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
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For the fiscal year ended Commission file number
December 31, 1998 1-6512
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AIRBORNE FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 91-0837469
(State of Incorporation) (I.R.S. Employer Identification No.)
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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:
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Name of each exchange
Title of each class on which registered
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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
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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.( )
As of February 22, 1999, 48,534,065 shares (net of 2,497,078 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 $1,966,311,000.(1)
Documents Incorporated by Reference
Portions of the 1998 Annual Report to Shareholders are incorporated by
reference into Part I and Part II.
Portions of the Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held April 27, 1999 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 22, 1999.
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
1998 FORM 10-K ANNUAL REPORT
Table of Contents
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Page
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Part I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 4a. Executive Officers of the Registrant 11
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 12
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and disagreements with Accountants on
Accounting and Financial Disclosure 13
Part III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management 14
Item 13. Certain Relationships and Related Transactions 14
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 15
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<PAGE> 1
PART I
ITEM 1. BUSINESS
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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
---------------------------------------------
Response to this Item is contained in Note K of the Notes to
Consolidated Financial Statements (contained in the 1998 Annual Report to
Shareholders and incorporated by reference herein).
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 290
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 59% of the Company's domestic
shipments during 1998, 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.
1
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 41% of
domestic shipments during 1998, 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.
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 14,800 radio-dispatched delivery vans and trucks, of
which approximately 5,900 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 14,000 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 1.2 million pieces during the primary 3-1/4 hour nightly sort
operation. On average, approximately 1.0 million pieces were sorted each
weekday night at the sort center during the fourth quarter of 1998.
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.
2
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. The Company has invested in sophisticated instrument
landing and radar systems and other equipment which is intended to limit
the effect bad weather may have on the Wilmington airport.
In the fourth quarter of 1998, approximately 50% and 24% of total
shipment weight was handled through the night sort and day sort operations
at Wilmington, respectively, with the remaining 26% being handled
exclusively by the regional hubs.
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 15 aircraft
that return to Wilmington from overnight service destinations on Tuesday
through Thursday. These aircraft, and trucks from five regional hubs,
arrive at Wilmington between 10:00 a.m. and 1:30 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 18
Company aircraft and by trucks.
Aircraft
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The Company currently utilizes pre-owned McDonnell Douglas DC-8 and
DC-9 aircraft and Boeing 767 aircraft. Upon acquisition, the aircraft are
modified by the Company. At the end of 1998, the Company's in-service
fleet consisted of a total of 110 aircraft, including 36 McDonnell Douglas
DC-8s (consisting of 13 series 61, 6 series 62 and 17 series 63), 71 DC-9s
(consisting of 2 series 10, 43 series 30 and 26 series 40), and 3 Boeing
767-200s. The Company owns the majority of the aircraft it operates, but
leases three DC-8 and seven DC-9 aircraft. The Company also owns three 767
and one DC-9 aircraft which are currently undergoing modifications and will
be placed in service in 1999. In addition, approximately 71 smaller
aircraft are chartered nightly to connect small cities with Company
aircraft that then operate to and from Wilmington.
3
In 1998, the Company introduced the Boeing 767-200 aircraft to its
operating fleet. During the year, 3 used 767-200's were placed in service.
The Company has commitments to acquire a total of 23 767-200 aircraft by
2003. 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.
During 1998, the nightly lift capacity of the system was increased by
approximately 117,000 pounds, reaching 3.9 million pounds at December 31,
1998. During 1998, the Company's average utilization of available lift
capacity approximated 75%.
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 767, DC-8 and DC-9 aircraft operated by the
Company) to comply with Stage 3 noise emission standards on or before
December 31, 1999 although the FAA may waive the final compliance deadline
for up to 15% of carriers fleet under certain circumstances. 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, 1998, the Company has complied with interim compliance
deadlines. As of December 31, 1998, 83% of the Company's turbojet aircraft
in service were Stage 3, the balance being Stage 2. In addition to FAA
regulation, certain local airports also regulate noise compliance. See
"Business - Regulation".
The 767 aircraft meet Stage 3 requirements and do not require any
noise-related modifications under the Noise Act. By the end of 1999, the
Company expects to convert to Stage 3 its remaining 11 DC-9 aircraft and at
least three of eight remaining Stage 2 DC-8-61 series aircraft. Total
capital costs expected to be expended in 1999 for these conversions is
approximately $27 million. Stage 3 compliance requirements have been met
on all DC-8-62 and DC-8-63 series aircraft. The Company has requested the
FAA to temporarily waive the application of the Noise Act with respect to
five DC-8-61 series aircraft. The Company cannot predict whether its
waiver application will be granted. If it is not granted, the Company
would evaluate other lift and replacement opportunities in conjunction with
its scheduled fleet expansion program.
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.
4
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, Netherlands, 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.
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, 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, 1998, the Company
serviced approximately 572,000 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
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 395
domestic representatives and approximately 90 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.
5
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
1998, the system was in use at approximately 10,200 domestic customer
locations and 500 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.
"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. LIGHTSHIP(R) Shipping and Tracking Software for Windows(R) allows
customers, working from their PCs, to obtain estimated shipping rates and
delivery times, prepare and print shipping labels, schedule pickups, and
track the status of their shipments. The Company's WORLD DIRECTORY
software provides a comprehensive catalog of worldwide shipping information
including customs requirements and delivery times among other useful
features.
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, locate drop boxes,
obtain information regarding the Company's service offerings and
documentation requirements, in addition to providing other useful
information about the Company. Future website developments will allow
customers to schedule pickups and create shipping labels online.
The Company offers a number of special logistics programs to customers
through Airborne Logistics Services ("ALS"), a division of ABX. 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.
6
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 100
locations around the United States and Canada.
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.
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 and Priority Mail Services 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, 1998, the Company and its subsidiaries had
approximately 14,300 full-time employees and 8,700 part-time and casual
employees. Approximately 6,800 full-time employees (including the
Company's 800 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 52% of the Company's union
ground personnel were renegotiated in 1998 for a term expiring in 2003.
Agreements covering most of the Company's remaining ground personnel either
expire in 1999 or are currently being renegotiated. 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 currently being negotiated will be renewed without disruption or
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:
7
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.
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 and
operation of its aircraft, 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.
8
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. In the case of Stage 3 aircraft, the
airport operator must obtain the carriers' or the government's 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 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.
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 48 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, 1998 is presented
in Note K (Segment Information) of the Notes to Consolidated Financial
Statements appearing in the 1998 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 290 domestic and 45
foreign stations, most of which are leased. The majority of the facilities
are located at or near airports.
9
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 1998 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
10
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 61 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 61 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 61 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 58 Executive Vice President, Marketing
Division (1980 to date); Senior Vice
President (1978 to 1980); Vice President
(1973 to 1978)
Raymond T. Van Bruwaene 60 Executive Vice President, Field Services
Division (1980 to date); Senior Vice
President (1978 to 1980); Vice President
(1973 to 1978)
John J. Cella 58 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 47 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>
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- ---------------------------------------------------------------
STOCKHOLDERS MATTERS
- --------------------
The response to this Item is contained in the 1998 Annual Report to
Shareholders and the information contained therein is incorporated herein
by reference.
On February 22, 1999 there were 1,306 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 1998 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 1998 Annual Report to
Shareholders and the information contained therein is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company is exposed to market risks in the ordinary course of its
business. These risks include interest rate risk, fuel price risk and
foreign exchange risk. The following is a description of these risks and a
discussion of the Company's exposure to changes in market rates and prices
and related effects on fair values, earnings and cashflows.
Interest Rate Risk
- ------------------
Indebtedness of the Company under its various borrowing arrangements
creates interest rate risk. The Company has outstanding long-term debt of
$249 million as of December 31, 1998. The Company does not have significant
exposure to changes in interest rates as the majority of its long-term debt
($207 million) carries interest rates which are fixed. Remaining long-term
debt ($42 million) carries variable interest rates which reprice
frequently. Management does not consider this repricing risk to be
significant. The Company does not currently use derivative financial
instruments to manage its interest rate risk.
The Company's sensitivity to interest rate risk can be quantified by
estimating the decrease in fair value of its long-term debt through a
hypothetical 10% increase in interest rates. As of December 31, 1998, a 10%
increase in interest rates would have decreased fair value of the Company's
long-term debt by approximately $6 million. The underlying fair value
before performing the hypothetical calculation was estimated principally
from quoted market prices for the same securities.
Foreign Currency Risk
- ---------------------
The Company's earnings are exposed to changes in the value of the U.S.
dollar relative to other foreign currencies due to the fact that the
Company's services are provided in a number of foreign markets. Currency
exposure may arise through the collection of revenues and payment of
expenses in these foreign markets. The Company currently does not use
derivative financial instruments to manage foreign currency risks.
12
Foreign currency rate sensitivity can be quantified by estimating the
decrease in earnings as a result of a hypothetical, uniform, 10%
strengthening in the value of the U.S. dollar relative to the currencies in
which the revenues and expenses are denominated. This calculation, while
ignoring the potential effect on revenue and expense levels resulting from
a significant change in foreign currency exchange rates, would result in an
approximately $5 million dollar increase in pretax earnings from operations
for the year ended December 31, 1998.
Jet Fuel Price Risk
- -------------------
The Company is inherently dependent on jet fuel to operate its fleet
of aircraft and accordingly earnings are impacted by changes in jet fuel
prices. For the year ended December 31, 1998 the Company consumed 182.5
million gallons of jet fuel at an average price of $.57 per gallon. Notes
A, B and G of the Notes to Consolidated Financial Statements (contained in
the 1998 Annual Report to Shareholders and incorporated by reference
herein) describe the accounting policy, fair value and additional
information regarding the Company's use of financial instruments to manage
jet fuel price risk.
Jet fuel price sensitivity can be quantified by estimating the
decrease in earnings as a result of a uniform increase in average jet fuel
prices applied against consumption. If jet fuel prices were to increase
10%, earnings would have decreased approximately $5 million, net of hedging
settlements.
The Company does not use derivative financial instruments for trading
purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The response to this Item is contained in the 1998 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
13
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 1999 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
1999 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
1999 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
14
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 1998 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
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
All 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 Bylaws
- ---------------------------------------------------
3(a) The Restated Certificate of Incorporation of the Company,
dated as of April 28, 1998 (incorporated by reference from
Exhibit 3 to the Company's Form 10-Q for the quarter ended
March 31, 1998).
3(b) The Bylaws 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).
15
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) Certificate of Adjustment relating to the Rights
Agreement (see 4(d) above, incorporated by reference to
Exhibit 4 to Amendment 1 to the Company's Registration
Statement on Form 8-A, filed with the Securities and Exchange
Commission on June 1, 1998).
4(g) 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 Corporation 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).
16
10(g) First Amendment to Airborne Freight Corporation
Director Stock Bonus Plan dated as of February 3, 1998.
10(h) Second Amendment to Airborne Freight Corporation
Director Stock Bonus Plan dated as of February 3, 1998.
10(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) $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(p) 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).
17
10(q) 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(r) 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.
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 1998 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, 1998.
EXHIBIT NO. 23 Consents of Experts and Counsel
- ----------------------------------------------
23 Independent Auditors' Consent
EXHIBIT NO. 27 Financial Data Schedule
- --------------------------------------
27 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
18
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 29, 1999
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)
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
EXHIBIT NO. 10 Material Contracts
- ----------------------------------
</TABLE>
<TABLE>
<S> <C>
10(g) First Amendment to Airborne Freight Corporation Director
Stock Bonus Plan dated as of February 3, 1998.
10(h) Second Amendment to Airborne Freight Corporation Director
Stock Bonus Plan dated as of February 3, 1998.
</TABLE>
EXHIBIT NO. 12 Statements Re Computation of Ratios
- ---------------------------------------------------
<TABLE>
<S> <C>
12 Statement re computation of ratio of total long-term debt
to total capitalization
</TABLE>
EXHIBIT NO. 13 Annual Report to Security Holders
- -------------------------------------------------
<TABLE>
<S> <C>
13 Portions of the 1998 Annual Report to Shareholders of
Airborne Freight Corporation
</TABLE>
EXHIBIT NO. 23 Consents of Experts and Counsel
- -----------------------------------------------
<TABLE>
<S> <C>
23 Independent Auditors' Consent
</TABLE>
EXHIBIT NO. 27 Financial Data Schedule
- ---------------------------------------
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
EXHIBIT 10(G)
FIRST AMENDMENT TO
AIRBORNE FREIGHT CORPORATION
DIRECTOR STOCK BONUS PLAN
Airborne Freight Corporation, a Delaware corporation, hereby amends
the terms of the Airborne Freight Corporation Director Stock Bonus Plan
(the "Plan") as follows:
Share Awards. Section 4 of the Plan is hereby amended by deleting
"$3,000" after "(a)" in line 7 and substituting therefor "$6,000".
Except as otherwise set forth herein, all terms of the Plan shall
remain in full force and effect.
This first amendment shall be effective this 3rd day of February,
1998.
AIRBORNE FREIGHT CORPORATION
By /s/ Robert S. Cline
----------------------
Robert S. Cline
Chairman and Chief Executive Officer
EXHIBIT 10(H)
SECOND AMENDMENT TO
AIRBORNE FREIGHT CORPORATION
DIRECTOR STOCK BONUS PLAN
Airborne Freight Corporation, a Delaware corporation, hereby amends
the terms of the Airborne Freight Corporation Director Stock Bonus Plan
(the "Plan") as follows:
Shares Available for the Plan. Section 10 of the Plan is hereby
amended by deleting "twenty thousand (20,000)" in line 2 and substituting
therefor "forty thousand (40,000)" .
Except as otherwise set forth herein, all terms of the Plan shall
remain in full force and effect.
This first amendment shall be effective this 3rd day of February,
1998.
AIRBORNE FREIGHT CORPORATION
By /s/ Robert S. Cline
----------------------
Robert S. Cline
Chairman and Chief Executive Officer
EXHIBIT 12
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
RATIO OF TOTAL LONG-TERM
DEBT TO TOTAL CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
(Dollars in thousands)
<S> <C>
LONG-TERM DEBT:
Revolving Credit Agreement $ --
Money Market Lines of Credit 29,000
Senior Notes 200,000
Refunding Revenue Bonds 13,200
Other 7,359
--------
250,559
Less Current Portion 410
--------
Total Long-term Debt $ 249,149
========
TOTAL CAPITALIZATION:
Long-term Debt $ 249,149
Deferred Income Taxes 88,838
Shareholders Equity, Net 769,152
--------
Total Capitalization $1,107,139
========
RATIO OF TOTAL LONG-TERM DEBT TO TOTAL CAPITALIZATION 22.5%
========
</TABLE>
<PAGE> 1
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 1998 and 1997:
<CAPTION>
Quarter High Low Dividend
- ------- ---- --- --------
<S> <C> <C> <C>
1998:
Fourth $35.781 $14.750 $ .0400
Third 35.625 17.438 .0400
Second 42.375 32.094 .0400
First 42.156 30.688 .0375
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
</TABLE>
1
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues
Domestic $2,712,344 $2,514,737 $2,108,670 $1,871,163 $1,660,003
International 362,181 397,672 375,636 368,188 310,756
---------- ---------- ---------- ---------- ----------
Total 3,074,525 2,912,409 2,484,306 2,239,351 1,970,759
Operating Expenses 2,840,058 2,687,154 2,405,125 2,170,370 1,881,821
---------- ---------- ---------- ---------- ----------
Earnings From Operations 234,467 225,255 79,181 68,981 88,938
Interest, Net 12,882 27,790 33,236 29,347 24,663
---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes 221,585 197,465 45,945 39,634 64,275
Income Taxes 84,300 77,393 18,500 15,814 25,440
---------- ---------- ---------- ---------- ----------
Net Earnings 137,285 120,072 27,445 23,820 38,835
---------- ---------- ---------- ---------- ----------
Preferred Stock Dividends -- -- 271 276 894
---------- ---------- ---------- ---------- ----------
Net Earnings Available $ 137,285 $ 120,072 $ 27,174 $ 23,544 $ 37,941
to Common Shareholders ========== ========== ========== ========== ==========
Net Earnings Per Common Share
Basic $ 2.77 $ 2.68 $ .64 $ .56 $ .92
========== ========== ========== ========== ==========
Diluted $ 2.72 $ 2.44 $ .64 $ .55 $ .87
========== ========== ========== ========== ==========
Dividends Per Common Share $ .16 $ .15 $ .15 $ .15 $ .15
========== ========== ========== ========== ==========
Weighted Average 49,620 44,883 42,266 42,100 41,289
Shares Outstanding ========== ========== ========== ========== ==========
FINANCIAL STRUCTURE:
Working Capital $ 102,531 $ 96,485 $ 141,457 $ 91,599 $ 66,871
Property and Equipment 1,021,885 916,331 866,627 842,703 766,346
Total Assets 1,501,577 1,365,973 1,307,422 1,217,384 1,078,506
Long-term Debt 249,149 250,559 409,440 364,621 279,422
Subordinated Debt -- -- 115,000 115,000 118,580
Redeemable Preferred Stock -- -- -- 3,948 5,000
Shareholders' Equity 769,152 670,915 431,830 406,315 387,398
NUMBER OF SHIPMENTS:
Domestic 316,590 297,032 254,234 225,553 187,460
International 6,451 5,699 5,036 4,592 3,954
---------- ---------- ---------- ---------- ----------
Total 323,041 302,731 259,270 230,145 191,414
========== ========== ========== ========== ==========
</TABLE>
2
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company achieved another record year for 1998 as revenues,
operating income, and net earnings all attained record levels. Shipment
growth was not as strong as the Company would have liked, due in part to a
less robust domestic economy. The shipment spike caused by the United
Parcel Service strike in 1997 also made the comparisons to last year
difficult. The Company is pleased with the strong financial performance
achieved despite the slower volume growth.
Net earnings available to common shareholders in 1998 increased to
$137.3 million, or $2.72 per share on a diluted basis, compared to $120.1
million, or $2.44 per share in 1997. The United Parcel Service strike is
estimated to have added $50 - $55 million in incremental domestic revenues
in 1997 and increased diluted earnings per share by $.28 - $.30.
<TABLE>
The following table is an overview of the Company's shipments, revenue
and weight trends for the last three years:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Number of Shipments (in thousands):
Domestic
Overnight 186,321 172,782 146,458
Next Afternoon Service 58,186 53,773 27,937
Second Day Service 71,724 70,138 79,541
100 lbs. and Over 359 339 298
------- ------- -------
Total Domestic 316,590 297,032 254,234
------- ------- -------
International
Express 6,017 5,223 4,500
Freight 434 476 536
------- ------- -------
Total International 6,451 5,699 5,036
------- ------- -------
Total Shipments 323,041 302,731 259,270
======= ======= =======
Average Pounds Per Shipment:
Domestic 4.3 4.5 4.5
International 42.6 51.2 54.6
Average Revenue Per Pound:
Domestic $ 1.96 $ 1.89 $ 1.83
International $ 1.31 $ 1.35 $ 1.34
Average Revenue Per Shipment:
Domestic $ 8.56 $ 8.45 $ 8.25
International $ 56.14 $ 69.78 $ 74.59
</TABLE>
3
Total revenues increased 5.6% in 1998, 17.2% in 1997, and 10.9% in
1996. Shipment volume grew to 323 million units in 1998, increasing 6.7%
compared to an increase of 16.8% in 1997 and 12.7% in 1996.
Domestic revenue increased 7.9% in 1998 on shipment growth of 6.6%,
compared to revenue growth of 19.3% in 1997 and 12.7% in 1996, and shipment
growth of 16.8% and 12.7% in 1997 and 1996, respectively. Domestic revenue
growth for 1998, although not as strong as 1997, continued to be positively
impacted by strong growth in higher yielding lower weight 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. The average revenue
per domestic shipment increased to $8.56 for 1998 compared to $8.45 for
1997 and $8.25 for 1996. During 1998, each sequential quarter experienced
an increase in the average revenue per domestic shipment. Domestic
revenues for 1997 included $15.5 million of fuel surcharge revenue which
was realized in the first half of the year. This fuel surcharge revenue
added approximately $.15 per share to 1997 operating results.
Overnight shipments accounted for over 58.9% of total domestic
shipments in 1998 compared to 58.2% in 1997 and 57.6% in 1996. The higher
yielding overnight shipments increased 7.8% in 1998 compared to 18.0% in
1997. Next Afternoon Service (NAS) shipments increased 8.2% while Second
Day Service (SDS) shipments increased 2.3% in 1998 compared to last year.
On a combined basis the NAS and SDS products increased 4.8% in 1998
compared to 15.3% in 1997. Beginning in 1995 and continuing into 1996, the
Company redefined its deferred service product through the creation of the
two distinct levels of service, NAS and 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.
4
International revenue decreased 8.9% in 1998 on shipment growth of
13.2% compared to revenue growth of 5.9% and 2.0% and shipment growth of
13.2% and 9.7% in 1997 and 1996, respectively. International revenue per
shipment and weight per shipment decreased in 1998 compared to last year as
a result of the continued decrease in higher yielding freight shipments.
This product has been negatively impacted over the past two years primarily
from slower global economic conditions prevailing, especially in parts of
Asia. Mitigating some of the weakness in freight volumes, the Company
experienced strong growth in its international express product, causing
gross margins on overall international business to remain relatively
stable. International express shipments increased 15.2% in 1998 compared
to 16.1% in 1997 and 11.5% in 1996. The international segment contribution
to earnings from operations was $1.5 million in 1998 compared to $3.8
million in 1997 and $6.9 million in 1996.
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 92.4% in
1998 compared to 92.3% in 1997 and 96.8% in 1996. Measuring cost
performance on a per shipment basis, total operating expenses per shipment
declined 1.0% in 1998 to $8.79, compared to $8.88 in 1997 and $9.28 in
1996. The Company achieved a 1.4% improvement in productivity in 1998, as
measured by shipments handled per paid employee hour, compared to 10.2%
improvement in 1997 and 1.9% in 1996. With slower volume growth in 1998,
productivity gains achieved were not as strong as experienced in 1997. A
strong focus on cost control, continuation of quality improvement programs,
along with a favorable price environment for aviation fuel, were
significant factors having an impact on 1998 operating costs.
Transportation purchased decreased as a percentage of revenues to
30.7% in 1998 compared to 31.7% in 1997 and 33.3% in 1996. This expense
category consists primarily of commercial airline costs, cartage costs
related to contracted pick-up and delivery, and trucking costs. The
decrease in 1998 was primarily due to commercial airline costs which were
lower in total and as a percentage of total revenues due to the decline in
international freight shipments. Also, the suspension in early 1996 and
eventual reinstatement in 1997 of the Federal Aviation Excise Tax 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, with no comparable cost reduction realized in 1998.
Station and ground expense as a percentage of revenues was 29.8% in
1998 compared to 29.5% in 1997 and 31.5% in 1996. The slight increase in
this category as a percentage of revenues in 1998 compared to 1997 was
primarily the result of lower productivity improvements in 1998. However,
overall productivity gains in pick-up and delivery, customer service and
terminal operations over the past three years have been instrumental in
partially offsetting the effect of increased wages and costs incurred to
accommodate the growth in shipments and expand service while maintaining
service integrity.
5
Flight operations and maintenance expense as a percentage of revenues
was 15.5% in 1998 compared to 14.8% in 1997 and 15.6% in 1996. The impact
of lower aviation fuel prices was offset by higher aircraft maintenance and
flight crew costs in 1998 compared to 1997. Costs associated with periodic
aircraft maintenance as a percentage of revenues were lower in 1997 versus
1998, due to fewer maintenance checks performed. The average aviation fuel
price, exclusive of fuel hedge settlements, was $.57 per gallon in 1998,
compared to $.73 per gallon in 1997, and $.75 per gallon in 1996. Aviation
fuel consumption increased 7.5% to 182.5 million gallons in 1998 compared
to a 5.7% increase in consumption in 1997 over 1996. 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 incurred
settlement expense equivalent to approximately $.04 per gallon in 1998
compared to settlement benefits realized of approximately $.01 per gallon
in 1997 and $.02 per gallon in 1996.
General and administrative expense as a percentage of revenues was
8.0% in 1998 and 1997 and 7.3% in 1996. The increase as a percentage of
revenues in this category in 1997 compared to 1996 was primarily due to
incremental profit sharing and management incentive compensation costs
resulting from the significant improvement in operating results over 1996.
Sales and marketing costs were 2.3% of revenues in 1998 compared to
2.4% in 1997 and 1996. 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
increased to 6.0% in 1998 compared to 5.8% in 1997 and 6.6% in 1996. Total
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 nonrecurring charge of
$3.7 million related to the loss of a DC-8-63 aircraft destroyed in an
accident in December 1996.
INTEREST EXPENSE decreased 53.6% in 1998 compared to 1997, primarily
as the result of the significantly lower level of average outstanding
borrowings during 1998 and to the higher level of capitalized interest.
Interest capitalized in 1998 of $5.9 million was primarily related to the
acquisition and modification of several 767-200 aircraft and compares to
capitalized interest of $1.9 million in 1997 and $1.7 million in 1996. The
Company anticipates the level of capitalized interest in 1999 to be
comparable to the 1998 amount.
INCOME TAXES for 1998 resulted in an effective tax rate of 38.0%
compared to 39.2% in 1997 and 40.3% in 1996. The comparatively lower tax
rate in 1998 was primarily due to a lower effective state tax rate. The
Company anticipates that the tax rate for 1999 will be in the 38.5% to
39.0% range.
6
Looking ahead, it is difficult at this point to project a trend for
all of 1999 regarding volume growth, but we are anticipating the
continuation of modest shipment growth. 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 1999 and beyond.
YEAR 2000 ISSUE:
The Company has implemented a compliance program to address the
challenges Year 2000 issues may present to its business. This program
includes computer systems and applications operated by the Company,
computer systems of third parties upon whose data or functionality the
Company relies, and certain other fixed assets, including aircraft, which
contain date sensitive technology critical to their operation.
Modifications to the Company's critical operational and financial
systems and conversions to new software were substantially complete at the
end of 1998. Testing of these critical systems and software as well as
remediation efforts and related testing on less critical applications are
scheduled to be completed before July 1999.
As part of the compliance program, the Company has also initiated
communications with third parties - primarily customers, vendors, airport
authorities, and other governmental agencies (domestic and foreign),
including the Federal Aviation Administration - whose failure to have Year
2000 compliant systems could have an adverse impact on the Company's
operations. The Company is scheduling testing of customer interfaces of
shipment information as this data is critical to providing services and
billing.
Although the Company does not believe the Year 2000 issue will have a
material impact on its operations, there can be no guarantee that the
Company's or any third party's Year 2000 remediation efforts will be fully
compliant. If noncompliance is extensive and involves some form of
temporary suspension of operations, this could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In an attempt to mitigate the risk of noncompliance, the Company is in
the process of developing contingency plans regarding critical systems
should they fail to become Year 2000 compliant. These plans are focusing on
the Company's own critical operational and financial systems as well as
customer interfaces of shipment information. Contingency plans covering
the failure of material third party systems will also be developed as their
status of readiness becomes fully known.
7
Management estimates the total cost of the Year 2000 compliance
program to be approximately $3.2 million, of which $1.2 million has been
incurred through December 31, 1998. Total information technology costs
are not expected to differ from the normal recurring costs that are
incurred for systems development, in part due to the reallocation of
internal resources and the deferral of other projects. These costs could
differ if either the scope or schedule of the compliance program is
altered.
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 $283 million in 1998 compared to $207 million in 1997 and $193 million
in 1996. A significant portion of these expenditures has been related to
the acquisition and modification of aircraft and related flight equipment.
The Company acquired four used Boeing 767-200 aircraft and one
McDonnell Douglas DC-9 aircraft in 1998. A total of five Company-owned
aircraft were placed into service during the year, made up of three 767's
and two DC-9's. At the end of 1998, there were 110 aircraft in service,
consisting of three 767's, 36 DC-8's, and 71 DC-9's. In addition, there
were four aircraft in modification status including three recently acquired
767 aircraft. Other capital expenditures in 1998 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 computer equipment.
Capital expenditures will continue to be a significant factor
affecting financial condition in 1999. The Company anticipates 1999
capital expenditures of approximately $365 million. A significant portion
of the 1999 capital investment is for the acquisition of six 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 eight
aircraft, five 767's and three DC-9's, are expected to be placed in service
in 1999.
During 1998, the Company committed to acquire 11 additional 767-200
aircraft, bringing the totals of future commitments to 17 aircraft,
including the six aircraft which will be delivered in 1999. The remaining
767 aircraft are to be delivered between the years 2000 and 2003. The
Company is also pursuing additional commitments for at least seven used
767's for delivery within this same time range.
LIQUIDITY AND CAPITAL RESOURCES: Liquidity for financing capital
expenditures in 1998 came primarily from internally generated cash provided
by operations. Cash provided by operations net of changes in working
capital was approximately $345 million in 1998 and in 1997 compared to $196
million in 1996. Additional liquidity during the year was provided by the
revolving bank credit agreement.
8
For the past two years, 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 $55 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 1998 and 1997. At December 31,
1998, a total of $29.0 million was owing under the revolving bank credit
and money market agreements compared to $30.0 million outstanding at
December 31, 1997, and $188.5 million outstanding at December 31, 1996.
In August 1998, the Board of Directors authorized a stock repurchase
program for up to 2 million shares of the Company's common stock. The
Company accomplished the repurchase of 2 million shares by the end of
September for approximately $38.8 million. These shares were added to the
Company's treasury stock.
In November 1998, the Board of Directors authorized a second stock
repurchase program for up to 4 million shares of the Company's common
stock. All shares may be acquired, at management's discretion, over time on
the open market. Shares repurchased will not be retired or canceled, but
will be held as treasury stock.
The Company's ratio of total long-term debt to total capitalization
was 22.5% at December 31, 1998, compared to 25.4% at December 31, 1997. The
debt-to-capitalization ratio is not expected to change significantly during
1999 as anticipated cash flow from operations should provide the majority
of the liquidity for projected 1999 capital expenditures.
In management's opinion, the available capacity under the bank credit
agreements coupled with anticipated internally generated cash flow from
1999 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
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, 1998 and
1997, and the related consolidated statements of net earnings, cash flows
and shareholders' equity for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements 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 the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
- -------------------------
DELOITTE & TOUCHE LLP
February 12, 1999
Seattle, Washington
10
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
REVENUES:
Domestic $2,712,344 $2,514,737 $2,108,670
International 362,181 397,672 375,636
---------- ---------- ----------
3,074,525 2,912,409 2,484,306
OPERATING EXPENSES:
Transportation purchased 944,357 922,885 827,997
Station and ground operations 914,919 858,238 781,867
Flight operations and maintenance 477,799 431,474 386,961
General and administrative 247,103 234,366 181,353
Sales and marketing 71,354 70,346 59,565
Depreciation and amortization 184,526 169,845 163,645
Loss related to aircraft accident -- -- 3,737
---------- ---------- ----------
2,840,058 2,687,154 2,405,125
---------- ---------- ----------
EARNINGS FROM OPERATIONS 234,467 225,255 79,181
INTEREST, NET 12,882 27,790 33,236
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 221,585 197,465 45,945
INCOME TAXES 84,300 77,393 18,500
---------- ---------- ----------
NET EARNINGS 137,285 120,072 27,445
PREFERRED STOCK DIVIDENDS -- -- 271
---------- ---------- ----------
NET EARNINGS AVAILABLE $ 137,285 $ 120,072 $ 27,174
TO COMMON SHAREHOLDERS ========== ========== ==========
NET EARNINGS PER COMMON SHARE:
Basic $ 2.77 $ 2.68 $ .64
========== ========== ==========
Diluted $ 2.72 $ 2.44 $ .64
========== ========== ==========
DIVIDENDS PER COMMON SHARE $ .16 $ .15 $ .15
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
11
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31 1998 1997
- ----------- ---- ----
(In thousands)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash $ 18,679 $ 25,525
Trade accounts receivable, less allowance of
$10,140,000 and $10,290,000 323,178 322,549
Spare parts and fuel inventory 39,726 37,966
Deferred income tax assets 28,508 14,530
Prepaid expenses and other 25,697 25,982
---------- ----------
TOTAL CURRENT ASSETS 435,788 426,552
PROPERTY AND EQUIPMENT, NET 1,021,885 916,331
EQUIPMENT DEPOSITS AND OTHER ASSETS 43,904 23,090
---------- ----------
TOTAL ASSETS $1,501,577 $1,365,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 153,000 $ 143,966
Salaries, wages and related taxes 77,030 80,154
Accrued expenses 93,997 100,126
Income taxes payable 8,820 5,440
Current portion of debt 410 381
---------- ----------
TOTAL CURRENT LIABILITIES 333,257 330,067
LONG-TERM DEBT 249,149 250,559
DEFERRED INCOME TAX LIABILITIES 88,838 65,322
OTHER LIABILITIES 61,181 49,110
SHAREHOLDERS' EQUITY:
Preferred stock, without par value -
Authorized 5,200,000 shares, no shares issued
Common stock, par value $1 per share -
Authorized 120,000,000 shares
Issued 50,818,493 and 50,428,548 50,819 50,428
Additional paid-in capital 293,629 287,209
Retained earnings 463,539 334,083
Accumulated other comprehensive income 766 --
---------- ----------
808,753 671,720
Treasury stock, 2,497,078 and
522,300 shares, at cost (39,601) (805)
---------- ----------
769,152 670,915
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,501,577 $1,365,973
========== ==========
</TABLE>
See notes to consolidated financial statements.
12
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $137,285 $120,072 $ 27,445
Adjustments to reconcile net earnings
to net cash provided
by operating activities:
Depreciation and amortization 168,029 156,233 151,538
Provision for aircraft
engine overhauls 16,497 13,612 12,107
Deferred income taxes 9,538 24,988 3,697
Loss related to aircraft accident -- -- 3,737
Other 12,256 13,076 8,027
-------- -------- --------
CASH PROVIDED BY OPERATIONS 343,605 327,981 206,551
Change in:
Receivables (629) (35,034) (28,107)
Inventories and prepaid expenses (1,475) (5,069) (200)
Accounts payable 9,034 4,930 2,049
Accrued expenses, salaries
and taxes payable (5,532) 52,444 16,118
NET CASH PROVIDED BY -------- -------- --------
OPERATING ACTIVITIES 345,003 345,252 196,411
INVESTING ACTIVITIES:
Additions to property and equipment (285,481) (211,758) (173,157)
Disposition of property and equipment 2,598 4,451 694
Expenditures for engine overhauls (22,846) (10,614) (15,000)
Proceeds from insurance on aircraft
accident -- 18,000 --
Investment in aircraft destroyed
in accident -- -- (21,232)
Other (4,584) (27) (3,309)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (310,313) (199,948) (212,004)
FINANCING ACTIVITIES:
Proceeds (payments) on bank notes, net (1,000) (158,500) 45,200
Principal payments on debt (381) (436) (5,818)
Repurchase of common stock (38,835) -- --
Proceeds from common stock issuance 6,509 10,104 734
Dividends paid (7,829) (6,763) (6,613)
-------- -------- --------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (41,536) (155,595) 33,503
-------- -------- --------
NET (DECREASE) INCREASE IN CASH (6,846) (10,291) 17,910
CASH AT BEGINNING OF YEAR 25,525 35,816 17,906
-------- -------- --------
CASH AT END OF YEAR $ 18,679 $ 25,525 $ 35,816
======== ======== ========
</TABLE>
13
<TABLE>
<CAPTION>
SUPPLEMENTAL CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid during the year -
Interest, net of amount capitalized $13,227 $ 32,768 $ 33,234
Income taxes 68,301 46,641 16,674
Noncash financing activities -
Contribution of treasury stock to
profit sharing plans 341 1,100 --
Conversion of subordinated debentures -- 114,572 --
Conversion of redeemable
preferred stock -- -- 3,948
</TABLE>
See notes to consolidated financial statements.
14
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
------ ------- -------- ------------- -------- -----
(In thousands)
<S> <C> <C> <C> <C>
BALANCE at JANUARY 1, 1996 $42,796 $164,549 $199,941 $ -- $ (971) $406,315
Net earnings available to common shareholders 27,174 27,174
Conversion of redeemable preferred stock 337 3,610 3,947
Common stock dividends paid (6,341) (6,341)
Exercise of stock options 110 625 735
------- -------- -------- ---- -------- --------
BALANCE at DECEMBER 31, 1996 $43,243 $168,784 $220,774 $ -- $ (971) $431,830
Net earnings available to common shareholders 120,072 120,072
Conversion of subordinated debt 6,474 108,099 114,573
Common stock dividends paid (6,763) (6,763)
Exercise of stock options 711 9,349 43 10,103
Contribution of treasury stock to profit sharing plans 977 123 1,100
------- -------- -------- ---- -------- --------
BALANCE at DECEMBER 31, 1997 $50,428 $287,209 $334,083 $ -- $ (805) $670,915
Comprehensive income:
Net earnings available to common shareholders 137,285 137,285
Other comprehensive income, net of tax -
Unrealized securities gains 947 947
Foreign currency translation adjustments (181) (181)
------- -------- -------- ---- -------- --------
Total comprehensive income -- -- 137,285 766 -- 138,051
Common stock dividends paid (7,829) (7,829)
Repurchase of common stock (38,835) (38,835)
Exercise of stock options 391 6,093 25 6,509
Contribution of treasury stock to profit sharing plans 327 14 341
------- -------- -------- ---- -------- --------
BALANCE at DECEMBER 31, 1998 $50,819 $293,629 $463,539 $766 $(39,601) $769,152
======= ======== ======== ==== ======== ========
</TABLE>
See notes to consolidated financial statements.
15
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING 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, 1998, the Company had approximately 10,600
employees (46% of total employees), including approximately 800 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 becomes amendable on July 31, 2001. Labor
agreements covering approximately 52% of the Company's ground personnel
were renegotiated in 1998 for a term expiring in 2003. Agreements covering
most of the Company's remaining ground personnel either expire in 1999 or
are currently being renegotiated. 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.
16
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 $47,063,000 and $29,311,000 are
included in accounts payable at December 31, 1998 and 1997, 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. Beginning in 1999, once an aircraft has been
depreciated to its residual value, the residual value will be depreciated
over 7 years for DC-8 aircraft and 10 years for DC-9 aircraft. 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.
17
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 $5,850,000, $1,869,000, and $1,728,000 for 1998,
1997 and 1996, 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.
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.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which will be effective for
fiscal year 2000. SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
Under the cash flow hedge provisions of SFAS No. 133, the Company will
be required to record its fuel contracts at fair value, with corresponding
changes in fair value recorded as a component of Other Comprehensive
Income. The Company has not adopted the provisions of SFAS No. 133 as of
December 31, 1998. However, if the provisions of the statement had been
adopted, a cumulative charge of $2,564,000, net of tax, would have been
recorded to Accumulated Other Comprehensive Income and a charge to Other
Comprehensive Income of approximately $1,912,000 would have been reported
for the year ended December 31, 1998.
18
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130) effective January 1,
1998. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in financial statements.
Comprehensive income includes net income and "other comprehensive income"
which includes changes in equity arising during the period from holding
investments in marketable securities and foreign joint ventures. Prior to
adoption of the SFAS No. 130, management did not consider comprehensive
income items to be material to shareholders' equity, and accordingly, no
amounts have been recorded previously.
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
1998.
19
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 1998 1997
- ----------- ---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Marketable securities $ 16,087 $ 16,087 $ -- $ --
Long-term debt 249,149 260,707 250,559 262,233
Off-balance sheet-derivative:
Fuel contracts -- (4,169) -- (1,060)
</TABLE>
Marketable securities are considered available-for-sale securities for
financial reporting purposes and are classified with Equipment Deposits and
Other Assets on the Consolidated Balance Sheets. Fair value for these
investments is based on quoted market prices for the same securities.
Unrealized holding gains on these securities, which are included in Other
Comprehensive Income, were $1,540,000 as of December 31, 1998. Realized
gains recognized in 1998 were $1,531,000.
Discussion regarding the fair value of the Company's long-term debt
and fuel contracts is disclosed in the respective notes to the consolidated
financial statements. Carrying amounts for cash, trade accounts
receivable, and current liabilities approximate fair value.
20
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consists of the following (in thousands):
<CAPTION>
December 31 1998 1997
- ----------- ---- ----
<S> <C> <C>
Flight equipment $1,430,880 $1,230,232
Land, buildings and leasehold improvements 232,669 226,628
Package handling and ground support equipment 153,921 133,624
Vehicles and other equipment 256,930 240,309
---------- ----------
2,074,400 1,830,793
Accumulated depreciation and amortization (1,052,515) (914,462)
---------- ----------
$1,021,885 $ 916,331
========== ==========
</TABLE>
NOTE D - ACCRUED EXPENSES
<TABLE>
Accrued expenses consist of the following (in thousands):
<CAPTION>
December 31 1998 1997
- ----------- ---- ----
<S> <C> <C>
Insurance accruals $ 27,289 $ 20,713
Profit sharing retirement plan 20,407 26,613
Unearned revenues 15,514 13,024
Property and other taxes 8,978 9,971
Aircraft lease payments 7,780 10,557
Other retirement plans 4,302 10,492
Interest 2,508 2,572
Other 7,219 6,184
------- -------
$ 93,997 $ 100,126
======= =======
</TABLE>
21
NOTE E - INCOME TAXES
<TABLE>
Deferred income tax assets and liabilities consist of the following (in
thousands):
<CAPTION>
December 31 1998 1997
- ----------- ---- ----
<S> <C> <C>
Employee benefits $ 14,586 $ 10,798
Insurance accruals 9,299 6,450
Bad debts, sales reserves and other 4,623 5,507
Union pension benefits -- (8,225)
-------- --------
Current net deferred income tax assets 28,508 14,530
-------- --------
Depreciation and amortization 98,421 90,931
Capitalized aircraft expenses 10,708 6,773
Insurance accruals (10,161) (10,832)
Aircraft engine overhaul accrual (6,566) (8,746)
Alternative Minimum Tax credit -- (11,761)
Employee benefits and other (3,564) (1,043)
-------- --------
Noncurrent net deferred income tax liabilities 88,838 65,322
-------- --------
Net deferred income tax liabilities $ 60,330 $ 50,792
======== ========
</TABLE>
22
<TABLE>
Income taxes consist of the following (in thousands):
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $66,372 $41,463 $12,361
State 7,800 10,443 1,900
Foreign 590 499 542
------- ------- -------
74,762 52,405 14,803
Deferred:
Alternative Minimum Tax credit 11,761 21,417 (4,830)
Depreciation and amortization 7,490 6,701 9,955
Aircraft engine overhaul accrual 2,180 (1,634) 1,027
Union pension benefits (8,225) 1,990 1,648
Employee benefits (6,240) (2,449) (2,515)
Insurance accruals (2,178) (3,342) (2,811)
Other 4,750 2,305 1,223
------- ------- -------
9,538 24,988 3,697
------- ------- -------
$84,300 $77,393 $18,500
======= ======= =======
</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 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Taxes computed at statutory rate of 35% $77,555 $69,113 $16,081
State and foreign income taxes,
net of Federal benefit 5,070 6,788 1,288
Tax effect of nondeductible expenses 1,647 1,549 1,185
Other 28 (57) (54)
------- ------- -------
$84,300 $77,393 $18,500
======= ======= =======
</TABLE>
23
NOTE F - LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following:
<CAPTION>
December 31 1998 1997
- ----------- ---- ----
(In thousands)
<S> <C> <C>
Money market lines of credit, effective rate
of 5.9% on December 31, 1998 $ 29,000 $ 30,000
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
4.1% on December 31, 1998, due June 2011 13,200 13,200
Other 7,359 7,740
-------- --------
249,559 250,940
Less current portion 410 381
-------- --------
$249,149 $250,559
======== ========
</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 1998,
1997, and 1996, including net worth restrictions which limit the payment of
dividends ($396,378,000 of retained earnings was not restricted at
December 31, 1998).
The Company has available $55,000,000 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 5.7% for 1998. 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.
24
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 3.5% during 1998.
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 $52,243,000 at December 31,
1998.
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.
The scheduled annual principal payments on long-term debt for the next
five years are $410,000, $442,000, $29,476,000, $100,513,000 and $553,000
for 1999 through 2003, respectively.
The fair value information shown in Note B reflects values for the
Company's senior notes 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 1998, 1997, and 1996 was $117,862,000, $115,350,000, and
$105,331,000, respectively.
<TABLE>
Rental commitments under long-term operating leases at December 31, 1998
total $422,678,000 and are payable as follows (in thousands):
<CAPTION>
Facilities Equipment
---------- ---------
<S> <C> <C>
1999 $ 70,449 $19,678
2000 66,447 9,399
2001 56,869 2,970
2002 48,328 1,027
2003 38,989 582
2004 and beyond 107,872 68
</TABLE>
25
COMMITMENTS
The Company has entered into firm agreements to purchase 17 used
Boeing 767s, related 767 freighter conversion kits and two McDonnell
Douglas DC-9 aircraft at various dates through 2003. Additionally, the
Company has exercised options to purchase in 1999 four leased DC-9 aircraft
it currently operates. The Company also has commitments in 1999 to
purchase 14 Stage III hush kits for its DC-8 and DC-9 aircraft. At
December 31, 1998, cash deposits of $10,686,000 had been made toward these
purchases. Additional deposits and payments for these acquisitions will
approximate $130,132,000, $80,766,000, $86,304,000, $57,000,000, and
$39,400,000 for 1999 through 2003, respectively.
The Company has outstanding fuel contracts, some extending through
November 1999, covering a monthly notional sum of between 5.0 million to
7.5 million gallons, which represents between 33% and 50% of prospective
average monthly consumption of jet fuel. Settlement payments related to
these contracts of $7,915,000 were made during 1998, and settlement
payments of $1,682,000 and $3,016,000 were received during 1997 and 1996,
respectively. The fair market value of these contracts, as computed by the
counterparties, was a liability of approximately $4,169,000 and $1,060,000
at December 31, 1998 and 1997, respectively.
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
adverse effect on the Company's financial condition or results of
operations as of and for the year ended December 31, 1998.
NOTE H - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits". SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans.
The Company sponsors defined benefit and defined contribution pension plans
and postretirement healthcare plans. These plans are generally provided to
employees who are not covered by multi-employer plans to which the Company
contributes under terms of various collective bargaining agreements.
26
<TABLE>
Information regarding the Company's qualified and nonqualified defined benefit
pension plans and postretirement healthcare plans is as follows (in thousands):
<CAPTION>
Postretirement
Pension Plans Healthcare Plans
------------- ----------------
Year Ended December 31 1998 1997 1998 1997
- ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Obligation as of January 1 $108,062 $ 71,280 $ 7,189 $ 5,039
Service cost 11,625 10,838 954 751
Interest cost 7,333 6,243 529 373
Benefits paid (892) (603) (199) (125)
Plan amendments -- 4,149 -- --
Actuarial loss 1,849 15,907 761 1,151
Plan transfers 178 248 -- --
-------- -------- ------- -------
Obligation as of December 31 $128,155 $108,062 $ 9,234 $ 7,189
======== ======== ======= =======
Reconciliation of fair value of plan assets:
Plan assets as of January 1 $ 60,889 $ 42,640 $ -- $ --
Actual return on plan assets 8,810 8,882 -- --
Employer contributions 9,252 9,722 199 125
Benefits paid (892) (603) (199) (125)
Plan transfers 178 248 -- --
-------- -------- ------- -------
Plan assets as of December 31 $ 78,237 $ 60,889 $ -- $ --
======== ======== ======= =======
Funded status:
Funded status as of December 31 $(49,918) $(47,172) $(9,234) $(7,189)
Unrecognized prior service cost (1,027) (871) -- --
Unrecognized net actuarial loss 23,368 26,744 1,377 644
Unrecognized transition amount 59 89 -- --
-------- -------- ------- -------
Accrued benefit liabilities $(27,518) $(21,210) $(7,857) $(6,545)
======== ======== ======= =======
</TABLE>
27
Accrued Liabilities on the Consolidated Balance Sheets include accrued
pension benefit liabilities of $4,303,000 and $10,482,000 as of December 31,
1998 and 1997, respectively. Other Liabilities include postretirement
healthcare and remaining pension liabilities of $31,072,000 and $17,273,000 as
of December 31, 1998 and 1997, respectively, which do not require funding in the
next year.
The Company's nonqualified pension plans and one qualified plan have
accumulated benefit obligations in excess of plan assets. The Company has
invested in certain commingled investment funds which may be used for funding
nonqualified pension plan obligations. Postretirement healthcare plan
obligations also have not been funded.
<TABLE>
The following table provides aggregate information for pension plans with
accumulated benefit obligations in excess of plan assets (in thousands):
<CAPTION>
Year Ended December 31 1998 1997
- ---------------------- ---- ----
<S> <C> <C>
Aggregate accumulated benefit obligation - qualified plan $35,750 $31,767
Aggregate accumulated benefit obligation - nonqualified plans 10,971 6,885
Aggregate fair value of plan assets - qualified plan 34,816 24,432
</TABLE>
<TABLE>
Net periodic benefit cost consists of the following components (in thousands):
<CAPTION>
Postretirement
Pension Plans Healthcare Plans
------------- ----------------
Year Ended December 31 1998 1997 1996 1998 1997 1996
- ---------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $11,625 $10,838 $ 8,295 $ 954 $ 751 $ 695
Interest cost 7,333 6,243 4,525 529 373 345
Expected return on plan assets (5,363) (3,851) (2,700) -- -- --
Net amortization and deferral 1,964 1,821 1,802 29 (44) 26
------- ------- ------- ------- ------- -------
Net periodic benefit cost $15,559 $15,051 $11,922 $ 1,512 $ 1,080 $ 1,066
======= ======= ======= ======= ======= =======
</TABLE>
28
<TABLE>
Assumptions used in determining pension and postretirement healthcare
obligations were as follows:
<CAPTION>
Postretirement
Pension Plans Healthcare Plans
------------- ----------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Expected return on plan assets 8.00% 8.00% 8.00% -- -- --
Rate of compensation increase (pilots) 6.50% 6.50% 6.50% -- -- --
Rate of compensation increase (nonpilots) 5.00% 5.00% 5.00% -- -- --
</TABLE>
The assumed healthcare cost trend rate used in measuring postretirement
healthcare benefit costs was 7% for 1998, decreasing each 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, 1998.
29
The Company maintains defined contribution capital accumulation and profit
sharing plans. Capital accumulation plans (401K) are funded by both voluntary
employee salary deferrals of up to 16% of annual compensation and by employer
matching contributions on employee salary deferrals up to 6% of annual
compensation. 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 profit sharing
plans hold 977,569 shares of the Company's common stock at December 31, 1998,
representing 2% of outstanding shares. Expense for these plans is as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Capital accumulation plans $ 7,375 $ 5,499 $ 4,987
Profit sharing plans 20,407 26,613 3,459
------- ------- -------
Defined contribution plans $27,782 $32,112 $ 8,446
======= ======= =======
</TABLE>
The Company contributes to multi-employer defined benefit pension plans and
health and welfare plans for substantially all employees covered under
collective bargaining agreements. Expense for these plans is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Multi-employer defined benefit pension plans $37,309 $34,106 $28,773
Multi-employer health and welfare plans 41,473 38,499 34,474
------- ------- -------
Multi-employer plans $78,782 $72,605 $63,247
======= ======= =======
</TABLE>
30
NOTE I - STOCK OPTIONS
The Company has four shareholder approved stock option plans. Three
of these plans, approved by the shareholders in 1989, 1994 and 1998 (the
"1989 Plan", "1994 Plan" and "1998 Plan"), reserve shares of the Company's
common stock for issuance to officers and key employees. Options granted
under the 1989 Plan and 1994 Plan vest over a three year period. Options
granted under the 1998 Plan include 484,280 options which vest over a four
year period and 268,000 performance options issued to the Company's
executive officers. The performance options vest in four installments
contingent upon attainment of specified market price targets of the
Company's common stock. A specific plan for the Company's nonemployee
directors provides for annual grants of 2,000 shares which vest six months
from the date of grant. Options granted under these four plans are issued
at the fair market value of the Company's stock on the date of grant. A
total of 9,507,250 shares may be granted under these plans of which
5,402,360 are available for future grants at December 31, 1998.
<TABLE>
A summary of the Company's stock option activity and related information is
as follows:
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 2,189,014 2,555,186 2,269,360
Granted 766,280 442,580 436,920
Exercised (423,697) (797,578) (127,318)
Canceled (15,180) (11,174) (23,776)
--------- --------- ---------
Outstanding at end of year 2,516,417 2,189,014 2,555,186
========= ========= =========
Exercisable at end of year 1,297,300 1,178,058 1,656,744
========= ========= =========
</TABLE>
31
<TABLE>
Weighted average option price information is as follows:
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year $12.22 $11.61 $11.06
Granted 34.90 13.63 13.00
Exercised 10.44 11.04 6.31
Canceled 20.07 12.94 13.34
Outstanding at end of year 19.38 12.22 11.61
Exercisable at end of year 14.54 11.53 10.73
</TABLE>
<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, 1998 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>
$ 6.38-$11.56 702,223 $10.40 3.5 702,223 $10.40 3.5
$13.00-$18.88 1,052,214 14.13 6.7 441,277 15.12 5.3
$31.06-$36.97 761,980 34.89 9.0 153,800 31.82 9.0
</TABLE>
<TABLE>
The Company has elected to follow APB Opinion No. 25 in accounting for its
stock option plans. Compensation expense of $1,198,000 was recognized in
1998 upon attainment of market price targets as specified under the grant
of the performance options. No compensation expense was recorded in 1997
or 1996. Had expense been measured under the fair value provisions of SFAS
No. 123, the Company's Net Earnings Available to Common Shareholders and
Earnings Per Share for 1998, 1997, and 1996 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 attributable to options
granted prior to 1995.
32
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Net Income Available to Common Shareholders
(in thousands):
As reported $137,285 $120,072 $ 27,174
Pro forma 134,230 118,084 26,086
Diluted Net Earnings Per Common Share:
As reported $2.72 $2.44 $ .64
Pro forma 2.65 2.40 .61
</TABLE>
<TABLE>
The weighted average fair value for options granted in 1998, 1997, and
1996, computed utilizing the Black-Scholes option-pricing model, was
$16.83, $5.90, and $4.67, respectively. Significant assumptions used in the
estimation of fair value and compensation expense are as follows:
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Weighted expected life (years) 7.4 6.7 6.6
Weighted risk-free interest rate 5.5% 6.3% 5.3%
Weighted volatility 38.8% 36.6% 36.9%
Dividend yield 0.5% 1.1% 1.2%
</TABLE>
33
NOTE J - 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 1998 1997 1996
- ---------------------- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
NET EARNINGS:
Net Earnings $137,285 $120,072 $ 27,445
Less preferred stock dividends -- -- 271
-------- -------- --------
Basic net earnings available to
common shareholders 137,285 120,072 27,174
Convertible subordinated
debenture interest, net of tax -- 2,969 --
-------- -------- --------
Diluted net earnings available to
common shareholders including
assumed conversions $137,285 $123,041 $ 27,174
======== ======== ========
SHARES:
Basic weighted average shares
outstanding 49,620 44,883 42,266
Stock options 941 939 307
Convertible subordinated
debentures -- 4,517 --
-------- -------- --------
Diluted weighted average shares
outstanding 50,561 50,339 42,573
======== ======== ========
NET EARNINGS PER SHARE:
Basic $2.77 $2.68 $ .64
Diluted $2.72 $2.44 $ .64
======== ======== ========
</TABLE>
The above calculations 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 be antidilutive and
would have the effect of increasing earnings per share.
34
<TABLE>
The following is a summary of these excluded common shares (in thousands):
<CAPTION>
Year Ended December 31 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Stock options 528 -- 910
Convertible securities -
Subordinated debentures -- -- 6,479
Redeemable preferred stock -- -- 328
------ ------ ------
Excluded common shares 528 -- 7,717
====== ====== ======
</TABLE>
NOTE K - SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards for reporting information
about operating segments.
The Company has organized its business into two reportable operating
segments. The domestic segment derives its revenues from the door-to-door
delivery of small packages and documents throughout the United States,
Canada, and Puerto Rico. Domestic operations are supported principally by
Company operated aircraft and facilities. The international segment
derives its revenues from express door-to-door delivery and a variety of
freight services. International revenues are recognized on shipments where
the origin and/or destination is outside of locations supported by the
domestic segment. The Company uses a variable cost approach to delivering
international services through use of existing commercial airline capacity
in connection with its domestic network and independent express and freight
agents in locations not currently served by Company-owned foreign
operations.
35
<TABLE>
The following is a summary of key segment information (in thousands):
<CAPTION>
Domestic International Total
-------- ------------- -----
<S> <C> <C> <C>
1998
- ----
Revenues $2,712,344 $ 362,181 $3,074,525
Depreciation and amortization 183,147 1,379 184,526
Segment earnings from operations 232,966 1,501 234,467
Segment assets 1,428,956 72,621 1,501,577
Expenditures for property
and equipment 281,571 3,910 285,481
1997
- ----
Revenues $2,514,737 $ 397,672 $2,912,409
Depreciation and amortization 168,646 1,199 169,845
Segment earnings from operations 221,473 3,782 225,255
Segment assets 1,288,180 77,793 1,365,973
Expenditures for property
and equipment 209,745 2,013 211,758
1996
- ----
Revenues $2,108,670 $ 375,636 $2,484,306
Depreciation and amortization 162,442 1,203 163,645
Loss related to aircraft accident 3,737 -- 3,737
Segment earnings from operations 72,283 6,898 79,181
Segment assets 1,229,011 78,411 1,307,422
Expenditures for property
and equipment 171,193 1,964 173,157
</TABLE>
International operations are supported in the United States by pickup
and delivery, customer service and airline capabilities provided by the
domestic segment. Management allocates these costs, generally on a per
shipment basis, to the international segment. The Company changed its cost
allocation method in 1998, and accordingly, segment earnings from
operations for 1997 and 1996 differ from amounts previously reported.
Management considers interest expense and income taxes as corporate
expenses and, accordingly, does not allocate these costs to the operating
segments. The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies.
36
A substantial portion of international revenue is associated with
shipments originating within the United States ($256,259,000 in 1998,
$279,532,000 in 1997, and $273,586,000 in 1996). Long lived assets located
within the United States and associated with the international segment were
$6,274,000, $4,694,000, and $5,113,000 as of December 31, 1998, 1997, and
1996, respectively.
NOTE L - LOSS RELATED TO AIRCRAFT ACCIDENT
In 1996, the Company suffered the loss of a DC-8-63 aircraft during a
routine maintenance check flight. 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.
NOTE M - OTHER COMPREHENSIVE INCOME
<TABLE>
Other comprehensive income includes the following transactions and tax
effects for the year ended December 31, 1998 (in thousands):
<CAPTION>
Income Tax
Before (Expense) Net of
Tax or Benefit Tax
------ ---------- ------
<S> <C> <C> <C>
Unrealized securities gains arising
during the period $ 3,071 $ (1,182) $ 1,889
Less: Reclassification adjustment for
gains realized in net income (1,531) 589 (942)
------- ------- -------
Net unrealized securities gains 1,540 (593) 947
Foreign currency translation adjustments (295) 114 (181)
------- ------- -------
Other comprehensive income $ 1,245 $ (479) $ 766
======= ======= =======
</TABLE>
37
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 1998 1997
- ----------- ---- ----
<S> <C> <C>
Current assets $ 66,572 $ 45,103
Property and equipment, net 886,801 784,555
Other noncurrent assets 22,623 7,487
Current liabilities 100,302 98,791
Long-term debt 20,149 20,559
Other noncurrent liabilities 105,926 94,424
Intercompany payable 426,590 377,019
</TABLE>
<TABLE>
<CAPTION>
Earnings Statement Information:
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues - intercompany $980,322 $900,428 $767,972
Revenues - third-party 77,923 72,763 72,702
Operating expenses 938,925 873,213 778,392
Earnings from operations 119,320 99,978 62,282
Net earnings 76,678 64,239 27,229
</TABLE>
38
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,
which conducts business as 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.
39
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
1998 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $750,193 $764,137 $769,082 $791,113
Earnings from Operations 57,536 58,887 55,085 62,959
Net Earnings Available
to Common Shareholders 32,360 33,827 32,813 38,285
Net Earnings per Common Share
Basic $ .65 $ .67 $ .66 $ .79
Diluted $ .63 $ .66 $ .65 $ .78
1997
- ----
<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
</TABLE>
40
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, 33-58905 and 333-55687 of Airborne Freight
Corporation and subsidiaries on Form S-8 of our report dated February 12,
1999, incorporated by reference in this Annual Report on Form 10-K of
Airborne Freight Corporation and subsidiaries for the year ended December
31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Seattle, Washington
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,679
<SECURITIES> 0
<RECEIVABLES> 333,318
<ALLOWANCES> 10,140
<INVENTORY> 39,726
<CURRENT-ASSETS> 435,788
<PP&E> 2,074,400
<DEPRECIATION> 1,052,515
<TOTAL-ASSETS> 1,501,577
<CURRENT-LIABILITIES> 333,257
<BONDS> 249,149
0
0
<COMMON> 50,819
<OTHER-SE> 718,333
<TOTAL-LIABILITY-AND-EQUITY> 1,501,577
<SALES> 0
<TOTAL-REVENUES> 3,074,525
<CGS> 0
<TOTAL-COSTS> 2,840,058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,882
<INCOME-PRETAX> 221,585
<INCOME-TAX> 84,300
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,285
<EPS-PRIMARY> 2.77<F1>
<EPS-DILUTED> 2.72<F2>
<FN>
<F1>EARNINGS PER SHARE - BASIC
<F2>EARNINGS PER SHARE - DILUTED
</FN>
</TABLE>
