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, 2002

Commission File Number 1-6512

AIRBORNE, INC.

(Exact name of registrant as specified in its charter)

Delaware (State of incorporation or organization)		91-2065027
~~(State of incorporation or organization)~~		(IRS Employer Identification No.)

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 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.

Common Stock, par value $1 per share
Outstanding (net of 3,234,526 treasury shares) as of ~~March 31,~~June 30, 2002		~~48,307,185~~48,396,921 shares

FORWARD LOOKING STATEMENTS

Statements contained in this quarterly report on Form 10-Q that 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 for the year ended December 31, 2001.

PART I. FINANCIAL INFORMATION

Item 1. ~~FINANCIAL STATEMENTS~~Financial Statements

AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

	Three Months Ended March 31						Three Months Ended June 30						Six Months Ended June 30
	2002			2001			2002			2001			2002			2001
REVENUES:
Domestic	$	712,067		$	730,099		$	719,913		$	720,235		$	1,431,980		$	1,450,334
International		76,453			93,422			90,538			91,990			166,991			185,412

		788,520			823,521
		810,451			812,225			1,598,971			1,623,746
OPERATING EXPENSES:
Transportation purchased		249,031			267,039			267,368			266,085			516,399			533,124
Station and ground operations		264,119			280,374			265,957			264,780			530,076			545,154
Flight operations and maintenance		125,366			151,686			132,531			143,686			257,897			295,372
General and administrative		63,414			66,067			65,237			66,821			128,651			132,888
Sales and marketing		22,276			24,002			23,492			23,329			45,768			47,331
Depreciation and amortization		49,121			52,638			46,731			52,684			95,852			105,322

		773,327			841,806			801,316			817,385			1,574,643			1,659,191

EARNINGS (LOSS) FROM OPERATIONS		15,193			(18,285	)		9,135			(5,160	)		24,328			(23,445	)

OTHER INCOME (EXPENSE):
Interest, net		(6,871	)		(4,497	)		(7,485	)		(4,454	)		(14,356	)		(8,951	)
Discounts on sales of receivables		(1,305	)		(3,758	)		(885	)		(2,229	)		(2,190	)		(5,986	)
Other		1,896			273			407			2,304			2,303			2,576

EARNINGS (LOSS) BEFORE INCOME TAXES		8,913			(26,267	)		1,172			(9,539	)		10,085			(35,806	)

INCOME TAX (EXPENSE) BENEFIT		(3,645	)		9,272			715			(3,178	)		4,360			(12,450	)

NET EARNINGS (LOSS)	$	5,268		$	(16,995	)	$	457		$	(6,361	)	$	5,725		$	(23,356	)


NET EARNINGS (LOSS) PER SHARE:
BASIC	$	0.11		$	(0.35	)	$	0.01		$	(0.13	)	$	0.12		$	(0.48	)


DILUTED	$	0.11		$	(0.35	)	$	0.01		$	(0.13	)	$	0.12		$	(0.48	)


DIVIDENDS PER SHARE	$	0.04		$	0.04		$	0.04		$	0.04		$	0.08		$	0.08

See notes to consolidated financial statements.

AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

							June 30			December 31
	March 31, 2002			December 31, 2001			2002			2001
	(Unaudited)						(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	393,165		$	201,500		$	338,063		$	201,500
Accounts receivable, less allowance of $11,549 and $11,509		133,019			126,040
Trade accounts receivable, less allowance of $10,849 and $11,509								224,322			126,040
Spare parts and fuel inventory		37,655			38,413			37,085			38,413
Refundable income taxes		178			27,161			517			27,161
Deferred income tax assets		30,768			30,572			30,929			30,572
Prepaid expenses and other		36,455			28,021			33,496			28,021

TOTAL CURRENT ASSETS		631,240			451,707			664,412			451,707

PROPERTY AND EQUIPMENT, NET		1,229,194			1,247,373			1,214,131			1,247,373

EQUIPMENT DEPOSITS and OTHER ASSETS		52,037			47,764			52,424			47,764

TOTAL ASSETS	$	1,912,471		$	1,746,844		$	1,930,967		$	1,746,844


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	120,578		$	141,873		$	138,784		$	141,873
Salaries, wages and related taxes		88,409			75,458			81,233			75,458
Accrued expenses		146,917			145,997			148,978			145,997
Income taxes payable		2,629			—
Current portion of debt		108,008			107,410			108,173			107,410

TOTAL CURRENT LIABILITIES		466,541			470,738			477,168			470,738
LONG-TERM DEBT								366,387			218,053
DEFERRED INCOME TAX LIABILITIES								144,717			143,526
POST RETIREMENT LIABILITIES								66,964			39,423
OTHER LIABILITIES								38,816			40,888

LONG-TERM DEBT		368,532			218,053

DEFERRED INCOME TAX LIABILITIES		143,303			143,526

POST RETIREMENT LIABILITIES		54,590			39,423

OTHER LIABILITIES		40,950			40,888
COMMITMENTS AND CONTINGENCIES

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 51,541,711 and 51,375,711 shares		51,542			51,376
Issued 51,631,447 and 51,375,711 shares								51,631			51,376
Additional paid-in capital		307,227			304,984			308,553			304,984
Retained earnings		543,882			540,544			542,163			540,544
Accumulated other comprehensive income		(4,238	)		(2,820	)		(5,574	)		(2,820	)

		898,413			894,084			896,773			894,084
Treasury stock, 3,234,526 and 3,240,526 shares, at cost		(59,858	)		(59,868	)		(59,858	)		(59,868	)

		838,555			834,216			836,915			834,216

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,912,471		$	1,746,844		$	1,930,967		$	1,746,844

See notes to consolidated financial statements.

AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31						Six Months Ended June 30
	2002			2001			2002			2001
OPERATING ACTIVITIES:
Net earnings (loss)	$	5,268		$	(16,995	)	$	5,725		$	(23,356	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization		49,121			52,638			95,852			105,322
Deferred income taxes		(420	)		806			834			9,623
Postretirement obligations		12,967			(6,323	)		23,537			3,427
Other		(1,548	)		5,836			(3,759	)		(2,299	)

CASH PROVIDED BY OPERATIONS		65,388			35,962			122,189			92,717

Change in:
Proceeds from receivable securitization facility		—			50,000
Receivable securitization facility								(100,000	)		50,000
Receivables		(6,979	)		20,123			1,718			24,764
Inventories and prepaid expenses		(7,676	)		(2,837	)		(4,147	)		(5,327	)
Refundable income taxes		26,983			867			26,644			(3,669	)
Accounts payable		(21,295	)		(24,577	)		(3,089	)		(30,163	)
Accrued expenses, salaries and taxes payable		18,699			16,105			12,759			17,405

NET CASH PROVIDED BY OPERATING ACTIVITIES		75,120			95,643			56,074			145,727

INVESTING ACTIVITIES:
Additions to property and equipment		(27,199	)		(26,325	)		(57,694	)		(73,389	)
Proceeds from sale of securities		1,656			—			3,778			—
Proceeds from sale of radio frequencies								—			2,071
Other		(1,915	)		1,439			(6,995	)		15

NET CASH USED BY INVESTING ACTIVITIES		(27,458	)		(24,886	)		(60,611	)		(71,303	)

FINANCING ACTIVITIES:
Payments on bank notes, net								—			(85,000	)
Issuance of convertible debt, net of issuance costs		145,125			—			145,125			—
Payments on bank notes, net		—			(43,000	)
Principal payments on debt		(1,611	)		(116	)		(3,753	)		(234	)
Proceeds from common stock issuance		2,419			783
Exercise of stock options								3,834			782
Dividends paid		(1,930	)		(1,924	)		(3,864	)		(3,848	)
Shareholder rights redemption								(242	)		—

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		144,003			(44,257	)		141,100			(88,300	)


NET INCREASE IN CASH		191,665			26,500
NET INCREASE (DECREASE) IN CASH								136,563			(13,876	)

CASH AND CASH EQUIVALENTS AT JANUARY 1		201,500			40,390			201,500			40,390

CASH AND CASH EQUIVALENTS AT JUNE 30							$	338,063		$	26,514

CASH AND CASH EQUIVALENTS AT MARCH 31	$	393,165		$	66,890

SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash financing activities:
Capital leases entered into during the period							$	2,850			—

See notes to consolidated financial statements.

AIRBORNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~June 30, 2002 (Unaudited)

NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION:

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 2002 presentation.

NOTE B—ACCOUNTS RECEIVABLE:

Trade accounts receivable exclude amounts sold under the Company’s accounts receivable securitization facility. As of June 30, 2002, we had $100.0 million of outstanding accounts receivable securitized in comparison to $200.0 million securitized as of December 31, 2001. In May 2002, the amount of receivables securitized were reduced by $100.0 million.

NOTE C—LONG-TERM DEBT:

Long-term debt consists of the following:

	March 31, 2002			December 31, 2001			June 30 2002			December 31 2001
	(In thousands)						(In thousands)
Senior debt:
Senior notes	$	200,000		$	200,000		$	200,000		$	200,000
Convertible senior notes		150,000			—			150,000			—
Aircraft loan		60,658			61,651			59,640			61,651
Capital lease obligations		45,291			43,070			44,525			43,070
Revenue bonds		13,200			13,200			13,200			13,200
Revolving bank credit		—			—
Other debt		7,391			7,542			7,195			7,542

		476,540			325,463			474,560			325,463
Less current portion		(108,008	)		(107,410	)		(108,173	)		(107,410	)

	$	368,532		$	218,053		$	366,387		$	218,053

On March 25, 2002, the Company issued $150,000,000 of 5.75% Convertible Senior Notes (“Notes”) due April 2007. The proceeds of the sale are intended, in part, to fund the repayment of $100,000,000 of ~~8.75%~~8.875% senior notes due December 15, 2002 at their stated maturity. The ~~notes~~Notes are convertible into shares of the Company’s common stock, at the option of the holder, at a conversion rate of 42.7599 shares per each $1,000 principal amount of ~~notes,~~Notes, subject to adjustment in certain circumstances. This is equivalent to a conversion price of $23.39 per share. At the current conversion price, a total of 6,413,985 shares are issuable upon full conversion of the notes.

The Company’s revolving bank credit agreement provides for a total commitment of $275,000,000 and expires in June 2004. The agreement provides that the Company pledge a substantial majority of its assets as collateral to secure the commitment, reduce available borrowing capacity by the amount of outstanding letters of credit and maintain compliance with certain restrictive covenants. Capacity under the facility is dependent on a borrowing base determined by the amount of eligible collateral, with a maximum commitment of $275,000,000. ~~The~~At June 30, 2002, the Company ~~has~~had eligible collateral in the borrowing base to support ~~$148,000,000~~$214,000,000 of the $275,000,000 ~~commitment and~~commitment. The Company has the ability to increase the borrowing base by pledging additional eligible collateral. ~~With the current level of eligible collateral,~~At June 30, 2002, available capacity under the agreement, net of outstanding letters of credit, was ~~$50,500,000.~~$110,000,000. At ~~March 31,~~June 30, 2002, no borrowings were outstanding under the agreement and the Company was in compliance with restrictive covenants including covenants requiring the maintenance of minimum levels of earnings before interest, taxes, depreciation and amortization (EBITDA), leverage and debt service coverage ratios and required levels of liquidity. The agreement also restricts the Company from declaring or paying dividends on its common stock during any calendar quarter in excess of $2,000,000 ~~(plus~~plus up to an additional ~~$300,000 for~~

$300,000 of dividends on any common stock issued upon conversion of the Notes. The agreement also permitted a one-time payment of $242,000 ($.005 per share) made in May 2002 to shareholders upon redemption and termination of the Company’s ~~convertible senior notes securities described below).~~shareholder rights plan. The Company’s $200,000,000 of outstanding non-convertible senior notes are also collateralized by assets of the Company.

The Company’s ratio of earnings to fixed charges was 1.06 for the quarter ended June 30, 2002. Fixed charges exceeded earnings by $10.1 million for the quarter ended June 30, 2001.

NOTE C—D—EARNINGS PER SHARE:

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 stock options and, when ~~applicable,~~dilutive, the assumed conversion of the convertible senior notes.

Weighted average shares outstanding used in earnings per share computations were as follows:

	Three Months Ended March 31		Three Months Ended June 30		Six Months Ended June 30
	2002	2001	2002	2001	2002	2001
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	48,253,078	48,079,634	48,356,841	48,103,545	48,304,960	48,091,590
Diluted	48,589,135	48,080,472	48,981,739	48,103,545	48,785,437	48,092,008

NOTE D—E—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.

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

	Three Months Ended March 31						Three Months Ended June 30						Six Months Ended June 30
	2002			2001			2002			2001			2002			2001
SEGMENT REVENUES:
Domestic	$	712,067		$	730,099		$	719,913		$	720,235		$	1,431,980		$	1,450,334
International		76,453			93,422			90,538			91,990			166,991			185,412

	$	788,520		$	823,521
							$	810,451		$	812,225		$	1,598,971		$	1,635,746

SEGMENT EARNINGS (LOSS) FROM OPERATIONS:
Domestic	$	16,932		$	(16,528	)	$	9,496		$	(4,622	)	$	26,428		$	(21,150	)
International		(1,739	)		(1,757	)		(361	)		(538	)		(2,100	)		(2,295	)

	$	15,193		$	(18,285	)	$	9,135		$	(5,160	)	$	24,328		$	(23,445	)

NOTE E—F—OTHER COMPREHENSIVE INCOME

Other comprehensive income includes the following transactions and tax effects for the three and six month periods ended ~~March 31,~~June 30, 2002 and 2001, respectively (in thousands):

										Three Months Ended June 30, 2002									Six Months Ended June 30, 2002
	Before Tax			Income Tax (Expense) or Benefit			Net of Tax			Before Tax			Income Tax (Expense) or Benefit			Net of Tax			Before Tax			Income Tax (Expense) or Benefit			Net of Tax
2002
Unrealized securities gains arising during the period	$	679		$	(262	)	$	417		$	(487	)	$	188		$	(299	)	$	192		$	(74	)	$	118
Less: Reclassification adjustment for gains realized in net income		(1,656	)		638			(1,018	)		—			—			—			(1,656	)		638			(1,018	)

Net unrealized securities losses		(977	)		376			(601	)		(487	)		188			(299	)		(1,464	)		564			(900	)
Foreign currency translation adjustments		(256	)		99			(157	)		386			(149	)		237			130			(50	)		80
Unrealized gain on interest rate swap		656			(252	)		404
Unrealized loss on interest rate swap											(2,071	)		797			(1,274	)		(1,414	)		544			(870	)
Additional minimum pension liabilities		(1,729	)		665			(1,064	)		—			—			—			(1,729	)		665			(1,064	)

Other comprehensive income	$	(2,306	)	$	888		$	(1,418	)	$	(2,172	)	$	836		$	(1,336	)	$	(4,477	)	$	1,723		$	(2,754	)



										Three Months Ended June 30, 2001									Six Months Ended June 30, 2001
										Before Tax			Income Tax (Expense) or Benefit			Net of Tax			Before Tax			Income Tax (Expense) or Benefit			Net of Tax
2001
Unrealized securities gains arising during the period										$	312		$	(120	)	$	192		$	168		$	(65	)	$	103
Less: Reclassification adjustment for gains realized in net income											—			—			—			(32	)		12			(20	)

Net unrealized securities gains											312			(120	)		192			136			(53	)		83
Foreign currency translation adjustments											(109	)		30			(79	)		(310	)		97			(213	)

Other comprehensive income										$	203		$	(90	)	$	113		$	(174	)	$	44		$	(130	)

Before Tax

Income Tax (Expense) or Benefit

Net of Tax

2001

Unrealized securities losses arising during the period    $ (145 )      $ 56      $ (89 )
Less: Reclassification adjustment for gains realized in net income    (32 )      12      (20 )



Net unrealized securities losses    (177 )      68      (109 )
Foreign currency translation adjustments    (201 )      67      (134 )



Other comprehensive income    $ (378 )      $ 135      $ (243 )



NOTE G—RESTRUCTURING CHARGE

In the second quarter of 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 $2.3 million in connection with such changes. A total of approximately 175 employees located at the Company’s station operations were terminated and provided severance benefits totaling $1.3 million, of which $.7 million had been paid at June 30, 2002. An additional $1.0 million was accrued for lease costs, net of estimated sublease income, for the closure of certain facilities.

NOTE F—H—BUSINESS ACQUISITION

On June 19, 2002, the Company acquired 100% of the outstanding common stock of Pagtrans SA, a French international transportation services company providing air express, air freight, ocean freight, logistics and customs brokerage services. The acquisition is intended to provide the Company an improved presence in France and throughout the region. Since 1997, Pagtrans SA had been the Company’s independent service agent in France.

The acquisition price will range from a minimum of $18,000, which was paid as of June 30, 2002, to a maximum of $670,000, including direct costs. The actual acquisition price will be determined in late 2002 based on a final measurement of the fair value of current assets and liabilities as of the purchase date.

The Company recorded assets and liabilities (primarily current assets and liabilities) of approximately $7.6 million and $7.5 million, respectively, as of the purchase date in connection with the transaction and goodwill of approximately $.6 million. The allocation of this excess purchase price has not been finalized and is subject to the ultimate determination of the purchase price and further review of the fair value of assets acquired and liabilities assumed. The operating results of Pagtrans have been included in the Company’s results of operations since the acquisition date though were not material to the Company’s consolidated results of operations for the six months ended June 30, 2002 and 2001. The Company does not anticipate the acquisition will result in material changes to future international revenues and expenses.

NOTE I—NEW ACCOUNTING PRONOUNCEMENTS

Effective January 2002, the Company implemented the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. This standard requires, among other things, the discontinuance of goodwill amortization and that transitional goodwill impairment tests be performed within six months from the date of adoption. The Company has completed its transitional tests and determined no impairment adjustments were necessary as of June 30, 2002. The total amount of goodwill recorded and included in equipment deposits and other assets on the consolidated balance sheet was $2.8 million as of June 30, 2002. Net losses and basic and diluted earnings per share for the quarter and six months ended June 30, 2001, excluding goodwill amortization expense, would not have materially differed from amounts reported. Goodwill expense for second quarter and first half of 2001 was $33,000 and $67,000, respectively.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs will be capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for companies with fiscal years beginning after June 15, 2002, is not expected to have a significant impact on our financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Revision of FASB Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 requires that only certain extinguishments of debt be classified as an extraordinary item. Further, this statement requires capital leases that are 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 companies with fiscal years beginning after May 15, 2002. The provision of the statement pertaining to lease modifications are effective for transactions consummated after May 15, 2002.

Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.

In July 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 EITF Issue 94-3, required an exit cost liability be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.

NOTE J—SUPPLEMENTAL GUARANTOR INFORMATION—SENIOR NOTES

In connection with the issuance of $200,000,000 of 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 the 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 substantial 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 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 following are consolidating condensed balance sheets of the Company as of ~~March 31,~~June 30, 2002 and December 31, 2001 and the related consolidating condensed statements of operations and cash flows for the three months and six months ended ~~March 31,~~June 30, 2002 and ~~2001:~~2001, respectively:

~~Balance Sheet~~Statement of Operations Information:

March 31, 2002

Airborne Express, Inc.

Airborne Inc.

Guarantors

Non-
guarantors

Elimination

Consolidated


(in thousands)

ASSETS

Current Assets:
Cash and cash equivalents    $ 391,470    $ —      $ 772    $ 923    $ —      $ 393,165
Accounts receivable    12,701    —      9,570    110,748    —      133,019
Spare parts and fuel inventory    —      —      34,892    2,763    —      37,655
Refundable income taxes    178    —      —      —      —      178
Deferred income tax assets    30,768    —      —      —      —      30,768
Prepaid expenses and other    20,405    —      15,550    500    —      36,455






Total current assets    455,522    —      60,784    114,934    —      631,240
Property & equipment,net    101,515    —      1,123,501    4,178    —      1,229,194
Intercompany advances    34,204    447,595    (33,942 )    3,558    (451,415 )    —
Equipment deposits and other assets    31,686    10,858    9,594    10    (111 )    52,037






Total assets    $ 622,927    $ 458,453    $ 1,159,937    $ 122,680    $ (451,526 )    $ 1,912,471






LIABILITIES AND
SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts payable    $ 83,432    $ —      $ 37,331    102    $ (287 )    $ 120,578
Salaries, wages and related taxes    52,827    —      35,584    (2 )    —      88,409
Accrued expenses and income taxes payable    142,827    167    5,789    763    —      149,546
Current portion of debt    101,345    —      6,663    —      —      108,008






Total current liabilities    380,431    167    85,367    863    (287 )    466,541
Long-term debt    106,102    150,000    112,430    —      —      368,532
Intercompany liabilities    —      —      336,127    —      (336,127 )    —
Deferred income tax liabilities    (7,190 )    —      149,961    532    —      143,303
Postretirement liabilities    46,552    —      8,038    —      —      54,590
Other liabilities    40,950    —      —      —      —      40,950
Shareholders’ equity:
Common stock    1    51,542    (9 )    120    (112 )    51,542
Additional paid in capital    164    307,065    (755 )    115,753    (115,000 )    307,227
Retained earnings    60,155    9,537    468,778    5,412    —      543,882
Accumulated other comprehensive income    (4,238 )    —      —      —      —      (4,238 )
Treasury stock    —      (59,858 )    —      —      —      (59,858 )






Total shareholders’ equity    56,082    308,286    468,014    121,285    (115,112 )    838,555






Total liabilities and shareholders’ equity    $ 622,927    $ 458,453    $ 1,159,937    $ 122,680    $ (451,526 )    $ 1,912,471

	Three months ended June 30, 2002															Six months ended June 30, 2002
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated			Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
				(in thousands)												(in thousands)
Revenues	$	794,778		$	—		$	15,673		$	—		$	810,451		$	1,567,819		$	—		$	31,152		$	—		$	1,598,971
Operating expenses:
Transportation purchased		480,542			—			(213,174	)		—			267,368			949,614			—			(433,215	)		—			516,399
Station and ground operations		224,816			—			41,141			—			265,957			448,298			—			81,778			—			530,076
Flight operations and maintenance		(869	)		—			133,989			(589	)		132,531			(1,324	)		—			260,424			(1,203	)		257,897
General and administrative		46,503			518			18,175			41			65,237			91,292			789			36,491			79			128,651
Sales and marketing		23,261			—			231			—			23,492			45,337			—			431			—			45,768
Depreciation and amortization		10,926			—			35,723			82			46,731			22,739			—			72,948			165			98,852

		785,179			518			16,085			(466	)		801,316			1,555,956			789			18,857			(959	)		1,574,643

Earnings (loss) from operations		9,599			(518	)		(412	)		466			9,135			11,863			(789	)		12,295			959			24,328
Other income (expense):
Dividend income		(5,885	)		175			(1,775	)		—			(7,485	)		(10,640	)		—			(3,716	)		—			(14,356	)
Discounts on sales of receivables		(1,001	)		—			(1	)		117			(885	)		(1,966	)		—			(1	)		(223	)		(2,190	)
Other		407			—			—			—			407			2,303			—			—			—			2,303

Earnings (loss) before income taxes		3,120			(343	)		(2,188	)		583			1,172			1,560			(789	)		8,578			736			10,085
Income tax (expense) benefit		(1,078	)		120			121			122			(715	)		(912	)		276			(4,137	)		413			(4,360	)

Net earnings (loss)	$	2,042		$	(223	)	$	(2,067	)	$	705		$	457		$	648		$	(513	)	$	4,441		$	1,149		$	5,725

~~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    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 & equipment, net    109,622    —      1,133,490      4,261    —      1,247,373
Intercompany advances    157,681    302,279    12,949      12,884    (485,793 )    —
Equipment deposits and other assets    31,078    5,963    16,224      10    (5,511 )    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 and income taxes payable    139,132    —      6,261      604    —      145,997
Current portion of debt    100,877    —      6,533      —      —      107,410






Total current liabilities    371,852    —      94,422      5,156    (692 )    470,738
Long-term debt    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
Shareholders’ equity:
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 income    (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

Statement of Operations Information:

Three months ended March 31, 2002

Airborne Express, Inc.

Airborne Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

Revenues    $ 773,041    $ —      $ 15,479    $ —      $ 788,520
Operating expenses:
Transportation purchased    469,072    —      (220,041 )    —      249,031
Station and ground operations    223,482    —      40,637    —      264,119
Flight operations and maintenance    (455 )    —      126,435    (614 )    125,366
General and administrative    44,789    271    18,316    38    63,414
Sales and marketing    22,076    —      200    —      22,276
Depreciation and amortization    11,813    —      37,225    83    49,121





   770,777    271    2,772    (493 )    773,327





Earnings (loss) from operations    2,264    (271 )    12,707    493    15,193
Other income (expense):
Interest, net    (4,755 )    (175 )    (1,941 )    —      (6,871 )
Discounts on sales of receivables    (965 )    —      —      (340 )    (1,305 )
Other    1,896    —      —      —      1,896





Earnings (loss) before income taxes    (1,560 )    (446 )    10,766    (153 )    8,913
Income tax (expense) benefit    166    156    (4,258 )    291    (3,645 )





Net earnings (loss)    $ (1,394 )    $ (290 )    $ 6,508    $ 444    $ 5,268

	Three months ended June 30, 2001															Six months ended June 30, 2001
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated			Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)															(in thousands)
Revenues	$	791,431		$	—		$	20,794		$	—		$	812,225		$	1,597,615		$	—		$	38,131		$	—		$	1,635,746
Operating expenses:
Transportation purchased		507,005			—			(240,920	)		—			266,085			1,019,945			—			(486,821	)		—			533,124
Station and ground operations		224,109			—			40,671			—			264,780			460,986			—			84,168			—			545,154
Flight operations and maintenance		(162	)		—			144,488			(640	)		143,686			(162	)		—			296,833			(1,299	)		295,372
General and administrative		52,736			228			13,818			39			66,821			100,781			447			31,581			79			132,888
Sales and marketing		22,995			—			334			—			23,329			46,639			—��			692			—			47,331
Depreciation and amortization		12,458			150			39,992			84			52,684			24,530			150			80,477			165			105,322

		819,141			378			(1,617	)		(517	)		817,385			1,652,719			597			6,930			(1,055	)		1,659,191

Earnings (loss) from operations		(27,710	)		(378	)		22,411			517			(5,160	)		(55,104	)		(597	)		31,201			1,055			(23,445	)
Other income (expense):
Interest, net		1,020			(585	)		(4,889	)		—			(4,454	)		2,353			18,424			(29,728	)		—			(8,951	)
Discounts on sales of receivables		(3,170	)		—			—			941			(2,229	)		(7,514	)		—			—			1,527			(5,987	)
Other		2,304			—			—			—			2,304			2,577			—			—			—			2,577

Earnings (loss) before income taxes		(27,556	)		(963	)		17,522			1,458			(9,539	)		(57,688	)		17,827			1,473			2,582			(35,806	)
Income tax (expense) benefit		9,696			337			(6,886	)		31			3,178			20,510			761			(8,656	)		(165	)		12,450

Net earnings (loss)	$	(17,860	)	$	(626	)	$	10,636		$	1,489		$	(6,361	)	$	(37,178	)	$	18,588		$	(7,183	)	$	2,417		$	(23,356	)

Balance Sheet Information:

Three months ended March 31, 2001

Airborne Express, Inc.

Airborne Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

Revenues    $ 806,184    $ —      $ 17,337    $ —      $ 823,521
Operating expenses:
Transportation purchased    512,940    —      (245,901 )    —      267,039
Station and ground operations    236,877    —      43,497    —      280,374
Flight operations and maintenance    —      —      152,345    (659 )    151,686
General and administrative    48,045    219    17,763    40    66,067
Sales and marketing    23,644    —      358    —      24,002
Depreciation and amortization    12,072    —      40,485    81    52,638





   833,578    219    8,547    (538 )    841,806





Earnings (loss) from operations    (27,394 )    (219 )    8,790    538    (18,285 )
Other income (expense):
Interest, net    1,333    19,009    (24,839 )    —      (4,497 )
Discounts on sales of receivables    (4,344 )    —      —      586    (3,758 )
Other    273    —      —      —      273





Earnings (loss) before income taxes    (30,132 )    18,790    (16,049 )    1,124    (26,267 )
Income tax (expense) benefit    10,814    424    (1,770 )    (196 )    9,272





Net earnings (loss)    $ (19,318 )    $ 19,214    $ (17,819 )    $ 928    $ (16,995 )

June 30, 2002	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non-guarantors			Elimination			Consolidated
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	336,947		$	—		$	106		$	1,010		$	—		$	338,063
Trade accounts receivable, less allowance		19,863			—			10,204			194,255			—			224,322
Spare parts and fuel inventory		—			—			34,326			2,759			—			37,085
Refundable income taxes		517			—			—			—			—			517
Deferred income tax assets		30,929			—			—			—			—			30,929
Prepaid expenses and other		19,191			—			13,805			500			—			33,496

Total current assets		407,447			—			58,441			198,524			—			664,412

Property & equipment, net		96,791			—			1,113,244			4,096			—			1,214,131
Intercompany advances		96,502			348,841			(99,584	)		23,677			(369,436	)		—
Equipment deposits and other assets		32,302			110,948			9,275			10			(100,111	)		52,424

Total assets	$	633,042		$	459,789		$	1,081,376		$	226,307		$	(469,547	)	$	1,930,967


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	96,709		$	—		$	38,822		$	3,488		$	(235	)	$	138,784
Salaries, wages and related taxes		48,840			—			32,394			(1	)		—			81,233
Accrued expenses		139,858			2,325			6,496			299			—			148,978
Current portion of debt		101,378			—			6,795			—			—			108,173

Total current liabilities		386,785			2,325			84,507			3,786			(235	)		477,168

Long-term debt		105,710			150,000			110,677			—			—			366,387
Intercompany liabilities		—			—			254,200			—			(254,200	)		—
Deferred income tax liabilities		(5,780	)		—			149,965			532			—			144,717
Post retirement liabilities		50,888			—			16,076			—			—			66,964
Other liabilities		38,816			—			—			—			—			38,816
Shareholders’ equity:
Common stock		1			51,631			(9	)		120			(112	)		51,631
Additional paid-in capital		—			308,553			(753	)		215,753			(215,000	)		308,553
Retained earnings net		62,196			7,138			466,713			6,116			—			542,163
Accumulated other comprehensive income		(5,574	)		—			—			—			—			(5,574	)
Treasury stock		—			(59,858	)		—			—			—			(59,858	)


Total shareholders’ equity		56,623			307,464			465,951			221,989			(215,112	)		836,915


Total liabilities and shareholders’ equity	$	633,042		$	459,789		$	1,081,376		$	226,307		$	(469,547	)	$	1,930,967

911

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
Trade 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 & equipment, net		109,622			—			1,133,490			4,261		—			1,247,373
Intercompany advances		157,681			302,279			12,949			12,884		(485,793	)		—
Equipment deposits and other assets		31,078			5,963			16,224			10		(5,511	)		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 debt		100,877			—			6,533			—		—			107,410

Total current liabilities		371,852			—			94,422			5,156		(692	)		470,738

Long-term debt		103,951			—			114,102			—		—			218,053
Intercompany liabilities		—			—			370,168			—		(370,168	)		—
Deferred income tax liabilities		(6,967	)		—			150,164			329		—			143,526
Post retirement liabilities		11,905			—			27,518			—		—			39,423
Other liabilities		40,888			—			—			—		—			40,888
Shareholders’ equity:
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 net		61,549			11,758			463,746			4,967		(1,476	)		540,544
Accumulated other comprehensive income		(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

Statement of Cash Flows Information:

Three months ended March 31, 2002

Airborne Express, Inc.

Airborne Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

OPERATING ACTIVITIES:
Net earnings (loss)    $ (1,394 )    $ (290 )    6,508    $ 444    $ 5,268
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities    42,145    (5,051 )    23,234    (208 )    60,120
Change in current assets and liabilities    164,099    (144,992 )    (798 )    (8,577 )    9,732





Net cash provided (used) by operating activities    204,850    (150,333 )    28,944    (8,341 )    75,120
INVESTING ACTIVITIES:
Net cash used by investing activities    (223 )    —      (27,235 )    —      (27,458 )
FINANCING ACTIVITIES:
Net cash provided (used) By financing activities    (4,786 )    150,333    (1,544 )    —      144,003





Net increase (decrease) in cash    199,841    —      165    (8,341 )    191,665
Cash and cash equivalents at January 1    191,629    —      607    9,264    201,500





Cash and cash equivalents at March 31    $ 391,470    $ —      $ 772    $ 923    $ 393,165

Three months ended March 31, 2001

Airborne Express, Inc.

Airborne Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

OPERATING ACTIVITIES:
Net earnings (loss)    $ (19,318 )    $ 19,214    $ (17,819 )    $ 928    $ (16,995 )
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities    3,467    (156 )    50,262    (616 )    52,957
Change in current assets and liabilities    71,569    (2,621 )    (12,897 )    3,630    59,681





Net Cash provided by operating activities    55,718    16,437    19,546    3,942    95,643
INVESTING ACTIVITIES:
Net cash used by investing activities    (5,499 )    —      (19,335 )    (52 )    (24,886 )
FINANCING ACTIVITIES:
Net cash used by financing activities    (27,704 )    (16,437 )    (116 )    —      (44,257 )





Net increase in cash    22,515    —      95    3,890    26,500
Cash and cash equivalents at January 1    37,523    —      52    2,815    40,390





Cash and cash equivalents at March 31    $ 60,038    $ —      $ 147    $ 6,705    $ 66,890

	Three months ended June 30, 2002															Six months ended June 30, 2002
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated			Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
				(in thousands)															(in thousands)
OPERATING ACTIVITIES:
Net earnings (loss)	$	2,041		$	(223	)	$	(2,065	)	$	704		$	457		$	647		$	(513	)	$	4,443		$	1,148		$	5,725
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		12,358			(99,934	)		43,960			99,960			56,344			54,503			(104,985	)		67,194			99,752			116,464
Change in current assets and liabilities		(60,826	)		101,030			(15,474	)		(100,577	)		(75,847	)		103,273			(43,962	)		(16,272	)		(109,154	)		(66,115	)

Net cash provided (used) by operating activities		(46,427	)		873			26,421			87			(19,046	)		158,423			(149,460	)		55,365			(8,254	)		56,074
INVESTING ACTIVITIES:
Net cash used by investing activities		(7,687	)		—			(25,466	)		—			(33,153	)		(7,910	)		—			(52,701	)		—			(60,611	)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities		(409	)		(873	)		(1,621	)		—			(2,903	)		(5,195	)		149,460			(3,165	)		—			141,100

Net increase (decrease) in cash		(54,523	)		—			(666	)		87			(55,102	)		145,318			—			(501	)		(8,254	)		136,563
Cash and cash equivalents at January 1		391,470			—			772			923			393,165			191,629			—			607			9,264			201,500

Cash and cash equivalents at June 30	$	336,947		$	—		$	106		$	1,010		$	338,063		$	336,947		$	—		$	106		$	1,010		$	338,063


	Three months ended June 30, 2001															Six months ended June 30, 2001
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated			Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)															(in thousands)
OPERATING ACTIVITIES:
Net earnings (loss)	$	(17,860	)	$	(627	)	$	10,637		$	1,489		$	(6,361	)	$	(37,178	)	$	18,587		$	(7,182	)	$	2,417		$	(23,356	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		10,758			(1,103	)		55,478			54			65,187			12,154			(1,259	)		105,740			(562	)		96,073
Change in current assets and liabilities		(41,237	)		64,270			(24,299	)		(5,405	)		(6,671	)		30,332			61,649			(37,196	)		(1,775	)		53,010

Net cash provided (used) by operating activities		(48,339	)		62,540			41,816			(3,862	)		52,155			5,308			78,977			61,362			80			145,727
INVESTING ACTIVITIES:
Net cash used by investing activities		(7,484	)		(151	)		(40,848	)		(5	)		(48,488	)		(10,911	)		(151	)		(60,183	)		(58	)		(71,303	)
FINANCING ACTIVITIES:
Net cash provided (used) By financing activities		18,465			(62,389	)		(119	)		—			(44,043	)		(9,239	)		(78,826	)		(235	)		—			(88,300	)

Net increase (decrease) in Cash		(37,358	)		—			849			(3,867	)		(40,376	)		(14,842	)		—			944			22			(13,876	)
Cash and cash equivalents at January 1		60,038			—			147			6,705			66,890			37,522			—			52			2,816			40,390

Cash and cash equivalents at June 30	$	22,680		$	—		$	996		$	2,838		$	26,514		$	22,680		$	—		$	996		$	2,838		$	26,514

1013

NOTE G—K—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES

On March 25, 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”). AEI provides domestic and international delivery services in addition to performing customer service, sales and marketing activities. 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 F.J.

~~Balance Sheet~~Statement of Operations Information:

March 31, 2002

Airborne, Inc.

Guarantors

Non-guarantors

Elimination

Consolidated


(in thousands)

ASSETS

Current Assets:
Cash and cash equivalents    $ —      $ 391,505    $ 1,660    $ —      $ 393,165
Accounts receivable    —      22,300    110,719    —      133,019
Spare parts and fuel inventory    —      37,655    —      —      37,655
Refundable income taxes    —      178    —      —      178
Deferred income tax assets    —      30,768    —      —      30,768
Prepaid expenses and other    —      36,086    369    —      36,455





Total current assets    —      518,492    112,748    —      631,240
Property and equipment, net    —      1,229,194    —      —      1,229,194
Intercompany advances    447,595    (275 )    4,095    (451,415 )    —
Equipment deposits and other assets    10,858    41,290    —      (111 )    52,037





Total assets    $ 458,453    $ 1,788,701    $ 116,843    $ (451,526 )    $ 1,912,471





LIABILITIES AND
SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts payable    $ —      $ 120,865    $ —      $ (287 )    $ 120,578
Salaries, wages and related taxes    —      88,409    —      —      88,409
Accrued expenses and income taxes payable    167    148,700    679    —      149,546
Current portion of debt    —      108,008    —      —      108,008





Total current liabilities    167    465,982    679    (287 )    466,541
Long-term debt    150,000    218,532    —      —      368,532
Intercompany liabilities    —      336,127    —      (336,127 )    —
Deferred income tax liabilities    —      143,303    —      —      143,303
Postretirement liabilities    —      54,590    —      —      54,590
Other liabilities    —      40,950    —      —      40,950
Shareholders’ equity:
Common stock    51,542    102    10    (112 )    51,542
Additional paid in capital    307,065    162    115,000    (115,000 )    307,227
Retained earnings    9,537    533,191    1,154    —      543,882
Accumulated other comprehensive income    —      (4,238 )    —      —      (4,238 )
Treasury stock    (59,858 )    —      —      —      (59,858 )





Total shareholders’ equity    308,286    529,217    116,164    (115,112 )    838,555





Total liabilities and shareholders’ equity    $ 458,453    $ 1,788,701    $ 116,843    $ (451,526 )    $ 1,912,471

	Three months ended June 30, 2002												Six months ended June 30, 2002
	Airborne, Inc.			Guarantors			Non- guarantors			Consolidated			Airborne, Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)												(in thousands)
Revenues	$	—		$	810,451		$	—		$	810,451		$	—		$	1,598,971		$	—		$	1,598,971
Operating expenses:
Transportation purchased		—			267,368			—			267,368			—			516,399			—			516,399
Station and ground operations		—			265,957			—			265,957			—			530,076			—			530,076
Flight operations and maintenance		—			132,531			—			132,531			—			257,897			—			257,897
General and administrative		518			64,719			—			65,237			789			127,862			—			128,651
Sales and marketing		—			23,492			—			23,492			—			45,768			—			45,768
Depreciation and amortization		—			46,731			—			46,731			—			95,852			—			95,852

		518			800,798			—			801,316			789			1,573,854			—			1,574,643

Earnings (loss) from operations		(518	)		9,653			—			9,135			(789	)		25,117			—			24,328
Other income (expense):
Interest, net		175			(7,660	)		—			(7,485	)		—			(14,356	)		—			(14,356	)
Discounts on sales of receivables		—			(1,002	)		117			(885	)		—			(1,967	)		(223	)		(2,190	)
Other		—			407			—			407			—			2,303			—			2,303

Earnings (loss) before income taxes		(343	)		1,398			117			1,172			(789	)		11,097			(223	)		10,085
Income tax (expense) benefit		120			(794	)		(41	)		(715	)		276			(4,714	)		78			(4,360	)

Net earnings (loss)	$	(223	)	$	604		$	76		$	457		$	(513	)	$	6,383		$	(145	)	$	5,725

	Three months ended June 30, 2001												Six months ended June 30, 2001
	Airborne, Inc.			Guarantors			Non-guarantors			Consolidated			Airborne, Inc.			Guarantors			Non-guarantors			Consolidated
	(in thousands)												(in thousands)
Revenues	$	—		$	812,225		$	—		$	812,225		$	—		$	1,635,746		$	—		$	1,635,746
Operating expenses:
Transportation purchased		—			266,085			—			266,085			—			533,124			—			533,124
Station and ground operations		—			264,780			—			264,780			—			545,154			—			545,154
Flight operations and maintenance		—			143,686			—			143,686			—			295,372			—			295,372
General and administrative		228			66,593			—			66,821			447			132,441			—			132,888
Sales and marketing		—			23,329			—			23,329			—			47,331			—			47,331
Depreciation and amortization		150			52,534			—			52,684			150			105,172			—			105,322

		378			817,007			—			817,385			597			1,658,594			—			1,659,191

Loss from operations		(378	)		(4,782	)		—			(5,160	)		(597	)		(22,848	)		—			(23,445	)
Other income (expense):
Interest, net		(585	)		(3,869	)		—			(4,454	)		18,424			(27,375	)		—			(8,951	)
Discounts on sales of receivables		—			(3,170	)		941			(2,229	)		—			(7,514	)		1,527			(5,987	)
Other		—			2,304			—			2,304			—			2,577			—			2,577

Earnings (loss) before income taxes		(963	)		(9,517	)		941			(9,539	)		17,827			(55,160	)		1,527			(35,806	)
Income tax (expense) benefit		337			3,171			(330	)		3,178			761			12,224			(535	)		12,450

Net earnings (loss)	$	(626	)	$	(6,346	)	$	611		$	(6,361	)	$	18,588		$	(42,936	)	$	992		$	(23,356	)

1115

Balance Sheet Information:

December 31, 2001	Airborne, Inc.			Guarantors			Non-guarantors		Elimination			Consolidated
June 30, 2002															Airborne, Inc.			Guarantors			Non- guarantors		Elimination			Consolidated
	(in thousands)																	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	—		$	191,664		$	9,836	$	—		$	201,500		$	—		$	336,982		$	1,081	$	—		$	338,063
Accounts receivable		—			28,763			97,277		—			126,040
Trade accounts receivable, less allowance																—			30,126			194,196		—			224,322
Spare parts and fuel inventory		—			38,413			—		—			38,413			—			37,085			—		—			37,085
Refundable income taxes		—			27,161			—		—			27,161			—			517			—		—			517
Deferred income tax assets		—			30,572			—		—			30,572			—			30,929			—		—			30,929
Prepaid expenses and other		—			27,619			402		—			28,021			—			33,173			323		—			33,496

Total current assets		—			344,192			107,515		—			451,707			—			468,812			195,600		—			664,412

Property and equipment, net		—			1,247,373			—		—			1,247,373			—			1,214,131			—		—			1,214,131
Intercompany advances		302,279			452			9,487		(312,218	)		—			348,841			(355	)		20,950		(369,436	)		—
Equipment deposits and other assets		5,963			41,912			—		(111	)		47,764			110,948			41,587			—		(100,111	)		52,424


Total assets	$	308,242		$	1,633,929		$	117,002	$	(312,329	)	$	1,746,844		$	459,789		$	1,724,175		$	216,550	$	(469,547	)	$	1,930,967


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	—		$	142,497		$	—	$	(624	)	$	141,873		$	—		$	139,019		$	—	$	(235	)	$	138,784
Salaries, wages and related taxes		—			75,458			—		—			75,458			—			81,233			—		—			81,233
Accrued expenses and income taxes payable		—			145,380			617		—			145,997
Accrued expenses																2,325			146,343			310		—			148,978
Current portion of debt		—			107,410			—		—			107,410			—			108,173			—		—			108,173

Total current liabilities		—			470,745			617		(624	)		470,738			2,325			474,768			310		(235	)		477,168

Long-term debt		—			218,053			—		—			218,053			150,000			216,387			—		—			366,387
Intercompany liabilities		—			196,593			—		(196,593	)		—			—			254,200			—		(254,200	)		—
Deferred income tax liabilities		—			143,526			—		—			143,526			—			144,717			—		—			144,717
Postretirement liabilities		—			39,423			—		—			39,423
Post retirement liabilities																—			66,964			—		—			66,964
Other liabilities		—			40,888			—		—			40,888			—			38,816			—		—			38,816
Shareholders’ equity:
Common stock		51,376			(102	)		10		(112	)		51,376			51,631			102			10		(112	)		51,631
Additional paid in capital		304,976			8			115,000		(115,000	)		304,984
Additional paid-in capital																308,553			—			215,000		(215,000	)		308,553
Retained earnings		11,758			527,411			1,375		—			540,544			7,138			533,795			1,230		—			542,163
Accumulated other comprehensive income		—			(2,820	)		—		—			(2,820	)		—			(5,574	)		—		—			(5,574	)
Treasury stock		(59,868	)		—			—		—			(59,868	)		(59,858	)		—			—		—			(59,858	)

Total shareholders’ equity		308,242			524,701			116,385		(115,112	)		834,216			307,464			528,323			216,240		(215,112	)		836,915


Total liabilities and shareholders’ equity	$	308,242		$	1,633,929		$	117,002	$	(312,329	)	$	1,746,844		$	459,789		$	1,724,175		$	216,550	$	(469,547	)	$	1,930,967

1216

~~Statement of Operations Information:~~

Three months ended March 31, 2002

Airborne, Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

Revenues    $ —      $ 788,520    $ —      $ 788,520
Operating expenses:
Transportation purchased    —      249,031    —      249,031
Station and ground operations    —      264,119    —      264,119
Flight operations and maintenance    —      125,366    —      125,366
General and administrative    271    63,143    —      63,414
Sales and marketing    —      22,276    —      22,276
Depreciation and amortization    —      49,121    —      49,121




   271    773,056    —      773,327




Earnings (loss) from operations    (271 )    15,464    —      15,193
Other income (expense):
Interest, net    (175 )    (6,696 )    —      (6,871 )
Discounts on sales of receivables    —      (965 )    (340 )    (1,305 )
Other    —      1,896    —      1,896




Earnings (loss) before income taxes    (446 )    9,699    (340 )    8,913
Income tax (expense) benefit    156    (3,920 )    119    (3,645 )




Net earnings (loss)    $ (290 )    $ 5,779    $ (221 )    $ 5,268

Three months ended March 31, 2001

Airborne, Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

Revenues    $ —      $ 823,521    $ —      $ 823,521
Operating expenses:
Transportation purchased    —      267,039    —      267,039
Station and ground operations    —      280,374    —      280,374
Flight operations and maintenance    —      151,686    —      151,686
General and administrative    219    65,848    —      66,067
Sales and marketing    —      24,002    —      24,002
Depreciation and amortization    —      52,638    —      52,638




   219    841,587    —      841,806




Loss from operations    (219 )    (18,066 )    —      (18,285 )
Other income (expense):
Interest, net    19,009    (23,506 )    —      (4,497 )
Discounts on sales of receivables    —      (4,344 )    586    (3,758 )
Other    —      273    —      273




Earnings (loss) before income taxes    18,790    (45,643 )    586    (26,267 )
Income tax (expense) benefit    424    9,053    (205 )    9,272




Net earnings (loss)    $ 19,214    $ (36,590 )    $ 381    $ (16,995 )

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		—			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		302,279			452			9,487		(312,218	)		—
Equipment deposits and other assets		5,963			41,912			—		(111	)		47,764

Total assets	$	308,242		$	1,633,929		$	117,002	$	(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 debt		—			107,410			—		—			107,410

Total current liabilities		—			470,745			617		(624	)		470,738
Long-term debt		—			218,053			—		—			218,053
Intercompany liabilities		—			196,593			—		(196,593	)		—
Deferred income tax liabilities		—			143,526			—		—			143,526
Post retirement liabilities		—			39,423			—		—			39,423
Other liabilities		—			40,888			—		—			40,888
Shareholders’ equity:
Common stock		51,376			102			10		(112	)		51,376
Additional paid-in capital		304,976			8			115,000		(115,000	)		304,984
Retained earnings		11,758			527,411			1,375		—			540,544
Accumulated other comprehensive income		—			(2,820	)		—		—			(2,820	)
Treasury stock		(59,868	)		—			—		—			(59,868	)

Total shareholders’ equity		308,242			524,701			116,385		(115,112	)		834,216

Total liabilities and shareholders’ equity	$	308,242		$	1,633,929		$	117,002	$	(312,329	)	$	1,746,844

1317

~~Statement of Cash Flows Information:~~

Statement of Cash Flows Information:
	Three months ended June 30, 2002												Six months ended June 30, 2002
	Airborne, Inc.			Guarantors			Non- guarantors			Consolidated			Airborne, Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)												(in thousands)
OPERATING ACTIVITIES:
Net earnings (loss)	$	(223	)	$	604		$	76		$	457		$	(513	)	$	6,383		$	(145	)	$	5,725
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		(99,934	)		56,237			100,041			56,344			(104,985	)		121,527			99,922			116,464
Change in current assets and liabilities		101,030			(76,181	)		(100,696	)		(75,847	)		(43,962	)		86,379			(108,532	)		(66,115	)

Net cash provided (used) by operating activities		873			(19,340	)		(579	)		(19,046	)		(149,460	)		214,289			(8,755	)		56,074
INVESTING ACTIVITIES:
Net cash used by investing activities		—			(33,153	)		—			(33,153	)		—			(60,611	)		—			(60,611	)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities		(873	)		(2,030	)		—			(2,903	)		149,460			(8,360	)		—			141,100

Net increase (decrease) in cash		—			(54,523	)		(579	)		(55,102	)		—			145,318			(8,755	)		136,563
Cash and cash equivalents at January 1		—			391,505			1,660			393,165			—			191,664			9,836			201,500

Cash and cash equivalents at June 30	$	—		$	336,982		$	1,081		$	338,063		$	—		$	336,982		$	1,081		$	338,063


	Three months ended June 30, 2001												Six months ended June 30, 2001
	Airborne, Inc.			Guarantors			Non-guarantors			Consolidated			Airborne, Inc.			Guarantors			Non-guarantors			Consolidated
	(in thousands)												(in thousands)
OPERATING ACTIVITIES:
Net earnings (loss)	$	(627	)	$	(6,346	)	$	612		$	(6,361	)	$	18,587		$	(42,936	)	$	993		$	(23,356	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		(1,104	)		63,891			329			63,116			(1,260	)		116,798			535			116,073
Change in current assets and liabilities		64,270			(66,983	)		(3,958	)		(6,671	)		61,649			(9,620	)		981			53,010

Net cash provided (used) by operating activities		62,539			(9,438	)		(3,017	)		50,084			78,976			64,242			2,509			145,727
INVESTING ACTIVITIES:
Net cash used by investing activities		(150	)		(46,267	)		—			(46,417	)		(150	)		(71,153	)		—			(71,303	)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities		(62,389	)		18,346			—			(44,043	)		(78,826	)		(9,474	)		—			(88,300	)

Net increase (decrease) in cash		—			(37,359	)		(3,017	)		(40,376	)		—			(16,385	)		2,509			(13,876	)
Cash and cash equivalents at January 1		—			60,095			6,795			66,890			—			39,121			1,269			40,390

Cash and cash equivalents at June 30	$	—		$	22,736		$	3,778		$	26,514		$	—		$	22,736		$	3,778		$	26,514

Three months ended March 31, 2002

Airborne, Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

OPERATING ACTIVITIES:
Net earnings (loss)    $ (290 )    $ 5,779    $ (221 )    $ 5,268
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities    (5,051 )    65,290    (119 )    60,120
Change in current assets and liabilities    (144,992 )    162,560    (7,836 )    9,732




Net cash provided (used) by operating activities    (150,333 )    233,629    (8,176 )    75,120
INVESTING ACTIVITIES:
Net cash used by investing activities    —      (27,458 )    —      (27,458 )
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities    150,333    (6,330 )    —      144,003




Net increase (decrease) in cash    —      199,841    (8,176 )    191,665
Cash and cash equivalents at January 1    —      191,664    9,836    201,500




Cash and cash equivalents at March 31    $ —      $ 391,505    $ 1,660    $ 393,165

Three months ended March 31, 2001

Airborne, Inc.

Guarantors

Non-
guarantors

Consolidated


(in thousands)

OPERATING ACTIVITIES:
Net earnings (loss)    $ 19,214    $ (36,590 )    $ 381    $ (16,995 )
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities    (156 )    52,907    206    52,957
Change in current assets and liabilities    (2,621 )    57,363    4,939    59,681




Net cash provided by operating activities    16,437    73,680    5,526    95,643
INVESTING ACTIVITIES:
Net cash used by investing activities    —      (24,886 )    —      (24,886 )
FINANCING ACTIVITIES:
Net cash used by financing activities    (16,437 )    (27,820 )    —      (44,257 )




Net increase in cash    —      20,974    5,526    26,500
Cash and cash equivalents at January 1    —      39,121    1,269    40,390




Cash and cash equivalents at March 31    $ —      $ 60,095    $ 6,795    $ 66,890

1418

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

RESULTS OF OPERATIONS

We achieved improved ~~quarterly~~ operating performance in the second quarter and first ~~quarter~~half of ~~2002. The~~2002 compared to the same periods in 2001. This progress can be attributed primarily to a reduction in operating expenses, was the primary factor contributing to the enhanced operating performance compared to the first quarter of 2001. We were able to accomplish this performance despite a difficult economic environment that has hampered shipment and revenue growth. The first quarter of 2002 marks the fourth consecutive quarter of improved operating results. This sequential progress can be attributed to the implementation of key strategic initiatives beginning in 2001, including the expansion of our product line, and the implementation of yield management ~~actions, as well as~~actions. This performance was accomplished despite a difficult economic environment that has hampered our core domestic air shipment and revenue growth. In the second quarter of 2002, we continued ~~reduction in~~to address our cost structure and made certain domestic and international operational realignments that are intended to further reduce operating ~~expense levels.~~costs.

We ~~had~~reported net earnings in the ~~first~~second quarter of 2002 of $.5 million or $.01 per diluted share, including a non-recurring restructuring charge of $2.3 million, or $1.4 million after tax, or $.03 per share. This compares to a net loss of $6.4 million or $.13 per share in the second quarter of 2002, which included gains on the sale of radio frequencies of $1.4 million after tax or $.03 per share and a non-recurring restructuring charge of $1.9 million or $.04 per share. Net earnings of $5.3 million or $.11 per ~~diluted~~ share ~~including~~were recorded in the first quarter of 2002. The first quarter of 2002 included a non-recurring ~~after tax~~ gain of $1.0 million after tax, or $.02 per share, from the sale of certain securities.

We reported net earnings for the first half of 2002 of $5.7 million or $.12 per diluted share, including the previously mentioned $.03 per share after tax restructuring charge and non-recurring securities gain of $.02 per share. This compares to a net loss of ~~$17.0~~$23.4 million or ~~$.35~~$.48 per share in the first ~~quarter~~six months of ~~2001 and net earnings of $2.2 million or $.05 per share in the fourth quarter of 2001. The fourth quarter of 2001~~2002 that included ~~an after tax credit of $3.2 million, or $.07 per share, related to federal compensation recorded under the Air Transportation Safety and System Stabilization Act, and after tax~~radio frequency sale gains ~~on the sale of radio frequencies of $.6 million or $.01 per share. Excluding those one-time items, a net loss would have been recorded~~ of $.03 per share and restructuring charges of $.04 per share.

We took actions in the second quarter of 2002 to lower our cost structure through both domestic and international operational realignments. Collectively, these actions are anticipated to provide annual costs savings of between $12.0 million and $14.0 million or $3.0 to $3.5 million on a quarterly basis. We estimate these actions provided a $.9 million cost savings in the second quarter of 2002 with the remaining quarterly savings of $2.0 to $2.5 million to be realized beginning in the third quarter of 2002. The domestic cost actions included the consolidation of a customer service call center and reducing certain categories of labor hours in our domestic station operations. We estimate these actions will provide between $8.0 million and $9.0 million of the total projected annual cost savings. Our international realignment included the integration of some of our separate U.S. international gateways into our domestic operations to leverage our labor, management and facilities infrastructure. Labor and other costs were also reduced in our offshore locations. These international changes are anticipated to provide annual savings of between $4.0 million and $5.0 million. To implement these realignments we incurred a $2.3 million non-recurring restructuring charge for employee severance and lease termination costs. Of the charge, $1.0 million was attributed to the domestic actions and $1.3 million was associated with the international changes. The charge was recorded as a component of general and administrative expense.

The following table is an overview of our shipments, revenue and weight trends for the ~~quarters~~periods indicated:

	Three Months Ended March 31						Three Months Ended June 30				Six Months Ended June 30
	2002		2001		Change		2002	2001	Change		2002	2001	Change
Shipments (in thousands):
Domestic
Overnight		39,885		45,618	–12.6	%	39,806	44,139	(9.8	%)	79,690	89,757	(11.2	%)
Next Afternoon Service		13,185		13,428	– 1.8	%	12,999	13,208	(1.6	%)	26,184	26,636	(1.7	%)
Second Day Service		23,797		24,215	– 1.7	%	17,421	18,805	(7.4	%)	35,726	37,745	(5.3	%)
Ground Delivery Service		6,163		—	n/a		8,824	329	NM		14,614	329	NM
Airborne@home							4,991	5,525	(9.7	%)	10,857	10,800	0.5	%
100 Lbs. and Over		51		60	–15.0	%	55	67	(17.9	%)	106	127	(16.5	%)

Total Domestic		83,081		83,321	– 0.3	%	84,096	82,073	2.5	%	167,177	165,394	1.1	%


International
Express		1,330		1,600	–16.9	%	1,431	1,549	(7.6	%)	2,761	3,149	(12.3	%)
Freight		87		102	–14.7	%	93	102	(8.8	%)	180	204	(11.8	%)

Total International		1,417		1,702	–16.7	%	1,524	1,651	(7.7	%)	2,941	3,353	(12.3	%)


Total Shipments		84,498		85,023	– 0.6	%	85,620	83,724	2.3	%	170,118	168,747	0.8	%


Average Pounds per Shipment:
Domestic		4.44		4.14	7.2	%
International		55.43		51.92	6.8	%

Average Revenue per Pound:
Domestic	$	1.88	$	2.07	– 9.2	%
International	$	0.98	$	1.04	– 5.8	%

Average Revenue per Shipment:
Domestic	$	8.53	$	8.72	– 2.2	%
International	$	53.95	$	54.89	– 1.7	%

Average Pounds per Shipment:
Domestic		4.72		4.14	14.0	%		4.58		4.14	10.6	%
International		59.19		53.32	11.0	%		58.35		52.61	9.0	%
Average Revenue per Pound:
Domestic	$	1.77	$	2.07	(14.5	%)	$	1.83	$	2.07	(11.6	%)
International	$	0.98	$	1.03	(4.9	%)	$	0.97	$	1.04	(6.7	%)
Average Revenue per Shipment
Domestic	$	8.51	$	8.69	(2.1	%)	$	8.52	$	8.71	(2.1	%)
International	$	59.41	$	55.72	6.6	%	$	56.78	$	55.30	2.7	%

Total revenues ~~decreased 4.3% to $789~~were $810.5 million in the ~~first~~second quarter of 2002 compared to revenues of ~~$824~~$812.2 million in the second quarter of 2001. For the first ~~quarter~~half of 2002, total revenues declined 1.5% compared to the first half of 2001. Shipment volumes ~~decreased .6% to 84.5 million~~increased 2.3% and .8% in the second quarter and first ~~quarter~~half of 2002, respectively, compared to ~~85.0 million in~~ the same periods in 2001. The second quarter ~~a year ago. The~~of 2002 had the same number of operating days as in 2001, and the first ~~quarter~~half of 2002 had one less operating day than ~~in 2001. On a per day basis total shipments increased 1.0% over levels achieved in~~ the ~~first quarter of~~comparable period in 2001.

Domestic revenues ~~decreased 2.5% to $712~~were $719.9 million in the second quarter compared to revenues of $720.2 million in the second quarter of 2001. Domestic revenues decreased 1.3% for the first ~~quarter~~six months of 2002 compared to ~~$730 million in~~ the first ~~quarter~~half of 2001. Domestic shipments ~~were 83.1~~increased 2.5% to 84.1 million in the ~~first~~second quarter compared to ~~83.3~~82.1 million in the ~~first~~second quarter of 2001. ~~On a per day~~

~~basis,~~For the first half of 2002, domestic shipments increased ~~1.3% in~~1.1% compared to the first ~~quarter~~half of ~~2002 compared to a 3.5% per day increase in the first quarter of 2001 over 2000 levels.~~2001. Average revenue per domestic shipment was ~~$8.53~~$8.51 in the second quarter compared to ~~$8.72~~$8.69 in the ~~first~~second quarter of 2001. Average revenue per domestic shipment was $8.52 for the first half of 2002 compared to $8.71 in the like period in 2001. The overall decline in ~~total domestic revenues and~~ domestic revenue per shipment was due primarily to a higher percentage of total shipments ~~being~~ from lower yielding deferred products and to ~~the~~a reduction in ~~the~~our fuel surcharge. The core air express shipment products revenue per shipment increased in the second quarter of 2002 over the first quarter of 2002 and over the comparable period of 2001 due primarily to yield actions taken. Revenue per shipment on Ground Delivery Service product decreased in the second quarter due to the decline in average weight per shipment.

Domestic revenues in ~~the first quarter of~~ 2002 and 2001 included fuel surcharge revenues which were used to help offset the historically high prices of fuel affecting costs in our air and surface operations. During 2001, we had in place a fuel surcharge of 4% applied to our air express products and a 1.2% surcharge on our airborne@home and Ground Delivery Service products. The fuel surcharge rates were reduced effective January 14, 2002 to 2.9% on air express products and 1% on airborne@home and ground products. Fuel surcharge revenues totaled ~~$17.8~~$16.9 million and $34.7 million in the second quarter and for the first ~~quarter~~six months of 2002, ~~compared~~respectively. This compares to ~~$24.6~~$23.8 million and $48.4 million recognized in the second quarter and first ~~quarter~~half of ~~2001.~~2001, respectively.

In early 2002, we took actions to increase rates on both domestic and international express services to improve our shipment yields. These actions included a phased in general rate increase on domestic services commensurate with increases of our major competitors and the introduction of a residential delivery fee and delivery area surcharge fee. These new industry-standard fees match recent competitor actions.

We continued to experience year over year declines in our core air express shipment volumes. This year over year decline in air volumes, impacted by the poor economic environment and customers’ shift to deferred services, is being experienced industry wide. Core air express shipments declined ~~8.6%~~7.8% and 8.1% in the second quarter and first ~~quarter compared~~half of 2002, respectively. This compares to ~~a decline~~declines of ~~3.8%~~3.6% and 4.4% in last year’s second quarter and first ~~quarter.~~six months, respectively. Our core air express products are Overnight Express, Next Afternoon Service (NAS) and Second Day ~~Service(SDS) excluding airborne@home shipments.~~Service (SDS). Higher yielding Overnight Express shipments decreased ~~12.6%~~9.8% in the ~~first~~second quarter of 2002 compared to a decrease of ~~4.9%~~4.4% in the ~~first~~second quarter of 2001. The NAS product decreased ~~1.8%~~1.6% in this year’s ~~first~~second quarter compared to a decline of ~~3.6%~~3.5% a year ago. SDS shipment volumes declined ~~3.6%~~7.4% compared to a ~~decline~~growth of ~~1.2%~~4.6% in the ~~first~~

second quarter of 2001. ~~However, core~~Core air express product volumes ~~increased 2.2%~~also decreased 3.1% on a per day basis in the ~~first~~second quarter of 2002 in comparison to the ~~fourth~~first quarter of ~~2001.~~2002.

In April 2001, we expanded our service portfolio by introducing our Ground Delivery ~~Service(GDS)~~Service (GDS) product. This new product ~~leverages~~utilizes our sort and linehaul infrastructure and was initially marketed to a targeted customer base. ~~We will be marketing~~Marketing of this product has been expanded in 2002 to ~~an expanded~~a broader customer segment ~~more aggressively in~~and we are focusing on the ~~coming quarters subject to an~~ appropriate balance between growth and yields. GDS is an important growth initiative that offers us the opportunity not only to generate revenues from the deferred ground segment, where we ~~have~~had not previously participated, but also to leverage GDS with cross marketing of higher yielding air express shipments. GDS has shown strong growth since its introduction, producing volumes of ~~5.8~~8.8 million shipments ~~(excluding .4 million airborne @home~~in the second quarter of 2002 compared to 329,000 shipments ~~shipped via GDS)~~in the second quarter of 2001. GDS shipment volumes in the first quarter of 2002 ~~or 92,000 shipments per day. This compares to~~and fourth quarter of 2001 were 5.8 million and 3.2 million, ~~and 1.5 million shipments in the fourth and third quarters of 2001,~~ respectively.

Our airborne@home product ~~increased 12.1%~~decreased 9.7% to ~~5.9~~5.0 million shipments in the ~~first~~second quarter of 2002 compared to ~~5.2~~5.5 million shipments in the second quarter of 2001. The decline in the second quarter of 2002 is attributed to fewer shipments from certain large customers in comparison to a year ago. For the first ~~quarter~~six months of 2002 airborne@home shipments totaled 10.9 million shipments compared to 10.8 million shipments in the comparable period of 2001. This service is intended to capture primarily business-to-consumer shipments from e-commerce and catalog fulfillment providers. airborne@home utilizes an arrangement with the U.S. Postal Service to provide final delivery of the product.

Total domestic shipments per day increased ~~1.3%~~2.5% and 1.9% in the second quarter and first ~~quarter this year~~half of 2002 compared to ~~last year, as~~ the same periods in 2001. The significant growth in our ~~deferred products~~GDS product has offset the ~~decline~~declines in our core air express shipments.

International revenues decreased ~~18.2%~~1.6% in the ~~first~~second quarter of 2002 to ~~$76~~$90.5 million compared to ~~$93~~$92.0 million in the ~~first~~second quarter of 2001. International revenues for the first half of 2002 declined 9.9% to $167 million compared to $185 million in the comparable period in 2001. Total international shipments decreased ~~16.7%~~7.7% to ~~1.4~~1.5 million shipments in this year’s ~~first~~second quarter compared to ~~an increase of 4.9% to 1.7~~1.6 million shipments in the ~~first~~second quarter of 2001. For the first six months of 2002, international shipments decreased 12.3% to 2.9 million from 3.4 million in the same period in 2001. Our international express shipments declined ~~16.9%~~7.7% and 12.3% in the second quarter and first half of 2002, respectively, compared to a year ago. International freight shipments declined 8.8% in the second quarter of 2002 and 11.8% in the first ~~quarter~~six months compared to ~~an increase of 4.6% in~~ the same ~~period of~~periods in 2001. ~~The international freight shipments declined 14.7% in the first quarter of 2002 compared to an 8.5% increase a year ago.~~ International shipments and revenues were impacted in the first ~~quarter~~half of 2002 by continued ~~global economic~~ weakness ~~particularly~~ in U.S. exports.

~~International margin percentages improved~~ We did realize a sequential improvement in international revenues in the ~~first~~second quarter ~~due to cost reduction and yield enhancement measures. However, net segment operating results were impacted due to the lower shipment volumes producing a segment loss from operations~~ of ~~$1.7~~2002 that increased 18% or $14.1 million ~~the same as reported~~over revenues recorded in the first quarter of ~~2001.~~2002. The increase in volumes was primarily due to increases in import freight shipments to the U.S. and to an increase in the average weight of freight shipments.

In June 2002, we acquired our service partner in France, Pagtrans SA. This acquisition increases our presence in France and the region and will be accomplished by a capital outlay that will not exceed $670,000. The ultimate purchase price is dependent upon a final determination of net current assets and liabilities as of the acquisition date.

International segment losses from operations, including the $1.3 million restructuring charge recorded in the second quarter and first half of 2002, were $.4 million and $2.1 million, respectively. The international segment losses in the second quarter and first six months of 2001 were $.5 million and $2.3 million, respectively. Non-recurring restructuring charges of $.4 were included in second quarter 2001 results.

The cost ~~reduction measures~~reductions implemented ~~during~~since the second quarter of 2001 were instrumental in the improvement inof second quarter and first ~~quarter~~half of 2002 results ~~and the sequential quarterly improvements we have made since the~~compared to first ~~quarter~~half results of 2001. Operating expense per shipment decreased ~~7.6%~~4.1% to ~~$9.15~~$9.36 in the ~~first~~second quarter of 2002 compared to ~~$9.90~~$9.76 in the ~~first~~second quarter of 2001 and $9.79 for full year of 2001. Operating expense per shipment decreased 5.9% to $9.26 in the first half of 2002 compared to $9.83 in the first half of 2001. We have been aggressively

managing our costs over the past year through ~~numerous cost cutting~~ actions designed to adjust our cost structure to be more in line with the volume levels being generated. The reduction of labor hours combined with modest per day shipment volume growth resulted in ~~significant improvement in~~ productivity improvements of ~~8.5%~~6.2% and 7.3% in the ~~first~~second quarter of 2002 ~~compared~~and first six months of 2002, respectively, as measured by shipments handled per paid employee hour. This compares to ~~a .1% improvement~~improvements of 5.5% and 2.7% in the second quarter and first half of 2001. In the second quarter of ~~2001. Our~~2002, we took further cost reduction actions, as described above, to improve productivity and ~~combination of airline flight segments resulted~~lower costs in ~~a reduction in fuel consumption~~our domestic and ~~savings in maintenance cost. The decline in jet fuel prices also had a positive impact on operating expenses.~~international station and ground operations.

Transportation purchased as a percentage of revenues increased to 33.0% in the second quarter of 2002 as compared to 32.8% in the same quarter a year ago. For the first half of 2002 this category of expense comprised 32.3% of revenues in comparison to 32.6% in the first half of 2001. Total transportation purchased expense increased ..5% in the second quarter of 2002 compared to a year ago but decreased 3.1% for the first half of 2002. While international commercial linehaul costs and offshore agent costs were similar in the second quarter of 2002 compared to ~~31.6%~~the second quarter of 2001, they decreased 10% in the first half of 2002 in comparison to 2001. This decrease, a result of lower shipments and revenues in the first quarter of 2002, ~~as compared~~is the primary factor contributing to ~~32.4% in~~ the ~~same period a year ago. Total~~lower transportation purchased ~~expense decreased 6.7%~~expenses in the first ~~quarter~~half of 2002 compared to ~~last year.~~the first half of 2001. In the second quarter, increases in shipment volumes, and in particular GDS volumes, resulted in increased truck linehaul costs and increased pickup and delivery costs paid to independent contractors. The ~~decrease in costs~~increase was ~~due, in part, to~~offset by lower ~~commercial airline and offshore agent costs associated with fewer international shipments. Delivery~~delivery costs paid to the U.S. Postal Service ~~increased~~ due to ~~the higher volumes of~~fewer airborne@home ~~shipments.~~ shipments and strong cost controls in other cost items.

Station and ground expense as a percentage of revenues was ~~33.5%~~32.8% in this year’s ~~first~~second quarter compared to ~~34.0%~~32.6% in the ~~first~~second quarter of 2001. For the first six months of 2002, this category of expense was 33.2% of revenues compared to 33.6% in the same period a year ago. Total station and ground expense increased .5% in the second quarter compared to the same period in 2001 and decreased ~~5.8%~~2.7% in the first ~~quarter~~half of 2002 compared to ~~a year ago as a result~~the first half of ~~significant reductions in labor hours for domestic operations. These reductions were also~~2001. While this category of expense has been aided by ~~relatively mild winter weather. While~~improved productivity ~~improved,~~in the first half of 2002, higher wage, benefit and workers compensation costs have partially offset the ~~effects~~cost benefits resulting from hours reductions. The cost reduction actions taken in the second quarter of ~~hours reductions.~~2002, as described above, will primarily be reflected in the station and ground category beginning in this year’s third quarter.

Flight operations and maintenance expense as a percentage of revenues was ~~15.9%~~16.4% in the ~~first~~second quarter of 2002 compared to ~~18.4%~~17.7% in the ~~first~~second quarter of 2001. For the first six months flight expenses were 16.1% compared to 18.2% for the same period a year ago. This category of expense declined ~~17.4%~~7.8% and 12.7% in the ~~first~~second quarter of 2002 and first half of 2002, respectively, when compared to a year ago due in part to lower jet fuel prices and reduced fuel ~~consumption compared to the same period in 2001.~~consumption. The average aviation fuel price per gallon was ~~$.71~~$.82 in the second quarter and $.76 for the first ~~quarter~~six months of 2002 compared to $1.00 and $.77 in the first and fourth quarters of 2001, respectively. Aviation fuel consumption decreased 12.0% in the first quarter to 38.4 million gallons compared to a decrease of 4.6% in the first quarter of 2001. The decrease in consumption was primarily due to our efforts to reduce and combine certain flight segments to reduce costs beginning$.95 in the second quarter of ~~2001. Also, the placement of three 767 aircraft in service since~~2001 and $.98 for the first ~~quarter~~half of ~~2001 allowed less~~2001. While fuel ~~efficient DC-8 aircraft to be moved to shorter lane segments or backup status or removed~~prices decreased from service. The improvement in flight operations and maintenance expense was also aided by lower weather related costs due to the mild weather and lower incurred aircraft maintenance expenses. Lower levels of heavy maintenance expenses were incurred in the first quarter of 2002 than in the same periodcomparable periods in 2001, ~~and were 5.8% as a percentage of revenues in the first quarter of 2002 compared to 6.3% in the first quarter of 2001. We anticipate maintenance expenses to increase~~prices increased in the second quarter of 2002 ~~to more historical levels.~~from first quarter of 2002 when the price per gallon was $.71. The relatively high cost of fuel over the past several years has hampered our efforts to enter into fuel hedging contracts at acceptable prices. While we may enter into fuel hedge contracts in the future, no fuel contracts were entered into during 2001 or the first half of 2002. Aviation fuel consumption decreased 5.0% in the second quarter to 38.5 million gallons and decreased 8.6% for the first six months of 2002 in comparison to 2001. The decrease in consumption was primarily due to our efforts beginning in the second quarter of ~~2002.~~2001 to reduce and combine certain flight segments to reduce costs. Also, the placement of three 767 aircraft in service since the second quarter of 2001 allowed less fuel efficient DC-8 aircraft to be moved to shorter lane segments or backup status or removed from service. Lower levels of heavy maintenance expenses were incurred in the second quarter and first half of 2002 than in the same periods in 2001. Aircraft maintenance costs were 6.0% and 5.9% as a percentage of revenues in the second quarter and first half of 2002 compared to 6.4% in both the second quarter and first half of 2001. Maintenance costs in the second quarter of 2002 increased over first quarter of 2002 levels due primarily to scheduled 767 maintenance activities.

General and administrative ~~expense~~expenses as a percentage of revenues ~~was~~were 8.0% in the second quarter and first ~~quarter of 2002 and the first quarter of 2001. Total general and administrative costs decreased 4.0% in the first quarter~~half of 2002 compared to ~~an increase of 8.4%~~8.2% in the second quarter and first half of 2001. General and administrative includes non-recurring restructuring charges of $2.3 million in the second quarter of 2002 (as discussed previously) and $2.9 million recorded in the second quarter 2001. ~~We took actions~~The charges incurred in the second quarter of 2001 related to ~~reduce costs~~company-wide labor reductions. General and administrative expenses in ~~this category of expense in 2001 and continue to employ strong cost controls over labor and discretionary costs. These cost reduction efforts~~2002 have ~~helped to mitigate cost pressures from wage and pension~~seen cost increases in the areas of pension, health care, insurance, litigation expenses and the reinstatement of certain incentive plans that ~~had been~~were suspended during 2001. However, overall cost reduction efforts and management’s continued emphasis on control over labor and discretionary costs has helped to mitigate some of these cost pressures.

Sales and marketing ~~expenses~~expense as a percentage of revenues ~~decreased to 2.8%~~remained consistent at 2.9% in the first quarter of 2002 ~~compared to 2.9% in~~and 2001 and for the first ~~quarter~~half of 2002 and 2001. While costs have been added to increase the number of sales personnel, ~~lower~~ marketing and packaging expenses ~~resulted in a 7.2% decline in this category of expense in comparison to the first quarter of 2001.~~have been reduced.

Depreciation and amortization expense totaled ~~6.2%~~5.8% of revenues in the ~~first~~second quarter of 2002 and ~~6.4%~~6.5% in the ~~first~~second quarter of 2001. For the first half of 2002, depreciation and amortization expense was 6.0% of revenues compared to 6.4% in 2001. Depreciation and amortization expense decreased ~~6.7%~~11.3% and 9.0% in the second quarter and first ~~quarter~~half of 2002, respectively, compared to 2001 ~~to $49 million~~levels for the same periods. The decline is due to ~~relatively~~the timing of certain aircraft assets becoming fully depreciated and lower levels of capital expenditures made in 2001 ~~coupled with~~and the ~~timing~~first half of ~~certain~~2002 in relation to expenditures made in 2000 and prior. This category of expense also includes additional depreciation charges of $1.3 million and $2.5 million for the first half of 2002 and 2001, respectively, on DC-8 aircraft ~~assets becoming fully depreciated.~~that were removed from service.

Interest expense increased in the second quarter and first ~~quarter~~half of 2002 compared to the same ~~period~~periods a year ago due to higher levels of outstanding debt coupled with lower levels of capitalized interest. ~~There was no interest~~Interest expense increased due to additional debt incurred upon the financing of five 767 aircraft in August 2001 and issuance of $150.0 million in Senior Convertible Notes in March 2002. Interest capitalized, ~~during the first quarter of 2001 compared to $1.1 million of capitalized interest in the first quarter of 2002~~primarily on the acquisition and modification of ~~767 aircraft.~~aircraft, during the second quarter and first half of 2002 was $.4 million compared to $.5 million and $1.6 million in the second quarter and first six months of 2001. Offsetting interest expense was ~~$.8~~$1.5 and $2.3 million of interest income recorded in the ~~first~~second quarter of 2002 ~~from~~and first six months of 2002, respectively compared to interest income of $.2 million and $.3 million in the comparable periods in 2001. Interest income has increased due to higher levels of cash equivalent short-term investments.

Discounts on the sales of receivables associated with recording the obligation to fund the purchaser’s costs under our accounts receivable securitization facility were ~~$1.3~~$.9 and $2.1 million in the second quarter and first ~~quarter~~half of 2002 compared to ~~$3.8~~$2.2 million and $6.0 million in the second quarter and first ~~quarter~~half of 2001. The decrease in cost is due to lower discounts on amounts sold as a result of the lower interest rate ~~environment.~~environment and the payment in May 2002 of $100.0 million on the accounts receivable securitization facility. Because of the sales recognition treatment associated with these securitization transactions, the cost is recorded separate from interest expense.

Included in other income in the first quarter of 2002 was a non-recurring gain of $1.7 million from the sale of an equity interest in one of our international agents. In the first half of 2001 and included in this category were $2.1 million of gains recognized on the sale of certain radio frequencies.

Our effective tax expense rate of ~~40.9%~~61.0% and 43.2% in the second quarter and first ~~quarter~~half of 2002 compares to a tax benefit rate of ~~35.3%~~33.3% and 34.8% in the ~~first~~comparable periods of 2001. The effective tax rate for 2002, particularly in the second quarter, ~~of 2001.~~was impacted by relatively low earnings and by nondeductible expenses.

We recorded compensation of ~~$13~~$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 and incremental losses through December 31, 2001. The compensation amounts have been recorded ~~were~~ based on our interpretation of the Act and related rules. ~~We are in the process of completing final information and audit filings with~~In April 2002, the Department of Transportation (“DOT”) issued final rules governing the process and ~~while~~content of final filings that support carriers’ compensation claims. We completed and filed our final filing along with required audit schedules in May 2002 and have had preliminary discussions with applicable government agencies regarding these filings. While we believe we have complied with the provisions of the Act, ~~the ultimate~~these agencies have raised certain exceptions concerning treatment of several compensation items. We are currently evaluating our options concerning these exceptions. The final amount of proceeds we will realize is subject to resolution of the exceptions and completion of further review and audit ~~and interpretation~~procedures by the ~~DOT.~~DOT or other applicable government agencies. We cannot be assured of the ultimate outcome of ~~the DOT’s final review,~~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.

Outlook

The performance of the U.S. and global economies will have an impact on our operating results for the balance of 2002 and beyond. ~~The current lack~~Although some areas of ~~certainty regarding sustained economic growth has caused us~~the economy appear to ~~expect continued pressure on year over year shipment and revenue growth, particularly~~be showing signs of strength, we are not seeing that translate into improvement in our ~~higher yielding~~core domestic air express ~~products for the balance of 2002. During the first six weeks of the second quarter of 2002 core express shipment volumes continue to be lower than~~volumes. Accordingly, core express volumes ~~for~~could be lower in the ~~comparable~~second half of 2002 compared to the same period of 2001.

We expect that our GDS product will continue to show strong growth with current estimates of ~~130,000~~between 180,000 and 190,000 shipments per day in the ~~second~~third quarter of ~~2002, with 10% to 15% sequential quarterly growth.~~2002. We expect ~~3% to 5% sequential quarterly growth in~~ our airborne@home product to achieve volumes of between 85,000 and 95,000 shipments per day in the ~~second~~third quarter of 2002. Both product lines should experience seasonal increases in this year’s fourth quarter. Growth in these products will result in incremental expenses primarily related to truck linehaul and, in the ~~fourth quarter~~case of airborne@home shipments, additional delivery costs paid to the ~~year.~~U.S. Postal Service.

~~While we~~We continue to aggressively manage costs ~~it will be difficult to sequentially reduce labor hours~~as evidenced by our recent realignment of international operations and ~~operating costs to the extent achieved~~reduction of additional overhead in our domestic stations. As previously mentioned, those actions provided a $.9 million cost savings in the ~~latter half~~second quarter of ~~2001~~2002 with additional quarterly savings of between $2.0 and ~~through~~$2.5 million to be realized beginning in the ~~first~~third quarter of 2002. We anticipate labor productivity improvement in the second ~~quarter~~half of 2002 ~~but below~~in comparison to the ~~level achieved~~like period in 2001. Wage pressures and additional hours to service expected growth will offset some of favorable cost savings produced by the ~~first quarter of~~productivity gains and accordingly we are not anticipating reductions in wage costs in relation to the ~~year. Productivity improvement will be much more difficult~~levels incurred in the second ~~half of 2002 without volume growth due to the more difficult year over year comparisons. Compensation pressures will also serve to offset some of our anticipated productivity gains.~~quarter.

We mentioned in our ~~Management,~~Management’s Discussion and Analysis included in our Annual Report on Form 10-K that we expected increases in 2002 in employee health care, pension and insurance related costs. While employee healthcare costs trended lower than expected in the first ~~quarter~~half of 2002, we still anticipate that the impact of the increase in these categories of expense will be in the range of ~~$25~~$20.0 to ~~$30~~$25.0 million for the ~~year.~~year in comparison to 2001.

Flight operations costs are also anticipated to be higher during the remainder of the year than the level achieved in the first quarter due to increased scheduled maintenance and higher fuel costs. In AprilThrough July 2002, the price of aviation fuel has increased slightly to approximately $.83 per gallon, compared to $.82 per gallon for the second quarter of 2002. While fuel costs have increased approximately ~~12% over~~17% from first quarter of 2002 ~~yet~~levels we have not adjusted our fuel surcharge percentages. The fuel surcharge percentage may not necessarily increase or decrease in correlation with the cost of fuel. Accordingly, during a period of rising fuel prices, additional costs may not be offset by corresponding increases in fuel surcharge revenues. We continue to monitor fuel cost trends and may make changes to the surcharge as warranted.

~~Interest expense is~~ Aircraft maintenance expenses are anticipated to ~~increase for~~trend to levels approximating the ~~next several quarters due to~~amounts incurred in the March 25, 2002 issuance of $150 million of convertible senior notes. This quarterly increase is expected to be approximately $2.0 million until the maturity of $100 million of senior notes in December of this year.

~~Our effective tax expense rate is expected to be between 40% and 42% for the balance~~second quarter of 2002.

While growth in our deferred products is encouraging, cost pressures and the lack of core express revenue growth could continue to have an adverse effect on operating results for the remainder of the year.

Financial Condition, Liquidity and Capital Resources

During 2001 we achieved our objectives of increasing our liquidity sources and cash reserves through the renegotiation of our bank credit agreement, increasing the size of our accounts receivable securitization facility and securing financing of five 767 aircraft. These efforts and stringent management over capital expenditures were primary factors in the substantial increase in cash to $201.5 million in cash and cash equivalents on the balance sheet as of December 31, 2001. Operating cash flows in the first ~~quarter~~half of 2002, coupled with proceeds from a ~~$150~~$150.0 million private placement offering of convertible senior notes in March 2002, ~~raised~~increased cash and cash equivalent balances to ~~$393.2~~$338.1 million as of ~~March~~June 30, 2002 compared to $201.5 million as of December 31, ~~2002.~~2001.

~~Cash~~Net cash provided by ~~operations net of the change in working capital~~operating activities for the first ~~quarter~~half of 2002 was ~~$75.1~~$156.1 million compared to ~~$45.6~~$95.7 million in the first ~~quarter~~half of 2001 (exclusive of ~~$50 million in proceeds~~repurchases and sales from or to our receivables securitization facility). The improvement in operating cash flow is primarily due to improved operating performance.

Capital expenditures and financing associated with those expenditures are significant factors that affect our financial condition. During the first ~~quarter~~half of 2002 we spent ~~$27.1~~$57.7 million on capital improvements compared to ~~$26.3~~$73.4 million in the first ~~quarter~~half of 2001. Capital spending levels were reduced significantly in the first half of 2002 and in 2001 in comparison to previous ~~year levels through management efforts to reduce spending to a level below the level of cash flow generated from operations.~~years’ levels. We anticipate ~~the level of~~2002 capital spending ~~for 2002 to be up to~~of between $150 and $160 million, revised down from our original target of $175 ~~million, compared~~million. This compares to $126 million in ~~2001,~~2001. The anticipated increase is primarily as a result of committed aircraft acquisitions and technology investments. We took delivery of ~~one~~two 767 aircraft in the first ~~quarter~~half of 2002 and anticipate taking delivery of ~~up to two~~one additional aircraft this year. Growth in ~~the new~~our ground product ishas not ~~anticipated to require~~required significant capital expenditures over the past several quarters since it is

designed to leverage our existing sort, linehaul and pickup and delivery infrastructure. WeIf ground volumes increase during the second half of 2002 as expected, we may ~~add additional regional hubs~~need to ~~augment~~make incremental capital expenditures to accommodate increased volumes. However, we anticipate this ~~service, but these~~ will ~~probably~~ be ~~leased facilities and should not require significant capital.~~accomplished within the $150 to $160 million targeted for 2002 capital spending.

In addition to our existing cash and cash equivalent reserves, we had ~~$50~~$110 million in available borrowing capacity under our bank credit agreement as of ~~March 31,~~June 30, 2002. No borrowings were outstanding under this agreement. This facility is collateralized by a substantial majority of our assets and contains certain restrictive covenants. We were in compliance with all restrictive covenants as of ~~March 31,~~June 30, 2002. We also had eligible receivables to support an additional ~~$40~~$134 million of sales proceeds under our accounts receivable securitization ~~facility (as~~facility. As of ~~March 31,~~June 30, 2002, we had ~~received~~$100 million of outstanding receivables securitized under this facility in comparison to $200 million securitized as of ~~sales proceeds under this facility).~~December 31, 2001.

On March 25, 2002 we completed a private placement offering of $150 million of 5.75% convertible senior notes. The notes are for a five-year term maturing in April 2007. Proceeds from the placement ~~will~~are intended to be used, in part, to pay off $100 million of senior notes that mature in December 2002.

We anticipate capital spending will increase in the second half of 2002 compared to the first half level of $58 million to achieve the targeted investment level of between $150 and $160 million. Working capital will also be impacted due to the planned funding of approximately $48 million of previously accrued pension obligations in the third quarter.

In our opinion, existing cash and cash equivalents coupled with anticipated cash flow from operations and available capacity under the accounts receivable securitization facility and bank credit agreement should provide adequate flexibility for financing capital expenditures and funding debt maturities scheduled in 2002.

While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for 2002, certain circumstances could arise that would materially affect liquidity. Cash flows from operations could be affected by any further deterioration in core shipment volumes caused by a continued slow economy, further terrorist attacks, ~~or our~~management’s inability to successfully implement sales growth initiatives in a cost effective ~~manner.~~manner or realize anticipated cost reductions from realignment and cost savings programs. 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 bank credit and accounts receivable securitization agreements, thereby reducing liquidity sources and potentially requiring the use of cash collateral to support outstanding letters of credit. Lower revenues could also cause amounts currently drawn under the securitization facility to be reduced.

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-Q, 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 make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an on-going basis, we evaluate the estimates used, including those related to bad debts, self-insurance reserves, accruals for labor contract settlements, valuation of spare-parts inventory, impairments of property and equipment, income taxes and contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of the consolidated financial statements.

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~~would be required.

We continually evaluate the fair value of our property and equipment. When an asset is considered impaired, ~~as has been the case with certain DC-8 aircraft that have been removed from service recently,~~ the asset is ~~adjusted~~written down to its fair value. Changes in the

estimated useful lives of certain assets ~~resulting~~may result from excess capacity or changes in regulations grounding the use of our ~~aircraft could require significant impairment losses to be recorded.~~aircraft.

We value spare parts inventory at the lower of cost or market and write down the value of inventory for estimated obsolescence. An inventory reserve is maintained based upon estimates of spare part utilization by aircraft type. Should actual parts usage be affected by conditions that are less favorable than those projected by management, revisions to the estimated inventory reserve ~~may~~would 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 reserves for workers compensation, automobile, and general liability are based upon historical data and recent claim trends. Changes in claim severity and frequency or other claim trends could result in actual claims being materially different ~~than~~from the amounts provided for in our results of operations.

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 recorded, if any, ~~provided for these matters.~~and make adjustments as appropriate. There can be no assurance that the ultimate outcome of these matters will not differ materially from our ~~assessment of them.~~assessment. There can also be no assurance that we know all matters that may be brought against us or that we may bring against other parties at any point in time.

New Accounting Pronouncements

~~In July 2001,~~Effective January 2002, the ~~Financial Accounting Standards Board (“FASB”) issued~~Company implemented the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. ~~SFAS No. 142, which was effective January 1, 2002,~~This standard requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwillamortization and ~~the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires a~~that transitional goodwill impairment ~~test~~tests be performed within six months from the date of adoption. The ~~adoption~~Company has completed its transitional tests and determined no impairment adjustments were necessary as of ~~SFAS Nos. 142 did~~June 30, 2002. The total amount of goodwill recorded and included in equipment deposits and other assets on the consolidated balance sheet was $2.8 million as of June 30, 2002. Net losses and basic and diluted earning per share for the quarter and six months ended June 30, 2001, excluding goodwill amortization expense, would not have ~~a significant impact on our financial position or results~~materially differed from amounts reported. Goodwill expense for second quarter and first half of ~~operations as of or for the three months ended March 31, 2002.~~2001 was $33,000 and $67,000, respectively.

In August 2001, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs will be capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for companies with fiscal years beginning after June 15, 2002, is not expected to have a significant impact on our financial position or results of operations.

In ~~October 2001,~~April 2002, the FASB issued SFAS No. ~~144, “Accounting for the Impairment or Disposal~~145, “Revision of ~~Long-Lived Assets”~~FASB Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. ~~144~~145 requires that only certain extinguishments of debt be classified as an extraordinary item. Further, this statement requires capital leases that are 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 companies with fiscal years beginning after May 15, 2002. The provision of the statement pertaining to lease modifications are effective for transactions consummated after May 15, 2002. Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.

In July 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 ~~the impairment~~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 EITF Issue 94-3, required an exit cost liability be recognized at the date of ~~long-lived assets, and supersedes SFAS No. 121, “Accounting for the Impairment~~an entity’s commitment to an exit plan. The provisions of Long-Lived Assets and For Long-Lived Assets To Be Disposed Of”, and portions of APB No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. SFAS No. 144 requires the use of one accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the definition of discontinued operations. The adoption of SFAS No. 144, which wasthis statement are effective for ~~our first quarter~~exit or disposal activities that are initiated by a company after December 31, 2002. Implementation of ~~2002, did~~this statement is not anticipated to have a significant impact on our financial position or results of operations.

2127

PART II. OTHER INFORMATION

~~Item 4. Submission of Matters to a Vote of Security Holders.~~

The annual meeting of Airborne, Inc. was held at the Sheraton Hotel, 1400 Sixth Avenue, Seattle, Washington on April 30, 2002. A total of 40,353,799 shares were represented at the meeting in person or by proxy, comprising 84% of the outstanding shares of the Company entitled to vote at the meeting on the record date (February 19, 2002).

~~The following directors were duly elected for terms ending in 2005:~~

Votes For

Votes Withheld
James H. Carey    30,771,970    9,581,829
Carl D. Donaway    31,113,563    9,240,236
Andrew B. Kim    30,786,764    9,567,035

~~The following are continuing directors with terms expiring as indicated:~~

~~Terms Expiring in 2003~~		~~Terms Expiring in 2004~~
~~Richard M. Rosenberg~~		~~Harold M. Messmer, Jr.~~
~~William Swindells~~		~~Mary Agnes Wilderotter~~
		~~Rosalie J. Wolf~~

At the meeting, the shareholders approved the selection of Deloitte & Touche LLP as independent auditors for the coming year. The following table sets forth information regarding the voting on that proposal:

Votes Cast For Proposal

Votes Cast Against Proposal

Abstentions
39,800,594

503,459

49,746.

The shareholders also approved the proposal to urge the Board of Directors to take all necessary steps, in compliance with state law, to declassify the Board for the purpose of director elections. The following table sets forth information regarding the voting on that proposal:

Votes Cast For Proposal

Votes Cast Against Proposal

Abstentions
26,132,970

4,800,823

169,113

The shareholders rejected the proposal to request that the Board of Directors adopt a Golden Parachute Policy requiring shareholder approval of certain severance agreements. The following table sets forth information regarding the voting on that proposal:

Votes Cast For Proposal

Votes Cast Against Proposal

Abstentions
9,707,974

20,875,757

519,175

The shareholders approved the proposal to recommend that the Board of Directors seek shareholder approval prior to adopting any poison pill and redeem or terminate any pill now in effect unless it is approved by a shareholder vote. The following table sets forth information regarding the voting on that proposal:

Votes Cast For Proposal

Votes Cast Against Proposal

Abstentions
18,811,656

1,766,553

83,438

~~After the close of the meeting, the following additional votes were received on the poison pill proposal: For: 42,995; Against: 86,240; Abstentions: 2,376.~~

The shareholders also approved the proposal to recommend that the Board of Directors adopt a policy of confidential voting at all shareholder meetings. The following table sets forth information regarding the voting on that proposal:

Votes Cast For Proposal

Votes Cast Against Proposal

Abstentions
18,833,561

3,805,669

22,417

~~After the close of the meeting, the following additional votes were received on the confidential voting proposal: For: 36,843; Against: 92,092; Abstentions: 2,676.~~

~~The Board of Directors, at its annual meeting on April 30, 2002, reappointed Carl D. Donaway as Chief Executive Officer and also appointed him Chairman of the Board.~~

~~At the meeting, the Board of Directors also declared a quarterly cash dividend of $0.04 per share on the common stock of the Company payable on May 28, 2002 to shareholders of record on May 14, 2002.~~

Item 6. Exhibits and Reports on Form 8-K.

(a) ~~Exhibits—~~Exhibits –

~~Exhibit No.~~
EXHIBIT NO. 10			Material Contracts

~~10(a)~~10	(a)		~~Executive~~Management Incentive Compensation Plan ~~(EICP) 2000-2004~~(MICP) 2002

~~10(b)~~EXHIBIT NO. 12		~~Executive Group Incentive Compensation Plan (EGICP) 2000-2004~~	Statements Regarding Computation of Ratios

~~10(c)~~12	(a)		~~First Amendment~~Ratio of Earnings to ~~Amended and Restated Credit Agreement dated March 14, 2002~~Fixed Charges

EXHIBIT NO. 99

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~~

On March 15, 2002 the Company filed a Form 8-K containing a copy of a press release announcing the Company's intent to raise a total of approximately $100 million of gross proceeds through a private offering of convertible senior notes.

On March 25, 2002 the Company filed a Form 8-K containing copies of press releases announcing that, on March 19, 2002, it had agreed to sell, and on March 25, 2002, it had closed the sale of, $150 million principal amount of convertible senior notes.

On May 9, 2002 the Company filed a Form 8-K to reissue its consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001. The reissued financial statements include certain financial information regarding the subsidiaries of the Company that have guaranteed the recently issued convertible senior notes.

2328

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

			~~AIRBORNE, INC.~~ ~~(Registrant)~~AIRBORNE, INC.

~~Date:~~	~~5/14/02~~			/S~~/ LANNY~~ ~~H. MICHAEL~~
				~~Lanny H. Michael~~(Registrant) ~~Executive Vice President,~~ ~~Chief Financial Officer~~

Date:	~~5/14/~~8/13/02		/s/ CARL D. DONAWAY
		/S~~/ ROBERT~~ ~~T. CHRISTENSEN~~
			Carl D. Donaway Chairman and Chief Executive Officer

Date:	~~Robert T. Christensen~~8/13/02		/s/ LANNY H. MICHAEL

			Lanny H. Michael Executive Vice President and Chief Financial Officer

Date:	8/13/02		/s/ ROBERT T. CHRISTENSEN

			Robert T. Christensen Chief Accounting Officer

2429

Three months ended March 31, 2002	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)
Revenues	$	773,041		$	—		$	15,479		$	—		$	788,520

Operating expenses:
Transportation purchased		469,072			—			(220,041	)		—			249,031
Station and ground operations		223,482			—			40,637			—			264,119
Flight operations and maintenance		(455	)		—			126,435			(614	)		125,366
General and administrative		44,789			271			18,316			38			63,414
Sales and marketing		22,076			—			200			—			22,276
Depreciation and amortization		11,813			—			37,225			83			49,121

		770,777			271			2,772			(493	)		773,327

Earnings (loss) from operations		2,264			(271	)		12,707			493			15,193

Other income (expense):
Interest, net		(4,755	)		(175	)		(1,941	)		—			(6,871	)
Discounts on sales of receivables		(965	)		—			—			(340	)		(1,305	)
Other		1,896			—			—			—			1,896

Earnings (loss) before income taxes		(1,560	)		(446	)		10,766			(153	)		8,913
Income tax (expense) benefit		166			156			(4,258	)		291			(3,645	)

Net earnings (loss)	$	(1,394	)	$	(290	)	$	6,508		$	444		$	5,268

Three months ended March 31, 2001	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)
Revenues	$	806,184		$	—		$	17,337		$	—		$	823,521

Operating expenses:
Transportation purchased		512,940			—			(245,901	)		—			267,039
Station and ground operations		236,877			—			43,497			—			280,374
Flight operations and maintenance		—			—			152,345			(659	)		151,686
General and administrative		48,045			219			17,763			40			66,067
Sales and marketing		23,644			—			358			—			24,002
Depreciation and amortization		12,072			—			40,485			81			52,638

		833,578			219			8,547			(538	)		841,806

Earnings (loss) from operations		(27,394	)		(219	)		8,790			538			(18,285	)

Other income (expense):
Interest, net		1,333			19,009			(24,839	)		—			(4,497	)
Discounts on sales of receivables		(4,344	)		—			—			586			(3,758	)
Other		273			—			—			—			273

Earnings (loss) before income taxes		(30,132	)		18,790			(16,049	)		1,124			(26,267	)
Income tax (expense) benefit		10,814			424			(1,770	)		(196	)		9,272

Net earnings (loss)	$	(19,318	)	$	19,214		$	(17,819	)	$	928		$	(16,995	)

	Votes For	Votes Withheld
James H. Carey	30,771,970	9,581,829
Carl D. Donaway	31,113,563	9,240,236
Andrew B. Kim	30,786,764	9,567,035

Votes Cast For Proposal		Votes Cast Against Proposal		Abstentions
39,800,594		503,459		49,746.