UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
<TABLE>
<S> <C>
For the fiscal year ended Commission file number
December 31, 1997 1-6512
</TABLE>
----------------------------------
AIRBORNE FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 91-0837469
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
Airborne Freight Corporation
3101 Western Avenue
P.O. Box 662
Seattle, WA 98111
(Address of principal executive offices)
Registrant's telephone number including area code: 206-285-4600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of each Exchange
Title of each class on which Registered
------------------- -------------------
Common Stock, Par Value New York Stock Exchange
$1.00 per share Pacific Stock Exchange
Rights to Purchase Series A New York Stock Exchange
Participating Cumulative Pacific Stock Exchange
Preferred Stock
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.(X)
As of February 23, 1998, 50,116,274 shares (net of 512,078 treasury
shares) of the registrant's Common Stock were outstanding and the aggregate
market value of the voting stock held by non-affiliates of the registrant
(based on the closing price on that date on the New York Stock Exchange)
was approximately $1,873,316,338.(1)
Documents Incorporated by Reference
Portions of the 1997 Annual Report to Shareholders are incorporated by
reference into Part I and Part II.
Portions of the Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held April 28, 1998 are incorporated by reference into
Part III.
(1) Excludes value of shares of Common Stock held of record by non-
employee directors and executive officers at February 23, 1998.
Includes shares held by certain depository organizations. Exclusion
of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the registrant,
or that such person is controlled by or is under common control with
the registrant.
AIRBORNE FREIGHT CORPORATION
1997 FORM 10-K ANNUAL REPORT
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 4a. Executive Officers of the Registrant 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and disagreements with Accountants on
Accounting and Financial Disclosure 11
Part III
Item 10. Directors and Executive Officers of the Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners
and Management 12
Item 13. Certain Relationships and Related Transactions 12
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 13
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
- ------------------
a) General Development of Business
-------------------------------
Airborne Freight Corporation (herein referred to as "Airborne Express"
or the "Company", which reference shall include its subsidiaries and their
assets and operations, unless the context clearly indicates otherwise) was
incorporated in Delaware on May 10, 1968. The Company is an air express
company and air freight forwarder that expedites shipments of all sizes to
destinations throughout the United States and most foreign countries. The
Company was formed in 1968 through the merger of two established freight
forwarders, Airborne Freight Corporation and Pacific Air Freight.
The Company holds a certificate of registration issued by the United
States Patent and Trademark Office for the service mark AIRBORNE EXPRESS.
Most public presentation of the Company carries this name. The purpose of
using this trade name is to more clearly communicate to the market place
the primary nature of the business of the Company.
ABX Air, Inc., the Company's principal wholly-owned subsidiary (herein
referred to as "ABX"), was incorporated in Delaware on January 22, 1980.
ABX provides domestic express cargo service and cargo service to Canada.
The Company is the sole customer of ABX for this service. ABX also offers
limited charter service.
b) Financial Information about Industry Segments
---------------------------------------------
None
c) Narrative Description of Business
---------------------------------
Airborne Express provides door-to-door express delivery of small
packages and documents throughout the United States and to and from most
foreign countries. The Company also acts as an international and domestic
freight forwarder for shipments of any size. The Company's strategy is to
be the low cost provider of express services for high volume corporate
customers.
Domestic Operations
- -------------------
The Company's domestic operations, supported by approximately 285
facilities, primarily involve express door-to-door delivery of shipments
weighing less than 100 pounds. Shipments consist primarily of business
documents and other printed matter, electronic and computer parts,
software, machine parts, health care items, films and videotapes, and other
items for which speed and reliability of delivery are important.
The Company's primary service is its Overnight Express product. This
product, which comprised approximately 58% of the Company's domestic
shipments during 1997, generally provides for before noon delivery on the
next business day to most metropolitan cities in the United States. The
Company also provides Saturday and holiday pickup and delivery service for
most cities.
The Company also offers two deferred service products, Next Afternoon
Service (NAS) and Second Day Service (SDS). NAS is available for shipments
weighing five pounds or less and SDS is offered for shipments of all
weights. Deferred service shipments, which comprised approximately 42% of
domestic shipments during 1997, are lower priced than the Overnight Express
product reflecting the less time sensitive nature of the shipments. NAS
rates are generally higher than SDS rates.
While the Company's domestic airline system is designed primarily to
handle express shipments, any available capacity is also utilized to carry
shipments which the Company would normally move on other carriers in its
role as an air freight forwarder.
1
<PAGE>
Communications System
- ---------------------
FOCUS (Freight On-line Control and Update System) is a proprietary
communications system which provides real time information for purposes of
tracking and providing the status of customer shipments as well as
monitoring the performance of the Company's operational systems. The
Company's facilities and international agents are linked to FOCUS and
provide information on the status and location of customer shipments 24
hours a day. Some information is provided to FOCUS through the use of hand-
held scanners which read bar-codes on the shipping documents. FOCUS allows
customers access to shipment information through either direct dial-in
capabilities or through the Company's website on the Internet.
FOCUS provides the Company's personnel with important information for
use in coordinating its operational activities. Information regarding
Company-operated aircraft arrivals and departures, weather, and
documentation requirements for shipments destined to foreign locations are
several examples of the information maintained and provided by FOCUS.
Pickup and Delivery
- -------------------
The Company accomplishes its door-to-door pickup and delivery service
using approximately 14,300 radio-dispatched delivery vans and trucks, of
which approximately 5,700 are owned by the Company. Independent
contractors under contract with the Company provide the balance of the
pickup and delivery services.
Because convenience is an important factor in attracting business from
less frequent shippers, the Company has an ongoing program to place drop
boxes in convenient locations. The Company has approximately 12,600 boxes
in service.
Sort Facilities
- ---------------
The Company's main sort center is located in Wilmington, Ohio. As
express delivery volume has increased, the main sort center has been
expanded. The sort center currently has the capacity to handle
approximately 1,095,000 pieces during the primary 3 hour nightly sort
operation. On average, approximately 972,000 pieces were sorted each
weekday night at the sort center during the fourth quarter of 1997.
In addition to the main sort facility at Wilmington, nine regional hub
facilities have been established primarily to sort shipments originating
and having a destination within approximately a 300 mile radius of a
regional hub.
The Company also conducts a day sort operation at Wilmington which
services SDS shipments. The day sort generally receives SDS shipments
through a combination of flights and trucks originating from either
regional hub or station facilities.
The operation of the Wilmington facility is critical to the Company's
business. The inability to use the Wilmington airport, because of bad
weather or other factors, would have a serious adverse effect on the
Company's service. However, contingency plans, including landing at nearby
airports and transporting packages to and from the sort center by truck,
can be implemented to address, in part, temporary inaccessibility of the
Wilmington airport.
In the fourth quarter of 1997, approximately 51% and 22% of total
shipment weight was handled through the night sort and day sort operations
at Wilmington, respectively, with the remaining 27% being handled
exclusively by the regional hubs.
2
<PAGE>
Shipment Routing
- ----------------
The logistics of moving a shipment from its origin to destination is
determined by several factors. Shipments are routed differently depending
on shipment product type, weight, geographic distances between origin and
destination, and locations of Company stations relative to the locations of
sort facilities. Shipments generally are moved between stations and sort
facilities on either Company aircraft or contracted trucks. A limited
number of shipments are transported airport-to-airport on commercial air
carriers.
Overnight Express shipments and NAS shipments are picked up by local
stations and generally consolidated with other stations' shipments at
Company airport facilities. Shipments that are not serviced through
regional hubs are loaded on Company aircraft departing each weekday evening
from various points within the United States and Canada. These aircraft
may stop at other airports to permit additional locations and feeder
aircraft to consolidate their cargo onto the larger aircraft before
completing the flight to the Wilmington hub. The aircraft are scheduled to
arrive at Wilmington between approximately 11:30 p.m. and 3:00 a.m. at
which time the shipments are sorted and reloaded. The aircraft are
scheduled to depart before 6:00 a.m. and return to their applicable
destinations in time to complete scheduled next business morning or
deferred service commitments. The Wilmington hub also receives shipments
via truck from selected stations in the vicinity of the Wilmington hub for
integration with the nightly sort process.
The day sort operation for SDS shipments is supported by 12 aircraft
that return to Wilmington from overnight service destinations on Tuesday
through Thursday. These aircraft, and trucks from six regional hubs,
arrive at Wilmington between 10:00 a.m. and 2:00 pm, at which time
shipments are sorted and reloaded on the aircraft or trucks by 3:30 p.m.
for departure and return to their respective destinations.
The Company also performs weekend sort operations at Wilmington to
accommodate Saturday pickups and Monday deliveries of both Overnight
Express and deferred service shipments. This sort is supported by 15
Company aircraft and by trucks.
Aircraft
- --------
The Company currently utilizes used aircraft manufactured in the late
1960s and early 1970s. Upon acquisition, the aircraft are modified by the
Company. At the end of 1997, the Company's in-service fleet consisted of a
total of 105 aircraft, including 36 McDonnell Douglas DC-8s (consisting of
13 series 61, 6 series 62 and 17 series 63) and 69 DC-9s (consisting of 2
series 10, 43 series 30 and 24 series 40). In 1997, the Company sold its 9
YS-11 turboprop aircraft which completed the planned phase out of this
smaller aircraft. The Company owns the majority of the aircraft it
operates, but in 1989 and 1990 completed sale-leaseback transactions with
respect to six DC-8 and six DC-9 aircraft. In addition, approximately 70
smaller aircraft are chartered nightly to connect small cities with Company
aircraft that then operate to and from Wilmington.
In late 1995, the Company agreed to purchase 12 used Boeing 767-200s
between the years 1997 and 2000. The Company also plans to pursue the
acquisition of 10 to 15 additional used 767-200's between the years 2000
and 2004. This newer generation of aircraft should increase operating
efficiency and allow the Company to meet anticipated demand for additional
lift capacity. There are no plans to retire any aircraft as a result of
these acquisitions, although retirement is an option if shipment growth
does not require the added capacity. The Company took delivery of 2 767's
in 1997 and expects to take delivery of an additional 4 767's in 1998. In
1998, 5 of these aircraft are planned to be placed in service following
completion of necessary modifications.
During 1997, the nightly lift capacity of the system was increased by
approximately 38,000 pounds, reaching 3.8 million pounds at December 31,
1997. During 1997, the Company's average utilization of available lift
capacity approximated 77%.
3
<PAGE>
In response to increased public awareness regarding the operation of
older aircraft, the Federal Aviation Administration ("FAA") periodically
mandates additional maintenance requirements for certain aircraft,
including the type operated by the Company. In recent years, the Company
has completed, and continues to perform, a number of inspection and
maintenance programs pertaining to various Airworthiness Directives issued
by the FAA. The FAA could, in the future, impose additional maintenance
requirements for aircraft and engines of the type operated by the Company
or interpret existing rules in a manner which could have a material effect
on the Company's operations and financial position.
In accordance with federal law and FAA regulations, only subsonic
turbojet aircraft classified as Stage 2 or 3 by the FAA may be operated in
the United States. Generally, Stage 3 aircraft produce less noise than
comparable Stage 2 aircraft.
In 1990, Congress passed the Airport Noise and Capacity Act of 1990
(the "Noise Act"). Among other things, the Noise Act generally requires
turbojet aircraft weighing in excess of 75,000 pounds and operating in the
United States (the type of DC-8 and DC-9 aircraft operated by the Company)
to comply with Stage 3 noise emission standards on or before December 31,
1999. In accordance with the Noise Act, the FAA has issued regulations
establishing interim compliance deadlines. These rules require air
carriers to reduce the base level of Stage 2 aircraft they operate 75% by
December 31, 1998. As of December 31, 1997, the Company had complied with
interim compliance deadlines, and the Company expects to meet or exceed the
December 31, 1998 interim compliance deadline. As of December 31, 1997,
71% of the Company's turbojet aircraft in service (27 DC-8 and 48 DC-9
aircraft) were Stage 3, the balance being Stage 2. The 767-200 aircraft
meet Stage 3 requirements and will not require noise compliance
modifications prior to being placed in service. In addition to FAA
regulation, certain local airports also regulate noise compliance. See
"Business - Regulation".
The Company, in conjunction with several other companies, has
developed noise suppression technology known as hush kits for its DC-9
series aircraft which have been certified to meet FAA Stage 3 requirements.
The capital cost for Stage 3 hush kits is approximately $1.5 million for
each DC-9 series aircraft. The Company has installed hush kits which
satisfy Stage 3 compliance requirements on all of its DC-8-62 and DC-8-63
series aircraft and four of its 13 DC-8-61 series aircraft. The capital
cost to modify the Company's remaining DC-8-61 aircraft to meet Stage 3
noise standards is approximately $5.8 million per aircraft.
International Operations
- ------------------------
The Company provides international express door-to-door delivery and a
variety of freight services. These services are provided in most foreign
countries on an inbound and outbound basis through a network of Airborne
offices and independent agents. Most international deliveries are
accomplished within 24 to 96 hours of pickup.
The Company's domestic stations are staffed and equipped to handle
international shipments to or from almost anywhere in the world. In
addition to its extensive domestic network, the Company operates its own
offices in the Far East, Australia, New Zealand, and the United Kingdom.
The Company's freight and express agents worldwide are connected to FOCUS,
Airborne's on-line communication network, through which the Company can
provide its customers with immediate access to the status of shipments
almost anywhere in the world.
The Company's international air express service is intended for the
movement of non dutiable and certain dutiable shipments weighing less than
99 pounds. The Company's international air freight service handles heavier
weight shipments on either an airport-to-airport, door-to-airport or door-
to-door basis. The Company also offers ocean service capabilities for
customers who want a lower cost shipping option.
4
<PAGE>
The Company's strategy is to use a variable-cost approach in
delivering and expanding international services to its customers. This
strategy uses existing commercial airline lift capacity in connection with
the Company's domestic network to move shipments to and from overseas
destinations and origins. Additionally, service arrangements with
independent freight and express agents have been entered into to
accommodate shipments in locations not currently served by Company-owned
operations. The Company currently believes there are no significant
service advantages which would justify the operation of its own aircraft on
international routes, or making significant investment in additional
offshore facilities or ground operations. In order to expand its business
at a reasonable cost, the Company continues to explore possible joint
venture agreements which combine the Company's management expertise,
domestic express system and information systems with local business
knowledge and market reputation of suitable partners. Joint venture
operations currently exist in Japan, Thailand, Malaysia, the Netherlands,
and South Africa.
Customers and Marketing
- -----------------------
The Company's primary domestic strategy focuses on express services
for high volume corporate customers. Most high volume customers have
entered into service agreements providing for specified rates or rate
schedules for express deliveries. As of December 31, 1997, the Company
serviced approximately 550,000 active customer shipping locations.
The Company determines prices for any particular domestic express
customer based on competitive factors, anticipated costs, shipment volume
and weight, and other considerations. The Company believes that it
generally offers prices that are competitive with, or lower than, prices
quoted by its principal competitors for comparable services.
Internationally, the Company's marketing strategy is to target the
outbound express and freight shipments of U.S. corporate customers, and to
sell the inbound service of the Company's distribution capabilities in the
United States.
Both in the international and domestic markets, the Company believes
that its customers are most effectively reached by a direct sales force
and, accordingly, does not currently engage in mass media advertising.
Domestic sales representatives are responsible for selling both domestic
and international express shipments. In addition, the International
Division has its own dedicated direct sales organization for selling
international freight service.
The Company's sales force currently consists of approximately 325
domestic representatives and approximately 80 international specialists.
The Company's sales efforts are supported by the Marketing and
International Divisions, based at the Company headquarters. Senior
management is also active in marketing the Company's services to major
accounts.
Value-added services continue to be important factors in attracting
and retaining customers. Accordingly, the Company is automating more of
its operations to make the service easier for customers to use and to
provide them with valuable management information. The Company believes
that it is generally competitive with other express carriers in terms of
reliability, value-added services and convenience.
For many of its high volume customers, the Company offers a metering
device, called LIBRA (SM), which is installed at the customer's place of
business. With minimum data entry, the metering device weighs the package,
calculates the shipping charges, generates the shipping labels, provides
custom shipping reports, and enables the customer to track the exact status
of shipments in Airborne's FOCUS shipping and tracking system. At year end
1997, the system was in use at approximately 10,800 domestic customer
locations and 900 international customer locations. Use of LIBRA not only
benefits the customer, but also lowers the Company's operating costs, since
LIBRA shipment data is transferred into the Airborne FOCUS system
automatically, thus avoiding duplicate data entry.
5
<PAGE>
"Customer Linkage", an electronic data interchange ("EDI") program
developed for Airborne's highest volume shippers, allows customers, with
their computers, to create shipping documentation at the same time they are
entering orders for their goods. At the end of each day, shipping
activities are transmitted electronically to the Airborne FOCUS system
where information is captured for shipment tracking and billing purposes.
Customer Linkage benefits the customer by eliminating repetitive data entry
and paperwork and also lowers the Company's operating costs by eliminating
manual data entry. EDI also includes electronic invoicing and payment
remittance processing. The Company also has available a software program
known as QUICKLINK, which significantly reduces programming time required
by customers to take advantage of linkage benefits.
The Company offers customers PC-based software designed to improve
their productivity and provide convenient access to the Company's various
services. LIGHTSHIPr TRACKER, the Company's first product, allows
customers, working from their PCs, to view the status of and receive
information regarding their shipments.
In 1997, the Company released LIGHTSHIP SHIPPER which allows customers
to obtain estimated shipping rates and delivery times, fill out and print
shipping labels, schedule pickups, and track the status of their shipments.
In 1998, the Company released LIGHTSHIP Shipping and Tracking Software for
Windowsr which combines the benefits of previous LIGHTSHIP software and
adds additional features designed to improve customer productivity.
The Company maintains an Internet website, www.airborne.com, which
provides customers a global connection to Airborne's services. The website
allows customers to track the status of their shipments, obtain information
regarding the Company's service offerings and documentation requirements,
in addition to providing other useful information about the Company.
The Company offers a number of special logistics programs to customers
through Airborne Logistics Services ("ALS"), a division of ABX Air, Inc.
ALS operates the Company's Stock Exchange and Hub Warehousing and other
logistics programs. These programs provide customers the ability to
maintain centralized inventories which can be managed either by Company or
customer personnel. Items inventoried at Wilmington can be delivered
utilizing either the Company's airline system or, if required, commercial
airlines on a next-flight-out basis. ALS' Central Print program allows
information to be sent electronically to customer computers located at
Wilmington where Company personnel monitor printed output and ship the
material according to customer instructions. ALS also provides
international inventory and distribution logistic services through a
logistics partner with bases in the Netherlands, Belgium, Germany, and
England.
In addition, the Company's Sky Courier operation provides expedited
next-flight-out service at premium prices. Sky Courier also offers a Field
Stock Exchange program where customer inventories are managed at over 60
locations around the United States and Canada.
The Company has obtained ISO 9000 certification for its Chicago,
Philadelphia and London stations and its Seattle Headquarters. ISO 9000 is
a program developed by the International Standards Organization ("ISO"),
based in Geneva, Switzerland. This organization provides a set of
international standards on quality management and quality assurance
presently recognized in over 90 countries. The certification is an asset
in doing business worldwide and provides evidence of the Company's
commitment to excellence and quality.
Competition
- -----------
The market for the Company's services has been and is expected to
remain highly competitive. The principal competitive factors in both
domestic and international markets are price, the ability to provide
reliable pickup and delivery, and value-added services.
6
<PAGE>
Federal Express continues to be the dominant competitor in the
domestic air express business, followed by United Parcel Service. Airborne
Express ranks third in shipment volume behind these two companies in the
domestic express business. Other domestic air express competitors include
the U.S. Postal Service's Express Mail Service and several other
transportation companies offering next morning or next-plane-out delivery
service. The Company also competes to some extent with companies offering
ground transportation services and with facsimile and other forms of
electronic transmission.
The Company believes it is important to maintain an active capital
expansion program to increase capacity, improve service and increase
productivity as its volume of shipments increases. However, the Company
has significantly less capital resources than its two primary competitors.
In the international markets, in addition to Federal Express and
United Parcel Service, the Company competes with DHL, TNT, and air freight
forwarders and carriers, and most commercial airlines.
Employees
- ---------
As of December 31, 1997, the Company and its subsidiaries had
approximately 13,500 full-time employees and 9,000 part-time and casual
employees. Approximately 6,500 full-time employees (including the
Company's 730 pilots) and 3,800 part-time and casual employees are employed
under union contracts, primarily with locals of the International
Brotherhood of Teamsters and Warehousemen.
Labor Agreements
- ----------------
Labor agreements covering approximately 70% of the Company's union
ground personnel will expire in 1998, with the balance expiring in 1999.
The Company's pilots are covered by a contract which becomes amendable on
July 31, 2001. Although the Company has not experienced any significant
disruption from labor disputes in the past, there can be no assurance that
the labor agreements covering ground personnel will be renewed on favorable
terms.
Subsidiaries
- ------------
The Company has the following wholly-owned subsidiaries:
1. ABX Air, Inc., a Delaware corporation, is a certificated air
carrier which owns and operates the Company's domestic express
cargo service. Its wholly-owned subsidiaries with operating
activities are as follows:
a) Wilmington Air Park, Inc., an Ohio corporation, is the owner
of the Wilmington airport property (Airborne Air Park).
b) Airborne FTZ, Inc., an Ohio corporation, is the holder of a
foreign trade zone certificate at the Wilmington airport
property and owns and manages the Company's expendable
aircraft parts inventory.
c) Aviation Fuel, Inc., an Ohio corporation, purchases and
sells aviation and other fuels.
2. Airborne Forwarding Corporation, a Delaware corporation doing
business as Sky Courier, provides expedited courier service.
3. Airborne Freight Limited, a New Zealand corporation, provides
air express and air freight services.
7
<PAGE>
Regulation
- ----------
The Company's operations are regulated by the United States Department
of Transportation ("DOT"), the FAA, and various other federal, state, local
and foreign authorities.
The DOT, under federal transportation statutes, grants air carriers
the right to engage in domestic and international air transportation. The
DOT issues certificates to engage in air transportation and has the
authority to modify, suspend or revoke such certificates for cause,
including failure to comply with federal law or the DOT regulations. The
Company believes it possesses all necessary DOT-issued certificates to
conduct its operations.
The FAA regulates aircraft safety and flight operations generally,
including equipment, ground facilities, maintenance, flight dispatch,
security procedures, training, communications, and other matters affecting
air safety. The FAA issues operating certificates and operations
specifications to carriers who possess the technical competence to conduct
air carrier operations. In addition, the FAA issues certificates of
airworthiness to each aircraft which meets the requirements for aircraft
design and maintenance. The Company believes it holds all airworthiness
and other FAA certificates required for the conduct of its business,
although the FAA has the power to suspend or revoke such certificates for
cause, including failure to comply with federal law.
The FAA has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft
and replacement of parts that have failed or may fail in the future. For
example, the FAA has commenced an inspection of DC-8 aircraft of the type
operated by the Company to determine if certain of the aircraft structures
which were originally designed for passenger carriage are adequate for the
carriage of cargo. The DC-9 may in the future also be subject to FAA
inspection. If the FAA were to determine the aircraft structures are not
adequate it could order operators to either reduce cargo loads or otherwise
strengthen any structure shown to be inadequate.
In addition to the issuance of mandatory directives, the FAA from time
to time may amend its regulations thereby increasing regulatory burdens on
air carriers. For example, the FAA can order the installation or
enhancement of safety related aircraft equipment.
Depending on the scope of the FAA's orders or amended regulations,
these requirements may cause the Company to incur substantial,
unanticipated expenses.
The federal government generally regulates aircraft engine noise at
its source. However, local airport operators may, under certain
circumstances, regulate airport operations based on aircraft noise
considerations. The Noise Act provides that in the case of Stage 2
aircraft restrictions, the airport operator must notify air carriers of its
intention to propose rules and satisfy the requirements of federal statutes
before implementation of the rules or in the case of Stage 3 aircraft, the
airport operator must obtain the carriers' or the governments' approval of
the rule prior to its adoption. The Company believes the operation of its
aircraft either complies with or is exempt from compliance with currently
applicable local airport rules. However, if more stringent aircraft
operating regulations were adopted on a widespread basis, the Company might
be required to expend substantial sums, make schedule changes or take other
actions.
The Company's aircraft currently meet all known requirements for
emission levels. However, under the Clean Air Act, individual states or
the Federal Environmental Protection Agency (the "EPA") may adopt
regulations requiring the reduction in emissions for one or more localities
based on the measured air quality at such localities. The EPA has in the
past proposed but not adopted regulations for portions of California
calling for emission reductions through restricting the use of emission
producing ground service equipment or aircraft auxiliary power units.
There can be no assurance, that if such regulations are adopted in the
future or changes in existing laws or regulations are promulgated, such
laws or rules would not have a material adverse effect on the Company.
8
<PAGE>
Under currently applicable federal aviation law, the Company's airline
subsidiary could cease to be eligible to operate as an all-cargo carrier if
more than 25% of the voting stock of the Company were owned or controlled
by non-U.S. citizens or the airline were not effectively controlled by U.S.
citizens. Moreover, in order to hold an all-cargo air carrier certificate,
the president and at least two-thirds of the directors and officers of an
air carrier must be U.S. citizens. To the best of the Company's knowledge,
foreign stockholders do not control more than 25% of the outstanding voting
stock. Two of the Company's 43 officers are not U.S. citizens.
The Company believes that its current operations are substantially in
compliance with the numerous regulations to which its business is subject;
however, various regulatory authorities have jurisdiction over significant
aspects of the Company's business, and it is possible that new laws or
regulations or changes in existing laws or regulations or the
interpretations thereof could have a material adverse effect on the
Company's operations.
Financial Information Regarding International and Domestic Operations
- ---------------------------------------------------------------------
Financial information relating to foreign and domestic operations for
each of the three years in the period ended December 31, 1997 is presented
in Note L (Segment Information) of the Notes to Consolidated Financial
Statements appearing in the 1997 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 2. PROPERTIES
- --------------------
The Company leases general and administrative office facilities
located in Seattle, Washington.
At year end the Company maintained approximately 285 domestic and 40
foreign stations, most of which are leased. The majority of the facilities
are located at or near airports.
The Company owns the airport at the Airborne Air Park, in Wilmington,
Ohio. The airport currently consists of two runways, taxi-ways, aprons,
buildings serving as aircraft and equipment maintenance facilities, sort
facilities, storage facilities, a training center, and operations and
administrative offices.
The Company believes its existing facilities are adequate to meet
current needs.
Information regarding collateralization of certain property and lease
commitments of the Company is set forth in Notes F and G of the Notes to
Consolidated Financial Statements appearing in the 1997 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
None
9
<PAGE>
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
- ----------------------------------------------
<TABLE>
<CAPTION>
Positions and Offices Presently
Name Age Held and Business Experience
- ---- --- ----------------------------
<S> <C> <C>
Robert S. Cline 60 Chairman and Chief Executive Officer (1984
to date); Vice Chairman and Chief Financial
Officer (1978 to 1984); Executive Vice
President and Chief Financial Officer (1973
to 1978); Senior Vice President, Finance
(1970 to 1973); Vice President, Finance
(1968 to 1970); Vice President, Finance,
Pacific Air Freight, Inc. (1966 to 1968)
Robert G. Brazier 60 President and Chief Operating Officer (1978
to date); Executive Vice President and
Chief Operating Officer (1973 to 1978);
Senior Vice President, Operations (1970 to
1973); Vice President, Operations (1968 to
1970); Vice President, Sales and
Operations, Pacific Air Freight, Inc. (1964
to 1968)
Roy C. Liljebeck 60 Chief Financial Officer (1984 to date);
Executive Vice President, Finance Division
(1979 to date); Senior Vice President (1973
to 1979); Treasurer (1968 to 1988)
Kent W. Freudenberger 57 Executive Vice President, Marketing
Division (1980 to date); Senior Vice
President (1978 to 1980); Vice President
(1973 to 1978)
Raymond T. Van Bruwaene 59 Executive Vice President, Field Services
Division (1980 to date); Senior Vice
President (1978 to 1980); Vice President
(1973 to 1978)
John J. Cella 57 Executive Vice President, International
Division (1985 to date); Senior Vice
President, International Division (1982 to
1985); Vice President, International Divi
sion (1981 to 1982); Vice President, Far
East (1971 to 1981)
Carl D. Donaway 46 President and Chief Executive Officer, ABX
Air, Inc. (1992 to date); offices held in
the Company: Vice President, Business
Analysis (1992); Vice President, Customer
Support (1990 to 1992)
</TABLE>
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- ---------------------------------------------------------------
STOCKHOLDERS MATTERS
- --------------------
The response to this Item is contained in the 1997 Annual Report to
Shareholders and the information contained therein is incorporated by
reference.
On February 23, 1998 there were 1,184 shareholders of record of the
Common Stock of the Company based on information provided by the Company's
transfer agent.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
The response to this Item is contained in the 1997 Annual Report to
Shareholders and the information contained therein is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The response to this Item is contained in the 1997 Annual Report to
Shareholders and the information contained therein is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The response to this Item is contained in the 1997 Annual Report to
Shareholders and the information contained therein is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The response to this Item is contained in part in the Proxy Statement
for the 1998 Annual Meeting of Shareholders under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
and the information contained therein is incorporated herein by reference.
The executive officers of the Company are elected annually at the
Board of Directors meeting held in conjunction with the annual meeting of
shareholders. There are no family relationships between any directors or
executive officers of the Company. Additional information regarding
executive officers is set forth in Part I, Item 4a.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The response to this Item is contained in the Proxy Statement for the
1998 Annual Meeting of Shareholders under the caption "Executive
Compensation" and the information contained therein is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The response to this Item is contained in the Proxy Statement for the
1998 Annual Meeting of Shareholders under the captions "Voting at the
Meeting" and "Stock Ownership of Management" and the information contained
therein is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a)1. Financial Statements
--------------------
The following consolidated financial statements of Airborne Freight
Corporation and its subsidiaries as contained in its 1997 Annual Report to
Shareholders are incorporated by reference in Part II, Item 8:
Consolidated Statements of Net Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)2. Financial Statement Schedules
-----------------------------
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or are
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a)3. Exhibits
- ---------------
The following exhibits are filed with this report:
EXHIBIT NO. 3 Articles of Incorporation and By-laws
- ----------------------------------------------------
3(a) The Restated Certificate of Incorporation of the Company,
dated as of August 4, 1987 (incorporated by reference from
Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 1987).
3(b) The By-laws of the Company as amended to February 4, 1997
(incorporated by reference from Exhibit 3(b) to the Company's
Form 10-K for the year ended December 31, 1996).
EXHIBIT NO. 4 Instruments Defining the Rights of Security Holders
- ------------------------------------------------------------------
Including Indentures
- --------------------
4(a) Indenture dated as of December 3, 1992, between the
Company and The Bank of New York, as trustee, relating to the
Company's 8-7/8% Notes due 2002 (incorporated by reference
from Exhibit 4(a) to Amendment No. 1 to the Company's
Registration Statement on Form S-3, No. 33-54560 filed with
the Securities and Exchange Commission on December 4, 1992).
4(b) First Supplemental Indenture dated as of September 15,
1995, between the Company and The Bank of New York, as
trustee, relating to the Company's 7.35% Notes due 2005
(incorporated by reference from Exhibit 4(b) to Amendment No.
1 to the Company's Registration Statement on Form S-3, No. 33-
61329, filed with the Securities and Exchange Commission on
September 5, 1995).
13
<PAGE>
4(c) Second Supplemental Indenture dated as of February 12,
1997 between the Company and The Bank of New York, as trustee,
relating to the Company's 8-7/8% Notes due 2002 (incorporated
by reference from Exhibit 4(e) to the Company's Form 10-K for
the year ended December 31, 1996).
4(d) Rights Agreement, dated as of February 14, 1997 between
the Company and The Bank of New York, as Rights Agent
(incorporated by reference from Exhibit 1 to the Company's
Registration Statement on Form 8-A, filed with the Securities
and Exchange Commission on February 12, 1997).
4(e) Certificate of the Voting Powers, Designations,
Preferences and Relative Participating, Optional and Other
Special Rights and Qualifications, Limitations or Restrictions
of Series A Participating Cumulative Preferred Stock of
Airborne Freight Corporation (incorporated by reference from
Exhibits 1 and 2 to the Company's Registration Statement on
Form 8-A, filed with the Securities and Exchange Commission on
February 12, 1997.)
4(f) Form of Right Certificate relating to the Rights
Agreement (see 4(d) above, incorporated by reference from
Exhibits 2 and 3 to the Company's Registration Statement on
Form 8-A, filed with the Securities and Exchange Commission on
February 12, 1997.)
EXHIBIT NO. 10 Material Contracts
- ---------------------------------
Executive Compensation Plans and Agreements
- -------------------------------------------
10(a) 1983 Airborne Freight Corporation Key Employee Stock
Option and Stock Appreciation Rights Plan, as amended through
February 2, 1987 (incorporated by reference from Exhibit 10(c)
to the Company's Form 10-K for the year ended December 31,
1986).
10(b) 1989 Airborne Freight Corporation Key Employee Stock
Option and Stock Appreciation Rights Plan (incorporated by
reference from Exhibit 10(d) to the Company's Form 10-K for
the year ended December 31, 1989).
10(c) 1994 Airborne Freight Corporation Key Employee Stock Option
and Stock Appreciation Rights Plan (incorporated by reference
from the Addendum to the Company's Proxy Statement for the
1994 Annual Meeting of Shareholders).
10(d) Airborne Freight Corporation 1998 Key Employee Stock Option
Plan (incorporated by reference from the Addendum to the
Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders).
10(e) Airborne Freight Corporations Directors Stock Option
Plan (incorporated by reference from the Addendum to the
Company's Proxy Statement for the 1991 Annual Meeting of
Shareholders).
10(f) Airborne Freight Corporation Director Stock Bonus
Plan dated April 23, 1996 (incorporated by reference from
Exhibit 10(a) to the Company's Form 10-Q for the quarter ended
June 30, 1996).
14
<PAGE>
10(g) Airborne Express Executive Deferral Plan dated
January 1, 1992 (incorporated by reference from Exhibit 10(b)
to the Company's Form 10-K for the year ended December 31,
1991).
10(h) Airborne Express Supplemental Executive Retirement
Plan dated January 1, 1992 (incorporated by reference from
Exhibit 10(c) to the Company's Form 10-K for the year ended
December 31, 1991).
10(i) Airborne Express 1995-1999 Executive Incentive
Compensation Plan, amended as of January 1, 1997 (incorporated
by reference from Exhibit 10(h) to the Company's Form 10-K for
the year ended December 31, 1996).
10(j) Airborne Express 1997-1999 Executive Group Incentive
Compensation Plan as of January 1, 1997 (incorporated by
reference from Exhibit 10(i) to the Company's Form 10-K for
the year ended December 31, 1996).
10(k) Employment Agreement dated December 15, 1983, as
amended November 20, 1986, between the Company and Mr. Robert
G. Brazier, President and Chief Operating Officer
(incorporated by reference from Exhibit 10(a) to the Company's
Form 10-K for the year ended December 31, 1986).
Substantially identical agreements exist between the Company
and the other six executive officers.
10(l) Employment Agreement dated November 20, 1986 between
the Company and Mr. Lanny H. Michael, then Vice President,
Treasurer and Controller (incorporated by reference from
Exhibit 10(b) to the Company's Form 10-K for the year ended
December 31, 1986). The Company and its principal subsidiary,
ABX Air, Inc., have entered into substantially identical
agreements with most of their officers.
Other Material Contracts
------------------------
10(m) $240,000,000 Revolving Loan Facility dated as of
November 19, 1993 among the Company, as borrower, and Wachovia
Bank of Georgia, N.A., as agent, and Wachovia Bank of Georgia,
N.A., ABN AMRO Bank N.V., United States National Bank of
Oregon, Seattle-First National Bank, CIBC, Inc., Continental
Bank N.A., Bank of America National Trust and Savings
Association, The Bank of New York and NBD Bank, N.A., as banks
(incorporated by reference from Exhibit 10(k) to the Company's
Form 10-K for the year ended December 31, 1993).
10(n) First Amendment to Revolving Loan Facility dated as
of March 31, 1995 among the Company, as borrower, and Wachovia
Bank of Georgia, N.A., as Agent, and Wachovia Bank of Georgia,
N.A., ABN AMRO Bank N.V., United States National Bank of
Oregon, Seattle-First National Bank, CIBC, Inc., National City
Bank, Columbus, Bank of America National Trust and Savings
Association, The Bank of New York, and NBD Bank, N.A., as
banks (incorporated by reference from Exhibit 10(a) to the
Company's Form 10-Q for the quarter ended March 31, 1995).
10(o) Second Amendment to Credit Agreement dated May 1,
1996 among the Company, as borrower, and Wachovia Bank of
Georgia, N.A., as Agent, and Wachovia Bank of Georgia, N.A.,
ABN AMRO Bank N.V., United States National Bank of Oregon,
Bank of America NW, N.A., CIBC, Inc., National City Bank,
Columbus, as assignee of Continental Bank N.A., Bank of
America National Trust and Savings Association, The Bank of
New York and NBD Bank, N.A., as banks (incorporated by
reference from Exhibit 10(b) to the Company's Form 10-Q for
the quarter ended June 30, 1996).
10(p) Used Aircraft Sales Agreement entered into as of
December 22, 1995 between ABX Air, Inc. and KC-One, Inc; KC-
Two, Inc.; and KC-Three, Inc. (incorporated by reference from
Exhibit 10(n) to the Company's Form 10-K for the year ended
December 31, 1996). Confidential treatment has been granted
for confidential commercial and financial information,
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.
15
<PAGE>
EXHIBIT NO. 12 Statements Re Computation of Ratios
- --------------------------------------------------
12 Statement re computation of ratio of total long-term debt
to total capitalization
EXHIBIT NO. 13 Annual Report to Security Holders
- ------------------------------------------------
13 Portions of the 1997 Annual Report to Shareholders of
Airborne Freight Corporation
EXHIBIT NO. 21 Subsidiaries of the Registrant
- ---------------------------------------------
21 The subsidiaries of the Company are listed in Part I of
this report on Form 10-K for the year ended December 31, 1997.
EXHIBIT NO. 23 Consents of Experts and Counsel
- ----------------------------------------------
23 Independent Auditors' Consent
EXHIBIT NO. 27 Financial Data Schedule
- --------------------------------------
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
All other exhibits are omitted because they are not applicable, or
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
-------------------
None
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AIRBORNE FREIGHT CORPORATION
By /s/ Robert S. Cline
--------------------------
Robert S. Cline
Chief Executive Officer
By /s/ Robert G. Brazier
--------------------------
Robert G. Brazier
Chief Operating Officer
By /s/ Roy C. Liljebeck
--------------------------
Roy C. Liljebeck
Chief Financial Officer
By /s/ Lanny H. Michael
--------------------------
Lanny H. Michael
Treasurer and Controller
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Robert G. Brazier /s/ Richard M. Rosenberg
- ----------------------------- -----------------------------
Robert G. Brazier (Director) Richard M. Rosenberg (Director)
/s/ Robert S. Cline /s/ William Swindells
- ----------------------------- -----------------------------
Robert S. Cline (Director) William Swindells (Director)
/s/ Mary A. Wilderotter
- -----------------------------
Mary A. Wilderotter (Director)
17
<PAGE>
AIRBORNE FREIGHT CORPORATION
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Balance at
Beginning Costs and End
Description of Period Expenses Deductions of Period
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
DEDUCTED FROM ASSETS TO
WHICH THEY APPLY:
1. Allowance for doubtful
accounts -
Year Ended December 31, 1997 $8,345 $21,638 $19,693 $10,290
Year Ended December 31, 1996 $7,750 $16,157 $15,562 $ 8,345
Year Ended December 31, 1995 $7,500 $13,309 $13,059 $ 7,750
</TABLE>
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- ------------
EXHIBIT NO. 12 Statements Re Computation of Ratios
- --------------------------------------------------
12 Statement re computation of ratio of total long-term debt
to total capitalization
EXHIBIT NO. 13 Annual Report to Security Holders
- -------------------------------------------------
13 Portions of the 1997 Annual Report to Shareholders of
Airborne Freight Corporation
EXHIBIT NO. 21 Subsidiaries of the Registrant
- ----------------------------------------------
21 The subsidiaries of the Company are listed in Part I of
this report on Form 10-K for the year ended December 31,
1997.
EXHIBIT NO. 23 Consents of Experts and Counsel
- -----------------------------------------------
23 Independent Auditors' Consent
EXHIBIT NO. 27 Financial Data Schedule
- ---------------------------------------
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
EXHIBIT 12
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
RATIO OF TOTAL LONG-TERM
DEBT TO TOTAL CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------
(Dollars in thousands)
<S> <C>
LONG-TERM DEBT:
Revolving Credit Agreement $ --
Money Market Lines of Credit 30,000
Senior Notes 200,000
Refunding Revenue Bonds 13,200
Other 7,740
--------
250,940
Less Current Portion 381
--------
Total Long-term Debt $ 250,559
========
TOTAL CAPITALIZATION:
Long-term Debt $ 250,559
Deferred Income Taxes 65,322
Shareholders Equity, Net 670,915
--------
Total Capitalization $ 986,796
========
RATIO OF TOTAL LONG-TERM DEBT TO TOTAL CAPITALIZATION 25.4%
========
</TABLE>
<PAGE>
EXHIBIT 13
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
COMMON STOCK AND DIVIDEND INFORMATION
<TABLE>
The Company's common stock is traded on the New York Stock Exchange and the
Pacific Stock Exchange under the symbol ABF. The following is a summary of
the cash dividends paid and the quarterly trading price ranges of Airborne
common stock on the New York Stock Exchange for 1997 and 1996:
<CAPTION>
Quarter High Low Dividend
------- ---- --- --------
<S> <C> <C> <C>
1997: *
Fourth $37.219 $25.875 $ .0375
Third 31.219 20.781 .0375
Second 20.938 14.938 .0375
First 15.625 11.375 .0375
1996: *
Fourth $11.688 $ 9.750 $ .0375
Third 13.438 9.938 .0375
Second 13.750 11.750 .0375
First 14.188 12.500 .0375
</TABLE>
* References to earnings and dividends per common share, average shares
outstanding and trading price information have been restated to
reflect the two-for-one stock split of common stock in February 1998.
1
<PAGE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues
Domestic $2,514,737 $2,108,670 $1,871,163 $1,660,003 $1,484,787
International 397,672 375,636 368,188 310,756 235,194
---------- ---------- ---------- ---------- ----------
Total 2,912,409 2,484,306 2,239,351 1,970,759 1,719,981
Operating Expenses 2,687,154 2,405,125 2,170,370 1,881,821 1,636,861
---------- ---------- ---------- ---------- ----------
Earnings From Operations 225,255 79,181 68,981 88,938 83,120
Interest, Net 27,790 33,236 29,347 24,663 24,093
---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes 197,465 45,945 39,634 64,275 59,027
Income Taxes 77,393 18,500 15,814 25,440 23,738
---------- ---------- ---------- ---------- ----------
Net Earnings Before 120,072 27,445 23,820 38,835 35,289
Changes in Accounting
Cumulative Effect of -- -- -- -- 3,828
Changes in Accounting ---------- ---------- ---------- ---------- ----------
Net Earnings 120,072 27,445 23,820 38,835 39,117
Preferred Stock Dividends -- 271 276 894 2,760
---------- ---------- ---------- ---------- ----------
Net Earnings Available $ 120,072 $ 27,174 $ 23,544 $ 37,941 $ 36,357
to Common Shareholders ========== ========== ========== ========== ==========
2
<PAGE>
Net Earnings Per Common Share 1
Basic 2 $ 2.68 $ .64 $ .56 $ .92 $ .84
========== ========== ========== ========== ==========
Diluted 2 $ 2.44 $ .64 $ .55 $ .87 $ .83
========== ========== ========== ========== ==========
Dividends Per Common Share 1 $ .15 $ .15 $ .15 $ .15 $ .15
========== ========== ========== ========== ==========
Weighted Average 44,883 42,266 42,100 41,289 38,511
Shares Outstanding 1 ========== ========== ========== ========== ==========
FINANCIAL STRUCTURE:
Working Capital $ 96,485 $ 141,457 $ 91,599 $ 66,871 $ 56,521
Property and Equipment 916,331 866,627 842,703 766,346 733,963
Total Assets 1,365,973 1,307,422 1,217,384 1,078,506 1,002,866
Long-term Debt 250,559 409,440 364,621 279,422 269,250
Subordinated Debt -- 115,000 115,000 118,580 122,150
Redeemable Preferred Stock -- -- 3,948 5,000 40,000
Shareholders' Equity 670,915 431,830 406,315 387,398 318,824
NUMBER OF SHIPMENTS:
Domestic 297,032 254,234 225,553 187,460 160,568
International 5,699 5,036 4,592 3,954 3,545
---------- ---------- ---------- ---------- ----------
Total 302,731 259,270 230,145 191,414 164,113
========== ========== ========== ========== ==========
</TABLE>
1 Per share amounts and average shares outstanding have been restated to
reflect a two-for-one stock split completed in February 1998.
2 For 1993, net earnings per common share is shown exclusive of the cumulative
effect of adopting accounting standards for income taxes and postretirement
benefits. Basic and diluted earnings per share inclusive of the changes were
$.94 and $.92, respectively.
3
<PAGE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company achieved record operating performance for 1997 as
revenues, operating income, and net earnings all attained record levels.
Yield enhancement strategies implemented over the past two years, a more
stable pricing environment, and significant productivity improvements were
positive factors impacting 1997 operating results.
Net earnings available to common shareholders in 1997 increased to
$120.1 million, or $2.44 per share on a diluted basis, compared to $27.2
million, or $.64 per share in 1996. (All references to earnings per share
reflect a two-for-one stock split declared and issued in February 1998 and
reflect diluted earnings per share unless otherwise noted.) The 1996
results include a non-recurring charge related to the loss of an aircraft
of $3.7 million, or $2.2 million on an after-tax basis and $.05 on a per
share basis. Basic earnings per share for 1997 were $2.68 compared to $.64
for 1996.
4
<PAGE>
<PAGE>
<TABLE>
The following table is an overview of the Company's shipments, revenue
and weight trends for the last three years:
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Number of Shipments (in thousands):
Domestic
Overnight 172,782 146,458 131,037
Next Afternoon Service 53,773 27,937 --
Second Day Service 70,138 79,541 94,199
100 lbs. and Over 339 298 317
------- ------- -------
Total Domestic 297,032 254,234 225,553
------- ------- -------
International
Express 5,223 4,500 4,035
Freight 476 536 557
------- ------- -------
Total International 5,699 5,036 4,592
------- ------- -------
Total Shipments 302,731 259,270 230,145
======= ======= =======
Average Pounds Per Shipment:
Domestic 4.5 4.5 4.6
International 51.2 54.6 62.9
Average Revenue Per Pound:
Domestic $ 1.89 $ 1.83 $ 1.80
International $ 1.35 $ 1.34 $ 1.28
Average Revenue Per Shipment:
Domestic $ 8.45 $ 8.25 $ 8.24
International $ 69.78 $ 74.59 $ 80.18
</TABLE>
5
<PAGE>
<PAGE>
During 1997, various events occurred in the first three quarters that
enhanced operating results. The Company's operating results in the third
quarter of 1997 were positively impacted by the additional shipment volume
handled as the result of a strike at United Parcel Service (UPS) during
August. The Company estimates the incremental revenues realized were $50
to $55 million, and that the impact on earnings per share was in the range
of $.28 to $.30. These are estimates that can only be arrived at by
assuming what level of business the Company would have handled had there
been no strike at UPS. Domestic revenues in 1997 included $15.5 million of
fuel surcharge revenue realized as the result of a surcharge that was
effective from mid-February until July 1. This surcharge revenue accounted
for approximately $.15 per share in 1997. Also, the absence of the Federal
Aviation Excise Tax, which was not in effect from January 1 through March
6, 1997, had a beneficial impact on earnings per share of $.05. The
cumulative effect of these items is estimated to have added $.47 to $.50 to
annual earnings per share. However, even without the benefit of these
items, the Company experienced a record year. The operating results and
trends discussed below include the impacts related to the strike, fuel
surcharge, and excise tax matters.
Total revenues increased 17.2% in 1997, 10.9% in 1996, and 13.6% in
1995. Shipment volume grew to 303 million units in 1997 increasing 16.8%,
compared to a 12.7% increase in 1996 and 20.2% in 1995.
Domestic revenue increased 19.3% in 1997 on shipment growth of 16.8%,
compared to revenue growth of 12.7% in both 1996 and 1995, and shipment
growth of 12.7% and 20.3% in 1996 and 1995, respectively. Domestic revenue
growth for 1997 continued to be positively impacted by strong growth in
higher yielding overnight shipments, the continued focus on yield
enhancement, and a stable pricing environment. As a result, the percentage
growth in domestic revenues exceeded the percentage growth in domestic
shipments, and the average revenue per domestic shipment increased 2.4% to
$8.45 for 1997. Also, the average weight per domestic shipment for 1997 of
4.5 pounds was, except for the UPS strike period, stable for each quarter
of the year and comparable to the average weight achieved in 1996.
Overnight shipments accounted for over 58.2% of total domestic
shipments in 1997 compared to 57.6% in 1996 and 58.1% in 1995. The higher
yielding overnight shipments increased 18.0% in 1997 compared to 11.8% in
1996. The strong growth in the overnight product had a positive impact on
domestic revenue growth. The Company's deferred service products increased
15.3% on a combined basis in 1997 compared to 14.1% in 1996. Beginning in
1995 and continuing into 1996, the Company redefined its deferred service
product through the creation of two distinct levels of service, Next
Afternoon Service (NAS) and Second Day Service (SDS), replacing the Select
Delivery Service category. This redefinition was not completed until late
1996, which makes comparison of separate NAS and SDS results for 1997 to
1996 not meaningful.
International revenue increased 5.9% in 1997 on shipment growth of
13.2% compared to revenue growth of 2.0% and 18.5% and shipment growth of
9.7% and 16.1% in 1996 and 1995, respectively. International revenue per
shipment and weight per shipment in 1997 decreased compared to last year as
a result of the continued decrease in higher yielding freight shipments in
1997 compared to 1996. The international contribution to earnings from
operations were $5.6 million in 1997 compared to $7.4 million in 1996, and
$1.2 million in 1995.
OPERATING EXPENSES are affected by shipment volume, productivity
improvements, costs incurred to increase capacity and expand service, fuel
price volatility and discretionary items such as the level of marketing
expenditures. Operating expenses as a percentage of revenues were 92.3% in
6
<PAGE>
<PAGE>
1997 compared to 96.8% in 1996 and 96.9% in 1995. Measuring cost
performance on a per shipment basis, total operating expenses per shipment
declined 4.3% in 1997 to $8.88, compared to $9.28 in 1996 and $9.43 in
1995. The Company achieved a 10.2% improvement in productivity in 1997, as
measured by shipments handled per paid employee hour, compared to 1.9%
improvement in 1996 and 7.3% in 1995. A strong focus on cost control,
productivity improvements, quality improvement programs, along with the
added volume from the UPS strike, were significant factors having an impact
on 1997 operating costs.
Transportation purchased decreased as a percentage of revenues to
31.7% in 1997 compared to 33.3% in 1996 and 35.2% in 1995. This expense
category consists primarily of commercial airline costs, cartage costs
related to contracted pick-up and delivery, and trucking costs. The
decrease in 1997 is primarily due to two factors. Commercial airline costs
were lower as a percentage of total revenues due to the decline in
international freight shipments and cartage costs were lower as a
percentage of revenue due to strong cost per unit improvement. Also, the
Federal Aviation Excise Tax was suspended on January 1, 1996 and re-
implemented effective August 27, 1996. The tax then expired on December
31, 1996 until it was reinstated March 7, 1997. This resulted in the
avoidance of cost associated with the tax of $14.7 million dollars during
the first eight months of 1996 and $4.3 million during the first three
months of 1997.
Station and ground expense as a percentage of revenues was 29.5% in
1997 compared to 31.5% in 1996 and 31.0% in 1995. Productivity gains in
pick-up and delivery, customer service and terminal operations have been
instrumental in partially offsetting the effect of increased costs incurred
to accommodate the growth in shipments and expand service while maintaining
service integrity.
Flight operations and maintenance expense as a percentage of revenues
was 14.8% in 1997 compared to 15.6% in 1996 and 14.6% in 1995. The average
aviation fuel price in 1997 was $.73 per gallon, compared to $.75 per
gallon in 1996, and $.62 per gallon in 1995. The average price above
includes the effect of a 4.3 cent per gallon excise tax on jet fuel that
became effective October 1, 1995. Aviation fuel consumption increased 5.7%
to 169.8 million gallons in 1997 compared to a 13.0% increase in
consumption in 1996 over 1995. The increased consumption year over year is
a result of additional Company operated aircraft placed in service during
each year to accommodate the growth in business. As a result of fuel
hedging contracts, the Company was able to mitigate $1.7 million and $3.0
million of the increase in fuel costs in 1997 and 1996, respectively.
General and administrative expense as a percentage of revenues
increased to 8.0% in 1997 compared to 7.3% in 1996 and 7.0% in 1995. This
increase was primarily due to approximately $30.0 million of incremental
profit sharing and management incentive compensation costs as a result of
the significant improvement in operating results for 1997.
Sales and marketing costs were 2.4% of revenues in 1997 compared to
2.4% in 1996 and 2.7% in 1995. Productivity gains and controls on
discretionary spending in General and Administrative and Sales and
Marketing expense categories have been instrumental in offsetting most of
the effect of increased costs incurred to accommodate shipment growth and
expand service.
Depreciation and amortization expense as a percentage of revenues
decreased to 5.8% in 1997 compared to 6.6% in 1996 and 6.4% in 1995. The
total dollar amount of depreciation and amortization has continued to
increase over the last three years as a result of capital expenditures
incurred primarily to expand the airline operations.
Operating expense in 1996 included a non-recurring charge of
$3.7 million related to the loss of a DC-8-63 aircraft destroyed in an
accident in December 1996.
7
<PAGE>
<PAGE>
INTEREST EXPENSE decreased 16.4% in 1997 compared to 1996, primarily
as the result of the significantly lower level of average outstanding
borrowings during 1997. Interest capitalized in 1997 of $1.9 million was
primarily related to the acquisition and modification of aircraft and the
airport expansion and compares to capitalized interest of $1.7 million in
1996 and $3.7 million in 1995.
INCOME TAXES for 1997 resulted in an effective tax rate of 39.2%
compared to 40.3% in 1996 and 39.9% in 1995. The Company anticipates that
the effective tax rate for 1998 will be in the 39% to 40% range.
Looking ahead, the Company's focus will continue to be on managing
yields and lowering cost per shipment to improve margins. The strength of
the U.S. and global economies will have an impact on the results of
operations in 1998 and beyond.
The Company is in the process of updating its computer systems to be
capable of meeting necessary year 2000 requirements. This process is not
expected to have a material cost consequence or create operational
uncertainties which would impact the Company's prospective operating
results or financial condition.
FINANCIAL CONDITION:
CAPITAL EXPENDITURES and financing associated with those expenditures
have been primary factors affecting the financial condition of the Company
over the last three years. Total capital expenditures net of dispositions
were $207 million in 1997 compared to $193 million in 1996 and $214 million
in 1995. A significant portion of these expenditures has been related to
the acquisition and modification of aircraft and related flight equipment.
Included in capital expenditures in 1996 was $21 million related to a DC-8-
63 aircraft that was destroyed in an accident in December 1996. The
Company realized insurance proceeds of $18 million in January 1997 for this
property loss.
The Company acquired 2 McDonnell Douglas DC-9 aircraft, 1 DC-8
aircraft, and 2 Boeing 767-200 aircraft in 1997. A total of 5 Company-
owned aircraft were placed into service during the year; made up of 4 DC-
9's and 1 DC-8. Also, the company retired and sold all remaining YS-11
aircraft in mid 1997. At the end of 1997, there were 105 aircraft in
service, consisting of 36 DC-8's and 69 DC-9's. In addition, there were 4
aircraft in modification status including the 2 recently acquired 767
aircraft. Other capital expenditures in 1997 included vehicles for
expansion and replacement, facilities and package handling equipment
related to servicing the increased shipment volume, leasehold improvements
for new or expanded facilities and for computer equipment.
Capital expenditures will continue to be a significant factor
affecting financial condition in 1998. The Company anticipates 1998
capital expenditures of approximately $274 million. A significant portion
of the 1998 capital investment is for the acquisition of 4 additional 767
aircraft, the modification of aircraft to be placed in service, the
retrofitting of aircraft with Stage III hush kits, and the continued
expansion of the central airport and sort facilities. A total of 7
aircraft, 5 767's and 2 DC-9's, are expected to be placed in service in
1998.
The Company has commitments to purchase 10 additional used Boeing
767-200's, including the 4 which will be delivered in 1998, with the
remaining 6 aircraft delivered between the years 1999 and 2000. These
acquisitions are not expected to significantly increase capital spending.
Instead, this newer generation aircraft should improve operating efficiency
8
<PAGE>
<PAGE>
while capital requirements will remain relatively in line with internally
generated cash flow.
LIQUIDITY AND CAPITAL RESOURCES: Liquidity for financing capital
expenditures in 1997 came primarily from internally generated cash provided
by operations which increased significantly in 1997 to approximately $328
million compared to $207 million in 1996 and $170 million in 1995.
Additional liquidity during the year was provided by the revolving bank
credit agreement.
In 1997, the Company's strong operating cash flow became the major
source of liquidity, whereas, the Company's $250 million unsecured
revolving bank credit agreement had traditionally been used as the major
source of liquidity for periods between other financing transactions. The
Company also has available $50 million under unsecured uncommitted money
market lines of credit with several banks, used in conjunction with the
revolving credit agreement to facilitate settlement and accommodate short-
term borrowing fluctuations. Reliance on the bank facilities decreased
significantly during 1997. At December 31, 1997, a total of $30.0 million
was owing under the revolving bank credit and money market agreements
compared to $188.5 million outstanding at December 31, 1996.
In August 1997, the Company called for the redemption of its 6-3/4%
convertible subordinated debentures due 2001, of which $114.9 million was
outstanding. Substantially all of the debenture holders elected conversion
to common stock rather than redemption. This resulted in the issuance, on
a pre-split stock basis, of approximately 3.3 million shares of common
stock in September 1997.
The Company's ratio of total long-term debt to total capitalization
was 25.4% at December 31, 1997, a significant improvement over the 52.6% at
December 31, 1996. The debt-to-capitalization ratio is not expected to
change significantly during 1998 as anticipated cash flow from operations
should provide the majority of the liquidity for projected 1998 capital
expenditures.
In management's opinion, the available capacity under the bank credit
agreements coupled with anticipated internally generated cash flow from
1998 operations should provide adequate flexibility for financing future
growth.
INFLATION:
The rate of inflation has been relatively constant over the past
several years, and so has the impact of inflation on the Company's results
of operations and financial condition. The effects of inflation have been
considered in management's discussion where considered pertinent.
9
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Airborne Freight Corporation
Seattle, Washington
We have audited the accompanying consolidated balance sheets of
Airborne Freight Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of net earnings and cash
flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the
Index at Item 14. These financial statements and financial statement
schedule are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Airborne Freight
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
-------------------------
DELOITTE & TOUCHE LLP
February 13, 1998
Seattle, Washington
10
<PAGE>
<PAGE>
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
REVENUES:
Domestic $2,514,737 $2,108,670 $1,871,163
International 397,672 375,636 368,188
---------- ---------- ----------
2,912,409 2,484,306 2,239,351
OPERATING EXPENSES:
Transportation purchased 922,885 827,997 788,040
Station and ground operations 858,238 781,867 693,371
Flight operations and maintenance 431,474 386,961 327,838
General and administrative 234,366 181,353 156,501
Sales and marketing 70,346 59,565 60,258
Depreciation and amortization 169,845 163,645 144,362
Loss related to aircraft accident -- 3,737 --
---------- ---------- ----------
2,687,154 2,405,125 2,170,370
---------- ---------- ----------
EARNINGS FROM OPERATIONS 225,255 79,181 68,981
INTEREST, NET 27,790 33,236 29,347
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 197,465 45,945 39,634
INCOME TAXES 77,393 18,500 15,814
---------- ---------- ----------
NET EARNINGS 120,072 27,445 23,820
PREFERRED STOCK DIVIDENDS -- 271 276
---------- ---------- ----------
NET EARNINGS AVAILABLE $ 120,072 $ 27,174 $ 23,544
TO COMMON SHAREHOLDERS ========== ========== ==========
NET EARNINGS PER COMMON SHARE:
Basic $ 2.68 $ .64 $ .56
========== ========== ==========
Diluted $ 2.44 $ .64 $ .55
========== ========== ==========
DIVIDENDS PER COMMON SHARE $ .15 $ .15 $ .15
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
<PAGE>
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31 1997 1996
----------- ---- ----
(In thousands)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 25,525 $ 35,816
Trade accounts receivable, less
allowance of $10,290,000 and $8,345,000 322,549 287,515
Spare parts and fuel inventory 37,966 34,761
Deferred income tax assets 14,530 15,012
Prepaid expenses and other 25,982 42,118
---------- ----------
TOTAL CURRENT ASSETS 426,552 415,222
PROPERTY AND EQUIPMENT, NET 916,331 866,627
EQUIPMENT DEPOSITS and OTHER ASSETS 23,090 25,573
---------- ----------
TOTAL ASSETS $1,365,973 $1,307,422
========== ==========
12
<PAGE>
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 143,966 $ 139,036
Salaries, wages and related taxes 80,154 63,835
Accrued expenses 100,126 68,759
Income taxes payable 5,440 1,782
Current portion of debt 381 353
---------- ----------
TOTAL CURRENT LIABILITIES 330,067 273,765
LONG-TERM DEBT 250,559 409,440
SUBORDINATED DEBT -- 115,000
DEFERRED INCOME TAX LIABILITIES 65,322 40,816
OTHER LIABILITIES 49,110 36,571
SHAREHOLDERS' EQUITY:
Preferred stock, without par value -
Authorized 5,200,000 shares, no shares issued
Common stock, par value $1 per share -
Authorized 60,000,000 shares
Issued 50,428,548 and 43,243,192 50,428 43,243
Additional paid-in capital 287,209 168,784
Retained earnings 334,083 220,774
---------- ----------
Treasury stock, 522,300 and 671,720 432,801
630,300 shares, at cost (805) (971)
---------- ----------
670,915 431,830
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,365,973 $1,307,422
========== ==========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
<PAGE>
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $120,072 $ 27,445 $ 23,820
Adjustments to reconcile net earnings
to net cash provided
by operating activities:
Depreciation and amortization 156,233 151,538 133,931
Provision for aircraft
engine overhauls 13,612 12,107 10,431
Deferred income taxes 24,988 3,697 4,163
Loss related to aircraft accident -- 3,737 --
Other 13,076 8,027 (2,351)
-------- -------- --------
CASH PROVIDED BY OPERATIONS 327,981 206,551 169,994
Change in:
Receivables (35,035) (28,107) (37,620)
Inventories and prepaid expenses (5,069) (200) (9,907)
Accounts payable 4,930 2,049 19,793
Accrued expenses, salaries
and taxes payable 52,444 16,118 14,499
NET CASH PROVIDED BY -------- -------- --------
OPERATING ACTIVITIES 345,252 196,411 156,759
INVESTING ACTIVITIES:
Additions to property and equipment (211,758) (173,157) (215,958)
Proceeds from insurance on aircraft
accident 18,000 -- --
Investment in aircraft destroyed
in accident -- (21,232) --
Disposition of property and equipment 4,451 694 2,079
Expenditures for engine overhauls (10,614) (15,000) (10,039)
Other (27) (3,309) 378
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (199,948) (212,004) (223,540)
14
<PAGE>
<PAGE>
FINANCING ACTIVITIES:
Proceeds (payments) on bank notes, net (158,500) 45,200 (8,700)
Principal payments on debt (436) (5,818) (18,434)
Proceeds from common stock issuance 10,104 734 638
Dividends paid (6,763) (6,613) (6,596)
Proceeds from debt issuance -- -- 107,461
-------- -------- --------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (155,595) 33,503 74,369
-------- -------- --------
NET (DECREASE) INCREASE IN CASH (10,291) 17,910 7,588
CASH AT BEGINNING OF YEAR 35,816 17,906 10,318
-------- -------- --------
CASH AT END OF YEAR $ 25,525 $ 35,816 $ 17,906
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid during the year -
Interest, net of amount capitalized $ 32,768 $ 33,234 $ 28,085
Income taxes 46,641 16,674 10,457
Non-cash financing activities -
Conversion of subordinated debentures 114,572 -- --
Contribution of treasury stock to
profit sharing plans 1,100 -- --
Conversion of redeemable
preferred stock -- 3,948 1,052
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
<PAGE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
NATURE OF OPERATIONS
The Company's revenues are derived from domestic and international
transportation of shipments. The Company provides door-to-door express
delivery of small packages and documents throughout the United States and
to most foreign countries. The Company also acts as an international and
domestic freight forwarder for shipments of any size. Most domestic
shipments are transported on the Company's own airline and a fleet of
ground transportation vehicles through its Company-owned airport and
central sorting facilities, or one of nine regional hubs. International
shipments are transported utilizing a combination of the Company's domestic
network, commercial airline lift capacity, and through a network of
offshore Company offices and independent agents.
The Company is subject to certain business risks which could affect
future operations and financial performance. These risks include weather
and natural disaster related disruptions, collective bargaining labor
disputes, fuel price volatility, regulatory compliance concerning the
operation or maintenance of aircraft, and aggressive competitor pricing.
As of December 31, 1997, the Company had approximately 10,300
employees (46% of total employees), including approximately 730 pilots,
employed under collective bargaining agreements with various locals of the
International Brotherhood of Teamsters and Warehousemen. The pilots are
covered by an agreement which expires on July 31, 2001. Most labor
agreements covering the Company's ground personnel will expire in 1998.
The Company has not experienced any significant disruptions from labor
disputes in the past.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany balances and
transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial
statements. Changes in these estimates and assumptions may have a material
impact on the financial statements. The Company has used estimates in
determining certain provisions and reserves including those for engine
overhaul costs, useful lives for fixed assets, insurance claims,
uncollectible trade accounts receivable, and tax liabilities.
16
<PAGE>
<PAGE>
CASH
The Company has a cash management system under which a cash overdraft
exists for uncleared checks in the Company's primary disbursement accounts.
The cash amount in the accompanying financial statements represents
balances in other accounts prior to being transferred to the primary
disbursement accounts. Uncleared checks of $29,311,000 and $28,059,000 are
included in accounts payable at December 31, 1997 and 1996, respectively.
SPARE PARTS AND FUEL INVENTORY
Spare parts are stated at average cost and fuel inventory is stated at
cost on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment, including rotable aircraft parts, are stated
at cost. The cost and accumulated depreciation of property and equipment
disposed of are removed from the accounts with any related gain or loss
reflected in earnings from operations.
<TABLE>
For financial reporting purposes, depreciation of property and equipment is
provided on a straight-line basis over the asset's useful life or lease
term as follows:
<CAPTION>
<S> <C>
Flight equipment 7 to 18 years
Buildings, runways, and leasehold improvements 5 to 30 years
Package handling and ground support equipment 3 to 8 years
Vehicles and other equipment 3 to 8 years
</TABLE>
DC-8 and DC-9 aircraft generally carry residual values of 10% and 15%
of asset cost, respectively. All other property and equipment have no
assigned residual values.
Major engine overhauls for DC-9 aircraft are accrued in advance of the
next scheduled overhaul based upon engine usage and estimates of overhaul
costs. Provision for engine overhauls is included in depreciation and
amortization expense. Major engine overhauls as well as ordinary engine
maintenance and repairs for DC-8 and 767 aircraft are performed by third-
party service providers under long-term contracts. Service costs under the
contracts are based upon hourly rates for engine usage and are charged to
expense in the period utilization occurs.
CAPITALIZED INTEREST
Interest incurred during the construction period of certain facilities
and on aircraft purchase and modification costs are capitalized as an
additional cost of the asset until the date the asset is placed in service.
Capitalized interest was $1,869,000, $1,728,000, and $3,741,000 for 1997,
1996 and 1995, respectively.
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Deferred income taxes are provided for temporary differences
between the timing of reporting certain revenues and expenses for financial
versus tax purposes. Deferred taxes are measured using provisions of
currently enacted tax laws. Tax credits are accounted for as a reduction
of income taxes in the year in which the credit originates.
EARNINGS PER SHARE
17
<PAGE>
<PAGE>
The Company has adopted the provisions of Statement of Financial
Standards No. 128, _Earnings Per Share_ effective December 31, 1997. The
statement requires the calculation and disclosure of basic and diluted
earnings per share as opposed to primary and fully diluted calculations
required under Accounting Principles Board Opinion No. 15, _Earnings Per
Share_ and related pronouncements. All prior period earnings per share and
average shares outstanding data has been restated to reflect the adoption
of this statement.
STOCK SPLIT
On February 3, 1998, the Company's board of directors authorized a
two-for-one stock split effected in the form of a stock dividend issued to
shareholders of record on February 9, 1998. An amount equal to the par
value of the common stock issued was transferred from additional paid-in
capital to the common stock account and has been reflected in shareholders'
equity, at the earliest date presented herein, January 1, 1995. All
references in the consolidated financial statements to shares, (except
shares authorized), per share and price information, and stock option plan
data have been restated to reflect the split.
FUEL CONTRACTS
The Company has entered into contracts with financial institutions to
limit its exposure to volatility in jet fuel prices. Under terms of the
contracts, the Company either makes or receives payments if the market
price of heating oil, as determined by an index of the monthly NYMEX
Heating Oil futures contracts, is lower than or exceeds certain prices
agreed to between the Company and the financial institutions. The
contracts, which have no cost basis, are accounted for as hedges since
there has historically existed a high correlation between the changes in
the NYMEX index and the price of jet fuel. Settlements are made in cash
and are recorded in the period of settlement as either an increase or
decrease to fuel expense.
REVENUE RECOGNITION
Domestic revenues and most domestic operating expenses are recognized
when shipments are picked up from the customer. International revenues and
direct air carrier expenses are recognized in the period when shipments are
tendered to a carrier for transport to a foreign destination. Domestic and
international delivery costs are recognized in the period incurred. The
net revenue resulting from existing recognition policies does not
materially differ from that which would be recognized on a delivery date
basis.
RECLASSIFICATIONS
Certain amounts for prior years have been reclassified in the
consolidated financial statements to conform to the classification used in
1997.
18
<PAGE>
<PAGE>
NOTE B - FAIR VALUE INFORMATION
<TABLE>
The carrying amounts and related fair values of the Company's financial
instruments are as follows (in thousands):
<CAPTION>
December 31 1997 1996
----------- ---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Long-term debt $250,559 $262,233 $409,440 $419,050
Subordinated debt -- -- 115,000 115,288
Off-balance sheet derivative:
Fuel contracts -- (1,060) -- 3,798
</TABLE>
Discussion regarding the fair value of the above financial instruments
is disclosed in the respective notes to the consolidated financial
statements. Carrying amounts for cash, trade accounts receivable, and
current liabilities approximate fair value.
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consist of the following (in thousands):
<CAPTION>
December 31 1997 1996
----------- ---- ----
<S> <C> <C>
Flight equipment $1,230,232 $1,125,019
Land, buildings and leasehold improvements 226,628 215,795
Package handling and ground support equipment 133,624 124,689
Vehicles and other equipment 240,309 230,227
---------- ----------
1,830,793 1,695,730
Accumulated depreciation and amortization (914,462) (829,103)
---------- ----------
$ 916,331 $ 866,627
========== ==========
</TABLE>
19
<PAGE>
<PAGE>
NOTE D - ACCRUED EXPENSES
<TABLE>
Accrued expenses consist of the following (in thousands):
<CAPTION>
December 31 1997 1996
----------- ---- ----
<S> <C> <C>
Profit sharing retirement plan $ 26,613 $ 3,459
Insurance reserves 20,713 16,703
Unearned revenues 13,024 8,866
Aircraft leases 10,557 12,576
Other retirement plans 10,492 9,009
Property and other taxes 9,971 6,097
Interest 2,572 7,141
Other 6,184 4,908
------- -------
$ 100,126 $ 68,759
======= =======
</TABLE>
NOTE E - INCOME TAXES
<TABLE>
Deferred income tax assets and liabilities consist of the following (in
thousands):
<CAPTION>
December 31 1997 1996
----------- ---- ----
<S> <C> <C>
Insurance reserves $ 6,450 $ 5,753
Employee benefits 2,573 3,317
Bad debts, sales reserves and other 5,507 5,942
-------- --------
Current deferred income tax assets 14,530 15,012
-------- --------
Depreciation and amortization 90,931 84,230
Alternative Minimum Tax credit (11,761) (33,178)
Insurance reserves (10,832) (8,187)
Aircraft engine overhaul accrual (8,746) (7,112)
Capitalized interest 6,584 5,982
Pension and other (854) (919)
-------- --------
Noncurrent net deferred income tax liabilities 65,322 40,816
-------- --------
Net deferred income tax liabilities $ 50,792 $ 25,804
======== ========
</TABLE>
20
<PAGE>
<PAGE>
<TABLE>
Income taxes consist of the following (in thousands):
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $41,463 $12,361 $10,297
State 10,443 1,900 1,250
Foreign 499 542 104
------- ------- -------
52,405 14,803 11,651
Deferred:
Depreciation and amortization 6,701 9,955 11,040
Alternative Minimum Tax credit 21,417 (4,830) (5,571)
Insurance reserves (3,342) (2,811) (522)
Aircraft engine overhaul accrual (1,634) 1,027 307
Employee benefits (459) (867) (1,027)
Other 2,305 1,223 (64)
------- ------- -------
24,988 3,697 4,163
------- ------- -------
$77,393 $18,500 $15,814
======= ======= =======
</TABLE>
<TABLE>
The following table summarizes the major differences between the actual
income tax provision and taxes computed at the Federal statutory rate (in
thousands):
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Taxes computed at statutory rate of 35% $69,113 $16,081 $13,872
State and foreign income taxes,
net of Federal benefit 6,788 1,288 855
Tax effect of nondeductible expenses 1,549 1,185 1,146
Other (57) (54) (59)
------- ------- -------
$77,393 $18,500 $15,814
======= ======= =======
</TABLE>
21
<PAGE>
<PAGE>
NOTE F - LONG-TERM AND SUBORDINATED DEBT
<TABLE>
Long-term and subordinated debt consist of the following:
<CAPTION>
December 31 1997 1996
----------- ---- ----
(In thousands)
<S> <C> <C>
LONG-TERM DEBT:
Money market lines of credit, effective rate
of 7.4% on December 31, 1997 $ 30,000 $ 43,500
Senior notes, 8.875%, due December, 2002 100,000 100,000
Senior notes, 7.35%, due September, 2005 100,000 100,000
Refunding revenue bonds, effective rate of
4.2% on December 31, 1997, due June 2011 13,200 13,200
Revolving credit notes payable to banks -- 145,000
Other 7,740 8,093
-------- --------
250,940 409,793
Less current portion 381 353
-------- --------
$250,559 $409,440
======== ========
SUBORDINATED DEBT:
Convertible subordinated debentures -- $115,000
======== ========
</TABLE>
The Company has a revolving bank credit agreement providing for a
total commitment of $250,000,000. Interest rates for borrowings
outstanding are generally determined by maturities selected and prevailing
market conditions. The agreement expires May 31, 2001. The Company was in
compliance with covenants of the revolving credit agreement during 1997,
1996, and 1995, including net worth restrictions which limit the payment of
dividends ($301,719,000 of retained earnings was not restricted at
December 31, 1997).
The Company has available $50,000,000 of financing under uncommitted
money market lines of credit with several banks. These facilities bear
interest at rates that vary with the banks' cost of funds and are typically
less than the prevailing bank prime rate. The average interest rate on
these borrowings was 5.9% for 1997. These credit lines are used in
conjunction with the revolving credit agreement to facilitate settlement
and accommodate short-term borrowing fluctuations.
The Company has classified the borrowings outstanding under the money
market lines of credit as long-term. These amounts will be refinanced
under the revolving credit agreement.
The Company's tax-exempt airport facilities refunding bonds carry no
sinking fund requirements and bear interest at weekly adjustable rates.
The average interest rate on these borrowings was 3.7% during 1997.
Payment of principal and interest is secured by an irrevocable bank letter
of credit that is collateralized by a mortgage on certain airport
properties which have a net carrying value of $51,763,000 at December 31,
1997.
In August 1997, the Company called for the redemption of its 6.75%
convertible subordinated debentures due in 2001. This transaction resulted
in the issuance of approximately 6,474,000 shares of common stock as
substantially all debenture holders elected conversion rather than
redemption.
22
<PAGE>
<PAGE>
The scheduled annual principal payments on long-term debt for the next
five years are $381,000, $410,000, $442,000, $30,476,000, and $100,513,000
for 1998 through 2002, respectively.
The fair value information shown in Note B reflects values for the
Company's senior notes and, for 1996, convertible subordinated debentures
based on quoted market prices for the same issues. The carrying value of
the Company's remaining long-term financial debt instruments approximate
fair value primarily because of the repricing frequency of the instruments.
NOTE G - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under various long-term operating lease
agreements for certain equipment and for a substantial portion of its
facilities. These leases expire at various dates through 2016. Rental
expense for 1997, 1996, and 1995 was $115,350,000, $105,331,000, and
$97,461,000, respectively.
<TABLE>
Rental commitments under long-term operating leases at December 31, 1997
total $439,895,000 and are payable as follows (in thousands):
<CAPTION>
Facilities Equipment
---------- ---------
<S> <C> <C>
1998 $ 65,492 $25,692
1999 64,228 22,053
2000 56,568 8,742
2001 46,695 2,253
2002 39,153 706
2003 and beyond 107,813 500
</TABLE>
COMMITMENTS
The Company has entered into firm agreements to purchase 10 Boeing 767
and 3 McDonnell Douglas DC-9 aircraft at various dates through 2000.
Additionally, the Company will exercise purchase options in 1998 on 3
leased DC-8 aircraft it currently operates. The Company also has
commitments to purchase 16 Stage III hush kits for its DC-8 and DC-9
aircraft at various dates through 1999. At December 31, 1997, cash
deposits of $3,000,000 had been made toward these purchases. Additional
deposits and payments for these acquisitions will approximate $105,302,000,
$71,897,000, and $53,800,000 for 1998 through 2000, respectively.
At December 31, 1997, the Company had fuel contracts, some extending
through October 1998, covering a monthly notional sum of between 2.5
million to 10 million gallons, which represents between 15% and 70% of
prospective average monthly consumption of jet fuel. Settlement payments
of $1,682,000 and $3,016,000 related to these contracts were received
during 1997 and 1996, respectively, with no payments being received in
1995. No settlement payments were made during 1997, 1996 or 1995. The
fair market value of these contracts was a liability of approximately
$1,060,000 at December 31, 1997 and an asset of $3,798,000 at December 31,
1996.
CONTINGENCIES
In the normal course of business, the Company has various legal claims
and other contingent matters outstanding. Management believes that any
ultimate liability arising from these actions would not have a material
23
<PAGE>
<PAGE>
adverse effect on the Company's financial condition or results of
operations as of and for the year ended December 31, 1997.
24
<PAGE>
<PAGE>
NOTE H - POSTRETIREMENT PLANS
PENSIONS
The Company has trusteed qualified retirement plans for all employees
not covered by multi-employer plans to which the Company contributes under
terms of various collective bargaining agreements. The Company's
retirement plans consist of defined contribution profit sharing and capital
accumulation plans and defined benefit minimum monthly retirement income
plans.
The capital accumulation plans are funded by both voluntary employee
salary deferrals of up to 16% of annual compensation and by employer
matching contributions of 35% of employee salary deferrals up to 6% of
annual compensation. The Company's matching contribution expense was
$5,499,000, $4,987,000, and $3,823,000 for 1997, 1996, and 1995,
respectively.
Contributions to the profit sharing plans are made at the discretion
of the Board of Directors. However, a basic formula has been followed for
contributions of 7% of earnings before taxes up to a specific profit level
plus 14% of earnings in excess of that level. The Company's profit sharing
expense was $26,613,000, $3,459,000, and $2,984,000 for 1997, 1996, and
1995, respectively. The profit sharing plans hold 970,052 shares of the
Company's common stock at December 31, 1997, representing 1.9% of
outstanding shares.
The profit sharing plans are intended to be a primary retirement
benefit. The minimum monthly retirement income plans guarantee a minimum
level of monthly pension income for those not accruing sufficient balances
in the profit sharing plans. The Company's funding of the plans is within
a range required by ERISA.
<TABLE>
Net minimum monthly plan pension expense included the following components
(in thousands):
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned during the period $ 8,844 $ 6,929 $ 4,664
Interest cost on projected benefit obligation 5,747 4,166 3,017
Actual return on plan assets (7,286) (5,211) (4,751)
Net amortization and deferral 5,153 4,213 4,036
------- ------- -------
Net pension expense $12,458 $10,097 $ 6,966
======= ======= =======
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
The following is a summary of the minimum monthly plan funded status (in
thousands):
<CAPTION>
December 31 1997 1996
----------- ---- ----
<S> <C> <C>
Projected benefit obligation for service
rendered to date $98,462 $64,780
Plan assets at fair market value,
primarily marketable securities 60,889 42,640
------- -------
Projected benefit obligation in excess of plan assets 37,573 22,140
Unrecognized prior service cost 1,802 (438)
Unrecognized net losses from past experience
different from that assumed (26,089) (11,131)
Unrecognized net transition obligation (89) (118)
------- -------
Pension liability included in
consolidated balance sheets $13,197 $10,453
======= =======
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$54,370,000 and $33,910,000, respectively $57,716 $36,913
======= =======
</TABLE>
Effective January 1, 1997, the Company amended the minimum monthly
income retirement plan covering a certain group of employees which improved
retirement benefits primarily through a change in the benefit formula.
The Company also has non-qualified, unfunded supplemental retirement
plans for certain employees and key executives which provides defined
retirement benefits that supplement those provided by the Company's
qualified retirement plans. Pension expense for these plans were
$2,588,000, $1,825,000, and $1,405,000 in 1997, 1996, and 1995,
respectively. The plans' projected benefit obligations, accumulated
benefit obligations and accrued pension liability was $9,600,000,
$6,885,000, and $8,008,000 at December 31, 1997 and $6,500,000, $3,455,000,
and $5,428,000 at December 31, 1996.
26
<PAGE>
<PAGE>
<TABLE>
Assumptions used in determining minimum monthly and supplemental retirement
pension obligations were as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 7.5% 7.0%
Rate of compensation increase (pilots) 6.5% 6.5% 5.5%
Rate of compensation increase (non pilots) 5.0% 5.0% 5.0%
Long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
The Company additionally contributes to multi-employer defined benefit
pension plans for substantially all employees covered under collective
bargaining agreements. Total expense of these plans was $34,106,000,
$28,773,000, and $24,278,000 for 1997, 1996, and 1995, respectively.
HEALTH CARE BENEFITS
The Company provides postretirement health care benefits for employees
and qualifying dependents who have met certain eligibility requirements and
who are not covered by other plans to which the Company contributes, such
as collectively bargained plans. The Company's plan is currently unfunded.
The accumulated postretirement benefit obligation was $7,189,000 and
$5,039,000 at December 31, 1997 and 1996, respectively, and $6,545,000 and
$5,593,000 has been accrued in Other Liabilities in the Consolidated
Balance Sheets. Postretirement benefit expense was $1,080,000, $1,066,000,
and $861,000, for 1997, 1996, and 1995, respectively.
The assumed health care cost trend rate used in measuring benefit
costs was 8% for 1997, decreasing each successive year to a 5% annual
growth rate in 2000, and thereafter. A 1% increase or decrease in the
assumed health care cost trend rate for each year would not have a material
effect on the accumulated postretirement benefit obligation or cost as of
or for the year ended December 31, 1997. The assumed discount rate used in
determining the accumulated postretirement benefit obligation was 7.0% and
7.5% at December 31, 1997 and 1996, respectively.
The Company also contributes to multi-employer health and welfare
plans for substantially all employees covered under collective bargaining
agreements. Portions of the these contributions, which cannot be
disaggregated, relate to postretirement benefits for plan participants.
Total expense of these plans was $38,499,000, $34,474,000, and $28,968,000
for 1997, 1996, and 1995, respectively.
27
<PAGE>
<PAGE>
NOTE I - SHAREHOLDERS' EQUITY
<TABLE>
Changes in shareholders' equity consist of the following (in thousands):
<CAPTION>
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
------ ------- -------- -------
<S> <C> <C> <C> <C>
BALANCE at JANUARY 1, 1995 $42,572 $163,083 $182,714 $ (971)
Net earnings available
to common shareholders 23,544
Conversion of redeemable
preferred stock 90 962
Common stock dividends paid (6,317)
Exercise of stock options 134 504
------- -------- -------- -------
BALANCE at DECEMBER 31, 1995 42,796 164,549 199,941 (971)
Net earnings available
to common shareholders 27,174
Conversion of redeemable
preferred stock 337 3,610
Common stock dividends paid (6,341)
Exercise of stock options 110 625
------- -------- -------- -------
BALANCE at DECEMBER 31, 1996 43,243 168,784 220,774 (971)
Net earnings available
to common shareholders 120,072
Conversion of subordinated
debentures 6,474 108,099
Common stock dividends paid (6,763)
Exercise of stock options 711 10,326 43
Contribution of treasury stock
to profit sharing plans 123
------- -------- -------- -------
BALANCE at DECEMBER 31, 1997 $50,428 $287,209 $334,083 $ (805)
======= ======== ======== =======
</TABLE>
28
<PAGE>
<PAGE>
NOTE J - STOCK OPTIONS
The Company has three fixed option plans which reserve shares of the
Company's common stock for issuance to officers, directors and key
employees. Options granted under these shareholder approved plans are
issued at the fair market value of the Company's stock on the date of grant
and become exercisable over a period of six months to three years, expiring
ten years from the date of grant. A total of 6,100,000 shares may be
granted under these plans of which 3,042,106 is available for future grants
at December 31, 1997. A summary of the Company's stock option activity and
related information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 2,555,186 2,269,360 2,083,642
Granted 442,580 436,920 386,570
Exercised (797,578) (127,318) (163,932)
Canceled (11,174) (23,776) (36,920)
--------- --------- ---------
Outstanding at end of year 2,189,014 2,555,186 2,269,360
========= ========= =========
Exercisable at end of year 1,178,058 1,656,744 1,480,000
========= ========= =========
</TABLE>
<TABLE>
Weighted average option price information is as follows:
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year $11.61 $11.06 $10.55
Granted 13.63 13.00 11.57
Exercised 11.04 6.31 5.26
Canceled 12.94 13.34 14.09
Outstanding at end of year 12.22 11.61 11.06
Exercisable at end of year 11.53 10.73 9.62
</TABLE>
29
<PAGE>
<PAGE>
<TABLE>
Information related to the number of options outstanding, weighted average
price per share and remaining life of significant option groups outstanding
at December 31, 1997 is as follows:
<CAPTION>
Outstanding Exercisable
---------------------------- ----------------------------
Life Life
Price Range Number Price in Years Number Price in Years
----------- ------ ----- -------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
$ 3.31-$ 9.25 324,452 $ 6.50 1.2 324,452 $ 6.50 1.2
$11.06-$14.25 1,694,642 12.64 7.0 683,686 12.10 5.0
$18.06-$18.88 169,920 18.84 6.1 169,920 18.84 6.1
</TABLE>
<TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, _Accounting for Stock Issued to Employees_ and related interpretations
in accounting for its stock option plans and accordingly no compensation
expense has been recognized in the Consolidated Statements of Net Earnings.
Had compensation expense been measured under the fair value provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, _Accounting for
Stock-Based Compensation_, the Company's Net Earnings Available to Common
Shareholders and Earnings Per Share for 1997, 1996 and 1995 would have been
reduced to the pro forma amounts shown below. In accordance with SFAS No.
123, pro forma information does not include compensation expense attributed
to 1996 and 1995 from options granted prior to 1995.
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C>
Net Income Available to Common Shareholders
(in thousands):
As reported $120,072 $ 27,174 $ 23,544
Pro forma 118,084 26,086 23,020
Diluted Net Earnings Per Common Share:
As reported $2.44 $ .64 $ .55
Pro forma 2.40 .61 .54
</TABLE>
30
<PAGE>
<PAGE>
<TABLE>
The weighted average fair value for options granted in 1997, 1996 and 1995,
computed utilizing the Black-Scholes option-pricing model, was $5.90,
$4.67 and $4.17, respectively. Significant assumptions used in the
estimation of fair value and compensation expense are as follows:
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Weighted expected life (years) 6.7 6.6 6.1
Weighted risk free interest rate 6.3% 5.3% 7.4%
Weighted volatility 36.6% 36.9% 38.4%
Dividend yield 1.1% 1.2% 1.3%
</TABLE>
31
<PAGE>
<PAGE>
NOTE K - EARNINGS PER SHARE
<TABLE>
Net earnings and average shares used in basic and diluted earnings per
share calculations were as follows:
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
NET EARNINGS
Net Earnings $120,072 $ 27,445 $ 23,820
Less preferred stock dividends -- 271 276
-------- -------- --------
Basic net earnings available to
common shareholders 120,072 27,174 23,544
Convertible subordinated
debentures 2,969 -- --
-------- -------- --------
Diluted net earnings available to
common shareholders including
assumed conversions $123,041 $ 27,174 $23,544
======== ======== ========
SHARES
Basic weighted average shares
outstanding 44,883 42,266 42,100
Stock options 939 307 333
Convertible subordinated
debentures 4,517 -- --
-------- -------- --------
Diluted weighted average shares
outstanding 50,339 42,573 42,433
======== ======== ========
NET EARNINGS PER SHARE
Basic $2.68 $ .64 $ .56
Diluted $2.44 $ .64 $ .55
======== ======== ========
</TABLE>
The above reconciliation of diluted earnings per share excludes certain
common shares issuable under stock option plans because the options'
exercise price was greater than the average market price of the common
shares. Also excluded are common shares issuable under convertible
securities arrangements since assuming conversion would have had the effect
of increasing earnings per share.
32
<PAGE>
<PAGE>
<TABLE>
The following is a summary of these excluded common shares (in thousands):
<CAPTION>
Year Ended December 31 1997 1996 1995
---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
Stock options -- 910 534
Convertible securities -
Subordinated debentures -- 6,479 6,479
Redeemable preferred stock -- 328 334
------ ------ ------
Excluded common shares -- 7,717 7,347
====== ====== ======
</TABLE>
33
<PAGE>
<PAGE>
NOTE L - SEGMENT INFORMATION
Substantially all of the Company's revenues are derived from domestic
and international transportation and/or forwarding of air freight and
express shipments. Domestic is defined as any shipment with an origin and
destination within the U.S., Puerto Rico or Canada. A substantial portion
of international revenue originates in the U.S. ($279,532,000 in 1997,
$273,586,000 in 1996, and $279,164,000 in 1995).
The determination of operating income of domestic and international
operations requires that certain costs incurred in the U.S. be allocated to
international operations
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues:
Domestic $2,514,737 $2,108,670 $1,871,163
International 397,672 375,636 368,188
---------- ---------- ----------
$2,912,409 $2,484,306 $2,239,351
========== ========== ==========
Earnings from Operations:
Domestic $ 219,630 $ 71,809 $ 67,765
International 5,625 7,372 1,216
Interest, net (27,790) (33,236) (29,347)
---------- ---------- ----------
Earnings Before Income Taxes $ 197,465 $ 45,945 $ 39,634
========== ========== ==========
Identifiable Assets:
Domestic $1,288,180 $1,229,011 $1,148,056
International 77,793 78,411 69,328
---------- ---------- ----------
$1,365,973 $1,307,422 $1,217,384
========== ========== ==========
</TABLE>
34
<PAGE>
<PAGE>
NOTE M - LOSS RELATED TO AIRCRAFT ACCIDENT
In December 1996, the Company suffered the loss of a DC-8-63 aircraft
during a routine maintenance check flight. There were no survivors among
the six persons aboard. Costs associated with the accident were
approximately $3,737,000 and include certain amounts for self insured
retention of workers' compensation, loss on the retirement of the aircraft
(net of insurance recoveries), and other costs specific to the accident.
Aircraft property insurance recoveries of $18,000,000 were received in
January 1997 and was classified with Prepaid Expenses and Other in the
Consolidated Balance Sheet at December 31, 1996.
To date, no significant actions have occurred nor is management
expecting or aware of any threatened litigation, claims, or other actions
specific to the accident which could have a material adverse effect on the
Company's financial condition or results of operations as of and for the
year ended December 31, 1997.
35
<PAGE>
<PAGE>
NOTE N - SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the issuance of $200,000,000 of Senior Notes
(Notes) certain of the Company's subsidiaries (collectively, "Guarantors")
have fully and unconditionally guaranteed, on a joint and several basis,
the Company's obligations to pay principal, premium, if any, and interest
with respect to the Notes. The Guarantors are ABX Air, Inc. (ABX) and
Airborne Forwarding Corporation (AFC), which are wholly-owned by the
Company, and Airborne FTZ, Inc. (FTZ) and Wilmington Air Park, Inc. (WAP),
which are wholly-owned subsidiaries of ABX. Non-guarantor subsidiaries'
assets, liabilities, revenues and net earnings are inconsequential both
individually and on a combined basis in comparison to the Company's
consolidated financial statement totals.
Management does not consider disclosure of separate subsidiary
financial statements for each Guarantor to be material. Summarized
financial information of the Guarantors on a combined basis is as follows
(in thousands):
<TABLE>
<CAPTION>
Balance Sheet Information:
December 31 1997 1996
----------- ---- ----
<S> <C> <C>
Current assets $ 45,103 $ 63,345
Property and equipment, net 784,555 739,470
Other noncurrent assets 7,487 11,469
Current liabilities 98,791 97,071
Long-term debt 20,559 20,940
Other noncurrent liabilities 94,424 87,284
Intercompany payable 377,019 426,878
</TABLE>
<TABLE>
<CAPTION>
Earnings Statement Information:
Year Ended December 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues - intercompany $900,428 $767,972 $668,592
Revenues - third-party 72,763 72,702 55,674
Operating expenses 873,213 778,392 662,632
Earnings from operations 99,978 62,282 61,634
Net earnings 64,239 27,229 28,704
</TABLE>
36
<PAGE>
<PAGE>
ABX is a certificated air carrier which owns and operates the domestic
express cargo services for which the Company is the sole customer. ABX
also offers air charter services on a limited basis to third-party
customers. FTZ owns certain aircraft parts inventory which it sells
primarily to ABX, with limited sales to third-party customers. FTZ is also
the holder of a foreign trade zone certificate at Wilmington airport
property. WAP is the owner of the Wilmington airport property which
includes the Company's main sort facility, aircraft maintenance facilities,
runways and related airport facilities and airline administrative and
training facilities. ABX is the only occupant and customer of WAP. AFC,
d.b.a. Sky Courier, provides expedited courier services and regional
logistics warehousing primarily to third-party customers.
Investment balances and revenues between Guarantors have been
eliminated for purposes of presenting the above summarized financial
information.
Intercompany revenues and net earnings recorded by ABX, FTZ, and WAP
are controlled by the Company and are based on various discretionary
factors. Intercompany payable amounts represent net amounts due the
Company by its Guarantors. The Company provides the Guarantors with a
majority of the cash necessary to fund operating and capital expenditure
requirements.
37
<PAGE>
<PAGE>
NOTE O - QUARTERLY RESULTS (Unaudited)
<TABLE>
The following is a summary of quarterly results of operations (in thousands
except per share data):
<CAPTION>
1st 2nd 3rd 4th
1997 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $655,522 $712,784 $788,598 $755,505
Earnings from Operations 32,321 54,970 83,911 54,053
Net Earnings Available
to Common Shareholders 14,374 28,287 46,619 30,792
Net Earnings per Common Share
Basic $ .34 $ .66 $ 1.05 $ .62
Diluted $ .31 $ .59 $ .94 $ .60
1996
----
Revenues $597,909 $622,398 $612,027 $651,972
Earnings from Operations 10,720 25,815 16,424 26,222
Net Earnings Available
to Common Shareholders 1,246 10,621 4,642 10,665
Net Earnings per Common Share
Basic $ .03 $ .25 $ .11 $ .25
Diluted $ .03 $ .24 $ .11 $ .24
</TABLE>
38
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Airborne Freight Corporation
Seattle, Washington
We consent to the incorporation by reference in Registration Statement Nos.
33-3713, 33-39720, 33-51651 and 33-58905 of Airborne Freight Corporation
and subsidiaries on Form S-8 of our reports dated February 13, 1998,
appearing in this Annual Report on Form 10-K of Airborne Freight
Corporation and subsidiaries for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Seattle, Washington
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,525
<SECURITIES> 0
<RECEIVABLES> 332,839
<ALLOWANCES> 10,290
<INVENTORY> 37,966
<CURRENT-ASSETS> 426,552
<PP&E> 1,830,793
<DEPRECIATION> 914,462
<TOTAL-ASSETS> 1,365,973
<CURRENT-LIABILITIES> 330,067
<BONDS> 250,559
0
0
<COMMON> 50,428
<OTHER-SE> 620,487
<TOTAL-LIABILITY-AND-EQUITY> 1,365,973
<SALES> 0
<TOTAL-REVENUES> 2,912,409
<CGS> 0
<TOTAL-COSTS> 2,687,154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,790
<INCOME-PRETAX> 197,465
<INCOME-TAX> 77,393
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,072
<EPS-PRIMARY> 2.68<F1>
<EPS-DILUTED> 2.44<F2>
<FN>
<F1>EARNINGS PER SHARE - BASIC (IN COMPLIANCE WITH SFAS 128)
<F2>EARNINGS PER SHARE - DILUTED (IN COMPLIANCE WITH SFAS 128)
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EPS RESTATED TO COMPLY WITH SFAS 128
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 10,678 13,857 22,156
<SECURITIES> 0 0 0
<RECEIVABLES> 312,059 315,608 355,414
<ALLOWANCES> 8,530 8,855 10,040
<INVENTORY> 36,617 37,734 36,693
<CURRENT-ASSETS> 390,177 401,771 443,941
<PP&E> 1,726,110 1,724,342 1,759,020
<DEPRECIATION> 862,222 859,337 878,734
<TOTAL-ASSETS> 1,282,006 1,290,998 1,348,751
<CURRENT-LIABILITIES> 275,398 294,422 321,408
<BONDS> 481,378 435,285 0
0 0 0
0 0 0
<COMMON> 43,281<F1> 43,371<F1> 50,230<F1>
<OTHER-SE> 402,826<F1> 430,375<F1> 588,254<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,282,006 1,290,998 1,348,751
<SALES> 0 0 0
<TOTAL-REVENUES> 655,522 1,368,306 2,156,904
<CGS> 0 0 0
<TOTAL-COSTS> 623,201 1,281,015 1,985,702
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 8,447 16,496 23,522
<INCOME-PRETAX> 23,874 70,795 147,680
<INCOME-TAX> 9,500 28,134 58,400
<INCOME-CONTINUING> 14,374 42,661 89,280
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 14,374 42,661 89,280
<EPS-PRIMARY> 0.34<F1><F2> 0.66<F1><F2> 1.05<F1><F2>
<EPS-DILUTED> 0.31<F1><F3> 0.59<F1><F3> 0.94<F1><F3>
<FN>
<F1> RESTATED TO REFLECT TWO-FOR-ONE STOCK SPLIT COMPLETED FEBRUARY 1998.
<F2> EARNINGS PER SHARE - BASIC (IN COMPLIANCE WITH SFAS 128)
<F3> EARNINGS PER SHARE - DILUTED (IN COMPLIANCE WITH SFAS 128)
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EPS RESTATED TO COMPLY WITH SFAS 128
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 17,906 35,816 12,163 12,362 10,765
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 267,158 295,860 267,998 270,990 269,276
<ALLOWANCES> 7,750 8,345 7,875 7,915 7,990
<INVENTORY> 33,792 34,761 33,039 35,645 35,221
<CURRENT-ASSETS> 352,128 415,222 345,857 350,836 344,607
<PP&E> 1,582,481 1,695,730 1,612,119 1,662,780 1,711,118
<DEPRECIATION> 739,778 829,103 775,404 808,162 844,604
<TOTAL-ASSETS> 1,217,384 1,307,422 1,211,361 1,230,548 1,234,985
<CURRENT-LIABILITIES> 260,529 273,765 247,310 248,436 241,435
<BONDS> 479,621 524,440 487,736 493,649 501,061
3,948 0 3,948 0 0
0 0 0 3,948 3,948
<COMMON> 42,796<F1> 43,243<F1> 42,889<F1> 42,899<F1> 42,899<F1>
<OTHER-SE> 363,519<F1> 388,587<F1> 363,554<F1> 372,687<F1> 375,739<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,217,384 1,307,422 1,211,361 1,230,548 1,234,985
<SALES> 0 0 0 0 0
<TOTAL-REVENUES> 2,239,351 2,484,306 597,909 1,220,307 1,832,334
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 2,170,370 2,405,125 587,189 1,183,772 1,779,375
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 29,347 33,236 8,341 16,532 24,875
<INCOME-PRETAX> 39,634 45,945 2,379 20,003 28,084
<INCOME-TAX> 15,814 18,500 1,065 8,000 11,370
<INCOME-CONTINUING> 0 0 0 12,003 16,714
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 23,820 27,445 1,246 11,867 16,509
<EPS-PRIMARY> 0.56<F1><F2> 0.64<F1><F2> 0.03<F1><F2> 0.25<F1><F2> 0.11<F1><F2>
<EPS-DILUTED> 0.55<F1><F3> 0.64<F1><F3> 0.03<F1><F3> 0.25<F1><F3> 0.11<F1><F3>
<FN>
<F1> RESTATED TO REFLECT TWO-FOR-ONE STOCK SPLIT COMPLETED FEBRUARY 1998.
<F2> EARNINGS PER SHARE - BASIC (IN COMPLIANCE WITH SFAS 128)
<F3> EARNINGS PER SHARE - DILUTED (IN COMPLIANCE WITH SFAS 128)
</FN>
</TABLE>
