SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31,June 30, 2003

Commission File Number 1-6512

AIRBORNE, INC.

(Exact name of registrant as specified in its charter)

3101 Western Avenue

P.O. Box 662

Seattle, Washington 98111-0662

(Address of Principal Executive Office)

Registrant’s telephone number, including area code: (206) 285-4600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:  x    No:  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes:  x    No:  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the close of the period covered by this report.

FORWARD LOOKING STATEMENTS

Statements contained in this quarterly report on Form 10-Q whichthat 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 in this report or in “Risk Factors” contained in our Annual Report on Form 10-K, as amended,10-K/A for the year ended December 31, 2002.2002 or in “Risk Factors” contained in the Form S-4 (333-105137), as amended of ABX Air, Inc., filed with the Securities and Exchange Commission on July 11, 2003.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

See notes to consolidated financial statements.

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AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

See notes to consolidated financial statements.

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AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See notes to consolidated financial statements.

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AIRBORNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31,June 30, 2003 (Unaudited)

NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATIONPREPARATION:

The consolidated financial statements included herein are unaudited but include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods reported.

Certain amounts for prior periods have been reclassified to conform to the 2003 presentation.

NOTE B—TRADE ACCOUNTS RECEIVABLERECEIVABLE:

Trade accounts receivable exclude amounts sold under the Company’s accounts receivable securitization facility. As of March 31,June 30, 2003 and December 31, 2002, the Company had $200,000,000$200.0 million of outstanding accounts receivable securitized, accounts. As of March 31, 2003, the Company had eligible receivables to support additional sales up to the full $250,000,000 permitted under the facility.respectively.

NOTE C—LONG-TERM OBLIGATIONSOBLIGATIONS:

Long-term obligations consist of the following:

As of March 31,June 30, 2003, the Company had a revolving bank credit agreement that provided for a total commitment of $275,000,000. In$200 million. This agreement was amended in April 2003 the Company amended this agreement and expires in June 2004. The amendment reduced the total facility to $200,000,000$200 million from $275 million and revised most of the financial covenants effective for the first quarter of 2003.covenants. The agreement is collateralized by a substantial majority of the Company’s non-cash assets and contains restrictions that reduce the amount of available borrowing capacity by the amount of outstanding letters of creditscredit and by amountsan amount based on leverage limitation provisions and the level of eligible collateral. TheCapacity under the agreement requiresis dependent on a periodic appraisal ofborrowing base determined by the Company’s aircraft to re-measure the levelamount of eligible collateral. An appraisal is in process andAs of June 30, 2003, the borrowing base supported approximately $58 million of outstanding letters of credit. In July 2003, the Company estimates the results willpledged cash of $43 million in support the $100,000,000, 7.35% senior notes, which are collateralized by the same processes, andof its remaining outstanding letters of credit of approximately $50,000,000. Support forcredit. The Company has the remaining letters of credit outstanding as of March 31, 2003 of approximately $51,000,000 will requireability to increase the borrowing base by pledging additional eligible collateral, although it has no plans to pledge of additional collateral by July 15,at this time. As of June 30, 2003, (e.g. cash, cash equivalents or accounts receivable resulting from reduction of amounts sold through the accounts receivable securitization facility). The Company does not plan on pledging additional collateral to create availableno capacity exists under the agreement for general borrowing purposes. At March 31, 2003, no borrowings were outstanding underThe assets pledged also sufficiently collateralize the agreement and theCompany’s $100 million, 7.35% senior notes. The Company was in compliance with all restrictive covenants including covenants requiring the maintenanceas of minimum levels of earnings before interest, taxes, depreciation and amortization (EBITDA), leverage and debt service coverage ratios and required levels of liquidity. The agreement also restricts the Company from declaring or paying dividends on its common stock in excess of $2,000,000 during any calendar quarter. The agreement expires in June 2004.

NOTE D—FUEL HEDGE

In February 2003, the Company entered into a call option contract on heating oil to hedge a significant portion of its jet fuel requirements for a three-month period ending in June30, 2003. The derivative is accounted for as a hedge for accounting purposes with changes in fair value deferred until the hedged forecasted transaction occurs and is recognized in earnings. The fair value of the call option was $24,000 at March 31, 2003. In March 2003, a call option contract expired that covered most of the Company’s jet fuel consumption for the first quarter of 2003. No proceeds were received under this contract.

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NOTE E—D—EARNINGS (LOSS) PER SHARESHARE:

Basic earnings per share are based upon the weighted average number of common shares outstanding during the interim period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the interim period plus dilutive common equivalent shares applicable to the assumed exercise of outstanding dilutive stock options and, when dilutive, the assumed conversion of the convertible senior notes.

Net earnings (loss) andWeighted average shares outstanding used in basic and diluted earnings per share calculationscomputations were as follows (in thousands except per share data):follows:

The above calculations of earnings (loss) per diluted share for the three months ended March 31,June 30, 2003 and 2002 exclude 4,565,0001,140,407 and 2,106,0001,279,144, 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, or the common stock equivalents were anti-dilutive. Similarly, shares excluded for the six months ended June 30, 2003 and 2002 were 1,886,780 and 2,056,836, respectively. 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 because they were anti-dilutive for the three and six months ended March 31,June 30, 2003 and 2002.

NOTE F—E—STOCK-BASED EMPLOYEE COMPENSATION

The Company has elected to follow APBAccounting Principles Board (APB) Opinion No. 25 in accounting for its stock option plans. No stock-based employee compensation expense was recorded in 2003 or 2002. Had stock-based employee compensation 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 the three-monthsthree and six-month periods ended March 31,June 30, 2003 and 2002 would have been reduced to the pro forma amounts as follows (in thousands, except per share data):

NOTE G—F—SEGMENT INFORMATION

The Company has organized its business into two reportable 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 to 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.

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The following is a summary of key segment information (in thousands):

NOTE H—G—OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) includes the following transactions and tax effects for the three-monththree and six-month periods ended March 31,June 30, 2003 and 2002, respectively (in thousands):

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NOTE I—H—MERGER WITH DHL

On March 25, 2003, Airborne, Inc. (Airborne)the Company entered into a definitive merger agreement with DHL Worldwide Express B.V. (DHL) and Atlantis Acquisition Corporation, a wholly-owned indirect subsidiary of DHL (Atlantis). A copy of the merger agreement was included as an exhibit to a Form 8-K that Airborne filed with the SEC on April 4, 2003. Under the terms of the agreement, (1) Airborne’s air operations will be separated from the ground operations and retained by ABX Air, Inc. (ABX) (Airborne’s wholly-owned subsidiary that provides domestic air express cargo transportation service), (2) DHL will acquire the ground operations (including all operations currently conducted by Airborne Express, Inc., including its book of business, customer service, express and deferred services and products, and pick up and delivery network) through a merger of Airborne and Atlantis, and (3) Airborne shareholders will receive, for each share of Airborne common stock held, $21.25 in cash (representing total cash consideration in the transaction of $1.05 billion) and one share of common stock of ABX. Upon closing of the transaction, Airborne will operate as a wholly-owned indirect subsidiary of DHL, and ABX will become an independent public company wholly-owned by Airborne’s former shareholders (although under certain circumstances, in accordance with the merger agreement, DHL could purchase all of Airborne’s operations and Airborne shareholders would receive alternative consideration of $21.65 per share in cash). A definitive proxy statement regarding the proposed transaction was filed with the SEC on July 11, 2003 and a shareholder vote on the merger is scheduled for August 14, 2003 at our Annual Meeting of Shareholders. The waiting period under the Hart-Scott-Rodino Antitrust Improvement Act has expired. The Company anticipates the transaction which is subject to shareholder and regulatory approvals, is targeted to be completed in the third quarter of 2003.

The separation will affect ABX’s organizational documents in a number of ways including an amendment and restatement of its certificate of incorporation and bylaws. These changes include the addition of supermajority voting provisions and the implementation of a rights plan that among other factors may tend to increase the likelihood, as desired by DHL in its negotiations with the Company, that ABX will be an independent company. This desire reflects DHL’s anticipated dependence on ABX for a substantial amount of lift and sort capacity in the United States. Airborne believes that the substantial cash premium offered by DHL in the Merger was in part dependent upon meeting DHL’s desires for ABX independence in this regard.

Upon closing of the transaction, the net assets of the ground portion of ABX (including its central and regional sort facilities, runways, taxiways, aprons, buildings serving as aircraft and equipment maintenance facilities, storage facilities, a training center and both operations and administrative offices) will be transferred to Airborne as part of the ground operations to be merged with Atlantis. Additionally, in connection with the transaction, ABX will enter into a number of commercial agreements with Airborne, including an ACMI (aircraft, crew, maintenance and insurance) agreement and a hub and line-haul services agreement.

Upon the separation of ABX from Airborne, ABX will be required to perform a cash flow recoverability test to determine the existence of a potential impairment as required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under provisions of this statement, assuming an impairment charge is identified through this test, a company is required to record an impairment charge for the excess of the carrying amount of the long-lived asset group over its fair value. The Company anticipates,expects, given the cash flows to be derived from the ACMI agreement coupled with the decline in market values for used aircraft and related equipment, that ABX will incur a significant impairment charge as a result of the separation. The Company estimates the charge and related reductions to historical property and equipment, spare parts inventories and other asset balances would have been $633,000,000$611,000,000 as of December 31, 2002,June 30, 2003, had the separation occurred as of that date. The charge ultimately recorded will depend on a number of factors that could occur before the separation date, including but not limited to, changes in the fair values of used aircraft and related equipment.

NOTE J—I—FEDERAL LEGISLATION COMPENSATION

The Company recorded a charge in the first quarter of 2003 of $650,000 related to its filing in March 2003 with the Department of Transportation regarding the computation of compensation due to the Company under the Air Transportation Safety and System Stabilization Act. The Company ultimately received $12,350,000 under the Act, and recorded theThis charge to recognizereflects the difference between the total amounts received and amounts previously estimated and recorded in 2001.

NOTE K—J—NEW ACCOUNTING PRONOUNCEMENTS

In June 2001,December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that the fair valueStatement 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’s fiscal year beginning on January 1, 2003, did not have a significant impact on its 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 did not have a significant impact on the Company’s financial position or results of operations.

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In December 2002, the FASB issued SFASFinancial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.”123”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,”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 the Company’sour 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)APB Opinion No. 25 in accounting for the Company’sour stock option plans until such time as 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. 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 was effective for the Company on January 31, 2003 and did not have a material impact on its financial position, results or operations or cash flows.

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In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”Activities”. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”Activities”. The clarification provisions of this statement require that contracts with comparable characteristics be accounted for similarly. This statement is effective for any new derivative instruments the Company enters into after June 30, 2003. Implementation of this statement is not anticipated to have a significant impact on the Company’s financial position or results of operations.operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope which possesses certain characteristics, and was previously classified as equity, as a liability (or an asset in some circumstances). The provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the second interim period beginning after June 15, 2003. Implementation of this statement is not anticipated to have a significant impact on the Company’s financial position or results of operations or cash flows.

NOTE L—K—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 by 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 AEI and are based on various discretionary factors. Further, certain costs incurred by AEI in performing various corporate functions on behalf of these and other guarantor and non-guarantor entities have not been allocated for purposes of presenting the financial information below. These unallocated costs include certain interest and insurance costs, and administrative costs incurred for technology support, employee benefits, treasury, accounting and cash management functions. Additionally, liabilities for pensions, employee healthcare, among other liabilities and certain assets, including deferred income tax assets have also not been allocated. As a result of the above, the financial information is not necessarily indicative of the results of operations or financial condition of these entities if they were to be reported on a standalone basis.

Intercompany advances and liabilities, which carry no repayment terms, represent net amounts due between the various entities and which result from the basis of accounting described above. 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 Companycompany provides its subsidiaries with a majority of the cash necessary to fund operating and capital expenditure requirements.requirements which are also reflected in the intercompany balance referred to above.

The Company’s revolving bank credit agreement imposes certain restrictions on loans made by the Company, AEI and ABX to certain nonguarantornon-guarantor 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 ($22.322.2 million as of March 31,June 30, 2003).

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.

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The following are consolidatingconsolidated condensed statements of operations of the Company for the three month periodand six-month periods ended March 31,June 30, 2003 and 2002, the consolidatingconsolidated condensed balance sheets of the Company as of March 31,June 30, 2003 and December 31, 2002, and the consolidatingconsolidated condensed statements of cash flows for the three monthsix-month periods ended March 31,June 30, 2003 and 2002:

Statement of Operations Information: