RESTATED CERTIFICATEUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF
INCORPORATIONTHE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002
Commission file number 1-6512
AIRBORNE, INC.
FIRST. 1.1 The(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 of principal executive offices)
206-285-4600
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the corporationAct:
Title of each class | Name of each exchange on which registered | |
Common Stock, Par Value | New York Stock Exchange | |
$1.00 per share | Pacific Exchange, Inc. |
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. 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’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YESx NO¨
State the aggregate market value of the voting and 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 last business day of the registrant’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 registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders to be held April 29, 2003 are incorporated by reference into Part III.
(1) Excludes value of shares of common stock held of record by non-employee directors and executive officers at 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, INC.
SECOND. 2.1 The address
2002 FORM 10-K ANNUAL REPORT
PART I | ||||
Page | ||||
Item 1. | 1 | |||
Item 2. | 12 | |||
Item 3. | 12 | |||
Item 4. | 12 | |||
PART II | ||||
Item 5. | Market for the Registrant’s Common Equity and Related Stockholder Matters | 13 | ||
Item 6. | 14 | |||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 7A. | 24 | |||
Item 8. | 25 | |||
PART III | ||||
Item 10. | 63 | |||
Item 11. | 63 | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 63 | ||
Item 13. | 63 | |||
Item 14. | 63 | |||
PART IV | ||||
Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 64 |
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.”
General
Airborne, Inc., a Delaware corporation formed in 1999 is a holding company operating through its subsidiaries as an air express company and airfreight forwarder. Airborne expedites shipments of all sizes to destinations throughout the United States and most foreign countries. When we refer to “we”, “our”, “us”, the “Company” or “Airborne” in this Form 10-K, we mean Airborne, Inc. and all of its registered officedirect 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 presentations of our business carry this name.
Business Description
We provide door-to-door express and deferred delivery of small packages and documents throughout the United States and to and from most foreign countries. We also act as an international and domestic freight forwarder for shipments of any size. Our strategy is to provide business customers with highly reliable, competitively priced, time definite delivery services while maintaining a low cost structure. Our combination of quality service, flexible delivery options and competitive pricing positions us as a high value alternative to other industry leaders.
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 Securities and Exchange Commission.
Domestic Products and Services
Our domestic operations, supported by approximately 310 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 machine parts, healthcare items, films and videotapes, and other items for which speed and reliability of delivery are important.
A primary express service is our Overnight Express product. This product, which comprised approximately 46% of our domestic shipments during 2002, generally provides delivery before noon on the next business day to most metropolitan cities in the StateUnited States. We also provide Saturday, Sunday and holiday pickup and delivery service for many cities.
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 April 2001, allows customers to designate that their package be delivered by 10:30 a.m. for a surcharge of Delaware is 1013 Centre Road, inup to $5.00 per package. This service 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”) generally provides overnight delivery by 3:00 p.m. on the Citynext business day. Our Second Day Service (“SDS”) generally provides delivery service by 5:00 p.m. on the second business day. These express products, which comprised
approximately 35% of Wilmington,
County of New Castle. The name of its registered agent at such
address is The Prentice-Hall Corporation System, Inc.
THIRD. 3.1 Thedomestic shipments during 2002, are lower priced than the Overnight Express product reflecting the less time sensitive nature of the businessshipments. NAS rates are generally higher than SDS 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 purposes tocustomer personnel. Items inventoried at or near our main sort facility, located in Wilmington, Ohio, can be conducteddelivered utilizing our airline system or, promoted is:
3.1.1 To transport intrastate,
interstate, and/or foreign commerce by aircraft, motor, rail,
water vehicle and/or other means of transportation, passengers,
freight, securities and articles of merchandise of every nature
and description, either directly, indirectly or as agent or
principal; to engage in and carry on the business of receiving,
carrying, transporting, and delivering for compensation,
passengers, baggage, goods, wares, mail matter, packages,
freight, and merchandise of every kind and description, to, from
and between airports, air terminals, railroad stations,
terminals, or wharves, and to, from and between any other places
whatsoever, by fixed routes or otherwise either public, quasi-
public, or private; to engage in and carryif required, commercial airlines on a general shippingnext-flight-out basis.
Our Sky Courier subsidiary provides expedited next-flight-out domestic and forwarding business, a general transfer, express and baggage
business; to engage in and carry on a general taxi business; to
engage in and carry on a general trucking, contracting, cooperage
and stevedore business, to engage in and carry on a general
brokerage, factoring and import-export business; and to contract
with air carriers, railroads, warehouses, water carriers, motor
carriers and transportation lines or carriers of every kind,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 our domestic system is designed primarily to handle small packages, any available capacity is also utilized to carry heavier weight shipments that we would normally move on other carriers in our role as an air freight forwarder.
Domestic Operations
Pickup and Delivery
We accomplish our door-to-door pickup and delivery service using approximately 15,300 delivery vans and trucks. Approximately, 5,900 are operated by us with corporation, copartnerships,employee drivers. Independent contractors provide the balance of our pickup and delivery services.
Because convenience is an important factor in attracting business concernsfrom less frequent shippers, we have an ongoing program to place drop boxes in convenient locations. Drop boxes allow customers the flexibility to tender shipments to us without scheduling a pickup. We have approximately 15,100 boxes in service.
Sort Facilities
Our main sort center is located in Wilmington, Ohio. The sort center currently has the capacity to handle approximately 1.2 million pieces during the primary 3 1/4 hour nightly sort operation. On average, approximately 1.0 million pieces were sorted each weekday night at the sort center during the fourth quarter of every kind, individuals,2002.
In addition to the main sort facility at Wilmington, we have eleven regional hub facilities that primarily sort shipments originating and the public in general, covering,
relating, or incidental to anyhaving a destination within approximately a 300 mile radius of the foregoing purposes.
3.1.2 It is the purposeregional hub.
We also conduct a day sort operation at Wilmington that services SDS, airborne@home and GDS shipments. The day sort generally receives these shipments through a combination of this
corporation to engage in any lawful actflights and trucks originating from regional hubs, station facilities or activity for which
corporations may be organized under the General Corporation Law
of Delaware and nonecustomer sites.
The operation of the above-stated purposes shall beWilmington facility is critical to our business. The inability to use the Wilmington airport, because of bad weather or be
deemedother 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 beminimize the effect bad weather may have on our operations.
In the fourth quarter of 2002, 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 36%.
Shipment Routing
The logistics of moving a shipment from its origin to destination are determined by several factors. Shipments are routed differently depending on shipment product type and weight, distances between origin and destination, and locations of our stations relative to the locations of sort facilities. Shipments generally are moved between stations and sort facilities on either aircraft or contracted trucks. A limited number of shipments are transported airport-to-airport on commercial air carriers.
Overnight Express shipments and NAS shipments are picked up by local stations and generally consolidated with other stations’ shipments at our airport facilities. Shipments that are not serviced through regional hubs are loaded on our aircraft departing each weekday evening from various points within the United States, Canada and 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 10:30 p.m. and 2:30 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 destinations in limitationtime to complete scheduled service commitments. The Wilmington hub also receives shipments via truck from selected stations in the vicinity of such general purposes.
FOURTH. 4.1 the Wilmington hub for integration with the nightly sort process.
The day sort operation for SDS and GDS shipments is supported by nine aircraft that return to Wilmington from overnight service destinations on Tuesday through Thursday. These aircraft, and trucks from regional hubs, arrive at Wilmington between 8:00 a.m. and 1:30 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.
We also perform weekend sort operations at Wilmington to accommodate Saturday pickups and Monday deliveries of both express and deferred service shipments. This sort is supported by 16 of our aircraft and by trucks.
Aircraft
We currently utilize pre-owned Boeing 767 aircraft and McDonnell Douglas DC-8 and DC-9 aircraft. After acquisition, the aircraft are modified for use within our cargo operation. At the end of 2002, our in-service fleet consisted of a total of 116 aircraft, including 22 Boeing 767-200s, 20 McDonnell Douglas DC-8s (consisting of six series 61 and 14 series 63 aircraft) and 74 DC-9s (consisting of two series 10, 43 series 30, and 29 series 40 aircraft). We own 113 of these aircraft and lease two 767 aircraft and one DC-9 aircraft. In addition, each night we charter approximately 60 smaller aircraft to connect to small cities with our own aircraft, which then operate to and from Wilmington.
During 2002, two additional 767 aircraft were placed into service, bringing the total number of shares767 aircraft in service at December 31, 2002 to 22. 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 all classes2003. One DC-8 aircraft is dedicated to our charter service operations, and additional DC-8s could be deployed as charters depending on prospective business opportunities. However, the demand for charters declined in 2002 compared to 2001 and 2000 as a result of capital stock which the corporation shallweak economic climate. We have authoritycommitments to issue
is one hundred twenty-six million (126,000,000),acquire six additional 767s by the first half of which six
million (6,000,000) shares shall be Preferred Stock, without par
value, issuable in one or more series,2005. Depending on various factors including shipment growth and one hundred twenty
million (120,000,000) shares shall be Common Stock, par value One
Dollar ($1.00) per share, amountingcapacity requirements, we may initiate negotiations to defer some of these deliveries, as we have done in the aggregatepast, 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 our system by approximately 55,000 pounds to One
Hundred Twenty Million Dollars ($120,000,000).
4.24.1 million pounds at December 31, 2002. During 2002, our average utilization of available lift capacity approximated 75% compared to 70% in 2001.
In response to increased public awareness regarding the operation of older aircraft, the Federal Aviation Administration (“FAA”) periodically mandates additional maintenance requirements for certain aircraft, including the type we operate. In recent years, we have completed, and continue to perform, a number of inspection and maintenance programs pertaining to
various Airworthiness Directives issued by the FAA. The BoardFAA could, in the future, impose additional maintenance requirements for aircraft and engines of Directorsthe type we operate or interpret existing rules in a manner that could have a material effect on our operations and financial position. See “Regulation”.
Communications Technology
FOCUS (Freight On-line Control and Update System) is hereby expressly
authorized,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 important information for use in coordinating our operational activities. Information regarding arrivals and departures of our aircraft, weather and documentation requirements for shipments destined to foreign locations are several examples of the information maintained and 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 use 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 functionality that allows for the digital capture of consignee signatures. We also gain productivity and cost improvements through centralization of dispatch functions and driver efficiencies. We had deployed approximately 12,300 scanners as of the end of 2002 and plan to deploy 5,700 additional scanners by July 2003 to complete the rollout to our domestic stations.
International Operations
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 our offices and independent agents.
Our domestic stations are staffed and equipped to handle international shipments to or from almost anywhere in the world. In addition to our extensive domestic network, we operate our own offices in Taipei, Hong Kong, Singapore, Australia, New Zealand, France, the Netherlands, Sweden and the United Kingdom. Our freight and express agents worldwide are connected to FOCUS, our on-line communication network, through which we can provide our customers with immediate access to the status of shipments almost anywhere in the world.
Our international air express service is intended for the door-to-door delivery of non-dutiable and certain dutiable shipments weighing 150 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-door basis. We also offer ocean service capabilities for customers who want a lower-cost shipping option.
Our strategy is to use a variable-cost approach in delivering and expanding international services to our customers. This strategy uses existing commercial airline lift capacity in connection with our domestic network to move shipments to and from overseas destinations and origins. Additionally, we have service arrangements with independent freight and express agents to accommodate shipments in locations not currently served by our own operations. In order to expand our business at any time ora reasonable cost, we have, from time to time, entered into joint venture agreements that combine our management expertise, domestic express system and information systems with local business knowledge and market reputation of suitable partners. Joint venture operations currently exist in Japan, Thailand, Malaysia and South Africa.
Customers and Marketing
Our primary domestic strategy focuses on providing highly reliable, competitively priced, time definite delivery services for business customers. Most high volume customers have entered into service agreements providing for specified rates or rate schedules for time definite deliveries. As of December 31, 2002, we serviced approximately 450,000 active customer shipping locations.
We determine prices for any particular domestic customer based on competitive factors, service type, anticipated costs, shipment volume and weight, and other considerations. We believe that we generally offer prices that are competitive with, or lower than, prices quoted by our principal competitors for comparable services.
Internationally, our marketing strategy is to divide any or
alltarget the outbound express and freight shipments of U.S. business customers, and to sell the inbound service of our distribution capabilities in the United States.
Both in the international and domestic markets, we believe customers are most effectively reached by a direct sales force, and accordingly, we do not 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 services.
Our sales force consisted of approximately 480 domestic representatives and 80 international specialists as of December 31, 2002. Our sales efforts are supported by the Marketing and International Divisions, based at our headquarters. Senior management is also active in marketing our services to major accounts.
Customer Automation
Customer technology and automation continue to be important factors in attracting and retaining customers. We continue to enhance automation of the sharesshipping process to make it easier for customers to use our services and obtain valuable management information. We believe that we are generally competitive with other express carriers in terms of Preferred Stockcustomer automation, reliability and convenience.
For many of our high-volume customers, we offer a metering device, called LIBRA(SM), which is installed at the customer’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 enables the customer to track the status of shipments in our FOCUS shipping and tracking system. At year end 2002, the system was in use at approximately 10,900 customer locations. Use of LIBRA not only benefits the customer, but also lowers our operating costs, since LIBRA shipment data is transferred into one or more series,the FOCUS system automatically, thus avoiding duplicate data entry.
“Customer Linkage”, an electronic data interchange (“EDI”) program developed for our 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 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 our operating costs by eliminating manual data entry. EDI also includes electronic invoicing and payment remittance processing. We also have available a software program known as QUICKLINK, which significantly reduces programming time required by customers to take advantage of linkage benefits.
We offer customers PC-based software designed to improve their productivity and provide convenient access to our various services. “Ship Exchange” is an internet shipping system available through our website, www.airborne.com. Ship Exchange allows customers to prepare shipping labels for domestic and international shipments, track the status of their shipments, store frequent ship-to locations in a personal 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 shipping features, Corporate Exchange allows customers centralized administration of employee shipping permissions and restrictions, maintenance of a shared address book, reference information and the ability to create custom reports.
Our “Small Business Center”, featured on our website, provides enhanced marketing and functionality. With this feature, customers can go 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 service representatives, locate drop boxes, compare rates and obtain other useful information about our business, such as our service offerings, documentation requirements and transit times.
Competition
The market for our 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 resolutiondomestic air express business, followed by United Parcel Service, 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’s Express and Priority Mail Services, as well as several other transportation companies offering next morning or resolutions establishingnext-plane-out delivery service. We also compete 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 addition of our deferred ground service provides us a particular
series,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 make capital investments to improve and maintain service and increase productivity. However, we have significantly less capital resources than our two primary competitors.
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.
Employees
As of December 31, 2002, we had approximately 15,200 full-time employees and 7,300 part-time and casual employees. Approximately 7,400 full-time employees (including our 745 pilots) and 2,800 part-time and casual employees are employed under union contracts.
Labor Agreements
Labor agreements with locals of the International Brotherhood of Teamsters and Warehousemen cover most of our union ground personnel. Agreements covering 73% and 25% of our union ground personnel expire in 2003 and 2004, respectively.
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 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, there can be no assurance that disputes will not arise in the future, which could disrupt service to customers.
Regulation
Our operations are regulated by the United States Department of Transportation (“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. We believe we possess all necessary DOT-issued certificates to conduct our 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 other matters affecting air safety. The FAA issues operating certificates and operations specifications to carriers that possess the technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each aircraft that meets the requirements for aircraft design and maintenance. We believe we hold all airworthiness and other FAA certificates required for the conduct of our 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 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 any ofmandatory directives, the shares thereof, to fix and
determine the number of shares and the designation of such
series, so as to distinguish it from the shares of all other
series and classes, and to fix and determine the preferences,
voting rights, qualifications, privileges, limitations, options,
conversion rights, restrictions and other special or relative
rights of the Preferred Stock or of such series to the fullest
extent now or hereafter permitted by the laws of the State of
Delaware, including, but not limited to, the variations between
different series in the following respects:
4.2.1 The distinctive designation of such
series and the number of shares which shall constitute such
series, which number may be increased or decreased (but not below
the number of shares thereof then outstanding)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 3 aircraft (all of our operating aircraft satisfy Stage 3 noise compliance requirements), an airport operator must obtain the carriers’ or the government’s approval of the rule prior to its adoption. We believe the operation of our aircraft either complies with or is exempt from compliance with currently applicable local airport rules. However, some airport authorities are considering adopting local noise regulations and, to the extent more stringent aircraft operating regulations are adopted on a widespread basis, we might be required to spend substantial sums, make schedule changes or take other actions 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 may adopt regulations requiring reduction in emissions for one or more localities based on the measured air quality at such localities. Such regulations may 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 our financial condition or results of operations.
Under currently applicable federal aviation law, ABX could cease to be eligible to operate as an all-cargo carrier if more than 25% of Airborne’s voting stock 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 our knowledge, non-U.S. citizens do not own or control more than 25% of our outstanding voting stock. One of our 37 officers is not a U.S. citizen.
We believe that our current operations are substantially in compliance with the numerous regulations to which our business is subject; however, various regulatory authorities have jurisdiction over significant aspects of our 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 primary 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 Board of Directors;
4.2.2 The annual dividend rate for such
series,current economic climate.
Intensified geopolitical risks and the dateresulting 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 datesthe 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.
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 other 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 dividends shall commenceincludes unconditional purchase obligations of approximately $66.5 million for committed aircraft and aircraft related acquisitions. While we believe we have the ability to accrue;
4.2.3 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, 2002, we derived approximately 11% of our revenues from international operations. If we are unable to compete successfully in 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 United States from other countries.
The price of our stock may be subject to wide 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:
Executive Officers of the Registrant
The following table sets forth certain information regarding our executive officers as of February 18, 2003. Unless otherwise indicated the positions shown are with AEI, although Messrs. Donaway, Michael and Anderson hold comparable positions with Airborne, Inc.
Name | Age | Position | ||
Carl D. Donaway | 51 | Chief Executive Officer and Chairman of the Board | ||
Lanny H. Michael | 51 | Executive Vice President and Chief Financial Officer | ||
David A. Billings | 57 | Senior Vice President and Chief Information Officer | ||
Bruce E. Grout | 56 | Senior Vice President, International | ||
Joseph C. Hete | 48 | President and Chief Operating Officer, ABX Air, Inc. | ||
Darby Langdon | 57 | Senior Vice President, Planning | ||
Kenneth J. McCumber | 57 | Senior Vice President, Sales | ||
David C. Anderson | 49 | Vice President, General Counsel and Corporate Secretary |
Carl D. Donaway. Mr. Donaway has been Chief Executive Officer and Chairman of the Board since April 2002. He served as Chief Executive Officer and President from February 2002 until April 2002. Mr. Donaway served as President and Chief
Operating Officer from August 2000 until February 2002. From February 2000 to August 2000, Mr. Donaway was Senior Executive Vice President and Chief Executive Officer of ABX and from 1992 to February 2000 he was Chief Executive Officer of ABX. Mr. Donaway was promoted to Vice President in 1990 and has been employed by us since 1977.
Lanny H. Michael. 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. 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, when he left us, and again from 1990 to 1993.
Bruce E. Grout. 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. 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. 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. 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. 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.
We lease our general and administrative office facilities located in Seattle, Washington.
At December 31, 2002 we maintained approximately 310 domestic and 45 foreign stations, most of which are leased. The majority of the facilities are located at which,or near airports.
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. In 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 and reasonably foreseeable future needs.
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
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock and Dividends
Our common stock is traded on the New York Stock Exchange and the termsPacific Exchange, Inc., under the symbol “ABF”. The following is a summary of the cash dividends paid and conditionsthe 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 the 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 consolidated financial statements and the notes thereto and the information contained herein in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of 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’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 following 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 trend 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 full year 2002 declined compared to 2001 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.
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 seriesas 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 made redeemable;
4.2.4achieved.
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 purchase or sinkingnotes are for a five-year term maturing in April 2007. The proceeds from the sale were used, in part, to fund provisions, if any,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 purchaseMarch 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 redemptionrenegotiating the minimum levels of sharesrequired 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 such series;
4.2.5$250 million in available proceeds from the sale of eligible receivables. The preferential amount orfacility is accounted for as a sale of assets and, accordingly, receivables sold and the amounts payable upon sharesoutstanding under the facility are not reflected on the consolidated balance sheet. At December 31, 2002, we had received $200 million of such seriessales 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 eventeconomy, 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 in 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 liquidation, dissolutionsecuritization facility to be reduced.
Disclosures About Contractual Obligations and Commercial Commitments
Information regarding contractual obligations and commercial commitments is as 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 winding upestimation techniques which could be selected. On an on-going basis, we evaluate our selection of the corporation;
4.2.6 The voting rights, if any, of
shares of such series;
4.2.7 The terms and conditions, if any,
upon which shares of such series may be convertedpolicies and the class
or classes or seriesestimation techniques we use, including those related to revenue recognition, postretirement liabilities, bad debts, self-insurance reserves, accruals for labor contract settlements, valuation of sharesspare-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 corporation orcircumstances, 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 securities into which such shares may be converted;
4.2.8 The relative seniority, parity or
junior rank of such seriessources, as to dividends or assetswell as for identifying and assessing our accounting treatment with respect to any other classescommitments and contingencies. Actual results may differ from these estimates under different assumptions or seriesconditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of stock then or thereafterthe 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 issued;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 4.2.9 Such other terms, qualifications,
privileges, limitations, options, restrictions,fair values of our property and specialequipment. Acceleration of depreciation expense or relative rightsthe 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 preferences,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 sharesthose matters will not differ materially from our assessment of such seriesthem. 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 Directors may,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 timedate of such resolutionan entity’s commitment to an exit plan. The provisions of this statement are effective for our exit or resolutions, lawfully fixdisposal 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 determineDisclosure 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 lawsrequirements for recognizing a liability at the inception of the Stateguarantee equal to the fair value of Delaware.
Unless otherwise providedthe 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 resolutionsignificant impact on our financial position or resolutions establishing any particular series,results of operations.
In December 2002, the aggregate
number of authorized shares of Preferred Stock may be increased
byFASB 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 Certificatefair value-based method of Incorporation approved
solely by a majority voteaccounting 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 outstanding sharesmethod used on reported results. We currently plan to follow the provisions of Common
Stock (or solely with a lesser voteAccounting 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 Common Stock,fair value of stock options as compensation. Accordingly, implementation of this statement will currently not have a significant impact on our financial position or solely by actionresults 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 Boardoverall 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 Directors, if permitted by law
atthis report, which are not historical facts, are considered forward-looking statements (as that term is defined in the time)Private Securities Litigation Reform Act of 1995). All sharesThese forward-looking statements are based on expectations, estimates and projections as of any one series shall be alike in
every particular, except with respect to the accrual of dividends
prior to the date of issuance.
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK
Section 1. Designationthis filing, and Number of
Shares. The shares of such series shall be designated as "Series
A Participating Cumulative Preferred Stock (without par value)"
(the "Series A Preferred Stock"). Theinvolve 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 shares initially
constitutingreasons, including those described above in “Risk Factors.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the Series A Preferred Stock shall be 300,000;
provided, however, that, if more thanordinary course of our business. These risks include interest rate, fuel price and foreign exchange risks. The following is a totaldescription of 300,000 sharesthese risks and a discussion of Series A Preferred Stock shall be issuable by the corporation
upon the exercise of Rights (the "Rights") outstanding under the
Rights Agreement dated as of February 14, 1997 between Airborne
Freight Corporation, a Delaware corporation ("ABF"),our exposure to changes in market rates and The Bank
of New York, a New York banking corporation, as Rights Agent (the
"Rights Agreement"), following the date (the "Effective Date")prices and related effects on which the corporation succeedsfair values, earnings and cash flows.
Interest Rate Risk
As described in Note G to the rightsconsolidated financial statements, we have various debt instruments, including debt issued at fixed and obligationsvariable rates of ABF underinterest. 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 estimating the Rights Agreementchange 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 merger
pursuant to which ABF becomes a wholly-owned subsidiaryissuance of the corporation,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 | 26 | |
Independent Auditors’ Report | 27 | |
Consolidated Statements of Operations | 28 | |
Consolidated Balance Sheets | 29 | |
Consolidated Statements of Cash Flows | 30 | |
Consolidated Statements of Shareholders’ Equity | 31 | |
Notes to Consolidated Financial Statements | 32 |
REPORT ON MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL REPORTING
The management 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 corporation, pursuant
to Section 151(g)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 General Corporation LawCompany’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 StateCompany as of Delaware, shall directDecember 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 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 resolutionan 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 resolutionsmoney 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 certificateportion 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 properly executed, acknowledged, filedon 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 recorded,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 Section 103
thereof, providingStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the total numberImpairment or Disposal of sharesLong-Lived Assets”. A fair value adjustment charge of Series A
Preferred Stock authorized$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 issueddeferred 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 (tonet 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 Certificatereceivables, 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 Incorporation then permits) toallowance for doubtful accounts would decrease the largest number of whole shares (rounded up to the nearest whole
number) issuable upon exercise of such Rights.
Section 2. Dividends or Distributions.
(a) Subject to the prior and superior rightsvalue of the holders of
shares of any other series of Preferred Stock or other class of
capital stockCompany’s retained interest.
Upon the sale of the corporation ranking prior and superior to
the shares of Series A Preferred Stock with respect to dividends,
the holders of shares of the Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of
Directors, out of the assets of the corporation legally available
therefor, (1) quarterly dividends payable in cash on the last day
of each fiscal quarter in each year, or such other dates as the
Board of Directors of the corporation shall approve (each such
date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or a fraction of a share of
Series A Preferred Stock,undivided interest in the amountreceivables, the Company incurs a liability to fund the purchaser’s costs of $30 per whole share
(rounded tofinancing the nearest cent) less the amount of all cash
dividends declared on the Series A Preferred Stock pursuant to
the following clause (2) since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock (the
total of which shall not, in any event, be less than zero) and
(2) dividends payable in cash on the payment date for each cash
dividend declared on the Common Stock in an amount per whole
share (rounded to the nearest cent) equal to the Formula Number
(as hereinafter defined) then in effect times the cash dividends
then to be paid on each share of Common Stock. In addition, if
the corporation shall pay any dividend or make any distribution
on the Common Stock payable in assets, securities or other forms
of noncash consideration (other than dividends or distributions
solely in shares of Common Stock), then, in each such case, the
corporation shall simultaneously pay or make on each outstanding
whole share of Series A Preferred Stock a dividend or
distribution in like kind equal to the Formula Number then in
effect times such dividend or distribution on each share of the
Common Stock. As used herein, the "Formula Number" shall be 200;
provided, however, that, if at any time after the Effective Date,
the corporation shall (i) declare or pay any dividend on the
Common Stock payable in shares of Common Stock or make any
distribution on the Common Stock in shares of Common Stock, (ii)
subdivide (by a stock split or otherwise) the outstanding shares
of Common Stock into a larger number of shares of Common Stock or
(iii) combine (by a reverse stock split or otherwise) the
outstanding shares of Common Stock into a smaller number of
shares of Common Stock, then in each such event the Formula
Number shall be adjusted to a number determined by multiplying
the Formula Number in effect immediately prior to such event by a
fraction, the numerator of whichproceeds. This liability is the number of shares of
Common Stock that are outstanding immediately after such event
and the denominator of which is the number of shares of Common
Stock that are outstanding immediately prior to such event (and
rounding the result to the nearest whole number); and provided
further that, if at any time after the Effective Date, the
corporation shall issue any shares of its capital stock in a
merger, reclassification, or change of the outstanding shares of
Common Stock, then in each such event the Formula Number shall be
appropriately adjusted to reflect such merger, reclassification
or change so that each share of Preferred Stock continues to be
the economic equivalent of a Formula Number of shares of Common
Stock prior to such merger, reclassification or change.
(b) The corporation shall declare
a dividend or distribution on the Series A Preferred Stock as
provided in Section 2(a) immediately prior to or at the same time
it declares a dividend or distribution on the Common Stock (other
than a dividend or distribution solely in shares of Common
Stock); provided, however, that, in the event no dividend or
distribution (other than a dividend or distribution in shares of
Common Stock) shall have been declared on the Common Stock during
the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of
$30 per share on the Series A Preferred Stock shall nevertheless
be payable on such subsequent Quarterly Dividend Payment Date.
The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock
entitled to receive a dividend or distribution declared thereon,
which record date shall be the same as the record date for any
corresponding dividend or distribution on the Common Stock.
(c) Dividends shall begin to
accrue and be cumulative on outstanding shares of Series A
Preferred Stock from and after the Quarterly Dividend Payment
Date next preceding the date of original issue of such shares of
Series A Preferred Stock; provided, however, that dividends on
such shares which are originally issued after the record date for
the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and on or prior to
the next succeeding Quarterly Dividend Payment Date shall begin
to accrue and be cumulative from and after such Quarterly
Dividend Payment Date. Notwithstanding the foregoing, dividends
on shares of Series A Preferred Stock which are originally issued
prior to the record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive a
quarterly dividend on the first Quarterly Dividend Payment Date
shall be calculated as if cumulative from and after the last day
of the fiscal quarter next preceding the date of original
issuance of such shares. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the shares of Series A Preferred
Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the
time outstanding.
(d) So long as any shares of the
Series A Preferred Stock are outstanding, no dividends or other
distributions shall be declared, paid or distributed, or set
aside for payment or distribution, on the Common Stock unless, in
each case, the dividend required by this Section 2 to be declared
on the Series A Preferred Stock shall have been declared.
(e) The holders of the shares of
Series A Preferred Stock shall not be entitled to receive any
dividends or other distributions except as provided herein.
Section 3. Voting Rights. The holders
of shares of Series A Preferred Stock shall have the following
voting rights:
(a) Each holder of Series A
Preferred Stock shall be entitled to a number of votes equal to
the Formula Number then in effect, for each share of Series A
Preferred Stock held of record on each matter on which holders of
the Common Stock or stockholders generally are entitled to vote,
multiplied by the maximum number of votes per share which any
holder of the Common Stock or stockholders generally then have
with respect to such matter (assuming any holding period or other
requirement to vote a greater number of shares is satisfied).
(b) Except as otherwise provided
herein or by applicable law, the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock shall
vote together as one class for the election of directors of the
corporation and on all other matters submitted to a vote of
stockholders of the corporation.
(c) If,recorded at the time of any annual
meeting of stockholders forsale and is estimated based on projected financing costs over the election of directors, the
equivalent of six quarterly dividends (whether or not
consecutive) payable on any share or shares of Series A Preferred
Stock are in default, the number of directors constituting the
Board of Directorsprojected life of the corporation shall be increased by two.
In addition to voting togetherreceivable interests sold. Discounts associated with the holderssale of Common Stockreceivables, 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 electionconsolidated statements of other directorsoperations. 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 corporation, the
holders of recordfollowing (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 Series A Preferred Stock, voting
separately as a class to the exclusionfollowing (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 holdersfollowing (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 Common
Stock, shall be entitled at said meeting of stockholders (and at
each subsequent annual meeting of stockholders), unless all
dividends in arrears have been paid or declared and set apart for
payment prior thereto, to vote for the election of two directorspretax earnings (loss) consist of the corporation, the holders of any Series A Preferred Stock
being entitled to cast a number of votes per share of Series A
Preferred Stock equal to the Formula Number. Until the default in
payments of all dividends which permitted the election of said
directors shall cease to exist, any director who shall have been
so elected pursuant to the next preceding sentence may be removed
at any time, either with or without cause, only by the
affirmative votefollowing:
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 holdersfollowing (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 sharesfollowing (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 Company has a revolving bank credit agreement providing for a total commitment of Series A
Preferred Stock at the time entitled to cast$275,000,000 that expires in June 2004. The agreement is collateralized by a substantial majority of the votes entitled toCompany’s assets and contains restrictions that reduce the amount of available borrowing capacity by the amount of outstanding letters of credits, amounts calculated under leverage limitation provisions and the level of eligible collateral. With the current level of eligible collateral, available capacity under the agreement at December 31, 2002, 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 covenants regarding the maintenance of minimum levels of EBITDA, both on a quarterly and trailing four-quarter basis, which sequentially increase over the remaining term of the agreement, may not be castmet for the electionMarch 31, 2003 reporting date. Accordingly, the Company is pursuing strategies which ensure the borrowing commitment under the facility is maintained. These strategies include obtaining covenant waivers or renegotiating the minimum levels of required EBITDA. If the Company is unsuccessful in obtaining waivers or renegotiating terms, it may not have access to any such director
at a special meetingborrowing capacity under this agreement. The agreement also restricts the Company from declaring or paying dividends on its common stock in excess of such holders called for that purpose, and$2,000,000 during any vacancy thereby created may be filledcalendar quarter. The $100,000,000 of outstanding 7.35% senior notes are also collateralized by the vote of such
holders. If and when such default shall cease to exist, the
holdersassets of the Series A Preferred Stock shall be divestedCompany. The agreement did permit a one-time payment of the
foregoing special voting rights, subject$242,000 ($.005 per share) made in May 2002 to revesting in the
event of eachshareholders upon redemption and every subsequent like default in payments of
dividends. Upon the termination of the foregoing special votingCompany’s shareholder rights the termsplan.
The Company has an aircraft loan, collateralized by three 767 aircraft, which has an outstanding balance of office$57,558,000 as of all persons who mayDecember 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 elected directors pursuantsold to said special voting rights shall
forthwith terminate,a majority-owned and the number of directors constituting the
Board of Directors shall be reduced by two.consolidated subsidiary. The voting rights
granted by this Section 3(c) shall be in addition to any other
voting rights granted to the holdersnet
AIRBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
carrying value of the Seriesthree aircraft was $73,803,000 at December 31, 2002. As discussed in Note A, Preferred
Stockthe 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 this Section 3.
(d) Except as provided herein, in
Section 11 or by applicable law, holderspart, to fund the repayment of Series A Preferred
Stock shall have no special voting rights and$100,000,000 of 8.875% senior notes due on December 15, 2002 at their consent shall
not be required (except to the extent theystated maturity. The notes are entitled to vote
with holders of Common Stock as set forth herein) for authorizing
or taking any corporate action.
Section 4. Certain Restrictions. (a)
Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, onconvertible into shares of Series A Preferred Stock outstanding shall have been paid in
full, the corporation shall not
(i) declare or pay dividends
on, make any other distributions on, or redeem or purchase or
otherwise acquire for consideration any shares ofCompany’s common stock, ranking
junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends
on or make any other distributions on any shares of stock ranking
on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders
of all such shares are then entitled;
(iii) redeem or purchase
or otherwise acquire for consideration shares of any stock
ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock;
provided that the corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for
shares of any stock of the corporation ranking junior (either as
to dividends or upon dissolution, liquidation or winding up) to
the Series A Preferred Stock; or
(iv) purchase or otherwise
acquire for consideration any shares of Series A Preferred Stock,
or any shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer made
in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective
series or classes.
(b) The corporation shall not
permit any subsidiary of the corporation to purchase or otherwise
acquire for consideration any shares of stock of the corporation
unless the corporation could, under paragraph (a) of this Section
4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Liquidation Rights. Upon
the liquidation, dissolution or winding up of the corporation,
whether voluntary or involuntary, no distribution shall be made
(1) to the holders of shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received an
amount equal to the accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of
such payment, plus an amount equal to the greater of (x) $100 per
whole share or (y) an aggregate amount per share equal to the
Formula Number then in effect times the aggregate amount to be
distributed per share to holders of Common Stock or (2) to the
holders of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series
A Preferred Stock and all other such parity stock in proportion
to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up.
Section 6. Consolidation, Merger, etc.
In case the corporation shall enter into any consolidation,
merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the
then outstanding shares of Series A Preferred Stock shall at the
same time be similarly exchanged or changed into an amount per
share equal to the Formula Number then in effect times the
aggregate amount of stock, securities, cash or any other property
(payable in kind), as the case may be, into which or for which
each share of Common Stock is exchanged or changed. In the event
both this Section 6 and Section 2 appear to apply to a
transaction, this Section 6 will control.
Section 7. No Redemption; No Sinking
Fund. (a) The shares of Series A Preferred Stock shall not be
subject to redemption by the corporation or at the option of anythe holder, at a conversion rate of Series A Preferred Stock except as set forth42.7599 shares per each $1,000 principal amount of notes held, subject to adjustment in Section
5certain circumstances. This is equivalent to a conversion price of Article Fourth$23.39 per share. At the current conversion price, a total of 6,413,985 shares are issuable upon full conversion of the Restated Certificatenotes. The Company incurred issue costs of Incorporation$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 |
| 31,520 |
|
| 20,196 |
|
| 238 |
|
| 1,763 |
| ||||
Plan amendments |
| 15,252 |
|
| — |
|
| — |
|
| — |
| ||||
Obligation as of December 31 | $ | 369,346 |
| $ | 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 | $ | (214,330 | ) | $ | (163,563 | ) | $ | (16,248 | ) | $ | (14,222 | ) | ||||
Unrecognized prior service cost (income) |
| 50,898 |
|
| 41,914 |
|
| (198 | ) |
| (318 | ) | ||||
Unrecognized net actuarial loss |
| 108,622 |
|
| 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 corporation; provided, however, thatfollowing 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) | 6.50% | 6.50% | 6.50% | — | — | — | ||||||
Rate of compensation increase (non-pilots) | 5.00% | 5.00% | 5.00% | — | — | — |
Effective January 1, 2002, the corporation may
purchase or otherwise acquire outstanding shares of Series A
Preferred Stock in the open market or by offerCompany amended its qualified retirement plans to any holder or
holders of shares of Series A Preferred Stock.
(b) The shares of Series A
Preferred Stock shall not be subject to or entitled to the
operation of a retirement or sinking fund.
Section 8. Ranking. The Series A
Preferred Stock shall rank junior to all other series of
Preferred Stock of the corporation unless the Board of Directors
shall specifically determine otherwise in fixing the powers,
preferences and relative, participating, optional and other
special rights of the shares of such series and the
qualifications, limitations and restrictions thereof.
Section 9. Fractional Shares. The
Series A Preferred Stock shall be issuable upon exercise of the
Rights issued pursuant to the Rights Agreement in whole shares or
in any fraction of a share that is one one-hundredth of a share
or any integral multiple of such fraction which shall entitle the
holder, in proportion to such holder's fractional shares, to
receive dividends, exercise voting rights, participate in
distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock. In lieu of fractional
shares, the corporation, prior to the first issuance of a share
or a fraction of a share of Series A Preferred Stock, may elect
(a) to make a cash payment as provided in the Rights Agreement
for fractions of a share other than one one-hundredths of a share
or any integral multiple thereof or (b) to issue depository
receipts evidencing such authorized fraction of a share of Series
A Preferred Stock pursuant to an appropriate agreement between
the corporation and a depository selected by the corporation;
provided that such agreement shall provide that the holders of
such depository receipts shall have all the rights, privileges
and preferences to which they are entitled as holders of the
Series A Preferred Stock.
Section 10. Reacquired Shares. Any
shares of Series A Preferred Stock purchased or otherwise
acquired by the corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, without designation as to
series until such shares are once more designated as part of a
particular series by the Board of Directors pursuant toincorporate the provisions of Section 4.2the Economic Growth and Tax Relief Reconciliation Act of this Article Fourth.
Section 11. Amendment. None2001 (“EGTRRA”). EGTRRA, among other things, increased the limits of covered compensation considered under the qualified plans benefit formulas. The effect of the powers, preferences and relative, participating, optional and
other special rights of the Series A Preferred Stock as provided
herein or in the Certificate of Incorporation shall be amended in
any manner which would alter or change the powers, preferences,
rights or privileges of the holders of Series A Preferred Stock
so as to affect them adversely without the affirmative vote of
the holders of at least 66-2/3% of the outstanding shares of
Series A Preferred Stock, voting as a separate class; provided,
however, that no such amendment approved by the holders of at
least 66-2/3% of the outstanding shares of Series A Preferred
Stock shall be deemed to apply to the powers, preferences, rights
or privileges of any holder of shares of Series A Preferred Stock
originally issued upon exercise of the Rights after the time of
such approval without the approval of such holder.
4.3 Except for and subject to those rights
expressly granted to the holders of Preferred Stock or any series
thereof by resolution or resolutions adopted by the Board of
Directors pursuant to Section 4.2 of this Article Fourth and
except as may be provided by the laws of the State of Delaware,
the holders of Common Stock shall have exclusively all other
rights of shareholders.
4.4.1 The Bylaws shall divide the
directors into three classes and prescribe the tenure of office
of the several classes; but such Bylaws shall not provide for the
election of any class for a period shorter than from the time of
election following the division into classes until the next
annual meeting, and thereafter for a period shorter than the
interval between annual meetings or for a period longer than
three years and shall provide that the term of the office of at
least one class shall expire each year. At all elections of
directors, voting shall be by class.
4.4.2 At all elections of directors of
the corporation, each holder of shares of Common Stock shall be
entitled to as many votes as shall equal the number of votes
which (except for such provision as to cumulative voting) he
would be entitled to cast for the election of directors with
respect to his shares of stock multiplied by the number of
directors to be elected, and he may cast all of such votes for a
single director or may distribute them among the number to be
voted for, or for any two or more of them as he may see fit.
FIFTH. The corporation is to have perpetual existence.
SIXTH. 6.1 In furtheranceincrease benefit obligations funded through the qualified plans and not in limitation of the
powers conferred by statute, the board of directors is expressly
authorized:
6.1.1 To make, alter or repeal the bylaws
of the corporation.
6.1.2 To authorize and cause to be
executed mortgages and liens upon the real and personal property
of the corporation.
6.1.3 To set apart out of any of the
funds of the corporation available for dividends a reserve or
reserves for any proper purpose and to abolish any such reserve
in the manner in which it was created.
6.1.4 By a majority of the whole board,
to designate one or more committees, each committee to consist of
two or more of the directors of the corporation. reduce obligations funded through Company sponsored non-qualified plans.
The board may
designate one or more directorsprojected benefit obligation (“PBO”) as alternate members of any
committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, to the extent
provided in the resolution or in the bylaws of the corporation,
shall have and may exercise the powers of the board of directors
in the management of the business and affairs of the corporation,
and may authorize the seal of the corporation to be affixed to
all papers which may require it; provided, however, the by-laws
may provide that in the absence or disqualification of any member
of such committee or committees, the member or members thereof
present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in
the place of any such absent or disqualified member.
6.1.5 When and as authorized by the
affirmative vote of the holders of a majority ofdate is the stock issued
and outstanding having voting power given at a stockholders'
meeting duly called upon such notice as is required by statute,
or when authorized by the written consent of the holders of a
majority of the voting stock issued and outstanding, to sell,
lease or exchange all or substantially all of the property and
assets of the corporation, including its good will and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or
property including shares of stock in, and/or other securities
of, any other corporation or corporations, as its board of
directors shall deem expedient and for the best interests of the
corporation.
SEVENTH. 7.1 Whenever a compromise or arrangement is
proposed between this corporation and its creditors or any class
of them and/or between this corporation and its stockholders or
any class of them, any court of equitable jurisdiction within the
State of Delaware may, on the application in a summary way of
this corporation or of any creditor or stockholder thereof, or on
the application of any receiver or receivers appointed for this
corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or
of any receiver or receivers appointed for this corporation under
the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or
stockholders or class of stockholders of this corporation, as the
case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths inactuarial present value of all benefits attributed to a plan’s benefit formula to employee service rendered to that date, including the creditors or classeffects of creditors, and/orestimated future compensation increases. Alternatively, the accumulated benefit obligation (“ABO”) is the actuarial present value of the
stockholders or class of stockholders of this corporation, as the
case may be, agree to any compromise or arrangement and to any
reorganization of this corporation as a consequence of such
compromise or arrangement, the said compromise or arrangement and
the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders
or class of stockholders, of this corporation, as the case may
be, and also on this corporation.
EIGHTH. 8.1 Meetings of shareholders may be held within
or without the State of Delaware as the Bylaws may provide.
Notwithstanding any provision of law, no action may be taken by
the shareholders, including without limitation amendment of this
Certificate or of the Bylaws, except at a meeting duly called in
accordance with the Bylaws.
8.2 The books of this corporation may be kept
(subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of
the corporation. Election of Directors need not be by written
ballot unless the Bylaws of the corporation shall so provide.
NINTH. 9.1 The corporation shall at all times indemnify
its officers and directors from and against all expenses and
liabilities of whatsoever nature to the full extent permitted by
Delaware law, and without limiting the generality of the
foregoing, shall indemnify any director or officer or any former
director or former officer or any person who may have served at
its request as a director or officer of another corporation, and
the heirs, personal representatives and estates of each of them,
against all costs and expenses including attorneys' fees
reasonably incurred by him or imposed on him in connection with
any action, proceeding or investigation of whatsoever nature,
civil, administrative or criminal (including any shareholder's
action and any other action in which the corporation is a party,
plaintiff or defendant) in which he is or may be made a party or
is proceeded against or involved by reason of any action
whatsoever alleged to have been taken by him or omitted by him as
such director or officer, and against any liabilities, judgments,
fines, penalties or damages imposed against him in such action,
proceeding or investigation, or sums paid in settlement or
compromise thereof with the approval of the Board of Directors;
provided, that the provisions of this paragraph shall not apply
unless such person acted in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation, and
shall not apply if such person shall be duly and finally adjudged
(1) to be guilty of willful misconduct, bad faith or gross
negligence in the performance of his duties to the corporation,
in a derivative action or one brought by the corporation, or (2)
to be guilty of willful misconduct or bad faith, if such action
or proceeding is broughtbenefits attributed by a third party.
9.2 Expenses incurred in defending such action,
proceeding or investigation may be paid byplan’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 corporation in
advanceABO a more meaningful measure of accrued liabilities for purposes of determining funding adequacy. As of December 31, 2002, the final disposition thereof as authorized by the
Board of Directors in the specific case and upon receipt of an
undertaking by or on behalf of the director or officer to repay
such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation.
9.3 The corporation shall have power to purchase
and maintain insurance on behalf of any person who is or was an
officer, director, employee or agent of the corporation, or is or
was serving at the request of the corporation as an officer,
director, employee and agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
whatsoever asserted against him and incurred by him in any such
capacity or arising out of his status as such, and against any
and all expenses in connection therewith, whether or not the
corporation would have the power to indemnify him against such
liability under the provisions of this certificate of
incorporation or under Delaware law.
TENTH. 10.1 The corporation reserves the right to
amend, alter, change or repeal any provision contained in this
certificate of incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ELEVENTH. 11.1 A higher than majority shareholder vote
for certain Business Combinations shall be required as follows
(all capitalized terms being used as subsequently defined
herein):
(a) In addition to any affirmative vote
required by law or the Certificate of Incorporation, and except
as otherwise expressly provided in Section 11.2 of this Article
Eleventh:
(1) any merger or consolidation of the
corporation or any Subsidiary with (A) any Interested Shareholder
or with (B) any other corporation (whether or not itself an
Interested Shareholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an
Interested Shareholder;
(2) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition (in one
transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate or Associate of any
Interested Shareholder of anyCompany’s qualified plans had funded plan assets of the corporation or any
Subsidiary having an aggregate Fair Market Value of $10,000,000
or more;
(3) the issuance or sale by the
corporation or any Subsidiary (in one transaction or a series of
transactions) of any securities of the corporation or any
Subsidiary to any Interested Shareholder or any Affiliate or
Associate of any Interested Shareholder in exchange for cash,
securities or other consideration (or a combination thereof)
having an aggregate Fair Market Value of $10,000,000 or more;
(4) the adoption of any plan or
proposal for the liquidation or dissolution of the corporation
proposed by or on behalf of any Interested Shareholder or any
Affiliate or associate of any Interested Shareholder; or
(5) any reclassification of securities
(including any reverse stock split), or recapitalization of the
corporation, or any merger or consolidation of the corporation
with any of it Subsidiaries or any transaction (whether or not
with or into or otherwise involving an Interested Shareholder)
which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity securities or securities convertible into equity
securities of the corporation or any Subsidiary which is directly
or indirectly owned by any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder; shall
require the affirmative vote of the holders of at least 80% of
the voting power of the then outstanding shares of common stock
of the corporation entitled to vote in an annual election of
directors, and at least 80% of the voting power of all shares of
all classes of capital stock of the corporation entitled to vote
in an annual election of directors (all such stock of all classes
constituting the "Voting Stock"), voting together as a single
class. Such affirmative vote shall be required notwithstanding
the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any
national securities exchange or otherwise.
(b) The term "Business Combination" as used
in this Article Eleventh shall mean any transaction which is
referred to in any one or more of clauses (1) through (5) of
paragraph (a) of Section 11.1 of this Article Eleventh.
11.2 The provisions of Section 11.1 of this
Article Eleventh shall not be applicable to any Business
Combination, and such Business Combination shall require only
such affirmative vote (if any) as is required by law, any other
provision of the Certificate of such corporation or any agreement
with any national securities exchange, if all of the conditions
specified in either of the following paragraphs (a) or (b) are
met:
(a) The Business Combination shall have been
approved by a majority of the Continuing Directors; or
(b) All of the following six conditions
shall have been met:
(1) The transaction constituting the
Business Combination shall provide for a consideration to be
received by holders of Common Stock in exchange for their stock,
and the aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders
of Common Stock in such Business Combination shall beplus accrued liabilities at least equal to the highestABO 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 following:
(A) (if applicable)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 highest
per share price (including any brokerage commissions, transfer
taxesdefined benefit plans and soliciting dealers' fees) paiddiscontinued future contributions to an employee’s account (with the exception of contributions for the Company’s pilots) in order to acquire any
shares of Common Stock beneficially owned by the Interested
Shareholder which were acquired (i) withinprofit sharing plan. Previous contributions and earnings accumulated under the two-year period
immediatelyprofit sharing plan prior to the first public announcementamendments 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 plan. 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 proposed Business Combination (the "Announcement Date") or (ii)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 55.9% 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 transactionabove 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 it became an Interested Shareholder,
whichever is higher;coordinated and (B)used to offset obligations accrued under the Fair Market Valuequalified defined benefit plans. Contributions to this plan, 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 Common Stocksignificant 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 Announcement Dateconsolidated 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 intercompany loan and dividend restrictions that apply to the 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 consolidating 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 in 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 |
| ||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is contained in part in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and the information contained therein is incorporated herein by reference.
The executive officers of Airborne are elected annually at the Board of Directors meeting held in conjunction with the annual meeting of shareholders. There are no family relationships between any directors or executive officers of Airborne. Additional information regarding executive officers is set forth in Part I, Item 1, under the caption “Executive Officers of the Registrant.”
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption “Executive Compensation,” and the information contained therein is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item is contained in part in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the captions “Voting at the Meeting” and “Stock Ownership of Management,” and the information contained therein is incorporated herein by reference.
The balance of the response to this Item is found in Part II, Item 5, under the caption “Securities Authorized for Issuance Under Equity Compensation Plans.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date on
whichof this report, the Interested Shareholder becameCompany carried out an Interested Shareholderevaluation, 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 "Determination Date"“Exchange Act”), whichever is higher.
(2) If. Based upon the transaction constitutingevaluation, the Business Combination shall provide for a considerationCompany’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 receiveddisclosed by holders of any class of outstanding Voting Stockthe Company in the reports filed or submitted by it under the 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 Company’s internal controls or in other than Common Stock,factors that could significantly affect the aggregate amount of the cashCompany’s disclosure controls and the
Fair Market Value as ofprocedures subsequent to the date of the consummationevaluation. There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions taken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this report:
(1) Index to Consolidated Financial Statements:
Independent Auditors’ Report
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
The following consolidated financial statement schedule of the Business Combination of considerationCompany is included as follows:
Schedule II—Valuation and Qualifying Accounts
All other than cashschedules 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.
(3) Exhibits
The following exhibits are filed with or incorporated by reference into this report (with respect to documents incorporated by referenced that were filed prior to December 26, 2000, references to “Airborne” shall be deemed to be received per share by holdersreferences to AEI as its predecessor):
EXHIBIT NO. 3 Articles of sharesIncorporation and 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 such Voting Stock
shall be at least equal to the highestSecurity Holders Including Indentures
4 | (a) | Indenture dated as of December 3, 1992, between AEI and The Bank of New York, as trustee, relating to AEI’s 8.875% Notes due 2002 (incorporated by reference from Exhibit 4(a) to Amendment No. 1 to Airborne’s Registration Statement on Form S-3, No. 33-54560 filed with the Securities and Exchange Commission on December 4, 1992). | |
4 | (b) | First Supplemental Indenture dated as of September 15, 1995, between AEI, ABX, Airborne Forwarding Corporation, Wilmington Air Park, Inc., and Airborne FTZ, Inc. and The Bank of New York, as trustee, relating to AEI’s 7.35% Notes due 2005 (incorporated by reference from Exhibit 4(a) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
4 | (c) | Third Supplemental Indenture dated June 29, 2001 between AEI, ABX, SKY Courier, Inc., Wilmington Air Park, Inc., Airborne FTZ, Inc. and the Bank of New York, as trustee, relating to AEI’s 7.35% notes due 2005 (incorporated by reference from Exhibit 4(b) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). See Exhibits 10(s) through 10(x) for the collateral documents executed in connection with the Third Supplemental Indenture. |
EXHIBIT NO. 10 Material Contracts
Executive Compensation Plans and Agreements
10 | (a) | 1989 Airborne, Inc. Key Employee Stock Option and Stock Appreciation Rights Plan (incorporated by reference from Exhibit 10(d) to Airborne’s Form 10-K for the year ended December 31, 1989). | |
10 | (b) | 1994 Airborne, Inc. Key Employee Stock Option and Stock Appreciation Rights Plan (incorporated by reference from the Addendum to Airborne’s Proxy Statement for the 1994 Annual Meeting of Shareholders). | |
10 | (c) | Airborne, Inc. 1998 Key Employee Stock Option Plan (incorporated by reference from the Addendum to Airborne’s Proxy Statement for the 1998 Annual Meeting of Shareholders). | |
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, Inc. 2000 Director Stock Option Plan (incorporated by reference from the addendum to Airborne’s Proxy Statement for the 2000 Annual Meeting of shareholders). | |
10 | (f) | Airborne, Inc. Director Stock Bonus Plan dated April 23, 1996 (incorporated by reference from Exhibit 10(a) to Airborne’s Form 10-Q for the quarter ended June 30, 1996). | |
10 | (g) | First Amendment to Airborne, Inc. Director Stock Bonus Plan dated as of February 3, 1998 (incorporated by reference from Exhibit 10(g) to Airborne’s Form 10-K for the year ended December 31, 1998). | |
10 | (h) | Second Amendment to Airborne, Inc. Director Stock Bonus Plan dated as of February 3, 1998 (incorporated by reference from Exhibit 10(h) to Airborne’s Form 10-K for the year ended December 31, 1998). | |
10 | (i) | Airborne, Inc. 2002 Executive Stock Option Plan dated February 5, 2002 (incorporated by reference from Exhibit 10(i) to Airborne’s Form 10-K for the year ended December 31, 2001). | |
10 | (j) | Airborne Express Executive Deferral Plan restated January 1, 2001 (incorporated by reference from Exhibit 10(j) to Airborne’s Form 10-K for the year ended December 31, 2001). | |
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). A substantially identical agreement exists between AEI and eight other executive officers. | |
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 its officers. |
Other Material Contracts
10 | (q) | $275,000,000 Amended and Restated Credit Agreement dated as of June 29, 2001 among Airborne, Inc. as parent, AEI and ABX, as borrowers, and Wachovia Bank, N.A., as administrative and collateral agent, with U.S. Bank, as documentation agent, Bank of America, N.A., as syndication agent, and Wachovia Securities, Inc., as lead arranger, and lenders party thereto (incorporated by reference from Exhibit 10(a) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). See Exhibits 10(s) through 10(x) for the collateral documents executed in connection with the Amended and Restated Credit Agreement. | |
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, 1996). | |
10 | (z) | Amended and Restated Receivables Purchase Agreement dated August 8, 2001 between Airborne Credit, Inc. as seller; AEI as servicer; Blue Ridge Asset Funding Corporation and certain committed investors as named therein; as purchaser, and Wachovia Bank, N.A. as administrative agent (incorporated by reference from Exhibit 10(d) to Airborne’s Form 10-Q for the quarter ended June 30, 2001). | |
10 | (aa) | Receivables Sale Agreement between AEI, as originator and Airborne Credit, Inc., as buyer (incorporated by reference from Exhibit 10(t) to Airborne’s Form 10-K for the year ended December 31, 2000). |
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 following (it being
intended thatRegistrant
21 | Subsidiaries of the Registrant. |
EXHIBIT NO. 23 Consents of Experts and Counsel
23 | Independent Auditors’ Consent. |
EXHIBIT NO. 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 clause (b)(2) shall be
requiredreport to be met with respect to every class of outstanding
Voting Stock, whether or not the Interested Shareholder
beneficially owns any shares of a particular class of Voting
Stock):
(A) (if applicable) the highest
per share price (including any brokerage commissions, transfer
taxes and soliciting dealers' fees) paid in order to acquire any
shares of such class of Voting Stock beneficially ownedsigned on its behalf by the Interested Shareholder which were acquired (i) within the two-
year period immediately priorundersigned, thereunto duly authorized.
AIRBORNE, INC
By: | /s/ CARL D. DONAWAY | |
Carl D. Donaway Chief Executive Officer and Chairman of the Board | ||
By: | /s/ LANNY H. MICHAEL | |
Lanny H. Michael Executive Vice President and Chief Financial Officer | ||
By: | /s/ ROBERT T. CHRISTENSEN | |
Robert T. Christensen Chief Accounting Officer |
Date: March 14, 2003
Pursuant to the Announcement Date or (ii) in
the transaction in which it became an Interested Shareholder,
whichever is higher;
(B) (if applicable) the highest
preferential amount per share to which the holders of shares of
such class of Voting Stock are entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up
of the corporation; and
(C) the Fair Market Value per
share of such class of Voting Stock on the Announcement Date or
on the Determination Date, whichever is higher.
(3) The consideration to be received by
holders of a particular class of outstanding Voting Stock
(including Common Stock) shall be in cash or in the same form as
was previously paid in order to acquire shares of such class of
Voting Stock which are beneficially owned by the Interested
Shareholder. If the Interested Shareholder beneficially owns
shares of any class of Voting Stock which were acquired with
varying forms of consideration, the form of consideration to be
received by holders of such class of Voting Stock shall be either
cash or the form used to acquire the largest number of shares of
such class of Voting Stock beneficially owned by it.
(4) After such Interested Shareholder
has become an Interested Shareholder and prior to the
consummation of such Business Combination: (A) there shall have
been (i) no reduction in the annual rate of dividends paid on the
Common Stock (except as necessary to reflect any subdivision of
the Common Stock), except as approved by a majority of the
Continuing Directors, and (ii) an increase in such annual rate of
dividends (as necessary to prevent any such reduction) in the
event of any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of
outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the
Continuing Directors; and (B) such Interested Shareholder shall
not have become the beneficial owner of any additional shares of
Voting Stock except as part of the transaction in which it became
an Interested Shareholder.
(5) After such Interested Shareholder
has become an Interested Shareholder, such Interested Shareholder
shall not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance or
any tax credits or other tax advantages provided by the
corporation, whether in anticipation of or in connection with
such Business Combination or otherwise.
(6) A proxy or information statement
describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, andthis report has been signed below by the rules and regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations) shall be mailed to
public shareholders of the corporation at least 30 days prior to
the consummation of such Business Combination (whether or not
such proxy or information statement is required to be mailed
pursuant to such Act or subsequent provisions).
11.3 For the purposes of this Article Eleventh:
(a) A "person" shall mean any individual,
firm, corporation or other entity.
(b) "Interested Shareholder" at any
particular time shall mean any person (other than the corporation
or any Subsidiary) who or which:
(1) is at such time the beneficial
owner, directly or indirectly, of more than 20% of the voting
power of the outstanding Voting Stock;
(2) is at such time a director of the
corporation and at any time within the two-year period
immediately prior to such time was the beneficial owner, directly
or indirectly, of more than 20% of the voting power of the then
outstanding Voting Stock; or
(3) is at such time an assignee of or
has otherwise succeeded to the beneficial ownership of any shares
of Voting Stock which were at any time within the two-year period
immediately prior to such time beneficially owned by any
Interested Shareholder, if such assignment or succession shall
have occurredfollowing persons in the course of a transaction or series of
transactions not involving a public offering within the meaning
of the Securities Act of 1933.
(c) A person shall be a "beneficial owner"
of any shares of Voting Stock:
(1) which such person or any of its
Affiliates or Associates beneficially owns, directly or
indirectly;
(2) which such person or any of its
Affiliates or Associates has (A) the right to acquire (whether or
not such right is exercisable immediately) pursuant to any
agreement, arrangements or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement,
arrangement or understanding; or
(3) which are beneficially owned,
directly or indirectly, by any other person with which such
person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Voting Stock.
(d) For the purposes of determining whether
a person is an Interested Shareholder pursuant to paragraph (b)
of this Section 11.3, the number of shares of Voting Stock deemed
to be outstanding shall include shares deemed owned by an
Interested Shareholder through application of paragraph (c) of
this Section 11.3 but shall not include any other shares of
Voting Stock which may be issuable pursuant to any agreement,
arrangements or understanding, or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise.
(e) "Affiliate" or "Associate" shall have
the respective meanings ascribed to such terms in Rule 12b-2 of
the General Rulescapacities and Regulations under the Securities Exchange
Act of 1934, as in effect on March 1, 1984 (the term "registrant"
in said Rule 12b-2 meaning in this case the corporation).
(f) "Subsidiary" means any corporation of
which a majority of any class of equity security is owned,
directly or indirectly, by the corporation; provided, however,
that for the purposes of the definition of Interested Shareholder
set forth in paragraph (b) of this Section 11.3, the term
"Subsidiary" shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly,
by the corporation.
(g) "Continuing Director" means any member
of the Board of Directors of the corporation who is unaffiliated
with, and not a representative of, the Interested Shareholder and
was a member of the Board of Directors prior to the time that the
Interested Shareholder became an Interested Shareholder, and any
successor of a Continuing Director who is unaffiliated with and
not a representative of, the Interested Shareholder and is
recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board of Directors.
(h) "Fair Market Value" means: (1) in the
case stock of the corporation, the highest closing sale price
during a 30-day period immediately preceding the date in question
of a share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stocks ("Composite Tape"), or, if such stock is
not quoted on the Composite Tape, on the New York Stock Exchange
(NYSE), or, if such stock is not listed on the NYSE, on the
principal United States securities exchange registered under the
Securities Exchange Act of 1934 on which such stock is listed,
or, if such stock is not listed on any such exchange, the highest
closing sale price or closing bid quotation (whichever is higher,
if both are reported) with respect to a share of such stock
during the 30-day period preceding the date in question on the
National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") or any system then in use, or if no
such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board
of Directors in good faith; (2) in the case of securities, other
than stock of the corporation, which are registered under Section
12 of the 1934 Act, the mean (average) of the closing sale prices
for the five business days prior to the date in question for such
securities on the Composite Tape, or if such securities are not
listed on the NYSE, on the principal United States securities
exchange registered under the 1934 Act on which such securities
are listed, or, if such securities are not listed on any such
exchange but are listed on the NASDAQ national list or national
market system, the average closing sale price or closing bid
quotation (whichever is higher, if both are reported) for the
five business days prior to the date in question, as quoted on
the NASDAQ system, or if such securities are not so listed or
such quotations are not available, then the Market Value of such
securities as determined by the Board of Directors in good faith;
and (3) in the case of property other than cash or securities of
the type described above, the fair market value of such property
on the date in question as determined by the Board of Directors
in good faith.
(i) In the event of any Business Combination
in which the corporation survives, the phrase "consideration
other than cash to be received" as used in paragraph (b) of
Section 11.2 of this Article Eleventh shall include the shares of
Common Stock and/or the shares of any other class of outstanding
Voting Stock retained by the holders of such shares.
11.4 The Board of Directors shall have the power
and duty to determine for the purpose of this Article Eleventh,
on the basis of information known to them after reasonable
inquiry (a) whether a person is an Interested Shareholder, (b)
the number of shares of Voting Stock beneficially owned by any
person, (c) whether a person is an Affiliate or Associate of
another, and (d) whether the assets which are the subject of any
business transaction which may be a Business Combination have, or
the consideration to be received for the issuance or transfer of
securities by the corporation or any Subsidiary in any
transaction which may be a Business Combination has, an aggregate
Fair Market Value of $10,000,000 or more. Any such determination
made in good faith shall be binding and conclusive on all
parties.
11.5 Nothing contained in this Article Eleventh
shall be construed to relieve any Interested Shareholder from any
fiduciary obligation imposed by law.
11.6 Notwithstanding any other provisions hereof
or of law, the Certificate of Incorporation or the Bylaws of the
corporation, the affirmative vote of the holders of at least 80%
of the voting power of the then outstanding shares of Common
Stock, and at least 80% of the voting power of all of the then
outstanding shares of Voting Stock, voting together as a single
class, shall be required to amend or repeal, or to adopt any
provision inconsistent with this Article Eleventh.
TWELFTH. 12.1 No director of the corporation shall be
personally liable to the corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a
director; provided, however, that this Article Twelfth shall not
eliminate or limit the liability of a director to the extent
provided by applicable law (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware (or
successor provision), or (iv) for any transaction from which the
director derived an improper personal benefit. No amendment to or
repeal of this Article Twelfth shall apply to or have any effect
on the liability or alleged liability of any director of the
corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
DATED as of the 15th day of December, 2000.
indicated:
/s/ ANDREW B. KIM | /s/ WILLIAM SWINDELLS | |||
Andrew B. Kim (Director) | William Swindells (Director) | |||
/s/ CARL D. DONAWAY | /s/ MARY AGNES WILDEROTTER | |||
Carl D. Donaway (Chairman of the Board) | Mary Agnes Wilderotter (Director) |
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl D. Donaway, certify that:
1. | I have reviewed this 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: March 14, 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 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: March 14, 2003
/s/ LANNY H. MICHAEL |
Lanny H. Michael Executive Vice President and Chief Financial Officer |
AIRBORNE, FREIGHT CORPORATION,
Incorporator
By /s/ David C. Anderson
David C. Anderson
Corporate Secretary
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. |
71