
| |||||
Long-term obligations |
| 150,000 |
|
| 220,091 |
|
| — |
| — |
|
| 370,091 |
| |||||
Intercompany liabilities |
| — |
|
| 314,768 |
|
| — |
| (314,768 | ) |
| — |
| |||||
Deferred income tax liabilities |
| — |
|
| 146,321 |
|
| — |
| — |
|
| 146,321 |
| |||||
Postretirement liabilities |
| — |
|
| 59,720 |
|
| — |
| — |
|
| 59,720 |
| |||||
Other liabilities |
| — |
|
| 60,410 |
|
| — |
| — |
|
| 60,410 |
| |||||
Common stock |
| 51,658 |
|
| 102 |
|
| 10 |
| (112 | ) |
| 51,658 |
| |||||
Additional paid-in capital |
| 308,813 |
|
| — |
|
| 215,000 |
| (215,000 | ) |
| 308,813 |
| |||||
Retained earnings |
| 2,875 |
|
| 543,187 |
|
| 1,347 |
| — |
|
| 547,409 |
| |||||
Accmulated other comprehensive loss |
| — |
|
| (8,859 | ) |
| — |
| — |
|
| (8,859 | ) | |||||
Treasury stock |
| (59,858 | ) |
| — |
|
| — |
| — |
|
| (59,858 | ) | |||||
Total shareholders’ equity |
| 303,488 |
|
| 534,430 |
|
| 216,357 |
| (215,112 | ) |
| 839,163 |
| |||||
Total liabilities and shareholders’ equity | $ | 455,669 |
| $ | 1,736,363 |
| $ | 216,967 | $ | (529,913 | ) | $ | 1,879,086 |
| |||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balance Sheet Information:
December 31, 2001 | Airborne Inc. | Guarantors | Non- guarantors | Elimination | Consolidated | ||||||||||||||
(in thousands) | |||||||||||||||||||
ASSETS | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | — |
| $ | 191,664 |
| $ | 9,836 | $ | — |
| $ | 201,500 |
| |||||
Accounts receivable, less allowance |
| — |
|
| 28,763 |
|
| 97,277 |
| — |
|
| 126,040 |
| |||||
Spare parts and fuel inventory |
| — |
|
| 38,413 |
|
| — |
| — |
|
| 38,413 |
| |||||
Refundable income taxes |
| — |
|
| 27,161 |
|
| — |
| — |
|
| 27,161 |
| |||||
Deferred income tax assets |
| — |
|
| 30,572 |
|
| — |
| — |
|
| 30,572 |
| |||||
Prepaid expenses and other |
| — |
|
| 27,619 |
|
| 402 |
| — |
|
| 28,021 |
| |||||
Total current assets |
| — |
|
| 344,192 |
|
| 107,515 |
| — |
|
| 451,707 |
| |||||
Property and equipment, net |
| — |
|
| 1,247,373 |
|
| — |
| — |
|
| 1,247,373 |
| |||||
Intercompany advances |
| 187,282 |
|
| 438 |
|
| 9,497 |
| (197,217 | ) |
| — |
| |||||
Equipment deposits and other assets |
| 120,964 |
|
| 41,912 |
|
| — |
| (115,112 | ) |
| 47,764 |
| |||||
Total assets | $ | 308,246 |
| $ | 1,633,915 |
| $ | 117,012 | $ | (312,329 | ) | $ | 1,746,844 |
| |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | — |
| $ | 142,497 |
| $ | — | $ | (624 | ) | $ | 141,873 |
| |||||
Salaries, wages and related taxes |
| — |
|
| 75,458 |
|
| — |
| — |
|
| 75,458 |
| |||||
Accrued expenses |
| — |
|
| 145,380 |
|
| 617 |
| — |
|
| 145,997 |
| |||||
Current portion of long-term obligations |
| — |
|
| 107,410 |
|
| — |
| — |
|
| 107,410 |
| |||||
Total current liabilities |
| — |
|
| 470,745 |
|
| 617 |
| (624 | ) |
| 470,738 |
| |||||
Long-term obligations |
| — |
|
| 218,053 |
|
| — |
| — |
|
| 218,053 |
| |||||
Intercompany liabilities |
| — |
|
| 196,593 |
|
| — |
| (196,593 | ) |
| — |
| |||||
Deferred income tax liabilities |
| — |
|
| 143,526 |
|
| — |
| — |
|
| 143,526 |
| |||||
Postretirement liabilities |
| — |
|
| 39,423 |
|
| — |
| — |
|
| 39,423 |
| |||||
Other liabilities |
| — |
|
| 40,888 |
|
| — |
| — |
|
| 40,888 |
| |||||
Common stock |
| 51,376 |
|
| 102 |
|
| 10 |
| (112 | ) |
| 51,376 |
| |||||
Additional paid-in capital |
| 304,976 |
|
| 8 |
|
| 115,000 |
| (115,000 | ) |
| 304,984 |
| |||||
Retained earnings |
| 11,762 |
|
| 527,397 |
|
| 1,385 |
| — |
|
| 540,544 |
| |||||
Accumulated other comprehensive loss |
| — |
|
| (2,820 | ) |
| — |
| — |
|
| (2,820 | ) | |||||
Treasury stock |
| (59,868 | ) |
| — |
|
| — |
| — |
|
| (59,868 | ) | |||||
Total shareholders’ equity |
| 308,246 |
|
| 524,687 |
|
| 116,395 |
| (115,112 | ) |
| 834,216 |
| |||||
Total liabilities and shareholders’ equity | $ | 308,246 |
| $ | 1,633,915 |
| $ | 117,012 | $ | (312,329 | ) | $ | 1,746,844 |
| |||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Cash Flows Information:
Year ended December 31, 2002 | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | ||||||||||||
(in thousands) | ||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net earnings (loss) | $ | (902 | ) | $ | 15,772 |
| $ | (27 | ) | $ | 14,843 |
| ||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||
Non-cash operating activities |
| (219,567 | ) |
| 321,566 |
|
| 99,985 |
|
| 201,984 |
| ||||
Change in current assets and liabilities |
| 74,807 |
|
| 23,633 |
|
| (108,444 | ) |
| (10,004 | ) | ||||
Net cash provided (used) by operating activities |
| (145,662 | ) |
| 360,971 |
|
| (8,486 | ) |
| 206,823 |
| ||||
INVESTING ACTIVITIES: | ||||||||||||||||
Net cash used by investing activities |
| — |
|
| (101,494 | ) |
| — |
|
| (101,494 | ) | ||||
FINANCING ACTIVITIES: | ||||||||||||||||
Net cash provided (used) by financing activities |
| 145,662 |
|
| (112,591 | ) |
| — |
|
| 33,071 |
| ||||
Net increase (decrease) in cash and cash equivalents |
| — |
|
| 146,886 |
|
| (8,486 | ) |
| 138,400 |
| ||||
Cash and cash equivalents at January 1 |
| — |
|
| 191,664 |
|
| 9,836 |
|
| 201,500 |
| ||||
Cash and cash equivalents at December 31 | $ | — |
| $ | 338,550 |
| $ | 1,350 |
| $ | 339,900 |
| ||||
Year ended December 31, 2001 | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | ||||||||||||
(in thousands) | ||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net earnings (loss) | $ | 19,460 |
| $ | (40,271 | ) | $ | 1,353 |
| $ | (19,458 | ) | ||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||
Non-cash operating activities |
| 187 |
|
| 242,266 |
|
| 729 |
|
| 243,182 |
| ||||
Change in current assets and liabilities |
| 62,311 |
|
| (7,637 | ) |
| 6,485 |
|
| 61,159 |
| ||||
Net cash provided by operating activities |
| 81,958 |
|
| 194,358 |
|
| 8,567 |
|
| 284,883 |
| ||||
INVESTING ACTIVITIES: | ||||||||||||||||
Net cash used by investing activities |
| (162 | ) |
| (115,859 | ) |
| — |
|
| (116,021 | ) | ||||
FINANCING ACTIVITIES: | ||||||||||||||||
Net cash provided (used) by financing activities |
| (81,796 | ) |
| 74,044 |
|
| — |
|
| (7,752 | ) | ||||
Net increase in cash and cash equivalents |
| — |
|
| 152,543 |
|
| 8,567 |
|
| 161,110 |
| ||||
Cash and cash equivalents at January 1 |
| — |
|
| 39,121 |
|
| 1,269 |
|
| 40,390 |
| ||||
Cash and cash equivalents at December 31 | $ | — |
| $ | 191,664 |
| $ | 9,836 |
| $ | 201,500 |
| ||||
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Cash Flows Information:
Year ended December 31, 2000 | Airborne, Inc. | Guarantors | Non- guarantors | Consolidated | ||||||||||||
(in thousands) | ||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net earnings (loss) | $ | — |
| $ | 28,460 |
| $ | 32 |
| $ | 28,492 |
| ||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||
Non-cash operating activities |
| 349,177 |
|
| (223,621 | ) |
| 115,027 |
|
| 240,583 |
| ||||
Change in current assets and liabilities |
| (364,303 | ) |
| 622,337 |
|
| (113,788 | ) |
| 144,246 |
| ||||
Net cash provided (used) by operating activities |
| (15,126 | ) |
| 427,176 |
|
| 1,271 |
|
| 413,321 |
| ||||
INVESTING ACTIVITIES: | ||||||||||||||||
Net cash used by investing activities |
| — |
|
| (382,010 | ) |
| — |
|
| (382,010 | ) | ||||
FINANCING ACTIVITIES: | ||||||||||||||||
Net cash provided (used) by financing activities |
| 15,126 |
|
| (34,725 | ) |
| — |
|
| (19,599 | ) | ||||
Net increase in cash and cash equivalents |
| — |
|
| 10,441 |
|
| 1,271 |
|
| 11,712 |
| ||||
Cash and cash equivalents at January 1 |
| — |
|
| 28,678 |
|
| — |
|
| 28,678 |
| ||||
Cash and cash equivalents at December 31 | $ | — |
| $ | 39,119 |
| $ | 1,271 |
| $ | 40,390 |
| ||||
NOTE U-SUBSEQUENT EVENT
Merger Agreement
On March 25, 2003, Airborne entered into a definitive merger agreement with DHL Worldwide Express B.V. (“DHL”) and Atlantis Acquisition Corporation, a wholly owned indirect subsidiary of DHL (“Atlantis”). A copy of the merger agreement was included as an exhibit to a Form 8-K that Airborne filed with the Securities and Exchange Commission on April 4, 2003. Under the terms of the agreement, (1) Airborne’s air operations will be separated from the ground operations and retained in ABX, (2) DHL will acquire Airborne’s ground operations (including all operations currently conducted by AEI, including its book of business, customer service, express and deferred services and products, and pick up and delivery network) through a merger of Airborne and Atlantis, and (3) Airborne shareholders will receive, for each share of Airborne common stock held, $21.25 in cash (representing total cash consideration in the transaction of $1.05 billion) and one share of common stock of ABX. Upon closing of the transaction, Airborne will operate as a wholly owned indirect subsidiary of DHL, and ABX will become an independent public company wholly owned by Airborne’s former shareholders (although under certain circumstances, in accordance with the merger agreement, DHL could purchase all of Airborne’s operations and Airborne shareholders would receive alternative consideration of $21.65 in cash). The transaction, which is incorporated hereinsubject to shareholder and regulatory approvals, is targeted to be completed in the third quarter of 2003.
Upon closing of the transaction, the net assets of the ground portion of ABX (including its central and regional sort facilities, runways, taxiways, aprons, buildings serving as aircraft and equipment maintenance facilities, storage facilities, a training center and both operations and administrative offices), will be transferred to Airborne as part of the ground operations to be merged with Atlantis. The carrying amount of the assets and liabilities to be transferred was $220,216,000 and $35,228,000, respectively at December 31, 2002.
Commercial Agreements
In connection with the transaction, ABX will enter into a number of commercial agreements with Airborne, including an aircraft, crew, maintenance and insurance agreement (“ACMI Service Agreement”) and a hub and line-haul services agreement. Under these agreements, ABX will provide air transportation, line-haul, hub and maintenance services to Airborne and receive compensation generally based on cost plus a specified mark-up percentage. Certain costs covered under these agreements, including fuel costs, will be reimbursed without specific mark-up percentages.
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Impairment
Upon the separation of ABX from Airborne, ABX will be required to perform a cash flow recoverability test to determine the existence of a potential impairment as required by reference.
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. Under provisions of this statement, assuming an impairment charge is identified through this test, a company is required to record an impairment charge for the excess of the carrying amount of the long-lived asset group over its fair value.
The Company anticipates, given the cash flows to be derived from the ACMI Service Agreement coupled with the decline in market values for used aircraft and related equipment, that ABX will incur a significant impairment charge as a result of the separation. The Company estimates the charge and related reductions to historical property and equipment and other asset balances would have been $622,000,000 as of December 31, 2002, had the separation occurred as of that date. The charge ultimately recorded will depend on a number of factors that could occur before the separation date, including but not limited to, changes in the fair values of used aircraft and related equipment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - - -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- - --------------------
None
-11-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - ------------------------------------------------------------
Directors
The responsefollowing sets forth certain information regarding the members of the Company’s Board of Directors:
Carl D. Donaway,age 51, Chairman and Chief Executive Officer of the Company.
Mr. Donaway was named Chief Executive Officer of the Company in February 2002 and Chairman in April 2002. Prior to this Itemthat time he served as President and Chief Operating Officer of the Company and Airborne Express, Inc. since August 2000. He was appointed Senior Executive Vice President of Airborne Express, Inc. in February 2000. Prior to that time, he was President and Chief Executive Officer of ABX Air, Inc., the Company’s wholly owned airline subsidiary, and Vice President, Business Analysis, and Vice President, Customer Service, of Airborne Express, Inc. Mr. Donaway has been a director of the Company since August 2000 and his term on the Board expires in 2005.
Richard M. Rosenberg, age 73, Chairman and Chief Executive Officer (Retired) of BankAmerica Corporation and Bank of America, NT&SA.
Mr. Rosenberg served as Chairman, President and Chief Executive Officer of Bank of America from 1990 until his retirement in 1996. Mr. Rosenberg currently serves as a director of Pacific Life Company. Mr. Rosenberg, a director of the Company since 1988, is contained in part inChairman of the Proxy Statement
forCompensation Committee and a member of the 1997 Annual Meeting of Shareholders under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"Executive Committee and the information contained therein is incorporated herein by reference.
The executive officersFinance Committee. Mr. Rosenberg’s term on the Board expires in 2003.
William Swindells, age 72, Chairman (Retired), Willamette Industries, Inc. (forest products).
Mr. Swindells served as Chairman of the Board of Directors of Willamette Industries, Inc., from 1985 to February 2002 and as its Chief Executive Officer from 1985 to 1996 and from November 1997 to December 1998. He is currently a director of Oregon Steel Mills. Mr. Swindells has been a director of the Company since 1994 and is a member of the Audit Committee. Mr. Swindells is retiring from the Board and will not continue after his term expires effective with the Company’s 2003 annual meeting of shareholders.
Harold M. Messmer, Jr., age 57, Chairman and Chief Executive Officer, Robert Half International Inc. (specialized staffing services).
Mr. Messmer has been Chairman and Chief Executive Officer of Robert Half International Inc. since 1987. Mr. Messmer is also a director of Health Care Property Investors, Inc. Mr. Messmer, a director of the Company since 1989, serves as Chairman of the Nominating Committee and a member of the Compensation Committee. Mr. Messmer’s term on the Board expires in 2004.
Mary Agnes Wilderotter, age 48, Senior Vice President of Business Strategies, Microsoft Corporation.
Ms. Wilderotter has been Senior Vice President of Business Strategies at Microsoft Corporation since November 2002. Ms. Wilderotter was President, Chief Executive Officer and a director of Wink Communications, Inc. from 1997 to 2002. From 1995 to 1997, she was Executive Vice President of National Operations for AT&T Wireless Services, Inc., and Chief Executive Officer of Claircom, its aviation communications division. From 1991 to 1995, Ms. Wilderotter was President of the California/Nevada/Hawaii Region for McCaw Cellular Communications Inc. She is a director of American Tower Corporation; Electric Lightwave Inc.; Gaylord Entertainment; and The McClatchy Company. Ms. Wilderotter has been a director of the Company since 1996 and is a member of the Nominating Committee and the Audit Committee. Ms. Wilderotter’s term on the Board expires in 2004.
Rosalie J. Wolf, age 61, Managing Director, Offit Hall Capital Management L.L.C. (investment advisor).
Ms. Wolf joined Laurel Management Company L.L.C., the predecessor of Offit Hall Capital Management L.L.C., as a Managing Director and member in 2001. In 2000, she founded and was the Managing Member of Botanica Capital Partners LLC, a private equity business. Ms. Wolf was Treasurer and Chief Investment Officer of The Rockefeller Foundation from 1994 to 2000. Ms. Wolf serves on the Board of Trustees of TIAA-CREF and the North European Oil Royalty Trust. She has been a director of the Company since 1999 and chairs the Finance Committee. Ms. Wolf’s term on the Board expires in 2004.
James H. Carey, age 70, Managing Director (Retired), Briarcliff Financial Associates (private financial advisory firm).
Mr. Carey was Managing Director of Briarcliff Financial Associates, a private financial advisory firm, from 1991 to 2002. He served as Chief Executive Officer of National Capital Benefits Corporation, a viatical settlement company, from March 1994 to December 1995. Mr. Carey is currently a director of the Midland Company. He has been a director of the Company since 1978 and is a member of the Compensation Committee and the Finance Committee. Mr. Carey’s term on the Board expires in 2005.
Andrew B. Kim, age 66, Advisory Director, Sit/Kim International Investment Associates, Inc. (investment company).
Mr. Kim served as President of Sit/Kim International Investment Associates, Inc., from 1989 to 1999 when he retired. Mr. Kim is currently a director of Ilshin Investment Corp. in Seoul, Korea; Asia Foods in Shanghai, China; and the Vertical Group of New York. Mr. Kim has been a director of the Company since 1994 and serves as Chairman of the Audit Committee and a member of the Nominating Committee. Mr. Kim’s term on the Board expires in 2005.
Executive Officers
In addition to Mr. Donaway, who is also a director of the Company, the following sets forth certain information regarding our executive officers:
Lanny H. Michael,age 51, Executive Vice President and Chief Financial Officer.
Mr. Michael has been Executive Vice President and Chief Financial Officer since February 2002. From August 2000 to February 2002, Mr. Michael served as Senior Vice President and Chief Financial Officer. From 1993 to August 2000, Mr. Michael held the position of Senior Vice President, Treasurer. Mr. Michael joined us as Controller in 1981 and was promoted to Vice President in 1985.
David A. Billings,age 57, Senior Vice President and Chief Financial Officer.
Mr. Billings has served as Senior Vice President and Chief Information Officer since August 2000. From 1993 to August 2000, Mr. Billings held the position of Senior Vice President, Information and Technology Systems. Mr. Billings joined us in 1970 and served as Vice President, Information and Technology Systems from 1981 until 1988 and again from 1990 to 1993.
Bruce E. Grout,age 56, Senior Vice President, International.
Mr. Grout has served as Senior Vice President, International since November 2001. From November 2000 until November 2001, Mr. Grout was Senior Vice President, International Freight Services and from March 2000 to November 2000 he was Vice President, International Freight Services. Mr. Grout was Vice President and General Manager, International Area II from 1992 to 2000 and Vice President and General Manager, Far East Sales from 1985 until 1992. Mr. Grout joined us in 1973.
Joseph C. Hete,age 49, President and Chief Operating Officer, ABX Air, Inc.
Mr. Hete has been President and Chief Operating Officer of ABX since January 2000. From 1997 until January 2000, Mr. Hete held the position of Senior Vice President and Chief Operating Officer of ABX. Mr. Hete served as Senior Vice President, Administration of ABX from 1991 to 1997 and Vice President, Administration of ABX from 1986 to 1991. Mr. Hete joined us in 1980.
Darby Langdon, age 57, Senior Vice President, Planning.
Ms. Langdon has served as Senior Vice President, Planning since November 2001. From November 2000 until November 2001, Ms. Langdon was Senior Vice President, International Express and from 1994 to 2000 she was Vice President, International Express. Ms. Langdon joined us in 1982 and was promoted to Vice President, International Services in 1992, a position she held until 1994.
Kenneth J. McCumber, age 57, Senior Vice President, Sales.
Mr. McCumber has been Senior Vice President, Sales since August 2000. From 1999 to August 2000, Mr. McCumber served as Senior Vice President and General Manager, Logistics Services of ABX and from 1993 to 1999 held the position of Vice President, Logistics Services of ABX. Mr. McCumber was Vice President, Corporate Marketing from 1986 to 1993 and has been employed with us since 1971.
David C. Anderson, age 50, Vice President, General Counsel and Corporate Secretary.
Mr. Anderson has served as Vice President, General Counsel and Corporate Secretary from February 2000. From the time he joined us in 1993 until February 2000, Mr. Anderson was Corporate Secretary and Counsel.
Executive officers are elected annually at the Board of Directors meeting held in conjunction with the annual meeting of shareholders. There are no family relationshipsrelationship between any executive officers or directors of Airborne.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that certain of the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, file reports of ownership and changes of ownership with the SEC and the New York Stock Exchange. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all such forms they file.
Based solely on its review of these copies of such forms received by the Company, and on written representations by the Company’s officers and directors regarding their compliance with the filing requirements, the Company believes that, in 2002, all filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning annual and long-term compensation paid or accrued during calendar years 2002, 2001 and 2000 for services in all capacities to the Company by the Chief Executive Officer, by the former Chief Executive Officer and by the four other most highly compensated executive officers of the Company. AdditionalCompany at December 31, 2002 (the “named executive officers”):
Annual Compensation | Long-Term Compensation Awards: Securities Underlying | All Other | |||||||||||
Name and Principal Position | Year | Salary | Bonus1 | Options2 | Compensation3 | ||||||||
Carl D. Donaway4 Chairman, Chief Executive Officer and Director | 2002 2001 2000 | $ | 652,500 500,000 465,231 | $ | 1,079,888 — — | 100,000 62,500 43,000 | $ | 6,323 11,418 12,057 | |||||
Lanny H. Michael Executive Vice President & Chief Financial Officer | 2002 2001 2000 | $ | 339,807 275,000 221,696 | $ | 337,429 — 28,067 | 45,000 29,000 9,300 | $ | 6,568 7,949 7,664 | |||||
Joseph C. Hete President & Chief Operating Officer, ABX Air, Inc. | 2002 2001 2000 | $ | 272,923 252,000 245,769 | $ | 271,013 — — | 45,000 29,000 14,700 | $ | 6,721 6,697 6,633 | |||||
Kenneth J. McCumber Senior Vice President, Sales | 2002 2001 2000 | $ | 275,000 275,000 214,596 | $ | 227,563 — 91,182 | 35,000 29,000 8,950 | $ | 6,323 7,949 7,571 | |||||
Bruce E. Grout Senior Vice President, International | 2002 2001 2000 | $ | 236,000 236,000 216,508 | $ | 218,215 — 10,202 | 21,000 15,650 5,700 | $ | 6,329 7,380 7,638 | |||||
Robert S. Cline4,5 Former Chief Executive Officer | 2002 2001 2000 | $ | 298,558 675,000 650,000 | $ | — — — | 100,000 62,500 85,500 | $ | 7,859 12,556 13,999 |
1 | Amounts shown for 2002 represent awards under the Executive Incentive Compensation Plan and the Executive Group Incentive Compensation Plan. Amounts shown for Messrs. Michael, McCumber and Grout in 2000 were awards under the Management Incentive Compensation Plan based on specific performance measured against individual objectives for that year. |
2 | Number of shares of common stock underlying options awarded under the Company’s option plans. |
3 | A portion of the amounts shown as All Other Compensation for 2002 represents contributions by the Company to the accounts of the named executive officers under the Company’s defined contribution plan, including 401(k) matching contributions ($3,850 for Mr. Cline and $4,048 for each of the other named executive officers). The balance of the amounts shown in this column for 2002 represents premiums paid on term life insurance for the named executive officers. |
4 | Mr. Donaway became Chief Executive Officer in February 2002. |
5 | Mr. Cline retired from the Company in April 2002. |
Option Grants in 2002
The following table shows information regardingconcerning stock options granted by the Company to the named executive officers during calendar year 2002:
Individual Grants | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term2 | |||||||||||||||
Name | Number of Securities Underlying Options Granted1 | Percent of Total Options Granted to Employees in Fiscal Year | Exercise Price (per share) | Expiration Date | 5% | 10% | ||||||||||
Carl D. Donaway | 100,000 | 10.85 | % | $ | 15.60 | 2/05/12 | $ | 981,076 | $ | 2,486,238 | ||||||
Lanny H. Michael | 45,000 | 4.88 | % |
| 15.60 | 2/05/12 |
| 441,484 |
| 1,118,807 | ||||||
Joseph C. Hete | 45,000 | 4.88 | % |
| 15.60 | 2/05/12 |
| 441,484 |
| 1,118,807 | ||||||
Kenneth J. McCumber | 35,000 | 3.80 | % |
| 15.60 | 2/05/12 |
| 343,376 |
| 870,183 | ||||||
Bruce E. Grout | 21,000 | 2.28 | % |
| 15.60 | 2/05/12 |
| 206,026 |
| 522,110 | ||||||
Robert S. Cline | 100,000 | 10.85 | % |
| 15.60 | 2/05/07 |
| 430,999 |
| 952,396 |
1 | Options for the named executive officers were granted on February 5, 2002. The options for Mr. Cline were fully exercisable as of the date of grant. Twenty-five percent of the other options will become exercisable on each anniversary of the date of grant, subject to certain contractual provisions that will apply in the event of a change in control (seeChange in Control Agreements). The exercise price of all options was the fair market value of the Company’s common stock on the date of grant. |
2 | Based upon the $15.60 per share market price on the date of grant and assumed appreciation over the term of the options at the annual rates of stock appreciation shown. |
Aggregate Option Exercises in 2002 and Year-End Option Values
The following table shows information concerning stock options exercised during calendar year 2002 by the named executive officers and the value of unexercised options at the end of that year:
Number of Securities Underlying Unexercised Options at Fiscal Year-End | Value of Unexercised In-the-Money Options at Fiscal Year-End2 | |||||||||||||
Name | Shares Acquired on Exercise | Value Realized1 | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||
Carl D. Donaway | — | — | 103,895 | 174,375 | $ | 72,228 | $ | 132,656 | ||||||
Lanny H. Michael | 2,400 | 3,001 | 48,580 | 73,650 |
| 70,512 |
| 61,552 | ||||||
Joseph C. Hete | — | — | 43,600 | 77,100 |
| 38,727 |
| 61,552 | ||||||
Kenneth J. McCumber | 4,240 | 5,371 | 40,206 | 62,724 |
| 63,109 |
| 61,552 | ||||||
Bruce E. Grout | — | — | 28,073 | 37,087 |
| 37,297 |
| 33,216 | ||||||
Robert S. Cline | 41,864 | 93,234 | 598,540 | — |
| 447,474 |
| — |
1 | Represents the aggregate fair market value, on the respective dates of exercise, of the shares of common stock received on exercise of options, less the aggregate exercise price of the options. |
2 | Represents the aggregate fair market value on December 31, 2002 (based on the closing price of $14.83 for the Company’s common stock on the New York Stock Exchange on that date), of the shares of common stock subject to outstanding options, less the aggregate exercise price of the options. |
Retirement Plans
The Company maintains two qualified retirement plans that cover the named executive officers (and all other employees other than certain union employees) and a non-qualified Supplemental Executive Retirement Plan (“SERP”) that provides for benefits in excess of statutory limits. Officers accrue benefits based on an age and service formula that accumulates a point value used to determine a benefit level at a particular retirement age. Normal retirement age is set forth62. Points are credited for each year of service and year of age up to a maximum point total of 80. Assuming the attainment of the maximum point total, the plans, in Part I, Item 4a.
ITEM 11. EXECUTIVE COMPENSATION
- - --------------------------------
The responseconjunction with Social Security, are designed to this Itemprovide a retirement benefit equal to approximately 65% of an officer’s final average earnings at a normal retirement date of age 62. Final average earnings is containedthe average of the highest five consecutive calendar years of compensation during an officer’s last ten years of employment. Compensation considered in the Proxy Statementformula includes salary and bonus paid in a calendar year without regard to IRS limitations.
Benefits determined through the above formula are offset by Social Security and the gross benefit amounts calculated under the Company’s two qualified retirement plans. The qualified plans, a defined contribution profit sharing plan and a defined benefit plan, are used in connection with the SERP and Social Security to fund retirement benefits. The SERP is unfunded, although the Company maintains commingled investment fund assets that could be used to fund eventual benefit payments. The Company also has a voluntary 401(k) salary deferral plan.
The following table sets forth the targeted annual pension benefits (calculated on the basis of a straight life annuity) payable upon normal retirement at age 62 to the Company’s officers (including the named executive officers) based on specified years of service and levels of final average earnings. The amounts shown take into account Social Security offsets based on the career average Social Security wage base in effect in 2002.
Pension Plan Table
Years of Service | |||||||||||||||||||||
Remuneration | 5 | 10 | 15 | 20 | 25 | 30 | 35 | ||||||||||||||
$ 200,000 | $ | 80,264 | $ | 93,264 | $ | 106,264 | $ | 114,064 | $ | 114,064 | $ | 114,064 | $ | 114,064 | |||||||
300,000 |
| 128,364 |
| 147,864 |
| 167,364 |
| 179,064 |
| 179,064 |
| 179,064 |
| 179,064 | |||||||
400,000 |
| 176,464 |
| 202,464 |
| 228,464 |
| 244,064 |
| 244,064 |
| 244,064 |
| 244,064 | |||||||
500,000 |
| 224,564 |
| 257,064 |
| 289,564 |
| 309,064 |
| 309,064 |
| 309,064 |
| 309,064 | |||||||
600,000 |
| 272,664 |
| 311,664 |
| 350,664 |
| 374,064 |
| 374,064 |
| 374,064 |
| 374,064 | |||||||
700,000 |
| 320,764 |
| 366,264 |
| 411,764 |
| 439,064 |
| 439,064 |
| 439,064 |
| 439,064 | |||||||
800,000 |
| 368,864 |
| 420,864 |
| 472,864 |
| 504,064 |
| 504,064 |
| 504,064 |
| 504,064 | |||||||
900,000 |
| 416,964 |
| 475,464 |
| 533,964 |
| 569,064 |
| 569,064 |
| 569,064 |
| 569,064 | |||||||
1,000,000 |
| 465,064 |
| 530,064 |
| 595,064 |
| 634,064 |
| 634,064 |
| 634,064 |
| 634,064 | |||||||
1,100,000 |
| 513,164 |
| 584,664 |
| 656,164 |
| 699,064 |
| 699,064 |
| 699,064 |
| 699,064 |
Based on compensation through December 31, 2002, the final average earnings of the named executive officers were as follows: Mr. Donaway, $557,611; Mr. Michael, $292,292; Mr. Hete, $276,587; Mr. McCumber, $320,002; Mr. Grout, $237,990; and Mr. Cline, $891,731. All of the named executive officers have accrued at least 20 years of service.
Director Compensation
Non-employee directors received an annual fee of $22,000 in 2002 plus $1,500 for each Board and Committee meeting attended.
The Company has a Directors Stock Option Plan (“Option Plan”) and Director Stock Bonus Plan (“Bonus Plan”) for non-employee directors of the Company. The Option Plan provides each such director an annual grant of options to acquire 2,000 shares of the Company’s common stock at an exercise price equal to the closing sales price on the New York Stock Exchange on the date of grant. Under the Bonus Plan, each director receives an annual award of shares of the Company’s common stock having a value of $6,000 on the award date. The issuance of shares is deferred until the director retires or otherwise ceases to be a director of the Company.
Change in Control Agreements
We have change in control agreements with our named executive officers, which are originally dated August 7, 2001, and have been subsequently amended. Under these agreements, the officers are entitled to certain severance benefits if employment is terminated without “cause” (as defined below) or with “good reason” (as defined below) after a change in control. In addition, the agreements of Carl Donaway and Lanny Michael have been amended to provide that each of these officers will receive the specified change in control severance benefits if he terminates his employment without any reason during the 30-day period immediately following the first anniversary of the date of the change in control.
The change in control severance benefits under these agreements include the payment of a lump sum equal to three times the sum of (1) the greatest of the officer’s annual base salary then in effect, the highest rate in effect during the two-year period prior to the date of termination, or a specified dollar amount, and (2) the greatest of the incentive compensation awarded to the officer for the 1997 Annual Meetingyear most recently ended, a pro-rata portion of Shareholdersthe incentive compensation for the year in which the termination occurs, or a specified dollar amount. In addition, each officer will receive his full base salary through his date of termination, payment for all accrued vacation, payment by us of an amount equal to certain amounts forfeited by the officer under our qualified retirement plans, and a pro-rata portion of his incentive compensation for the year in which his employment is terminated.
Until the expiration of the term of the agreement (which is generally a four-year term) or, if earlier, the officer’s attainment of age 65, we will pay the officer’s health insurance premiums and we will maintain all other employee benefit plans, programs, and policies in which the officer was entitled to participate immediately prior to his termination. We will also pay the officer the difference between the amount he is entitled to receive under the caption "Executive
Compensation"Supplemental Executive Retirement Plan (“SERP”) and the information contained thereinamount he would have received under the SERP if the officer had continued in our employ for an additional three years. Similarly, we will pay the officer the difference between the amount he is incorporated hereinentitled to receive under our qualified defined benefit plan and the amount he would have received under such plan if the officer had continued in our employ for an additional three years. Finally, the officer will be provided with a gross-up payment equal to an amount, such that after payment of all taxes, including federal and state income taxes and additional excise taxes imposed by reference.
Section 4999 of the Internal Revenue Code on this additional payment, the officer will retain an amount equal to the excise taxes imposed on the officer by Section 4999 of the Internal Revenue Code in connection with the change in control.
In addition, an officer terminated after a change in control may elect to receive cash equal to the difference between the exercise price of all stock options held by the officer (whether or not then fully exercisable) and the greater of the market value of the stock on the date of termination or the highest price per share actually paid in connection with any change in control of Airborne. In the absence of this provision, under Airborne’s stock option plans, an employee terminated other than for cause has three months to exercise any options exercisable on the date of termination but any options not then exercisable are cancelled. Airborne’s stock option plans generally provide that all outstanding options become exercisable upon retirement and expire three years after the date of retirement unless their terms expire sooner.
For purposes of the above agreements, “good reason” generally includes the assignment to the officer of duties not customarily performed by our senior executives or inconsistent with the officer’s current position with us, a reduction in base salary, the failure by us to maintain any of the employee benefits to which the officer was entitled prior to the change in control, the failure by us to provide the officer with the number of paid vacation days to which he would be entitled as one of our salaried employees, the relocation of the officer’s offices to a location more than twenty-five miles from their current location, or any termination other than for “cause”, disability, or the attainment of age sixty-five.
For purposes of the above agreements, “cause” is generally defined as the officer’s willful and continued failure to substantially perform his duties with us (other than any such failure resulting from incapacity due to physical or mental illness) after a specific demand for substantial performance, or the officer’s willful engaging in gross misconduct demonstrably injurious to us.
In return for the benefits under the agreements described above, each of the named executive officers has agreed, among other things, not to serve as an executive, director or consultant to any competitor of Airborne for at least one year after termination of employment with Airborne. While these contracts were designed to encourage these officers to stay with Airborne, and not to deter changes in control, it is possible that a party wishing to obtain control of Airborne with the intention of replacing incumbent management could be influenced by the additional cost that Airborne would incur under these contracts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
To the best of the Company’s knowledge, as of February 18, 2003, shareholders owning over 5% of the outstanding common stock of the Company were as follows:
Name and Address | Number of Shares | Percentage of Common Stock Outstanding | |||
Vanguard PRIMECAP Fund 100 Vanguard Blvd. Malvern, PA 19355 | 3,400,000 | 7.02 | % | ||
Dimensional Fund Advisors, Inc. 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 | 2,744,880 | 5.67 | % | ||
Westport Asset Management, Inc. 253 Riverside Avenue Westport, CT 06880 | 2,262,017 | 4.67 | % |
Information in this table is based on reports on Schedules 13G, or amendments thereto, filed with the SEC.
Security Ownership of Management
The following table sets forth information as to the shares of common stock beneficially owned (or deemed to be beneficially owned pursuant to the rules of the SEC) as of February 18, 2003 by each director of the Company, by the named executive officers and by all directors and named executive officers as a group:
Name | Common Stock of the Company Beneficially Owned as of 2/18/03 | Percentage of Common Stock Outstanding | |||
Directors | |||||
James H. Carey | 21,4041,2 | * | |||
Andrew B. Kim | 47,1761,2 | * | |||
Harold M. Messmer, Jr. | 28,0041,2 | * | |||
Richard M. Rosenberg | 30,0041,2 | * | |||
William Swindells | 26,8541,2 | * | |||
Mary A. Wilderotter | 15,9691,2 | * | |||
Rosalie J. Wolf | 10,4311,2 | * | |||
Named Executive Officers | |||||
Carl D. Donaway3 | 182,863 5 | * | |||
Lanny H. Michael | 73,341 5 | * | |||
Joseph C. Hete | 69,850 5 | * | |||
Kenneth J. McCumber | 71,312 5 | * | |||
Bruce E. Grout | 42,749 5 | * | |||
Robert S. Cline4 | 884,650 5 | 1.8 | % | ||
All Directors and Executive Officers as a Group | 1,686,033 6 | 3.4 | % |
* | Less than 1% of common stock outstanding. |
1 | Includes shares subject to options granted under the Company’s option plans as follows: Mr. Carey, 18,000; Mr. Kim, 20,000; Mr. Messmer, 20,000; Mr. Rosenberg, 20,000; Mr. Swindells 20,000; Ms. Wilderotter, 14,000 and Ms. Wolf, 8,000. |
2 | Includes 1,769 shares for Ms. Wilderotter, 1,431 shares for Ms. Wolf and 2,004 shares for each of the other directors issuable under the Director Stock Bonus Plan. |
3 | Mr. Donaway also serves as a director. |
4 | Mr. Cline, former Chairman and Chief Executive Officer, retired from the Company in April 2002. |
5 | Includes shares subject to options granted under the Company’s option plans as follows: Mr. Donaway, 160,270; Mr. Michael, 66,255; Mr. Hete, 68,775; Mr. McCumber, 55,063 and Mr. Grout, 40,161; and Mr. Cline, 598,540. |
6 | Includes 1,284,350 shares (inclusive of the shares mentioned in Notes 1, 2 and 5 above) subject to options or issuable under the Director Stock Bonus Plan. |
The balance of the response to this Item is containedfound in the Proxy Statement for the
1997 Annual Meeting of ShareholdersPart II, Item 5, under the captions "Voting at the
Meeting" and "Stock Ownership of Management" and the information contained
therein is incorporated herein by reference.
caption “Securities Authorized for Issuance Under Equity Compensation Plans.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------
The response
None
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this Item is containedreport, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon the evaluation, the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the Proxy Statement for the
1997 Annual Meeting of Shareholdersreports filed or submitted by it under the caption "Executive
Compensation"Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in Internal Controls
There were no significant changes in the information contained therein is incorporated herein
by reference.
-12-
Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the date of the evaluation. There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions taken.
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- - -------------------------------------------------------------------------
(a)1. List of Documents filed as part of this report:
(1) Index to Consolidated Financial Statements
--------------------
The following consolidated financial statements of Airborne Freight
Corporation and its subsidiaries as contained in its 1996 AnnualStatements:
Independent Auditors’ Report to
Shareholders are incorporated by reference in Part II, Item 8:
Consolidated Statements of Net Earnings
Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial Statement Schedule
The following consolidated financial statement schedule of the Company is included as follows:
Schedule II—Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto.
(a)3.
(3) Exhibits
- - ---------------
A)
The following exhibits are filed with or incorporated by reference into this report:
report (with respect to documents incorporated by referenced that were filed prior to December 26, 2000, references to “Airborne” shall be deemed to be references to AEI as its predecessor):
EXHIBIT NO. 3 Articles of Incorporation and By-laws
- - ----------------------------------------------------
3(a) The Restated Certificate of Incorporation of the Company,
dated as of August 4, 1987 (incorporated herein by reference
from Exhibit 3(a) to the Company's Form 10-K for the year
ended December 31, 1987).
3(b) The By-laws of the Company as amended to February 4,
1997.
Bylaws
3 | (a) | The Restated Certificate of Incorporation of Airborne, Inc. (incorporated by reference from Exhibit 3(a) to Airborne’s Form 10-K for the year ended December 31, 2000). | |
3 | (b) | Amended and Restated Bylaws of Airborne, Inc. (incorporated by reference from Exhibit 3(a) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). |
EXHIBIT NO. 4 Instruments Defining the Rights of Security Holders - - ------------------------------------------------------------------
Including Indentures
- - --------------------
4(a) Indenture dated as of August 15, 1991, between the
Company and Bank of America National Trust and Savings
Association, as Trustee, with respect to the Company's 6-3/4%
Convertible Subordinated Debentures due August 15, 2001
(incorporated herein by reference from Exhibit 4(i) to
Amendment No. 1 to the Company's Registration Statement on
Form S-3 No. 33-42044 filed with the Securities and Exchange
Commission on August 15, 1991).
4(b) First Supplemental Trust Indenture dated as of June 30,
1994 between the Company and LaSalle National Bank, as
Successor Trustee, with respect to the Company's 6-3/4%
Convertible Subordinated Debentures due August 15, 2001
(incorporated by reference from Exhibit 4(d) to the Company's
Form 10-K for the year ended December 31, 1996).
-13-
4(c) Indenture dated as of December 3, 1992, between the
Company and The Bank of New York, as trustee, relating to the
Company's 8-7/8% Notes due 2002 (incorporated by reference
from Exhibit 4(a) to Amendment No. 1 to the Company's
Registration Statement on Form S-3, No. 33-54560 filed with
the Securities and Exchange Commission on December 4, 1992).
4(d) First Supplemental Indenture dated as of September 15,
1995, between the Company and The Bank of New York, as
trustee, relating to the Company's 7.35% Notes due 2005
(incorporated by reference from Exhibit 4(b) to Amendment No.
1 to the Company's Registration Statement on Form S-3, No. 33-
61329, filed with the Securities and Exchange Commission on
September 5, 1995).
4(e) Second Supplemental Indenture dated as of February 12,
1997 between the Company and The Bank of New York, as trustee,
relating to the Company's 8-7/8% Notes due 2002.
4(f) Rights Agreement, dated as of February 14, 1997 between
the Company and The Bank of New York, as Rights Agent
(incorporated by reference from Exhibit 1 to the Company's
Registration Statement on Form 8-A, filed with the Securities
and Exchange Commission on February 12, 1997).
4(g) Certificate of the Voting Powers, Designations,
Preferences and Relative Participating, Optional and Other
Special Rights and Qualifications, Limitations or Restrictions
of Series A Participating Cumulative Preferred Stock of
Airborne Freight Corporation (incorporated by reference from
Exhibits 1 and 2 to the Company's Registration Statement on
Form 8-A, filed with the Securities and Exchange Commission on
February 12, 1997.)
4(h) Form of Right Certificate relating to the Rights
Agreement (see 4(f) above, incorporated by reference from
Exhibits 2 and 3 to the Company's Registration Statement on
Form 8-A, filed with the Securities and Exchange Commission on
February 12, 1997.)
EXHIBIT NO. 10 Material Contracts
- - ---------------------------------
Executive Compensation Plans and Agreements
- - -------------------------------------------
10(a) 1983 Airborne Freight Corporation Key Employee Stock
Option and Stock Appreciation Rights Plan, as amended through
February 2, 1987 (incorporated by reference from Exhibit 10(c)
to the Company's Form 10-K for the year ended December 31,
1986).
10(b) 1989 Airborne Freight Corporation Key Employee Stock
Option and Stock Appreciation Rights Plan (incorporated herein
by reference from Exhibit 10(d) to the Company's Form 10-K for
the year ended December 31, 1989).
10(c) 1994 Airborne Freight Corporation Key Employee Stock Option
and Stock Appreciation Rights Plan (incorporated herein by
reference from the Addendum to the Company's Proxy Statement
for the 1994 Annual Meeting of Shareholders).
10(d) Airborne Freight Corporations Directors Stock Option
Plan (incorporated herein by reference from the Addendum to
the Company's Proxy Statement for the 1991 Annual Meeting of
Shareholders).
10(e) Airborne Freight Corporation Director Stock Bonus
Plan dated April 23, 1996 (incorporated by reference from
Exhibit 10(a) to the Company's Form 10-Q for the quarter ended
June 30, 1996).
-14-
10(f) Airborne Express Executive Deferral Plan dated
January 1, 1992 (incorporated by reference from Exhibit 10(b)
to the Company's Form 10-K for the year ended December 31,
1991).
10(g) Airborne Express Supplemental Executive Retirement
Plan dated January 1, 1992 (incorporated by reference from
Exhibit 10(c) to the Company's Form 10-K for the year ended
December 31, 1991).
10(h) Airborne Express 1995-1999 Executive Incentive
Compensation Plan, amended as of January 1, 1997.
10(i) Airborne Express 1997-1999 Executive Group Incentive
Compensation Plan as of January 1, 1997.
10(j) Employment Agreement dated December 15, 1983, as
amended November 20, 1986, between the Company and Mr. Robert
G. Brazier, President and Chief Operating Officer
(incorporated by reference from Exhibit 10(a) to the Company's
Form 10-K for the year ended December 31, 1986). Identical
agreements exist between the Company and the other six
executive officers.
10(k) Employment Agreement dated November 20, 1986 between
the Company and Mr. Lanny H. Michael, then Vice President,
Treasurer and Controller (incorporated by reference from
Exhibit 10(b) to the Company's Form 10-K for the year ended
December 31, 1986). The Company and its principal subsidiary,
ABX Air, Inc., have entered into substantially identical
agreements with most of their officers.
Other Material Contracts
------------------------
10(l) $240,000,000 Revolving Loan Facility dated as of
November 19, 1993 among the Company, as borrower, and Wachovia
Bank of Georgia, N.A., as agent, and Wachovia Bank of Georgia,
N.A., ABN AMRO Bank N.V., United States National Bank of
Oregon, Seattle-First National Bank, CIBC, Inc., Continental
Bank N.A., Bank of America National Trust and Savings
Association, The Bank of New York, NBD Bank, N.A., as banks
(incorporated herein by reference from Exhibit 10(k) to the
Company's Form 10-K for the year ended December 31, 1993).
10(m) First Amendment to Revolving Loan Facility dated as
of March 31, 1995 among the Company, as borrower, and Wachovia
Bank of Georgia, N.A., as Agent, and Wachovia Bank of Georgia,
N.A., ABN AMRO Bank N.V., United States National Bank of
Oregon, Seattle-First National Bank, CIBC, Inc., National City
Bank, Columbus, Bank of America National Trust and Savings
Association, The Bank of New York, and NBD Bank, N.A., as
banks (incorporated by reference from Exhibit 10(a) to the
Company's Form 10-Q for the quarter ended March 31, 1995).
10(n) Second Amendment to Credit Agreement dated May 1,
1996 among the Company, as borrower, and Wachovia Bank of
Georgia, N.A., as Agent, and Wachovia Bank of Georgia, N.A.,
ABN AMRO Bank N.V., United States National Bank of Oregon,
Bank of America NW, N.A., CIBC, Inc., National City Bank,
Columbus, as assignee of Continental Bank N.A., Bank of
America National Trust and Savings Association, The Bank of
New York and NBD Bank, N.A., as banks (incorporated by
reference from Exhibit 10(b) to the Company's Form 10-Q for
the quarter ended June 30, 1996).
-15-
10(o) Used Aircraft Sales Agreement entered into as of
December 22, 1995 between ABX Air, Inc. and KC-One, Inc; KC-
Two, Inc.; and KC-Three, Inc. Confidential treatment has been
granted for confidential commercial and financial information,
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 (incorporated herein by reference from Exhibit 10(n) to
the Company's From 10-K for the year ended December 31,
1996.).
EXHIBIT NO. 11 Statement Re Computation of Per Share Earnings
- - -------------------------------------------------------------
11 Statement re computation of earnings per share
EXHIBIT NO. 12 Statements Re Computation of Ratios
- - --------------------------------------------------
12 Statement re computation of ratio of senior long-term
debt and total long-term debt to total capitalization
EXHIBIT NO. 13 Annual Report to Security Holders
- - ------------------------------------------------
13 Portions of the 1996 Annual Report to Shareholders of
Airborne Freight Corporation
EXHIBIT NO. 21 Subsidiaries of the Registrant
- - ---------------------------------------------
21 The subsidiaries of the Company are listed in Part I of
this report on Form 10-K for the year ended December 31, 1996.
EXHIBIT NO. 23 Consents of Experts and Counsel
- - ----------------------------------------------
23 Independent Auditors' Consent and Report on Schedule
EXHIBIT NO. 27 Financial Data Schedule
- - --------------------------------------
27 Financial Data Schedule
All other exhibits are omitted because they are not
applicable, or not required, or because the required
information is included in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K
-------------------
A Form 8-K was filed February 12, 1997 which disclosed the following
information:
(1) Approval, by the Board of Directors, of a shareholder rights
plan effective February 14, 1997.
(2) Summary description of the shareholder rights plan.
-16-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AIRBORNE FREIGHT CORPORATION
By /s/ Robert S. Cline
--------------------------
Robert S. Cline
Chief Executive Officer
By /s/ Robert G. Brazier
--------------------------
Robert G. Brazier
Chief Operating Officer
By /s/ Roy C. Liljebeck
--------------------------
Roy C. Liljebeck
Chief Financial Officer
By /s/ Lanny H. Michael
--------------------------
Lanny H. Michael
Treasurer and Controller
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Robert G. Brazier /s/ Andrew V. Smith
- - ----------------------------- -----------------------------
Robert G. Brazier (Director) Andrew V. Smith (Director)
/s/ Robert S. Cline /s/ Mary Agnes Wilderotter
- - ----------------------------- -----------------------------
Robert S. Cline (Director) Mary Agnes Wilderotter (Director)
/s/ Harold M. Messmer, Jr. /s/ James H. Carey
- - ----------------------------- -----------------------------
Harold M. Messmer, Jr.(Director) James H. Carey (Director)
-17-
AIRBORNE FREIGHT CORPORATION
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
4 | (a) |
Indenture dated as of December 3, 1992, between | |||
4 | (b) | First Supplemental Indenture dated as of | |
4 | (c) | Third Supplemental Indenture dated |
EXHIBIT NO. 10 Material Contracts
- - ----------------------------------
Executive Compensation Plans and Agreements
- - -------------------------------------------
10 | (a) | 1989 Airborne, | |
10 | (b) | 1994 Airborne, | |
10 | (c) | Airborne, | |
10 | (d) | Airborne, Inc. Directors Stock Option Plan (incorporated by reference from the Addendum to Airborne’s Proxy Statement for the 1991 Annual Meeting of Shareholders). | |
10 | (e) | Airborne, | |
10 | (f) | Airborne, Inc. Director Stock Bonus Plan dated April 23, 1996 (incorporated by reference from Exhibit 10(a) to | |
10 | (g) | First Amendment to Airborne, | |
10 | (h) | Second Amendment to Airborne, | |
10 | (i) | Airborne, | |
10 | (j) | Airborne Express Executive Deferral Plan restated January 1, 2001 (incorporated by reference from Exhibit | |
10 | (k) | Airborne Express Supplemental Executive Retirement Plan amended on August 15, 2001 and restated effective January 1, 2000 (incorporated by reference from Exhibit 10(k) to Airborne’s Form 10-K for the year ended December 31, 2001). | |
10 | (l) | Airborne Express 2000-2004 Executive Incentive Compensation Plan (incorporated by reference from Exhibit 10(a) to Airborne’s Form 10-Q for the quarter ended March 31, 2002). | |
10 | (m) | Airborne Express 2000-2004 Executive Group Incentive Compensation Plan (incorporated by reference from Exhibit 10(b) to Airborne’s Form 10-Q for the quarter ended March 31, 2002). | |
10 | (n) | Airborne Express Management Incentive Compensation Plan (MICP) 2002 (incorporated by reference form Exhibit 10(a) to Airborne’s Form 10-Q for the quarter ended June 30, 2002). | |
10 | (o) | Employment Agreement dated August 7, 2001, between AEI and Mr. Lanny H. Michael, then Senior Vice President and Chief Financial Officer (incorporated by reference from Exhibit 10(n) to Airborne’s Form 10-K for the year ended December 31, 2001). | |
10 | (p) | Employment Agreement dated August 7, 2001 between AEI and Mr. Robert T. Christensen, Vice President, Corporate Controller (incorporated by reference from Exhibit 10(o) to Airborne’s Form 10-K for the year ended December 31, 2001). AEI has entered into substantially identical agreements with most of |
Other Material Contracts
10 | (q) | $275,000,000 Amended and Restated Credit Agreement dated as of | |
10 | (r) | First Amendment to Amended and Restated Credit Agreement dated as of March 14, 2002 among Airborne, Inc. as parent, AEI and ABX, as borrowers, and Wachovia Bank, N.A. as administrative and collateral agent, and lenders party there to (incorporated by reference from Exhibit 10(c) to Airborne’s Form 10-Q for the quarter ended March 31, 2002). | |
10 | (s) | Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents dated June 29, 2001 by ABX and Wachovia Bank, N.A. (incorporated by reference from Exhibit 10(b) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
10 | (t) | Stock Pledge Agreement dated June 29, 2001 between Airborne, Inc. and Wachovia Bank, N.A. (incorporated by reference from Exhibit 10(c) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
10 | (u) | Open-Ended Mortgage, Assignment of leases and Rents and Fixture Filing dated June 29, 2001 by ABX, Wilmington Air Park, Inc., Sky Courier, Inc., Aviation Fuel, Inc., Sound Suppression, Inc., Airborne FTZ, Inc., and Wachovia Bank, N.A. (incorporated by reference from Exhibit 10(d) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
10 | (v) | Security Agreement dated June 29, 2001 Between AEI, ABX, Airborne, Inc., Wilmington Air Park, Inc., Sky Courier, Inc., Aviation Fuel, Inc., Sound Suppression, Inc., Airborne FTZ, Inc., and Wachovia Bank, N.A. (incorporated by reference from Exhibit 10(e) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
10 | (w) | Trademark Security Agreement dated June 29, 2001 between AEI and Wachovia Bank, N.A. (incorporated by reference from Exhibit 10(f) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
10 | (x) | Assignments of Leases and Rents dated June 29, 2001 between ABX, Wilmington Air Park, Inc., Aviation Fuel, Inc., and Wachovia Bank, N.A. (incorporated by reference from Exhibit 10(g) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
10 | (y) | Used Aircraft Sales Agreement entered into as of December 22, 1995 between ABX and KC-One, Inc; KC-Two, Inc.; and KC-Three, Inc. (incorporated by reference from Exhibit 10(c) to Airborne’s Form 10-K for the year ended December 31, | |
10 | (z) | Amended and Restated Receivables Purchase Agreement dated | |
10 | (aa) | Receivables Sale Agreement |
EXHIBIT NO. 12 Statements Re Computation of Ratios
12 | (a) | Statement recomputation of percentage ratio of total long-term obligations to total capitalization. | |
12 | (b) | Ratio of earnings to fixed charges. |
EXHIBIT NO. 21 Subsidiaries of the Registrant
21 | Subsidiaries of the Registrant. |
EXHIBIT NO. 23 Consents of Experts and Counsel
- - -----------------------------------------------
23 | Independent |
EXHIBIT NO. 27 Financial Data Schedule
- - ---------------------------------------
99 Additional Exhibits
99 | (a) | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99 | (b) | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to its report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
AIRBORNE, INC
By: | /s/ LANNY H. MICHAEL | |
Lanny H. Michael Executive Vice President and Chief Financial |
Date: April 29, 2003
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl D. Donaway, certify that:
1. | I have reviewed this Amendment No. 1 to annual report on Form |
2. | Based on my knowledge, this annual report does not contain any untrue statement of a |
3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
c. | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
a. | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: April 29, 2003
/s/ CARL D. DONAWAY |
Carl D. Donaway Chief Executive Officer and Chairman of the Board |
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lanny H. Michael, certify that:
1. | I have reviewed this Amendment No. 1 to annual report on Form 10-K of Airborne, Inc.; |
2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
c. | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
a. | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: April 29, 2003
/s/ LANNY H. MICHAEL |
Lanny H. Michael Executive Vice President and Chief Financial Officer |
AIRBORNE, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
| |||||||||||||||
Column A | Column B | Column C | Column D | Column E | |||||||||||
Additions | |||||||||||||||
Description | Balance at beginning of period | Charged to costs and expenses | Deductions | Balance at end of period | |||||||||||
Allowance for doubtful accounts: | |||||||||||||||
Year ended: | |||||||||||||||
December 31, 2002 | $ | 11,509 | $ | 27,250 | $ | 25,143 | (A) | $ | 13,616 |
| |||||
December 31, 2001 | $ | 10,290 | $ | 26,264 | $ | 25,045 | (A) | $ | 11,509 |
| |||||
December 31, 2000 | $ | 9,640 | $ | 21,690 | $ | 21,040 | (A) | $ | 10,290 |
| |||||
Self insurance reserves: | |||||||||||||||
Year ended: | |||||||||||||||
December 31, 2002 | $ | 86,888 | $ | 149,479 | $ | 128,928 | (B) | $ | 107,439 | (C) | |||||
December 31, 2001 | $ | 76,923 | $ | 139,615 | $ | 129,650 | (B) | $ | 86,888 | (C) | |||||
December 31, 2000 | $ | 62,170 | $ | 119,069 | $ | 104,316 | (B) | $ | 76,923 | (C) |
(A) | Deductions consist of write-offs of uncollectible accounts, net of recoveries and collection fees paid to third parties. |
(B) | Deductions consist of claim and insurance premium payments. |
(C) | Includes casualty claim reserves classified as long-term other liabilities on the consolidated balance sheets. Long-term casualty reserves were $54,100, $37,615 and $34,812 as of December 31, 2002, 2001 and 2000, respectively. |
80