---

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 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


(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 June 30, 2002

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





AIRBORNE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars in thousands except per share data)


(Unaudited)





Three Months Ended June 30


Six Months Ended June 302002


2001


2002


2001REVENUES:Domestic

$
719,913


$
720,235


$
1,431,980


$
1,450,334International


90,538



91,990



166,991



185,412810,451



812,225



1,598,971



1,623,746OPERATING EXPENSES:Transportation purchased


267,368



266,085



516,399



533,124Station and ground operations


265,957



264,780



530,076



545,154Flight operations and maintenance


132,531



143,686



257,897



295,372General and administrative


65,237



66,821



128,651



132,888Sales and marketing


23,492



23,329



45,768



47,331Depreciation and amortization


46,731



52,684



95,852



105,322801,316



817,385



1,574,643



1,659,191EARNINGS (LOSS) FROM OPERATIONS


9,135



(5,160
)


24,328



(23,445
)OTHER INCOME (EXPENSE):Interest, net


(7,485
)


(4,454
)


(14,356
)


(8,951
)Discounts on sales of receivables


(885
)


(2,229
)


(2,190
)


(5,986
)Other


407



2,304



2,303



2,576EARNINGS (LOSS) BEFORE INCOME TAXES


1,172



(9,539
)


10,085



(35,806
)INCOME TAX (EXPENSE) BENEFIT


715



(3,178
)


4,360



(12,450
)NET EARNINGS (LOSS)

$
457


$
(6,361
)

$
5,725


$
(23,356
)NET EARNINGS (LOSS) PER SHARE:BASIC

$
0.01


$
(0.13
)

$
0.12


$
(0.48
)DILUTED

$
0.01


$
(0.13
)

$
0.12


$
(0.48
)DIVIDENDS PER SHARE

$
0.04


$
0.04


$
0.08


$
0.08





See notes to consolidated financial statements.




1




---




AIRBORNE, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(Dollars in
thousands)





June 30


December 312002


2001(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
338,063


$
201,500Trade accounts receivable, less allowance of $10,849 and $11,509


224,322



126,040Spare parts and fuel inventory


37,085



38,413Refundable income taxes


517



27,161Deferred income tax assets


30,929



30,572Prepaid expenses and other


33,496



28,021TOTAL CURRENT ASSETS


664,412



451,707PROPERTY AND EQUIPMENT, NET


1,214,131



1,247,373EQUIPMENT DEPOSITS and OTHER ASSETS


52,424



47,764TOTAL ASSETS

$
1,930,967


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

$
138,784


$
141,873Salaries, wages and related taxes


81,233



75,458Accrued expenses


148,978



145,997Current portion of debt


108,173



107,410TOTAL CURRENT LIABILITIES


477,168



470,738LONG-TERM DEBT


366,387



218,053DEFERRED INCOME TAX LIABILITIES


144,717



143,526POST RETIREMENT LIABILITIES


66,964



39,423OTHER LIABILITIES


38,816



40,888COMMITMENTS AND CONTINGENCIESSHAREHOLDERS 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 51,631,447 and 51,375,711 shares


51,631



51,376Additional paid-in capital


308,553



304,984Retained earnings


542,163



540,544Accumulated other comprehensive income


(5,574
)


(2,820
)896,773



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


(59,858
)


(59,868
)836,915



834,216TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
1,930,967


$
1,746,844





See notes to consolidated financial statements.




2




---




AIRBORNE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Dollars
in thousands)


(Unaudited)





Six Months Ended June 302002


2001OPERATING ACTIVITIES:Net earnings (loss)

$
5,725


$
(23,356
)Adjustments to reconcile net earnings tonet cash provided by operating activities:Depreciation and amortization


95,852



105,322Deferred income taxes


834



9,623Postretirement obligations


23,537



3,427Other


(3,759
)


(2,299
)CASH PROVIDED BY OPERATIONS


122,189



92,717Change in:Receivable securitization facility


(100,000
)


50,000Receivables


1,718



24,764Inventories and prepaid expenses


(4,147
)


(5,327
)Refundable income taxes


26,644



(3,669
)Accounts payable


(3,089
)


(30,163
)Accrued expenses, salaries and taxes payable


12,759



17,405NET CASH PROVIDED BY OPERATING ACTIVITIES


56,074



145,727INVESTING ACTIVITIES:Additions to property and equipment


(57,694
)


(73,389
)Proceeds from sale of securities


3,778



Proceeds from sale of radio frequencies






2,071Other


(6,995
)


15NET CASH USED BY INVESTING ACTIVITIES


(60,611
)


(71,303
)FINANCING ACTIVITIES:Payments on bank notes, net






(85,000
)Issuance of convertible debt, net of issuance costs


145,125



Principal payments on debt


(3,753
)


(234
)Exercise of stock options


3,834



782Dividends paid


(3,864
)


(3,848
)Shareholder rights redemption


(242
)


NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES


141,100



(88,300
)NET INCREASE (DECREASE) IN CASH


136,563



(13,876
)CASH AND CASH EQUIVALENTS AT JANUARY 1


201,500



40,390CASH AND CASH EQUIVALENTS AT JUNE 30

$
338,063


$
26,514SUPPLEMENTAL CASH FLOW INFORMATION:Non-cash financing activities:Capital leases entered into during the period

$
2,850









See notes to consolidated financial statements.




3




---




AIRBORNE, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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:





June 30 2002


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

$
200,000


$
200,000Convertible senior notes


150,000



Aircraft loan


59,640



61,651Capital lease obligations


44,525



43,070Revenue bonds


13,200



13,200Other debt


7,195



7,542474,560



325,463Less current portion


(108,173
)


(107,410
)$
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 8.875% senior 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. 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. At June 30, 2002, the Company had eligible collateral in the borrowing base to support $214,000,000 of the $275,000,000 commitment. The Company has the ability to increase the borrowing
base by pledging additional eligible collateral. At June 30, 2002, available capacity under the agreement, net of outstanding letters of credit, was $110,000,000. At 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 up to an additional




4




---

$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 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 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 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 June 30

Six Months Ended June 302002

2001

2002

2001WEIGHTED AVERAGE SHARES OUTSTANDING:Basic

48,356,841

48,103,545

48,304,960

48,091,590Diluted

48,981,739

48,103,545

48,785,437

48,092,008





NOTE 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 June 30


Six Months Ended June 302002


2001


2002


2001SEGMENT REVENUES:Domestic

$
719,913


$
720,235


$
1,431,980


$
1,450,334International


90,538



91,990



166,991



185,412$
810,451


$
812,225


$
1,598,971


$
1,635,746SEGMENT EARNINGS (LOSS) FROM OPERATIONS:Domestic

$
9,496


$
(4,622
)

$
26,428


$
(21,150
)International


(361
)


(538
)


(2,100
)


(2,295
)$
9,135


$
(5,160
)

$
24,328


$
(23,445
)




5




---




NOTE FOTHER COMPREHENSIVE INCOME





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





Three Months Ended June 30,
2002


Six Months Ended June 30,
2002Before Tax


Income Tax (Expense) or Benefit


Net of Tax


Before Tax


Income Tax (Expense) or Benefit


Net of Tax2002Unrealized securities gains arising during the period

$
(487
)

$
188


$
(299
)

$
192


$
(74
)

$
118Less: Reclassification adjustment for gains realized in net income














(1,656
)


638



(1,018
)Net unrealized securities losses


(487
)


188



(299
)


(1,464
)


564



(900
)Foreign currency translation adjustments


386



(149
)


237



130



(50
)


80Unrealized loss on interest rate swap


(2,071
)


797



(1,274
)


(1,414
)


544



(870
)Additional minimum pension liabilities














(1,729
)


665



(1,064
)Other comprehensive income

$
(2,172
)

$
836


$
(1,336
)

$
(4,477
)

$
1,723


$
(2,754
)Three Months Ended June 30,
2001


Six Months Ended June 30,
2001Before Tax


Income Tax (Expense) or Benefit


Net of Tax


Before Tax


Income Tax (Expense) or Benefit


Net of Tax2001Unrealized securities gains arising during the period

$
312


$
(120
)

$
192


$
168


$
(65
)

$
103Less: Reclassification adjustment for gains realized in net income














(32
)


12



(20
)Net unrealized securities gains


312



(120
)


192



136



(53
)


83Foreign currency translation adjustments


(109
)


30



(79
)


(310
)


97



(213
)Other comprehensive income

$
203


$
(90
)

$
113


$
(174
)

$
44


$
(130
)




6




---




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 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.




7




---




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.




8




---




The following are consolidating condensed balance sheets of the Company as of
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 June 30, 2002 and 2001, respectively:





Statement of Operations Information:





Three months ended June 30, 2002


Six months ended June 30, 2002Airborne 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


$



$
1,598,971Operating expenses:Transportation purchased


480,542







(213,174
)






267,368



949,614







(433,215
)






516,399Station and ground operations


224,816







41,141







265,957



448,298







81,778







530,076Flight operations and maintenance


(869
)






133,989



(589
)


132,531



(1,324
)






260,424



(1,203
)


257,897General and administrative


46,503



518



18,175



41



65,237



91,292



789



36,491



79



128,651Sales and marketing


23,261







231







23,492



45,337







431







45,768Depreciation and amortization


10,926







35,723



82



46,731



22,739







72,948



165



98,852785,179



518



16,085



(466
)


801,316



1,555,956



789



18,857



(959
)


1,574,643Earnings (loss) from operations


9,599



(518
)


(412
)


466



9,135



11,863



(789
)


12,295



959



24,328Other 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















2,303Earnings (loss) before income taxes


3,120



(343
)


(2,188
)


583



1,172



1,560



(789
)


8,578



736



10,085Income 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




9




---




Statement of Operations Information:





Three months ended June 30, 2001


Six months ended June 30, 2001Airborne 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


$



$
1,635,746Operating expenses:Transportation purchased


507,005







(240,920
)






266,085



1,019,945







(486,821
)






533,124Station and ground operations


224,109







40,671







264,780



460,986







84,168







545,154Flight operations and maintenance


(162
)






144,488



(640
)


143,686



(162
)






296,833



(1,299
)


295,372General and         administrative


52,736



228



13,818



39



66,821



100,781



447



31,581



79



132,888Sales and marketing


22,995







334







23,329



46,639







692







47,331Depreciation and amortization


12,458



150



39,992



84



52,684



24,530



150



80,477



165



105,322819,141



378



(1,617
)


(517
)


817,385



1,652,719



597



6,930



(1,055
)


1,659,191Earnings (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















2,577Earnings (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
)


12,450Net earnings (loss)

$
(17,860
)

$
(626
)

$
10,636


$
1,489


$
(6,361
)

$
(37,178
)

$
18,588


$
(7,183
)

$
2,417


$
(23,356
)




10




---

Balance Sheet Information:





June 30, 2002

Airborne Express, Inc.


Airborne Inc.


Guarantors


Non-guarantors


Elimination


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

$
336,947


$



$
106


$
1,010


$



$
338,063Trade accounts receivable, less allowance


19,863







10,204



194,255







224,322Spare parts and fuel inventory










34,326



2,759







37,085Refundable income taxes


517



















517Deferred income tax assets


30,929



















30,929Prepaid expenses and other


19,191







13,805



500







33,496Total current assets


407,447







58,441



198,524







664,412Property & equipment, net


96,791







1,113,244



4,096







1,214,131Intercompany 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
)


52,424Total assets

$
633,042


$
459,789


$
1,081,376


$
226,307


$
(469,547
)

$
1,930,967LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
96,709


$



$
38,822


$
3,488


$
(235
)

$
138,784Salaries, wages and related taxes


48,840







32,394



(1
)






81,233Accrued expenses


139,858



2,325



6,496



299







148,978Current portion of debt


101,378







6,795











108,173Total current liabilities


386,785



2,325



84,507



3,786



(235
)


477,168Long-term debt


105,710



150,000



110,677











366,387Intercompany liabilities










254,200







(254,200
)


Deferred income tax liabilities


(5,780
)






149,965



532







144,717Post retirement liabilities


50,888







16,076











66,964Other liabilities


38,816



















38,816Shareholders equity:Common stock


1



51,631



(9
)


120



(112
)


51,631Additional paid-in capital






308,553



(753
)


215,753



(215,000
)


308,553Retained earnings net


62,196



7,138



466,713



6,116







542,163Accumulated 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
)


836,915Total liabilities and shareholders equity

$
633,042


$
459,789


$
1,081,376


$
226,307


$
(469,547
)

$
1,930,967




11




---




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

$



$
201,500Trade accounts receivable, less allowance


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 AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
84,867


$



$
53,146


$
4,552

$
(692
)

$
141,873Salaries, wages and related taxes


46,976







28,482










75,458Accrued expenses


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






143,526Post retirement 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 net


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




12




---




Statement of Cash Flows Information:





Three months ended June 30, 2002


Six months ended June 30, 2002Airborne 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


$
5,725Adjustments 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



116,464Change 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
)


56,074INVESTING 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
)






141,100Net increase (decrease) in cash


(54,523
)






(666
)


87



(55,102
)


145,318







(501
)


(8,254
)


136,563Cash and cash equivalents at January 1


391,470







772



923



393,165



191,629







607



9,264



201,500Cash and cash equivalents at June 30

$
336,947


$



$
106


$
1,010


$
338,063


$
336,947


$



$
106


$
1,010


$
338,063Three months ended June 30, 2001


Six months ended June 30, 2001Airborne 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
)


96,073Change in current assets and liabilities


(41,237
)


64,270



(24,299
)


(5,405
)


(6,671
)


30,332



61,649



(37,196
)


(1,775
)


53,010Net cash provided (used) by operating activities


(48,339
)


62,540



41,816



(3,862
)


52,155



5,308



78,977



61,362



80



145,727INVESTING 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



40,390Cash and cash equivalents at June 30

$
22,680


$



$
996


$
2,838


$
26,514


$
22,680


$



$
996


$
2,838


$
26,514




13




---




NOTE 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 J.




14




---




The following are consolidating condensed balance sheets of the Company as of
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 June 30, 2002 and June 30, 2001, respectively. A description regarding the basis of
presenting these statements is contained in Note I.





Statement of Operations Information:





Three months ended June 30, 2002


Six months ended June 30, 2002Airborne, Inc.


Guarantors


Non-guarantors


Consolidated


Airborne, Inc.


Guarantors


Non-guarantors


Consolidated(in thousands)


(in thousands)Revenues

$



$
810,451


$



$
810,451


$



$
1,598,971


$



$
1,598,971Operating expenses:Transportation purchased






267,368







267,368







516,399







516,399Station and ground operations






265,957







265,957







530,076







530,076Flight operations and maintenance






132,531







132,531







257,897







257,897General and administrative


518



64,719







65,237



789



127,862







128,651Sales and marketing






23,492







23,492







45,768







45,768Depreciation and amortization






46,731







46,731







95,852







95,852518



800,798







801,316



789



1,573,854







1,574,643Earnings (loss) from operations


(518
)


9,653







9,135



(789
)


25,117







24,328Other 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







2,303Earnings (loss) before income taxes


(343
)


1,398



117



1,172



(789
)


11,097



(223
)


10,085Income 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, 2001Airborne, Inc.


Guarantors


Non-guarantors


Consolidated


Airborne, Inc.


Guarantors


Non-guarantors


Consolidated(in thousands)


(in thousands)Revenues

$



$
812,225


$



$
812,225


$



$
1,635,746


$



$
1,635,746Operating expenses:Transportation purchased






266,085







266,085







533,124







533,124Station and ground operations






264,780







264,780







545,154







545,154Flight operations and maintenance






143,686







143,686







295,372







295,372General and administrative


228



66,593







66,821



447



132,441







132,888Sales and marketing






23,329







23,329







47,331







47,331Depreciation and amortization


150



52,534







52,684



150



105,172







105,322378



817,007







817,385



597



1,658,594







1,659,191Loss 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







2,577Earnings (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
)


12,450Net earnings (loss)

$
(626
)

$
(6,346
)

$
611


$
(6,361
)

$
18,588


$
(42,936
)

$
992


$
(23,356
)




15




---




Balance Sheet Information:





June 30, 2002

Airborne, Inc.


Guarantors


Non- guarantors

Elimination


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

$



$
336,982


$
1,081

$



$
338,063Trade accounts receivable, less allowance






30,126



194,196






224,322Spare parts and fuel inventory






37,085










37,085Refundable income taxes






517










517Deferred income tax assets






30,929










30,929Prepaid expenses and other






33,173



323






33,496Total current assets






468,812



195,600






664,412Property and equipment, net






1,214,131










1,214,131Intercompany advances


348,841



(355
)


20,950


(369,436
)


Equipment deposits and other assets


110,948



41,587






(100,111
)


52,424Total assets

$
459,789


$
1,724,175


$
216,550

$
(469,547
)

$
1,930,967LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$



$
139,019


$


$
(235
)

$
138,784Salaries, wages and related taxes






81,233










81,233Accrued expenses


2,325



146,343



310






148,978Current portion of debt






108,173










108,173Total current liabilities


2,325



474,768



310


(235
)


477,168Long-term debt


150,000



216,387










366,387Intercompany liabilities






254,200






(254,200
)


Deferred income tax liabilities






144,717










144,717Post retirement liabilities






66,964










66,964Other liabilities






38,816










38,816Shareholders equity:Common stock


51,631



102



10


(112
)


51,631Additional paid-in capital


308,553







215,000


(215,000
)


308,553Retained earnings


7,138



533,795



1,230






542,163Accumulated other comprehensive income






(5,574
)









(5,574
)Treasury stock


(59,858
)













(59,858
)Total shareholders equity


307,464



528,323



216,240


(215,112
)


836,915Total liabilities and shareholders equity

$
459,789


$
1,724,175


$
216,550

$
(469,547
)

$
1,930,967




16




---




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 AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$



$
142,497


$


$
(624
)

$
141,873Salaries, wages and related taxes






75,458










75,458Accrued expenses






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










143,526Post retirement 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




17




---

Statement of Cash Flows Information:Three months ended June 30, 2002


Six months ended June 30, 2002Airborne, 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
)

$
5,725Adjustments 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



116,464Change 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
)


56,074INVESTING 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
)






141,100Net increase (decrease) in cash






(54,523
)


(579
)


(55,102
)






145,318



(8,755
)


136,563Cash and cash equivalents at January 1






391,505



1,660



393,165







191,664



9,836



201,500Cash and cash equivalents at June 30

$



$
336,982


$
1,081


$
338,063


$



$
336,982


$
1,081


$
338,063Three months ended June 30, 2001


Six months ended June 30, 2001Airborne, 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



116,073Change in current assets and liabilities


64,270



(66,983
)


(3,958
)


(6,671
)


61,649



(9,620
)


981



53,010Net cash provided (used) by operating activities


62,539



(9,438
)


(3,017
)


50,084



78,976



64,242



2,509



145,727INVESTING 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



40,390Cash and cash equivalents at June 30

$



$
22,736


$
3,778


$
26,514


$



$
22,736


$
3,778


$
26,514







18




---

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





RESULTS OF OPERATIONS





We achieved improved operating performance in the second quarter and first half of 2002 compared to the same periods in 2001. This progress can be attributed primarily to a
reduction in operating expenses, the implementation of key strategic initiatives beginning in 2001, including the expansion of our product line, and the implementation of yield management 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 to address our cost structure and made certain domestic and international operational realignments that
are intended to further reduce operating costs.





We reported net earnings in the 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 share were recorded in the first quarter
of 2002. The first quarter of 2002 included a non-recurring 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 $23.4 million or $.48 per share in the first six months of 2002 that included radio frequency sale gains 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 periods indicated:





Three Months Ended June 30




Six Months Ended June
302002

2001

Change


2002

2001

ChangeShipments (in thousands):DomesticOvernight

39,806

44,139

(9.8
%)

79,690

89,757

(11.2
%)Next Afternoon Service

12,999

13,208

(1.6
%)

26,184

26,636

(1.7
%)Second Day Service

17,421

18,805

(7.4
%)

35,726

37,745

(5.3
%)Ground Delivery Service

8,824

329

NM


14,614

329

NMAirborne@home

4,991

5,525

(9.7
%)

10,857

10,800

0.5
%100 Lbs. and Over

55

67

(17.9
%)

106

127

(16.5
%)Total Domestic

84,096

82,073

2.5
%

167,177

165,394

1.1
%InternationalExpress

1,431

1,549

(7.6
%)

2,761

3,149

(12.3
%)Freight

93

102

(8.8
%)

180

204

(11.8
%)Total International

1,524

1,651

(7.7
%)

2,941

3,353

(12.3
%)Total Shipments

85,620

83,724

2.3
%

170,118

168,747

0.8
%




19




---




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 ShipmentDomestic

$
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 were $810.5 million in the second quarter of 2002
compared to revenues of $812.2 million in the second quarter of 2001. For the first half of 2002, total revenues declined 1.5% compared to the first half of 2001. Shipment volumes increased 2.3% and .8% in the second quarter and first half of 2002,
respectively, compared to the same periods in 2001. The second quarter of 2002 had the same number of operating days as in 2001, and the first half of 2002 had one less operating day than the comparable period in 2001.





Domestic revenues 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 six months of 2002 compared to the first half of 2001. Domestic shipments increased 2.5% to 84.1 million in the second quarter compared to 82.1 million in the second quarter of 2001. For the first half of 2002,
domestic shipments increased 1.1% compared to the first half of 2001. Average revenue per domestic shipment was $8.51 in the second quarter compared to $8.69 in the 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 domestic revenue per shipment was due primarily to a higher percentage of total shipments from lower yielding deferred products and to a reduction in 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 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 $16.9 million and $34.7 million in the second quarter and for the first six months of 2002, respectively. This compares to $23.8 million and $48.4 million recognized in the second quarter and first
half of 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 7.8% and 8.1% in the second quarter and first half of 2002, respectively. This compares to declines of 3.6% and 4.4% in last years second quarter and first six months, respectively. Our core air express products are
Overnight Express, Next Afternoon Service (NAS) and Second Day Service (SDS). Higher yielding Overnight Express shipments decreased 9.8% in the second quarter of 2002 compared to a decrease of 4.4% in the second quarter of 2001. The NAS product
decreased 1.6% in this years second quarter compared to a decline of 3.5% a year ago. SDS shipment volumes declined 7.4% compared to a growth of 4.6% in the




20




---

second quarter of 2001. Core air express product volumes also decreased 3.1% on a per day basis in the second quarter of 2002 in comparison to the first quarter of 2002.





In April 2001, we expanded our service portfolio by introducing our Ground Delivery Service (GDS) product. This new product utilizes our
sort and linehaul infrastructure and was initially marketed to a targeted customer base. Marketing of this product has been expanded in 2002 to a broader customer segment and we are focusing on the 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 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 8.8 million shipments in the second quarter of 2002 compared to 329,000 shipments in the second quarter of 2001. GDS shipment volumes in the first quarter of 2002
and fourth quarter of 2001 were 5.8 million and 3.2 million, respectively.





Our airborne@home product decreased
9.7% to 5.0 million shipments in the second quarter of 2002 compared to 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 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 2.5% and 1.9% in the second quarter and first half of 2002 compared to the same periods in 2001. The significant growth in our GDS product has offset the
declines in our core air express shipments.





International revenues decreased 1.6% in the second quarter of 2002
to $90.5 million compared to $92.0 million in the 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 7.7% to 1.5 million shipments in this years second quarter compared to 1.6 million shipments in the 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 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 six months compared to the same periods in 2001. International shipments and revenues were impacted in the first half of 2002 by continued weakness in U.S. exports. We did realize a sequential improvement in international revenues
in the second quarter of 2002 that increased 18% or $14.1 million over revenues recorded in the first quarter of 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 reductions
implemented since the second quarter of 2001 were instrumental in the improvement of second quarter and first half of 2002 results compared to first half results of 2001. Operating expense per shipment decreased 4.1% to $9.36 in the second quarter
of 2002 compared to $9.76 in the 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




21




---

managing our costs over the past year through 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 productivity improvements of 6.2% and 7.3% in the second quarter of 2002 and first six months of 2002, respectively, as measured by shipments handled per paid employee hour. This compares to
improvements of 5.5% and 2.7% in the second quarter and first half of 2001. In the second quarter of 2002, we took further cost reduction actions, as described above, to improve productivity and lower costs in our domestic and 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 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, is the primary factor contributing to the lower transportation purchased expenses in
the first half of 2002 compared to 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 increase was offset by lower delivery costs paid to the U.S. Postal Service due to fewer airborne@home shipments and strong cost controls in other cost items.





Station and ground expense as a percentage of revenues was 32.8% in this years second quarter compared to 32.6% in the 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 2.7% in the first
half of 2002 compared to the first half of 2001. While this category of expense has been aided by improved productivity in the first half of 2002, higher wage, benefit and workers compensation costs have partially offset the cost benefits resulting
from hours reductions. The cost reduction actions taken in the second quarter of 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 16.4% in the second quarter of 2002 compared to 17.7% in the
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 7.8% and 12.7% in the 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. The average aviation fuel price per gallon was $.82 in the second quarter and $.76 for the first six months of 2002 compared to $.95 in the second quarter of
2001 and $.98 for the first half of 2001. While fuel prices decreased from comparable periods in 2001, prices increased in the second quarter of 2002 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 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.




22




---




General and administrative expenses as a percentage of revenues were 8.0% in the
second quarter and first half of 2002 compared to 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. The charges incurred in the second quarter of 2001 related to company-wide labor reductions. General and administrative expenses in 2002 have seen cost increases in the areas of pension, health care,
insurance, litigation expenses and the reinstatement of certain incentive plans that 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 expense as a percentage of revenues remained
consistent at 2.9% in the first quarter of 2002 and 2001 and for the first half of 2002 and 2001. While costs have been added to increase the number of sales personnel, marketing and packaging expenses have been reduced.





Depreciation and amortization expense totaled 5.8% of revenues in the second quarter of 2002 and 6.5% in the 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 11.3% and 9.0% in the second quarter and first half of 2002, respectively, compared to 2001
levels for the same periods. The decline is due to the timing of certain aircraft assets becoming fully depreciated and lower levels of capital expenditures made in 2001 and the first half of 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 that were removed from service.





Interest expense increased in the second quarter and first half of 2002 compared to the same periods a year ago due to higher levels of
outstanding debt coupled with lower levels of capitalized 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, primarily on the acquisition and modification of 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 $1.5 and $2.3 million of interest income recorded in the second quarter of 2002 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 $.9 and $2.1 million in the second quarter and first half of 2002 compared to $2.2 million
and $6.0 million in the second quarter and first half of 2001. The decrease in cost is due to lower discounts on amounts sold as a result of the lower interest rate 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 61.0% and 43.2% in the second quarter and first half of 2002 compares to a tax benefit rate of 33.3% and 34.8% in the comparable periods of 2001. The effective tax rate for 2002,
particularly in the second quarter, was impacted by relatively low earnings and by nondeductible expenses.




23




---




We recorded compensation of $13.0 million in 2001 provided to us under the Air
Transportation Safety and System Stabilization Act (Act). The Act provided eligible cargo carriers compensation for certain direct losses associated with the closure of the national air system for a two-day period following the terrorist
attacks of September 11 and incremental losses through December 31, 2001. The compensation amounts have been recorded based on our interpretation of the Act and related rules. In April 2002, the Department of Transportation (DOT) issued
final rules governing the process and content of final filings that support carriers compensation claims. We completed and filed our final filing along with required audit schedules 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, 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 procedures by the DOT or other applicable government agencies. We cannot be
assured of the ultimate outcome of these reviews, but it is possible that a reduction to the amount of compensation previously recognized could occur. We estimate the range of compensation ultimately realized will be between $11.0 million and $15.0
million.





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. Although some areas of the economy appear to be showing signs of
strength, we are not seeing that translate into improvement in our core domestic air express volumes. Accordingly, core express volumes could be lower in the 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 between 180,000 and 190,000 shipments per day
in the third quarter of 2002. We expect our airborne@home product to achieve volumes of between 85,000 and 95,000 shipments per day in the 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 case of airborne@home shipments, additional delivery costs paid to the U.S. Postal Service.





We continue to aggressively manage costs as evidenced by our recent realignment of international operations and reduction of additional
overhead in our domestic stations. As previously mentioned, those actions provided a $.9 million cost savings in the second quarter of 2002 with additional quarterly savings of between $2.0 and $2.5 million to be realized beginning in the third
quarter of 2002. We anticipate labor productivity improvement in the second half of 2002 in comparison to the like period in 2001. Wage pressures and additional hours to service expected growth will offset some of favorable cost savings produced by
the productivity gains and accordingly we are not anticipating reductions in wage costs in relation to the levels incurred in the second quarter.





We mentioned in our 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 half of 2002, we still anticipate that the impact of the increase in these categories of expense will be in the range of $20.0 to $25.0 million for the year in comparison to
2001.





Through 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 17% from first quarter 2002 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. Aircraft maintenance expenses are anticipated to trend to levels approximating the amounts incurred in the 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.




24




---




Financial Condition, Liquidity and Capital Resources





Operating cash flows in the first half of 2002, coupled with proceeds from a $150.0 million private placement offering of
convertible senior notes in March 2002, increased cash and cash equivalent balances to $338.1 million as of June 30, 2002 compared to $201.5 million as of December 31, 2001.





Net cash provided by operating activities for the first half of 2002 was $156.1 million compared to $95.7 million in the first half of 2001 (exclusive of 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 half of 2002 we spent $57.7 million on capital
improvements compared to $73.4 million in the first half of 2001. Capital spending levels were reduced significantly in the first half of 2002 and in 2001 in comparison to previous years levels. We anticipate 2002 capital spending of between
$150 and $160 million, revised down from our original target of $175 million. This compares to $126 million in 2001. The anticipated increase is primarily a result of committed aircraft acquisitions and technology investments. We took delivery of
two 767 aircraft in the first half of 2002 and anticipate taking delivery of one additional aircraft this year. Growth in our ground product has not required significant capital expenditures over the past several quarters since it is designed to
leverage our existing sort, linehaul and pickup and delivery infrastructure. If ground volumes increase during the second half of 2002 as expected, we may need to make incremental capital expenditures to accommodate increased volumes. However, we
anticipate this will be accomplished within the $150 to $160 million targeted for 2002 capital spending.





In
addition to our existing cash and cash equivalent reserves, we had $110 million in available borrowing capacity under our bank credit agreement as of 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 June 30, 2002. We also had eligible receivables to support an additional $134 million of sales proceeds
under our accounts receivable securitization facility. As of June 30, 2002, we had $100 million of outstanding receivables securitized under this facility in comparison to $200 million securitized as of 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 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, managements inability to successfully implement sales growth initiatives in a cost effective
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.




25




---




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 would be required.





We continually evaluate
the fair value of our property and equipment. When an asset is considered impaired, the asset is written down to its fair value. Changes in the estimated useful lives of certain assets may result from excess capacity or changes in regulations
grounding the use of our 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 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 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, and make adjustments as appropriate. There can be no assurance that the ultimate outcome of these matters will not differ materially from our 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.




26




---




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 earning 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.




27




---




PART II.    OTHER INFORMATION





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





(a)    Exhibits 





EXHIBIT NO. 10


Material Contracts10
(a)

Management Incentive Compensation Plan (MICP) 2002EXHIBIT NO. 12


Statements Regarding Computation of Ratios12
(a)

Ratio of Earnings to Fixed ChargesEXHIBIT NO. 9999
(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.




28




---




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:

8/13/02

/s/    CARL D. DONAWAYCarl D. Donaway Chairman and Chief Executive
OfficerDate:

8/13/02

/s/    LANNY H.
MICHAELLanny H. Michael Executive Vice President and Chief Financial OfficerDate:

8/13/02

/s/    ROBERT T. CHRISTENSENRobert T. Christensen Chief Accounting Officer




29