---




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, 2002





Commission File Number 1-6512





---




AIRBORNE, INC.


(Exact name of registrant as specified
in its charter)





Delaware

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 shareOutstanding (net of 3,234,526 treasury shares) as of March 31, 2002

48,307,185 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





AIRBORNE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars in thousands except per share data)


(Unaudited)





Three Months Ended March 312002


2001REVENUES:Domestic

$
712,067


$
730,099International


76,453



93,422788,520



823,521OPERATING EXPENSES:Transportation purchased


249,031



267,039Station and ground operations


264,119



280,374Flight operations and maintenance


125,366



151,686General and administrative


63,414



66,067Sales and marketing


22,276



24,002Depreciation and amortization


49,121



52,638773,327



841,806EARNINGS (LOSS) FROM OPERATIONS


15,193



(18,285
)OTHER INCOME (EXPENSE):Interest, net


(6,871
)


(4,497
)Discounts on sales of receivables


(1,305
)


(3,758
)Other


1,896



273EARNINGS (LOSS) BEFORE INCOME TAXES


8,913



(26,267
)INCOME TAX (EXPENSE) BENEFIT


(3,645
)


9,272NET EARNINGS (LOSS)

$
5,268


$
(16,995
)NET EARNINGS (LOSS) PER SHARE:BASIC

$
0.11


$
(0.35
)DILUTED

$
0.11


$
(0.35
)DIVIDENDS PER SHARE

$
0.04


$
0.04





See notes to consolidated financial statements.




1




---




AIRBORNE, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(Dollars in thousands)





March 31, 2002


December 31, 2001(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
393,165


$
201,500Accounts receivable, less allowance of $11,549 and $11,509


133,019



126,040Spare parts and fuel inventory


37,655



38,413Refundable income taxes


178



27,161Deferred income tax assets


30,768



30,572Prepaid expenses and other


36,455



28,021TOTAL CURRENT ASSETS


631,240



451,707PROPERTY AND EQUIPMENT, NET


1,229,194



1,247,373EQUIPMENT DEPOSITS and OTHER ASSETS


52,037



47,764TOTAL ASSETS

$
1,912,471


$
1,746,844LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable

$
120,578


$
141,873Salaries, wages and related taxes


88,409



75,458Accrued expenses


146,917



145,997Income taxes payable


2,629



Current portion of debt


108,008



107,410TOTAL CURRENT LIABILITIES


466,541



470,738LONG-TERM DEBT


368,532



218,053DEFERRED INCOME TAX LIABILITIES


143,303



143,526POST RETIREMENT LIABILITIES


54,590



39,423OTHER LIABILITIES


40,950



40,888SHAREHOLDERS EQUITY:Preferred Stock, without par valueAuthorized 6,000,000 shares, no shares issuedCommon stock, par value $1 per shareAuthorized 120,000,000 sharesIssued 51,541,711 and 51,375,711 shares


51,542



51,376Additional paid-in capital


307,227



304,984Retained earnings


543,882



540,544Accumulated other comprehensive income


(4,238
)


(2,820
)898,413



894,084Treasury stock, 3,234,526 and 3,240,526 shares, at cost


(59,858
)


(59,868
)838,555



834,216TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
1,912,471


$
1,746,844





See notes to consolidated financial statements.




2




---




AIRBORNE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Dollars in thousands)


(Unaudited)





Three Months Ended March 312002


2001OPERATING ACTIVITIES:Net earnings (loss)

$
5,268


$
(16,995
)Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization


49,121



52,638Deferred income taxes


(420
)


806Postretirement obligations


12,967



(6,323
)Other


(1,548
)


5,836CASH PROVIDED BY OPERATIONS


65,388



35,962Change in:Proceeds from receivable securitization facility






50,000Receivables


(6,979
)


20,123Inventories and prepaid expenses


(7,676
)


(2,837
)Refundable income taxes


26,983



867Accounts payable


(21,295
)


(24,577
)Accrued expenses, salaries and taxes payable


18,699



16,105NET CASH PROVIDED BY OPERATING ACTIVITIES


75,120



95,643INVESTING ACTIVITIES:Additions to property and equipment


(27,199
)


(26,325
)Proceeds from sale of securities


1,656



Other


(1,915
)


1,439NET CASH USED BY INVESTING ACTIVITIES


(27,458
)


(24,886
)FINANCING ACTIVITIES:Issuance of convertible debt, net of issuance costs


145,125



Payments on bank notes, net






(43,000
)Principal payments on debt


(1,611
)


(116
)Proceeds from common stock issuance


2,419



783Dividends paid


(1,930
)


(1,924
)NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES


144,003



(44,257
)NET INCREASE IN CASH


191,665



26,500CASH AND CASH EQUIVALENTS AT JANUARY 1


201,500



40,390CASH AND CASH EQUIVALENTS AT MARCH 31

$
393,165


$
66,890





See notes to consolidated financial statements.




3




---




AIRBORNE, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


March 31, 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LONG-TERM DEBT:





Long-term debt consists of the following:





March 31, 2002


December 31, 2001(In thousands)Senior debt:Senior notes

$
200,000


$
200,000Convertible senior notes


150,000



Aircraft loan


60,658



61,651Capital lease obligations


45,291



43,070Revenue bonds


13,200



13,200Revolving bank credit






Other debt


7,391



7,542476,540



325,463Less current portion


(108,008
)


(107,410
)$
368,532


$
218,053





On March 25, 2002, the Company issued $150,000,000 of 5.75% Convertible Senior
Notes due April 2007. The proceeds of the sale are intended, in part, to fund the repayment of $100,000,000 of 8.75% notes due December 15, 2002 at their stated maturity. The notes are convertible into shares of the Companys common stock, at
the option of the holder, at a conversion rate of 42.7599 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. This is equivalent to a conversion price of $23.39 per share.





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 Company has eligible collateral in the borrowing base to support $148,000,000 of the $275,000,000
commitment and has the ability to increase the borrowing base by pledging additional eligible collateral. With the current level of eligible collateral, available capacity under the agreement, net of outstanding letters of credit, was $50,500,000.
At March 31, 2002 no borrowings were outstanding under the agreement and the Company was in compliance with restrictive covenants including covenants requiring the maintenance of minimum levels of earnings before interest, taxes, depreciation and
amortization (EBITDA), leverage and debt service coverage ratios and required levels of liquidity. The agreement also restricts the Company from declaring or paying dividends on its common stock during any calendar quarter in excess of $2,000,000
(plus up to an additional $300,000 for dividends on any common stock issued upon conversion of the Companys convertible senior notes securities described below). The Companys $200,000,000 of outstanding non-convertible senior notes are
also collateralized by assets of the Company.




4




---




NOTE C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, the assumed conversion of convertible senior notes.





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





Three Months Ended March 312002

2001WEIGHTED AVERAGE SHARES OUTSTANDING:Basic

48,253,078

48,079,634Diluted

48,589,135

48,080,472





NOTE D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 312002


2001SEGMENT REVENUES:Domestic

$
712,067


$
730,099International


76,453



93,422$
788,520


$
823,521SEGMENT EARNINGS (LOSS) FROM OPERATIONS:Domestic

$
16,932


$
(16,528
)International


(1,739
)


(1,757
)$
15,193


$
(18,285
)





NOTE EOTHER COMPREHENSIVE INCOME





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





Before Tax


Income Tax (Expense) or Benefit


Net of Tax2002Unrealized securities gains arising during the period

$
679


$
(262
)

$
417Less: Reclassification adjustment for gains realized in net income


(1,656
)


638



(1,018
)Net unrealized securities losses


(977
)


376



(601
)Foreign currency translation adjustments


(256
)


99



(157
)Unrealized gain on interest rate swap


656



(252
)


404Additional minimum pension liabilities


(1,729
)


665



(1,064
)Other comprehensive income

$
(2,306
)

$
888


$
(1,418
)




5




---




Before Tax


Income Tax (Expense) or Benefit

Net of Tax2001Unrealized 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 F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.





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 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.




6




---




The following are consolidating condensed balance sheets of the Company as of March 31, 2002
and December 31, 2001 and the related consolidating condensed statements of operations and cash flows for the three months ended March 31, 2002 and 2001:





Balance Sheet Information:





March 31, 2002

Airborne Express, Inc.


Airborne Inc.


Guarantors


Non-guarantors


Elimination


Consolidated(in thousands)ASSETSCurrent Assets:Cash and cash equivalents

$
391,470


$



$
772


$
923


$



$
393,165Accounts receivable


12,701







9,570



110,748







133,019Spare parts and fuel inventory










34,892



2,763







37,655Refundable income taxes


178



















178Deferred income tax assets


30,768



















30,768Prepaid expenses and other


20,405







15,550



500







36,455Total current assets


455,522







60,784



114,934







631,240Property & equipment,net


101,515







1,123,501



4,178







1,229,194Intercompany advances


34,204



447,595



(33,942
)


3,558



(451,415
)


Equipment deposits and other assets


31,686



10,858



9,594



10



(111
)


52,037Total assets

$
622,927


$
458,453


$
1,159,937


$
122,680


$
(451,526
)

$
1,912,471LIABILITIES ANDSHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
83,432


$



$
37,331



102


$
(287
)

$
120,578Salaries, wages and related taxes


52,827







35,584



(2
)






88,409Accrued expenses and income taxes payable


142,827



167



5,789



763







149,546Current portion of debt


101,345







6,663











108,008Total current liabilities


380,431



167



85,367



863



(287
)


466,541Long-term debt


106,102



150,000



112,430











368,532Intercompany liabilities










336,127







(336,127
)


Deferred income tax liabilities


(7,190
)






149,961



532







143,303Postretirement liabilities


46,552







8,038











54,590Other liabilities


40,950



















40,950Shareholders equity:Common stock


1



51,542



(9
)


120



(112
)


51,542Additional paid in capital


164



307,065



(755
)


115,753



(115,000
)


307,227Retained earnings


60,155



9,537



468,778



5,412







543,882Accumulated 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
)


838,555Total liabilities and shareholders equity

$
622,927


$
458,453


$
1,159,937


$
122,680


$
(451,526
)

$
1,912,471




7




---




Balance Sheet Information:





December 31, 2001

Airborne Express, Inc.


Airborne Inc.


Guarantors


Non-guarantors

Elimination


Consolidated(in thousands)ASSETSCurrent Assets:Cash and cash equivalents

$
191,629


$



$
607


$
9,264

$



$
201,500Accounts receivable


18,706







10,113



97,289


(68
)


126,040Spare parts and fuel inventory










36,272



2,141






38,413Refundable income taxes


27,161


















27,161Deferred income tax assets


30,572


















30,572Prepaid expenses and other


13,918







13,627



476






28,021Total current assets


281,986







60,619



109,170


(68
)


451,707Property & equipment, net


109,622







1,133,490



4,261






1,247,373Intercompany 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
)


47,764Total assets

$
580,367


$
308,242


$
1,223,282


$
126,325

$
(491,372
)

$
1,746,844LIABILITIES ANDSHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
84,867


$



$
53,146


$
4,552

$
(692
)

$
141,873Salaries, wages and related taxes


46,976







28,482










75,458Accrued expenses and income taxes payable


139,132







6,261



604






145,997Current portion of debt


100,877







6,533










107,410Total current liabilities


371,852







94,422



5,156


(692
)


470,738Long-term debt


103,951







114,102










218,053Intercompany liabilities










370,168






(370,168
)


Deferred income tax liabilities


(6,967
)






150,164



329






143,526Postretirement liabilities


11,905







27,518










39,423Other liabilities


40,888


















40,888Shareholders equity:Common stock


1



51,376



(9
)


120


(112
)


51,376Additional paid in capital


8



304,976



3,171



115,753


(118,924
)


304,984Retained earnings


61,549



11,758



463,746



4,967


(1,476
)


540,544Accumulated 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
)


834,216Total liabilities and shareholders equity

$
580,367


$
308,242


$
1,223,282


$
126,325

$
(491,372
)

$
1,746,844




8




---




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


$



$
788,520Operating expenses:Transportation purchased


469,072







(220,041
)






249,031Station and ground operations


223,482







40,637







264,119Flight operations and maintenance


(455
)






126,435



(614
)


125,366General and administrative


44,789



271



18,316



38



63,414Sales and marketing


22,076







200







22,276Depreciation and amortization


11,813







37,225



83



49,121770,777



271



2,772



(493
)


773,327Earnings (loss) from operations


2,264



(271
)


12,707



493



15,193Other income (expense):Interest, net


(4,755
)


(175
)


(1,941
)






(6,871
)Discounts on sales of receivables


(965
)










(340
)


(1,305
)Other


1,896















1,896Earnings (loss) before income taxes


(1,560
)


(446
)


10,766



(153
)


8,913Income 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


$



$
823,521Operating expenses:Transportation purchased


512,940







(245,901
)






267,039Station and ground operations


236,877







43,497







280,374Flight operations and maintenance










152,345



(659
)


151,686General and administrative


48,045



219



17,763



40



66,067Sales and marketing


23,644







358







24,002Depreciation and amortization


12,072







40,485



81



52,638833,578



219



8,547



(538
)


841,806Earnings (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















273Earnings (loss) before income taxes


(30,132
)


18,790



(16,049
)


1,124



(26,267
)Income tax (expense) benefit


10,814



424



(1,770
)


(196
)


9,272Net earnings (loss)

$
(19,318
)

$
19,214


$
(17,819
)

$
928


$
(16,995
)







9




---




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


$
5,268Adjustments to reconcile net earnings to net cash provided by operating activities:Non-cash operating activities


42,145



(5,051
)


23,234



(208
)


60,120Change in current assets and liabilities


164,099



(144,992
)


(798
)


(8,577
)


9,732Net cash provided (used) by operating activities


204,850



(150,333
)


28,944



(8,341
)


75,120INVESTING 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
)






144,003Net increase (decrease) in cash


199,841







165



(8,341
)


191,665Cash and cash equivalents at January 1


191,629







607



9,264



201,500Cash 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
)


52,957Change in current assets and liabilities


71,569



(2,621
)


(12,897
)


3,630



59,681Net Cash provided by operating activities


55,718



16,437



19,546



3,942



95,643INVESTING 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



26,500Cash and cash equivalents at January 1


37,523







52



2,815



40,390Cash and cash equivalents at March 31

$
60,038


$



$
147


$
6,705


$
66,890




10




---




NOTE G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.





The following are consolidating condensed balance sheets of the Company as of March 31, 2002 and
December 31, 2001 and the related consolidating condensed statements of operations and cash flows for the three months ended March 31, 2002 and March 31, 2001. A description regarding the basis of presenting these statements is contained in Note F.





Balance Sheet Information:





March 31, 2002

Airborne, Inc.


Guarantors


Non-guarantors

Elimination


Consolidated(in thousands)ASSETSCurrent Assets:Cash and cash equivalents

$



$
391,505


$
1,660

$



$
393,165Accounts receivable






22,300



110,719






133,019Spare parts and fuel inventory






37,655










37,655Refundable income taxes






178










178Deferred income tax assets






30,768










30,768Prepaid expenses and other






36,086



369






36,455Total current assets






518,492



112,748






631,240Property and equipment, net






1,229,194










1,229,194Intercompany advances


447,595



(275
)


4,095


(451,415
)


Equipment deposits and other assets


10,858



41,290






(111
)


52,037Total assets

$
458,453


$
1,788,701


$
116,843

$
(451,526
)

$
1,912,471LIABILITIES ANDSHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$



$
120,865


$


$
(287
)

$
120,578Salaries, wages and related taxes






88,409










88,409Accrued expenses and income taxes payable


167



148,700



679






149,546Current portion of debt






108,008










108,008Total current liabilities


167



465,982



679


(287
)


466,541Long-term debt


150,000



218,532










368,532Intercompany liabilities






336,127






(336,127
)


Deferred income tax liabilities






143,303










143,303Postretirement liabilities






54,590










54,590Other liabilities






40,950










40,950Shareholders equity:Common stock


51,542



102



10


(112
)


51,542Additional paid in capital


307,065



162



115,000


(115,000
)


307,227Retained earnings


9,537



533,191



1,154






543,882Accumulated other comprehensive income






(4,238
)









(4,238
)Treasury stock


(59,858
)













(59,858
)Total shareholders equity


308,286



529,217



116,164


(115,112
)


838,555Total liabilities and shareholders equity

$
458,453


$
1,788,701


$
116,843

$
(451,526
)

$
1,912,471




11




---




Balance Sheet Information:





December 31, 2001

Airborne, Inc.


Guarantors


Non-guarantors

Elimination


Consolidated(in thousands)ASSETSCurrent Assets:Cash and cash equivalents

$



$
191,664


$
9,836

$



$
201,500Accounts receivable






28,763



97,277






126,040Spare parts and fuel inventory






38,413










38,413Refundable income taxes






27,161










27,161Deferred income tax assets






30,572










30,572Prepaid expenses and other






27,619



402






28,021Total current assets






344,192



107,515






451,707Property and equipment, net






1,247,373










1,247,373Intercompany advances


302,279



452



9,487


(312,218
)


Equipment deposits and other assets


5,963



41,912






(111
)


47,764Total assets

$
308,242


$
1,633,929


$
117,002

$
(312,329
)

$
1,746,844LIABILITIES ANDSHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$



$
142,497


$


$
(624
)

$
141,873Salaries, wages and related taxes






75,458










75,458Accrued expenses and income taxes payable






145,380



617






145,997Current portion of debt






107,410










107,410Total current liabilities






470,745



617


(624
)


470,738Long-term debt






218,053










218,053Intercompany liabilities






196,593






(196,593
)


Deferred income tax liabilities






143,526










143,526Postretirement liabilities






39,423










39,423Other liabilities






40,888










40,888Shareholders equity:Common stock


51,376



(102
)


10


(112
)


51,376Additional paid in capital


304,976



8



115,000


(115,000
)


304,984Retained earnings


11,758



527,411



1,375






540,544Accumulated other comprehensive income






(2,820
)









(2,820
)Treasury stock


(59,868
)













(59,868
)Total shareholders equity


308,242



524,701



116,385


(115,112
)


834,216Total liabilities and shareholders equity

$
308,242


$
1,633,929


$
117,002

$
(312,329
)

$
1,746,844




12




---




Statement of Operations Information:





Three months ended March 31, 2002

Airborne, Inc.


Guarantors


Non-guarantors


Consolidated(in thousands)Revenues

$



$
788,520


$



$
788,520Operating expenses:Transportation purchased






249,031







249,031Station and ground operations






264,119







264,119Flight operations and maintenance






125,366







125,366General and administrative


271



63,143







63,414Sales and marketing






22,276







22,276Depreciation and amortization






49,121







49,121271



773,056







773,327Earnings (loss) from operations


(271
)


15,464







15,193Other income (expense):Interest, net


(175
)


(6,696
)






(6,871
)Discounts on sales of receivables






(965
)


(340
)


(1,305
)Other






1,896







1,896Earnings (loss) before income taxes


(446
)


9,699



(340
)


8,913Income 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


$



$
823,521Operating expenses:Transportation purchased






267,039







267,039Station and ground operations






280,374







280,374Flight operations and maintenance






151,686







151,686General and administrative


219



65,848







66,067Sales and marketing






24,002







24,002Depreciation and amortization






52,638







52,638219



841,587







841,806Loss 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







273Earnings (loss) before income taxes


18,790



(45,643
)


586



(26,267
)Income tax (expense) benefit


424



9,053



(205
)


9,272Net earnings (loss)

$
19,214


$
(36,590
)

$
381


$
(16,995
)




13




---




Statement of Cash Flows Information:





Three months ended March 31, 2002

Airborne, Inc.


Guarantors


Non-guarantors


Consolidated(in thousands)OPERATING ACTIVITIES:Net earnings (loss)

$
(290
)

$
5,779


$
(221
)

$
5,268Adjustments to reconcile net earnings to net cash provided by operating activities:Non-cash operating activities


(5,051
)


65,290



(119
)


60,120Change in current assets and liabilities


(144,992
)


162,560



(7,836
)


9,732Net cash provided (used) by operating activities


(150,333
)


233,629



(8,176
)


75,120INVESTING ACTIVITIES:Net cash used by investing activities






(27,458
)






(27,458
)FINANCING ACTIVITIES:Net cash provided (used) by financing activities


150,333



(6,330
)






144,003Net increase (decrease) in cash






199,841



(8,176
)


191,665Cash and cash equivalents at January 1






191,664



9,836



201,500Cash 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


52,957Change in current assets and liabilities


(2,621
)


57,363



4,939


59,681Net cash provided by operating activities


16,437



73,680



5,526


95,643INVESTING 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


26,500Cash and cash equivalents at January 1






39,121



1,269


40,390Cash and cash equivalents at March 31

$



$
60,095


$
6,795

$
66,890




14




---




|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------




RESULTS OF OPERATIONS





We achieved improved quarterly operating performance in
the first quarter of 2002. The 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, the implementation of yield management actions, as well as the continued reduction in operating expense levels.





We had net earnings in the first quarter of 2002 of $5.3 million or $.11 per diluted share, including a non-recurring after tax gain of $1.0 million, or $.02 per share, from the sale of
certain securities. This compares to a net loss of $17.0 million or $.35 per share in the first quarter of 2001 and net earnings of $2.2 million or $.05 per share in the fourth quarter of 2001. The fourth quarter of 2001 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 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.





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





Three Months Ended March 312002

2001

ChangeShipments (in thousands):DomesticOvernight


39,885


45,618

12.6
%Next Afternoon Service


13,185


13,428

  1.8
%Second Day Service


23,797


24,215

  1.7
%Ground Delivery Service


6,163




n/a100 Lbs. and Over


51


60

15.0
%Total Domestic


83,081


83,321

  0.3
%InternationalExpress


1,330


1,600

16.9
%Freight


87


102

14.7
%Total International


1,417


1,702

16.7
%Total Shipments


84,498


85,023

  0.6
%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
%





Total revenues decreased 4.3% to $789 million in the first
quarter of 2002 compared to revenues of $824 million in the first quarter of 2001. Shipment volumes decreased .6% to 84.5 million in the first quarter compared to 85.0 million in the same quarter a year ago. The first quarter 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 2001.





Domestic revenues decreased 2.5% to $712 million in the first quarter of 2002 compared to $730 million in the first quarter of 2001. Domestic shipments were 83.1 million in the first quarter compared to 83.3 million in the first quarter of
2001. On a per day




15




---

basis, domestic shipments increased 1.3% in the first quarter of 2002 compared to a 3.5% per day increase in the first quarter of 2001 over 2000 levels. Average
revenue per domestic shipment was $8.53 compared to $8.72 in the first quarter of 2001. The 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 reduction in the fuel surcharge.





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 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 million in the
first quarter of 2002 compared to $24.6 million in the first quarter of 2001.





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 express shipment volumes. Core express shipments declined 8.6% in the first quarter compared to a decline of 3.8% in last years first quarter. Our core express products are Overnight
Express, Next Afternoon Service (NAS) and Second Day Service(SDS) excluding airborne@home shipments. Higher yielding Overnight Express shipments decreased 12.6% in the first quarter of 2002 compared to a decrease of 4.9% in the first quarter of
2001. The NAS product decreased 1.8% in this years first quarter compared to a decline of 3.6% a year ago. SDS shipment volumes declined 3.6% compared to a decline of 1.2% in the first quarter of 2001. However, core express product volumes
increased 2.2% on a per day basis in the first quarter of 2002 in comparison to the fourth quarter of 2001.





In April 2001 we
expanded our service portfolio by introducing our Ground Delivery Service(GDS) product. This new product leverages our sort and linehaul infrastructure and was initially marketed to a targeted customer base. We will be marketing this product to an
expanded customer segment more aggressively in 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 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 million shipments
(excluding .4 million airborne @home shipments shipped via GDS) in the first quarter of 2002, or 92,000 shipments per day. This compares to 3.2 million and 1.5 million shipments in the fourth and third quarters of 2001, respectively.





Our airborne@home product increased 12.1% to 5.9 million shipments in the first quarter of 2002 compared to 5.2 million
shipments in the first quarter 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% in the first quarter this year compared to last
year, as the significant growth in our deferred products offset the decline in our core express shipments.





International
revenues decreased 18.2% in the first quarter of 2002 to $76 million compared to $93 million in the first quarter of 2001. Total international shipments decreased 16.7% to 1.4 million shipments in this years first quarter compared to an
increase of 4.9% to 1.7 million shipments in the first quarter of 2001. Our international express shipments declined 16.9% in the first quarter compared to an increase of 4.6% in the same period of 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 by continued global economic weakness, particularly in U.S. exports.




16




---

International margin percentages improved in the first 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 million, the same as reported in the first quarter of 2001.





The cost
reduction measures implemented during 2001 were instrumental in the improvement in first quarter of 2002 results and the sequential quarterly improvements we have made since the first quarter of 2001. Operating expense per shipment decreased 7.6% to
$9.15 in the first quarter of 2002 compared to $9.90 in the first quarter of 2001 and $9.79 for full year of 2001. We have been aggressively managing our costs 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 of 8.5% in the first quarter of 2002 compared to a .1% improvement in
the first quarter of 2001. Our reduction and combination of airline flight segments resulted in a reduction in fuel consumption and savings in maintenance cost. The decline in jet fuel prices also had a positive impact on operating expenses.





Transportation purchased as a percentage of revenues decreased to 31.6% in the first quarter of 2002 as compared to 32.4% in
the same period a year ago. Total transportation purchased expense decreased 6.7% in the first quarter compared to last year. The decrease in costs was due, in part, to lower commercial airline and offshore agent costs associated with fewer
international shipments. Delivery costs paid to the U.S. Postal Service increased due to the higher volumes of airborne@home shipments.





Station and ground expense as a percentage of revenues was 33.5% in this years first quarter compared to 34.0% in the first quarter of 2001. Total
station and ground expense decreased 5.8% in the first quarter of 2002 compared to a year ago as a result of significant reductions in labor hours for domestic operations. These reductions were also aided by relatively mild winter weather. While
productivity improved, higher wage, benefit and workers compensation costs partially offset the effects of hours reductions.





Flight operations and maintenance expense as a percentage of revenues was 15.9% in the first quarter of 2002 compared to 18.4% in the first quarter of 2001. This category of expense declined 17.4% in the first quarter of 2002 compared to a
year ago due in part to lower jet fuel prices and reduced fuel consumption compared to the same period in 2001. The average aviation fuel price per gallon was $.71 in the first quarter 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 in the second quarter of 2001. Also, the placement of three 767 aircraft in service since the first quarter of 2001 allowed less fuel efficient DC-8 aircraft to be moved to shorter lane
segments or backup status or removed 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 period 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 in the second quarter of 2002 to more historical levels. 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 quarter of 2002.





General and
administrative expense as a percentage of revenues was 8.0% in the first quarter of 2002 and the first quarter of 2001. Total general and administrative costs decreased 4.0% in the first quarter of 2002 compared to an increase of 8.4% in the first
quarter of 2001. We took actions to reduce costs in this category of expense in 2001 and continue to employ strong cost controls over labor and discretionary costs. These cost reduction efforts have helped to mitigate cost pressures from wage and
pension cost increases and the reinstatement of certain incentive plans that had been suspended during 2001.




17




---




Sales and marketing expenses as a percentage of revenues decreased to 2.8% in the first quarter
of 2002 compared to 2.9% in the first quarter of 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.





Depreciation and amortization expense totaled 6.2% of revenues in the first quarter of 2002 and 6.4% in the
first quarter of 2001. Depreciation and amortization expense decreased 6.7% in the first quarter of 2002 compared to 2001 to $49 million due to relatively lower levels of capital expenditures made in 2001 coupled with the timing of certain aircraft
assets becoming fully depreciated.





Interest expense increased in the first quarter of 2002 compared to the same period a year
ago due to higher levels of outstanding debt coupled with lower levels of capitalized interest. There was no interest capitalized during the first quarter of 2001 compared to $1.1 million of capitalized interest in the first quarter of 2002 on the
acquisition and modification of 767 aircraft. Offsetting interest expense was $.8 million of interest income recorded in the first quarter of 2002 from 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
million in the first quarter of 2002 compared to $3.8 million in the first quarter of 2001. The decrease in cost is due to lower discounts on amounts sold as a result of the lower interest rate environment. 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.





Our effective tax expense rate of 40.9% in the first quarter of 2002 compares to a tax benefit rate of 35.3% in the first quarter of 2001.





We recorded compensation of $13 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
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 the Department of Transportation (DOT) and, while we believe we have complied with the
Act, the ultimate amount of proceeds we will realize is subject to audit and interpretation by the DOT. We cannot be assured of the ultimate outcome of the DOTs final review, but it is possible that a reduction to the amount of compensation
previously recognized could occur.





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 of certainty regarding sustained economic growth has caused us to
expect continued pressure on year over year shipment and revenue growth, particularly in our higher yielding 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 core express volumes for the comparable period of 2001.





We expect that our GDS product will continue to show
strong growth with current estimates of 130,000 shipments per day in the second quarter of 2002, with 10% to 15% sequential quarterly growth. We expect 3% to 5% sequential quarterly growth in our airborne@home product in the second quarter of 2002.
Both product lines should experience seasonal increases in the fourth quarter of the year.




18




---




While we continue to aggressively manage costs, it will be difficult to sequentially reduce
labor hours and operating costs to the extent achieved in the latter half of 2001 and through the first quarter of 2002. We anticipate labor productivity improvement in the second quarter of 2002, but below the level achieved in the first quarter of
the year. Productivity improvement will be much more difficult 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.





We mentioned in our Management, 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 of 2002, we still anticipate that the impact of the increase in these
categories of expense will be in the range of $25 to $30 million for the year.





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 April 2002, the price of aviation fuel increased approximately 12% over first quarter of 2002
yet 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 anticipated to increase for the next several quarters due to 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 of 2002.





While growth in our deferred products is encouraging, cost pressures and the
lack of core express revenue growth could 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 of 2002 coupled with proceeds from a $150 million private placement offering
of convertible senior notes in March 2002 raised cash and cash equivalent balances to $393.2 million as of March 31, 2002.





Cash
provided by operations net of the change in working capital for the first quarter of 2002 was $75.1 million compared to $45.6 million in the first quarter of 2001 (exclusive of $50 million in proceeds from 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 of 2002 we spent $27.1 million on capital improvements compared to $26.3 million in the first quarter of 2001. Capital spending
levels were reduced significantly 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. We anticipate the level of capital spending for 2002 to
be up to $175 million, compared to $126 million in 2001, primarily as a result of committed aircraft acquisitions and technology investments. We took delivery of one 767 aircraft in the first quarter of 2002 and anticipate taking delivery of up to
two additional aircraft this year. Growth in the new ground product is not anticipated to require significant capital expenditures since it is




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designed to leverage our existing sort, linehaul and pickup and delivery infrastructure. We may add additional regional hubs to augment this service, but these will probably be leased facilities
and should not require significant capital.





In addition to our existing cash and cash equivalent reserves, we had $50 million
in available borrowing capacity under our bank credit agreement as of March 31, 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, 2002. We also had eligible receivables to support an additional $40 million of sales proceeds under our accounts receivable securitization facility (as of March 31, 2002
we had received $200 million of sales proceeds under this facility).





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 be used, in part, to pay off $100 million of senior notes that mature in December 2002.





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 deterioration in core shipment volumes caused by a continued slow economy, further terrorist attacks, or our inability to successfully implement sales growth
initiatives in a cost effective manner. Operating results could also be negatively impacted by prolonged labor disputes or changes in our cost structure from areas such as a significant rise in fuel prices. Weakening operating performance also could
result in our inability to remain in compliance with financial covenants contained in our 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, 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 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 to its fair
value. Changes in the




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





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 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 could
result in actual claims being materially different than 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, if any, provided for these matters. There can be no assurance that the ultimate outcome
of these matters will not differ materially from our assessment of them. 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, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142, which was effective January 1, 2002, 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 goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires a transitional goodwill
impairment test six months from the date of adoption. The adoption of SFAS Nos. 142 did not have a significant impact on our financial position or results of operations as of or for the three months ended March 31, 2002.





In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs will be capitalized as part of the carrying
amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for 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, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and supersedes SFAS No. 121, Accounting for the Impairment 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 was effective for our first quarter of
2002, did not have a significant impact on our financial position or results of operations.




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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 WithheldJames H. Carey

30,771,970

9,581,829Carl D. Donaway

31,113,563

9,240,236Andrew 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 2004Richard M. Rosenberg

Harold M. Messmer, Jr.William Swindells

Mary Agnes WilderotterRosalie 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

Abstentions39,800,594

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

Abstentions26,132,970

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

Abstentions9,707,974

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

Abstentions18,811,656

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

Abstentions18,833,561

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.




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





(a)  Exhibits





Exhibit No. 10

Material Contracts10(a)

Executive Incentive Compensation Plan (EICP) 2000-200410(b)

Executive Group Incentive Compensation Plan (EGICP) 2000-200410(c)

First Amendment to Amended and Restated Credit Agreement dated March 14, 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.




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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)Date:

5/14/02



/S/    LANNY H. MICHAELLanny H. Michael Executive Vice President, Chief Financial OfficerDate:

5/14/02



/S/    ROBERT T. CHRISTENSENRobert T. ChristensenChief Accounting Officer




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